AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 4, 2003
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DELTA NATURAL GAS COMPANY, INC.
(Exact name of registrant as specified in its charter)
KENTUCKY 61-0458329
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
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(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
GLENN R. JENNINGS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DELTA NATURAL GAS COMPANY, INC.
3617 LEXINGTON ROAD, WINCHESTER, KENTUCKY 40391
(859) 744-6171
(Name, address, including zip code, and telephone number, including area code, of agent for service)
COPIES TO:
RUTHEFORD B CAMPBELL, JR., ESQ. THOMAS A. LITZ, ESQ.
RICHARD H. MAINS, ESQ. Thompson Coburn LLP
Stoll, Keenon & Park, LLP One U.S. Bank Plaza
300 West Vine St., Suite 2100 St. Louis, Missouri 63101
Lexington, Kentucky 40507 (314) 552-6000
(859) 231-3000
------------------------
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / /
If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to
Item 11(a)(1) of this Form, check the following box. / /
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / _______
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ________
If delivery of this prospectus is expected to be made pursuant to Rule 434, please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE IN WHICH THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 4, 2003
PROSPECTUS
500,000 SHARES
[LOGO] DELTA NATURAL GAS COMPANY, INC.
COMMON STOCK
We are offering 500,000 shares of our common stock, $1 par value. We will receive all the net proceeds from this sale.
Our shares of common stock are listed on the Nasdaq National Market System under the symbol "DGAS".
Our most recent quarterly dividend for our common stock was paid at an annual rate of $1.18 per share, representing an annual yield of 5.36% based on the closing price of our common stock on the Nasdaq National Market System of $22.00 on April 2, 2003.
PER SHARE TOTAL
--------- --------------
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds to us.............................................. $ $
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We have granted the underwriters a 30-day option to purchase up to an additional 75,000 shares of our common stock at the public offering price, less the underwriting discount, solely to cover over-allotments, if any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
We expect the shares of common stock to be ready for delivery on or about , 2003.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
J.J.B. HILLIARD, W.L. LYONS, INC.
FRIEDMAN BILLINGS RAMSEY
BB&T CAPITAL MARKETS
A DIVISION OF SCOTT &
STRINGFELLOW, INC.
THE DATE OF THIS PROSPECTUS IS , 2003.
[This page of the prospectus depicts a map of our service area]
We sell natural gas to customers in 23 predominantly rural communities in central and southeastern Kentucky.
TABLE OF CONTENTS
PAGE
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Prospectus Summary.......................................... 3
Risk Factors................................................ 6
Forward-Looking Statements.................................. 9
Use of Proceeds............................................. 10
Price Range of Common Stock and Dividends................... 10
Capitalization.............................................. 11
Selected Consolidated Financial Data........................ 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Business.................................................... 19
Description of Capital Stock................................ 26
Underwriting................................................ 28
Legal Matters............................................... 29
Experts..................................................... 29
Where You Can Find More Information......................... 30
Incorporation by Reference.................................. 30
Index to Consolidated Financial Statements.................. F-1
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PROSPECTUS SUMMARY
This Prospectus Summary calls your attention to selected information in this document but may not contain all the information that is important to you. Unless otherwise indicated, we have assumed that the underwriters' over-allotment option will not be exercised. In this prospectus, we frequently use the terms "Delta", "we" and "our" to refer to Delta Natural Gas Company, Inc. and, unless the context otherwise indicates, our subsidiaries. The term "you" refers to a prospective investor. To understand the offering fully and for a more complete description of the offering you should read this entire document carefully, including particularly the "Risk Factors" section, as well as the documents we have referred you to in the section called "Incorporation by Reference".
THE COMPANY
We sell natural gas to approximately 40,000 retail customers on our distribution system in central and southeastern Kentucky. Additionally, 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 produce a relatively small amount of natural gas and oil from our southeastern Kentucky wells.
We seek to provide dependable, high-quality service to our customers while steadily enhancing value for our shareholders. Our efforts have been focused on developing a balance of regulated and non-regulated businesses to contribute to our earnings by profitably selling and transporting gas in our service territory.
We strive to achieve operational excellence through economical, reliable service and our emphasis on responsiveness to customers. We continue to invest in facilities for the transmission, distribution and storage of natural gas. We believe that our responsiveness to customers and the dependability of the service we provide afford us additional opportunities for growth. While we seek those opportunities, our strategy will continue to entail a conservative approach that seeks to minimize our exposure to market risk arising from fluctuations in the prices of gas.
We operate through two segments, a regulated segment and an unregulated segment. Through our regulated segment, we sell natural gas to our retail customers in 23 predominantly rural communities. In addition, our regulated segment transports gas to industrial customers on our system who purchase gas in the open market. Our regulated segment also transports gas on behalf of local producers and other customers not on our distribution system. Our results of operations and financial condition have been strengthened by regulatory developments in recent years, including a weather normalization provision and gas cost recovery clause which have reduced fluctuations in our earnings due to variations in weather and gas prices.
We operate our unregulated segment through three wholly-owned subsidiaries. Two of these subsidiaries, Delta Resources, Inc. and Delgasco, Inc., purchase natural gas on the national market and from Kentucky producers. We resell this gas to industrial customers on our distribution system and to others not on our system. Our third subsidiary that is part of the unregulated segment, Enpro, Inc., produces a relatively small amount of natural gas and oil that is sold on the unregulated market.
Our executive offices are located at 3617 Lexington Road, Winchester, Kentucky 40391. Our telephone number is (859) 744-6171.
RECENT DEVELOPMENT
On February 18, 2003, we issued $20,000,000 aggregate principal amount of our 7.00% Debentures due 2023. The net proceeds of the offering were $19,270,000. On March 20, 2003, we applied $15,399,000 of the net proceeds to redeem $14,806,000 aggregate principal amount of our 8.30% Debentures due 2026, and we used the remainder of the net proceeds to pay down a portion of our short-term notes payable.
The shares of common stock identified in the table above to be outstanding after the offering are based on our shares outstanding as of April 2, 2003 and exclude shares issued after that date under our Dividend Reinvestment and Stock Purchase Plan and through our Employee Stock Purchase Plan.
The annualized dividend rate identified in the table above is based on a quarterly dividend of $0.295, which we paid on March 15, 2003.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial information should be read in conjunction with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in this prospectus.
FOR THE FOR THE FOR THE
TWELVE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED FOR THE FISCAL YEARS ENDED JUNE 30,
DEC. 31, DEC. 31, DEC. 31, ------------------------------------------
2002 2002 2001 2002 2001 2000
------------- ----------- ---------- ---------- ---------- ----------
INCOME DATA ($)
Operating revenues......... 58,745,599 22,655,101 19,839,281 55,929,780 70,770,156 45,926,775
Operating income........... 8,124,316 2,082,552 2,359,687 8,401,452 8,721,719 8,176,722
Net income (loss).......... 3,524,805 (298,482) (186,574) 3,636,713 3,635,895 3,464,857
Basic and diluted earnings
(loss) per common
share.................... 1.39 (0.12) (0.07) 1.45 1.47 1.42
Dividends declared per
common share............. 1.17 0.59 0.58 1.16 1.14 1.14
DECEMBER 31, 2002
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PRO FORMA
PRO AS
ACTUAL PERCENT FORMA(1) PERCENT ADJUSTED(2) PERCENT
---------- ------- ---------- ------- ----------- -------
SHORT-TERM NOTES PAYABLE ($).......... 29,037,841 25,166,481 14,730,481
========== ========== ==========
CAPITALIZATION ($)
Common shareholders' equity........... 32,835,349 39.7 32,835,349 37.3 43,271,349 44.0
Long-term debt (including current
portion)............................ 49,911,000 60.3 55,105,000 62.7 55,105,000 56.0
---------- ------ ---------- ------ ---------- ------
Total capitalization.............. 82,746,349 100.0 87,940,349 100.0 98,376,349 100.0
========== ====== ========== ====== ========== ======
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(1) Pro Forma amounts reflect the issuance and sale in February 2003 of $20,000,000 aggregate principal amount of
7.00% Debentures due 2023 and the application of the $19,270,000 of net proceeds. We used $15,399,000 of the
net proceeds to redeem $14,806,000 aggregate principal amount of our 8.30% Debentures due 2026, and the
remaining $3,871,000 was used to pay down a portion of our short-term notes payable.
(2) Pro Forma as Adjusted amounts reflect the Pro Forma amounts on an as adjusted basis to reflect the sale of
500,000 shares of common stock offered by this prospectus at an assumed public offering price of $22.00 per
share and the application of the estimated net proceeds of $10,436,000 from this sale to pay down a portion
of our short-term notes payable.
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RISK FACTORS
Purchasing our common stock involves risks. The following are material risks.
You should carefully consider each of the following risk factors and all of the information in this prospectus before purchasing any of our common stock.
WEATHER CONDITIONS MAY CAUSE OUR REVENUES TO VARY FROM YEAR TO YEAR. Our revenues vary from year to year, depending on weather conditions. We estimate that approximately 75% of our annual gas sales are temperature sensitive. As a result, mild winter temperatures can cause a decrease in the amount of gas we sell in any year. For example, in fiscal 2002 the average daily temperature in our service areas was 89% of normal and in fiscal 2001 the average daily temperature in our service areas was 107% of normal. Our operating revenues in fiscal 2002 were approximately $14,800,000 less than in fiscal 2001, mostly due to warmer winter temperatures during fiscal 2002 and decreased gas rates due to lower gas prices.
CHANGES IN FEDERAL REGULATIONS COULD REDUCE THE AVAILABILITY OR INCREASE THE COST OF OUR INTERSTATE GAS SUPPLY. We purchase a substantial portion of our gas supply from interstate sources. For example, in our fiscal year ended June 30, 2002 approximately 98% of our gas supply was purchased from interstate sources. The Federal Energy Regulatory Commission regulates the transmission of the natural gas we receive from interstate sources, and it could increase our transportation costs or decrease our available pipeline capacity by changing its regulatory policies. As an example, on the Tennessee Gas Pipeline System, which in fiscal year ended June 30, 2002 supplied approximately 25% of our natural gas supply, we reserve capacity and transport the majority of our gas under a rate schedule approved by the Federal Energy Regulatory Commission for smaller local distribution companies that tend to have primarily residential customers. An increase in this rate schedule would cause the transportation cost of our natural gas supply to increase.
OUR GAS SUPPLY DEPENDS UPON THE AVAILABILITY OF ADEQUATE PIPELINE TRANSPORTATION CAPACITY. We purchase a substantial portion of our gas supply from interstate sources. Interstate pipeline companies transport the gas to our system. A decrease in interstate pipeline capacity available to us or an increase in competition for interstate pipeline transportation service could reduce our normal interstate supply of gas.
OUR CUSTOMERS ARE ABLE TO ACQUIRE NATURAL GAS WITHOUT USING OUR DISTRIBUTION SYSTEM. Our larger customers can obtain their natural gas supply by purchasing their natural gas directly from interstate suppliers, local producers or marketers and arranging for alternate transportation of the gas to their plants or facilities. Customers may undertake such a by-pass of our distribution system in order to achieve lower prices for their gas service. Our larger customers who are in close proximity to alternative supplies would be most likely to consider taking this action. This potential to by-pass our distribution system creates a risk of the loss of large customers and thus could result in lower revenues and profits.
WE FACE REGULATORY UNCERTAINTY AT THE STATE LEVEL. We are regulated by the Kentucky Public Service Commission. The majority of our revenues are generated by our regulated segment. We face the risk that the Kentucky Public Service Commission may fail to grant us adequate and timely rate increases or may take other actions that would cause a reduction in our income from operations, such as limiting our ability to pass on to our customers our increased costs of natural gas. Such regulatory actions would decrease our revenues and our profitability.
VOLATILITY IN THE PRICE OF NATURAL GAS COULD REDUCE OUR PROFITS. Significant increases in the price of natural gas would likely cause our retail customers to conserve or switch to alternate sources of energy. Any decrease in the volume of gas we sell that is caused by such actions would reduce our profits. Higher prices could also make it more difficult to add new customers. Natural gas prices have risen significantly in recent months.
WE DO NOT GENERATE SUFFICIENT CASH FLOW TO MEET ALL OUR CASH NEEDS. Historically, we have made large capital expenditures in order to finance the maintenance, expansion and upgrading of our distribution system. As a result, we have funded a portion of our cash needs through borrowing and by offering new securities into the market. For example, by a combination of increasing our borrowing under our short-term line of credit and sales of securities through our Dividend Reinvestment and Stock Purchase Plan, we generated cash in the amount of $3,262,000 in fiscal 2002, $7,822,000 in fiscal 2001 and $4,628,000 in fiscal
2000. Although our cash needs vary from year to year, we consider these years indicative of our future needs for external cash. Our dependency on external sources of financing creates the risks that our profits could decrease as a result of high capital costs and that lenders could impose onerous and unfavorable terms on us as a condition to granting us loans. We also risk the possibility that we may not be able to secure external sources of cash necessary to fund our operations.
OUR INABILITY TO OBTAIN ARTHUR ANDERSEN LLP'S CONSENT WILL LIMIT YOUR
ABILITY TO ASSERT CLAIMS AGAINST ARTHUR ANDERSEN LLP. After reasonable
efforts, we have not been able to obtain the written consent of Arthur
Andersen LLP to our naming it in this prospectus as having certified our
Consolidated Financial Statements and schedules for the fiscal years ended
June 30, 2000 and 2001, as required by Section 7 of the Securities Act of
1933. As a result, we have dispensed with the filing of their consent with
the Securities and Exchange Commission in reliance on Rule 437a promulgated
under the Securities Act. Consequently, your ability to assert claims
against Arthur Andersen LLP will be limited. In particular, because of this
lack of consent, you will not be able to sue Arthur Andersen LLP under
Section 11(a)(4) of the Securities Act for any untrue statements of a
material fact contained in the financial statements audited by Arthur
Andersen LLP or any omissions to state a material fact required to be
stated in those financial statements. Therefore, your right of recovery
under that section will be limited.
CROSS-DEFAULT PROVISIONS IN OUR BORROWING ARRANGEMENTS INCREASE THE CONSEQUENCES OF A DEFAULT ON OUR PART. Each indenture under which our outstanding debentures were issued, as well as the loan agreement for our bank line of credit, contains a cross-default provision which provides that we will be in default under the indenture or loan agreement in the event of certain defaults under any of the other indentures or our loan agreement. Accordingly, should an event of default occur under one of our debt agreements, we face the prospect of being in default under all of our debt agreements and obliged in such instance to satisfy all of our outstanding indebtedness.
OUR BORROWING ARRANGEMENTS INCLUDE VARIOUS NEGATIVE COVENANTS THAT RESTRICT OUR ACTIVITIES. Our bank line of credit prevents us from merging with another entity, selling a material portion of our assets other than in the ordinary course of business, issuing stock which in the aggregate exceeds 35% of our outstanding shares of common stock on October 31, 2003 and having any person or group of affiliates hold more than 20% of our outstanding shares of common stock. The indentures for our outstanding debentures prevent us from assuming additional mortgage indebtedness in excess of $2,000,000 or from paying dividends on our common stock unless our consolidated shareholders' equity exceeds $25,800,000. These negative covenants create the risk that we may be unable to take advantage of business and financing opportunities as they arise.
OUR ABILITY TO PAY DIVIDENDS ON OUR COMMON STOCK IS LIMITED. We cannot assure you that we will continue to pay dividends at our current annual dividend rate or at all. In particular, our ability to pay dividends in the future will depend upon, among other things, our future earnings, cash requirements, covenants under the loan agreement for our bank line of credit and covenants under the indentures for our outstanding debentures.
THIS OFFERING LIKELY WILL HAVE THE EFFECT OF REDUCING OUR EARNINGS PER SHARE FOR SOME PERIOD OF TIME. This offering will increase the number of shares of our common stock outstanding and considered in computing our earnings per share. For some period of time, we do not expect to generate additional earnings sufficient to offset the additional shares to be outstanding as a result of this offering and thus, during that period, the effect of this offering will be to reduce our earnings per share from the amount we would have reported if we did not effect this offering. Moreover, we will need approval from the Kentucky Public Service Commission to include the capital raised in this offering in our capital base used to determine our rates and our allowed return. If our ability to include the capital from this offering in our capital base is limited or delayed, it will have an adverse effect on our earnings per share.
TERRORIST ATTACKS AND THREATS, ESCALATION OF MILITARY ACTIVITY IN RESPONSE TO SUCH ATTACKS OR ACTS OF WAR MAY NEGATIVELY AFFECT OUR EARNINGS AND FINANCIAL CONDITION. Terrorist attacks, such as the attacks that occurred in New York, Pennsylvania and Washington, D.C. on September 11, 2001, and future war or risk of war may adversely impact our results of operations, our ability to raise capital and our future growth. The impact that possible terrorist attacks may have on our industry in general, and on us in particular, is not
known at this time but could likely lead to increased volatility in gas rates. Uncertainty surrounding the current military action in Iraq, future military strikes or sustained military campaigns may impact our operations in unpredictable ways, including disruptions of fuel or gas supplies and markets, and the possibility that infrastructure facilities, including pipelines, processing plants and storage facilities, could be direct targets of, or indirect casualties of, an act of terror. Terrorist activity may also hinder our ability to transport gas if transportation facilities or pipelines become damaged as a result of an attack. In addition, war or risk of war may have an adverse effect on the economy in our service territory. A lower level of economic activity could result in a decline in energy consumption which could adversely affect our revenues or restrict our future growth. Instability in the financial markets as a result of terrorism or war also could affect our ability to raise capital.
THERE IS A LIMITED TRADING MARKET FOR OUR COMMON STOCK AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE PRICE YOU PAY FOR THEM. The price of our common stock that you purchase in this offering may decrease significantly. Our common stock is quoted on the Nasdaq National Market System under the symbol "DGAS". A public trading market having the desired characteristics of liquidity and order depends on the presence in the market of willing buyers and sellers at any given time. While certain of the underwriters are currently market makers in our common stock on the Nasdaq National Market System, none of them is obligated to remain a market maker. The presence of willing buyers and sellers depends on the individual decisions of investors and general economic conditions, all of which are beyond our control.
FUTURE SALES OF SHARES OF OUR COMMON STOCK IN THE MARKET, OR THE PERCEPTION THAT SUCH SALES MAY OCCUR, MAY DEPRESS OUR COMMON STOCK PRICE. If our existing shareholders sell our common stock in the market following this offering, or if there is a perception that these sales may occur, the market price of our common stock could decline. In addition, our board of directors has the authority to issue additional shares of our authorized but unissued common stock without the vote of our shareholders. Additional issuances of our common stock would dilute the ownership percentage of existing shareholders and may dilute the earnings per share of our common stock.
PROVISIONS OF OUR ARTICLES OF INCORPORATION AND KENTUCKY LAW COULD DETER TAKEOVER ATTEMPTS THAT SOME SHAREHOLDERS MAY CONSIDER DESIRABLE. Provisions contained in our articles of incorporation and Kentucky law may hinder an acquisition of our company. For example, our articles of incorporation and Kentucky law require that certain acquisitions be approved by holders of 80% or more of our outstanding shares of common stock. In addition, our articles of incorporation establish a board with staggered, three-year terms for our directors. The existence of these provisions may deprive you of any opportunity to sell your shares at a premium over the prevailing market price for our common stock. The potential inability of our shareholders to obtain a control premium could reduce the market price of our common stock.
THE FUTURE MARKET PRICE OF OUR COMMON STOCK COULD BE VOLATILE. The trading price of our common stock could be subject to wide fluctuations in response to variations in operating results caused by weather, changes in gas prices, operating costs or uninsured losses, financial results that are different from securities analysts' forecasts, interest rates and other events or factors, many of which we do not control. In addition, fluctuations in the market prices for shares of comparable companies or broad market fluctuations may reduce the market price of our common stock.
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference in this prospectus contain forward-looking statements that relate to future events or our future performance. We have attempted to identify these statements by using words such as "estimates", "attempts", "expects", "monitors", "plans", "anticipates", "intends", "continues", "believes", "seeks", "strives" and similar expressions.
THESE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO,
STATEMENTS ABOUT:
* our operational plans and strategies,
* the cost and availability of our natural gas supplies,
* our capital expenditures,
* sources and availability of funding for our operations and expansion,
* our anticipated growth and growth opportunities through system expansion and acquisition,
* competitive conditions that we face,
* our production, storage, gathering and transportation activities,
* regulatory and legislative matters, and
* dividends.
FACTORS THAT COULD CAUSE FUTURE RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS OR HISTORICAL RESULTS INCLUDE THE IMPACT OR OUTCOME OF:
* the ongoing restructuring of the natural gas industry and the outcome of the regulatory proceedings related to that restructuring,
* the changing regulatory environment, generally,
* a change in the rights under present regulatory rules to recover for costs of gas supply, other expenses and investments in capital assets,
* uncertainty in our capital expenditure requirements,
* changes in economic conditions, demographic patterns and weather conditions in our retail service areas,
* changes affecting our cost of providing gas service, including changes in gas supply costs, cost and availability of interstate pipeline capacity, interest rates, the availability of external sources of financing for our operations, tax laws, environmental laws and the general rate of inflation,
* changes affecting the cost of competing energy alternatives and competing gas distributors,
* changes in accounting principles and tax laws or the application of such principles and laws to us, and
* other matters described in the "Risk Factors" section.
USE OF PROCEEDS
We estimate that the net proceeds from this offering will be $10,436,000 ($12,013,400 if the underwriters fully exercise their over-allotment option to purchase an additional 75,000 shares). These estimates are based upon an assumed offering price of $22.00 per share. We will use the entire net proceeds to pay down a portion of our short-term indebtedness. This will reduce our debt to total capitalization ratio and, we believe, improve our ability to issue additional long-term debt to finance future capital investments.
As of April 1, 2003, our short-term indebtedness consisted of $18,068,364 borrowed under a $40,000,000 line of revolving credit bank loan. The interest rate on this line of credit is a variable rate based on the London Interbank Offered Rate and was 2.3% as of April 1, 2003. The line of credit extends through October 31, 2003. We use this line of credit to fund general operating expenses and to temporarily fund our capital expenditures. The capital expenditures are primarily for replacement and upgrading the capacity of our existing facilities and system extensions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations".
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
We have paid cash dividends on our common stock each year since 1964. The frequency and amount of future dividends will depend upon our earnings, financial requirements and other relevant factors, including limitations imposed by the indentures for our debentures. See "Risk Factors--Our ability to pay dividends on our common stock is limited" and "Description of Capital Stock".
Our common stock is traded on the Nasdaq National Market System and trades under the symbol "DGAS". There were 2,261 record holders of our common stock as of April 1, 2003. The accompanying table sets forth, for the periods indicated, the high and low closing sale prices for the common stock on the Nasdaq National Market System and the cash dividends declared per share.
DIVIDENDS
HIGH LOW PER SHARE
------ ------ ---------
FISCAL 2001
First Quarter.......................... $18.00 $15.25 $0.285
Second Quarter......................... $19.62 $16.25 $0.285
Third Quarter.......................... $20.31 $17.69 $0.285
Fourth Quarter......................... $20.75 $18.00 $0.285
FISCAL 2002
First Quarter.......................... $20.43 $18.90 $ 0.29
Second Quarter......................... $20.99 $18.67 $ 0.29
Third Quarter.......................... $23.08 $19.75 $ 0.29
Fourth Quarter......................... $22.50 $21.47 $ 0.29
FISCAL 2003
First Quarter.......................... $21.97 $18.50 $0.295
Second Quarter......................... $21.99 $19.50 $0.295
Third Quarter.......................... $23.99 $21.24 $0.295
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The closing sale prices shown above reflect prices between dealers and do not include markups or markdowns or commissions and may not necessarily represent actual transactions. On February 20, 2003, we declared a quarterly dividend of $0.295 per share that we paid on March 15, 2003.
CAPITALIZATION
The following table sets forth our consolidated capitalization and short-term debt as of December 31, 2002, (i) as reported, (ii) on a pro forma basis and (iii) on a pro forma as adjusted basis as explained in the notes below. This information should be read in conjunction with our Consolidated Financial Statements and Notes included in this prospectus.
DECEMBER 31, 2002
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PRO FORMA AS
ACTUAL PRO FORMA(1) ADJUSTED(2)
--------------------- ---------------------- ----------------------
SHORT-TERM NOTES PAYABLE.................... $29,037,841 $25,166,481 $14,730,481
=========== =========== ===========
LONG-TERM DEBT (INCLUDING CURRENT PORTION)
7.15% Debentures due 2018................. $24,017,000 $24,017,000 $24,017,000
7.00% Debentures due 2023................. -- 20,000,000 20,000,000
6.625% Debentures due 2023................ 11,088,000 11,088,000 11,088,000
8.30% Debentures due 2026................. 14,806,000 -- --
----------- ----------- -----------
Total long-term debt.................... $49,911,000 60.3% $55,105,000 62.7% $55,105,000 56.0%
----------- ----------- -----------
COMMON SHAREHOLDERS' EQUITY
Common shares, par value $1 per share
Authorized--6,000,000 shares
Outstanding--2,551,372 shares Actual
and Pro Forma; 3,051,372 shares Pro
Forma As Adjusted (3)................. $ 2,551,372 $ 2,551,372 $ 3,051,372
Premium on common shares. ................ 30,760,733 30,760,733 41,260,733
Capital stock expense..................... (1,925,392) (1,925,392) (2,489,392)
Retained earnings......................... 1,448,636 1,448,636 1,448,636
----------- ----------- -----------
Total common shareholders' equity....... $32,835,349 39.7% $32,835,349 37.3% $43,271,349 44.0%
----------- ----- ----------- ----- ----------- -----
Total capitalization...................... $82,746,349 100.0% $87,940,349 100.0% $98,376,349 100.0%
=========== ===== =========== ===== =========== =====
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(1) Pro Forma amounts reflect the issuance and sale in February 2003 of $20,000,000 aggregate principal amount of
7.00% Debentures due 2023, and the application of the $19,270,000 of net proceeds. We used $15,399,000 of the
net proceeds to redeem $14,806,000 aggregate principal amount of our 8.30% Debentures due 2026, and the
remaining $3,871,000 was used to pay down a portion of our short-term notes payable.
(2) Pro Forma as Adjusted amounts reflect the Pro Forma amounts on an as adjusted basis to reflect the sale of
500,000 shares of common stock offered by this prospectus at an assumed public offering price of $22.00 per
share and the application of the estimated net proceeds of $10,436,000 from this sale to reduce short-term
notes payable.
(3) The number of shares excludes shares issued after December 31, 2002 through our Dividend Reinvestment and
Stock Purchase Plan and through our Employee Stock Purchase Plan.
|
SELECTED CONSOLIDATED FINANCIAL DATA
In the following table we set forth our selected consolidated financial data for the periods indicated. The data for each of the five fiscal years in the period ended June 30, 2002 are derived from our audited Consolidated Financial Statements and Notes for each of those periods. The data for the twelve months and the six months ended December 31, 2002 and for the six months ended December 31, 2001 are derived from our unaudited consolidated financial statements. We believe that the unaudited consolidated financial statements include all adjustments necessary for the fair presentation of the information below.
The information in the table below does not provide all financial data about us. Consequently, we urge you to read and consider the information in our Consolidated Financial Statements and Notes and in the section of this prospectus entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations".
AS OF AND FOR THE
---------------------------------------
TWELVE SIX SIX
MONTHS MONTHS MONTHS
ENDED ENDED ENDED
DEC. 31, DEC. 31, DEC. 31,
2002 2002 2001
----------- ----------- -----------
SUMMARY OF OPERATIONS ($)
Operating revenues......... 58,745,599 22,655,101 19,839,281
Operating income........... 8,124,316 2,082,552 2,359,687
Net income................. 3,524,805 (298,482) (186,574)
Basic and diluted earnings
per common share.......... 1.39 (0.12) (0.07)
Dividends declared per
common share (2).......... 1.17 0.59 0.58
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (BASIC
AND DILUTED)................ 2,531,974 2,541,975 2,506,205
TOTAL ASSETS AT PERIOD END($) 136,453,752 136,453,752 130,629,610
SHORT-TERM DEBT AT PERIOD END
($)(3)(4)................... 30,787,841 30,787,841 29,505,000
CAPITALIZATION AT PERIOD
END($)
Common shareholders'
equity.................... 32,835,349 32,835,349 31,512,318
Long-term debt (3)......... 48,161,000 48,161,000 48,830,000
----------- ----------- -----------
Total capitalization..... 80,996,349 80,996,349 80,342,318
=========== =========== ===========
OTHER ITEMS ($)
Capital expenditures....... 8,884,605 4,727,323 5,264,483
Total plant, before
accumulated depreciation.. 159,950,436 159,950,436 152,631,278
AS OF AND FOR THE FISCAL YEARS ENDED JUNE 30,
-------------------------------------------------------------------
2002 2001 2000 1999 1998(1)
----------- ----------- ----------- ----------- -----------
SUMMARY OF OPERATIONS ($)
Operating revenues......... 55,929,780 70,770,156 45,926,775 38,672,238 44,258,000
Operating income........... 8,401,452 8,721,719 8,176,722 6,652,070 6,731,859
Net income................. 3,636,713 3,635,895 3,464,857 2,150,794 2,451,272
Basic and diluted earnings
per common share.......... 1.45 1.47 1.42 0.90 1.04
Dividends declared per
common share (2).......... 1.16 1.14 1.14 1.14 1.14
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (BASIC
AND DILUTED)................ 2,513,804 2,477,983 2,433,397 2,394,181 2,359,598
TOTAL ASSETS AT PERIOD END($) 127,948,525 124,179,138 112,918,919 107,473,117 102,866,613
SHORT-TERM DEBT AT PERIOD END
($)(3)(4)................... 21,105,000 19,250,000 11,375,000 8,145,000 3,665,000
CAPITALIZATION AT PERIOD
END($)
Common shareholders'
equity.................... 34,182,277 32,754,560 31,297,418 29,912,007 29,810,294
Long-term debt (3)......... 48,600,000 49,258,902 50,723,795 51,699,700 52,612,494
----------- ----------- ----------- ----------- -----------
Total capitalization..... 82,782,277 82,013,462 82,021,213 81,611,707 82,422,788
=========== =========== =========== =========== ===========
OTHER ITEMS ($)
Capital expenditures....... 9,421,765 7,069,713 8,795,653 7,982,143 11,193,613
Total plant, before
accumulated depreciation.. 156,305,063 147,792,390 141,986,856 133,804,954 127,028,159
----------
(1) During March 1998, we sold $25,000,000 aggregate principal amount of Debentures due 2018. We used the net
proceeds to redeem $10,000,000 of our 9.00% Debentures due 2011 and to pay down a portion of our short-term
debt.
(2) On August 22, 2002, our board of directors increased the dividend to $0.295 per quarter.
(3) On February 18, 2003, we issued $20,000,000 aggregate principal amount of 7.00% Debentures due 2023. The net
proceeds of the offering were $19,270,000. On March 20, 2003, we used $15,399,000 of the net proceeds to
redeem $14,806,000 aggregate principal amount of our 8.30% Debentures due 2026, and we used the remaining
$3,871,000 to pay down a portion of our short-term notes payable.
(4) Includes current portion of long-term debt.
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR OUR COMPLETE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES,
SEE PAGES F-1 THROUGH F-25.
OVERVIEW
The Kentucky Public Service Commission regulates our utility operations. As a part of this regulation, the Kentucky Public Service Commission sets the rates we are permitted to charge our customers. These rates have a significant impact on our annual revenues and profits. See "Business--Regulatory Matters".
The rates approved by the Kentucky Public Service Commission allow us a specified rate of return on our regulated investment. The rates we are allowed to charge our customers also permit us to pass through to our customers changes in the costs of our gas supply. See "Business--Regulatory Matters".
Our business is temperature-sensitive. Our sales volumes in any period reflect the impact of weather, with colder temperatures generally resulting in increased sales volumes. We anticipate that this sensitivity to seasonal and other weather conditions will continue to be reflected in our sales volumes in future periods. The impact of unusual winter temperatures on our revenues was ameliorated to some extent when the Kentucky Public Service Commission permitted us to start adjusting our winter rates in response to unusual winter temperatures in the year 2000. Under this weather normalization tariff, we are permitted to increase our rates for residential and small non-residential customers when, based on a 30-year average temperature, winter weather is warmer than normal, and we are required to decrease our rates when winter weather is colder than normal. We are permitted to adjust these rates for the billing months of December through April.
LIQUIDITY AND CAPITAL RESOURCES
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 of our construction activity takes place during these warmer months. As a result, we meet our cash needs for operations and construction during the warmer non-heating months partially through short-term borrowings.
We made capital expenditures of $4,727,000 during the first six months of fiscal 2003. We made capital expenditures of $9,422,000, $7,070,000 and $8,796,000 for the fiscal years ended 2002, 2001 and 2000, respectively. We expect our total capital expenditures for fiscal 2003 to be approximately $9,800,000. We plan to make these capital expenditures on system extensions and for the replacement and improvement of existing transmission, distribution, gathering and general facilities.
We generate internally only a portion of the cash necessary for our capital expenditure requirements. We finance the balance of our capital expenditure requirements on an interim basis through a short-term line of bank credit. Our current available line of bank credit is $40,000,000, of which $29,038,000 was borrowed at December 31, 2002. Our line of credit is with Branch Banking and Trust Company and extends through October 31, 2003. We intend to pursue renewal or to enter into a new agreement and seek substantially the same terms as the existing agreement.
We periodically repay our short-term borrowings under our line of credit by using the net proceeds from the sale of long-term debt and equity securities. For example, on February 18, 2003, we issued $20,000,000 aggregate principal amount of 7.00% Debentures due 2023. The net proceeds of the offering were $19,270,000. On March 20, 2003, we applied $15,399,000 of the net proceeds to redeem $14,806,000 aggregate principal amount of our 8.30% Debentures due 2026, and we used the remaining $3,871,000 to pay down a portion of our short-term notes payable. We intend to use the proceeds from this offering to pay down our line of credit with Branch Banking and Trust Company. This will reduce our debt to total capitalization ratio and, we believe, improve our ability to issue additional long-term debt to finance future capital investments. We will use additional borrowings under our existing line of credit to help meet working capital and capital expenditures needs as required.
Below, we summarize our primary cash flows during the fiscal years and the interim periods indicated:
FOR THE SIX MONTHS ENDED
DECEMBER 31, FOR THE FISCAL YEARS ENDED JUNE 30,
---------------------------- ---------------------------------------------
2002 2001 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Provided by (used in) our
operating activities......... $(3,274,198) $(2,699,390) $10,511,896 $ 2,652,572 $ 8,827,505
Used in our investing
activities................... (4,727,323) (5,264,483) (9,421,765) (7,069,713) (8,795,653)
Provided by (used in) financing
activities................... 8,195,395 8,754,332 (1,028,996) 4,185,248 115,554
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents......... $ 193,874 $ 790,459 $ 61,135 $ (231,893) $ 147,406
=========== =========== =========== =========== ===========
|
For the year ended June 30, 2002, we had a $61,000 net increase in cash and cash equivalents compared to a $232,000 net decrease in cash and cash equivalents for the year ended June 30, 2001. This variation resulted from an increase in cash provided by operating activities, offset by increases in net cash used in investing and financing activities. The increase in cash provided by operating activities was largely due to changes in deferred recovery of gas costs, accounts receivable, accounts payable and other liabilities. The increase in cash used in investing activities resulted from increased capital expenditures. Cash was used in financing activities in 2002 due to the fact that dividends paid on common stock and repayments of long-term debt exceeded borrowings from the short-term line of credit. In 2001, borrowings from the short-term line of credit exceeded dividends paid on common stock and repayments of long-term debt.
For the year ended June 30, 2001, we had a $232,000 net decrease in cash and cash equivalents compared to a $147,000 net increase in cash and cash equivalents for the year ended June 30, 2000. This variation resulted from a decrease in cash provided by operating activities, offset by a decrease in cash used in investing activities and an increase in cash provided by financing activities. The decrease in cash provided by operating activities was largely due to changes in deferred recovery of gas costs and gas in storage. The decrease in cash used in investing activities resulted from decreased capital expenditures. The increase in cash provided by financing activities is primarily attributable to increased borrowings from the short-term line of credit and decreased repayments of long-term debt.
The net increase in cash and cash equivalents for the six months ended December 31, 2002 was less than the net increase in cash and cash equivalents for the six months ended December 31, 2001 due to a $575,000 increase in cash used in operating activities and a $559,000 decrease in cash provided by financing activities, offset by a $537,000 reduction in cash used in investing activities. The increase in cash used in operating activities was largely due to changes in accounts receivable, deferred recovery of gas costs, accounts payable and gas in storage. The decrease in cash provided by financing activities is primarily attributable to reduced borrowings from the short-term line of credit, offset by a decrease in repayments of long-term debt. The decrease in cash used in investing activities resulted from a decrease in capital expenditures.
Cash provided by our operating activities primarily consists of net income adjusted for non-cash items, including depreciation, depletion, amortization, deferred income taxes and changes in working capital in our cash generated by operating activities. We expect that internally generated cash, coupled with short-term borrowings and the net proceeds of this offering, will be sufficient to satisfy our operating, normal capital expenditure requirements and to pay dividends for the foreseeable future.
RESULTS OF OPERATIONS
OPERATING REVENUES
The decrease of $14,840,000 in our operating revenues for 2002 was primarily attributable to decreased sales volumes and decreased gas rates. Sales volumes decreased due to warmer winter weather in 2002. Gas rates decreased due to lower gas prices. This decrease, however, was offset to some extent, because unusually warm temperatures enabled us to adjust our rates upward under our authorized weather normalization tariff.
The increase of $24,843,000 in operating revenues for 2001 was primarily attributable to higher gas rates and increased sales volumes. Gas rates increased due to higher gas prices. This increase, however, was offset to some extent, because unusually cold temperatures required us to adjust our rates downward under our authorized weather normalization tariff. Our sales volumes increased due to colder winter weather in 2001.
Heating degree days billed for 2002 were 89% of normal 30-year average temperatures as compared with 107% of normal temperatures for 2001 and 90% of normal temperatures for 2000. 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.
In the following table we set forth variations in our revenues for the last two fiscal years:
INCREASE (DECREASE)
--------------------------------
2002 COMPARED 2001 COMPARED
TO 2001 TO 2000
------------- -------------
Variations in our regulated revenues
Gas rates............................................... $ (1,930,000) $11,364,800
Weather normalization adjustment........................ 1,935,000 (1,634,000)
Sales volumes........................................... (9,002,000) 5,715,700
Transportation.......................................... 529,000 69,100
Other................................................... (49,000) 57,400
------------ -----------
Total............................................... $ (8,517,000) $15,573,000
------------ -----------
Variations in our non-regulated revenues
Gas rates............................................... $ (6,354,000) $ 8,669,000
Sales volumes........................................... 32,000 601,000
Other................................................... (1,000) --
------------ -----------
Total............................................... $ (6,323,000) $ 9,270,000
------------ -----------
Total variations in our revenues................ $(14,840,000) $24,843,000
============ ===========
Percentage variations in our regulated volumes
Gas sales............................................... (19.1) 18.0
Transportation.......................................... 13.6 16.8
Percentage variations in our non-regulated gas sales
volumes................................................... 0.4 7.7
|
The increase in operating revenues for the six months ended December 31, 2002 of $2,816,000 was primarily due to the 27% increase in sales volumes in our regulated business. Our sales volumes primarily increased because of the significantly colder weather in the 2002 period.
The decrease in non-regulated revenues and intersegment revenues for the six months ended December 31, 2002 were primarily attributable to the non-regulated segment discontinuance of selling gas to the regulated segment effective January 1, 2002.
Heating degree days billed were 71% of 30-year average temperatures for the six months ended December 31, 2002, as compared with 47% for the 2001 period.
For meaningful analysis of our revenue and expense variations, the variation amounts and percentages presented in the following tables for regulated and non-regulated revenues and expenses include intersegment transactions. These intersegment revenues and expenses, whose variations are also disclosed in the following tables, are eliminated in the consolidated statements of income.
In the following table we set forth variations in revenues for the six months ended December 31, 2002 compared to 2001:
Increase (decrease) in our regulated revenues
Gas rates............................................... $ (748,000)
Weather normalization adjustment........................ (652,000)
Sales volumes........................................... 2,904,000
On-system transportation................................ 81,000
Off-system transportation............................... 193,000
Other................................................... (16,000)
-----------
Total............................................... $ 1,762,000
-----------
Increase (decrease) in our non-regulated revenues
Gas rates............................................... $ 689,000
Sales volumes........................................... (1,263,000)
Other................................................... 7,000
-----------
Total............................................... $ (567,000)
-----------
Total increase in revenues...................... $ 1,195,000
Decrease in our intersegment revenues....................... 1,621,000
-----------
Increase in our consolidated revenues................... $ 2,816,000
===========
Percentage increase in our regulated volumes
Gas sales............................................... 27.2
On-system transportation................................ 11.1
Off-system transportation............................... 26.4
Percentage decrease in our non-regulated gas sales
volumes................................................... (15.1)
|
OPERATING EXPENSES
The decrease in purchased gas expense for 2002 of $14,551,000 was due primarily to the 21% decrease in the cost of gas purchased for retail sales and the 11% decrease in volumes sold.
The increase in purchased gas expense for 2001 of $23,493,000 was due primarily to the 73% increase in the cost of gas purchased for retail sales and the 13% increase in volumes sold.
In the following table we set forth variations in our purchased gas expense for the last two fiscal years:
INCREASE (DECREASE)
--------------------------------
2002 COMPARED 2001 COMPARED
TO 2001 TO 2000
------------- -------------
Increase (decrease) in our regulated gas expense
Gas rates............................................... $ (2,887,000) $11,505,000
Purchase volumes........................................ (4,877,000) 2,967,000
------------ -----------
Total............................................... $ (7,764,000) $14,472,000
------------ -----------
Increase (decrease) in our non-regulated gas expense
Gas rates............................................... $ (6,651,000) $ 8,308,000
Purchase volumes........................................ (136,000) 713,000
------------ -----------
Total............................................... $ (6,787,000) $ 9,021,000
------------ -----------
Total increase (decrease) in our gas expense.... $(14,551,000) $23,493,000
============ ===========
|
The increase in purchased gas expense for the six months ended December 31, 2002 of $2,326,000 was primarily due to the 27% increase in sales volumes in our regulated business. Our sales volumes primarily increased because of the significantly colder weather in 2002.
The decreases in non-regulated gas expense and intersegment gas expenses for the six months ended December 31, 2002 were primarily attributable to the non-regulated segment discontinuance of selling gas to the regulated segment effective January 1, 2002.
In the following table we set forth variations in our purchased gas expense for the six months ended December 31, 2002 compared to 2001:
Increase (decrease) in our regulated gas expense
Gas rates............................................... $ (135,000)
Purchase volumes........................................ 1,407,000
----------
Total............................................... $1,272,000
----------
Increase (decrease) in our non-regulated gas expense
Gas rates............................................... $ 340,000
Purchase volumes........................................ (974,000)
Transportation expense.................................. 67,000
----------
Total............................................... $ (567,000)
----------
Total increase in our gas expense............... $ 705,000
Decrease in our intersegment gas expense.................... 1,621,000
----------
Increase in our consolidated gas expense.................... $2,326,000
==========
|
The increase in operation and maintenance expense of $577,000 for the six months ended December 31, 2002 was primarily due to an increase in bad debt expense resulting from higher gas prices and colder winter weather, and due to increased payroll and benefit costs. The increase in taxes other than income taxes for the six months ended December 31, 2002 of $110,000 was primarily due to increased property taxes.
The decrease in interest charges for the six months ended December 31, 2002 of $244,000 was primarily due to lower interest rates on the short-term notes payable.
BASIC AND DILUTED EARNINGS PER COMMON SHARE
For the fiscal years ended June 30, 2002, 2001 and 2000, and the six months ended December 31, 2002 and 2001, our basic earnings per common share changed as a result of changes in net income 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 and our Employee Stock Purchase Plan.
We have no potentially dilutive securities. As a result, our basic earnings per common share and our diluted earnings per common share are the same.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, entitled Accounting for Asset Retirement Obligations, and we adopted this statement effective July 1, 2002. Statement No. 143 addresses financial accounting for legal obligations associated with the retirement of long-lived assets. Upon adoption of this statement, we recorded $178,000 of asset retirement obligations in the balance sheet primarily representing the current estimated fair value of our obligation to plug oil and gas wells at the time of abandonment. Of this amount, $47,000 was recorded as incremental cost of the underlying property, plant and equipment. The cumulative effect on earnings of adopting this new statement was a charge to earnings of approximately $88,000 (net of income taxes of approximately $55,000), representing the cumulative amounts of depreciation and changes in the asset retirement obligation due to the passage of time for historical accounting periods. The adoption of this new standard did not have a significant impact on income before cumulative effect of a change in accounting
principle for the six- and twelve-month periods ended December 31, 2002. Pro forma net income and earnings per share have not been presented for the six months ended December 31, 2001 because the pro forma application of Statement No. 143 to prior periods would result in pro forma net income and earnings per share not materially different from the actual amounts reported for those periods in the accompanying consolidated statements of income.
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, entitled Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 addresses accounting and reporting for the impairment or disposal of long-lived assets. Statement No. 144 was effective July 1, 2002. The impact of implementation on our financial position or results of operations was not material.
In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, entitled Accounting for Costs Associated with Exit or Disposal Activities. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and is effective for exit or disposal activities that are initiated after December 31, 2002. We have not committed to any such exit or disposal plan. Accordingly, this new statement will not presently have any impact on us.
OUR 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 months 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. 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.
As a part of our unregulated transportation activities, we periodically contract with our transportation customers to acquire gas that we will transport to these customers. At the time we make a sales commitment to one of these customers, we attempt to cover this position immediately with gas purchase commitments that match the terms of the related sales contract in order to minimize our price volatility risk.
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" under Statement of Financial Accounting Standards No. 133 entitled Accounting for Derivative Instruments and Hedging Activities.
We are exposed to risk resulting from changes in interest rates on our variable rate notes payable. The interest rate on our current short-term line of credit with Branch Banking and Trust Company is benchmarked to the monthly London Interbank Offered Rate. The balance on our outstanding short-term line of credit was $29,038,000 on December 31, 2002 and $27,755,000 on December 31, 2001. On April 1, 2003, the outstanding balance on our short-term line of credit was $18,068,364. Based on the amount of our outstanding short-term line of credit on December 31, 2002, a one percent (one hundred basis point) increase in our average interest rates would result in a decrease in our annual pre-tax net income of $290,000.
The proceeds from this offering will be used to pay down a portion of our short-term line of credit. See "Use of Proceeds".
BUSINESS
GENERAL
In 1951, we established our first retail gas distribution system, which provided service to a total of 300 customers in two small Kentucky towns. As a result of acquisitions, as well as expansions of our customer base within our existing service areas, we now provide retail gas distribution service to approximately 40,000 customers in central and southeastern Kentucky. We also transport natural gas for others and produce a relatively small amount of oil and gas.
We operate through two segments, regulated and non-regulated. Through our regulated segment, we sell natural gas to our retail customers in 23 predominantly rural communities. In addition, our regulated segment transports gas to industrial customers on our system who purchase gas in the open market. Our regulated segment also transports gas on behalf of local producers and other customers not on our distribution system.
We operate our unregulated segment through three wholly-owned subsidiaries. Two of these subsidiaries, Delta Resources, Inc. and Delgasco, Inc., purchase natural gas on the national market and from Kentucky producers. We resell this gas to industrial customers on our distribution system and to others not on our system. Our third subsidiary that is part of the unregulated segment, Enpro, Inc., produces a relatively small amount of natural gas and oil that is sold on the unregulated market.
We seek to provide dependable, high-quality service to our customers while steadily enhancing value for our shareholders. Our efforts have been focused on developing a balance of regulated and non-regulated businesses to contribute to our earnings by profitably selling and transporting gas in our service territory. Our primary operating strategies are as follows:
* We strive to achieve operational excellence through economical, reliable service and our emphasis on responsiveness to customers. We believe that the expertise and experience of our management and operating employees has enabled us to control operating costs and work with our regulators to manage the rate-making process. For example, our results of operations and financial condition have been strengthened by regulatory developments in recent years, including a weather normalization provision and gas cost recovery clause which have reduced fluctuations in our earnings due to variations in weather and gas prices.
* We continue to invest in facilities for the transmission, distribution and storage of natural gas. We intend to continue to grow our transmission and distribution facilities in order to meet any increasing demand from customers in our service territory. In addition, we intend to enhance our gas storage capability which we believe will enable us better to manage procurement and provide favorable utilization of our system.
* We believe that our responsiveness to customers and the dependability of the service we provide afford us opportunities for growth. While we seek those opportunities, our strategy will continue to entail a conservative approach that strives to minimize our exposure to market risk arising from fluctuations in the prices of gas.
DISTRIBUTION AND TRANSMISSION OF NATURAL GAS
The economy of our service area is based principally on coal mining, farming and light industry. The communities we serve typically contain populations of less than 20,000. Our three largest service areas are Nicholasville, Corbin and Berea, Kentucky. In Nicholasville we serve approximately 7,000 customers, in Corbin we serve approximately 6,000 customers, and in Berea we serve approximately 4,000 customers.
The communities we serve continue to expand, resulting in growth opportunities for us. Industrial parks have been built in our service areas, resulting in some new industrial customers for us.
Factors that affect our revenues include rates we charge our customers, our supply cost for the natural gas we purchase for resale, economic conditions in our service areas, weather and competition.
Although the rules of the Kentucky Public Service Commission permit us to pass through to our customers changes in the price we must pay for our gas supply, increases in our rates to customers may cause our customers to conserve or to use alternative energy sources.
Our retail sales are seasonal and temperature-sensitive, since the majority of the gas we sell is used for heating. Variations in the average temperature during the winter impact our revenues year-to-year. Kentucky Public Service Commission regulations, however, provide for us to adjust the rates we charge our customers in response to winter weather that is warmer or colder than normal temperatures.
We compete with alternate sources of energy for our retail customers. These alternate sources include electricity, coal, oil, propane and wood. Our unregulated subsidiaries, which sell gas to industrial customers and others, compete with natural gas producers and natural gas marketers for those customers.
Our industrial customers may be able to bypass our system by purchasing their gas supply from sources other than us. Additionally, some of our industrial customers are able to switch economically to alternative sources of energy. These are competitive concerns that we continue to address.
Some natural gas producers in our service area can access pipeline delivery systems other than ours, which generates competition for our transportation function. We continue our efforts to purchase or transport natural gas that is produced in reasonable proximity to our transportation facilities.
As an active participant in many areas of the natural gas industry, we plan to continue efforts to expand our gas distribution system and customer base. We continue to consider acquisitions of other gas systems, some of which are contiguous to our existing service areas, as well as expansion within our existing service areas.
We anticipate continuing activity in gas production and transportation and plan to pursue and increase these activities wherever practicable. We continue to consider the construction, expansion or acquisition of additional transmission, storage and gathering facilities to provide for increased transportation, enhanced supply and system flexibility.
CONSOLIDATED OPERATING STATISTICS
In the following table, we provide information about our business during the periods indicated. The data for the six months ended December 31, 2002 and 2001 have been derived from our unaudited quarterly financial statements.
FOR THE FOR THE
SIX SIX
MONTHS MONTHS
ENDED ENDED FOR THE FISCAL YEARS ENDED JUNE 30,
DEC. 31, DEC. 31, ----------------------------------------------------------
2002 2001 2002 2001 2000 1999 1998
-------- -------- ------ ------ ------ ------ ------
AVERAGE RETAIL CUSTOMERS SERVED
Residential................... 33,098 32,904 33,624 33,691 33,251 32,429 31,953
Commercial.................... 5,122 5,049 5,235 5,227 5,110 4,958 4,873
Industrial.................... 62 62 62 65 66 68 70
------ ------ ------ ------ ------ ------ ------
Total....................... 38,282 38,015 38,921 38,983 38,427 37,455 36,896
====== ====== ====== ====== ====== ====== ======
OPERATING REVENUES ($000)
Residential sales............. 7,296 6,606 23,202 28,088 19,672 17,329 19,969
Commercial sales.............. 4,798 4,038 13,832 17,040 10,952 10,039 11,890
Industrial sales.............. 443 390 1,141 2,046 1,104 1,173 1,576
On-system transportation...... 1,961 1,880 3,826 3,895 4,056 4,107 3,877
Off-system transportation..... 765 571 1,220 814 522 363 483
Non-regulated sales........... 7,323 6,269 12,511 18,640 9,431 5,491 6,335
Other......................... 69 85 198 247 190 170 128
------ ------ ------ ------ ------ ------ ------
Total....................... 22,655 19,839 55,930 70,770 45,927 38,672 44,258
====== ====== ====== ====== ====== ====== ======
SYSTEM THROUGHPUT
(MILLION CU. FT.)
Residential sales............. 649 515 2,133 2,614 2,266 2,223 2,377
Commercial sales.............. 472 362 1,389 1,666 1,397 1,401 1,504
Industrial sales.............. 53 46 142 249 174 189 231
------ ------ ------ ------ ------ ------ ------
Total retail sales.......... 1,174 923 3,664 4,529 3,837 3,813 4,112
On-system transportation...... 2,640 2,376 4,866 4,768 4,703 4,434 3,467
Off-system transportation..... 2,254 1,781 3,590 2,677 1,672 1,144 1,489
------ ------ ------ ------ ------ ------ ------
Total....................... 6,068 5,080 12,120 11,974 10,212 9,391 9,068
====== ====== ====== ====== ====== ====== ======
AVERAGE ANNUAL CONSUMPTION PER
AVERAGE RESIDENTIAL CUSTOMER
(THOUSAND CU. FT.)............. 59 47 63 78 68 69 74
LEXINGTON, KENTUCKY DEGREE DAYS
Actual........................ 1,276 830 4,137 4,961 4,162 4,188 4,397
Percent of 30-year average
(six months - 1,789)
(fiscal year - 4,655)........ 71.3% 46.4% 88.9% 106.6% 89.4% 90.0% 94.5%
AVERAGE REVENUE PER MILLION
CU. FT. SOLD AT RETAIL ($)..... 10.68 11.95 10.42 10.42 8.27 7.49 8.13
AVERAGE GAS COST PER MILLION
CU. FT. SOLD AT RETAIL ($)..... 5.49 5.60 5.39 6.07 3.77 3.69 4.60
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GAS SUPPLY
We purchase our natural gas from a combination of interstate and Kentucky sources. In our fiscal year ended June 30, 2002, we purchased approximately 98% of Delta's natural gas from interstate sources.
INTERSTATE GAS SUPPLY
Our agreement with Woodward is for a term that expires on April 30, 2004. Our agreement with Woodward is to supply the interstate gas transported for us by Tennessee Gas Pipeline. In our fiscal year June 30, 2002, approximately 25% of Delta's gas supply was purchased under our agreement with Woodward.
Our agreement with Dynegy, under which we purchase the natural gas transported for us by Columbia Gas Transmission Corporation and Columbia Gulf Transmission Corporation, will end April 30, 2003. In fiscal year ended June 30, 2002, approximately 13% of Delta's gas supply was purchased under our agreement with Dynegy.
We are currently in negotiations with Woodward to enter into a commodity requirements agreement to replace Dynegy's supply obligations to us. We intend, prior to April 30, 2003, to enter into a formal agreement with Woodward that contains terms similar or more favorable to us than the terms in the Dynegy agreement. However, we cannot assure you that we will enter into an agreement with Woodward or that such agreement will be on similar or more favorable terms than our Dynegy agreement.
In the event we are unable to obtain an agreement with Woodward on terms similar or more favorable to us than the Dynegy agreement, we intend to negotiate and enter into an agreement with Woodward or another gas marketer containing as favorable terms as possible. The most material term that could be less favorable under an agreement to replace Dynegy is our cost of gas. If we are forced to enter into agreements with our cost of gas greater than under the Dynegy agreement, we will attempt through the Kentucky Public Service Commission's normal gas cost recovery process to obtain approval of an increase in the rates we charge our regulated customers in order to recover any increase in our gas supply cost. In such event, we would anticipate obtaining Kentucky Public Service Commission's approval of increased rates. Although this would permit us to pass our increased gas costs on to our customers, the result could reduce the amount of gas we sell to them.
We also purchase additional interstate natural gas from Woodward, as needed, outside of our commodity requirements agreement with Woodward. This spot gas purchasing arrangement is pursuant to an agreement with Woodward that expires on March 31, 2005. We are not obligated to purchase gas from Woodward under this agreement for any periods longer than one month at a time. The price of gas under this agreement is based on current market prices, determined in a similar manner as under the commodity requirements contract with Woodward, with an agreed-to fixed price adjustment per million British Thermal Units purchased.
We purchase gas from M & B Gas Services, Inc. for injection into our underground natural gas storage field. We are not obligated to purchase gas from M & B for any periods longer than one month at a time. The gas is priced at index-based market prices or at mutually agreed to fixed prices. Our agreement with M & B may be terminated upon 30 days' prior written notice by either party. In our fiscal year ended June 30, 2002, approximately 60% of Delta's gas supply was purchased under our agreement with M & B.
We also purchase interstate natural gas from other gas marketers as needed at either current market prices, determined by industry publications, or at forward market prices.
TRANSPORTATION OF INTERSTATE GAS SUPPLY
Our interstate natural gas supply is transported to us from production and storage fields by Tennessee Gas Pipeline Company, Columbia Gas Transmission Corporation, Columbia Gulf Transmission Corporation and Texas Eastern Transmission Corporation.
Our agreements with Tennessee Gas Pipeline extend by their terms until 2005 and, unless terminated by one of the parties, automatically renew for subsequent five-year terms. However, Tennessee has represented to us that as a result of Tennessee's Early Renewal Incentive Option Program begun in 1999, our agreements with Tennessee actually extend through 2008 and thereafter automatically renew for subsequent five-year terms unless terminated by one of the parties. Tennessee is obligated under these agreements to transport up to 19,600 Million cubic feet ("Mcf") per day for us. During fiscal 2002, Tennessee transported a total of 1,106,000 Mcf for us under these contracts. Annually, approximately 25% of Delta's supply requirements flow through Tennessee Gas Pipeline to our points of receipt under our transportation agreements with Tennessee. We have gas storage agreements with Tennessee under the terms of which we reserve a defined storage space in Tennessee's production area storage fields and its market area storage fields, and we reserve the right to withdraw up to fixed daily volumes. These gas storage agreements terminate on the same schedule as our transportation agreements with Tennessee.
Under our agreements with Columbia Gas and Columbia Gulf, Columbia Gas is obligated to transport up to 12,500 Mcf per day for us, and Columbia Gulf is obligated to transport up to a total of 4,300 Mcf per day for us. During fiscal 2002, Columbia Gas and Columbia Gulf transported for us a total of 555,000 Mcf, or approximately 13% of Delta's supply requirements, under all of our agreements with them.
All of our transport agreements with Columbia Gas and Columbia Gulf, except one agreement concerning the transportation of natural gas to supply our Mt. Olivet, Kentucky service area and two agreements concerning the transportation of natural gas to supply our North Middletown, Kentucky service area, extend through 2008 and thereafter continue on a year-to-year basis until terminated by one of the parties. The Mt. Olivet agreement and one of the North Middletown agreements are, by their terms, continuing on a year-to-year basis until terminated by one of the parties upon at least six months prior written notice. The other North Middletown agreement, is by its terms, set to expire October 31, 2004. However, Columbia Gas and Columbia Gulf have orally agreed with us to extend these agreements to 2008 with our other agreements and the parties are in the process of finalizing this extension. While the Mt. Olivet and North Middletown transport agreements are important for these service areas, they involve a relatively small amount of our overall gas supply.
Columbia Gulf also transported additional volumes under agreements it has with M & B to a point of interconnection between Columbia Gulf and us where we purchase the gas to inject into our storage field, as discussed below. The amounts transported under the agreement between Columbia Gulf and this gas marketer for fiscal 2002 constituted approximately 60% of Delta's gas supply. We are not a party to any of these separate agreements.
We have no direct agreement with Texas Eastern Transmission Corporation. However, Woodward has an arrangement with Texas Eastern to transport the gas to us that we purchase from that marketer. Consequently, Texas Eastern transports a small percentage of our interstate gas supply. In fiscal year ended June 30, 2002, Texas Eastern transported approximately 6,100 Mcf of natural gas to our system, which constituted less than 1% of our gas supply.
KENTUCKY GAS SUPPLY
We have an agreement with Columbia Natural Resources to purchase natural gas through October 31, 2004, and thereafter it will renew for additional terms of one year each until terminated by one of the parties. We purchased 55,000 Mcf from Columbia Natural Resources during fiscal 2002. The price for the gas we purchase from Columbia Natural Resources is based on the index price of spot gas delivered to
We also purchased 25,000 Mcf of natural gas from our wholly-owned, unregulated subsidiary, Enpro, during fiscal 2002. Our unregulated production business has since discontinued supplying our utility.
We own and operate an underground natural gas storage field that we use to store a significant portion of our winter gas supply needs. The storage gas is delivered during the summer injection season by Columbia Gulf on behalf of M & B to an interconnection point between Columbia Gulf and us where we receive the gas and flow it to our storage field. M & B arranges transportation of the gas through the Columbia Gulf system to us. This storage capability permits us to purchase and store gas during the non- heating months and then withdraw and sell the gas during the peak usage months. During fiscal 2002, we withdrew 1,900,000 Mcf from this storage field.
We continue to seek additional gas supplies from available sources. We 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 our customers.
REGULATORY MATTERS
The Kentucky Public Service Commission exercises regulatory authority over our retail natural gas distribution and our transportation services. The Kentucky Public Service Commission regulation of our business includes setting the rates we are permitted to charge our retail customers and our transportation customers.
We monitor our need to file requests with the Kentucky Public Service Commission for a general rate increase for our retail gas and transportation services. Through these general rate cases, we are able to adjust the sales prices of our retail gas we sell to and transport for our customers.
On December 27, 1999, the Kentucky Public Service Commission approved an annual revenue increase for us of $420,000. We filed this general rate case in July 1999, and it is our most recent filing of a rate case. The approval of our requests in this rate case included a weather normalization provision that permits us to adjust rates for the billing months of December through April to reflect variations from 30-year average winter temperatures.
The Kentucky Public Service Commission has also approved a gas cost recovery clause, which permits us to adjust the rates charged to our customers to reflect changes in our natural gas supply costs. Although we are not required to file a general rate case to adjust rates pursuant to the gas recovery clause, we are required to make quarterly filings with the Kentucky Public Service Commission.
During July 2001, the Kentucky Public Service Commission required an independent audit of our gas procurement activities and the gas procurement activities of four other gas distribution companies. This is part of the Kentucky Public Service Commission's investigation of increases in wholesale natural gas prices and their impact on customers. The Kentucky Public Service Commission indicated that Kentucky distributors had generally developed sound planning and procurement procedures for meeting their customers' natural gas requirements and that these procedures had provided customers with a reliable supply of natural gas at reasonable costs. The Kentucky Public Service Commission noted the events of the prior year, including changes in natural gas wholesale markets. It required the auditors to evaluate distributors' gas planning and procurement strategies in light of the recent more volatile wholesale markets, with a primary focus on a balanced portfolio of gas supply that balances cost issues, price risk and reliability. The auditors were selected by the Kentucky Public Service Commission. The final audit report, dated November 15, 2002, contains 16 procedural and reporting-related recommendations in the areas of gas supply planning, organization, staffing, controls, gas supply management, gas transportation, gas balancing, response to regulatory change and affiliate relations. The report also addresses several general areas for the five gas distribution companies involved in the audit, including Kentucky natural gas price issues, hedging, gas cost recovery mechanisms, budget billing, uncollectible accounts and forecasting. In January 2003, we responded to the auditors with our comments on action plans they have drafted relating to the
recommendations. We believe that implementation of the recommendations will not result in a significant impact on our financial position or results of operations.
In addition to regulation by the Kentucky Public Service Commission, we may obtain non-exclusive franchises from the cities and communities in which we operate authorizing us to place our facilities in the streets and public grounds. No utility may obtain a franchise until it has obtained approval from the Kentucky Public Service Commission to bid on a local franchise. We hold franchises in four of the cities and seven of the communities we serve. In the other cities and communities we serve, either our 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. We attempt to acquire or reacquire franchises whenever feasible.
Without a franchise, a local government could require us to cease our occupation of the streets and public grounds or prohibit us from extending our facilities into any new area of that city or community. To date, the absence of a franchise has caused no adverse effect on our operations.
PROPERTIES
We own our corporate headquarters in Winchester, Kentucky. We own ten buildings used for field operations in the cities we serve. Also, we own a building in Laurel County, Kentucky used for training and equipment and materials storage.
We own approximately 2,400 miles of natural gas gathering, transmission, distribution, storage and service lines. These lines range in size up to 12 inches in diameter.
We hold leases for the storage of natural gas under 8,000 acres located in Bell County, Kentucky. We developed this property for the underground storage of natural gas.
We use all the properties described in the three paragraphs immediately above principally in connection with our regulated natural gas distribution, transmission and storage segment. See Note 11 of the Notes to Consolidated Financial Statements for a description of our two business segments.
Through our wholly-owned subsidiary, Enpro, we produce oil and gas as a part of the unregulated segment of our business.
Enpro owns interests in oil and gas leases on 11,000 acres located in Bell, Knox and Whitley Counties. Forty gas wells and five oil wells are producing from these properties. The remaining proved, developed natural gas reserves on these properties are estimated to be 3,000,000 Mcf. Oil production from the property has not been significant. Also, Enpro owns the oil and gas underlying 15,400 additional acres in Bell, Clay and Knox Counties. These properties are currently non-producing, and we have performed no reserve studies on these properties. Enpro produced a total of 187,000 Mcf of natural gas during fiscal 2002 from all the properties described in this paragraph.
A producer is conducting exploration activities on part of Enpro's undeveloped holdings. Enpro reserved the option to participate in wells drilled by this producer and also retained certain working and royalty interests in any production from future wells.
Our assets have no significant encumbrances.
EMPLOYEES
On April 1, 2003, we had 156 full-time employees. We consider our relationship with our employees to be satisfactory. Our employees are not represented by unions nor are they subject to any collective bargaining agreements.
LEGAL PROCEEDINGS
We are not parties to any legal proceedings that are expected to have a materially adverse impact on our financial condition or our results of operations.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
Our articles of incorporation authorize us to issue 6,000,000 shares, $1 par value, of our common stock.
Holders of our common stock are entitled to receive such dividends as may be declared by our board of directors. Indentures under which our debentures were issued include a covenant that prohibits our paying dividends on our common stock unless our "Consolidated Tangible Net Worth" (which is defined as our consolidated shareholders' equity less intangible assets) exceeds $25,800,000. As of December 31, 2002, our shareholders' equity, less the $1,461,440 book value of our subsidiaries' pension-related intangible assets, was $31,373,909.
In the event of liquidation, owners of our common stock are entitled to share pro-rata in any distribution, after payment of all of our debts and obligations. There are no pre-emptive rights, conversion rights, redemption provisions or sinking fund provisions applicable to our common stock. The shares of common stock sold in this offering will be fully paid and nonassessable.
The Registrar and Transfer Agent for our common stock is Fifth Third Bank, 38 Fountain Square Plaza, Cincinnati, Ohio 45263.
VOTING
Each share of our common stock entitles the holder to one vote on all matters submitted to a vote of shareholders, including the election of directors. The affirmative vote of a plurality of the votes duly cast is required for the election of directors (that is, the nominees receiving the greatest number of votes will be elected). In the election of directors, shareholders are not permitted to cumulate votes.
The approval of some extraordinary transactions with any person or entity holding 10% or more of our voting stock may require the affirmative vote of holders of at least 80% of the outstanding shares entitled to vote, as explained below.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
We have a Dividend Reinvestment and Stock Purchase Plan under which our shareholders can have their cash dividends automatically reinvested in our common stock. The price of shares purchased through our dividend reinvestment plan is based on the average high and low sales price of our common stock on the date of the participant's purchase. No brokerage fees are added to the purchase price. Participation in our dividend reinvestment plan is voluntary, and a participant may withdraw from the plan at any time.
PREFERRED STOCK
Under our articles of incorporation, we are authorized to issue up to 312,500 shares of preferred stock. At the present time, no preferred shares are issued or outstanding. Our board of directors, without a shareholder vote, is empowered to issue these shares in series and to set the rights pertaining to these shares, including rights to dividends, redemption, liquidation, conversion and voting.
To hinder a proposed transaction opposed by our board of directors, we could issue shares of our preferred stock that might create voting impediments to extraordinary corporate transactions or frustrate persons seeking to effect a merger or otherwise gain control of us.
ANTI-TAKEOVER PROVISIONS
In addition to our ability to issue preferred stock, our articles of incorporation contain provisions and the Kentucky Business Corporation Act contains statutes that have anti-takeover implications. These provisions and statutes are summarized below, but are subject to numerous detailed exceptions and qualifications. For a complete understanding of these provisions and statutes, you should read our articles of incorporation and the Kentucky Revised Statutes Sections 271B.12-200-12-230. These provisions and statutes could also have the effect of creating impediments to extraordinary corporate transactions and frustrating
persons seeking to effect a merger or otherwise gain control of us in a transaction opposed by our board of directors.
Our articles of incorporation establish a classified board of directors. Under this provision, one-third of our directors are elected each year for a three-year term. Directors may be removed without cause, but only by a vote of 80% of the shares entitled to vote at an election of our directors. Also, our articles of incorporation provide that the number of directors as fixed by our by-laws can only be changed by an 80% or more affirmative shareholder vote or an affirmative vote of a majority of our board of directors.
Under our articles of incorporation, extraordinary transactions with any person or entity holding 10% or more of our voting stock that would involve a change in our control, such as mergers and other acquisition transactions, may require the approval of holders of at least 80% of each class of our outstanding voting securities.
Kentucky has adopted a type of anti-takeover statute known as a business combination statute that applies to some transactions in which we and any interested shareholder, or affiliates or associates of interested shareholders, might be a party. Under the statute, an "interested shareholder" means any person (other than us and our majority-owned subsidiaries):
* who beneficially owns 10% or more of our outstanding voting stock, or
* who is one of our affiliates and at any time during the five-year period prior to the proposed business combination owned 10% or more of our outstanding voting stock.
The business combination transactions covered by the business combination statute include, among other things, mergers, certain dispositions of assets, certain issuances and transfers of securities, certain recapitalizations and reorganizations, as well as other specified transactions involving us and an interested shareholder or its affiliates or associates.
Subject to exceptions and qualifications, the business combination statute prohibits us from engaging in a business combination with an interested shareholder or its affiliates or associates for a period of five years following the date on which the shareholder became an interested shareholder, unless a majority of our independent directors approves the business combination before the shareholder becomes an interested shareholder.
In addition, any covered business combination with an interested shareholder must be approved by either:
* (1) the affirmative vote of at least 80% of the votes entitled to be cast by outstanding shares of our voting stock and (2) the affirmative vote of at least 2/3 of the votes entitled to be cast by holders of our voting stock other than voting stock beneficially owned by the interested shareholder who is, or whose affiliate is, a party to the business combination or beneficially owned by an affiliate or associate of such interested shareholders; or
* a majority of our "independent directors" that are also "continuing directors".
An "independent director" is any director who is not one of our officers or full-time employees or an affiliate or associate of an interested shareholder or any of its affiliates. A "continuing director" is:
* any director who is not an affiliate or associate of an interested shareholder and who was a director before the interested shareholder became an interested shareholder, and
* any successor to a continuing director who is not an affiliate or associate of an interested shareholder and was recommended or elected by a majority of our other continuing directors at a meeting at which a quorum consisting of a majority of our other continuing directors was present.
The foregoing vote requirements are not applicable in some instances if the consideration paid to our shareholders in the business combination transaction meets specific "fair price" determinations set forth in the Kentucky Business Corporation Act and certain other requirements regarding the payment of annual dividends and the amount of our stock acquired by the interested shareholder after it became an interested shareholder.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement among us and the underwriters named below, for whom Stifel, Nicolaus & Company, Incorporated is the lead underwriter, the underwriters have severally agreed to purchase from us, and we have agreed to sell to them, an aggregate of 500,000 shares of common stock in the amounts set forth below opposite their respective names.
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
Stifel, Nicolaus & Company, Incorporated....................
J.J.B. Hilliard, W.L. Lyons, Inc. ..........................
Friedman, Billings, Ramsey & Co., Inc. .....................
BB&T Capital Markets, a division of Scott & Stringfellow,
Inc. .....................................................
-------
Total................................................... 500,000
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Under the terms and conditions of the underwriting agreement, the underwriters are committed to accept and pay for all of the shares, if any are taken. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the non-defaulting underwriters may be increased or, in certain cases, the underwriting agreement may be terminated. In the underwriting agreement, the obligations of the underwriters are subject to approval of certain legal matters by their counsel, including, without limitation, the authorization and the validity of the shares, and to various other conditions contained in the underwriting agreement, such as receipt by the underwriters of officers' certificates and legal opinions.
The underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus, and to certain securities dealers (who may include the underwriters) at such price, less a concession in an amount determined by the underwriters in their sole discretion. The underwriters may allow, and the selected dealers may reallow, a concession in an amount determined by the underwriters in their sole discretion to certain brokers and dealers. After the offering, the offering price and other selling terms may from time to time be changed by the underwriters.
We have granted to the underwriters an option, exercisable within 30 days after the date of this prospectus, to purchase up to 75,000 additional shares of our common stock solely to cover over-allotments, if any, at the same price per share to be paid by the underwriters for the other shares of common stock in this offering. If the underwriters purchase any additional shares under this option, each underwriter will be committed to purchase that number of additional shares as determined by the underwriters and set forth in the written notice to us indicating that the underwriters are exercising their option to purchase the additional shares.
The following table shows the underwriting fees to be paid to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the over-allotment option.
NO EXERCISE FULL EXERCISE
----------- -------------
Per Share....................................... $ $
Total....................................... $ $
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We estimate that we will spend approximately $80,000 in expenses in addition to the underwriters fees.
In connection with the offering, the underwriters may engage in transactions that are intended to stabilize, maintain or otherwise affect the price of the common stock during and after the offering, such as the following:
* The underwriters may over-allot or otherwise create a short position in the common stock for their own account by selling more shares of common stock than have been sold to them;
* The underwriters may elect to cover any such short position by purchasing shares of common stock in the open market or by exercising the over-allotment option;
* The underwriters may stabilize or maintain the price of the common stock by bidding;
* The underwriters may impose penalty bids, under which selling concessions allowed to syndicate members or other broker-dealers participating in the offering are reclaimed if shares of common stock previously distributed in the offering are repurchased in connection with stabilization transactions or otherwise; and
* The underwriters may engage in passive market-making transactions.
The effect of these transactions may be to stabilize or maintain the market price of the common stock at a level above that which might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of the common stock to the extent that it discourages resales of the common stock. The magnitude or effect of any stabilization or other transactions is uncertain. These transactions may be effected in the Nasdaq National Market System or otherwise and, if commenced, may be discontinued at any time.
We have agreed to indemnify the underwriters and their controlling persons against specified liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments that the underwriters may be required to make for such liabilities.
With the exception of issuances and sales under our Dividend Reinvestment and Stock Purchase Plan and our Employee Stock Purchase Plan, we and each of our executive officers and directors have agreed that for a period of 90 days after the date of this prospectus, we and they will not, without the prior written consent of Stifel, Nicolaus & Company, Incorporated, directly or indirectly offer for sale, sell or contract to sell, any option or contract to purchase or purchase any option or contract to sell or grant any option, right or warrant for the sale of or otherwise dispose of or transfer (subject to certain exceptions) any shares of our common stock or securities convertible into or exchangeable or exercisable for shares of our common stock.
Certain of the underwriters engage in transactions with and, from time to time, have performed services for us and our subsidiaries in the ordinary course of business.
LEGAL MATTERS
Our counsel, Stoll, Keenon & Park, LLP, Lexington, Kentucky, will pass on the validity of the common stock. Certain legal matters will be passed upon for the underwriters by their counsel, Thompson Coburn LLP, St. Louis, Missouri.
Attorneys in the firm of Stoll, Keenon & Park, LLP representing us in this common stock offering own collectively 7,534 shares of our common stock.
EXPERTS
The financial statements as of June 30, 2002 and for the year ended June 30, 2002, included in this prospectus, and the related financial statement schedule for the year ended June 30, 2002, incorporated by reference in this prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the registration statement, and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.
Arthur Andersen LLP, independent public accountants, audited our Consolidated Financial Statements and schedules for the fiscal years ended June 30, 2000 and 2001, included and/or incorporated by reference in this prospectus, and elsewhere in the registration statement filed in connection with this prospectus, as indicated in their reports with respect to those Consolidated Financial Statements and schedules. We include those Consolidated Financial Statements and schedules in this prospectus in reliance upon the authority of Arthur Andersen LLP as experts in giving those reports. After reasonable efforts we have not been able to obtain the written consent of Arthur Andersen LLP permitting us to name it in this prospectus as having certified our financial statements for the two fiscal years in the period ended June 30, 2001. This lack of consent will limit your ability to assert claims against Arthur Andersen LLP as explained under the heading "Risk Factors".
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other information with the SEC. Instead of repeating the information that we have already filed with the SEC, the SEC allows us to "incorporate by reference" in this prospectus information contained in documents we have filed with the SEC. Those documents form an important part of this prospectus. You may obtain a copy of any filing we have made with the SEC directly from the SEC by:
* reading and copying any materials we file with the SEC at the SEC's public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549, or
* visiting the SEC's Internet site at http://www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file electronically.
You can obtain more information about the SEC's public reference room by calling the SEC at 1-800-SEC-0330.
INCORPORATION BY REFERENCE
We incorporate by reference the following reports that we previously filed with the SEC:
* Our Annual Report on Form 10-K (SEC File Number: 1.000-08788) for the fiscal year ended June 30, 2002 and our amendment to our Annual Report on Form 10-K/A for the year ended June 30, 2002 that we filed with the SEC on September 16, 2002;
* Those portions of the Proxy Statement with respect to the 2002 Annual
Meeting of Shareholders that are incorporated by reference into Items
10, 11, 12 and 13 of our Annual Report on Form 10-K (SEC File Number:
1.000-08788) for the fiscal year ended June 30, 2002;
* Our Quarterly Report on Form 10-Q (SEC File Number: 1.000-08788) for the quarterly period ended September 30, 2002;
* Our Quarterly Report on Form 10-Q (SEC File Number 1.000-08788) for the quarterly period ended December 31, 2002; and
* Our current Report on Form 8-K (SEC File Number: 1.000-08788) dated November 22, 2002 that we filed with the SEC on November 22, 2002.
We will provide to each person, including any beneficial owner, to whom this prospectus is delivered, a copy of any or all of the information that has been incorporated by reference in this prospectus but not delivered with this prospectus. This additional information will be provided upon a written or oral request and at no cost to the requester. Requests for this information should be made to:
Mr. John F. Hall Vice President--Finance, Secretary and Treasurer Delta Natural Gas Company, Inc. 3617 Lexington Road Winchester, Kentucky 40391 Telephone: (859) 744-6171
As allowed by the SEC's rules, we have not included in this prospectus all of the information that is included in the registration statement. At your request, we will provide you, free of charge, with a copy of the registration statement, any of the exhibits to the registration statement, or a copy of any other filing we have made with the SEC. If you want more information, write in care of or call Mr. John F. Hall at the above address or phone number.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Delta Natural Gas Company, Inc.:
We have audited the accompanying consolidated balance sheet of Delta Natural Gas Company, Inc. and subsidiaries (the "Company") as of June 30, 2002, and the related consolidated statements of capitalization, income, cash flows and changes in shareholders' equity for the year ended June 30, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of the Company as of June 30, 2001 and for each of the two years in the period then ended were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated August 10, 2001.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Delta Natural Gas Company, Inc. and subsidiary companies as of June 30, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
August 19, 2002
REPORT OF PREVIOUS INDEPENDENT PUBLIC ACCOUNTANTS
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
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, 2001 and 2000, 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, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Delta Natural Gas Company, Inc. and subsidiary companies as of June 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
August 10, 2001
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------------
2002 2001 2000
----------- ----------- -----------
OPERATING REVENUES................................... $55,929,780 $70,770,156 $45,926,775
----------- ----------- -----------
OPERATING EXPENSES
Purchased gas.................................... $30,157,225 $44,707,739 $21,214,834
Operation and maintenance........................ 9,685,746 9,844,728 9,139,143
Depreciation and depletion....................... 4,080,944 3,840,450 3,989,090
Taxes other than income taxes.................... 1,354,913 1,423,020 1,338,486
Income taxes (Note 3)............................ 2,249,500 2,232,500 2,068,500
----------- ----------- -----------
Total operating expenses..................... $47,528,328 $62,048,437 $37,750,053
----------- ----------- -----------
OPERATING INCOME..................................... $ 8,401,452 $ 8,721,719 $ 8,176,722
OTHER INCOME AND DEDUCTIONS, NET..................... 17,018 31,141 42,866
----------- ----------- -----------
INCOME BEFORE INTEREST CHARGES....................... $ 8,418,470 $ 8,752,860 $ 8,219,588
----------- ----------- -----------
INTEREST CHARGES
Interest on long-term debt....................... $ 3,728,847 $ 3,775,856 $ 3,845,565
Other interest................................... 891,750 1,179,949 748,006
Amortization of debt expense..................... 161,160 161,160 161,160
----------- ----------- -----------
Total interest charges....................... $ 4,781,757 $ 5,116,965 $ 4,754,731
----------- ----------- -----------
NET INCOME........................................... $ 3,636,713 $ 3,635,895 $ 3,464,857
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
(BASIC AND DILUTED)................................ 2,513,804 2,477,983 2,433,397
BASIC AND DILUTED EARNINGS PER COMMON SHARE.......... $ 1.45 $ 1.47 $ 1.42
DIVIDENDS DECLARED PER COMMON SHARE.................. $ 1.16 $ 1.14 $ 1.14
The accompanying notes to consolidated financial statements are an integral part of these statements.
|
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------------
2002 2001 2000
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.......................................... $ 3,636,713 $ 3,635,895 $ 3,464,857
Adjustments to reconcile net income to net cash from
operating activities
Depreciation, depletion and amortization.......... 4,354,396 4,047,715 4,240,595
Deferred income taxes and investment tax
credits.......................................... 1,110,916 2,332,458 1,446,444
Other--net........................................ 595,894 700,091 841,877
(Increase) decrease in assets
Accounts receivable............................... 1,767,741 (1,860,926) (1,160,957)
Gas in storage.................................... (556,871) (1,665,124) 48,005
Materials and supplies............................ 69,663 (129,278) 200,689
Prepayments....................................... 681,195 (690,662) (51,964)
Other assets...................................... (1,551,055) (333,402) (561,893)
Increase (decrease) in liabilities
Accounts payable.................................. (1,524,216) 1,647,056 1,630,760
Refunds due customers............................. 35,653 (5,708) 2,679
Deferred (advance recovery of) gas cost........... 368,648 (4,518,953) (1,124,219)
Accrued taxes..................................... (44,503) (521,190) 284,891
Other current liabilities......................... 128,283 11,340 (302,553)
Other liabilities................................. 1,439,439 3,260 (131,706)
----------- ----------- -----------
Net cash provided by operating activities....... $10,511,896 $ 2,652,572 $ 8,827,505
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................ $(9,421,765) $(7,069,713) $(8,795,653)
----------- ----------- -----------
Net cash used in investing activities........... $(9,421,765) $(7,069,713) $(8,795,653)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock......................... $(2,916,418) $(2,825,267) $(2,777,372)
Issuance of common stock, net..................... 707,422 646,514 697,926
Repayment of long-term debt....................... (1,375,000) (810,999) (1,735,000)
Issuance of notes payable......................... 36,860,000 52,415,000 27,810,000
Repayment of notes payable........................ (34,305,000) (45,240,000) (23,880,000)
----------- ----------- -----------
Net cash provided by (used in) financing
activities..................................... $(1,028,996) $ 4,185,248 $ 115,554
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.......................................... $ 61,135 $ (231,893) $ 147,406
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.......... 164,101 395,994 248,588
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR................ $ 225,236 $ 164,101 $ 395,994
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for
Interest.......................................... $ 4,636,051 $ 4,970,327 $ 4,626,542
Income taxes (net of refunds)..................... $ 1,130,566 $ 395,737 $ 533,908
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,
-------------------------------
2002 2001
------------ ------------
ASSETS
GAS UTILITY PLANT, AT COST................................ $156,305,063 $147,792,390
Less - Accumulated provision for depreciation........... (49,142,976) (45,375,230)
------------ ------------
Net gas plant......................................... $107,162,087 $102,417,160
------------ ------------
CURRENT ASSETS
Cash and cash equivalents............................... $ 225,236 $ 164,101
Accounts receivable, less accumulated provisions for
doubtful accounts of $165,000 and $575,000 in 2002 and
2001, respectively..................................... 2,884,025 4,651,766
Gas in storage, at average cost......................... 5,216,772 4,659,901
Deferred gas costs...................................... 4,076,059 4,444,707
Materials and supplies, at first-in, first-out cost..... 523,756 593,419
Prepayments............................................. 388,794 1,090,515
------------ ------------
Total current assets.................................. $ 13,314,642 $ 15,604,409
------------ ------------
OTHER ASSETS
Cash surrender value of officers' life insurance (face
amount of $1,236,009).................................. $ 344,687 $ 354,891
Note receivable from officer............................ 158,000 128,000
Prepaid pension, unamortized debt expense and other
(Notes 4 and 7)........................................ 6,969,109 5,674,678
------------ ------------
Total other assets.................................... $ 7,471,796 $ 6,157,569
------------ ------------
Total assets........................................ $127,948,525 $124,179,138
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CAPITALIZATION (SEE CONSOLIDATED STATEMENTS OF
CAPITALIZATION)
Common shareholders' equity............................. $ 34,182,277 $ 32,754,560
Long-term debt (Notes 7 and 8).......................... 48,600,000 49,258,902
------------ ------------
Total capitalization.................................. $ 82,782,277 $ 82,013,462
------------ ------------
CURRENT LIABILITIES
Notes payable (Note 6).................................. $ 19,355,000 $ 16,800,000
Current portion of long-term debt (Notes 7 and 8)....... 1,750,000 2,450,000
Accounts payable........................................ 4,077,983 5,602,199
Accrued taxes........................................... 673,873 718,376
Refunds due customers................................... 73,973 38,320
Customers' deposits..................................... 440,568 418,582
Accrued interest on debt................................ 1,162,956 1,178,410
Accrued vacation........................................ 558,066 538,595
Other accrued liabilities............................... 503,178 400,898
------------ ------------
Total current liabilities............................. $ 28,595,597 $ 28,145,380
------------ ------------
DEFERRED CREDITS AND OTHER
Deferred income taxes................................... $ 14,078,273 $ 12,851,457
Investment tax credits.................................. 404,600 449,800
Regulatory liability (Note 3)........................... 562,025 632,725
Additional minimum pension liability (Note 4)........... 1,461,440 --
Advances for construction and other..................... 64,313 86,314
------------ ------------
Total deferred credits and other...................... $ 16,570,651 $ 14,020,296
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
Total liabilities and shareholders' equity.......... $127,948,525 $124,179,138
============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements.
|
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------------
2002 2001 2000
----------- ----------- -----------
COMMON SHARES
Balance, beginning of year......................... $ 2,495,679 $ 2,459,067 $ 2,413,942
$1.00 par value of 34,400, 36,612 and 45,125 shares
issued in 2002, 2001 and 2000, respectively
Dividend reinvestment and stock purchase
plan.......................................... 28,506 28,958 37,499
Employee stock purchase plan and other......... 5,894 7,654 7,626
----------- ----------- -----------
Balance, end of year............................... $ 2,530,079 $ 2,495,679 $ 2,459,067
=========== =========== ===========
PREMIUM ON COMMON SHARES
Balance, beginning of year......................... $29,657,308 $29,038,995 $28,386,194
Premium on issuance of common shares
Dividend reinvestment and stock purchase
plan.......................................... 561,547 503,897 533,760
Employee stock purchase plan and other......... 111,475 114,416 119,041
----------- ----------- -----------
Balance, end of year............................... $30,330,330 $29,657,308 $29,038,995
=========== =========== ===========
CAPITAL STOCK EXPENSE
Balance, beginning of year......................... $(1,925,431) $(1,917,020) $(1,917,020)
Dividend reinvestment and stock purchase plan.... -- (8,411) --
----------- ----------- -----------
Balance, end of year............................... $(1,925,431) $(1,925,431) $(1,917,020)
=========== =========== ===========
RETAINED EARNINGS
Balance, beginning of year......................... $ 2,527,004 $ 1,716,376 $ 1,028,891
Net income....................................... 3,636,713 3,635,895 3,464,857
Cash dividends declared on common shares (See
Consolidated Statements of Income for rates).... (2,916,418) (2,825,267) (2,777,372)
----------- ----------- -----------
Balance, end of year............................... $ 3,247,299 $ 2,527,004 $ 1,716,376
=========== =========== ===========
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,
-----------------------------
2002 2001
----------- -----------
COMMON SHAREHOLDERS' EQUITY
Common shares, par value $1.00 per share (Notes 4 and 5)
Authorized 6,000,000 shares
Issued and outstanding 2,530,079 and 2,495,679
shares in 2002 and 2001, respectively............. $ 2,530,079 $ 2,495,679
Premium on common shares................................ 30,330,330 29,657,308
Capital stock expense................................... (1,925,431) (1,925,431)
Retained earnings (Note 7).............................. 3,247,299 2,527,004
----------- -----------
Total common shareholders' equity............... $34,182,277 $32,754,560
----------- -----------
LONG-TERM DEBT (NOTES 7 AND 8)
Debentures, 8.3%, due 2026.............................. $14,816,000 $14,821,000
Debentures, 6 5/8%, due 2023............................ 11,445,000 11,933,000
Debentures, 7.15%, due 2018............................. 24,089,000 24,271,000
Promissory note from acquisition of underground storage,
non-interest bearing, due through 2001 (less
unamortized discount of $16,098 in 2001).............. -- 683,902
----------- -----------
Total long-term debt............................ $50,350,000 $51,708,902
Less amounts due within one year, included in current
liabilities........................................... (1,750,000) (2,450,000)
----------- -----------
Net long-term debt.............................. $48,600,000 $49,258,902
----------- -----------
Total capitalization........................ $82,782,277 $82,013,462
=========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements.
|
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION Delta Natural Gas Company, Inc. ("Delta" or "the Company") has three wholly-owned subsidiaries. Delta Resources, Inc. ("Delta Resources") buys gas and resells it to industrial or other large use customers on Delta's system. Delgasco, Inc. buys gas and resells it to Delta Resources and to customers not on Delta's 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.
(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 3.1% of average depreciable plant for 2002, 2001 and 2000, 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 serves 40,000 customers in central and southeastern Kentucky. Revenues and customer receivables arise primarily from sales of natural gas to customers and from transportation services for others. Provisions for doubtful accounts are recorded to reflect the expected net realizable value of accounts receivable.
(H) USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(I) RATE REGULATED BASIS OF ACCOUNTING The Company's regulated operations follow the accounting and reporting requirements of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation". The economic effects of regulation can result in a regulated company recovering costs from customers in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this results, costs are deferred as assets in the consolidated balance sheet (regulatory assets) and recorded as expenses when such amounts are reflected in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
current collection in rates of costs that are expected to be incurred in the future (regulatory liabilities). The amounts recorded by the Company as regulatory assets and regulatory liabilities are as follows:
2002 2001
----- -----
REGULATORY ASSETS ($000)
Deferred gas cost....................................... 4,076 4,445
Loss on extinguishment of debt.......................... 1,337 1,395
Rate case and gas audit expense......................... 116 142
----- -----
Total regulatory assets............................. 5,529 5,982
===== =====
REGULATORY LIABILITIES ($000)
Refunds from suppliers that are due customers........... 74 38
Regulatory liability for deferred income taxes.......... 562 633
----- -----
Total regulatory liabilities........................ 636 671
===== =====
|
The Company is currently earning a return on loss on extinguishment of debt and rate case expenses. Deferred gas costs are presented every three months to the PSC for recovery in accordance with the gas cost recovery rate mechanism.
(2) NEW ACCOUNTING PRONOUNCEMENTS
Effective June, 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 eliminates the pooling-of-interests method and requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. It also requires intangible assets acquired in a business combination to be recognized separately from goodwill. SFAS No. 141 had no impact on the Company's financial position or results of operations with respect to business combination transactions that occurred prior to June 30, 2001. SFAS No. 142 addresses how goodwill and other intangible assets should be accounted for upon their acquisition and afterwards. The primary impact of SFAS No. 142 is that future goodwill and intangible assets with indefinite lives will no longer be amortized beginning in 2002. Instead of amortization, goodwill will be subject to an assessment for impairment by applying a fair-value-based test annually and more frequently if circumstances indicate a possible impairment. If the carrying amount of goodwill exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. The Company does not have recorded goodwill or intangible assets. Accordingly, these new accounting rules will not presently have a significant impact on the Company.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations", which is required to be adopted July 1, 2002. SFAS No. 143 addresses asset retirement obligations that result from the acquisition, construction or normal operation of long-lived assets. It requires companies to recognize asset retirement obligations as a liability when the liability is incurred at its fair value. Adoption of SFAS No. 143 is not expected to have a significant impact on the Company.
In August 2001, the FASB issued SFAS No. 144, entitled Accounting for the Impairment or Disposal of Long-Lived Assets, which is required to be adopted July 1, 2002. SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and APB Opinion No. 30, "Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", and combines the two accounting models
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
into a single model based on the framework established in SFAS No. 121. Adoption of SFAS No. 144 will not have a significant impact on the Company.
The American Institute of Certified Public Accountants has issued an exposure draft Statement of Position ("SOP") "Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment". This proposed SOP applies to all nongovernmental entities that acquire, construct or replace tangible property, plant and equipment ("PP&E") including lessors and lessees. A significant element of the SOP requires that entities use component accounting for PP&E to the extent future component replacement will be capitalized. At adoption, entities would have the option to apply component accounting retroactively for all PP&E assets, to the extent applicable, or to apply component accounting as an entity incurs capitalizable costs that replace all or a portion of PP&E. The proposed effective date of the SOP is January 1, 2003. The Company is currently analyzing the impact of this proposed SOP.
(3) 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 asset and 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 regulatory 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:
2002 2001
----------- -----------
DEFERRED TAX LIABILITIES
Accelerated depreciation................................ $13,436,373 $12,440,957
Deferred gas cost....................................... 1,364,800 1,444,200
Accrued pension......................................... 1,104,200 1,157,200
Debt expense............................................ 406,300 426,900
----------- -----------
Total............................................... $16,311,673 $15,469,257
----------- -----------
DEFERRED TAX ASSETS
Alternative minimum tax credits......................... $ 1,365,200 $ 1,701,100
Regulatory liabilities.................................. 221,700 249,600
Investment tax credits.................................. 159,600 177,400
Other................................................... 486,900 489,700
----------- -----------
Total............................................... $ 2,233,400 $ 2,617,800
----------- -----------
Net accumulated deferred income tax liability... $14,078,273 $12,851,457
=========== ===========
|
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the income tax provision are comprised of the following for the years ended June 30:
2002 2001 2000
---------- ---------- ----------
COMPONENTS OF INCOME TAX EXPENSE
Current
Federal......................................... $ 776,200 $ (77,000) $ 568,100
State........................................... 296,100 (71,700) 137,500
---------- ---------- ----------
Total....................................... $1,072,300 $ (148,700) $ 705,600
Deferred............................................ 1,177,200 2,381,200 1,362,900
---------- ---------- ----------
Income tax expense.......................... $2,249,500 $2,232,500 $2,068,500
========== ========== ==========
|
Reconciliation of the statutory federal income tax rate to the effective income tax rate is shown in the table below:
2002 2001 2000
---- ---- ----
Statutory federal income tax rate........................... 34.0% 34.0% 34.0%
State income taxes net of federal benefit................... 5.3 5.4 5.2
Amortization of investment tax credits...................... (0.8) (0.9) (1.1)
Other differences--net...................................... (0.2) (0.3) (0.4)
---- ---- ----
Effective income tax rate............................... 38.3% 38.2% 37.7%
==== ==== ====
|
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) EMPLOYEE BENEFIT PLANS
(A) DEFINED BENEFIT RETIREMENT PLAN Delta has a trusteed, noncontributory, defined benefit pension plan covering all eligible employees. Retirement income is based on the number of years of service and annual rates of compensation. The Company makes annual contributions equal to the amounts necessary to fund the plan adequately. The following table provides a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the two-year period ended March 31, 2002, and a statement of the funded status as of March 31 of both years, as recognized in the Company's consolidated balance sheets at June 30:
2002 2001
----------- -----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year................. $ 8,486,103 $ 8,188,361
Service cost............................................ 518,496 487,392
Interest cost........................................... 657,126 592,537
Amendments.............................................. 1,514,620 --
Actuarial loss.......................................... (84,009) 332,610
Benefits paid........................................... (411,217) (1,114,797)
----------- -----------
Benefit obligation at end of year....................... $10,681,119 $ 8,486,103
----------- -----------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.......... $ 9,073,398 $10,176,049
Actual return (loss) on plan assets..................... 14,243 (636,591)
Employer contribution................................... 543,255 648,737
Benefits paid........................................... (411,217) (1,114,797)
----------- -----------
Fair value of plan assets at end of year................ $ 9,219,679 $ 9,073,398
----------- -----------
Funded status........................................... $(1,461,440) $ 587,295
Unrecognized net actuarial loss......................... 2,272,764 1,652,236
Unrecognized prior service cost......................... 1,514,620 --
Net transition asset.................................... -- (29,262)
----------- -----------
Net pension asset................................... $ 2,325,944 $ 2,210,269
=========== ===========
|
In addition, the Company has recognized an additional minimum pension liability of $1,461,440 and a corresponding intangible pension asset in the accompanying balance sheet as of June 30, 2002. Effective April 1, 2002, the Company adopted a plan amendment which enhanced the formula for benefits paid under the plan.
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
2002 2001 2000
-------- -------- --------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost............................................ $518,496 $487,392 $535,681
Interest cost........................................... 657,125 592,537 538,400
Expected return on plan assets.......................... (755,307) (800,303) (764,449)
Amortization of unrecognized net loss................... 36,528 -- --
Amortization of net transition asset.................... (29,262) (42,394) (42,394)
-------- -------- --------
Net periodic benefit cost........................... $427,580 $237,232 $267,238
======== ======== ========
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate........................................... 7.50% 7.75% 7.75%
Expected return on plan assets.......................... 8.00% 8.00% 8.00%
Rate of compensation increase........................... 4.00% 4.00% 4.00%
|
During the plan year ended March 31, 2000, Delta eliminated 16 positions in conjunction with a workforce reduction plan. Subsequently, seven additional positions were eliminated as a result of reorganization of Delta's branch offices, which was completed by June 30, 2000. These events constituted a curtailment under SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits". The combined impact of the curtailment gain, the savings in salary expense, and the cost of one time payments made to severed employees was not material to results of operations in 2000.
SFAS No. 106, "Employers' Accounting for Post-Retirement Benefits", and SFAS No. 112, "Employers' Accounting for Post-Employment Benefits", do not affect the Company, as Delta does not provide benefits for post-retirement or post-employment other than the pension plan for retired employees.
(B) EMPLOYEE SAVINGS PLAN The Company has an Employee Savings Plan ("Savings Plan") under which eligible employees may elect to contribute any whole percentage between 2% and 15% of their annual compensation. The Company will match 50% of the employee's contribution up to a maximum Company contribution of 2.5% of the employee's annual compensation. For 2002, 2001 and 2000, Delta's Savings Plan expense was $165,500, $154,600 and $170,800, 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 high and low sale prices of Delta's stock as quoted in NASDAQ's National Market System on the last business day in June and matches those shares so purchased. Therefore, stock with an equivalent market value of $96,300 was issued in July, 2002. 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, 2003.
(5) DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company's Dividend Reinvestment and Stock Purchase Plan ("Reinvestment Plan") provides that shareholders of record can reinvest dividends and also make limited additional investments of up to $50,000 per year in shares of common stock of the Company. Under the Reinvestment Plan the Company issued
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
28,506, 28,958 and 37,499 shares in 2002, 2001 and 2000, respectively. Delta reserved 150,000 shares for issuance under the Reinvestment Plan in December 2000, and as of June 30, 2002 there were 106,266 shares still available for issuance.
(6) NOTES PAYABLE AND LINE OF CREDIT
The current available line of credit is $40,000,000, of which $19,355,000 and $16,800,000 was borrowed, having a weighted average interest rate of 3.67% and 6.97%, as of June 30, 2002 and 2001, respectively. The maximum amount borrowed during 2002 and 2001 was $29,005,000 and $21,445,000, respectively. The interest on this line is determined monthly at the London Interbank Offered Rate plus 1% (one hundred basis points) on the used line of credit. The cost of the unused line of credit is 0.30%. The current line of credit must be renewed during October 2002.
(7) LONG-TERM DEBT
In March 1998 Delta issued $25,000,000 of 7.15% Debentures that mature in March 2018. Redemption of up to $25,000 annually will be made on behalf of deceased holders within 60 days of notice, subject to an annual aggregate $750,000 limitation. The 7.15% Debentures can be redeemed by the Company after April 1, 2003. Restrictions under the indenture agreement covering the 7.15% Debentures include, among other things, a restriction whereby dividend payments cannot be made unless consolidated shareholders' equity of the Company exceeds $21,500,000. No retained earnings are restricted under the provisions of the indenture.
In July 1996 Delta issued $15,000,000 of 8.3% Debentures that mature in July 2026. Redemption on behalf of deceased holders within 60 days of notice of up to $25,000 per holder will be made annually, subject to an annual aggregate limitation of $500,000. The 8.3% Debentures can be redeemed by the Company beginning in August 2001 at a 5% premium, such premium declining ratably until it ceases in August 2006.
In October 1993 Delta issued $15,000,000 of 6 5/8% Debentures that mature in October 2023. Each holder may require redemption of up to $25,000 annually, subject to an annual aggregate limitation of $500,000. Such redemption will also be made on behalf of deceased holders within 60 days of notice, subject to the annual aggregate $500,000 limitation. The 6 5/8% Debentures can be redeemed by the Company beginning in October 1998 at a 5% premium, such premium declining ratably until it ceases in October 2003. The Company may not assume any additional mortgage indebtedness in excess of $2 million without effectively securing the 6 5/8% Debentures equally to such additional indebtedness.
The Company amortizes debt issuance expenses over the life of the related debt on a straight-line basis, which approximates the effective yield method.
(8) 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, 2002 and 2001 was estimated to be $47,479,000 and $48,429,000, respectively. The carrying amount in the accompanying consolidated financial statements as of June 30, 2002 and 2001 is $50,350,000 and $51,025,000, respectively.
The carrying amount of the Company's other financial instruments including cash equivalents, accounts receivable, notes receivable, accounts payable and the non-interest bearing promissory note approximate their fair value.
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES
The Company has entered into individual employment agreements with its five officers and an agreement with the Chairman of the Board. The agreements expire or may be terminated at various times. The agreements provide for continuing monthly payments or lump sum payments and continuation of specified benefits over varying periods in certain cases following defined changes in ownership of the Company.
(10) RATES
Delta's retail natural gas distribution and its transportation services are 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. Delta monitors the need to file a general rate case as a way to adjust its sales prices.
On December 27, 1999, Delta received approval from the PSC for an annual revenue increase of $420,000. This resulted from Delta's last rate case that was filed by Delta in July 1999. The approval included a weather normalization provision that permits Delta to adjust base rates for the billing months of December through April to reflect variations from normal winter weather.
Delta's rates include a Gas Cost Recovery ("GCR") clause, which permits changes in Delta's gas supply costs to be reflected in the rates charged to customers. The GCR requires Delta to make quarterly filings with the PSC, but such procedure does not require a general rate case.
During July 2001, the PSC required an independent audit of the gas procurement activities of Delta and four other gas distribution companies as part of its investigation of increases in wholesale natural gas prices and their impacts on customers. The PSC indicated that Kentucky distributors had generally developed sound planning and procurement procedures for meeting their customers' natural gas requirements and that these procedures had provided customers with a reliable supply of natural gas at reasonable costs. The PSC noted the events of the prior year, including changes in natural gas wholesale markets, and required the audits to evaluate distributors' gas planning and procurement strategies in light of the recent more volatile wholesale markets, with a primary focus on a balanced portfolio of gas supply that balances cost issues, price risk and reliability. The consultants that were selected by the PSC are currently completing this audit. Delta has received a draft of the consultant's report and is in the process of reviewing and commenting on it. The draft report contains procedural and reporting-related recommendations in the areas of gas supply planning, organization, staffing, controls, gas supply management, gas transportation, gas balancing, response to regulatory change and affiliate relations. The report also addresses several general areas for the five distribution companies involved in the audit, including Kentucky natural gas price issues, hedging, GCR mechanisms, budget billing, uncollectible accounts and forecasting. Delta cannot predict how the PSC will interpret or act on any audit recommendations. As a result, Delta cannot predict the impact of this regulatory proceeding on the Company's financial position or results of operations.
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. No utility may obtain a franchise until it has obtained approval from the PSC to bid on a local franchise. Delta holds franchises in four of the cities and seven other communities it serves. In the other cities and communities served by Delta, 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.
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) OPERATING SEGMENTS
The 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 represents Delta and the non-regulated segment consists of Delta Resources, Delgasco and Enpro. The Company operates in a single geographic area of central and southeastern Kentucky.
The segments follow the same accounting policies as described in the Summary of Significant Accounting Policies in Note 1 of the Notes to Consolidated Financial Statements. Intersegment transportation revenue and expenses consist of intercompany revenues and expenses from the sale and purchase of gas as well as intercompany gas transportation services. Effective January 1, 2002, the non-regulated segment discontinued the practice of selling gas to the regulated segment. This led to a decline in intersegment revenues and expenses for 2002. Intersegment transportation revenue and expense is recorded at Delta's tariff rates. Transfer pricing for sales of gas between segments is at cost. Operating expenses, taxes and interest are allocated to the non-regulated segment.
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Segment information is shown below for the fiscal years ended June 30:
2002 2001 2000
($000) ------- ------- -------
REVENUES
Regulated
External customers.................................. 40,370 48,887 33,314
Intersegment........................................ 3,050 3,244 4,606
------- ------- -------
Total regulated................................. 43,420 52,131 37,920
Non-regulated
External customers.................................. 15,560 21,883 12,613
Intersegment........................................ 1,688 27,609 16,249
------- ------- -------
Total non-regulated............................. 17,248 49,492 28,862
Eliminations for intersegment........................... (4,738) (30,853) (20,855)
------- ------- -------
Total operating revenues........................ 55,930 70,770 45,927
======= ======= =======
OPERATING EXPENSES
Regulated
Depreciation........................................ 3,964 3,797 3,940
Income taxes........................................ 1,599 1,696 1,657
Other............................................... 30,485 38,662 24,792
------- ------- -------
Total regulated................................. 36,048 44,155 30,389
------- ------- -------
Non-regulated
Depreciation........................................ 117 43 49
Income taxes........................................ 651 536 412
Other............................................... 15,450 48,167 27,755
------- ------- -------
Total non-regulated............................. 16,218 48,746 28,216
Eliminations for intersegment........................... (4,738) (30,853) (20,855)
------- ------- -------
Total operating expenses........................ 47,528 62,048 37,750
======= ======= =======
OTHER INCOME AND DEDUCTIONS
Regulated............................................... 17 31 43
Non-regulated........................................... -- -- --
------- ------- -------
Total other income and deductions................... 17 31 43
======= ======= =======
INTEREST CHARGES
Regulated............................................... 4,768 5,191 4,766
Non-regulated........................................... 25 42 41
Eliminations for intersegment........................... (11) (116) (52)
------- ------- -------
Total interest charges.............................. 4,782 5,117 4,755
======= ======= =======
NET INCOME
Regulated............................................... 2,621 2,817 2,808
Non-regulated........................................... 1,016 819 657
------- ------- -------
Total net income.................................... 3,637 3,636 3,465
======= ======= =======
ASSETS
Regulated............................................... 126,226 120,710 108,876
Non-regulated........................................... 1,723 3,469 4,043
------- ------- -------
Total assets........................................ 127,949 124,179 112,919
======= ======= =======
CAPITAL EXPENDITURES
Regulated............................................... 9,415 7,070 8,796
Non-regulated........................................... 7 -- --
------- ------- -------
Total capital expenditures.......................... 9,422 7,070 8,796
======= ======= =======
|
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) QUARTERLY FINANCIAL DATA (UNAUDITED)
The quarterly data reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the results for the interim periods.
BASIC AND
DILUTED
EARNINGS (LOSS)
OPERATING OPERATING NET INCOME PER COMMON
QUARTER ENDED REVENUES INCOME (LOSS) SHARE(a)
------------- ----------- ---------- ----------- ---------------
FISCAL 2002
September 30....................... $ 7,258,892 $ 479,305 $ (778,325) $(.31)
December 31........................ 12,580,389 1,880,382 591,751 .24
March 31........................... 25,158,025 4,843,984 3,745,226 1.49
June 30............................ 10,932,474 1,197,781 78,061 .03
FISCAL 2001
September 30....................... $ 6,722,188 $ 152,070 $(1,055,810) $(.43)
December 31........................ 16,941,117 2,081,843 765,633 .31
March 31........................... 32,330,755 5,315,853 3,983,175 1.60
June 30............................ 14,776,096 1,171,953 (57,103) (.02)
---------
(a) Quarterly earnings per share may not equal annual earnings per share due to changes in shares outstanding.
|
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
-----------------------------
2002 2001
----------- -----------
OPERATING REVENUES.......................................... $22,655,101 $19,839,281
----------- -----------
OPERATING EXPENSES
Purchased gas........................................... $12,762,298 $10,436,552
Operation and maintenance............................... 5,125,721 4,549,158
Depreciation and depletion.............................. 2,103,465 2,014,587
Taxes other than income taxes........................... 722,508 612,697
Income tax expense (benefit)............................ (141,443) (133,400)
----------- -----------
Total operating expenses............................ $20,572,549 $17,479,594
----------- -----------
OPERATING INCOME............................................ $ 2,082,552 $ 2,359,687
OTHER INCOME AND DEDUCTIONS, NET............................ 22,693 12,736
INTEREST CHARGES............................................ 2,315,357 2,558,997
----------- -----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE...................................... $ (210,112) $ (186,574)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
(NOTE 3).................................................. (88,370) --
----------- -----------
NET INCOME (LOSS)........................................... $ (298,482) $ (186,574)
=========== ===========
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE BEFORE
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE..... $ (.09) $ (.07)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE....... (.03) --
----------- -----------
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE.......... $ (.12) $ (.07)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (BASIC
AND DILUTED).............................................. 2,541,975 2,506,205
DIVIDENDS DECLARED PER COMMON SHARE......................... $ .59 $ .58
|
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, 2002 JUNE 30, 2002 DECEMBER 31, 2001
----------------- ------------- -----------------
ASSETS
GAS UTILITY PLANT............................ $159,950,436 $156,305,063 $152,631,278
Less-Accumulated provision for
depreciation........................... (50,476,406) (49,142,976) (47,252,928)
------------ ------------ ------------
Net gas plant........................ $109,474,030 $107,162,087 $105,378,350
------------ ------------ ------------
CURRENT ASSETS
Cash and cash equivalents................ $ 419,110 $ 225,236 $ 954,560
Accounts receivable--net................. 4,818,559 2,884,025 2,730,761
Gas in storage........................... 7,381,120 5,216,772 8,141,071
Deferred gas costs....................... 6,706,204 4,076,059 7,064,205
Materials and supplies................... 462,736 523,756 373,237
Prepayments.............................. 192,222 388,794 184,334
------------ ------------ ------------
Total current assets................. $ 19,979,951 $ 13,314,642 $ 19,448,168
------------ ------------ ------------
OTHER ASSETS
Cash surrender value of officers' life
insurance.............................. $ 344,687 $ 344,687 $ 354,891
Note receivable from officer............. 146,000 158,000 116,000
Prepaid pension benefit cost............. 1,924,344 2,325,944 2,071,618
Unamortized debt expense and other....... 4,584,740 4,643,165 3,260,583
------------ ------------ ------------
Total other assets................... $ 6,999,771 $ 7,471,796 $ 5,803,092
------------ ------------ ------------
Total assets......................... $136,453,752 $127,948,525 $130,629,610
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CAPITALIZATION
Common shareholders' equity.............. $ 32,835,349 $ 34,182,277 $ 31,512,318
Long-term debt........................... 48,161,000 48,600,000 48,830,000
------------ ------------ ------------
Total capitalization................. $ 80,996,349 $ 82,782,277 $ 80,342,318
------------ ------------ ------------
CURRENT LIABILITIES
Notes payable............................ $ 29,037,841 $ 19,355,000 $ 27,755,000
Current portion of long-term debt........ 1,750,000 1,750,000 1,750,000
Accounts payable......................... 4,773,183 4,077,983 3,539,356
Accrued taxes............................ (97,857) 673,873 776
Refunds due customers.................... 49,442 73,973 103,406
Customers' deposits...................... 566,968 440,568 551,687
Accrued interest on debt................. 1,174,729 1,162,956 1,235,706
Accrued vacation......................... 558,066 558,066 538,595
Other accrued liabilities................ 441,337 503,178 350,858
------------ ------------ ------------
Total current liabilities............ $ 38,253,709 $ 28,595,597 $ 35,825,384
------------ ------------ ------------
DEFERRED CREDITS AND OTHER
Deferred income taxes.................... $ 14,589,173 $ 14,078,273 $ 13,330,057
Investment tax credits................... 384,600 404,600 427,200
Regulatory liability..................... 536,275 562,025 605,275
Additional minimum pension liability..... 1,461,440 1,461,440 --
Advances for construction and other...... 232,206 64,313 99,376
------------ ------------ ------------
Total deferred credits and other..... $ 17,203,694 $ 16,570,651 $ 14,461,908
------------ ------------ ------------
Total liabilities and
shareholders' equity........... $136,453,752 $127,948,525 $130,629,610
============ ============ ============
|
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
-------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................... $ (298,482) $ (186,574)
Adjustments to reconcile net income (loss) to net cash
from operating activities
Cumulative effect of a change in accounting
principle......................................... 88,370 --
Depreciation, depletion and amortization............ 2,183,099 2,111,265
Deferred income taxes and investment tax credits.... 465,150 428,550
Other, net.......................................... 310,230 288,706
Increase in assets...................................... (6,047,973) (2,779,403)
Increase (decrease) in other liabilities................ 25,408 (2,561,934)
------------ ------------
Net cash provided by (used in) operating
activities........................................ $ (3,274,198) $ (2,699,390)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................................... $ (4,727,323) $ (5,264,483)
------------ ------------
Net cash used in investing activities............... $ (4,727,323) $ (5,264,483)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock............................... $ (1,500,181) $ (1,453,922)
Issuance of common stock, net........................... 451,735 398,254
Repayment of long-term debt............................. (439,000) (1,145,000)
Issuance of notes payable............................... 50,660,202 21,730,000
Repayment of notes payable.............................. (40,977,361) (10,775,000)
------------ ------------
Net cash provided by (used in) financing
activities........................................ $ 8,195,395 $ 8,754,332
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ $ 193,874 $ 790,459
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 225,236 164,101
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 419,110 $ 954,560
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for
Interest............................................... $ 2,223,004 $ 2,128,894
Income taxes (net of refunds).......................... $ 271,271 $ 47,700
|
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) Delta Natural Gas Company, Inc. has three wholly-owned subsidiaries. Delta Resources, Inc. buys gas and resells it to industrial or other large use customers on Delta's system. Delgasco, Inc. buys gas and resells it to Delta Resources and to customers not on Delta's system. Enpro, Inc. owns and operates production properties and undeveloped acreage. All of our subsidiaries 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 six months ended December 31, 2002 and 2001, respectively, are included. All such adjustments are accruals of a normal and recurring nature. The results of operations for the period ended December 31, 2002 are not necessarily indicative of the results of operations to be expected for the full fiscal year. The accompanying financial statements are unaudited and should be read in conjunction with the financial statements, which are incorporated herein by reference to our Annual Report on Form 10-K for the year ended June 30, 2002 and our amendment to our Annual Report on 10-K/A. Certain reclassifications have been made to prior-period amounts to conform to the 2002 presentation.
(3) In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, entitled Accounting for Asset Retirement Obligations, and Delta adopted this statement effective July 1, 2002. Statement No. 143 addresses financial accounting for legal obligations associated with the retirement of long-lived assets. Upon adoption of this statement, we recorded $178,000 of asset retirement obligations in the balance sheet primarily representing the current estimated fair value of our obligation to plug oil and gas wells at the time of abandonment. Of this amount, $47,000 was recorded as incremental cost of the underlying property, plant and equipment. The cumulative effect on earnings of adopting this new statement was a charge to earnings of $88,000 (net of income taxes of $55,000), representing the cumulative amounts of depreciation and changes in the asset retirement obligation due to the passage of time for historical accounting periods. The adoption of the new standard did not have a significant impact on income (loss) before cumulative effect of a change in accounting principle for the six months ended December 31, 2002. Pro forma net income and earnings per share have not been presented for the six months ended December 31, 2001 because the pro forma application of Statement No. 143 to prior periods would result in pro forma net income and earnings per share not materially different from the actual amounts reported for those periods in the accompanying consolidated statements of income.
(4) In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, entitled Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 addresses accounting and reporting for the impairment or disposal of long-lived assets. Statement No. 144 was effective July 1, 2002. The impact of implementation on our financial position or results of operations was not material.
(5) In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, entitled Accounting for Costs Associated with Exit or Disposal Activities. Statement No. 146 addresses financial reporting and accounting for costs associated with exit or disposal activities. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and is effective for exit or disposal activities that are initiated after December 31, 2002. We have not committed to any such exit or disposal plan. Accordingly, this new statement will not presently have any impact on us.
(6) Delta's note receivable from an officer on the accompanying balance sheet relates to a $160,000 loan made to Glenn R. Jennings, our President & Chief Executive Officer. The loan, secured by real estate owned by Mr. Jennings, bears interest at 6%, which Mr. Jennings pays monthly. Delta forgives $2,000 of the principal amount for each month of service Mr. Jennings completes. The outstanding balance on this loan was $146,000 as of December 31, 2002. In the event Mr. Jennings terminates his employment with Delta other than due to a change in control, or Mr. Jennings' employment is terminated for cause or as a result of his disability or death, the loan will become immediately due and payable.
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
(7) Our line of credit agreement and the indentures relating to all of our publicly held debentures contain defined "events of default" which, among other things, can make the obligation immediately due and payable. Of these, we consider the following covenants to be most significant and for the series of debt are 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 $2,000,000 without effectively securing all debentures 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 line of credit and all of the debentures. We are not in default on any of our line of credit or debenture agreements.
(8) In September 2002, our Board of Directors approved an amendment to our Company's Defined Benefit Retirement Plan, effective November 1, 2002. The plan amendment reduced the formula for benefits paid under the plan for future service and restricted participants from taking lump-sum distributions from the plan. Monthly pension expense is currently $26,000. Prior to the amendment becoming effective, monthly pension expense was $71,000.
(9) Delta and its subsidiaries are not parties to any legal proceedings that are expected to have a materially adverse impact on our liquidity, financial condition or results of operations.
(10) During July 2001, the Kentucky Public Service Commission required an independent audit of the gas procurement activities of Delta and four other gas distribution companies as part of its investigation of increases in wholesale natural gas prices and their impacts on customers. The Kentucky Public Service Commission indicated that Kentucky distributors had generally developed sound planning and procurement procedures for meeting their customers' natural gas requirements and that these procedures had provided customers with a reliable supply of natural gas at reasonable costs. The Kentucky Public Service Commission noted the events of the prior year, including changes in natural gas wholesale markets, and required the audits to evaluate distributors' gas planning and procurement strategies in light of the recent more volatile wholesale markets, with a primary focus on a balanced portfolio of gas supply that balances cost issues, price risk and reliability. The consultants that were selected by the Kentucky Public Service Commission issued their final report on November 15, 2002. The report contains 16 procedural and reporting-related recommendations in the areas of gas supply planning, organization, staffing, controls, gas supply management, gas transportation, gas balancing, response to regulatory change and affiliate relations. The report also addresses several general areas for the five gas distribution companies involved in the audit, including Kentucky natural gas price issues, hedging, gas cost recovery mechanisms, budget billing, uncollectible accounts and forecasting. In January 2003, we responded to the consultants with our comments on action plans they had drafted relating to the recommendations. We believe that implementation of the recommendations will not result in a significant impact on our financial position or results of operations.
(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.
DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
External and intersegment revenues and net income (loss) by business segment are as follows:
SIX MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
($000) ------------ ------------
Revenues
Regulated
External customers.................................. 13,726 12,031
Intersegment........................................ 1,607 1,540
------ ------
Total regulated................................. 15,333 13,571
------ ------
Non-regulated
External customers.................................. 8,929 7,808
Intersegment........................................ -- 1,688
------ ------
Total non-regulated............................. 8,929 9,496
------ ------
Eliminations for intersegment........................... (1,607) (3,228)
------ ------
Total operating revenues........................ 22,655 19,839
====== ======
Net Income (Loss)
Regulated............................................... (730) (729)
Non-regulated........................................... 432 542
------ ------
Total net income (loss)......................... (298) (187)
====== ======
|
Effective January 1, 2002, the non-regulated segment discontinued the practice of selling gas to the regulated segment. This led to a decline in intersegment revenues for the six months ended December 31, 2002.
(12) Subsequent events. On February 18, 2003, we completed the sale of the aggregate principal amount of $20,000,000 of 7.00% Debentures due 2026. We used the net proceeds to repay short-term debt and to redeem our 8.30% Debentures outstanding in the aggregate principal amount of $14,806,000.
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. THIS PROSPECTUS DOES NOT OFFER TO SELL ANY SECURITIES IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE INFORMATION IN THIS PROSPECTUS IS CURRENT AS OF THE DATE SHOWN ON THE COVER PAGE.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary....................... 3
Risk Factors............................. 6
Forward-Looking Statements............... 9
Use of Proceeds.......................... 10
Price Range of Common Stock and
Dividends.............................. 10
Capitalization........................... 11
Selected Consolidated Financial Data..... 12
Management's Discussion and Analysis of
Financial Condition and
Results of Operations.................. 13
Business................................. 19
Description of Capital Stock............. 26
Underwriting............................. 28
Legal Matters............................ 29
Experts.................................. 29
Where You Can Find More Information...... 30
Incorporation by Reference............... 30
Index to Consolidated Financial
Statements............................. F-1
|
500,000 SHARES
DELTA NATURAL GAS
COMPANY, INC.
COMMON STOCK
[Delta Natural Gas Company, Inc. Logo]
STIFEL, NICOLAUS & COMPANY
INCORPORATED
J.J.B. HILLIARD, W.L. LYONS, INC.
FRIEDMAN BILLINGS RAMSEY
BB&T CAPITAL MARKETS
A DIVISION OF SCOTT & STRINGFELLOW, INC.
, 2003
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses in connection with the issuance and distribution of the securities being registered, other than underwriting discounts and commissions. Except for the registration fee, Nasdaq National Market System filing fee and NASD review fee, all the amounts shown are estimates.
Registration Fee............................................ $ 1,026
Nasdaq National Market System Filing Fee.................... 5,750
NASD Review Fee............................................. 1,268
Blue Sky Fees and Expenses.................................. 5,000
Accounting Fees............................................. 20,000
Legal Fees.................................................. 20,000
Printing.................................................... 15,000
Miscellaneous Expenses...................................... 11,956
-------
Total................................................... $80,000
=======
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ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Indemnification of directors and officers of Kentucky corporations is governed by Sections 271B.8-500 through 271B.8-580 of the Kentucky Revised Statutes (the "Act"). The Act permits a corporation to provide insurance for directors and officers against claims arising out of their services in those capacities. The registrant provides its directors and officers with indemnification insurance coverage with limits up to $10,000,000.00.
Under the Act, a corporation may indemnify an individual against judgments, amounts paid in settlement, penalties, fines and reasonable expenses (including attorneys' fees) incurred by the individual in connection with any threatened or pending suit or proceeding or any appeal thereof (other than (1) an action by or in the right of the corporation in which the individual is adjudged liable to the corporation or (2) any proceeding charging improper personal benefit to the individual), whether civil or criminal, by reason of the fact that the individual is or was a director or officer of the corporation (or is or was serving at the request of the corporation as a director or officer, employee or agent of another corporation of any type or kind), if such director or officer:
(1) acted in good faith for a purpose;
(2) which the director or officer reasonably believed:
(a) to be in the best interest of the corporation; and
(b) in all cases not involving conduct in the director's or officer's official capacity, that the director's or officer's acts were at least not opposed to the best interest of the corporation; and
(3) in criminal actions or proceedings only, the director or the officer must have had no reasonable cause to believe his or her conduct was unlawful.
The registrant, under agreements with its officers, has agreed to indemnify the officers against liability for actions taken by them in good faith while performing services for the registrant and has agreed to pay legal expenses arising from any such proceedings.
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Further, the registrant's by-laws have provisions requiring the registrant to indemnify its officers and directors, to the extent the Act permits such indemnification. Article VII of the registrant's by-laws, entitled INDEMNIFICATION, provides as follows:
ARTICLE VII
Indemnification
7.1 Definitions. As used in this Article VII:
(a) "Proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether formal or informal;
(b) "Party" includes a person who was, is or is threatened to be made a named defendant or respondent in a Proceeding;
(c) "Expenses" include attorneys' fees;
(d) "Officer" means any person serving as Chairman of the Board of Directors, President, Vice-President, Treasurer, Secretary or any other officer of the Corporation; and
(e) "Director" means an individual who is or was a director of the Corporation or an individual who, while a director of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, limited liability company, registered limited liability partnership, joint venture, association, trust, employee benefit plan or other enterprise. A Director shall be considered serving an employee benefit plan at the request of the Corporation if his or her duties to the Corporation also impose duties on, or otherwise involve services by, him or her to the plan or to participants in or beneficiaries of the plan. "Director" includes, unless the context requires otherwise, the estate or personal representative of a director.
7.2 Indemnification by Corporation.
(a) The Corporation shall indemnify any Officer or Director who is made a Party to any Proceeding by reason of the fact that such person is or was an Officer or Director if:
(1) Such Officer or Director conducted himself in good faith; and
(2) Such Officer or Director reasonably believed:
(i) In the case of conduct in his official capacity with the Corporation, that his conduct was in the best interests of the Corporation; and
(ii) In all other cases, that his conduct was at least not opposed to the best interests of the Corporation; and
(3) In the case of any criminal Proceeding, he had no reasonable cause to believe his conduct was unlawful.
(b) A Director's conduct with respect to an employee benefit plan for a purpose he reasonably believes to be in the interest of the participants in and beneficiaries of the plan shall be conduct that satisfies the requirement of Section 7.2 (a)(2)(ii).
(c) Indemnification shall be made against judgments, penalties, fines, settlements and reasonable expenses, including legal expenses, actually incurred by such Officer or Director in connection with the Proceeding, except that if the Proceeding was by or in the right of the Corporation, indemnification shall be made only against such reasonable Expenses and shall not be made in respect of any Proceeding in which the Officer or Director shall have been adjudged to be liable to the Corporation. The termination of any Proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, by itself, be determinative that the Officer or Director did not meet the requisite standard of conduct set forth in this Section 7.2.
(d) (1) Reasonable Expenses incurred by an Officer or Director as a Party to a Proceeding with respect to which indemnity is to be provided under this Section 7.2 shall be paid or reimbursed by the Corporation in advance of the final disposition of such Proceeding provided:
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(i) The Corporation receives (I) a written affirmation by the
Officer or Director of his good faith belief that he has met the
requisite standard of conduct set forth in this Section 7.2, and
(II) the Corporation receives a written undertaking by or on behalf
of the Officer or Director to repay such amount if it shall
ultimately be determined that he has not met such standard of
conduct; and
(ii) The Corporation's Board of Directors (or other appropriate decision maker for the Corporation) determines that the facts then known to the Board of Directors (or decision maker) would not preclude indemnification under Kentucky law.
(2) The undertaking required herein shall be an unlimited general obligation of the Officer or Director but shall not require any security and shall be accepted without reference to the financial ability of the Officer or Director to make repayment.
(3) Determinations and authorizations of payments under this
Section 7.2(d) shall be made in the manner specified in Section 7.2(e)
of these Bylaws.
(e) (1) The Corporation shall not indemnify an Officer or Director under this Section 7.2 unless authorized in the specific case after a determination has been made that indemnification of the Officer or Director is permissible in the circumstances because he has met the standard of conduct set forth in this Section 7.2.
(2) Such determination shall be made:
(i) By the Corporation's Board of Directors by majority vote of a quorum consisting of directors not at the time Parties to the Proceeding;
(ii) If a quorum cannot be obtained under Section 7.2(e)(2)(i), by majority vote of a committee duly designated by the Corporation's Board of Directors (in which designation directors who are Parties may participate), consisting solely of two (2) or more directors not at the time Parties to the Proceeding; or
(iii) By special legal counsel:
(I) Selected by the Corporation's Board of Directors or its committee in the manner prescribed in Sections 7.2(e)(2)(i) and (ii); or
(II) If a quorum of the Board of Directors cannot be obtained under Section 7.2(e)(2)(i) and a committee cannot be designated under Section 7.2(e)(2)(ii), selected by a majority vote of the full Board of Directors (in which selection directors who are Parties may participate); or
(3) Authorization of indemnification and evaluation as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is permissible, except that if the determination is made by special legal counsel, authorization of indemnification and evaluation as to reasonableness of Expenses shall be made by those entitled under Section 7.2(e)(2)(iii) to select counsel.
7.3 Further Indemnification. Notwithstanding any limitation imposed by
Section 7.2 or elsewhere and in addition to the indemnification set forth
in Section 7.2, the Corporation, to the full extent permitted by law, may
agree by contract or otherwise to indemnify any Officer or Director and
hold him harmless against any judgments, penalties, fines, settlements and
reasonable expenses actually incurred or reasonably anticipated in
connection with any Proceeding in which any Officer or Director is a Party,
provided the Officer or Director was made a Party to such Proceeding by
reason of the fact that he is or was an Officer or Director of the
Corporation or by reason of any inaction, nondisclosure, action or
statement made, taken or omitted by or on behalf of the Officer or Director
with respect to the Corporation or by or on behalf of the Officer or
Director in his capacity as an Officer or Director.
7.4 Insurance. The Corporation may, in the discretion of the Board of Directors, purchase and maintain or cause to be purchased and maintained insurance on behalf of all Officers and Directors against any liability asserted against them or incurred by them in their capacity or arising out of their status as an Officer or Director, to the extent such insurance is reasonably available. Such insurance shall provide such coverage for the Officers and Directors as the Board of Directors may deem appropriate.
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ITEM 16. EXHIBITS.
EXHIBIT
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1(a) Form of Underwriting Agreement, filed herewith.
4(a) Registrant's Amended and Restated Articles of Incorporation,
filed herewith.
4(b) Registrant's Amended and Restated By-Laws (dated November
21, 2002) are incorporated herein by reference to Exhibit 3(a)
to Registrant's Form 10-Q (File No. 000-08788) for the period
ended December 31, 2002.
5 Opinion of Stoll, Keenon & Park LLP concerning legality,
filed herewith.
10(a) Employment agreements between Registrant and five officers,
those being John B. Brown, Johnny L. Caudill, John F. Hall,
Alan L. Heath and Glenn R. Jennings, are incorporated herein
by reference to Exhibit 10(k) to Registrant's Form 10-Q
(File No. 000-08788) for the period ended March 31, 2000.
10(b) Agreement between Registrant and Harrison D. Peet, Chairman
of the Board, is incorporated herein by reference to Exhibit
10(l) to Registrant's Form 10-Q (File No. 000-08788) for the
period ended March 31, 2000.
10(c) Gas Sales Agreement, dated May 1, 2000, by and between the
Registrant and Woodward Marketing, L.L.C. is incorporated
herein by reference to Exhibit 10(d) to Registrant's Form
S-2 (Reg. No. 333-100852) dated February 7, 2003.
10(d) Gas Sales Agreement, dated November 1, 1993, by and between
the Registrant and Dynegy Marketing and Trade (formerly
known as Natural Gas Clearinghouse) with First Amendment to
Gas Sales Agreement and Second Amendment to Gas Sales
Agreement is incorporated herein by reference to Exhibit
10(d) to Registrant's Form S-2 (Reg. No. 333-100852) dated
February 7, 2003.
10(e) Gas Transportation Agreement (Service Package 9069), dated
December 19, 1994, by and between Tennessee Gas Pipeline
Company and Registrant is incorporated herein by reference
to Exhibit 10(e) to Registrant's Form S-2 (Reg. No.
333-100852) dated February 7, 2003.
10(f) GTS Service Agreement (Service Agreement No.: 37815), dated
November 1, 1993, by and between Columbia Gas Transmission
Corporation and Registrant is incorporated herein by
reference to Exhibit 10(f) to Registrant's Form S-2 (Reg.
No. 333-100852) dated February 7, 2003.
10(g) FTS1 Service Agreement (Service Agreement No.: 4328), dated
October 4, 1994, by and between Columbia Gulf Transmission
Company and Registrant is incorporated herein by reference
to Exhibit 10(g) to Registrant's Form S-2 (Reg. No.
333-100852) dated February 7, 2003.
10(h) Loan Agreement, dated October 31, 2002, by and between
Branch Banking and Trust Company and Registrant is
incorporated herein by reference to Exhibit 10(i) to
Registrant's Form S-2 (Reg. No. 333-100852) dated February
7, 2003.
10(i) Promissory Note, in the original principal amount of
$40,000,000, made by Registrant to the order of Branch
Banking and Trust Company, is incorporated herein by
reference to Exhibit 10(a) to Registrant's Form 10-Q (File
No. 000-08788) for the period ended September 30, 2002.
10(j) Gas Storage Lease, dated October 4, 1995, by and between Judy
L. Fuson, Guardian of Jamie Nicole Fuson, a minor, and Lonnie
D. Ferrin and Assignment and Assumption Agreement, dated
November 10, 1995, by and between Lonnie D. Ferrin and
Registrant, filed herewith.
10(k) Gas Storage Lease, dated November 6, 1995, by and between
Thomas J. Carnes, individually and as Attorney-in-fact and
Trustee for the individuals named therein, and Registrant,
filed herewith.
10(l) Deed and Perpetual Gas Storage Easement, dated December 21,
1995, by and between Katherine M. Cornelius, William
Cornelius, Frances Carolyn Fitzpatrick, Isabelle Fitzpatrick
Smith and Kenneth W. Smith and Registrant, filed herewith.
10(m) Underground Gas Storage Lease and Agreement, dated March 9,
1994, by and between Equitable Resources Exploration, a
division of Equitable Resources Energy Company, and Lonnie D.
Ferrin and Amendment No. 1 and Novation to Underground Gas
Storage Lease and Agreement, dated March 22, 1995, by and
between Equitable Resources Exploration, Lonnie D. Ferrin and
Registrant, filed herewith.
10(n) Base Contract for Short-Term Sale and Purchase of Natural
Gas, dated January 1, 2002, by and between M & B Gas Services,
Inc. and Registrant, filed herewith.
10(o) Oil and Gas Lease, dated July 19, 1995, by and between
Meredith J. Evans and Helen Evans and Paddock Oil and Gas,
Inc.; Assignment, dated June 15, 1995, by Paddock Oil and
Gas, Inc., as assignor, to Lonnie D. Ferrin, as assignee;
Assignment, dated August 31, 1995, by Paddock Oil and Gas,
Inc., as assignor, to Lonnie D. Ferrin, as assignee; and
Assignment and Assumption Agreement, dated November 10, 1995,
by and between Lonnie D. Ferrin and Registrant, filed
herewith.
13(a) Registrant's Form 10-K (File No. 000-08788) for the period
ended June 30, 2002, is incorporated herein by reference.
13(b) Registrant's Form 10-K/A (Amendment No. 1) (File No.
000-08788) for the period ended June 30, 2002, is
incorporated herein by reference.
13(c) Registrant's Form 10-Q (File No. 000-08788) for the period
ended September 30, 2002, is incorporated herein by
reference.
13(d) Registrant's Form 10-Q (File No. 000-08788) for the period
ended December 31, 2002, is incorporated herein by reference.
16 Letter dated May 22, 2002 from Arthur Andersen LLP to the
Securities and Exchange Commission, is incorporated herein by
reference to Exhibit 16 to Registrant's Form 8-K (File No.
000-08788) dated May 22, 2002.
23(a) Independent Auditors' Consent and Report on Schedule of
Deloitte & Touche LLP, filed herewith.
23(b) Consent of Stoll, Keenon & Park is contained in its opinion
letter filed as Exhibit 5.
24 Power of Attorney is included with the signature page in
Part II of this Registration Statement.
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ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions referred to in Item 15, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted against the registrant by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Winchester, State of Kentucky, on the 2nd day of April, 2003.
DELTA NATURAL GAS COMPANY, INC.
By: /s/ GLENN R. JENNINGS
--------------------------------------
Glenn R. Jennings
President and Chief Executive Officer
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POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Glenn R. Jennings, John F. Hall, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and to make any and all state securities law or blue sky filings, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
(i) Principal Executive Officer:
/s/ GLENN R. JENNINGS
------------------------------------ President, Chief Executive Officer and April 2, 2003
(Glenn R. Jennings) Vice Chairman of the Board
(ii) Principal Financial Officer:
/s/ JOHN F. HALL
------------------------------------ Vice-President--Finance, Secretary and April 2, 2003
(John F. Hall) Treasurer
(iii) Principal Accounting Officer:
/s/ JOHN B. BROWN
------------------------------------ Controller April 2, 2003
(John B. Brown)
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(iv) A Majority of the Board of Directors:
/s/ H. D. PEET
------------------------------------ Chairman of the Board April 2, 2003
(H. D. Peet)
/s/ DONALD R. CROWE
------------------------------------ Director April 2, 2003
(Donald R. Crowe)
/s/ JANE HYLTON GREEN
------------------------------------ Director April 2, 2003
(Jane Hylton Green)
/s/ LANNY D. GREER
------------------------------------ Director April 2, 2003
(Lanny D. Greer)
/s/ BILLY JOE HALL
------------------------------------ Director April 2, 2003
(Billy Joe Hall)
/s/ MICHAEL J. KISTNER
------------------------------------ Director April 2, 2003
(Michael J. Kistner)
/s/ LEWIS N. MELTON
------------------------------------ Director April 2, 2003
(Lewis N. Melton)
/s/ ARTHUR E. WALKER, JR.
------------------------------------ Director April 2, 2003
(Arthur E. Walker, Jr.)
/s/ MICHAEL R. WHITLEY
------------------------------------ Director April 2, 2003
(Michael R. Whitley)
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II-7
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
1(a) Form of Underwriting Agreement, filed herewith.
4(a) Registrant's Amended and Restated Articles of Incorporation,
filed herewith.
4(b) Registrant's Amended and Restated By-Laws (dated November
21, 2002) are incorporated herein by reference to Exhibit 3(a)
to Registrant's Form 10-Q (File No. 000-08788) for the
period ended December 31, 2002.
5 Opinion of Stoll, Keenon & Park LLP concerning legality,
filed herewith.
10(a) Employment agreements between Registrant and five officers,
those being John B. Brown, Johnny L. Caudill, John F. Hall,
Alan L. Heath and Glenn R. Jennings, are incorporated herein
by reference to Exhibit 10(k) to Registrant's Form 10-Q
(File No. 000-08788) for the period ended March 31, 2000.
10(b) Agreement between Registrant and Harrison D. Peet, Chairman
of the Board, is incorporated herein by reference to Exhibit
10(l) to Registrant's Form 10-Q (File No. 000-08788) for the
period ended March 31, 2000.
10(c) Gas Sales Agreement, dated May 1, 2000, by and between the
Registrant and Woodward Marketing, L.L.C. is incorporated
herein by reference to Exhibit 10(d) to Registrant's Form
S-2 (Reg. No. 333-100852) dated February 7, 2003.
10(d) Gas Sales Agreement, dated November 1, 1993, by and between
the Registrant and Dynegy Marketing and Trade (formerly
known as Natural Gas Clearinghouse) with First Amendment to
Gas Sales Agreement and Second Amendment to Gas Sales
Agreement is incorporated herein by reference to Exhibit
10(d) to Registrant's Form S-2 (Reg. No. 333-100852) dated
February 7, 2003.
10(e) Gas Transportation Agreement (Service Package 9069), dated
December 19, 1994, by and between Tennessee Gas Pipeline
Company and Registrant is incorporated herein by reference
to Exhibit 10(e) to Registrant's Form S-2 (Reg. No.
333-100852) dated February 7, 2003.
10(f) GTS Service Agreement (Service Agreement No.: 37815), dated
November 1, 1993, by and between Columbia Gas Transmission
Corporation and Registrant is incorporated herein by
reference to Exhibit 10(f) to Registrant's Form S-2 (Reg.
No. 333-100852) dated February 7, 2003.
10(g) FTS1 Service Agreement (Service Agreement No.: 4328), dated
October 4, 1994, by and between Columbia Gulf Transmission
Company and Registrant is incorporated herein by reference
to Exhibit 10(g) to Registrant's Form S-2 (Reg. No.
333-100852) dated February 7, 2003.
10(h) Loan Agreement, dated October 31, 2002, by and between
Branch Banking and Trust Company and Registrant is
incorporated herein by reference to Exhibit 10(i) to
Registrant's Form S-2 (Reg. No. 333-100852) dated February
7, 2003.
10(i) Promissory Note, in the original principal amount of
$40,000,000, made by Registrant to the order of Branch
Banking and Trust Company, is incorporated herein by
reference to Exhibit 10(a) to Registrant's Form 10-Q (File
No. 000-08788) for the period ended September 30, 2002.
10(j) Gas Storage Lease, dated October 4, 1995, by and between Judy
L. Fuson, Guardian of Jamie Nicole Fuson, a minor, and Lonnie
D. Ferrin and Assignment and Assumption Agreement, dated
November 10, 1995, by and between Lonnie D. Ferrin and
Registrant, filed herewith.
10(k) Gas Storage Lease, dated November 6, 1995, by and between
Thomas J. Carnes, individually and as Attorney-in-fact and
Trustee for the individuals named therein, and Registrant,
filed herewith.
10(l) Deed and Perpetual Gas Storage Easement, dated December 21,
1995, by and between Katherine M. Cornelius, William
Cornelius, Frances Carolyn Fitzpatrick, Isabelle Fitzpatrick
Smith and Kenneth W. Smith and Registrant, filed herewith.
10(m) Underground Gas Storage Lease and Agreement, dated March 9,
1994, by and between Equitable Resources Exploration, a
division of Equitable Resources Energy Company, and Lonnie D.
Ferrin and Amendment No. 1 and Novation to Underground Gas
Storage Lease and Agreement, dated March 22, 1995, by and
between Equitable Resources Exploration, Lonnie D. Ferrin and
Registrant, filed herewith.
10(n) Base Contract for Short-Term Sale and Purchase of Natural
Gas, dated January 1, 2002, by and between M & B Gas Services,
Inc. and Registrant, filed herewith.
10(o) Oil and Gas Lease, dated July 19, 1995, by and between
Meredith J. Evans and Helen Evans and Paddock Oil and Gas,
Inc.; Assignment, dated June 15, 1995, by Paddock Oil and
Gas, Inc., as assignor, to Lonnie D. Ferrin, as assignee;
Assignment, dated August 31, 1995, by Paddock Oil and Gas,
Inc., as assignor, to Lonnie D. Ferrin, as assignee; and
Assignment and Assumption Agreement, dated November 10, 1995,
by and between Lonnie D. Ferrin and Registrant, filed
herewith.
13(a) Registrant's Form 10-K (File No. 000-08788) for the period
ended June 30, 2002, is incorporated herein by reference.
13(b) Registrant's Form 10-K/A (Amendment No. 1) (File No.
000-08788) for the period ended June 30, 2002, is
incorporated herein by reference.
13(c) Registrant's Form 10-Q (File No. 000-08788) for the period
ended September 30, 2002, is incorporated herein by
reference.
13(d) Registrant's Form 10-Q (File No. 000-08788) for the period
ended December 31, 2002, is incorporated herein by reference.
16 Letter dated May 22, 2002 from Arthur Andersen LLP to the
Securities and Exchange Commission, is incorporated herein by
reference to Exhibit 16 to Registrant's Form 8-K (File No.
000-08788) dated May 22, 2002.
23(a) Independent Auditors' Consent and Report on Schedule of
Deloitte & Touche LLP, filed herewith.
23(b) Consent of Stoll, Keenon & Park is contained in its opinion
letter filed as Exhibit 5.
24 Power of Attorney is included with the signature page in
Part II of this Registration Statement.
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II-8
EXHIBIT 1(a)
500,000 Shares
DELTA NATURAL GAS COMPANY, INC.
Common Stock
_________________, 2003
Stifel, Nicolaus & Company, Incorporated
J.J.B. Hilliard, W.L. Lyons
Friedman Billings Ramsey
BB&T Capital Markets, A Division of Scott & Stringfellow, Inc.
c/o Stifel, Nicolaus & Company, Incorporated
500 North Broadway
St. Louis, Missouri 63102
Ladies and Gentlemen:
(a) The Company meets the requirements for use of Form S-2 under the Securities Act of 1933, as amended (the "Act"), and has prepared and filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (as defined below) on Form S-2 (Registration Statement No. 333-_______) relating to the Stock, and the offering thereof in accordance with the Act and has filed such amendments thereto as may have been required to the date hereof. The Registration Statement has been prepared in conformity with the requirements of the Act and the Rules and Regulations (as defined below). Copies of that Registration Statement as amended to date have been delivered by the Company to you as the Underwriters. As used in this Agreement, "Preliminary Prospectus" means each prospectus included in the Registration Statement, or amendments of the Registration Statement or of the Prospectus, before the Registration Statement, as so amended, became effective under the Act
and any Prospectus filed by the Company with the consent of the Underwriters pursuant to Rule 424(a) of the Rules and Regulations and the documents incorporated by reference in such Preliminary Prospectus; "Registration Statement" means that registration statement, including the Prospectus, exhibits and financial statements and all documents incorporated by reference therein, including any information deemed by virtue of Rule 430A(a)(3) of the Rules and Regulations to be part of such Registration Statement, as of the time such Registration Statement or post-effective amendment became effective under the Act; "Effective Time" means the date and the time as of which the Registration Statement, or the most recent post-effective amendment thereto, if any, became effective under the Act; "Effective Date" means the date of the Effective Time; "Prospectus" means the prospectus filed with the Commission by the Company with the consent of the Underwriters pursuant to Rule 424(b) of the Rules and Regulations and the documents incorporated by reference in such Prospectus, unless no such Rule 424(b) Prospectus is filed, in which case it shall mean the Prospectus filed as part of the last Registration Statement filed on or before the Effective Date; "Rules and Regulations" means the rules and regulations adopted by the Commission under either the Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable. The Commission has not issued and, to the knowledge of the Company, has not threatened, any order preventing or suspending the use of any Preliminary Prospectus.
(b) Each Preliminary Prospectus, at the time of the filing thereof, did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which made, not misleading; provided that no representation or warranty is made as to information contained in or omitted from any Preliminary Prospectus in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Underwriters specifically for inclusion therein. The Registration Statement has been declared effective by the Commission.
(c) The Registration Statement and the Prospectus in all material respects: (i) complied as of the Effective Date, (ii) comply as of the date hereof, and (iii) will comply as of the Delivery Dates, as hereinafter defined, with the requirements of the Act, the Exchange Act and the Rules and Regulations; the Registration Statement and any amendment thereof, at the Effective Time, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and the Prospectus, at the time the Registration Statement became effective did not, as of the date hereof does not and as of the Delivery Dates will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties in this paragraph (c) shall not apply to statements in or omissions from the Registration Statement or the Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by the Underwriters expressly for use in the Registration Statement or the Prospectus. The Company has complied in all material respects with all requests of the Commission for additional information to be included in the Registration Statement or in any Preliminary Prospectus or Prospectus. Each Preliminary Prospectus and the Prospectus delivered to the Underwriters for use in connection with this offering will, at the time of such delivery, be substantively identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(d) The documents incorporated by reference into the Prospectus pursuant to Item 12 of Form S-2 under the Act, at the time they were filed with the Commission, complied in all material respects with the requirements of the Exchange Act and the Rules and Regulations, comply in all materials respects with the requirements of the Exchange Act and the Rules and Regulations and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading.
(e) Deloitte & Touche LLP, the accountants whose report appears in the Prospectus, are independent public accountants as required by the Act and the Rules and Regulations.
(f) The consolidated financial statements of the Company and its subsidiaries (as defined in paragraph (j) of this section) filed as part of the Registration Statement or included in any Preliminary Prospectus or the Prospectus present fairly, and the financial statements included in any amendment or supplement to the Prospectus will present fairly, the financial condition and results of operations of the Company and its subsidiaries, at the dates and for the periods indicated, and have been, and in the case of financial statements included in any amendment or supplement to the Prospectus will be, prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved. No other financial statements are required to be set forth in the Registration Statement or the Prospectus under the Act or the Rules and Regulations thereunder.
(g) Except as described in or contemplated by the Registration Statement and the Prospectus, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has incurred any material liability or obligation, direct or contingent, or entered into any material transaction, whether or not in the ordinary course of business, and there has not been any material change on a consolidated basis in the Company's capital stock, or any material increase in the short-term or long-term debt of the Company or any of its subsidiaries, or any issuance of options, warrants, convertible securities or other rights to purchase capital stock of such entity, or any material adverse change in, or any adverse development which materially affects, the business, properties, assets, condition (financial or otherwise), results of operations or prospects of the Company and its subsidiaries taken as a whole.
(h) Each of the Company and its subsidiaries has been duly incorporated, is validly existing and in good standing under the laws of its jurisdiction of incorporation, and each of the Company and its subsidiaries is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which its respective ownership of property or the conduct of its business requires such qualification except where the failure to be so qualified would not have a material adverse effect on the business, properties, assets, condition (financial or otherwise), results of operations or prospects of the Company and its subsidiaries taken as a whole, and has all power and authority necessary to own or hold its properties and to conduct the business in which it is engaged.
(i) The authorized and outstanding capitalization of the Company as of ____________, 2003 was as set forth in the Registration Statement and the Prospectus, and there
have been no changes in the authorized or outstanding capitalization of the Company since ____________, 2003 except as contemplated by the Registration Statement and the Prospectus. All corporate action required to have been taken by the Company for the due and proper authorization, issuance and delivery of the Stock and all the issued and outstanding shares of Common Stock are, and all the shares of the Stock, when issued, delivered and paid for in the manner described in the Prospectus on the First Delivery Date and the Second Delivery Date, if any, will be, validly issued and outstanding, fully paid and nonassessable with no personal liability attaching to the ownership thereof. None of the shares of the Stock to be sold by the Company when issued, sold and delivered in accordance with this Agreement will be subject to any lien, claim, encumbrance, preemptive rights or any other claim of any third party; and the Stock will conform to the description thereof contained in the Registration Statement under the caption "Description of Capital Stock." On the Effective Date, the First Delivery Date and Second Delivery Date, if any, there will be no options or warrants or other outstanding rights (contractual or otherwise) to purchase, agreements or obligations to issue or agreements or other rights to convert or exchange any obligation or security into, capital stock of the Company or securities convertible into or exchangeable for capital stock of the Company, except as described in the Prospectus and the documents incorporated by reference therein or the grant of options after the date of the Prospectus under option plans of the Company. The information in the Prospectus insofar as it relates to all outstanding options and other rights to acquire securities of the Company as of the Effective Date is, and immediately prior to the First Delivery Date and the Second Delivery Date, if any, will be complete and correct in all material respects. All previous offers and sales of the outstanding shares of capital stock of the Company were made in conformity with applicable federal, state or foreign securities laws (except where the failure to so conform would not, in the aggregate, have a material adverse effect on the business, properties, assets, condition (financial or otherwise), results of operations or prospects of the Company and its subsidiaries taken as a whole). The certificates representing the Stock are in proper legal form under, and conform in all material respects to the requirements of, Kentucky corporate law.
(j) The issued shares of capital stock of the Company's subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable with no personal liability attaching to the ownership thereof and are owned by the Company free and clear of any security interests, liens, encumbrances, equities or claims. The Company does not have any subsidiaries and does not own a material interest in or control, directly or indirectly, any other corporation, partnership, joint venture, association, trust or other business organization, except those set forth in exhibit 21 to the Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 2002 ("Company's 10-K"). As used in this Agreement, "subsidiaries" shall mean those subsidiaries set forth in exhibit 21 to the Company's 10-K.
(k) The Company is legally permitted, pursuant to the
terms of the Act, to offer and sell the Stock pursuant to the Registration
Statement. The Common Stock (including the Stock) is registered pursuant to
Section 12(g) of the Exchange Act. The issued and outstanding shares of
Common Stock are included for quotation on the Nasdaq National Market.
Neither the Company nor, to the best knowledge of the Company, any other
person has taken any action designed to cause, or likely to result in, the
termination of the registration of the Common Stock under the Exchange Act.
The Company has not received any notification from the Commission or the
Nasdaq Stock Market, Inc. that either that agency or entity is contemplating
terminating such registration or inclusion.
(l) The filing of the Registration Statement and the execution and delivery by the Company of this Agreement, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by the board of directors of the Company, and all necessary corporate action to authorize and approve the same has been taken. This Agreement has been duly executed and delivered by the Company and is a valid and legally binding obligation of the Company.
(m) Each of the Company and its subsidiaries has good and marketable title to, or valid and enforceable leasehold interests in, all items of real and personal property which are material to the business of the Company and its subsidiaries taken as a whole, free and clear of all liens, encumbrances and claims (other than the liens disclosed in the Prospectus) which might materially interfere with the conduct of the business of the Company and its subsidiaries taken as a whole.
(n) Except to the extent disclosed in the Prospectus, neither the Company, nor any of its subsidiaries, is in violation of its corporate charter or bylaws or in default under any obligation, agreement, covenant or condition contained in any mortgage or other material contract, lease, note, indenture or instrument to which it is a party or by which it may be bound, the effect of which violation or default would be material to the Company and its subsidiaries taken as a whole, or is in violation in any material respect of any law, ordinance, governmental rule, regulation or court decree to which it or its property may be subject, the effect of which violation would be material to the Company and its subsidiaries taken as a whole, or has failed to obtain any consent, approval, order, material license, certificate, franchise or other governmental authorization or permit necessary to the ownership, maintenance and operation of its property, assets or conduct of its business; and the execution, delivery and performance of this Agreement by the Company and its subsidiaries taken as a whole, the sale of the Stock, and the consummation of the transactions contemplated by this Agreement will not conflict with, result in the creation or imposition of any lien, charge or encumbrance upon any of the properties or assets of the Company and its subsidiaries taken as a whole, pursuant to the terms of, or constitute a breach of or default under, any agreement, indenture or instrument to which the Company and its subsidiaries taken as a whole, is a party, or by which the Company is bound, or result in a violation of the corporate charter or bylaws of the Company and its subsidiaries taken as a whole or, except to the extent disclosed in the Prospectus, any law or ordinance to which the Company and its subsidiaries taken as a whole, or its properties may be subject or of any order, rule or regulation of any court or governmental agency having jurisdiction over the Company and its subsidiaries taken as a whole, or its properties, except for conflicts, breaches, violations or defaults which would be immaterial to the business, properties, assets, condition (financial or otherwise), results of operations or prospects of the Company and its subsidiaries taken as a whole and which would not affect the validity or enforceability of the Stock or this Agreement or otherwise adversely affect the rights, duties or obligations of the Underwriters or the shareholders.
(o) No approval or consent of any governmental body other than (i) as may be required under the Act or in connection or compliance with the provisions of the securities or "Blue Sky" laws of any jurisdiction, and (ii) approval by the Kentucky Public Service Commission which has been obtained, is legally required for the carrying out by the Company of the provisions of this Agreement.
(p) Except as described in the Registration Statement and the Prospectus, there is no litigation or governmental proceeding pending or, to the knowledge of the Company, threatened against the Company or any of its subsidiaries which, if adversely resolved, could reasonably be expected to result in any material adverse change in the business, properties, financial condition, results of operations or prospects of the Company and its subsidiaries taken as a whole or which is required to be disclosed in the Registration Statement or the Prospectus.
(q) There are no contracts or other documents which are required to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations which have not been filed as exhibits to the Registration Statement.
(r) Except as disclosed in the Prospectus, each of the Company and its subsidiaries has sufficient authority under statutory provisions or by grant of franchises or permits by municipalities or counties to conduct in all material respects its business as presently conducted and as described in the Registration Statement and Prospectus.
(s) Except as set forth in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries is in violation of or liable under any statute, any rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, "environmental laws"), owns or operates any real property contaminated with any substance that is subject to any environmental laws, is liable for any off-site disposal or contamination pursuant to any environmental laws, or is subject to any claim relating to any environmental laws and the Company is not aware of any pending investigation which might lead to such a claim which violation, contamination, liability or claim would individually or in the aggregate have a material adverse effect on the current or future consolidated financial position, shareholders' equity or results of operations of the Company and its subsidiaries, taken together as a whole.
(t) No material labor dispute with the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is imminent; and the Company knows of no existing or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers or contractors which might reasonably be expected to result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries taken as a whole.
(u) Each of the Company and its subsidiaries owns, possesses or has the right to use all material licenses, trademarks, patents, patent rights, inventions, copyrights, service marks and trade names presently employed by it in connection with the business now operated by it, and neither the Company nor any of its subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing.
(v) Each of the Company and its subsidiaries maintains insurance covering their properties, operations, personnel and business which insures against such losses and risks as are adequate in accordance with its reasonable business judgment to protect the Company and its subsidiaries and their businesses. Neither the Company nor any of its subsidiaries has received
notice from any insurer or agent of such insurer that substantial capital improvements or other expenditures will have to be made in order to continue such insurance. All such insurance is outstanding and duly in force on the date hereof and will be outstanding and duly in force on the First Delivery Date and the Second Delivery Date, if any.
(w) Neither the Company nor any of its subsidiaries is an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended.
(x) Neither the Company nor any of its affiliates has taken, within the 90-day period preceding the date of this Agreement, and the Company agrees that during the 90-day period following the date of this Agreement it will not take (and it will not permit its affiliates to take), directly or indirectly, any action which has constituted or might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock of the Company.
(y) The Company and its subsidiaries have timely and properly prepared and filed all necessary federal, state, local and foreign tax returns which are required to be filed and have paid all taxes shown as due thereon and have paid all other taxes and assessments to the extent that the same shall have become due, except such as are being contested in good faith. The Company has no knowledge of any tax deficiency which has been or might be assessed against the Company or any of its subsidiaries which, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the business, properties, assets, condition (financial or otherwise), results of operations or prospects of the Company and its subsidiaries taken as a whole.
(z) Except as otherwise disclosed in the Prospectus, each of the Company and its subsidiaries has all necessary consents, authorizations, approvals, orders, certificates and permits of and from, and has made all declarations and filings with, all federal, state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals, to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus, except to the extent that the failure to obtain or file would not have a material adverse effect on the Company and its subsidiaries, taken as a whole.
Any certificate signed by any officer of the Company and delivered to you or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby.
The Underwriters are to make a public offering of the Firm Stock and such of the Option Stock as the Underwriters may determine on or as soon after the Effective Date as the Underwriters deem it advisable for the Underwriters to so do. The Stock is to be initially offered to the public at the public offering price set forth on the cover page of the Prospectus (such price being hereinafter called the "public offering price"). The Underwriters may from time to time increase or decrease the public offering price after the initial public offering to such extent as the Underwriters, in their sole discretion, deem advisable. The Underwriters may enter into one or more agreements as the Underwriters, in their sole discretion deem advisable, with one or more broker-dealers who shall act as dealers in connection with such public offering.
Nothing contained herein shall relieve a defaulting Underwriter of any liability it may have to the Company for damages caused by its default. If other underwriters are obligated
or agree to purchase the Stock of a defaulting or withdrawing Underwriter, or the Company and the remaining non-defaulting Underwriters elect to proceed with the offering contemplated hereby notwithstanding such default, either the remaining Underwriters or the Company may postpone the First Delivery Date or the Second Delivery Date, as the case may be, for up to seven full business days in order to effect any changes that, in the opinion of counsel for the Company or counsel for the Underwriters, may be necessary in the Registration Statement, the Prospectus or in any other document or agreement, and to file promptly any necessary amendments or supplements to the Registration Statement or the Prospectus.
At any time on or before the 30th day after the date on which this Agreement becomes effective, the option granted in section 3 may be exercised in whole or from time to time in part by written notice being given by the Underwriters to the Company. Such notice shall set forth the aggregate number of shares of Option Stock as to which the option is being exercised, the names in which the shares of Option Stock are to be registered, the denominations in which the shares of Option Stock are to be issued and the date and time, as determined by the Underwriters, when the shares of Option Stock are to be delivered (the "Second Delivery Date"); provided, however, that the Second Delivery Date shall not be earlier than the First Delivery Date nor earlier than the second business day after the date on which the option shall have been exercised nor later than the third business day after the date on which the option shall have been exercised.
Delivery of and payment for the Option Stock shall be made at the offices of Thompson Coburn LLP, One US Bank Plaza, St. Louis, Missouri 63101 at 10:00 a.m., St. Louis, Missouri time, on the Second Delivery Date. On the Second Delivery Date, the certificates shall be delivered by the Company to the Underwriters at The Depository Trust Company in New York, New York, against payment of the purchase price therefor in funds immediately available to the order of the Company. The Company agrees to make available to the Underwriters for inspection and packaging in New York, New York, at least one full business day prior to the Second Delivery Date, certificates for the Option Stock so to be delivered in good delivery form and in such denominations and registered in such names as the Underwriters shall have requested, all such requests to have been made in writing in the aforesaid written notice.
(a) To furnish promptly to each of the Underwriters and counsel for the Underwriters a signed copy of the Registration Statement as originally filed, and of each amendment thereto filed with the Commission, including all consents and exhibits filed therewith.
(b) To deliver promptly to the Underwriters such number of conformed copies of the Registration Statement as originally filed and each amendment thereto (in each case excluding exhibits other than this Agreement) and of each Preliminary Prospectus, the Prospectus and any amended or supplemented Prospectus as the Underwriters may reasonably request.
(c) To file promptly with the Commission the Prospectus pursuant to Rule 424(b) of the Rules and Regulations and to file with the Commission any amendment to the Registration Statement or the Prospectus or any supplement to the Prospectus and file any document under the Exchange Act before the termination of the offering of the Stock by the Underwriters if such document would be deemed to be incorporated by reference into any Preliminary Prospectus or the Prospectus that may, in the reasonable judgment of the Company and the Underwriters, be required by the Act or requested by the Commission and approved by the Underwriters (which approval shall not be unreasonably withheld). Prior to filing with the Commission any Preliminary Prospectus, any amendment to the Registration Statement, any supplement to the Prospectus, any Prospectus pursuant to Rule 424 of the Rules and Regulations, or any other document under the Exchange Act if such document would be deemed to be incorporated by reference into any Preliminary Prospectus or the Prospectus, to (i) furnish a copy thereof to the Underwriters and counsel for the Underwriters, (ii) obtain the consent of the Underwriters to the filing, which consent shall not be unreasonably withheld, and (iii) promptly advise the Underwriters when any such amendment to the Registration Statement becomes effective.
(d) To use its best efforts to cause any required post-effective amendment to the Registration Statement to become effective and to advise the Underwriters promptly (i) when any post-effective amendment to the Registration Statement becomes effective, (ii) of any request or proposed request by the Commission for an amendment to the Registration Statement, an amendment or a supplement to the Prospectus or for any additional information, (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation or threat of any stop order proceeding, (iv) of receipt by the Company of any notification with respect to the suspension of the qualification of the Stock for sale in any jurisdiction or the initiation or threat of any proceeding for that purpose, and (v) of the happening of any event which makes untrue any statement of a material fact made in the Registration Statement or the Prospectus, or which requires the making of a change in the Registration Statement or the Prospectus in order to make any material statement therein not misleading.
(e) If, at any time when a prospectus relating to the Stock is required to be delivered under the Act, any event occurs as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were
made, not misleading, or if it shall be necessary to amend or supplement the Registration Statement or the Prospectus to comply with the Act or the Exchange Act or the Rules and Regulations, the Company promptly will prepare and file forthwith at its own expense with the Commission, subject to paragraph (c) above, an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance. The Company shall furnish to the Underwriters a reasonable number of copies of, such amendment or supplement or other filing that will correct such statement or omission or effect such compliance. The Company will use its best efforts to prevent the issuance of any stop order suspending the effectiveness of the Registration Statement by the Commission. If the Commission shall issue a stop order suspending the effectiveness of the Registration Statement, to make every reasonable effort to obtain the lifting of that order at the earliest possible time.
(f) To cause the Stock to be listed for quotation on the Nasdaq National Market beginning on the Effective Date, and to file with the Nasdaq National Market all documents and notices required by the Nasdaq National Market of companies that have securities that are traded in the over-the-counter market and quotations for which are reported by the Nasdaq National Market.
(g) As soon as practicable after the Effective Date of the Registration Statement, to make generally available to its security holders and to deliver to the Underwriters an earning statement, conforming with the requirements of Section 11(a) of the Act, covering a period of at least 12 months beginning after the effective date of the Registration Statement, provided that the Company may comply with this paragraph by complying with the safe harbor provisions of Rule 158 of the Rules and Regulations.
(h) For a period of three years from the Effective Date of the Registration Statement, to furnish to the Underwriters copies of all reports to shareholders and all reports, filings and financial statements furnished by the Company to the principal national securities exchange, automated quotation system or over-the-counter market upon which its Common Stock may be listed or traded pursuant to requirements of or agreements with such exchange or market or filed with the Commission pursuant to the Exchange Act or the Rules and Regulations.
(j) To endeavor to qualify the Stock for offer and sale under the securities laws of such jurisdictions as the Underwriters may reasonably request, provided that no such qualification shall be required if as a result thereof the Company would be required to qualify as a foreign corporation, subject itself to general taxation or would be made subject to service of general process, in each case in any jurisdiction in which it is not so qualified or subject; and to maintain such qualifications in effect so long as required for the distribution of the Stock and to arrange for the determination of the legality of the Stock for purchase by institutional investors.
(k) Without the prior written consent of the Underwriters
(which consent shall not be unreasonably withheld), not to sell or otherwise
dispose of, or offer or contract to sell any shares of Common Stock or sell
or grant any rights, options, warrants or securities convertible with
respect to Common Stock within 180 days after the Effective Date except for
(i) the sale of the Stock to the Underwriters pursuant to this Agreement,
(ii) the grant or exercise of options pursuant to the Company's stock option
plans as described in the Registration Statement and Prospectus consistent
with past practice, and (iii) the issuance by the Company of its securities
in connection with a merger, acquisition or similar transaction.
(l) Until the termination of the offering of the Stock, to file timely all documents, and any amendments to previously filed documents, required to be filed by it pursuant to the Exchange Act.
(m) Whether or not the transactions contemplated by this
Agreement are consummated or this Agreement is terminated, the Company will
pay (i) the costs incident to the authorization, issuance, sale and delivery
of the Stock and any taxes payable in that connection; (ii) the costs
incident to the preparation, printing and filing under the Act of the
Registration Statement, any Preliminary Prospectus, the Prospectus and any
amendments, supplements and exhibits thereto; (iii) the costs of
distributing the Registration Statement as originally filed and each
amendment thereto and any post-effective amendments thereof (including
exhibits), any Preliminary Prospectus, the Prospectus, and any amendment or
supplement to the Prospectus; (iv) the costs, if any, of printing and
distributing this Agreement; (v) the costs of filings incident to securing
any required review by the National Association of Securities Dealers, Inc.;
(vi) the fees and expenses of qualifying the Stock under the securities laws
of the several jurisdictions and of preparing and printing a Blue Sky
Memorandum (including related fees and expenses of counsel to the
Underwriter); (vii) the costs of the listing or qualification of the Stock
on the Nasdaq National Market and related filing fees; (viii) the fees and
expenses of the Company's accountants and counsel; (ix) the travel expenses
of the Company in connection with informational meetings and presentations
for the brokerage community and institutional investors; (x) registrar and
transfer agent costs and fees; (xi) the costs of printing certificates for
the Stock; and (xii) all other costs and expenses incident to the
performance of the obligations of the Company under this Agreement;
provided, however, that except as provided in this paragraph and in section
8 and section 11 hereof, each Underwriter shall pay its own costs and
expenses, including the fees and expenses of its counsel, any transfer taxes
on the Stock which it may sell and the expenses of advertising any offering
of the Stock made by such Underwriter.
(n) To apply the net proceeds of the Stock as set forth in the Prospectus.
(a) The Prospectus shall have been timely filed with the Commission; at or before the First Delivery Date and Second Delivery Date, if any, no stop order suspending the effectiveness of the Registration Statement shall have been issued, and prior to that time no stop order proceeding nor any order directed at any document incorporated by reference in the Prospectus shall have been initiated or, to the knowledge of the Company, threatened by the Commission, and no challenge shall have been made to any document incorporated by reference in the Prospectus; any request of the Commission for inclusion of additional information in the Registration Statement or the Prospectus or otherwise shall have been complied with; and the Company shall not have filed the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus with the Commission without the consent of the Underwriters.
(b) No Underwriter shall have discovered and disclosed to the Company on or prior to the First Delivery Date or the Second Delivery Date, if any, that the Registration Statement or the Prospectus or any amendment or supplement thereto contains any untrue statement of a fact which, in the reasonable opinion of the Underwriters or Thompson Coburn LLP, counsel for the Underwriters, is material or omits to state a fact that, in the reasonable opinion of the Underwriters or such counsel, is material and is required to be stated therein or is necessary to make the statements therein not misleading.
(c) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Stock and the form of the Registration Statement and the Prospectus, other than financial statements and other financial data, and all other legal matters relating to this Agreement and the transactions contemplated hereby shall be satisfactory in all reasonable respects to Thompson Coburn LLP, counsel for the Underwriters; and the Company shall have furnished to such counsel all documents and information that such counsel may reasonably request to enable them to pass upon such matters.
(d) Stoll, Keenon & Park, LLP, as counsel for the Company, shall have furnished to the Underwriters their opinion, addressed to the Underwriters and dated the First Delivery Date and Second Delivery Date, if any, to the effect that:
(i) Each of the Company and its subsidiaries has been duly incorporated and is validly existing and in good standing under the laws of its jurisdiction of incorporation, is duly qualified to do business and in good standing as a foreign corporation in each jurisdiction in which its ownership of property or conduct of business requires such qualification and wherein the failure to be so qualified would have a material adverse effect on the business of the Company or such subsidiary, and has all corporate power and authority necessary to own or hold its properties and conduct the business in which it is engaged as described in the Prospectus.
(ii) All corporate action required to have been taken by the Company for the due and proper authorization, issuance, sale and delivery of the Stock has been validly and sufficiently taken.
(iii) The Stock conforms in all material respects to the statements concerning it in the Prospectus.
(iv) To the knowledge of such counsel, based upon communications with representatives of the Commission, (A) the Registration Statement is effective under the Act, and (B) the Prospectus was timely filed with the Commission as required.
(v) To the knowledge of such counsel, (A) no stop order suspending the effectiveness of the Registration Statement has been issued, and (B) no proceeding for that purpose is pending or threatened by the Commission.
(vi) To the knowledge of such counsel, (A) no order directed to any document incorporated by reference in the Prospectus has been issued, and (B) no challenge has been made to the accuracy or adequacy of any such document.
(vii) The Registration Statement and the Prospectus and each amendment or supplement, if any, thereto comply as to form in all material respects with the requirements of the Act and the Rules and Regulations thereunder.
(viii) The statements made in the Prospectus, insofar as they purport to summarize the provisions of statutes, legal and governmental proceedings, contracts or other documents specifically referred to therein are accurate and fairly present the information called for with respect thereto by Form S-2 under the Act (except that no opinion need be expressed as to financial statements or financial date continued therein).
(ix) To such counsel's knowledge, except as disclosed in the Prospectus, there is no litigation or any governmental proceeding pending or threatened against the Company or any of its subsidiaries which could have a material adverse effect on the Company and its subsidiaries taken as a whole or which is required to be disclosed in the Registration Statement or the Prospectus.
(x) To such counsel's knowledge, there are no contracts or other documents which are required to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations which have not been filed as exhibits to the Registration Statement as permitted by the Rules and Regulations.
(xi) To such counsel's knowledge, neither the Company nor any of its subsidiaries is in violation of its corporate charter or bylaws, or in default under any agreement, indenture or instrument, the effect of which violation or default would be material to the Company and its subsidiaries taken as a whole, or is in violation in any material respect of any law, ordinance, governmental rule, regulation or court decree to which it or its property may be subject or, except as disclosed in the Prospectus, has failed to obtain any material license, permit, certificate, franchise or other governmental authorization or permit necessary to the ownership of its property or to the conduct of its business.
(xii) This Agreement has been duly authorized, executed and delivered by the Company. The Agreement and the transactions contemplated by this Agreement will not conflict with any agreement of the Company or its subsidiaries known to counsel, will not create a lien or encumbrance upon any property of the Company or its subsidiaries, will not violate the articles of incorporation or bylaws of the Company or its subsidiaries and will not violate any law or governmental ordinance, order or regulation, except to the extent that such conflict, lien, encumbrance or violation would have no material adverse effect on the Company and its subsidiaries taken as a whole.
(xiii) No approval or consent of any governmental body, other than (A) as may be required under the Act or in connection or compliance with the provisions of the securities or "Blue Sky" laws of any jurisdiction, and (B) approval by the Public Service Commission of Kentucky ("PSC"), which approval by the PSC has been obtained, is legally required for the issue and sale of the Stock by the Company or for the carrying out by the Company of the provisions of this Agreement.
(xiv) To the knowledge of counsel, at the date or dates indicated in the Prospectus, the Company had the duly authorized and outstanding capitalization set forth in the Prospectus under the caption "Capitalization" and all the authorized shares of Common Stock, including the Stock, were duly authorized, and all the issued and outstanding shares of Common Stock were, and all the shares of the Stock, when issued, delivered and paid for in the manner described in the Prospectus will be validly issued and outstanding, fully paid and nonassessable with no personal liability attaching to the ownership thereof. Such counsel shall also confirm that none of the shares of the Stock to be sold by the Company when issued, sold and delivered in accordance with this Agreement will be subject to any lien, claim, encumbrance, preemptive rights or any other claim of any third party; and the Stock conforms to the description thereof contained in the Registration Statement under the caption "Description of Capital Stock." To the knowledge of counsel, there are no options or warrants or other outstanding rights (contractual or otherwise) to purchase, agreements or obligations to issue or agreements or other rights to convert or exchange any obligation or security into, capital stock of the Company or securities convertible into or exchangeable for capital stock of the Company, except as described in the Prospectus and the documents incorporated by reference therein or the grant of options after the date of the Prospectus under option plans of the Company. All previous offers and sales of the outstanding shares of capital stock of the Company were made in conformity with applicable federal, state or foreign securities laws. The certificates representing the Stock are in proper legal form under, and conform in all material respects to the requirements of, Kentucky corporate law.
(xv) To the knowledge of counsel, after due inquiry, neither the filing of the Registration Statement or any amendment thereto nor the offer and sale of the Stock to the Underwriters as contemplated by this Agreement gives rise to any rights, nor do any rights exist, for or relating to the registration under the Act of any securities of the Company.
In addition to the above opinions, such counsel also shall confirm that during the preparation of the Registration Statement and Prospectus, such counsel has participated in conferences with your representatives and counsel for the Underwriters, and with officers and representatives of the Company, at which conferences the contents of the Registration Statement
and Prospectus were discussed, reviewed and revised. On the basis of the information which was developed in the course thereof, considered in light of such counsel's understanding of applicable law and the experience gained by such counsel thereunder, such counsel shall confirm that nothing came to such counsel's attention that would lead such counsel to believe that either the Registration Statement or Prospectus or any amendment or supplement thereto (other than the financial statements and notes thereto, or any related schedules therein, as to which such counsel need express no opinion) contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
(e) On each of the First Delivery Date and the Second Delivery Date, if any, there shall have been furnished to the Underwriters a certificate, dated such delivery date, from the Company, signed on behalf of the Company by the President and Chief Executive Officer and the Vice President-Finance, Secretary and Treasurer, stating that to the knowledge of the officers signing such certificates:
(i) The representations, warranties and agreements of the Company in section 2 are true and correct as of such date; the Company has complied with all its agreements contained herein; and satisfied all the conditions set forth herein on its part to be performed or satisfied at or prior to such Delivery Date.
(ii) Neither the Registration Statement nor the Prospectus, as of the Effective Date, included any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and since the Effective Date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or amendment of the Prospectus which has not been set forth in such a supplement or amendment.
(iii) No stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending or threatened, under the Act.
(f) The Company shall have furnished to the Underwriters on the date of this Agreement and on each of the First Delivery Date and the Second Delivery Date, if any, a letter of Deloitte & Touche LLP, addressed to the Underwriters and dated such Delivery Date substantially in the form heretofore approved by the Underwriters.
(g) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall not have been any change specified in the letter referred to in paragraph 7(f) which makes it impractical or inadvisable in the reasonable judgment of the Underwriters to proceed with the public offering or delivery of the Stock as contemplated by the Prospectus.
(h) The Lock-up Letters described in section 6(i) shall be in full force and effect.
(i) The Underwriters shall have received from Thompson Coburn LLP, counsel for the Underwriters, such opinion or opinions, dated the First Delivery Date and the Second Delivery Date, if any, with respect to the sale of the Stock, the Registration Statement, the Prospectus and other related matters as the Underwriters may reasonably require, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters.
All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to the Underwriters and Thompson Coburn LLP, counsel for the Underwriters.
If any of the conditions specified in this section 7 shall not have been fulfilled when and as provided in this Agreement, or if any of the opinions or certificates mentioned above or elsewhere in this Agreement shall not be in all material respects reasonably satisfactory in form and substance to the Underwriters and its counsel, this Agreement and all obligations of the Underwriters hereunder may be canceled at, or at any time prior to, the First Delivery Date by the Underwriters.
(a) The Company shall indemnify and hold harmless each
Underwriter, each person, if any, who controls (within the meaning of the
Act) any Underwriter from and against any loss, claim, damage or liability,
joint or several, and any action in respect thereof, to which any
Underwriter or control person may become subject, under or as a result of
(i) the Act, (ii) any condition to the Underwriters' obligations hereunder
not being fulfilled, (iii) the Company sustaining a loss, whether or not
insured, by reason of fire, flood, accident or other calamity, which, in the
reasonable opinion of the Underwriters, substantially affects the value of
the properties of the Company or which materially interferes with the
operation of the business of the Company, (iv) trading generally being
suspended or materially limited on or by the New York Stock Exchange,
American Stock Exchange or the Nasdaq National Market or trading in any
securities of the Company being suspended, insofar as such loss, claim,
damage, liability or action arises out of, or is based upon, any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement, the Prospectus or the
Registration Statement or Prospectus as amended or supplemented, or arises
out of, or is based upon, the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and shall reimburse the Underwriters and
each such control person for any legal and other expenses reasonably
incurred by such Underwriter or control person for any legal and other
expenses reasonably incurred by such Underwriter or control person in
investigating or defending or preparing to defend against any such loss,
claim, damage, liability or action; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss,
claim, damage, liability or action arises out of, or is based upon, any
untrue statement or alleged untrue statement or omission or alleged omission
made in any Preliminary Prospectus or in the Registration Statement or the
Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by the
Underwriters specifically for inclusion therein; and
provided further that as to any Preliminary Prospectus, this indemnity agreement shall not inure to the benefit of any Underwriters or any control person on account of any loss, claim, damage, liability or action arising from the sale of Stock to any person by such Underwriter if such Underwriter failed to send or give a copy of any Prospectus, as the same may be amended or supplemented, to that person within the time required by the Act, and the untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact in such Preliminary Prospectus was corrected in such Prospectus, unless such failure resulted from non-compliance by the Company with paragraph 6(b) hereof. The foregoing indemnity is in addition to any liability which the Company may otherwise have to the Underwriters or any control person of the Underwriters.
(b) Each Underwriter, severally but not jointly, agrees to indemnify and hold harmless the Company, its directors and officers who signed the Registration Statement and any person who controls the Company within the meaning of the Act from and against any loss, claim, damage or liability or any action in respect thereof, to which the Company or any such director, officer or control person may become subject, under the Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement, the Prospectus or the Registration Statement or Prospectus as amended or supplemented, or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by the Underwriters specifically for inclusion therein, and shall reimburse the Company for any legal and other expenses reasonably incurred by the Company or any such director, officer or control person in investigating or defending or preparing to defend against any such loss, claim, damage, liability or action. The foregoing indemnity agreement is in addition to any liability which the Underwriters may otherwise have to the Company.
(c) Promptly after receipt by an indemnified party under this section 8 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this section 8, notify the indemnifying party in writing of the claim or the commencement of that action, provided that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this section 8. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein, and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying
party shall not be liable to the indemnified party under this section 8 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense other than reasonable costs of investigation, unless (i) the indemnified party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso to the next preceding sentence, (ii) the indemnified party shall have reasonably concluded that there may be a conflict of interest between the indemnifying party and the indemnified party in the conduct of the defense of such action (in which case the indemnifying party shall not have the right to direct the defense of such action on behalf of the indemnified party), (iii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, or (iv) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party.
(d) If the indemnification provided for in this section 8 shall for any reason be unavailable to an indemnified party under paragraph 8(a) or 8(b) in respect of any loss, claim, damage or liability, or any action in respect thereof, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Stock, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other hand with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand with respect to such offering shall be deemed to be in the same proportion as the total net proceeds from the offering of the Stock (before deducting expenses) received by the Company bears to the total underwriting discounts and commissions received by the Underwriters with respect to such offering, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this paragraph 8(d) were to be determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this paragraph 8(d) shall be deemed to include, for purposes of this paragraph 8(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this paragraph 8(d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Stock underwritten by each of them, respectively, and distributed to the public was offered to the public exceeds the amount of any damages which such Underwriter has otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
(e) The Underwriters confirm that the statements with respect to the public offering of the Stock set forth on the cover page of, and under the caption "Underwriting" in, the Prospectus are correct and were furnished in writing to the Company by the Underwriters for inclusion in the Registration Statement and the Prospectus.
(f) The agreements contained in this section 8 and the representations, warranties and agreements of the Company contained in sections 2 and 6 shall survive the delivery of the Stock and shall remain in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of any indemnified party.
On the Closing Date the orders of the Kentucky Public Service Commission referred to in paragraph 2(o) and paragraph 7(d)(xiii) hereof shall be in full force and effect substantially in the form in which originally entered; and no stop order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for that purpose shall then be pending before, or threatened by, the Commission.
In case any of the conditions specified above in this paragraph 10 shall not have been fulfilled, this Agreement may be terminated by the Company by delivering written notice of termination to the Underwriter. Any such termination shall be without liability of any party to any other party except to the extent provided in paragraph 6(m) and paragraph 11 hereof.
[SIGNATURE PAGE TO FOLLOW]
If the foregoing correctly sets forth the agreement between the Company and the Underwriters, please indicate your acceptance in the space provided for that purpose below.
Very truly yours,
Delta Natural Gas Company, Inc.
Confirmed and accepted as of
the date first above mentioned:
Stifel, Nicolaus & Company, Incorporated
Underwriters Number of
------------ Shares
---------
Stifel, Nicolaus & Company, Incorporated
J.J.B. Hilliard, W.L. Lyons
Friedman Billings Ramsey
BB&T Capital Markets, A Division of Scott & Stringfellow, Inc.
-------
Total 500,000
=======
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EXHIBIT 4(a)
AMENDED AND RESTATED
ARTICLES OF INCORPOATION OF
DELTA NATURAL GAS COMPANY, INC.
ARTICLE I. The name of the Corporation shall be Delta Natural Gas Company, Inc.
ARTICLE II. The nature and purposes of the Corporation shall be:
(a) To construct, operate and maintain a system of mains, pipes, wires, conduits, reservoirs, pumps and appliances for the transmission and distribution of natural, manufactured, or mixed gas, electricity, water and power, to residents, plants and consumers.
(b) To manufacture, develop, store, clean, filter, service, produce, sell, convey, distribute, transport and pipe natural, manufactured, mixed gas and gas products or appliances, electricity, electrical appliances and products, water, water plants and systems.
(c) To generate, produce and distribute heat, light, water and power for public, private, industrial and commercial uses and consumers and to buy, sell, trade and deal in gas, electricity, water and the by-products thereof or any processes or appliances related thereto.
(d) To acquire, hold, own, issue, lease, mortgage, mine, dig, sell gas and water and power rights, franchises, contracts, easements, leases, real and personal property, improvements, natural resources, wells, underground rights, patents, stocks, bonds or other securities and evidences of indebtedness.
(e) To do and perform all and every thing necessary, proper and incident to the foregoing, it being provided that the specific enumeration of the foregoing powers shall not exclude the right and power of the Corporation to do and perform any other acts as may be incident to the carrying out of the said enumerated powers.
ARTICLE III. The Corporation shall have perpetual existence unless sooner dissolved in accordance with law.
ARTICLE IV. The principal office of the Corporation shall be located at 3617 Lexington Road, Winchester, Clark County, Kentucky 40391, and the name of the registered agent of the Corporation at such office shall be Jane W. Hylton.
ARTICLE V. The capital stock of the Corporation shall consist of SIX MILLION (6,000,000) shares of voting Common Stock with a par value of ONE DOLLAR ($1.00) per share; THREE HUNDRED TWELVE THOUSAND FIVE HUNDRED (312,500) shares of Preferred Stock with a par value of TEN DOLLARS ($10.00) per share.
Except to the extent permitted by this ARTICLE V, all Preferred Stock shall have identical rights.
The shares of Preferred Stock may be divided into and issued in series. One series hereby specifically authorized to be issued is the Ten Percent Series, and the following terms shall be applicable to the Ten Percent Series:
(1) The Ten Percent Series shall be entitled to receive dividends in cash at the rate of ten percent (10%) per annum, payable when and as declared from the earned surplus of the Corporation before any dividends are payable on common stock. The dividends on the Ten Percent Series shall be cumulative and the holders of the Ten Percent Series shall not be entitled to participate in the surplus or net profits of the Corporation in excess of the rate herein specified.
(2) The Ten Percent Series shall be subject to call or redemption in whole or in part at any semi-annual or annual date,
at such time and in such manner as the Board of Directors may determine, upon payment to the holders of said Ten Percent Series of the par value thereof plus any accumulated or unpaid dividends thereon, and in the event the Board of Directors shall determine to redeem only a part of said Ten Percent Series the shares to be redeemed shall be determined by law in accordance with regulations promulgated by the Board of Directors.
(3) In the event of the liquidation or dissolution of the Corporation, either voluntarily or involuntarily, the holders of the Ten Percent Series shall be entitled to be paid in full the par value of each share of the Ten Percent Series held by them, plus any accumulated or unpaid dividends. This payment shall be made before any payments upon liquidation are made to any Common Shareholders.
(4) Ten Percent Series shall be nonvoting.
In addition to the Ten Percent Series which is authorized by this ARTICLE V, the Board of Directors of Delta Natural Gas Company, Inc. is hereby authorized to establish and issue other series and fix and determine the variation in rights and preferences as among all series. In determining the relative rights and preferences among series, the Board of Directors may establish variations among series as to the following relative rights and preferences:
(1) The rate of dividend;
(2) Whether shares may be redeemed and, if so, the redemption price and the terms and conditions of redemption;
(3) The amount payable upon shares in event of voluntary and involuntary liquidation;
(4) Sinking fund provisions, if any, for the redemption or purchase of shares;
(5) The terms and conditions, if any, on which shares may be converted;
(6) Voting rights, if any.
ARTICLE VI. The Corporation shall commence business with capital in the amount of One Thousand ($1,000.00) Dollars.
ARTICLE VII. The names, addresses, and number of shares of the capital stock subscribed by each of the incorporators are as follows:
NAME ADDRESS NO. OF SHARES
---- ------- -------------
Harrison D. Peet Stanton, Kentucky 1
V.E. Scott Winchester, Kentucky 1
William Love Louisville, Kentucky 1
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ARTICLE VIII. (a) The affairs and business of the Corporation shall be conducted by a Board of Directors whose membership shall number not less than seven (7) members nor more than fifteen (15) members as fixed by the By-Laws of the Corporation. Such number of Directors so fixed in such By-Laws may be changed only by receiving the affirmative vote of (i) the holders of at least 80% of all the securities of the Corporation then entitled to vote on such change, or (ii) a majority of the Directors in office at the time of the vote.
(b) A Director may be removed without cause, but only upon the approval of the holders of 80% of the shares then entitled to vote at an election of Directors.
(c) The Board of Directors shall elect as officers of the
Corporation a President; one (1) or more Vice Presidents; a Secretary; one
(1) or more Assistant Secretaries; a Treasurer; and one (1) or more
Assistant Treasurers. Any two (2) of the offices of Vice President,
Secretary, and Treasurer may be combined in one person.
(d) The first Board of Directors shall be elected by the incorporators and subscribers by ballot at such time and place as the majority of the incorporators and subscribers may determine.
(e) The Directors shall be divided into three classes, and each class shall be as nearly equal in number as possible. The term of office of Directors of the first class shall expire at the annual meeting of the shareholders of the Corporation to be held in 1983; the term of office of the Directors of the second class shall expire at the annual meeting of the shareholders of the Corporation to be held in 1984; and the term of office of the Directors of the third class shall expire at the annual meeting of the shareholders of the Corporation to be held in 1985. At each annual meeting of the shareholders of the Corporation beginning in 1983, a class of Directors equal to five (5) or less, as set by the Directors in accordance with the By-Laws, shall be elected to hold office until the third succeeding annual meeting.
(f) The Board of Directors shall make such rules and By-Laws governing the Corporation as are not inconsistent with the Articles of Incorporation and the laws of the Commonwealth of
Kentucky subject to the power of the shareholders to change or repeal such By-Laws.
ARTICLE IX. The private property of the stockholders shall not be subject to the payment of the debts of the Corporation.
ARTICLE X. There shall be no preemptive rights for any shares of stock issued by the Corporation.
ARTICLE XI. Subject to the provisions of law, the Board of Directors may, from time to time, make distributions to the shareholders out of capital surplus of the Corporation. Such distribution may be in the form of cash or property.
ARTICLE XII. (a) The affirmative vote of not less than 80% of the outstanding shares of each class of securities of the Corporation entitled to vote shall be required, except as otherwise expressly provided in paragraph (b) of this Article XII, in order for any of the following actions or transactions to be effected by the Corporation or approved by the Corporation as stockholder of any subsidiary of the Corporation, if, as of the vote thereon or consent thereto, any Prior Holder (as hereinafter defined) owns or controls, directly or indirectly, 10% or more of the outstanding shares of the Corporation entitled to vote (such Prior Holder owning such 10% shall hereinafter be referred to as "10% Prior Holder"):
(i) any merger or consolidation of the Corporation or any of its subsidiaries with or into such 10% Prior Holder or any of the 10% Prior Holder's affiliates, subsidiaries or associates, or any merger or
consolidation of the Corporation with or into any subsidiary of the Corporation, except a merger with a subsidiary of the Corporation in which the Corporation is the surviving corporation, provided that in the event the subsidiary is the surviving corporation the articles of incorporation of such subsidiary contains provisions substantially the same in substance as those in Article VIII and Article XII of these Articles of Incorporation, or
(ii) any sale, lease, exchange or other disposition of all or any substantial part of the assets of the Corporation or any of its subsidiaries to or with such 10% Prior Holder or any affiliate, subsidiary or associate of such 10% Prior Holder, or
(iii) any issuance or delivery of any voting securities of the Corporation or any of its subsidiaries to such 10% Prior Holder or affiliate, subsidiary or associates of such 10% Prior Holder in exchange for cash, other assets or securities or a combination thereof, or
(iv) any dissolution of the Corporation or any of its subsidiaries, or
(v) the amendment or repeal of Article VIII(a), Article VIII(b), Article VIII(e) or Article XII of the Corporation's Articles of Incorporation.
(b) The vote of stockholders specified in paragraph (a) of this Article XII shall not apply to any action or transaction described in such paragraph, if the Board of
Directors of the Corporation shall have approved the action or transaction before direct or indirect ownership or control of 10% or more of the outstanding shares of stock of the Corporation entitled to vote is acquired by the 10% Prior Holder.
(c) For the purpose of this Article XII (i) "Prior Holder" shall mean any corporation, person or entity other than the Corporation or any of its subsidiaries; (ii) a Prior Holder shall be deemed to own or control, directly or indirectly, any outstanding shares of stock of the Corporation (x) which it has the right to acquire pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise, or (y) which are owned, directly or indirectly (including shares deemed owned through application of clause (x) above), by any other corporation, person or other entity which is its subsidiary, affiliate or associate or with which it or any of its subsidiaries, affiliates or associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of stock of the Corporation (or, with or without such an agreement, arrangement or understanding, acts in concert) or, (z), with regard to which the Prior Holder is the "Beneficial Owner", as defined on September 15, 1983, in Rule 13d-3 under the Securities Exchange Act of 1934; (iii) the "affirmative vote of not less than 80% of the outstanding shares of each class of securities of the Corporation entitled to vote" shall mean, in an instance where class voting is required, the approval of 80% of the shares of each class of securities of the Corporation entitled to vote on a
particular question as a class and 80% of the total shares entitled to vote thereon, and, in other instances, 80% of the voting securities of the Corporation; (iv) "subsidiary" shall mean any corporation of which another corporation owns, directly or indirectly, 50% or more of the voting stock, an "associate" and "affiliate" shall have the same means as set forth in the General Rules and Regulations under the Securities Exchange Act of 1934 on September 15, 1983, and (iv) "substantial part of the assets" shall mean assets then having a fair market value, in the aggregate, of more than $500,000.
ARTICLE XIII. No Director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for a breach of his duties as a Director except for liability:
(a) for any transaction in which the Director's personal financial interest is in conflict with the financial interest of the Corporation or its stockholders;
(b) for acts or omissions not in good faith or which involve intentional misconduct or are known to the Director to be a violation of law;
(c) for distributions made in violation of the Kentucky Revised Statues; or
(d) for any transaction from which the Director derives an improper personal benefit.
If the Kentucky Revised Statutes are amended after approval by the stockholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a Director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Kentucky Revised statutes, as so amended. Any repeal or
modification of this Article XIII by the Stockholders of the Corporation shall not adversely affect any right or protection of a Director of the Corporation existing at the time of such repeal or modification.
Amendments to the Articles of Incorporation, amending Article V, above, and adopting a new Article XIII, above, were duly adopted by shareholders holding a majority of the outstanding shares of Common Stock of the Corporation voting by proxy and in person at a meeting of the shareholders held on November 17, 1988, as follows:
(a) The only voting group entitled to vote on the amendments consists of the shareholders holding Common Stock of the Corporation as of the record date for the meeting, October 3, 1988.
(b) As of such record date, the number of outstanding shares of Common Stock was 1,151,784 with each share being entitled to cast one (1) vote on each amendment.
(c) The total number of shares of Common Stock, as well as the total number of votes, indisputably represented at the meeting in person or by proxy was 843,453.
(d) A total of 696,654 undisputed votes were cast for the amendment to Article V, above, by shareholders holding Common Stock of the Corporation.
(e) A total of 691,414 undisputed votes were cast for the amendment adopting Article XIII, above, by shareholders holding Common Stock of the Corporation.
(f) The number of votes cast for each amendment by shareholders holding Common Stock of the Corporation was sufficient for approval by that voting group.
The foregoing Restated Articles of Incorporation for Delta Natural Gas Company, Inc. correctly set forth without change the corresponding provisions of the Articles of Incorporation as heretofore amended.
The foregoing Restated Articles of Incorporation for Delta Natural Gas Company, Inc. supersede the original Articles of Incorporation of Delta Natural Gas Company, Inc. and all amendments thereto.
DELTA NATURAL GAS COMPANY, INC.
By: /s/ GLENN R. JENNINGS
------------------------
Glenn R. Jennings
President and Chief Executive
Officer
/s/ JANE W. HYLTON
------------------
Jane W. Hylton
Secretary
|
STATE OF KENTUCKY )
) SCT.
COUNTY OF CLARK )
I, Emily P. Bennett, a notary public, do hereby certify that on this 20th day of January, 1989, personally appeared Glenn R. Jennings, who, being by me first duly sworn, declared that he is the President and Chief Executive Officer of Delta Natural Gas Company, Inc., a Kentucky corporation, that he signed the foregoing document as President of the Corporation, and that the statements therein contained are true.
My commission expires: November 24, 1991.
/s/ EMILY P. BENNETT ---------------------------- Notary Public,State-at-Large |
EXHIBIT 5
STOLL, KEENON & PARK, LLP
300 West Vine Street, Suite 2100
Lexington, Kentucky 40507
(859) 231-3683
Facsimile: (859) 253-1093
April 3, 2003
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Delta Natural Gas Company, Inc. Registration Statement
Ladies and Gentlemen:
We are acting as counsel to Delta Natural Gas Company, Inc., a Kentucky corporation ("Delta"), in connection with the issuance and sale by Delta of up to 575,000 shares (the "Shares") of $1 par value common stock (the "Common Stock"). A Registration Statement on Form S-2 with respect to the Shares has been filed by Delta with the Securities and Exchange Commission.
In our capacity as counsel to Delta, we have familiarized ourselves with the corporate affairs of Delta and are familiar with the actions taken by Delta in connection with the aforementioned issuance and sale. We have examined the original or certified copies of all such records of Delta and all such agreements, certificates of public officials, certificates of officers or representatives of Delta and others and such other documents as we deem relevant and necessary as a basis for the opinions hereinafter expressed. In such examination we have assumed the genuineness of all signatures on original documents and the conformity to original documents of all copies submitted to us as conformed or photostatic copies. As to various questions of fact material to such opinions, we have relied upon statements or certificates of officials and representatives of Delta and others.
Based upon the foregoing, it is our opinion that:
1. Delta is a corporation duly organized and validly existing under the laws of the Commonwealth of Kentucky.
2. The Shares have been legally authorized by Delta and will, when sold, be legally issued, fully paid and non-assessable shares of Delta's Common Stock.
We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement. We also hereby consent to the use of our name under "Legal Matters" in the Prospectus constituting part of the Registration Statement.
Very truly yours,
STOLL, KEENON & PARK, LLP
By: /s/ RUTHEFORD B. CAMPBELL, JR.
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Rutheford B. Campbell, Jr.
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EXHIBIT 10(j)
GAS STORAGE LEASE
THIS AGREEMENT, made and entered into this 4th day of October, 1995, by and between Judy L. Fuson, Guardian of Jaimie Nicole Fuson, a minor, P.O. Box 1161, Rt. 190, Pineville, Kentucky 40977, hereinafter called Lessor (whether one or more), and Lonnie D. Ferrin, whose address is 431 Electra Drive, Houston, Texas 77024 hereinafter called Lessee: WITNESSETH THAT:
1. Lessor, for and in consideration of the sum of Ten Dollars ($10.00) in hand paid, receipt of which is hereby acknowledged, of the rentals herein provided, and of the agreements of Lessee hereinafter set forth, hereby grants, demises, leases and lets exclusively unto said Lessee the lands hereinafter described for the purpose of the underground storing of natural gas and other gaseous substances, as set forth below, together with the right to construct, replace, inspect, repair, relocate, change the size of and maintain pipelines, electric lines and telephone line, roadways, equipment and structures thereon for use in connection with the underground storage of gas; and also the exclusive right to inject air, gas, water, brine and other fluids from any source into subsurface strata and any and all other rights and privileges necessary, incident to, or convenient for the economical operation of said land, alone or conjointly with neighboring land, for storing gas, said lands being situated in Bell, Kentucky, and being bounded now or formerly substantially as follow, to-wit:
On the North by lands of Ky. State Forest and O. Gregory
On the East by lands of Thomas Carnes Trustee
On the South by lands of Thomas Carnes Trustee
On the West by lands of Thomas Carnes Trustee and Ky. State Forest
Being the same land conveyed to Lessor by Deed dated April 14, 1987 in Deed Book 251, page 149 from James S. Fuson, et ux.
This Lease also covers and includes all land and interest in land owned or claimed by Lessor adjacent or contiguous to the land particularly described above, whether the same be in said county or counties or in
2. This Lease shall remain in force for a term of ten (10) years from the date hereof (called "primary term") and as long thereafter as said land is used for gas storage purposes.
3. Lessee shall have the exclusive right to use and to enter into possession of any formation, stratum or strata underlying the lands hereinabove described (except any formation, stratum or strata bearing potable water or workable coal) for the storage of gas, or other gaseous substances produced in a gaseous state, from whatever source or sources obtained, and may for this purpose re-open and restore to operation any and all abandoned wells on the premises which may have penetrated such formation, stratum or strata, or may drill new wells thereon for the purpose of introducing and storing any kind of gas, or other gaseous substances produced in a gaseous state, in any such formation, stratum or strata and recovering the same therefrom. It is understood that a well need not be drilled on said land to permit the storage of gas or other gaseous substances produced in a gaseous state. Lessee shall be the sole judge as to whether gas or other gaseous substances produced in a gaseous state is stored within the lease premises and Lessee's determination in respect thereto shall be final and conclusive.
As full compensation for the storage rights herein granted and in lieu of any royalty which may become due on the production or removal of stored gas or other gaseous substances produced in a gaseous state from the lease premises. Lessee agrees to pay Lessor on or before each anniversary date hereof an annual rental in an amount equal to Two Dollars ($2.00) per acre covered hereby until such time as Lessee actually utilizes the property covered hereby in connection with underground gas storage purposes, and beginning with the first anniversary date hereof after Lessee has commenced utilizing the property for underground storage purposes, the annual rentals payable to Lessor shall be increased to an amount equal to Four Dollars ($4.00) per acre. Said rental payments may be paid or tendered to Lessor by check or draft of Lessee mailed or delivered to the Lessor at address of Lessor indicated above, or by check or draft of Lessee mailed or delivered to ___________________ bank at ____________________, for deposit to the credit of Lessor. Lessee further agrees to pay Lessor as liquidated damages for the drilling operation and maintenance of each well on the leased premises which is utilized for the storage of gas or other gaseous substances produced in a gaseous state, as well as for the necessary or
useful surface rights and privileges relating thereto, for the entire term of this agreement, the sum of $100.00 payable in one sum within three months after each well now existing or hereafter drilled upon the lease premises is so utilized. Lessee agrees to give Lessor written notice of the use of the lease premises for such gas storage purposes and of the use of any well drilled thereon for such gas storage purposes. In the event any formation, stratum or strata utilized for storage purposes contains an economically recoverable reserve of native gas. Lessee agrees to compensate Lessor for royalty on such gas as provided below.
4. In the event Lessor should become entitled to any royalty under the preceding paragraph hereof, such royalty shall be one-eighth (1/8th) of the reasonable market value of the gas at the well, provided, further, however, the reasonable market value shall not in any event exceed the net amount which may be realized by Lessee from the sale of such gas, and it is further understood that if Lessor is entitled to royalty on any such recoverable native gas under the provisions of any oil and gas lease covering said property, Lessee hereunder shall not be required to pay any royalty thereon in addition to the royalty payable under any such oil and gas lease.
5. The down cash payment is consideration for this Lease according to its terms and shall not be allocated as rental for period. Lessee may at any time, and from time to time, execute and deliver to Lessor or file for record a release or releases of this Lease as to any part or all of said land and thereby be relieved of all obligations as to the released land. If this Lease is released as to a portion of said land, the rental computed in accordance therewith shall thereupon be reduced in the proportion that the acreage released bears to the acreage which was covered by this Lease immediately prior to such release.
6. Lessee shall have the right, but not the obligation, at any time during or after the expiration of this Lease to remove all property and fixtures placed by Lessee on said land, including the right to draw and remove all casing. When necessary for utilization of the surface for some intended use by Lessor and upon request of Lessor or when deemed necessary by Lessee for protection of the pipeline, Lessee will bury pipelines below ordinary plow depth, and no well shall be drilled within two hundred (200) feet of any residence or born now on said land without Lessor's consent.
7. The rights or either party hereunder may be assigned in whole or in part, and the provisions hereof shall extend to their heirs, successors and assigns; but no change or division in ownership of the land, rental or royalties, however accomplished, shall operate to enlarge
the obligation or diminish the rights of Lessee; and no change or division in such ownership shall be binding on Lessee until forty-five (45) days after Lessee shall have been furnished by registered United States Mail at Lessee's principal place of business with certified copy of recorded instrument or instruments evidencing same. In the event of assignment hereof in whole or part, liability for breach of any obligation hereunder shall rest exclusively upon the owner of this Lease or a portion thereof who commits such breach. In the event of the death of any person entitled to rental hereunder, Lessee may pay or tender such rentals to the credit of the decease or the estate of the deceased until such time as Lessee is furnished with proper evidence of the appointment and qualifications of an executor or administrator of the estate, or if there be none, until Lessee is furnished with evidence satisfactory to it as to the heirs or devisees of the deceased and that all debts of the estate have been paid. If at any time two or more persons be entitled to participate in rentals payable hereunder, Lessee may pay or tender said rental jointly to such persons, or at Lessee's election, the proportionate part of rental to which each participant is entitled may be paid or tendered to him separately or to his separate credit in said depository. In the event of assignment of this Lease as to a segregated portion of said land, rental hereunder shall be apportionable as between the several leasehold owners ratably according to the surface area of each and default in rental payment by one shall not affect the rights of other leasehold owners hereunder. If six or more parties become entitle to rental hereunder, Lessee may withhold payment thereof unless and until furnished with a recordable instrument executed by all such parties designating an agent to receive payment for all.
8. Lessor hereby warrants and agrees to defend the title of said land and agrees that Lessee at its options may discharge any tax, mortgage or other lien upon said land, either in whole or in part, and if Lessee does so, it shall be subrogated to such lien with right to enforce same and apply rentals and royalties accruing hereunder toward satisfying same. When required by state, federal or other law, Lessee may withhold taxes with respect to rental, royalty and other payments hereunder and remit the amounts withheld to the applicable taxing authority for the credit of Lessor. Without impairment of Lessee's rights under the warranty in the event of failure of title, if Lessor owns an interest in the oil or gas on, in or under said land less than the entire fee simple estate, whether or not this Lease purports to cover the whole or a fractional interest, the royalties and rentals to be paid Lessor shall be in accordance with the nature of the estate of which Lessor is seized. Should any one or more of the parties named above as Lessor fail to execute this Lease, it shall nevertheless be binding upon the party or parties executing the same. Failure of Lessee to reduce rental paid
hereunder shall not impair the right of Lessee to reduce any royalties which may be payable hereunder.
9. Should Lessee be prevented from complying with any express or implied covenant of this Lease, from utilizing the property for underground storage purposes by reason of scarcity of or an inability to obtain or to use equipment or material or failure or breakdown of equipment, or by operation of force majeure, any federal or state law or any order, rule or regulation of governmental authority, then while so prevented, Lessee's obligation to comply with such covenant shall be suspended and this Lease shall be extended while and so long as Lessee is prevented by any such cause from utilizing the property for underground storage purposes and the time while Lessee is so prevented shall not be counted against Lessee, anything in this Lease to the contrary notwithstanding.
10. Each singular person herein shall include the plural whenever applicable.
IN WITNESS WHEREOF, this instrument is executed on the date first above written.
/s/ Judy L. Fuson
---------------------------------
Judy L. Fuson, Guardian of Jaimie
Nicole Fuson, a Minor
APPROVED THIS 4th DAY OF
OCTOBER, 1995
/s/ James r. [illegible]
---------------------------
Judge, Bell District Court
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ACKNOWLEDGEMENT
STATE OF KENTUCKY )
)
COUNTY OF BELL )
I, Joann Baker, a Notary Public in and for said County and State aforesaid, do hereby certify that Judy L. Fuson, Guardian for Jaimie Nicole Fuson, a minor, personally known to be the same person whose name is subscribed to the foregoing instrument, appeared before me this day in person, and acknowledged that she signed, sealed and delivered the said instrument as her free and voluntary act for the uses and purposes therein set forth, and desired the same to be recorded as such.
Given under my hand and ___________ Seal, this 4th day of October, 1995.
My commission expires 7-29-96 .
-----------------
/s/ Joann Baker
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Notary Public
This instrument prepared by:
Benjamin C. Cubbage, Jr.
600 Barrett Blvd., P.O. Box 17
Henderson, Kentucky 42420
/s/ Benjamin C. Cubbage ----------------------- |
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT is entered into this 10 day of November, 1995, by and between LONNIE D. FERRIN ("Seller"), and DELTA NATURAL GAS COMPANY, INC., a Kentucky corporation ("Purchaser"). Capitalized terms used herein and in the attachments hereto shall have the meanings set forth in the Agreement (as defined below) unless otherwise stated herein.
THAT WHEREAS, on March 1, 1995 Seller and Purchaser entered into an Agreement for Purchase and Sale of Assets (the "Agreement") pursuant to which Seller agreed to transfer, assign and convey to Purchaser and Purchaser agreed to purchase and acquire from Seller certain of the property and assets of Seller located in Bell County, Kentucky; and
WHEREAS, subject to the terms and conditions of the Agreement, Seller desires to now transfer and assign to Purchaser the Leases, and Purchaser desires to accept and assume same, pursuant to and in discharge of their respective obligations set forth in the Agreement.
NOW, THEREFORE, for and in consideration of the performance and observance of the terms and conditions contained herein and set forth in the Agreement, the terms and conditions of which are incorporated herein by reference, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller does hereby sell, transfer, assign and quitclaim to Purchaser, its successors and assigns, all of Seller's right, title and interest in and to the Leases. It is understood and agreed that this is a quitclaim assignment of the leases described on Exhibit A and that Seller is not warranting title to any of such leases. It is further agreed and acknowledged that this Assignment shall be governed by and construed in accordance with the terms and conditions of the Agreement.
Purchaser does hereby accept the transfer and assignment of the Leases made herein and does hereby assume same and agree to pay or discharge when
due and perform in full all of Seller's duties and obligations under the Leases arising on or after the date hereof.
IN WITNESS WHEREOF, the parties have executed this Assignment and Assumption Agreement on this the day and year first above written.
"SELLER"
/s/ LONNIE D. FERRIN
-------------------------------
LONNIE D. FERRIN
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"PURCHASER"
DELTA NATURAL GAS COMPANY, INC.,
a Kentucky corporation
BY: /s/ GLENN R. JENNINGS
----------------------------
ITS: President & CEO
---------------------------
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STATE OF KENTUCKY)
COUNTY OF JEFFERSON)
The foregoing Agreement was subscribed, sworn to and acknowledged before me this 10th day of November, 1995, by Lonnie D. Ferrin.
My Commission Expires: 4-15-98
-------------------
/s/ Suzan N. Ellis
-----------------------------
NOTARY PUBLIC
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STATE OF KENTUCKY)
COUNTY OF JEFFERSON)
The foregoing Agreement was subscribed, sworn to and acknowledged before me this 10th day of November, 1995, by Glen Jennings as President of Delta Natural Gas Company, Inc., a Kentucky corporation, for and on behalf of the corporation.
My Commission Expires: 4-15-98
----------------------
/s/ Suzan N. Ellis
-----------------------------
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NOTARY PUBLIC
THIS INSTRUMENT PREPARED BY:
STOLL, KEENON & PARK
201 E. Main Street
Suite 1000
Lexington, Kentucky 40507
(606) 231-3000
BY: /s/ J. MEL CAMENISCH, JR. ------------------------------ J. Mel Camenisch, Jr. |
Attachment to that certain Assignment and Assumption Agreement between Lonnie D. Ferrin and Delta Natural Gas Company dated November 10, 1995.
1. Oil and Gas Lease dated October 15, 1992 from Earlene Z. Smith to Equitable Resources Exploration and recorded in Lease Book 39, Page 677 in the Bell County Clerk's office, as assigned in that Amendment No. 1 and Novation to Underground Storage Lease and Agreement (Canada Mountain Field) dated March 22, 1995 by and between Equitable Resources Exploration, Lonnie D. Ferrin and Delta Natural Gas Company and recorded in Lease Book 40, Page 832 in the aforesaid Clerk's office.
2. Oil and Gas Lease dated November 19, 1992 from James Earl Fuson, Guardian for Jaimie Nicole "Sweet Pea" Fuson, a single minor, to Equitable Resources Exploration and recorded in Lease Book 39, 741 in the Bell County Clerk's office, as assigned in that Amendment No. 1 and Novation to Underground Storage Lease and Agreement (Canada Mountain Field) dated March 22, 1995 by and between Equitable Resources Exploration, Lonnie D. Ferrin and Delta Natural Gas Company and recorded in Lease Book 40, Page 832 in the aforesaid Clerk's office.
3. Oil and Gas Lease dated January 11, 1993 from James Earl Fuson and Judy L. Fuson, husband and wife, to Equitable Resources Exploration and recorded in Lease Book 39, Page 800 in the Bell County Clerk's office, as assigned in that Amendment No. 1 and Novation to Underground Storage Lease and Agreement (Canada Mountain Field) dated March 22, 1995 by and between Equitable Resources Exploration, Lonnie D. Ferrin and Delta Natural Gas Company and recorded in Lease Book 40, Page 832 in the aforesaid Clerk's office.
4. Oil and Gas Lease dated September 2, 1992 from Zella Fuson, widow, Barbara Fuson Evans and Rabon Evans to Equitable Resources Exploration and recorded in Lease Book 39, Page 665 in the Bell County Clerk's office, as assigned in that Amendment No. 1 and Novation to Underground Storage Lease and Agreement (Canada Mountain Field) dated March 22, 1995 by and between Equitable Resources Exploration, Lonnie D. Ferrin and Delta Natural Gas Company and recorded in Lease Book 40, Page 832 in the aforesaid Clerk's office.
5. Gas Storage Lease dated October 4, 1995 from Judy L. Fuson, Guardian of Jaimie Nicole Fuson, a minor, to Lonnie D. Ferrin and recorded in Lease Book 40, Page 799 in the Bell County Clerk's office.
EXHIBIT 10(k)
THIS AGREEMENT, made and entered into this 6th day of November, 1995, by and between Thomas J. Carnes, individually and as Attorney-in-fact and Trustee for Davis Greer, single, Carol Fortner, single, William Fortner and Nancy Fortner, his wife, Gladys Jeanett Fortner, single, Dorothy Ann Taylor, single, Jane Lynch and Lawrence Lynch, her husband, Virginia Banks and Carl Banks, her husband, and George Fortner and May Fortner, his wife, whose address is 412 Ridgeway Road, Lexington, Kentucky 40502, all of such persons are hereinafter collectively referred to as "Lessor", and Delta Natural Gas Company, Inc., a Kentucky corporation, whose address is 3617 Lexington Road, Winchester, Kentucky 40391, hereinafter called "Lessee";
WITNESSETH:
THAT, Lessor, for and in consideration of the sum of Forty Thousand Dollars ($40,000) in hand paid, receipt of which is hereby acknowledged, of the rentals herein provided, and of the agreements of Lessee hereinafter set forth, hereby grants, demises, leases and lets unto said Lessee the lands hereinafter described for the purpose of the underground storing of natural gas within and the withdrawing of natural gas from the stratigraphic interval as described in Paragraph 2, with such perpetual rights of way, easements and privileges upon and under the lands hereinafter described as may be necessary or desirable for constructing pipelines and appurtenant facilities for the underground storing of natural gas, together with the exclusive right to inject air, gas, water, and other fluids, except brine, in accordance with generally accepted industry standards and practices, from any source other than Lessor's into the subsurface strata named herein and any and all other rights and privileges necessary, incident to, or convenient for the economical operation of said land, alone or conjointly with neighboring land, for storing gas subject to the other provisions herein; said lands being situated in Bell County, Kentucky, as identified in "Exhibit A" attached hereto and made a part hereof (the "Property"). It being intended hereby to include herein all lands and interests therein contiguous to or appurtenant to said described lands owned or claimed by Lessor or appurtenant to Lessee's underground gas storage operations. Said land is estimated to contain one thousand four hundred (1,400) acres, whether it contains more or less.
1. This Gas Storage Lease shall remain in force for a term of five
(5) years from the date hereof (called "primary term") and as long
thereafter as said land is used for gas storage purposes or rental is paid
for the right to inject, store, and remove gas in and from the gas strata
underlying said premises. This Gas Storage Lease may be subject to the terms
and conditions of that Oil and Gas Lease dated September 11, 1980 from Thomas
J. Carnes, individually and as attorney-in-fact and trustee for the Davis
and Fortner heirs, to Stan Pietzak and John Love, d/b/a L. P. Energy
Associates, recorded in Lease Book 28, page 167 in the Bell County Clerk's
Office (the "L. P. Energy lease"). During the term of this Gas Storage Lease
and limited to the extent such rights are vested in Lessor, Lessee shall
have the right to use the three existing gas wells on the lands covered by
this Gas Storage Lease or to plug and abandon any or all of the wells at
Lessee's sole discretion, provided, however, (i) Lessor does not warrant or
represent that Lessor has any rights in or to said wells, and (ii) the
exercise of any rights by the lessee under the L. P. Energy lease shall not
diminish the obligation of the Lessee under this Gas Storage Lease to make
the payments to Lessor as provided herein. To the extent such operations do
not interfere with Lessee's rights and privileges granted herein, Lessor
reserves the right to use any or all of the three existing wells on the
lands covered by this Gas Storage Lease for the purpose of producing native
natural gas from strata other than the stratigraphic interval described in
Paragraph 2. After Lessor gives Lessee written notice of Lessor's intent to
operate the wells, Lessor shall be responsible for bearing all costs
associated with or resulting from the operation and maintenance of the
well(s) for the production of the native natural gas and for any damages,
costs or expenses incurred by Lessee or Lessee's storage operations
resulting from Lessor's production operations. Prior to commencing gas
production operations or well modifications, Lessor shall provide to Lessee
specific plans setting forth the details of the modifications to be made to
the well(s). If Lessee determines such proposed well modifications to be
unacceptable, Lessor shall not alter the wells or equipment until Lessee's
concerns are resolved, provided, however, Lessee shall not unreasonably
withhold approval of Lessor's well modifications or plans. Upon cessation of
gas storage operations, Lessee shall have the obligation to plug and abandon
any of the existing three wells which have not been plugged and abandoned
and any wells drilled by Lessee during the term hereof. However, upon
termination of this Gas Storage Lease, Lessee may,
with Lessor's approval and with regulatory consent, assign ownership and plugging responsibility for any or all of the wells to a third party or to Lessor.
2. Lessee shall have the exclusive right to use and to enter into possession of the stratigraphic interval lying between 200 feet above the top of the Newman Limestone formation and the base of the Ohio Shale formation for the storage of natural gas, from whatever source or sources obtained, and the withdrawal of natural gas from such stratigraphic interval, and may for this purpose drill additional wells and reopen and restore to operation any and all abandoned wells on the premises which may have penetrated such formation, stratum or strata for the purpose of introducing and storing gas in said formation, stratum or strata and recovering the same therefrom. Lessee shall be the sole judge as to whether gas is stored within the leased premises, and Lessee's determination in respect thereto shall be final and conclusive. All natural gas injected into, stored, withdrawn and/or removed from and underneath the Property shall be considered personal property of Lessee, its successors and assigns, and shall remain the personal property of Lessee, its successors and assigns, while in storage and shall be personal property when withdrawn. Lessee shall have the right to enter into such other strata and geologic formations underlying the Property as may be necessary or desirable to recover any gas stored by Lessee which may have migrated out of the above-described stratigraphic interval underlying the Property. As full compensation for the storage rights herein granted, Lessee agrees to pay Lessor upon the execution of this Gas Storage Lease and on or before each anniversary date hereof an annual rental in the amount of Twelve Thousand Dollars ($12,000). Said rental payments may be paid or tendered to Lessor by check or draft of Lessee mailed or delivered to Lessor at the address of Lessor indicated above. In the event Lessee fails to make payments in full under the terms of this Agreement to Lessor, Lessor's heirs or assigns, this Agreement may not be terminated by Lessor unless (i) Lessor has notified Lessee in writing of Lessee's failure to make such payment and (ii) Lessee has failed to make such payment during the twenty (20) days following Lessee's receipt of such written notice from Lessor.
3. The initial Forty Thousand Dollars ($40,000) payment set forth above is consideration for this Gas Storage Lease according to its terms and
shall not be allocated as rental for a period. After the first five year term, Lessee, its successors and assigns, shall have the right at any time and from time to time to surrender this Gas Storage Lease, in whole or in part, by executing and delivering to Lessor or by placing of record in the county in which the land is situated a release of the entire lease premises or any portion thereof, whereupon Lessee shall be relieved of any and all unaccrued obligations as to the acreage so surrendered, except for any plugging responsibilities, provided, however, that any such partial surrender of acreage hereunder shall not reduce the annual rental of $12,000.
4. Lessee shall have the right at any time during or within six (6) months after the expiration of this Gas Storage Lease to remove all property and fixtures owned by Lessee on said land, including the right to draw and remove all casing, except for the casing in the three (3) existing wells on the Property so long as leaving the casing in place is permitted by the regulations then in effect. Lessee shall make a good faith effort not to interfere with any coal mining or timber harvesting operations and usages. To the extent Lessee's operations interfere with coal mining, Lessee shall bear the reasonable costs of padding or protecting its pipelines or other facilities on the Property which interfere with coal hauling, mine entrances, or other mining operations, provided that Lessor shall provide Lessee with sufficient documentation or evidence that Lessee's pipelines or other facilities are significantly impeding the mining operations, and Lessee shall be provided sufficient advance notification to permit the work to be done in a timely and reasonable manner. Lessee shall use its best efforts not to damage or destroy any timber, trees or undergrowth on the lease premises and shall be liable to Lessor for the value of all such timber and growing crops which are damaged or destroyed in connection with its operation. Lessee shall repair any damage to existing roads, fences, gates, etc. that results from Lessee's presence on Lessor's premises.
5. Lessor hereby warrants and agrees to defend the title to the leased premises. Lessor covenants that Lessor is the lawful owner of the premises and has the right to lease the same, free of rights to ownership and possession of third persons, except for the L. P. Energy lease referenced in Paragraph 1 herein, and that subject to the observance of all covenants, terms and conditions herein, the Lessee may peacefully enjoy the premises for the purposes herein set forth without interference. When required by
state, federal or other law, Lessee may withhold taxes with respect to rental and other payments hereunder and remit the amounts withheld to the applicable taxing authority for the credit of Lessor. Without impairment of Lessee's rights under the warranty in the event of failure of title, if Lessor owns an interest in the estate conveyed herein less than the entire fee simple estate, whether or not this Gas Storage Lease purports to cover the whole or a fractional interest, the rentals to be paid Lessor shall be reduced in the proportion that Lessor's interest bears to the whole and undivided fee.
6. All of the terms, covenants, conditions and agreements herein contained shall extend to and be binding upon the heirs, representatives, executors, administrators, successors or assigns of the parties hereto; provided that if the rights of either party hereunder are transferred or assigned (and the privilege of transferring or assigning in whole or in part is hereby expressly allowed), no such transfer and no such assignment of royalty hereunder by either party shall be effective as between the parties hereto until the party making such transfer or assignment has furnished the other party hereto a certified copy of the recorded instrument or instruments effecting such transfer or assignment.
7. Lessee shall pay all taxes and assessments of every kind and character that may be levied as assessed by any governmental authority against or upon the estate hereby leased, or the privilege of storing gas, or improvements or other property of Lessee in or on the lands included herein. Lessee covenants that it will at all times conduct its operations, including the plugging of wells, in compliance with all applicable laws, rules and regulations of the United States of America and the state, or other governmental entity empowered to so act, where the lands are located, or are hereafter in force and effect. This Gas Storage Lease shall not be terminated, in whole or in part, nor Lessee held liable for any failure to perform thereunder if such failure is due to or is the result of any such law, order, rule or regulation.
8. Lessee expressly covenants and warrants that it will defend, save and hold Lessor harmless from any liabilities, damages or obligations of any kind or character whatsoever arising from or in any way connected with Lessee's operations hereunder. Lessor expressly covenants and warrants that Lessor will defend, save and hold Lessee harmless from any liabilities, damages or obligations of any kind or character whatsoever arising from or in any way connected with Lessor's natural gas production operations described in
Paragraph 1. Lessee shall maintain such insurance as will protect Lessor from any claims for damages to persons or properties of others which may arise from operations under this agreement whether such operations be by Lessee or assignee or by anyone directly or indirectly employed by them or acting on their behalf, and Lessor shall be named as an additional insured party under Lessee's liability insurance coverage, which coverage shall not be less than Ten Million Dollars ($10,000,000).
9. Thomas J. Carnes ("Carnes") hereby represents and warrants to Lessee that he has the full right, power and authority to grant, demise, lease and let unto Lessee the gas storage rights and surface rights, as described herein, of Davis Greer, single, Carol Fortner, single, William Fortner and Nancy Fortner, his wife, Gladys Jeanett Fortner, single, Dorothy Ann Taylor, single, Jane Lynch and Lawrence Lynch, her husband, Virginia Banks and Carl Banks, her husband, and George Fortner and May Fortner, his wife, in, under and on the lands identified in "Exhibit A" attached hereto and to accept and receive payment hereunder for and on behalf of the aforesaid individuals pursuant to the terms and conditions of that Power of Attorney recorded in the Bell County Clerk's Office at Misc. Book _____, Page ____.
10. It is expressly agreed between the parties that this instrument embraces the entire understanding and contract between the parties; and any agreements or representations made by any person on behalf of either the Lessor or the Lessee not contained in this Gas Storage Lease are unauthorized and do not bind the parties. Each singular pronoun herein shall include the plural whenever applicable.
IN WITNESS WHEREOF, this Gas Storage Lease is executed on the date first above written.
"LESSOR"
/s/ THOMAS CARNES
------------------------------------
THOMAS J. CARNES, individually and
as Attorney-in-fact and Trustee for
Davis Greer, single, Carol Fortner,
single, William Fortner and Nancy
Fortner, his wife, Gladys Jeanett
Fortner, single, Dorothy Ann Taylor,
single, Jane Lynch and Lawrence
Lynch, her husband, Virginia Banks
and Carl Banks, her husband, and
George Fortner and May Fortner, his
wife
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"LESSEE"
DELTA NATURAL GAS COMPANY, INC.
BY: /s/ ALAN L. HEATH
--------------------------------
ITS: V.P. OPNS & ENG.
-------------------------------
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STATE OF KENTUCKY )
COUNTY OF FAYETTE )
The foregoing Gas Storage Lease was produced and acknowledged before me this 6th day of November, 1995, by Thomas J. Carnes, individually and as attorney in fact on behalf of Davis Greer, single, Carol Fortner, single, William Fortner and Nancy Fortner, his wife, Gladys Jeanett Fortner, single, Dorothy Ann Taylor, single, Jane Lynch and Lawrence Lynch, her husband, Virginia Banks and Carl Banks, her husband, and George Fortner and May Fortner, his wife.
/s/ F.H. BURNETT
------------------------------------
NOTARY PUBLIC, Ky State at Large
STATE OF KENTUCKY )
COUNTY OF CLARK )
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The foregoing Gas Storage Lease was produced and acknowledged before me this 6th day of November, 1995, by Alan L. Heath, Vice President of Delta Natural Gas Company, Inc. on behalf of said corporation.
/s/ GEORGE S. BILLINGS
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NOTARY PUBLIC Ky, State at Large
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THIS INSTRUMENT PREPARED BY:
STOLL, KEENON & PARK, LLP
201 EAST MAIN STREET
SUITE 1000
LEXINGTON, KENTUCKY 40507
By: /s/ J. MEL CAMENISCH, JR.
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J. MEL CAMENISCH, JR.
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EXHIBIT "A"
A parcel of land lying on Cannon Creek, a tributary of Big Yellow Creek, and situated in the 6th Magisterial District of Bell County, Kentucky, and further described as follows:
BEGINNING at the mouth of Johnson's Branch, where it empties into Cannon Creek; thence Eastwardly down said Creek with the lines of the deed from Afford and Sarah Barnett to N. T. Johnson, dated January 19, 1935, to a point South of Philadelphia Veneer and Lumber Company land; thence Northwardly with the lines of the above referred to deed reversed to the line of Philadelphia Veneer and Lumber Company formerly; thence with Veneer and Lumber Company lines Northwardly and Westwardly to a point on top of Log Mountain, a corner of a tract of land formerly owned by Geoge Camp, and known as the Camp land; thence with the lines of said Camp land Westwardly and Southwardly to a point near the head of Smith Branch of Cannon Creek, a corner of a tract of land formerly belonging to Philadelphia Veneer and Lumber Company; thence Southeastwardly to a point on the Ridge between aforesaid Smith Branch and Johnson Branch, said point being a common corner to the referred to Veneering Company land, also a corner to Johnson land, as well as a corner to the lands now belonging to Sarah Barnett, formerly Sarah Shackleford; thence with the line between Johnson and Shackleford to the center of Johnson Branch, where formerly stood a white walnut; thence down Johnson's Branch with the meanders of same to the BEGINNING, CONTAINING 200 ACRES MORE OR LESS.
Being the same property conveyed to William I. Davis by deed dated October 2, 1942, recorded in Deed Book 125, page 148 of the Bell County Court Clerk's Office. See also Will Book 3, page 123, Deed Book 202, page 463, and Will Book 9, page 588 of said Clerk's Office.
Lying and being in Bell County, State of Kentucky, on the waters of Cannon Creek and Little Clear Creek, and bounded and described as follows, to wit:
Chadwell's former residence; thence N 40-10 West 10-7/10 poles to a small
white oak; thence N 87-40 W 6 poles to a stale; thence N 65-15 W 8-3/l0
poles to a double cucumber; thence N 54 W 7-9/10 poles to a black gum near a
road leading up the mountain; thence N 39 W 23 poles to a stake in Alex
Moore's patent line; thence N 31 E 20 poles to a hickory, said Moore's
corner; thence N 77-1/2 E 38 poles to a beech, white oak and fallen hickory;
thence with the meanders of the ridge N 48-1/2 W 16 poles to a stake; thence
N 85-1/2 W 11-5/10 poles to a hickory; thence N 80-1/2 W 19 poles to a
hollow white oak: thence S 77-1/2 W 11-5/10 poles to a live chestnut; thence
N 80-1/2 W 29-7/10 poles to a dogwood; thence N 40 E 16-1/2 poles to a
stake, pointed by a black gum; thence N 55 E 14 poles to a dogwood, formerly
a black oak, in Wilson Poff's patent corner; thence N 24 E 98 poles to a
black oak stump, formerly a white oak, also a corner to said Wilson Poff
survey; thence N 17-35 W 24-3/10 poles to a stake pointed by a dogwood and
poplar; thence N 2-30 W 15 poles to a scrubby white oak standing above the
old Alex Moore residence; thence N 82 W 31 poles to a stake pointed by two
maples; thence N 47-50 W 25 poles to a chestnut pointed by an oak, dogwood
and two sourwoods; thence S 53-53 W 106-9/10 poles to a large water oak
pointed by two chestnuts and black oak on steep hill near a cabin: thence S
11-3/4 W 20 poles to a double sourwood inside of Hendrickson fence; thence S
43-1/4 W 3-7/10. poles to a stake pointed by a chestnut and poplar: thence S
16-1/2 W 38-4/10 poles to a stake pointed by a sassafras and chestnut at
Hendrickson's fence; thence S 2-3/4 W 22-6/10 poles to chestnut oak stump
and small black gum pointed by a dogwood and three chestnuts; thence S 6-1/2
W 9-6/10 poles to an old broken top chestnut oak, now down, pointed by three
chestnuts, maple and sassafras, corner of the Elias Arnett conveyance:
thence S 73-3/4 W 32-5/10 poles to a stake; thence S 66-3/4 W 4-5/10 poles
to a stake, formerly a poplar and chestnut, and a corner of the Thos. B.
Poff 200 acre survey; thence with the lines of same N 84-1/4 W 30-5/10 poles
to a black gum,
BEGINNING at a pine standing on the point of a cliff about 125 poles North of a chestnut and
maple, a corner of a survey in the name of T. J. Kellems for 100 acres, said chestnut and maple, a corner of a survey in the name of T. J. Kellems for 100 acres, said chestnut and maple standing on the North bank of Cannon Creek, beginning of the survey in the name of Willis Johnson, near which the said Johnson, near which the said Johnson made an improvement; thence N 17 W 20 poles to a chestnut and white oak: thence N 10 W 54 poles to two chestnuts and maples growing from the same root; thence N 57 W 157 poles to a white oak and black oak; thence S 58 W 72 poles to a chestnut oak and small sourwood on top of the ridge between Cannon Creek and Clear Creek; thence S 37 W 36 poles to 2 white oaks; thence S 22 W 30 poles to a black gum; thence S 2 W 42 poles to a black walnut and two hickories near William Givens line; with same to E. Hurst's line; with E. Hurst's line to T. J. Kellems line and with said Kellems' line to the beginning.
The entire boundary of the James Johnson patent which embraces the excluded boundary just above described is estimated to contain 310 acres and that part of said James Johnson boundary which is excluded from this conveyance is estimated to contain 292 acres and 19 poles.
Also another tract of land lying on Cannon Creek and Clear Creek, in Bell County, Kentucky, being part of the John Kellems 200 acre patent No. 29345, and bounded as follows:
beeches; thence N 37-1/2 W 73-3/10 poles to a white oak and dogwood near the road, pointed by two beeches and three sourwoods; thence S 60 W 51 poles to a stake in Fuson's field on the East side of the ridge: thence S 43-1/2 E 106-5/10 poles to a beech at the lower end of Fuson's field, pointed by an ash and chestnut; thence S 23-1/4 E 190 poles to a stake, pointed by two chestnuts and a black oak on Spencer Flats; thence N 52-1/2 E 40 poles to a stake, pointed by a dogwood and sourwood; thence S 59-1/2 E 20 poles to a stake in the third line of said Kellems 200 acre survey; thence with said line N 22 E 96-4/10 poles to the beginning, containing 157 acres.
On the head waters of Cannon Creek, beginning at three lynns, corner of property of the Calston heirs, corner A. C. Campbell's grant No. 16518; thence north 24 degrees west 77-1/2 poles to a double spanish oak: thence north 48-1/4 degrees east 56 poles to a poplar: thence north 1/2 degrees east 30 poles to a white oak; thence north 83-3/4 degrees west 39.4 poles to a black gum; thence south 43-1/4 degrees west 32 poles to a chestnut oak; thence south 22 degrees west 98.5 poles to a stake on the survey corner for John Kellogs; thence north 60 degrees west 11.4 poles to a stake corner of same; thence south 52 degrees west 40 poles to a stake corner of same; thence north 23 degrees west 119.5 poles to a stake in line of same; thence south 2 degrees 51 minutes east 59.5 poles to a white oak corner of John Bull; thence south 82.9 west 44 poles to 5 maples, corner of same; thence south 65 degrees west 27 poles to a chestnut corner of Wm. Miracle: thence south 50-1/2 degrees east 70 poles to a chestnut oak Wm. Miracle corner; thence south 34-1/4 degrees east 22.6 poles to a fallen white oak stump, Wm. Miracle's line; thence south 69 degrees east 25.8 poles to a locust stump, Wm. Miracle's line; thence south 17-1/2 degrees west 27 poles to a white oak, Wm. Miracle's line; thence south 42-1/2 degrees east 20 poles to a stake at a fence: thence south 35-1/2 degrees east 7 poles to a fence; thence
Beginning at a white oak corner; thence north 59-1/2 degrees west 25 poles to a dogwood and hickory; thence north 66 degrees west 22.3 poles to a hickory; thence north 34-1/2 degrees west 26 poles to a poplar; thence north 14 degrees west 17.6 poles to James Evans line; thence north 71-1/2 degrees east 85 poles to a stake corner to J. N. Sampson; thence south 14 degrees east 90 poles to center of Rock Alum Branch; thence with said Branch to a stake bearing S 75 E from beginning corner; thence N 75 W about 30 poles to the beginning. Containing 30.5 acres, more or less.
A certain tract of land situated on the waters of North Cannon Creek near the head of Arnett Branch, in said County, and bounded as follows, to-wit:
BEGINNING at a large poplar and chestnut, near a sulphur spring in the head of Lot Hollow, the beginning corner of the James Colson 50 acre survey, patent #12070 and the 9th corner of the T. J. Kellems 100 acre patent No. 57678; thence N 86-29 W 81.32 poles to a stake, the 4th. corner of the Colson patent No. 12070 near Grassy spring near the top of the spur leading to Caney Knob; thence N 16-29 W 104.40 poles to two chestnuts and chestnut snag, with chestnut and dogwood pointers, being the third corner of said Colson patent #12070; thence S 86-29 E 83.36 poles to a large chestnut and two dogwoods, being the second corner of said Colson patent #12070; thence S 15-26 E (N 15-26 W) 103.72 poles (passing a chestnut stump with a bunch of chestnut pointers on top of a spur, at 86.92 poles) to the beginning, containing fifty (50) acres, more or less, it being embraced and covered by patent No. 12070, which issued to James Colson on the 10th. day of July, 1927, on a survey bearing date September 20th, 1825.
Situated in Bell County, Kentucky, on the head of the Green Cove Branch of the North Fork of Cannon Creek on the east side of Log Mountain and bounded as follows, to-wit:
oak stumps on the outside of a fence from this corner Gillis Hendrickson's chimney bears S 72-30 E 230 links; thence S 6 W 26-90/100 poles to a maple stump in a small drain in said Hendrickson's field; thence up said drain S 76-20 W 12-80/100 poles to a large dead chestnut and small dead chestnut from the same root; thence S 61-42 W 30-80/100 poles to a stake, from which a dead ash snag bears N 82 W 9 links; a small chestnut bears N 89-15 W 28 links and another small chestnut bears S 85-30 E 9 links; thence S 19-13 E 46 poles to a stake, on a line of patent No. 5200, a corner of Philadelphia Veneer & Lumber Company; thence leaving lines of Louisville Property Company, and with the lines of said Philadelphia Veneer & Lumber Company reversed N 73-06 E 32-56/100 poles to a chestnut oak stump with three chestnuts, sassafras and sarvis pointers on top of a spur; thence N 5-35 E 8-88/100 poles to chestnut oak stump and small black gum, with three chestnuts and dogwood as pointers; thence N 3-20 E 21-56/100 poles to a stake, chestnut and sassafras pointers; thence N 16-20 E 37-3/10 poles to a stake with poplar pointer; thence N 24-06 E 3-92/100 poles to a small sourwood; thence N 11-04 E 20-40/100 poles, crossing Green Cove Branch, to the beginning, containing 18-25/100 acres by actual survey.
This is the same property conveyed to William I. Davis and G. W. Fortner by C. W. Rhodes et ux., et al. by Deed dated June 4, 1936 in Deed Book 112, page 461 of the Bell County Court Clerk's Office.
EXHIBIT 10(l)
DEED AND PERPETUAL GAS STORAGE EASEMENT
THIS DEED AND PERPETUAL GAS STORAGE EASEMENT, made and entered into by and between KATHERINE M. CORNELIUS and WILLIAM CORNELIUS, her husband, 5744 West Del Rio, Chandler, Arizona 85226, FRANCES CAROLYN FITZPATRICK, a single person, 2574 Cardwell Chapel Road, Lenoir City, Tennessee 37771, and ISABELLE FITZPATRICK SMITH and KENNETH W. SMITH, her husband, 612 Gloucester Avenue, Middlesboro, Kentucky 40965 (hereinafter collectively referred to as "Grantor"), and DELTA NATURAL GAS COMPANY, INC., a Kentucky corporation, with its principal offices located at 3617 Lexington Road, Winchester, Kentucky 40391 (hereinafter "Grantee").
Grantor, for and in consideration of the sum of Eleven Thousand Six Hundred Sixty Dollars and Seventy Five Cents ($11,660.75) cash in hand paid, the receipt of which is hereby acknowledged, and of the agreements of Grantee hereinafter set forth, hereby bargains, sells, grants, and, conveys exclusively unto said Grantee, its successors and assigns, all right, title and interest of Grantor in and to the oil and gas underlying the following described property and contained within that stratigraphic interval lying between two-hundred (200) feet above the top of the Newman Limestone formation and the base of the Ohio Shale formation (the "Oil and Gas") and such perpetual rights of way, easements and privileges upon and under the lands hereinafter described for the underground storing of natural gas, including constructing, maintaining, and replacing pipelines, electric lines and telephone lines, and appurtenant facilities for the underground storing of natural gas, limited to those strips of land more particularly described in the Easement and Right-of-Way Agreement executed by the parties hereto of even date herewith, together with the exclusive right to inject and to withdraw natural gas, water, and other gaseous substances or fluids into and from the subsurface strata and any and all other rights and privileges necessary, incident to, or convenient for the economical operation of said land, alone or conjointly with neighboring land, for storing gas (collectively the "Gas Storage Rights") subject to the other provisions herein; said lands being situated in Bell County, Kentucky, as identified in "Exhibit A" attached hereto (the "Property") and made a part hereof. It being intended hereby to include herein all lands and interests therein contiguous to or appurtenant to said described lands owned or claimed by Grantor or appurtenant to Grantee's underground gas storage operations. Said land is estimated to contain one hundred (100) acres.
TO HAVE AND TO HOLD the oil and gas and the gas storage rights together with all the appurtenances thereunto belonging, along with rights of ingress and egress and use of the surface as reasonably necessary to the exercise of the rights granted hereunder, unto said Grantee, its successors and assigns, forever, it being the intent of the Grantor that Grantee, its successors and assigns, shall have the Gas Storage Rights in perpetuity, regardless of the presence or absence of any oil and gas upon or under the Property.
Grantor conveys and Grantee acquires hereunder the right to make all reasonably necessary installations to accomplish injection and removal of injected gases and liquids including the right to convert existing oil and gas wells for use in the storage of gas. Grantor further conveys and Grantee acquires hereunder the right to use the surface around the existing gas well on the Property and around wells which may be hereafter drilled for the purpose of operating, maintaining or repairing the well or associated equipment and facilities, said surface area to be no more than the area within the radius of one hundred seventy five (175) feet around each well. Upon permanent cessation of gas storage operations, Grantee shall have the obligation to plug and abandon any gas wells currently in existence on Grantor's property which have not been plugged and abandoned and any wells drilled by Grantee during the term hereof. However, upon cessation of storage operations Grantee may, with Grantor's approval and with regulatory consent, assign ownership and plugging responsibility for any or all of the wells to a third party.
Grantee shall have the exclusive right to use and to enter into possession of the stratigraphic intervals described above for the storage of gas, from whatever source or sources obtained, and may for this purpose drill two (2) additional wells and reopen and restore to operation any and all existing wells on the premises which may have penetrated such formation, stratum or strata for the purpose of introducing and storing gas in said formation, stratum or strata and recovering the same therefrom, provided, however, that prior to the commencement of drilling additional wells upon the Property, Grantee shall advise Grantor, its heirs, successors, or assigns of the proposed well location and will consult with Grantor, its heirs, successors, or assigns and will use its best efforts to minimize the impact on Grantor's use of the Property. Any additional wells which may be drilled shall be located no closer than two hundred (200) feet to permanent aboveground structures. All natural gas injected into, stored, withdrawn and/or removed from and underneath the Property shall be considered personal property of Grantee, its successors and assigns, and shall remain the personal property of Grantee, its
successors and assigns, while in storage and shall be personal property when withdrawn. Grantee shall have the right to enter into such other strata and geologic formations underlying the Property as may be necessary or desirable to recover any gas stored by Grantee which may have migrated out of the above-described stratigraphic interval underlying the Property.
Grantee acknowledges Grantor's interest in the potential development of coal reserves on the Property, and Grantee shall make a good faith effort not to interfere with any coal mining or timber harvesting operations and usages. Grantee shall use its best efforts not to damage or destroy any timber, trees or growing crops on the premises and shall be liable to Grantor for the value of all such timber and growing crops which are damaged or destroyed in connection with its operations. Grantee shall repair any damage to existing roads, fences, gates, etc. that results from Grantee's presence on Grantor's premises, and Grantee shall pay for damages to timber or growing crops caused by its operations on said lands and shall restore or repair damage to Grantor's real property due to Grantee's exercise of its rights hereunder.
Grantor hereby warrants and agrees to defend the title to the oil and gas and the gas storage rights conveyed hereunder. Grantor covenants that Grantor is the lawful owner of the oil and gas and the gas storage rights and has the right to sell and convey the same, free of rights to ownership and possession of third persons, and that subject to the observance of all covenants, terms and conditions herein, the Grantee may peacefully enjoy the premises for the purposes herein set forth without interference.
Grantee agrees and covenants to hold harmless and indemnify Grantor from all losses, claims or damages of any kind resulting from Grantee's gas storage operations that may arise from a violation or enforcement of any law or regulation, state or federal, pertaining to environmental protection.
All of the terms, covenants, conditions and agreements herein contained shall extend to and be binding upon the heirs, representatives, executors, administrators, successors or assigns of the parties hereto.
During such time that Grantee is operating the property for storage, Grantee shall pay all taxes and assessments of every kind and character that may be levied or assessed by any governmental authority against or upon the estate hereby conveyed, or the privilege of storing gas, or improvements or other property of Grantee in or on the lands included herein.
Grantee covenants that it will at all times conduct its operations in compliance with all applicable laws, rules and regulations of the United States of America and the Commonwealth of Kentucky, or other governmental entity empowered to so act, where the lands are located, or are hereafter in force and effect.
Grantee expressly covenants and warrants that it will defend, save and hold Grantor harmless from any liabilities, damages or obligations of any kind or character whatsoever arising from or in any way connected with Grantee's storage operations hereunder. It is expressly agreed between the parties that this instrument embraces the entire understanding and contract between the parties; and any agreements or representations made by any person on behalf of either the Grantor or the Grantee not contained in this document are unauthorized and do not bind the parties. Each singular pronoun herein shall include the plural whenever applicable.
For purposes of compliance with KRS 382.132, the parties hereto certify that the above-stated consideration is the true, correct and full consideration paid for the property herein conveyed.
IN WITNESS WHEREOF, executed on this the 21st day of December, 1995.
/s/ Isabelle Fitzpatrick Smith ------------------------------- ISABELLE FITZPATRICK SMITH /s/ Kenneth W. Smith -------------------------------- KENNETH W. SMITH |
DELTA NATURAL GAS COMPANY, INC.
BY: /s/ Alan L. Heath
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ITS: V.P. OPNS. & ENG.
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THIS INSTRUMENT PREPARED BY:
/s/ Robert M. Watt III ----------------------------- Robert M. Watt III Stoll, Keenon & Park 201 East Main Street - Suite 1000 Lexington, Kentucky 40507-1380 |
ACKNOWLEDGMENT
STATE OF KENTUCKY)
COUNTY OF BELL)
I, Keith A. Nagle, a Notary Public in and for the State of Kentucky, do hereby certify that the foregoing Deed and Perpetual Gas Storage Easement was produced before me and acknowledged before me by Isabelle Fitzpatrick Smith and Kenneth W. Smith, her husband, who acknowledged the same to be their free and voluntary act and deed and that satisfactory evidence was produced that the persons acknowledging this document were the persons described herein and were the persons who executed this document. Witness my hand and notary seal on this the 21st day of December, 1995.
/s/ Keith A. Nagle ------------------------------- NOTARY PUBLIC |
STATE OF KENTUCKY)
COUNTY OF CLARK)
The foregoing Deed and Perpetual Gas Storage Easement was acknowledged before me this 15th day of January, 1996, by Alan L. Heath, an authorized representative of Delta Natural Gas Company, Inc. on behalf of said corporation.
/s/ ------------------------------- NOTARY PUBLIC |
IN WITNESS WHEREOF, executed this Deed and Perpetual Gas Storage Easement on the 21st day of December, 1995.
/s/ Frances Carolyn Fitzpatrick
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FRANCES CAROLYN FITZPATRICK
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ACKNOWLEDGMENT
STATE OF TENNESSEE)
COUNTY OF LOUDON)
I, Ramona M. Sutton, a Notary Public in and for the State of Tennessee, do hereby certify that the foregoing Deed and Perpetual Gas Storage Easement was produced before me and acknowledged before me by Frances Carolyn Fitzpatrick, a single person, who acknowledged the same to be her free and voluntary act and deed and that satisfactory evidence was produced that the person acknowledging this document was the person described herein and was the person who executed this document. Witness my hand and notary seal on this the 21st day of December, 1995.
/s/ Ramona M. Sutton
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NOTARY PUBLIC
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IN WITNESS WHEREOF, executed this Deed and Perpetual Gas Storage Easement on the 10th day of January, 1996.
/s/ Katherine M. Cornelius ------------------------------------ KATHERINE M. CORNELIUS /s/ William Cornelius ------------------------------------ WILLIAM CORNELIUS |
ACKNOWLEDGMENT
STATE OF ARIZONA)
COUNTY OF MARICOPA)
I, Valerie J. Riggs, a Notary Public in and for the State of Arizona, do hereby certify that the foregoing Deed and Perpetual Gas Storage Easement was produced before me and acknowledged before me by Katherine M. Cornelius and William Cornelius, her husband, who acknowledged the same to be their free and voluntary act and deed and that satisfactory evidence was produced that the persons acknowledging this document were the persons described herein and were the persons who executed this document. Witness my hand and notary seal on this the 10th day of January, 1996.
/s/ Valerie J. Riggs ------------------------------------ NOTARY PUBLIC |
EXHIBIT A
Beginning at a point, said point being the southeast property corner; thence running in a westerly direction N 77 degrees 58' 48" W approximately 251.35 feet; thence N 86 degrees 27' 03" W approximately 295.73 feet; thence S 80 degrees 57' 57" W approximately 134.37 feet; thence N 82 degrees 34' 03" W approximately 231.14 feet; thence S 76 degrees 48' 57" W approximately 235.81 feet; thence S 58 degrees 49' 28" W approximately 373.19 feet; thence S 39 degrees 55' 57" W approximately 217.96 feet; thence S 83 degrees 07' 57" W approximately 140.20 feet; thence S 73 degrees 24' 28" W approximately 550.24 feet; thence S 43 degrees 06' 57" W approximately 139.59 feet; thence S 34 degrees 18' 39" W approximately 245.75 feet; thence S 76 degrees 19' 13" W approximately 359.48 feet; thence S 3 degrees 17' 21" E approximately 174.30 feet; thence S 8 degrees 45' 41" E approximately 251.27 feet; thence S 24 degrees 35' 57" W approximately 184.91 feet to a point, said point being the southwest property corner; thence running in a northwesterly direction N 20 degrees 36' 52" W approximately 1,477.81 feet; thence N 32 degrees 42' 00" W approximately 171.41 feet; thence S 82 degrees 58' 02" W approximately 301.24 feet; thence N 12 degrees 25' 26" W approximately 182.90 feet to a point, said point being the northwest property corner; thence running in a northeasterly direction N 88 degrees 03' 57" E approximately 1,443.48 feet; thence N 32 degrees O1' 16" E approximately 102.36 feet; thence N 44 degrees 33' 21" E approximately 363.97 feet; thence N 18 degrees 19' 14" W approximately 670.53 feet; thence N 56 degrees 39' 57" E approximately 992.46 feet; thence N 80 degrees 09' 17" E approximately 460.12 feet to a point, said point being the northeast property corner; thence running in a southeasterly direction S 45 degrees 20' 41" E approximately 1,033.14 feet; thence S 18 degrees 17' 11" E approximately 666.52 feet; thence S 48 degrees 41' 00" E approximately 313.69 feet; thence S 34 degrees 04' 15" W approximately 325.47 feet to the point of beginning.
Being the same property in which Katherine M. Cornelius received a one-half interest by inheritance from Frances Fitzpatrick McKinnon, her, mother, as shown by an Affidavit of Descent recorded in Deed Book 227, page 367 in the Bell County Clerk's Office and from John McKinnon, her father, as shown by an Affidavit of Descent recorded in Deed Book 227, page 369' in the Bell County Clerk's Office, said Frances Fitzpatrick McKinnon having acquired said property by Deed recorded in Deed Book 103, page 570 in the Bell County Clerk's Office, and Frances Carolyn Fitzpatrick and Isabelle Fitzpatrick Smith received a one-fourth interest each by the Last Will and Testament of T. C. Fitzpatrick, their father, recorded in Will Book 7, page 215 in the Bell County Clerk's Office and the Affidavit of Descent of Isabelle Fitzpatrick, their mother, recorded in Deed Book 282, page 407 in the Bell County Clerk's Office, said T. C. Fitzpatrick having acquired his interest in said property by Deed recorded in Deed Book 119, page 362 in the Bell County Clerk's Office.
EXHIBIT 10(m)
UNDERGROUND GAS STORAGE LEASE AND AGREEMENT
(CANADA MOUNTAIN FIELD)
WITNESSETH:
WHEREAS, EREX is the fee owner of the oil and gas rights in and underlying various tracts of land including, but not limited to the American Association, Inc. Fee Tract Nos. 34-14, 34-18, 34-21 and 34-22, situate on the waters of Cannon Creek and Fourmile Creek, Kayjay and Middlesboro North Quads, Bell County, Kentucky; and
WHEREAS, by Shallow Horizon Master Agreement dated November 1, 1971, between Kentucky West Virginia Gas Company ("Kentucky West"), predecessor to EREX, and Weaver Oil and Gas Corporation ("Weaver"), predecessor to Ferrin, Kentucky West granted to Weaver certain shallow horizon oil and gas exploration rights on Kentucky West acreage in various counties in Eastern Kentucky (hereinafter referred to as "Shallow Horizon Master Agreement," also denominated as Agreement A-432); and
WHEREAS, Section 4.3 of the Shallow Horizon Master Agreement provides that assignments from Kentucky West to Weaver shall not include any gas storage rights in the shallow horizons; and
WHEREAS, by Deed and Assignment dated June 14, 1978, and recorded at Lease Book 25, Page 659 of the records of Bell County, Kentucky, Kentucky West assigned to Weaver certain oil and gas exploration rights in three thousand (3,000.0) acres in the form of a circle, having at its center the Weaver Mapco #1 American Association Well (American Association #34-22-1) (Kentucky Permit No. 30992), having a radius of 6,449.5 feet, and located at Carter Coordinates 25-C-70, 10' FSL and 950' FEL, and being part of the American Association, Inc. Fee
Tract Nos. 34-14, 34-18, 34-21, and 34-22 (hereinafter referred to as the "Farmout Acreage"); and,
WHEREAS, Weaver drilled a total of five (5) wells on the Farmout Acreage, including the above-referenced American Association #34-21-1, and the American Association #34-22-1, the American Association #34-22-2, the American Association #34-22-3A, and the American Association #34-18-1A (collectively hereinafter referred to as the "Existing Wells"); and
WHEREAS, by that certain Consent to Assignment dated October 23, 1987, by and between Eastern Kentucky Production Company ("ERPC") (successor to Kentucky West and predecessor to EREX) and Kaneb Operating Company, Ltd. ("Kaneb") (successor to Weaver and predecessor to Ferrin), ERPC consented to the assignment by Kaneb to Ferrin of various properties subject to the Shallow Horizon Master Agreement; and
WHEREAS, Ferrin has heretofore produced and marketed natural gas from the Big Lime Formation underlying the Farmout Acreage, and now desires to store natural gas underground in said Big Lime Formation (hereinafter referred to as the "Storage Formation"); and
WHEREAS, EREX and Ferrin have determined to settle their conflicting claims to the gas storage rights underlying the Farmout Acreage by entering into this Agreement; and
WHEREAS, upon full execution of this Agreement, Ferrin has agreed to withdraw his appeal in the referenced litigation, and the parties have agreed to execute a Stipulation to Dismiss and any other necessary documents in order to dismiss the litigation.
NOW, THEREFORE, for and in consideration of the premises and of the sum of Eighteen Thousand Dollars ($18,000.00), cash in hand paid and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Lessor does hereby lease and let exclusively unto the Lessee the right, use and privilege to inject, store, withdraw and remove natural gas underground into and from the
Storage Formation (hereinafter collectively referred to as "Gas Storage Operations"), in and underlying the Leased Premises (as hereinafter defined), together with all rights incident thereto and with all necessary and convenient rights-of-way and easements incident to or required by Lessee in the conduct thereof, subject however, to the following terms and conditions:
Being in the form of a rectangle, and beginning at dry hole No. F-2646 (no Kentucky Permit, Carter Coordinates 5-B-70, 800' FSL, 1000' FWL) near the southwest corner of the rectangular unit; thence west using the astronomic north meridian to the intersection of a line running due south of a point 2,000 feet west of Well No. F-17862 (American Association #34-22-2, KR-1187, Kentucky Permit No. 30991, Carter Coordinates 1-B-69, 1400' FNL, 5' FEL) as located on the ground; thence running north through said aforementioned point 2,000 feet west of said Well No. F-17862 to the intersection of said line with a line running west from a point 2,000 feet north of Well No. F-12635 (Thomas J. Cannes #2, Kentucky Permit No. 44100, Carter Coordinates 17-C-70, 2000 FSL, 700' FWL.); thence east through said point 2,000 feet north of said Well No. F-12635 to the intersection of this line with a line running north from a point 2,000 feet east of Well No. F-12520 (Thomas J. Cannes #1, Kentucky Permit No. 40019, Carter Coordinates 17-C-70, 10' FSL, 2150' FEL); thence south through said point 2,000 feet east of said Well No. F-12520 to the intersection of said line with a line running due east of Well No. F-2646; thence west to dry hole No. F-2646, the point of beginning.
The rectangular unit herein described contains 4,212.00 acres, more or less, in which Lessor does hereby lease and let unto Lessee approximately 3,128.00 acres, more or less, which leased acreage .has been planimetered and which is more particularly set forth and described as the cross-hatched area on Exhibit "A" (Map of Leased Premises) , attached hereto and by this reference made a part hereof (hereinafter referred to as the "Leased Premises").
It is understood that as the exact boundaries of the proposed gas storage project are not determined at this time, that Lessor agrees, upon the written request of Lessee, to lease additional gas storage rights it owns or controls upon fee or lease acreage within 2,000 feet of any future drilled wells by Lessee that may prove to be necessary to identify and protect Lessee's gas storage project. The parties agree that three thousand one hundred twenty eight (3,128.0) acres shall be used for purposes of rental and storage payments (as hereinafter defined), which acreage figure may be amended from time to time as required, and which shall be set forth as a written Amendment to this Agreement. However, the acreage figure for rental and storage payments shall never be less than three thousand one hundred twenty eight (3,128.0) acres. It is understood and agreed that Lessee shall not request any extension of the Leased Premises after five (5) years from the effective date hereof.
It is understood and agreed that the Primary Term may be extended for successive periods of one (1) year each by Lessor upon the written request of Lessee upon demonstration by Lessee of a governmental delay due to Federal Energy Regulatory Commission ("FERC") involvement, defined as a failure to issue a required certificate-of public convenience and necessity or other necessary authorization. Lessee agrees to diligently pursue the needed permits and certificates for this project. It is understood that any extension for FERC governmental delay shall not exceed two (2) years, for a total primary term of five (5) years. Ferrin shall give notice to EREX if said FERC governmental delay occurs, and shall provide EREX with documentation to evidence any said governmental delay.
Storage Rentals shall be paid at the aforesaid rate for each succeeding year that Lessee operates the Leased Premises for Gas Storage Operations. All payments provided for by this Agreement shall be made by check payable to Lessor and mailed directly to Lessor at the address shown in Paragraph 15 below. Such Delay Rental and Storage Rental payments shall be increased upon enlargement of the gas storage project as required pursuant to Paragraph 1 hereinabove.
a) The right to utilize Lessee's Existing Wells, to drill new injection wells and withdrawal wells, and to inject natural gas from any source or supply of Lessee into the Storage Formation underlying the Leased Premises;
b) The right to store such injected natural gas in the Storage Formation;
c) The right to withdraw and remove natural gas from the Storage Formation and deliver the same for transport;
d) All natural gas injected, stored, withdrawn and/or removed into and from the Storage Formation underlying the Leased Premises shall be considered personal property, and shall remain personal property while in storage and shall be personal property when withdrawn;
e) Subject to compliance with Paragraph 5 hereinabove, Lessee shall have the right to commingle its stored natural gas with the native gas;
f) All wells drilled and operated by Lessee shall be in conformity with all applicable state and federal laws, rules and regulations, including the Department's Kentucky Gas Storage Regulation.
Lessor agrees not to unreasonably object to the Department as to any injection and/or withdrawal wells proposed by Lessee if such wells are in conformity with the Kentucky Gas Storage Regulation and this Agreement.
g) To the extent Lessor is able to do so, Lessor grants to Lessee such rights-of-way and easements over, in, upon and under the Leased Premises as are necessary, expedient, convenient and customarily required in the development, construction and operation of an underground gas storage reservoir, together with all such rights reasonably necessary for the full and proper enjoyment of all rights herein granted.
h) Upon termination of this Agreement, Lessee shall have a period of one hundred eighty (180) days within which time to remove all equipment and personal property from the Leased Premises.
i) Lessee shall have the obligation to plug and abandon all of Lessee's wells now or hereafter existing on the Leased Premises in conformity with all applicable state and federal laws, rules and regulations. This provision shall survive any termination of the Agreement.
j) Upon termination of Lessee's Gas Storage Operations, all rights of Lessee to gas storage underlying the Leased Premises shall cease, and shall revert automatically to Lessor.
Lessor hereby expressly reserves the perpetual right and easement to drill wells through the Big Lime Formation and the Ohio Shale Formation, which reservation shall be a covenant running with the land. Lessor shall notify Lessee before the commencement of drilling any wells through the Big Lime or Ohio Shale formations, and shall take all reasonable precautions and care to protect the Storage Formation from blowout or loss of gas during the drilling of any such wells. Upon completion of any such drilling, such wells shall be properly sealed between casing and formations by cementing or by such other means as may be required by applicable law, to prevent loss of gas or reservoir fluids or the encroachment of water into the Storage Formation.
Lessor shall be liable to Lessee for any damage or loss to the Storage Formation caused by Lessor's drilling, completion, production, or well stimulation operations. Lessor agrees to defend, indemnify and hold harmless Lessee for any claims, demands or actions for all damages, liabilities, demands, injuries and costs of any nature whatsoever, including attorneys' fees, to persons or real or personal property caused by Lessor's employees, agents, or contractors resulting from Lessor's operations through the Storage Formation, whether negligent or not, and-whether such damages or injuries to persons or property be suffered by Lessee, its employees, agents, or contractors, or by third parties.
Lessor shall permit Lessee, or its duly authorized employees or agents, at Lessee's sole risk and expense, to have access to the derrick floor of all wells which penetrate the Storage Formation for the purpose of observing and inspecting drilling operations insofar as they relate to the safety of Lessee's Gas Storage Operations and the integrity of the Storage Formation.
Any wells drilled by Lessor through the Storage Formation shall be operated by Lessor in such a manner as to protect the integrity of the Storage Formation and to prevent the loss of gas therefrom. All wells drilled and operated by Lessor shall be in conformity with all applicable state and federal laws, rules and regulations, including the Kentucky Gas Storage Regulation.
Lessee agrees not to unreasonably object to the Department as to the drilling of wells proposed by Lessor if such wells are in conformity with the referenced Kentucky Gas Storage Regulation.
Upon termination of Lessee's Gas Storage Operations, all rights of Lessee to the Big Lime Storage Formation shall cease, and shall revert automatically to Lessor. In addition, Lessee hereby agrees that if drilling operations are not commenced and production in paying quantities obtained from the Ohio Shale Formation within one (1) year from the cessation of Gas Storage Operations, then Lessee's rights to the Ohio Shale Formation shall also cease, and shall revert automatically to Lessor.
Lessee agrees to provide Lessor with driller's logs and electric logs for all new wells drilled by Lessee on the Leased Premises, including gamma ray-density neutron logs from the surface to the total depth of said wells.
Lessor: Equitable Resources Exploration,
a division of Equitable Resources Energy Company
Two Executive Park Place
1989 East Stone Drive
Ringsport, Tennessee 37660
615/224-3800
Fax: 615/224-3891
(ATTN: Bryan L. Wolcott, Vice President -
Engineering and Operations)
Lessee: Lonnie D. Ferrin
431 Electra Drive
Houston, Texas 77024
713/461-9886
Fax: 713/461-9866
Either Lessor or Lessee may change any address for notices by a writing sent to the other party's address, by certified mail.
IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized officers and representatives as of the date first hereinabove written.
LESSOR:
ATTEST: EQUITABLE RESOURCES EXPLORATION,
a division of Equitable Resources
Energy Company
By: /s/ Rand E. Sterling By: /s/ Bryon L. Wolcott
---------------------- -------------------------------
Bryan L. Wolcott
Its: Assistant Secretary Its: Vice-President - Engineering
and Operations
LESSEE:
WITNESS:
LONNIE D. FERRIN
/s/ Lonnie D. Ferrin
-----------------------------------
/s/ Teresa G. Escobedo Lonnie D. Ferrin
--------------------------
STATE OF TENNESSEE)
|
COUNTY OF SULLIVAN)
I, Rosemary Schiefer, a Notary Public in and for said County and State, do hereby certify that the foregoing Underground Gas Storage Lease and Agreement (Canada Mountain Field) was this day produced to me in said County and State aforesaid and duly acknowledged before me by Bryan L. Wolcott known to me to be the Vice President - Engineering and Operations of Equitable Resources Exploration, a division of Equitable Resources Energy Company, to be the free act and deed of himself as President thereof.
Given under my hand this 9th day of March, 1994.
My commission expires: April 8, 1995.
/s/ Rosemary Schiefer
------------------------------
Notary Public
|
** [Map of area appears following this page.]
STATE OF TEXAS
COUNTY OF
I, Vicki Vaculik, a Notary Public in and for said County and State, do hereby certify that the foregoing Underground Gas Storage Lease and Agreement (Canada Mountain Field) was this day produced to me in said County and State aforesaid and duly acknowledged before me by Lonnie D. Ferrin to be the free act and deed of himself.
Given under my hand this 9th day of March, 1994
My commission expires: 8/9/97
------------
/s/ Vicki Vaculik
------------------------
|
Notary Public
THIS INSTRUMENT PREPARED BY:
/S/ Benjamin C. Cubbage, Jr. -------------------------------- Benjamin C. Cubbage, Jr. Cubbage and Stigger 600 Barret Boulevard P.O. Box 17 Henderson, Kentucky 42420 502/827-5635 /s/ Rand E. Sterling -------------------------------- Rand E. Sterling Equitable Resources Exploration, a division of Equitable Resources Energy Company 1989 East Stone Drive Kingsport, Tennessee 37660 615/224-3809 |
AMENDMENT NO. 1 AND
NOVATION TO
UNDERGROUND GAS STORAGE LEASE AND AGREEMENT
(Canada Mountain Field)
WITNESSETH:
WHEREAS, on March 9, 1994, EREX and Ferrin entered into an Underground Gas Storage Lease and Agreement (Canada Mountain Field) (hereinafter "Agreement"), whereby EREX did lease and let exclusively unto Ferrin the Big Lime Formation in and underlying certain described Leased Premises for a gas storage project situate on the waters of Cannon Creek and Fourmile Creek, Kayjay and Middlesboro North Quads, Bell County, Kentucky; and
WHEREAS, a Memorandum of Underground Gas Storage Lease and Agreement (Canada Mountain Field) was recorded March 10; 1995 at Lease Book 40, Page 580, of the records of Bell County, Kentucky, incorporating by reference the terms and provisions of the Agreement and referencing the Agreement for the full particulars thereof; and
WHEREAS, by Letter dated March 8, 1995, Ferrin advised EREX that Ferrin and Delta have executed a Purchase and Sale Agreement dated March 1, 1995, providing for the acquisition by Delta of all of Ferrin's interests in the Underground Gas Storage Lease and Agreement, subject to the approval of the Kentucky Public Service Commission and various other leasehold and title conditions; and
WHEREAS, by Letter of March 8, 1995, Ferrin requested EREX, in order to satisfy various conditions of the Purchase
and Sale Agreement with Delta, to amend the Underground Gas Storage Lease
and Agreement as follows:(1) amend the definition of the Storage Formation;
(2) add four EREX Oil and Gas Leases to the Leased Premises; (3) provide the
written consent required for an assignment; and (4) substitute Delta as
Lessee in place of Ferrin, and discharge Ferrin as a party to the Agreement;
and
WHEREAS, EREX is willing to make the requested amendments, provide--the written consent for the assignment from Ferrin to Delta, substitute Delta as Lessee in place of Ferrin, and discharge Ferrin as a party to the Agreement; and
WHEREAS, Delta is agreeable to the requested amendments, is willing to be substituted in place of Ferrin as Lessee to the Agreement, agrees to the discharge of Ferrin as Lessee, and agrees to assume all the rights, duties, obligations and liabilities of the Lessee under the Agreement.
NOW, THEREFORE, for and in consideration of the terms, provisions and premises contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties do hereby mutually agree as follows:
The definition of Storage Formation, as contained in the second Whereas paragraph on Page 2 of the Agreement, and for all purposes thereunder, is hereby deleted and substituted with the following:
The Storage Formation is defined as the Geologic Section from the Top of the New Albany Shale back to and including 200 feet above the Top of the Newman Limestone.
The Leased Premises, as defined in Paragraph No. 1 of the Agreement, is amended to include, as of the Effective Date, the following four (4) EREX Oil and Gas Leases, as to the gas storage provisions contained therein, and shall be subject to all other terms and provisions of the Agreement:
a. Oil and Gas Lease dated October 15, 1992 from Earlene Z. Smith, single, Lessor, to EREX, Lessee, containing 69.0 Acres, more or less, for a seven (7) year term from November 20, 1992 and recorded at Lease Book 39, Page 677 of the records of Bell County, Kentucky (EREX Lease No. 241416L).
b. Oil and Gas Lease dated September 2, 1992 from Zella
Fuson, widow, et al., Lessor, to EREX, Lessee, containing
84.0 Acres, more or less, for a seven (7) year term from
November 22, 1992, and recorded at Lease Book 39, Page 665
of the records of Bell County, Kentucky (EREX Lease No.
241458L).
c(1). Oil and Gas Lease dated November 19, 1992 from James Earl Fuson, Guardian, et al., Lessor, to EREX, Lessee, containing 86.0 Acres, more or less, for a seven (7) year term from December 6, 1992, and recorded at Lease Book 39, Page 741, of the records of Bell County, Kentucky (EREX Lease No. 241389L).
c(2). Oil and Gas Lease dated January 11, 1993 from James Earl Fuson, et ux., Lessor, to EREX, Lessee, containing 86.0 acres, more or less, for a seven (7) year term from December 6, 1992, and recorded at Lease Book 39, Page 800, of the records of Bell County, Kentucky (EREX Lease No. 241389L03) (hereinafter collectively "Oil and Gas Leases").
It is also understood and agreed that the four (4) Oil and Gas Leases added hereto are the first leasehold acreage to be included in the Leased Premises. Therefore, Lessee agrees to pay Lessor, in addition to the Delay Rentals and Storage Rentals in the Agreement, as reimbursement for the Delay Rentals in the Oil and Gas Leases, an additional $3.00 per acre per year for the 239.0 additional leasehold acres, being $717.00 per year. At such time as the land in the Oil and Gas Leases is used for gas storage, and the $2.00 per acre per annum, payable quarterly, gas storage rental becomes effective in lieu of the Oil and Gas Leases Delay Rental, then Lessee shall reimburse Lessor for such payments.
Lessor agrees to maintain responsibility for payment of Delay Rentals and gas storage rentals under the Oil and Gas Leases, and Lessee agrees to reimburse Lessor for such payments within thirty (30) days of receipt of an invoice for same, including documentation of payments and any correspondence from lessors under the Oil and Gas Leases. Lessee shall also reimburse Lessor for any reasonable costs and expenses for the renewal or extension of the Oil and Gas Leases. Lessor shall use its best efforts to make the required Delay Rental and gas storage rental payments, but shall not be held liable for failure to make such payments.
Ferrin agrees to pay EREX upon execution of this Amendment, on the additional 196.0 net leasehold acres, the $2.00 per acre Delay Rental in the Agreement being $392.00, and the $3.00 per acre Delay Rentals in the Oil and Gas Leases, being $588.00, for a total of $980.00.
EREX acknowledges receipt from Ferrin of the Agreement second year Delay Rentals in the amount of $6,256.00, being $2.00 per acre for the original 3,128.0 Acres, and states that in all other respects Ferrin, up to the Effective Date hereof, has performed all of his duties and obligations under the Agreement, and that the Agreement is in good standing and in full force and effect.
Pursuant to Paragraph No. 12, Assignments, of the Agreement, EREX hereby provides its written consent to Ferrin to assign all his rights, titles and interests in the Agreement, including the above-described Oil and Gas Leases, to Delta, on the condition that Delta agrees with EREX to assume all of Ferrin's rights, duties, obligations and liabilities of the Agreement, as herein amended, from and after the Effective Date hereof.
The parties agree that as of the Effective Date hereof Delta is hereby substituted in place of Ferrin as Lessee to the Agreement, and agree that Ferrin is discharged as Lessee to the Agreement. Furthermore, Delta hereby expressly agrees with EREX to assume all the rights, duties, obligations and liabilities of the Lessee under the Agreement, including the rental obligations of the Oil and Gas Leases referred to herein.
a. It is understood and agreed that if the Kentucky Public Service Commission should not approve the Purchase and Sale Agreement dated March 1, 1995 by and between Ferrin and Delta, or if the other leasehold and title conditions therein are not satisfied, thus preventing the completion of said Purchase and Sale Agreement, then Ferrin shall so notify EREX in writing, and this Amendment shall be of no force and effect, and EREX and Ferrin shall return to their original rights, duties, obligations and liabilities under the Agreement, and Delta shall have no obligation to either party under the Agreement or to the Oil and Gas Leases referred to herein.
b. It is understood and agreed that a recording of this Amendment shall only be by a Memorandum of Amendment No. 1 and Novation to Underground Gas Storage Lease and Agreement (Canada Mountain Field) executed
by the parties herein which shall be properly placed of record in the records of Bell County, Kentucky. Such Memorandum shall not be placed of record until the Purchase and Sale Agreement dated March 1, 1995 by and between Ferrin and Delta is finalized and all approvals and conditions have been satisfied. Ferrin shall notify EREX in writing when the Purchase and Sale is finalized.
c. This Amendment and all the terms and provisions hereof shall extend to and be binding upon the heirs, successors, assigns and representatives of the parties hereto.
d. This Amendment and all the terms and provisions hereof shall be construed under the applicable laws of the Commonwealth of Kentucky.
e. The Agreement, as amended herein, shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment by their duly authorized officers and representatives as of the date first hereinabove written.
ATTEST: LESSOR:
EQUITABLE RESOURCES EXPLORATION,
a division of Equitable Resources
Energy Company
By: /s/ Rand E. Sterling By: /s/ Michael J. Miller
------------------------ ----------------------------
Rand E. Sterling Michael J. Miller
ITS: Assistant Secretary ITS: Vice President - Kentucky
Operations
WITNESS: LONNIE D. FERRIN
/s/ Sally Horak /s/ Lonnie D. Ferrin
--------------------------- -------------------------------
Lonnie D. Ferrin
|
ATTEST: LESSEE:
DELTA NATTJRAL GAS COMPANY, INC.
By: /s/ John T. Hall By: /s/ Glenn R. Jennings
------------------------ -----------------------------
Glenn R. Jennings
ITS: Secretary ITS: President
STATE OF: TENNESSEE )
COUNTY OF: SULLIVAN )
|
I, Rosemary Schiefer, a Notary Public in and for said County and State, do hereby certify that the foregoing Amendment No. 1 and Novation to Underground Gas Storage Lease and Agreement (Canada Mountain Field) was this day produced to me in said County and State aforesaid and duly acknowledged before me by Michael J. Miller, known to me to be the Vice President - Kentucky Operations of EQUITABLE RESOURCES EXPLORATION, a division of Equitable Resources Energy Company, to be the free act and deed of himself as Vice President - Kentucky Operations thereof.
Witness my hand this 22nd day of March, 1995.
My commission expires: April 8, 1995
-------------------
(OFFICIAL SEAL) /s/ Rosemary Schiefer
--------------------------------
Notary Public
STATE OF TEXAS )
COUNTY OF HARRIS)
|
I, John R. Coutter, a Notary Public in and for said County and State, do hereby certify that the foregoing Amendment No. 1 and Novation to Underground Gas Storage Lease and Agreement (Canada Mountain Field) was this day produced to me in said County and State aforesaid and duly acknowledged before me by Lonnie D. Ferrin to be his free act and deed.
Witness my hand this 29th day of March, 1995.
My commission expires: March 6, 1999
-------------------------
(OFFICIAL SEAL) /S/ John R. Coulter
--------------------------------
Notary Public
|
STATE OF: KENTUCKY )
COUNTY OF: CLARK)
I, Emily P. Bennett, a Notary Public in and for said County
|
an State, do hereby certify that the foregoing Amendment No. 1 and Novation to Underground Gas Storage Lease and Agreement (Canada Mountain Field) was this day produced to me in said County and State aforesaid and duly acknowledged before me by Glenn R. Jennings, known to me to be the President of Delta Natural Gas Company, Inc. to be the free act and deed of himself as President thereof.
Witness my hand this 6th day of April, 1995.
My commission expires: November 24, 1995
--------------------------
(OFFICIAL SEAL) /s/ Emily P. Bennett
---------------------------
Notary Public
/s/ Benjamin C. Cubbage, Jr.
---------------------------------
Benjamin C. Cubbage, Jr.
Cubbage and Stigger
600 Barret Boulevard
P.O. Box 17
Henderson, Kentucky 42420
502/827-5635
/s/ Rand E. Sterling
---------------------------------
Rand E. Sterling
1989 East Stone Drive
Kingsport, Tennessee 37660
615/224-3800 **[Map of area -
entitled "Exhibit
"A" Map of Leased
Premises" attached
after this page.]
|
EXHIBIT 10(n)
BASE CONTRACT FOR SHORT-TERM
SALE AND PURCHASE OF NATURAL GAS
This Base Contract is entered into as of the following date: January 1, 2002. The parties to this Base Contract are the following:
M&B Gas Services, Inc. and Delta Natural Gas Company, Inc. P.O. Box 377 3617 Lexington Road Frazeysburg, Ohio 43822 Winchester, Kentucky 40391 Attn: Brian Jonard Attn: Brian S. Ramsey Phone: (740) 828-2892 Phone: (859) 744-6171 Fax: (740) 828-3660 Fax: (859) 744-3623 Federal Tax ID Number: 31-0925705 Federal Tax ID Number: 61-0458329 Duns # Duns # 00-77-9408 Invoices and Payments: Delta Natural Gas Company, Inc. M&B Gas Services, Inc. Attn: Brian S. Ramsey Attn: Gas Accounting 3617 Lexington, Road P.O. Box 377 Winchester, Kentucky 40391 Frazeysburg, Ohio 43822 Phone: (859) 744-6171 Phone: (740) 828-2892 Fax: (859) 744-3623 Fax: (740) 828-3660 |
Wire Transfer Payments:
Summit Bank Hackensack ABA #021202162
Credit To: Clearfield Energy, Inc.
A/C #496-08311
This Base Contract incorporates by references for all purposes the General Terms and Conditions for Short-Term Sale and Purchase of Natural Gas published by the Gas Industry Standards Board. The parties hereby agree to the following provisions offered in said General Terms and Conditions (SELECT ONLY ONE FROM EACH BOX, BUT SEE "NOTE" RELATING TO SECTION 2.24.):
SECTION 1.2 X Oral SECTION 6. X Buyer Pays At and After Delivery Point
--- ---
Transaction Procedure Written Taxes Seller Pays Before and At Delivery Point
--- ---
SECTION 2.4 X 2 Business Days after receipt SECTION 7.2 25th date of Month following Month of
--- ---
Confirm Deadline (default) Payment Date Month of delivery
Business Days after receipt
---
SECTION 2.5 X Seller SECTION 7.2 X Wire Transfer (WT)
--- ---
Confirming Party Buyer Method of Payment Automated Clearinghouse (ACH)
--- ---
Check
---
SECTION 3.2 X Cover Standard
--- ---
Performance Obl. Spot Price Standard SECTION 13.5
---
CHOICE OF LAW: Ohio
|
NOTE: THE FOLLOWING SPOT PRICE PUBLICATION APPLIES TO
BOTH OF THE IMMEDIATELY PRECEDING STANDARDS AND
MUST BE FILLED IN AFTER A STANDARD IS SELECTED.
IN WITNESS WHEREOF, the parties hereto have executed this Base Contract in duplicate.
M&B Gas Services, Inc. Delta Natural Gas Company, Inc. By:/s/ BRIAN R. JONARD By: /s/ GEORGE S. BILLINGS ------------------- ---------------------- Name: Brian R. Jonard Name: George S. Billings Title: President Title: Manager - Gas Supply |
DISCLAIMER: The purposes of this Contract are to facilitate trade, avoid misunderstandings and make more definite the terms of contracts of purchase and sale of natural gas. This Contract is intended for interruptible transactions or Firm transactions of one month or less and may not be suitable for Firm transactions of longer than one month. Further, GISB does not mandate the use of this Contract by any part. GISB DISCLAIMS AND EXCLUDES AND ANY USER OF THIS CONTRACT ACKNOWLEDGES AND AGREES TO GISB'S DISCLAIMER OF, ANY AND ALL WARRANTIES, CONDITIONS OR REPRESENTATIONS, EXPRESS OR IMPLIED, ORAL OR WRITTEN, WITH RESPECT TO THIS CONTRACT OR ANY
PART THEREOF, INCLUDING ANY AND ALL IMPLIED WARRANTIES OR CONDITIONS OF
TITLE, NON-INFRINGEMENT, MERCHANTABILITY, OR FITNESS OR SUITABILITY FOR ANY PARTICULAR PURPOSE (WHETHER OR NOT GISB KNOWS, HAS REASON TO KNOW, HAS BEEN ADVIED, OR IS OTHERWISE IN FACT AWARE OF ANY SUCH PURPOSE), WHETHER ALLEGED TO ARISE BY LAW, BY REASON OF CUSTOM OR USAGE IN THE TRADE, OR BY COURSE OF DEALING. EACH USER OF THIS CONTRACT ALSO AGREES THAT UNDER NO CIRCUMSTANCES WILL GISB BE LIABLE FOR ANY DIRECT, SPECIAL, INCIDENTAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES ARISING OUT OF ANY USE OF THIS CONTRACT.
GENERAL TERMS AND CONDITIONS
BASE CONTRACT FOR SHORT-TERM
SALE AND PURCHASE OF NATURAL GAS
SECTION 1. PURPOSE AND PROCEDURES
1.1 These General Terms and Conditions are intended to facilitate purchase and sale transactions of Gas on a Firm or Interruptible basis. "Buyer" refers to the party receiving Gas and "Seller" refers to the party delivering Gas.
THE PARTIES HAVE SELECTED EITHER THE "ORAL" VERSION OR THE "WRITTEN" VERSION OF TRANSACTION PROCEDURES AS INDICATED ON THE BASE CONTRACT.
ORAL TRANSACTION PROCEDURE:
1.2 The parties will use the following Transaction Confirmation procedure. Any Gas purchase and sale transaction may be effectuated in an EDI transmission or telephone conversation with the offer and acceptance constituting the agreement of the parties. The parties shall be legally bound from the time they so agree to transaction terms and may each rely thereon. Any such transaction shall be considered a "writing" and to have been "signed." Notwithstanding the foregoing sentence, the parties agree and Confirming Party shall, and the other party may, confirm a telephonic transaction by sending the other party a Transaction Confirmation by facsimile, EDI or mutually agreeable electronic means. Confirming Party adopts its confirming letterhead, or the like, as its signature on any Transaction Confirmation as the identification and authentication of Confirming Party.
WRITTEN TRANSACTION PROCEDURE:
1.2 The parties will use the following Transaction Confirmation procedure:
Should the parties come to an agreement regarding a Gas purchase and sale
transaction for a particular Delivery Period, the Confirming Party shall,
and the other party may, record that agreement on a Transaction Confirmation
and communicate such Transaction Confirmation by facsimile, EDI or mutually
agreeable electronic means, to the other party by the close of the Business
Day following the date of agreement. The parties acknowledge that their
agreement will not be binding until the exchange of non-conflicting
Transaction Confirmation or the passage of the Confirm Deadline without
objection from the receiving party, as provided in Section 1.3.
1.3 If a sending party's Transaction Confirmation is materially different
from the receiving party's understanding of the agreement referred to in
Section 1.2, such receiving party shall notify the sending party via
facsimile by the Confirm Deadline, unless such receiving party has
previously sent a Transaction Confirmation to the sending party. The failure
of the receiving party to so notify the second party in writing by the
Confirm Deadline constitutes the receiving party's agreement to the terms of
the transaction described in the sending party's Transaction Confirmation.
If there are any material differences between timely sent Transaction
Confirmations governing the same transaction, then neither Transaction
Confirmation shall be binding until or unless such differences are resolved
including the use of any evidence that clearly resolves the differences in
the Transaction Confirmations. The entire agreement between the parties
shall be those provisions contained in both the Base Contract and any
effective Transaction Confirmation. In the event of a conflict among the
terms of (i) a Transaction Confirmation, (ii) the Base Contract, and (iii)
these General Terms and Conditions, the terms of the documents shall govern
in the priority listed in this sentence.
SECTION 2. DEFINITIONS
2.1 "Base Contract" shall mean a contract executed by the parties that incorporates these General Terms and Conditions by reference; that specifies the agreed selections of provisions contained herein; and that sets forth other information required herein.
2.2 "British thermal unit" or "Btu" shall have the meaning ascribed to it by the Receiving Transporter.
2.3 "Business Day" shall mean any day except Saturday, Sunday or Federal Reserve Bank holidays.
2.4 "Confirm Deadline" shall mean 5:00 p.m. in the receiving party's time zone on the second Business Day following the Day a Transaction Confirmation is received, or if applicable, on the Business Day agreed to by the parties in the Base Contract; provided, if the Transaction Confirmation is time stamped after 5:00 p.m. in the receiving party's time zone, it shall be deemed received at the opening of the next Business Day.
2.5 "Confirming Party" shall mean the party designated in the Base Contract to prepare and forward Transaction Confirmations to the other party.
2.6 "Contract" shall mean the legally-binding relationship established by
(i) the Base Contract and (i) the provisions contained in any effective
Transaction Confirmation.
2.7 "Contract Price" shall mean the amount expressed in U.S. Dollars per MMBtu, as evidenced by the Contract Price on the Transaction Confirmation.
2.8 "Contract Quantity" shall mean the quantity of Gas to be delivered and taken as set forth in the Transaction Confirmation.
2.9 "Cover Standard", if applicable, shall mean that if there is an unexcused failure to take over or deliver any quantity of Gas pursuant to this Contract, then the non-defaulting party shall use commercially reasonable efforts to obtain Gas or alternate fuels, or sell Gas, at a price reasonable for the delivery or production area, as applicable, consistent with: the amount of notice provided by the defaulting party; the immediacy of the Buyer's Gas consumption needs or Seller's Gas sales requirements, as applicable; the quantities involved; and the anticipated length of failure by the defaulting party.
2.10. "Day" shall mean a period of 24 consecutive hours, coextensive with a "day" as defined by the Receiving Transporter in a particular transaction.
2.11 "Delivery Period" shall be the period during which deliveries are to be made as set forth in the Transaction Confirmation.
2.12 "Delivery Point(s)" shall mean such point(s) as are mutually agreed upon between Seller and Buyer as set forth in the Transaction Confirmation.
2.13 "EDI" shall mean an electronic data interchange pursuant to an agreement entered into by the parties, specifically relating to the communication of Transaction Confirmations under this Contract.
2.14 "EFP" shall mean the purchase, sale or exchange of natural Gas as the "physical" side of an exchange for physical transaction involving gas futures contracts. EFP shall incorporate the meaning and remedies of "Firm."
2.15 "Firm" shall mean that either party may interrupt its performance without liability only to the extent that such performance is prevented for reasons of Force Majeure; provided, however, that during Force Majeure interruptions, the party invoking Force Majeure may be responsible for any Imbalance Charges as set forth in Section 4.3. related to its interruption after the nomination is made to the Transporter and until the change in deliveries and/or receipts is confirmed by the Transporter.
2.16 "Gas" shall mean any mixture of hydrocarbons and non-combustible gases in a gaseous state consisting primarily of methane.
2.17 "Imbalance Charges" shall mean any fees, penalties, costs or charges (in cash or in kind) assessed by a Transporter for failure to satisfy the Transporter's balance and/or nomination requirements.
2.18 "Interruptible" shall mean that either party may interrupt its performance at any time for any reason, whether or not caused by an event of Force Majeure, with no liability, except such interrupting party may be responsible for any Imbalance Charges as set forth in Section 4.3, related to its interruption after the nomination is made to the Transporter and until the change in deliveries and/or receipts is confirmed by Transporter.
2.19 "MMBtu" shall mean one million British thermal units which is equivalent to one dekatherm.
2.20 "Month" shall mean the period beginning on the first Day of the calendar month and ending immediately prior to the commencement of the first Day of the next calendar month.
2.21 "Payment Date" shall mean a date, selected by the parties in the Base Contract, on or before which payment is due Seller for Gas received by Buyer in the previous Month.
2.22 "Receiving Transporter" shall mean the Transporter receiving Gas at a Delivery Point, or absent such receiving Transporter, the Transporter delivering Gas at a Delivery Point.
2.23 "Scheduled Gas" shall mean the quantity of Gas confirmed by Transporter(s) for movement, transportation or management.
2.24 "Spot Price" as referred in Section 3.2 shall mean the price listed in the publication specified by the parties in the Base Contract, under the listing applicable to the geographic location closest in proximity to the Delivery Point(s) for the relevant Day; provided, if there is no single price published for such location for such Day, but there is published a range of prices, then the Spot Price shall be the average of such high and low prices. If no price or range of prices is published for such Day, then the Spot Price shall be the average of the following: (i) the price (determined as stated above) for the first Day for which a price or range of prices is published that next precedes the relevant Day; and (ii) the price (determined as stated above) for the first Day for which a price or range of prices is published that next follows the relevant Day.
2.25 "Transaction Confirmation" shall mean the document, substantially in the form of Exhibit A, setting forth the terms of a purchase and sale transaction formed pursuant to Section 1. for a particular Delivery Period.
2.26 "Transporter(s)" shall mean all Gas gathering or pipeline companies, or local distribution companies, acting in the capacity of a transporter, transporting Gas for Seller or Buyer upstream or downstream, respectively, of the Delivery Point pursuant to a particular Transaction Confirmation.
SECTION 3. PERFORMANCE OBLIGATION
3.1 Seller agrees to sell and deliver, and Buyer agrees to receive and purchase, the Contract Quantity for a particular transaction in accordance with the terms of the Contract. Sales and purchases will be on a Firm or Interruptible basis, as specified in the Transaction Confirmation.
THE PARTIES HAVE SELECTED THE "COVER STANDARD" VERSION OR THE "SPOT PRICE STANDARD" VERSION AS INDICATED ON THE BASE CONTRACT.
COVER STANDARD:
3.2 In addition to any liability for Imbalance Charges, which shall not be
recovered twice by the following remedy, the exclusive and sole remedy of
the parties in the event of a breach of a Firm obligation shall be recovery
of the following: (i) in the event of a breach by Seller on any Day(s),
payment by Seller to Buyer in an amount equal to the positive difference, if
any, between the purchase price paid by Buyer utilizing the Cover Standard
for replacement Gas or alternative fuels and the Contract Price, adjusted
for commercially reasonable differences in transportation costs to or from
the Delivery Point(s), multiplied by the difference between the Contract
Quantity and the quantity actually delivered by Seller for such Day(s); or
(ii) in the event of a breach by Buyer on any Day(s), payment by Buyer to
Seller in the amount equal to the positive difference, if any, between the
Contract Price and the price received by Seller utilizing the cover Standard
for the resale of such Gas, adjusted for commercially reasonable differences
in transportation costs to or from the Delivery Point(s) multiplied by the
difference between the Contract Quantity and the quantity actually taken by
Buyer for such Day(s); or (iii) in the event that Buyer has used
commercially reasonable efforts to replace the Gas or Seller has used
commercially reasonable efforts to sell the Gas to a third party, and no
such replacement or sale is available, then the exclusive and sole remedy of
the non-breaching party shall be any unfavorable difference between the
Contract Price and the Spot Price, adjusted for such transportation to the
applicable Delivery Point, multiplied by the difference between the Contract
Quantity and the quantity actually delivered by Seller and received by Buyer
for such Day(s).
SPOT PRICE STANDARD:
3.2 In addition to any liability for Imbalance Charges, which shall not be recovered twice by the following remedy, the exclusive and sole remedy of the parties in the event of a breach of a Firm obligation shall be recovery of the following: (i) in the event of a breach by Seller on any Day(s), payment by Seller to Buyer in an amount equal to the difference between the Contract Quantity and the actual quantity delivered by Seller and received by Buyer for such Day(s), multiplied by the positive difference, if any, obtained by subtracting the Contract Price from the Spot Price; (ii) in the event of a breach by Buyer on any Day(s), payment by Buyer to Seller in an amount equal to the difference between the Contract Quantity and the actual quantity delivered by Seller and received by Buyer for such Day(s), multiplied by the positive difference, if any, obtained by subtracting the applicable Spot Price from the Contract Price.
EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED HEREIN, IN NO EVENT WILL EITHER PARTY BE LIABLE UNDER THIS CONTRACT, WHETHER IN CONTRACT, IN TORT (INCLUDING NEGLIGENCE AND STRICT LIABLITY), OR OTHERWISE, FOR INCIDENTAL, CONSEQUENTIAL, SPECIAL, OR PUNITIVE DAMAGES.
SECTION 4. TRANSPORTATION, NOMINATIONS AND IMBALANCES
4.1 Seller shall have the sole responsibility for transporting the Gas to the Delivery Point(s) and for delivering such Gas at a pressure sufficient to effect such delivery but not to exceed the maximum operating pressure of the Receiving Transporter. Buyer shall have the sole responsibility for transporting the Gas from the Delivery Point(s).
4.2 The parties shall coordinate their nomination activities, giving sufficient time to meet the deadlines of the affected Transporter(s). Each party shall give the other party timely prior notice, sufficient to meet the requirements of all Transporter(s) involved in the transaction, of the quantities of Gas to be delivered and purchased each Day. Should either party become aware that actual deliveries at the Delivery Point(s) are greater or lesser than the Scheduled Gas, such party shall promptly notify the other party.
4.3 The parties shall use commercially reasonable efforts to avoid imposition of any Imbalance Charges. If Buyer or Seller receives an invoice from a Transporter that includes Imbalance Charges, the parties shall determine the validity as well as the cause of such Imbalance Charges. If the Imbalance Charges were incurred as a result of Buyer's actions or inactions (which shall include, but shall not be limited to, Buyer's failure to accept quantities of Gas equal to the Scheduled Gas), then Buyer shall pay for such Imbalance Charges, or reimburse Seller for such Imbalance Charges paid by Seller to the Transporter. If the Imbalance Charges were incurred as a result of Seller's actions or inactions (which shall include, but shall not be limited to, Seller's failure to deliver quantities of Gas equal to the Scheduled
Gas), then Seller shall pay for such Imbalance Charges, or reimburse Buyer for such Imbalance Charges paid by Buyer to the Transporter.
SECTION 5. QUALITY AND MEASUREMENT
All Gas delivered by Seller shall meet the quality and heat content requirements of the Receiving Transporter. The unit of quantity measurement for purposes of this Contract shall be one MMBtu dry. Measurement of Gas quantities hereunder shall be in accordance with the established procedures of the Receiving Transporter.
SECTION 6. TAXES
The parties have selected either the "Buyer Pays At and After Delivery Point" version or the "Seller Pays Before and At Delivery Point" version as indicated on the Base Contract.
BUYER PAYS AT AND AFTER DELIVERY POINT:
Seller shall pay or cause to be paid all taxes, fees, levies, penalties, licenses or charges imposed by any government authority ("Taxes") on or with respect to the Gas prior to the Delivery Point (s). Buyer shall pay or cause to be paid all Taxes on or with respect to the Gas at the Delivery Point(s) and all Taxes after the Delivery Point(s). If a party is required to remit or pay Taxes that are the other party's responsibility hereunder, the party responsible for such Taxes shall promptly reimburse the other party for such Taxes. Any party entitled to an exemption from any such Taxes or charges shall furnish the other party any necessary documentation thereof.
SELLER PAYS BEFORE AND AT DELIVERY POINT:
Seller shall pay or cause to be paid all taxes, fees, levies, penalties, licenses or charges imposed by any government authority ("Taxes") on or with respect to the Gas prior to the Delivery Point(s) and all Taxes at the Delivery Point(s). Buyer shall pay or cause to be paid all Taxes on or with respect to the Gas after the Delivery Point(s). If a party is required to remit or pay Taxes which are the other party's responsibility hereunder, the party responsible for such Taxes shall promptly reimburse the other party for such Taxes. Any party entitled to an exemption from any such Taxes or charges shall furnish the other party any necessary documentation thereof.
SECTION 7. BILLING, PAYMENT AND AUDIT
7.1 Seller shall invoice Buyer for Gas delivered and received in the preceding Month and for any other applicable charges, providing supporting documentation acceptable in industry practice to support the amount charged. If the actual quantity delivered is not known by the billing date, billing will be prepared based on the quantity of Scheduled Gas. The invoiced quantity will then be adjusted to the actual quantity on the following Month's billing or as soon thereafter as actual delivery information is available.
7.2 Buyer shall remit the amount due in the manner specified in the Base Contract, in immediately available funds, on or before the later of the Payment Date or 10 days after receipt of the invoice by Buyer; provided that if the Payment Date is not a Business Day, payment is due on the next Business Day following that date. If Buyer fails to remit the full amount payable by it when due, interest on the unpaid portion shall accrue at a rate equal to the lower of (i) the then-effective prime rate of interest published under "Money Rates" by The Wall Street Journal, plus two percent per annum from the date due until the date of payment; or (ii) the maximum applicable lawful interest rate. If Buyer, in good faith, disputes the amount of any such statement or any part thereof, Buyer will pay to Seller such amount as it concedes to be correct; provided, however, if Buyer disputes the amount due, Buyer must provide supporting documentation acceptable in industry practice to support the amount paid or disputed.
7.3 In the event any payments are due Buyer hereunder, payment to Buyer shall be made in accordance with Section 7.2. above.
7.4 A party shall have the right, at its own expense, upon reasonable notice and at reasonable times, to examine the books and records of the other party only to the extent reasonably necessary to verify the accuracy of any statement, charge, payment, or computation made under the Contract. This examination right shall not be available with respect to proprietary information not directly relevant to transactions under this Contract. All invoices and billings shall be conclusively presumed final and accurate unless objected to in writing, with adequate explanation and/or documentation, within two years after the Month of Gas delivery. All retroactive adjustments under Section 7. shall be paid in full by the party owing payment within 30 days of notice and substantiation of such inaccuracy.
SECTION 8. TITLE, WARRANTY AND INDEMNITY
8.1 Unless otherwise specifically agreed, title to the Gas shall pass from Seller to Buyer at the Delivery Point(s). Seller shall have responsibility for and assume any liability with respect to the Gas prior to its delivery to Buyer at the specified
Delivery Point(s). Buyer shall have responsibility for and any liability with respect to said Gas after its delivery to Buyer at the Delivery Point(s).
8.2 Seller warrants that it will have the right to convey and will transfer good and merchantable title to all Gas sold hereunder and delivered by it to Buyer, free and clear of all liens, encumbrances and claims.
8.3 Seller agrees to indemnify Buyer and save it harmless from all losses, liabilities or claims including attorneys' fees and costs of court ("Claims"), from any and all persons, arising from or out of claims of title, personal injury or property damage from said Gas or other charges thereon which attach before title passes to Buyer. Buyer agrees to indemnify Seller and save it harmless from all Claims, from any and all persons, arising from or out of claims regarding payment, personal injury or property damage from said Gas or other charges thereon which attach after title passes to Buyer.
8.4 Notwithstanding the other provisions of this Section 8., as between Seller and Buyer, Seller will be liable for all Claims to the extent that such arise from the failure of Gas delivered by Seller to meet the quality requirements of Section 5.
SECTION 9. NOTICES
9.1 All Transaction Confirmations, invoices, payments and other communications made pursuant to the Base Contract ("Notices") shall be made to the addresses specified in writing by the respective parties from time to time.
9.2 All Notices required hereunder may be sent by facsimile or mutually acceptable electronic means, a nationally recognized overnight courier service, first class mail or hand delivered.
9.3 Notice shall be given when received on a Business Day by the addressee. In the absence of proof of the actual receipt date, the following presumptions will apply. Notices sent by facsimile shall be deemed to have been received upon the sending party's receipt of its facsimile machine's confirmation of successful transmission, if the day on which such facsimile is received is not a Business Day or is after five p.m. on a Business Day, then such facsimile shall be deemed to have been received on the next following Business Day. Notice by overnight mail or courier shall be deemed to have been received on the next Business Day after it was sent or such earlier time as is confirmed by the receiving party. Notice via first class mail shall be considered delivered two Business Days after mailing.
SECTION 10. FINANCIAL RESPONSIBILITY
10.1 When reasonable grounds for insecurity of payment or title to the Gas
arise, either party may demand adequate assurance of performance. Adequate
assurance shall mean sufficient security in the form and for the term
reasonably specified by the party demanding assurance, including, but not
limited to, a standby irrevocable letter of credit, a prepayment, a security
interest in an asset acceptable to the demanding party or a performance bond
or guarantee by a creditworthy entity. In the event either party shall
(i) make an assignment or any general arrangement for the benefit of creditors;
(ii) default in the payment obligation to the other party; (iii) file a
petition or otherwise commence, authorize, or acquiesce in the commencement
of a proceeding or cause under any bankruptcy or similar law for the
protection of creditors or have such petition filed or proceeding commenced
against it; (iv) otherwise become bankrupt or insolvent (however evidenced);
or (v) be unable to pay its debts as they fall due; then the other party
shall have the right to either withhold and/or suspend deliveries or
payment, or terminate the Contract without prior notice, in addition to any
and all other remedies available hereunder. Seller may immediately suspend
deliveries to Buyer hereunder in the event Buyer has not paid any amount due
Seller hereunder on or before the second day following the date such payment
is due.
10.2 Each party reserves to itself all rights, set-offs, counterclaims, and other defenses which it is or may be entitled to arising from the Contract.
SECTION 11. FORCE MAJEURE
11.1 Except with regard to a party's obligation to make payment due under
Section 7. and Imbalance Charges under Section 4, neither party shall be
liable to the other for failure to perform a Firm obligation, to the extent
such failure was caused by Force Majeure. The term "Force Majeure" as
employed herein means any cause not reasonably within the control of the
party claiming suspension, as further defined in Section 11.2.
11.2 Force Majeure shall include but not be limited to the following:
(i) physical events such as acts of God landslides, lightning, earthquakes,
fires, storms or storm warnings, such as hurricanes, which result in
evacuation of
the affected area, floods, washouts, explosions, breakage or accident or
necessity of repairs to machinery or equipment or lines of pipe; (ii)
weather related events affecting an entire geographic region, such as low
temperatures which cause freezing or failure of wells or lines of pipe;
(iii) interruption of firm transportation and/or storage by Transporters;
(iv) acts of others such as strikes, lockouts or other industrial
disturbances, riots, sabotage, insurrections or wars; and (v) governmental
actions such as necessity for compliance with any court order, law, statute,
ordinance, or regulation promulgated by a governmental authority having
jurisdiction. Seller and Buyer shall make reasonable efforts to avoid the
adverse impacts of a Force Majeure and to resolve the event or occurrence
once it has occurred in order to resume performance.
11.3 Neither party shall be entitled to the benefit of the provisions of Force Majeure to the extent performance is affected by any or all of the following circumstances: (i) the curtailment of interruptible or secondary firm transportation unless primary, in-path, firm transportation is also curtailed; (ii) the party claiming excuse failed to remedy the condition and to resume the performance of such covenants or obligations with reasonable dispatch; or (iii) economic hardship. The party claiming Force Majeure shall not be excused from its responsibility for Imbalance Charges.
11.4 Notwithstanding anything to the contrary herein, the parties agree that the settlement of strikes, lockouts or other industrial disturbances shall be entirely within the sole discretion of the party experiencing such disturbance.
11.5 The party whose performance is prevented by Force Majeure must provide notice to the other party. Initial notice may be given orally; however, written notification with reasonably full particulars of the event or occurrence is required as soon as reasonably possible. Upon providing written notification of Force Majeure to the other party, the affected party will be relieved of its obligation to make or accept delivery of Gas as applicable to the extent and for the duration of Force Majeure, and neither party shall be deemed to have failed in such obligations to the other during such occurrence or event.
SECTION 12. TERM
This Contract may be terminated on 30 days' written notice, but shall remain in effect until the expiration of the latest Delivery Period of any Transaction Confirmation(s). The rights of either party pursuant to Section 7.4., the obligations to make payment hereunder, and the obligation of either party to indemnify the other, pursuant hereto shall survive the termination of the Base Contract or any Transaction Confirmation.
SECTON 13. MISCELLANEOUS
13.1 This Contract shall be binding upon and inure to the benefit of the successors, assigns, personal representatives, and heirs of the respective parties hereto, and the covenants, conditions, rights and obligations of this Contract shall run for the full term of this Contract. No assignment of this Contract, in whole or in part, will be made without the prior written consent of the non-assigning party, which consent will not be unreasonably withheld or delayed; provided, either party may transfer its interest to any parent or affiliate by assignment, merger or otherwise without the prior approval of the other party. Upon any transfer and assumption, the transferor shall not be relieved of or discharged from any obligations hereunder.
13.2 If any provision in this Contract is determined to be invalid, void or unenforceable by any court having jurisdiction, such determination shall not invalidate, void or make unenforceable any other provision, agreement or covenant of this Contract.
13.3 No waiver of any breach of this Contract shall be held to be a waiver of any other or subsequent breach.
13.4 This Contract sets forth all understandings between the parties respecting each transaction subject hereto, and any prior contracts, understandings and representations, whether oral or written, relating to such transactions are merged into and superseded by this Contract and any effective Transaction Confirmation(s). This Contract may be amended only by a writing executed by both parties.
13.5 The interpretation and performance of this Contract shall be governed by the laws of the state specified by the parties in the Base Contract, excluding, however, any conflict of laws rule which would apply the law of another jurisdiction.
13.6 This Contract and all provisions herein will be subject to all applicable and valid statutes, rules, orders and regulations of any Federal, State or local governmental authority having jurisdiction over the parties, their facilities, or Gas supply, this Contract or Transaction Confirmation or any provisions thereof.
13.7 There is no third party beneficiary to this Contract.
13.8 Each party to this Contract represents and warrants that it has full and complete authority to enter into and perform this Contract. Each person who executes this Contract on behalf of either party represents and warrants that it has full and complete authority to do so and that such party will be bound thereby.
EXHIBIT 10(o)
OIL AND GAS LEASE
KENTUCKY-TENNESSEE FORM
THIS AGREEMENT, made and entered into this 19th day of July, 1995, by and between Meredith J. Evans and Helen Evans, his wife, P.O. Box 1238. Middlesboro, Kentucky 40965, party of the first part, hereinafter called Lessor (whether one or more) and Paddock Oil and Gas, Inc., 101 Paddock Drive, Nicholasville, Kentucky 40356, party of the second part, hereinafter called Lessee.
WITNESSETH that the Lessor, for and in consideration of Ten Dollars ($10.00) cash in hand paid, the receipt of which is hereby acknowledged, and the covenants and agreements hereinafter contained, has granted, demised, leased and let exclusively unto the said Lessee, its successors and assigns, the land hereinafter described, for the purpose of mining, exploring by geophysical and other methods, and operating for and producing therefrom oil, gas, casing-head gas, casing-head gasoline, and the exclusive right of injecting gas, water, brine and other fluids or substances into the subsurface strata, with rights of way and permanent easements for laying pipelines for the removal of oil or gas from the below described premises as well as from gas producing wells on other tracts, telephone, telegraph and electrical lines, tanks, power houses, stations, gasoline plants, ponds and roadways and fixtures for producing, treating and caring for such products and any and all other rights and privileges necessary, incident to, or convenient for the economical operation alone or conjointly with neighboring land, for the production of oil, gas, casing-head gas, casing-head gasoline, and the erection of structures thereon to produce, save and take care of said products.
TERM OF LEASE It is agreed that this lease shall remain in force for a term of five (5) years from this date and as long thereafter as oil, gas, casing-head gas, casing-head gasoline or any of them is produced from said leased premises or shut-in royalty or rental is paid for the right to inject, store and remove gas in and from the oil and gas strata underlying said premises, as hereinafter provided; or operations for drilling are continued as hereinafter provided; or Lessor consumes gas free of cost for stoves and inside lights in the principal dwelling house, as hereinafter provided.
In consideration of the premises the said Lessee covenants and agrees:
1. ROYALTY OR SHARE OF OIL. To deliver to the credit of Lessor into the storage tanks or in the pipeline to which Lessee may connect his wells, the equal one-eighth (1/8th) part of all oil produced and saved from the leased premises, or at the Lessee's option, to pay to the Lessor for such one-eighth (1/8th) royalty, the market price for oil of like grade and gravity prevailing on the day such oil is run into the pipeline or into storage tanks.
2. ROYALTY FOR GAS: FREE GAS. To pay Lessor one-eighth (1/8th) of the market price at the well for gas sold or for the gas so used from each well off the premises, except for injection for secondary recovery of oil; and Lessor is to have gas free of cost from any such well for all stoves and inside lights in the principal dwelling house on said land during the same time by making his own connections with the wells at his sole risk and expense. See Exhibit "A" attached hereto and made a part hereof.
in ownership of said premises, or rentals or royalties; provided, however, that such rental shall not be due, but shall be excused, if on any such rental paying date oil or gas, has been or is being produced from said land or drilling, mining, or reworking operations conducted thereon; and it is agreed that after such production or operations cease, upon the resumption of the payment of rentals, this lease shall continue in force just as though there had been no interruption in the rental payments. Should the depository bank hereafter close with a successor, Lessee or his assigns may deposit rental in any National Bank located in the same county with the first named bank with due notice of the deposit of such rental to be mailed to the Lessor at last known post office address.
4. DRY HOLE. Lessor agrees that if Lessee drills a dry hole on the leased premises or upon any pooled unit which contains a part of the leased premises, then the term of this lease shall be extended or the payment of rentals due hereunder shall be excused for a period of one (1) year from the date drilling ceases on said well, and Lessee shall either commence the drilling of another well before the end of said period or commence paying rentals as provided hereunder. If a well capable of producing oil or gas is drilled under this provision, Lessee shall be able to continue this lease by making the rental or royalty payments set out hereunder.
5. LESSOR'S SHARE OF RENTS, ETC. If said Lessor owns a less interest in the above-described land than the entire and undivided fee simple estate therein, then, the royalties and rentals herein provided shall be paid the Lessor only in proportion which his interest bears to the whole and undivided fee.
In the event Lessor's title or interest herein is claimed by others, Lessee shall have the right to purchase a lease or leases from others to protect its leasehold rights and Lessee shall have the right to withhold payment of rentals or royalties or deposit such rentals or royalties in Court until a final determination of Lessor's rights. The withholding of such rentals or royalties shall not be deemed a default hereinunder by the Lessee.
6. LESSEE'S FREE UTILITIES, ETC. Lessee shall have the right to use, free of cost, gas, oil and water produced on said land for its operation thereon, except water from wells of Lessor.
7. LOCATION OF PIPELINE. When requested by Lessor, Lessee shall bury its pipelines below plow depth.
8. LOCATION OF WELLS. No well shall be drilled nearer than two hundred (200) feet to any house or barn on said premises, without the written consent of the Lessor.
9. RECLAMATION. Lessee shall repair any damage to existing roads, fences, gates, etc. which results from Lessee's presence on Lessor's premises and further Lessee shall reclaim, to the best of its ability, any damages to Lessor's land.
10. DAMAGE TO CROPS. Lessee shall pay for damage to growing crops caused by its operation on said lands.
11. REMOVAL OF EQUIPMENT. Lessee shall have the right at any time within one (1) year after termination of this lease to remove all machinery and fixtures placed on said premises, including the right to draw and remove casing.
12. COMPLETION OF DRILLING. If the Lessee shall commence to drill a well within the term of this lease or any extension thereof, the Lessee shall have the right to drill such well to completion with reasonable diligence and dispatch, and if oil and gas, or either of them, be found, this lease shall continue and be in force with like effect as if such well had been completed within the term herein with Lessee paying rental, royalty or shut-in royalty payments.
13. TRANSFER OR ASSIGNMENT. If the estate of either party hereto is assigned, and the privilege of assigning in whole or in part is expressly allowed, the covenants hereof shall extend to their heirs, executors, successors or assigns, but no change in the ownership of the land or assignment of rental or royalties shall be binding on the Lessee until after the Lessee has been furnished with a written transfer or assignment or a true copy thereof; and it is hereby agreed in the event this lease shall be assigned, as to a part or parts of the above-described lands and the assignee or assignees of such parts shall fail or make default in the payment of the proportionate part of the rent due from him or them, such default shall not operate to defeat or affect this lease in so far as it covers a part or parts of said lands which the said Lessee or any assignee thereof shall make due payment of said rental.
14. SEVERAL OWNERS. If the leased premises are now, or shall hereafter be, owned in severalty or in separate tracts, the premises nevertheless shall be developed and operated as one lease, and all rentals and royalties accruing hereunder shall be treated as an entirety and shall be divided among, and paid to, such separate owners in the proportion that the acreage owned by each separate owner bears to the entire leased acreage; provided, however, if the leased premises consist of
two (2) or more non-abutting tracts, this paragraph shall apply separately to each such non-abutting tract, and further provided that if a portion of the leased premises is hereafter pooled or combined with other lands for the purpose of operating the pooled tract as one lease, this paragraph shall be inoperative as to such portion so pooled and paragraph 15 shall apply.
15. COMMON AGENT. If at any time there be as many as four (4) parties entitled to rentals or royalties, Lessee may withhold payments thereof unless and until all parties designate, in writing, a recordable instrument to be filed with the Lessee, a common agent to receive all payments due hereunder, and to execute division and transfer orders on behalf of said parties and their respective successors in title.
16. POOLING ACREAGE. Lessee is hereby given the right and power to pool or combine the acreage covered by this lease or any portion thereof with other land, lease or leases in the immediate vicinity thereof, when in Lessee's judgment it is necessary or advisable to do so in order to properly develop and operate said premises in compliance with spacing rules of any lawful authority, or when to do so would, in the judgment of the Lessee, promote the conservation of the oil and gas in and under and that may be produced from said premises. If oil or gas is found on the pooled acreage, it shall be treated as if production is had from this lease for all purposes except the payment of royalties on production from the pooled unit, whether the well or wells be located on the premises covered by this lease or not. In lieu of the rentals or royalties elsewhere herein specified, Lessor shall receive as rental or royalty from a unit so pooled only such portion of the rental or royalty stipulated herein as the amount of his acreage placed in the unit or his royalty interest therein bears to the total acreage so pooled in the particular unit involved. Provided, Lessee shall be under no obligation whatsoever, express or implied, to drill more than one (1) well on each such pooled unit regardless of when, where or by whom offset wells may be drilled. Such units to be a maximum of eighty (80) acres for each oil well and six hundred forty (640) acres for each gas well with Lessee executing in writing an instrument identifying and describing the pooled acreage.
17. DOWER AND HOMESTEAD RIGHTS. The undersigned Lessors, for themselves and their heirs, successors and assigns, hereby surrender and release all rights of dower and homestead in the premises herein described, insofar as said right of dower and homestead may in any way affect the purpose for which this lease is made as recited herein.
18. GAS STORAGE. Lessee shall have the right to use any formation underlying the leased premises for the storage of gas and shall have all rights and right-of-way necessary to store and produce such stored gas. As full payment for such storage rights, the Lessee shall pay to the Lessor rental at the rate of One Dollar ($1.00) per acre per year, while the premises are so used, and so long as the storage payment is made, all provisions of this lease shall remain in full effect.
19. SHUT-IN ROYALTY. This lease shall not expire at the end of either the primary or secondary term hereof if there is a well capable of producing gas in paying quantities located upon some part of the lands embraced herein, or on a pooled unit which contains a part of the leased premises, where such well is shut-in due to the inability of the Lessee to obtain a pipeline connection or to market the gas therefrom; provided, however, the Lessee shall pay an annual royalty of One Dollar ($1.00) per acre, said royalty to be paid on or before the expiration of one (1) year from the date said well was shut-in or if said shut-in royalty is not made by Lessee within the time period aforementioned, Lessor shall notify Lessee in writing and demand payment which Lessee shall then have ten (10) additional days to remit payment thereof. The payment of said royalty shall be considered for all purposes the same as if gas were being produced in paying quantities and upon the commencement of marketing of gas from said well or wells the royalty paid for the lease year in which the gas is first marketed shall be credited upon the royalty payable hereunder to the Lessor for such year. The provisions of this section shall also apply where gas is being marketed from said leasehold premises and through no fault of the Lessee, the pipeline connection or market is lost or ceases, in which case this lease shall not expire so long as said royalty is paid as herein provided.
20. STATE AND FEDERAL LAWS. All express or implied covenants of this lease shall be subject to all federal and state laws and to all executive orders, rules or regulations of state and federal authorities and this lease shall not be terminated, in whole or in part, nor Lessee held liable for any failure to perform thereunder if such failure is due to the result of any such law, order, rule or regulation.
21. WARRANTY CLAUSE. Lessor consents to the payment of any royalties hereunder to any mortgagee or trustee under a deed of trust on said lands and agrees that any such payments shall be treated as though said payments were made directly to Lessor.
Lessor hereby warrants and agrees to defend the title to the lands herein described, and agrees that the Lessee shall have the right at any time to redeem for Lessor, by payment any mortgage, deed of trust, taxes
or other liens on the above-described lands, in the event of default of payment by Lessor, and be subrogated to the rights of the holder thereof and Lessor hereby agrees that any such payment made by the Lessee for the Lessor shall be deducted from any amounts of money which may become due the Lessor under the terms of this lease.
Lessor agrees to execute a Division Order which correctly and properly denotes the interests of all parties owning an interest in the well; and Lessor further agrees that any royalties due from production may be held in escrow until such Division Order is executed.
IN TESTIMONY WHEREOF, witness the signatures of the parties hereto:
(SEAL) /s/ Meredith J. Evans (SEAL)
--------------------------- ---------------------------
Meredith J. Evans SS#000-00-0000
(SEAL) /s/ Helen Evans (SEAL)
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Helen Evans SS# 000-00-0000
(SEAL) (SEAL)
--------------------------- ---------------------------
(SEAL) (SEAL)
--------------------------- ---------------------------
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ACKNOWLEDGEMENT
STATE OF KENTUCKY )
) SS.
COUNTY OF BELL )
Given under my hand this 19th day of July, A.D., 1995.
My Commission Expires: June 12, 1995.
/s/ Ralph Vernon Smith --------------------------- NOTARY PUBLIC |
STATE OF ) CORPORATE ACKNOWLEDGEMENT
---------------------------
) SS.
COUNTY OF )
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GIVEN UNDER MY HAND AND SEAL this day of , 20 .
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My commission expires:
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Sign
R. Vernon Smith
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Print Name
This lease prepared by:
R. Vernon Smith
101 Paddock Drive
Nicholasville, KY 40356
By:
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ACKNOWLEDGEMENT
STATE OF )
---------------------------
) SS.
COUNTY OF )
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Given under my hand this day of A.D., 20 .
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My Commission Expires:
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---------------------------------
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NOTARY PUBLIC
ASSIGNMENT
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the within lease.
Given under my hand this day of , A.D., 20 .
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State of Kentucky, County of S.S.
---------------------------------
I, , a in and
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EXHIBIT "A"
Attached to and made a part of that certain Oil and Gas Lease dated the 19th day of July, 1995, by and between Meredith J. Evans and Helen Evans as Lessor, and Paddock Oil and Gas, Inc. as Lessee.
Lessor may have gas, free of cost, up to 200,000 cubic feet annually, for domestic use in one (1) dwelling house for heating, cooling and cooking purposes only, on the herein leased premises from any gas well thereon so long as Lessee operates such well and uses or sells gas therefrom. Lessor shall pay for all gas used over 200,000 cubic feet annually at the Lessee's prevailing farm tap rate in the area. Lessor shall construct or cause to be constructed in compliance with all governmental regulations and laws applicable to such connections, the service line and shall maintain and keep the service line in good repair. Lessor shall provide and install or cause to be installed and keep in good repair, the necessary automatic gas regulators, and shall pay the entire cost thereof. Lessee is hereby released from all liability and expenses arising out of such use. Lessor assumes all responsibility and liability for any and all injuries, loss of life and damage to property which may result from Lessor taking, handling, or using of gas hereunder. Notwithstanding the provisions of this paragraph or any other section of this lease, should the lease be made part of a Unit and the well is not actually located on the leased premises, but is on other property within the unit, then the Lessor shall not be entitled to free gas from the Unit well.
Signed for identification this 19th day of July, 1995.
/s/ Meredith J. Evans --------------------------- Meredith J. Evans /s/ Helen Evans --------------------------- Helen Evans |
PADDOCK OIL AND GAS, INC.
By: /s/ R. Vernon Smith --------------------------- |
State of Kentucky
County of Bell
I, Joan Asher Cawood, clerk within and for the state and county aforesaid, do hereby certify that the foregoing Oil and Gas Lease from Meredith J. and Helen Evans to Paddock Oil and Gas, Inc. was this day lodged for record; whereupon the same has been duly recorded in Lease Book No. 40 at Page No. 775, record of my said office.
Given under my hand this the 19th day of July, 1995.
JOAN ASHER CAWOOD, CLERK
By: /s/ Beth Hurst
---------------------
DEPUTY CLERK
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SCHEDULE OF SIMILAR CONTRACTS
The following listed oil and gas leases are substantially similar to the Oil and Gas Lease, dated July 19, 1995 (the "July 1995 Evans Oil and Gas Lease"), by and between Meredith J. Evans and Helen Evans and Paddock Oil and Gas, Inc. filed as part of this Exhibit 10(o) (which appears in its entirety above) and are assigned by the Assignments and Assignment and Assumption Agreement filed as part of this Exhibit 10(o) (which appear in their entirety below). This Schedule identifies these additional omitted oil and gas leases and sets forth the material details in such oil and gas leases that differ from the July 1995 Evans Oil and Gas Lease.
1. Oil and Gas Lease, dated March 11, 1995, by and between Oliver Gregory and Nell Gregory and Paddock Oil and Gas, Inc. Leased Premises located in Bell County, Kentucky, bounded on the North by lands of Kentucky State Forest, on the East by lands of Kentucky State Forest, on the South by lands of Pink Fuson Heirs and on the West by lands of J. M. Huber, and containing 117.5 acres more or less.
2. Oil and Gas Lease, dated February 11, 1995, by and between Meredith J. Evans and Helen Evans and Paddock Oil and Gas, Inc. Leased Premises located in Bell County, Kentucky and bounded on the North by lands of Donna E. Smith, on the East by lands of Donna E. Smith, on the South by lands of J.M. Huber Corporation and on the West by lands of Donna E. Smith, and containing 60 acres more or less.
3. Oil and Gas Lease, dated June 21, 1995, by and between Lizzie Freeman, Troy Freeman, Boyd Freeman and Janice Freeman and Paddock Oil & Gas, Inc. Leased Premises located in Bell County, Kentucky, bounded on the North by lands of Donna Smith, on the East by lands of Donna Smith and J.M. Huber Corporation, on the South by lands of J.M. Huber Corporation and on the West by lands of Donna Smith, et. al., and containing 82 acres more or less.
4. Oil and Gas Lease, dated December 17, 1994, by and between Donna Evans Smith and Kirby Smith, III and Kirby Smith, IV and Paddock Oil & Gas, Inc. and Amendment of Oil and Gas Lease, dated December 17, 1994, by and between the same parties. Leased Premises located in Bell County, Kentucky and bound on the North by lands of Arthur Fuson, on the East by lands of Thomas Carnes, on the South by lands of J.M. Huber Land Company and on the West by lands of Kentucky State Forest, and containing 1071 acres more or less.
ASSIGNMENT
KNOW ALL MEN BY THESE PRESENTS: THAT
Paddock Oil and Gas, Inc., 101 Paddock Drive, Nicholasville, Kentucky 40356, hereinafter referred to as ASSIGNOR, for and in consideration of the sum of Ten Dollars ($10.00) and other good and valuable consideration to it paid by Lonnie D. Ferrin, 431 Electra Drive, Houston, Texas 77024, hereinafter referred to as ASSIGNEE, does hereby sell, assign, transfer, set over and convey unto ASSIGNEE, his heirs and assigns, subject to the terms, conditions and reservations herein contained, all of ASSIGNOR'S right, title and interest in and to the oil and gas leases embracing lands in Bell County, Kentucky, as set forth on Exhibit "A" attached hereto and made a part hereof, together with a like interest in all rights incident to or obtained by virtue of the oil and gas leases, the personal property and equipment thereon, appurtenant thereto and used or obtained in connection therewith.
Out of the interest hereby transferred and assigned, the Assignor does hereby retain and reserve unto itself, its successors and assigns, an overriding royalty interest equal to 1/32 of 7/8 of all oil and/or gas produced, saved and marketed from the oil and gas leases set forth and described on Exhibit "A".
While ASSIGNOR does not warrant the title to said oil and gas leases generally, it nevertheless covenants to and with ASSIGNEE, his heirs and assigns, that it has done nothing to encumber the title to said oil and gas leases, and ASSIGNOR will warrant and defend the title to aid leases as against all persons claiming by, through and under them, but as to no others; and ASSIGNOR hereby transfers and assigns unto ASSIGNEE, his heirs and assigns, the benefit of all prior warranties lying within ASSIGNOR'S chain of title.
IN TESTIMONY WHEREOF, witness the execution hereof by ASSIGNOR, this 15th day of June, 1995.
PADDOCK OIL AND GAS, INC.
By: /s/ R. Vernon Smith
----------------------
R. Vernon Smith
President
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STATE OF KENTUCKY )
)
COUNTY OF BREATHITT )
The foregoing instrument was acknowledged before me by R. Vernon Smith, President of Paddock Oil and Gas, Inc., this 15th day of June, 1995.
My commission expires: 3-30-97
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/s/ Melissa M. Bush
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Notary Public
This instrument prepared by:
Benjamin C. Cubbage, Jr.
P.O. Box 17 - 600 Barrett Blvd.
Henderson, Kentucky 42420
/s/ Benjamin C. Cubbage, Jr.
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Attached to and made a part of that certain Assignment dated the 15th day of June, 1995, from Paddock Oil and Gas, Inc., as Assignor, to Lonnie D. Ferrin, as Assignee.
1. Oil and Gas Lease dated December 17, 1994, recorded in Lease Book 40, page 444 of the Bell County Court Clerk's Office, from Donna Evans Smith and Kirby Smith III, husband and wife, and Kirby Smith IV, single, as Lessors, to Paddock Oil & Gas, Inc., as Lessee, covering lands in said County and State bounded as follows, to-wit:
North: Arthur Fuson East: Thomas Carnes South: J.M. Huber Land Corporation West: Kentucky State Forest |
and containing 1000 acres, more or less.
2. Oil and Gas Lease dated February 11, 1995, recorded Lease Book 40, page 494 of the Bell County Court Clerk's Office, from Meredith J. Evans and Helen Evans, his wife, as Lessors, to Paddock Oil and Gas, Inc., as Lessee, covering lands in said County and State bounded as follows, to-wit:
North: Donna E. Smith East: Donna Smith South: J.M. Huber Corporation West: Donna E. Smith |
and containing 60 acres, more or less.
3. Oil and Gas Lease dated March 11, 1995, recorded Lease Book 40, page 699 of the Bell County Court Clerk's Office, from Oliver Gregory and Nell Gregory, his wife, as Lessors, to Paddock Oil and Gas, Inc., as Lessee covering lands in said County and state bounded as follows, to-wit:
North: Kentucky State Forest East: Kentucky State Forest South: Pink Fuson Heirs West: J.M. Huber now or formerly |
and containing 117.5 acres, more or less.
ASSIGNMENT
KNOW ALL MEN BY THESE PRESENTS: THAT
Paddock Oil and Gas, Inc., 101 Paddock Drive, Nicholasville, Kentucky 40356, hereinafter referred to as ASSIGNOR, for and in consideration of the sum of Ten Dollars ($10.00) and other good and valuable consideration to it paid by Lonnie D. Ferrin, 431 Electra Drive, Houston, Texas 77024, hereinafter referred to as ASSIGNEE, does hereby sell, assign, transfer, set over and convey unto ASSIGNEE, his heirs and assigns, subject to the terms, conditions and reservations herein contained, all of ASSIGNOR'S right, title and interest in and to the oil and gas leases embracing lands in Bell County, Kentucky, as set forth on Exhibit "A" attached hereto and made a part hereof, together with a like interest in all rights incident to or obtained by virtue of the oil and gas leases, the personal property and equipment thereon, appurtenant thereto and used or obtained in connection therewith.
Out of the interest hereby transferred and assigned, the Assignor does hereby retain and reserve unto itself, its successors and assigns, an overriding royalty interest equal to 1/32 of 7/8 of all oil and/or gas produced, saved and marketed from the oil and gas leases set forth and described on Exhibit "A".
While ASSIGNOR does not warrant the title to said oil and gas leases generally, it nevertheless covenants to and with ASSIGNEE, his heirs and assigns, that it has done nothing to encumber the title to said oil and gas leases, and ASSIGNOR will warrant and defend the title to aid leases as against all persons claiming by, through and under them, but as to no others; and ASSIGNOR hereby transfers and assigns unto ASSIGNEE, his heirs and assigns, the benefit of all prior warranties lying within ASSIGNOR'S chain of title.
IN TESTIMONY WHEREOF, witness the execution hereof by ASSIGNOR, this 31st day of August, 1995.
PADDOCK OIL AND GAS, INC.
By: /s/ R. Vernon Smith
-----------------------
R. Vernon Smith
President
|
STATE OF KENTUCKY )
)
COUNTY OF BREATHITT )
The foregoing instrument was acknowledged before me by R. Vernon Smith, President of Paddock Oil and Gas, Inc., this 31st day of August, 1995.
/s/ Melissa M. Bush ------------------------- Notary Public |
This instrument prepared by:
Benjamin C. Cubbage, Jr.
P.O. Box 17 - 600 Barrett Blvd.
Henderson, Kentucky 42420
/s/ Benjamin C. Cubbage, Jr. ------------------------------ |
Attached to and made a part of that certain Assignment dated the 31st day of August, 1995,from Paddock Oil and Gas, Inc., as Assignor, to Lonnie D. Ferrin, as Assignee.
1. Oil and Gas Lease dated June 21, 1995, recorded in Lease Book 40, page 770 of the Bell County Court Clerk's Office, from Lizzie Freeman, widow, Troy Freeman, single, and Boyd Freeman and Janice Freeman, his wife, as Lessors, to Paddock Oil & Gas, Inc., as Lessee, covering lands in said County and State bounded as follows, to-wit:
North: Donna Smith East: Donna Smith; J.M. Huber Corporation South: J.M. Huber Corporation West: Donna Smith, et al |
and containing 82 acres, more or less.
2. Oil and Gas Lease dated July 19, 1995, recorded Lease Book 40, page 775 of the Bell County Court Clerk's Office, from Meredith J. Evans and Helen Evans, his wife, as Lessors, to Paddock Oil and Gas, Inc., as Lessee, covering lands in said County and State bounded as follows, to-wit:
North: Bill Lee Fuson, now or formerly East: Donna Smith, et al South: Lizzie Freeman, et al., J.M. Huber West: Kentucky State Forest; Donna Smith |
and containing 490 acres, more or less.
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT is entered into this 10th day of November, 1995, by and between LONNIE D. FERRIN ("Seller"), and DELTA NATURAL GAS COMPANY, INC., a Kentucky corporation ("Purchaser"). Capitalized terms used herein and in the attachments hereto shall have the meanings set forth in the Agreement (as defined below) unless otherwise stated herein.
THAT WHEREAS, on March 1, 1995 Seller and Purchaser entered into an Agreement for Purchase and Sale of Assets (the "Agreement") pursuant to which Seller agreed to transfer, assign and convey to Purchaser and Purchaser agreed to purchase and acquire from Seller certain of the property and assets of Seller located in Bell County, Kentucky; and
WHEREAS, subject to the terms and conditions of the Agreement, Seller desires to now transfer and assign to Purchaser the Leases, and Purchaser desires to accept and assume same, pursuant to and in discharge of their respective obligations set forth in the Agreement.
NOW, THEREFORE, for and in consideration of the performance and observance of the terms and conditions contained herein and set forth in the Agreement, the terms and conditions of which are incorporated herein by reference, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Seller does hereby sell, transfer and assign to Purchaser, its successors and assigns, all of Seller's right, title and interest in and to the Leases. Seller will WARRANT SPECIALLY its title to the Leases. It is agreed and acknowledged that this Assignment shall be governed by and construed in accordance with the terms and conditions of the Agreement.
Purchaser does hereby accept the transfer and assignment of the Leases made herein and does hereby assume same and agree to pay or discharge when due and perform in full all of Seller's duties and obligations under the Leases arising on or after the date hereof.
IN WITNESS WHEREOF, the parties have executed this Assignment and Assumption Agreement on this the day and year first above written.
"SELLER"
/s/ LONNIE D. FERRIN -------------------------- LONNIE D. FERRIN |
"PURCHASER"
DELTA NATURAL GAS COMPANY, INC.,
a Kentucky corporation
BY: /s/ GLENN R. JENNINGS
--------------------------
ITS: President & CEO
--------------------------
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STATE OF KENTUCKY)
COUNTY OF JEFFERSON)
The foregoing Agreement was subscribed, sworn to and acknowledged before me this 10th day of November, 1995, by Lonnie D. Ferrin.
STATE OF KENTUCKY)
COUNTY OF JEFFERSON)
The foregoing Agreement was subscribed, sworn to and acknowledged before me this 10th day of November, 1995, by Glen Jennings as President of Delta Natural Gas Company, Inc., a Kentucky corporation, for and on behalf of the corporation.
THIS INSTRUMENT PREPARED BY:
STOLL, KEENON & PARK
201 E. Main Street
Suite 1000
Lexington, Kentucky 40507
(606) 231-3000
BY: /s/ J. Mel Camenisch, Jr. -------------------------- J. Mel Camenisch, Jr. |
Attachment to that certain Assignment and Assumption Agreement between Lonnie D. Ferrin and Delta Natural Gas Company dated November 10, 1995.
1. Underground Gas Storage Lease and Agreement (Canada Mountain Field) dated March 9, 1994 by and between Equitable Resources Exploration, a division of Equitable Resources Energy Company, a West Virginia corporation, and Lonnie D. Ferrin covering approximately 3,128 acres in Bell County, Kentucky (unrecorded, but evidenced by a Memorandum of Lease at Lease Book 40, Page 580 in the Bell County Clerk's office), as amended by that Amendment No. 1 and Novation to Underground Storage Lease and Agreement (Canada Mountain Field) dated March 22, 1995 by and between Equitable Resources Exploration, Lonnie D. Ferrin and Delta Natural Gas Company and recorded in Lease Book 40, Page 832 in the aforesaid Clerk's office.
2. Gas Storage Lease dated June 18, 1990 by and between J.M. Huber Corporation and Lonnie D. Ferrin covering approximately 5,000 acres in Bell County, Kentucky and recorded in Lease Book 39, Page 637 in the Bell County Clerk's office, as amended by that Amendment to Gas Storage Lease dated December 4, 1990 by and between J.M. Huber Corporation and Lonnie D. Ferrin and recorded in Lease Book 39, Page 643 in the aforesaid Clerk's office, and further amended by another Amendment to Gas Storage Lease dated June 8, 1995 between J.M. Huber Corporation and Lonnie D. Ferrin and recorded in Lease Book 40, Page 751 in the aforesaid Clerk's office.
3. Oil and Gas Lease dated February 11, 1995 from Meredith J. Evans and Helen Evans, husband and wife, to Paddock Oil and Gas, Inc. and recorded in Lease Book 40, Page 494 in the Bell County Clerk's office, as assigned to Lonnie D. Ferrin by Assignment dated June 15, 1995 and recorded in Lease Book 40, Page 762 in the aforesaid Clerk's office.
4. Oil and Gas Lease dated December 17, 1994 from Donna Evans Smith and Kirby Smith III, husband and wife, to Paddock Oil and Gas, Inc. and recorded in Lease Book 40, Page 444 in the Bell County Clerk's office, as assigned to Lonnie D. Ferrin by Assignment dated June 15, 1995 and recorded in Lease Book 40, Page 762 in the aforesaid Clerk's office.
5. Oil and Gas Lease dated March 11, 1995 from Oliver Gregory and Nell Gregory, husband and wife, to Paddock Oil and Gas, Inc. and recorded in Lease Book 40, Page 699 in the Bell County Clerk's office, as assigned to Lonnie D. Ferrin by Assignment dated June 15, 1995 and recorded in Lease Book 40, Page 762 in the aforesaid Clerk's office.
6. Gas Storage Lease dated April 3, 1995 from Kathy Cornelius and William Cornelius, husband and wife, to Lonnie D. Ferrin and recorded in Lease Book 40, Page 719 in the Bell County Clerk's office.
7. Oil and Gas Lease dated July 19, 1995 from Meredith J. Evans and Helen Evans, husband and wife, to Paddock Oil and Gas, Inc. and recorded in Lease Book 40, Page 775 in the Bell County Clerk's office, as assigned to Lonnie D. Ferrin by Assignment dated August 31, 1995 and recorded in Lease Book 40, Page 796 in the aforesaid Clerk's office.
8. Oil and Gas Lease from Lizzie Freeman, widow, Troy Freeman, single, and Boyd Freeman and Janice Freeman, husband and wife, dated June 21, 1995 to Paddock Oil & Gas, Inc. and recorded in Lease Book 40, Page 770 in the Bell County Clerk's office, as assigned to Lonnie D. Ferrin by Assignment dated August 31, 1995 and recorded in Lease Book 40, Page 796 in the aforesaid Clerk's office.
EXHIBIT 23(a)
INDEPENDENT AUDITOR'S CONSENT AND REPORT ON SCHEDULE
We consent to the use in this Registration Statement of Delta Natural Gas Company, Inc. on Form S-2 of our report dated August 19, 2002, relating to the consolidated financial statements of Delta Natural Gas Company, Inc. as of and for the year ended June 30, 2002, appearing in this Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus.
Our audit of the 2002 financial statements referred to in our aforementioned report also included the 2002 financial statement schedule of Delta Natural Gas Company, Inc., listed in Item 8 of the Annual Report on Form 10-K of Delta Natural Gas Company, Inc. for the year ended June 30, 2002 and incorporated by reference in this Registration Statement of Delta Natural Gas Company, Inc. on Form S-2. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such 2002 financial statement schedule, when considered in relation to the 2002 basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The financial statement schedule for the years ended June 30, 2001 and 2000 was audited by other auditors who have ceased operations. Those auditors expressed an opinion, in their report dated August 10, 2001, that the 2001 and 2000 financial statement schedule, when considered in relation to the 2001 and 2000 basic financial statements taken as a whole, presented fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
March 31, 2003