ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1)
|
Nature of Operations and Basis of Presentation
|
Delta Natural Gas Company, Inc. ("Delta" or "the Company") distributes or transports natural gas to approximately 36,000 customers. Our distribution and transmission pipeline systems are located in central and southeastern Kentucky, and we operate an underground storage field in southeastern Kentucky. We transport natural gas to our industrial customers who purchase their natural gas in the open market. We also transport natural gas on behalf of local producers and customers not on our distribution system and sell liquids extracted from natural gas in our storage field and on our pipeline systems. We have three wholly-owned subsidiaries. Delta Resources, Inc. ("Delta Resources") buys natural gas and resells it to industrial or other large use customers on Delta's system. Delgasco, Inc. ("Delgasco") buys gas and resells it to Delta Resources and to customers not on Delta's system. Enpro, Inc. ("Enpro") owns and operates production properties and undeveloped acreage.
All subsidiaries of Delta are included in the condensed consolidated financial statements. Intercompany balances and transactions have been eliminated. All adjustments necessary for a fair presentation of the unaudited results of operations for the three and nine months ended March 31, 2013 and 2012 are included. All such adjustments are accruals of a normal and recurring nature other than the amounts disclosed in Note 7 related to the Utility Gross Receipts License Tax assessment.
The results of operations for the period ended March 31, 2013 are not necessarily indicative of the results of operations to be expected for the full fiscal year. Because of the seasonal nature of our sales, we generate the smallest proportion of cash from operations during the warmer months, when sales volumes decrease considerably. Most construction activity and gas storage injections take place during these warmer months.
The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the financial statements, and the notes thereto, included in our Annual Report on Form 10-K for the year ended June 30, 2012.
(2)
|
Fair Value Measurements
|
Our financial assets and liabilities measured at fair value on a recurring basis consist of the assets of our supplemental retirement benefit trust, which are included in other non-current assets on the Condensed Consolidated Balance Sheets. Contributions to the trust are presented in other investing activities on the Condensed Consolidated Statements of Cash Flows. The assets of the trust are recorded at fair value and consist of exchange traded mutual funds. The mutual funds are recorded at fair value using observable market prices from active markets, which are categorized as Level 1 in the fair value hierarchy. The fair value of the trust assets are as follows:
|
|
March 31,
|
|
June 30,
|
|
|
|
|
($000)
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets
|
|
|
|
|
|
|
|
Money market
|
6
|
|
6
|
|
|
|
|
U.S. equity securities
|
472
|
|
364
|
|
|
|
|
U.S. fixed income securities
|
249
|
|
220
|
|
|
|
|
|
727
|
|
590
|
|
|
|
The carrying amounts of our other financial instruments including cash equivalents, accounts receivable, notes receivable and accounts payable approximate their fair value.
Our Series A Notes, presented as current portion of long-term debt and long-term debt on the Condensed Consolidated Balance Sheets, are stated at historical cost. Fair value of our long-term debt is based on the expected future cash flows of the debt discounted using a credit adjusted risk-free rate. The credit adjusted risk-free rate for our 4.26% Series A Notes is the estimated cost to borrow a debt instrument with the same terms from a private lender at the measurement date. The fair value of our long-term debt is categorized as Level 2 in the fair value hierarchy.
|
|
March 31,
|
|
June 30,
|
|
|
|
2013
|
|
2012
|
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
($000)
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
4.26% Series A Notes
|
56,500
|
|
59,835
|
|
58,000
|
|
59,027
|
|
(3)
|
Risk Management and Derivative Instruments
|
To varying degrees, our regulated and non-regulated segments are exposed to commodity price risk. We purchase our gas supply through a combination of spot market and forward purchases. We mitigate commodity price risk by efforts to balance supply and demand. For our regulated segment, we have minimal price risk resulting from these forward natural gas purchases because we are permitted to pass these gas costs on to our regulated customers through the gas cost recovery rate mechanism, approved quarterly by the Kentucky Public Service Commission. None of our gas contracts are accounted for using the fair value method of accounting. While some of our natural gas purchase contracts and natural gas sales contracts meet the definition of a derivative, we have designated these contracts as normal purchases and normal sales.
We bill our customers on a monthly meter reading cycle. At the end of each month, gas service which has been rendered from the date the customer's meter was last read to the month-end is unbilled.
Unbilled revenues and gas costs include the following:
|
|
March 31,
|
|
June 30,
|
|
|
|
(000)
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled revenues ($)
|
|
4,954
|
|
1,358
|
|
|
|
Unbilled gas costs ($)
|
|
2,466
|
|
392
|
|
|
|
Unbilled volumes (Mcf)
|
|
457
|
|
46
|
|
|
|
Unbilled revenues are included in accounts receivable and unbilled gas costs are included in deferred gas costs on the accompanying Condensed Consolidated Balance Sheets. Unbilled revenues are included in regulated revenues and unbilled gas costs are included in regulated purchased gas on the accompanying Condensed Consolidated Statements of Income.
(5)
|
Defined Benefit Retirement Plan
|
Net periodic benefit cost for our trusteed, noncontributory defined benefit pension plan for the periods ended March 31 include the following:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
($000)
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
279
|
|
228
|
|
837
|
|
690
|
|
|
|
|
|
Interest cost
|
|
228
|
|
231
|
|
685
|
|
691
|
|
|
|
|
|
Expected return on plan assets
|
|
(394
|
)
|
(367
|
)
|
(1,183
|
)
|
(1,105
|
)
|
|
|
|
|
Amortization of unrecognized net loss
|
|
154
|
|
50
|
|
461
|
|
150
|
|
|
|
|
|
Amortization of prior service cost
|
|
(22
|
)
|
(21
|
)
|
(65
|
)
|
(65
|
)
|
|
|
|
|
Net periodic benefit cost
|
|
245
|
|
121
|
|
735
|
|
361
|
|
|
|
|
|
For the nine months ended March 31, 2013, we made discretionary contributions of $2,800,000 to the defined benefit pension plan.
Notes Payable
The current bank line of credit with Branch Banking and Trust Company permits borrowings up to $40,000,000, all of which was available as of March 31, 2013 and June 30, 2012. The bank line of credit extends through June 30, 2013. We have received regulatory approval to renew the line of credit through June 30, 2015 from the Kentucky Public Service Commission and anticipate renewal of this line by June 30, 2013. The interest rate on the used bank line of credit is the London Interbank Offered Rate plus 1.15%. The annual cost of the unused bank line of credit is .125%.
We were not in default on our bank line of credit during any period presented in the Condensed Consolidated Financial Statements.
Long-Term Debt
Our Series A Notes are unsecured, bearing interest at a rate of 4.26% per annum, which is payable quarterly, and mature on December 20, 2031. Each December, we are required to make an annual $1,500,000 principal payment on the Series A Notes. The following table summarizes the remaining contractual maturities of our Series A Notes by fiscal year:
($000)
|
|
|
2013
|
|
—
|
2014
|
|
1,500
|
2015
|
|
1,500
|
2016
|
|
1,500
|
2017
|
|
1,500
|
Thereafter
|
|
50,500
|
Total Series A Notes
|
|
56,500
|
|
|
|
Any additional prepayment of principal by the Company is subject to a prepayment premium which varies depending on the yields of United States Treasury securities with a maturity equal to the remaining average life of the Series A Notes.
We were not in default on any covenants on our long-term debt during any period presented in the Condensed Consolidated Financial Statements.
(7)
|
Commitments and Contingencies
|
We have entered into an employment agreement with our Chairman of the Board, President and Chief Executive Officer and change in control agreements with our other four officers. The agreements expire or may be terminated at various times. The agreements provide for continuing monthly payments or lump sum payments and the continuation of specified benefits over varying periods in certain cases following defined changes in ownership of the Company. In the event all of these agreements were exercised in the form of lump sum payments, approximately $4.0 million would be paid in addition to continuation of specified benefits for up to five years. Additionally, upon a change in control, all unvested shares awarded under our Incentive Compensation Plan, as further discussed in Note 11 of the Notes to Condensed Consolidated Financial Statements, would immediately vest.
Our June 30, 2012 Condensed Consolidated Balance Sheet includes accrued taxes and interest related to an assessment of a license tax levied on the gross receipts of Delta Resources' customers over the period of July, 2005 through September, 2011, as further discussed in Note 13 of the Notes to Consolidated Financial Statements in our 2012 Annual Report on Form 10-K. As reflected in our December 31, 2012 Quarterly Report on Form 10-Q, the assessment was resolved in February, 2013 and $923,000 of previously accrued interest was reversed. Delta Resources billed its customers their proportionate share of the assessment, as Delta Resources has a contractual right to seek reimbursement from its customers. As of March 31, 2013, the net receivable from Delta Resources' customers was $1,418,000. We will continue to pursue collection of the taxes from these customers and to monitor the amount of the receivable to be realized. Included in the receivable is $174,000 due from a Delta Resources' customer that is wholly-owned by a Director of Delta Natural Gas Company, Inc. and his immediate family.
On the Condensed Consolidated Balance Sheets, the receivable from Delta Resources' customers is included in accounts receivable. On the June 30, 2012 Condensed Consolidated Balance Sheet, the liability for taxes was included in accrued taxes, and the liability for interest was included in accrued interest on debt. In the Condensed Consolidated Statements of Income, the change in the interest accrued is included in interest expense.
We are not a party to any material pending legal proceedings.
We have entered into forward purchase agreements beginning in April, 2013 and expiring at various dates through December, 2013. These agreements require us to purchase minimum amounts of natural gas throughout the term of the agreements. These agreements are established in the normal course of business to ensure adequate gas supply to meet our customers' gas requirements. These agreements have aggregate minimum purchase obligations of $115,000 and $211,000 for our fiscal years ended June 30, 2013 and June 30, 2014, respectively.
The Kentucky Public Service Commission exercises regulatory authority over our retail natural gas distribution and transportation services. Their regulation of our business includes approving the rates we are permitted to charge our regulated customers. We monitor our need to file requests with them for a general rate increase for our natural gas and transportation services. They have historically utilized cost-of-service ratemaking where our base rates are established to recover normal operating expenses, exclusive of gas costs, and a reasonable rate of return. We do not have any matters pending before the Kentucky Public Service Commission which would have a material impact on our results of operations, financial positions or cash flows.
Our Company has two segments: (i) a regulated natural gas distribution and transmission segment, and (ii) a non-regulated segment that participates in related ventures, consisting of natural gas marketing, natural gas production and sales of natural gas liquids. Virtually all of the revenues recorded under both segments come from the sale or transportation of natural gas or related sales of natural gas liquids. The regulated segment serves residential, commercial and industrial customers in the single geographic area of central and southeastern Kentucky. Price risk for the regulated segment is mitigated through our gas cost recovery clause, approved quarterly by the Kentucky Public Service Commission. Price risk for the non-regulated segment is mitigated by efforts to balance supply and demand. However, there are greater risks in the non-regulated segment because of the practical limitations on the ability to perfectly predict our demand. In addition, we are exposed to price risk resulting from changes in the market price of natural gas, natural gas liquids and uncommitted gas inventory of our non-regulated companies.
The reportable 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 that are included in our Annual Report on Form 10-K for the year ended June 30, 2012. Intersegment transportation revenues and expenses represent the natural gas transportation costs from the regulated segment to the non-regulated segment at our tariff rates. Operating expenses, taxes and interest are allocated to the non-regulated segment.
Segment information is shown in the following table:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
($000)
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External customers
|
|
19,140
|
|
16,928
|
|
38,181
|
|
35,530
|
|
|
|
|
|
Intersegment
|
|
1,432
|
|
1,090
|
|
3,307
|
|
2,918
|
|
|
|
|
|
Total regulated
|
|
20,572
|
|
18,018
|
|
41,488
|
|
38,448
|
|
|
|
|
|
Non-regulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External customers
|
|
11,993
|
|
9,788
|
|
26,511
|
|
26,609
|
|
|
|
|
|
Eliminations for intersegment
|
|
(1,432
|
)
|
(1,090
|
)
|
(3,307
|
)
|
(2,918
|
)
|
|
|
|
|
Consolidated operating revenues
|
|
31,133
|
|
26,716
|
|
64,692
|
|
62,139
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
|
|
3,797
|
|
3,125
|
|
5,861
|
|
4,768
|
|
|
|
|
|
Non-regulated
|
|
446
|
|
800
|
|
1,472
|
|
872
|
|
|
|
|
|
Consolidated net income
|
|
4,243
|
|
3,925
|
|
7,333
|
|
5,640
|
|
|
|
|
|
(10)
Earnings per Common Share
The following table sets forth the computation of basic and diluted earnings per share:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Numerator – basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income ($000)
|
|
|
4,243
|
|
|
|
3,925
|
|
|
|
7,333
|
|
|
|
5,640
|
|
Dividends paid ($000)
|
|
|
(1,238
|
)
|
|
|
(1,192
|
)
|
|
|
(3,711
|
)
|
|
|
(3,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings ($000)
|
|
|
3,005
|
|
|
|
2,733
|
|
|
|
3,622
|
|
|
|
2,071
|
|
Percentage allocated to common shares (a)
|
|
|
99.6
|
%
|
|
|
99.7
|
%
|
|
|
99.6
|
%
|
|
|
99.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings allocated to common shares ($000)
|
|
|
2,992
|
|
|
|
2,725
|
|
|
|
3,607
|
|
|
|
2,065
|
|
Dividends declared allocated to common shares ($000)
|
|
|
1,233
|
|
|
|
1,188
|
|
|
|
3,696
|
|
|
|
3,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shares ($000)
|
|
|
4,225
|
|
|
|
3,913
|
|
|
|
7,303
|
|
|
|
5,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator – (b) (d)
|
|
Basic – weighted-average common shares
|
|
|
6,851,533
|
|
|
|
6,788,307
|
|
|
|
6,838,283
|
|
|
|
6,770,438
|
|
Incremental unvested non-participating shares
|
|
|
12,126
|
|
|
|
—
|
|
|
|
4,042
|
|
|
|
—
|
|
Diluted – weighted-average common shares
|
|
|
6,863,659
|
|
|
|
6,788,307
|
|
|
|
6,842,325
|
|
|
|
6,770,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
.62
|
|
|
|
.58
|
|
|
|
1.07
|
|
|
|
.83
|
|
Diluted
|
|
|
.62
|
|
|
|
.58
|
|
|
|
1.07
|
|
|
|
.83
|
|
(a) Percentage allocated to common shares – weighted average
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding
|
|
|
6,851,533
|
|
|
|
6,788,307
|
|
|
|
6,838,283
|
|
|
|
6,770,438
|
|
Unvested participating
shares (c)
|
|
|
28,667
|
|
|
|
21,332
|
|
|
|
28,667
|
|
|
|
21,332
|
|
Total
|
|
|
6,880,200
|
|
|
|
6,809,639
|
|
|
|
6,866,950
|
|
|
|
6,791,770
|
|
Percentage allocated to common shares
|
|
|
99.6
|
%
|
|
|
99.7
|
%
|
|
|
99.6
|
%
|
|
|
99.7
|
%
|
|
(b)
|
Under our incentive compensation plan, recipients of performance share awards receive unvested non-participating shares, as further discussed in Note 11 of the Notes to Condensed Consolidated Financial Statements. Unvested non-participating shares become dilutive in the interim quarter-end in which the performance objective is met. If the performance objective continues to be met through the end of the performance period, these shares become unvested participating shares as of the fiscal year-end, as further discussed in (c). The weighted average number of unvested non-participating shares outstanding during a period is included in the diluted earnings per common share calculation using the treasury stock method, unless the effect of including such shares would be antidilutive. As of March 31, 2013, 39,000 unvested non-participating shares are included in the diluted earnings per share calculation using the treasury stock method. As of March 31, 2012, there were 36,000 unvested non-participating shares outstanding, which were not dilutive as the underlying performance condition has not yet been met.
|
|
(c)
|
Certain awards under our incentive compensation plan provide recipients of the awards all the rights of a shareholder of Delta including a right to dividends declared on common shares, as further discussed in Note 11 of the Notes to Condensed Consolidated Financial Statements. Any unvested shares which are participating in dividends are considered participating securities and are included in our computation of basic and diluted earnings per share using the two-class method unless the effect of including such shares would be antidilutive. As of March 31, 2013 and 2012 there were 29,000 and 21,000 unvested participating shares outstanding, respectively.
|
|
(d)
|
For the three and nine months ended March 31, 2013 and 2012 there were no antidilutive shares.
|
(11)
|
Share-Based Compensation
|
We have a shareholder approved incentive compensation plan (the "Plan"), which provides for incentive compensation payable in shares of our common stock. The Plan is administered by our Corporate Governance and Compensation Committee of our Board of Directors, which has complete discretion in determining which employees, officers and outside directors shall be eligible to participate in the Plan, as well as the type, amount, terms and conditions of each award, subject to the limitations of the Plan.
The number of shares of our common stock that may be issued pursuant to the Plan may not exceed 1,000,000 shares in the aggregate. As of March 31, 2013, 889,000 shares of common stock were available for issuance under the Plan, subject to the limitations imposed by our Corporate Governance Guidelines. Shares of common stock may be available from authorized but unissued shares, shares reacquired by us or shares that we purchase in the open market.
Compensation expense for share-based compensation is recorded in the non-regulated segment and included in operation and maintenance expense in the Condensed Consolidated Statements of Income based on the fair value of the awards at the grant date and is amortized over the requisite service period. Fair value is the closing price of our common shares at the grant date. The grant date is the date at which our commitment to issue the share-based awards arises, which is generally when the award is approved and the terms of the awards are communicated to the employee or director. We initially recognize expense for our performance shares when it is probable that any stipulated performance criteria will be met.
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
|
($000)
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
175
|
|
99
|
|
747
|
|
613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended March 31, 2013 and 2012, an excess tax benefit of $26,000 and $22,000, respectively, was recognized as an increase to premium on common shares on our Condensed Consolidated Balance Sheets, which decreased our taxes payable as the deduction for income tax purposes exceeds the compensation expense recognized for share-based compensation. This excess tax benefit can be utilized to offset tax deficiencies related to share-based compensation in subsequent periods.
Stock Awards
For the nine months ended March 31, 2013 and 2012, common stock was awarded to virtually all Delta employees and directors having grant date fair values of $264,000 (12,000 shares) and $337,000 (22,000 shares), respectively. The recipients vested in the awards shortly after the awards were granted, but during the time between the vesting dates and the grant dates the shares awarded were not transferable by the holders. Once the shares were vested, the shares received under the stock awards were immediately transferable.
Performance Shares
For the nine months ended March 31, 2013 and 2012, performance shares were awarded to the Company's executive officers having grant date fair values of $844,000 (39,000 shares) and $552,000 (36,000 shares), respectively. The performance share awards vest only if the performance objectives of the awards are met, which are based on the Company's earnings per common share for the fiscal year in which the performance shares are awarded, before any cash bonuses or share-based compensation. Upon satisfaction of the performance objectives, unvested shares are issued to the recipients and vest equally over a three-year period beginning the August 31 subsequent to achieving the performance objectives as long as the recipients are employees throughout each such service period. The recipients of the awards also become vested as a result of certain events such as death or disability of the holders. The unvested shares have both dividend participation rights and voting rights during the remaining terms of the awards. Holders of performance shares may not sell, transfer or pledge their shares until the shares vest.
For the three and nine months ended March 31, 2013, compensation expense related to the performance shares was $175,000 and $482,000, respectively. For the three and nine months ended March 31, 2012, compensation expense related to the performance shares was $99,000 and $276,000, respectively. As of March 31, 2013 and 2012, there were 29,000 and 21,000 unvested performance shares outstanding, respectively, for which the performance objectives have been satisfied.
Our performance shares have graded vesting schedules, and each separate annual vesting tranche is treated as a separate award for expense recognition. Compensation expense is amortized over the vesting period of the individual awards based on the probable outcome of meeting the performance objectives.