S-2 1 eos2.txt DELTA NATURAL GAS COMPANY, INC. FORM S-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 2002. Registration No. 333-_________ ============================================================================ 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) 3617 Lexington Road, Winchester, Kentucky 40391 (859) 744-6171 (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. JOHN L. GILLIS, JR., Esq. Stoll, Keenon & Park, LLP Armstrong, Teasdale, Schlafly & Davis 300 West Vine St., Suite 2100 One Metropolitan Square Lexington, KY 40507 St. Louis, MO 63102 (859) 231-3000 (314) 621-5070 ---------- 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 the prospectus is expected to be made pursuant to Rule 434, please check the following box. | | CALCULATION OF REGISTRATION FEE
Proposed Proposed maximum maximum Amount offering aggregate Amount of being price per offering registration registered Debenture price fee Title of each class of Securities to be registered ======================================================================================================================= % Debentures, due 2022..... $20,000,000 100% $20,000,000 $ 1,840.00 -----------------------------------------------------------------------------------------------------------------------
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 Commission, acting pursuant to said Section 8(a), may determine. SUBJECT TO COMPLETION, DATED OCTOBER 30, 2002 ***************************************************************************** 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. ***************************************************************************** DELTA NATURAL GAS COMPANY, INC. [COMPANY LOGO] $20,000,000 % DEBENTURES DUE 2022 ----------------- We are offering $20,000,000 of our % Debentures due in 2022. We will receive all the net proceeds from this sale. We will pay interest on the % Debentures quarterly. The Debentures will mature on December 1, 2022. We have the right to redeem your Debentures at any time after , 2006. If we elect to redeem your Debentures in the first year after , 2006, we are required to pay you 102% of the principal value of your Debentures. If we redeem during the next year, we must pay you 101% of the principal value of your Debentures. After , 2008, we may redeem your Debentures at 100% of their principal value. In all redemptions, we also must pay you any accrued but unpaid interest on your Debentures. We will also redeem the Debentures, subject to limitations, at the option of the representative of any deceased beneficial owner of the Debentures. There is no market for these Debentures, and we can give no assurance that a market will develop. ------------- INVESTING IN OUR DEBENTURES INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6. ------------
Per $1,000 Debenture Total ------------------------ ------------------- Public offering price $ 1,000.00 $20,000,000.00 Underwriting discount $ $ Proceeds, before our expenses $ $
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 Debentures will be ready for delivery on or about . --------------------- EDWARD D. JONES & CO., L.P. The date of this prospectus is , 2002. TABLE OF CONTENTS PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 FORWARD LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 8 USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . 13 BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 DESCRIPTION OF DEBENTURES. . . . . . . . . . . . . . . . . . . . . . . . . . 25 UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 WHERE YOU CAN FIND MORE INFORMATION. . . . . . . . . . . . . . . . . . . . . 38 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . F-1
2 PROSPECTUS SUMMARY This summary highlights selected information in this prospectus. This summary is not complete and does not contain all of the information that you should consider before investing in our Debentures. You should read this entire prospectus carefully before investing in our Debentures. THE COMPANY We sell natural gas to approximately 40,000 retail customers on our distribution system. 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. OUR ADDRESS AND TELEPHONE NUMBER Our executive offices are located at 3617 Lexington Road, Winchester, Kentucky 40391. Our telephone number is (859) 744-6171. Our FAX number is (859) 744-6552, and our internet address is www.deltagas.com. ---------------- THE OFFERING Debentures offered by us $20,000,000 in aggregate principal amount Maturity December 1, 2022 Interest % per annum payable quarterly on each March 1, June 1, September 1, and December 1, beginning March 1, 2003 Redemption Option of a Deceased Beneficial Owner's Representative We will redeem the Debentures at the option of the representative of any deceased beneficial owner of a Debenture at 100% of the principal amount, plus any interest accrued to (but excluding) the redemption date, subject to the conditions that, during the period from the original issue date of a Debenture through , 2003 and during each twelve month period after , 2003, the maximum principal amount we will redeem is $25,000 per deceased beneficial owner 3 and an aggregate of $400,000 for all deceased beneficial owners. See "Description of Debentures - Limited Right of Redemption upon Death of Beneficial Owner". Our right to redeem the Debentures Beginning on , 2006, we are permitted to redeem your Debentures. If we redeem your Debentures in the first year after , 2006, we are required to pay you 102% of the principal value of your Debentures. If we redeem your Debentures during the next year, we must pay you 101% of the principal value of your Debentures. After , 2008, we may redeem your Debentures at 100% of their principal value. In all redemptions, we also must pay you any accrued but unpaid interest on your Debentures. See "Description of Debentures - Optional Redemption". Use of Proceeds To redeem our outstanding 8.30% Debentures due 2026 and to reduce our short-term indebtedness. -------------
4 SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following table summarizes our selected consolidated financial information. The table provides information about each of our last three fiscal years.
FOR THE FISCAL YEARS ENDED JUNE 30, ----------------------------------- 2002 2001 2000 ---- ---- ---- INCOME DATA ($) Operating revenues 55,929,780 70,770,156 45,926,775 Operating income 8,401,452 8,721,719 8,176,722 Net income 3,636,713 3,635,895 3,464,857 Basic earnings per common share 1.45 1.47 1.42 Diluted earnings per common share 1.45 1.47 1.42 Dividends declared per common share 1.16 1.14 1.14 JUNE 30, 2002 ------------- ACTUAL AS ADJUSTED(1) ------ -------------- CAPITALIZATION ($) Common shareholders' equity 34,182,277 40.4% 34,182,277 38.1% Long-term debt (including current portion) 50,350,000 59.6 55,534,000 61.9 ---------- ------ ---------- ------ Total capitalization 84,532,277 100.0% 89,716,277 100.0% ========== ====== ========== ====== SHORT-TERM NOTES PAYABLE ($) 19,355,000 15,494,000 --------------------- FOR THE FISCAL YEARS ENDED JUNE 30, ----------------------------------- 2002 2001 2000 ---- ---- ---- RATIO OF EARNINGS TO FIXED CHARGES (2) Actual 2.23 x 2.15 x 2.16 x Pro Forma (1) 2.20 x --------- (1) Adjusted to reflect the issuance of the Debentures (at an assumed interest rate of 7.25%) and the application of the estimated net proceeds of $19,270,000. We will use $15,409,000 of the net proceeds to call our 8.30% debentures due 2026, and the remaining $3,861,000 to reduce our short term notes payable. See "Use of Proceeds". (2) The ratio of earnings to fixed charges is the number of times that fixed charges are covered by earnings. Earnings for the calculation consist of net income before income taxes and fixed charges. Fixed charges consist of interest expense and amortization of debt expense.
5 RISK FACTORS Purchasing our Debentures involves risks. The following are material risks. You should carefully consider each of the following factors and all of the information in this prospectus before purchasing any of our Debentures. WEATHER CONDITIONS MAY CAUSE OUR REVENUES TO VARY FROM YEAR TO YEAR. Our revenues vary from year to year, depending on weather conditions. A significant part of our retail gas sales is for heating. As a result, mild winter temperatures can have a significant and adverse effect on our sales volumes in any year. CHANGES IN FEDERAL REGULATIONS COULD ADVERSELY AFFECT OUR INTERSTATE SUPPLY OF NATURAL GAS. We purchase a substantial portion of our gas supply from interstate sources. The Federal Energy Regulatory Commission regulates the price we pay interstate pipelines to transport interstate gas and the amount of gas we are able to transport through those interstate pipelines. The Federal Energy Regulatory Commission could adversely affect our transportation costs or our available pipeline capacity by changing its regulatory policies. 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 adversely affect our normal interstate supply of gas. SOME OF OUR LARGE CUSTOMERS ARE ABLE TO PURCHASE NATURAL GAS DIRECTLY FROM SUPPLIERS. Some of our large customers are able to purchase gas directly from interstate suppliers, producers or marketers. An increase in these direct purchases will adversely affect our revenues. 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. Our profitability in our regulated segment depends on: o approval by the Kentucky Public Service Commission of adequate and timely rate increases, and o our continued ability to pass on to our retail customers the increased costs of natural gas. VOLATILITY IN THE PRICE OF NATURAL GAS COULD ADVERSELY AFFECT OUR PROFITS. Significant increases in the price of natural gas will 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 will adversely affect our profits. Higher prices could also make it more difficult to add new customers. WE DO NOT GENERATE SUFFICIENT CASH FLOWS 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 6 by offering new securities into the market. We anticipate this need to borrow and offer new securities will continue in the future. THERE IS NO PUBLIC MARKET FOR OUR DEBENTURES. There is no public trading market for the Debentures. We do not intend to apply for listing of the Debentures on any national securities exchange or for quotation of the Debentures on any automated dealer quotation system. Our underwriter has told us it intends to make a market in the Debentures after this offering, although the underwriter is under no obligation to do so and may discontinue any market-making activities at any time without any notice. As a result, we can give no assurances that an active public market for the Debentures will develop. If an active public trading market for the Debentures does not develop, the market price and liquidity of the Debentures may be adversely affected. 7 FORWARD LOOKING STATEMENTS This prospectus contains 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" and similar expressions. These forward-looking statements include, but are not limited to, statements about: o our operational plans, o the cost and availability of our natural gas supplies, o our capital expenditures, o sources and availability of funding for our operations and expansion, o our anticipated growth and growth opportunities through system expansion and acquisition, o competitive conditions that we face, o our production, storage, gathering and transportation activities, o regulatory and legislative matters, and o 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: o the ongoing restructuring of the natural gas industry and the outcome of the regulatory proceedings related to that restructuring, o the changing regulatory environment, generally, o a change in the rights under present regulatory rules to recover for costs of gas supply, other expenses and investments in capital assets, o uncertainty in our capital expenditure requirements, o changes in economic conditions, demographic patterns and weather conditions in our retail service areas, o changes affecting our cost of providing gas service, including changes in gas supply costs, interest rates, the availability of external sources of financing for our operations, tax laws, environmental laws and the general rate of inflation, 8 o changes affecting the cost of competing energy alternatives and competing gas distributors, o changes in accounting principles and tax laws or the application of such principles and laws to us, and o other matters described in the "RISK FACTORS" section. 9 USE OF PROCEEDS We will use approximately $15.4 million of the estimated net proceeds from this offering to redeem our 8.30% Debentures due 2026. We will use the balance of the net proceeds, which we estimate to be $3,861,000, to reduce our short-term indebtedness. As of October 21, 2002, our short term indebtedness consisted of $27,080,000 borrowed under a $40,000,000 line of revolving credit bank loan. The interest rate on this line of credit was 2.82% as of October 21, 2002. Effective October 31, 2002, we will replace this line of revolving credit bank loan with a new, similar $40,000,000 line of credit from another banking institution. The interest rate on this new line of credit will be a variable rate based on the London Interbank Offered Rate. This new line of credit will extend through October 31, 2003. We use our existing line of credit, and anticipate using our new line of credit, to fund general operating expenses and capital expenditures. The capital expenditures are primarily for replacement and upgrading of existing facilities and system extensions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 10 CAPITALIZATION The following tables set forth our consolidated capitalization and short-term debt as of June 30, 2002, and as adjusted to reflect the sale of the Debentures and the application of the estimated net proceeds. This table should be read in conjunction with our consolidated financial statements and notes included in this prospectus.
AS OF JUNE 30, 2002 ACTUAL AS ADJUSTED --------------------- -------------------- LONG-TERM DEBT (INCLUDING CURRENT PORTION) 7.15% Debentures due 2018 $ 24,089,000 $ 24,089,000 % Debentures due 2022 - 20,000,000 6.625% Debentures due 2023 11,445,000 11,445,000 8.30% Debentures due 2026 14,816,000 - ------------ ------------ Total long-term debt $ 50,350,000 59.6% $ 55,534,000 61.9% ------------ ------------ COMMON SHAREHOLDERS' EQUITY Common shares, par value $1 per share Authorized-6,000,000 shares Outstanding-2,530,079 shares $ 2,530,079 $ 2,530,079 Premium on common shares 30,330,330 30,330,330 Capital stock expense (1,925,431) (1,925,431) Retained earnings 3,247,299 3,247,299 ------------ ------------ Total common shareholders' equity $ 34,182,277 40.4% $ 34,182,277 38.1% ------------ ------ ------------ ------ Total capitalization $ 84,532,277 100.0% $ 89,716,277 100.0% ============ ====== ============ ====== SHORT-TERM NOTES PAYABLE $ 19,355,000 $ 15,494,000 ============ ============
11 SELECTED FINANCIAL DATA In the following table we set forth our selected financial data for the periods indicated. In the table we also include our ratio of earnings to our fixed charges. The data was extracted from our audited financial statements for each of those periods. 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 the notes to those financial statements 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 FISCAL YEARS ENDED JUNE 30, --------------------------------------------- 2002 2001 2000 1999 1998(a) ---- ---- ---- ---- ------- SUMMARY OF OPERATIONS ($) Operating revenues 55,929,780 70,770,156 45,926,775 38,672,238 44,258,000 Operating income 8,401,452 8,721,719 8,176,722 6,652,070 6,731,859 Net income 3,636,713 3,635,895 3,464,857 2,150,794 2,451,272 Basic and diluted earnings per common share 1.45 1.47 1.42 .90 1.04 Dividends declared per common share 1.16 1.14 1.14 1.14 1.14 AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (BASIC AND DILUTED) 2,513,804 2,477,983 2,433,397 2,394,181 2,359,598 TOTAL ASSETS ($) 127,948,525 124,179,138 112,918,919 107,473,117 102,866,613 CAPITALIZATION ($) Common shareholders' equity 34,182,277 32,754,560 31,297,418 29,912,007 29,810,294 Long-term debt 48,600,000 49,258,902 50,723,795 51,699,700 52,612,494 ---------- ---------- ---------- ---------- ---------- Total capitalization 82,782,277 82,013,462 82,021,213 81,611,707 82,422,788 ========== ========== ========== ========== ========== SHORT-TERM DEBT ($)(b) 21,105,000 19,250,000 11,375,000 8,145,000 3,665,000 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 Ratio of Earnings to Fixed Charges (c) Actual 2.23 x 2.15 x 2.16 x 1.75 x 1.89 x Pro forma (d) 2.20 x --------------------- (a) During March 1998, we sold $25,000,000 of debentures. We used the proceeds to repay short-term debt and to redeem $10,000,000 of our 9.00% debentures due 2011. (b) Includes current portion of long-term debt. (c) The ratio of earnings to fixed charges is the number of times that fixed charges are covered by earnings. Earnings for the calculation consist of net income before income taxes and fixed charges. Fixed charges consist of interest expense and amortization of debt expense. (d) As adjusted to reflect the issuances of the Debentures (at an assumed rate of 7.25%) offered hereby and the application of the estimated net proceeds of $19,270,000.
12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR OUR COMPLETE CONSOLIDATED FINANCIAL STATEMENTS, SEE PAGES F-1 THROUGH F-22. 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 in the year 2000 the Kentucky Public Service Commission permitted us to start adjusting our winter rates in response to unusual winter temperatures. Under this weather normalization tariff, we are permitted to increase our rates for residential and small non-residential customers when, based on a thirty 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 expect our capital expenditures for fiscal 2003 to be $9.8 million. We will make these capital expenditures for 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 $27,080,000 was borrowed at October 21, 2002. On October 31, 2002, we will move our $40,000,000 line of credit to a new lender, Branch Banking and Trust Company. This new line of 13 credit is on substantially the same terms as our former line of credit and extends through October 31, 2003. See "Use of Proceeds". We have periodically repaid our short term borrowings under the existing line of credit by using the net proceeds from the sale of long-term debt and equity securities. For example, in March, 1998, we used the net proceeds of $24,100,000 from the sale of $25,000,000 of our debentures to repay short-term debt and to redeem our 9.00% debentures, that would have matured in 2011, in the amount of $10,000,000. We will use a portion of the proceeds from this offering to pay down our new line of credit with Branch Banking and Trust Company. See "Use of Proceeds". If market conditions are favorable, we plan to make an equity offering late in fiscal 2003. Below, we summarize our primary cash flows during the last three fiscal years:
2002 2001 2000 ---- ---- ---- Provided by our operating activities $10,511,896 $ 2,652,572 $ 8,827,505 Used in our investing activities (9,421,765) (7,069,713) (8,795,653) 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 provided by our operating activities consists of net income and noncash items, including depreciation, depletion, amortization and deferred income taxes. Cash provided by our operating activities also includes changes in working capital in our cash generated by operating activities. We expect that internally generated cash, coupled with short-term borrowings, will be sufficient to satisfy our operating, normal capital expenditure and dividend requirements for the foreseeable future. RESULTS OF OPERATIONS OPERATING REVENUES The decrease in our operating revenues for 2002 of $14,840,000 was primarily attributable to decreased sales volumes and decreased gas rates. Sales volumes decreased due to the 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. The increase in operating revenues for 2001 of $24,843,000 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. Our sales volumes increased due to the colder winter weather in 2001. Heating degree days billed for 2002 were 89.0% of normal thirty-year average temperatures as compared with 106.8% of normal temperatures for 2001 and 89.6% of normal temperatures for 2000. A "heating degree day" is determined each day when the average of the high and low temperature is one degree less than 65 degrees Fahrenheit. 14 In the following table we set forth variations in our revenues for the last two fiscal years:
2002 compared 2001 compared Increase (Decrease) 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 .4 7.7
OPERATING EXPENSES The decrease in purchased gas expense for 2002 of $14,551,000 was due primarily to the 21.3% decrease in the cost of gas purchased for retail sales and the 10.7% 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. 15 In the following table we set forth variations in our purchased gas expense for the last two fiscal years:
2002 compared 2001 compared to 2001 to 2000 --------------- ------------- Variations 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 --------------- ------------- Variations 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 variations in our gas expense $ (14,551,000) $ 23,493,000 =============== =============
BASIC AND DILUTED EARNINGS PER COMMON SHARE For the years ended June 30, 2002, 2001 and 2000, 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 plan and 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 No. 143, entitled Accounting for Asset Retirement Obligations. This statement No. 143 addresses asset retirement obligations that result from the acquisition, construction or normal operation of long-lived assets. We expect the adoption of this statement No. 143 to have no significant impact on our financial statements. In August, 2001, the Financial Accounting Standards Board issued statement No. 144, entitled Accounting for the Impairment or Disposal of Long-Lived Assets. We expect the adoption of this statement No. 144 to have no significant impact on our financial statements. The American Institute of Certified Public Accountants has issued an exposure draft Statement of Position, entitled Accounting for Certain Costs and Activities Related to Property, Plant, and Equipment. This proposal will apply to all nongovernmental entities that acquire, construct or replace tangible property, plant and equipment, including lessors and lessees. The proposal requires that entities use component accounting for property, plant and equipment to the extent future component replacement will be capitalized. At adoption, entities would have the option to apply component 16 accounting retroactively for all property, plant and equipment assets to the extent applicable, or to apply component accounting as they incur capitalizable costs that replace all or a portion of property, plant and equipment. We are currently analyzing the impact of this proposal which becomes effective on January 1, 2003. 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 sometimes 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 matched to the terms of the related sales contract. By immediately covering our obligation under the contracts with our transportation customers, we are able 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 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 and on the anticipated Branch Banking and Trust Company note payable is benchmarked to the monthly London Interbank Offered Rate. The balance on our outstanding short-term line of credit was $19,355,000 on June 30, 2002 and $16,800,000 on June 30, 2001. On October 21, 2002, the balance on our short-term line of credit was $27,080,000. Based on the amount of our outstanding short-term line of credit on June 30, 2002, a one percent increase (decrease) in our average interest rates would result in a decrease (increase) in our annual pre-tax net income of $194,000. See Note (6) of the Notes to Consolidated Financial Statements. A portion of the proceeds from this offering will be used to pay down our short-term line of credit. See "Use of Proceeds". 17 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. We also transport natural gas for others and produce a relatively small amount of oil and 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 predominately rural communities in central and southeastern Kentucky. Our regulated segment also transports gas to industrial customers on our system who have purchased 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 system and to others not on our distribution 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. 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. 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. Developers have built industrial parks in our service areas, and this has resulted in some new industrial customers for us. Over 99% of our customers are residential and commercial. In fiscal 2002, those customers accounted for 96% of the total volume of gas we sold. Our remaining customers are light industrial, and in fiscal 2002, they accounted for 4% of the total volume of gas we sold. 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. 18 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 impacts our revenues year-to-year. 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. 19 CONSOLIDATED OPERATING STATISTICS In the following table, we provide information about our business during the periods indicated.
FOR THE YEARS ENDED JUNE 30, ---------------------------- 2002 2001 2000 1999 1998 AVERAGE RETAIL CUSTOMERS SERVED Residential 33,624 33,691 33,251 32,429 31,953 Commercial 5,235 5,227 5,110 4,958 4,873 Industrial 62 65 66 68 70 ------ ------ ------ ------ ------ Total 38,921 38,983 38,427 37,455 36,896 ====== ====== ====== ====== ====== OPERATING REVENUES ($000) Residential sales 23,202 28,088 19,672 17,329 19,969 Commercial sales 13,832 17,040 10,952 10,039 11,890 Industrial sales 1,141 2,046 1,104 1,173 1,576 On-system transportation 3,826 3,895 4,056 4,107 3,877 Off-system transportation 1,220 814 522 363 483 Non-regulated sales 12,511 18,640 9,431 5,491 6,335 Other 198 247 190 170 128 ------ ------ ------ ------ ------ Total 55,930 70,770 45,927 38,672 44,258 ====== ====== ====== ====== ====== SYSTEM THROUGHPUT (MILLION CU. FT.) Residential sales 2,133 2,614 2,266 2,223 2,377 Commercial sales 1,389 1,666 1,397 1,401 1,504 Industrial sales 142 249 174 189 231 ------ ------ ------ ------ ------ Total retail sales 3,664 4,529 3,837 3,813 4,112 On-system transportation 4,866 4,768 4,703 4,434 3,467 Off-system transportation 3,590 2,677 1,672 1,144 1,489 ------ ------ ------ ------ ------ Total 12,120 11,974 10,212 9,391 9,068 ====== ====== ====== ====== ====== AVERAGE ANNUAL CONSUMPTION PER AVERAGE RESIDENTIAL CUSTOMER (THOUSAND CU. FT.) 63 78 68 69 74 LEXINGTON, KENTUCKY DEGREE DAYS Actual 4,137 4,961 4,162 4,188 4,397 Percent of thirty-year average (4,646) 89.0 106.8 89.6 90.1 94.6 AVERAGE REVENUE PER Mcf SOLD AT RETAIL ($) 10.42 10.42 8.27 7.49 8.13 AVERAGE GAS COST PER Mcf SOLD AT RETAIL ($) 5.39 6.07 3.77 3.69 4.60
20 GAS SUPPLY We purchase our natural gas supply from a combination of interstate and Kentucky sources. We acquire our interstate gas supply from gas marketers. Our interstate 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 until 2003 and, unless terminated by Tennessee or us, automatically renew for subsequent five year terms. Tennessee is obligated under the agreements to transport up to 19,600 Mcf per day for us. During fiscal 2002, Tennessee transported a total of 1,109,000 Mcf for us under these agreements. All but two of our agreements with Columbia Gas and Columbia Gulf extend through 2008 and thereafter continue on a year-to-year basis until terminated by one of the parties to the particular agreement. The two other agreements we have with Columbia Gas and Columbia Gulf currently continue on a year-to-year basis until terminated by one of the parties to the particular agreement. Under all of these agreements, Columbia Gas is obligated to transport up to a total of 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. The two agreements with Columbia Gas and Columbia Gulf that currently continue on a year-to-year basis only account for approximately 6.0% of these daily transportation obligations. During fiscal 2002, Columbia Gas and Columbia Gulf transported a total of 555,000 Mcf for us under all of these agreements. Only approximately 8.0% of this 555,000 Mcf was transported under the agreements that currently continue on a year-to-year basis. All other amounts were transported under the agreements that extend through 2008. We currently have agreements with two gas marketers. Under these commodity requirements contracts, the marketers are obligated to supply the volumes consumed by our regulated customers in defined sections of our service areas. Gas prices are based on market prices. One of the agreements began May 1, 2000 and extends through April 30, 2003 with an option to extend the agreement for one additional year. The other agreement currently continues on a year-to-year basis. We purchase gas from other gas marketers as needed at either current market prices or forward market prices. We have an agreement with Columbia Natural Resources to purchase natural gas through October 31, 2004. We purchased 55,000 Mcf from Columbia Natural Resources during 2002. Columbia Natural Resources delivers this gas to our customers on Columbia Natural Resource's pipelines. We also purchased 25,000 Mcf of natural gas from our wholly owned, unregulated subsidiary, Enpro, during 2002. We own and operate an underground natural gas storage field that we use to store a significant portion of our winter gas supply needs. 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 2002, we withdrew 1,900,000 Mcf from this storage field. 21 We continue to seek additional new 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 of 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 thirty-year average winter temperatures. The rates approved for our customers include 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. The gas cost recovery clause requires us to make quarterly filings with the Kentucky Public Service Commission but does not require a general rate case. 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 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 are currently completing this audit. We have received a draft of the consultant's report and are 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 us and the four other gas distribution companies involved in the audit, including Kentucky natural gas price issues, hedging, gas cost recovery mechanisms, budget billing, uncollectible accounts and forecasting. We cannot predict how the Kentucky Public Service Commission will interpret or act on any audit 22 recommendations. As a result, we cannot predict the impact of this regulatory proceeding 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 other 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 used for training and equipment and materials storage. We own 2,403 miles of natural gas gathering, transmission, distribution, storage and service lines. These lines range in size up to twelve 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 million 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 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. 23 Our assets have no significant encumbrances. EMPLOYEES On October 28, 2002, we had 154 full-time employees. We consider our relationship with our employees to be satisfactory. Our employees are not represented by unions or 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. 24 DESCRIPTION OF DEBENTURES We are offering $20,000,000 of our % Debentures due December 1, 2022. We currently have outstanding 7.15% Debentures due 2018 in the aggregate principal amount of $24,089,000, 6.625% Debentures due 2023 in the aggregate principal amount of $11,445,000 and 8.30% Debentures due 2026 in the aggregate principal amount of $14,816,000. While we issued these other debentures under indentures different from the indenture under which this offering is made and these other debentures have slightly different terms from the Debentures being offered by this prospectus, the outstanding debentures (as well as our short-term line of credit) are all our unsubordinated, unsecured debt obligations and the outstanding debentures mainly differ from the Debentures offered by this prospectus as to interest rate and maturity date. These other debentures (as well as our short-term line of credit) will rank equally as our debt obligations to the Debentures offered by this prospectus. As discussed above, we will use part of the proceeds from the sale of the Debentures offered by this prospectus to redeem the 8.30% Debentures due 2026 and the balance to pay a portion of the outstanding balance on our short-term line of credit. We will issue the Debentures under an indenture dated as of November 1, 2002, between us and Fifth Third Bank, Cincinnati, Ohio, as the trustee. We have filed a copy of the indenture with the SEC. The indenture is a contract between us and the trustee. The trustee has two main roles. First, the trustee can enforce your rights against us if an "event of default," as that term is described below, occurs. Second, the trustee performs certain administrative duties for us. The terms of the Debentures include those stated in the indenture and those made a part of the indenture by reference to the Trust Indenture Act of 1939, as in effect on November 1, 2002. We have summarized below the material provisions of the Debentures and the indenture. However, you should understand that this is only a summary, and we have not included all of the provisions of the Debentures or the indenture. We have filed the indenture with the SEC, and we suggest that you read the indenture. We are incorporating by reference the provisions of the indenture and this summary is qualified in its entirety by the provisions of the indenture. We do not intend to list the Debentures on a national securities exchange. The Debentures do not presently have a trading market. We can give no assurance that such a market will develop. If a market for the Debentures does develop, there can be no assurance that it will continue to exist. BOOK-ENTRY ONLY SYSTEM We will issue the Debentures in the aggregate initial principal amount of $20,000,000. The Debentures will be represented by one global certificate (also known as a global security) issued to The Depository Trust Company, which is known as DTC. DTC will act as securities depository for the Debentures. The Debentures will be issued only as fully-registered securities registered in the name of DTC's nominee, Cede & Co. DTC will maintain the Debentures in denominations of $1,000, and integral multiples $1,000, through its book-entry facilities. 25 The following is based upon information furnished by DTC: o DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds securities that its participants (known as direct participants) deposit with DTC. DTC also facilitates the post-trade settlement among direct participants of sales and other securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry transfers and pledges between direct participants' accounts. This eliminates the need for physical movement of securities certificates. Direct participants in DTC include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly-owned subsidiary of Depository Trust & Clearing Corporation, which in turn is owned by a number of direct participants and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation and Emerging Markets Clearing Corporation, as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others, known as indirect participants, such as securities brokers and dealers, banks, trust companies and clearing corporations that clear transactions through or maintain a custodial relationship with a direct participant. The rules applicable to DTC and its participants are on file with the SEC. More information about DTC can be found at www.dtcc.com. o Purchases of Debentures within the DTC system must be made by or through direct participants, which will receive a credit for the Debentures on DTC's records. The ownership interest of each actual purchaser of an interest in the Debentures, the owners of which are known as beneficial owners, is in turn to be recorded on the direct and indirect participants' records. Beneficial owners like yourself will not receive written confirmation from DTC of their purchase, but beneficial owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the direct or indirect participants through which the beneficial owners entered into the transaction. Transfers of the Debentures are to be accomplished by entries made on the books of direct and indirect participants acting on behalf of beneficial owners. Beneficial owners will not receive certificates representing the Debentures, except in the event that use of the book-entry system for the Debentures is discontinued, as discussed below. o To facilitate subsequent transfers, all Debentures deposited by participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Debentures with DTC and their registration in the name of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of the actual beneficial owners of the Debentures. DTC's records reflect only the identity of the direct participants to whose accounts the Debentures are credited, which may or may not be the beneficial owners. The direct and indirect participants will remain responsible for keeping account of their holdings on behalf of their customers. o The delivery of notices and other communications by DTC to direct participants, by direct participants to indirect participants and by direct participants and indirect participants to 26 beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial owners of Debentures like yourself may wish to take certain steps to augment transmission to you of notices of significant events with respect to the Debentures, such as redemptions, tenders and defaults. o Redemption notices will be sent to Cede & Co., as registered holder of the Debentures. If less than all of the Debentures are being redeemed, DTC's practice is to determine by lot the amount of the interest of each direct participant to be redeemed. o Neither DTC nor Cede & Co. (nor any other DTC nominee) will itself consent or vote with respect to Debentures. Under its usual procedures, DTC mails an Omnibus Proxy to us as soon as possible after the record date for any event giving holders of Debentures a voting opportunity. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those direct participants to whose accounts the Debentures are credited on the record date (identified in a listing attached to the Omnibus Proxy). o Principal and interest payments on the Debentures will be made to Cede & Co., or such other nominee as may be requested by DTC. DTC's practice is to credit direct participants' accounts on the relevant payment date in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payment on such payment date. Payments by direct or indirect participants to beneficial owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such direct or indirect participants and not of DTC, the trustee, you or us, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment or principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) will be the responsibility of the trustee as paying agent under the indenture, disbursement of payments to direct participants will be the responsibility of DTC, and further disbursement of payments to the beneficial owners will be the responsibility of direct and indirect participants. So long as DTC is the registered owner of the Debentures, we and the trustee will consider DTC as the sole owner or holder of the Debentures for all purposes under the indenture and any applicable laws. As a beneficial owner of interests in the Debentures, you will not be entitled to receive a physical certificate representing your ownership interest and you will not be considered an owner or holder of the Debentures under the indenture, except as otherwise provided below. You, as a beneficial owner, will have the right to sell, transfer or otherwise dispose of an interest in the Debentures and the right to receive the proceeds from the Debentures and all interest, principal and premium payable on the Debentures. Your beneficial interest in the Debentures will be recorded, in integral multiples of $1,000, on the records of DTC's direct participant that maintains your account. In turn, this interest held by DTC's direct participant in the Debentures will be recorded, in integral multiples of $1,000, on the computerized records of DTC. Beneficial ownership of the Debentures may be transferred only by compliance with the procedures of DTC and the DTC direct (or, as applicable, indirect) participant that maintains your account. All rights of ownership must be exercised through DTC and the book-entry system, except that you are entitled to exercise directly your rights under Section 316(b) of the Trust Indenture Act of 1939 with respect to the payment of interest and principal on the Debentures. Notices that we or the trustee 27 give under the indenture will be given only to DTC. We expect DTC will forward the notices to its participants by its usual procedures, so that its participants may forward the notices to the beneficial owners like yourself. Neither we nor the trustee will have any responsibility or obligation to assure that any notices are forwarded by DTC to its direct participants or by its direct participants to the beneficial owners of the Debentures. DTC may discontinue providing its services as securities depository for the Debentures at any time by giving reasonable written notice to us and the trustee. Under such circumstances, and in the event that we do not obtain a successor securities depository, we will deliver Debenture certificates to the beneficial owners. We may decide to replace DTC or any successor depository. Additionally, we may decide to discontinue use of the system of book-entry transfers through DTC or a successor depository. In that event, we will print and deliver to the beneficial owners certificates for the Debentures. According to DTC, the foregoing information with respect to DTC is provided to the financial community for informational purposes only and is not intended to serve as a representation, warranty or contract modification of any kind. The information in this section concerning DTC and DTC's book-entry system and procedures has been obtained from sources that we believe are reliable, but neither we, the underwriter nor the trustee take any responsibility for the accuracy of this information. Neither we, the underwriter nor the trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership of the Debentures or for maintaining, supervising or reviewing any records relating to the beneficial ownership of Debentures. Except as provided in this prospectus, you and other beneficial owners of the Debentures may not receive physical delivery of Debentures. Accordingly, you and each other beneficial owner must rely on the procedures of DTC to exercise any rights under the Debentures. INTEREST AND PAYMENT The Debentures will mature on December 1, 2022. The Debentures will bear interest from the date of issuance at the annual interest rate stated on the cover page of this prospectus. The amount of interest payable will be calculated on the basis of a 360-day year of twelve 30-day months. Interest will be payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year, beginning on March 1, 2003. Interest will be paid to the persons in whose names the Debentures are registered at the close of business on the 15th day of the month immediately preceding the applicable interest payment date. If any payment date would otherwise be a day that is a holiday under the indenture, which includes each Saturday, Sunday and other bank holidays, the payment will be postponed to the next day that is not a holiday. No interest will accrue on an interest payment for the period from and after a scheduled payment date that is postponed because of a holiday. So long as DTC is the registered owner of the Debentures, the trustee as paying agent will make payments of interest, principal and premium on the Debentures to DTC. DTC will be responsible for crediting the amount of the distributions to the accounts of its participants entitled to the distributions, in accordance with DTC's normal procedures. Each of DTC's direct participants will be responsible for disbursing distributions to indirect participants, if applicable, or to you and the other beneficial owners of the interests in Debentures that it represents. 28 Neither we nor the trustee will have any responsibility or liability for any aspect of: o the records relating to, notices to, or payments made on account of, beneficial ownership interests in the Debentures, including your interest; o maintaining, supervising or reviewing any records relating to beneficial ownership interests in the Debentures, including your interest; o the selection of any beneficial owner, including you, of the Debentures to receive payment in the event of a partial redemption of the global security; or o consents given or other action taken on behalf of any beneficial owner, including you, of the Debentures. OPTIONAL REDEMPTION Under the indenture, we have the option to redeem all or part of the Debentures before their stated maturity. We may redeem all or part of the Debentures at any time on or after December 1, 2006. If we redeem all or part of the Debentures from , 2006 through , 2007, we must pay 102% of the principal amount of the Debentures being redeemed, plus accrued interest on those Debentures up to the date of such redemption. If we redeem all or part of the Debentures from , 2007 through , 2008, we must pay 101% of the principal amount of the Debentures being redeemed, plus accrued interest on those Debentures up to the date of such redemption. If we redeem all or part of the Debentures after , 2008, we must pay 100% of the principal amount of the Debentures being redeemed, plus accrued interest on those Debentures up to the date of such redemption. If we redeem fewer than all the Debentures, the trustee will select by lot the particular Debentures to be redeemed. We will give notice of redemption at least thirty days before the date of redemption to each holder of Debentures to be redeemed at the holder's registered address. We may rescind any notice of redemption at any time at least five days prior to the date of redemption. On and after the date of redemption, interest will cease to accrue on Debentures or portions thereof redeemed. However, interest will continue to accrue if we default in the payment of the amount due upon redemption. LIMITED RIGHT OF REDEMPTION UPON DEATH OF BENEFICIAL OWNER Unless the Debentures have been declared due and payable prior to their maturity by reason of an event of default under the indenture, the representative of a deceased beneficial owner of interests in the Debentures has the right at any time to request redemption prior to stated maturity of all or part of his interest in the Debentures. We will redeem these interests in the Debentures subject to the limitations that we will not be obligated to redeem, during the period from the original issue date through and including , 200 (known as the "initial period"), and during any twelve-month period which ends on and includes each thereafter (each such twelve-month period 29 being known as a "subsequent period"), on behalf of a deceased beneficial owner any interest in the Debentures which exceeds $25,000 principal amount or interests in the Debentures exceeding $400,000 in aggregate principal amount. We may, at our option, redeem interests of any deceased beneficial owner in the Debentures in the initial period or any subsequent period in excess of the $25,000 limitation. Any such redemption, to the extent that it exceeds the $25,000 limitation for any deceased beneficial owner, will not be included in the computation of the $400,000 aggregate limitation for that initial period or that subsequent period, as the case may be, or for any succeeding subsequent period. We may, at our option, redeem interests of deceased beneficial owners in the Debentures, in the initial period or any subsequent period, in an aggregate principal amount exceeding $400,000. Any redemption so made, to the extent it exceeds the $400,000 aggregate limitation, will not reduce the $400,000 aggregate limitation for any subsequent period. If we elect to redeem Debentures in excess of the $25,000 limitation or the $400,000 aggregate limitation, Debentures so redeemed will be redeemed in the order of the receipt of redemption requests by the trustee. A request for redemption of an interest in the Debentures may be initiated by the representative of the deceased beneficial owner. For purposes of making a redemption request, the representative of a deceased beneficial owner is any person who is the personal representative or other person authorized to represent the estate of the deceased beneficial owner or the surviving joint tenant or tenant(s) by the entirety or the trustee of a trust. The representative must deliver a request to the participant through whom the deceased beneficial owner owned the interest to be redeemed, in form satisfactory to the participant, together with evidence of the death of the beneficial owner, evidence of the authority of the representative satisfactory to the participant, such waivers, notices or certificates as may be required under applicable state or federal law and such other evidence of the right to redemption as the participant may require. The request will specify the principal amount of the interest in the Debentures to be redeemed. The participant will thereupon deliver to DTC a request for redemption substantially in the form attached as Appendix A to this prospectus (known as the "redemption request"). DTC will, on receipt of a redemption request, forward the redemption request to the trustee. The trustee will maintain records with respect to redemption requests received by it including date of receipt, the name of the participant filing the redemption request and the status of each redemption request with respect to the $25,000 limitation and the $400,000 aggregate limitation. The trustee will immediately file with us each redemption request it receives, together with the information regarding the eligibility of that redemption request with respect to the $25,000 limitation and the $400,000 aggregate limitation. We, DTC and the trustee may conclusively assume, without independent investigation, that the statements contained in each redemption request are true and correct, and will have no responsibility for reviewing any documents submitted to the participant by the representative. We, DTC and the trustee will also have no responsibility for determining whether the applicable decedent is in fact the beneficial owner of the interest in the Debentures to be redeemed or is in fact deceased and whether the representative is duly authorized to request redemption on behalf of the applicable beneficial owner. Subject to the $25,000 limitation and the $400,000 aggregate limitation, we will, after the death of any beneficial owner, redeem the interest of that beneficial owner in the Debentures within 60 days following our receipt of a redemption request from the trustee. If redemption requests exceed the $400,000 aggregate limitation during the initial period or during any subsequent period, then the excess redemption requests will be applied in the order received by the trustee to successive subsequent 30 periods, regardless of the number of subsequent periods required to redeem such interests. We may, at any time, notify the trustee that we will redeem, on a date not less than 30 or more than 60 days after that notice, all or any lesser amount of Debentures for which redemption requests have been received but which are not then eligible for redemption by reason of the $25,000 limitation or the $400,000 aggregate limitation. If we so elect to redeem excess Debentures, we will redeem these excess Debentures in the order of receipt of redemption requests by the trustee. The price we will pay for the interests in the Debentures to be redeemed pursuant to a redemption request is 100% of the principal amount of the interests plus accrued but unpaid interest to the date of payment. Subject to arrangements with DTC, payment for interests in the Debentures which are to be redeemed will be made to DTC upon presentation of Debentures to the trustee for redemption in the aggregate principal amount specified in the redemption requests submitted to the trustee by DTC which are to be fulfilled in connection with that payment. The principal amount of any Debentures we acquire or redeem, other than by redemption at the option of any representative of a deceased beneficial owner, will not be included in the computation of either the $25,000 limitation or the $400,000 aggregate limitation for the initial period or for any subsequent period. A beneficial owner, for purposes of determining if the representative of a deceased person may make a proper redemption request, is the person who has the right to sell, transfer or otherwise dispose of an interest in a Debenture and the right to receive the proceeds from that interest, as well as the interest and principal payable to the holder of the Debenture. In general, a determination of beneficial ownership in the Debentures will be subject to the rules, regulations and procedures governing DTC and its participants. Any interest in a Debenture held in tenancy by the entirety, joint tenancy or by tenants in common will be considered to be held by a single beneficial owner and the death of a tenant by the entirety, joint tenant or tenant in common will be considered the death of a beneficial owner. The death of a person who, during his lifetime, was entitled to substantially all of the rights of a beneficial owner of an interest in the Debentures will be considered the death of the beneficial owner, regardless of the recordation of such interest on the records of the participant, if such rights can be established to the satisfaction of the participant. These rights will be considered to exist in typical cases of nominee ownership, ownership under the Uniform Gifts to Minors Act or the Uniform Transfer to Minors Act, community property or other similar joint ownership arrangements, including individual retirement accounts or Keogh [H.R. 10] plans maintained solely by or for the decedent or by or for the decedent and any spouse, trusts and certain other arrangements where one person has substantially all of the rights of a beneficial owner during such person's lifetime. In the case of a redemption request which is presented on behalf of a deceased beneficial owner and which has not been fulfilled at the time we give notice of our election to redeem the Debentures, the Debentures which are the subject of such pending redemption request will be redeemed prior to any other Debentures. Any redemption request may be withdrawn by the person(s) presenting the redemption request upon delivery of a written request for withdrawal given by the participant on behalf of that person to DTC and by DTC to the trustee not less than 30 days prior to our payment with respect to that redemption request. We may, at any time, purchase any Debentures for which redemption requests have been received in lieu of redeeming those Debentures. Any Debentures we purchase in this manner will either be re-offered for sale and sold within 180 days after the date of purchase or presented to the trustee for redemption and cancellation. 31 During any time or times as the Debentures are not represented by a global certificate and are issued in definitive form, o all references herein to participants and DTC, including DTC's governing rules, regulations and procedures, will be considered deleted, o all determinations which under this section the participants are required to make will be made by us (including, without limitation, determining whether the applicable decedent is in fact the beneficial owner of the interest in the Debentures to be redeemed or is in fact deceased and whether the representative is duly authorized to request redemption on behalf of the applicable beneficial owner), o all redemption requests, to be effective, must be delivered by the representative to the trustee, with a copy to us, and must be in the form of a redemption request (with appropriate changes to reflect the fact that the redemption request is being executed by a representative) and, in addition to all documents that are otherwise required to accompany a redemption request, must be accompanied by the Debenture that is the subject of the request. NO SINKING FUND The Debentures are not subject to a sinking fund requirement, which means we will not deposit money on a regular basis into any separate custodial account to repay the Debentures. DEBENTURES NOT CONVERTIBLE The Debentures are not convertible into any other security. DEBENTURES UNSECURED The Debentures are unsecured obligations and are equal in rank to all of our other unsecured and unsubordinated debt that may be outstanding at any time. Subject only to the restrictions described below, the indenture does not limit the amount of debt which we may incur. RESTRICTIVE COVENANTS Under the indenture, we agreed to the following restrictions: o We, and our subsidiaries, may not create, issue, incur, guarantee or assume any long-term debt, which ranks prior to or equal to the Debentures in right of payment, unless, after the creation, issuance, incurrence or assumption of the additional long-term debt, the net book value of all of our and our subsidiaries' physical property is at least equal to all of our and our subsidiaries' then outstanding long-term debt. We are required to include the Debentures outstanding in calculating our long-term debt. For purposes of this debt limitation, long-term debt is generally calculated as any of our or our subsidiaries' indebtedness that is not payable on demand or not required to be paid within one year after the calculation is made. For purposes of this limitation, our and our subsidiaries' physical property is limited to physical property used or useful to us in the business of furnishing or distributing gas service as a public utility. As of June 30, 32 2002, after giving effect to the issuance of the Debentures and the application of the proceeds from the sale of the Debentures to reduce other long-term debt, the net book value of all of our and our subsidiaries' physical property would have exceeded our and our subsidiaries' long-term debt by $51,628,000. o We may not declare or pay any dividends or make any other distribution upon our common stock, and we may not apply any of our assets to the redemption, retirement, purchase or other acquisition of any of our capital stock. This restriction does not apply: * if after the declaration, payment, distribution or application of assets our shareholders' equity, less the book value of our and our subsidiaries' intangible assets, is at least equal to $25,800,000 as reflected on our then latest available balance sheet (our June 30, 2002 balance sheet, after giving effect to the issuance of the Debentures, reflects that our shareholders' equity, less the book value of our and our subsidiaries' intangible assets, is $34,182,277); or * to dividends and distributions consisting only of shares of our common stock, but not cash or other property; or * to purchases or redemptions of our preferred stock in compliance with any mandatory sinking fund, purchase fund or redemption requirement. o We may not issue, assume or guarantee any debt secured by a lien on any property or asset that we own. However, this restriction does not apply, if prior to or at the same time as the issuance, assumption or guarantee of that debt, we equally and ratably secure the Debentures. This restriction is also subject to certain exceptions described in the indenture, which include liens securing debt having an aggregate outstanding principal balance of $5,000,000 or less. Except as described above, the indenture does not afford any protection to holders of Debentures solely on account of our involvement in highly leveraged transactions. SUCCESSOR CORPORATION We agree in the indenture that we will not consolidate with, merge into or transfer or lease all or substantially all of our assets to another corporation, unless immediately after such transaction: o no default will exist under the indenture; o the other corporation assumes all of our obligations under the Debentures and the indenture; and o certain other requirements are met. 33 EVENTS OF DEFAULT; NOTICE AND WAIVER The following constitute events of default under the indenture: o default in the payment of principal of the Debentures when due; o default in the payment of any interest on the Debentures, when due, if continued for thirty days; o default in the performance of any other agreement we have made in the Debentures or the indenture, if continued for sixty days after written notice; o acceleration of certain of our or our subsidiaries' indebtedness for borrowed money under the terms of any instrument under which indebtedness of $100,000 or more is issued or secured; and o certain events in bankruptcy, insolvency or reorganization involving us. The trustee is required, within ninety days after the occurrence of a default, to give the holders of Debentures notice of all continuing defaults known to the trustee. However, in the case of a default in the payment of the principal or interest in respect of any of the Debentures, the trustee is protected in not giving notice if it in good faith determines that not giving notice is in the interest of the holders of the Debentures. If any event of default occurs and is continuing, the trustee or the holders of at least twenty-five percent in principal amount of outstanding Debentures may declare the Debentures immediately due and payable. This acceleration may be rescinded by the holders of a majority in principal amount of the Debentures then outstanding, upon the conditions provided in the indenture. The holders of a majority in principal amount of the Debentures may waive an existing default and its consequences, upon the conditions provided in the indenture. This right to waive the default and its consequences do not apply to: o an uncured default in payment of principal or interest on the Debentures; or o an uncured failure to make any redemption payment; or o an uncured default of a provision which cannot be modified under the terms of the indenture without the consent of each holder of the Debentures affected. Each year we must file with the trustee a statement regarding our compliance with the terms of the indenture. This statement must be filed within 120 days after the end of each fiscal year. Further, this statement must specify any defaults of which our officers signing the statement may have knowledge. 34 MODIFICATION OF THE INDENTURE We, together with the trustee, may modify and amend the indenture in a manner that materially affects the rights of the holders of the Debentures only if we obtain the consent of the holders of not less than a majority in principal amount of the Debentures then outstanding. We, together with the trustee, may only modify or amend the indenture in a manner that materially affects the rights of the holders of the Debentures and that: o changes the stated maturity of any Debenture, or o reduces the principal amount of or interest rate on any Debenture, or o changes the interest payment date or otherwise modifies the terms of payment of the principal of or interest on the Debentures, or o reduces the percentage required for any consent, waiver or modification, or o modifies certain other provisions of the indenture, with the consent of each holder of any Debenture affected by the modification or amendment. DISCHARGE OF THE INDENTURE The indenture will be discharged and canceled upon payment of all the Debentures. The indenture may also be discharged upon our deposit with the trustee of funds or U.S. Government obligations sufficient to pay the principal of and premium, if any, and interest on the Debentures. We may only deposit funds or U.S. Government obligations to discharge the indenture within a year or less of the maturity or redemption of all Debentures. TRUSTEE The indenture entitles the trustee to be indemnified by the holders of Debentures before proceeding to exercise any right or power under the indenture at the request of the holders of Debentures. This indemnification of the trustee is subject to the trustee's duty during default to act with the standard of care required in the indenture. The indenture provides that the holders of a majority in principal amount of the outstanding Debentures may direct the time, method and place of conducting any proceeding and any remedy available to the trustee or exercising any trust or power conferred upon the trustee. Fifth Third Bank, the trustee and debenture registrar under the indenture, has its corporate trust office in Cincinnati, Ohio. In addition to serving as trustee and debenture registrar under the indenture, Fifth Third Bank serves as: o registrar, transfer agent and dividend disbursement agent for our common stock, o agent for our dividend reinvestment and stock purchase plan, o trustee and debenture registrar for our 7.15% debentures due 2018, and o trustee and debenture registrar for our 8.30% debentures due 2026. 35 UNDERWRITING Edward D. Jones & Co., L.P. is the underwriter for this offering. Subject to the terms and conditions of the underwriting agreement, the underwriter has agreed to purchase, and we have agreed to sell to the underwriter, all of the Debentures. We have filed a copy of the underwriting agreement with the SEC. The underwriting agreement provides that the obligations of the underwriter to purchase the Debentures are subject to the approval of a number of legal matters by its counsel as well as our counsel, and to other conditions. The underwriter is obligated to purchase all of the Debentures if it purchases any of the Debentures. The underwriter proposes to offer the Debentures directly to the public initially at the public offering prices set forth on the cover page of this prospectus. The following table shows the underwriting discount we will pay to the underwriter. These amounts show the discount paid per $1,000 purchase of the Debentures and the total for the purchase of all Debentures being offered.
PER $1,000 DEBENTURE TOTAL ------------------------ ------------------- PUBLIC OFFERING PRICE $1,000.00 $20,000,000.00 UNDERWRITING DISCOUNT $ $ PROCEEDS, BEFORE OUR EXPENSES $ $
We estimate that our out-of-pocket expenses for this offering that are in addition to discounts we pay to the underwriters will be approximately $80,000.00. The underwriter intends to make a market in the Debentures. However, the underwriter will have no obligation to make a market in the Debentures and may cease market making activities at any time. The Debentures will not be listed on any exchange. Until the distribution of the Debentures is completed, the SEC's rules may limit the ability of the underwriter to bid for and purchase the Debentures. As an exception to these rules, the underwriter is permitted to engage in certain transactions that stabilize the price of the Debentures. These transactions consist of placing bids for or effecting purchases of the Debentures for the purpose of pegging, fixing or maintaining the price of the Debentures. If the underwriter creates a short position in the Debentures in connection with the offering by selling more Debentures than are set forth on the cover page of this prospectus, the underwriter may reduce that short position by purchasing Debentures in the open market. In general, purchases of a 36 security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. We and the underwriter make no representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Debentures. In addition, we and the underwriter make no representations that the underwriter will engage in these types of transactions or that these transactions, once begun, will not be discontinued without notice. The offering of the Debentures is made for delivery when, as and if accepted by the underwriter and subject to prior sale and to withdrawal, cancellation or modification of the offer without notice. The underwriter reserves the right to reject any order for the purchase of Debentures in whole or in part. We have agreed to indemnify the underwriter and persons who control the underwriter against certain liabilities that may be incurred in connection with the offering, including liabilities under the Securities Act of 1933. LEGAL MATTERS The validity of the Debentures will be passed upon for us by our special counsel, Stoll, Keenon & Park, LLP, Lexington, Kentucky. Certain other matters will be passed upon for the underwriter by its counsel, Armstrong Teasdale LLP, St. Louis, Missouri. Attorneys in the firm of Stoll, Keenon & Park, LLP, and members of such attorneys' immediate families, own collectively 7,901 shares of our common stock. Attorneys of Stoll, Keenon & Park, LLP participating in this Debenture offering on behalf of the firm account for 7,454 of these shares. 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 ending June 30, 2000 and 2001, included and 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 financial statements and schedules. We include those financial statements and schedules in this prospectus in reliance upon the authority of Arthur Andersen LLP as experts in giving those reports. Because we have not been able to obtain, after reasonable efforts, the written consent of Arthur Andersen LLP to our naming it in this prospectus as having certified our financial statements for the 37 two years ended June 30, 2001, as required by Section 7 of the Securities Act, we have dispensed with the filing of their consent 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 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. 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. We incorporate by reference in this prospectus our Annual Report on Form 10-K for our fiscal year ended June 30, 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. You may also obtain a copy of any filing we have made with the SEC directly from the SEC. You may either: o read and copy any materials we file with the SEC at the SEC's public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549 and at its offices in New York, New York and Chicago, Illinois; or o visit 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. 38 DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Report of Independent Auditors F-2 Report of Previous Independent Public Accountants F-3 Consolidated Statements of Income for the Years Ended June 30, 2002, 2001 and 2000 F-4 Consolidated Statements of Cash Flows for the Years Ended June 30, 2002, 2001 and 2000 F-5 Consolidated Balance Sheets as of June 30, 2002 and 2001 F-7 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended June 30, 2002, 2001 and 2000 F-9 Consolidated Statements of Capitalization as of June 30, 2002 and 2001 F-10 Notes to Consolidated Financial Statements F-11 F-1 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 F-2 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 F-3 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.
F-4 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) ----------- ----------- ----------- The accompanying notes to consolidated financial statements are an integral part of these statements.
F-5 DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2002 2001 2000 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 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.
F-6 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 ============ ============ The accompanying notes to consolidated financial statements are an integral part of these statements.
F-7 DELTA NATURAL GAS COMPANY, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2002 2001 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 1,461,440 -- (Note 4) 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.
F-8 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.
F-9 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 under- ground 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.
F-10 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 F-11 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 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- F-12 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, "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 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 F-13 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 ratemaking treatment. A regulatory liability has been established to recognize the future revenue requirement impact from these deferred taxes. The temporary differences which gave rise to the net accumulated deferred income tax liability for the periods are as follows:
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 =========== ===========
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 ========== ========== ==========
F-14 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 % ==== ==== ====
(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 F-15 June 30, 2002. Effective April 1, 2002, the Company adopted a plan amendment which enhanced the formula for benefits paid under the plan. 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, 7 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 F-16 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 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% 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 F-17 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. (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. F-18 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. (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. F-19 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. Segment information is shown below for the periods:
($000) 2002 2001 2000 ---- ---- ---- 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 ====== ======= =======
F-20
($000) 2002 2001 2000 ---- ---- ---- 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 124,764 120,710 108,876 Non-regulated 1,723 3,469 4,043 ------- ------- ------- Total assets 126,487 124,179 112,919 ======= ======= ======= Capital Expenditures Regulated 9,415 7,070 8,796 Non-regulated 7 -- -- ------- ------- ------- Total capital expenditures 9,422 7,070 8,796 ======= ======= =======
F-21 (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.
F-22 APPENDIX A FORM OF REDEMPTION REQUEST DELTA NATURAL GAS COMPANY, INC. ____% DEBENTURES DUE DECEMBER 1, 2022 (THE "DEBENTURES") CUSIP NO. __________ The undersigned, ____________________ (the "Participant"), does hereby certify, pursuant to the provisions of that certain Indenture dated as of December 1, 2002 (the "Indenture") made by Delta Natural Gas Company, Inc. (the "Company") and Fifth Third Bank, as Trustee (the "Trustee"), to The Depositary Trust Company (the "Depositary"), the Company, and the Trustee that: 1. [Name of deceased Beneficial Owner] is deceased. 2. [Name of deceased Beneficial Owner] had a $__________ interest in the above referenced Debentures. 3. [Name of Representative] is [Beneficial Owner's personal representative/other person authorized to represent the estate of the Beneficial Owner/surviving joint tenant/surviving tenant by the entirety/trustee of a trust] of [Name of deceased Beneficial Owner] and has delivered to the undersigned a request for redemption in form satisfactory to the undersigned, requesting that $__________ principal amount of said Debentures be redeemed pursuant to said Indenture. The documents accompanying such request, all of which are in proper form, are in all respects satisfactory to the undersigned and the [Name of Representative] is entitled to have the Debentures to which this Request relates redeemed. 4. The Participant holds the interest in the Debentures with respect to which this Redemption Request is being made on behalf of [Name of deceased Beneficial Owner]. 5. The Participant hereby certifies that it will indemnify and hold harmless the Depositary, the Trustee and the Corporation (including their respective officers, directors, agents, attorneys and employees), against all damages, loss, cost, expense (including reasonable attorneys' and accountants' fees), obligations, claims or liability (collectively, the "Damages") incurred by the indemnified party or parties as a result of or in connection with the redemption of Debentures to which this Request relates. The Participant will, at the request of the Corporation, forward to the Corporation, a copy of the documents submitted by [Name of Representative] in support of the request for redemption. IN WITNESS WHEREOF, the undersigned has executed this Redemption Request as of ____________, _____. [PARTICIPANT NAME] By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- A-1 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. DELTA NATURAL GAS COMPANY, INC. $20,000,000 OF % DEBENTURES DUE 2022 --------------------------------- PROSPECTUS --------------------------------- EDWARD D. JONES & CO., L.P. , 2002 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, NASD filing fee and initial trustee fee, all the amounts shown are estimates. Registration Fee..................................... $ 1,840.00 NASD Filing Fee...................................... 2,500.00 Blue Sky Fees and Expenses........................... 3,000.00 Accounting Fees...................................... 20,000.00 Legal Fees........................................... 35,000.00 Printing............................................. 10,000.00 Initial Trustee Fee.................................. 5,000.00 Miscellaneous Expenses............................... 2,660.00 ---------- Total.............................................. $80,000.00 ========== II-1 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 (included 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. A Kentucky corporation's indemnification of a director or officer in connection with a proceeding by or in the right of the corporation is limited to reasonable expenses (including attorneys' fees) incurred in connection with the proceeding. 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. Further, the registrant's bylaws 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 Bylaws, entitled INDEMNIFICATION, provides as follows: II-2 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. II-3 (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: (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. II-4 (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. II-5 ITEM 16. EXHIBITS. EXHIBIT ------- 1(a) Form of Underwriting Agreement 4(a) The Indenture dated September 1, 1993, in respect of 6.625% Debentures, due 2023, is incorporated herein by reference to Exhibit 4(d) to Registrant's Form S-2 dated September 2, 1993. 4(b) The Indenture dated July 1, 1996, in respect of 8.30% Debentures, due 2026, is incorporated herein by reference to Exhibit 4(c) to Registrant's Form S-2 dated June 21, 1996. 4(c) The Indenture dated April 1, 1998 in respect of 7.15% Debentures, due 2018, is incorporated herein by reference to Exhibit 4(d) to Registrant's Form S-2 dated March 11, 1998. 4(d) Form of Indenture between Registrant and Fifth Third Bank, as Trustee (including the Form of Global Security and Form of Debenture). 5 Opinion of Stoll, Keenon & Park, LLP concerning legality. 10(a) Certain of Registrant's material natural gas supply contracts are incorporated herein by reference to Exhibit 10 to Registrant's Form 10 for the year ended June 30, 1978 and by reference to Exhibits C and D to Registrant's Form 10-K for the year ended June 30, 1980. 10(b) Assignment to Registrant by Wiser of its Columbia Service Agreement, including a copy of said Service Agreement, is incorporated herein by reference to Exhibit 2(D) to Registrant's Form 8-K dated February 9, 1981. 10(c) Contract between Tennessee Gas Pipeline and Registrant (amends earlier contract for Nicholasville and Wilmore Service Areas) is incorporated herein by reference to Exhibit 10(d) to Registrant's Form 10-Q for the period ended September 30, 1990. 10(d) Contract between Tennessee Gas Pipeline and Registrant (amends earlier contract for Jeffersonville Service Area) is incorporated herein by reference to Exhibit 10(e) to Registrant's Form 10-Q for the period ended September 30, 1990. 10(e) Contract between Tennessee Gas Pipeline and Registrant (amends earlier contract for Salt Lick Service Area) is incorporated herein by reference to Exhibit 10(f) to Registrant's Form 10-Q for the period ended September 30, 1990. 10(f) Contract between Tennessee Gas Pipeline and Registrant (amends earlier contract for Berea Service Area) is incorporated herein by reference to Exhibit 10(g) to Registrant's Form 10-Q for the period ended September 30, 1990. II-6 10(g) Service Agreements between Columbia and Registrant (amends earlier service agreements for Cumberland, Stanton and Owingsville service areas) are incorporated herein by reference to Exhibit 10(h) to Registrant's Form 10-Q for the period ended September 30, 1990. 10(h) 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 for the period ended March 31, 2000. 10(i) 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 for the period ended March 31, 2000. 10(j) Promissory Note in the original principal amount of $15,000,000 made by Registrant to the order of Bank One, Kentucky, N.A. 10(k) Promissory Note in the original principal amount of $25,000,000 made by Registrant to the order of Bank One, Kentucky, N.A. 12 Computation of the consolidated ratio of earnings to fixed charges. 13(a) Registrant's Form 10-K for the period ended June 30, 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 as Exhibit 16 to Registrant's Form 8-K dated May 22, 2002. 23(a) Independent Auditors' Consent and Report on Schedules of Deloitte & Touche LLP. 23(c) 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 filing. 25 Statement of eligibility of trustee. II-7 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. II-8 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 25th day of October, 2002. DELTA NATURAL GAS COMPANY, INC. By: /s/Glenn R. Jennings ------------------------------------------ Glenn R. Jennings President and Chief Executive Officer 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 October 25, 2002 ------------------------ Officer and Vice Chairman (Glenn R. Jennings) of the Board (ii) Principal Financial Officer: /s/John F. Hall Vice-President - Finance, October 25, 2002 ------------------------ Secretary and Treasurer (John F. Hall) II-9 (iii) Principal Accounting Officer: /s/John B. Brown Controller October 25, 2002 ------------------------ (John B. Brown) (iv) A Majority of the Board of Directors: /s/H. D. Peet Chairman of the Board October 25, 2002 ------------------------ (H. D. Peet) /s/Donald R. Crowe Director October 25, 2002 ------------------------ (Donald R. Crowe) /s/Jane Hylton Green Director October 25, 2002 ------------------------ (Jane Hylton Green) /s/ Director __________, 2002 ------------------------ (Lanny D. Greer) /s/Billy Joe Hall Director October 25, 2002 ------------------------ (Billy Joe Hall) /s/Lewis N. Melton Director October 25, 2002 ------------------------ (Lewis N. Melton) /s/ Director __________, 2002 ------------------------ (Arthur E. Walker, Jr.) /s/Michael R. Whitley Director October 25, 2002 ------------------------ (Michael R. Whitley) II-10 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ---------- ----------- 1(a) Form of Underwriting Agreement 4(a) The Indenture dated September 1, 1993, in respect of 6.625% Debentures, due 2023, is incorporated herein by reference to Exhibit 4(d) to Registrant's Form S-2 dated September 2, 1993. 4(b) The Indenture dated July 1, 1996, in respect of 8.30% Debentures, due 2026, is incorporated herein by reference to Exhibit 4(c) to Registrant's Form S-2 dated June 21, 1996. 4(c) The Indenture dated April 1, 1998 in respect of 7.15% Debentures, due 2018, is incorporated herein by reference to Exhibit 4(d) to Registrant's Form S-2 dated March 11, 1998. 4(d) Form of Indenture between Registrant and Fifth Third Bank, as Trustee (including the Form of Global Security and Form of Debenture). 5 Opinion of Stoll, Keenon & Park, LLP concerning legality. 10(a) Certain of Registrant's material natural gas supply contracts are incorporated herein by reference to Exhibit 10 to Registrant's Form 10 for the year ended June 30, 1978 and by reference to Exhibits C and D to Registrant's Form 10-K for the year ended June 30, 1980. 10(b) Assignment to Registrant by Wiser of its Columbia Service Agreement, including a copy of said Service Agreement, is incorporated herein by reference to Exhibit 2(D) to Registrant's Form 8-K dated February 9, 1981. 10(c) Contract between Tennessee Gas Pipeline and Registrant (amends earlier contract for Nicholasville and Wilmore Service Areas) is incorporated herein by reference to Exhibit 10(d) to Registrant's Form 10-Q for the period ended September 30, 1990. 10(d) Contract between Tennessee Gas Pipeline and Registrant (amends earlier contract for Jeffersonville Service Area) is incorporated herein by reference to Exhibit 10(e) to Registrant's Form 10-Q for the period ended September 30, 1990. 10(e) Contract between Tennessee Gas Pipeline and Registrant (amends earlier contract for Salt Lick Service Area) is incorporated herein by reference to Exhibit 10(f) to Registrant's Form 10-Q for the period ended September 30, 1990. II-11 10(f) Contract between Tennessee Gas Pipeline and Registrant (amends earlier contract for Berea Service Area) is incorporated herein by reference to Exhibit 10(g) to Registrant's Form 10-Q for the period ended September 30, 1990. 10(g) Service Agreements between Columbia and Registrant (amends earlier service agreements for Cumberland, Stanton and Owingsville service areas) are incorporated herein by reference to Exhibit 10(h) to Registrant's Form 10-Q for the period ended September 30, 1990. 10(h) 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 for the period ended March 31, 2000. 10(i) 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 for the period ended March 31, 2000. 10(j) Promissory Note in the original principal amount of $15,000,000 made by Registrant to the order of Bank One, Kentucky, N.A. (graphically attached) 10(k) Promissory Note in the original principal amount of $25,000,000 made by Registrant to the order of Bank One, Kentucky, N.A. (graphically attached) 12 Computation of the consolidated ratio of earnings to fixed charges. 13(a) Registrant's Form 10-K for the period ended June 30, 2002, is incorporated herein by reference. 17 Letter dated May 22, 2002 from Arthur Andersen LLP to the Securities and Exchange Commission is incorporated herein by reference as Exhibit 16 to Registrant's Form 8-K dated May 22, 2002. 23(a) Independent Auditors' Consent and Report on Schedules of Deloitte & Touche LLP. 23(c) 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 filing. 25 Statement of eligibility of trustee. II-12