NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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(1)
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Nature of Operations and Basis of Presentation
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Delta Natural Gas Company, Inc. ("Delta" or "the Company") distributes or transports natural gas to approximately
36,000
customers. Our distribution and transportation systems are located in central and southeastern Kentucky and we own and operate an underground storage field in southeastern Kentucky. We transport natural gas to our industrial customers who purchase their natural gas in the open market. We also transport natural gas on behalf of local producers and customers not on our distribution system and extract liquids from natural gas in our storage field and our pipeline systems that are sold at market prices. We have
three
wholly-owned subsidiaries. Delta Resources, Inc. ("Delta Resources") buys natural gas and resells it to industrial or other large use customers on Delta's system. Delgasco, Inc. ("Delgasco") buys natural gas and resells it to Delta Resources and to customers not on Delta's system. Enpro, Inc. ("Enpro") owns and operates natural gas production properties and undeveloped acreage.
All subsidiaries of Delta are included in the condensed consolidated financial statements. Intercompany balances and transactions have been eliminated. All adjustments necessary for a fair presentation of the unaudited results of operations for the three and
nine months ended
March 31, 2017
and
2016
are included. All such adjustments are accruals of a normal and recurring nature.
The results of operations for the period ended
March 31, 2017
are not necessarily indicative of the results of operations to be expected for the full fiscal year. Because of the seasonal nature of our sales, we generate the largest proportion of cash from operations during the winter months, when sales volumes increase considerably. Most construction activity and natural gas storage injections take place during the warmer months.
The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the financial statements, and the notes thereto, included in our Annual Report on Form 10-K for the year ended
June 30, 2016
.
On February 20, 2017, we entered into an Agreement and Plan of Merger ("Merger Agreement") with PNG Companies, LLC ("PNG"), hereinafter referred to as the "Merger". For further information, see Note 13 of the Notes to Condensed Consolidated Financial Statements.
(2) Accounting Pronouncements
Recently Issued Pronouncements
In May, 2014, the Financial Accounting Standards Board issued guidance revising the principles and standards for revenue recognition. The guidance creates a framework for recognizing revenue to improve comparability of revenue recognition practices across entities and industries focusing on when a customer obtains control of goods or services, rather than the current risks and rewards model of recognition. The core principle of the new standard is that an entity recognizes revenue when it transfers goods or services to its customers in an amount that reflects the consideration an entity expects to be entitled to for those goods or services. The new disclosure requirements include information intended to communicate the nature, amount, timing and any uncertainty of revenue and cash flows from applicable contracts, including any significant judgments. Entities will generally be required to make more estimates and use more judgment under the new standard. The guidance is effective for our quarter ending September 30, 2018.
As of March 31, 2017, we are evaluating our sources of revenue and are assessing the effect that the new guidance will have on our financial position, results of operations and cash flows. The conclusion of our assessment is contingent, in part, upon the completion of deliberations currently in progress by our industry, notably in connection with efforts to produce an accounting guide intended to be developed by the American Institute of Certified Public Accountants. In association with this undertaking, the American Institute of Certified Public Accountants formed a number of industry task forces, including a Power & Utilities Task Force ("Task Force").
Currently, the industry is working with the Task Force to address several items including 1) the evaluation of collectability from customers if a utility has regulatory mechanisms to help assure recovery of uncollected accounts from ratepayers; 2) the accounting for funds received from third parties to partially or fully reimburse the cost of construction of an asset and 3) the accounting for alternative revenue programs, such as performance-based ratemaking. Existing alternative revenue program guidance, though excluded by the Financial Accounting Standards Board in updating specific guidance associated with revenue from contracts with customers, was continued without substantial modification. It will require separate presentation of such revenues (subject to the above-noted deliberations) in the statement of comprehensive income, effective at the same time that updated guidance associated with revenue from contracts with customers becomes effective.
Currently, a timeline for the resolution of these deliberations has not been established. Additionally, we are actively working with our peers in the rate-regulated natural gas industry to determine the accounting treatment for several other issues that are not expected to be addressed by the Task Force. Given the uncertainty with respect to the conclusions that might arise from these deliberations, we are currently unable to determine the effect the new guidance will have on our financial position, results of operations, cash flows, internal controls or the transition method we will utilize to adopt the new guidance.
In July, 2015, the Financial Accounting Standards Board issued guidance simplifying the measurement of inventory. The guidance requires inventory to be measured at the lower of cost or net realizable value. The guidance, effective for our quarter ending September 30, 2017, is not expected to have a material impact on our results of operations, financial position and cash flows.
In January, 2016, the Financial Accounting Standards Board issued guidance to improve the recognition, measurement, presentation and disclosure of financial instruments. The improvements include guidance on estimating fair value for financial instruments measured at amortized cost on the balance sheet, the classification of financial assets and liabilities on the balance sheet and reduced disclosure for the fair value of financial instruments recognized on the balance sheet at amortized cost. The guidance, effective for our quarter ending September 30, 2018, is not expected to have a material impact on our results of operations, financial position, cash flows and disclosures.
In February, 2016, the Financial Accounting Standards Board issued guidance revising the principles and standards for recognizing leases. The guidance requires a lessee to recognize on the statement of financial position a liability for the lease payments and a right-of-use asset representing the lessee's right to use the underlying asset for the lease term. The recognition and measurement of lease expenses have not significantly changed from previous guidance. The guidance is effective for our quarter ending September 30, 2018 and we are evaluating the impact the guidance is expected to have on our results of operations, financial position, cash flows and disclosures.
In March, 2017, the Financial Accounting Standards Board issued guidance to improve the recognition and presentation of net periodic pension cost. The guidance requires employers who sponsor defined benefit pension plans to disaggregate the service cost component of net periodic benefit cost from the other components of net periodic benefit cost in the income statement. The guidance also allows only the service cost component to be eligible for capitalization, which is a departure from current accounting guidance where all components of net periodic benefit cost are eligible for capitalization. The guidance is effective for our quarter ending September 30, 2018 and we are evaluating the impact the guidance is expected to have on our results of operations, financial position, cash flows, disclosures and internal controls.
Recently Adopted Pronouncements
In March, 2016, the Financial Accounting Standards Board issued guidance simplifying the accounting and disclosure requirements for share-based compensation, including income tax consequences, classification of the awards as equity or liability and classification on the statement of cash flows. The guidance is effective for our quarter ending September 30, 2017; however, we have elected early adoption.
The guidance changed the accounting for excess tax benefits and deficiencies, where previously the difference in compensation cost recognized for financial reporting purposes versus the deduction on the corporate tax return was recognized as additional paid-in capital to the extent the cumulative tax benefits exceeded tax deficiencies. Effective July 1, 2016, on a prospective basis, we began recognizing the effect of vested awards as discrete items in the period in which they occur with excess tax benefits and deficiencies recognized in the Condensed Consolidated Statements of Income as an adjustment to income tax expense. We do not have any previously unrecognized excess tax benefits which require a cumulative effect adjustment upon adoption. The guidance also requires the classification of excess tax benefits
and deficiencies as an operating activity on the Condensed Consolidated Statements of Cash Flows, which has been adopted retrospectively and resulted in an immaterial reclassification between financing activities and operating activities on the Condensed Consolidated Statements of Cash Flows.
Entities may elect an accounting policy for forfeitures where they can either continue the current method of recognizing forfeitures based on the number of awards expected to vest or as forfeitures occur. We have elected to recognize forfeitures as they occur. The adoption of this accounting policy did not result in a cumulative effect adjustment.
The threshold increased for an award to qualify for equity classification where shares are redeemed to meet statutory withholding obligations. Shares can now be redeemed up to the maximum statutory tax rates in the applicable jurisdiction, rather than the minimum statutory tax rates. The adoption of this guidance did not result in a change in classification of the award requiring a cumulative effect adjustment.
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(3)
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Fair Value Measurements
|
Our financial assets measured at fair value on a recurring basis consist of the assets of our supplemental retirement benefit trust, which are included in other non-current assets on the Condensed Consolidated Balance Sheets. Contributions to the trust are presented in other investing activities on the Condensed Consolidated Statements of Cash Flows. The assets of the trust are recorded at fair value and consist of exchange traded securities and exchange traded mutual funds. The securities and mutual funds are recorded at fair value using observable market prices from active markets, which are categorized as Level 1 in the fair value hierarchy. The fair value of the trust assets are as follows:
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March 31,
|
|
June 30,
|
($000)
|
2017
|
|
2016
|
|
|
|
|
Trust assets
|
|
|
|
Money market
|
39
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|
|
44
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|
U.S. equity securities
|
529
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|
|
435
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|
Foreign equity funds
|
233
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|
|
168
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U.S. fixed income funds
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267
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|
|
223
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|
Foreign fixed income funds
|
23
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|
|
19
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|
Absolute return strategy mutual funds
|
93
|
|
|
145
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|
Total trust assets
|
1,184
|
|
|
1,034
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The carrying amounts of our other financial instruments including cash equivalents, accounts receivable, notes receivable and accounts payable approximate their fair value.
Our Series A Notes, presented as long-term debt as well as the current portion of long-term debt on the Condensed Consolidated Balance Sheets, are stated at historical cost, net of unamortized debt issuance costs. The fair value of our long-term debt is based on the expected future cash flows of the debt discounted using a credit adjusted risk-free rate. The credit adjusted risk-free rate for our 4.26% Series A Notes is the estimated cost to borrow a debt instrument with the same terms from a private lender at the measurement date. The fair value of our long-term debt is categorized as Level 3 in the fair value hierarchy.
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March 31,
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June 30,
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2017
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|
2016
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|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
($000)
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
|
|
|
|
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4.26% Series A Notes
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50,428
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|
|
51,621
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|
|
51,923
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|
|
55,324
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(4)
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Risk Management and Derivative Instruments
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To varying degrees, our regulated and non-regulated segments are exposed to commodity price risk. We purchase our natural gas supply through a combination of requirements contracts with no minimum purchase obligations, monthly spot purchase contracts and forward purchase contracts. We mitigate price risk related to the sale of natural gas by efforts to balance supply and demand. For our regulated segment, we utilize requirements contracts, spot purchase contracts and our underground storage to meet our regulated customers' natural gas requirements, all of which have minimal price risk because we are permitted to pass these natural gas costs on to our regulated customers through our natural gas cost recovery tariff.
None
of our natural gas contracts are accounted for using the fair value method of accounting. While some of our natural gas purchase contracts and natural gas sales contracts meet the definition of a derivative, we have designated these contracts as normal purchases and normal sales.
We bill our regulated sales of natural gas at tariff rates approved by the Kentucky Public Service Commission ("KYPSC"). Our customers are billed on a monthly basis; however, the billing cycle for certain classes of customers do not necessarily coincide with the calendar month-end. For these customers, we apply the unbilled method of accounting, where we estimate and accrue revenues applicable to customers but not yet billed. The related natural gas costs are charged to expense. At the end of each month, natural gas service which has been rendered from the date the customer's meter was last read to the month-end is unbilled. Unbilled revenues are included in regulated revenues and unbilled natural gas costs are included in regulated natural gas on the accompanying Condensed Consolidated Statements of Income. Unbilled revenues are included in accounts receivable and unbilled natural gas costs are included in deferred natural gas costs on the accompanying Condensed Consolidated Balance Sheets. Unbilled amounts include the following:
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March 31,
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|
June 30,
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(000)
|
2017
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2016
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|
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Unbilled revenues ($)
|
4,045
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|
|
1,452
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Unbilled natural gas costs ($)
|
1,633
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|
|
319
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Unbilled volumes (Mcf)
|
330
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|
|
63
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(6) Defined Benefit Retirement Plan
Net periodic benefit costs for our trusteed, noncontributory defined benefit retirement plan for the periods ended
March 31,
2017 and 2016, include the following:
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Three Months Ended
|
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Nine Months Ended
|
|
March 31,
|
|
March 31,
|
($000)
|
2017
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|
2016
|
|
2017
|
|
2016
|
|
|
|
|
|
|
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|
Service cost
|
255
|
|
|
251
|
|
|
765
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|
|
753
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Interest cost
|
263
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|
|
289
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|
|
789
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|
|
867
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|
Expected return on plan assets
|
(406
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)
|
|
(409
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)
|
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(1,218
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)
|
|
(1,227
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)
|
Amortization of unrecognized net loss
|
237
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|
|
94
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|
|
711
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|
|
282
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|
Amortization of prior service cost
|
(21
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)
|
|
(22
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)
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|
(63
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)
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|
(66
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)
|
Net periodic benefit cost
|
328
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|
|
203
|
|
|
984
|
|
|
609
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|
In August, 2016 and October, 2016 discretionary contributions of $
1,000,000
and $
500,000
, respectively, were made to the defined benefit retirement plan.
Notes Payable
The current bank line of credit with Branch Banking and Trust Company permits borrowings up to
$40,000,000
, all of which was available as of
March 31, 2017
and
June 30, 2016
. The bank line of credit extends through
June 30, 2017
and we anticipate renewal of this line by June 30, 2017. The interest rate on the used bank line of credit is the
London Interbank Offered Rate
plus
1.075%
. The annual cost of the unused bank line of credit is
0.125%
.
Long-Term Debt
Our Series A Notes are unsecured, bear interest at a rate of 4.26% per annum, which is payable quarterly, and mature on December 20, 2031. We are required to make an annual $1,500,000 principal payment on the Series A Notes each December. The following table summarizes the remaining contractual maturities of our Series A Notes by fiscal year:
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($000)
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2017
|
—
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2018
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1,500
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2019
|
1,500
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2020
|
1,500
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2021
|
1,500
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Thereafter
|
44,500
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Total long-term debt
|
50,500
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|
Any additional payment of principal by the Company is subject to a prepayment premium which varies depending on the yields of United States Treasury securities with a maturity equal to the remaining average life of the Series A Notes.
With our bank line of credit and Series A Notes, we have agreed to certain financial and other covenants. Noncompliance with these covenants can make the obligations immediately due and payable. We were in compliance with the financial covenants under our bank line of credit and our 4.26% Series A Notes for all periods presented in the condensed consolidated financial statements.
Our Series A Notes preclude merger or consolidation with any other corporation without the consent of the Series A Note holders. Refer to Note 13 of the Notes to Condensed Consolidated Financial Statements for a discussion of the proposed Merger with PNG. We intend to seek such consent prior to closing.
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(8)
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Commitments and Contingencies
|
We have entered into an employment agreement with our Chairman of the Board, President and Chief Executive Officer and change in control agreements with our other
four
officers. The agreements expire or may be terminated at various times. The agreements provide for continuing monthly payments and the continuation of specified benefits over varying periods following defined changes in ownership of the Company if the officer is either terminated without cause during the term of the agreement or the officer terminates his employment because the officer cannot in good faith effectively carry out his duties. In the event all of these agreements were exercised in the form of lump sum payments, approximately
$4.7 million
of wages would be paid in addition to continuation of specified benefits for up to five years. Additionally, the agreements provide for a reimbursement of excise taxes levied on such payments and a gross-up of income taxes attributable to the reimbursement. If all agreements were exercised by the officers, based on the
$30.50
per share price offered by PNG, approximately
$14.7 million
would be paid, which includes wages, benefits, unvested shares awarded under our Incentive Compensation Plan and any tax gross-ups.
On April 13, 2017, a lawsuit related to the Merger was filed, Halberstam v. Delta Natural Gas Company, Inc. et al., in state circuit court in Clark County, Kentucky (“Halberstam Complaint”). On April 28, 2017, a lawsuit related to the Merger was filed, Parshall v. Delta Natural Gas Company, Inc. et al., in U.S. District Court for the Eastern District
of Kentucky (“Parshall Complaint”). The Halberstam Complaint alleges, among other things, that the Company's Board of Directors breached its fiduciary duties in relation to the Merger, including breaching its fiduciary duty of disclosure in the preliminary proxy statement filed with the SEC. The Parshall Complaint alleges, among other things, that the Company’s Board of Directors violated certain laws under the Securities Exchange Act of 1934 with the filing of a preliminary proxy statement containing materially false and misleading statements. Both complaints seek, among other things, certification as a class action on behalf of all Company shareholders similarly situated and to enjoin the consummation of the Merger until the breaches are cured. Although the complaints do not specify the amount of damages sought, Delta is insured for such litigation, subject to a
$1 million
deductible. We intend to vigorously defend the complaints and believe they are without merit.
We are not a party to any other material pending legal proceedings that are expected to have a materially adverse impact on our liquidity, financial position or results of operations.
As of March 31, 2017, we have entered into forward purchase agreements for a portion of our non-regulated segment's natural gas purchases through
June, 2019
. The agreements require us to purchase minimum amounts of natural gas throughout the term of the agreements. The agreements are established in the normal course of business to ensure adequate natural gas supply to meet our non-regulated customers' natural gas requirements. The agreements have aggregate minimum purchase obligations of
$178,000
,
$350,000
and
$199,000
for our fiscal years ending
June 30, 2017
,
June 30, 2018
and June 30, 2019, respectively.
In connection with the Merger, we retained Tudor Pickering, Holt & Co. Advisors, LLC (“TPH”) to act as financial advisors in connection with the transaction contemplated by the Merger Agreement and
$1,654,000
is payable to TPH upon closing of the Merger.
The KYPSC exercises regulatory authority over our retail natural gas distribution and transportation services, which includes approval of our rates and tariffs. Their regulation of our business includes setting the rates we are permitted to charge our regulated customers. We monitor our need to file requests with them for a general rate increase for our natural gas distribution and transportation services. The KYPSC has historically utilized cost-of-service ratemaking where our base rates are established to recover normal operating expenses, exclusive of natural gas costs, and a reasonable rate of return on our rate base. Rate base consists primarily of our regulated segment's property plant and equipment, natural gas in storage and unamortized debt expense offset by accumulated depreciation and certain deferred income taxes. Our regulated rates were most recently adjusted in our 2010 rate case and became effective in October, 2010. We do not currently have any matters before the KYPSC which would have a material impact on our results of operations, financial position and cash flows.
On March 17, 2017, we and PNG filed a joint application with the KYPSC seeking regulatory approval of the Merger, as further discussed in Note 13 of the Notes to Condensed Consolidated Financial Statements. Under Kentucky Law, the KYPSC has up to 120 days to approve the Merger and such approval is granted if the acquirer of a public utility demonstrates they possess the financial, technical, and managerial abilities to provide reasonable service. A procedural schedule in this proceeding has been developed by the KYPSC, with a hearing scheduled for June 8, 2017.
Our Company has two reportable segments: a regulated segment and a non-regulated segment. Our regulated segment includes our natural gas distribution and transportation services, which are regulated by the KYPSC. Our non-regulated segment includes our natural gas marketing activities and the sales of natural gas liquids. The non-regulated segment produces a portion of the natural gas it markets to its customers. The division of these segments into separate revenue generating components is based upon regulation, products and services. Both segments operate in the single geographic area of central and southeastern Kentucky. Our chief operating decision maker is our Chief Executive Officer. We evaluate performance based on net income of the respective segment.
The reportable segments follow the same accounting policies as described in the Summary of Significant Accounting Policies in Note 1 of the Notes to Consolidated Financial Statements that are included in our Annual Report on Form 10-K for the year ended
June 30, 2016
. Intersegment revenues and expenses represent the natural gas transportation costs from the regulated segment to the non-regulated segment at our tariff rates. Operating expenses, taxes and interest are allocated to the non-regulated segment.
Segment information is shown in the following table:
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|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
($000)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Operating Revenues
|
|
|
|
|
|
|
|
|
Regulated
|
|
|
|
|
|
|
|
|
External customers
|
16,607
|
|
|
17,193
|
|
|
34,496
|
|
|
33,900
|
|
|
Intersegment
|
1,203
|
|
|
1,312
|
|
|
2,775
|
|
|
2,902
|
|
|
Total regulated
|
17,810
|
|
|
18,505
|
|
|
37,271
|
|
|
36,802
|
|
|
Non-regulated
|
|
|
|
|
|
|
|
|
External customers
|
10,180
|
|
|
9,009
|
|
|
21,736
|
|
|
19,369
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations for intersegment
|
(1,203
|
)
|
|
(1,312
|
)
|
|
(2,775
|
)
|
|
(2,902
|
)
|
|
Consolidated operating revenues
|
26,787
|
|
|
26,202
|
|
|
56,232
|
|
|
53,269
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
Regulated
|
2,900
|
|
|
3,675
|
|
|
4,365
|
|
|
4,860
|
|
|
Non-regulated
|
1,121
|
|
|
308
|
|
|
1,641
|
|
|
402
|
|
|
Consolidated net income
|
4,021
|
|
|
3,983
|
|
|
6,006
|
|
|
5,262
|
|
|
(11)
Earnings per Common Share
The following table sets forth the computation of basic and diluted earnings per common share:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Numerator - Basic and Diluted
($000)
|
|
|
|
|
|
|
|
|
Net income
|
4,021
|
|
|
3,983
|
|
|
6,006
|
|
|
5,262
|
|
|
Dividends paid
|
(1,479
|
)
|
|
(1,456
|
)
|
|
(4,434
|
)
|
|
(4,365
|
)
|
|
Undistributed earnings (a)
|
2,542
|
|
|
2,527
|
|
|
1,572
|
|
|
897
|
|
|
|
|
|
|
|
|
|
|
|
Allocated to common shares:
|
|
|
|
|
|
|
|
|
Undistributed earnings (a)
|
2,540
|
|
|
2,517
|
|
|
1,572
|
|
|
894
|
|
|
Dividends paid (b)
|
1,478
|
|
|
1,451
|
|
|
4,431
|
|
|
4,347
|
|
|
Earnings allocated to common shares
|
4,018
|
|
|
3,968
|
|
|
6,003
|
|
|
5,241
|
|
|
|
|
|
|
|
|
|
|
|
Denominator - Basic and Diluted
|
Weighted average common shares (c)
|
7,125,173
|
|
|
7,076,734
|
|
|
7,114,471
|
|
|
7,061,693
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share - Basic and Diluted
($)
|
.56
|
|
|
.56
|
|
|
.84
|
|
|
.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Percentage allocated to common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average:
|
|
|
|
|
|
|
|
|
Common shares outstanding
|
7,125,173
|
|
|
7,076,734
|
|
|
7,114,471
|
|
|
7,061,693
|
|
|
Unvested participating shares outstanding (d)
|
3,999
|
|
|
27,664
|
|
|
3,999
|
|
|
27,664
|
|
|
Total
|
7,129,172
|
|
|
7,104,398
|
|
|
7,118,470
|
|
|
7,089,357
|
|
|
|
|
|
|
|
|
|
|
|
Percentage allocated to common shares
|
99.9
|
%
|
|
99.6
|
%
|
|
99.9
|
%
|
|
99.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings (
$000
)
|
2,542
|
|
|
2,527
|
|
|
1,572
|
|
|
897
|
|
|
|
|
|
|
|
|
|
|
|
Allocated to common shares
|
2,540
|
|
|
2,517
|
|
|
1,572
|
|
|
894
|
|
|
|
|
|
|
|
|
|
|
|
(b) Represents dividends paid on common shares, exclusive of unvested participating shares.
(c) Under our Incentive Compensation Plan, recipients of performance share awards receive unvested non-participating shares, as further discussed in Note 12 of the Notes to Condensed Consolidated Financial Statements. Unvested non-participating shares become dilutive in the interim quarter-end in which the performance objective is met. If the performance objective continues to be met through the end of the performance period, these shares become unvested participating shares as of the fiscal year-end, as further discussed below in Note (d). The weighted average number of unvested non-participating shares outstanding during a period is included in the diluted earnings per common share calculation using the treasury stock method, unless the effect of including such shares would be antidilutive. As of
March 31, 2017
, and 2016 there were
41,000
and
39,000
unvested non-participating shares outstanding, respectively, which were not dilutive as the underlying performance conditions have not been met.
(d) Certain awards under our shareholder approved incentive compensation plan, as further discussed in Note 12 of the Notes to Condensed Consolidated Financial Statements, provide recipients of the awards all the rights of a shareholder of Delta including the right to dividends declared on common shares. Any unvested shares which are participating in dividends are considered participating securities and are included in our computation of basic and diluted earnings per share using the two-class method unless the effect of including such shares would be antidilutive. As of March 31, 2017 and 2016, there were
4,000
and
28,000
unvested participating shares outstanding, respectively.
|
|
(12)
|
Share-Based Compensation
|
We have a shareholder approved incentive compensation plan (the "Plan"), that provides for compensation payable in shares of our common stock. The Plan is administered by our Corporate Governance and Compensation Committee of our Board of Directors, which has complete discretion in determining our employees, officers and outside directors who shall be eligible to participate in the Plan, as well as the type, amount, terms and conditions of each award, subject to the limitations of the Plan.
The number of shares of our common stock that may be issued pursuant to the Plan may not exceed in the aggregate
1,000,000
shares. As of
March 31, 2017
, approximately
751,000
shares of common stock were available for issuance under the Plan, subject to the limitations imposed by our Corporate Governance Guidelines. Shares of common stock may be available from authorized but unissued shares, shares reacquired by us or shares that we purchase in the open market. Upon vesting, the Plan allows for withholding a number of shares equal in fair value to the taxes required to satisfy statutory withholding requirements. For the nine months ended March 31, 2017, the following shares were granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
March 31, 2017
|
|
Nine Months Ended
March 31, 2016
|
|
|
Shares
|
|
Grant Date Fair Value
(000’s)
|
|
Shares
|
|
Grant Date Fair Value
(000’s)
|
Stock Awards
|
|
9,600
|
|
|
$
|
247
|
|
|
8,400
|
|
|
$
|
169
|
|
Performance Shares
|
|
41,000
|
|
|
|
1,056
|
|
|
39,000
|
|
|
|
787
|
|
Total
|
|
50,600
|
|
|
$
|
1,303
|
|
|
47,400
|
|
|
$
|
956
|
|
Compensation expense for share-based compensation is recorded in operation and maintenance expense in the Condensed Consolidated Statements of Income based on the fair value of the awards at the grant date and is amortized over the requisite service period. Fair value is the closing price of our common shares at the grant date. The grant date is the date at which our commitment to issue the share-based awards arises, which is generally when the award is approved and the terms of the awards are communicated to the employee or director. We initially recognize expense for our performance shares when it is probable that any stipulated performance criteria will be met. Forfeitures of awards are recognized as they occur.
Share-based compensation expense recognized in the condensed consolidated statements of income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($000’s)
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Stock Awards
|
|
—
|
|
|
—
|
|
|
247
|
|
|
169
|
|
Performance Shares
|
|
9
|
|
|
69
|
|
|
36
|
|
|
214
|
|
Total
|
|
9
|
|
|
69
|
|
|
283
|
|
|
383
|
|
Stock Awards
For the
nine months ended March 31, 2017
, common stock was awarded to Delta's eight outside directors who vested in the awards shortly after the awards were granted, but during the time between the vesting dates and the grant dates the shares awarded were not transferable by the holders. Once the shares were vested, the shares received under the stock awards were immediately transferable.
Performance Shares
For the
nine months ended March 31, 2017
and
2016
, performance shares were awarded to the Company's executive officers. The performance shares vest only if the performance objectives of the awards are met, which are based on the Company's earnings per common share for the fiscal year in which the performance shares are awarded, before any cash bonuses or share-based compensation.
Upon satisfaction of the performance objectives, unvested shares are issued to the recipients and vest in one-third increments each August 31 subsequent to achieving the performance objectives as long as the recipients are employees throughout each such service period.
Unvested shares of executive officers while still employed by the Company will fully vest upon them attaining the age of sixty-seven. The recipients of the awards also become vested as a result of certain events such as death or disability of the holders or a change in control. The unvested shares have both dividend participation rights and voting rights during the remaining terms of the awards. Holders of performance shares may not sell, transfer or pledge their shares until the shares vest. As of
March 31,
2017
and
2016
, there were
4,000
and
28,000
unvested performance shares outstanding, respectively, for which the performance objectives have been satisfied.
Our performance shares have graded vesting schedules, and each separate annual vesting tranche is treated as a separate award for expense recognition. Compensation expense is amortized over the vesting period of the individual awards based on the probable outcome of meeting the performance objectives. Pursuant to the Merger Agreement, if closing occurs before June 30, 2017, 28,000 performance shares will vest; however, if closing occurs after June 30, 2017, the recipient will vest based on the actual performance objective achieved.
|
|
(13)
|
Proposed Merger with PNG Companies, LLC
|
On February 20, 2017, we entered into a Merger Agreement with PNG and Drake Merger Sub Inc. (“Merger Sub”), a new wholly owned subsidiary of PNG. The Merger Agreement provides for the merger of Merger Sub with and into PNG, with Delta surviving as a wholly owned subsidiary of PNG. At the effective time of the Merger, subject to receipt of required shareholder and regulatory approvals and meeting specified customary closing conditions, each share of Delta common stock issued and outstanding immediately prior to the closing will be converted automatically into the right to receive $30.50 in cash per share, without interest, less any applicable withholding taxes. Upon consummation of the Merger, Delta common stock will be delisted from NASDAQ.
Completion of the Merger is subject to various closing conditions, including, among others (i) the approval of the Merger Agreement by an affirmative vote of the holders of a majority of the outstanding shares of our common stock, (ii) approval from the KYPSC, and (iii) expiration or termination of any applicable waiting period under the federal Hart-Scott-Rodino Antitrust Improvements Act of 1976. A special meeting of shareholders is being held on June 1, 2017 to vote on the Merger. The KYPSC has scheduled a hearing on June 8, 2017 to determine if PNG has the financial, technical, and managerial abilities to provide reasonable service. We have received approval under the federal Hart-Scott-Rodino Antitrust Improvements Act of 1976.
The Merger Agreement may be terminated by either party under certain circumstances if the Merger is not consummated by December 1, 2017, subject to a six-month extension. The Merger Agreement also contains certain termination rights for both parties and provides that, upon termination of the Merger Agreement under specified circumstances, the company terminating the Merger Agreement would be required to pay the other party a termination fee of
$4,340,000
.
The Merger Agreement includes certain restrictions, limitations and prohibitions as to actions we may or may not take in the period prior to completion of the Merger. Among other restrictions, the Merger Agreement limits our total capital spending, limits the extent to which we can obtain financing through long-term debt and equity, and limits our cash dividend to no more than the current annual per share dividend plus an increase of not more than
$.01
per calendar quarter, with record dates and payment dates consistent with our current dividend practices. Also, provision is made for
a stub period dividend payment to holders of record of our shares of common stock immediately prior to consummation of the Merger.
In connection with this transaction, for the nine months ended March 31, 2017 we incurred Merger-related expenses of
$1,323,000
for costs paid to outside parties, which are reflected in operation and maintenance in the Condensed Consolidated Statement of Income. This amount does not include the cost of company personnel participating in Merger-related activities. Refer to Note 8 of the Notes to Condensed Consolidated Financial Statements for a discussion of litigation related to the Merger.