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EX-32.1 - EXHIBIT 32.1 - DELTA NATURAL GAS CO INCdgas-20140331x10qxex3212.htm
EX-31.2 - EXHIBIT 31.2 - DELTA NATURAL GAS CO INCdgas-20140331x10qxex3122.htm
EX-31.1 - EXHIBIT 31.1 - DELTA NATURAL GAS CO INCdgas-20140331x10qxex3112.htm
EX-32.2 - EXHIBIT 32.2 - DELTA NATURAL GAS CO INCdgas-20140331x10qxex3222.htm
EXCEL - IDEA: XBRL DOCUMENT - DELTA NATURAL GAS CO INCFinancial_Report.xls

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549
______________

FORM 10-Q

______________
(Mark one)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________

Commission File No. 0-8788
______________

DELTA NATURAL GAS COMPANY, INC.
(Exact name of registrant as specified in its charter)
______________
Kentucky
61-0458329
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

3617 Lexington Road, Winchester, Kentucky
40391
(Address of principal executive offices)
(Zip code)

859-744-6171
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).          Yes x     No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer     ¨
Accelerated filer     x
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)
Smaller reporting company     ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨   No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.

As of March 31, 2014 Delta Natural Gas Company, Inc. had 6,936,146 shares of Common Stock outstanding.
 
 




DELTA NATURAL GAS COMPANY, INC.

INDEX TO FORM 10-Q

PART I -
FINANCIAL INFORMATION
 
 
 
 
 
ITEM 1.
Financial Statements
 
 
 
 
 
 
Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended March 31, 2014 and 2013
 
 
 
 
 
 
Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2014 and June 30, 2013
 
 
 
 
 
 
Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited) for the nine months ended March 31, 2014 and 2013
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended March 31, 2014 and 2013
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
 
 
 
 
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
ITEM 4.
Controls and Procedures
 
 
 
 
 
PART II -
OTHER INFORMATION
 
 
 
 
 
ITEM 1.
Legal Proceedings
 
 
 
 
 
ITEM 1A.
Risk Factors
 
 
 
 
 
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
ITEM 3.
Defaults Upon Senior Securities
 
 
 
 
 
ITEM 4.
Mine Safety Disclosures
 
 
 
 
 
ITEM 5.
Other Information
 
 
 
 
 
ITEM 6.
Exhibits
 
 
 
 
 
 
Signatures
 

2



PART I – FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS

DELTA NATURAL GAS COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 
Three Months Ended
 
Nine Months Ended
 
 
March 31,
 
March 31,
 
 
2014
 
2013
 
2014
 
2013
 
 

 

 
 
 
 
 
OPERATING REVENUES

 

 
 
 
 
 
Regulated revenues
$
26,270,729

 
$
19,140,556

 
$
48,677,954

 
$
38,181,030

 
Non-regulated revenues
14,164,787

 
11,992,793

 
30,609,498

 
26,511,323

 
Total operating revenues
$
40,435,516

 
$
31,133,349

 
$
79,287,452

 
$
64,692,353

 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
 
Regulated purchased gas
$
14,988,738

 
$
8,654,059

 
$
24,267,893

 
$
15,036,956

 
Non-regulated purchased gas
10,607,359

 
9,166,269

 
22,507,137

 
19,977,804

 
Operation and maintenance
3,781,445

 
3,820,751

 
10,910,884

 
10,648,735

 
Depreciation and amortization
1,548,836

 
1,525,365

 
4,661,922

 
4,553,924

 
Taxes other than income taxes
623,015

 
643,841

 
1,736,425

 
1,768,068

 
Total operating expenses
$
31,549,393

 
$
23,810,285

 
$
64,084,261

 
$
51,985,487

 
 
 
 
 
 
 
 
 
 
OPERATING INCOME
$
8,886,123

 
$
7,323,064

 
$
15,203,191

 
$
12,706,866

 
 
 
 
 
 
 
 
 
 
OTHER INCOME AND DEDUCTIONS, NET
27,025

 
61,596

 
159,814

 
119,234

 
 
 
 
 
 
 
 
 
 
INTEREST EXPENSE
659,375

 
676,968

 
2,011,694

 
1,192,858

 
 
 
 
 
 
 
 
 
 
NET INCOME BEFORE INCOME TAXES
$
8,253,773

 
$
6,707,692

 
$
13,351,311

 
$
11,633,242

 
 
 
 
 
 
 
 
 
 
INCOME TAX EXPENSE
3,080,149

 
2,465,015

 
4,963,549

 
4,300,093

 
 
 
 
 
 
 
 
 
 
NET INCOME
$
5,173,624

 
$
4,242,677

 
$
8,387,762

 
$
7,333,149

 
 
 
 
 
 
 
 
 
 
INCOME PER COMMON SHARE (Note 11)
 
 
 
 
 
 
 
 
Basic
$
.74

 
$
.62

 
$
1.21

 
$
1.07

 
Diluted
$
.74

 
$
.62

 
$
1.21

 
$
1.07

 
 
 
 
 
 
 
 
 
 
DIVIDENDS DECLARED PER COMMON SHARE
$
.19

 
$
.18

 
$
.57

 
$
.54

 




The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

3



DELTA NATURAL GAS COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
  
 
March 31,
 
June 30,
 
2014
 
2013
ASSETS
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
19,565,866

 
$
10,360,462

Accounts receivable, less accumulated allowances
 
 
 
     for doubtful accounts of $310,000 and $536,000, respectively
12,827,913

 
8,700,982

Gas in storage, at average cost
1,827,208

 
5,481,313

Deferred gas costs
1,448,254

 
3,922,844

Materials and supplies, at average cost
534,042

 
561,270

Prepayments
1,415,198

 
1,987,855

Total current assets
$
37,618,481

 
$
31,014,726

 
 
 
 
PROPERTY, PLANT AND EQUIPMENT
$
227,906,550

 
$
223,545,925

Less-Accumulated provision for depreciation
(92,630,367
)
 
(88,429,625
)
Net property, plant and equipment
$
135,276,183

 
$
135,116,300

 
 
 
 
OTHER ASSETS
 
 
 
Cash surrender value of life insurance
$
381,788

 
$
334,425

Prepaid pension
2,617,661

 
2,679,864

Regulatory assets
14,461,657

 
13,770,011

Unamortized debt expense
92,004

 
97,104

Other non-current assets
955,660

 
917,585

Total other assets
$
18,508,770

 
$
17,798,989

 
 
 
 
Total assets
$
191,403,434

 
$
183,930,015
















The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

4



DELTA NATURAL GAS COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(UNAUDITED)
 
March 31,
 
June 30,
 
2014
 
2013
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
6,665,233

 
$
7,417,789

Current portion of long-term debt
1,500,000

 
1,500,000

Accrued taxes
5,014,712

 
1,433,666

Customers' deposits
745,629

 
646,375

Accrued interest on debt
123,427

 
132,560

Accrued vacation
720,292

 
730,867

Deferred income taxes
500,346

 
1,339,287

Other current liabilities
521,509

 
435,064

Total current liabilities
$
15,791,148

 
$
13,635,608

 
 
 
 
LONG-TERM DEBT
$
53,500,000

 
$
55,000,000

 
 
 
 
LONG-TERM LIABILITIES
 
 
 
Deferred income taxes
$
40,408,221

 
$
39,623,563

Investment tax credits
28,600

 
40,600

Regulatory liabilities
1,168,982

 
1,252,629

Asset retirement obligations
3,739,524

 
3,547,441

Other long-term liabilities
934,047

 
824,759

Total long-term liabilities
$
46,279,374

 
$
45,288,992

 
 
 
 
COMMITMENTS AND CONTINGENCIES (Note 8)
 
 
 
Total liabilities
$
115,570,522

 
$
113,924,600

 
 
 
 
SHAREHOLDERS' EQUITY
 
 
 
Common shares ($1.00 par value), 20,000,000 shares
 
 
 
authorized, 6,936,146 and 6,864,253 shares
 
 
 
outstanding at March 31, 2014 and June 30,
 
 
 
2013, respectively
$
6,936,146

 
$
6,864,253

Premium on common shares
46,856,192

 
45,523,123

Retained earnings
22,040,574

 
17,618,039

Total shareholders' equity
$
75,832,912

 
$
70,005,415

 
 
 
 
Total liabilities and shareholders' equity
$
191,403,434

 
$
183,930,015





The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

5



DELTA NATURAL GAS COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
 
 
Nine Months Ended March 31, 2014
 
Common Shares
 
Premium on Common Shares
 
Retained Earnings
 
Shareholders' Equity
 
 
 
 
 
 
 
 
Balance, beginning of period
$
6,864,253

 
$
45,523,123

 
$
17,618,039

 
$
70,005,415

Net income

 

 
8,387,762

 
8,387,762

Issuance of common shares
22,197

 
440,225

 

 
462,422

Issuance of common shares under the
 
 
 
 
 
 
 
incentive compensation plan
49,696

 
299,930

 

 
349,626

Share-based compensation expense

 
562,648

 

 
562,648

Excess tax benefit from share-based compensation

 
30,266

 

 
30,266

Dividends on common shares

 

 
(3,965,227
)
 
(3,965,227
)
 
 
 
 
 
 
 
 
Balance, end of period
$
6,936,146

 
$
46,856,192

 
$
22,040,574

 
$
75,832,912



 
Nine Months Ended March 31, 2013
 
Common Shares
 
Premium on Common Shares
 
Retained Earnings
 
Shareholders' Equity
 
 
 
 
 
 
 
 
Balance, beginning of period
$
6,803,941

 
$
44,048,201

 
$
15,368,265

 
$
66,220,407

Net income

 

 
7,333,149

 
7,333,149

Issuance of common shares
20,156

 
389,434

 

 
409,590

Issuance of common shares under the
 
 
 
 
 
 
 
incentive compensation plan
31,876

 
232,226

 

 
264,102

Share-based compensation expense

 
482,464

 

 
482,464

Excess tax benefit from share-based compensation

 
26,166

 

 
26,166

Dividends on common shares

 

 
(3,711,217
)
 
(3,711,217
)
 
 
 
 
 
 
 
 
Balance, end of period
$
6,855,973

 
$
45,178,491

 
$
18,990,197

 
$
71,024,661













The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

6



DELTA NATURAL GAS COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) 
 
Nine Months Ended
 
March 31,
 
2014
 
2013
 
 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
8,387,762

 
$
7,333,149

Adjustments to reconcile net income to net cash from operating activities
 
 
 
Depreciation and amortization
4,873,928

 
4,806,424

Deferred income taxes and investment tax credits
(151,962
)
 
2,265,706

Change in cash surrender value of officer's life insurance
(47,363
)
 
(22,441
)
Share-based compensation
912,274

 
746,566

Excess tax deficiency from share-based compensation
(8,967
)
 
(8,946
)
Decrease in assets
2,227,977

 
431,954

Increase (decrease) in liabilities
3,208,318

 
(3,556,139
)
 
 
 
 
Net cash provided by operating activities
$
19,401,967

 
$
11,996,273

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures
$
(5,343,268
)
 
$
(4,924,459
)
Proceeds from sale of property, plant and equipment
170,277

 
53,402

Other
(60,000
)
 
(60,000
)
 
 
 
 
Net cash used in investing activities
$
(5,232,991
)
 
$
(4,931,057
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Dividends on common shares
$
(3,965,227
)
 
$
(3,711,217
)
Issuance of common shares
462,422

 
409,590

Excess tax benefit from share-based compensation
39,233

 
35,112

Repayment of long-term debt
(1,500,000
)
 
(1,500,000
)
Borrowing on bank line of credit
691,157



Repayment on bank line of credit
(691,157
)


 
 
 
 
Net cash used in financing activities
$
(4,963,572
)
 
$
(4,766,515
)
 
 
 
 
INCREASE IN CASH AND CASH EQUIVALENTS
$
9,205,404

 
$
2,298,701

 
 
 
 
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD
10,360,462

 
9,740,502

 
 
 
 
CASH AND CASH EQUIVALENTS,
END OF PERIOD
$
19,565,866

 
$
12,039,203







The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

7



DELTA NATURAL GAS COMPANY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1)
Nature of Operations and Basis of Presentation

Delta Natural Gas Company, Inc. ("Delta" or "the Company") distributes or transports natural gas to approximately 36,000 customers.  Our distribution and transmission 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 sell liquids extracted from natural gas in our storage field and on our pipeline systems.  We have three wholly-owned subsidiaries.  Delta Resources, Inc. ("Delta Resources") buys natural gas and resells it to industrial or other large use customers on Delta's system. Delgasco, Inc. ("Delgasco") buys natural gas and resells it to Delta Resources and to customers not on Delta's system.  Enpro, Inc. ("Enpro") owns and operates production properties and undeveloped acreage.

All subsidiaries of Delta are included in the condensed consolidated financial statements. Intercompany balances and transactions have been eliminated.  All adjustments necessary for a fair presentation of the unaudited results of operations for the three months and nine months ended March 31, 2014 and 2013 are included.  All such adjustments are accruals of a normal and recurring nature, other than the December, 2012 reversal of interest previously accrued on a tax assessment, as disclosed in Note 13 of the Notes to Consolidated Financial Statements in our 2013 Annual Report on Form 10-K.

The results of operations for the period ended March 31, 2014 are not necessarily indicative of the results of operations to be expected for the full fiscal year.  Because of the seasonal nature of our sales, we generate the smallest proportion of cash from operations during the warmer months, when sales volumes decrease considerably.  Most construction activity and gas storage injections take place during these warmer months.

The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the financial statements, and the notes thereto, included in our Annual Report on Form 10-K for the year ended June 30, 2013.


(2)     New Accounting Pronouncements

                In December, 2011, the Financial Accounting Standards Board issued guidance requiring additional disclosure of the effect or potential effect of financial instruments and derivative instruments which have rights of setoff where an entity offsets the assets and liabilities of such instruments. The guidance, effective for our quarter ending December 31, 2013, did not require any additional disclosures with respect to our results of operations, financial position or cash flows, as we have no such financial instruments or derivative instruments.
In September, 2013, the IRS issued final regulations regarding the tax treatment of amounts paid to acquire, produce or improve tangible property, which update temporary regulations issued by the IRS in December, 2011. In 2014, the IRS plans to issue further guidance for specific industry sectors, including natural gas. The final regulations are effective for our tax year beginning July 1, 2014; however, we do not expect compliance with the final regulations and industry specific guidance to have a material impact on our results of operations, financial positions or cash flows.



8



(3)
Fair Value Measurements

Our financial assets and liabilities measured at fair value on a recurring basis consist of the assets of our supplemental retirement benefit trust, which are included in other non-current assets on the Condensed Consolidated Balance Sheets. Contributions to the trust are presented in other investing activities on the Condensed Consolidated Statements of Cash Flows. The assets of the trust are recorded at fair value and consist of exchange traded securities and 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.  In fiscal 2014, upon changing investment advisors for the supplemental retirement benefit trust, we adopted a new asset allocation model which resulted in the reallocation of assets in the trust. The fair value of the trust assets are as follows:

 
March 31,
 
June 30,
($000)
2014
 
2013
 
 
 
 
Trust assets
 
 
 
Money market
40

 
9

U.S. equity securities
336

 
486

Foreign equity securities
176

 

U.S. fixed income securities
86

 
244

Foreign fixed income securities
52

 

Domestic real estate securities
56

 

Inflation indexed securities
131

 

 
877

 
739


The carrying amounts of our other financial instruments including cash equivalents, accounts receivable, notes receivable and accounts payable approximate their fair value.

Our Series A Notes, presented as current portion of long-term debt and long-term debt on the Condensed Consolidated Balance Sheets, are stated at historical cost. 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 2 in the fair value hierarchy.

 
March 31,
 
June 30,
 
2014
 
2013
 
Carrying
 
Fair
 
Carrying
 
Fair
($000)
Amount
 
Value
 
Amount
 
Value
 
 
 
 
 
 
 
 
4.26% Series A Notes
55,000

 
53,970

 
56,500

 
55,150



(4)
Risk Management and Derivative Instruments

To varying degrees, our regulated and non-regulated segments are exposed to commodity price risk.  We purchase our natural gas supply primarily through forward purchase contracts.  We mitigate price risk by efforts to balance supply and demand.  For our regulated segment, we have minimal price risk resulting from these forward natural gas purchases because we are permitted to pass these gas costs on to our regulated customers through the gas cost recovery rate mechanism, approved quarterly by the Kentucky Public Service Commission.   None of our gas contracts are accounted for using the fair value method of accounting.  While some of our natural gas purchase contracts and natural gas sales contracts meet the definition of a derivative, we have designated these contracts as normal purchases and normal sales.



9



(5)
Unbilled Revenue
 
We bill our customers on a monthly meter reading cycle. At the end of each month, gas service which has been rendered from the date the customer's meter was last read to the month-end is unbilled.

Unbilled revenues and gas costs include the following:
 
March 31,
 
June 30,
(000)
2014
 
2013
 
 
 
 
Unbilled revenues ($)
7,327

 
1,435
Unbilled gas costs ($)
4,347

 
390
Unbilled volumes (Mcf)
538

 
47

Unbilled revenues are included in accounts receivable and unbilled gas costs are included in deferred gas costs on the accompanying Condensed Consolidated Balance Sheets.  Unbilled revenues are included in regulated revenues and unbilled gas costs are included in regulated purchased gas on the accompanying Condensed Consolidated Statements of Income.

(6)    Defined Benefit Retirement Plan

Net periodic benefit costs for our trusteed, noncontributory defined benefit retirement plan for the periods ended March 31, 2014 and 2013, include the following:
 
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
($000)
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Service cost
256

 
279

 
768

 
837

Interest cost
259

 
228

 
778

 
685

Expected return on plan assets
(392
)
 
(394
)
 
(1,176
)
 
(1,183
)
Amortization of unrecognized net loss
86

 
154

 
257

 
461

Amortization of prior service cost
(22
)
 
(22
)
 
(66
)
 
(65
)
Net periodic benefit cost
187

 
245

 
561

 
735


(7)
Debt Instruments

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, 2014 and June 30, 2013.  The bank line of credit extends through June 30, 2015.  The interest rate on the used line of credit is the London Interbank Offered Rate plus 1.15%.  The annual cost of the unused bank line of credit is .125%. We were in compliance with the covenants of our bank line of credit during all periods presented in the condensed consolidated financial statements.








10



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:

($000)
 
2014

2015
1,500

2016
1,500

2017
1,500

2018
1,500

Thereafter
49,000

    Total long-term debt
55,000


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.

We were in compliance with the covenants of our 4.26% Series A Notes for all periods presented in the condensed consolidated financial statements.

(8)
Commitments and Contingencies

We have entered into an employment agreement with our Chairman of the Board, President and Chief Executive Officer and change in control agreements with our other four officers.  The agreements expire or may be terminated at various times.  The agreements provide for continuing monthly payments or lump sum payments and the continuation of specified benefits over varying periods in certain cases following defined changes in ownership of the Company.  In the event all of these agreements were exercised in the form of lump sum payments, approximately $4.1 million would be paid in addition to continuation of specified benefits for up to five years.  Additionally, upon a change in control, all unvested shares awarded under our Incentive Compensation Plan, as further discussed in Note 12 of the Notes to Condensed Consolidated Financial Statements, would immediately vest.

We have entered into a forward purchase agreement for natural gas purchases beginning in April, 2014 and expiring in December, 2014.  The agreement requires us to purchase minimum amounts of natural gas throughout the term of the agreement.  The agreement is established in the normal course of business to ensure adequate gas supply to meet our non-regulated customers' gas requirements.  The agreement has a minimum purchase obligation of $47,000 and $140,000 for our fiscal years ended June 30, 2014 and June 30, 2015, respectively.

We are not a party to any material pending legal proceedings.

(9)
Regulatory Matters

The Kentucky Public Service Commission exercises regulatory authority over our retail natural gas distribution and transportation services.  Their regulation of our business includes approving the rates we are permitted to charge our regulated customers.  We monitor our need to file requests with them for a general rate increase for our natural gas and transportation services.  They have historically utilized cost-of-service ratemaking where our base rates are established to recover normal operating expenses, exclusive of gas costs, and a reasonable rate of return.  We do not have any matters pending before the Kentucky Public Service Commission which would have a material impact on our results of operations, financial positions or cash flows.


11




(10)
Operating Segments

Our Company has two reportable segments:  (i) a regulated segment that distributes and transports natural gas and (ii) a non-regulated segment that participates in related ventures, consisting of natural gas marketing, natural gas production and sales of natural gas liquids.  Virtually all of the revenues recorded under both segments come from the sale or transportation of natural gas, or sales of related natural gas liquids.  The regulated segment serves residential, commercial and industrial customers in the single geographic area of central and southeastern Kentucky. Price risk for the regulated segment is mitigated through our gas cost recovery rate mechanism, approved quarterly by the Kentucky Public Service Commission.  Price risk for the non-regulated segment is mitigated by efforts to balance supply and demand. However, there are greater risks in the non-regulated segment because of the practical limitations on the ability to perfectly predict demand. In addition, we are exposed to price risk resulting from changes in the market price of natural gas, natural gas liquids and uncommitted gas inventory of our non-regulated companies.

The reportable segments follow the same accounting policies as described in the Summary of Significant Accounting Policies in Note 1 of the Notes to Consolidated Financial Statements that are included in our Annual Report on Form 10-K for the year ended June 30, 2013.  Intersegment transportation revenues and expenses represent the natural gas transportation costs from the regulated segment to the non-regulated segment at our tariff rates.  Operating expenses, taxes and interest are allocated to the non-regulated segment.
 
Segment information is shown in the following table:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
($000)
2014
 
2013
 
2014
 
2013
Operating Revenues
 
 
 
 
 
 
 
Regulated
 
 
 
 
 
 
 
External customers
26,271

 
19,140

 
48,678

 
38,181

Intersegment
1,365

 
1,432

 
3,303

 
3,307

Total regulated
27,636

 
20,572

 
51,981

 
41,488

Non-regulated

 

 

 

External customers
14,165

 
11,993

 
30,609

 
26,511

Eliminations for intersegment
(1,365
)
 
(1,432
)
 
(3,303
)
 
(3,307
)
Consolidated operating revenues
40,436

 
31,133

 
79,287

 
64,692



 

 

 

Net Income

 

 

 

Regulated
4,039

 
3,797

 
6,236

 
5,861

Non-regulated
1,135

 
446

 
2,152

 
1,472

Consolidated net income
5,174

 
4,243

 
8,388

 
7,333















12



(11)            Earnings per Common Share

The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
 
2014
 
2013
 
2014
 
2013
Numerator - Basic and Diluted ($000)
 
 
 
 
 
 
 
Net income
5,174

 
4,243

 
8,388

 
7,333

Dividends paid
(1,323
)
 
(1,238
)
 
(3,965
)
 
(3,711
)
Undistributed earnings
3,851

 
3,005

 
4,423

 
3,622

 
 
 
 
 
 
 
 
Allocated to common shares:
 
 
 
 
 
 
 
Percentage allocated to common shares (a)
99.5
%
 
99.6
%
 
99.5
%
 
99.6
%
 
 
 
 
 
 
 
 
Undistributed earnings
3,832

 
2,992

 
4,401

 
3,607

Dividends paid
1,316

 
1,233

 
3,945

 
3,696

Net income available to common shares
5,148

 
4,225

 
8,346

 
7,303

 
 
 
 
 
 
 
 
Denominator
Basic - weighted average common shares
6,929,875

 
6,851,533

 
6,912,727

 
6,838,283

      Add: Incremental unvested non-participating
 
 
 
 
 
 
 
          shares (b)
13,035

 
12,126

 
4,345

 
4,042

      Diluted - weighted average common shares
6,942,910

 
6,863,659

 
6,917,072

 
6,842,325

 
 
 
 
 
 
 
 
Net income per common share ($)
 
 
 
 
 
 
 
Basic
.74

 
.62

 
1.21

 
1.07

Diluted
.74

 
.62

 
1.21

 
1.07

(a) Percentage allocated to weighted average common shares outstanding
 
 
 
 
 
 
 
Common shares outstanding
6,929,875

 
6,851,533

 
6,912,727

 
6,838,283

Unvested participating shares outstanding (c)
35,000

 
28,667

 
35,000

 
28,667

Total
6,964,875

 
6,880,200

 
6,947,727

 
6,866,950

Percentage allocated to common shares
99.5
%
 
99.6
%
 
99.5
%
 
99.6
%

(b) Under our incentive compensation plan, recipients of performance share awards received 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. The weighted average number of unvested non-participating shares outstanding during a period is included in the diluted net income per common share calculation using the treasury stock method, unless the effect of including such shares would be antidilutive. As of both March 31, 2014 and 2013, there were 39,000 unvested non-participating shares outstanding which are dilutive as the underlying performance condition had been met.

(c) Certain unvested awards provide recipients of the awards all the rights of a shareholder of Delta including a 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 net income per common share using the two-class method unless the effect of including such shares would be antidilutive. As of March 31, 2014 and 2013, there were 35,000 and 29,000 unvested participating shares outstanding, respectively.


13



 

(12)         
Share-Based Compensation

We have a shareholder approved incentive compensation plan (the "Plan"), which 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, 2014, approximately 833,000 shares of common stock were available for issuance under the Plan, subject to the limitations imposed by our Corporate Governance Guidelines.  Shares of common stock may be available from authorized but unissued shares, shares reacquired by us or shares that we purchase in the open market.

Compensation expense for share-based compensation for officers and employees has been recorded in the non-regulated segment and included in operation and maintenance expense in the Condensed Consolidated Statements of Income based on the fair value of the awards at the grant date and is amortized over the requisite service period.  Fair value is the closing price of our common shares at the grant date.  The grant date is the date at which our commitment to issue the share-based awards arises, which is generally when the award is approved and the terms of the awards are communicated to the recipient.  We initially recognize expense for our performance shares when it is probable that any stipulated performance criteria will be met. For the three months ended March 31, 2014 and 2013, share-based compensation expense was $200,000 and $175,000, respectively. For the nine months ended March 31, 2014 and 2013, share-based compensation was $912,000 and $747,000, respectively.

For the nine months ended March 31, 2014 and 2013, excess tax benefits of $30,000 and $26,000, respectively, were recognized as an increase to premium on common shares on our Condensed Consolidated Balance Sheets, which decreased our taxes payable as the deduction for income tax purposes exceeds the compensation expense recognized for financial reporting purposes.  These excess tax benefits can be utilized to offset tax deficiencies related to share-based compensation in subsequent periods.

Stock Awards

For the nine months ended March 31, 2014 and 2013, common stock was awarded to virtually all Delta employees and directors having grant date fair values of $350,000 (17,000 shares) and $264,000 (12,000 shares), respectively.  The recipients vested in the awards shortly after the awards were granted, but during the time between the vesting dates and the grant dates the shares awarded were not transferable by the holders. Once the shares were vested, the shares received under the stock awards were immediately transferable.

Performance Shares

For the nine months ended March 31, 2014 and 2013, performance shares were awarded to the Company's executive officers having grant date fair values of $801,000 (39,000 shares) and $844,000 (39,000 shares), respectively. The performance share awards vest only if the performance objectives of the awards are met, which are based on the Company's earnings per common share for the fiscal year in which the performance shares are awarded, before any cash bonuses or share-based compensation.  Upon satisfaction of the performance objectives, unvested shares are issued to the recipients and vest equally over a three-year period beginning the August 31 subsequent to achieving the performance objectives as long as the recipients are employees throughout each such service period.  The recipients of the awards also become vested as a result of certain events such as death or disability of the holders. The unvested shares have both dividend participation rights and voting rights during the remaining terms of the awards.  Holders of performance shares may not sell, transfer or pledge their shares until the shares vest.  As of March 31, 2014 and 2013, there were 35,000 and 29,000 unvested performance shares outstanding, respectively, for which the performance objectives have been satisfied.





14



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. For the three months ended March 31, 2014 and 2013, compensation expense related to the performance shares was $200,000 and $175,000, respectively. For the nine months ended March 31, 2014 and 2013, compensation expense related to the performance shares was $563,000 and $482,000, respectively.


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

YEAR TO DATE MARCH 31, 2014 OVERVIEW AND FUTURE OUTLOOK

The following is a discussion of the segments we operate, our corporate strategy for the conduct of our business within these segments and significant events that have occurred during the nine months ended March 31, 2014. Our Company has two segments:  (i) a regulated natural gas distribution and transmission segment, and (ii) a non-regulated segment which participates in related ventures, consisting of natural gas marketing, natural gas production and the sale of liquids extracted from natural gas.

Earnings from the regulated segment are primarily influenced by sales and transportation volumes, the rates we charge our customers and the expenses we incur. In order for us to achieve our strategy of maintaining reasonable long-term earnings, cash flow and stock value, we must successfully manage each of these factors.  Regulated sales volumes are temperature-sensitive and in any period reflect the impact of weather, with colder temperatures generally resulting in increased sales volumes.  The impact of winter temperatures on our revenues is partially reduced by our ability to adjust our winter rates for residential and small non-residential customers based on the degree to which actual winter temperatures deviate from normal.

Our non-regulated segment markets natural gas to large-use customers both on and off our regulated system.  We endeavor to enter sales agreements matching supply with estimated demand while providing an acceptable gross margin.  The non-regulated segment also produces natural gas and sells liquids extracted from natural gas.

Our consolidated earnings per common share for the nine months ended March 31, 2014 increased $.14 per share, as compared to the same period in the prior year, due to increased gross margins, which were partially offset by increased expenses (as further discussed in Results of Operations). However, the results of operations for the period ended March 31, 2014 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 a significant proportion of our operating revenues during the heating months (December – April) when our sales volumes increase considerably.

Future profitability of the regulated segment is contingent on the adequate and timely adjustment of the rates we charge our regulated customers.  The Kentucky Public Service Commission sets these rates, and we monitor our need to file rate cases with the Kentucky Public Service Commission for a general rate increase for our regulated services.  The regulated segment's largest expense is gas supply, which we are permitted to pass through to our customers.  We manage remaining expenses through budgeting, approval and review.

Future profitability of the non-regulated segment is dependent on the business plans of some of our industrial and other large use customers and the market prices of natural gas and natural gas liquids, all of which are beyond our control.  We anticipate our non-regulated segment to continue to contribute to our consolidated net income for the remainder of fiscal 2014.  If natural gas prices increase, we would expect to experience a corresponding increase in our non-regulated segment gross margins related to our natural gas production and marketing activities.  However, if natural gas prices decrease, we would expect a decrease in our non-regulated gross margins related to our natural gas production and marketing activities.  The profitability of selling natural gas liquids is dependent on the amount of liquids extracted and the pricing for any such liquids is determined by a national unregulated market.

LIQUIDITY AND CAPITAL RESOURCES

Operating activities provide our primary source of cash. Cash provided by operating activities consists of our net income adjusted for non-cash items, including depreciation, amortization, deferred income taxes, share-based compensation and changes

15



in working capital. Our sales and cash requirements are seasonal.  The largest portion of our sales occurs during the heating months whereas significant cash requirements for the purchase of natural gas for injection into our storage field and capital expenditures occur during non-heating months.  Therefore, when cash provided by operating activities is not sufficient to meet our capital requirements, our ability to maintain liquidity depends on our bank line of credit.  The current bank line of credit with Branch Banking and Trust Company permits borrowings up to $40,000,000.  There were no borrowings outstanding on the bank line of credit as of March 31, 2014 or June 30, 2013.

Cash and cash equivalents were $19,566,000 at March 31, 2014, as compared with $10,360,000 at June 30, 2013.  The changes in cash and cash equivalents are summarized in the following table:

 
Nine Months Ended
 
March 31,
($000)
2014
 
2013
 
 
 
 
Provided by operating activities
19,402

 
11,996

Used in investing activities
(5,233
)
 
(4,931
)
Used in financing activities
(4,964
)
 
(4,766
)
Increase in cash and cash equivalents
9,205

 
2,299


For the nine months ended March 31, 2014, cash provided by operating activities increased $7,406,000 (62%), as compared to the same period in the prior year, due to increased cash received from customers as a result of increased sales, partially offset by increased amounts paid for natural gas.

Changes in cash used in investing activities result primarily from changes in the level of capital expenditures between years.

For the nine months ended March 31, 2014, there was not a significant change in cash used in financing activities as compared to the same period in the prior year.

Cash Requirements

Our capital expenditures result in a continued need for cash. These capital expenditures are being made for system extensions and for the replacement and improvement of existing transmission, distribution, gathering, storage and general facilities. We expect our capital expenditures for fiscal 2014 to be approximately $7.8 million.

Sufficiency of Future Cash Flows

Our ability to maintain liquidity, finance capital expenditures and pay dividends is contingent on the adequate and timely adjustment of the regulated rates we charge our customers.  The Kentucky Public Service Commission sets these rates and we monitor our need to file for rate increases for our regulated segment.  Our regulated base rates were most recently adjusted in our 2010 rate case and became effective in October, 2010.  We expect that cash provided by operations will be sufficient to satisfy our operating and normal capital expenditure requirements and to pay dividends for the remainder of fiscal 2014.

To the extent that internally generated cash is not sufficient to satisfy seasonal operating and capital expenditure requirements and to pay dividends, we rely on our bank line of credit.  Our current available bank line of credit with Branch Banking and Trust Company extends through June 30, 2015 and permits borrowings up to $40,000,000.  There were no borrowings outstanding on the bank line of credit as of March 31, 2014.

16





In December, 2011, we issued $58,000,000 of Series A Notes that are unsecured, bear interest at a fixed rate of 4.26% per annum that 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.  Any refinance of the Series A Notes, or any additional prepayments of principal, may be subject to a prepayment penalty.

With our bank line of credit and Series A Notes, we have agreed to certain financial covenants.  Noncompliance with these covenants can make the obligation immediately due and payable, as further discussed in our Annual Report on Form 10-K for the year ended June 30, 2013.  A default on the performance on any single obligation incurred in connection with our borrowings simultaneously creates an event of default with our bank line of credit and the Series A Notes.  We were in compliance with the covenants under our bank line of credit and Series A Notes for all periods presented in the condensed consolidated financial statements.


RESULTS OF OPERATIONS

Gross Margins

Our operating revenues are derived primarily from the sale of natural gas and natural gas liquids and the provision of natural gas transportation services. We define "gross margins" as gas sales less the corresponding purchased gas expenses, plus transportation, natural gas liquids and other revenues.  We view gross margins as an important performance measure of the core profitability of our operations and believe that investors benefit from having access to the same financial measures that our management uses.  Gross margins can be derived directly from our Condensed Consolidated Statements of Income, included in Item 1.  Financial Statements, as follows:

 
Three Months Ended
 
Nine Months Ended
 
March 31,
 
March 31,
($000)
2014

2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Operating revenues
40,436


31,133

 
79,287

 
64,692

Regulated purchased gas
(14,989
)

(8,654
)
 
(24,268
)
 
(15,037
)
Non-regulated purchased gas
(10,607
)

(9,166
)
 
(22,507
)
 
(19,978
)
 
 
 
 
 
 
 
 
Consolidated gross margins
14,840

 
13,313

 
32,512

 
29,677



Operating Income, as presented in the Condensed Consolidated Statements of Income, is the most directly comparable financial measure calculated and presented in accordance with accounting principles generally accepted in the United States ("GAAP").  Gross margin is a "non-GAAP financial measure", as defined in accordance with SEC rules.

Natural gas prices are determined by an unregulated national market. Therefore, the price that we pay for natural gas fluctuates with national supply and demand. See Item 3. Quantitative and Qualitative Disclosures About Market Risk for the impact of forward contracts.

17



In the following table we set forth variations in our gross margins for the three and nine months ended March 31, 2014 compared with the same periods in the preceding year. The variation amounts and percentages presented in the following tables include intersegment transactions. These intersegment revenues and expenses are eliminated in the Condensed Consolidated Statements of Income.
 
 
2014 compared to 2013
 
Three Months Ended
 
Nine Months Ended
($000)
March 31
 
March 31
 
 
 
 
Increase (decrease) in gross margins:
 
 
 
Regulated segment
 
 
 
Natural gas sales
700

 
1,026

On-system transportation
67

 
246

Off-system transportation
(41
)
 
(45
)
Other
2

 
35

Intersegment elimination (a)
67

 
4

Total
795

 
1,266

 
 
 

Non-regulated segment
 
 


Natural gas sales
809

 
1,195

Natural gas liquids
(17
)
 
357

Other
6

 
21

Intersegment elimination (a)
(67
)
 
(4
)
Total
731

 
1,569

 
 
 

Increase in consolidated gross margins
1,526

 
2,835

 
 
 

Percentage increase (decrease) in volumes:
 
 

  Regulated segment
 
 

    Natural gas sales (Mcf)
15

 
12

    On-system transportation (Mcf)
(10
)
 

    Off-system transportation (Mcf)
(2
)
 

 
 
 

  Non-regulated segment
 
 

    Natural gas sales (Mcf)
(7
)
 
(5
)
    Natural gas liquids (gallons)
(15
)
 
24


(a)
Intersegment eliminations represent the natural gas transportation costs from the regulated segment to the non-regulated segment

Heating degree days were 118% and 110% of the normal temperatures for the three and nine months ended March 31, 2014, respectively, as compared with 108% and 105% of normal temperatures in the 2013 periods. A heating degree day is the equivalent for each degree that the average of the high and the low temperatures for a day is below 65 degrees in a specific geographic location.  Heating degree days are used in the natural gas industry to measure the relative coldness of weather and to estimate the demand for natural gas.  Normal temperatures are based on historical 30-year average heating degree days, as calculated from data provided by the National Weather Service for the same geographic location.

For the three months ended March 31, 2014, consolidated gross margins increased $1,526,000 (11%), as compared to the same period in the prior year, due to increased regulated and non-regulated gross margins of $795,000 and $731,000, respectively. Regulated gross margins increased as a result of increased volumes sold to our regulated customers as a result of colder weather and increased amounts billed through our pipe replacement program tariff. Partially offsetting these increases are decreased rates

18



billed through our weather normalization tariff. Our non-regulated gross margins increased due to the increased sales of the non-regulated segment's production inventory.

For the nine months ended March 31, 2014, consolidated gross margins increased $2,835,000 (10%), as compared to the same period in the prior year, due to increased non-regulated and regulated gross margins of $1,569,000 and $1,266,000, respectively. Our non-regulated gross margins increased due to the increased sales of the non-regulated segment's production inventory and increased sales of natural gas liquids extracted from the natural gas in our system. Regulated gross margins increased as a result of increased volumes sold to our regulated customers as a result of colder weather and increased amounts billed through our pipe replacement program tariff. Partially offsetting these increases are decreased rates billed through our weather normalization tariff.

Operating Expenses

For the three and nine months ended March 31, 2014, there were no significant changes in operation and maintenance, depreciation and amortization, taxes other than income taxes and other income and deductions, net, as compared to the same periods in the prior year.

Interest Expense

For the three months ended March 31, 2014, there was not a significant change in interest expense, as compared to the same period in the prior year. For the nine months ended March 31, 2014, interest expense increased $819,000 (69%), as compared to the same period in the prior year, due to a decrease in interest accrued in the prior year relating to the resolution of a tax assessment.

Income Tax Expense

For the three and nine months ended March 31, 2014, income tax expense increased $615,000 (25%) and $664,000 (15%), respectively, due to an increase in net income before income taxes. For the three and nine months ended March 31, 2014, there was not a significant change in our effective tax rate, as compared to the same periods in the prior year.

Basic and Diluted Earnings Per Common Share

For the three and nine months ended March 31, 2014, our basic and diluted income per common share changed, as compared to the same period in the prior year, as a result of the change in our net income and an increase in the number of our common shares outstanding.  We increased our number of common shares outstanding as a result of shares issued through our Dividend Reinvestment and Stock Purchase Plan as well as those shares awarded through our incentive compensation plan.

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 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. 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 both March 31, 2014 and 2013, there were 39,000 unvested non-participating shares outstanding, which are dilutive as the underlying performance condition has been met.

Certain unvested awards under our 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 Natural Gas Company, Inc. 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 further discussed in Note 11 of the Notes to Condensed Consolidated Financial Statements.  As of March 31, 2014 and 2013 there were 35,000 and 29,000 unvested participating shares outstanding, respectively.

19




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We purchase our natural gas supply primarily through forward natural gas contracts. The price we pay for natural gas acquired under these purchase contracts is fixed prior to the delivery of the gas.  Additionally, we inject some of our natural gas purchases into our underground gas storage facility in the non-heating months and withdraw this natural gas from storage for delivery to customers during the heating months.  For our regulated segment, we have minimal price risk resulting from forward gas purchases and storage of natural gas because we are permitted to pass these gas costs on to our regulated customers through our gas cost recovery rate mechanism, approved quarterly by the Kentucky Public Service Commission.

Price risk for our non-regulated gas segment is mitigated by efforts to balance supply and demand.  However, there are greater risks because of the practical limitations on the ability to perfectly predict demand.  In addition, we are exposed to changes in the market price of gas on uncommitted gas inventory of our non-regulated segment.  The natural gas liquids sold by our non-regulated segment is priced based upon the pricing determined in the national unregulated market.

None of our natural gas contracts are accounted for using the fair value method of accounting.  While some of our gas purchase and gas sales contracts meet the definition of a derivative, we have designated these contracts as normal purchases and normal sales.  As of March 31, 2014, we had a forward purchase contract for natural gas purchases totaling $187,000 that expires in December, 2014.  The forward purchase contract is at a fixed price and thus is not impacted by changes in the market price of natural gas.

When we have a balance outstanding on our variable rate bank line of credit, we are exposed to risk resulting from changes in interest rates.  The interest rate on our bank line of credit with Branch Banking and Trust Company is benchmarked to the monthly London Interbank Offered Rate.  There were no borrowings outstanding on our bank line of credit as of March 31, 2014 or June 30, 2013. During the nine months ended March 31, 2014, we borrowed and repaid $691,000 from the bank line of credit having a weighted average interest rate of 1.4%. A one percent (one hundred basis point) increase in our average interest rate would not have a significant impact on our annual pre-tax net income.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls and procedures are our controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 ("Exchange Act") is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2014, and, based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective in providing reasonable assurance of compliance.


Changes in Internal Control over Financial Reporting

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2014 and found no change that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

20





PART II – OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

We are not a party to any legal proceedings that are expected to have a materially adverse impact on our liquidity, financial position or results of operations.

ITEM 1A.
RISK FACTORS

No material changes.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.
MINE SAFETY DISCLOSURES

None.

ITEM 5.
OTHER INFORMATION

None.


21



ITEM 6.
EXHIBITS
 
31.1
 
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2
 
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1
 
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2
 
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101.INS
 
XBRL Instance Document
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
101.DEF
 
XBRL Taxonomy Extension Definition Database
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
 
 
Attached as Exhibit 101 to this Quarterly Report are the following documents formatted in extensible business reporting language (XBRL):
 
(i)
 
Document and Entity Information;
 
(ii)
 
Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended March 31, 2014 and 2013;
 
 (iii)
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended March 31, 2014 and 2013;
 
(iv)
 
Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2014 and June 30, 2013;
 
(v)
 
Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited) for the nine months ended March 31, 2014 and 2013; and
 
(vi)
 
Notes to Condensed Consolidated Financial Statements (Unaudited).
 
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospects for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.  We also make available on our web site the Interactive Data Files submitted as Exhibit 101 to this Quarterly Report.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


DATE:  May 6, 2014
/s/Glenn R. Jennings
 
Glenn R. Jennings
Chairman of the Board, President and Chief Executive Officer
(Duly Authorized Officer)
 
 
 
/s/John B. Brown
 
John B. Brown
Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer)

 


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