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DGAS > SEC Filings for DGAS > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for DELTA NATURAL GAS CO INC

Form 10-Q for DELTA NATURAL GAS CO INC


6-Nov-2012

Quarterly Report


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

YEAR TO DATE SEPTEMBER 30, 2012 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 three months ended September 30, 2012. 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. Our regulated sales volumes 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 to match estimated demand with supply and provide an acceptable margin. The non-regulated segment also produces natural gas and sells liquids extracted from natural gas.

Our consolidated net loss per common share for the three months ended September 30, 2012, decreased $.10 as compared to the same period in the prior year. This decrease is primarily due to a decrease in interest expense resulting from the prior year accrual of interest on a tax assessment issued to Delta Resources by the Kentucky Department of Revenue (as further discussed in Note 7 of the Notes to Condensed Consolidated Financial Statements) and a reduction in interest expense on our long-term debt due to the refinancing of our 7% Debentures and 5.75% Insured Quarterly Notes in December, 2011 by the issuance of our 4.26% Series A Notes.

The results of operations for the period ended September 30, 2012 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 our operating revenues during the warmer months when our sales volumes decrease 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 in fiscal 2013. If natural gas prices increase, we would expect to experience a corresponding increase in our non-regulated segment 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 margins related to our natural gas production and marketing activities. We anticipate selling additional natural gas liquids in 2013. The profitability of such sales is dependent on the amount of liquids extracted and the pricing for any such liquids as determined in the national unregulated market.

LIQUIDITY AND CAPITAL RESOURCES

Operating activities provide our primary source of cash. Cash provided by operating activities consists of our net loss adjusted for non-cash items, including depreciation, amortization, deferred income taxes and changes in working capital. Our sales and cash requirements are seasonal. The largest portion of our sales occurs during the heating months (December through April), 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 September 30, 2012 or June 30, 2012.

Cash and cash equivalents were $4,247,000 at September 30, 2012, as compared with $9,741,000 at June 30, 2012. The changes in cash and cash equivalents are summarized in the following table:

                                               Three Months Ended
                                                 September 30,
($000)                                         2012         2011

Used in operating activities                    (2,705 )     (6,699 )
Used in investing activities                    (1,735 )     (2,071 )
(Used in) provided by financing activities      (1,054 )      1,566
Decrease in cash and cash equivalents           (5,494 )     (7,204 )

For the three months ended September 30, 2012, cash used in operating activities decreased $3,994,000 (60%) as compared to the same period in the prior year.
Cash paid for natural gas decreased $8,244,000 as a result of a decrease in volumes of natural gas purchased for storage as we did not need to refill all of our storage inventory due to volumes remaining in storage from the previous year as a result of warmer than normal weather, and due to a decrease in the market price of natural gas purchased. This decrease was partially offset by a $2,228,000 decrease in cash received from customers due to a decrease in sales prices and a $2,300,000 elective contribution made in August, 2012 to our defined benefit pension plan to maintain the fully-funded status of the plan.

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

For the three months ended September 30, 2012, cash provided by financing activities decreased $2,620,000 (167%) as a result of not borrowing on our bank line of credit since we had sufficient cash to meet our operating and capital expenditure requirements.

Cash Requirements
Our capital expenditures result in a continued need for capital. These capital expenditures are 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 2013 to be approximately $7.5 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 base 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 rates were most recently adjusted in our 2010 rate case and became effective October, 2010. We expect that cash provided by operations, coupled with short-term borrowings, will be sufficient to satisfy our operating and normal capital expenditure requirements and to pay dividends for the remainder of fiscal 2013.

To the extent that internally generated cash is not sufficient to satisfy seasonal operating and capital expenditure requirements and to pay dividends, we will rely on our bank line of credit. Our current available 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 September 30, 2012.

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 which mature on December 20, 2031. Beginning in December, 2012, we are required to make an annual $1,500,000 principal payment on the Series A Notes.

Any additional prepayment of principal by the Company is subject to a prepayment premium which varies depending on the yields of United States Treasury securities with maturities equal to the remaining average life of the Series A Notes.

The Agreement for the Series A Notes contains a private shelf facility that extends through December, 2013. We may, with mutual agreement between us and the purchasers or their affiliates, issue them additional long-term unsecured promissory notes of the Company in an aggregate principal amount of $17,000,000.

With our bank line of credit and Series A Notes, we have agreed to certain financial, affirmative and negative 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, 2012. 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 not in default on our bank line of credit or Series A Notes during any period 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 we believe investors benefit from having access to the same financial measures that our management uses. Gross margin can be derived directly from our Condensed Consolidated Statements of Loss as follows:

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