United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedDecember 31, 2005
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 Number 0-643
Corning Natural Gas Corporation
(Exact name of registrant as specified in its charter)
New York | 16-0397420 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
|
|
330 W William Street, PO Box 58 | 14830 |
Corning, New York | (Zip Code) |
(Address of principal executive offices)
(607) 936-3755
(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 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES X NO
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES NO X
Indicate the number shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Number of shares of Common Stock outstanding at the end of the quarter: 506,918
There is only one class of Common Stock and no Preferred Stock outstanding.
<PAGE 1>
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income (Unaudited) - Three Months Ended December 31, 2005 and 2004 - Page 3
Consolidated Balance Sheets - December 31, 2005 (unaudited) and September 30, 2005 (audited) - Pages 4 - 5
Consolidated Statements of Cash Flows (unaudited) - Three Months Ended December 31, 2005 and 2004 - Page 6
Notes to Consolidated Financial Statements - Pages 7 - 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Pages 11 - 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk - Page 14
Item 4. Controls and Procedures - Page 14
Part II. Other Information
Item 1. Legal Proceedings - The Company has nothing to report under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - The Company has nothing to report under this item.
Item 3. Defaults Upon Senior Securities - The Company has nothing to report under this item.
Item 4. Submission of Matters to a Vote of Security Holders - The Company has nothing to report under this item.
Item 5. Other Information - The Company has nothing to report under this item.
Item 6. Exhibits - Page 15
Signatures - Page 15
<PAGE 2>
CORNING NATURAL GAS CORPORATION AND SUBSIDIARY | |||||
Condensed Consolidated Statements of Income | |||||
Unaudited | |||||
Form 10 Q | |||||
Quarter Ended | |||||
December 31, 2005 | December 31, 2004 | ||||
Utility Operating Revenues | $7,273,639 | $5,485,152 | |||
Cost and Expense | |||||
Natural Gas Purchased | 5,314,765 | 3,346,732 | |||
Operating & Maintenance Expense | 1,487,184 | 1,123,836 | |||
Taxes other than Federal Income Taxes | 283,978 | 337,924 | |||
Depreciation | 112,425 | 128,024 | |||
Other Deductions, Net | 7,625 | 1,599 | |||
Total Costs and Expenses | 7,205,977 | 4,938,115 | |||
Utility Operating Income | 67,662 | 547,037 | |||
Other Income and (Expense) | |||||
Interest Expense | (363,892) | (324,517) | |||
Investment Income | 67,254 | 6,211 | |||
Net (Loss) Income from Utility Operations, Before Income Tax | (228,976) | 228,731 | |||
Federal Income Tax Benefit (Expense) | 153,624 | (81,855) | |||
Income from Non-Utility Operations, Net of Income Tax | (6,822) | 66,501 | |||
Net Income from Continued Operations | (82,174) | 213,377 | |||
Loss from Discontinued Operations, Net of Income Tax | (21,317) | (22,170) | |||
Net Income | (103,491) | 191,207 | |||
Other Comprehensive Income (Loss) | (19,891) | 51,082 | |||
Total Comprehensive Income (Loss) | ($123,382) | $242,289 | |||
Weighted average earnings per share- | |||||
basic & diluted: | |||||
From Continued Operations | ($0.162) | $0.421 | |||
From Discontinued Operations | ($0.042) | ($0.044) | |||
($0.204) | $0.377 | ||||
Weighted average shares outstanding | 506,918 | 506,918 |
<PAGE 3>
CORNING NATURAL GAS CORPORATION AND SUBSIDIARY | |||||||
Consolidated Balance Sheets | |||||||
Assets | December 31, 2005 | September 30, 2005 | |||||
Plant: | |||||||
Utility property, plant and equipment | $27,513,957 | $26,826,478 | |||||
Non-utility property, plant and equipment | 393,105 | 392,241 | |||||
Non-utility assets - discontinued operations | 179,930 | 180,930 | |||||
Less: accumulated depreciation | (10,744,558) | (10,567,331) | |||||
Total plant utility and non-utility net | 17,342,434 | 16,832,318 | |||||
Investments: | |||||||
Marketable securities available-for-sale at fair value | 2,518,205 | 2,440,237 | |||||
Investment in joint venture and associated companies | 186,009 | 185,719 | |||||
Total investments | 2,704,214 | 2,625,956 | |||||
Current assets: | |||||||
Cash and cash equivalents | 913,515 | 255,037 | |||||
Customer accounts receivable, (net of allowance for | |||||||
uncollectible accounts of $80,000 and $92,000) | 3,435,994 | 1,083,909 | |||||
Gas stored underground, at average cost | 1,241,168 | 3,734,795 | |||||
Gas inventories | 279,839 | 271,960 | |||||
Prepaid expenses | 533,445 | 658,857 | |||||
Current assets - discontinued operations | 275,418 | 309,865 | |||||
Total current assets | 6,679,379 | 6,314,423 | |||||
Deferred debits and other assets: | |||||||
Regulatory assets: | |||||||
Unrecovered gas costs | 4,839,215 | 3,090,280 | |||||
Deferred pension and other | 372,602 | 394,606 | |||||
Goodwill (net of accumulated | |||||||
amortization of $521,294 for both periods) | 1,457,117 | 1,457,117 | |||||
Unamortized debt issuance cost (net of accumulated | |||||||
amortization of $270,097 and $269,849) | 253,958 | 254,206 | |||||
Other | 418,854 | 420,528 | |||||
Note Receivable - discontinued operations | 487,713 | 491,852 | |||||
Total deferred debits and other assets | 7,829,459 | 6,108,589 | |||||
Total assets | $34,555,486 | $31,881,286 | |||||
See accompanying notes to consolidated financial statements. |
<PAGE 4>
CORNING NATURAL GAS CORPORATION AND SUBSIDIARY | ||||||
Consolidated Balance Sheets | ||||||
December 31, 2005 | September 30, 2005 | |||||
Capitalization and liabilities: | ||||||
Common stockholders' equity: | ||||||
Common stock (common stock $5.00 par | ||||||
value per share. Authorized 1,000,000 shares; | ||||||
issued and outstanding 507,000 shares at December 31, 2005 | ||||||
and September 30, 2005) | $2,534,590 | $2,534,590 | ||||
Other paid-in capital | 959,512 | 959,512 | ||||
Retained earnings | 2,856,232 | 2,959,723 | ||||
Accumulated other comprehensive loss | (1,440,056) | (1,420,165) | ||||
Total common stockholders' equity | 4,910,278 | 5,033,660 | ||||
Long-term debt, less current installments | 9,175,158 | 9,196,060 | ||||
Long-term debt, less current installments - discontinued operations | 62,294 | 63,797 | ||||
Total Long-term debt | 9,237,452 | 9,259,857 | ||||
Current liabilities: | ||||||
Current portion of long-term debt | 542,377 | 612,390 | ||||
Demand Note Payable | 1,741,665 | 1,836,666 | ||||
Borrowings under lines-of-credit | 5,773,170 | 6,600,000 | ||||
Accounts payable | 3,961,562 | 270,139 | ||||
Accrued expenses | 243,072 | 745,119 | ||||
Customer deposits and accrued interest | 1,227,280 | 952,503 | ||||
Deferred income taxes | 545,190 | 460,055 | ||||
Other current liabilities - discontinued operations | 120,110 | 317,860 | ||||
Total current liabilities | 14,154,426 | 11,794,732 | ||||
Deferred credits and other liabilities: | ||||||
Deferred income taxes | 837,936 | 837,727 | ||||
Deferred compensation | 1,970,119 | 1,910,686 | ||||
Deferred pension costs & post-retirement benefits | 2,634,931 | 2,429,958 | ||||
Other | 471,705 | 265,043 | ||||
Other deferred liabilities - deferred federal income | ||||||
taxes discontinued operations | 192,788 | 192,788 | ||||
Other deferred credits and other liabilites - discontinued operations | 145,851 | 156,835 | ||||
Total deferred credits and other liabilities | 6,253,330 | 5,793,037 | ||||
Concentrations and commitments | ||||||
Total capitalization and liabilities | $34,555,486 | $31,881,286 | ||||
See accompanying notes to consolidated financial statements. |
<PAGE 5>
CORNING NATURAL GAS CORPORATION AND SUBSIDIARY | ||||
Consolidated Statements of Cash Flows | ||||
For the Quarter Ended December 31, 2005 and 2004 | ||||
2005 | 2004 | |||
Cash flows from operating activities: | ||||
Net income | ($103,491) | $191,207 | ||
Adjustments to reconcile net income to net cash | ||||
used in operating activities: | ||||
Depreciation and amortization | 177,227 | 155,839 | ||
Unamortized debt issuance cost | 248 | 5,390 | ||
(Gain) Loss on sales of marketable securities | (63,055) | 626 | ||
Deferred income taxes | (35,094) | (82,978) | ||
Changes in assets and liabilities: | ||||
(Increase) decrease in: | ||||
Accounts receivable | (2,352,085) | (1,534,581) | ||
Gas stored underground | 2,493,627 | 1,083,627 | ||
Gas inventories | (7,879) | 11,273 | ||
Prepaid expenses | 125,412 | 186,390 | ||
Unrecovered gas costs | (1,748,935) | (1,115,426) | ||
Deferred pension and other | 22,004 | 27,129 | ||
Other | 40,260 | 38,313 | ||
Increase (decrease) in: | ||||
Accounts payable | 3,691,423 | 653,379 | ||
Accrued expenses | (502,047) | 25,796 | ||
Customer deposit liability | 274,777 | 332,213 | ||
Deferred income taxes | 85,344 | (310,658) | ||
Deferred compensation | 59,433 | 58,050 | ||
Deferred pension & post-retirement benefits | 204,973 | 183,109 | ||
Other liabilities and deferred credits | (2,072) | 203,162 | ||
Net cash provided by operating activities | 2,360,070 | 111,860 | ||
Cash flows from investing activities: | ||||
Purchase of securities available-for-sale | (89,942) | (132,022) | ||
Sale of securities available-for-sale | 89,942 | 50,078 | ||
Capital expenditures | (687,343) | (218,203) | ||
Net cash used in investing activities | (687,343) | (300,147) | ||
Cash flows from financing activities: | ||||
Proceeds under lines-of-credit | 4,598,170 | 2,650,022 | ||
Repayment of lines-of-credit | (5,425,000) | (2,400,000) | ||
Proceeds under long-term debt | 0 | 0 | ||
Repayment of long-term debt | (187,419) | (14,714) | ||
Net cash (used in) provided by financing activities | (1,014,249) | 235,308 | ||
Net increase in cash | 658,478 | 47,021 | ||
Cash and cash equivalents at beginning of period | 255,037 | 253,863 | ||
Cash and cash equivalents at end of period | $913,515 | $300,884 | ||
Supplemental disclosures of cash flow information: | ||||
Cash paid during the period for: | ||||
Interest | $341,383 | $315,985 | ||
Income taxes | $3,000 | $209,089 |
- <PAGE 6>
Corning Natural Gas Corporation
Notes to Consolidated Financial Statements
Note A - Basis of Presentation
The information furnished herewith reflects all adjustments, which are in the opinion of management necessary to a fair statement of the results for the period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principals generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules and regulations, although the Company believes the disclosures which are made are adequate to make the information presented not misleading.
The condensed consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's latest annual report on Form 10-K. These unaudited interim financial statements have not been audited or certified by a firm of certified public accountants.
It is the Company's policy to reclassify amounts in the prior year financial statements to conform with the current year presentation.
Note B - New Accounting Standards
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" (SFAS 151). This statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that those items be recognized as current-period charges. In addition, this statement requires that allocation of fixed production overheads to costs of conversion be based upon the normal capacity of the production facilities. The provisions of SFAS 151 are effective for inventory cost incurred in fiscal years beginning after June 15, 2005. As such, the Company is required to adopt these provisions in the beginning of fiscal 2006. The adoption of SFAS 151 did not have a material impact on the consolidated financial statements.
Note C - Pension and Other Post-retirement Benefit Plans
The Company uses September 30, 2005 as the measurement for its plans.
Components of Net Periodic Benefit Cost:
|
| Three months ended December 31, 2005 | ||||||
|
| Pension Benefits |
| Other Benefits | ||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
|
|
|
|
|
|
|
|
|
Service cost | $ | 100,885 | $ | 90,248 | $ | 7,806 | $ | 8,434 |
Interest cost |
| 167,911 |
| 187,628 |
| 14,317 |
| 17,519 |
Expected return on plan assets |
| (186,271) |
| (175,545) |
| 0 |
| 0 |
Amortization of prior service cost |
| 10,093 |
| 17,885 |
| 12,186 |
| 12,186 |
Amortization of net (gain) loss |
| 110,399 |
| 81,578 |
| (5,675) |
| (5,473) |
Net periodic benefit cost | $ | 203,017 | $ | 201,794 | $ | 28,634 | $ | 32,666 |
Pension Plan Assets
The Company's pension plan weighted-average asset allocations at December 31, 2005 and 2004 by asset category are as follows:
Plan Assets | |||
At December 31 | |||
Asset Category | 2005 | 2004 | |
Equity Securities | 54% | 46% | |
Debt Securities | 43% | 44% | |
Other | 3% | 10% | |
100% | 100% |
<PAGE 7>
There is no Company common stock included in the plan assets.
Amounts recognized in the Statement of Financial Position consist of:
|
| Pension Benefits |
| Other Benefits | ||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
Prepaid Benefit Cost |
|
|
|
|
|
|
|
|
Accrued Benefit Cost | $ | (2,620,841) | $ | (1,796,982) | $ | (1,100,466) | $ | (1,035,520) |
Intangible Assets |
| 167,751 |
| 266,828 |
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
|
|
Comprehensive Income |
| 1,839,173 |
| 1,202,787 |
|
|
|
|
Net Amount Recognized | $ | (613,917) | $ | (327,367) | $ | (1,100,466) | $ | (1,035,520) |
The accumulated benefit obligation for all defined benefit pension plans is $12,741,295 at September 30, 2006 and $11,199,055 at September 30, 2005, respectively.
Information for pension plans with an accumulated benefit obligation in excess of plan assets:
|
| September 30 | ||
|
| 2006 |
| 2005 |
|
|
|
|
|
Projected Benefit Obligation | $ | 13,710,180 | $ | 12,858,704 |
Accumulated Benefit Obligation |
| 12,741,295 |
| 11,199,055 |
Fair Value of Plan Assets |
| 10,120,454 |
| 9,402,073 |
The plan objective is to provide real (inflation adjusted) growth in assets vs. benchmark over a complete market cycle. The plan's objective assumes asset growth will meet or exceed 8% of (risk adjusted) growth over a complete market cycle.
<PAGE 8>
Investment guidelines are based upon an investment horizon of greater than five years. There is a requirement to maintain sufficient liquid reserves to provide for payment of retirement benefits.
The asset allocation guidelines for the plan are as follows:
Minimum | Maximum | |||
Domestic Common Stock | ||||
Large/Mid Cap | 15% | 50% | ||
Small Cap | 5% | 15% | ||
Reits | 0% | 20% | ||
International Common Stock | 10% | 20% | ||
Total Equities | 30% | 75% | ||
Total Fixed Income | 20% | 60% | ||
Cash | 0% | 10% |
These asset allocation guidelines reflect the plan's desire for investment return. They also reflect the full discretion of the Investment Manager to shift the asset mix within the specified ranges.
The desired investment objective is a long-term rate of return on assets that is approximately 8%. The target rate of return for the plan has been based upon the assumption that future real returns will approximate the long-term rates of return experienced for each asset class of the Investment Policy Statement over a complete business cycle. The plan's overall annualized total return after deducting advisory, money management and custodial fees, as well as total transaction costs should perform above an index comprised of market indices weighted by the strategic asset allocation of the plan.
In order to accomplish the investment goals, the Investment Committee believes that the investments of the plan must be diversified to provide the Investment Manager with the flexibility to invest in various types of assets. The Investment Committee recognizes that a moderate amount of risk must be assumed to achieve the Plan's long-term objectives. The Investment Committee believes that the Company's prospects for the future, current financial conditions, and several other factors suggest collectively that the plan can tolerate some interim fluctuations in market value and rates of return in order to achieve long-term objectives.
Contributions
The Company expects to contribute $452,181 to its Pension Plan in 2006. The Post Retirement Benefit Plan is not funded.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Pension | Other | |||
Benefits | Benefits | |||
2006 | $598,619 | $59,144 | ||
2007 | 705,382 | 65,155 | ||
2008 | 685,733 | 65,014 | ||
2009 | 666,467 | 66,640 | ||
2010 | 662,684 | 69,606 | ||
Years 2011 - 2015 | 3,430,564 | 390,471 |
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effect:
Effect on total of service and interest cost | 1 - Percentage- | 1 - Percentage- | ||||
Effect on postretirement benefit obligation | Point Increase | Point Increase | ||||
$3,694 | ($3,177) | |||||
$47,845 | ($41,421) |
<PAGE 9>
Note D - Segment Overview
The following table reflects year-to-date results of the segments consistent with the Company's internal financial reporting process. The following results are used in part, by management, both in evaluating the performance of, and in allocating resources to, each of these segments.
Utility | Non-Utility Operations | Discontinued Operations | |||||||||||||||
Gas Company | Corning Realty | Corning Mortgage | Subtotal | (2) Appliance | (3) Tax Center | (4) Foodmart Plaza | Subtotal | Total Consolidated | |||||||||
Revenue:(1) | |||||||||||||||||
2005 | $ 7,273,639 | $ 882,861 | $ 290 | $ 883,151 | $ 24,168 | $ - | $ - | $ 24,168 | $8,180,958 | ||||||||
2004 | 5,485,152 | 1,061,090 | (744) | 1,060,346 | 15,572 | 20,185 | 0 | 35,757 | 6,581,255 | ||||||||
Net income (loss):(1) | |||||||||||||||||
2005 | (75,352) | 6,868 | (13,690) | (6,822) | (21,317) | 0 | 0 | (21,317) | (103,491) | ||||||||
2004 | 146,876 | 71,518 | (5,017) | 66,501 | 6,138 | (28,308) | 0 | (22,170) | 191,207 | ||||||||
Interest income:(1) | |||||||||||||||||
2005 | 67,254 | 0 | 0 | 0 | 24,928 | 0 | 0 | 24,928 | 92,182 | ||||||||
2004 | 6,211 | 0 | 0 | 0 | 40,145 | 2,971 | 0 | 43,116 | 49,327 | ||||||||
Interest expense:(1) | |||||||||||||||||
2005 | 363,892 | 16,038 | 2,475 | 18,513 | 1,787 | 0 | 0 | 1,787 | 384,192 | ||||||||
2004 | 324,517 | 15,372 | 1,906 | 17,278 | 3,311 | 0 | 0 | 3,311 | 345,106 | ||||||||
Total assets: | |||||||||||||||||
2005 | 31,686,080 | 1,711,573 | 178,805 | 1,890,378 | 979,028 | 0 | 0 | 979,028 | 34,555,486 | ||||||||
2004 | 27,601,186 | 1,635,750 | 195,273 | 1,831,023 | 974,487 | 131,689 | 0 | 1,106,176 | 30,538,385 | ||||||||
Capital expenditures: | |||||||||||||||||
2005 | 686,615 | 864 | 0 | 864 | 0 | 0 | 0 | 0 | 687,479 | ||||||||
2004 | 218,203 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 218,203 | ||||||||
Federal income tax expense (benefit): | |||||||||||||||||
2005 | (153,624) | 7,402 | (7,052) | 350 | (10,982) | 0 | 0 | (10,982) | (164,256) | ||||||||
2004 | 81,855 | 40,414 | (2,585) | 37,829 | 3,162 | (14,583) | 0 | (11,421) | 108,263 |
(1) Before elimination of intercompany interest.
(2) The Appliance Co. discontinued operations in September 2003.
(3) Tax Center International discontinued operations in October 2004.
(4) Foodmart discontinued operations in July 2004.
Interest income and expense have been displayed in the segment in which it has been earned or incurred. Segment interest expense other than the Gas Company is included within unregulated expenses in the consolidated statements of income.
There were no sales of unregistered securities (debt or equity) during the quarter ended December 31, 2005.
<PAGE 10>
CORNING NATURAL GAS CORPORATION
FORM 10-Q for the quarter ended December 31, 2005
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The company's primary business is natural gas distribution. We serve approximately 14,000 customers through 400 miles of pipeline. Our service territory is very saturated with very little residential growth. Growth opportunities exist in the industrial market, as well as in local production. Focus is given to controlling costs and making timely rate applications to the Public Service Commission. Key performance indicators are net income and rate of return. Other indicators that are tracked include degree days (a measure of weather), working capital changes and debt level trends.
Earnings
2005 compared with 2004
A consolidated loss amounted to $103,500 or $.204 per share in 2005 compared to earnings of $191,200 or $.377 per share in 2004. The decrease is the result of a significant decrease in local production revenues and a $64,600 reduction in Corning Realty earnings due to changing real estate market and competitive products, as shown in the table below.
Earnings (Loss) by Segment | |||
for the quarter ended December 31: | 2005 | 2004 | |
Utility | $ (75,352) | $ 146,876 | |
Corning Realty | 6,868 | 71,518 | |
Corning Mortgage | (13,690) | (5,017) | |
Total from Continuing Operations | (82,174) | 213,377 | |
Earnings from Discontinued Operations | (21,317) | (22,170) | |
Total Consolidated | $ (103,491) | $ 191,207 |
Revenue
Utility Operating Revenue | 2005 | 2004 | |
Retail Revenue: | |||
Residential | $ 4,023,407 | $ 2,817,195 | |
Commercial | 893,004 | 556,248 | |
Industrial | 88,330 | 35,680 | |
5,004,741 | 3,409,123 | ||
Transportation | 698,290 | 738,927 | |
Wholesale | 1,362,568 | 986,206 | |
Local Production | 103,910 | 217,491 | |
Other | 104,130 | 133,405 | |
$ 7,273,639 | $ 5,485,152 |
<PAGE 11>
2005 compared with 2004
Utility operating revenue increased $1,788,500 or 33 percent due primarily to an increase from higher gas costs. Gas costs are charged to customers through the Company's Gas Adjustment Clause.
Non-Utility Revenue
2005 compared to 2004
Non-utility revenue by operating segment can be found in note D to the financial statements. Non-utility revenue in 2005 decreased $177,195 or 17 percent due to the Corning Realty segment because of the competitiveness of that segment.
Operating Expenses
Utility
2005 compared with 2004
Purchase gas expense increased $1,968,000 or 59 percent in 2005. The Company's average cost of gas, including reconciliation amounts increased to $9.67 per mcf in 2005 from $6.83 per mcf the previous year. Other operating and maintenance expense increased 22 percent due to cost containment measures implemented. Depreciation expense decreased $16,000 or 12 percent due to assets reaching their full depreciable value.
Non-Utility
2005 compared with 2004
Corning Realty commission and fees expense increased $8,100 or 9 percent as a result of an increase in referrals paid out. Realty occupancy and advertising expenses increased $49,000 due to an increase in utility and advertising costs.
Other Income and Expense
Investment income increased $61,000 in 2005 versus 2004. The change is due to realized gains and losses on a trust fund established to fund post-retirement compensations to certain officers. Interest expense increased $39,000 in 2005 and $30,000 in 2004 due to rising interest rates.
Operating Segments
Note D to the financial statements, which also contains the results by segment for the quarters ended December 31, 2005 and 2004.
Liquidity and Capital Resources
Internally generated cash from operating activities consists of net income, adjusted for non-cash expenses and changes in operating assets and liabilities. Non-cash items include depreciation and amortization and deferred income taxes. In the utility segment, over or under recovered gas costs significantly impacts cash flow. In addition, there are significant year to year changes in regulatory assets that impact cash flow. Cash flows from investing activities consist primarily of capital expenditures. Capital expenditures have historically exceeded $1 million annually and the same is expected in the coming year. Cash flows from financing activities consist of repayment of long-term debt and borrowings and repayments under our lines of credit. For consolidated operations, the Company had $6,600,000 for the quarter ended December 31, 2005 available through lines of credit at local banks. The amount outstanding under these lines at December 31, 2005 is $5,773,000. As security for the Company& #39;s line of credit, collateral assignments have been executed which assign to the lender various rights in the investment trust account, membership interest in Corning Realty Associates, LLC and proceeds from the note agreement. In addition, the lender has a purchase money interest in and to all natural gas purchases by debtor utilizing funds advanced by the bank under the line of credit agreement and all proceeds of sale thereof and accounts receivable pertaining to such sale. The Company relies heavily on its credit lines and a large portion is utilized throughout the entire year. Due to the Company's relatively small size it had been required to provide prepayment for all or most of its supply requirements from those Marketers offering competitive pricing, effectively advancing the time of payment be nearly two months. That action, coupled with the continuing high prices of natural gas, especially following Hurricanes Katrina and Rita, meant that the Company's cash flow would be severely straine d and would likely become negative early in the 2005-2006 winter, returning to positive levels only after the winter. As a consequence, the Company sought ways of obtaining sufficient cash or credit to meet its natural gas purchase obligations. In September 2005, the Company negotiated an agreement with Sprague Energy, Inc. ("Sprague") whereby Sprague would purchase the Company's natural gas already in storage and complete filling storage to the operationally necessary level. Pursuant to that agreement, Sprague made payments to the Company totaling $5.195 million, which the Company is using for current cash needs. As natural gas is withdrawn from storage, Corning will pay Sprague and index-based price. The cash for storage gas was to be provided under the Company's two lines of credit totaling approximately $6.6 million, from Community National Bank, N.A. ("Community Bank"). The Company had also sought to enter into an arrangement with one or more other natural gas local distribution companie s ("LDCs") whereby such LDC would supply natural gas to the Company during the winter months when sufficient cash to cover all supplies was not available and receive payment at the end of the winter when the Company had sufficient cash flow. Such an arrangement was completed on December 6, 2005. Through such agreements, the Company has entered supply and financing contracts that allow the Company to obtain supplies of natural gas that are anticipated to be sufficient for serving its customers for the remainder of the 2005-2006 winter heating season.
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Regulatory Matters
On October 31, 2005, the Company filed with the PSC a request to increase its rates for natural gas service by approximately $3.46 million or 16.2 percent. Ordinarily, major rate increases are not permitted by the PSC to take effect for approximately 11 months after filing, which, in this case, would be on or about October 1, 2006. In an effort to realize the benefits of the proposed increase as soon as possible, however, the Company moved for the establishment of the increased rates on an emergency temporary basis to take effect by May 2006.
On March 12, 2004, the Company filed with the PSC a petition to amend the Joint Proposal approved in its last rate case. Among the matters highlighted in the Petition as requiring review and modification were:
(a) The allocation of costs between utility and non-utility business functions to reflect the sale of the Company's Appliance business; (b) restrictions on the Company's ability to record as current income the $174,124 annual additional revenues for improving its equity ratio; (c) the treatment of the costs of Pensions and Other Post-Retirement Benefits (OPEBs) for prior periods; and (d) the computation of costs pertaining to natural gas stored underground. On July 23, 2004, the Company reached a settlement (Joint Proposal) with the staff of the Public Service Commission. The Joint Proposal represents a negotiated resolution of the issues, and is subject to final approval by the Public Service Commission. The Joint Proposal provides for the release of the $174,124 from rate year 2004 to income. The Joint Proposal also provides for the filing of a deferral petition for the allocation costs resulting from the sale of the Appliance business. Hence, these costs have been deferred on the balanc e sheet, and subject to future PSC review for recovery through utility rates. The Joint Proposal was approved by the PSC on September 1, 2004.
Critical Accounting Policies
The Company's most significant accounting policies are described below. It is increasingly important to understand that the application of generally accepted accounting principles involve certain assumptions, judgments and estimates that affect reported amounts of assets, liabilities, revenues and expenses. Thus, the application of these principles can result in varying results from company to company.
Accounting for Utility Revenue and Cost of Gas Recognition.The Company records revenues from residential and commercial customers based on meters read on a cycle basis throughout each month, while certain large industrial and utility customers' meters are read at the end of each month. The Company does not accrue revenue for gas delivered but not yet billed, as the New York PSC requires that such accounting must be adopted during a rate proceeding, which the Company has not done. The Company's tariffs contain mechanisms that provide for the recovery of the cost of gas applicable to firm customers, which includes estimates. Under these mechanisms, the Company periodically adjusts its rates to reflect increases and decreases in the cost of gas. Annually, the Company reconciles the difference between the total gas costs collected from customers and the cost of gas. The Company defers any excess or deficiency and subsequently either recovers it from, or refunds it to, customers over the follow ing twelve-month period. To the extent estimates are inaccurate, a regulatory asset on the balance sheet is increased or decreased.
Accounting for Regulated Operations - Regulatory Assets and Liabilities.A significant portion of the Company's business is subject to regulation. The Company's regulated utility records the results of its regulated activities in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation, which results in differences in the application of generally accepted accounting principles between regulated and non-regulated businesses. SFAS No. 71 requires the recording of regulatory assets and liabilities for certain transactions that would have been treated as revenue and expense in non-regulated businesses. In certain circumstances, SFAS No. 71 allows entities whose rates are determined by third-party regulators to defer costs as "regulatory" assets in the balance sheet to the extent that the entity expects to recover these costs in future rates. Management believes that currently available facts support the continued application of SFAS No. 71 and that all regulatory assets and liabilities are recoverable or refundable through the regulatory environment.
Pension and Post-Retirement Benefits.The amounts reported in the Company's financial statements related to its pension and other post-retirement benefits are determined on an actuarial basis, which uses many assumptions in the calculation of such amounts. These assumptions include the discount rate, the expected return on plan assets, the rate of compensation increase and, for other post-retirement benefits, the expected annual rate of increase in per capita cost of covered medical and prescription benefits. Changes in actuarial assumptions and actuarial experience could have a material impact on the amount of pension and post-retirement benefit costs and funding requirements experienced by the Company. However, the Company expects to recover substantially all of its net periodic pension and other post-retirement benefit costs attributed to employees in its Utility segment in accordance with the applicable regulatory commission authorization. For financial reporting purposes, the difference between the amounts of such costs as determined under applicable accounting principles is recorded as either a regulatory asset or liability.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements which, to the extent they are not recitations of historical facts, constitute "forward-looking statements" within the meaning of the Securities Litigation Reform Act of 1995 (Reform Act). In this respect, the words "estimate", "project", "anticipate", "expect", "intend", "believe" and similar expressions are intended to identify forward-looking statements. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. A number of important factors affecting the Company's business and financial results could cause actual results to differ materially from those stated in the forward-looking statements.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
The Company's exposure to interest rate risk arises from borrowing under short-term debt instruments. At December 31, 2005, these instruments consisted of a term loan and bank credit line borrowings outstanding of $5,773,000. The interest rate (prime less 1/2 point) on this loan and these lines was 6.75 percent at December 31, 2005.
Item 4 - Controls and Procedures
a.Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this quarterly report Form 10-QSB the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15). Based upon that evaluation, or Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that material information relating to us and our consolidated subsidiaries is recorded, processed, summarized and reported in a timely manner.
b.Changes in Internal Controls. There have been no changes in our internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II - Other Information
Item 6 - Exhibits
The following documents are filed as exhibits to this Report:
31.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date:
February 14, 2006
/s/ Thomas K. Barry | |
Thomas K. Barry, Chairman of the Board, President and CEO |
Date:
February 14, 2006
/s/ Kenneth J. Robinson | |
Kenneth J. Robinson, Executive Vice President |
Date:
February 14, 2006
/s/ Firouzeh Sarhangi | |
Firouzeh Sarhangi, Chief Financial Officer and Treasurer |
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