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 ended June 30, 2006
OR
o 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 |
|
|
|
330 W William Street, PO Box 58 |
| 14830 |
(Address of principal executive offices) |
| (Zip Code) |
|
|
|
(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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES o 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.
INDEX
Part I. Financial Information | |
| |
Item 1. Financial Statements | |
| |
| |
Consolidated Balance Sheets — June 30, 2006 (unaudited) and September 30, 2005 (audited) | |
| |
Consolidated Statements of Cash Flows (unaudited) — Nine Months Ended June 30, 2006 and 2005 | |
| |
| |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | |
| |
| |
| |
| |
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. | |
| |
| |
2
CORNING NATURAL GAS CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
Unaudited
Form 10 Q
|
| Quarter Ended |
| Nine Months Ended |
| ||||||||
|
| June 30, 2006 |
| June 30, 2005 |
| June 30, 2006 |
| June 30, 2005 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Utility Operating Revenues |
| $ | 5,534,561 |
| $ | 4,757,379 |
| $ | 24,541,370 |
| $ | 20,630,489 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cost and Expense |
|
|
|
|
|
|
|
|
| ||||
Natural Gas Purchased |
| 3,845,959 |
| 2,971,677 |
| 18,042,660 |
| 13,401,830 |
| ||||
Operating & Maintenance Expense |
| 1,321,696 |
| 1,096,664 |
| 4,121,280 |
| 3,516,412 |
| ||||
Taxes other than Federal Income Taxes |
| 288,114 |
| 290,126 |
| 915,013 |
| 1,019,034 |
| ||||
Depreciation |
| 134,299 |
| 129,533 |
| 379,407 |
| 384,643 |
| ||||
Other Deductions, Net |
| 7,723 |
| 1,413 |
| 23,023 |
| 4,350 |
| ||||
Total Costs and Expenses |
| 5,597,791 |
| 4,489,413 |
| 23,481,383 |
| 18,326,269 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Utility Operating Income (Loss) |
| (63,230 | ) | 267,966 |
| 1,059,987 |
| 2,304,220 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other Income and (Expense) |
|
|
|
|
|
|
|
|
| ||||
Interest Expense |
| (444,497 | ) | (298,814 | ) | (1,184,616 | ) | (947,217 | ) | ||||
Investment Income |
| 38,044 |
| 25,226 |
| 143,799 |
| 83,950 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Income (Loss) from Utility Operations, Before Income Tax |
| (469,683 | ) | (5,622 | ) | 19,170 |
| 1,440,953 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Federal Income Tax (Expense) Benefit |
| 185,810 |
| 31,881 |
| 61,898 |
| (643,721 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Income (Loss) from Non-Utility Operations, Net of Income Tax |
| (34,465 | ) | 14,998 |
| (75,990 | ) | 31,284 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Income (Loss) from Continued Operations |
| (318,338 | ) | 41,257 |
| 5,078 |
| 828,516 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income (Loss) from Discontinued Operations, Net of Income Tax |
| (4,263 | ) | 2,481 |
| (28,717 | ) | (17,763 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net Income (Loss) |
| (322,601 | ) | 43,738 |
| (23,639 | ) | 810,753 |
| ||||
Other Comprehensive Income (Loss) |
| (54,323 | ) | 14,022 |
| (41,998 | ) | 15,938 |
| ||||
Total Comprehensive Income (Loss) |
| $ | (376,924 | ) | $ | 57,760 |
| $ | (65,637 | ) | $ | 826,691 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average earnings (loss) per share-basic & diluted: |
|
|
|
|
|
|
|
|
| ||||
From Continued Operations |
| $ | (0.628 | ) | $ | 0.081 |
| $ | 0.010 |
| $ | 1.634 |
|
From Discontinued Operations |
| $ | (0.008 | ) | $ | 0.005 |
| $ | (0.057 | ) | $ | (0.035 | ) |
|
| $ | (0.636 | ) | $ | 0.086 |
| $ | (0.047 | ) | $ | 1.599 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average shares outstanding |
| 506,918 |
| 506,918 |
| 506,918 |
| 506,918 |
|
3
CORNING NATURAL GAS CORPORATION AND SUBSIDIARY
|
| (Unaudited) |
|
|
| ||
|
| June 30, 2006 |
| September 30, 2005 |
| ||
Assets |
|
|
|
|
| ||
|
|
|
|
|
| ||
Plant: |
|
|
|
|
| ||
Utility property, plant and equipment |
| $ | 28,278,458 |
| $ | 26,826,478 |
|
Non-utility property, plant and equipment |
| 393,645 |
| 392,241 |
| ||
Non-utility assets - discontinued operations |
| 178,130 |
| 180,930 |
| ||
Less: accumulated depreciation |
| (11,102,446 | ) | (10,567,331 | ) | ||
Total plant utility and non-utility net |
| 17,747,787 |
| 16,832,318 |
| ||
|
|
|
|
|
| ||
Investments: |
|
|
|
|
| ||
Marketable securities available-for-sale at fair value |
| 2,526,077 |
| 2,440,237 |
| ||
Investment in joint venture and associated companies |
| 139,105 |
| 185,719 |
| ||
Total investments |
| 2,665,182 |
| 2,625,956 |
| ||
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| 1,019,090 |
| 255,037 |
| ||
Customer accounts receivable, (net of allowance for uncollectible accounts of $97,000 and $92,000) |
| 2,423,240 |
| 1,083,909 |
| ||
Gas stored underground, at average cost |
| 98,644 |
| 3,734,795 |
| ||
Gas inventories |
| 360,279 |
| 271,960 |
| ||
Prepaid expenses |
| 884,074 |
| 658,857 |
| ||
Current assets - discontinued operations |
| 418,114 |
| 309,865 |
| ||
Total current assets |
| 5,203,441 |
| 6,314,423 |
| ||
|
|
|
|
|
| ||
Deferred debits and other assets: |
|
|
|
|
| ||
Regulatory assets: |
|
|
|
|
| ||
Unrecovered gas costs |
| 2,547,632 |
| 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 $281,911 and $269,849) |
| 242,144 |
| 254,206 |
| ||
Other |
| 415,507 |
| 420,528 |
| ||
Note Receivable - discontinued operations |
| 464,505 |
| 491,852 |
| ||
Total deferred debits and other assets |
| 5,499,507 |
| 6,108,589 |
| ||
|
|
|
|
|
| ||
Total assets |
| $ | 31,115,917 |
| $ | 31,881,286 |
|
See accompanying notes to consolidated financial statements.
4
|
| (Unaudited) |
|
|
| ||
|
| June 30, 2006 |
| 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 June 30, 2006 and September 30, 2005) |
| $ | 2,534,590 |
| $ | 2,534,590 |
|
Other paid-in capital |
| 959,512 |
| 959,512 |
| ||
Retained earnings |
| 2,936,084 |
| 2,959,723 |
| ||
Accumulated other comprehensive loss |
| (1,462,163 | ) | (1,420,165 | ) | ||
Total common stockholders’ equity |
| 4,968,023 |
| 5,033,660 |
| ||
|
|
|
|
|
| ||
Long-term debt, less current installments |
| 9,098,006 |
| 9,196,060 |
| ||
Long-term debt, less current installments - discontinued operations |
| 58,614 |
| 63,797 |
| ||
Total long-term debt |
| 9,156,620 |
| 9,259,857 |
| ||
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Current portion of long-term debt |
| 592,730 |
| 612,390 |
| ||
Demand Note Payable |
| 1,551,663 |
| 1,836,666 |
| ||
Borrowings under lines-of-credit |
| 5,804,035 |
| 6,600,000 |
| ||
Accounts payable |
| 1,223,058 |
| 270,139 |
| ||
Accrued expenses |
| 479,070 |
| 745,119 |
| ||
Customer deposits and accrued interest |
| 501,909 |
| 952,503 |
| ||
Accrued income taxes |
| 562,582 |
| 460,055 |
| ||
Other current liabilities - discontinued operations |
| 94,487 |
| 317,860 |
| ||
Total current liabilities |
| 10,809,534 |
| 11,794,732 |
| ||
|
|
|
|
|
| ||
Deferred credits and other liabilities: |
|
|
|
|
| ||
Accrued income taxes |
| 701,260 |
| 837,727 |
| ||
Deferred compensation |
| 2,066,786 |
| 1,910,686 |
| ||
Deferred pension costs & post-retirement benefits |
| 2,836,136 |
| 2,429,958 |
| ||
Other |
| 242,728 |
| 265,043 |
| ||
Other deferred liabilities - deferred federal income taxes discontinued operations |
| 192,788 |
| 192,788 |
| ||
Other deferred credits and other liabilites - discontinued operations |
| 142,042 |
| 156,835 |
| ||
Total deferred credits and other liabilities |
| 6,181,740 |
| 5,793,037 |
| ||
|
|
|
|
|
| ||
Concentrations and commitments |
|
|
|
|
| ||
|
|
|
|
|
| ||
Total capitalization and liabilities |
| $ | 31,115,917 |
| $ | 31,881,286 |
|
See accompanying notes to consolidated financial statements.
5
CORNING NATURAL GAS CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Nine Months Ended June 30, 2006 and 2005
Unaudited
|
| 2006 |
| 2005 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income (Loss) |
| $ | (23,639 | ) | $ | 810,753 |
|
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
|
|
|
|
| ||
Depreciation |
| 537,915 |
| 464,130 |
| ||
Unamortized debt issuance cost |
| 12,062 |
| 14,601 |
| ||
Gain on sale of marketable securities |
| (105,115 | ) | (54,035 | ) | ||
Deferred income taxes |
| (33,940 | ) | 24,079 |
| ||
|
|
|
|
|
| ||
Changes in assets and liabilities: |
|
|
|
|
| ||
(Increase) decrease in: |
|
|
|
|
| ||
Accounts receivable |
| (1,339,331 | ) | (883,441 | ) | ||
Gas stored underground |
| 3,636,151 |
| 2,308,298 |
| ||
Gas inventories |
| (88,319 | ) | (4,197 | ) | ||
Prepaid expenses |
| (225,217 | ) | (217,609 | ) | ||
Unrecovered gas costs |
| 542,648 |
| (409,121 | ) | ||
Deferred pension and other |
| 22,004 |
| 65,988 |
| ||
Other |
| (75,881 | ) | 31,948 |
| ||
Increase (decrease) in: |
|
|
|
|
| ||
Accounts payable |
| 952,919 |
| 713,904 |
| ||
Accrued expenses |
| (266,049 | ) | 21,417 |
| ||
Customer deposit liability |
| (450,594 | ) | (544,095 | ) | ||
Deferred income taxes |
| 0 |
| 443,466 |
| ||
Deferred compensation |
| 156,100 |
| 174,150 |
| ||
Deferred pension & post-retirement benefits |
| 406,178 |
| 611,020 |
| ||
Other liabilities and deferred credits |
| (260,481 | ) | 70,304 |
| ||
Net cash provided by operating activities |
| 3,397,411 |
| 3,641,560 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Purchase of securities available-for-sale |
| (114,523 | ) | (209,309 | ) | ||
Sale of securities available-for-sale |
| 138,414 |
| 35,766 |
| ||
Capital expenditures |
| (1,453,384 | ) | (737,628 | ) | ||
Net cash used in investing activities |
| (1,429,493 | ) | (911,171 | ) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Proceeds under lines-of-credit |
| 7,087,919 |
| 8,675,000 |
| ||
Repayment of lines-of-credit |
| (7,883,884 | ) | (11,500,000 | ) | ||
Repayment of long-term debt |
| (407,900 | ) | (51,198 | ) | ||
Net cash used in financing activities |
| (1,203,865 | ) | (2,876,198 | ) | ||
Net increase in cash |
| 764,053 |
| (145,809 | ) | ||
|
|
|
|
|
| ||
Cash and cash equivalents at beginning of period |
| 255,037 |
| 253,863 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents at end of period |
| $ | 1,019,090 |
| $ | 108,054 |
|
|
|
|
|
|
| ||
Supplemental disclosures of cash flow information: |
|
|
|
|
| ||
Cash paid during the period for: |
|
|
|
|
| ||
Interest |
| $ | 1,216,278 |
| $ | 983,048 |
|
|
|
|
|
|
| ||
Income taxes |
| $ | 3,000 |
| $ | 212,194 |
|
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 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.
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 June 30 as the measurement date for its plans.
Components of Net Periodic Benefit Cost:
| Nine months ended June 30, 2006 |
| |||||||||||
|
| Pension Benefits |
| Other Benefits |
| ||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Service cost |
| $ | 302,654 |
| $ | 270,745 |
| $ | 23,417 |
| $ | 25,302 |
|
Interest cost |
| 503,733 |
| 562,884 |
| 42,950 |
| 52,558 |
| ||||
Expected return on plan assets |
| (558,813 | ) | (526,636 | ) | 0 |
| 0 |
| ||||
Amortization of prior service cost |
| 30,278 |
| 53,654 |
| 36,559 |
| 36,559 |
| ||||
Amortization of net (gain) loss |
| 331,198 |
| 244,733 |
| (17,024 | ) | (16,420 | ) | ||||
Net periodic benefit cost |
| $ | 609,050 |
| $ | 605,380 |
| $ | 85,902 |
| $ | 97,999 |
|
Pension Plan Assets
The Company’s pension plan weighted-average asset allocations by asset category are as follows:
| Plan Assets |
| |||||
|
| At June 30 |
| ||||
Asset Category |
|
|
| 2006 |
| 2005 |
|
Equity Securities |
| 56 | % | 56 | % | ||
Debt Securities |
| 42 | % | 41 | % | ||
Other |
| 2 | % | 3 | % | ||
|
| 100 | % | 100 | % | ||
There is no Company common stock included in the plan assets.
Amounts recognized in the Balance Sheets consist of:
7
| Pension Benefits |
| Other Benefits |
| |||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Accrued Benefit Cost |
| $ | (2,620,841 | ) | $ | (3,023,498 | ) | $ | (1,100,466 | ) | $ | (1,037,380 | ) |
Intangible Assets |
| 167,751 |
| 208,121 |
| — |
| — |
| ||||
Accumulated Other |
|
|
|
|
|
|
|
|
| ||||
Comprehensive Income |
| 1,839,173 |
| 2,354,643 |
| — |
| — |
| ||||
Net Amount Recognized |
| $ | (613,917 | ) | $ | (460,734 | ) | $ | (1,100,466 | ) | $ | (1,037,380 | ) |
The accumulated benefit obligation for all defined benefit pension plans is $13,949,368 at September 30, 2006 and $13,446,250 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 |
| $ | 15,438,815 |
| $ | 14,881,213 |
|
Accumulated Benefit Obligation |
| 13,949,368 |
| 13,446,250 |
| ||
Fair Value of Plan Assets |
| 10,120,454 |
| 9,251,719 |
| ||
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.
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.
8
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 |
| |||
|
|
|
|
|
| ||
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:
| 1 – Percentage- |
| 1-Percentage |
| |||
|
| Point Increase |
| Point Decrease |
| ||
Effect on total of service and interest cost |
| $ | 3,694 |
| $ | (3,177 | ) |
Effect on postretirement benefit obligation |
| $ | 47,845 |
| $ | (41,421 | ) |
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 |
| Subtotal |
| (2) |
| (3) Tax |
| (4) |
| Subtotal |
| Total |
| |||||||||
Revenue:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
2006 |
| $ | 24,541,370 |
| $ | 2,190,594 |
| $ | 290 |
| $ | 2,190,884 |
| $ | 58,195 |
| $ | 0 |
| $ | 0 |
| $ | 58,195 |
| $ | 26,790,449 |
|
2005 |
| 20,630,489 |
| 2,445,803 |
| (15,252 | ) | 2,430,551 |
| 169,484 |
| 29,263 |
| 0 |
| 198,747 |
| 23,259,787 |
| |||||||||
Transportation Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
2006 |
| 2,259,302 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 2,259,302 |
| |||||||||
2005 |
| 2,360,007 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 2,360,007 |
| |||||||||
Net income (loss):(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
2006 |
| 81,068 |
| (38,319 | ) | (37,671 | ) | (75,990 | ) | (28,717 | ) | 0 |
| 0 |
| (28,717 | ) | (23,639 | ) | |||||||||
2005 |
| 797,232 |
| 48,939 |
| (17,655 | ) | 31,284 |
| 9,345 |
| (27,108 | ) | 0 |
| (17,763 | ) | 810,753 |
| |||||||||
Interest income:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
2006 |
| 143,799 |
| 0 |
| 0 |
| 0 |
| 79,388 |
| 0 |
| 0 |
| 79,388 |
| 223,187 |
| |||||||||
2005 |
| 83,950 |
| 0 |
| 0 |
| 0 |
| 121,196 |
| 9,078 |
| 0 |
| 130,274 |
| 214,224 |
| |||||||||
Interest expense:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
2006 |
| 1,184,616 |
| 48,239 |
| 4,710 |
| 52,949 |
| 4,111 |
| 0 |
| 0 |
| 4,111 |
| 1,241,676 |
| |||||||||
2005 |
| 947,217 |
| 51,937 |
| 7,416 |
| 59,353 |
| 14,801 |
| 0 |
| 0 |
| 14,801 |
| 1,021,371 |
| |||||||||
Total assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
2006 |
| 28,310,743 |
| 1,593,578 |
| 147,920 |
| 1,741,498 |
| 1,063,676 |
| 0 |
| 0 |
| 1,063,676 |
| 31,115,917 |
| |||||||||
2005 |
| 25,664,926 |
| 1,625,504 |
| 179,439 |
| 1,804,943 |
| 795,339 |
| 120,762 |
| 0 |
| 916,101 |
| 28,385,970 |
| |||||||||
Capital expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
2006 |
| 1,451,980 |
| 1,404 |
| 0 |
| 1,404 |
| 0 |
| 0 |
| 0 |
| 0 |
| 1,453,384 |
| |||||||||
2005 |
| 728,023 |
| 9,605 |
| 0 |
| 9,605 |
| 0 |
| 0 |
| 0 |
| 0 |
| 737,628 |
| |||||||||
Federal income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
2006 |
| (61,898 | ) | (15,684 | ) | (19,406 | ) | (35,090 | ) | (14,793 | ) | 0 |
| 0 |
| (14,793 | ) | (111,781 | ) | |||||||||
2005 |
| 643,721 |
| 30,078 |
| (9,236 | ) | 20,842 |
| 4,815 |
| (14,760 | ) | 0 |
| (9,945 | ) | 654,618 |
| |||||||||
9
(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 June 30, 2006.
Note E – Subsequent Event
On May 15, 2006, Corning Natural Gas Corporation (CNG) and C&T Enterprises filed a joint petition with the New York State Public Service Commission (PSC) for approval of a stock acquisition and merger.
On July 19, 2006, The PSC approved the stock acquisition and merger proposal of Corning Natural Gas Corporation and C&T Enterprises, Inc, with certain conditions. The PSC determined that the merger and acquisition is in the public interest, will not adversely affect the development of competitive markets, and will provide significant customer benefits.
Also on July 19, 2006, the Company (CNG) filed a preliminary Proxy Statement and Notice of Special Meeting of Stockholders with the Securities and Exchange Commission (SEC) for their review. On August 8, 2006, a limited number of comments were received from the SEC. It is expected that the Company will file its amended proxy statement expeditiously with a shareholder mailing to follow.
10
CORNING NATURAL GAS CORPORATION
FORM 10-Q for the quarter ended June 30, 2006
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
2006 compared with 2005
Consolidated net loss amounted to $322,600 or ($.636) per share in the third quarter of 2006 compared to earnings of $43,700 or $.086 per share in the third quarter of 2005. Consolidated net loss in the nine months ended June 30, 2006 was $23,600 or ($.047) per share compared to consolidated net income of $810,700 or $1.599 per share in the nine months ended June 30, 2005. The decrease is the result of a significant decrease in local production revenues, increased interest expense on short-term borrowings and increased legal and consulting services incurred as a result of proceedings before the PSC. Also, reduction in Corning Mortgage earnings due to soft local real estate market, as shown in the table below.
Earnings (Loss) by Segment
| Quarter |
| Quarter |
| YTD |
| YTD |
| |||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Utility |
| $ | (283,874 | ) | $ | 26,259 |
| $ | 81,068 |
| $ | 797,232 |
|
Corning Realty |
| (25,473 | ) | 21,688 |
| (38,319 | ) | 48,939 |
| ||||
Corning Mortgage |
| (8,991 | ) | (6,690 | ) | (37,671 | ) | (17,655 | ) | ||||
Total from Continuing Operations |
| (318,338 | ) | 41,257 |
| 5,078 |
| 828,516 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings from Discontinued Operations |
| (4,263 | ) | 2,481 |
| (28,717 | ) | (17,763 | ) | ||||
Total Consolidated |
| $ | (322,601 | ) | $ | 43,738 |
| $ | (23,639 | ) | $ | 810,753 |
|
Revenue
| Quarter |
| Quarter |
| YTD |
| YTD |
| |||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Utility Operating Revenue |
|
|
|
|
|
|
|
|
| ||||
Retail Revenue: |
|
|
|
|
|
|
|
|
| ||||
Residential |
| $ | 3,366,649 |
| $ | 2,894,767 |
| $ | 14,544,409 |
| $ | 11,883,350 |
|
Commercial |
| 714,423 |
| 574,789 |
| 3,287,226 |
| 2,408,746 |
| ||||
Industrial |
| 50,244 |
| 19,426 |
| 229,528 |
| 110,128 |
| ||||
|
| 4,131,316 |
| 3,488,982 |
| 18,061,163 |
| 14,402,224 |
| ||||
Transportation |
| 608,466 |
| 556,831 |
| 2,259,302 |
| 2,360,007 |
| ||||
Wholesale |
| 624,479 |
| 443,137 |
| 3,576,710 |
| 2,672,232 |
| ||||
Local Production |
| 65,723 |
| 206,308 |
| 269,797 |
| 828,591 |
| ||||
Other |
| 104,577 |
| 62,121 |
| 374,398 |
| 367,435 |
| ||||
|
| $ | 5,534,561 |
| $ | 4,757,379 |
| $ | 24,541,370 |
| $ | 20,630,489 |
|
2006 compared with 2005
Utility operating revenue increased $777,000 in the third quarter of 2006 compared to the third quarter of 2005. Utility operating revenue YTD 2006 increased $3,911,000 compared to YTD 2005 due primarily to an increase from higher gas costs. Gas costs are charged to customers through the Company’s Gas Adjustment Clause.
11
Non-Utility Revenue
2006 compared to 2005
Non-utility revenue by operating segment can be found in note D to the financial statements. Non-utility revenue in 2006 decreased $239,700 or 10 percent due to the Corning Realty segment because of the competitiveness of that segment.
Operating Expenses
Utility
2006 compared with 2005
Purchase gas expense increased $874,300 or 29 percent in the third quarter of 2006 compared to the third quarter of 2005. The Company’s average cost of gas, including reconciliation amounts increased to $17.53 per mcf in June 2006 from $9.24 per mcf in June 2005. Other operating and maintenance expense increased by 21 percent.
Non-Utility
2006 compared with 2005
Corning Realty commission and fees expense increased by 19 percent in the third quarter of 2006 compared to the third quarter of 2005 as a result of an increase in referrals paid out. Realty occupancy and advertising expenses decreased $22,000 in the third quarter of 2006 compared to the third quarter of 2005 due to a net decrease in advertising costs.
Other Income and Expense
Investment income increased $12,800 in the third quarter of 2006 versus 2005. 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 $145,700 in the third quarter of 2006 compared to the same period in 2005 due to rising interest rates.
Income Taxes
Utility income tax expense (benefit) for the quarter ended June 30, 2006 was ($185,800), compared to ($31,900) for the same period last year. For the nine months ended June 30, 2006, we reported income tax expense (benefit) of ($61,900) compared to $643,700 for the same period last year.
The effective tax rate for the quarter ended June 30, 2006 was 40 percent, compared to 18 percent in the prior year period. The effective tax rate in the prior period reflects an adjustment resulting from prior period accelerated depreciation deductions. The effective tax rate for the nine months ended June 30, 2006 was 31 percent compared to 45 percent in the same period last year. The effective tax rate in the current period reflects an adjustment to prior period deferred income taxes.
Operating Segments
Note D to the financial statements, which also contain the results by segment for the nine months ended June 30, 2006 and 2005.
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 June 30, 2006 available through lines of credit at local banks, of which $5,800,000 is outstanding at June 30, 2006. As security for the Company’s line of credit, collateral assignments have been executed which assign to the lender various rights in the investment trust account, membership
12
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.
The Company has reached an agreement with a Virginia based company, “Virginia Power Energy” to manage all of its gas supply capacity and purchases effective April 2006.
Regulatory Matters
Rate Case Decision of May 22, 2006
On May 22, 2006, the New York Public Service Commission (the “Commission”) issued a decision in three proceedings involving the Company: Case 05-G-1359, to examine the Company’s October 31, 2005 filing for increased rates; Case 05-G-1268, to review the Company’s practices particularly relating to natural gas supply in light of the difficulties experienced by the Company in the summer and fall of 2005 in procuring supplies for the 2005-2006 winter heating season; and Case 04-G-1032, to consider the Company’s request for deferral and recovery of costs formerly allocated to the appliance business that had been sold in 2003. The decision, entitled “Order Setting Gas Delivery Service Rates, Adopting Performance Targets and Incentives, Allowing Deferral and Rate Recovery of Certain Costs, and Crediting Customers with $1.4 Million of Prior Gas Commodity Costs” (the “May Order”), resolved the issues presented in the three proceedings, adopting, with certain modifications, the provisions of the Gas Rates Joint Proposal (the “Joint Proposal”) dated March 15, 2006 that had been agreed upon by the Company, the Staff of the Department of Public Service (“Staff”), Multiple Intervenors (an association of large customers), and, in part, Fortuna Energy Inc. (a natural gas exploration and production corporation utilizing Company facilities to transport its natural gas to market).
In the May Order, the Commission authorized the Company to increase its base rates for natural gas service by approximately $2.7 million of the $3.4 million requested by the Company in its October 31, 2005 rate filing. Although the Company’s rate filing and the Joint Proposal originally were based on the assumption that rates would go into effect as of October 1, 2006, the Joint Proposal had been amended on April 14, 2006 (the “Amendment”) to propose that the increased rates go into effect as of June 1, 2006 to enhance the Company’s cash flow and access to credit on favorable terms. The May Order adopted that recommendation on the condition, also suggested in the Amendment, that the additional amount collected by the Company as a result of early implementation, calculated to be approximately $420,000, be returned to customers over the period June 1, 2007 through September 30, 2007, to correspond to the period during which it will be collected. The Commission granted recovery of approximately $2.63 million of deferred costs associated with the appliance business, offsetting against that amount $1.4 million of costs identified in the Joint Proposal as attributable to excessive gas costs incurred in 2005.
The Commission adopted the hypothetical capital structure of 70 percent debt and 30 percent equity recommended in the Joint Proposal to enhance the Company’s financial outlook. In the event that the Company earns in excess of 11.0 percent on equity using that structure, 50 percent of the excess will be retained by shareholders and 50 percent will be deferred to be applied to the benefit of customers in a manner to be determined by the Commission.
The Commission further adopted the revenue allocation proposals contained in the Joint Proposal designed to better match revenues with the costs of providing service in the three distinct areas served by the Company, Corning, Hammondsport and Bath (through Bath Electric, Gas and Water Systems, a municipal utility). In addition, the May Order approved increases in the customer minimum charge that were designed to collect more of the fixed costs of serving customers in that component of the bill. Although, for an average residential customer using 10 dekatherms per month, the increase in the minimum charge alone would amount to approximately 40.77 percent, viewed as a percentage of the entire bill, including the commodity cost of natural gas, the increase would be approximately 11 percent.
13
The May Order also adopted a number of measures included in the Joint Proposal designed to enhance sound practices in three major areas: Health and Safety; Gas Procurement and Capacity Asset Management; and Accounting. Included in the Health and Safety measures are requirements for the testing, repair and replacement of certain types of pipe that are determined to pose potential safety concerns and periodic reporting on results. Gas Procurement and Capacity Asset Management measures include meeting specific deadlines and quantity requirements for the procurement of natural gas supplies, including storage gas and hedging of future supplies; adherence to specific Natural Gas Supply and Acquisition Plan requirements, including procedures for modification of that Plan; and maintaining capacity contracts and minimizing stranded capacity costs consistent with a Commission Policy Statement on those matters. Accounting measures include providing to the Commission’s Office of Accounting and Finance daily cash-flow reports; monthly reconciliations of cash balances per the Company’s books with bank account balances; rolling cash flow forecasts; monthly income statements and balance sheets; and quarterly reports of General Ledger activity, long- and short-term debt, and investment activity in non-utility businesses. The Accounting measures further include separation of the Treasurer and Chief Financial Officer functions; reporting on specific opportunities for improvement in accounting and recordkeeping practices; reconciliation of accruals with payments/refunds for vendors; reconciliation of Federal and State Income Tax returns with amounts recorded on the books; adherence to Commission record-retention policies; exploration of opportunities for new lines of bank credit; and development of a succession plan for key employees. Continued use of the hypothetical capital structure referred to above is conditioned on the Company’s adherence to a series of conditions set forth in the Joint Proposal and adopted by the May Order.
Pursuant to the May Order, if the Company is deficient in any of the enumerated obligations, it will incur a regulatory liability for the benefit of customers, determined in accordance with a matrix set forth in the May Order. The matrix groups different types of deficiencies according to their perceived seriousness and assigns different amounts to those different categories. The minimum amount that can be incurred for a single deficiency is $9,000 and the maximum amount that can be incurred for a series of failures is $519,000.
To enhance interest in an acquisition of the Company by a responsible purchaser, the Joint Proposal included, and the Commission adopted, a “Merger Package” consisting of a series of commitments from and to a prospective buyer. Among these measures are an opportunity to “freeze” rates for a three-year period, an increase in the earnings threshold, removal of certain requirements that are intended to apply only if the Company is not sold, and options for passing back to customers the $1.4 million of costs identified in the Joint Proposal as attributable to excessive gas costs.
On May 24, 2006, the Company agreed unconditionally to accept and abide by the terms and conditions of the May Order and the new rates authorized by the May Order went into effect as of June 1, 2006.
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
14
defers any excess or deficiency and subsequently either recovers it from, or refunds it to, customers over the following 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.
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 June 30, 2006, these instruments consisted of a term loan and bank credit line borrowings outstanding of $5,800,000. The interest rate (prime rate as published in the Wall Street Journal) on these lines was 8.25 percent at June 30, 2006.
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-Q 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
15
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.
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 |
|
|
|
99.1 |
| Amended and Restated Employment Agreement by and between Coring Natural Gas Corporation and Thomas K. Barry executed December 14, 2000. |
|
|
|
99.2. |
| Amended and Restated Employment Agreement by and between Coring Natural Gas Corporation and Kenneth J. Robinson executed December 14, 2000. |
|
|
|
99.3. |
| Amended and Restated Survivor Benefit Deferred Compensation Agreement by and between Corning Natural Gas Corporation and Thomas K. Barry executed December 14, 2000. |
|
|
|
99.4. |
| Amended and Restated Survivor Benefit Deferred Compensation Agreement by and between Corning Natural Gas Corporation and Kenneth J. Robinson executed December 14, 2000. |
|
|
|
99.5. |
| Amended and Restated Severance Agreement by and between Corning Natural Gas Company and Thomas K. Barry executed December 14, 2000. |
|
|
|
99.6. |
| Amended and Restated Severance Agreement by and between Corning Natural Gas Company and Kenneth J. Robinson executed December 14, 2000. |
|
|
|
99.7. |
| Assignment Agreement by and between Corning Natural Gas Corporation and Thomas K. Barry executed July 10, 2001. |
|
|
|
99.8. |
| Assignment Agreement by and between Corning Natural Gas Corporation and Kenneth J. Robinson executed July 10, 2001. |
16
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: | ||
August 14, 2006 | ||
/s/ Thomas K. Barry |
| |
| Thomas K. Barry, Chairman of the Board, President and CEO | |
|
| |
|
| |
Date: |
| |
August 14, 2006 |
| |
| /s/ Kenneth J. Robinson |
|
| Kenneth J. Robinson, Executive Vice President | |
|
| |
|
| |
Date: |
| |
August 14, 2006 |
| |
| /s/ Firouzeh Sarhangi |
|
| Firouzeh Sarhangi, Chief Financial Officer and Treasurer |
17