U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(X) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the nine month transition period ended September 30, 1996
Commission file number 0-643
Corning Natural Gas Corporation
(Name of small business issuer in its charter)
New York 16-0397420
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
330 W. William St., Corning NY 14830
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (607) 936-3755
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock - $5.00 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X
No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. (X)
Revenues for 9 month period ended September 30, 1996 $ 15,082,135
The aggregate market value of the 336,903 shares of the Common Stock held by
non-affiliates of the Registrant at the $22 average of bid and asked prices as
of November 1, 1996 was $7,411,866.
Number of shares of Common Stock outstanding as of the close of business on
November 1, 1996 - 460,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the nine month period
ended September 30, 1996, and definitive proxy statement and notice of annual
meeting of shareholders, dated January 16, 1997, are incorporated by reference
into Part I, Part II and Part III hereof.
Information contained in this Form 10-KSB and the Annual Report to shareholders
for fiscal 1996 period which is incorporated by reference contains certain
forward looking comments which may be impacted by factors beyond the control of
the Company, including but not limited to natural gas supplies, regulatory
actions and customer demand. As a result, actual conditions and results may
differ from present expectations.
CORNING NATURAL GAS CORPORATION
FORM 10-KSB
For the 9 Month Period Ended September 30, 1996
Part I
ITEM 1 - DESCRIPTION OF BUSINESS
(a) Business Development
Corning Natural Gas Corporation (the "Company" or "Registrant"), incorporated in
1904, is a natural gas utility. The Company purchases its entire supply of gas,
and distributes it through its own pipeline distribution and transmission
systems to residential, commercial, industrial and municipal customers in the
Corning, New York area and to two other gas utilities which service the Elmira
and Bath, New York areas. The Company is under the jurisdiction of the Public
Service Commission of New York State which oversees and sets rates for New York
gas distribution companies. The Company also sells, leases and services
appliances, primarily gas burning, through its wholly owned subsidiary, Corning
Natural Gas Appliance Corporation.
(b) Business of Issuer
(1) The Company maintains a gas supply portfolio of numerous contracts and
is not dependent on a single supplier. Additionally, the Company has
capabilities for storing 793,000 Mcf through storage operations with two of its
suppliers. The Company had no curtailments during 1996 and expects to have an
adequate supply available for its customers during 1997 providing that no
abnormal conditions or actions occur.
(2) The Company is franchised to supply gas service in all the political
subdivisions in which it operates and is adequately protected therewith.
(3) Since the Company's business is seasonal by quarters, sales for each
quarter of the year vary and are not comparable. Sales for different periods
vary depending on variations in temperature, but the Company's Weather
Normalization Clause (WNC) serves to stabilize net revenue from the effects of
temperature variations. The WNC allows the Company to adjust customer billings
to compensate for fluctuations in net revenue caused by temperatures which are
higher or lower than the thirty year average temperature for the period. Degree
days, which represent the number of degrees that the average daily temperature
falls below 65 degrees Fahrenheit, totaled 4,577 for the period January 1
through September 30, 1996 and 4,273 for the same period in 1995.
(4) The Company has three major customers, Corning Incorporated, New York
State Electric & Gas (NYSEG), and Bath Electric, Gas & Water Systems (BEGWS).
The loss of any of these customers could have a significant impact on the
Company's financial results.
(5) Historically, the Company's competition in the residential market has
been primarily from electricity in cooking, water heating and clothes drying,
and to a very small degree, in heating. The price of gas remains low in
comparison to that of electricity in the Company's service territory and the
Company's competitive position in the residential market continues to be very
strong. Approximately 99% of the Company's general service customers heat with
gas.
In recent years competition from oil has developed in the industrial
market. The Company has been able to counteract much of this competition, to
date, through the transportation of customer owned gas for a transportation
charge. The customer arranges for their own gas supply, then moves it through
the Company's facilities for a transportation fee. The Company's
transportation rate is equal to the lowest unit rate of the appropriate rate
classification, exclusive of gas costs, hence the profit margin is maintained.
Additionally, under the recent deregulated environment there is opportunity for
the Company to increase revenue by selling its upstream pipeline capacity to
transportation customers. The Company is authorized to retain 15% of such
revenue and 85% is returned to firm customers in the form of lower gas costs.
Transportation customers that pay for this capacity are virtually assured that
their supply will not be interrupted. Revenues derived from the resale of this
capacity were $131,953 for 9 months ended September 30, 1996 and $104,294 for
the period January 1 through September 30, 1995.
For those willing to bear some risk, the Company has an interruptible
transportation rate for its large industrial customers whereby the customer may
elect to avoid payment of demand charges but bears the risk of partial or total
upstream interruption of service during certain periods. To maintain industrial
load in the event that oil prices temporarily drop below the equivalent gas
price, the Company continues to maintain a flexible transportation rate
schedule. This flexible rate, however, was not utilized in 1996 and has been
invoked only once since its inception.
In September 1995 the Company purchased the assets of a local gas
distribution system, Finger Lakes Gas Company, through the Federal Bankruptcy
Court. Finger Lakes Gas served customers in the Hammondsport, NY area and had a
customer base of approximately 320 customers. The Company was able to purchase
this all plastic system with a bid of $560,000. The Company was pleased to
purchase these assets that originally cost over $1.5 million to construct for
its relatively low bid. The nearly new, all plastic, system was already
connected and serving 320 customers with a potential to add 200 more in the near
future. On a per customer basis, this represents a very low investment. The
capital to purchase these assets was obtained through short term debt. The
Company has not found it necessary to apply for an increase in rates on this
part of our system which means the original rates made effective in 1990 remain
in effect six years later.
Shortly after the Company took possession of the system, Mercury Aircraft,
Inc. announced it would purchase the former Taylor Wine Company facilities and
centralize their other plants. The reopening of this major facility will most
certainly contribute toward the stability and future viability of the new gas
system which is now part of the Company. The former Finger Lakes Gas Company's
operations, did not have a significant impact on 1995, but contributed in excess
of $150,000 to gross margin (revenues less gas cost) for the period ended
September 30, 1996.
In December, 1994 the New York Public Service Commission instituted a
proceeding to address issues related to the merging competitive natural gas
market. This proceeding is intended to provide a framework whereby access to
facilities on upstream pipelines made available by FERC Order 636 would be
available to end use customers on the Local Distribution Company level. New
tariff filings were approved and became effective September 1, 1996. The
Company considers this a transitional step towards full unbundling of services
with future changes made as circumstances warrant.
The Company received approval for a rate increase from the New York State
Public Service Commission of approximately $124,000 in revenues with an
effective date of September 1, 1996.
(6) The Company believes compliance with present federal, state and local
provisions relating to the protection of the environment will not have any
material adverse effect on capital expenditures, earnings and financial position
of the Company and its subsidiary.
(7) Sixty-seven persons were employed on a full-time basis and six on a
part-time basis by the Company in 1996 and 1995.
(8) The Company's labor-management relationship is good. Typical labor
negotiations are completed in one to two days. The current labor contract was
signed September 1, 1995 for a three year period.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company completed the construction of a new office building at 330 West
William Street, Corning, NY in the fall of 1991. This structure is physically
connected to the operations center built three years earlier. The Company had
outgrown its general offices at 27 East Denison Parkway. The property has been
sold, and the gain on the sale was returned to ratepayers in previous years.
The Company's pipeline system is thoroughly surveyed each year. Any
necessary replacements are included in the construction budget. Approximately
105 miles of transmission main, 279 miles of distribution main, 13,800 services
and 86 measuring and regulating stations, along with various other property are
distributed throughout the service area. All of the above described property is
owned by the Company, except for approximately one mile of 10" gas main which is
under a long-term lease and is used primarily to serve Corning Incorporated.
All of the above described property which is owned by the Company is adequately
insured, and is subject to the lien of the Company's first mortgage indenture.
ITEM 3 - LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings, nor
is the Company aware of any problems of any consequence which it anticipates may
result in legal proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the third
quarter of 1996.
Additional Item
Executive Officers of the Registrant
(Including Certain Significant Employees)
Business Experience Years Served
Name Age During Past 5 Years In This Office
Thomas K. Barry 51 Chairman of the Board of Directors 3
President & C.E.O. 12
Edgar F. Lewis 59 Senior Vice President - Operations 16
Kenneth J. Robinson 52 Executive Vice President 5
Financial Vice President & Treasurer 4
Phyllis J. Groeger 56 Secretary 9
Thomas S. Roye 43 Vice President - Administration 5
Assistant Treasurer & Assistant Secretary 4
Gary K. Earley 42 Treasurer 5
Accountant, Rates & Regulations 4
Term of office is for one year. (Normally from April to April)
Part II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The principal market on which the Registrant's common stock is traded, the
range of high and low bid quotations for each quarterly period during the past
two years, the amount and frequency of dividends, and a description of
restrictions upon the Registrant's ability to pay dividends, appear in the table
below. The number of stockholders of record of the Registrant's Common Stock was
373 at September 30, 1996. The high and low bid quotations reflect inter-dealer
prices, without retail markup, markdown or commission and may not represent
actual transactions.
MARKET PRICE - (OTC)
Dividend
Quarter Ended High Low Paid
March 31, 1996 $ 23 $ 22 $ .315
June 30, 1996 23 22 .315
September 30, 1996 22 21 1/2 .315
March 31, 1995 25 24 $ .31
June 30, 1995 24 1/2 24 .31
September 30, 1995 24 3/4 24 .31
December 31, 1995 24 23 .315
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion of financial condition and results of operations of
the Company appears in the 1996 Annual Report to Shareholders which is
incorporated by reference.
ITEM 7 - FINANCIAL STATEMENTS
The consolidated financial statements, together with the independent
auditors' report thereon of KPMG Peat Marwick LLP dated November 8, 1996 are
included in the 1996 Annual Report to Shareholders attached hereto, and are
incorporated in this Form 10-KSB by reference thereto.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
Part III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The information required regarding the executive officers of the Registrant
is included in Part 1 under "Additional Item".
ITEM 10 - EXECUTIVE COMPENSATION
The information required regarding the compensation of the executive
officers appears in the Definitive Proxy Statement attached hereto.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required regarding the security ownership of certain
beneficial owners and management appears in the Definitive Proxy Statement
attached hereto.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required regarding certain relationships and related
transactions appears in the Definitive Proxy Statement attached hereto.
Part IV
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed with this Form 10-KSB or incorporated
herein by reference: (Exhibit numbers correspond to numbers assigned to
exhibits in Item 601 of Regulation S-B)
Name of Exhibit
Exhibit Page
3 A copy of the Corporation's Articles of Incorporation,
as currently in effect, including all amendments, was
filed with the Company's Form 10-K for December 31, 1987.
3 A copy of the Corporation's complete by-laws, as
currently in effect, was filed with the Corporation's
report on Form 10-Q for the quarter ended March 31, 1984.
10 A copy of the "Agreement Between Corning Natural Gas
Corporation and Local 139", dated September 1, 1995
was filed with Form 10-KSB for December 31, 1995.
10 Consulting Agreement and Employment Contracts with
three executive officers were filed with the Company's
Form 10-K for December 31, 1987.
10 A copy of the Service Agreement with CNG Page
Transmission Corporation was filed with the Company's
Form 10-KSB for December 31, 1993.
10 A copy of the Sales Agreement with Bath Electric, Gas
and Water was filed with the Company's Form 10-K for
December 31, 1989.
10 A copy of the Transportation Agreement between the Company
and New York State Electric and Gas Corporation was filed
with the Company's Form 10-KSB for December 31, 1992.
10 A copy of the Transportation Agreement between the
Company and Corning Incorporated was filed with the
Company's Form 10-KSB for December 31, 1992.
10 A copy of the Service Agreement with Columbia Gas
Transmission Co. was filed with the Company's
10-KSB for December 31, 1993.
10 A copy of the Service Agreement with Tennessee Gas
Pipeline Co. was filed with the Company's 10-KSB
for December 3, 1993.
13 A copy of the Corporation's Annual Report to
Shareholders for 1996, is filed herewith. 11
22 Information regarding the Company's sole subsidiary was
filed as Exhibit 22 with the Company's Form 10-K for
the period ended December 31, 1981.
28 Corning Natural Gas Corporation Proxy Statement is
filed herewith. 12
99 Order from the U.S. Bankruptcy Court, Northern District
of New York re: Approval of Acquisition of Finger Lakes
Gas Company was filed with the Company's 10-KSB for the
period ended December 31, 1995.
99 Order from the Public Service Commission of New York State
re: Approval of Acquisition of Finger Lakes Gas Company
was filed with the Company's 10-KSB for the period ended
December 31, 1995.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the three month period
ended September 30, 1996.
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.
CORNING NATURAL GAS CORPORATION
(Registrant)
Date December 26, 1996 THOMAS K. BARRY
Thomas K. Barry, Chairman of the
Board, President and C.E.O.
Date December 26, 1996 GARY K. EARLEY
Gary K. Earley, Treasurer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Date December 26, 1996 J.E. BARRY
J. E. Barry, Director
Date December 26, 1996 DONALD R. PATNODE
Donald R. Patnode, Director
Date December 26, 1996 J.A. FINLEY
J.A. Finley, Director
CORNING NATURAL GAS CORPORATION 1996 ANNUAL REPORT
Report to Shareholders
A variety of circumstances and opportunities have culminated in the
production of above average financial results for the first three quarters of
1996 as well as for the past twelve months. We will be discussing the first
nine months of the year in addition to twelve month results as we have moved
from a December 31 to a September 30 fiscal year. This change, which will end
our year during a mild season, actually provides a more realistic annual picture
of the financial results of the highly seasonal business nature that is typical
for northeastern natural gas distribution companies. The numbers presented to
you throughout this report are audited for the nine month period ended September
30, 1996 but are unaudited for the nine months and twelve months ended September
30, 1995.
FINANCIAL RESULTS - As previously stated, a number of factors combined in
providing outstanding results for the past year. On an individual basis, no
particular segment of our business was outstanding except perhaps for overall
gas deliveries. Rather exceptionally cold weather, which produced 7.5 percent
more degree days than the fifteen year average, did result in 779,000 Mcf more
deliveries in the twelve months ended September 30, 1996 than the prior year.
Consolidated earnings of $483,000 for the nine months ended September 30, 1996,
and $795,000 for the twelve month period ended September 30, 1996 resulted in an
increase over the prior period of 56 percent and 37 percent respectively.
Incremental revenues derived from non-traditional sources provided as a result
of the restructuring process referred to elsewhere in this report account for
some of the earnings improvement. The purchase of the Hammondsport, NY gas
delivery system generated gross margin of $150,000 for the nine months ended
September 30, 1996. The physical acquisition was made without difficulty while
sales generated were higher than projections with relatively low operating
costs. The Company's Appliance subsidiary also contributed significantly, once
again, to our consolidated results.
APPLIANCE SUBSIDIARY - The Company's wholly owned subsidiary also continued
to improve its contributions to earnings. For the nine months ended September
30, 1996 the Appliance Corporation earned $132,000, an improvement of 24 percent
over the same period of 1995. Twelve month earnings, ended September 30, 1996,
of $229,000 are 19 percent ahead of the prior year and amount to 29 percent of
our 12 month consolidated results. The Company operates three retail stores
including one in Elmira, Bath and Corning. We recently moved the Elmira store
into a complex of shops adjacent to the new, impressive Wegman's supermarket
near downtown Elmira. Eleven burning natural gas fireplace displays were
installed at this store as its primary feature. We expect to vastly improve the
traffic at this new outlet which opened October 1, 1996 as the Wegmans plaza is
projected to eventually attract up to 50,000 customers per week. Both the
Corning and Bath outlets were remerchandised at the same time to capitalize on
the opening of the Elmira unit. We look forward to a promising future for the
Appliance Subsidiary as its growth and contribution to consolidated results play
an ever increasing role.
ACQUISITION - The purchase of the Hammondsport, NY, distribution system
(previously operated by the Finger Lakes Gas Company) has exceeded forecast
expectations. We have achieved moderate results in adding new customers on the
system which was approximately sixty percent saturated when we purchased it in
bankruptcy court. However, projected results were enhanced when the single
largest customer was placed on stream very shortly after we purchased the system
in September, 1995. This customer, Mercury Aircraft, Inc., accounts for a
significant proportion of system deliveries in Hammondsport. The additional
revenues generated by this customer have enabled us to provide continued service
throughout Hammondsport without any rate adjustments. While the rates that we
deliver natural gas to customers in Hammondsport are similar to those in
Corning, there has been no rate increase on this system since its original
construction in 1990.
MAJOR CUSTOMERS - The Company has continued its relationships with its
primary industrial and wholesale customers. We provide primarily gas
transportation services to our wholesale accounts in Elmira and Bath which
amounted to 37 percent of total throughput for the year ending September 30,
1996 which represents an increase of 13 percent. We also maintain excellent
relationships with our large industrial users, Corning Incorporated, Pollio
Dairy and Dresser Rand. We recently executed a contract with Corning
Incorporated wherein the Company will provide the main plant facilities (intown)
with all of their requirements either through sales, transportation, and/or
storage services for the next three years with potential renewals extending to
five years. Such contracts and relationships help us to stabilize our overall
throughput and earnings into the future. The Company currently transports
nearly one hundred percent of the natural gas used by all of its industrial and
wholesale customers and many of its large commercial and municipal accounts.
Transportation services now account for approximately two thirds of our total
gas deliveries.
RATES - The Company had filed a rate application with the NYSPSC in the
amount of $368,000 on June 8, 1995 with a requested implementation date of
January 1, 1996. Unfortunately, a series of delays and adjustments resulted in
a final approval of only $124,000 which did not become effective until September
1, 1996. Thus, this rate adjustment has almost no impact upon earnings as
stated in this report. We have managed to keep control of our overhead,
particularly when considering that the prior rate increase, which was effective
in November, 1993, amounted to only $88,000. Therefore, our rates have only
increased a total of $212,000 during the past three years which represents an
increase of only 1.5% to the average residential customer. Further, any
additional potential increases in our rates will not take place before 1998.
Another adjustment that affects rates is that the Company chose, in 1992,
to protect its customers and its shareholders from exceptional swings in the
weather by instituting the weather normalization into the billing factor.
Thus, when the winter is colder than average, the Company reduces its billing
factor to residential and commercial customers thereby minimizing excess
earnings or losses as a result of warmer or colder than normal weather.
During the twelve months ended September 30, 1996, the Company returned $201,000
in the form of reduced rates to its retail and commercial customers as a result
of colder than normal weather.
Additionally, we previously stated that we were successful in deriving
revenues from non-traditional sources. The marketing of excess pipeline
capacity on the system benefits both the Company and its customers. Since the
Company retains only fifteen percent of its capacity assignment sales, our
customers are the beneficiaries of the other eighty-five percent of such sales.
Over the past twelve months we have returned $1,030,000 to our customers through
lower rates as a direct result of these incremental revenues.
OPERATING EXPENSES AND TAXES - On the positive side, our ability to
maintain a steady rate structure and control our operating expenses helps to
keep gas at affordable prices. For the twelve months ended September 30, 1996,
our total operating expenses, including depreciation, actually declined by
$78,000 or 2 percent. Unfortunately, general and federal income taxes rose by
$450,000 or 27 percent during this same period.
During the past year, our Company collected over $1.8 million in general
taxes from our customers. Most of these taxes were made up of the much
discussed gross revenue tax (GRT) which is a tax on all revenues charged by
utilities within the state. Other industries in the state are taxed only upon
their earnings. There has been a great deal of discussion across the state
regarding the need to reduce energy costs, particularly electric rates, if we
are to attract new industries or even maintain existing industry. New York
State utility customers pay twice the national average in taxes. Everyone
recognizes the need to replace the GRT with a more realistic taxing system, but
nothing has yet been accomplished at the state capital in this regard. Governor
George Pataki's administration has reduced personal income taxes and eliminated
the surtax on businesses and is now discussing a gradual phase-down of the GRT.
The Governor was also successful in reforming workman's compensation laws which
has resulted in a 17 percent savings in this particular expense to our Company.
CAPITAL ADDITIONS - The majority of our capital additions are made to
upgrade the pipeline distribution system and to add new customers. During the
past nine months we replaced 118 service lines, 3,570 feet of mains and added
50 new services. We have had an ongoing program to replace all outdoor meters
with temperature compensated meters which provides for more accurate measurement
of gas at weather extremes, particularly important during cold weather. This
program will be completed in 1997. Nearly 100 percent of all the pipelines and
service lines we have installed since 1970 have been with plastic. We continue
to carefully monitor the older steel distribution system while installing
corrosion control equipment in the most crucial areas. In the past three years
we have installed corrosion protection equipment on an additional 29 miles of
mains. We dedicate three full-time employees for leak detection and corrosion
control. Each year we also expend a portion of the budget to upgrade the
rolling stock and expand computer utilization. Our fleet of 30 service and
installation vans, crew trucks, backhoes, special equipment trucks and
automobiles are in excellent condition and replacements are made annually based
upon usage and condition.
SUMMARY - The local economy remains somewhat stagnant as Corning
Incorporated and Dresser Rand have downsized and done some restructuring over
the past several years. Corning Natural Gas has, however, made advances through
its purchase of the Hammondsport gas system, sales of pipeline capacity,
expansion of appliance sales in Elmira and through internal cost controls.
Having just ended an excellent year, while positioning ourselves to provide a
variety of services to our customers at highly competitive rates, we feel quite
positive about the future of our industry and our Company. Twelve month
earnings of $1.74 per share have positioned us to pay an annualized dividend of
$1.28 per share. The dividend to be paid on February 20, 1997 is the Company's
176th consecutive dividend. These results could not have been possible without
the commitment of a group of loyal and dedicated employees who strive to upgrade
the quality of their work and expand the services provided to our customers. We
sincerely thank these employees along with a supportive Board of Directors and
all of the customers that help to make us a service driven organization.
For the Board of Directors,
Thomas K. Barry
Chairman of the Board, President & CEO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During 1996 the Company changed its fiscal year end from December 31 to
September 30. The Company believes that the September 30 fiscal year end better
represents its natural business cycle. The adjacent table compares the results
for the nine months ended September 30, 1996 to the unaudited results for the
nine months ended September 30, 1995. The discussion of operating results will
focus on these periods.
EARNINGS
Net income in 1996 was $483,000, or $1.05 a share, compared to net income
of $309,000, or $.67 a share in 1995. The earnings improvement results from the
acquisition of the former Finger Lakes Gas Company which contributed $150,000 to
gross margin (revenue less gas cost), and from revenues derived from non-
traditional sources. Recent industry restructuring allows the Company to
benefit from such non-traditional sources such as the assignment of unused
pipeline capacity, the sale of natural gas to both on-system and off-system
customers, and the assignment of storage capacity.
Additionally, unregulated subsidiary earnings improved 24 percent to
$131,900 in 1996, as discussed below.
OPERATING REVENUE
Operating revenue of $15,100,000 increased 24 percent in 1996 due primarily
to an increase in gas cost billings. The Company's billing rates are adjusted
to reflect changes in gas costs (which include current cost as well as prior
period reconciliation amounts), keeping the effect of such changes earnings
neutral to the Company. The acquisition of the former Finger Lakes Gas Company
produced an additional $603,000 in revenue for the nine months ended September
30, 1996.
Total gas delivered to customers increased 10 percent to 6,033,000 Mcf in
1996. The acquisition of the former Finger Lakes Gas Company added 111,000 Mcf
to the Company's throughput in 1996. Colder weather also increased throughput
in 1996 but the Company's weather normalization billing mechanism serves to
neutralize the effect of weather. Accordingly, the Company billed $203,000 less
to customers through this mechanism in 1996, as expected and designed.
Nine Months Ended
9/30/95
9/30/96 Unaudited
Operating revenue $15,082,135 12,119,422
Operating expenses and taxes:
Natural gas purchased 9,538,759 7,093,144
Operating and maintenance 2,613,231 2,519,090
Taxes other than federal income taxes 1,428,476 1,198,240
Depreciation 356,400 340,012
Federal income taxes 185,570 155,954
Total operating expenses and taxes 14,122,436 11,306,440
Income from utility operations 959,699 812,982
Income from unregulated operations: 131,935 106,038
Other income 10,447 15,679
Income before interest expense 1,102,081 934,699
Interest expense 618,695 625,658
Net income $ 483,386 $ 309,041
Earnings per common share $ 1.05 $ .67
OPERATING EXPENSE
The Company's most significant element of cost is purchased natural gas.
Purchased gas expense amounted to 68 percent of total operating expenses in 1996
and 63 percent of the total in 1995. Purchased gas expense increased 34% in
1996 due to increased deliveries noted above, higher prior period gas cost
reconciliation amounts and higher supplier rates. The Company's average cost of
gas per Mcf was $4.47 in 1996 and $4.21 in 1995.
Taxes other than income taxes increased $230,000 or 19% primarily due to an
increase in state and local taxes levied on gross revenue. Other operating and
maintenance expenses did not change significantly.
UNREGULATED OPERATIONS
The Appliance Corporation subsidiary earnings improved 24 percent to
$131,900 in 1996. Increased rental revenues and an improvement in profit
margins resulting from strategic pricing contributed to the boost in subsidiary
earnings.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures amounting to $682,500 in 1996 were financed with
internally generated funds and short-term borrowing.
Our change in fiscal year end created several significant variations in
balance sheet amounts from December 31, 1995 including accounts receivable,
unrecovered or refundable gas costs and notes payable, as the result of much
milder weather at September 30. Transition costs deferred and the related
liability decreased significantly as this liability is almost entirely paid by
the Company and collected from its customers. Gas stored underground at
September 30, 1996 increased significantly from December 31, 1995 due to the
normal operation of storage. The Company injects gas into storage during the
summer months and withdraws it during the winter months.
The Company has unsecured bank lines of credit totaling $5,500,000, the
terms of which are disclosed in note 6 to the financial statements. The Company
continues to explore opportunities to refinance current debt. Management
believes that the combination of currently available credit facilities and
internally generated funds will provide sufficient financial resources for 1997.
REGULATORY MATTERS
The Company implemented a rate increase effective September 1, 1996 in the
amount of $124,000. However, the increase had no material effect on the fiscal
period ended September 30, 1996. In addition, the Company will continue its
weather normalization clause whereby customer bills are adjusted to reflect
deviations from normal weather patterns.
INDUSTRY RESTRUCTURING
1996 saw the culmination of efforts which began in 1994 to provide the
perceived benefits of competition in the natural gas industry to all classes of
customers, irrespective of size. Tariffs were filed and approved by the Public
Service Commission (PSC) to give each and every customer the opportunity to
participate in the competitive environment by purchasing gas in the open market
rather than from Corning Natural Gas and by utilizing the storage facilities
leased by the Company.
The Company has also been provided with additional opportunities and
responsibilities through non-traditional sources. Opportunities exist for the
Company to enhance earnings by assigning unneeded upstream pipeline capacity to
others and by marketing gas to both on-system and off-system customers. In each
case the Company is allowed to retain 15% of the margin, passing 85% back to
firm customers through rates. Efforts to assign unneeded capacity have been
quite successful. Competition in the gas marketing business, however, is very
keen, with thin margins.
It will be some time before the success of the restructuring efforts can be
effectively gauged. For a variety of reasons transportation to small volume
customers has been slow to catch on, both on Corning's system and throughout the
state. At meetings held with customers and marketers, each group expressed
interest in participating, however, it was generally agreed that the transition
will be gradual. Within the industry there are a variety of directions being
taken by individual companies, with some companies taking the extreme position
of exiting the merchant function completely and providing only transportation
service.
This Company has been involved in the entire regulatory process leading up
to the current scheme and will continue to keep abreast of changes which may
evolve. Since this initiative represents the most sweeping change ever to
impact the industry, it is logical that more change will follow. Management is
dedicated to not only complying with the regulatory requirements but looking for
every opportunity to prosper in the new environment.
CORNING NATURAL GAS CORPORATION
AND SUBSIDIARY
Notes to Consolidated Financial Statements
For The Nine Months Ended September 30, 1996
And The Year Ended December 31, 1995
(1) Summary of Significant Accounting Policies
Corning Natural Gas Corporation (the Company) is a gas distribution company
providing gas on a commodity and transportation basis to its customers in
the Southern Tier of New York State. The Company follows the Uniform
System of Accounts prescribed by the Public Service Commission of the State
of New York (PSC) which has jurisdiction over and sets rates for New York
State gas distribution companies. The Company's regulated operations meet
the criteria and accordingly, follow the accounting and reporting of SFAS
71 "Accounting for the Effects of Certain Types of Regulation." The
Company's financial statements contain the use of estimates and assumptions
for reporting certain assets, liabilities, revenue and expenses and actual
results could differ from the estimates. The more significant accounting
policies are summarized below.
Principles of Consolidation and Presentation
The consolidated financial statements include the Company and its wholly
owned subsidiary, The Corning Natural Gas Appliance Corporation (Appliance
Corporation). All significant intercompany accounts and transactions have
been eliminated in consolidation. The results of the Appliance Corporation
are reported separately as unregulated operations in the consolidated
statements of income and retained earnings. Shared expenses are allocated
to the Appliance Corporation. It is the Company's policy to reclassify
amounts in the prior year's financial statements to conform with the
current year's presentation.
Utility Plant and Rented Gas Appliances
Utility plant is stated at the historical cost of construction. These
costs include payroll, fringe benefits, materials and supplies and
transportation costs. The Company charges normal repairs to maintenance
expense. The Appliance Corporation capitalizes the cost of appliances and
the original installation to rented gas appliances. Subsequent repairs are
expensed.
Depreciation
The Company provides for depreciation for accounting purposes using a
composite straight-line method based on the estimated economic lives of
property. The depreciation rate used for utility plant, expressed as an
annual percentage of depreciable property, was 3.3% in 1996 and 1995. At
the time utility properties are retired, the original cost plus costs of
removal less salvage, are charged to accumulated depreciation. Rented gas
appliances are depreciated on a straight-line basis ranging from 10% to 20%
per year.
Revenue and Natural Gas Purchased
The Company records revenue 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 through the end of each
month. The Company secured a weather normalization clause in the last
major filing as protection against severe weather fluctuations. This
affects space heating customers and is activated when degree days are 2%
greater or less than a 30 year average. Hence, the effect on revenue
fluctuations in weather related gas sales is somewhat neutralized. Gas
purchases are recorded based on readings of suppliers' meters as of the end
of the month. The Company's rate tariffs include a Gas Adjustment Clause
(GAC) which adjusts rates to reflect changes in gas costs from levels
established in the rate setting process. In order to match such costs and
revenue, the PSC has provided for an annual reconciliation of recoverable
GAC costs with applicable revenue billed. Any excess or deficiency in GAC
revenue billed is deferred and the balance at the reconciliation date is
either refunded or recovered from the customers over a subsequent 12-month
period.
Federal Income Tax
The Company uses the asset and liability method to establish deferred tax
assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities
at enacted tax rates expected to be in effect when such amounts are
realized or settled. In addition, such deferred tax assets and liabilities
will be adjusted for the effects of enacted changes in tax laws and rates.
(2) Acquisition of Finger Lakes Gas
On September 20, 1995 the Company acquired the assets associated with the
distribution system of Finger Lakes Gas Company for $560,000. The assets
were purchased at public auction held in Federal Bankruptcy Court. The
acquisition was accounted for as a purchase, accordingly, the assets were
added to utility plant at their purchase price. The former Finger Lakes
Gas Company's operations, which did not have a significant impact on 1995,
are included in the consolidated results from the acquisition date. Gross
margin (revenue less gas cost) generated was $150,000 for the nine months
ended September 30, 1996 and $50,000 for the twelve months ended December
31, 1995.
(3) Information About Operating Segments
Selected financial information for the Company's identifiable operating
segments follows:
Identifiable Assets Capital Expenditures Depreciation
1996 1995 1996 1995 1996 1995
Reg. Oper. $18,382,249 20,088,094 475,121 1,272,123 356,400 454,637
Unreg. Oper. 2,175,313 2,131,621 207,355 241,073 174,300 232,219
$20,557,562 22,219,715 682,476 1,513,196 530,730 686,856
========== ========== ======= ========= ======= =======
The Company's regulated operations have no significant assets which are
excluded from recoverability under rate filings.
(4) Regulatory Matters
Certain costs are deferred and recognized as expenses when they are
reflected in rates and recovered from customers as permitted by SFAS 71.
These costs are shown as Regulatory Assets. Such costs arise from the
traditional cost-of-service rate setting approach where all prudently
incurred costs are recoverable through rates. Deferral of these costs is
appropriate while the Company's rates are regulated under a cost-of-service
approach.
In a purely competitive environment, such costs might not have been
incurred or deferred. Accordingly, if the Company's rate setting were
changed from a cost-of-service approach and it was no longer allowed to
defer these costs under SFAS 71, certain of these assets may not be fully
recoverable. However, the Company cannot predict the impact, if any, of
competition and continues to operate in a cost-of-service based regulatory
environment and therefore believes that accounting under SFAS 71 is still
appropriate.
Below is a summarization of the Regulatory Assets as of September 30, 1996
and December 31, 1995:
1996 1995
Unrecovered gas costs $ --- 1,157,382
Deferred transition costs 29,093 414,504
Deferred debits - accounting for income taxes 1,016,661 1,016,661
Other deferred debits 555,716 275,719
Total-Regulatory Assets $ 1,601,470 2,864,266
========= =========
Unrecovered gas costs - These costs are recoverable over future years and
arise from an annual reconciliation of certain gas revenue and costs (as
described in Note 1).
Deferred transition costs - The Company is currently collecting transition
costs through the GAC as authorized by the PSC, but final policy may
require collection from transportation customers as well.
Deferred debits - accounting for income taxes - This amount represents the
expected future recovery from ratepayers of the tax consequences of
temporary differences between the financial reporting basis and tax basis
of assets and liabilities.
Other deferred debits - The majority of this amount represents timing
differences between the Company's rate case filings and financial reporting
period for pension and postretirement benefit accounting.
The Company expects that its regulatory assets will be fully recoverable
from customers.
(5) Long-Term Debt
A summary of long-term debt as of September 30, 1996 and December 31, 1995
follows:
1996 1995
First Mortgage bonds-10% series due 2008 $1,700,000 $1,700,000
First mortgage bonds- 8 1/4% series all due 2018 3,100,000 3,100,000
Unsecured senior note-9.83% due serially 2016 1,600,000 1,600,000
Total long-term debt 6,400,000 6,400,000
Less current installments 100,000 100,000
Long-term debt less
current installments $6,300,000 $6,300,000
========== ==========
The Company will redeem long-term debt as follows:
10% First Mortgage Bonds - $100,000 on December 15th annually with a
final $500,000 payment due in 2008.
9.83% Senior Note - $100,000 annually 2007 through 2015 with $700,000
due 2016.
Under the Company's bond indenture, retained earnings as of September 30,
1996 in the amount of $796,654 are restricted as to the payment of
dividends. The first mortgage bonds are secured by substantially all
utility plant.
(6) Lines of Credit
The Company has lines of credit with local banks to borrow up to $5,500,000
on a short-term basis. Borrowings outstanding under these lines were
$2,725,000 at September 30, 1996 and $3,815,000 at December 31, 1995. The
lines of credit are unsecured and payable on demand with interest at the
prime rate (8.25% at September 30, 1996) less 1/8 to 1/2%.
(7) Federal Income Taxes
Federal income tax expense (benefit) recorded in the accompanying
consolidated statements of income and retained earnings is as follows:
1996 1995
Utility Operations:
Current $ 392,304 117,403
Deferred (196,063) 124,746
Investment Tax Credits (10,671) (10,671)
185,570 231,478
Unregulated Operations:
Current 97,095 99,966
Deferred (127) 6,630
96,968 106,596
Total federal income tax expenses $ 282,538 338,074
======== ========
Actual federal income tax expense differs from the expected federal income
tax expense (computed by applying the federal corporate tax rate of 34% to
income before federal income tax expense) as follows:
1996 1995
Expected tax expense $ 260,414 325,993
Investment tax credits (10,671) (10,671)
Other, net 32,795 22,752
$ 282,538 338,074
======= =======
The tax effects of temporary differences that result in deferred tax assets
and deferred tax liabilities at September 30, 1996 and December 31, 1995
are as follows:
1996 1995
Deferred tax assets:
Alternative minimum tax carry fwrd $ 0 50,000
Unbilled revenue 29,000 105,000
Supplemental pension reserve 151,000 126,000
Postretirement benefit obligations 106,000 83,000
Allowance for uncollectible accounts 33,000 34,000
Other 45,000 56,000
Total gross deferred tax assets 364,000 454,000
======= =======
Deferred tax liabilities:
Property, plant and equipment,
principally due to differences
in depreciation $2,075,000 2,025,000
Pension benefit obligations 294,000 209,000
Deficiency of GAC revenue billed 80,000 394,000
FERC Order 636 transition costs 10,000 141,000
Other 158,213 134,403
Total del. income tax liabilities 2,617,213 2,903,403
Net deferred income tax liability $2,253,213 2,449,403
========= =========
There was no change in the valuation allowance for deferred tax assets
during 1996 and 1995.
(8) Pension Plan
The Company has defined pension plans covering substantially all of its
employees. The benefits are based on years of service and the employee's
highest average compensation during a specified period. The Company makes
annual contributions to the plans equal to amounts determined in accordance
with the funding requirements of the Employee Retirement Security Act of
1974. Contributions are intended to provide not only for benefits
attributed for service to date, but also for those expected to be earned in
the future. The following table sets forth the plan's funded status and
amounts recognized on the Company's balance sheet under Statement of
Financial Accounting Standards No. 87, "Employers' Accounting for Pensions"
(SFAS 87) at September 30, 1996 and December 31, 1995.
1996 1995
Actuarial present value of accumulated benefit
obligation (including vested benefits of
$5,154,703 in 1996 and $4,892,382 in 1995) $5,268,331 4,985,900
========= ==========
Plan assets at fair value, primarily
listed stocks and bonds 7,411,741 6,946,629
Projected benefit obligation 6,517,723 6,314,458
Excess of plan assets over projected
benefit obligation 894,018 632,171
Unrecognized net gain being recognized over
10 years in accordance with PSC policy (676,625) (573,499)
Unrecognized prior service cost 801,578 861,053
Unrecognized net transition asset at
January 1, 1989 being recognized
over 20 years (444,486) (474,117)
Prepaid pension cost recognized on the
balance sheet $ 574,485 445,608
========= ==========
The components of net periodic pension expense under SFAS 87 for the nine
months ended September 30, 1996 and the year ended December 31, 1995 are as
follows:
1996 1995
Service cost benefits earned during the period $ 154,713 168,062
Interest on projected benefit obligation 335,492 384,451
Actual return on plan assets (572,699) (1,495,481)
Net amortization and deferrals 116,004 1,034,354
Net periodic pension expense $ 33,510 91,386
For ratemaking purposes, pension expense represents the amount approved by
the PSC in the Company's most recently approved rate case. Pension benefit
for ratemaking purposes was approximately $45,000 and $60,000 during the
nine months ended September 30, 1996 and the year ended December 31, 1995,
respectively. The difference between the pension expense (benefit) for
ratemaking purposes and the amount computed under SFAS 87 has been deferred
and is not included in the prepaid pension cost noted above.
The assumptions used to determine pension expense obligations and pension
costs for 1995 and 1996 were 7.25% for weighted average discount rate, 5.0%
for rate of compensation increase, and 8.0% for weighted average rate of
return on plan assets.
(9) Major Customers
The Company has three major customers, Corning Incorporated, New York State
Electric & Gas (NYSEG) and Bath Electric Gas & Water Systems (BEGWS). The
loss of any of these customers could have a significant impact on the
Company's financial results. In addition, a significant portion of
capacity assignment revenue is generated from Corning Inc. Total revenue
and deliveries to these customers were as follows:
Mcf % of % of
Corning Inc. Deliveries Total Revenue Total
9 Mo. ended 9/30/96 1,580,243 26 $ 549,527 4
Year ended 12/31/95 2,124,993 27 $ 688,907 4
NYSEG
9 Mo. ended 9/30/96 1,575,679 26 $ 197,586 1
Year ended 12/31/95 2,041,628 27 $ 259,659 2
BEGWS
9 Mo. ended 9/30/96 544,200 9 $ 1,503,239 10
Year ended 12/31/95 784,069 10 $ 2,075,703 12
(10) Postretirement Employee Benefits
In addition to the Company's defined benefit pension plans, the
Company offers postretirement benefits to its employees who meet
certain age and service criteria. Currently, the retirees under age
65 pay 60% of their health care premium until Medicare benefits
commence at age 65. After age 65, Medicare supplemental coverage is
offered with Company payment of the premium. For participants who
retire on or after September 2, 1992, the Company cost, as stated
above, shall not exceed $150 per month. In addition, the Company
offers limited life insurance coverage to active employees and
retirees. The postretirement benefit plan is not funded.
The Company accrues the cost of providing postretirement benefits,
including medical and life insurance coverage, during the active
service period of the employee. The following table presents the
Company's postretirement benefit plan's status reconciled with amounts
recognized in the Company's consolidated balance sheets under
Statement of Financial Accounting Standard No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions (SFAS 106)
at September 30, 1996 and December 31, 1995:
Actuarial present value of accumulated postretirement benefit
obligation:
1996 1995
Current retirees $ (670,000) (708,000)
Future retirees (347,000) (323,000)
$ (1,017,000) (1,031,000)
Unrecognized transition obligation
at January 1, 1993 being
recognized over 20 years 973,000 1,016,000
Unrecognized net gain being
recognized over 10 years in
accordance with PSC policy (258,000) (253,000)
Accrued postretirement benefit cost
recognized on the balance sheet $ (302,000) (268,000)
=========== ===========
The PSC has allowed the Company to recover incremental SFAS 106 cost
through rates on a current basis. Due to the timing differences
between the Company's rate case filings and financial reporting
period, a regulatory asset has been recognized in the amount of
approximately $30,000 to be recovered from ratepayers in the future.
Net periodic postretirement benefit cost for the nine months ended
September 30, 1996 and the year ended December 31, 1995 under SFAS 106
includes the following components:
1996 1995
Service cost $ 10,000 13,000
Interest cost 53,000 75,000
Net amortization and deferrals 22,000 49,000
Net periodic postretirement
benefit cost $ 85,000 137,000
======= =======
For measurement purposes, a 9% annual rate of increase in the per
capita cost of covered benefits (health care cost trend rate) was
assumed for 1997. The rate is assumed to decrease gradually to 6% by
the year 2012 and remain at that level thereafter. A 1% increase in
the actual health care cost rate would result in approximately a 4.4%
increase in the service and interest cost components to annual net
periodic postretirement benefit cost and a 4.3% increase in the
accumulated postretirement benefit obligation. The weighted average
discount rate used in determining the actuarial present value of the
accumulated postretirement benefit obligation was 7.52%.
(11) Commitments
The Company has agreements with six pipeline companies providing for
pipeline capacity for terms that extend through 2001. These
agreements require the payment of a demand charge for contracted
capacity at FERC approved rates. Purchased gas costs incurred under
these pipeline capacity agreements during 1996 and 1995 amounted to
$3,139,258 and $3,805,687 respectively. The Company also has short-
term gas purchase agreements averaging three months in length, with
prices tied to various indices. The Company does not anticipate these
agreements to be in excess of normal capacity requirements.
(12) Disclosures About Fair Value Of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments: Notes Payable - The
carrying amount approximates fair value because of the short-term
nature of the borrowings. Long-term debt - The fair value of the
Company's long-term debt has been estimated by discounting the future
principal and interest cash flows using an interest rate for long-term
debt with similar terms, maturities, and credit ratings. The
estimated fair value of the Company's financial instruments are as
follows at September 30, 1996.
Carrying Amount Fair Value
Notes Payable $ 2,725,000 2,725,000
Long-term debt $ 6,400,000 7,200,000
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Corning Natural Gas Corporation
We have audited the accompanying consolidated balance sheets of Corning
Natural Gas Corporation and Subsidiary (the Company) as of September 30,
1996 and December 31, 1995, and the related consolidated statements of
income and retained earnings, and cash flows for the nine months ended
September 30, 1996 and the year ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Corning
Natural Gas Corporation and Subsidiary at September 30, 1996 and December
31, 1995, and the results of their operations and their cash flows for the
nine months ended September 30, 1996 and the year ended December 31, 1995
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Rochester, New York
November 8, 1996
CORNING NATURAL GAS CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 1996 and December 31, 1995
Assets 1996 1995
Property, plant and equipment, at original cost:
Utility $ 19,616,872 19,309,418
Non-utility - principally rented gas appliances 2,451,396 2,366,834
22,068,268 21,676,252
Less accumulated depreciation (7,846,128) (7,519,218)
14,222,140 14,157,034
Current assets:
Cash 180,595 142,905
Accounts receivable, less allowance for
uncollectible accounts of $97,000
in 1996 and $117,000 in 1995 789,677 2,225,206
Gas stored underground, at average cost 1,347,099 838,317
Gas and appliance inventories, at average
cost or market 653,030 600,527
Prepaid income taxes 334,485 0
Deferred income tax assets 107,000 278,000
Prepaid expenses 432,163 352,363
3,844,049 4,437,318
Deferred charges:
Long-term debt issuance costs,
net of amortization 243,401 252,718
Deferred income tax assets 257,000 176,000
Urecovered gas costs 0 1,157,382
Deferred transition costs 29,093 414,504
Deferred debits - accounting for income taxes 1,016,661 1,016,661
Other deferred debits 555,716 275,719
2,101,871 3,292,984
Other assets 389,502 332,379
$ 20,557,562 $ 22,219,715
========== ==========
Capitalization and Liabilities
------------------------------
Common stock, $5.00 par value per share.
Authorized 1,000,000 shares; issued
and outstanding 460,000 shares $ 2,300,000 $ 2,300,000
Additional paid-in capital 653,346 653,346
Retained earnings 2,194,382 2,145,697
5,147,728 5,099,043
Long-term debt, less current installments 6,300,000 6,300,000
Total capitalization 11,447,728 11,399,043
Current liabilities:
Current installments of long-term debt 100,000 100,000
Notes payable 2,275,000 3,815,000
Accounts payable 1,146,190 1,206,134
Transition cost liability 29,093 414,504
Customers' deposits and accrued interest 735,398 599,213
Accrued general taxes 141,598 107,587
Accrued federal income taxes 0 91,063
Supplier refunds due customers 532,009 769,606
Accrued expenses 304,332 299,659
Other 19,276 43,839
5,732,896 7,446,605
Deferred credits:
Deferred income taxes liability 2,617,213 2,903,403
Refundable gas costs 232,769 0
Other 526,956 470,664
3,376,938 3,374,067
$20,557,562 $22,219,715
=========== ===========
Commitments (note 11)
See accompanying notes to consolidated financial statements.
CORNING NATURAL GAS CORPORATION
AND SUBSIDIARY
Consolidated Statements of Cash Flows
For The Nine Months Ended September 30, 1996
And The Year Ended December 31, 1995
1996 1995
Cash flows from operating activities:
Net income $ 483,386 $ 620,729
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 530,730 686,856
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,435,529 (888,646)
Gas stored underground (508,782) 396,451
Gas and appliance inventories (52,503) (103,255)
Prepaid expenses (79,800) 8,637
Unrecovered/refundable gas costs 1,390,151 326,208
Other deferred charges 114,731 704,068
Other assets (57,123) (122,679)
Increase (decrease) in:
Accounts payable (59,944) 114,912
Accrued general taxes 34,011 19,061
Accrued/prepaid federal
income taxes (425,548) 413,586
Supplier refunds due customers (237,597) (22,071)
Deferred federal income tax (196,190) 131,376
Other liabilities and deferred
credits (212,824) (467,868)
Net cash provided by
operating activities 2,158,227 1,817,365
Cash flows from investing activities:
Capital expenditures (682,476) (1,513,196)
Gain on disposal of property and equipment 86,640 168,351
Net cash used in investing activities (595,836) (1,344,845)
Cash flows from financing activities:
Net borrowings (repayments) under
line-of-credit agreements (1,090,000) 160,000
Dividends paid (434,701) (572,701)
Repayment of long-term debt 0 (100,000)
Net cash used in financing
activities (1,524,701) (512,701)
Net increase (decrease) in cash 37,690 (40,181)
Cash at beginning of period 142,905 183,086
Cash at end of period $ 180,595 $ 142,905
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 515,132 $ 844,035
Income taxes $ 899,754 $ 145,250
See accompanying notes to consolidated financial statements.
CORNING NATURAL GAS CORPORATION
AND SUBSIDIARY
Consolidated Statements of Earnings and Retained Earnings
For the Nine Months Ended September 30, 1996
And The Year Ended December 31, 1996
1996 1995
Operating revenue:
Residential, commercial and industrial 12,192,896 12,962,838
Transportation 2,757,286 3,497,865
Capacity assignment 131,953 154,023
Total operating revenue 15,082,135 16,614,726
Operating expenses and taxes
Natural gas purchased 9,538,759 9,871,848
Operating and maintenance 2,613,231 3,179,716
Taxes other than federal income taxes 1,428,476 1,604,574
Depreciation 356,400 454,637
Federal income taxes 185,570 242,149
Total operating expenses and taxes 14,122,436 15,352,924
Income from utility operations 959,699 1,261,802
Unregulated Operations:
Unregulated revenue:
Appliance rental 548,718 720,437
Service and merchandising 957,816 1,321,119
Interest Income 15,569 11,720
Total unregulated revenue 1,522,103 2,053,276
Unregulated expenses: 1,390,168 1,849,895
Income from unregulated operations 131,935 203,381
Other income: 10,447 29,356
Income before interest expense 1,102,081 1,494,539
Interest expense: 618,695 873,810
Net income income 483,386 620,729
Retained earnings, beginning of period 2,145,697 2,097,669
Less cash dividends 434,701 572,701
Retained earnings, end of period 2,194,382 2,145,697
========= =========
Weighted average number of shares outstanding 460,000 460,000
Earnings per common share 1.05 1.35
Dividends per common share 0.95 1.25
See accompanying notes to consolidated financial statements
Corning Natural Gas Corporation
330 W. William Street
P.O. Box 58
Corning, New York 14830
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
to be held on Thursday, February 13, 1997
Corning, New York
January 16, 1997
To the Common Stockholders of
Corning Natural Gas Corporation
Notice is hereby given that the Annual Meeting of
Stockholders of Corning
Natural Gas Corporation will be held at the office of the
Company, 330 W.
William Street, in the City of Corning, New York, on Thursday,
February 13, 1997
at 10:30 A.M., local time, for the following purposes:
(1) To fix the number of Directors at seven and to elect a
Board of
Directors for the ensuing year.
(2) To transact such other business as may properly come
before the
meeting.
The stock transfer books will not be closed, but only common
stockholders
of record at the close of business on January 9, 1997 will be
entitled to vote
at the meeting or any adjournment thereof.
You are cordially invited to attend the meeting and vote
your shares. In
the event that you cannot attend, please date, sign and mail the
enclosed proxy
in the enclosed self-addressed envelope. A stockholder who
executes and returns
a proxy in the accompanying form has the power to revoke such
proxy at any time
prior to the exercise thereof.
By Order of the Board of
Directors
PHYLLIS J. GROEGER, Secretary
CORNING NATURAL GAS CORPORATION
PROXY STATEMENT
January
16, 1997
By Whom Proxy Solicited and Solicitation Expenses. The
accompanying proxy
is solicited by the Board of Directors of the Company for use at
the Annual
Meeting of Stockholders to be held on Thursday, February 13,
1997. Proxies in
substantially the accompanying form, properly executed and
received prior to or
delivered at the meeting and not revoked, will be voted in
accordance with the
specification made. The expense of soliciting proxies will be
borne by the
Company.
The approximate date upon which this proxy statement and the
accompanying
proxy will first be mailed to stockholders is January 16, 1997.
Right to Revoke Proxy. Any stockholder giving the proxy
enclosed with this
statement has the power to revoke it at any time prior to the
exercise thereof.
Such revocation may be by writing (which may include a later
dated proxy)
received by the Office of the Secretary, Corning Natural Gas
Corporation, 330 W.
William Street, P.O. Box 58, Corning, New York, 14830, no later
than February
12, 1997 if by mail, or prior to the exercise thereof if
delivered by hand.
Such revocation may also be effected orally at the meeting prior
to the exercise
of the proxy.
Proposals of Stockholders. Stockholders' proposals intended
to be
presented at the 1998 Annual Meeting of Stockholders must be
received by the
Office of the Secretary, Corning Natural Gas Corporation, 330 W.
William Street,
P.O. Box 58, Corning, New York 14830, by September 5, 1997.
Voting Securities Outstanding. There were 460,000 shares of
common stock
outstanding and entitled to vote on January 9, 1997 (the "Record
Date"). Each
share of common stock is entitled to one vote. Only stockholders
of record on
the Record Date are entitled to notice of and to vote at the
meeting or any
adjournment thereof.
Abstentions and broker non-votes are each included in
calculating the
number of shares present and voting for purposes of determining
quorum
requirements. However, each is tabulated separately.
Abstentions are counted
in tabulating the votes cast on proposals presented to
shareholders, whereas
broker non-votes are not counted for purposes of determining
whether a proposal
has been approved.
The following table sets forth the shares of the Company's
common stock,
and the percent of total outstanding shares represented thereby,
beneficially
owned* by the nominees for director of the Company, the Chief
Executive Officer
of the Company, all directors and officers as a group, and all
persons or groups
known to the Company to beneficially own more than 5% of such
stock.
* As used in this Proxy Statement, "beneficial ownership"
includes direct or
indirect, sole or shared power to vote, or to direct the
voting of, and/or
investment power to dispose of, or to direct the disposition
of, shares of
the common stock of the Company. Except as otherwise
indicated in the
footnotes below, the listed beneficial owners held direct
and sole voting
and investment power with respect to the stated shares.
Shares of Stock
Beneficially Owned
Directly or Indirectly
Percent
Beneficial Owners as of September 30, 1996
of Class
J. Edward Barry (Director) 45,999(1)
10.0%
330 W. William Street
Corning, New York
Thomas K. Barry (Director and 14,181(2)
3.1%
Chief Executive Officer)
330 W. William Street
Corning, New York
Thomas H. Bilodeau (Director) 3,788(3)
0.8%
1648 Jupiter Cove Dr., Apt. 312
Jupiter, Florida
Bradford J. Faxon (Director) 26,210(4)
5.7%
225 Hix Bridge Road
Westport, Massachusetts
Jay A. Finley (Director) 13,900(5)
3.0%
27 Spring Terrace
Corning, New York
Liselotte R. Lull and 45,029(6)
9.8%
Robert E. Lull
231 Watauga Avenue
Corning, New York
Jack R. McCormick (Director) 1,469(7)
0.3%
2560 Riverside Avenue
Somerset, Massachusetts
Donald R. Patnode (Director) 13,753(8)
3.0%
91 Stage Harbor Road
Chatham, Massachusetts
All directors and officers 122,197(9)
26.4%
of the Company, twelve persons
as a group
(1) Includes 25,066 shares held in trust, with respect to which
J. Edward Barry
has shared voting and investment power, and 20,933 shares
beneficially
owned and held in trust on behalf of Virginia S. Barry, with
respect to
which J. Edward Barry also has shared voting and investment
power.
Percentage reflects rounding; actual percentage is less than
10 percent.
(2) Includes indirect beneficial ownership of 1,000 shares owned
by children of
Thomas K. Barry, and as to which Thomas K. Barry has shared
voting and
investment power. Also includes 1,000 shares owned by a
daughter of Thomas
K. Barry, as to which shares Mr. Barry disclaims beneficial
ownership.
(3) All shares are held in trusts and Mr. Bilodeau is a
beneficiary or
contingent beneficiary of such trusts.
(4) Includes indirect beneficial ownership of 5,431 shares owned
by children of
Bradford J. Faxon, and as to which Bradford J. Faxon has
shared voting and
investment power.
(5) Includes indirect beneficial ownership of 6,900 shares owned
by Gertrude C.
Finley, who has sole voting and investment power over such
shares.
(6) Includes 23,378 shares owned by Liselotte R. Lull and 21,651
shares owned
by Robert E. Lull.
(7) All shares are owned jointly with Madeline McCormick.
(8) Includes 1,559 shares owned by spouse, who has sole voting
and investment
power over such shares. Also includes 6,994 shares held in
two trusts, of
which Donald R. Patnode is co-trustee.
(9) Aggregate record or imputed beneficial ownership, with sole
or shared
voting or investment power.
Election of Directors. (Proposal No. 1) It is the
intention of the
persons named in the enclosed proxy to vote the shares
represented by the proxy
to fix the number of directors at seven and to elect the nominees
listed below
to serve until the next Annual Meeting of Stockholders and until
their
successors are duly elected and qualified. In the event of a
vacancy in the
list of nominees, an event which the Board of Directors does not
anticipate, the
holders of the proxies will vote for the election of a nominee
acceptable to the
remaining nominees. The directors must be elected by a plurality
of votes cast.
The following is a brief description of each nominee, including
his principal
employment or professional experience for the past five years.
J. Edward Barry, 84, Consultant to the Company. Former
Chairman of
the Board of Directors 1975 - 1993. A Director since 1953
and Chairman of
the Executive and Pension Fund Committees. Father of Thomas
K. Barry,
Chairman of the Board, Chief Executive Officer and President
of the
Company.
Thomas K. Barry, 51, Chairman of the Board of Directors
since 1993,
President of the Company since 1983, Chief Executive Officer
since 1984. A
Director since 1983 and a member of the Executive and
Pension Fund
Committees. A Director of Fall River Gas Company. Son of
J. Edward Barry,
Consultant to the Company.
Thomas H. Bilodeau, 54, Vice President - Finance,
Medical &
Environmental Coolers, Inc. since 1990. A Director since
1984 and a member
of the Compensation and Audit Committees. A Director of
Fall River Gas
Company.
Bradford J. Faxon, 58, Chairman of the Board of
Directors, President
and Director of Fall River Gas Company since 1986. A
Director since 1984,
Chairman of the Compensation Committee and a member of the
Pension Fund
Committee.
Jay A. Finley, 81, Retired; former President of the
Company, 1977-
1983. A Director since 1975 and a member of the Executive
Committee.
Jack R. McCormick, 72, Utility Consultant; current
Director and former
President (1974-1986) of Fall River Gas Company. A Director
since 1985 and
a member of the Audit Committee.
Donald R. Patnode, 67, Retired; former President of
Industrial Filters
and Equipment Corporation 1989-1994. A Director since 1964,
Chairman of the
Audit Committee and a member of the Compensation Committee.
Director also
of Fall River Gas Company.
The Board of Directors does not have a standing nominating
committee, or
any committee performing similar functions. The Board of
Directors has a
standing Audit Committee, of which Messrs. D.R. Patnode, J.R.
McCormick and T.H.
Bilodeau are the members, the function of which is to recommend
the selection of
independent auditors, review the plan and results of the
independent audit and
approve each professional service provided by the independent
auditors. The
Audit Committee had one meeting in 1996. The Board of Directors
also has a
standing Compensation Committee, of which Messrs. D.R. Patnode,
B.J. Faxon and
T.H. Bilodeau are the members. This committee met once during
1996. This
committee reviews officer performance and duties and decides upon
appropriate
remuneration. The Board of Directors met four times in 1996.
Each Director
attended more than 75% of the aggregate number of meetings of the
Board and
committees on which he served during the year.
At the most recent annual meeting of stockholders of the
Company, held on
April 23, 1996, out of a total of 460,000 shares entitled to vote
at the
meeting, 425,756 shares (92.6% of the total) were actually voted
at the meeting
with respect to the election of Directors. Nominees proposed for
election by
the Board of Directors were elected by requisite vote at such
meeting. Each
nominee received an affirmative vote of over 99% of the votes
cast.
Cash Compensation of Executive Officers. The following
table sets forth
the compensation paid or accrued by the Company and its
subsidiary during the
fiscal years ended December 31, 1994, 1995 and September 30, 1996
to the
Company's Chief Executive Officer. Other than the Chief
Executive Officer, no
other executive officer of the Company was paid an annual salary
and bonus in
1996 that aggregated $100,000. Although only principal
capacities are listed,
the compensation figures include all compensation received in any
capacity,
including directorships, for services rendered during the fiscal
years
indicated.
SUMMARY COMPENSATION TABLE
Annual Compensation(1)
Name and
Other Annual
Principal Position Year Salary Bonus
Compensation
Thomas K. Barry 1996 $106,800(2) ---
$ 2,970 (2)
President and Chief 1995 134,967 ---
3,721
Executive Officer 1994 126,667 ---
3,512
(1) The Company did not pay any long-term compensation to its
Chief Executive
Officer or to its other executive officers during the fiscal
years ended
December 31, 1994, 1995 and September 30, 1996.
(2) 1996 amounts reflect compensation received with respect to
the Company's nine month 1996 fiscal year (ended September
30, 1996) that result from the adoption by the Company of a
fiscal year-end of September 30 instead of December 31 each
year.
A description of the executive officers, other than Mr.
Thomas K. Barry,
for whom a description is provided above, is set forth below.
Kenneth J. Robinson (age 52) is Executive Vice President.
Mr. Robinson
joined the Company in 1978 as an accountant. Most recently he
served as
Financial Vice President and Treasurer for 4 years and in his
current position
for 5 years.
Edgar F. Lewis (age 59) is Senior Vice President -
Operations. Mr. Lewis'
career with the Company dates back to 1956. He has been in
charge of operations
for the past 24 years; 16 years in his current position.
Thomas S. Roye (age 42) is Vice President - Administration.
Mr. Roye has
served 5 years in his current position and was previously
Assistant Treasurer &
Assistant Secretary. He has prior utility experience and
accounting education
and has been employed since 1978.
Gary K. Earley (age 42) is Treasurer. Mr. Earley has been a
practicing
accountant since 1976. He joined the firm in 1987 as an
accountant in the rates
and regulations department and has served as Treasurer for the
past 5 years.
Phyllis J. Groeger (age 55) is Corporate Secretary. Mrs.
Groeger has been
employed since 1973 in a number of positions advancing to
Assistant Secretary in
1986 and has been Secretary of the Company for the past 9 years.
Compensation Pursuant to Plans. The Company has entered
into separate
supplemental benefits agreements with Thomas K. Barry and one
other executive
officer (collectively, the "Supplemental Benefits Agreements"),
which provide
that the officer covered thereby and retiring after the age of 62
is entitled to
receive monthly payments equal to 35% of such officer's monthly
salary at
retirement for either life or 180 months, whichever is longer.
Such amount
payable shall increase by 4% annually on the anniversary date of
such officer's
retirement. Retirement benefits otherwise available upon
retirement at age 62
under the Supplemental Benefits Agreements are reduced
cumulatively by 4% for
each year prior to age 60 in which the covered officer retires;
provided,
however, that an officer covered under a Supplemental Benefits
Agreement
receives no retirement benefits thereunder in the event that such
officer
retires before age 55. Furthermore, the Supplemental Benefits
Agreements
provide that in the event that an officer covered by a
Supplemental Benefits
Agreement dies prior to retirement, such officer's designated
beneficiary is
entitled to receive monthly payments equal to 50% of such
officer's monthly
salary at death for 180 months.
The Company has also entered into an additional, more
limited, Supplemental
Benefits Agreement with one other employee, which contains terms
similar to the
foregoing agreements. However, such limited Supplemental
Benefits Agreement
provides for monthly payments equal to 20% of the subject
employee's monthly
salary in the event of retirement, monthly payments equal to 35%
of his monthly
salary in the event of his death prior to retirement, and does
not include an
annual escalator.
Eligibility to enter into a Supplemental Benefits Agreement,
or equivalent
thereof, is based upon employee performance, service and value to
the Company;
such eligibility is determined on an individual basis by the
Board of Directors.
Currently, Mr. Thomas K. Barry and two other executive officers
(as discussed,
above) are the only employees of the Company covered by a
Supplemental Benefits
Agreement, and no payments have been made to date under such
agreements. The
Supplemental Benefits Agreements are in addition to the amounts
shown in the
Summary Compensation Table and are not subject to limitation. As
of September
30, 1996, the estimated annual benefits payable under a
Supplemental Benefits
Agreement upon retirement at the normal retirement age for Mr.
Thomas K. Barry
are $ 45,413.
The Company also maintains the Corning Natural Gas
Corporation Employees
Savings Plan (the "Savings Plan"). All non-union employees of
the Company who
work for more than 1,000 hours per year and who have completed
one year of
service may participate in the Savings Plan as of the following
January 1 or
July 1. Under the Savings Plan, participants may contribute up
to 15% of their
wages. The Company will match one-half of the participant's
contributions up to
a total of 3% of the participant's wages. Company matching
contributions vest
in the participants at a rate of 20% per year and become fully
vested after five
years. Participants may select one of five investment plans, or
a combination
thereof, for their account. Distribution of amounts accumulated
under the
Savings Plan occurs upon the termination of employment or death
of the
participant. The Savings Plan also contains loan and hardship
withdrawal
provisions. During the nine month fiscal year ended September
30, 1996, no
amounts were distributed to executive officers under the Savings
Plan. Mr.
Thomas K. Barry had $2,970 accrued to his account under the
Savings Plan during
said period. This accrual is included in the figures appearing
in the summary
compensation table on page 4.
Compensation of Directors. The current annual Director's
compensation is
$5,000. In addition, Directors are paid $300 for each Board
meeting attended.
Additionally, the chairmen of the Board's Executive, Audit,
Compensation and
Pension Fund committees and those directors who serve on more
than one committee
receive an annual fee of $1,500 for such services. Committee
members other than
the chairmen are paid $1,000 annually for their services, subject
to the
limitation that no committee chairman or member may receive more
than $1,500
annually for such services regardless of the number of committees
on which he
serves.
As allowed by New York law, the Company currently has in
effect an
insurance policy, with an effective date of June 1, 1996, with
National Union
Fire Insurance Company for the indemnification of officers and
directors at an
annual premium cost of $ 43,000.
Employment Contracts and Termination of Employment and
Change-in-Control
Arrangements. In January of 1992, the Company entered into an
employment
contract with its President and Chief Executive Officer, Mr.
Thomas K. Barry.
Under the terms of such employment contract, Mr. Barry is
compensated for his
duties as an officer and director with such salary as is
determined from time to
time by the Board of Directors. The term of Mr. Barry's
employment contract is
five years, unless earlier terminated by an act of either the
Company or Mr.
Barry. Beginning in 1994, however, the remaining term of Mr.
Barry's employment
contract is automatically extended for an additional one-year
period. Mr.
Barry's employment contract further provides that upon any change
in control of
the Company leading to the termination of Mr. Barry's employment
with the
Company, the Company shall pay Mr. Barry three times his
then-present annual
salary, or such lesser amount as may be required to comply with
certain
provisions of the Internal Revenue Code.
Selection of Auditors. KPMG Peat Marwick, Certified Public
Accountants of
Rochester, New York, have been selected as auditors for the
Company for the
ensuing year. KPMG Peat Marwick, who served as principal
accountants for the
Company for the past fiscal year, have no direct or indirect
financial interest
in the Company or its subsidiaries in the capacity of promoter,
underwriter,
voting director, officer or employee. A representative of KPMG
Peat Marwick
will be present at the meeting, with the opportunity to make a
statement if such
representative desires to do so, and will be available to respond
to appropriate
questions.
Other Matters. Except for the matters set forth above, the
Board of
Directors knows of no matters which may be presented to the
meeting, but if any
other matters properly come before the meeting, it is the
intention of the
persons named in the accompanying form of proxy to vote such
proxy in accordance
with their judgment in such matters.
PLEASE DATE, SIGN AND RETURN THE ENCLOSED PROXY.
By Order of the Board of
Directors,
PHYLLIS J. GROEGER,
Secretary
Persons whose proxies are solicited by the Board of Directors of
the Company may
obtain, without charge, a copy of the Company's Annual Report on
Form 10-KSB,
including the financial statements and schedules thereto,
required to be filed
with the Securities and Exchange Commission for the Company's
most recent fiscal
year. The report will be furnished upon request made in writing
to:
Thomas K. Barry
Chairman of the Board of Directors
Corning Natural Gas Corporation
330 W. William Street
P.O. Box 58
Corning, New York 14830
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