U.S. Securities and Exchange Commission
Washington, D.C. 20549
(X) ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 (Fee Required)
For the twelve month period ended September 30, 1998
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 issurer (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-ISV. (X)
Revenues for 12 month period ended September 30, 1997 $16,673,295
The aggregate market value of the 330,739 shares of the Common Stock held by
non-affiliates of the Registrant at the $20 average of bid and asked prices
as of November 1, 1998 was $6,614,780.
Number of shares of Common Stock outstanding as of the close of business on
November 1, 1998 - 460,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the twelve month
period ended September 30, 1998, and definitive proxy statement and notice of
annual meeting of shareholders, dated February 1 , 1998, are incorporated by
reference into Part I, Part II and Part II hereof.
Information contained in this Form 10-KSB and the Annual Report to
shareholders for fiscal 1998 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 12 Month Period Ended September 30, 1998
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 fiscal 1998 and expects
to have an adequate supply available for its customers during fiscal 1999
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.
(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 5,979 for the
period October 1, 1997 through September 30, 1998 and 6,831 for the same
period ended September 30, 1997.
(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 an increasingly 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 $159,872 for 12 months ended September
30, 1998 and $242,289 for the 12 months ended September 30, 1997.
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 has been used infrequently
since its inception.
On November 3, 1998 the New York State Public Service Commission (PSC)
issued a Policy Statement in which they provided their view as to how to best
ensure a competitive market, eliminate barriers to competition, provide
guidance to LDC's and marketers and address customer inertia. A detailed
discussion appears in the Industry Restructuring section of the enclosed
Annual Report to Shareholders.
(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) Seventy-seven persons were employed by the Company in 1998 versus
seventy-six for the previous year.
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.
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, 287 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 one short section 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 1998.
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 53 Chairman of the Board of Directors 5
President & C.E.O
14
Edgar F. Lewis 61 Senior Vice President - Operations 18
Kenneth J. Robinson 54 Executive Vice President 7
Phyllis J. Groeger 58 Secretary 11
Thomas S. Roye 45 Vice President - Administration 7
Gary K. Earley 44 Treasurer
7
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 355 at September 30, 1998. 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, 1997 22 21 1/2 $ .32
June 30, 1997 21 1/4 20 .32
September 30, 1997 21 1/4 20 .32
December 31, 1997 .325
March 31, 1998 $ $
$
.325
June 30, 1998 .325
September 30, 1998 .325
The Company incurred $4,700,000 in new long-term debt in 1997. The
proceeds of this new issue were used to pay off $3.1 million in short-term
debt and retire a 10% First Mortgage Bond with a balance of $1.6 million. The
new debt is an unsecured senior note at 7.9 percent interest with a maturity
date of September 25, 2017. Canada Life Assurance Company of Toronto is the
debt holder; interest payments are made quarterly with sinking fund payments
as follows: $355,000 annually starting September, 2006 with a $795,000
payment due September 1, 2017.
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 1998 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 7, 1998 are
included in the 1998 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)
Exhibit Name of Exhibit
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, 1998
was filed with Form 10-KSB for September 30, 1998.
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
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.
13 A copy of the Corporation's Annual Report to
Shareholders for 1998, is filed herewith.
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.
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, 1998.
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
(R
egistrant)
Date December 21, 1998 THOMAS K. BARRY
Thomas K. Barry, Chairman of the
Board, President and C.E.O.
Date December 21, 1998 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 21, 1998 J.E. BARRY
J.E. Barry, Director
Date December 21, 1998 DONALD R. PATNODE
Donald R. Patnode, Director
Date December 21, 1998 J.A. FINLEY
J.A. Finley, Director
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 Tuesday, February 9, 1999
Corning, New York
January 12, 1999
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 Tuesday,
February 9, 1999 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 5, 1999 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 12, 1999
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 Tuesday, February 9, 1999. 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 12, 1999.
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 8, 1999 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 2000 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 14, 1999. As to
any proposal that a stockholder intends to present to stockholders without
being included in the Company's proxy statement for the Company's 2000
Annual Meeting of Stockholders, the proxies named in management's proxy
for the meeting will be entitled to exercise their discretionary authority
on that proposal unless the Company receives notice of that matter to be
proposed not later than November 30, 1999. Even if proper notice is
received on or prior to November 30, 1999, the proxies named in management's
proxy for that meeting may nevertheless exercise their discretionary
authority with respect to such matter by advising stockholders of such
proposals and how they intend to exercise their discretion to vote on such
matter, unless the stockholder making the proposal solicits proxies with
respect to the proposal as set forth in Rule 14a-4(c) of the Securties
Exchange Act of 1934.
Voting Securities Outstanding. There were 460,000 shares of common stock
outstanding and entitled to vote on January 5, 1999 (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, 1998 of Class
J. Edward Barry (Director) 45,999(1)
10.0%
330 W. William Street
Corning, New York
Thomas K. Barry (Director and 14,293(2)
3.1%
Chief Executive Officer)
330 W. William Street
Corning, New York
Thomas H. Bilodeau (Director) 3,788(3)
*
1648 Jupiter Cove Dr., Apt. 312
Jupiter, Florida
Bradford J. Faxon (Director) 27,210(4) 5.9%
225 Hix Bridge Road
Westport, Massachusetts
Jay A. Finley (Director) 17,000(5)
3.7%
27 Spring Terrace
Corning, New York
Edgar F. Lewis (Sr V-P-Oper) 200(6) *
330 W. William Street
Corning, New York
Liselotte R. Lull and 45,029(7)
9.8%
Robert E. Lull
231 Watauga Avenue
Corning, New York
Jack R. McCormick (Director) 1,969 *
2560 Riverside Avenue
Somerset, Massachusetts
Donald R. Patnode (Director) 14,194(8) 3.1%
91 Stage Harbor Road
Chatham, Massachusetts
Kenneth J. Robinson (Exec V-P) 3,277(9) *
330 W. William Street
Corning, New York
All directors and officers 129,261(10) 28.1%
of the Company, thirteen persons
as a group
* Less than one percent
(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 1,180 shares owned by
children of Thomas K. Barry, and as to which Thomas K. Barry has shared
voting and investment power.
(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 8,500 shares owned by Gertrude
C. Finley, who has sole voting and investment power over such shares.
(6) All shares are owned jointly with Evelyn Lewis.
(7) Includes 23,378 shares owned by Liselotte R. Lull and 21,651 shares
owned by Robert E. Lull.
(8) Includes 2,000 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) Includes 2,745 shares owned jointly with Sherry Robinson and 500 shares
owned by a son of Kenneth J. Robinson, and as to which Kenneth J.
Robinson has shared voting and investment power.
(10) 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, 86, Consultant to the Company. Former Chairman of
the Board of Directors 1975 - 1993; former Chief Executive Officer,
President, Executive Vice President, Vice President and Secretary of the
Company. 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, 53, 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, 56, 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, 60, 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, 83, Retired; former President of the Company, 1977-1983.
A Director since 1975 and a member of the Executive Committee.
Jack R. McCormick, 74, 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, 70, 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 1998. 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 1998. This committee reviews officer performance
and duties and decides upon appropriate remuneration. The Board of Directors
met five times in 1998. 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
February 12, 1998, out of a total of 460,000 shares entitled to vote at the
meeting, 441,315 shares (95.9% 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 September 30, 1996, September 30, 1997 and September 30,
1998 to the Company's Chief Executive Officer and to each Executive Officer
whose aggregate cash compensation exceeded $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(2) Bonus Compensation(3)
Thomas K. Barry 1998 $153,212 --- $12,500
President and Chief 1997 144,887 --- 12,500
Executive Officer 1996 101,970(4) --- 7,800
Kenneth J. Robinson 1998 $106,777 --- ---
Exec. Vice President 1997 100,425 --- ---
Edgar F. Lewis 1998 $100,511 --- ---
Sr. Vice President-Operations
(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 Sept-
ember30, 1998, 1997 and 1996.
(2) The amounts in this column represent the aggregate of cash contributions
received and matching contributions made by the Company on behalf of the
named executive officers to the Company's 401 (k) Savings Plan (the "Savings
Plan").
(3) Consists of director's fees paid to the named executive officers by the
Company and its subsidiary.
(4) 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 54) 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 7 years.
Edgar F. Lewis (age 61) 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 26 years; 18 years in his current position.
Thomas S. Roye (age 45) is Vice President-Administration. Mr. Roye has
served 7 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.
Stanley G. Sleve (age 49) is Vice President-Business Development. Mr.
Sleve was employed by the Company in January, 1998 primarily to secure and
develop new business. Mr. Sleve has had twenty-four years of project, client
and construction management experience with engineering and architectural
service firms.
Gary K. Early (age 44) 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
7 years.
Phyllis J. Groeger (age 58) 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
11 years.
Compensation Pursuant to Plans. The Company has entered into separate
supplemental benefits agreements with Thomas K. Barry and Kenneth J. Robinson
(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 officers
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 Agreement
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, Supple-
mental Benefits Agreement with Edgar F. Lewis, 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 his death prior to retirement, and does not
include an annual escalator.
Eligibility to enter into a Supplemental Benefits Agreement, or equivalent
therof, 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, such 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, 1998
the estimated annual benefits payable under a Supplemental Benefits Agreement
upon retirement at the normal retirement age for Mr. E.F. Lewis are $20,800,
Mr. K.J. Robinson are $38,850 and for Mr. T.K. Barry are $54,950.
The Company also maintains the Corning Natural Gas Corporation Employees
Savings Plan (the "Savings Plan"). All 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.
For non-union employees 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. All participants may select one of
seven 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. During the fiscal year
ended September 30, 1998, no amounts were distributed to exectutive officers
under the Savings Plan. The amounts accrued under the Savings Plan by Messrs.
T.K. Barry, K.J. Robinson and E.F. Lewis in fiscal 1998 are included in the
compensation figures in the table on Page 5.
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, 1998, with National
Union Fire Insurance Company for the indemnification of officers and
directors at an annual premium cost of $ 38,000.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements. The Company has entered into an employment contract with
each of Mr. T.K. Barry and Mr. K.J. Robinson. Under the terms of such
employment contracts, each officer 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 each officer's employment contract
is for a rolling three year period, unless earlier terminated by an act of
either the Company or such officer. Each officer's employment contract
further provides that upon any change in control of the Company leading to
the termination of such officers employement with the Company, the Company
shall pay such officer three times his then-present annual salary and
reimbursment of payments for excise tax, if any, required under Section
4999 of the Internal Revenue Code. The Employment Contracts also provide
for payment to such officer, upon his retirement, of amounts that, when
combined with payments under the pension plan, would provide such officer a
total pension benefit, as specified in the Company's pension plan,as if the
limitations on pension plan payments under Internal Revenue Code Sections
415(b) and (e) did not apply. Payment of such amounts and downward
adjustments of such amounts are made under the same terms as specified in
the pension plan. Such contracts also require the Company's continued
provision of health care benefits to such officer after retirement, except
when the officer is terminated for cause.
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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To Our Shareholders
The national weather service's favorite topic during the 1997-98 winter
season was how El Nino affects weather patterns across the country. Indeed,
a record setting mild winter throughout the northeast resulted in a 7 percent
reduction in gas deliveries to all of the Company's customers over the prior
year as of September 30, 1998. A reduction in degree days of over 12 percent
from the year ended September 1997 contributed to a reduction of 8.6 percent
in gas deliveries to residential and commercial custumers. Earnings declined
from $1.64 per share in 1997 to $1.39 per share for fiscal year 1998. The
Company produced record high earnings for the year ended September, 1997
which makes the difference in earnings appear more severe than it is.
Earnings derived from sources other than gas deliveries contributed toward
producing relatively reasonable year end results considering the extremely
mild weather conditions.
The Company continues to maintain a weather normalization clause within its
tariffs. This clause allows the Company to charge a slightly higher rate when
the weather is milder than average and operates in the reverse when
temperatures are colder than the 15 year average. In fiscal 1998 the Company
collected nearly $180,000 from this revenue source to help offset the large
reduction in sales to firm customers. The Company also earned nearly $160,000
in incentive capacity assignment revenues. In total, we sold $1,067,000 of
capacity assignments of which 85 percent, or $907,000, was returned to our
customers in the form of lower rates. The Company was, once again, success-
ful in achieving additional incentive arnings through the lost and unaccounted
for gas calulation. In essence, we receive credit for minimizing the gas
that is lost on the system typically through metering and gas leaks. A long
term program of improving the meters we have in service, the ongoing repair
of these meters on a regular basis, the degree to which meters are adjusted
for accuracy, combined with a vigilant program to search for and repair leaks
on the distribution system have enabled us to better account for all the gas
that is brought into the system at the city gates. Over the past few years
we have received credit, which goes to earnings, primarily due to the positive
results of these efforts.
The wholly owned Appliance Corporation continues to contribute a substantial
portion of consolidated earnings. This year the subsidiary posted income of
over $248,000, a 12 percent increase over the prior year. The rental of water
heaters and water refining products plays a key role in the ongoing success of
this operation. Emphasis is also placed upon the sale and installation of
central heating units for residential use and upon the popular room heating
natural gas fired fireplace units. The Company carries the area's largest
selection of free standing and built-in fireplace/stove units and has several
operating displays in its sales offices in Elmira, Bath and Corning. The
original goal of the Appliance Corporation, which was started in 1954 during
the peak years of the expansion of the gas distribtion system, was to promote
the utilization of natural gas through the sale and installation of gas burn-
ing appliances consisting primarily of forced air furnaces, boilers, water
heaters, clothes dryers and ranges. We have been quite successfl in attaining
this goal and in connecting gas lines to nearly every building that is on the
distribution system pipelines. This has led to a very high saturation rate
which brings us to the next subject of concern and action-diversification.
In January, 1998, the Company employed Mr. Stanley Sleve as Manager of
Business Development. Mr. Sleve has twenty fouur years of project, client and
construction managmenent experience with engineering and architectural service
firms. As a result of Mr. Sleve's local connections and actions, the Company,
through its subsidiary appliance corporation, has purchased three different
businesses. In April, 1998 the company puurchased the Foodmart Plaza, which
is a retail comlex consisting of a major grocery store, an Eckerd Drug Store
and six other businesses located in four buildings on the property. The
property and buildings were purchased for $1.175 million of which $940,000
was financed through a local bank with interest at 8.02percent over ten years.
The complex started at this South Corning location in the mid-1950's as one
of the areas first large, modern grocery stores. It has a remarkably solid
history as the property has been expanded and upgraged over the years and
remains in excellent condition.
While it apears that The Foodmart Plaza will turn out to be a solid long
term investment, the goal is to create growth through high quality, low
capitalization, service oriented businesses. The Appliance Corporation has
also purchased a tax preparation and financial accounting services business,
Tax Center International (TCI), which currently employs five people and
provides services to approximately 700 clients. Mrs. Firouzeh Sarhangi, who
was the princial owner-operator of TCI, has an employment agreement with the
Company and the business has been moved into the Company's Corning office
building. We have added new services for our clients and have begun to
achieve growth through word of mouth contacts. Also in April 1998, the
Appliance Corporation purchased The Corning Realty Associates which has The
Prudential Marketplace real estate franchise in the Corning and Elmira area.
This is a residential and commercial real estate business operating with
twenty three agents with offices in our Corning service center and in a
building in Elmira Heights. This subsidiary has a residential real estate
market share of approximately ten percent.
One of the Company's goals is to maintain as much price stability as
possible in the transportion and sale of natural gas. We view this objective
as part of an economic package to help attract and sustain business and
industry. Additionally, we want to become less dependent upon cold weather
to drive earnings and to find new means to increase shareholder value. We
believe we have an excellent start in this direction with the diversity in
products and services we now offer. Our near term agenda is to grow these
new businesses and maximize synergies.
This report would be incomplete if we did not continue a dialogue on the
status of utility deregulation in New York State and on the economic viability
of our service area. Deregulation is a slow, on-going process which can become
more complicated and costly to implement than the purported benefits warrant.
This subject along with a review of the area's economic growth are reported
on in more depth further on in this annual report.
While the stock market has experienced sporadic movements in the pas years,
the Company's stock price has held steady in the low $20 range. In the past
four quarters we have paid out a total of $1.30 per share which is a return
of 6 1/2 percent at $20 per share. We continue to support our historic policy
of paying a large portion of earnings to our shareholders on a consistent
basis. In fact, our February 20, 1999 payment will be the 184th consecutive
quarterly dividend. With earnings at $1.39 per share and the dividend payout
at $1.30 we need to drive earnings to a higher level through improvements in
the Gas Corporation profits as well as through our diversification efforts in
order to sustain our goal of moderate increases in dividend payments. Our
employees have put in a great deal of personal energy to make so many positive
things happen this past year. We were also successful in mutally negotiating
a four year contract with IBEW Local Union 139, which commenced September 1,
1998. We take this opportunity to thank our shareholders for their support
and to express our gratitude to all our employees for their efforts and their
dedication toward making this a stronger, larger, and more diverse
organazation.
Thomas K. Barry
Chairman of the Board,
President & CEO
ECONOMIC DEVELOPMENT - CORNING AND VICINITY
In last year's report we described several major building developments of
the area's largest employer, Corning Incorporated. A new 400,000 square
foot opto-electronic components plant was completed early in 1998. This
$40 million manufacturing facility now provides 625 new high tech
manufacturing jobs and is located in Erwin, adjacent to the expanding
Sullivan Science Research Center. This massive facility is still in the
midst of a $125 million expansion which will double its size to 650,000
square feet. Corning Incorporated's world headquarters building located in
downtown Corning is well on its way toward completion of a $20 milion
expansion. Also, work progresses on the major $60 million renovation and
addition to the exquisite Corning Glass Museum which is scheduled for a grand
opening in April, 2000. This particular project is geared toward attracting
650,000 tourists annually to the Corning area.
There are a number of other private and public brick and mortar projects in
the works. The completion of the Route 17 bypass around Corning positioned
the City to totally rehabilitate Denison Parkway, the old route 17 that ran
through the center of the downtown area adjacent to Market Street. This main
east-west traffic bearing road was in bad condition mainly due to the trucks
that now utilize the bypass. This $4.3 million total rehabilitation has
changed the appearance of the City. In addition to constructing a new street
and curbs, sidewalk areas were widened, new street lights were installed,
along with new trees, shrubs, grass and infrastructure improvements. There
are five housing projects in Erwin and three more in the Town of Corning in
various phases of development. One of these developments, Woods Edge Housing,
will eventually consist of 245 new housing units which will include some
apartments. Other projects completed during the year range from a new
planetarium at Corning Community College to a new child care center in Erwin
to a cancer treatment center in Corning.
In the following year we can expect to see major expansions to the YMCA
facility, the area's art facility - 171 Cedar Arts Center and to the
Ceramics Corridor manufacturing incubator. We are also preparing to close
down one of the city's primary bridges for a total rehabilitation. The
Three Rivers Development Corporation, which is a non-profit organization
dedicated toward the development of housing, commerce, industry and job
creation and retention, gets directly and indirectly involved with many of
the projects and commercial activities in the area. They have identified 100
projects completed since 1985 in the greater Corning area that amount to over
$600 million. They have also quantified another $250 million in approximately
20 planned projects.Thus, while we are located in a relatively small community
there is no doubt that it is an active and vibrant community that is healthy
and growing.
Highlights - 12 Months Ended September 30
1998
1997
Operating Revenue 16,673,300 17,835,700
New Income $ 640,200
755,800
Earnings Per Common Share $ 1.39 1.64
Gas Deliveries (Mcf) 7,335,000 7,898,000
Degree Day 5,979 6,831
Total Customers 13,919 13,837
Construction Expense $ 971,000 999,700
Property, Plant and Equipment$25,178,457 22,911,900
Common Stock Data - Market Price (OTC)
Dividend
Quarter Ended High Low Paid
December 31, 1996 $ 22 $ 21 1/2 .320
March 31, 1997 22 21 1/2 .320
June 30, 1997 21 1/4 20 .320
September 30, 1997 21 1/4 20 .320
December 31, 1997 21 20 .325
March 31, 1998 21 20 .325
June 30, 1998 20 20 .325
September 30, 1998 21 20 .325
Industry Restructuring
The natural gas industry has been undergoing continuous and dramatic change
since the mid-1980's when large customers were given the option to purchase
their requirements directly from marketers. Since that time the industry
has transitioned to the point that today even residential customers have the
option of choosing their gas supplier. However, acceptance of the new
competitive environment by small customers, and by marketers to serve the
small customers, has been slow to catch on. The electric industry has
is also undergoing a transition to the competitive environment with many
similar issues to be resolved. While the company is keeping abreast of the
electric proceedings, efforts are directed towards the natural gas
proceedings.
On November 3, 1998 the New York State Public Service Commission (PSC)
issued a Policy Statement indicating its view as to how to best ensure a
competitive market for natural gas in New York State. The Statement's
intended purpose was to facilitate development of a competitive market,
eliminate barriers to competition, provide guidance to LDC's and marketers
and address customer inertia. It concluded that the most effective way to
establish a competitive market is for local distribution companies, such as
Corning, to cease selling gas with the theory that separating the monopoly
distribution function from the competitive merchant function would maximize
competition and customer benefits. The statement did not set a specific date
for cessation of sales activities. Rather, a transitional period of three to
seven years was suggested as appropriate for individual LDC's to exit the
merchant function. There are many issues such as capacity contracts, system
reliability, rate design and provider of last resort to be resolved during
this transition. The Policy Statement suggests that these issues will be
best be resolved both at the individual LDC level and callaboratively with
all stakeholders involved. Staff of the PSC plans to initiate a process to
address these issues in the near future. As it has been throughout this
process, this company will be active in the proceeding.
By retaining the distribution function, but no longer selling gas, little
will change regarding the operating functions of the company. The company
will continue to own and maintain the distribution system, regulate the flow
of gas, measure and meter gas, bill customers, be the provider of last resort
and handle all emergency calls. Since the company has never made a profit
on the actual sale of gas, the profit margin should also remain unchanged.
Acceptance by customers in the company's service territory with regards to the
option of supplier choice reflects that of customers around the state.
Mailings were sent to each individual customer explaining the availability
and procedures to be followed and the response was very limited. Presently
there are only four marketers that have shown an interest in serving the
small volume customers and they are currently serving approximately 125
customers, or less than one percent of the small customer base. Within
New York State there are 95 marketers certified to serve small volume
customers. These marketers are serving approximately 50,000 customers or less
than nine percent of the total available customer base. Less than one percent
of the residential customers are currently being served directly by marketers.
The ability of the company to comply with the PSC timetable will rely
directly upon the acceptance by the market and the marketers, and the
initiatives directed by the PSC. As the Company's capacity contracts come
up for renewal, starting in 2001, a careful analysis will need to be made with
respect to future requirements. The contract requirements and the related
company costs which are currently passed on to customers through the gas adj-
ustment clause mechanism should decrease significantly, relieving the company
of fixed financial obligations as the captive customber base is declining.
Industry restructuring has forced managment to take a critical look at
traditional revenue sources and make certain strategic planning decisions
if the company is to move forward. As was mentioned in the letter to
shareholders, the decision was made to look for non-traditional revenue
sources to mitigate the uncertainty of the current natural gas market. The
natural gas business will continue to be the company's core business and rate
stability for our customers will continue to be the highest priority.
However, it is very apparent that if the company is to grow, it must
diversify its earnings base. That process has begun and will continue into
the future. In the end, management is confident that the company will be
successful in the new deregulated environment.
MANAGMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Earnings
Consolidated net income amounted to $640,000 or $1.39 per share in 1998
compared to $756,000 or $1.64 per share in 1997. The primary reason for the
decline was the extremely mild winter. Other significant items affecting
the Company's operating results are discussed below.
Operating Revenue
Operating revenue of $16,673,000 declined seven percent in 1998 due
primarily to a reduction in gas delivered as a result of mild weather.
Total gas delivered to customers amounted to 7,334,858 Mcf in 1998 compared
to 7,897,614 Mcf in 1997. However, the Company's weather normalization
billing mechanism (discussed briefly in not 1 to the financial statements)
retores some of the margin lost in times of warm weather. Accordingly, the
Company billed $226,000 more than the previous year through this mechanism.
The Company also experienced a decline in capacity assignment revenue in
1998. This revenue is obtained from marketing the Company's unused pipeline
capacity and a regulatory incentive that allows the Company to retain fifteen
percent of such revenue. Capacity assignment revenue of $160,000 in 1998 was
down from $242,000 the previous year, a reduction of $82,000 that was
expected due to a mild winter and an increasingly competitive market.
Operating Expense
Purchased gas expense of $9,409,000 in 1998 decreased 10% due to decreased
deliveries noted above. The decline was further driven by a benefit from
the Company's lost and unaccounted for gas incentive mechanism. The Company
realized a benefit of $276,000 in 1998, up substantially from the $120,000
benefit the preceding year. Other operating and maintenance expense remained
stable at $3,557,000, an increase of less than one percent from the previous
year.
Taxes other than federal income taxes decreased slightly due to lower gross
receipts taxes as the result of decreased revenue. The Company is subject
to the New York public utilities gross receipts tax which is levied on all
revenues.
Utility depreciation expense increased five percent to $574,000 due to
increased investment in plant. Interest expense increased eight percent in
1998 as the result of higher outstanding debt levels.
Unregulated Operations
The Appliance Corporation subsidiary earnings increased twelve percent to
$249,000 in 1998. The increase results primarily from three newly acquired
businesses. In April 1998 the Company's appliance subsidiary completed the
purchase of three local existing businesses. A shopping plaza in South
Corning was purchased which has multi-year leases with eight businesses
housed in 52,000 square feet of rentable space with a major grocery store as
the anchor. Also purchased was a real estate management and brokerage organ-
azation and a tax and financial services company. The shopping plaza was
purchased for $1,175,000 and finaced primarily through a $940,000 ten year
note secured by a mortgage on the shopping center real estate. The real
estate and financial service companies were purchased for $349,000, funded
through a $180,000 eight year, 6.5 percent interest loan agreement with the
sellers and the balance through operating funds. The real estate firm is a
franchise of The Prudential Marketplace Realty and has twenty three agents
operating out of offices in both the Corning and Elmira, New York market. The
financial services business, Tax Center International, provides tax
preparation, accounting and payroll services and currently serves approx-
imately seven hundred clients . These purchases are part of the Company's
plan to aggresively explore new opportunities in non-traditional areas.
Liquidity and Capital Resources
The Company financed its 1998 capital additions for regulated operations of
$1,105,000 through internally generated funds and short-term borrowing.
Capital additions for the Company's unregulated operations consisted
primarily of the three acquisitions discussed above.
The Company has $7,500,000 available through lines of credit at local banks,
the terms of which are discussed in note 6 to the financial statements. It
is expected that the Company's current capital resources will be sufficient
for 1999 planned operations.
Regulatory Matters
In 1998 the New York Public Service Commission issued an order concerning
the future of the natural gas industry. A detailed discussion appears on
page 10 of this report.
Year 2000
The year 2000 issue (Y2K") refers to the inability of certain computerized
systems and technologies to recognize and/or correctly process dates beyond
December 31, 1999. Corning Natural Gas Corporation has identified those
areas within the Company where the potential exists for computer system
failure or miscalculations by computer programs could cause a disruption in
the Company's operations or services. A Y2K Coordinator was assigned to
develop and implement a Y2K plan. The Company has developed and put into
place solutions for the following areas:
1) Computer Hardware and Software
The AS/400 Main Frame Computer Operating System and all software modules
including Customer Information Systems, Meter Reading, Billing for the Gas
and Appliance Company, Service Orders, Accounting and Financial Statements,
Inventory and Purchase Orders and Accounts Payable are now Y2K compliant
through upgrades received from our software provider and IBM.
All personal computers identified as being non compliant have been replaced.
The review of software contained on these computers is currently being
conducted and the Company anticipates no problems with compliance in
this area.
2. Telemetering System
The telemetering system is Y2K compliant and we anticipate no interruption
in the flow of gas to our customers due to our computer system.
3. Phone System
The internal telephone system for the Company is now Y2K compliant. We will
be able to receive emergency calls and generate the proper service orders
for all phases of our operations. We do not require the use of PC's in
handling our customers' calls and creating orders.
Costs of Compliance
Because the Company is still in the process of identifying and replacing
non compliant systems or problems, it is not possible at this time to
quantify the total cost incurred with the Y2K program. However, the
company expects that it will not be significant.
Risks of the Company's Y2K Issues
Since the Company has not completed all testing on some of the IT and non-IT
systems that may not be Y2K compliant, failure of these systems could have a
material impact on the Company's systems. While the Company's Y2K program
is designed to identify and remedy these systems in order to avoid
interruption of its operations, there can be no assurance that it will be
able to identify all non compliant systems or successfully remedy all those
identified.
The Company is dependent upon third party products and services, such as
utilities and programming uplinks, for the operation of its businesses. As
part of its Y2K program the Company will contact these third party product and
service providers to ascertain whether Y2K compliance issues may exist. While
many of these companies may give us assurances that they are fully Y2K
complaint, the Company does not have the ability to verify such information.
If critical third party systems fail as a result of Y2K issues, the ability
of the Company to provide services to its customers may be interrupted. While
the Company intends to consider contingency plans to address those risks,
although no such plans have been identified, there can be no assurance that
any such plan would resolve such problems in a satisfactory manner. This
could result in lost revenues or the risk of actions against the Company if
the businesses of others are disrupted.
Cautionary Statement Regarding Forward Looking Statements
This report contains statements which, to the extent they are not recitations
of historical fact, constiture "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 in the Reform Act. A number of
important factors affecting the Company's business and finacial results could
cause actual results to differ materially from those stated in the forward-
looking statements.
Accounting Pronouncements
In 1999 the Company will be required to adopt the provisions of Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains, and losses) in a full set of
general purpose finacial statements. Management expects that the significant
component of comprehensive income to be the net unrealized gain/loss on
marketable securities available for sale.
Management expects that other pronouncements to be adopted in 1999 will have
an immaterial impact on the financial statements.
UNION CONTRACT
SCHEDULE OF WAGES
The following schedule applies to employees hired after 09/01/85. These
rates apply only to the following
nine job classifications.
DESCRIPTION RATE PER HOUR
08/31/98 08/30/99 09/04/00
09/01/01
Line Maintenance Division
1. Line Maintenance Laborer $ 13.77 $ 14.25 $ 14.75 $ 15.26
2. Line Maintenance Helper 14.37 14.87 15.39 15.93
Engineering Division
1. Pipeline Inspector Helper 14.37 14.87 15.39 15.93
Customer Service Division
1. Installer Helper 14.54 15.05 15.58 16.13
Administrative Division
1. Meter Reader - Class A 14.37 14.87 15.39 15.93
2. Meter Reader - Class B 13.43 13.90 14.39 14.89
3. General Laborer - Class A 10.08 10.43 10.80 11.18
4. General Laborer - Class B 9.29 9.62 9.96 10.31
Probationary Division
1. Probationary Employee 8.28 8.57 8.87 9.18
The foregoing schedule of wages as referred to in Section 14 of the
Memorandum of the Agreement between the Union and the Company is hereby
accepted by the Union and the Company this 28th day of August, 1998.
CORNING NATURAL GAS INTERNATIONAL BROTHER-IBEW LOCAL 139
CORPORATION HOOD OF ELECTRICAL
WORKERS, AFL-CIO
by by by
Thomas K. Barry, Charles B. Patton Stephen L. Miles
President Business Manager President
Date: Date: Date:
Page 1 of 2
CORNING NATURAL GAS CORPORATION - LOCAL UNION 139
AGREEMENT DATED SEPTEMBER 1, 1998
TABLE OF CONTENTS
Item Page Article
Accident Prevention........................... 29 13.7, 13.8
Benefits....................................... 33 16 (All)
Bumping Procedure................................... 19 8.5A
Call Out (Pay).............................. 9, 12 4.10, 6.3
Compensation....................... 13, 21, 22 7.1, 8.11, 8.14
Definitions..... .................................. 6 4 (All)
Effective Date-Wage Increase......................... 27 12.2
Funeral Leave........................................ 17 7.9
Grievance........................................ 30 15 (All)
Holidays......................................... 26 11 (All)
Inclement Weather Conditions............................ 10 5.6
Jury Duty.............................................. 14 7.4
Lay Offs................................ 19, 20 8.5, 8.5A, 8.6
Leave of Absence....................................... 17 7.8
Meal Allowance......................................... 22 9.1
Membership Entrance Date................................ 4 2.3
Overtime Compensation.............................. 11 6 (All)
Personal Leave/Day...... ............................. 13 7.10
Premium Pay Rate....................................... 10 5.3
Probationary Employee................................... 6 4.2
Raingear.............................................. 29 13.6
Safety Shoes...........................................29 13.5
Page 2 of 2
Seniority................................ 19, 20, 21 8.1,8.2,8.3,
8.4,8.7,8.8,
8.9,8.12
Sick Leave Allowance..................................... 14 7.6
Termination Due to Physical Condition................... 19 8.10
Upgrade................................................. 22 8.14
CORNING NATURAL GAS CORPORATION AND SUBSIDIARIES
Financial Statements
Year Ended September 30, 1998 and 1997
(With Independent Auditors Report Thereon)
CORNING NATURAL GAS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1998 and 1997
Assets 1998 1997
Property, plant and equipment, at original cost:
Utility 21,396,130 20,378,449
Non-utility-principally rented
gas appliances and property 3,782,327 2,533,498
----------- ----------
25,178,457 22,911,947
Less accumulated depreciation (9,079,776) (8,478,446)
----------- -----------
16,098,681 14,433,501
Current assets:
Cash 284,426 262,752
Marketable securities available
for sale, at fair value(cost of
$725,295 and $574,842 in 1998
and 1997) 785,361 641,899
Accounts receivable, less allowance for uncollectible
accounts of $97,000 in 1998 and 1997 1,038,524 995,215
Gas stored underground, at average cost 1,539,727 1,347,682
Gas and appliance inventories, at lower
of average cost or market 581,765 641,716
Prepaid income taxes 55,534 465,786
Deferred income tax assets 57,000 62,000
Prepaid expenses 511,638 580,896
-------- --------
4,853,975 4,997,946
Deferred charges:
Pension and other 1,509,695 1,234,960
Deferred debitd-accounting for
income taxes 1,016,661 1,016,661
Unrecovered gas costs 191,819 32,933
Long-term debt issuance costs,
net of amortization 392,875 374,564
--------- ----------
3,111,050 2,659,118
Goodwill, net of amortization 348,235 ----
Other assets 412,817 405,131
--------- ----------
$ 24,824,758 22,495,696
=========== ==========
See accompanying notes to consolidated financial statements.
CORNING NATURAL GAS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
September 30, 1998 and 1997
Capitalization and Liabilities 1998 1997
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
Net unrealized gain on securities available for sale
(net of income taxes of $20,422 in 1998 and
$22,799 in 1997) 39,644 44,258
Retained earnings 2,403,489 2,211,833
---------- ---------
5,396,479 5,209,437
Long-term debt, less current installments 10,459,351 9,400,000
Total capitalization 15,855,830 14,609,437
---------- ----------
Current liabilities:
Notes payable 2,325,000 775,000
Accounts payable 1,266,918 1,680,840
Dividends payable ---- 149,500
Current installments of long-term 36,830 -----
Customers' deposits and accrued interest 728,645 673,114
Accrued general taxes 145,170 112,367
Supplier refunds due customers 70,731 380,994
Accrued expenses 502,755 489,316
Other 29,035 20,826
-------- -------
Total current liabilities 5,105,084 4,281,957
--------- ---------
Deferred credits:
Deferred income tax liabilities 2,353,665 2,444,966
Deferred compensation, postretirement benefits,
and other 1,510,179 1,159,336
--------- ---------
3,863,844 3,604,302
--------- ---------
$ 24,824,758 22,495,696
============ ==========
Commitments (note 12)
See accompanying notes to consolidated financial statements.
CORNING NATURAL GAS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Retained Earnings
For the Years Ended September 30, 1998 and 1997
Utility Operations 1998 1997
Operating revenue:
Residential, commercial and industrial $ 13,311,539 13,824,008
Transportation 3,201,884 3,769,390
Capacity assignment 159,872 242,289
---------- ----------
Total operating revenue 16,673,295 17,835,687
Operating expenses and taxes:
Natural gas purchased 9,409,388 10,448,308
Operating and maintenance 3,557,025 3,529,373
Taxes other than federal income taxes 1,650,950 1,668,049
Depreciation 574,372 548,614
Federal income taxes 162,792 245,887
--------- -----------
Total operating expenses and taxes 15,354,527 16,440,231
Income from utility operations 1,318,768 1,395,456
Unregulated Operations
Service and merchandising 1,540,959 1,509,250
Appliance rental 743,865 736,762
Professional services and real estate 341,375 ----
Interest income 38,263 21,307
---------- ----------
Total unregulated revenue 2,664,462 2,267,319
--------- ---------
Unregulated expenses 2,415,797 2,045,463
--------- ---------
Income from unregulated operations 248,665 221,856
Other income (including net realized gains on marketable
securities of $31,592 in 1998 and $20,997 in 1997) 31,885 22,977
Income before interest expense 1,599,318 1,640,289
Interest expense 959,161 884,538
--------- ----------
Net income 640,157 755,751
Retained earnings, beginning of period 2,211,833 2,194,382
Less dividends 448,501 738,300
-------- ---------
Retained earnings, end of period $ 2,403,489 2,211,833
========== =========
Weighted average number of shares outstanding - basic and
diluted 460,000 460,000
Basic and diluted earnings per common share 1.39 1.64
See accompanying notes to consolidated financial statements.
CORNING NATURAL GAS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended September 30, 1998 and 1997
1998 1997
Cash flows from operating activities:
Net income $ 640,157 755,751
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 837,151 788,368
Gain on sale of marketable securities (31,592) (20,997)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (43,309) (205,538)
Gas stored underground (192,045) (583)
Gas and appliance inventories 59,951 11,314
Prepaid expenses 69,258 (148,733)
Unrecovered gas costs (158,886) (265,702)
Prepaid income taxes 410,252 (131,301)
Deferred charges-pension and other (274,735) (650,151)
Other assets and long-term debt issuance costs (25,997) (146,792)
Increase (decrease) in:
Accounts payable (413,922) 534,650
Accrued general taxes 32,803 (29,231)
Supplier refunds due customers (310,263) (151,015)
Deferred income taxes (86,301) 129,753
Other liabilities and deferred credits 430,399 704,738
-------- --------
Net cash provided by operating activities 942,921 1,174,531
------- ---------
Cash flows from investing activities:
Proceeds from sale of marketable securities 182,284 619,798
Purchases of marketable securities (301,145) (1,173,643)
Acquisitions of businesses net of cash acquired (1,879,531) ----
Capital expenditures, net of minor disposals (971,035) (999,729)
--------- ---------
Net cash used in investing activities (2,969,427)(1,553,574)
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit
agreements 1,550,000 (1,950,000)
Dividends paid (598,001) (588,800)
Borrowings under long-term debt agreements 1,096,181 4,700,000
Repayment of long-term debt ---- (1,700,000)
---------- -----------
Net cash provided by financing activities 2,048,180 461,200
---------- ----------
Net increase in cash 21,674 82,157
Cash at beginning of period 262,752 180,595
---------- --------
Cash at end of period $ 284,426 262,752
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 933,000 883,000
Income taxes 368,000 732,000
See accompanying notes to consolidated financial statements.
CORNING NATURAL GAS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1998 and 1997
(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 Statement of
Financial Accounting Standards No. 71 (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 of the Company are
summarized below.
(a)Principles of Consolidation and Presentation
The consolidated financial statements include the Company and its wholly
owned subsidiaries, the Corning Natural Gas Appliance Corporation. In
April 1998, the Corning Natural Gas Appliance Corporation completed the
purchase of three businesses which have been established as New York State
limited liability subsidiary corporations, as follows: Tax Center
International, LLC; The Foodmart Plaza, LLC; and Corning Realty Assoc, LLC
(collectively referred to as "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.
(b)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.
(c)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 2.7% in 1998 and 1997.
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 at rates
ranging from 10% to 20% per year.
(d)Revenue and Natural Gas Purchased
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. Capacity assignment revenue is recorded at a rate of
15% of the amount received from released capacity and is recognized upon
notification of capacity release from the pipeline company while the
remaining 85% is returned to customers through reduced gas cost. The
Company secured a weather normalization clause in the last major rate
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. As a result, the effect on revenue
fluctuations in weather related gas sales is somewhat neutralized. Real
estate commissions are recognized at closing while professional services
revenues are recognized as services are performed.
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 to or recovered from customers
over a subsequent 12-month period.
(e)Marketable Securities
Marketable securities, which are intended to fund the Company's deferred
compensation plan, are classified as available for sale at September 30,
1998 and 1997. Such securities are reported at fair value based on
quoted market prices, with unrealized gains and losses, net of the
related income tax effect, excluded from earnings, and reported as a
separate component of stockholders' equity until realized. The cost of
securities sold was determined using the specific identification method.
A summary of the marketable securities at September 30, 1998 and 1997
is as follows:
Net
Market Cost Unrealized Unrealized Unrealized
Value Basis Gains Losses Gains
1998 $ 785,361 725,295 87,718 (27,652) 60,066
1997 641,899 574,842 71,876 (4,819) 67,057
(f)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.
(g)Dividends
Dividends are accrued when declared by the Board of Directors. Dividends
declared were $448,501 or $0.98 per share in 1998, and $738,300 or $1.61
per share in 1997. Dividends paid were $598,001 and $1.30 per share in
1998, and $588,800 and $1.28 per share in 1997.
(h)Goodwill
Goodwill represents the excess of purchase price over the fair value of
the identified net assets of acquired businesses. Goodwill is amortized
over 15 years, the estimated period of benefit, on a straight-line basis.
Goodwill in excess of associated expected operating cash flows is
considered to be impaired and is written down to fair value, which is
determined based on either discounted future cash flows or appraised
values, depending on the nature of the asset.
(i)Accounting for Impairment
SFAS 121, Accounting for the Impairment of Long-Lived Assets to be
Disposed Of establishes accounting standards to account for the
impairment of long-lived assets, and certain identifiable intangibles.
Under SFAS 121 the Company reviews assets for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be
recoverable. SFAS 121 also requires that a rate-regulated enterprise
recognize an impairment when regulatory assets are no longer probable
of recovery.
(2)Acquisitions
In April 1998, the Corning Natural Gas Appliance Corporation completed
three acquisitions accounted for by the purchase method, as follows:
The Foodmart Plaza, LLC, (the Plaza) was purchased for $1,175,000 and
financed primarily through a $940,000 ten year note secured by the real
property. Located in South Corning, New York, the Plaza consists of
eight tenants under multi-year leases anchored by a major supermarket.
Tax Center International, LLC (Tax Center) and Corning Realty Associates,
LLC (Corning Realty) were purchased for $349,000, funded through a
$180,000 eight year loan agreement with the sellers and the balance
through operating funds. Tax Center provides tax preparation, accounting,
and payroll services. Corning Realty is a residential and commercial
real estate brokerage with agents operating out of offices in Corning
and Elmira, New York.
Total goodwill related to these transactions was $355,531. Results of
operations for the acquired entities have been included in the
accompanying financial statements beginning in April 1998. Working
capital acquired in connection with these purchases was immaterial.
The following summarized unaudited pro forma financial information
assumes the acquisitions had occurred on October 1 of each year and
reflects interest expense and goodwill amortization, net of applicable
taxes, related to the acquisitions:
Years ended
September 30,
1998 1997
(unaudited)
Total revenues $ 20,024,000 21,421,000
Net earnings 767,000 843,000
Basic earnings per common share 1.67 1.92
The above amounts are based upon certain assumptions and estimates which
the Company believes are reasonable. The pro forma results do not
necessarily represent results which would have occurred if the
acquisition had taken place on the basis assumed above, nor are they
indicative of the results of future combined operations.
(3)Information About Operating Segments
Selected financial information for the Company's identifiable operating
segments follows:
Identifiable Assets
1998 1997
Regulated operations $ 21,348,267 20,180,675
Unregulated operations 3,476,491 2,315,021
------------ -----------
$ 24,824,758 22,495,696
============ ==========
Capital Expenditures
1998 1997
Regulated operations $ 756,953 762,254
Unregulated operations 214,082 237,475
----------- ---------
$ 971,035 999,729
=========== ========
Depreciation and Amortization
1998 1997
Regulated operations $ 574,372 548,614
Unregulated operations 262,779 239,754
---------- --------
$ 837,151 788,368
========== ========
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 Deferred Charges. Such costs arise from the
traditional cost-of-service rate setting approach whereby all prudently
incurred costs are generally recoverable through rates. Deferral of
these costs is appropriate while the Company\rquote 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. Accordingly, the Company believes that accounting under
SFAS 71 is still appropriate.
Below is a summarization of the Company's regulatory assets as of
September 30, 1998 and 1997:
1998 1997
Deferred pension and other $ 1,509,695 1,234,960
Deferred debits-accounting for income 1,016,661 1,016,661
taxes
Unrecovered gas costs 191,819 32,933
--------- ----------
Total-regulatory assets $ 2,718,175 2,284,554
========== ==========
Deferred pension and other Approximately $1,294,000 and $1,086,000
of these balances represent pension
costs in excess of the amounts currently
recoverable through rates at September
30, 1998 and 1997, respectively. The
PSC requires such excess costs to be
deferred. Remaining balances represent
miscellaneous regulatory assets.
Deferred debits-accounting These amounts represent the expected
for income taxes future recovery from ratepayers of the
tax consequences of temporary differences
between the financial reporting basis
and tax basis of assets and liabilities.
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).
The Company expects that its regulatory assets will be fully recoverable
from customers.
(5)Long-Term Debt
A summary of long-term debt at September 30, 1998 and 1997 follows:
1998 1997
Unsecured senior note - 7.9% due
serially as described below $ 4,700,000 4,700,000
First mortgage bonds - 8 1/4%
series all due 2018 3,100,000 3,100,000
Unsecured senior note - 9.83% due
serially as described below 1,600,000 1,600,000
Mortgage note - 8.02% monthly
installments through April 2008 932,245 ---
Unsecured promissory note - 6.5%
monthly installments through
April 2006 163,936 ---
Total long-term debt 10,496,181 9,400,000
Less current installments 36,830 ---
---------- ---------
Long-term debt less
current installments $ 10,459,351 9,400,000
The Company will redeem long-term debt as follows:
7.9% Senior Note - $355,000 annually from 2006 through 2016 with $795,000
due 2017.
The 8 1/4% first mortgage bond is secured by substantially all utility plant.
9.83% Senior Note - $100,000 annually from 2007 through 2015 with $700,000
due 2016.
The aggregate maturities of long-term debt for each of the five years
subsequent to September 30, 1998 are as follows:
1999 $ 36,830
2000 40,000
2001 43,000
2002 46,000
2003 49,000
(6)Lines of Credit
The Company has lines of credit with local banks to borrow up to $7,500,000
on a short-term basis. Borrowings outstanding under these lines were
$2,325,000 at September 30, 1998 and $775,000 at September 30, 1997. The
maximum amount outstanding during the year ended September 30, 1998 and 1997
was $2,325,000 and $3,445,000, respectively. The lines of credit are
unsecured and payable on demand with interest at rates which range from the
prime rate (8.25% at September 30, 1998) to the prime rate less 3/4%. The
weighted average interest rates on outstanding borrowings during fiscal 1998
and 1997 were 7.80% and 7.88%, respectively.
(7)Federal Income Taxes
Federal income tax expense (benefit) recorded in the accompanying
consolidated statements of income and retained earnings is as follows:
1998 1997
Utility Operations:
Current $ 249,093 122,335
Deferred (92,439) 133,681
Investment Tax Credits 6,138 (10,129
--------- ---------
162,792 245,887
Unregulated Operations:
Current 175,484 122,665
Deferred ---- (3,928)
------- --------
175,484 118,737
------- ---------
Total federal income tax expense $ 338,276 364,624
======== ========
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:
1998 1997
Expected tax expense $ 332,667 380,928
Investment tax credits 6,138 (10,129)
Other, net (529) (6,175)
--------- --------
$ 338,276 364,624
========== ========
The Company is exempt from state income taxes.
The tax effects of temporary differences that result in deferred income tax
assets and liabilities at September 30, 1998 and 1997 are as follows:
1998 1997
Deferred income tax assets:
Unbilled revenue $ 24,000 27,000
Deferred compensation reserve 229,000 188,000
Postretirement benefit obligations 151,000 102,000
Allowance for uncollectible accounts 33,000 33,000
Inventories 46,000 49,000
Other 15,000 43,000
--------- --------
Total deferred income tax assets $ 498,000 442,000
========= ========
Deferred income tax liabilities:
Property, plant and equipment,
principally due to differences in
depreciation $ 2,139,000 2,110,000
Pension benefit obligations 427,000 358,000
Deficiency of GAC revenue billed 61,000 90,000
Other 167,665 266,966
---------- ---------
Total deferred income tax
liabilities 2,794,665 2,824,966
----------- ---------
Net deferred income tax liability $ 2,296,665 2,382,966
=========== ==========
There was no change in the valuation allowance for deferred income tax assets
during the year ended September 30, 1998 or 1997.
(8)Deferred Compensation and Pension Plans\par
In 1997, the Company established a trust to fund a deferred compensation
plan for certain officers. The fair market value of assets in the trust was
$785,361 and $641,899 at September 30, 1998 and 1997, respectively, and the
plan liability, which is included in deferred compensation postretirement
benefits and other credits on the balance sheet, was $675,000 and $554,000
at September 30, 1998 and 1997, respectively. The assets of the trust are
available to general creditors in the event of insolvency.
The Company has defined benefit 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 for benefits attributed for service to
date, and those expected to be earned in the future.
The following table sets forth the plan\rquote s funded status and amounts
recognized on the Company's balance sheet at September 30, 1998 and 1997:
1998 1997
Actuarial present value of accumulated
benefit obligation (including vested
benefits of $6,689,000 in 1998 and
$5,707,000 in 1997 $ 6,824,000 5,818,000
============= ==========
Plan assets at fair value, primarily listed
stocks and bonds $ 9,658,000 9,102,000
Projected benefit obligation 8,445,000 7,159,000
Excess of plan assets over projected
benefit obligation 1,213,000 1,943,000
Unrecognized net gain being recognized
over 10 years in accordance with PSC
policy (864,000) (1,946,000)
Unrecognized prior service cost 817,000 810,000
Unrecognized net transition amount 8,000 8,000
------------ ----------
Prepaid pension cost included in
deferred charges - pension and
other on the balance sheet $ 1,174,000 815,000
=============== ===========
Effective October 1, 1998 and 1997, the Plan was amended to provide an
increase of 3% and 3.5%, respectively, in pension payments to all retirees.
The components of net periodic pension expense (benefit) for the years ended
September 30, 1998 and 1997 are as follows:
1998 1997
Service cost of benefit earned during the
period $ 229,000 218,000
Interest on projected benefit obligation 512,000 467,000
Actual return on plan assets (765,000) (1,824,000)
Net amortization and deferrals (120,000) 1,162,000
----------- ----------
Net periodic pension expense (benefit) $ (144,000) 23,000
========== ==========
For ratemaking and financial statement purposes, pension expense represents
the amount approved by the PSC in the Company's most recently approved rate
case. Pension expense for ratemaking and financial statement purposes
was approximately $39,000 for the years ended September 30, 1998 and 1997.
The difference between the pension expense (benefit) for ratemaking and
financial statement purposes, and the amount computed above has been
deferred and is not included in the prepaid pension cost noted above. Such
balances equal $135,000 and $286,000 as of September 30, 1998 and 1997,
respectively.
The assumptions used to determine net periodic pension expense (benefit)
prepaid pension cost were as follows:
1998 1997
Weighted average discount rate 6.50% 7.25%
Rate of compensation increase 5.0 % 5.0%
Weighted average return on plan assets 8.0 % 8.0%
(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:
Deliveries Revenue
Mcf % of Total Amount % of Total
Corning, Inc.
Year ended September 30, 1998 1,933,000 26 $788,000 5
Year ended September 30, 1997 2,049,000 26 842,000 5
NYSEG
Year ended September 30, 1998 1,985,000 27 $270,000 2
Year ended September 30, 1997 2,135,000 27 266,000 1
BEGWS
Year ended September 30, 1998 731,000 10 $1,640,000 10
Year ended September 30, 1997 809,000 10 2,050,000 11
(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 at September 30, 1998 and 1997.
Actuarial present value of accumulated postretirement benefit obligation:
1998 1997
Current retirees $ (699,000) (541,000)
Future retirees (364,000) (401,000)
---------- ---------
(1,063,000) (942,000)
Unrecognized transition obligation at
January 1, 1993 being recognized over
20 years 859,000 916,000
Unrecognized net gain being recognized
over 10 years in accordance with PSC
policy (179,000) (315,000)
------------- -----------
Accrued postretirement benefit cost
recognized on the balance sheet,
included in deferred credits $ (383,000) (341,000)
============ ============
The PSC has allowed the Company to recover incremental cost through rates on
a current basis. Due to the timing differences between the Company's rate
case filings and financial reporting period, a $126,000 regulatory liability
and a $26,000 regulatory asset have been recognized at September 30, 1998
and 1997, respectively.
Net periodic postretirement benefit cost for the years ended September 30,
1998 and 1997 includes the following components:
1998 1997
Service costs $ 16,000 13,000
Interest cost 66,000 65,000
Net amortization and deferrals 25,000 22,000
----------- ---------
Net periodic postretirement
benefit cost $ 107,000 100,000
============ =========
For measurement purposes, an 8% annual rate of increase in the per capita
cost of covered benefits (health care cost trend rate) was assumed for 1998.
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
trend would result in approximately a 2.7% increase in the service and
interest cost components of the annual net periodic postretirement benefit
cost and a 3.2% 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 6.50%.
(11)Rentals Under Operating Leases
The Company receives income from the rental of retail store space under
operating leases. The following is a schedule of minimum future rentals
(excluding amounts representing executory costs such as taxes, maintenance
and insurance) of operating leases as of September 30, 1998:
1999 $ 261,000
2000 241,000
2001 239,000
2002 206,000
2003 74,000
--------
Total minimum future rentals $1,021,000
All leases contain renewal options at the end of their respective lease terms.
(12)Commitments
The Company has agreements with seven 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 Federal
Energy Regulatory Commission approved rates. Purchased gas costs incurred
under these pipelines capacity agreements during 1998 and 1997 amounted to
$3,735,000 and $3,363,000, 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
significantly in excess of normal capacity requirements.
(13)Subsequent Event - Acquisition
Effective December 3, 1998, the Corning Natural Gas Appliance Corporation
completed the acquisition of a company for $1,525,000 as part of its ongoing
diversification efforts. The acquisition was accounted for by the purchase
method.
INDEPENDENT AUDITOR'S 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 Subsidiaries (the Company) as of September 30,
1998 and 1997, and the related 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 overall financial statement presentation
We believe that our audits provide a reasonable basis for our opinion.
In our opinionm, the consolidated financial statements referred to abover
present fairly, in all material respects, the financial position of Corning
Natural Gas Corportation and Subsidiaries at September 30, 1998 and 1997, and
the results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
November 6, 1998 except as to note 13, which is as of December 3, 1998.
