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, 1999
Commission file number 0-643
Corning Natural Gas Corporation
(Name of small business issuer in its charter)
New York 16-0397420
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
330 W. William St., Corning NY 14830
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (607) 936-3755
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock - $5.00 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-ISV. (X)
Revenues for 12 month period ended September 30, 1999 $23,022,974
The aggregate market value of the 331,953 shares of the Common Stock held by
non-affiliates of the Registrant at the $21.50 average of bid and asked
prices as of November 1, 1999 was $7,136,989.
Number of shares of Common Stock outstanding as of the close of business on
November 1, 1999 - 460,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the twelve month
period ended September 30, 1999, and definitive proxy statement and notice of
annual meeting of shareholders, dated January 12, 1999 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 1999 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, 1999
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 operates as five operating
segments, the Gas Company, Appliance Corporation, Tax Center International,
Corning Realty and Foodmart Plaza.The Gas 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 Gas 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
Appliance Corporation sells, rents and services primarily gas burning
appliances. The Tax Center provides tax preparation, accounting and payroll
services to approximately 800 clients. Corning Realty is a residential and
commercial real estate business with approximately 80 agents operating in
three neighboring counties. Foodmart Plaza is a retail complex consisting
of eight tenants under multi-year leases anchored by a major supermarket.
(b) Business of Issuer
(1) The Gas Company maintains a gas supply portfolio of numerous
contracts and is not dependent on a single supplier. Additionally, the Gas
Company has capabilities for storing 793,000 Mcf through storage operations
with two of its suppliers. The Gas Company had no curtailments during fiscal
1999 and expects to have an adequate supply available for its customers
during fiscal 2000 providing that no abnormal conditions or actions occur.
(2) The Gas Company is franchised to supply gas service in all of the
political subdivisions in which it operates.
(3) Since the Gas 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 6,241 for the period October 1, 1998 through September 30, 1999 and
5,979 for the same period ended September 30, 1998.
(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.
Competition from oil still exists 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 $128,445 for the 12
months ended September 30, 1999 and $159,872 for the 12 months ended
September 30, 1998.
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.
The Appliance Corporation faces the challenges of local competition. The
home center chains which have been opened in our vicinity offer competition,
however, the Appliance Corporation continues to depend on its long standing
reputation in the area as a top quality sales and service company. As for
the rental section of the appliance business, there really isn't a great
deal of competition in our very strong rental water heater market. This
stabilizes a substantial portion of our net income.
The real estate business is clearly a highly competitive market in which
Corning Realty is well positioned.Prudential Ambrose & Shoemaker Real Estate
maintains approximately 55% of the local market. Local economy and interest
rates play a factor in the outcome of the market, however, Corning Realty
continues to hold strong.
The impact of competition is less material in the other two areas of our
business, the commercial property rented out at our Foodmart Plaza is in
demand with limited competition. The services provided by Tax Center are
available from various competitors. The Tax Center maintains a steady growth
of clients regardless of that competition.
(6) The Gas 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 subsidiaries.
(7) Ninety-two persons were employed by the Company in 1999 versus
seventy-seven for the previous year.
(8 The Gas Company expects no shortage of raw materials to impact our
business over the next 5 - 10 years. The Energy Information Administration
indicates an increase in the efficiency of gas exploration and development
is expected to result in increased gas productive capacity. As for the
availability of the necessary pipes and valves for safe distribution of
natural gas, the Gas Company likewise anticipates no shortages and continues
to receive both gas supply and material inventory from various reliable
sources.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company completed 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.
That property has been sold, and the gain on the sale was returned to
ratepayers.
The Gas Company's pipeline system is thoroughly surveyed each year. Any
necessary replacements are included in the construction budget.
Approximately 105 miles of transmission main, 290 miles of distribution
main, 13,800 services and 86 measuring and regulating stations, along with
various other property are owned by the Gas 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 Gas Company, is adequately insured and is
subject to the lien of the Company's first mortgage indenture.
The Foodmart Plaza is a retail/commercial complex consisting of a major
grocery store and several other businesses located on an approximately 7
acre lot at 328 Park Avenue, South Corning, NY. The main building includes
2 retail stores which covers 48,300 square feet and an additional 6
buildings totaling 10,775 square feet house 7 other businesses. The
property is well maintained and its overall condition remains very good.
All of the above described property, which is owned by the Appliance Company,
is adequately insured and is subject to a lien agreement with a local bank.
The Appliance Corporation, Tax Center and Realty businesses are operated
out of the Company's West William Street complex in combination with rented
office space in various locations. The Tax Center and Realty companies own
no buildings at this time.
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 1999.
Additional Item
Executive Officers of the Registrant
(Including Certain Significant Employees)
Business Experience
Yea
rs Served
Name Age During Past 5 Years In
This Office
Thomas K. Barry 54 Chairman of the Board of Directors 6
President & C.E.O.
15
Edgar F. Lewis 62 Senior Vice President - Operations
19
Kenneth J. Robinson 55 Executive Vice President 8
Phyllis J. Groeger 59 Secretary 12
Thomas S. Roye 46 Vice President - Administration 8
Gary K. Earley 45 Treasurer
8
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 344 at September 30, 1999. 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 Declared
December 31, 1997 20 20 $ .325
March 31, 1998 20 20 .325
June 30, 1998 20 20 .325
September 30, 1998 20 20 .325
December 31, 1998 20 20 .325
March 31, 1999 21 1/2 20 .325
June 30, 1999 21 1/2 21 1/2 .325
September 30, 1999 21 1/2 21 1/2 .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.
Under the terms of the $4,700,000 senior note issued September 5, 1997, the
Company may not declare or pay any dividend, or cause any other payment
from retained earnings except to the extent that consolidated tangible net
worth of the Company exceeds $2,000,000.
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 1999 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 LLP dated November 15, 1999 are
included in the 1999 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 filed with the Commission
on December 30, 1999.
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
filed with the Commission December 30, 1999.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required regarding certain relationships and related
transactions appears in the Definitive Proxy Statement filed with the
Commission December 30, 1999.
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 December 31, 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 1999, 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 was
filed with the Commission on December 30, 1999
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, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CORNING NATURAL GAS CORPORATION (Registrant
)
Date December 27, 1999 Thomas K. Barry, Chairman of the Board,
President and C.E.O.
Date December 27, 1999 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 27, 1999 J.E. Barry, Director
Date December 27, 1999 Donald R. Patnode,Director
Date December 27, 1999 J.A. Finley, Director
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<PERIOD-END> SEP-30-1999 SEP-30-1998
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<TOTAL-ASSETS> 26,489,195 24,798,172
<COMMON> 2,300,000 2,300,000
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<OPERATING-INCOME-LOSS> 1,121,423 1,318,768
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<TOTAL-INTEREST-ON-BONDS> 965,105 959,161
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The Company's Proxy Statment was filed with the Commission December 30, 1999.
To our Shareholders
The utility industry across the country has slowly been put through a process
referred to as deregulation. What has happened to the telecommunications
business is gradually now occuring in the gas and electric industry. In
short, it is the process of pulling apart the services traditionally provided
by one utility, which is referred to as unbundling of services and then
repackaging in such a manner that several businesses will provide separate
pieces of the service pie to each customer. The net result, hopefully, will
be increased competition leading to more choices with better service at
lower prices to the end user. Deregulation of the gas and electric business
has been slow ot evolve due to the serious ramifications of reliability of
supply and provider of last resort issues. Furthermore, the competitively
slim profit margins available for marketers have created a certain amount
of reluctance to serve small commercial and residential customers.
This new direction of serving the customer and the injectionof competition
has initiated more than just discussion throughout the utility industry. Our
reaction has primarily centered on the concept that we must embrace change,
as change will inevitably be the constatn. Not only will we change the way
we handle the utility business, but we must also change the way we service
customers as well as reconsider the types of service we will provide. These
concepts utilimately lead to diversification and that is the focus of this
report to shareholders. There is an automobile advertisement that states,
"This isn't your father's Oldsmobile." If our Company is to improve and grow
we must recognize that it can not continue as a traditional local gas
distribution company. The following information will explain the results of
the Gas Corporation and the Appliance Corporation over the past year and will
also explore the efforts management has taken toward growth through
diversification.
Let's review the overall results of the Company for the year ended September
30, 1999. Consolidated earnings were $.95 per share, which is down from
$1.39 per share the prior year. Some areas of the Company produced
excellent results while others were disappointing. Net earnings of the Gas
Corporation were $219,700 vs. $391,500 in 1998, while the subsidiary
company's net earnings were $218,300 vs. $248,700 in 1998. First, we will
examine the results of the parent (Gas) corporation during 1999 and then we
will review the Appliance Corporation and wholly owned entities. For the
second consecutive year the number of degree days recorded in the northeast
U.S. were less than the fifteen-year average. Warmer temperatures resulted
in lower than forecast gas deliveries to the Company's firm and
transportation customers. Total gas deliveries during 1999 were 682,000
dekatherms more than the total for 1998. However, the Company has contracts
with two major customers that were negotiated at a fixed revenue level that
accounted for 707,000 additional dekatherms of these deliveries. Thus, we
actually delivered slightly less gas to those customers who pay according
to volumetric use. This is somewhat surprising considering that the prior
year(1998) established the record as the warmest year in our history. To
further exacerbate depressing earnings, the Company was required to record
a net loss of $61,000 at the end of the year due to the mandated method of
accounting for lost and unaccounted for gas. During the prior year the
Company had a sizable gain in this area thus the turnaround accounts for a
significant change in net income from one year to the next.
In last year's report we reviewed several areas of economic development in the
Corning area. Several of the new housing projects are just now swinging
into high gear. In the Erwin area there are currently 160 new apartments
and townhouses in the beginning construction phase with many new single
family homes completed and underway. The Corning Incorporated Sullivan Park
Science Research Center, also located in Erwin, has physically doubled its
size over the past two years and continues its expansion program here. As
As Corning Incorporated officials predicted, this facility has more than
doubled its gas usage while Corning Incorporated has employed over two hundred
new scientists and additional support staff at the research center to
invigorate its thrust into new technologies. Our Company provided a five year
graduated rate program for this facility as part of a package to encourage
economic development in New York State.
As our Company progressed throughout last winter it became clear that it
would be increasingly difficult to move forward without some rate relief. We
have managed to survive on a very small increase in rates of only $212,000
during the past even years. We have been able to cut costs in some areas
and have done what is possible to stabilize expenses in other areas, but
inflation, albiet moderate, has finally taken its toll. On June 22, 1999 the
Board of Directors voted to file a major rate application at the beginning
of 2000, which will not become effective until approximately January, 2001.
Due to the restructuring of the utility industry, this filing will be
rather complex thus a more complete review of this issue is provided
further on in this report. At this point we will review the results of the
Company's subsidiary and its three limited liability corporations(LLC's).
The Appliance Corporation
The Appliance Corporation continues to make substantial contributions to
consolidated earnings, yet 1999 income of $180,000 does not compare well
with the prior year's level of $236,000. The rental portion of the
business provided the majority of net income as revenues derived from
rental appliances remained relatively stable. Sales of merchandise and service
revenues were 4 1/4 percent less than the prior year. Overall gross margins
were also reduced to meet more sever competition while uncontrollable cost
increases, such as pension expense, all combined to produce depressed earnings
from this side of the business. Several adjustments are being implemented to
assist in improving results in this area during 2000.
Tax Center International
In its first full year of operation after purchasing this Company in April,
1998, net income of $75,000 were produced on gross revenues of $275,000,
an impressive 27 percent return on revenues. Under the direction of Vice
President, Ms. Firouzeh Sarhangi, this business was expanded from a base of
600 clients to over 1,000 clients in the past year. This organization,
consisting of five full time employees, provides monthly accounting, payroll
and consulting services to small businesses and professional offices and
tax services to businesses and individuals. Looking forward, the primary
objective will be to secure additional qualified accounting personnel to
allow for expansion.
Foodmart Plaza
This small retail plaza, which was originally constructed in 1956 as the
area's leading grocery store produced net income of just over $40,000 during
our first full year of ownership. The earings and revenue levels are
precisely on target with our expectations. The plaza, which consists of
eight various businesses, is 100 percent rented. One store is currently
empty but has an active lease through 2004. The Plaza has a property
tax assesment court case in process, which, if successfull, will produce a
reduction in expenses of approximately $20,000 annually. Improvements were
made to the exterior of the buildings and to the expansive parking facilities.
The property is well maintained and its overall condition remains very good.
Prudential Ambrose & Shoemake Real Estate
On December 3, 1998 the Company completed an agreement to purchase the
region's largest and most successful real estate company(Ambrose & Shoemaker
Better Homes & Gardens). This company was immediately merged with the
Prudential Marketplace (Real Estate Company), which the Company purchased
just eight months prior to Decemver 1998 to form this area's largest
residential real estate organization, Corning Realty Associates that maintains
between 55-60 percent of the market. The Company has 15 employees and 70
liscensed sales agents who operate out of four sales offices located in
Elmira, Corning, Horseheads and Watkins Glen. The Company has been highly
successfull in terms of total commissions produced but recorded a net loss
of $77,000 through September 1999, due, in part, to indirect acquisition and
start up costs. A comprehensive budget has recently been implemented and
some further restructuring of the organization is moving forward to position
this business to contribute toward consolidated earnings during 2000. This is
a full service real estate business offering residential and commercial
listing and sales services as well as auction, rental and property management
services.
Overview:While financial results for 1999 did not meet expectations, a great
deal was accomplished to position the Company for a brighter, more diversified
future. As we move into a more competitive arena, the Company has put in
place a fine staff of personnel coupled with a mix of service oriented
businesses that position us to survive and prosper as we move forward. We
remain committed in our policy to pay dividends to our shareholders as we
paid $1.30 per share over the past year. The February 2000 dividend will
reflect 47 years of consecutive quarterly dividend payments. We are
grateful to all the Company's employees who have been highly supportive in
our goal to diversify as so many have taken on additional responsibilities
to make this possible. We look forward with enthusiasm to a more interesting,
productive organization that no longer must depend primarily on cold weather
for its success. The Board of Directors is appreciative of the dedication
of the employees, the support given by shareholders and the loyalty of
its many customers.
Thomas K. Barry
Chairman of the Board,
President and CEO
RETIREMENT
Edgar F. Lewis, Senior Vice President - Operations, retired at the beginning
of 2000. Ed began his career with Corning Natural Gas in 1956 as an
apprentice draftsman on a part time basis while he attended college at
Cleveland State University. Upon graduation in June, 1962, Mr. Lewis
joined the firm as the Company engineer. In 1971 he became general
superintendent of the department. In 1972, in the midst of the Company's
recovery from the results of Hurricane Agnes, he was promoted to Vice
President - Opererations in 1981. Ed earned a masters of business admin-
isrtation degree from Syracuse University in 1980 and was promoted to Senior
Vice President-Operations in 1981. Mr. Lewis has worked with the Company
through periods of growth, through both difficult and prosperous times,
always with determination and devotion to his employees and his work. We
greatly appreciate his dedication and wish him well for a long, successful
future.
OPERATIONS MANAGEMENT
Assuming the management of gas operations is Russell S. Miller who joined
the engineering department of the Company as a draftsman in 1989. One of
his first responsibilities was to computerize the Company's mapping system
utilizing skills he learned while obtaining a degree in computer graphics
technology at Corning Community College. Russ grew up in the Corning area,
graduated from high school in 1981 then enlisted in the United States Navy
where he served for six years as a technician. While trainingto manage the
gas operations of the Company, he has served as Gas Supply Manager and is
working toward earning an electrical/mechanical technology degree at the
Rochester Institute of Technology.
RATES & REGULATION
The Company's last rate case was approved to become effective on September 1,
1996. While there has been some moderate customer growth, increased wages,
investment in new and replacement gas plant and the effects of inflation
now necessitate the filing of a request for increased rates with the Public
Service Commission. Because this request must meet additional requirements
with regards to the new deregulated environment, the Company will file a
major case requiring the use of legal assistance and outside consultants.
It is anticipated that the request will be filed prior to the end of January,
2000 with new rates to become effective January 1, 2001.
Over the last several years the Company has been involved in the process of
transitioning towards the deregulated environment where all customers,
including residential, have the ability to purchase natural gas from a
marketer of their choice and are not required to purchase from the Company.
As has been previously reported, the Company is neutral with respect to
profit margin in that no margin has ever been received from the sale of gas.
Rates are set by the Public Service Commission based on investment in plant
and the cost of operating the distribution system, functions which will not
change.
On November 3, 1998 the Public Service Commission issued a Policy Statement
that clearly stated the concern that the deregulated market would not succeed
if local distribution companies (LDC's) were allowed to continue in the
merchant function. The Commission is, therefore, requiring that LDC's
submit plans indicating how they would transition to a fully deregulated
market in which they are no longer a participant in the activity of selling
gas.
Company personnel have been actively involved in the regulatory process
leading towards deregulation and have spent many hours in internal
discussion and planning. Along with the request for increased rates the
Company will file its plan to exit the merchant function and unbundle rates
in accordance with the Commission directive. In this regard, a consultant
familiar with all of the complexities associated with this transition has
been retained. The plan will address all of the perceived implications of
this significant change in the traditional way of conducting business
including capacity contract expirations, provider of last resort
responsibility, customer motivation and internal operating procedures. A
timetable to completely exit the merchant function will be established.
The transition to a more competitive environment in which utilities are not
active participants in the activity of selling gas is inevitable. The
Company supports the efforts of the Public Service Commission to make this
transition as smooth and as soon as is practical and we are confidant in our
ability to adapt to this new environment.
GAS OPERATIONS
It was an exciting and challenging year from an operational standpoint as we
endeavored to meet the growth in our community. During the year the Company
added 4.6 miles of new main and 159 new services to accommodate the growth
within our franchise territory.
MUNICIPALITY MAIN IN FEET SERVICES
City of Corning 730 14
Town of Campbell 2,040 23
Town of Caton 1,508 9
Town of Corning 1,200 15
Town of Erwin 13,195 51
Town of Southport 1,424 5
Town of Urbana 2,873 24
Village of Addison 275 5
Village of H'Sport 468 5
Village of Sth Cng 360 8
------- ----
TOTALS 24,073 159
In addition, the Company supervised the installation of a new 7,000' 10 inch
diameter plastic main and a new meter station to accommodate the doubling in
gas load at Corning Incorporated's Sullivan Park Research Center.
Developments for the upcoming year include a new Wal-Mart Plaza in the Town
of Erwin and the beginning phase of a new Interstate highway interchange
between what is now routes 15 and 17 in the Town of Erwin, which will
become Interstates 99 and 86, respectively. The changes to the highway
system, coupled with the continued economic success of Corning Incorporated,
may act as a catalyst for growth of the commercial and residential sectors
within our franchise area. The Company has also been involved in removing
or modifying existing pipeline networks to facilitate improvements to
municipal water, sewer and transportation systems in our area. This
increase in activity has prompted the operations department to continue
to develop new and innovative ways to handle the increase in main and
service installations, line locations, leak repairs, system modifications,
data requests and potential emergencies that occur in a more densely
populated area. The operations department continues in its mission to insure
the safe, efficient and cost effective operations of the energy delivery
system for our customers and shareholders.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
EARNINGS
Consolidated net income amounted to $438,000 or $0.95 per share in 1999
compared to $640,000 or $1.39 per share in 1998. The primary reason for
the decline was a loss experienced on the Company's lost and unaccounted
for gas incentive mechanism in the amount of $61,000, compared to a benefit
of $276,000 that was realized in the previous year.
OPERATING REVENUE
Utility operating revenue of $16,276,000 declined 2.5 percent even though
total gas delivered increased 9 percent to 8,017,000 Mcf. The revenue
decline is due to a reduction in the cost of gas, which the Company passes
through to customers through a reduction in billing rates.
Capacity assignment revenue decreased $31,000 to $128,000 in 1999. This
revenue is realized from marketing the Company's unused pipeline capacity
and a regulatory incentive that allows the Company to retain 15 percent of
such revenue. The revenue reduction was expected as this market becomes
increasingly competitive.
Unregulated revenue increased from $2,664,000 in 1998 to $6,747,000 in 1999
as the result of completing our first full year of operating with our new
acquisitions. Revenue by operating segment can be found in note 3 to the
Company's financial statements.
UTILITY OPERATING EXPENSE
Purchased gas expense of $9,460,000 was basically unchanged from 1998,
however, there were two large changes that offset in total. The cost of
gas declined in 1999, the Company's average cost of gas was $4.18 per Mcf
compared to $4.33 the previous year. Conversely, purchased gas expense
increased as the result of an unfavorable swing in the Company's lost and
unaccounted for gas incentive mechanism. The Company experienced a loss of
$61,000 in 1999, compared to a gain on $276,000 that was realized in 1998.
Other operating and maintenance expense remained stable at $3,593,000, an
increase of 1 percent from the previous year. Taxes other than federal
income taxes decreased 5 percent as the result of a tax rate decrease on
October 1, 1998. The Company is subject to the New York public utilities
gross receipts tax which is levied on all revenue. Depreciation expense
decreased due to some assets becoming fully depreciated.
OPERATING SEGMENTS
The Company's five operating segments are descrived in Note 3 to the
consolidated financial statements, which also include the results by segment
for fiscal years 1999 and 1998.
The Gas Corporation experienced a reduction in net income from $391,500 in
1998 to $219,700 in 1999. The primary reason for the decline was the loss
incurred on the lost and unaccounted for gas incentive mechanism as
discussed above.
The Appliance Corporation net income of $180,000 was down $57,000 from
the previous year. Rental revenue was stable, but a decline in service
revenue and a decrease in profit margin on merchandise sales due to severe
competition resulted in the earnings reduction.
Tax Center International, in its first full year of operation since the
Company purchased it, provided earnings of $75,000 on revenue of $275,000,
a significant 27 percent profitability rate. In 1998, a partial year, Tax
Center earnings amounted to $12,000.
The Foodmart Plaza, also in its first full year, exceeded $40,000 in earnings.
Fully rented, this is the earnings level expected by the Company. Earnings
for 1998 were $19,000.
Corning Realty experienced a loss of $77,000 in 1999 due in part to indirect
acquisition and start up costs. Some budgeting and restructuring of the
organization has been put in place, which is expected to result in a
contribution to consolidated earnings. In the previous year Corning Realty
experienced a loss of $19,000.
A detailed discussion of the operating segments can be found in the
President's letter to shareholders at the beginning of this report.
LIQUIDITY AND CAPITAL RESOURCES
The Company was able to finance its 1999 capital additions for regulated
operations of $894,000 through internally generated funds and short-term
borrowing. In December 1998, the Appliance Corporation acquired a local
real estate company, Ambrose and Shoemaker ffor $1,636,000 funded through
a $608,000 five-year note to the seller, $580,000 in cash and #448,000
payable over three years.
The Company has $7,500,000 available through lines of credit at local banks,
the terms of which are disclosed in note 6 to the consolidated financial
statements. It is expected that the combination of currently available
credit facilities and internally generated funds will provide sufficient
financial resources for the year 2000.
REGULATORY MATTERS
On November 3, 1998 the Public Service Commission issued a Statement
concerning the future of the natural gas industry in New York State. A
discussion appears in the Rates and Regulations Section of this report.
YEAR 2000
The Company has developed and put in place solutions for these areas.
COMPUTER HARDWARE AND SOFTWARE
The AS/400 main frame Computer Operating System provided by IBM and all
software modules provided by Orcom Systems, Inc. are now Y2K ready through
upgrades we have received. All personal computer BIOS have been tested with
three test programs for Y2K readiness. Those identified as being not able
to correctly rollover to the year 2000 have been replaced, while others have
had their BIOS upgraded. The review of software contained on these computers
is complete and the Company anticipates no problems with readiness in this
area. No PC is being used in an area critical to our operations.
TRANSMISSION AND DISTRIBUTION SYSTEM
We have only two controllers with imbedded chips on our pipeline system.
Both have been tested and are Y2K compliant. We anticipate no problem
delivering gas on our system due to Y2K issues since it is a manual system.
TELEMETERING SYSTEM
The telemetering system is Y2K ready and we anticipate no interruption in
the flow of gas to our customers due to our computer system. The personal
computer that controls the system reporting and monitoring functions has
been replaced. New Y2K compliant software was put in place in May 1999.
PHONE SYSTEM
The internal telephone system for the Company is now Y2K ready. 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 customer's calls and creating service orders. The phone system is on the
backup generator and will be operational even if the Main Office loses power.
THIRD PARTIES AND IDENTIFIED RISKS
The Company is primarily concerned with insuring that we continue to deliver
natural gas safely and reliably. We must also be able to respond to our
customer's requests for service and emergency calls. Based on our efforts
to date, the Company expects to be able to operate its own facilities without
interruption and continue normal operations in the Year 2000 and beyond.
However, 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 has contacted 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 compliant, 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 has prepared a contingency
plant to address those risks, there can be no assurance that any such plan
would resolve such problems in a satisfactory manner.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements which, to the extent they are not recitations
of historical fact, constitue "forward-looking statements" within the
meanings of the Securities Litigation Reform Act of 1995(Reform Act). In
this respect, the words "estimate", "project", "anticipate", "expect",
"intend", "believe" and similar expressions are intended to identify
forward-looking statements. All such forward-looking statements are
intended to be subject to the safe harbor protection provided by the
Reform Act. A number of important factors affecting the Company's business
and financial results could cause actual results to differ materially from
those stated in the forward-looking statements.
CORNING NATURAL GAS CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
September 30, 1999 and 1998
1999 1998
Property, plant and equipment:
Utility $21,667,115 21,396,130
Non-utility-principally rented gas
appliances and Plaza property 3,941,231 3,782,327
------------ -----------
25,608,346 25,178,457
Less accumulated depreciation ( 9,113,046) ( 9,079,776)
------------ -----------
16,495,300 16,098,681
------------ -----------
Current assets:
Cash 205,787 284,426
Marketable securities avail for sale 1,021,696 785,361
Accounts receivable, less allow for
uncoll accts of $97,000 in 1999 & 1998 1,883,915 1,038,524
Gas stored underground, at average cost 134,650 1,539,727
Gas and appliance inventories 634,348 581,765
Prepaid income taxes 340,328 28,948
Deferred income tax assets 11,000 57,000
Prepaid expenses 402,883 511,638
------------ ----------
4,634,607 4,827,389
Deferred charges:
Prepaid pension asset 1,380,984 1,173,849
Regulatory assets 196,707 205,830
Deferred debits-accounting for income taxes 1,016,661 1,016,661
Unrecovered gas costs ---- 191,819
---------- ----------
2,594,352 2,588,159
Goodwill, net of amort of $131,744 in 1999
and $2,561 in 1998 1,851,625 348,235
Long-term debt issuance costs, net of amort
of $168,256 in 1999 and $146,698 in 1998 371,317 392,875
Other assets 541,994 542,833
--------- ---------
$26,489,195 24,798,172
============ ==========
See accompanying notes to consolidated finacial statements.
1999 1998
Common stock, $5.00 par value per share. Authorized
1,000,000 shares;issued and outstanding 460,000
shares $2,300,000 2,300,000
Additional paid-in capital 653,346 653,346
Retained earnings 2,093,937 2,403,489
Accumulated other comprehsive income-net
unrealized gain on securites available
for sale (net of income taxes of $33,424
in 1999 and $20,422 in 1998) 64,883 39,644
--------- ---------
5,112,166 5,396,479
Long-term debt, less current installments 11,223,256 10,459,351
----------- ----------
Total capitalization 16,335,422 15,855,830
---------- ----------
Current liabilities:
Borrowings under lines-of-credit 2,165,000 2,325,000
Accounts Payable 1,404,370 1,266,918
Dividends payable 149,500 -----
Current installments long-term debt 202,774 36,830
Customers' deposits and accrued interest 665,990 728,645
Accrued general taxes 94,441 147,619
Supplier refunds due customers 268,862 70,731
Accrued expenses 668,224 502,755
--------- ----------
Total current liabilities 5,619,161 5,078,498
---------- ---------
Deferred credits:
Deferred income tax liabilities 2,413,080 2,353,665
Deferred compensation and post-
retirement benefits 1,519,142 1,181,190
Other 602,390 328,989
--------- ---------
4,534,612 3,863,844
--------- ---------
$26,489,195 24,798,172
============ ==========
Concentrations and commitments(notes 3 and 10)
CORNING NATURAL GAS CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
For the years ended September 20, 1999 and 1998
Utility Operations 1999 1998
Operating revenue:
Residential, commercial and industrial $12,668,536 13,311,539
Transportation 3,479,189 3,201,884
Capacity assignment 128,445 159,872
---------- ----------
Total operating revenue 16,276,170 16,673,295
---------- ----------
Operating expenses and taxes:
Natural gas purchased 9,459,613 9,409,388
Operating and maintenance 3,593,462 3,557,025
Taxes other than federal income taxes 1,570,206 1,650,950
Depreciation 488,631 574,372
Federal income taxes 42,835 162,792
---------- ----------
Total operating expenses and taxes 15,154,747 15,354,527
---------- ----------
Operating income from utility
operations 1,121,423 1,318,768
---------- ----------
Unregulated Operations
Unregulated revenue 6,746,804 2,664,462
Unregulated expenses 6,528,527 2,415,797
--------- ----------
Operating income from unregulated Ops 218,277 248,665
---------- ----------
Other income(incl net realized gains on
marketable securities of $25,375 in 1999
and $31,592 in 1998) 63,353 31,885
---------- -----------
Income before interest expense 1,403,053 1,599,318
Interest expense-regulated 965,105 959,161
--------- ---------
Net income $ 437,948 640,157
=========== =========
Weighted average number of shares outstanding-
basic and diluted 460,000 460,000
Basic and diluted earnings per common share $ 0.95 1.39
=========== =========
See accompanying notes to consolidated financial statements.
CORNING NATURAL GAS CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity and Comprehensive Income
For the years ended September 30, 1999 and 1998
Accumulated
Additional other
Common paid in Retained comprehensive
stock captial earnings income Total
----------------------------------------------------
Balances at
Sept 30, 1997 $2,300,000 653,346 2,211,833 44,258 5,209,437
Comprehensive income:
Change in unrealized
gain on securities
available for sale,
net of income taxes
of $2,377 --- --- --- (4,614) (4,614)
Net income --- --- 640,157 --- 640,157
-----------------------------------------------------
Total comprehensive
income --- --- 640,157 (4,614) 635,543
Dividends$.975/share --- --- (448,501) --- (448,501)
------------------------------------------------------
Balances at
Sept 30, 1998 2,300,000 653,346 2,403,489 39,644 5,396,479
Comprehensive income:
Change in unrealized
gain on securities
available for sale,
net of income taxes
of $13,002 --- --- --- 25,239 25,239
Net income --- --- 437,948 --- 437,948
------------------------------------------------------
Total comprehensive
income --- --- 437,948 25,239 463,187
Dividends$1.625/share --- --- (747,500) --- (747,500)
-------------------------------------------------------
Balances at
Sept 30, 1999 $2,300,000 653,346 2,093,937 64,883 5,112,166
=======================================================
Dividends are accrued when declared by the Board of Directors. Dividends
declared were $747,500 or $1.63 per share in 1999, and $448,501 or $.98 per
share in 1998. Dividends paid were $598,000 and $1.30 per share in 1999,
and $598,001 and $1.30 per share in 1998.
CORNING NATURAL GAS CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended September 30, 1999 and 1998
1999 1998
Cash flows from operating activities:
Net income $ 437,948 640,157
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortizaiton 895,280 837,151
Gain on sale of marketable sec (25,375) (31,592)
Deferred income taxes 105,415 (86,301)
Changes in assets and liablilities:
(Increase)decrease in:
Accounts receivable (845,391) (43,309)
Gas stored underground 1,405,077 (192,045)
Gas and appliance inventories (52,583) 59,951
Prepaid expenses 108,755 69,258
Unrecovered gas costs 191,819 (158,886)
Prepaid income taxes (311,380) 436,838
Deferred cgarges-pension/other (198,012) (144,719)
Other assets & longterm debt iss 22,397 (156,013)
Increase(decrease in:
Accounts Payable 137,452 (413,922)
Accrued general taxes (53,178) 14,426
Supplier refunds due customers 198,131 (310,263)
Other liabilities and def credits 265,834 419,813
-------- ---------
Net cash provided by op activities 2,282,189 940,544
----------- ---------
Cash flows from investing activities:
Purchase of securities available
for sale, net (172,719) (118,861)
Acquisitions of businesses, net of
cash acquired (600,907) (1,407,068)
Capital expenditures, net of minor
disposals (1,150,718) (1,270,305)
----------- ------------
Net cash used in investing activi (1,924,344) (2,796,234)
----------- ------------
Cash flows from financing activities:
Net borrowings(repaymts)line-of-cred (160,000) 1,550,000
Dividends paid (598,000) (598,000)
Borrowings under long-term debt agmt 468,334 940,000
Repayment of long-term debt (146,818) (14,635)
---------- --------------
Net cash provided(used)by
financing activities (436,484) 1,877,364
----------- -------------
Net increase(decrease)in cash (78,639) 21,674
Cash at beginning of year 284,426 262,752
---------- -----------
Independent Auditors' Report
The Board of Directors and Stockholders
Corning Natural Gas Corporation:
We have audited the accompanying consolidated balance sheets of Corning
Natural Gas Corporation and Subsidiary (the Company) as of September 30,
1999 and 1998, and the related consolidated statements of income,
stockholders' equity and comprehensive income, and cash flows for the years
then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and signifi-
cant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
presently fairly, in all material respects, the financial position of
Corning Natural Gas Corporation and Subsidiary at September 30,1999 and 1998,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ KPMG LLP
November 15, 1999
CORNING NATURAL GAS CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended September 30, 1999 and 1998
(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 subsidiary, the Corning Natural Gas Appliance Corporation. In fiscal
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 Associates, LLC. In fiscal 1999,
the Corning Natural Gas Appliance Corporation completed the purchase of
Ambrose and Shoemaker Better Homes and Gardens Real Estate, which has also
been established as a New York State limited liability subsidiary corporation.
Hereinafter the Appliance Corporation and its limited liability subsidiary
corporations are collectively referred to as "Appliance Corportion". 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.
Shared expenses are allocated to the Appliance Corporation.
It is the Company's policy to reclassify amounts in the prior year financial
statements to conform with the current year's presentation.
(b) Property, Plant and Equipment
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.
Property and equipment acquired pursuant to the acquisitions discussed in
note 2 were initially recorded at estimated fair market value.
(c)Depreciation
The Company provides for depreciation for accounting purposes using a
straight-line method based on the estimated economic lives of property,
which ranges from 3 to 55 years for all assets except utility plant. The
depreciation rate used for utility plant, expressed as an annual percentage
of depreciable property, was 2.7% in 1999 and 1998. At the time utility
properties are retired, the original cost plus costs of removal less salvage,
are charged to accumulated depreciation.
(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.
Pursuant to the most recent rate order, 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.
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.
Real estate commissions are recognized at closing while professional services
revenues are recognized as services are performed.
(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, 1999
and 1998. 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 component of accumulated
other comprehensive income in 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, 1999 and 1998 is as
follows:
Net
Market
C
ost Unrealized Unrealized Unrealized
value basis gains
losse
s gains
1999 $ 1,021,696 923,389 130,511
(32,
204) 98,307
1998 $ 785,361 725,295 87,718
(2
7,652) 60,066
(f) Inventories
Inventories are stated at the lower of cost or market, cost being determined
on a first-in, first-out basis.
(g) 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.
(h) Dividends
Dividends are accrued when declared by the Board of Directors. Dividends
declared were $747,500 or $1.63 per share in 1999, and $448,501 or $0.98 per
share in 1998. Dividends paid were $598,000 and $1.30 per share in 1999, and
$598,001 and $1.30 per share in 1998.
Under the most restrictive long-term debt covenants, the Company may not
declare or pay annual dividends except to the extent that consolidated net
worth exceeds $2,000,000.
(i) 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 undiscounted future operating cash flows or appraised values,
depending on the nature of the asset.
(j) 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.
(k) Pension and Postretirement Plans
On October 1, 1998, the Company adopted Financial Accounting Standards Board
Statement No. 132, Employers' Disclosures about Pension and Other Postretire-
ment Benefits (Statement 132). Statement 132 revises employers' disclosures
about pension and other postretirement benefit plans; it does not change the
method of accounting for such plans.
(l) Comprehensive Income
On October 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting and presentation
of comprehensive income and its components in a full set of financial
statements. Comprehensive income consists of net income and net unrealized
gains (losses) on securities and is presented in the consolidated statements
of stockholders' equity and comprehensive income. The Statement requires
only additional disclosures in the consolidated financial statements; it does
not affect the Company's financial position or results of operations. Prior
year financial statements have been reclassified to conform to the require-
ments of SFAS No. 130.
(m) Segment Information
Effective September 30, 1999, the Company adopted Financial Accounting
Standards Board Statement No. 131, Disclosures About Segments of an Enter-
prise and Related Information, which changes the way the Company reports
information about its operating segments. The information for fiscal 1998
has been restated in accordance with the requirements of the new standard.
(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, (Foodmart Plaza) was purchased for $1,202,996,
including direct acquisition costs, and financed through cash of $262,996
and a $940,000 ten year note secured by the real property. Located in South
Corning, New York, Foodmart 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 $374,888, including direct acquisition
costs, and were funded through cash of $204,072 and a $170,816 eight year
loan agreement with the sellers. 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.
In December 1998, the Corning Natural Gas Appliance Corporation acquired a
local real estate company, Ambrose and Shoemaker Better Homes and Gardens
Real Estate (Ambrose and Shoemaker) for $1,636,589, including direct
acquisition costs, funded through cash of $579,923, a $608,333 five year
promissory note to the seller, and the remaining $448,333 payable over three
years.
The purchase price for these acquisitions,including direct acquisition costs,
was allocated to assets acquired based upon the estimated fair values, with
the excess of the consideration over such estimated fair values recorded as
goodwill, as follows:
1998
1999
Foodmart Tax Center/
Ambr
ose and
Plaza Corning Realty
Shoem
aker
Property, plant and
equipment $ 1,175,000 52,088
25,0
00
Goodwill 27,996 322,800
1,611
,589
------------ -------- -----------
$ 1,202,996 374,888
1,636,589
============ ========= ===========
Purchase price adjustments of $20,984 related to 1998 direct acquisition
costs were recorded in 1999 and are reflected as additional goodwill.
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, (unaudited)
1999 1998
---------------------------
Total revenues $ 23,623,000 23,550,300
Net income 457,900 693,400
Basic and diluted earnings per
common share 1.00 1.51
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
The Company's reportable segments have been determined based upon the nature
of the products and services offered, customer base, availability of
discrete internal financial information, homogeneity of products, delivery
channel, and other factors.
The Corning Natural Gas Corporation (the Gas 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 Appliance Corporation
sells, rents and services primarily gas burning appliances. The Tax Center
provides tax preparation, accounting and payroll services to approximately
800 clients. Corning Realty is a residential and commercial real estate
business with approximately 80 agents operating in three neighboring counties.
Foodmart Plaza is a retail complex consisting of eight tenants under multi-
year leases anchored by a major supermarket.
The following table reflects the results of the segments consistent with the
Company's internal financial reporting process. The following results are
used in part, by management, both in evaluating the performance of, and in
allocating resources to, each of the segments.
Gas Appliance Tax Cornin
g Foodmart
Company Corporation Center
Rea
lty Plaza Consolidated
Revenue:
1999 $16,276,170 2,276,802 274,855 3,922,
879 272,268 23,022,974
1998 16,673,295 2,323,087 62,668
157,
750 120,957 19,337,757
Net income (loss):
1999 219,671 179,610 75,490
(77,289) 40,466 437,948
1998 391,492 236,349 12,323
(1
9,148) 19,141 640,157
Interest income:
1999 1,991 58,769 -
-
- 60,760
1998 - 38,263 -
-
- 38,263
Interest expense:
1999 965,105 - 5,157 101,86
2 93,976 1,166,100
1998 959,161 - 1,761
10,3
06 40,473 1,011,701
Identifiable assets*:
1999 20,493,744 2,690,298 190,264
1,939
,511 1,203,168 26,516,985
1998 20,670,347 2,497,312 91,241
3
40,935 1,224,923 24,824,758
Depreciation and
amortization:
1999 488,631 236,271 5,388
133,
557 31,433 895,280
1998 574,389 242,293 2,018
7,005 11,446 837,151
Income tax expense
(benefit):
1999 42,835 135,369 44,846
(
27,402) 26,595 222,243
1998 162,792 159,978 8,195
(5
,417) 12,728 338,276
*Identifiable assets include property, plant and equipment, cash, accounts
receivable, inventories and other amounts specifically related to each
identified segment.
Interest income and expense have been displayed in the segment in which it
has been earned or incurred. Segment interest expense other than the Gas
Company is included within unregulated expenses in the consolidated
statements of income.
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
Reve
nue
Mcf % of Total
Amoun
t % of Total
Corning, Inc.
Year ended Sept 30, 1999 2,107,000 26 $
728
,000 4
Year ended Sept 30, 1998 1,933,000 26
698,
000 4
NYSEG
Year ended Sept 30, 1999 2,518,000 31 $
274
,000 2
Year ended Sept 30, 1998 1,985,000 27
270,0
00 2
BEGWS
Year ended Sept 30, 1999 691,000 8 $
1,657,000 10
Year ended Sept 30, 1998 731,000 10
1,640
,000 10
(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'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, 1999 and 1998:
1999 1998
Deferred pension and other $ 196,707 205,830
Deferred debits - accounting
for income taxes 1,016,661 1,016,661
Unrecovered gas costs - 191,819
------------ ----------
Total - regulatory assets $ 1,213,368 1,414,310
Deferred pension and other: Approximately $84,000 and $135,000 of these
balances represent costs in excess of the amounts currently recoverable
through rates at September 30, 1999 and 1998, respectively. The PSC
requires such excess costs to be deferred. Remaining balances represent
miscellaneous regulatory assets.
Deferred debits - accounting for income taxes: These amounts represent the
expected future recovery from ratepayers of the tax consequences of
temporary differences between the financial reporting basis and tax basis
of assets and liabilities.
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 follows:
1999
1998
Unsecured senior note - 7.9%, due serially
with annual payments of $355,000
beginning in 2006 through 2016 and
$795,000 due in 2017 $ 4,700,000
4,700
,000
First mortgage bonds - 8.25%, series all due
2018, secured by substantially all utility plant 3,100,000
3,100
,000
Unsecured senior note - 9.83%, due serially
with annual payments of $100,000
beginning in 2007 through 2015
and $700,000 due in 2016 1,600,000
1,600
,000
Mortgage note - 8.02% monthly
installments through April 2008 912,044
932,
245
Unsecured promissory note - 6.5% monthly
installments through April 2006 146,643
163,
936
Note payable - 6.5% monthly installments
through January 2004 secured by assets of
Corning Realty 520,128
- -
Note payable - 7.75% monthly installments
through January 2009 secured by assets of
Corning Realty 447,215
- -
------------ ----------
Total long-term debt 11,426,030
10,4
96,181
Less current installments 202,774
36,83
0
------------ -----------
Long-term debt less
current installments $ 11,223,256
10,4
59,351
============= ==========
The aggregate maturities of long-term debt for each of the five years
subsequent to September 30, 1999 are as follows:
2000 $ 202,774
2001 219,492
2002 234,812
2003 251,001
2004 149,601
2005 and thereafter 10,368,350
(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
$2,165,000 and $2,325,000 at September 30, 1999 and 1998, respectively. The
maximum amount outstanding during the year ended September 30, 1999 and 1998
was $2,840,000 and $2,325,000, 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, 1999) to the prime rate less 3/4%. The
weighted average interest rates on outstanding borrowins during fiscal 1999
and 1998 wer 7.24% and 7.8%, respectively.
(7) Federal Income Taxes
Federal income tax expense (benefit) for the years ended September 30
is as follows:
1999 1998
Utility Operations:
Current $ (86,529) 242,955
Deferred 123,251 (86,301)
Investment Tax Credits 6,113 6,138
---------- --------
42,835 162,79
2
Unregulated Operations:
Current 197,244 175,484
Deferred (17,836) -
----------- --------
179,408 175,48
4
---------- -------
Total federal income
tax expense $ 222,243 338,276
========== =======
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:
1999 1998
Expected tax expense $ 224,465 332,667
Investment tax credits 6,113 6,138
Other, net (8,335) (529)
------------ ---------
$ 222,243 338,276
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 are as follows:
1999 1998
Deferred income tax assets:
Unbilled revenue $ 21,118 23,530
Deferred compensation reserve 272,371 229,438
Postretirement benefit obligations 202,063 150,884
Allowance for uncollectible accounts 32,980 32,980
Inventories 32,420 45,912
Other 18,575
1
4,947
--------- --------
Total deferred income tax assets 579,527 497,691
Deferred income tax liabilities:
Plant and equipment, principally
due to differences in depreciation 2,215,658 2,139,
275
Pension benefit obligations 449,707 426,787
Deficiency of GAC revenue billed 94,405 61,311
Other 221,837
166,9
83
---------- ---------
Total deferred income tax liabilities 2,981,607 2,794,356
--------- ---------
Net deferred income tax liability $2,402,080 2,296,665
========== ==========
There was no change in the valuation allowance for deferred income tax
assets during the year ended September 30, 1999 or 1998.
(8) Pension and Other Postretirement Benefit Plans
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
$1,021,696 and $785,361 at September 30, 1999 and 1998, respectively, and the
plan liability, which is included in deferred compensation, postretirement
benefits and other credits on the balance sheet, was $801,091 and $673,416 at
September 30, 1999 and 1998, respectively. The assets of the trust are
available to general creditors in the event of insolvency. Beginning October
1, 1998, the Company changed the manner in which the plan liability is
calculated. The Company believes that the newly elected actuarial method
more accurately reflects the obligation to covered participants as of the
balance sheet date. This change in accounting method reduced the Company's
expense under the Plan by $65,000 in 1999.
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.
In addition to the Company's defined benefit pension plans, the Company
offers postretirement benefits comprising of medical and life coverages 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 during the active service period of the employee.
The following table shows reconciliations of the Company's pension and
postretirement plan benefits as of September 30:
Pension benefits Postretirement
benefits
1999 1998
1999
1998
Change in benefit obligations
Benefit obligation at
beginning of year $ 8,445,196 7,159,528 1,062,666
941,855
Service cost 283,700 228,817
23,9
94 16,171
Interest cost 541,895 512,415
69,98
6 65,512
Participant contributions - -
18,78
6 -
Actuarial gain/(loss) (1,269,615) 868,962
(246
,840) 104,724
Benefits paid (459,727) (423,378)
(84,3
58) (65,596)
Amendments 91,189 98,852
48,82
8 -
------------------------------------------------
Benefit obligation at
end of year $ 7,632,638 8,445,196
893,0
62 1,062,666
=================================================
Change in plan assts
Fair value of plan assets
at beginning of year $ 9,658,264 9,102,282
-
-
Actual return on plan assets 1,138,844 764,923
- -
-
Company contributions 191,232 214,437
65,572 65,596
Participant contributions - -
18,78
6 -
Benefits paid (459,727) (423,378)
(84,
358) (65,596)
------------------------------------------------
Fair value of plan assets at
end of year $ 10,528,613 9,658,264
- -
==================================================
Funded status 2,864,283 1,213,048 (893,062)
(1,062,666)
Unrecognized actuarial
loss (gain) (2,328,796) (864,189) (407,718)
(178,753)
Unrecognized PSC adjustment 332,762 373,097
- - -
Unrecognized prior
service cost 838,691 817,339
43,40
3 -
Unrecognized net transition
asset (obligation) (325,956) (365,446) 802,25
0 859,250
-------------------------------------------------
Prepaid (accrued)
benefit cost $ 1,380,984 1,173,849
(455,
127) (382,169)
==================================================
Weighted-average assumptions as of
September 30, 1999 and 1998
Discount rate 7.75% 6.5%
7.75% 6.5%
Expected return on assets 8.0 8.0
- - -
Rate of compensation increase 5.0 5.0
-
-
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 4.5% increase in the service and interest
cost components of the annual net periodic postretirement benefit cost and a
3.4% increase in the accumulated postretirement benefit obligation. A 1%
decreae in the actual health care cost trend would result in approximately
a 3.7% decrease in the service and interest cost components of the annual
net periodic postretirement benefit cost and a 3.0% decrease in the
accumulated postretirement benefit obligation.
Pension benefits Postre
tirement benefits
1999 1998
1999
1998
Components of net periodic
benefit cost
Service cost $ 285,161 228,817
23,9
94 16,171
Interest cost 543,856 512,415
6
9,986 65,512
Expected return on
plan assets (764,699) (715,243) -
-
Amortization of prior service 100,017 91,137 5,425
- -
Amortization of transition obligation (39,510) (39,510)
57,00
0 57,000
Amortization of PSC adjustment 40,335 40,335
- -
-
Amortization of unrecognized
actuarial (gain) loss (180,288) (262,216) (17,875)
(32,153)
----------------------------------------
Net periodic benefit cost (benefit) $ (15,128) (144,265) 138,530
106,5
30
========================================
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, 1999 and 1998. 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
$84,000 and $135,000 as of September 30, 1999 and 1998, respectively.
The PSC has allowed the Company to recover incremental cost associated with
postretirement benefits through rates on a current basis. Due to the timing
differences between the Company's rate case filings and financial reporting
period, a regulatory liability of $262,924 and $125,605 have been recognized
at September 30, 1999 and 1998, respectively.
(9) Rentals Under Operating Leases
Foodmart Plaza 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, 1999:
2000 $ 267,000
2001 250,450
2002 192,300
2003 52,900
2004 34,875
------------
Total minimum future rentals $ 797,525
All leases contain renewal options at the end of their respective lease terms.
(10) 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 1999 and 1998 amounted to
$3,599,300 and $3,735,000, 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.
