Quarterly Report (10-q)

Date : 08/13/2019 @ 8:55PM
Source : Edgar (US Regulatory)
Stock : Corning Natural Gas Holding Corporation (QX) (CNIGP)
Quote : 22.35  0.0 (0.00%) @ 1:08PM
Corning Natural Gas Holding share price Chart

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-00643

 

CORNING NATURAL GAS HOLDING CORPORATION

(Exact name of Registrant as specified in its charter)

 

New York 46-3235589
(State of incorporation) (I.R.S. Employer Identification No.)

 

330 West William Street, Corning, New York 14830

(Address of principal executive offices) (Zip Code)

 

(607) 936-3755

(Registrant’s telephone number, including area code)

 

 

 

 
 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
None N/A N/A

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 No

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer Accelerated Filer Non-accelerated Filer ☐ Smaller Reporting Company Emerging Growth Filer

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class Shares outstanding as of August 13, 2019
Common Stock, $.01 par value 3,043,760

 

1  
 

 

 

 

 

 

 

PART I.   FINANCIAL INFORMATION         Page
                   
    I tem 1.   Financial Statements         3
                   
    Item 2.   Management’s Discussion and Analysis of Financial   23
        Condition and Results of Operations    
                  29
    Item 4.   Controls and Procedures          
                   
                   
PART II.   OTHER INFORMATION          
                   
    I tem 1.   Legal Proceedings         29
                   
    I tem 1A .   Risk Factors         29
                   
    I tem 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

  29
                   
    I tem 3.   Defaults Upon Senior Securities       29
                   
    I tem 4.   Mine Safety Disclosures         29
                   
    I tem 5.   Other Information         29
                   
    I tem 6.   Exhibits         30
                   
    S IGNATURES             31

 

 

 

 

 

2  
 

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements
CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES                
Consolidated Balance Sheets                
      Unaudited          
Assets     June 30, 2019       September 30, 2018  
                 
Plant:                
  Utility property, plant and equipment   $118,885,594     $114,559,199  
  Less: accumulated depreciation     (28,655,599)     (26,966,064)
     Total plant, net     90,229,995       87,593,135  
                 
Investments:                
  Marketable securities at fair value     2,167,876       2,193,578  
  Investment in joint ventures     2,725,251       2,740,575  
      4,893,127       4,934,153  
                 
Current assets:                
  Cash and cash equivalents     226,443       219,962  
  Customer accounts receivable, (net of allowance for                
    uncollectible accounts of $200,677 and $228,666, respectively)     2,970,969       3,350,700  
  Other accounts receivable     93,552       385,987  
  Related party receivables     195,420       208,876  
  Gas stored underground, at average cost     790,450       1,620,916  
  Materials and supplies inventories     2,668,067       1,818,974  
  Prepaid expenses     2,230,083       1,468,030  
     Total current assets     9,174,984       9,073,445  
                 
Regulatory and other assets:                
  Regulatory assets:                
     Unrecovered gas and electric costs     677,850       1,236,124  
     Deferred regulatory costs     3,580,567       4,279,839  
     Deferred pension     3,985,439       4,043,072  
  Other     567,888       583,437  
     Total regulatory and other assets     8,811,744       10,142,472  
                 
     Total assets   $113,109,850     $111,743,205  

 

See accompanying notes to consolidated financial statements

 

3  
 

 

CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES                
Consolidated Balance Sheets                
                 
      Unaudited          
Liabilities and capitalization     June 30, 2019       September 30, 2018  
                 
Long-term debt, less current installments   $35,751,391     $36,975,484  
  Less: debt issuance costs     (281,947)     (338,903)
      Total long-term debt     35,469,444       36,636,581  
                 
Redeemable preferred stock - Series A     5,181,630       5,166,082  
  (Authorized 255,500 shares. Issued and outstanding:                
 210,600 shares at June 30, 2019 and September 30, 2018,                
  less issuance costs of $83,370 and $98,918, respectively)                
                 
Current liabilities:                
  Current portion of long-term debt     3,899,215       3,793,998  
  Borrowings under lines-of-credit and short-term debt     6,594,296       6,662,357  
  Accounts payable     2,183,690       3,247,376  
  Accrued expenses     496,591       410,237  
  Customer deposits and accrued interest     943,916       1,227,398  
  Dividends declared     501,688       483,806  
     Total current liabilities     14,619,396       15,825,172  
                 
Deferred credits and other liabilities:                
  Deferred income taxes     6,221,699       4,896,771  
  Regulatory liabilities     3,609,030       3,777,495  
  Deferred compensation     1,386,087       1,412,345  
  Pension costs and post-retirement benefits     6,298,195       6,016,240  
  Other     250,466       219,948  
     Total deferred credits and other liabilities     17,765,477       16,322,799  
                 
Commitments and contingencies     —         —    
                 
Temporary equity:                
  Redeemable convertible preferred stock - Series B                
  (Authorized 244,500 shares. Issued and outstanding:                
  244,263 shares at June 30, 2019 and September 30, 2018)     4,963,132       4,951,847  
                 
Common stockholders' equity:                
  Common stock ($.01 par value per share.     30,410       30,218  
  Authorized 4,500,000 shares. Issued and                
  outstanding: 3,041,051 shares at June 30, 2019                
  and 3,021,851 at September 30, 2018)                
  Additional paid-in capital     27,638,822       27,320,162  
  Retained earnings     7,448,915       5,399,751  
  Accumulated other comprehensive (loss) income     (7,376)     90,593  
     Total common stockholders' equity     35,110,771       32,840,724  
                 
     Total liabilities and capitalization   $113,109,850     $111,743,205  

See accompanying notes to consolidated financial statements.

 

4  
 

 

 

CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES              
Consolidated Statements of Income                                
(Unaudited)     Three Months Ended       Nine Months Ended  
      June 30, 2019       June 30, 2018       June 30, 2019       June 30, 2018  
Utility operating revenues:                                
Gas operating revenues   $5,475,533     $5,547,695     $23,877,524     $22,534,388  
Electric operating revenues     1,467,575       2,068,433       6,252,018       5,910,445  
Total utility operating revenues     6,943,108       7,616,128       30,129,542       28,444,833  
                                 
Costs of sales:                                
Gas purchased     1,266,954       1,351,932       7,499,254       6,757,377  
Electricity purchased     426,859       481,066       2,303,479       1,639,140  
Total cost of sales     1,693,813       1,832,998       9,802,733       8,396,517  
                                 
Gross margin     5,249,295       5,783,130       20,326,809       20,048,316  
                                 
Cost and expense:                                
Operating and maintenance expense     2,816,156       2,736,239       8,444,362       8,719,143  
Taxes other than income taxes     839,146       977,671       2,763,673       2,725,350  
Depreciation     626,074       593,401       1,866,728       1,776,755  
Other deductions, net     123,221       110,250       369,799       346,869  
Total costs and expenses     4,404,597       4,417,561       13,444,562       13,568,117  
                                 
Utility operating income     844,698       1,365,569       6,882,247       6,480,199  
                                 
Other income and (expense):                                
Interest expense     (559,292 )     (487,226 )     (1,776,491 )     (1,600,399 )
Other income (expense)     (173,366 )     (205,485 )     (449,068 )     (549,635 )
Investment income     34,454       3,030       94,352       62,525  
 Loss from joint ventures     (56,877 )   (51,861 )     (15,324 )     (16,595 )
Rental income     7,638       12,138       27,414       36,414  
                                 
Income from utility operations, before income taxes     97,255       636,165       4,763,130       4,412,509  
                                 
Income tax expense     (58,875 )     (301,270 )     (1,326,628 )     (1,736,447 )
                                 
Net income     38,380       334,895       3,436,502       2,676,062  
Less: Series B Preferred Stock Dividends     61,065       61,065       183,197       183,197  
Net income (loss) attributable to common stockholders   ($22,685 )   $273,830     $3,253,305     $2,492,865  

 

 

5  
 

 

  Weighted average earnings (loss) per share:                  
          basic     ($0.01)   $0.09     $1.07     $0.83
          diluted     ($0.01)   $0.09     $1.03     $0.81
                                     
  Average shares outstanding - basic               3,038,864       3,012,975       3,032,342     3,007,339
  Average shares outstanding - diluted               3,038,864       3,012,975       3,325,458     3,300,454

 

 

See accompanying notes to consolidated financial statements

6  
 

 

CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES                
Consolidated Statements of Comprehensive Income                
(Unaudited) Three Months Ended       Nine Months Ended  
  June 30, 2019   June 30, 2018   June 30, 2019   June 30, 2018
Net income $38,380   $334,895     $3,436,502     $2,676,062  
Other comprehensive income (loss):                                
Net unrealized gain (loss) on debt securities available for sale                                
net of tax of ($2,364), $3,224, $820 and ($675), respectively (6,233)     7,306       2,162       (1,782 )
                                 
Total comprehensive income   $32,147     $342,201     $3,438,664     $2,674,280  

 

See accompanying notes to consolidated financial statements

7  
 

 

 

CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES                  
Consolidated Statement of Changes in Common
Stockholders' Equity
For the Three and Nine Months ended June 30, 2019 and 2018
                 
(Unaudited)                                                
                                      Accumulated          
      Number of      

 

Common

     

Additional

Paid In

      Retained      

Other

Comprehensive

         
      Shares       Stock       Capital       Earnings        (Loss)       Total  
                                                 
Balances at March 31, 2019     3,035,482     $30,355     $27,543,011     $7,912,222     ($1,143 )   $35,484,445  
                                                 
Issuance of common stock     5,569       55       95,811       —         —         95,866  
Dividends declared on common ($0.145 per share)     —         —         —         (440,622 )     —         (440,622 )
Dividends declared on Preferred B shares ($0.25 per share)     —         —         —         (61,065 )     —         (61,065 )
Comprehensive income:                                                
Change in unrealized loss on                                                
debt securities available for sale, net of income taxes     —         —         —         —         (6,233 )     (6,233 )
Net income     —         —         —         38,380       —         38,380  
Balances at June 30, 2019     3,041,051     $30,410     $27,638,822     $7,448,915     ($7,376 )   $35,110,771  
                                                 

 

 

 

                                                 
                                      Accumulated          
      Number of      

 

Common

     

Additional

Paid In

      Retained      

Other

Comprehensive

         
      Shares       Stock       Capital       Earnings       Income (Loss)       Total  
                                                 
Balances at September 30, 2018     3,021,851     $30,218     $27,320,162     $5,399,751     $90,593     $32,840,724  
                                                 
Adoption of accounting standard (See Note 1)     —         —         —         100,131       (100,131 )     —    
Issuance of common stock     19,200       192       318,660       —         —         318,852  
Dividends declared on common ($0.43 per share)     —         —         —         (1,304,272 )     —         (1,304,272 )
Dividends declared on Preferred B shares ($0.75 per share)     —         —         —         (183,197 )     —         (183,197 )
Comprehensive income:                                                
Change in unrealized gain on                                                
debt securities available for sale, net of income taxes     —         —         —         —         2,162       2,162  
Net income     —         —         —         3,436,502       —         3,436,502  
Balances at June 30, 2019     3,041,051     $30,410     $27,638,822     $7,448,915     ($7,376 )   $35,110,771  

 

 

8  
 

 

 

                                                 
                                      Accumulated          
      Number of      

 

Common

     

Additional

Paid In

      Retained      

Other

Comprehensive

         
      Shares       Stock       Capital       Earnings       Income (Loss)       Total  
                                                 
Balances at March 31, 2018     3,010,207     $ 30,102     $27,138,301     $6,563,452       $ 48,430     $33,780,285  
                                                 
Issuance of common stock     5,856       59       95,192       —         —         95,251  
Dividends declared on common ($0.14 per share)     —         —         —         (421,932 )     —         (421,932 )
Dividends declared on Preferred B shares ($0.25 per share)     —         —         —         (61,065 )     —         (61,065 )
Comprehensive income:                                                
Change in unrealized gain on securities available for sale, net of income taxes     —         —         —         —         7,306       7,306  
Net income     —         —         —         334,895       —         334,895  
Balances at June 30, 2018     3,016,063     $30,161     $27,233,493     $6,415,350     $ 55,736     $33,734,740  

 

 

 

                                                 
                                      Accumulated          
      Number of      

 

Common

     

Additional

Paid In

      Retained      

Other

Comprehensive

         
      Shares       Stock       Capital       Earnings       Income (Loss)       Total  
                                                 
Balances at September 30, 2017     2,994,797     $29,948     $27,084,738     $5,170,855     $57,518     $32,343,059  
                                                 
Issuance of common stock     21,266       213       301,919       —         —         302,132  
Dividends declared on common ($0.415 per share)     —         —         —         (1,248,370 )     —         (1,248,370 )
Dividends declared on Preferred B shares ($0.75 per share)     —         —         —         (183,197 )     —         (183,197 )
Stock issuance costs     —         —         (153,164 )     —         —         (153,164 )
Comprehensive income:                                                
Change in unrealized loss on securities available for sale, net of income taxes     —         —         —         —         (1,782 )     (1,782 )
Net income     —         —         —         2,676,062       —         2,676,062  
Balances at June 30, 2018     3,016,063     $30,161     $27,233,493     $6,415,350     $55,736     $33,734,740  

 

  

See accompanying notes to consolidated financial statements

9  
 

 

CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES                
Consolidated Statements of Cash Flows                
(Unaudited)                
                          Nine Months Ended  
      June 30, 2019       June 30, 2018  
Cash flows from operating activities:                
  Net income $3,436,502     $2,676,062  
  Adjustments to reconcile net income to net cash                
    provided by operating activities:                
      Depreciation     1,866,728       1,776,755  
      Amortization of debt issuance cost     83,063       95,485  
      Non-cash pension expenses     706,071       997,133  
      Regulatory asset amortizations     465,921       208,700  
      Stock issued for services     185,429       180,032  
      Loss on sale of marketable securities     2,378       31,152  
      Unrealized gain on investments     (76,947 )     —    
      Deferred income taxes     1,326,628       1,736,447  
      Bad debt expense     212,000       192,189  
      Loss from joint ventures     15,324       16,595  
                 
Changes in assets and liabilities:                
  (Increase) decrease in:                
      Accounts receivable     460,166       (843,494 )
      Gas stored underground     830,466       323,339  
      Materials and supplies inventories     (849,093 )     (340,940 )
      Prepaid expenses     (762,053 )     (385,075 )
      Unrecovered gas and electric costs     558,274       124,435  
      Deferred regulatory costs     209,818       91,842  
      Other     15,549       2,956  
  Increase (decrease) in:                
      Accounts payable     (1,063,686 )     289,056  
      Accrued expenses     88,899       (1,212,638 )
      Customer deposits and accrued interest     (283,482 )     (514,006 )
      Deferred compensation     (26,258 )     (13,111 )
      Deferred pension costs & post-retirement benefits     (366,483 )     (813,254 )
      Other liabilities and deferred credits     (139,647 )     541,013  
           Net cash provided by operating activities     6,895,567       5,160,673  
                 
Cash flows from investing activities:                
  Sale of securities, net of purchases     102,433       43,659  
  Amount received from (paid to) related parties     10,911       (38,721 )
  Capital expenditures     (4,447,201 )     (3,823,512 )
            Net cash used in investing activities     (4,133,857 )     (3,818,574 )
                 
Cash flows from financing activities:                
  Net repayments on lines-of-credit and short-term debt     (68,061 )     (819,164 )
  Debt issuance costs paid     (32,128 )     (149,523 )
  Dividends paid     (1,336,164 )     (1,289,948 )
  Proceeds under long-term debt     1,669,120       40,200,000  
  Repayment of long-term debt     (2,787,996 )     (39,516,432 )
            Net cash used in financing activities     (2,555,229 )     (1,575,067 )
            Net increase (decrease) in cash and cash equivalents     6,481       (232,968 )
                 
            Cash and cash equivalents at beginning of period     219,962       442,930  
                 
            Cash and cash equivalents at end of period   $226,443   $209,962  
               
Supplemental disclosures of cash flow information:                
  Cash paid during the period for:                
      Interest   $1,686,621   $1,371,503  
      Income taxes $—     $42,372  
  Non-cash financing activities:                
     Dividends paid with shares $133,423     $125,548  
     Number of shares issued for dividends     7,300       7,091  
                 

See accompanying notes to consolidated financial statements.

 

10  
 

 

CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1 – Basis of Presentation

 

Corning Natural Gas Holding Corporation (“Holding Company”) was incorporated in New York in July 2013 to serve as a holding company for Corning Natural Gas Corporation (the “Gas Company” or “Corning Gas”) and its dormant subsidiary Corning Natural Gas Appliance Corporation (“Appliance Company”). Pike County Light & Power Company (“Pike”) is also a wholly-owned subsidiary of the Holding Company. The Holding Company has 50% ownership interests in our joint ventures Leatherstocking Gas Company, LLC (“Leatherstocking Gas”), its subsidiary, Leatherstocking Gas Development Corporation, and Leatherstocking Pipeline Company, LLC (“Leatherstocking Pipeline”). As used in this document, the term “the Company” refers to the consolidated operations of the Holding Company, Gas Company and Pike.

 

The Holding Company’s primary business, through its subsidiaries Corning Gas and Pike, is natural gas and electricity distribution. Corning Gas serves approximately 15,000 residential, commercial, industrial and municipal customers in the Corning, Hammondsport and Virgil, New York, areas and two other gas utilities which serve the Elmira and Bath, New York, areas. It is franchised to supply gas service in all of the political subdivisions in which it operates. It also transports for a gas producer from the producer’s gathering networks. Corning Gas is under the jurisdiction of the New York Public Service Commission (“NYPSC”) which oversees and sets rates for New York gas distribution companies. In addition, Corning Gas has contracts with Corning Incorporated and Woodhull Municipal Gas Company, a small local utility, to provide maintenance service on their gas lines. Pike is an electricity and gas utility regulated by the Pennsylvania Public Utility Commission (“PAPUC”). Pike provides electric service to approximately 4,800 customers in the Townships of Westfall, Milford and the northern part of Dingman and in the Boroughs of Milford and Matamoras. Pike provides natural gas service to approximately 1,200 customers in Westfall Township and the Borough of Matamoras. All of these communities are located in Pike County, Pennsylvania. Additionally, Leatherstocking Gas distributes gas in Susquehanna and Bradford Counties, Pennsylvania, and has an application pending before the NYPSC for authority to provide gas distribution services in Broome County, New York. Leatherstocking Pipeline, an unregulated company, serves one customer in Lawton, Pennsylvania.

 

The market for natural gas in our traditional service territories is relatively saturated with limited growth potential. However, growth opportunities do exist in extending our mains to areas adjacent or reasonably close to areas we currently serve. In addition, the Gas Company continues to see expansion opportunities in the commercial and industrial markets. We completed a new pipeline to Marcellus Shale gas in Pennsylvania in 2009 and are transporting that gas throughout our pipeline infrastructure. In addition, the Holding Company has interests in two joint ventures, Leatherstocking Gas and Leatherstocking Pipeline (the “Joint Ventures”), to transport and provide gas to areas of the northeast currently without gas service. Through Leatherstocking Gas, we are continuing to pursue opportunities to provide natural gas to unserved areas of New York and Pennsylvania. Our electric and gas service territory in Pike County, Pennsylvania is seeing economic growth and we are experiencing customer load and revenue growth for both electric and gas. In May 2018 Corning Gas renegotiated our supply arrangement with a local gas producer.

 

The information furnished herewith reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the period. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules and regulations, although the Holding Company believes the disclosures which are made are adequate to make the information presented not misleading.

 

The consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Holding Company’s latest annual report on Form 10-K for the fiscal year ended September 30, 2018 (“Annual Report”), filed on December 20, 2018. These interim consolidated financial statements are unaudited.

 

Our significant accounting policies are described in the notes to the Consolidated Financial Statements in the Holding Company’s Annual Report. It is important to understand that the application of generally accepted accounting principles in the United States of America involves certain assumptions, judgments and estimates that affect reported amounts of assets, liabilities, revenues and expenses. Thus, the application of these principles can have varying results from company to company.

 

11  
 

 

 

Because our business is highly seasonal in nature, sales for each quarter of the year vary and are not comparable. Sales vary depending on seasonal variations in temperature, although the Gas Company’s weather normalization and revenue decoupling clauses approved by the New York Public Service Commission (“NYPSC”) serve to stabilize net revenue, by insulating the Gas Company, to an extent, from the effects of unusual temperature variations and conservation. Certain larger customer classes are not covered by weather normalization or revenue decoupling and weather will impact revenue from these classes. Neither Pike nor Leatherstocking have weather normalization or revenue decoupling clauses.

 

It is the Holding Company’s policy to reclassify amounts in the prior year financial statements to conform to the current year presentation.

 

Adoption of New Accounting Guidance

 

On October 1, 2018, we adopted Accounting Standards Update (“ASU”) 2016-01 “Financial Instruments—Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”) and Accounting Standards Codification (“ASC”) 606 – “Revenues from Contracts with Customers” (“ASC 606”).

 

With respect to ASU 2016-01, we reclassified net after-tax unrealized gains on equity securities of $100,131 as of October 1, 2018 from accumulated other comprehensive income (loss) to retained earnings. We continue to carry our investments in equity securities at fair value and there is no change to the asset values or total stockholders’ equity that we would have otherwise recorded. Beginning in fiscal 2019, we are including unrealized gains and losses arising from the changes in the fair values of our equity securities as a component of investment income in the Consolidated Statements of Income. ASU 2016-01 prohibited the restatement of prior year financial statements and for periods ending prior to 2018, unrealized gains and losses from the changes in fair value of available-for-sale equity securities were recorded in other comprehensive income.

 

We adopted ASC 606 using the modified retrospective method, whereby the cumulative effect of the adoption is required to be recorded as an adjustment to retained earnings. For the three and nine months ended June 30, 2019, the Company recognized revenues from contracts with customers in accordance with ASC 606. The revenues recognized were equivalent to the revenues that would have been recognized had the Companies not adopted ASC 606 and had recognized all revenues in accordance with ASC 605 – Revenue Recognition (ASC 605). For the three and nine months ended June 30, 2018, the Company recognized revenues, including revenues from contracts with customers, in accordance with ASC 605. No prior period adjustment or charge to retained earnings for cumulative impact was required as a result of the Company’s adoption of ASC 606. ASC 606 also provides for certain other disclosures which are included in Note 2.

 

In March 2017, the FASB issued authoritative guidance related to the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires segregation of the service cost component from the other components of net periodic pension cost and net periodic postretirement benefit cost for financial reporting purposes. The service cost component is to be presented on the income statement in the same line items as other compensation costs included within Operating Expenses and the other components of net periodic pension cost and net periodic postretirement benefit cost are to be presented on the income statement below the subtotal labeled Operating Income (Loss). Under this guidance, the service cost component is eligible to be capitalized as part of the cost of inventory or property, plant and equipment while the other components of net periodic pension cost and net periodic postretirement benefit cost are generally not eligible for capitalization, unless allowed by a regulator. The Company adopted this guidance effective October 1, 2018. The Company applied the guidance retrospectively for the pension and postretirement benefit costs using amounts disclosed in prior period financial statement notes as estimates for the reclassifications in accordance with a practical expedient allowed under the guidance. Operation and maintenance expenses decreased $487,871 and $590,740 and Other Income (expense) increased by the same amount for the nine months ended June 30, 2019 and 2018 respectively as a result of the reclassifications. Operation and maintenance expenses decreased $162,623 and $196,914 and Other Income (expense) increased by the same amount for the three months ended June 30, 2019 and 2018 respectively as a result of the reclassifications.

 

 

12  
 

 

New Accounting Pronouncements Not Yet Adopted

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (ASC Topic 842), which requires lessees to recognize substantially all leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right of use ("ROU") model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard is effective for annual and interim periods beginning after December 15, 2018.  ASU 2016-02 requires entities to adopt a modified retrospective transition method for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements.  The Company continues to evaluate the impact that adopting ASU 2016-02 will have on its consolidated financial statements, but does not believe it will have a material impact at this time.

 

 

Note 2 – Revenue From Contracts With Customers

 

The following tables present, for the three and nine months ended June 30, 2019, revenue from contracts with customers as defined in ASC 606, as well as additional revenue from sources other than contracts with customers, disaggregated by major source.

 

      For the three months ended June 30, 2019  
      Revenues from contracts with customers       Other revenues (a)       Total utility operating revenues  
Corning Gas:                        
  Residential gas $3,289,092   $3,432   $3,292,524  
  Commercial gas     481,535       (27,031 )     454,504  
  Transportation     945,835       —         945,835  
  Street lights gas     108       —         108  
  Wholesale     357,364       —         357,364  
  Local production     162,708       —         162,708  
Total Corning Gas   $5,236,642     ($23,599 )   $5,213,043  
                         
Pike:                        
  Residential gas   $195,908   $6,121   $202,029  
  Commercial gas     60,461       —         60,461  
  Total Pike retail gas     256,369       6,121       262,490  
                         
  Residential electric     603,535       (6,943 )     596,592  
  Commercial electric     841,150       —         841,150  
  Electric – street lights     29,833       —         29,833  
  Total Pike retail electric     1,474,518       (6,943 )     1,467,575  
                         
Total Pike   $1,730,887     ($822 )   $1,730,065  
                         
Total consolidated utility operating revenue $6,967,529     ($24,421 )   $6,943,108  

 

 

(a) Other revenues include revenue from alternative revenue programs, such as revenue decoupling mechanisms under New York gas rate plans and weather normalization clauses. This also reflects reductions in revenues resulting from the deferral as regulatory liabilities of the net benefits of the federal Tax Cuts and Jobs Act of 2017. See “Regulatory Matters” in Note 10.

 

13  
 

 

      For the nine months ended June 30, 2019  
      Revenues from contracts with customers       Other revenues (a)       Total utility operating revenues  
Corning Gas:                        
  Residential gas   $13,913,428     $156,987   $14,070,415  
  Commercial gas     2,228,169       (96,514 )     2,131,655  
  Transportation     3,587,388       —         3,587,388  
  Street lights gas     363       —         363  
  Wholesale     2,008,337       —         2,008,337  
  Local production     525,857       —         525,857  
Total Corning Gas $22,263,542     $60,473     $22,324,015  
                         
Pike:                        
  Residential gas   $1,232,125     $15,511     $1,247,636  
  Commercial gas     305,873       —         305,873  
  Total Pike retail gas     1,537,998       15,511       1,553,509  
                         
  Residential electric     2,984,694       58,398       3,043,092  
  Commercial electric     3,112,054       —         3,112,054  
  Electric – street lights     96,872       —         96,872  
  Total Pike retail electric     6,193,620       58,398       6,252,018  
                         
Total Pike   $7,731,618     $73,909     $7,805,527  
                         
Total consolidated utility operating revenue   $29,995,160     $134,382     $30,129,542  

 

 

(a) Other revenues include revenue from alternative revenue programs, such as revenue decoupling mechanisms under New York gas rate plans and weather normalization clauses. This also reflects reductions in revenues resulting from the deferral as regulatory liabilities of the net benefits of the federal Tax Cuts and Jobs Act of 2017. See “Regulatory Matters” in Note 10.

 

The Gas Company records revenues from residential and commercial customers based on meters read on a cyclical basis throughout each month, while certain large industrial and utility customers’ meters are read at the end of each month. Several meters are read at the end of each month to calculate local production revenues. The Gas Company does not accrue revenue for gas delivered but not yet billed, as the NYPSC requires that such accounting must be adopted during a rate proceeding which the Gas Company has not done. The Gas Company, as part of its currently effective rate plan, has a weather normalization clause as protection against severe weather fluctuations. This affects space heating customers and is activated when degree days are 2.2% greater or less than the 30-year average. As a result, the effect on revenue fluctuations of weather related gas sales is somewhat moderated.

 

Pike recognizes revenues for electric and gas service on a monthly billing cycle basis. Pike does not accrue for gas and electricity delivered. Pike does not have a weather normalization clause as protection against severe weather.

 

In addition to weather normalization, the Gas Company has implemented a revenue decoupling mechanism (RDM). The RDM reconciles actual delivery service revenues to allowed delivery service revenues (which are based on the annual customer and volume forecasts in the last rate case) for certain residential customers. The Gas Company will refund or surcharge customers for differences between actual and allowed revenues. The shortfall or excess after the annual reconciliation will be surcharged or refunded to customers over a twelve-month period starting September 1st each year. Pike does not have a revenue decoupling mechanism as part of their rate structure.

 

Revenues are recorded as energy is delivered, generated, or services are provided and billed to customers. Amounts billed are recorded in customer accounts receivable, with payment generally due the following month.

 

14  
 

 

 

Note 3 - Pension and Other Post-Retirement Benefit Plans

 

Components of Net Periodic Benefit Cost:

 

Pension Benefits                                
    Three Months Ended June 30,     Nine Months Ended June 30,  
      2019       2018       2019       2018  
Service Cost   $116,453     $107,161     $349,360     $321,482  
Interest Cost     258,774       240,301       776,323       720,902  
Expected return on plan assets     (319,966)     (300,205)     (959,898)     (900,614)
Amortization of net gain     212,665       242,497       637,996       727,491  
Net periodic benefit cost   $267,926     $289,754     $803,781     $869,261  

 

Other Benefits                                
      Three Months Ended June 30,       Nine Months Ended June 30,  
      2019       2018       2019       2018  
Service Cost $4,123     $4,445   $12,369   $13,336  
Interest Cost     11,939       12,060       35,817       36,180  
Amortization of prior service cost     888       887       2,664       2,660  
Amortization of net (gain) loss     (1,677 )     1,374       (5,032 )     4,121  
Net periodic benefit cost   $15,273     $18,766     $45,818     $56,297  

 

For ratemaking and financial statement purposes, pension expense represents the amount approved by the NYPSC in the Gas Company’s most recently approved rate case. Pension expense for ratemaking and financial statement purposes was $221,152 for the three months ended June 30, 2019 and $219,000 for the three months ended June 30, 2018. Pension expense for ratemaking and financial statement purposes was $663,457 for the nine months ended June 30, 2019 and $656,000 for the nine months ended June 30, 2018. Total pension costs are recorded in accordance with accounting prescribed by the NYPSC in 1993. The cumulative net difference between the pension expense for ratemaking and financial statement purposes, since 1993, has been deferred as a regulatory asset and amounted to $792,492 and $874,689 at June 30, 2019 and June 30, 2018, respectively.

 

The NYPSC has allowed the Gas Company to recover incremental costs associated with other post-retirement benefits through rates on a current basis. Other post-retirement benefit expense (benefit) (OPEB) for ratemaking and financial statement purposes was $16,408 for the three months ended June 30, 2019 and $15,000 for the three months ended June 30, 2018. Other post-retirement benefit expense (benefit) for ratemaking and financial statement purposes was $42,614 for the nine months ended June 30, 2019 and $44,000 for the nine months ended June 30, 2018. The difference between the other post-retirement benefit expense (benefit) for ratemaking and financial statement purposes, and the amount computed above has been deferred as a regulatory asset.

 

The Company has adopted (see Note 1) the FASB issued authoritative guidance related to the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires segregation of the service cost component from the other components of net periodic pension cost and net periodic postretirement benefit cost for financial reporting purposes.  The service cost component is to be presented on the income statement in the same line items as other compensation costs included within Operating Expenses and the other components of net periodic pension cost and net periodic postretirement benefit cost are to be presented on the income statement below the subtotal labeled Operating Income (Loss). Operation and maintenance expenses decreased $487,871 and Other Income (expense) increased by the same amount for the nine months ended June 30, 2019 as a result of the reclassifications. Operation and maintenance expenses decreased $590,740 and Other Income (expense) increased by the same amount for the nine months ended June 30, 2018 as a result of the reclassifications. For the three month period ended June 30, 2019 and 2018 Operation and maintenance expenses decreased and Other Income (expense) increased by $173,366 and $205,445 respectively. Total pension and OPEB costs are recorded in accordance with accounting prescribed by the NYPSC in 1993 and 1998 respectively. The FASB guidance and income statement presentation does not affect the recoverability of service cost component and the other components of net periodic pension and postretirement benefit cost from customers.

 

15  
 

 

 

Contributions

 

The Gas Company expects to contribute $711,098 to its Pension Plan during the year ending September 30, 2019. A total of $577,045 was paid to the Pension Plan during the nine months ending June 30, 2019 and $830,046 was paid to the Pension Plan during the nine months ended June 30, 2018.

 

 

Note 4 – Financing Activities

 

On August 15, 2018, the Gas Company entered into a $3.6 million multiple disbursement term note with Manufactures and Traders Trust Company (“M&T”) which permitted draws from time to time for capital expenditures in accordance with its terms until October 31, 2018 at which time amounts outstanding under the note totaling $3.6 million converted to a ten year term loan, payable in 119 equal monthly installments with an additional final installment of unpaid principal and interest due on November 30, 2028.  Before converting to a term loan, borrowings on the note had a variable interest rate of the one-month LIBOR rate plus 3% (5.26% as of September 30, 2018).  After October 31, 2018, the interest rate was fixed at 4.71%.  Additional terms of this note are substantially the same as those in the Gas Company’s November 2017 Credit Agreement with M&T.  As of June 30, 2019, the outstanding balance of this note was approximately $3.5 million.

 

On December 4, 2018, Pike entered into a demand note with M&T for $510,000, payable in 364 days unless otherwise converted into a term note (“replacement term note”).  On February 1, 2019 Pike converted the $510,000 demand note to a 10 year term loan with a fixed interest rate of 4.89%. As of June 30, 2019, the outstanding balance of this note was $489,659.

 

On June 27, 2019, the Gas Company entered into a $3.127 million multiple disbursement term note with M&T which permits draws from time to time for capital expenditures in accordance with its terms until October 31, 2019 at which time amounts outstanding under the note totaling $3.127 million convert to a ten year term loan, payable in 119 equal monthly installments with an additional final installment of unpaid principal and interest due on November 30, 2029.  Before converting to a term loan, borrowings on the note have a variable interest rate of the one-month LIBOR rate plus 3% (5.4375% as of June 30, 2019).  After October 31, 2019, the interest rate will be fixed at 1.80 percentage points above the sum of the yield on United States Treasury Obligations adjusted to a constant maturity of ten (10) years in effect two (2) New York Business Days prior to the Amortization Commencement Date, as published by the Board of Governors of the Federal Reserve System in the Federal Reserve Statistical Release H.15 (519), or by such other quoting service, index or commonly available source utilized by M&T.   Additional terms of this note are substantially the same as those in the Gas Company’s November 2017 Credit Agreement with M&T.  As of June 30, 2019, the outstanding balance of this note was approximately $1.832 million.

On June 27, 2019, Pike Light & Power Company entered into a $2.072 million multiple disbursement term note with M&T which permits draws from time to time for capital expenditures in accordance with its terms until October 31, 2019 at which time amounts outstanding under the note totaling $2.072 million convert to a ten year term loan, payable in 119 equal monthly installments with an additional final installment of unpaid principal and interest due on November 30, 2029.  Before converting to a term loan, borrowings on the note have a variable interest rate of the one-month LIBOR rate plus 3% (5.4375% as of June 30, 2019).  After October 31, 2019, the interest rate will be fixed at 1.80 percentage points above the sum of the yield on United States Treasury Obligations adjusted to a constant maturity of ten (10) years in effect two (2) New York Business Days prior to the Amortization Commencement Date, as published by the Board of Governors of the Federal Reserve System in the Federal Reserve Statistical Release H.15 (519), or by such other quoting service, index or commonly available source utilized by M&T.   Additional terms of this note are substantially the same as those in the Gas Company’s November 2017 Credit Agreement with M&T.  As of June 30, 2019, the outstanding balance of this note was approximately $1.639 million.

We are in compliance with our financial covenant calculations as of June 30, 2019.

 

16  
 

 

 

Note 5 – Fair Value of Financial Instruments

The Holding Company has determined the fair value of debt and other financial instruments using a valuation hierarchy. The hierarchy, which prioritizes the inputs used in measuring fair value, consists of three levels. Level 1 uses observable inputs such as quoted prices in active markets; Level 2 uses inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, which is defined as unobservable inputs in which little or no market data exists, requires the Holding Company to develop its own assumptions. The carrying amount of debt on the Consolidated Balance Sheets approximates fair value as a result of instruments bearing interest rates that approximate current market rates for similar instruments, and the carrying amounts for cash, accounts receivable and accounts payable approximate fair value due to their short-term nature. Investment assets, which fund the Holding Company’s deferred compensation plan, are valued based on Level 1 inputs.

The Holding Company has determined the fair value of certain assets through application of FASB ASC 820 “Fair Value Measurements and Disclosures”.

Fair value of assets and liabilities measured on a recurring basis at June 30, 2019 and September 30, 2018 are as follows:

 

Fair Value Measurements at Reporting Date Using:

 

      Fair Value       Quoted Prices In Active Markets for Identical Assets/Liabilities (Level 1)       Level 2       Level 3  
June 30, 2019                                
Available-for-sale securities   $2,167,876     $2,167,876     $—       $—    
September 30, 2018                                
Available-for-sale securities   $2,193,578     $2,193,578     $—       $—    

 

 

 

 

A summary of the marketable securities at June 30, 2019 and September 30, 2018 is as follows:

 

      Cost Basis       Unrealized Gain       Unrealized Loss       Market Value  
June 30, 2019                                
Cash and equivalents   $117,713   $—       $—     $117,713  
Metlife stock value     39,395       —         —         39,395  
Government and agency bonds     264,706       6,711       —         271,417  
Corporate bonds     177,249       3,098       —         180,347  
Mutual funds     22,359       366       —         22,725  
Holding Company Preferred A Stock     572,876       41,246       —         614,122  
Equity securities     771,299       150,858       —         922,157  
Total securities   $1,965,597     $202,279     $—       $2,167,876  
                                 
September 30, 2018                                
Cash and equivalents   $158,210     $—       $—       $158,210  
Metlife stock value     38,197       —         —         38,197  
Government and agency bonds     264,376       —         9,246       255,130  
Corporate bonds     193,526       —         3,716       189,810  
Mutual funds     22,359       —         292       22,067  
Holding Company Preferred A Stock     572,875       —         23,144       549,731  
Equity securities     813,215       167,218       —         980,433  
Total securities   $2,062,758     $167,218     $36,398     $2,193,578  

 

 

17  
 

 

 

Realized gains included in earnings for the periods reported in investment income are as follows:

 

Investment Income                                
      Three Months Ended June 30,       Nine Months Ended June 30,  
      2019       2018       2019       2018  
Net realized gains and (losses) recognized during the
period on investments
  $7,042     $4,185     ($2,378 )   $31,152  

 

 

 

Unrealized gains on equity securities included in investment income for the three and nine months ended June 30, 2019 were $18,014 and $76,947, respectively. Unrealized gains of $0 and $0 were included in investment income for the three and nine months ended June 30, 2018, respectively.

Financial assets and liabilities valued using level 1 inputs are based on unadjusted quoted market prices as of the close of business on the days noted within active markets.

Note 6 – Stockholders’ Equity

 

For the three months ended June 30, 2019, there were a total of 5,569 shares of common stock issued for $95,866. For the nine months ended June 30, 2019 there were a total of 19,200 shares of common stock issued for $318,852. The amounts issued were for the following:

 

 

      Three months ended June 30, 2019       Nine months ended June 30, 2019  
      Shares       Amount       Shares       Amount  
Dividend reinvestment program (DRIP)     2,269     $45,992       7,300     $133,423  
Directors     3,150       46,589       9,450       138,651  
Leatherstocking Gas Company     150       3,285       450       8,778  
Officers     —         —         2,000       38,000  
Total     5,569   $95,866       19,200     $318,852  

 

 

Shares issued to Leatherstocking Gas were used to compensate its independent director, Carl Hayden.

 

For the three months ended September 30, 2018, dividends were paid on October 12, 2018 to stockholders of record on September 30, 2018 in the amount of $422,740. For the quarter ended December 31, 2018, $423,836 was accrued for dividends paid on January 14, 2019 to stockholders of record on December 31, 2018. For the quarter ended March 31, 2019, $439,814 was accrued for dividends paid on April 15, 2019 to stockholders of record on March 31, 2019. For the quarter ended June 30, 2019, $440,622 was accrued for dividends paid on July 15, 2019 to stockholders of record on June 30, 2019.

 

Series A Cumulative Preferred Stock accrues cumulative dividends at a rate of 6.0% of the liquidation preference per share ($25.00) and are expected to be paid on or about the 14th day of April, July, October and January of each year and began October 14, 2016. For the three months ended September 30, 2018, dividends were paid on October 12, 2018 in the amount of $78,975. For the three months ended December 31, 2018, $78,975 was paid on January 14, 2019. For the three months ended March 31, 2019, $78,975 was accrued for dividends paid on April 15, 2019. For the three months ended June 30, 2019, $78,975 was accrued for dividends paid on July 15, 2019. Dividends on the Series A Cumulative Preferred Stock are reported as interest expense.

 

Series B Convertible Preferred Stock accrues cumulative dividends at a rate of 4.8% of the liquidation preference per share ($20.75) and are expected to be paid on or about the 14th day of April, July, October and January of each year and began October 14, 2016. At September 30, 2018 there was $61,066 accrued for Series B dividends paid on October 12, 2018. For the three months ended December 31, 2018, $61,066 was accrued for dividends paid on January 14, 2019. For the three months ended March 31, 2019, $61,066 was accrued for dividends paid on April 15, 2019. For the three months ended June 30, 2019, $61,065 was accrued for dividends paid on July 15, 2019. See Note 9 for additional information on the preferred stock, including its mandatory redemption provisions.

 

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Basic earnings (loss) per share are computed by dividing income (loss) available for common stock (net income less dividends declared on Series B Preferred Stock) by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

 

293,116 shares of common stock issuable upon conversion of Series B Convertible Preferred Stock were excluded from the calculation of diluted earnings per share for the three months ended June 30, 2019 and 2018 because their inclusion would have been anti-dilutive.

 

Note 7 – Investment in Joint Ventures

 

The Holding Company has an interest in Leatherstocking Gas and Leatherstocking Pipeline (the Joint Ventures), each of which is a joint venture with Mirabito Regulated Industries, LLC, accounted for by the equity method.

The following table represents the Holding Company’s investment activity in the Joint Ventures for the nine months ended June 30, 2019 and 2018:

      2019       2018  
Beginning balance in investment in joint ventures $2,740,575     $2,707,406  
Loss from joint ventures     (15,324 )     (16,595 )
Ending balance in joint ventures   $2,725,251     $2,690,811  

 

As of and for the nine months ended June 30, 2019 and 2018, the Joint Ventures financial summary is as follows:

 

      2019       2018  
Total assets   $13,000,000     $13,000,000  
Total liabilities   $7,600,000     $7,600,000  
Net loss   $31,000     $34,000  

 

 

Note 8 – Income Taxes

 

 

Income tax expense for the periods ended June 30 are as follows:        
      Three Months Ended       Three Months Ended       Nine Months Ended       Nine Months Ended  
      June 30, 2019       June 30, 2018       June 30, 2019       June 30, 2018  
Current   $—       $—     $—       $—    
Deferred     58,875       301,270       1,326,628       1,736,447  
Total $58,875     $301,270   $1,326,628     $1,736,447  
                                 

 

 

Actual income tax expense differs from the expected tax expense (computed by applying the federal corporate tax rate of 21% before income tax expense) as follows:

    Three Months Ended   Three Months Ended   Nine Months Ended   Nine Months Ended
    June 30, 2019   June 30, 2018   June 30, 2019   June 30, 2018
Expected federal tax expense $20,423     $60,798     $1,000,257     $981,286  
State tax expense (net of federal)     2,480       35,312       263,120       229,013  
Federal income sur credit amortization     11,761       —         46,046       —    
Regulatory deferral for tax rate difference     —         126,098       —         478,054  
Prior period tax write off     —         —         (11,405 )     —    
Other, net     24,211       79,062       28,610       48,094  
Actual tax expense $58,875     $301,270   $1,326,628     $1,736,447  

 

 

On December 22, 2017, the Federal Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act makes significant changes to the federal tax structure, which will impact the tax liabilities of utility companies. On August 9, 2018 the NYSPSC issued an order in Case 17-M-0815 that required the Company to return to customers the difference between the federal income tax allowance in base rates and the new statutory rate of 21%. The refund to customers began on October 1, 2018. Impacted customers will experience a decrease of 5.20% on their overall bill in the year starting October 1, 2018 and 7.83% in the year starting October 1, 2019. The amounts returned to customers will be $1,317,719 and $2,112,540 during the years ending September 30, 2019 and 2020, respectively. These refunds will not impact the Company’s earnings. The impact of the change in the Tax Act on deferred regulatory balances will be deferred until the Company’s next base rate case. The Company has recorded those amounts as Regulatory Liabilities on the accompanying consolidated balance sheets.

 

The PAPUC issued an order in Case M-2018-2641242 that requires the Company to return to customers the difference between the federal income tax allowance in base rates and the new statutory rate of 21%. Pike’s electric customers began receiving a total refund of $73,923 or decrease of 0.67% on their overall bill beginning October 1, 2018. This refund is subject to reconciliation and will remain in effect until Pike’s next base rate case. No refunds were ordered for Pike’s gas operation because amounts were not material. The impact of the change in the Tax Act on deferred regulatory balances will be deferred until the Company’s next base rate case. The Company has recorded those amounts as Regulatory Liabilities on the accompanying consolidated balance sheets.

 

 

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Note 9 – Preferred Stock

 

The Holding Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission with respect to a subscription rights offering to its stockholders to issue up to approximately $11.0 million in preferred stock. The subscription rights were distributed on a one-for-one basis to stockholders of record as of April 14, 2016 and expired on June 20, 2016. The Form S-1 covered 2,469,861 subscription rights for the purchase of up to 140,000 shares of 6% Series A Preferred Stock and up to 360,000 shares of 4.8% Series B Preferred Stock. Each subscription right entitled the holder to purchase either: (i) one-eighth share of the 6% Series A Preferred Stock, par value $0.01 per share, for $25.00 per share, or (ii) one-sixth share of the 4.8% Series B Preferred Stock, par value $0.01 per share, for $20.75 per share, which is convertible in accordance with its terms into 1.2 shares of common stock, subject to adjustment. Of the 140,000 shares of Series A Preferred Stock available, 105,303 shares were subscribed and of the 360,000 shares of Series B Preferred Stock available, 244,263 shares were subscribed. In August of 2017 the Company privately placed an additional 105,297 shares of Series A Preferred Stock.

 

Series A Preferred Stock accrues cumulative dividends at a rate of 6.0% of the liquidation preference per share ($25.00) and are expected to be paid on or about the 14 th day of April, July, October and January of each year. The dates of record for the dividends, are March 31, June 30, September 30 and December 31, immediately preceding the relevant dividend payment date. On September 30, 2023, outstanding shares of Series A Preferred Stock will mature and be redeemed solely in cash at a redemption price equal to the liquidation preference per share plus an amount equal to all accrued but unpaid dividends subject to our having funds legally available for redemption under New York law. The dividends for each of the nine month periods ended June 30, 2019 and 2018 were $236,925, and these are recorded as interest expense. For the three months ended June 30, 2019 and 2018 the dividends were $78,975, and these are recorded as interest expense.

 

In accordance with ASC 480, because of the mandatory redemption feature this is treated as liability. The issuance costs are treated as debt issuance costs and will be amortized over the life of the instrument. The debt issuance costs reduce the carrying value of the liability. The amortization of the Series A Preferred Stock debt issuance costs was $15,548 and $15,269 for the nine months ended June 30, 2019 and 2018, respectively. The amortization of the Series A Preferred Stock debt issuance costs was $5,183 and $5,090 for the three months ended June 30, 2019 and 2018, respectively.

 

Series B Preferred Stock accrues cumulative dividends at a rate of 4.8% of the liquidation preference per share ($20.75) and are expected to be paid on or about the 14th day of April, July, October and January of each year commencing October 14, 2016. The dates of record for the dividends, if any, will be March 31, June 30, September 30 and December 31, immediately preceding the relevant dividend payment date. Our president, Michael German along with his wife, owns 57,936 of these shares.

 

Although by its terms the Series B Preferred Stock is mandatorily redeemable on September 30, 2026, in accordance with ASC 480 it is not considered mandatorily redeemable for accounting purposes as a result of the conversion feature presenting a contingency related to the redemption dates. Accordingly, this is not considered a liability. However, as a result of the decision related to conversion and not reaching redemption resting with the holder, this instrument has been classified as temporary equity in accordance with ASC 480. Upon conversion, the instrument would be reclassified as permanent equity. Dividends were $183,197 for both the nine months ended June 30, 2019 and 2018. Dividends were $61,065 for both the three months ended June 30, 2019 and 2018. The issuance costs of approximately $120,000 reduced the initial proceeds and will be accreted until redemption or conversion. During the nine months ended June 30, 2019 and 2018 there was accretion of $11,285 and $11,284, respectively. During the three months ended June 30, 2019 and 2018 there was accretion of $3,762 and $3,761, respectively.

 

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Note 10 – Regulatory Matters

 

On June 17, 2016, the Gas Company filed with the NYPSC a three-year plan to implement a levelized increase in revenues from gas delivery service of $3,463,287 in each year over the period June 1, 2017 through May 31, 2020, resulting in total bill impacts on customers in each year of 10.4%.

 

On June 15, 2017, the NYPSC, in Case 16-G-0369, issued an Order Adopting Terms of Joint Proposal and Establishing Gas Rate Plan (the “June 2017 Order”) adopting without substantive modification a Joint Proposal (the “2017 Joint Proposal”) among the Gas Company, the Staff of the Department of Public Service, and multiple intervenors (which represent large industrial customers) to resolve all issues in Case 16-G-0369. As adopted by the June 2017 Order, the 2017 Joint Proposal is a comprehensive settlement extending for three consecutive Rate Years (the twelve months ending May 31, 2018, 2019 and 2020) and permits Corning Gas to increase its base rates for gas delivery service. The new base rates under the June 2017 Order, when offset by the elimination of existing surcharges at the beginning of Rate Year 1 and levelized over the three Rate Years, result in the following incremental revenue increases over the prior Rate Year: Rate Year 1 - $1,558,553, Rate Year 2 - $1,573,706, and Rate Year 3 - $1,566,594, equating to increases of approximately 6.2%, 5.9% and 5.5%, respectively, as a percentage of total delivery revenues including gas costs. The 2017 Joint Proposal, as adopted, permits a rate of return on common equity of 9.0%, and an “Earnings Sharing Mechanism” that provides for Corning Gas to retain all earnings above 9.00% up to and including 9.50%, and for customers to retain 50% of the earnings above 9.50% up to and including 10.00%, 75% of earnings above 10.00% up to and including 10.50%, and 90% of earnings above 10.50%.

 

The 2017 Joint Proposal, as adopted, provides true-ups for property taxes, pension costs, plant expenditures, large customer revenue, local production revenue and continues performance metrics for safety and customer satisfaction from the prior rate case. Although the stringency of certain performance measures and the amount of certain negative revenue adjustments for failure to meet specific standards are increased, the 2017 Joint Proposal, as approved by the June 2017 Order, also provides opportunities for positive revenue adjustments for exceeding applicable standards with regard to certain measures. Because the June 2017 Order approving the 2017 Joint Proposal was issued after the June 1, 2017 commencement of Rate Year 1 of the three-year rate plan and new rates did not go into effect until July 1, 2017, the 2017 Order provided for each of the Gas Company and its customers to be placed in the same position in which they would have been if the new rates had gone into effect as of June 1, 2017. Any resulting revenue adjustments in favor of the Gas Company are deferred for future recovery, with interest. The Rate Year 3 rate increase of $1,556,594 became effective June 1, 2019.

 

On August 9, 2018 the NYSPSC issued an order in Case 17-M-0815 that required the Company to return to customers the difference between the federal income tax allowance in base rates and the new statutory rate of 21%. The refund to customers began on October 1, 2018. Customers will experience an average decrease of 5.20% on their overall bill in the year starting October 1, 2018 and 7.83% in the year starting October 1, 2019. The amounts returned to customers will be $1,317,719 and $2,112,540 respectively. These refunds will not impact the Company’s allowed earnings.

 

In addition, the impact of the change in the Tax Act on deferred regulatory balances will be deferred until the Company’s next base rate case. The Company has recorded those amounts a Regulatory Liabilities on the accompanying Consolidated Balance Sheets.

 

The PAPUC issued an order in Case M-2018-2641242 that require the Company to return to customers the difference between the federal income tax allowance in base rates and the new statutory rate of 21%. Pike’s electric customers are receiving an annual refund of $73,923 or decrease of 0.67% on their overall bill effective October 1, 2018. No refunds were ordered for Pike’s gas operation because amounts were not material. The impact of the change in the Tax Act on deferred regulatory balances will be deferred until the Company’s next base rate case. The Company has recorded those amounts as a Regulatory Liabilities on the accompanying Consolidated Balance Sheets.

 

The PAPUC issued an order on February 7, 2019 in Docket S-2019-3007089 and S-2019-3007332 authorizing Pike to issue debt in the amount of $2,732,154. The authorization expires on December 31, 2019, if the transaction has not taken place by that date.

Total Regulatory Assets on the accompanying Consolidated Balance Sheets as of June 30, 2019 amounts to $8,243,856 compared to $9,559,035 at September 30, 2018. The Regulatory Assets include $1,544,347 at June 30, 2019 and $1,544,347 at September 30, 2018 that is subject to Deferred Accounting Petitions and $806,799 at June 30, 2019 and $845,708 at September 30, 2018 that is under regulatory audit. The remaining items in regulatory assets are either approved in rates, part of annual reconciliations approved by the NYSPSC and PAPUC or approved through various commission directives.

 

The Gas Company in accordance with the rate order in Case 16-G-0204 is required to make capital expenditures to reach a net plant target of $50,427,717, $53,930,803 and $56,959,911 at May 31, 2018, 2019 and 2020 respectively. The annual net plant target is developed by taking the forecast Rate Year average of the monthly averages of: (1) plant in service, (2) construction work in process, (3) deferred taxes associated with tax depreciation, accelerated recovery of plant and contributions in aid of construction (“CIAC”), and (4) depreciation reserve including accelerated recovery of plant. If the actual net plant in service falls short of the target net plant in service for a particular Rate Year, Corning Gas will defer carrying costs for customers’ benefit equal to the shortfall multiplied by the authorized pre-tax rate of return, as well as depreciation expense associated with the shortfall. If the actual net plant in service exceeds the target net plant in service for a particular Rate Year, no adjustment ( i.e. , no surcharge to customers) will be made. The determination of any shortfall or excess will be made on a cumulative basis at the end of the three year period. For the period ended May 31, 2018, the Company exceeded the target by $318,396. For the period ended May 31, 2019, the Company exceeded the target by $269,090.

 

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Note 11 – Segment Reporting

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 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. Pike provides electricity and natural gas to Pike County, Pennsylvania. The Holding Company is the parent company of all subsidiaries and has a 50% ownership in the Leatherstocking joint ventures. The Appliance Company’s information is presented with the Holding Company as it has little activity.

The following table reflects the results of the segments consistent with the Holding 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 for the three months and nine months ended June 30, 2019 and 2018.

 

 

 

As of and for the three months ended June 30, 2019

 

 

      Gas Company       Pike       Holding Company       Total Consolidated  
Total electric utility revenue   $0     $1,467,575     $0     $1,467,575  
Total gas utility revenue   $5,213,043     $262,490     $0     $5,475,533  
Investment income   $34,454     $0     $0     $34,454  
Equity earnings from joint ventures   $0     $0     ($56,877 )   ($56,877 )
Net income (loss) $254,705     ($96,466 ) ($119,859 ) $38,380  
Income tax expense (benefit)   $67,402     $2,844     ($11,371 ) $58,875  
Interest expense $323,052     $157,264     $78,976     $559,292  
Depreciation expense $460,400   $164,759     $$915     $626,074  
Amortization expense $125,864     $111,457     $16,174     $253,495  
Total assets $83,042,452   $26,851,360   $3,216,038   $113,109,850  
Capital expenditures $879,754     $580,981     $0     $1,460,735  

 

 

As of and for the three months ended June 30, 2018

 

 

      Gas Company       Pike       Holding Company       Total Consolidated  
Total electric utility revenue   $0     $2,068,433     $0     $2,068,433  
Total gas utility revenue $5,257,250     $290,445     $0     $5,547,695  
Investment income $3,030     $0     $0     $3,030  
Equity earnings from joint ventures $0     $0     ($51,861 )   ($51,861 )
Net income (loss) $167,912     $262,328     ($95,345 )   $334,895  
Income tax expense (benefit) $71,874     $269,996     ($40,600 )   $301,270  
Interest expense $302,554     $103,186     $81,486   $487,226  
Depreciation expense $446,165   $146,321     $915     $593,401  
Amortization expense $36,708     $51,389     $19,031     $107,128  
Total assets   $80,514,116     $25,640,851     $3,354,728     $109,509,695  
Capital expenditures   $661,918     $277,351     $0     $939,269  

 

 

 

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As of and for the nine months ended June 30, 2019

 

 

      Gas Company       Pike       Holding Company       Total Consolidated  
Total electric utility revenue   $0     $6,252,018     $0     $6,252,018  
Total gas utility revenue   $22,324,015     $1,553,509     $0     $23,877,524  
Investment income   $94,352   $0     $0     $94,352  
Loss from joint ventures   $0     $0     ($15,324 )   ($15,324 )
Net income (loss)   $3,196,579     $491,894   ($251,971 )   $3,436,502  
Income tax expense   $1,124,665     $198,083     $3,880     $1,326,628  
Interest expense   $1,048,523     $476,377     $251,591     $1,776,491  
Depreciation expense   $1,369,717     $494,266     $2,745   $1,866,728  
Amortization expense   $230,322     $282,830     $34,986   $548,138  
Total assets   $83,042,452     $26,851,360   $3,216,038     $113,109,850  
Capital expenditures   $2,939,110     $1,508,091     $0     $4,447,201  

 

 

 

As of and for the nine months ended June 30, 2018

 

 

      Gas Company       Pike       Holding Company       Total Consolidated  
Total electric utility revenue   $0     $5,910,445     $0     $5,910,445  
Total gas utility revenue   $21,032,049     $1,502,339     $0     $22,534,388  
Investment income   $62,525     $0     $0     $62,525  
Loss from joint ventures   $0     $0     ($16,595 )   ($16,595 )
Net income (loss)   $2,377,704     $484,575     ($186,217 )   $2,676,062  
Income tax expense (benefit)   $1,387,086     $427,237     ($77,876 )   $1,736,447  
Interest expense   $981,115     $373,759     $245,525     $1,600,399  
Depreciation expense   $1,330,423     $443,587     $2,745     $1,776,755  
Amortization expense   $122,819     $154,812     $26,554     $304,185  
Total assets   $80,514,116     $25,640,851     $3,354,728     $109,509,695  
Capital expenditures   $3,106,213     $717,299     $0     $3,823,512  

 

Note 12 – Subsequent Events – State adopted law

On July 18, 2019, New York signed the Climate Leadership and Community Protection Act. The Act sets out a series of goals to significantly reduce the use of carbon-based fossil fuels and lower New York State’s greenhouse emissions by certain dates out to 2050. The New York State Climate Action Council has roughly three years to develop a scoping plan to recommend changes the State can make to reduce carbon emissions. The Act has the potential to significantly impact the Company’s New York operations over the next thirty (30) years. However, it is yet to be determined what the impact on the Company may be.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Statements

 

This report contains statements which, to the extent they are not recitations of historical facts, constitute "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 (Reform Act). The words "estimate", "project", "anticipate", "expect", "intend", "believe", "could" 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. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. As forward-looking statements, these statements involve risks, uncertainties and other factors that could cause actual results to differ materially from the expected results. Accordingly, actual results may differ materially from those expressed in any forward-looking statements. Factors that could cause results to differ materially from our management's expectations include, but are not limited to, those listed under Item 1A - "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, and in our Prospectus, dated April 15, 2017, forming a portion of our Registration Statement on Form S-1 (File No. 333-208943), filed with the Securities and Exchange Commission on April 25, 2016, in addition to:

 

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* the effect of any interruption in our supply of natural gas or electricity or a substantial increase in the price of natural gas or electricity,
* our ability to successfully negotiate new supply agreements for natural gas and electricity as they expire, on terms favorable to us, or at all,
* the effect on our operations of any action by the NYPSC, with respect to Corning Gas or PAPUC, with respect to Pike and our joint venture interest in Leatherstocking Gas,
* the effect of any litigation,
* the effect on our operations of unexpected changes in legal or regulatory requirements, including environmental and energy consumption regulations and laws,
* the amount of natural gas produced and directed through our pipeline by producers,
* our ability to obtain additional equity or debt financing to fund our capital expenditure plans and for general corporate purposes,
* our successful completion of various capital projects and the use of pipelines, compressor stations and storage by customers and counterparties at levels consistent with our expectations,
* The effect of weather on our utility infrastructure,
* our ability to retain the services of our senior executives and other key employees,
* our vulnerability to adverse economic and industry conditions generally and particularly the effect of those conditions on our major customers,
* the effect of any leaks in our transportation and delivery pipelines, and
* competition to our gas transportation business from other pipelines.

 

Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement in light of new information or future events.

 

Overview

The Jobs and Tax Act of 2017 reduced the federal corporate tax rate from 34% to 21%. Upon that occurrence the NYSPSC and PAPUC issued orders to New York and Pennsylvania utilities intended to give utility customers the benefit of the income tax reduction. As a result, revenue collected from customers mirror the reduction of the utility federal income tax expense. While net income for the fiscal year should not be materially affected, revenue and margin will be reduced by the credit on customer bills. The impact of the credit will be offset by lower book income taxes (34% vs. 21%). On a quarterly basis, higher margin/income quarters will see net benefits from lower tax rate, while low margin/income quarters will be negatively impacted by the credit.

For the nine months ended June 30, 2019 the rate increase at the Gas Company and the cost savings at our other utilities drove higher earnings. For the three months ended June 30, 2019, the regulatory reconciliation at Corning Gas and Pike, timing of revenue recognition at Pike, as well as, weather, negatively impacted the Company’s results. These negative impacts were partially offset by the rate increase at the Gas Company.

We continue to focus on improving the efficiency of our operations and making capital investments to improve our infrastructure. Corning Gas’s infrastructure improvement program concentrates on the replacement of older distribution mains and customer service lines. In fiscal 2018 the Gas Company repaired 134 leaks and replaced 9.8 miles of bare steel main and 249 bare steel services. For the first nine months of fiscal 2019 the Gas Company repaired 103 leaks, replaced 169 bare steel services and replaced 9.0 miles of bare steel main. For the first nine months of fiscal 2019, Pike replaced approximately 80 poles and did extensive tree trimming to maintain our electric infrastructure. On January 18, 2019 Pike filed a Long Term Infrastructure Improvement Plan (“LTIIP”) to accelerate replacement of cast iron, wrought iron and bare steel pipe over 11 years. The PAPUC has approved the LTIIP plan on June 13, 2019.

 

We believe our key performance indicators are net income, stockholders’ equity and the safety and reliability of our systems. Net income decreased by $296,515 for the three months and increased by $760,440 for the nine months ended June 30, 2019 compared to the same periods in fiscal 2018. Because the Holding Company’s principal operations are conducted through Corning Gas and Pike, both regulated utility companies, stockholders’ equity is an important performance indicator. The NYPSC and PAPUC allow Corning Gas, Pike and Leatherstocking the opportunities to earn a just and reasonable return on stockholders’ equity as determined under applicable regulations. Stockholders’ equity is, therefore, a precursor of future earnings potential. As of June 30, 2019, compared to June 30, 2018, stockholders’ equity increased from $33,734,740 to $35,110,771. We plan to continue our focus on building stockholders’ equity. Safety and efficiency indicators include leak repair, main and service replacements and customer service metrics. Key performance indicators:

 

  Three Months Ended June 30, Nine Months Ended June 30,
  2019 2018 2019 2018
Net income $38,380 $334,895 $3,436,502 $2,676,062
Stockholders' equity $35,110,771 $33,734,740 $35,110,771 $33,734,740
Stockholders' equity per outstanding common share $11.55 $11.19 $11.55 $11.19

 

 

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Revenue and Margin

 

 

Electric and Gas margin, net, was down $533,835 and up $278,493 for the three and nine months ended June 30, 2019, respectively. The margins were negatively impacted by the federal income tax credit mandated by the NYPSC and PAPUC which amounted to $286,011 and $963,542 for the three and nine months ended June 30, while this decline in margin impacted net income this was mitigated by the decrease in federal income tax rate and the rate increase at the Gas Company.

 

Utility electric retail operating revenues decreased $466,279 during the three months and increased $418,850 during the nine months ended June 30, 2019 compared to the same periods last year. The decrease for the three months primarily results from lower electric cost of $233,755 (a pass-through in rates), reduced usage (weather related), timing related to recognition of pole attachment revenues and a regulatory reconciliation. The increase for the nine month period ended June 30, 2019 primarily results from increased electric cost recovery of $514,274 and the remainder is primarily due to increased usage offset by customer bill credits, associated with the Tax Act mandated by the PAPUC.

 

Other electric revenues decreased $134,579 during the three months and $77,277 during the nine months ended June 30, 2019 compared to the same periods last year. The decrease is primarily due to the timing of pole attachment billings year over year.

 

Gas retail operating revenues increased $43,270 during the three months and $1,211,518 during the nine months ended June 30, 2019 compared to the same periods last year. The increase primarily results from a Gas Company rate increase offset by surcharge credits mandated by the NYSPSC associated with the Federal Tax Act. For the nine month period ended June 30, 2019 the increase primarily results from increased gas cost recoveries of $818,372. The remaining difference results primarily from increased sales of approximately $126,626, and a rate increase offset by the surcharge credits mandated by the NYSPSC.

 

Other gas revenues decreased $115,432 during the three months and increased $131,617 during the nine months ended June 30, 2019 compared to the same periods last year. The drivers for the changes in other gas revenue for the three and nine month periods are detailed in the table below.

 

The following table summarizes our utility operating revenue:

 

      Three months ended June 30,       Nine months ended June 30,  
      2019       2018       2019       2018  
Retail electric revenue:                                
Residential   $603,535     $877,382     $2,984,694     $2,806,934  
Commercial     841,150       1,036,561       3,112,054       2,872,308  
Street lights     29,833       26,854       96,872       95,528  
Total retail electric revenue   $1,474,518     $1,940,797     $6,193,620     $5,774,770  
                                 
Other electric revenue:                                
Customer discounts forfeited   $12,948     $—       $57,308     $1,000  
Third party billings     (8,770 )     134,675       17,723       134,675  
Other     (11,121 )     (7,039 )     (16,633 )     —    
Total other electric revenue   ($6,943 )   $127,636       58,398       135,675  
                                 
Total electric revenue   $1,467,575     $2,068,433     $6,252,018     $5,910,445  
                                 
Retail gas revenue:                                
Residential   $3,485,108     $3,461,242     $15,145,916     $14,327,597  
Commercial     541,997       543,498       2,534,042       2,342,763  
Transportation     945,835       907,440       3,587,388       3,629,899  
Wholesale     357,364       374,854       2,008,337       1,763,906  
Total retail gas revenue   $5,330,304     $5,287,034     $23,275,683     $22,064,165  
                                 
Other gas revenue:                                
Local production   $162,708     $202,791     $525,857     $635,738  
Customer discounts forfeited     50,531       34,416       94,891       79,382  
Reconnect fees     1,810       (675 )     2,930       1,299  
Surcharges     1,681       20,467       2,271       21,709  
Other (see detail below)     (71,501 )     3,662       (24,108 )     (267,905 )
Total other gas revenue   $145,229       $260,661       $601,841       $470,223  
                                 
Total gas revenue     5,475,533       5,547,695       23,877,524       22,534,388  
                                 
Total revenue     6,943,108       7,616,128       30,129,542       28,444,833  

 

 

The following table details amounts making up the Other line in the schedule of Other gas revenue above:

 

 

      Three months ended June 30,       Nine months ended June 30,  
      2019       2018       2019       2018  
Other gas revenues:                                
Delivery Rate Adjustment (DRA) carrying costs   $1,348     $911     $5,410     $2,873  
Contract customer reconciliation     (27,031 )     (113 )     (96,514 )     (65,467 )
Monthly RDM amortizations     (161,984 )     9,375       (425,465 )     (172,244 )
Local production revenues     23,290       (2,861 )     43,320       (13,335 )
2017 Jobs Act federal income tax reconciliation     17,872       —         384,974       —    
Regulatory liability reserve     (50,000 )     —         (74,147 )     —    
Annual DRA reconciliation     —         (37,046 )     —         (111,140 )
Customer performance incentive     32,000       32,000       32,000       32,000  
Write off from Pike purchase     —         156,899       —         156,899  
Capacity release revenues     27,804       —         27,804       —    
All other     65,200       (155,503 )     78,510       (97,491 )
Total other gas revenues   $(71,501 )   $3,662     $(24,108 )   $(267,905 )

 

 

25  
 

 

 

Gas purchases are our largest expenses. Purchased gas expense decreased $84,978 for the three months and increased $741,877 for the nine months ended June 30, 2019, compared to the same periods last year. The decrease in costs for the three months ended June 30, 2019 is due primarily to higher gas costs of $33,874 at Corning and Pike Gas compared to the same three months in fiscal 2018, offset by reduced gas costs of $118,852 resulting from decrease of purchased gas volumes. The increase in costs for the nine months ended June 30, 2019 is due primarily to higher gas costs of $734,118 at Corning and Pike Gas compared to the same nine months in fiscal 2018. The remaining difference of $7,759 is a result of a minimal increase of purchased gas volumes.

 

Electricity costs decreased by $54,207 for the three months and increased by $664,339 for the nine months ended June 30, 2019. The decrease in costs for the three months ended June 30, 2019 is due primarily to a decrease in electricity costs of $75,809 at Pike Electric compared to the same three months in fiscal 2018. The remaining difference of $21,602 is a result of increase of purchased electric sales volumes. The increase in costs for the nine months ended June 30, 2019 is due primarily to higher

electricity costs of $1,443,263 at Pike Electric compared to the same nine months in fiscal 2018. The remaining difference of $778,924 is a result of decrease purchased electric sales volumes due to weather.

 

Gas Margin (the excess of utility gas revenues over the cost of natural gas purchased) percentage increased 1.23% for the three months ended June 30, 2019 compared to the same period last year. The increase primarily results from decreased gas cost expense of $84,978 and higher revenues from a rate increase offset by federal tax refunds mandated by the NYSPSC.  Gas Margin percentage decreased 1.42% for the nine months ended June 30, 2019 compared to the same period last year.  Gas margin percentage for the nine months ended June 30, 2019 decreased as a result of increased gas cost expense of $741,877 and Federal Tax refunds mandated by the NYPSC. The decrease in margin percentage due to higher gas costs was offset by the rate increase at the Gas Company. Electric Margin (the excess of electric revenues over the cost) percentage decreased 5.83% for the three months ended June 30, 2019 compared to the same period last year and decreased 9.11% for the nine months ended June 30, 2019 compared to the same period last year, primarily because of higher prices of purchased electricity costs for the period.

 

      Three Months Ended June 30,       Nine Months Ended June 30,  
      2019       2018       2019       2018  
Utility Gas Revenues   $5,475,533     $5,547,695     $23,877,524     $22,534,388  
Natural Gas Purchased     1,266,954       1,351,932       7,499,254       6,757,377  
Margin   $4,208,579     $4,195,763     $16,378,270     $15,777,011  
Margin %     76.86%     75.63%     68.59%     70.01%
                                 
Utility Electric Revenues   $1,467,575     $2,068,433     $6,252,018     $5,910,445  
Electricity Purchased     426,859       481,066       2,303,479       1,639,140  
Margin   $1,040,716     $1,587,367     $3,948,539     $4,271,305  
Margin %     70.91%     76.74%     63.16%     72.27%

 

Operating and Interest Expenses

 

Operating and maintenance expense for the three and nine months ended June 30, 2019, increased by $79,917 and decreased by $392,868, respectively, compared to the three months and nine months ended June 30, 2018. The three month increase of $79,917 was due to an increase of $34,291 due to the adoption the FASB authoritative guidance related to the presentation of net periodic pension cost and net periodic postretirement benefit cost and the balance was primarily due to inflationary increases in costs. The decrease in expenses for the nine month period was due primarily from lower cost of repair and maintenance of overhead lines and distribution expenses of $319,998, higher bad debt expense of $29,889, and reduced legal expenses of $102,095 and the remaining decrease results primarily from lower customer service and administrative and general expenses. 

 

Taxes other than income taxes decreased $138,525 for the three months and increased $38,323 for the nine months ended June 30, 2019, compared to the same periods in the prior fiscal year. The decrease for the three months was primarily due to decreased property taxes of $64,069, due to property tax reconciliation adjustment of approximately $78,000 in the prior year and a decrease in Gross Receipts Tax (“GRT”) of $36,981. The increase for the nine months was primarily due to increased Gross Receipts Tax (“GRT”) expense of $46,356, due to increased revenues, offset by decreases in property taxes. 

 

Depreciation expense for the three and nine months ended June 30, 2019 increased by $32,673 and $89,973, respectively compared to the same periods in the prior fiscal year due to increases in utility plant placed in service.

 

Interest expenses for the three and nine months ended June 30, 2019, increased by $72,066 and $176,092, respectively compared to the same periods last year mainly due to additional interest costs associated with higher levels of outstanding debt attributed to capital expenditures.

 

 

26  
 

 

Net Income

 

As a result of the foregoing, net income decreased by $296,515 for the three months and increased by $760,440 for the nine months ended June 30, 2019 compared to the same periods in fiscal 2018. The decrease for the three months was mainly due to lower income at Pike. Three factors impacted Pikes earnings (1) electric usage was down due to warmer weather at Pike, (2) pole attachment revenue is generally recognized once a year and was recognized during the three months ended June 30, 2018 but not June 30, 2019 as it was recognized earlier in fiscal 2019 (3) there was a regulatory System Benefit Charge (SBC) reconciliation that negatively impacted earnings. The increase in net income for the nine months ended June 30, 2019 was due primarily due to higher gas and electric sales volume and the rate increase at the Gas Company, offset by regulatory reconciliations (detail are shown pre tax in Other Electric and Gas Revenues on page 29 and 30).

 

Liquidity and Capital Resources

 

The Holding Company does not have any borrowings (excluding Series A Preferred Stock that is classified as debt) at the corporate level and has no access to liquidity except through dividends and distributions from its subsidiaries as well as equity issuances. Its principal liquidity requirements are for investments in the Leatherstocking Joint Ventures to permit those companies to make the capital expenditures required to provide services to their customers and for dividend payments to the Holding Company’s stockholders.

 

Under the orders of the NYPSC, the Gas Company’s cost of capital is based on an equity-to-debt ratio of 48%/52%. If additional equity is required for the Gas Company to maintain that ratio when issuing new debt, the Holding Company, as the sole stockholder of the Gas Company, is the only source of such equity, through either equity or debt financings at the Holding Company level. The Gas Company and Pike rely on internally generated cash and short and long-term debt.

 

The Gas Company’s internally generated cash from operating activities consists of net income, adjusted for non-cash expenses, and changes in operating assets and liabilities. Non-cash items include depreciation and amortization; gain on investment and deferred income taxes. Over or under-recovered gas costs significantly impact cash flow. In addition, there are significant year-to-year changes in regulatory assets that impact cash flow. The Gas Company’s cash flow is seasonal. Cash expenditures are the highest in the summer and fall months when we refill gas storage and conduct our construction programs. Our cash receipts are highest during the heating season. At Pike cash flow is strongest in the winter and summer when customer demand for natural gas and electricity are highest. Given year round electric sales, Pike is less seasonal than the Gas Company.

 

On April 13, 2016, the Gas Company filed a petition in Case 16-G-0204 with the NYPSC, to defer leak repair and survey costs over and above the amounts permitted to be recovered in rates for 2015. See “Corning Gas Company” under “Regulatory Matters” herein for additional information.

 

Capital expenditures are the principal use of internally generated cash flow.  To fund capital expenditures, the Gas Company and Pike need to draw on both operating cash and new debt. In fiscal year 2019 to date, the Gas Company has spent approximately $4.5 million on projects and safety-related infrastructure improvements. This, in conjunction with our growth projects, creates liquidity pressure on the Holding Company. We anticipate that our aggressive capital construction program will continue to require the Holding Company to raise new debt and/or equity.

 

Cash flows from financing activities of the Company consist of repayment of long-term debt, new long-term borrowing, borrowings and repayments under our lines-of-credit and quarterly dividend payments. For the Gas Company’s operations, it has an $8.0 million revolving line of credit with M&T Bank. Interest is a variable rate determined by the Gas Company’s funded debt to EBITDA ratio calculated ninety days after the end of each quarter added to the daily LIBOR rate with no additional collateral or covenants beyond those included in the M&T Bank term notes. See Note 4 - Financing Activities of the notes to the consolidated financial statements above for further information. The amount outstanding under this line on June 30, 2019 was $2.3 million with an interest rate of 5.03%. The Gas Company was in compliance with all of its loan covenants as of June 30, 2019.

 

For Pike’s operations, it has a $2.0 million revolving line of credit with M&T Bank. Interest is a variable rate determined by Pike’s funded debt to EBITDA ratio calculated ninety days after the end of each quarter added to the daily LIBOR rate with no additional collateral or covenants beyond those included in the M&T Bank term notes. See Note 4 - Financing Activities of the notes to the consolidated financial statements above for further information. The amount outstanding under this line on June 30, 2019 was approximately $848,500 with an interest rate of 5.19%. Pike was in compliance with all of its loan covenants as of June 30, 2019.

 

During this quarter, we mainly injected gas into storage and as of June 30, 2019, had a balance of $790,450 worth of gas in storage, the volume in storage at June 30, 2019 was 311,712 Mcf at an average price of $2.54 per Mcf. At June 30, 2018, the Company had a balance of $1,058,857 worth of gas in storage, the volume in storage at June 30, 2018 was 421,136 Mcf at an average price of $2.51 per Mcf. During the next quarter, the Gas Company expects to be injecting gas into storage to have sufficient gas to supply customers for the winter season.

 

As of June 30, 2019, we believe that cash flow from operating activities and borrowings under our lines of credit will be sufficient to satisfy our working capital and debt service requirements over the next twelve months. We believe primarily new debt will be required to satisfy our capital expenditures to finance our internal growth needs for the next twelve months.

 

27  
 

 

 

 

Off Balance Sheet Arrangements

 

We have no off balance sheet arrangements.

Regulatory Matters

 

Holding Company

 

On August 1, 2016, the NYPSC issued an order in Case 16-G-0200 approving the exercise of conversion rights (to common stock) of our 4.8% Series B Convertible Preferred Stock by our three holders of 10% or more of our common stock. The three holders, our President Michael German, funds controlled or with investments managed by Mario Gabelli, and the Article 6 Marital Trust under the First Amended and Restated Jerry Zucker Revocable Trust, reported on filings with the U.S. Securities and Exchange Commission that they acquired 57,936, 73,398 and 0 shares of our Series B Convertible Preferred Stock, respectively. There can be no assurance that any of such shares will actually be converted into our common stock.

 

The Holding Company’s primary business, through its subsidiaries Corning Gas and Pike, is regulated by the NYPSC and PAPUC, respectively, among other agencies.

 

 

Corning Gas Company

 

On April 13, 2016, Corning Gas filed a petition in Case 16-G-0204 with the NYPSC, to defer leak repair and survey costs over and above the amounts permitted to be recovered in rates for 2015. In this petition we requested that the incremental cost of $349,547 together with the associated income tax effect, be deferred and recovered in a manner to be established in future rate proceedings. The Company recognized this deferral in the quarter ended March 31, 2016. The petition is still pending before the NYSPSC .

 

On June 15, 2017, the NYPSC issued an Order Adopting Terms of Joint Proposal and Establishing Gas Rate Plan (the “June 2017 Order”) adopting the Joint Proposal without substantive modification in Case 16-G-0369.

 

As adopted by the June 2017 Order, the 2017 Joint Proposal defined earlier is a comprehensive settlement extending for three consecutive Rate Years (the twelve months ending May 31, 2018, 2019 and 2020) and permits Corning Gas to increase its base rates for gas delivery service. The new base rates under the June 2017 Order, when offset by the elimination of existing surcharges at the beginning of Rate Year 1 and levelized over the three Rate Years, result in the following incremental revenue increases over the prior Rate Year: Rate Year 1 - $1,558,553, Rate Year 2 - $1,573,706, and Rate Year 3 - $1,556,594, equating to increases of approximately 6.2%, 5.9% and 5.5%, respectively, as a percentage of total delivery revenues including gas costs. The 2017 Joint Proposal, as adopted, permits a rate of return on common equity of 9.0%, and an “Earnings Sharing Mechanism” that provides for Corning Gas to retain all earnings above 9.00% up to and including 9.50%, and for customers to retain (a) 50% of the earnings above 9.50% up to and including 10.00%, (b) 75% of earnings above 10.00% up to and including 10.50%, and (c) 90% of earnings above 10.50%.

 

The 2017 Joint Proposal provides true-ups for property taxes, pension costs, and plant additions and continues performance metrics for safety and customer satisfaction from the prior rate case. Although the stringency of certain performance measures and the amount of certain negative revenue adjustments for failure to meet specific standards are increased, the 2017 Joint Proposal, as approved by the June 2017 Order, also provides opportunities for positive revenue adjustments for exceeding applicable standards with regard to certain measures. Because the June 2017 Order approving the 2017 Joint Proposal was issued after the June 1, 2017 commencement of Rate Year 1 of the three-year rate plan and new rates did not go into effect until July 1, 2017, the June 2017 Order provides for each of the Gas Company and its customers to be placed in the same position in which they would have been if the new rates had gone into effect as of June 1, 2017. Any resulting revenue adjustments in favor of the Gas Company are deferred for future recovery, with interest. The Rate Year 3 rate increase of $1,556,594 became effective June 1, 2019.

 

By petition dated June 13, 2017, in Case 17-G-0346, Corning Gas requested authority under Public Service Law §69 to issue approximately $44 million of long-term debt through December 31, 2020. In its petition, Corning Gas requested permission to refinance all or a portion of its existing loans with a ten-year fixed rate loan (“Refunding Debt”). In addition, Corning Gas requested authority to issue new debt through December 31, 2020 to fund its future construction expenditures, repay short-term debt incurred to finance previous years’ construction expenditures, and to refinance its maturing debt obligations (“New Debt”). The NYSPSC, in an order issued November 17, 2017, authorized Corning Gas to issue up to $26 million for Refinancing Debt and up to $18 million for New Debt.

 

 

Pike

 

The acquisition of Pike was subject to the approval of the PAPUC. At its public meeting held on August 11, 2016, the PAPUC approved the Recommended Decision of the Administrative Law Judge, dated June 30, 2016, which approved the Joint Petition for Full Settlement of the Joint Application of Pike, Orange and Rockland Utilities, Inc. (“O&R”) and the Company, and the Pennsylvania Office of Consumer Advocate and the Pennsylvania Officer of Small Business Advocate (the “Settlement”). The Settlement requires Pike and the Holding Company to take a variety of actions including, among a series of other matters, hiring a general manager and other staffing of Pike, which had no employees when owned by O&R, and not filing for a rate increase prior to March 1, 2018.

 

On March 3, 2018 Pike experienced a major storm. Winter Storm Riley resulted in high winds and wet heavy snow, causing trees to fall to the ground, taking down numerous poles, spans of primary, secondary and service conductors, and damaging numerous pole top transformers. The cost of restoration was approximately $1.4 million. The $1.4 million is comprised of approximately $0.2 million of capital expenditures and $1.2 million of operation and maintenance repairs. On April 20, 2018 Pike filed a petition with PAPUC for permission to defer losses, for accounting and financial reporting purposes, resulting from the operation and maintenance expenses arising from severe storm damage, and to amortize such losses commencing on the date when rates are changed pursuant to the Commission's final order in Pike’s next general rate case. On June 14, 2018 in Docket P-2018-3001395 the PAPUC granted Pike’s deferral petition. On January 14, 2019 Pike filed a petition with the PAPUC requesting a Securities Certificate for issuance of additional debt in the amount of $2,732,154.

 

The PAPUC issued an order on February 7, 2019 in Docket S-2019-3007089 and S-2019-3007332 authorizing Pike to issue debt in the amount of $2,732,154. The authorization expires on December 31, 2019, if the transaction has not taken place by that date.

 

28  
 

 

 

Leatherstocking Gas

 

On February 20, 2015, Leatherstocking Gas, pursuant to Section 68 of the Public Service Law, filed with the NYPSC for a Certificate of Public Convenience and Necessity and for approval of, and permission to exercise, franchises previously granted in the Town of Windsor (Case 15-G-0098) and Village of Windsor (Case 15-G-0099). NYPSC’s review of the applications is pending.

 

On February 27, 2015, Leatherstocking Gas, pursuant to Public Service Law Section 69, filed with the NYPSC for authority to issue long-term indebtedness in the principal amount of $2,750,000 for the purpose of financing new construction in the Town and Village of Windsor. The Commission review of the application in Case 15-G-0128 is pending.

 

On January 15, 2019 Leatherstocking Gas filed a petition with the PAPUC requesting a Securities Certificate for issuance of additional debt refinance in the amount of $8,748,742. That petition was approved was approved February 28, 2019.

 

 

Critical Accounting Policies

 

Our significant accounting policies are described in the notes to the Consolidated Financial Statements in the Holding Company’s Form 10-K for the year ended September 30, 2018, filed on December 20, 2018. There have been no significant changes in our accounting policies during the nine months ended June 30, 2019. The adoption of Accounting Standards Codification 606 did not impact the amount or timing of the Company’s revenues and expenses.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of June 30, 2019, the Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended. Based upon the Company’s evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective as of June 30, 2019.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conducted during the last fiscal quarter for the Company, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II.

 

OTHER INFORMATION

 

Item 1. Legal Proceedings .

 

The Holding Company and its subsidiaries has lawsuits pending of the type incurred in the normal course of business. The Company expects that any potential losses will be covered by insurance, subject to deductibles, and will not have a material adverse impact on the Company.

 

Item 1A. Risk Factors.

 

Please refer to risk factors listed under Item 1A – “Risk Factors” of the Holding Company’s Form 10-K for the fiscal year ended September 30, 2018, and in our Prospectus, dated April 15, 2017, forming a portion of our Registration Statement on Form S-1 (File No. 333-208943), filed with the Securities and Exchange Commission on April 25, 2016, for disclosure relating to certain risk factors applicable to the Company. Also see note 12, subsequent events.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None

 

 

Item 3. Defaults Upon Senior Securities.

None

 

Item 4. Mine Safety Disclosures.

 

Not applicable

 

 

Item 5. Other Information.

 

None

 

 

29  
 

 

 

 

 

Item 6. Exhibits.

 

10.1** Multiple Disbursement Term Note, dated June 27, 2019, from Corning Natural Gas Corporation to M&T Bank in the maximum principal amount of $3,127,000 , with Prepayment Premium Rider.
10.2** Multiple Disbursement Term Note, dated June 27, 2019 from Pike Light & Power Company to M&T Bank in the maximum principal amount of $2,072,000, with Prepayment Premium Rider.
31.1** Certification of the Chief Executive Officer and President pursuant to 17 CFR Section 240.13a-14
31.2** Certification of the Chief Financial Officer and Treasurer pursuant to 17 CFR Section 240.13a-14
32.1** Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to
  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101** The following materials from the Corning Natural Gas Holding Corporation Quarterly Report on Form
  10Q for the period ended June 30, 2019, formatted in XBRL (eXtensible Business Reporting Language):
  (i)     the Consolidated Balance Sheets at June 30, 2019 and September 30, 2018,
  (ii)    the Consolidated Statements of Income and Comprehensive Income for the three months and nine months
            ended June 30, 2019 and June 30, 2018.
  (iii)  the Consolidated Statements of Cash Flows for the nine months ended June 30, 2019
           and June 30, 2018, and
  (iv)   related notes to the Condensed Consolidated Financial Statements
   
 

** Filed herewith

*** Furnished herewith

 

 

 

 

 

 

30  
 

 

 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CORNING NATURAL GAS HOLDING CORPORATION

Date: August 13, 2019 By: /s/ Michael I. German

Michael I. German, Chief Executive Officer and President

(Principal Executive Officer)

Date: August 13, 2019 By: /s/ Firouzeh Sarhangi

Firouzeh Sarhangi, Chief Financial Officer and Treasurer

(Principal Financial and Accounting Officer)

 

 

31  
 

 

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