Company Quick10K Filing
Quick10K
Corning Natural Gas Holding
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-12-29 Annual: 2017-12-29
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-15 Quarter: 2015-03-15
10-Q 2014-12-31 Quarter: 2014-12-31
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-04-02 Shareholder Vote, Other Events
8-K 2019-02-12 Other Events, Exhibits
8-K 2018-08-15 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2017-09-30
MO Altria Group 97,270
FRO Frontline 1,340
AINV Apollo Investment 1,090
MITT AG Mortgage Investment Trust 541
TCRR TCR2 Therapeutics 361
AMID American Midstream Partners 282
CCLP CSI Compressco 156
TCCO Technical Communications 8
HLYK Healthlynked 0
MMMB Mamamancini's Holdings 0
CNIG 2019-03-31
Part I
Item 1. Financial Statements
Note 1 - Basis of Presentation
Note 2 - Revenue From Contracts with Customers
Note 3 - Pension and Other Post-Retirement Benefit Plans
Note 4 - Financing Activities
Note 5 - Fair Value of Financial Instruments
Note 6 - Stockholders' Equity
Note 7 - Investment in Joint Ventures
Note 8 - Income Taxes
Note 9 - Preferred Stock
Note 10 - Regulatory Matters
Note 11 - Segment Reporting
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4. Controls and Procedures
Part II.
Item 1.Legal Proceedings.
Item 1A.Risk Factors.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures.
Item 5.Other Information.
Item 6. Exhibits.
EX-3 exhibit31_1.htm
EX-3 exhibit31_2.htm
EX-3 exhibit32_1.htm

Corning Natural Gas Holding Earnings 2019-03-31

CNIG 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 cng_mar2019q.htm
 

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 March 31, 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)

 

 

 

 
 

 

 

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 May 10, 2019
Common Stock, $.01 par value 3,037,751

 

 

 

 

1 
 

 

 

PART I.   FINANCIAL INFORMATION       PAGE
               
    Item 1. Financial Statements        3
               
    Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations    19
               
    Item 4. Controls and Procedures        27
               
               
PART II   OTHER INFORMATION        
               
    Item 1. Legal Proceedings        27
               
    Item 1A. Risk Factors        27
               
    Item 2. Unregistered Sales of Equity Securities and Use of Proceeds    27
               
    Item 3.

Defaults Upon Senior Securities 

     27
               
    Item 4. Mine Safety Disclosures        27
               
    Item 5. Other Information        27
               
    Item 6. Exhibits        28
               
               
    SIGNATURES        29
               
               
               

 

 

 

 

 

 

2 
 

 

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

 

CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES          
Consolidated Balance Sheets          
    Unaudited      
Assets   March 31, 2019    September 30, 2018 
           
Plant:          
  Utility property, plant and equipment  $117,594,551   $114,559,199 
  Less: accumulated depreciation   (28,232,149)   (26,966,064)
     Total plant, net   89,362,402    87,593,135 
           
Investments:          
  Marketable securities at fair value   2,112,169    2,193,578 
  Investment in joint ventures   2,782,128    2,740,575 
    4,894,297    4,934,153 
           
Current assets:          
  Cash and cash equivalents   69,073    219,962 
  Customer accounts receivable, (net of allowance for          
    uncollectible accounts of $153,089 and $228,666, respectively)   5,101,054    3,350,700 
  Other accounts receivable   80,409    385,987 
  Related party receivables   301,469    208,876 
  Gas stored underground, at average cost   591,601    1,620,916 
  Materials and supplies inventories   2,492,364    1,818,974 
  Prepaid expenses   2,206,724    1,468,030 
     Total current assets   10,842,694    9,073,445 
           
Regulatory and other assets:          
  Regulatory assets:          
     Unrecovered gas and electric costs   480,398    1,236,124 
     Deferred regulatory costs   3,932,521    4,279,839 
     Deferred pension   4,079,433    4,043,072 
  Other   573,070    583,437 
     Total regulatory and other assets   9,065,422    10,142,472 
           
     Total assets  $114,164,815   $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   March 31, 2019    September 30, 2018 
           
Long-term debt, less current installments  $36,603,051   $36,975,484 
  Less: debt issuance costs   (272,798)   (338,903)
      Total long-term debt   36,330,253    36,636,581 
           
Redeemable preferred stock - Series A   5,176,447    5,166,082 
  (Authorized 255,500 shares. Issued and outstanding:          
 210,600 shares at March 31, 2019 and September 30, 2018,          
  less issuance costs of $88,553 and $98,918, respectively)          
           
Current liabilities:          
  Current portion of long-term debt   3,905,713    3,793,998 
  Borrowings under lines-of-credit and short-term debt   6,594,274    6,662,357 
  Accounts payable   2,354,009    3,247,376 
  Accrued expenses   506,500    410,237 
  Customer deposits and accrued interest   762,185    1,227,398 
  Dividends declared   500,880    483,806 
     Total current liabilities   14,623,561    15,825,172 
           
Deferred credits and other liabilities:          
  Deferred income taxes   6,158,449    4,896,771 
  Regulatory liabilities   3,646,626    3,777,495 
  Deferred compensation   1,333,531    1,412,345 
  Pension costs and post-retirement benefits   6,256,405    6,016,240 
  Other   195,728    219,948 
     Total deferred credits and other liabilities   17,590,739    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 March 31, 2019 and September 30, 2018)   4,959,370    4,951,847 
           
Common stockholders' equity:          
  Common stock ($.01 par value per share.   30,355    30,218 
  Authorized 4,500,000 shares. Issued and          
  outstanding: 3,035,482 shares at March 31, 2019          
  and 3,021,851 at September 30, 2018)          
  Additional paid-in capital   27,543,011    27,320,162 
  Retained earnings   7,912,222    5,399,751 
           
Accumulated other comprehensive (loss) income   

(1,143)

    

90,593

 
           

Total common stockholders' equity

   

35,484,445

    

32,840,724

 
           
Total liabilities and capitalization   

$114,164,815

    

$114,164,815

 

See accompanying notes to consolidated financial statements.

 

4 
 

 

 

CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES           
Consolidated Statements of Income                    
(Unaudited)   Three Months Ended    Six Months Ended 
    

March 31, 2019

    March 31, 2018    March 31, 2019    March 31, 2018 
Utility operating revenues:                    
Gas operating revenues  $11,334,913   $11,116,721   $18,401,991   $16,986,693 
Electric operating revenues   2,383,915    1,941,442    4,784,443    3,842,012 
Total utility operating revenues   13,718,828    13,058,163    23,186,434    20,828,705 
                     
Costs of sales:                    
Gas purchased   3,937,631    3,949,255    6,232,300    5,405,445 
Electricity purchased   899,390    536,380    1,876,620    1,158,074 
Total cost of sales   4,837,021    4,485,635    8,108,920    6,563,519 
                     
Gross margin   8,881,807    8,572,528    15,077,514    14,265,186 
                     
Cost and expense:                    
Operating and maintenance expense   3,059,774    3,377,915    5,953,453    6,397,982 
Taxes other than income taxes   1,000,215    910,560    1,924,527    1,747,679 
Depreciation   620,290    575,654    1,240,654    1,183,354 
Other deductions, net   130,083    173,561    246,578    215,367 
Total costs and expenses   4,810,362    5,037,690    9,365,212    9,544,382 
                     
Utility operating income   4,071,445    3,534,838    5,712,302    4,720,804 
                     
Other income and (expense):                    
Interest expense   (606,209)   (546,639)   (1,217,199)   (1,113,173)
Other income (expense)   (5,660)   (5,719)   49,545    49,676 
Investment income   143,878    39,814    59,898    59,495 
Equity earnings from joint ventures   48,432    36,332    41,553    35,266 
Rental income   7,638    12,138    19,776    24,276 
                     
Income from utility operations, before income taxes   3,659,524    3,070,764    4,665,875    3,776,344 
                     
Income tax expense, deferred   (1,011,196)   (1,150,234)   (1,267,753)   (1,435,177)
                     
Net income   2,648,328    1,920,530    3,398,122    2,341,167 
Less Series B Preferred Stock Dividends   61,066    61,066    122,132    122,132 
Net income attributable to common stockholders 

 

 

$2,587,262   $1,859,464   $3,275,990  

$2,219,035 

 
Weighted average earnings per share:                    
basic   $0.85    $0.62    $1.08    $0.74 
diluted   $0.80    $0.58    $1.02    $0.71 
                     

Average shares outstanding - basic

   

3,032,938

    

3,008,130

    

3,029,081

    

3,004,521

 
                     
Average shares outstanding - diluted   

3,326,054

    

3,301,246

    

3,322,197

    

3,297,636

 

 

See accompanying notes to consolidated financial statements

  

5 
 

 

 

CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES         
Consolidated Statements of Comprehensive Income              
   Three Months Ended   Six Months Ended
    

March 31, 2019

    March 31, 2018    March 31, 2019    March 31, 2018 
Net Income  $2,648,328   $1,920,530   $3,398,122   $2,341,167 
Other comprehensive income (loss):                    
Net unrealized gain (loss) on debt securities available for sale                    
net of tax of $1,249 $(37,259), $26,132 and $(17,646), respectively   3,260    (37,902)   8,395    (9,088)
                     
Total comprehensive income  $2,651,588   $1,882,628   $3,406,517   $2,332,079 

 

  See accompanying notes to consolidated financial statements

CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES           
Consolidated Statement of Changes in Common
Stockholders' Equity
For the Three and Six Months ended March 31, 2019 and 2018
      
(Unaudited)                              
                        Accumulated      
    Number of    

 

Common

    

Additional

Paid In

    Retained    

Other

Comprehensive

      
    Shares    Stock    Capital    Earnings    Income (Loss)    Total 
                               
Balances at December 31, 2018   3,029,678   $30,297   $27,452,591   $5,764,774   ($4,403)  $33,243,259 
                               
Issuance of common stock   5,804    58    90,420    —      —      90,478 
Dividends declared on common   —      —      —      (439,814)   —      (439,814)
Dividends declared on Preferred B shares   —      —      —      (61,066)   —      (61,066)
Comprehensive income:                              
Change in unrealized loss on                              
debt securities available for sale, net of income taxes   —      —      —      —      3,260    3,260 
Net income   —      —      —      2,648,328    —      2,648,328 
Balances at March 31, 2019   3,035,482   $30,355   $27,543,011   $7,912,222   ($1,143)  $35,484,445 

 

 

                               
                        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   13,631    137    222,849    —      —      222,986 
Dividends declared on common   —      —      —      (863,650)   —      (863,650)
Dividends declared on Preferred B shares   —      —      —      (122,132)   —      (122,132)
Comprehensive income:                              
Change in unrealized loss on                              
debt securities available for sale, net of income taxes   —      —      —      —      8,395    8,395 
Net income   —      —      —      3,398,122    —      3,398,122 
Balances at March 31, 2019   3,035,482   $30,355   $27,543,011   $7,912,222   ($1,143)  $35,484,445 

 

 

                               
                        Accumulated      
    Number of    

 

Common

    

Additional

Paid In

    Retained    

Other

Comprehensive

      
    Shares    Stock    Capital    Earnings    Income (Loss)    Total 
                               
Balances at December 31, 2017   3,000,287   $30,003   $27,169,809   $5,125,098   $86,332   $32,411,242 
                               
Issuance of common stock   9,920    99    121,656    —      —      121,755 
Dividends declared on common   —      —      —      (421,110)   —      (421,110)
Dividends declared on Preferred B shares   —      —      —      (61,066)   —      (61,066)
Stock issuance costs   —           (153,164)             (153,164)
Comprehensive income:                              
Change in unrealized gain on securities available for sale, net of income taxes   —      —      —      —      (37,902)   (37,902)
Net income   —      —      —      1,920,530    —      1,920,530 
Balances at March 31, 2018   3,010,207   $30,102   $27,138,301   $6,563,452    $48,430   $33,780,285 

 

 

                               
                        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   15,410    154    206,727    —      —      206,881 
Dividends declared on common   —      —      —      (826,438)   —      (826,438)
Dividends declared on Preferred B shares   —      —      —      (122,132)   —      (122,132)
Stock issuance costs             (153,164)             (153,164)
Comprehensive income:                              
Change in unrealized gain on securities available for sale, net of income taxes   —      —      —      —      (9,088)   (9,088)
Net income   —      —      —      2,341,167    —      2,341,167 
Balances at March 31, 2018   3,010,207   $30,102   $27,138,301   $6,563,452    $48,430   $33,780,285 

 

See accompanying notes to consolidated financial statements

 

6 
 

 

 

CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES          
Consolidated Statements of Cash Flows          
(Unaudited)          
                    Six Months Ended 
    March 31, 2019    March 31, 2018 
Cash flows from operating activities:          
  Net income  $3,398,122   $2,341,167 
  Adjustments to reconcile net income to net cash          
    provided by operating activities:          
      Depreciation   1,240,654    1,183,354 
      Amortization of debt issuance cost   51,259    53,570 
      Non-cash pension expenses   470,714    758,688 
      Regulatory asset amortizations   243,385    143,487 
      Stock issued for services   135,555    127,316 
      Loss on sale of marketable securities   9,421    42,444 
      Unrealized (gain) on investments   (48,760)   —   
      Deferred income taxes   1,267,753    1,435,177 
      Bad debt expense   142,000    127,690 
      Equity earnings from joint ventures   (41,553)   (35,266)
           
Changes in assets and liabilities:          
  (Increase) decrease in:          
      Accounts receivable   (1,586,776)   (2,365,017)
      Gas stored underground   1,029,315    1,280,001 
      Materials and supplies inventories   (673,390)   101,523 
      Prepaid expenses   (738,694)   (490,648)
      Unrecovered gas and electric costs   755,726    456,870 
      Deferred regulatory costs   78,896    (881,087)
      Other   10,367    321 
  Increase (decrease) in:          
      Accounts payable   (893,367)   1,260,595 
      Accrued expenses   98,808    183,168 
      Customer deposits and accrued interest   (465,213)   (529,766)
      Deferred compensation   (78,814)   (52,474)
      Deferred pension costs & post-retirement benefits   (266,910)   (694,512)
      Other liabilities and deferred credits   (103,393)   (39,283)
           Net cash provided by operating activities   4,035,105    4,407,318 
           
Cash flows from investing activities:          
  Sale of securities, net of purchases   129,143    46,805 
  Amount paid to related parties   (95,138)   (28,558)
  Capital expenditures   (3,009,921)   (2,884,243)
            Net cash used in investing activities   (2,975,916)   (2,865,996)
           
Cash flows from financing activities:          
  Net repayments on lines-of-credit   (68,083)   (1,548,300)
  Debt issuance costs paid   —      (60,292)
  Dividends paid   (881,277)   (852,155)
           
Proceeds under long-term debt   1,521,675    29,000,000 
Repayment of long-term debt   (1,782,393)   (28,146,894)
Net cash used in financing activities   (1,210,078)   (1,607,641)
Net decrease in cash and cash equivalents   (150,889)   (66,319)
           
Cash and cash equivalents at beginning of period   219,962    442,930 
           
Cash and cash equivalents at end of period  $69,073   $376,611 
           
Supplemental disclosures of cash flow information:          
Cash paid during the period for:          
Interest  $921,321   $878,704 
Income taxes  $—     $27,372 
Non-cash financing activities:          
Dividends paid with shares  $87,431   $81,433 
Number of shares issued for dividends   5,031    4,535 

 

See accompanying notes to consolidated financial statements

 

7 
 

 

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, Pike and Appliance Company.

 

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.

 

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 six months ended March 31, 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 six months ended March 31, 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.

 

8 
 

 

 

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 six months ended March 31, 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 March 31, 2019 
    Revenues from contracts with customers    Other revenues (a)    Total utility operating revenues 
Corning Gas:               
  Residential gas  $6,654,303   $264,928   $6,919,231 
  Commercial gas   1,139,929    (69,483)   1,070,446 
  Transportation   1,523,125    (9,141)   1,513,984 
  Street lights gas   126    —      126 
  Wholesale   886,322    —      886,322 
  Local production   176,875    (6,854)   170,021 
Total Corning Gas  $10,380,680   $179,450   $10,560,130 
                
Pike:               
  Residential gas  $630,437   $1,713   $632,150 
  Commercial gas   142,633    —      142,633 
  Total Pike retail gas   773,070    1,713    774,783 
                
  Residential electric   1,193,040    42,713    1,235,753 
  Commercial electric   1,115,418    —      1,115,418 
  Electric – street lights   32,744    —      32,744 
  Total Pike retail electric   2,341,202    42,713    2,383,915 
                
Total Pike  $3,114,272   $44,426   $3,158,698 
                
Total consolidated utility operating revenue   

$13,494,952

    

$223,876

    

$13,718,828

 

 

 

(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.

 

 

9 
 

 

 

    For the six months ended March 31, 2019 
    Revenues from contracts with customers    Other revenues (a)    Total utility operating revenues 
Corning Gas:               
  Residential gas  $10,624,336   $153,555   $10,777,891 
  Commercial gas   1,746,634    (69,483)   1,677,151 
  Transportation   2,641,553    —      2,641,553 
  Street lights gas   255    —      255 
  Wholesale   1,650,973    —      1,650,973 
  Local production   363,149    —      363,149 
Total Corning Gas  $17,026,900   $84,072   $17,110,972 
                
Pike:               
  Residential gas  $1,036,217   $9,390   $1,045,607 
  Commercial gas   245,412    —      245,412 
  Total Pike retail gas   1,281,629    9,390    1,291,019 
                
  Residential electric   2,381,159    65,341    2,446,500 
  Commercial electric   2,270,904    —      2,270,904 
  Electric – street lights   67,039    —      67,039 
  Total Pike retail electric   4,719,102    65,341    4,784,443 
                
Total Pike  $6,000,731   $74,731   $6,075,462 
                
Total consolidated utility operating revenue  $23,027,631   $158,803   $23,186,434 

 

 

(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.

 

10 
 

 

 

Note 3 - Pension and Other Post-Retirement Benefit Plans

 

Components of Net Periodic Benefit Cost:

 

Pension Benefits                    
    Three Months Ended March 31,    Six Months Ended March 31, 
    2019    2018    2019    2018 
Service Cost  $116,454   $107,160   $232,907   $214,321 
Interest Cost   258,775    240,300    517,549    480,601 
Expected return on plan assets   (319,966)   (300,205)   (639,932)   (600,410)
Amortization of prior service cost   —      —      —      —   
Amortization of net (gain) loss   212,666    242,497    425,331    484,994 
Net periodic benefit cost  $267,929   $289,752   $535,855   $579,506 

 

Other Benefits                    
    Three Months Ended March 31,    Six Months Ended March 31, 
    2019    2018    2019    2018 
Service Cost  $4,123   $4,446   $8,246   $8,891 
Interest Cost   11,939    12,060    23,878    24,120 
Expected return on plan assets   —      —      —      —   
Amortization of prior service cost   888    887    1,776    1,774 
Amortization of net (gain) loss   (1,678)   1,373    (3,355)   2,747 
Net periodic benefit cost  $15,272   $18,766   $30,545   $37,532 

 

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 March 31, 2019 and $218,683 ended March 31, 2018. Pension expense for ratemaking and financial statement purposes was $442,304 for the six months ended March 31, 2019 and $437,000 for the six months ended March 31, 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 $822,847 and $846,597 at March 31, 2019 and March 31, 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 $15,232 for the three months ended March 31, 2019 and $20,904 for the three months ended March 31, 2018. Other post-retirement benefit expense (benefit) for ratemaking and financial statement purposes was $30,282 for the six months ended March 31, 2019 and $32,828 for the six months ended March 31, 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 and is not included in the prepaid cost noted above. The net period benefit costs have been included in the income statement in the operating and maintenance expense. Total pension and OPEB costs are recorded in accordance with accounting prescribed by the NYPSC in 1993 and 1998 respectively.

 

11 
 

 

 

Contributions

 

The Gas Company expects to contribute $711,098 to its Pension Plan during the year ending September 30, 2019. A total of $389,496 was paid to the Pension Plan during the six months ending March 31, 2019 and $617,344 was paid to the Pension Plan during the six months ended March 31, 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 Companies November 2017 Credit Agreement with M&T.  As of March 31, 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 M&T $510,000 demand note to a 10 year term loan with a fixed interest rate of 4.89%. As of March 31, 2019, the outstanding balance of this note was $503,210.

 

We are in compliance with our financial covenant calculations as of March 31, 2019.

 

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 March 31, 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 
March 31, 2019                    
Available-for-sale securities  $2,112,169   $2,112,169   $—     $—   
September 30, 2018                    
Available-for-sale securities  $2,193,578   $2,193,578    $—      $—   

 

 

12 
 

 

A summary of the marketable securities at March 31, 2019 and September 30, 2018 is as follows:

 

    Cost Basis    Unrealized Gain    Unrealized Loss    Market Value 
March 31, 2019                    
Cash and equivalents  $96,532   $—     $—     $96,532 
Metlife stock value   37,606    —      —      37,606 
Government and agency bonds   249,606    606    —      250,212 
Corporate bonds   188,147    835    —      188,982 
Mutual funds   22,359    136    —      22,495 
Holding Company Preferred A Stock   572,875    41,247    —      614,122 
Equity securities   757,172    145,048    —      902,220 
Total securities  $1,924,297   $187,872   $—     $2,112,169 
                     
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 

 

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

 

Investment Income                    
    Three Months Ended March 31,     Six Months Ended March 31,  
    2019    2018    2019    2018 
Net realized gains and losses recognized during the
period on investments
  $5,597   $18,120   ($9,421)  ($42,444)

 

Unrealized gains on equity securities included in investment income for the three and six months ended March 31, 2019 were $125,167 and $48,760, respectively. Unrealized gains of $0 and $0 were included in investment income for the three and six months ended March 31, 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 March 31, 2019, there were a total of 5,804 shares of common stock issued for $90,478. For the six months ended March 31, 2019 there were a total of 13,631 shares of common stock issued for $222,986. The amounts issued were for the following:

 

    Three months ended March 31, 2019    Six months ended March 31, 2019 
    Shares    Amount    Shares    Amount 
Dividend reinvestment program (DRIP)   2,504   $43,995    5,031   $87,431 
Directors   3,150    43,706    6,300    92,062 
Leatherstocking Gas Company   150    2,777    300    5,493 
Officers   —      —      2,000    38,000 
Total   5,804   $90,478    13,631   $222,986 

 

 

13 
 

 

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.

 

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. 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 paid on January 14, 2019. For the three months ended March 31, 2019, $61,066 was accrued for dividends paid on April 15, 2019. See Note 9 for additional information on the preferred stock, including its mandatory redemption provisions.

 

Basic earnings per share are computed by dividing income 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.

 

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 six months ended March 31, 2019 and 2018:

    2019    2018 
Beginning balance in investment in joint ventures  $2,740,575   $2,707,406 
Equity earnings from joint ventures   41,553    35,266 
Ending balance in joint ventures  $2,782,128   $2,742,672 

 

As of and for the six months ended March 31, 2019 and 2018, the Joint Ventures financial summary is as follows:

 

    2019    2018 
Total assets  $13,200,000   $12,500,000 
Total liabilities  $7,600,000   $7,000,000 
Net income  $83,000   $71,000 

 

 

 

14 
 

 

Note 8 – Income Taxes

 

Income tax expense for the six months ended March 31 is as follows:                    
    Six Months Ended    Six Months Ended    Three Months Ended    Three Months Ended 
    March 31, 2019    March 31, 2018    March 31, 2019    March 31, 2018 
Current  $—     $—     $—     $—   
Deferred   1,267,753    1,435,177    1,011,196    1,150,234 
Total  $1,267,753   $1,435,177   $1,011,196   $1,150,234 

 

 

 

 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:                    
    Six Months Ended    Six Months Ended    Three Months Ended    Three Months Ended 
    March 31,2019    March 31, 2018    March 31, 2019    March 31, 2018 
Expected federal tax expense  $979,834   $920,488   $768,501   $680,612 
State tax expense (net of federal)   260,640    193,701    201,514    162,778 
Federal income sur credit amortization   34,285    —      19,608    —   
Regulatory deferral for tax rate difference   —      351,956    —      351,956 
 Tax Accrual true up   (11,405)   —      9,827    —   
Other, net   4,399    (30,968)   11,746    (45,112)
Actual tax expense  $1,267,753   $1,435,177   $1,011,196   $1,150,234 

 

 

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 a 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 will receive a total refund of $73,923 or decrease of 0.67% on their overall bill beginning effective 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.

 

15 
 

 

 

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 14th 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 the six months ended March 31, 2019 and 2018 were $157,950 and $157,950, respectively, 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 $10,365 and $7,538 for the six months ended March 31, 2019 and 2018, respectively. The amortization of the Series A Preferred Stock debt issuance costs was $5,183 and $2,634 for the three months ended March 31, 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 $122,132 for both the six months ended March 31, 2019 and 2018. Dividends were $61,066 for both the three months ended March 31, 2019 and 2018. The issuance costs of approximately $120,000 reduced the initial proceeds and will be accreted until redemption or conversion. During the six months ended March 31, 2019 and 2018 there was accretion of $7,523 and $7,523, respectively. During the three month ended March 31, 2019 and 2018 there was accretion of $3,762 and $3,762, respectively.

 

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%.

 

16 
 

 

 

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 2 rate increase of $1,573,706 became effective June 1, 2018.

 

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 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 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 Balance Sheets as of March 31, 2019 amounts to $8,492,352 compared to $9,559,035 at September 30, 2018. The Regulatory Assets include $1,544,347 at March 31, 2019 and $1,544,347 at September 30, 2018 that is subject to Deferred Accounting Petitions and $894,552 at March 31, 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.

 

17 
 

 

 

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. The Company for the period ended May 31, 2018 has exceeded the target by $318,396. The Company estimates that it will meet the May 31, 2019 targets.

 

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 six months ended March 31, 2019 and 2018.

 

 

As of and for the three months ended March 31, 2019

 

    Gas Company    Pike    Holding Company    Total Consolidated 
Total electric utility revenue  $0   $2,383,915   $0   $2,383,915 
Total gas utility revenue  $10,560,130   $774,783   $0   $11,334,913 
Investment income  $143,878   $0   $0   $143,878 
Equity earnings from joint ventures  $0   $0   $48,432   $48,432 
Net income (loss)  $2,339,875   $354,567   $(46,114)  $2,648,328 
Income tax expense  $844,785   $151,690   $14,721   $1,011,196 
Interest expense  $366,085   $155,524   $84,600   $606,209 
Depreciation expense  $454,622   $164,753   $915   $620,290 
Amortization expense  $51,386   $93,651   $10,629   $155,666 
Total assets  $84,253,557   $26,709,126   $3,202,132   $114,164,815 
Capital expenditures  $762,148   $573,642   $—     $1,335,790 

 

As of and for the three months ended March 31, 2018

 

    Gas Company    Pike    Holding Company    Total Consolidated 
Total electric utility revenue  $0   $1,941,442   $0   $1,941,442 
Total gas utility revenue  $10,341,959   $774,762   $0   $11,116,721 
Investment income  $39,814   $0   $0   $39,814 
Equity earnings from joint ventures  $0   $0   $36,332   $36,332 
Net income (loss)  $1,785,476   $175,285   $(40,231)  $1,920,530 
Income tax expense (benefit)  $1,038,266   $117,581   $(5,613)  $1,150,234 
Interest expense  $320,278   $141,491   $84,870   $546,639 
Depreciation expense  $441,713   $133,026   $915   $575,654 
Amortization expense  $38,554   $54,751   $7,523   $100,828 
Total assets  $80,810,179   $25,390,948   $3,420,148   $109,621,275 
Capital expenditures  $742,110   $363,493   $0   $1,105,603 

 

 

 

18 
 

 

 

As of and for the six months ended March 31, 2019

 

    Gas Company    Pike    Holding Company    Total Consolidated 
Total electric utility revenue  $0   $4,784,443   $0   $4,784,443 
Total gas utility revenue  $17,110,972   $1,291,019   $0   $18,401,991 
Investment income  $59,898   $0   $0   $59,898 
Equity earnings from joint ventures  $0   $0   $41,553   $41,553 
Net income (loss)  $2,941,874   $588,360   $(132,112)  $3,398,122 
Income tax expense  $1,057,263   $195,239   $15,251   $1,267,753 
Interest expense  $725,471   $319,113   $172,615   $1,217,199 
Depreciation expense  $909,317   $329,507   $1,830   $1,240,654 
Amortization expense  $104,458   $171,373   $18,812   $294,643 
Total assets  $84,253,557   $26,709,126   $3,202,132   $114,164,815 
Capital expenditures  $2,059,356   $927,110   $0   $2,986,466 

 

As of and for the six months ended March 31, 2018

 

    Gas Company    Pike    Holding Company    Total Consolidated 
Total electric utility revenue  $0   $3,842,012   $0   $3,842,012 
Total gas utility revenue  $15,774,799   $1,211,894   $0   $16,986,693 
Investment income  $59,495   $0   $0   $59,495 
Equity earnings from joint ventures  $0   $0   $35,266   $35,266 
Net income (loss)  $2,209,792   $222,247   $(90,872)  $2,341,167 
Income tax expense (benefit)  $1,315,212   $157,241   $(37,276)  $1,435,177 
Interest expense  $678,561   $270,573   $164,039   $1,113,173 
Depreciation expense  $884,258   $297,266   $1,830   $1,183,354 
Amortization expense  $86,111   $103,423   $7,523   $197,057 
Total assets  $80,810,179   $25,390,948   $3,420,148   $109,621,275 
Capital expenditures  $2,444,295   $439,948   $0   $2,884,243 

 

 

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:

 

 

 

19 
 

 

* 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

 

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, Pike, Leatherstocking investments and Appliance Company.

 

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.

 

20 
 

 

 

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.

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 six months of fiscal 2019 the Gas Company repaired 53 leaks, replaced 116 bare steel services and replaced 6.56 miles of bare steel main. For the first six months of fiscal 2019, Pike replaced approximately 35 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 is currently reviewing Pike’s plan. 

 

We believe our key performance indicators are net income, stockholders’ equity and the safety and reliability of our systems. Net income increased by $727,798 for the three months and $1,056,955 for the six months ended March 31, 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 March 31, 2019, compared to March 31, 2018, stockholders’ equity increased from $33,780,285 to $35,484,445. 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 March 31,    Six Months Ended March 31, 
    2019    2018    2019    2018 
Net income  $2,648,328   $1,920,530   $3,398,122   $2,341,167 
Stockholders' equity  $35,484,445   $33,780,285   $35,484,445   $33,780,285 
Stockholders' equity per outstanding common share  $11.69   $11.22   $11.69   $11.22 

 

 

Revenue and Margin

 

The demand for natural gas is directly affected by weather conditions. Significantly warmer than normal weather conditions in our service areas could reduce our earnings and cash flows as a result of lower gas sales. We partially mitigate the risk of warmer winter weather through the weather normalization and revenue decoupling mechanism (“RDM”) clauses in our NYPSC rate tariffs. These clauses allow us to surcharge customers for under recovery of revenue. Neither of these regulatory mechanisms are applicable to larger commercial customers or in Pennsylvania.

 

Utility electric retail operating revenues increased $359,222 during the three months and $885,129 during the six months ended March 31, 2019 compared to the same periods last year. The increase primarily results from electric cost recoveries of $363,010 for the three month ended March 2019. For the six month period ended March 2019 the increase primarily results from increased electric cost recovery of $718,546 and the remainder is primarily change in sales mix.

 

Gas retail operating revenues increased $77,098 during the three months and $1,168,248 during the six months ended March 31, 2019 compared to the same periods last year. The increase primarily results from decrease for gas cost recoveries of (11,624) for the three months ended March 2019. The remaining difference results primarily from a rate increase offset by federal tax refunds mandated by the NYSPSC. For the six month period ended March 2019 the increase primarily results from increased gas cost recoveries of $826,855. The remaining difference results primarily from increased customer sales of approximately $200,000, and a rate increase offset by federal tax refunds mandated by the NYSPSC.

 

21 
 

 

Other Operating revenues increased $224,345 during the three months and $ 304,352 during the six months ended March 31, 2019 compared to the same periods last year. The drivers for the Other Operating Revenues changes for the three and six month period are detailed in the table below:

 

 

The following table summarizes our utility operating revenue:                    
                     
    Three months ended March 31,    Six months ended March 31, 
    2019    2018    2019    2018 
Retail electric revenue:                    
Residential  $1,193,040   $992,780   $2,381,159   $1,929,552 
Commercial   1,066,842    910,682    2,270,904    1,835,747 
Street lights   32,744    29,942    67,039    68,674 
Total retail electric revenue  $2,292,626   $1,933,404   $4,719,102   $3,833,973 
                     
 Retail gas revenue:                    
Residential  $7,284,866   $7,277,584   $11,660,808   $10,866,355 
Commercial   1,282,561    1,237,096    1,992,045    1,799,265 
Transportation   1,523,125    1,524,495    2,641,553    2,722,459 
Wholesale   886,322    860,601    1,650,973    1,389,052 
Total retail gas revenue  $10,976,874   $10,899,776   $17,945,379   $16,777,131 
                     
 Total retail revenue  $13,269,500   $12,833,180   $22,664,481   $20,611,104 
                     
Local production   176,875    213,864    363,149    432,947 
Other utility gas and electric revenues   272,453    11,119    158,804    (215,346)
Total revenue  $13,718,828   $13,058,163   $23,186,434   $20,828,705 

 

 

The following tables further summarize other utility revenues on the operating revenue table:

 

    Three months ended March 31,    Six months ended March 31, 
    2019    2018    2019    2018 
Other utility gas and electric revenues:                    
Customer discounts forfeited  $62,214   $30,582   $100,435   $45,966 
Reconnect fees   108    1,108    1,119    1,974 
Other gas and electric revenues (see below)   212,899    (20,759)   56,660    (264,529)
Surcharges   (2,768)   188    590    1,243 
Total other utility revenues  $272,453   $11,119   $158,804   $(215,346)

 

 

    Three months ended March 31,    Six months ended March 31, 
    2019    2018    2019    2018 
Other gas and electric revenues:                    
Delivery Rate Adjustment (DRA) carrying costs  $1,937   $1,962   $4,062   $1,962 
Contract customer reconciliation   (78,624)   (36,976)   (69,483)   (65,354)
Monthly RDM amortizations   (62,093)   (2,011)   (263,481)   (181,619)
Local production revenues   

13,176

    

26,573

    

20,030

    

(10,474)

 
2017 Jobs Act federal income tax reconciliation  

321,999

    

-

    

367,102

    

-

 
Leak backlog performance incentive   

(7,161)

    

-

    

(24,147)

    

-

 
Annual DRA reconciliation   

-

    

(75,357)

    

-

    

(74,094)

 

All other

   

23,665

    

65,050

    

22,577

    

65,050

 
Total other gas revenues   

$212,899

    

$(20,759)

    

$56,660

    

$(264,529)

 

 

 

22 
 

 

Gas purchases are our largest expenses. Purchased gas expense decreased $11,624 for the three months and increased $826,855 for the six months ended March 31, 2019, compared to the same periods last year. The increase in costs for the six months ended March 31, 2019 is due primarily to higher gas costs of $537,453 at Corning Gas compared to the same six months in fiscal 2018. The remaining difference of $289,402 is a result of increased volumes. Electricity costs increased by $363,010 for the three months and by $718,546 for the six months ended March 31, 2019 due to higher electricity prices at Pike.

 

Gas Margin (the excess of utility gas revenues over the cost of natural gas purchased) percentage increased 0.79% for the three months ended March 31, 2019 compared to the same period last year The increase primarily results from decrease for gas cost expense of (11,624) and higher revenues from a rate increase offset by federal tax refunds mandated by the NYSPSC..  The Margin decreased of 2.05% for the six months ended March 31, 2019 compared to the same period last year.  Gas margins for the six months ended March 31, 2019 decreased as a result of increased gas cost expense of $826,855 and Federal Tax refunds mandated by the NYPSC. This margin decrease is offset by the rate increases that were effective June 1, 2017 and June 1, 2018.  Electric Margin (the excess of electric revenues over the cost) percentage decreased 10.10% for the three months ended March 31, 2019 compared to the same period last year and decreased 9.08% for the six months ended March 31, 2019 compared to the same period last year, primarily because of higher prices of purchased electricity costs for the period.

 

    Three Months Ended March 31,    Six Months Ended March 31, 
    2019    2018    2019    2018 
Utility Gas Revenues  $11,334,913   $11,116,721   $18,401,991   $16,986,693 
Natural Gas Purchased   3,937,631    3,949,255    6,232,300    5,405,445 
Margin  $7,397,282   $7,167,466   $12,169,691   $11,581,248 
Margin %   65.26%   64.47%   66.13%   68.18%
                     
Utility Electric Revenues  $2,383,915   $1,941,442   $4,784,443   $3,842,012 
Electricity Purchased   899,390    536,380    1,876,620    1,158,074 
Margin  $1,484,525   $1,405,062   $2,907,823   $2,683,938 
Margin %   62.27%   72.37%   60.78%   69.86%

 

Operating and Interest Expenses

 

Operating and maintenance expense for the three and six months ended March 31, 2019, decreased by $318,141 and $444,529, respectively, compared to the three months and six months ended March 31, 2018. The decrease in expenses for the six month period was due primarily from lower cost of Pike overhead line and distribution expenses of $73,765, lower bad debt expense of $67,689, reduced legal expenses of $70,989, and the remaining decrease results primarily from  lower customer service and administrative and general expenses.  Taxes other than income taxes increased $89,655 and $176,848 for the three and six months ended March 31, 2019, respectively. The increase was primarily due to property tax increases of $60,736 and Gross Receipts Tax (“GRT”) expense of $83,337. Depreciation expense for the three and six months ended March 31, 2019 increased by $44,636 and $57,300, respectively compared to the same periods last year due to increases in utility plant placed in service. Interest expenses for the three and six months ended March 31, 2019, increased by $59,570 and $104,026, 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.

 

23 
 

 

Net Income

 

As a result of the foregoing, net income increased by $727,798 for the three months and $1,056,955 for the six months ended March 31, 2019 compared to the same periods in fiscal 2018. This increase was mainly due to the rate increase at the Gas Company. This increase was offset by regulatory amortization, rate case expenses and Pike’s minor storm costs, as well as, higher depreciation expense.

 

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 $3.0 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 March 31, 2019 was $5.6 million with an interest rate of 5.1%. The Gas Company was in compliance with all of its loan covenants as of March 31, 2019.

 

For Pike’s operations, it has an $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 March 31, 2019 was approximately $956,000 with an interest rate of 5.95%. Pike was in compliance with all of its loan covenants as of March 31, 2019.

 

24 
 

 

 

During this quarter, we mainly withdrew gas from storage and as of March 31, 2019, had a balance of $591,601 worth of gas in storage, the volume in storage at March 2019 was 227,780 Mcf at an average price of $2.60 per Mcf. At March 31, 2018, the Company had a balance of $102,194 worth of gas in storage, the volume in storage at March 2018 was 46,463 Mcf at an average price of $2.20 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 March 31, 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.

 

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%.

 

25 
 

 

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 2 rate increase of $1,573,706 became effective June 1, 2018.

 

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.

 

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 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 February 28, 2019.

 

26 
 

 

 

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 six months ended March 31, 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 March 31, 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 March 31, 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 Gas Company has lawsuits pending of the type incurred in the normal course of business. The Holding Company and the Gas Company expect that any potential losses will be covered by insurance, subject to deductibles, and will not have a material adverse impact on the Holding Company, the Gas Company or their operations or financial condition.

 

 

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.

 

 

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

 

27 
 

  

Item 6. Exhibits.

 

   
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 March 31, 2019, formatted in XBRL (eXtensible Business Reporting Language):
  (i)     the Consolidated Balance Sheets at March 31, 2019 and September 30, 2018,
  (ii)    the Consolidated Statements of Income and Comprehensive Income for the three months and six months
            ended March 31, 2019 and March 31, 2018.
  (iii)  the Consolidated Statements of Cash Flows for the six months ended March 31, 2019
           and March 31, 2018, and
  (iv)   related notes to the Condensed Consolidated Financial Statements