UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2014

 

£ 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 R No £

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, 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 R No £

 

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

Large Accelerated Filer £ Accelerated Filer £ Non-accelerated Filer £

Smaller Reporting Company R

 

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

PART I.	FINANCIAL INFORMATION		PAGE
	Item 1.	Financial Statements (Unaudited)	2
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 4.	Controls and Procedures	20
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	20
	Item 1A.	Risk Factors	20
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
	Item 3.	Defaults upon Senior Securities	20
	Item 4.	Mine Safety Disclosures	20
	Item 5.	Other Information	20
	Item 6.	Exhibits	21
	SIGNATURES		21

 

 

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 February 17, 2015
Common Stock, $.01 par value	2,436,145

 

 

Corning Natural Gas Holding Corporation (“Holding Company”) is a successor issuer to Corning Natural Gas Corporation (“Company”) as of November 12, 2013 as a result of a share-for-share exchange, creating a holding company structure. As of November 12, 2013, the Company became a wholly-owned subsidiary of Holding Company.

As used in this Form 10-Q, the terms “Company,” “Corning Gas,” “we,” “us,” and “our” mean Corning Natural Gas Corporation, unless the context clearly indicates otherwise. Except as otherwise stated, the information contained in this Form 10-Q is as of December 31, 2014.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

CORNING NATURAL GAS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets

Assets			December 31, 2014				September 30, 2014
			(Unaudited)
Plant:
Utility property, plant and equipment		$ 70,748,792				$ 68,687,509
Less: accumulated depreciation			(19,975,789	)			(19,578,820	)
Total plant utility and non-utility, net			50,773,003				49,108,689
Investments:
Marketable securities available-for-sale at fair value			2,363,985				2,308,138
Investment in joint ventures			1,810,680				1,280,757
Total Investments			4,174,665				3,588,895
Current assets:
Cash and cash equivalents			39,147				108,086
Customer accounts receivable, (net of allowance
uncollectible accounts of $61,638 and $42,540 respectively)			3,084,668				1,788,447
Related party receivables			491,675				446,154
Gas stored underground, at average cost			1,733,650				2,291,665
Materials and supplies inventory			935,880				937,459
Prepaid expenses			805,245				982,198
Total current assets			7,090,265				6,554,009
Regulatory and other assets:
Regulatory assets:
Unrecovered gas costs			288,306				110,372
Deferred regulatory costs			2,064,068				2,653,778
Debt issuance cost (net of accumulated
amortization of $616,107 and $595,637, respectively)			293,804				313,292
Other			192,557				193,026
Total regulatory and other assets			2,838,735				3,270,468
Total assets		$ 64,876,668				$ 62,522,061
See accompanying notes to consolidated financial statements.

 

 

 

CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

Liabilities and capitalization			December 31, 2014				September 30, 2014
			(Unaudited)
Long-term debt, less current installments		$ 14,759,445				$ 14,571,746
Current liabilities:
Current portion of long-term debt			2,855,612				2,697,140
Borrowings under lines-of-credit			6,023,682				4,614,541
Accounts payable			1,929,226				1,903,594
Accrued expenses			606,491				534,059
Customer deposits			1,297,836				976,734
Dividends declared			328,395				327,819
Deferred income taxes			73,923				215,757
Total current liabilities			13,115,165				11,269,644
Other liabilities:
Deferred income taxes			1,676,481				1,223,875
Deferred compensation			1,702,024				1,666,415
Deferred pension costs & post-retirement benefits			6,159,655				6,091,540
Other			627,148				1,113,655
Total deferred credits and other liabilities			10,165,308				10,095,485
Commitments and contingencies (Note 3 - Financing Activities)			—				—
Common stockholders' equity:
Common stock (common stock $.01 par
value per share.  Authorized 3,500,000 shares;
issued and outstanding 2,434,454 shares at
December 31, 2014 and 2,430,184 at September 30, 2014)			24,345				24,302
Additional paid-in capital			26,114,894				26,037,603
Retained earnings			3,161,452				2,921,478
Accumulated other comprehensive loss			(2,463,941	)			(2,398,197	)
Total common stockholders' equity			26,836,750				26,585,186
Total liabilities and capitalization		$ 64,876,668				$ 62,522,061
See accompanying notes to consolidated financial statements.

 

 

 

 

CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
Unaudited
	Three Months ended December 31,
		2014				2013
Utility operating revenues		$ 5,866,335				$ 6,232,007
Natural gas purchased			1,935,910				2,237,220
Gross margin			3,930,425				3,994,787
Cost and expense
Operating and maintenance expense			1,854,548				1,655,133
Taxes other than income taxes			498,000				468,761
Depreciation			387,192				459,837
Other deductions, net			59,853				285,923
Total costs and expenses			2,799,593				2,869,654
Operating income			1,130,832				1,125,133
Other income and (expense)
Interest expense			(227,996	)			(231,630	)
Other expense			(21,539	)			(10,414	)
Other income			10,000				350
Investment income			43,184				7,557
(Loss) from joint ventures			(20,077	)			(29,313	)
Rental income			12,138				12,138
Net income from operations, before income taxes			926,542				873,821
Income tax benefit (expense), current			—				—
Income tax (expense), deferred			(358,177	)			(329,576	)
Total tax (expense)			(358,177	)			(329,576	)
Net income			568,365				544,245
Other comprehensive (loss)
Pension adjustment, net of tax of $51,721 and $45,723, respectively			(74,121	)			(65,796	)
Net unrealized gain (loss) in securities available for sale,
net of tax of $4,316 and $38,825, respectively			8,377				59,457
Total other comprehensive (loss)			(65,744	)			(6,339	)
Total comprehensive income		$ 502,621				$ 537,906
Weighted average earnings per share-
basic:		$ 0.23				$ 0.24
diluted:		$ 0.23				$ 0.24
Average shares outstanding - basic			2,433,553				2,264,771
Average shares outstanding - diluted			2,439,090				2,268,513
See accompanying notes to consolidated financial statements.

 

CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
		Three Months ended December 31,
		2014				2013
Cash flows from operating activities:
Net income		$ 568,365				$ 544,245
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation			387,192				459,837
Amortization of debt issuance cost			20,470				19,462
Non-cash pension expenses			195,022				195,022
Regulatory asset amortizations			54,761				69,786
Stock issued for services			43,318				—
Loss (Gain) on sale of marketable securities			(29,297	)			6,400
Deferred income taxes			358,177				329,576
Bad debt expense			39,313				53,550
Loss on joint ventures			20,077				29,313
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable			(1,335,534	)			(1,428,442	)
Gas stored underground			558,015				902,161
Materials and supplies inventories			1,579				263,725
Prepaid expenses			176,953				80,213
Unrecovered gas costs			(177,934	)			(388,672	)
Deferred regulatory costs			534,949				341,451
Other			469				(19,809	)
Increase (decrease) in:
Accounts payable			25,632				(84,993	)
Accrued expenses			72,432				137,519
Customer deposits			321,102				273,350
Deferred compensation			35,609				34,452
Deferred pension costs & post-retirement benefits			(254,085	)			(265,130	)
Other liabilities and deferred credits			(486,467	)			(341,731	)
Net cash (used in) provided by operating activities			1,130,118				1,211,285
Cash flows from investing activities:
Purchase of securities available-for-sale			(384,192	)			(52,084	)
Sale of securities available-for-sale			371,635				40,007
Amount (paid to) related parties			(45,521	)			(49,842	)
Investment in joint ventures			(550,000	)			(300,000	)
Capital expenditures			(2,051,506	)			(2,915,526	)
Net cash (used in) provided by investing activities			(2,659,584	)			(3,277,445	)
Cash flows from financing activities:
Proceeds under (repayment of) lines-of-credit			1,409,141				2,231,473
Debt issuance cost expense			(982	)			(103,116	)
Cash received from sale of stock			2,582				—
Dividends paid			(296,385	)			(247,407	)
Proceeds under long-term debt			982,903				2,522,859
Repayment of long-term debt			(636,732	)			(2,328,100	)

Net cash (used in) provided by financing activities			1,460,527				2,075,709
Net (decrease) increase in cash			(68,939	)			9,549
Cash and cash equivalents at beginning of period			108,086				14,244
Cash and cash equivalents at end of period		$ 39,147				$ 23,793
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$ 228,474				$ 230,223
Income taxes		$ 35,500				$ 48,000
Non-cash financing activities:
Dividends paid with shares		$ 31,433				$ 26,792
Number of shares issued for dividends			1,591				2,117

 

 

CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholder’ Equity

Unaudited

																			Accumulated
											Additional								Other
			Number of				Common				Paid in				Retained				Comprehensive
			Shares				Stock				Capital				Earnings				Income				Total
Balances at September 30, 2014			2,430,184			$ 24,302				$26,037,603					$2,921,478				$(2,398,197	)			$26,585,186
Issuance of common stock			4,270				43				77,291				—				—				77,334
Dividends declared							—				—				(328,391	)			—				(328,391	)
Comprehensive income:
Change in unrealized gain on
securities available for sale, net of
income taxes							—				—				—				8,377				8,377
Minimum pension liability, net of
income taxes							—				—				—				(74,121	)			(74,121	)
Net income							—				—				568,365				—				568,365
Total comprehensive income																							502,621
Balances at December 31, 2014			2,434,454				$24,345				$26,114,894				$3,161,452				$(2,463,941	)			$26,836,750

 

 

See accompanying notes to consolidated financial statements

 

 

 

 

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 “Company” or “Corning Gas”) and its dormant subsidiary Corning Natural Gas Appliance Corporation (“Appliance Company”). The Holding Company has 50% ownership interests in our joint ventures Leatherstocking Gas Company, LLC and Leatherstocking Pipeline Company, LLC.

 

The information furnished herewith reflects all adjustments which are, in the opinion of management, necessary to a fair statement 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 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, 2014. These interim consolidated financial statements have not been audited by a firm of certified public accountants.

 

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, 2014, filed on December 23, 2014. 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 result in 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 Company’s weather normalization and revenue decoupling clauses in our latest NYPSC rate order serve to stabilize net revenue, by insulating it, to a large extent, from the effects of unusual temperature variations and conservation.

 

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

 

New Accounting Pronouncements Not Yet Adopted – In May 2014, the FASB issued new accounting guidance on revenue from contracts with customers. The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods and services to customers. The updated guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a retrospective or cumulative effect transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. We have not yet selected a transition method and we are currently evaluating the effect the updated standard will have on our consolidated financial statements and related disclosures.

 

Note 2 - Pension and Other Post-retirement Benefit Plans

 

Components of Net Periodic Benefit Cost:

		Three Months Ended December 31,
			Pension Benefits							Other Benefits
			2014				2013				2014				2013
Service Cost		$ 85,760				$ 77,819				$ 21,440				$ 19,455
Interest Cost			229,789				201,622				57,447				50,406

Expected return on plan assets			(256,891	)			(231,590	)			(64,223	)			(57,898	)
Amortization of prior service cost			2,352				2,687				588				672
Amortization of net (gain) loss			123,490				108,832				30,873				27,208
Net period benefit cost		$ 184,500				$ 159,370				$ 46,125				$ 39,843

 

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 (benefit) for ratemaking and financial statement purposes was approximately $242,500 for the quarters ended December 31, 2014 and 2013. The difference between the pension expense (benefit) for ratemaking and financial statement purposes, and the amount computed above has been deferred as regulatory assets and are not included in the prepaid pension cost noted above.

 

The NYPSC has allowed the Gas Company to recover incremental cost associated with other post-retirement benefits through rates on a current basis. Other post-retirement benefit expense (benefit) for ratemaking and financial statement purposes was approximately $18,466 for the quarters ended December 31, 2014 and 2013. 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 regulatory assets and are not included in the prepaid cost noted above.

 

Contributions

 

The Company expects to contribute $1.0 million to its Pension Plan and $68,000 to its other Post Retirement Benefit Plan in fiscal year 2015. A total of $254,675 has been paid to the Pension Plan for the first three months of this fiscal year.

 

Note 3 – Financing Activities

 

On July 3, 2014, the Gas Company entered into a Multiple Disbursement Term Note and Credit Agreement in the amount of $3,796,000 with M&T. As collateral, the Gas Company granted M&T a security interest in all fixed assets and equipment, contract rights, easements, right of ways, etc. of the Gas Company. From July 3, 2014 to November 29, 2014 (“Draw Period”), the Note was payable as interest only at the prime interest rate in effect at time of draw. On November 30, 2014 the Note converted to a permanent loan payable monthly for five years at an interest rate of 2.75 percentage points above the sum of the yield on United States Treasury Obligations to a constant maturity of five years plus the “ask” side of the five-year LIBOR swap. The monthly repayment amount will be calculated on a ten year amortization schedule. A final payment equal to the outstanding principal and interest will be due on the maturity date. The purpose of this Note is to fund construction projects in our New York Public Service Commission (“NYPSC”) mandated repair/replacement program for 2014. As of the loan conversion on November 30, 2014, the Gas Company had drawn $3,796,000 on this note, of which $943,451 was drawn during the quarter ended December 31, 2014. The interest rate for this loan is 4.39% with monthly payments of $39,257.

For our consolidated operations, we have an $8.5 million revolving line of credit with an interest rate calculated as the 30-day LIBOR plus 2.8%. The amount outstanding under this line on December 31, 2014 was approximately $6.0 million with an interest rate of 2.9577%. As security for the Company’s line of credit, Community Bank has a purchase money interest in all of our natural gas purchases utilizing funds advanced by Community Bank under the line-of-credit agreement and all proceeds of sale of the gas to customers and related accounts receivable. Under the terms of this line the Company is required to maintain a debt to tangible net worth ratio of less than 2.5 to 1 and a debt service coverage ratio of 1.1 to 1 as defined in the credit agreement. We rely heavily on our credit lines to finance the purchase of gas that we place in storage.

 

Note 4 - 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 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 December 31, 2014 and September 30, 2014 are as follows:

Fair Value Measurements at Reporting Date Using:

					Fair Value				Quoted Price in Active Market for Identical Asset/Liabilities (Level 1)				Level 2				Level 3
	December 31, 2014
	Available-for-sale securities			$ 2,363,985				$ 2,363,985					0				0
	September 30, 2014 Available -for sale securites			$ 2,308,138					$2,308,138				0				0

  

 

  

A summary of the marketable securities at December 31, 2014 and September 30, 2014 is as follows:

			Cost Basis				Unrealized Gain				Unrealized Loss				Market Value
December 31, 2014
Cash and equivalents			$342,751				—				—				$342,751
Metlife stock value			51,185				—				—				51,185
Government and agency bonds			301,673				—				3,300				298,373
Corporate bonds			301,324				—				5,778				295,546
Mutual funds			56,515				—				3,884				52,631
Equity securities			1,104,391				219,108				—				1,323,499
Total securities		$ 2,157,839				$ 219,108				$ 12,962				$ 2,363,985
September 30, 2014
Cash and equivalents			$59,096				—				—				$59,096
Metlife stock value			51,185				—				—				51,185
Government and agency bonds			301,673				—				4,029				297,644
Corporate bonds			303,428				—				5,050				298,378
Mutual funds			56,515				—				449				56,066
Equity securities			1,342,789				202,980				—				1,545,769
Total securities		$ 2,114,686				$ 202,980				$ 9,528				$ 2,308,138

 

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

Investment Income
		Three Months Ended December 31,
		2014		2013
Total realized gains (losses) included in earnings		$29,297		$(6,400)

Financial assets and liabilities valued using level 1 inputs are based on unadjusted quoted market prices within active markets.

 

Note 5 – Common Stock and Dividends

 

For the fiscal quarter ended December 31, 2014 there were 4,270 shares issued for $2,582 of cash, $43,318 of services and $31,433 of DRIP (dividend reinvestment program). There were 2,567 shares issued to directors, 121 shares sold to Leatherstocking Gas, which used the shares to compensate its independent director, Carl Hayden, and 1,591 of DRIP shares to various investors.

 

Dividends are accrued when declared by the board of directors. At its regular meeting on December 19, 2014, the board of directors approved a quarterly dividend of $.135 a share. This dividend was paid on January 15, 2015 to shareholders of record on December 31, 2014.

As of November 12, 2013, the Holding Company registered 129,004 shares of common stock with a par value of $.01 per share for a dividend reinvestment program. During the quarter ended December 31, 2014, 1,591 shares have been issued under this program.

At a special meeting on December 2, 2013, the board of directors of the Gas Company approved the payment and transfer of a dividend of $1.5 million to the Holding Company for the quarter ended December 31, 2013, payable on the same day.

Note 6 – Leatherstocking Companies

 

The Holding Company has an equity method interest in Leatherstocking Gas, a joint venture with Mirabito Regulated Industries. This joint venture is currently moving forward on expansions to several areas in the northeast. The Holding Company and Mirabito Regulated Industries each own 50% of the joint venture and each appoints three managers to operate Leatherstocking Gas. The seventh manager is a neutral manager agreed to by the Holding Company and Mirabito Regulated Industries who is not an officer, director, or employee of either company, currently Carl T. Hayden. The current managers are Joseph P. Mirabito, John J. Mirabito and William Mirabito from Mirabito Regulated Industries; Matthew J. Cook, Michael I. German and Russell S. Miller from the Company; and Carl T. Hayden as the neutral manager. Michael I. German is the Chief Executive Officer and President of the Holding Company and is also a stockholder and current board member of the Holding Company. Joseph P. Mirabito and William Mirabito are stockholders and current board members of the Holding Company. Mirabito Holdings, Inc. an affiliate of the co-venturer, holds shares of the Holding Company. Leatherstocking Gas has received franchises from the Village and Town of Sidney, Village and Town of Bainbridge, Village and Town of Windsor, Village and Town of Unadilla, and Village and Town of Delhi in New York. In addition, Leatherstocking Gas has acquired sixteen franchises in Susquehanna and Bradford Counties, Pennsylvania. Leatherstocking Gas has met with potential customers and public officials, as well as attended public hearings, and believes there is interest in acquiring gas service. On July 25, 2013, Leatherstocking Gas signed a loan agreement with Five Star Bank for $1.5 million to finance the construction in Bridgewater, Pennsylvania. This agreement increased to $1.8 million before converting to a long-term note. Construction in the Township of Bridgewater began in July 2013 and Leatherstocking Gas began serving customers in October 2013. Construction of the Borough of Montrose system started in the spring of 2014 and construction started in the Township of Dimock in November 2014. On August 28, 2014, Leatherstocking Gas, as borrower, and Leatherstocking Pipeline as guarantor, entered into a loan agreement with Five Star Bank for up to $4 million over two years to finance the work and services required for the infrastructure costs and ongoing costs of underground piping construction projects in Montrose, Bridgewater and Dimock, Pennsylvania. This agreement requires equity investments from the Holding Company and Mirabito Regulated Industries for a total of 66% of all amounts borrowed. During the quarter ended December 31, 2014, $1,650,000 was borrowed and the Holding Company invested $550,000. As of December 31, 2014, Leatherstocking Gas has drawn $3.15 million on this loan. The Holding Company would be required to invest approximately $280,000 additionally to meet the loan requirements necessary to receive the balance on the agreement of $.85 million from the bank.

 

The interests in Leatherstocking Pipeline, which was formed with the same structure and managers as Leatherstocking Gas, were also transferred to the Holding Company. Leatherstocking Pipeline is an unregulated company whose purpose is to serve one customer in Lawton, Pennsylvania. In the spring and summer of 2012, Leatherstocking Pipeline built and placed in service facilities to serve that customer.

 

The investment and equity in both companies (collectively, “Joint Ventures”) has been recognized in the consolidated statements. The Holding Company has accounted for its equity investment using the equity method of accounting based on the guidelines established in FASB ASC 323. In applying the guidance of FASB ASC 323, the Holding Company recognized the investment in the Joint Ventures as an asset at cost. The investment will fluctuate in future periods based on the Holding Company’s allocable share of earnings or losses from the Joint Ventures which is recognized through earnings.

 

The following table represents the Holding Company’s investment activity in the Joint Ventures at December 31, 2014 and September 30, 2014:

 

			December 31, 2014				September 30, 2014
Beginning balance in investment in joint ventures		$ 1,280,757				$ 587,678
Investment in joint ventures during period			550,000				800,000
Income (loss) in joint ventures during period			(20,077	)			(109,921	)
Ending balance in joint ventures		$ 1,810,680				$ 1,280,757

 

At December 31, 2014, the Joint Ventures had combined assets of $9.9 million, combined liabilities of $6.2 million and combined net losses of $40,154.

 

Note 7 – Effective Tax Rate

 

Income tax expense for the quarters ended December 31 is as follows:
			2014				2013
Current		$—					$—
Deferred			358,177				329,576
Total		$ 358,177				$ 329,576
Actual income tax expense differs from the expected tax expense (computed by applying the
federal corporate tax rate of 34% to income before income tax expense ) as follows:
			2014				2013
Expected federal tax expense		$ 315,024				$ 310,998
State tax expense (net of federal)			59,015				42,863
Other, net			(15,862	)			(24,285	)
Actual tax expense		$ 358,177			$ 329,576

 

Note 8 – Subsequent Events

 

At its regular meeting on January 20, 2015, the board of directors approved an increase in the quarterly dividend to $.145 a share.

 

On February 3, 2015, the Gas Company was notified that the federal return for the period ended September 30, 2011, will be examined. At this time, the Holding Company and Gas Company do not know of any material financial impact as a result of the audit.

 

 

 

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

 

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 “Company” or “Corning Gas”) and its dormant subsidiary Corning Natural Gas Appliance Corporation (“Appliance Company”). The Holding Company has 50% ownership interests in our joint ventures Leatherstocking Gas Company, LLC and Leatherstocking Pipeline Company, LLC.

 

The Holding Company’s primary business, through its subsidiary Corning Gas is natural gas 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 we operate. It also transports and compresses gas for a gas producer from its gathering network into an interstate pipeline. It 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, the Gas Company has contracts with Corning Incorporated and Woodhull Municipal Gas Company, a small local utility, to provide maintenance service on their gas lines. Additionally Leatherstocking Gas distributes gas in Susquehanna County, Pennsylvania and Leatherstocking Pipeline, an unregulated company, serves one customer in Lawton, Pennsylvania.

The market for natural gas in our traditional service territory 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 Company continues to see expansion opportunities in the commercial and industrial markets. Some of our largest customers added additional facilities in our service area that is increasing our revenue and margins. We believe that our most promising growth opportunity for both revenues and margins is increasing connection with local gas production sources. We completed a new pipeline to Marcellus Shale gas in Pennsylvania in 2009 and that pipeline is significantly increasing throughput and margins on our system. In 2010 we upgraded portions of Line 4 which runs from Caton to the Bradley Station in Elmira and NYSEG, Line 7 which runs from Caton to the Compressor Station and Line 13, which runs from Stateline Station at the New York/Pennsylvania border to Line 4, to increase our capacity to transport local production gas. We have completed a compressor station that is working in conjunction with our pipeline upgrades to transport gas on our system and into the interstate pipeline system. In addition, the Holding Company has interests in two joint ventures, Leatherstocking Gas and Leatherstocking Pipeline, to pipe gas to areas of the northeast currently without gas service.

We continue to focus on improving the efficiency of our operations and making capital investments to improve our infrastructure. Our infrastructure improvement program has concentrated on the replacement of older distribution mains and customer service lines. In fiscal 2014 we exceeded our goals and replaced 8.2 miles of pipe and 411 services. We have begun work on the systematic replacement of 7.5 miles of bare steel pipe and 350 bare steel services for fiscal 2015. We have constructed approximately 5 miles of new pipe to interconnect Line 15 with Inergy Storage in the Town of Bath. Line 15 is the high pressure distribution main that provides gas supply to the Villages of Bath and Hammondsport and the Towns of Urbana and Bath, New York. Additionally the Company accomplished its goal of ending the calendar year with 10 or fewer repairable leaks.

We believe our key performance indicators are net income, stockholders’ equity and the safety of our system. For the three months ended December 31, 2014, net income increased by $24,120 compared to the same period in 2013 mainly due to the rate increase being offset by warmer weather. Because the Holding Company’s principal operations are conducted through Corning Gas, a regulated utility company, stockholders’ equity is an important performance indicator. The NYPSC allows us to earn a just and reasonable return on stockholders’ equity as determined under applicable regulations. We believe this does not have a significant effect on our liquidity because even with our rate of return limited, we have sufficient cash collected from our earnings to support operations. Stockholders’ equity is, therefore, a precursor of future earnings potential. For the twelve months ended December 31, 2014, stockholders’ equity increased from $23,682,133 to $26,836,750. 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. In fiscal year 2015 to date, we have spent $2.1 million on reliability projects and safety-related infrastructure

improvements. For the first three months of fiscal 2015 we repaired 78 leaks, replaced 239 bare steel services and replaced 25,667 feet of bare steel main.

 

Key Performance Indicators:
			2014				2013
Net Income		$ 568,365			$ 544,245
Shareholders' equity		$ 26,836,750				$ 23,682,133
Shareholders’ equity per weighted average share		$ 11.03				$ 10.46

 

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 mitigate the risk of warmer winter weather through the weather normalization and revenue decoupling clauses in our tariffs. These clauses allow the Company to surcharge customers for under recovery of revenue.

Utility operating revenues decreased $365,672 in the three months ended December 31, 2014 compared to the same period last year mainly due to warmer weather and less favorable regulatory amortizations. Local production revenues declined because part of our monthly volumetric charge is now being recognized as a deferral due to customers per the last rate case. The NYPSC is allowing the Company recovery in revenues to offset our costs of building certain projects. As of fiscal year 2011, we are recognizing the revenue and also increasing the accumulated depreciation and depreciation expense for those recoveries. In November 2013, the compressor station and related assets were fully depreciated. As a result, 80% of certain payments from producers are no longer recognized as revenue earned which is consistent with public utility accounting. Other utility revenue decreased $118,271 for this fiscal year to date compared to last year mainly because of the Revenue Decoupling Mechanism (“RDM”) monthly reconciliation due to new regulatory targets in the rate year beginning May 1, 2014.

 

The following table summarizes our utility operating revenue:
		Three months ended December 31,
		2014				2013
Retail revenue:
Residential		$3,340,843				$3,342,493
Commercial			476,143				542,802
Transportation			1,097,235				1,089,651
Total retail revenue			4,914,221				4,974,946
Wholesale			624,279				739,898
Local production			200,817				271,874
Other utility revenues			127,018				245,289
Total revenue		$ 5,866,335				$ 6,232,007

 

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

 

		Three months ended December 31,
		2014				2013
Other utility revenues:
Customer discounts forfeited		$20,680				$17,765
Reconnect fees			2,836				2,120
Other gas revenues (see below)			101,810				222,801
Surcharges			1,692				2,603
Total other utility revenues		$ 127,018				$ 245,289

 

		Three months ended December 31,
		2014				2013
Other gas revenues:
DRA carrying costs			$2,143				$1,992
Contract customer reconciliation			130,467				159,847
Monthly RDM amortizations			(158,362	)			(1,947	)
Local production revenues			23,495				—
Annual RDM reconciliation			104,067				62,909
		$ 101,810				$ 222,801

 

 

Gas purchases are our largest expense. Purchased gas expense decreased $301,310 for the three months ended December 31, 2014 compared to the same periods last year due primarily to lower volumes purchased for the period.

 

Margin (the excess of utility operating revenues over the cost of natural gas purchased) percentage increased 2.9% for the three months ended December 31, 2014 compared to the same periods last year primarily because of the rate increase.

 

		Three Months Ended December 31,
		2014				2013
Utility operating revenues		$ 5,866,335				$ 6,232,007
Natural gas purchased		1,935,910				2,237,220
Margin		$ 3,930,425				$ 3,994,787
Margin %			67.00%				64.10%

 

Operating and Interest Expenses

 

Operating and maintenance expense increased $199,415 in the first quarter of fiscal 2015 compared to the same quarter of fiscal 2014 mainly because of the addition of new employees, there was an additional payroll of approximately $100,000. The timing of payment of stock issued to directors for services of $43,318 in this quarter also contributed to the increase. Both costs are in the first quarter of fiscal 2015 and not present in the same period of 2014. There were also increased insurance costs of $53,583. Depreciation expense decreased by $72,645 in this quarter compared to the same period in 2013 because in November 2013, the compressor station and related assets were fully depreciated. As a result, 80% of certain payments from producers are no longer recognized as depreciation expense because the Company was recording depreciation in the amount of revenue earned which is consistent with public utility accounting. Other deductions, net decreased $226,070 in this quarter compared to last quarter due to $228,002 of organizational costs for the Holding Company start-up recognized in the first quarter of fiscal 2014. This was a one-time cost. Interest expense showed a decrease of $3,634 for the quarter from fiscal 2015 to 2014 due to loan consolidations at better interest rates offset by increased borrowings.

 

Net Income

 

Net income increased $24,120 for the quarter ended December 31, 2014 compared to the same period in 2013 due primarily to the rate increase, higher investment income and lower total costs and expenses offset by firm volumes that were 233,080 MCF’s lower than the prior period.

 

Liquidity and Capital Resources

 

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 Company’s cash flow is seasonal. Out

flows 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.

 

Capital expenditures are the principal use of internally generated cash flow. As part of our 2012 rate order by the NYPSC, we have estimated capital expenditures to upgrade our distribution system of approximately $4.0 million in each calendar year from 2015 to 2017. Cash flows from operations are more than sufficient to cover our operating needs, however to fund capital expenditures we will draw both on operating cash and new debt and/or equity. In fiscal year 2015 to date, we have spent approximately $2.1 million on projects and safety-related infrastructure improvements. This, in conjunction with our growth projects, creates liquidity pressure on the Company. We anticipate that our aggressive capital construction program will continue to require the Company to raise new debt and/or equity.

 

Cash flows from financing activities consist of repayment of long-term debt, new long-term borrowing, borrowings and repayments under our lines-of-credit and equity issuances. For our consolidated operations, we have an $8.5 million revolving line of credit with an interest rate calculated as the 30-day LIBOR plus 2.8%. The amount outstanding under this line on December 31, 2014 was approximately $6.0 million with an interest rate of 2.9577%. As security for the Company’s line of credit, Community Bank has a purchase money security interest in all of our natural gas purchases utilizing funds advanced by Community Bank under the line-of-credit agreement and all proceeds of sale of the gas to customers and related accounts receivable. Under the terms of this line the Company is required to maintain a debt to tangible net worth ratio of less than 2.5 to 1 and a debt service coverage ratio of 1.1 to 1 as defined in the credit agreement. We rely heavily on our credit lines to finance the purchase of gas that we place in storage.

 

We have approximately $17.6 million in long term debt outstanding including current year installments as of December 31, 2014. We repaid $636,732 in the first three months of fiscal 2015 consistent with the requirements of our debt instruments and refinancing activities.

 

The Company is in compliance with all of our loan covenants as of December 31, 2014.

 

During this quarter, we mainly withdrew gas from storage and as of December 31, 2014, had a balance of $1.7 million worth of gas in storage. During the next quarter, we will also be withdrawing gas from storage. We believe we will have sufficient gas to supply our customers for the winter season.

 

Off Balance Sheet Arrangements

 

We have no off balance sheet arrangements.

Regulatory Matters

 

The Holding Company’s primary business, through its subsidiary Corning Gas is regulated by the NYPSC among other agencies.

On November 17, 2010, Bath Electric Gas & Water Systems (BEGWS), a natural gas customer of the Company, filed a petition with the NYPSC in Case 10-G-0598 that claimed BEGWS was overbilled for gas by the Company. BEGWS asserted that the Company's meters registered 2.94% more gas than was actually delivered to BEGWS from 2004 through 2010. Based on its calculations, BEGWS requested that the NYPSC order the Company to refund approximately $1.2 million for overcharges and interest. The Company conducted a comprehensive review of the BEGWS claim. The Company believes that its meters and the resulting bills have been accurate. On January 26, 2011, the Company responded that its preliminary review of its billing data and gas cost reconciliation to the NYPSC shows that the Company has already credited BEGWS the amount in the claim. In testimony filed by its consultants on July 8, 2011, BEGWS acknowledged receipt of the amount in the claim but raised new claims not in the original petition. BEGWS now asserts that the Company owes it a refund of $345,747. The Company contested the testimony filed on July 8, 2011. Over a period of approximately the last three years, BEGWS and the Company met on several occasions in an effort to resolve their differences. On November 26, 2014, the Company and BEGWS filed a Memorandum of Understanding (“MOU”) with the NYPSC to settle the dispute. BEGWS agreed to drop its claims against the Company and the Company agreed to make

certain capital expenditures totaling approximately $250,000 to improve the reliability of service to BEGWS and the Company’s Hammondsport customers. The NYPSC has not yet issued a decision.

On May 24, 2011, the Company filed Case 11-G-0280, a base rate case that requested an increase in revenues of $1,429,281 (or 6.63% on an overall bill rate basis) in the 12 months ending April 30, 2013, (the Rate Year) and by the same dollar amount in the two succeeding 12-month periods (ending April 30, 2014, and April 30, 2015). On January 13, 2012 the Company, the Staff of the NYPSC and other intervenor parties filed a Joint Proposal (the “Proposal”) with the NYPSC to resolve all issues in the rate case. The Proposal provided for revenue increases to the Company’s rates in the first year (May 1, 2012 to April 30, 2013) of $944,310; in year two (May 1, 2013 to April 30, 2014) of $899,674; and in year three (May 1, 2014 to April 30, 2015) of $323,591. The Proposal also provided the Company the opportunity to earn $545,284 from local production before sharing, a 118% increase from the $250,000 allowed previously. The Proposal also provided for property tax reconciliation, treatment of future local production investment, cost allocations to the Company’s new Leatherstocking operations, consolidation of the three divisional rate tariffs into a single rate tariff and recovery of forecasted capital and operation and maintenance costs for the period May 1, 2012 to April 30, 2015. The rates are based on a 9.5% return on equity. The cumulative potential revenue increases over the three years total $4,955,869. On April 20, 2012 the NYPSC issued a final order in the case accepting the Proposal, with rates effective May 1, 2012. In the order the NYPSC directed the Company and the other parties to the case, including Staff, to collaborate on a code of conduct for the Company and its affiliates. This code of conduct was used until a more comprehensive code of conduct was established in conjunction with the establishment of a holding company structure for the Company and its affiliates, as requested in Case 12-G-0141 discussed below. On October 18, 2012, the NYPSC issued an order adopting affiliate standards that included certain restrictions, among them a prohibition on the sharing of distribution company employees other than specified officers with Company affiliates. Pursuant to that order, these standards remained in place until they were modified when the NYPSC issued an order on the Company’s request to establish a holding company structure (Case 12-G-0141). The second year rate increase of $899,674 provided for in Case 11-G-0280 became effective on May 1, 2013. On August 28, 2013, the Company filed the excess earning, net plant, property tax and large customer reconciliations required by the Joint Proposal for the first rate year (the twelve months ended April 30, 2013). The earned equity return for ratemaking purposes in the first rate year is 9.71%, below the sharing threshold of 10.25%. The net plant over-collection for the first rate year is $108,017. The amount due customers will be determined at the end of the third rate year (twelve months ended April 30, 2015). The property tax under-collection for the same period amounted to $284,504. The Company estimates that the under-collection at the end of the third rate year would be a minimum of $853,512. In order to minimize the effect on customers at the conclusion of the three year agreement, on October 4, 2013, the Company requested that it be permitted recovery of the annual property tax under collection via the Delivery Rate Adjustment (“DRA”) commencing January 1, 2014. The large customer reconciliation showed an under-collection of $471,072. This amount is sufficiently large that the Company requested that 1/3 of the under- collection be recovered via the DRA starting January 1, 2014 to avoid “rate shock” at the conclusion of the current three-year rate agreement. On December 19, 2013, the NYPSC, in Case 13-G-0465, authorized the Company to recover, through the DRA, $441,528 to offset both the property tax deferral (by $284,504) and the large customer deferral (by $157,024) beginning January 1, 2014 for calendar year 2014. We have billed $244,684 for the property tax deferral and $135,047 for the large customer deferral through September 30, 2014. The third year rate increase of $323,591 provided for in Case 11-G-0280 became effective May 1, 2014. On June 16, 2014 the Company filed the property tax and large customer reconciliations required by the Joint Proposal for the second rate year (the twelve months ended April 30, 2014). The property tax under-collection for the period was $449,692. The large customer reconciliation showed an under-collection of $495,251. The Company in its filing requested recovery of these under-collections via the DRA commencing January 1, 2015. On December 12, 2014, in Case 13-G-0465, the NYPSC approved the recovery of $809,299 for the large customer deferral for rate year two and the balance of rate year one under-collection not previously approved. The amounts that were approved will reduce the under-collection and thus help to reduce the potential for a sudden and large rate increase in the future. The NYPSC, in the December 12, 2014 order, stated that it had not completed its consideration of the property tax issues and that it would address these issues at a later date. On January 8, 2015, the Company filed with the NYPSC a notice of impending settlement negotiations in Case 11-G-0280, identifying the issues expected to be addressed in those negotiations, principally a possible extension of the Proposal, and noting the measures necessary to effect such an extension. The list of provisions to be addressed included, but was not limited to, continued pipe replacement, property taxes, safety and reliability measures, and excess earnings. Settlement

negotiations have commenced; but, under NYPSC rules, their content is confidential. To the extent that the negotiations do not produce an extension proposal or the NYPSC fails to approve any such extension proposal, unresolved issues could be addressed in a future rate filing by the Company.

On August 8, 2011, the Company and Mirabito Holdings, Inc. (“MHI”) filed a joint petition requesting that the NYPSC authorize the acquisition by MHI of up to 15 percent of the Company’s voting capital stock. The petition was submitted pursuant to a provision of the New York Public Service Law (Section 70) that requires NYPSC authorization for acquisitions in excess of 10 percent of such stock of a utility. This proceeding, designated Case 11-G-0417, was consolidated with Case 12-G-0141, discussed below, in which the Company sought authorization to form a holding company. The Joint Proposal in the consolidated proceedings which was adopted by the NYPSC, as discussed below, supported authorization of the stock purchase.

On February 8, 2012, the Company filed a petition in Case 12-G-0049 requesting authorization to issue $12,650,000 in debt and $12,650,000 equity to support the utility infrastructure and growth programs ($20,950,000), Leatherstocking ($1,800,000) and non-utility investments ($2,500,000). As a result of discussions with the NYPSC Staff, the Company requested that the petition be bifurcated and that the NYPSC immediately review and approve that portion of the petition’s funding request pertaining to the Company’s gas distribution system. On May 17, 2012, the NYPSC acted on the petition. The Company was authorized to issue long-term debt up to $9,000,000 and authorized to issue common stock, convertible preferred stock and stock warrants up to $9,000,000, no later than December 31, 2016. As of December 31, 2014, the Company had issued new long-term debt of $8,575,223.

On March 26, 2012, the Company filed a petition with the NYPSC in Case 12-G-0141 requesting authority to reorganize into a holding company structure. The petition included a request to use up to $1 million to fund initial construction of Leatherstocking Gas Company, LLC facilities to permit exercise of recently granted franchises for its distribution system in Pennsylvania. This proceeding was consolidated with Case 11-G-0417 pertaining to the acquisition of stock by MHI, as discussed above. A settlement between Staff and the Company was reached and filed on March 15, 2013 as a Joint Proposal. In an order issued May 17, 2013, the NYPSC adopted the Joint Proposal and authorized the formation of a holding company; placed certain restrictions on the members of the Company’s Board of Directors and officers designed to avoid conflicts of interest; eased some of the restrictions on employee sharing between regulated and unregulated operations; implemented a series of measures designed to limit exposure of customers of the regulated utility to risk from unregulated business units; provided for sharing of revenues from unregulated operations in the regulated utility’s service area and use of regulated facilities in furtherance of unregulated operations; provided for withdrawal of the Company’s November 19, 2012 petition for clarification or rehearing of the NYPSC’s October 18, 2012 order on affiliate standards in Case 11-G-0280; authorized the stock acquisition for which approval was sought in Case 11-G-0417; and authorized the use of $1 million in funds derived from the rendition of service as a loan to Leatherstocking Gas to permit construction of its new facilities in Pennsylvania and New York. The reorganization into the holding company structure required approval of holders of at least 66 2/3 % of the Company’s common stock and the exchange of shares of common stock of the Company for common stock of the Holding Company. On August 1, 2013, the Holding Company filed a Registration Statement/Proxy Statement on Form S-4 (the “Registration Statement”) with the SEC to register the securities to be issued by the Holding Company in connection with the exchange and to file a proxy statement for a special meeting of the Company’s shareholders regarding the proposal to create the holding company structure and the exchange of shares of the Company’s common stock on a one-for-one basis for shares of the Holding Company’s common stock. Please refer to the Registration Statement of Corning Natural Gas Holding Corporation on the SEC’s website (www.sec.gov) for more information regarding the holding company proposal and reorganization. The Registration Statement was declared effective as of September 30, 2013 by the SEC. In a special shareholder meeting on November 6, 2013, the proposal was approved by more than two-thirds of the Company’s shareholders. The NYPSC endorsed the Certificate of Exchange on November 8, 2013, and it was filed with the New York Department of State to effect the exchange of each share of the common stock, par value $5.00 per share, of the Company into a share of common stock, par value $0.01 per share, of the Holding Company. The Holding Company incurred costs of $228,003 in moving to a holding company structure including expenses associated with the NYPSC approval process, SEC filings and other corporate matters. The effective date of reorganization creating the holding company structure was November 12, 2013.

On May 6, 2013 the Company and The Article 6 Marital Trust under the First Amended and Restated Jerry Zucker Revocable Trust dated April 2, 2007 ("Zucker Trust") filed a joint petition with the NYPSC in Case 13-G-0202 for a declaratory ruling that the purchase of up to 15 percent of the Company's common stock by the Zucker Trust does not require authorization by the NYPSC under a provision of the New York Public Service Law that requires such authorization for certain types of entities to own more than 10 percent of a New York gas utility's voting capital stock. In the alternative, the Company and Zucker Trust requested that in the event that the NYPSC concludes that such approval would be required, the NYPSC issue an order granting the authority to purchase the Company's stock. On September 19, 2013, the NYPSC dismissed the request for a declaratory ruling but granted the authority for the purchase of stock.

On March 24, 2014 Leatherstocking Gas, filed a petition with the Pennsylvania Public Utility Commission (the “PAPUC”) requesting authorization to issue a commercial promissory note in the amount of $4,000,000. On May 22, 2014 the PAPUC issued an order in Docket No. S-2014-2412743 approving the petition.

Critical Accounting Policies

Our significant accounting policies are described in the notes to the Consolidated Financial Statements in the Company’s Form 10-K for the year ended September 30, 2014, filed on December 23, 2014. It is important to understand that the application of generally accepted accounting principles involves certain assumptions, judgments and estimates that affect reported amounts of assets, liabilities, revenues and expenses. Thus, the application of these principles can produce varying results from company to company. The most significant principles that impact us are discussed below.

Accounting for Utility Revenue and Cost of Gas Recognition

 

We record revenues from residential and commercial customers based on meters read on a cycle basis throughout each month, while certain large industrial and utility customers’ meters are read at the end of each month. We do not accrue revenue for gas delivered but not yet billed. We do not currently anticipate adopting unbilled revenue recognition and we do not believe it would have a material impact on our financial results. Our tariffs contain mechanisms that provide for the recovery of the cost of gas applicable to firm customers, which includes estimates. Under these mechanisms, we periodically adjust our rates to reflect increases and decreases in the cost of gas. Annually, we reconcile the difference between the total gas costs collected from customers and the cost of gas. We defer any excess or deficiency and subsequently either recover it from, or refund it to, customers over the following twelve-month period. To the extent estimates are inaccurate; a regulatory asset on the balance sheet is increased or decreased.

 

Accounting for Regulated Operations - Regulatory Assets and Liabilities

 

All of the Company’s business is subject to regulation by the NYPSC. We record the results of our regulated activities in accordance with FASB ASC 980, which results in differences in the application of generally accepted accounting principles between regulated and non-regulated businesses. FASB ASC 980 requires the recording of regulatory assets and liabilities for certain transactions that would have been treated as revenue and expense in non-regulated businesses. In certain circumstances, FASB ASC 980 allows entities whose rates are determined by third-party regulators to defer costs as "regulatory" assets in the balance sheet to the extent that the entity expects to recover these costs in future rates. Management believes that currently available facts support the continued application of FASB ASC 980 and that all regulatory assets and liabilities are recoverable or refundable through the regulatory environment.

 

Pension and Post-Retirement Benefits

 

The amounts reported in our financial statements related to pension and other post-retirement benefits are determined on an actuarial basis; therefore, certain assumptions are required to calculate those amounts. These assumptions include the discount rate, the expected return on plan assets, the rate of compensation increase and, for other post-retirement benefits, the expected annual rate of increase in per capita cost of covered medical and prescription benefits. Changes in actuarial assumptions and actuarial experience could have a material impact on the amount of pension and post-retirement benefit costs and funding requirements. However, the Company expects to recover our entire net periodic pension and other post-retirement benefit costs attributed to employees in accordance with the

applicable NYPSC authorization. The Company's pension expense for financial reporting purposes is the amount approved by the NYPSC in the Company's last base rate case (Case 11-G-0280). That amount is $970,000 for the period beginning May 1, 2012. The Company on a monthly basis (1/12 of the annual amount) accrues the amount determined by the latest actuarial estimate of its FASB ASC 715 liability. The Company then compares the FASB ASC 715 amount to the monthly pension allowance approved by the NYPSC. The difference is recorded to expense (plus or minus) in order to match the pension expense included in base delivery rates by order of the NYPSC in Case 11-G-0280. The amount (plus or minus) required to match the pension expense allowed by the NYPSC is recorded as either a regulatory asset or liability and is deferred for subsequent rate consideration.

 

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 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, 2013, in addition to:

 

*	the effect of any interruption in our supply of natural gas or a substantial increase in the price of natural gas,
*	our ability to successfully negotiate new supply agreements for natural gas as they expire, on terms favorable to us, or at all,
*	the effect on our operations of any action by the NYPSC or PAPUC,
*	the effect of any litigation,
*	the effect on our operations of unexpected changes in any other applicable legal or regulatory requirements,
*	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,
*	our ability to retain the services of our senior executives and other key employees,
*	our  vulnerability to adverse general 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.

 

Item 4 - Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

As of December 31, 2014, the Holding Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of the Holding Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based upon the Holding Company’s evaluation, the Holding Company’s principal executive officer and principal financial officer each concluded that the Holding Company’s disclosure controls and procedures are effective as of December 31, 2014.

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 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 Company has lawsuits pending of the type incurred in the normal course of business and the Holding Company and the Company believes that any potential losses should be covered by insurance and will not have a material adverse impact on the Holding Company, the 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, 2014, 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

 

 

 

 

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 10-Q for the period ended December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language):
	(i) the Consolidated Balance Sheets at December 31, 2014 and September 30, 2014,
	(ii) the Consolidated Statements of Income and Comprehensive Income for the three months ended December 31, 2014 and December 31, 2013,
	(iii) the Consolidated Statements of Cash Flows for the three months ended December 31, 2014 and December 31, 2013, and
	(iv) related notes to the Condensed Consolidated Financial Statements.
	As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections.

 

**Filed herewith

***Furnished herewith

SIGNATURES

 

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

 

CORNING NATURAL GAS HOLDING CORPORATION

 

Date: February 17, 2015		By: /s/ Michael I. German Michael I. German, Chief Executive Officer and President (Principal Executive Officer)
Date: February 17, 2015		By: /s/ Firouzeh Sarhangi Firouzeh Sarhangi, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)