2280

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

 

☐  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 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 ☒   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 ☒  

 

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

 

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

 

Class	Shares outstanding as of August 14, 2015
Common Stock, $.01 par value	2,446,872

 

 

PART I.	FINANCIAL INFORMATION			Page
	Item 1.	Financial Statements (Unaudited)		4
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
	Item 4.	Controls and Procedure		25
PART II.	OTHER INFORMATION
	Item1.	Legal Proceedings		25
	Item 1A	Risk Factors		25
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		25
	Item 3.	Defaults upon Senior Securities		25
	Item 4.	Mine Safety Disclosures		25
	Item 5.	Other Information		25
	Item 6.	Exhibits		26
	SIGNATURES			26

 

Corning Natural Gas Holding Corporation (“Holding Company”) is a successor issuer to Corning Natural Gas Corporation (“Gas 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 Gas Company became a wholly-owned subsidiary of Holding Company.

As used in this Form 10-Q, the terms “Gas 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 June 30, 2015.

 

 

 

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

CORNING NATURAL GAS  HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
Assets			June 30, 2015				September 30, 2014
			(Unaudited)
Plant:
Utility property, plant and equipment		$ 72,801,811				$ 68,687,509
Less: accumulated depreciation			(20,781,919	)			(19,578,820	)
Total plant utility and non-utility, net			52,019,892				49,108,689
Investments:
Marketable securities available-for-sale at fair value			2,221,143				2,308,138
Investment in joint ventures			2,253,657				1,280,757
Total Investments			4,474,800				3,588,895
Current assets:
Cash and cash equivalents			63,197				108,086
Customer accounts receivable, (net of allowance for
uncollectible accounts of $60,667 and $42,540, respectively)			1,953,950				1,788,447
Related party receivables			509,430				446,154
Gas stored underground, at average cost			913,484				2,291,665
Materials and supplies inventory			1,158,296				937,459
Prepaid expenses			1,339,618				982,198
Deferred income taxes			77,694				—
Total current assets			6,015,669				6,554,009
Regulatory and other assets:
Regulatory assets:
Unrecovered gas costs			—				110,372
Deferred regulatory costs			2,510,280				2,653,778
Debt issuance cost (net of accumulated
amortization of $662,748 and $595,637, respectively)			247,163				313,292
Other			192,869				193,026
Total regulatory and other assets			2,950,312				3,270,468
Total assets		$ 65,460,673				$ 62,522,061
See accompanying notes to consolidated financial statements.

 

 

 

 

 

CORNING NATURAL GAS  HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
Liabilities and Stockholders’ Equity:			June 30, 2015				September 30, 2014
			(Unaudited)
Long-term debt, less current installments		$ 13,296,380				$ 14,571,746
Current liabilities:
Current portion of long-term debt			2,898,670				2,697,140
Borrowings under line-of-credit			5,658,278				4,614,541
Accounts payable			1,673,714				1,903,594
Accrued expenses			472,090				534,059
Customer deposits and accrued interest			815,453				976,734
Unrecovered gas costs			137,988				—
Dividends declared			351,242				327,819
Deferred income taxes			—				215,757
Total current liabilities			12,007,435				11,269,644
Other liabilities:
Deferred income taxes			2,827,502				1,223,875
Deferred compensation			1,630,806				1,666,415
Deferred pension costs & post-retirement benefits			6,520,604				6,091,540
Other			1,220,972				1,113,655
Total deferred credits and other liabilities			12,199,884				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 2,444,943 shares at
June 30, 2015 and 2,430,184 at September 30, 2014)			24,449				24,302
Additional paid-in capital			26,286,171				26,037,603
Retained earnings			4,325,227				2,921,478
Accumulated other comprehensive loss			(2,678,873	)			(2,398,197	)
Total common stockholders' equity			27,956,974				26,585,186
Total liabilities and stockholders’ equity		$ 65,460,673				$ 62,522,061
See accompanying notes to consolidated financial statements.

 

 

 

CORNING NATURAL GAS  HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income Unaudited
		Three Months Ended								Nine Months Ended
		June 30, 2015				June 30, 2014				June 30, 2015				June 30, 2014
Utility operating revenues		$ 4,421,769				$ 5,620,685				$ 19,952,289				$ 22,767,702
Natural gas purchased			958,163				1,865,616				6,616,534				9,303,816
Gross margin			3,463,606				3,755,069				13,335,755				13,463,886
Cost and expense
Operating and maintenance expense			2,016,269				1,754,900				5,892,006				5,396,101
Taxes other than income taxes			484,840				473,540				1,520,957				1,488,034
Depreciation			404,966				349,134				1,225,155				1,185,303
Other deductions, net			65,276				101,657				214,595				489,905
Total costs and expenses			2,971,351				2,679,231				8,852,713				8,559,343
Operating income			492,255				1,075,838				4,483,042				4,904,543
Other income and (expense)
Interest expense			(226,416	)			(193,233	)			(688,414	)			(634,698	)
Other expense			(19,734	)			(9,010	)			(56,400	)			(20,176	)
Other income			60,032				48,262				70,032				57,544
Investment income			14,872				26,400				131,893				41,318
(Loss) from joint ventures			(48,404	)			(35,607	)			(57,100	)			(65,706	)
Rental income			12,138				12,138				36,414				36,414
Net income from operations, before income tax			284,743				924,788				3,919,467				4,319,239
Income tax benefit (expense), current			—				—				—				—
Income tax (expense), deferred			(107,000	)			(375,229	)			(1,482,723	)			(1,593,905	)
Total tax (expense)			(107,000	)			(375,229	)			(1,482,723	)			(1,593,905	)
Net income			177,743				549,559				2,436,744				2,725,334
Other comprehensive (loss)
Pension adjustment, net of tax of $51,721, $45,723,
$155,163 and $137,169, respectively			(74,121	)			(65,796	)			(222,363	)			(197,388	)
Net unrealized gain (loss) on securities available for sale,
net of tax of $660, $33,825, $17,371 and $66,571,
respectively			(25,873	)			41,009				(58,313	)			123,024
Total other comprehensive (loss)			(99,994	)			(24,787	)			(280,676	)			(74,364	)
Total comprehensive income		$ 77,749				$ 524,772				$ 2,156,068				$ 2,650,970
Weighted average earnings per share-
basic:		$ 0.07				$ 0.23				$ 1.00				$ 1.18
diluted:		$ 0.07				$ 0.23				$ 1.00				$ 1.18
Average shares outstanding - basic			2,443,518				2,401,964				2,438,335				2,312,663
Average shares outstanding - diluted			2,447,721				2,406,114				2,442,085				2,316,567
See accompanying notes to consolidated financial statements.

 

 

CORNING NATURAL GAS  HOLDING CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
		Nine Months ended June 30,
		2015				2014
Cash flows from operating activities:
Net income		$ 2,436,744				$ 2,725,334
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation			1,225,155				1,185,303
Unamortized debt issuance cost			67,111				102,499
Non-cash pension expenses			751,944				751,944
Regulatory asset amortization			164,282				209,358
Stock issued for services			124,037				106,031
(Gain) on sale of marketable securities			(97,423)				(871	)
Deferred income taxes			1,482,723				1,593,905
Bad debt expense			99,888				168,679
Loss on joint ventures			57,100				65,706
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable			(265,391)				(906,698	)
Gas stored underground			1,378,181				464,602
Materials and supplies inventories			(220,837)				389,494
Prepaid expenses			(357,420	)			(408,207	)
Under/over recovered gas costs			248,360				387,288
Deferred regulatory costs			(20,784)				(155,062	)
Other			157				18,438
Increase (decrease) in:
Accounts payable			(229,880)				394,468
Accrued expenses			(61,969)				(21,531	)
Customer deposits and accrued interest			(161,281)				(438,690	)
Deferred compensation			(35,609)				(34,523	)
Deferred pension costs & post-retirement benefits			(747,786)				(729,579	)
Other liabilities and deferred credits			150,261				655,167
Net cash provided by operating activities			5,987,563				6,523,055
Cash flows from investing activities:
Purchase of securities available-for-sale			(737,792)				(271,392	)
Sale of securities available-for-sale			850,953				359,348
Amount owed to related parties			(63,276)				(84,222	)
Investment in joint ventures			(1,030,000)				(650,000	)
Capital expenditures			(4,136,358)				(5,282,239	)
Net cash (used in) investing activities			(5,116,473				(5,928,505	)
Cash flows from financing activities:
Proceeds under line-of-credit			1,043,737				(1,030,888	)
Debt issuance expense			(982)				(150,336	)
Cash received from sale of stock			27,070				2,465,348
Dividends paid			(911,968)				(779,238	)
Proceeds under long-term debt			982,903				2,522,859
Repayment of long-term debt			(2,056,739)				(3,497,474	)
Net (decrease) increase in cash			(915,979)				(469,729	)
Cash and cash equivalents at beginning of period			(44,889)				124,821
Cash and cash equivalents at end of period			108,086				14,244
Supplemental disclosures of cash flow information:		$ 63,197				$ 139,065
Cash paid during the period for:
Interest		$ 692,423				$ 634,698
Income taxes		$ 144,626				$ 216,278
Non-cash financing activities:
Dividends paid with shares		$ 97,608				$ 92,673
Number of shares issued for dividends		5,066				5,482
See accompanying notes to consolidated financial statements.

 

 

 

CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Unaudited
	Number of Shares		Comon Stock		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive 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	14,759		147		248,568		-		-	248,715
Dividends declared	-		-		-		(1,032,995)		-	(1,032,995)
Comprehensive income: securities available for sale, net of income taxes	-		-		-		-		(58,313)	(58,313)
Minimum pension liability,net of income taxes	-		-		-		-		(222,363)	(222,363)
Net income	-		-		-		2,436,744		-	2,436,744
Total comprehensive income										2,156,068
Balances at June 30, 2015	2,444,943		$24,449		$26,286,171		$4,325,227		$(2,678,873)	$27,956,974

 See accompanying notes to the 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 “Gas 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 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, 2014. 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 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 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 in our latest New York Public Service Commission (“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.

 

In April 2015, the FASB issued new accounting guidance on the presentation of debt issuance costs. The new guidance requires that debt issuance costs related to a note be presented as a direct deduction from that note. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. We do not believe this guidance will have a material effect on our consolidated financial statements when adopted.

 

 

 

Note 2 - Pension and Other Post-retirement Benefit Plans

 

 

Components of Net Periodic Benefit Cost: 

 

Pension Benefits
		Three Months Ended June 30,								Nine Months Ended June 30,
		2015				2014				2015				2014
Service Cost		$ 85,760				$ 77,819				$ 257,279				$ 233,456
Interest Cost			229,789				201,622				689,367				604,867
Expected return on plan assets			(256,891	)			(231,590	)			(770,674	)			(694,771	)
Amortization of prior service cost			2,352				2,687				7,055				8,062
Amortization of net (gain) loss			123,490				108,832				370,469				326,495
Net period benefit cost		$ 184,500				$ 159,370				$ 553,496				$ 478,109
Other Benefits
		Three Months Ended June 30,								Nine Months Ended June 30,
			2015				2014				2015				2014
Service Cost		$ 5,245				$ 4,024				$ 15,734				$ 12,072
Interest Cost			12,168				13,171				36,505				39,512
Expected return on plan assets			—				—				—				—
Amortization of prior service cost			887				887				2,660				2,660
Amortization of net (gain) loss			(1,975	)			(5,994	)			(5,926	)			(17,983	)
Net period benefit cost		$ 16,325				$ 12,088				$ 48,973				$ 36,261

 

 

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 $727,000 for the nine months ended June 30, 2015 and 2014. 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 is 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 $55,396 for the nine months ended June 30, 2015 and 2014. 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 is not included in the prepaid cost noted above.

 

Contributions

 

The Gas 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 $747,786 has been paid to the Pension Plan for the first nine 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 Manufacturers and Traders Trust Company (“M&T). As collateral, the Gas Company granted M&T a security interest in all utility property, plant and equipment, contract rights, easements, rights of way, 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 term 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 is calculated on a ten year amortization schedule. A final payment equal to the outstanding principal and interest will be due on the maturity date. This Note funded construction projects in our NYPSC mandated repair/replacement program for 2014. As of the loan conversion on November 30, 2014, the Gas Company had drawn the total amount of the note, with $943,451 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 Community Bank, N.A .with an interest rate calculated as the 30-day LIBOR plus 2.8%. The amount outstanding under this line on June 30, 2015 was approximately $5.7 million with an interest rate of 2.9822%. As security for the Gas 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 Gas Company is required to maintain a debt to tangible net worth ratio of less than 2.5 to 1.0 and a debt service coverage ratio of 1.1 to 1.0 as defined in the credit agreement. We rely heavily on our credit line 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 Gas Company’s deferred compensation plan, are valued based on Level 1 inputs.

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

 

Fair value of assets and liabilities measured on a recurring basis at June 30, 2015 and September 30, 2014 are as follows:

Fair Value Measurements at Reporting Data Using:

	Fair Value	Quoted Prices In Active Market for Identical Assets/Liabilities(Level1)		Level2	Level 3
June 30, 2015 Available-for-sale securities	$2,221,143	$2,221,143		0	0
September 30, 2014 Available-for-sale securities	$2,308,138	$2,308,138		0	0

 

A summary of the marketable securities at June 30, 2015 and September 30, 2014 is as follows:

		Cost Basis		Unrealized Gain		Unrealized Loss		Market Value
June 30, 2015
Cash and equivalents	$ 157,356			-		-	$ 157,356
Metlife stock Value		51,185		-		-		51,185
Government and agency bonds		301,673		-		2,036		299,637
Corporate bonds		258,383		-		7,915		250,468
Mutual funds		56,515		-		4,732		51,783
Equity securities		1,278,262		132,452		-		1,410,714
	$ 2,103,374			132,452		14,683	$ 2,221,143

 

		Cost Basis		Unrealized Gain		Unrealized Loss		Market Value
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 included in earnings for the periods reported in investment income as follows:

 

Investment Income

 

	Three Months Ended June 30,		Nine Months Ended June 30,
	2015	2014	2015	2014
Total realized gains included in earnings	$4,525	$9,390	$97,423	$871

 

 

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 5 – Common Stock and Dividends

 

For the fiscal year to date there were 14,759 shares issued for $27,070 of cash, $124,037 of services and $97,608 of DRIP (dividend reinvestment program). There were 7,817 shares issued to directors, 376 shares sold to Leatherstocking Gas, which used the shares to compensate its independent director, Carl Hayden, 5,066 shares issued to various investors under the dividend reinvestment program and 1,500 options exercised.

 

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. At its regular meeting on January 20, 2015, the board of directors approved an increase in the quarterly dividend to $.145 a share. This dividend was paid on April 15, 2015 to shareholders of record on March 31, 2015 and on July 15, 2015 to shareholders of record on June 30, 2015.

 

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 nine months ended June 30, 2015, 5,066 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. At a regular meeting on April 7, 2015, the board of directors of the Gas Company approved the payment and transfer of a dividend of $1.0 million to the Holding Company. These transactions are eliminated in consolidation.

Note 6 – Leatherstocking Companies

 

The Holding Company has an interest in Leatherstocking Gas, a joint venture with Mirabito Regulated Industries accounted for by the equity method. 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 Holding 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. 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. Leatherstocking Gas’ petition for authority to exercise its franchises in the Town and Village of Winsor is currently pending before the NYPSC. 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. Leatherstocking Gas currently serves nearly 200 customers in these boroughs and townships. 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 nine months ended June 30, $2,500,000 was borrowed and both the Holding Company and Mirabito Regulated Industries invested $850,000. As of June 30, 2015, Leatherstocking Gas has drawn the $4 million available over the two year period on this loan. In February 2015 Leatherstocking Gas purchased a 1.5 mile high pressure gas main along with a meter, heater and regulator station for $900,000. This purchase was funded with a new loan agreement with Five Star Bank for $540,000 and investment from the Holding Company and Mirabito Regulated Industries of $180,000 each for total investments of $1,030,000 by each for the nine months ended June 30, 2015. The new note matures on March 1, 2020 with an interest rate of 4.58%. With this purchase, Leatherstocking Gas began service to a large industrial customer.

 

The interests in Leatherstocking Pipeline, which was formed with the same structure and managers as Leatherstocking Gas, are also held by 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 Leatherstocking companies (collectively, “Joint Ventures”) has been recognized in the consolidated financial 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 for the nine months ended June 30, 2015 and June 30, 2014:

 

			2015				2014
Beginning balance in investment in joint ventures		$	1,280,757			$	587,678
Investment in joint ventures during nine months ended June 30			1,030,000				650,000
(Loss) on joint ventures during nine months ended June 30			(57,100	)			(65,706	)
Ending balance in joint ventures		$	2,253,657			$	1,171,972

 

 

 

As of and for the nine months ended June 30, 2015, the Joint Ventures had combined assets of $11 million, combined liabilities of $6.5 million and combined net losses of approximately $114,000. As of and for the nine months ended June 30, 2014, the Joint Ventures had combined assets of $5 million, combined liabilities of $2.6 million and combined net losses of approximately $131,000.

 

Note 7 – Effective Tax Rate

 

Income tax expense for the nine months ended June 30 is as follows:
			2015				2014
Current		$ —			$ —
Deferred			1,482,723				1,593,905
Total		$ 1,482,723				$ 1,593,905

 

Actual income tax expense differs from the expected tax expense (computed by applying the federal corporate tax rate of 34% before income tax expense) as follows:

 

			2015				2014
Expected federal tax expense		$ 1,332,619				$ 1,468,541
State tax expense (net of federal)		$ 267,054				$ 202,400
Other, net			(116,950	)			(77,036	)
Actual tax expense		$ 1,482,723				$ 1,593,905

 

 

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. The Gas Company was also notified during the quarter ended March 31, 2015 that the Internal Revenue Service had finished their examination of the federal return for the period ended September 30, 2012 with no changes ordered.

 

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 “Gas 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 it operates. 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 and Bradford Counties, 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 Gas 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 one of our most promising growth opportunities 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 9 to 10 miles of bare steel pipe and approximately 400 bare steel services for fiscal 2015. We have constructed approximately 5 miles of new pipe to interconnect Line 15 with Arlington Storage in the Town of Bath. Line 15 is a high pressure distribution main that provides gas supply to the Villages of Bath and Hammondsport and the Towns of Urbana and Bath, New York.

 

We believe our key performance indicators are net income, stockholders’ equity and the safety of our system. For the three months ended June 30, 2015, net income decreased by $371,816 compared to the same period in 2014 mainly due to unfavorable regulatory reconciliations along with higher operating and depreciation expenses. For the nine months ended June 30, 2015, net income decreased $288,590 compared to the same period in 2014 for substantially identical reasons. 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 Corning Gas 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 June 30, 2015, stockholders’ equity increased from $27,790,401 to $27,956,974. 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 $4.1 million on reliability projects and safety-related infrastructure improvements. For the first nine months of fiscal 2015 we repaired 196 leaks, replaced 335 bare steel services and replaced 30,354 feet of bare steel main.

 

Key Performance Indicators:

 

 

				Three Months Ended June 30,			Nine Months Ended June 30,
				2015	2014		2015	2014
Net Income				$177,743	$549,559		$2,436,744	$2,725,334
Shareholders’ equity				$27,956,974	$27,790,974		$27,956,974	$27,790,401
Shareholders’ per weighted average share				$11.44	$11.57		$11.47	$11.40

 

 

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 us to surcharge customers for under recovery of revenue.

Utility operating revenues decreased $1.2 million in the three months ended June 30, 2015 and $2.8 million for the nine months ended June 30, 2015 compared to the same periods last year mainly due to lower gas costs (a pass through expense) and less favorable regulatory amortizations of $103,728 for MFC and $75,891 for RDM. Additionally, local production revenues decreased by $3,940 for the three months and $2,378 for the nine months ended June 30, 2015 compared to the same periods last year. Part of our monthly volumetric charge for local production revenues is now being recognized as a deferral due to customers per the last rate case. The NYPSC is allowing Corning Gas 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. These payments amounted to $125,603 for the nine months ended June 30, 2014. Other utility revenue decreased $252,490 for the three months ended June 30, 2015 and $383,756 for the nine months ended June 30, 2015 compared to last year mainly because of the Revenue Decoupling Mechanism (“RDM”) monthly reconciliation and annual reconciliations for RDM and Merchant Function Charge (“MFC”). The RDM is a rate adjustment intended to prevent the potential for reduced revenues due to customer conservation from becoming a disincentive to utilities to pursue conservation measures. The MFC is a customer charge intended to reflect the administrative costs related to the acquisition and management of natural gas supplies. Both are subject to annual reconciliations. Both RDM and MFC reconciliations have been affected by the colder than usual weather causing higher volumes of gas sold and revenues on a per customer basis as measured at April 30, 2015, the end of the rate plan. There has also been a movement by residential customers from marketers to system supply. Customers who use our system supply are charged a volumetric MFC. Both factors caused an over-collection compared to targets and negative revenue reconciliations.

 

The following table summarizes our utility operating revenue:

 

		Three Months Ended June 30,								Nine Months Ended June 30,
		2015				2014				2015				2014
Retail revenue:
Residential		$ 2,594,559				$ 3,296,386				$ 11,710,437				$ 13,281,012
Commercial			377,901				549,886				1,805,813				2,272,931
Transportation			923,298				897,419				3,573,467				3,555,892
Total retail revenue			3,895,758				4,743,691				17,089,717				19,109,835
Wholesale			320,525				415,078				1,925,982				2,335,143
Local production			237,155				241,095				668,789				671,167
Other utility revenues			(31,669)				220,821				267,801				651,557
Total utility operating revenue		$ 4,421,769				$ 5,620,685				$ 19,952,289				$ 22,767,702

 

 

 

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

 

		Three Months Ended June 30,								Nine Months Ended June 30,
		2015				2014				2015				2014
Other utility revenues:
Customer discounts forfeited		$ 35,280				$ 45,689				$ 91,797				$ 100,791
Reconnect fees			931				1,200				4,049				3,680
Other gas revenues (see below)			(69,543)				171,539				166,846				539,502
Surcharges			1,663				2,393				5,109				7,584
Total other utility revenues		($ 31,669)				$ 220,821				$ 267,801				$ 651,557
			2015				2014				2015				2014
Other gas revenues:
DRA carrying costs		$ 1,148				$ 1,855				$ 4,249				$ 4,594
Monthly RDM amortizations			(60,675)				74,576				(248,935)				91,739
Local production revenues			30,853				—				83,454				—
Capacity release revenues			—				—				46,674				—
Annual RDM reconciliation			(15,216)				—				88,851				62,909
Annual MFC reconciliation			(103,728)				—				(103,728)				—
Contract customer target reconciliation			78,075				95,108				296,281				380,260
		($ 69,543)				$ 171,539				$ 166,846				$ 539,502

 

Gas purchases are our largest expense. Purchased gas expense decreased $1.0 million for the three months ended June 30, 2015 and $2.7 million for the nine months ended June 30, 2015 compared to the same periods last year due primarily to lower gas prices on purchases for the period.

 

Margin (the excess of utility operating revenues over the cost of natural gas purchased) percentage increased 11.52% for the three months and 7.7% for the nine months ended June 30, 2015 compared to the same periods last year primarily because of the rate increase and lower gas prices. Margin decreased $291,461 for the three months and $128,131 for the nine months ended June 30, 2015 compared to the same periods last year. This decline was attributable to regulatory reconciliations of $103,728 for MFC, $75,891 for RDM and an adjustment to purchase gas of $46,674 to recognize a prior period capacity release re-calculation. The Gas Company sells unused pipeline capacity in the secondary market and is allowed to keep 15% of the revenue resulting from these sales.

 

		Three Months Ended June 30,								Nine Months Ended June 30,
		2015				2014				2015				2014
Utility operating revenues		$ 4,421,769				$ 5,620,685			$ 19,952,289					$ 22,767,702
Natural gas purchased			958,163				1,865,618				6,616,534				9,303,816
Margin		$ 3,463,606				$ 3,755,067				$ 13,335,755				$ 13,463,886
Margin %			78.33%				66.81%				66.84%				59.14%

 

Operating and Interest Expenses

 

Operating and maintenance expense increased $261,369 in the third quarter of fiscal 2015 and $495,905 for the year to date compared to the same periods of fiscal 2014 mainly because of increased insurance costs, increased pension administration costs, increased fees related to audit consultations, increased regulatory expense due to net plant reconciliation and increased costs due to our leak repair project. Depreciation expense increased $55,832 for the quarter ended June 30, 2015 because of added plant and accelerated recovery on certain projects allowed by the NYPSC. Depreciation expense increased only by $33,852 for the year-to-date compared to the same period in 2014 because in November 2013, the compressor station and related assets were fully depreciated. As a result, 80% of certain payments from producers were no longer recognized as depreciation expense because the Gas Company was recording depreciation in the amount of revenue earned which is consistent with public utility accounting. Other deductions, net decreased $36,381 in this quarter compared to last quarter due mainly to lower amortizations for debt issuance. There was a decrease of $275,310 for the nine months ended June 30, 2015 for other deductions, net, due mainly to $228,002 of one-time organizational costs for the Holding Company start-up recognized in the first quarter of fiscal 2014. Interest expense showed an increase of $33,183 for the quarter and $53,716 from fiscal 2014 to 2015 due to new debt instruments.

 

Net Income

 

Net income decreased $371,816 for the three months and $288,590 for the nine months ended June 30, 2015 compared to the same periods in 2014 due primarily to unfavorable regulatory reconciliations partially offset by the rate increase. In the third quarter of fiscal 2015 the Gas Company recognized pre-tax expenses associated with a MFC reconciliation of $103,728, RDM reconciliations of $75,891 and a net plant reconciliation of $76,501. The MFC and RDM reconciliations have been discussed previously as part of “Revenue and Margin”. Net plant was compared to targets in the 2012 rate plan based on monthly targets for the entire three years of the plan and compared to actual additions to plant during the period. The decline in net income for the quarter is primarily the result of these regulatory adjustments which also affects the year to date figures. Also contributing to increased costs during the current quarter were legal and accounting expenses incurred in responding to a Securities and Exchange Commission Comment Letter for the period ending September 30, 2014 amounting to $13,000 and expense for acceleration of our leak survey and repair project of approximately $72,000 for the quarter. These costs are also pre-tax expenses for the quarter. Without the regulatory reconciliations and expenses listed above, income for the current quarter was comparable to the same quarter in the previous year.

 

 

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 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.

 

On July 15, 2015, the Gas Company, the staff of the NYPSC, and other parties to the Gas Company’s most recent NYPSC rate proceeding (Case 11-G-0280) filed a joint proposal for an extension of the Gas Company’s 2012 Gas Rate Plan (the “Extension Joint Proposal”)

 

Under an earnings sharing mechanism contained in the Joint Proposal, however, Corning Gas is allowed to retain all earnings above 9.50% up to and including 10.25%, 50% of earnings above 10.25% up to and including 11.00%, 25% of earnings above 11.00% up to and including 11.75%, and 10% of earning above 11.75%.  We believe that these limits do not have a significant effect on our liquidity because even at those limits we have sufficient cash collected from our earnings to support operations.

 

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 need to draw on both operating cash and new debt and/or equity. In fiscal year 2015 to date, we have spent approximately $4.1 million on projects and safety-related infrastructure improvements. This, in conjunction with our growth projects, creates liquidity pressure on the Gas Company. We anticipate that our aggressive capital construction program will continue to require the Gas 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, quarterly dividends paid 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 June 30, 2015 was approximately $5.7 million with an interest rate of 2.9822%. As security for the Gas 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 Gas Company is required to maintain a debt to tangible net worth ratio of less than 2.5 to 1.0 and a debt service coverage ratio of 1.1 to 1.0 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 $16.2 million in long term debt outstanding including current year installments as of June 30, 2015. We repaid approximately $2.1 million in the first nine months of fiscal 2015 consistent with the requirements of our debt instruments and refinancing activities.

 

The Gas Company is in compliance with all of our loan covenants as of June 30, 2015.

 

During this quarter, we mainly injected gas into storage and as of June 30, 2015, had a balance of $913,484 worth of gas in storage. During the fourth quarter, we will be injecting gas into storage to have sufficient gas to supply our customers for the next 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 Gas Company, filed a petition with the NYPSC in Case 10-G-0598 that claimed BEGWS was overbilled for gas by the Gas Company. BEGWS asserted that the Gas 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 Gas Company to refund approximately $1.2 million for overcharges and interest. The Gas Company conducted a comprehensive review of the BEGWS claim. The Gas Company believes that its meters and the resulting bills have been accurate. On January 26, 2011, the Gas Company responded that its preliminary review of its billing data and gas cost reconciliation to the NYPSC shows that the Gas 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 Gas Company owes it a refund of $345,747. The Gas 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 Gas Company and the Gas Company agreed to make certain capital expenditures totaling approximately $250,000 to improve the reliability of service to BEGWS and the Gas Company’s Hammondsport customers. On February 27, 2015, the NYPSC issued an order dismissing the BEGWS complaint against Corning Gas. However, the NYPSC expects both BEGWS and the Gas Company to address the system improvements contained in the MOU in their respective future rate case extensions and filings.

On May 24, 2011, the Gas 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, 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 Gas Company, the Staff of the NYPSC and other intervenor parties filed a Joint Proposal (the “2012 Joint Proposal”) with the NYPSC to resolve all issues in the rate case. The 2012 Joint Proposal provided for revenue increases to the Gas 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 2012 Joint Proposal also provided the Gas Company the opportunity to earn $545,284 from local production before sharing, a 118% increase from the $250,000 allowed previously. The 2012 Joint Proposal also provided for property tax reconciliation, treatment of future local production investment, cost allocations to the Gas 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 based on a 9.5% return on equity. The cumulative potential revenue increases over the three years totaled $4,955,869. On April 20, 2012 the NYPSC issued a final order in the case accepting the 2012 Joint Proposal, with rates effective May 1, 2012.

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 Gas 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 following 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 Gas 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 Gas 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 Gas 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 Gas 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 Gas 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 Gas 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 Gas 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 2012 Joint Proposal, and noting the measures necessary to effect such an extension.  On July 15, 2015 the Company, PSC Staff and the other parties to Case 11-G-0280 filed a Joint Proposal for an Extension of the Gas Rate Plan ("Extension Joint Proposal"). This Extension Joint Proposal, if approved, will settle all contested issues among the parties pertaining to an extension, with modifications, of the original 2012 Joint Proposal’s three-year Gas Rate Plan. Except as modified by the Extension Joint Proposal, the terms of the 2012 Joint Proposal will continue in effect and subject to the adjustments permitted in the Extension Joint Proposal, the delivery rates established by the 2012 Joint Proposal will continue in effect through April 30, 2017. The Extension Joint Proposal provides for the Gas Company to establish a “Safety and Reliability” customer surcharge on its customers to recover certain carrying costs on approved infrastructure improvements for the period of the extension. The proposal also resolves a property tax issue and requires the Gas Company to return to customers a “Gas System Benefit Charge” over-collection (a regulatory liability of the Gas Company) over a three-year period. NYPSC action on the Extension Joint Proposal is expected in October 2015, although it is possible that the NYPSC could act on the Extension Joint Proposal at a later time.

 

On August 8, 2011, the Gas 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 Gas 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 Gas 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 Gas Company filed a petition in Case 12-G-0049 requesting authorization to issue $12,650,000 in debt and $12,650,000 in 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 Gas 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 Gas Company’s gas distribution system. On May 17, 2012, the NYPSC acted on the petition. The Gas 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. During the preparation of a new debt financing petition with the NYPSC, the Gas Company discovered that it had inadvertently not filed notice to the Commission of issuance of debt on August 13, 2013 and September 3, 2013 in the amounts of $750,000 and $2,329,223 respectively. The total amount issued under Commission Order Case 12-G-0049 amounted to $10,440,223. Therefore, the Company exceeded the $9,000,000 authorized in Case 12-G-0049 by $1,440,223. The Company on August 3, 2015 filed with NYPSC notifying it of the two above reference loan issuances. The Company will file a new debt petition for approximately $35.0 million to fund its capital expenditures for the period 2015-2021 no later than August 7, 2015. The Gas Company has deducted the amount of $1,440,223 from its request and will ask for retroactive approval of the amount issued. NYPSC action is expected in the fourth quarter of 2015.

On March 26, 2012, the Gas 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 Gas 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 Gas 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 Gas Company’s common stock and the exchange of shares of common stock of the Gas 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 Gas Company’s shareholders regarding the proposal to create the holding company structure and the exchange of shares of the Gas 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 Gas 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 Gas 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 Gas 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 Gas 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 Gas 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.

 

On February 20, 2015, Leatherstocking Gas filed under Section 68 of the Public Service Law 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 and Village of Winsor in Case 15-G-0098 (Town of Windsor) and Case 15-G-0099 (Village of Windsor). The Commission review of the applications has begun.

 

On February 27, 2015, Leatherstocking Gas filed pursuant to Public Service Law Section 69 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 has begun in Case 15-G-0128.

 

On June 3, 2015 Leatherstocking Gas filed a petition with the PAPUC requesting authorization to issue a commercial promissory note in the amount of $5,668,963. On July 8, 2014 the PAPUC issued an order in Docket No. S-2015-2486104 approving the petition.

 

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, 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 Gas 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 Gas 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 Gas Company's pension expense for financial reporting purposes is the amount approved by the NYPSC in the Gas 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 Gas 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, 2014, 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, with respect to Corning Gas or PAPUC, with respect to our joint venture interest in Leatherstocking Gas Company, LLC,
*	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 June 30, 2015, the Holding Company’s management, with the participation of the Holding 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 June 30, 2015.

 

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 Gas Company has lawsuits pending of the type incurred in the normal course of business and the Holding Company and the Gas Company believe that any potential losses should 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, 2014, for disclosure relating to certain risk factors applicable to the Gas 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 March 31, 2014, formatted in XBRL (eXtensible Business Reporting Language):
		(i)	the Consolidated Balance Sheets at June 30, 2015 and September 30, 2014,
		(ii)	the Consolidated Statements of Income and Comprehensive Income for the three months and nine months ended June 30, 2015 and June 30, 2014
		(iii)	the Consolidated Statements of Cash Flows for the nine months ended June 30, 2015 and June 30, 2014, and
		(iv)	related notes to the Condensed Consolidated Financial Statements.
	*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: August 14, 2015		By: /s/ Michael I. German
		Michael I. German, Chief Executive Officer and President
		(Principal Executive Officier)
Date: August 14, 2015		By: /s/ Firouzeh Sarhangi
		Firouzeh Sarhangi, Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)