Attached files
file | filename |
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EX-32 - Corning Natural Gas Holding Corp | exh32_1.htm |
EX-31 - Corning Natural Gas Holding Corp | exh31_2.htm |
EX-31 - Corning Natural Gas Holding Corp | exh31_1.htm |
EX-10 - Corning Natural Gas Holding Corp | exh10_2.htm |
EX-10 - Corning Natural Gas Holding Corp | exh10_1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION☒
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2019
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-00643
CORNING NATURAL GAS HOLDING CORPORATION
(Exact name of Registrant as specified in its charter)
New York | 46-3235589 |
(State of incorporation) | (I.R.S. Employer Identification No.) |
330 West William Street, Corning, New York 14830
(Address of principal executive offices) (Zip Code)
(607) 936-3755
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
None | N/A | N/A |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ☐ Accelerated Filer ☐ Non-accelerated Filer ☐ Smaller Reporting Company ☒ Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Shares outstanding as of February 13, 2020 |
Common Stock, $.01 par value | 3,055,779 |
PART I. | FINANCIAL INFORMATION | PAGE | ||||||
Item 1. | Financial Statements | 2 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 | ||||||
Item 4. | Controls and Procedures | 26 | ||||||
PART II. | OTHER INFORMATION | |||||||
Item 1. | Legal Proceedings | 27 | ||||||
Item 1A. | Risk Factors | 27 | ||||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 27 | ||||||
Item 3. | Defaults Upon Senior Securities | 27 | ||||||
Item 4. | Mine Safety Disclosures | 27 | ||||||
Item 5. | Other Information | 27 | ||||||
Item 6. | Exhibits | 27 | ||||||
SIGNATURES | 28 | |||||||
1 |
PART I
FINANCIAL INFORMATION
Item 1. | Financial Statements |
CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES | ||||||||
Consolidated Balance Sheets | ||||||||
Unaudited | ||||||||
Assets | December 31, 2019 | September 30, 2019 | ||||||
Plant: | ||||||||
Utility property, plant and equipment | $123,420,705 | $121,041,738 | ||||||
Less: accumulated depreciation | (29,917,150 | ) | (29,263,612 | ) | ||||
Total plant, net | 93,503,555 | 91,778,126 | ||||||
Investments: | ||||||||
Marketable securities at fair value | 2,271,438 | 2,184,170 | ||||||
Investment in joint ventures | 2,601,502 | 2,597,919 | ||||||
4,872,940 | 4,782,089 | |||||||
Current assets: | ||||||||
Cash and cash equivalents | 292,669 | 314,341 | ||||||
Customer accounts receivable, (net of allowance for | ||||||||
uncollectible accounts of $83,819 and $66,470, respectively) | 4,064,309 | 2,436,221 | ||||||
Other accounts receivable | 398,803 | 335,481 | ||||||
Related party receivables | 40,736 | 5,818 | ||||||
Gas stored underground | 1,173,203 | 1,238,826 | ||||||
Materials and supplies inventories | 2,841,499 | 2,747,194 | ||||||
Prepaid expenses | 1,359,889 | 1,726,353 | ||||||
Total current assets | 10,171,108 | 8,804,234 | ||||||
Regulatory and other assets: | ||||||||
Regulatory assets: | ||||||||
Unrecovered gas and electric costs | 1,163,043 | 985,556 | ||||||
Deferred regulatory costs | 4,183,516 | 4,401,299 | ||||||
Deferred pension | 7,346,440 | 7,294,641 | ||||||
Other | 557,520 | 562,703 | ||||||
Total regulatory and other assets | 13,250,519 | 13,244,199 | ||||||
Total assets | $121,798,122 | $118,608,648 |
See accompanying notes to consolidated financial statements.
2 |
CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES | ||||||||
Consolidated Balance Sheets | ||||||||
Unaudited | ||||||||
Liabilities and capitalization | December 31, 2019 | September 30, 2019 | ||||||
Long-term debt, less current installments | $38,430,131 | $37,939,785 | ||||||
Less: debt issuance costs | (265,840 | ) | (276,885 | ) | ||||
Total long-term debt | 38,164,291 | 37,662,900 | ||||||
Redeemable preferred stock - Series A | 5,191,995 | 5,186,812 | ||||||
(Authorized 255,500 shares. Issued and outstanding: | ||||||||
210,600 shares at December 31, 2019 and September 30, 2019, | ||||||||
less issuance costs of $73,005 and $78,188, respectively) | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | 4,644,917 | 4,260,846 | ||||||
Borrowings under lines-of-credit and short-term debt | 8,308,963 | 6,875,752 | ||||||
Accounts payable | 2,093,210 | 1,826,604 | ||||||
Accrued expenses | 405,472 | 422,557 | ||||||
Customer deposits and accrued interest | 1,672,119 | 1,403,139 | ||||||
Dividends declared | 503,462 | 502,559 | ||||||
Total current liabilities | 17,628,143 | 15,291,457 | ||||||
Deferred credits and other liabilities: | ||||||||
Deferred income taxes | 6,382,134 | 6,209,336 | ||||||
Regulatory liabilities | 3,499,646 | 3,557,481 | ||||||
Deferred compensation | 1,434,948 | 1,391,924 | ||||||
Pension costs and post-retirement benefits | 9,849,553 | 9,683,393 | ||||||
Other | 210,597 | 240,747 | ||||||
Total deferred credits and other liabilities | 21,376,878 | 21,082,881 | ||||||
Commitments and contingencies | — | — | ||||||
Temporary equity: | ||||||||
Redeemable convertible preferred stock - Series B | ||||||||
(Authorized 244,500 shares. Issued and outstanding: | ||||||||
244,263 shares at December 31, 2019 and September 30, 2019) | 4,970,655 | 4,966,893 | ||||||
Common stockholders' equity: | ||||||||
Common stock ($.01 par value per share. | 30,533 | 30,470 | ||||||
Authorized 4,500,000 shares. Issued and | ||||||||
outstanding: 3,053,285 shares at December 31, 2019 | ||||||||
and 3,047,060 at September 30, 2019) | ||||||||
Additional paid-in capital | 27,846,012 | 27,745,837 | ||||||
Retained earnings | 6,584,706 | 6,634,085 | ||||||
Accumulated other comprehensive income | 4,909 | 7,313 | ||||||
Total common stockholders' equity | 34,466,160 | 34,417,705 | ||||||
Total liabilities and capitalization | $121,798,122 | $118,608,648 |
See accompanying notes to consolidated financial statements.
3 |
CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES | ||||||||
Consolidated Statements of Income | ||||||||
(Unaudited) | Three Months Ended | |||||||
December 31, 2019 | December 31, 2018 | |||||||
Utility operating revenues: | ||||||||
Gas operating revenues | $6,554,199 | $7,067,078 | ||||||
Electric operating revenues | 1,607,218 | 2,400,528 | ||||||
Total utility operating revenues | 8,161,417 | 9,467,606 | ||||||
Costs of sales: | ||||||||
Gas purchased | 1,824,665 | 2,294,669 | ||||||
Electricity purchased | 338,361 | 977,230 | ||||||
Total cost of sales | 2,163,026 | 3,271,899 | ||||||
Gross margin | 5,998,391 | 6,195,707 | ||||||
Cost and expense: | ||||||||
Operating and maintenance expense | 2,976,291 | 2,731,056 | ||||||
Taxes other than income taxes | 928,859 | 924,312 | ||||||
Depreciation | 652,704 | 620,364 | ||||||
Other deductions, net | 114,413 | 116,495 | ||||||
Total costs and expenses | 4,672,267 | 4,392,227 | ||||||
Utility operating income | 1,326,124 | 1,830,480 | ||||||
Other income and (expense): | ||||||||
Interest expense | (610,714 | ) | (610,990 | ) | ||||
Other expense | (163,495 | ) | (107,418 | ) | ||||
Investment income (loss) | 87,710 | (83,980 | ) | |||||
Income (loss) from joint ventures | 3,583 | (6,879 | ) | |||||
Rental income | 7,638 | 12,138 | ||||||
Income from utility operations before income taxes | 650,846 | 1,006,351 | ||||||
Income tax expense | (196,763 | ) | (256,557 | ) | ||||
Net income | 454,083 | 749,794 | ||||||
Less Series B Preferred Stock Dividends | 61,066 | 61,066 | ||||||
Net income attributable to common stockholders | $393,017 | $688,728 |
4 |
Weighted average earnings (loss) per share: | ||||||||||
basic | $0.13 | $0.23 | ||||||||
diluted | $0.13 | $0.23 | ||||||||
Average shares outstanding - basic | 3,050,875 | 3,025,308 | ||||||||
Average shares outstanding - diluted | 3,050,875 | 3,318,424 |
See accompanying notes to consolidated financial statements
CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES | ||||||||
Consolidated Statements of Comprehensive Income | ||||||||
(Unaudited) | Three Months Ended | |||||||
December 31, 2019 | December 31, 2018 | |||||||
Net income | $454,083 | $749,794 | ||||||
Other comprehensive income (loss): | ||||||||
Net unrealized (loss) gain on debt securities available for sale | ||||||||
net of (benefit) tax of ($1,057) and $2,046, respectively | (2,404 | ) | 5,135 | |||||
Total comprehensive income | $451,679 | $754,929 |
See accompanying notes to consolidated financial statements
5 |
CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES | ||||||||||||||||||||||||
Consolidated Statement of Changes in Common Stockholders' Equity For the Three Months ended December 31, 2019 and 2018 | ||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||
Number of |
Common | Additional Paid In | Retained | Other Comprehensive | ||||||||||||||||||||
Shares | Stock | Capital | Earnings | (Loss) | Total | |||||||||||||||||||
Balances at September 30, 2019 | 3,047,060 | $30,470 | $27,745,837 | $6,634,085 | $7,313 | $34,417,705 | ||||||||||||||||||
Issuance of common stock | 6,225 | 63 | 100,175 | — | — | 100,238 | ||||||||||||||||||
Dividends declared on common ($0.145 per share) | — | — | — | (442,396 | ) | — | (442,396 | ) | ||||||||||||||||
Dividends declared on Preferred B shares ($0.25 per share) | — | — | — | (61,066 | ) | — | (61,066 | ) | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Change in unrealized loss on | ||||||||||||||||||||||||
debt securities available for sale, net of income taxes | — | — | — | — | (2,404 | ) | (2,404 | ) | ||||||||||||||||
Net income | — | — | — | 454,083 | — | 454,083 | ||||||||||||||||||
Balances at December 31, 2019 | 3,053,285 | $30,533 | $27,846,012 | $6,584,706 | $4,909 | $34,466,160 |
Accumulated | ||||||||||||||||||||||||
Number of |
Common | Additional Paid In | Retained | Other Comprehensive | ||||||||||||||||||||
Shares | Stock | Capital | Earnings | Income (Loss) | Total | |||||||||||||||||||
Balances at September 30, 2018 | 3,021,851 | $30,218 | $27,320,162 | $5,399,751 | $90,593 | $32,840,724 | ||||||||||||||||||
Adoption of accounting standard | — | — | — | 100,131 | (100,131 | ) | — | |||||||||||||||||
Issuance of common stock | 7,827 | 79 | 132,429 | — | — | 132,508 | ||||||||||||||||||
Dividends declared on common ($0.14 per share) | — | — | — | (423,836 | ) | — | (423,836 | ) | ||||||||||||||||
Dividends declared on Preferred B shares ($0.25 per share) | — | — | — | (61,066 | ) | — | (61,066 | ) | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Change in unrealized gain on | ||||||||||||||||||||||||
debt securities available for sale, net of income taxes | — | — | — | — | 5,135 | 5,135 | ||||||||||||||||||
Net income | — | — | — | 749,794 | — | 749,794 | ||||||||||||||||||
Balances at December 31, 2018 | 3,029,678 | $30,297 | $27,452,591 | $5,764,774 | ($4,403 | ) | $33,243,259 |
See accompanying notes to consolidated financial statements
See
accompanying notes to consolidated financial statements
6 |
CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES | ||||||||
Consolidated Statements of Cash Flows | ||||||||
(Unaudited) | ||||||||
Three Months Ended | ||||||||
December 31, 2019 | December 31, 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $454,083 | $749,794 | ||||||
Adjustments to reconcile net income to net cash | ||||||||
provided by operating activities: | ||||||||
Depreciation | 652,704 | 620,364 | ||||||
Amortization of debt issuance cost | 26,915 | 24,755 | ||||||
Non-cash pension expenses | 235,357 | 235,357 | ||||||
Regulatory asset amortizations | 181,025 | 114,221 | ||||||
Stock issued for services | 46,735 | 89,072 | ||||||
(Gain) loss on sale of marketable securities | (9,734 | ) | 15,018 | |||||
Unrealized (gain) loss on marketable securities | (77,976 | ) | 76,307 | |||||
Deferred income taxes | 196,763 | 256,557 | ||||||
Bad debt expense | 55,000 | 70,000 | ||||||
(Gain) loss from joint ventures | (3,583 | ) | 6,879 | |||||
Changes in assets and liabilities: | ||||||||
(Increase) decrease in: | ||||||||
Accounts receivable | (1,746,410 | ) | (1,615,612 | ) | ||||
Gas stored underground | 65,623 | 56,118 | ||||||
Materials and supplies inventories | (94,305 | ) | (262,209 | ) | ||||
Prepaid expenses | 366,464 | 313,397 | ||||||
Unrecovered gas and electric costs | (177,487 | ) | 459,724 | |||||
Deferred regulatory costs | 29,833 | (64,155 | ) | |||||
Other | 5,183 | 5,183 | ||||||
Increase (decrease) in: | ||||||||
Accounts payable | 266,606 | (972,452 | ) | |||||
Accrued expenses | (17,085 | ) | (2,196 | ) | ||||
Customer deposits and accrued interest | 268,980 | 164,125 | ||||||
Deferred compensation | 43,024 | 40,715 | ||||||
Deferred pension costs & post-retirement benefits | (120,996 | ) | (198,195 | ) | ||||
Other liabilities and deferred credits | (111,953 | ) | (33,898 | ) | ||||
Net cash provided by operating activities | 534,766 | 148,869 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of securities, net of sales | (1,959 | ) | (14,949 | ) | ||||
Amount paid to related parties | (34,918 | ) | (83,588 | ) | ||||
Capital expenditures | (2,378,133 | ) | (1,650,676 | ) | ||||
Net cash used in investing activities | (2,415,010 | ) | (1,749,213 | ) | ||||
Cash flows from financing activities: | ||||||||
Net proceeds from lines-of-credit | 1,433,211 | 2,194,732 | ||||||
Dividends paid | (449,056 | ) | (440,371 | ) | ||||
Proceeds under long-term debt | 1,860,590 | 1,018,465 | ||||||
Repayment of long-term debt | (986,173 | ) | (843,337 | ) | ||||
Net cash provided by financing activities | 1,858,572 | 1,929,489 | ||||||
Net (decrease) increase in cash and cash equivalents | (21,672 | ) | 329,145 | |||||
Cash and cash equivalents at beginning of period | 314,341 | 219,962 | ||||||
Cash and cash equivalents at end of period | $292,669 | $549,107 | ||||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $607,676 | $542,311 | ||||||
Income taxes | $— | $— | ||||||
Non-cash financing activities: | ||||||||
Dividends paid with shares | $53,503 | $43,436 | ||||||
Number of shares issued for dividends | 2,925 | 2,115 |
See accompanying notes to consolidated financial statements
7 |
CORNING NATURAL GAS HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – Basis of Presentation
Corning Natural Gas Holding Corporation (“Holding Company”) was incorporated in New York in July 2013 to serve as a holding company for Corning Natural Gas Corporation (the “Gas Company” or “Corning Gas”) and its dormant subsidiary Corning Natural Gas Appliance Corporation (“Appliance Company”). Pike County Light & Power Company (“Pike”) is also a wholly-owned subsidiary of the Holding Company. The Holding Company has 50% ownership interests in our joint ventures Leatherstocking Gas Company, LLC (“Leatherstocking Gas”), its subsidiary, Leatherstocking Gas Development Corporation, and Leatherstocking Pipeline Company, LLC (“Leatherstocking Pipeline”). As used in this document, the term “the Company” refers to the consolidated operations of the Holding Company, Gas Company and Pike.
The Holding Company’s primary business, through its subsidiaries Corning Gas and Pike, is natural gas and electricity distribution. Corning Gas serves approximately 15,000 residential, commercial, industrial and municipal customers in the Corning, Hammondsport and Virgil, New York, areas and two other gas utilities which serve the Elmira and Bath, New York, areas. It is franchised to supply gas service in all of the political subdivisions in which it operates. It also transports for a gas producer from the producer’s gathering networks. Corning Gas is under the jurisdiction of the New York Public Service Commission (“NYPSC”) which oversees and sets rates for New York gas distribution companies. In addition, Corning Gas has contracts with Corning Incorporated and Woodhull Municipal Gas Company, a small local utility, to provide maintenance service on their gas lines. Pike is an electricity and gas utility regulated by the Pennsylvania Public Utility Commission (“PAPUC”). Pike provides electric service to approximately 4,800 customers in the Townships of Westfall, Milford and the northern part of Dingman and in the Boroughs of Milford and Matamoras. Pike provides natural gas service to approximately 1,200 customers in Westfall Township and the Borough of Matamoras. All of these communities are located in Pike County, Pennsylvania. Additionally, Leatherstocking Gas distributes gas in Susquehanna and Bradford Counties, Pennsylvania, and has an application pending before the NYPSC for authority to provide gas distribution services in Broome County, New York. Leatherstocking Pipeline, an unregulated company, serves one customer in Lawton, Pennsylvania.
The market for natural gas in the Gas Company’s traditional service territories is relatively saturated with limited growth potential. However, growth opportunities do exist in extending our mains to areas adjacent or reasonably close to areas we currently serve. In addition, the Gas Company continues to see expansion opportunities in the commercial and industrial markets. We completed a pipeline to Marcellus Shale gas in Pennsylvania in 2009 and are transporting that gas throughout our pipeline infrastructure. In addition, the Holding Company has interests in two joint ventures, Leatherstocking Gas and Leatherstocking Pipeline (the “Joint Ventures”), to transport and provide gas to areas of the northeast currently without gas service. Through Leatherstocking Gas, we are continuing to pursue opportunities to provide natural gas to unserved areas of New York and Pennsylvania. Our electric and gas service territory in Pike County, Pennsylvania is seeing economic growth.
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, 2019 (“Annual Report”), filed on December 23, 2019. These interim consolidated financial statements are unaudited.
8 |
Our significant accounting policies are described in the notes to the Consolidated Financial Statements in the Holding Company’s Annual Report. It is important to understand that the application of generally accepted accounting principles in the United States of America involves certain assumptions, judgments and estimates that affect reported amounts of assets, liabilities, revenues and expenses. Thus, the application of these principles can have varying results from company to company.
Because our business is highly seasonal in nature, sales for each quarter of the year vary and are not comparable. Sales vary depending on seasonal variations in temperature, although the Gas Company’s weather normalization and revenue decoupling clauses approved by the NYPSC serve to stabilize net revenue, by insulating the Gas Company, to an extent, from the effects of unusual temperature variations and conservation. Certain larger customer classes are not covered by weather normalization or revenue decoupling and weather will impact revenue from these classes. Neither Pike nor Leatherstocking have weather normalization or revenue decoupling clauses.
It is the Holding Company’s policy to reclassify amounts in the prior year financial statements to conform to the current year presentation.
Adoption of New Accounting Guidance
On October 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02 “Leases” (ASC Topic 842), including the amendments thereto, using a modified retrospective transition method of adoption that required no prior period adjustments or charges to retained earnings for cumulative impact. From a lessee standpoint, on December 13, 2019 the Company purchased the only material item for $280,000, which had been previously leased, a section of 10” gas main. Prior to purchase, the Company paid a nominal fee annually for the use of this 10“ gas main. The Company did not change how this lease was accounted for prior to purchase. From a lessor standpoint, the only material lease is the lease of space in the Company’s headquarters to a local appliance company. This lease is an operating lease for which the Company receives less than $50,000 annually. The accounting for the lease did not change upon adoption of the new standard and there was no significant impact on these financial statements as a result of adoption of the new standard.
In March 2017, the FASB issued authoritative guidance related to the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires segregation of the service cost component from the other components of net periodic pension cost and net periodic postretirement benefit cost for financial reporting purposes. The service cost component is to be presented on the income statement in the same line items as other compensation costs included within Operating Expenses and the other components of net periodic pension cost and net periodic postretirement benefit cost are to be presented on the income statement below the subtotal labeled Operating Income (Loss). The guidance was not reflected in our financial statements for the three months ended December 31, 2018. In order for the financial information for the three months ended December 31, 2018 to be comparable to our current year financial information, Operation and maintenance expenses would be decreased by $162,623 and Other Income (expense) would be increased by the same amount for the three months ended December 31, 2018 compared to what was presented in our Form 10-Q for that period.
New Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments – Credit Losses” (Topic 326), which provides a model, known as the current expected credit loss model, to estimate the expected lifetime credit loss on financial assets, including trade and other receivables, rather than incurred losses over the remaining life of most financial assets measured at amortized cost. The guidance also requires use of an allowance to record estimated credit losses on available-for-sale debt securities. The new standard is effective for annual and interim periods beginning after December 15, 2019. The Company is currently evaluating the impact of the guidance on their consolidated financial statements and related disclosures.
9 |
Note 2 – Revenue From Contracts With Customers
The following tables present, for the three months ended December 31, 2019 and 2018, revenue from contracts with customers as defined in ASC 606 (Revenue from Contracts with Customers), as well as additional revenue from sources other than contracts with customers, disaggregated by major source.
For the three months ended December 31, 2019 | ||||||||||||
Revenues from contracts with customers | Other revenues (a) | Total utility operating revenues | ||||||||||
Corning Gas: | ||||||||||||
Residential gas | $3,791,218 | $102,549 | $3,893,767 | |||||||||
Commercial gas | 575,657 | — | 575,657 | |||||||||
Transportation | 922,649 | (181,616 | ) | 741,033 | ||||||||
Street lights gas | 106 | — | 106 | |||||||||
Wholesale | 810,053 | — | 810,053 | |||||||||
Local production | 81,602 | — | 81,602 | |||||||||
Total Corning Gas | $6,181,285 | ($79,067 | ) | $6,102,218 | ||||||||
Pike: | ||||||||||||
Residential gas | $359,803 | $2,079 | $361,882 | |||||||||
Commercial gas | 90,099 | — | 90,099 | |||||||||
Total Pike retail gas | 449,902 | 2,079 | 451,981 | |||||||||
Residential electric | 815,798 | (44,884 | ) | 770,914 | ||||||||
Commercial electric | 806,043 | — | 806,043 | |||||||||
Electric – street lights | 30,261 | — | 30,261 | |||||||||
Total Pike retail electric | 1,652,102 | (44,884 | ) | 1,607,218 | ||||||||
Total Pike | $2,102,004 | ($42,805 | ) | $2,059,199 | ||||||||
Total consolidated utility operating revenue | $8,283,289 | ($121,872 | ) | $8,161,417 |
(a) Other revenues include revenue from alternative revenue programs, such as revenue decoupling mechanisms under New York gas rate plans and weather normalization clauses. This also reflects reductions in revenues resulting from the deferral as regulatory liabilities of the net benefits of the federal Tax Cuts and Jobs Act of 2017. See “Regulatory Matters” in Note 10.
For the three months ended December 31, 2018 | ||||||||||||
Revenues from contracts with customers | Other revenues (a) | Total utility operating revenues | ||||||||||
Corning Gas: | ||||||||||||
Residential gas | $3,970,033 | ($111,373 | ) | $3,858,660 | ||||||||
Commercial gas | 606,705 | — | 606,705 | |||||||||
Transportation | 1,118,428 | 9,141 | 1,127,569 | |||||||||
Street lights gas | 129 | — | 129 | |||||||||
Wholesale | 764,651 | — | 764,651 | |||||||||
Local production | 186,274 | 6,854 | 193,128 | |||||||||
Total Corning Gas | $6,646,220 | ($95,378 | ) | $6,550,842 | ||||||||
Pike: | ||||||||||||
Residential gas | $405,780 | $7,677 | $413,457 | |||||||||
Commercial gas | 102,779 | — | 102,779 | |||||||||
Total Pike retail gas | 508,559 | 7,677 | 516,236 | |||||||||
Residential electric | 1,188,119 | 22,628 | 1,210,747 | |||||||||
Commercial electric | 1,155,486 | — | 1,155,486 | |||||||||
Electric – street lights | 34,295 | — | 34,295 | |||||||||
Total Pike retail electric | 2,377,900 | 22,628 | 2,400,528 | |||||||||
Total Pike | $2,886,459 | $30,305 | $2,916,764 | |||||||||
Total consolidated utility operating revenue | $9,532,679 | ($65,073 | ) | $9,467,606 |
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(a) Other revenues include revenue from alternative revenue programs, such as revenue decoupling mechanisms under New York gas rate plans and weather normalization clauses. This also reflects reductions in revenues resulting from the deferral as regulatory liabilities of the net benefits of the federal Tax Cuts and Jobs Act of 2017. See “Regulatory Matters” in Note 10.
The Gas Company records revenues from residential and commercial customers based on meters read on a cyclical basis throughout each month, while certain large industrial and utility customers’ meters are read at the end of each month. Several meters are read at the end of each month to calculate local production revenues. The Gas Company does not accrue revenue for gas delivered but not yet billed, as the NYPSC requires that such accounting must be adopted during a rate proceeding, which the Gas Company has not done. The Gas Company, as part of its currently effective rate plan, has a weather normalization clause as protection against severe weather fluctuations. This affects space heating customers and is activated when degree days are 2.2% greater or less than the 30-year average. As a result, the effect on revenue fluctuations of weather related gas sales is somewhat moderated.
Pike recognizes revenues for electric and gas service on a monthly billing cycle basis. Pike does not accrue for gas and electricity delivered. Pike does not have a weather normalization clause as protection against severe weather.
In addition to weather normalization, the Gas Company has implemented a revenue decoupling mechanism (RDM). The RDM reconciles actual delivery service revenues to allowed delivery service revenues (which are based on the annual customer and volume forecasts in the last rate case) for residential customers. The Gas Company will refund or surcharge customers for differences between actual and allowed revenues. The shortfall or excess after the annual reconciliation will be surcharged or refunded to customers over a twelve-month period starting September 1st each year. Pike does not have a revenue decoupling mechanism as part of its rate structure.
Revenues are recorded as energy is delivered, generated, or services are provided and billed to customers. Amounts billed are recorded in customer accounts receivable, with payment generally due the following month.
Note 3 - Pension and Other Post-Retirement Benefit Plans
Pension Benefits Three Months Ended December 31, | Other Benefits Three Months Ended December 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Service Cost | $186,111 | $116,453 | $4,633 | $4,123 | ||||||||||||
Interest Cost | 246,324 | 258,774 | 9,255 | 11,939 | ||||||||||||
Expected return on plan assets | (325,249 | ) | (319,966 | ) | — | — | ||||||||||
Amortization of prior service cost | — | — | 3,495 | 888 | ||||||||||||
Amortization of net (gain) loss | 224,322 | 212,665 | 654 | (1,677 | ) | |||||||||||
Net periodic benefit cost | $331,508 | $267,926 | $18,037 | $15,273 |
For ratemaking and financial statement purposes, pension expense represents the amount approved by the NYPSC in the Gas Company’s most recently approved rate case. Pension expense for ratemaking and financial statement purposes was $269,888 for the three months ended December 31, 2019 and $245,000 for the three months ended December 31, 2018. Total pension costs are recorded in accordance with accounting prescribed by the NYPSC in 1993. The cumulative net difference between the pension expense for ratemaking and financial statement purposes, since 1993, has been deferred as a regulatory asset and amounted to $1,079,642 and $908,892 at December 31, 2019 and December 31, 2018, respectively.
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The NYPSC has allowed the Gas Company to recover incremental costs associated with other post-retirement benefits through rates on a current basis. Other post-retirement benefit expense (benefit) (OPEB) for ratemaking and financial statement purposes was $16,101 for the three months ended December 31, 2019 and $15,050 for the three months ended December 31, 2018. Total OPEB costs are recorded in accordance with accounting prescribed by the NYPSC in 1998. The difference between the other post-retirement benefit expense (benefit) for ratemaking and financial statement purposes, and the amount computed above has been deferred as a regulatory asset.
Contributions
The Gas Company expects to contribute $1,424,157 to its Pension Plan during the fiscal year ending September 30, 2020. A total of $187,549 was paid to the Pension Plan during the three months ending December 31, 2019 and $220,702 was paid to the Pension Plan during the three months ended December 31, 2018.
Note 4 – Financing Activities
On June 27, 2019, the Gas Company entered into a $3.127 million multiple disbursement term note with M&T which permitted draws from time to time for capital expenditures in accordance with its terms until October 31, 2019 at which time amounts outstanding under the note totaling $3.127 million converted to a ten year term loan, payable in 119 equal monthly installments with an additional final installment of unpaid principal and interest due on November 30, 2029. Before converting to a term loan, borrowings on the note had a variable interest rate of the one-month LIBOR rate plus 3%. After October 31, 2019, the interest rate was fixed at 3.51%.
On June 27, 2019, Pike entered into a $2.072 million multiple disbursement term note with M&T which permitted draws from time to time for capital expenditures in accordance with its terms until October 31, 2019 at which time amounts outstanding under the note totaling $2.072 million converted to a ten year term loan, payable in 119 equal monthly installments with an additional final installment of unpaid principal and interest due on November 30, 2029. Before converting to a term loan, borrowings on the note had a variable interest rate of the one-month LIBOR rate plus 3%. After October 31, 2019, the interest rate was fixed at 3.51%.
We are in compliance with our financial covenant calculations as of December 31, 2019.
Note 5 – Fair Value of Financial Instruments
The Holding Company has determined the fair value of debt and other financial instruments using a valuation hierarchy. The hierarchy, which prioritizes the inputs used in measuring fair value, consists of three levels. Level 1 uses observable inputs such as quoted prices in active markets; Level 2 uses inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, which is defined as unobservable inputs in which little or no market data exists, requires the Holding Company to develop its own assumptions. The carrying amount of debt on the Consolidated Balance Sheets approximates fair value as a result of instruments bearing interest rates that approximate current market rates for similar instruments, and the carrying amounts for cash, accounts receivable and accounts payable approximate fair value due to their short-term nature. Investment assets, which fund the Holding Company’s deferred compensation plan, are valued based on Level 1 inputs.
The Holding Company has determined the fair value of certain assets through application of FASB ASC 820 “Fair Value Measurements and Disclosures”.
Fair value of assets and liabilities measured on a recurring basis at December 31, 2019 and September 30, 2019 are as follows:
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Fair Value Measurements at Reporting Date Using:
Fair Value | Quoted Prices In Active Markets for Identical Assets/Liabilities (Level 1) | Level 2 | Level 3 | |||||||||||||
December 31, 2019 | ||||||||||||||||
Available-for-sale securities | $2,271,438 | $2,271,438 | $— | $— | ||||||||||||
September 30, 2019 | ||||||||||||||||
Available-for-sale securities | $2,184,170 | $2,184,170 | $— | $— |
A summary of the marketable securities at December 31, 2019 and September 30, 2019 is as follows:
Cost Basis | Unrealized Gain | Unrealized Loss | Market Value | |||||||||||||
December 31, 2019 | ||||||||||||||||
Cash and equivalents | $188,239 | $— | $— | $188,239 | ||||||||||||
Metlife stock value | 39,810 | — | — | 39,810 | ||||||||||||
Government and agency bonds | 189,592 | 4,548 | — | 194,140 | ||||||||||||
Corporate bonds | 153,719 | 1,795 | — | 155,514 | ||||||||||||
Mutual funds | 55,061 | 428 | — | 55,489 | ||||||||||||
Holding Company Preferred A Stock | 572,875 | 41,247 | — | 614,122 | ||||||||||||
Equity securities | 802,103 | 222,021 | — | 1,024,124 | ||||||||||||
Total securities | $2,001,399 | $270,039 | $— | $2,271,438 | ||||||||||||
September 30, 2019 | ||||||||||||||||
Cash and equivalents | $64,457 | $— | $— | $64,457 | ||||||||||||
Metlife stock value | 39,810 | — | — | 39,810 | ||||||||||||
Government and agency bonds | 229,850 | 8,024 | — | 237,874 | ||||||||||||
Corporate bonds | 190,113 | 2,477 | — | 192,590 | ||||||||||||
Mutual funds | 22,359 | 486 | — | 22,845 | ||||||||||||
Holding Company Preferred A Stock | 572,875 | 41,247 | — | 614,122 | ||||||||||||
Equity securities | 866,600 | 145,872 | — | 1,012,472 | ||||||||||||
Total securities | $1,986,064 | $198,106 | $— | $2,184,170 |
Realized gains included in earnings for the periods reported in investment income are as follows:
Investment Income | ||||||||
Three Months Ended December 31, | ||||||||
2019 | 2018 | |||||||
Net realized
gains (losses) recognized during the period on investments | $9,734 | ($15,018 | ) |
Unrealized gains (losses) on equity securities included in investment income for the three months ended December 31, 2019 and 2018 were $77,976 and ($76,307), respectively.
Financial assets and liabilities valued using level 1 inputs are based on unadjusted quoted market prices as of the close of business on the days noted within active markets.
Note 6 – Stockholders’ Equity
Shares issued during the three months ended December 31, 2019 and 2018 were for the following:
Three months ended December 31, 2019 | Three months ended December 31, 2018 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Dividend reinvestment program (DRIP) | 2,925 | $53,503 | 2,527 | $43,436 | ||||||||||||
Directors | 3,150 | 43,943 | 3,150 | 48,355 | ||||||||||||
Leatherstocking Gas Company | 150 | 2,792 | 150 | 2,717 | ||||||||||||
Officers | — | — | 2,000 | 38,000 | ||||||||||||
Total | 6,225 | $100,238 | 7,827 | $132,508 |
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Shares issued to Leatherstocking Gas were used to compensate its independent director, Carl Hayden.
For the three months ended September 30, 2019, dividends were paid on October 15, 2019 to stockholders of record on September 30, 2019 in the amount of $441,944, less DRIP shares valued at $53,503. For the three months ended December 31, 2019, $442,396 was accrued for dividends paid on January 14, 2020 to stockholders of record on December 31, 2019.
Series A Cumulative Preferred Stock accrues cumulative dividends at a rate of 6.0% of the liquidation preference per share ($25.00) and are expected to be paid on or about the 14th day of April, July, October and January of each year and began October 14, 2016. For the three months ended September 30, 2019, dividends were paid on October 15, 2019 in the amount of $78,975. For the three months ended December 31, 2019, $78,975 was paid on January 15, 2020. Dividends on the Series A Cumulative Preferred Stock are reported as interest expense.
Series B Convertible Preferred Stock accrues cumulative dividends at a rate of 4.8% of the liquidation preference per share ($20.75) and are expected to be paid on or about the 14th day of April, July, October and January of each year and began October 14, 2016. At September 30, 2019 there was $61,065 accrued for Series B dividends paid on October 15, 2019. For the three months ended December 31, 2019, $61,066 was accrued for dividends paid on January 15, 2020. See Note 9 for additional information on the preferred stock, including its mandatory redemption provisions.
Basic earnings (loss) per share are computed by dividing income (loss) available for common stock (net income less dividends declared on Series B Preferred Stock) by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
293,116 shares of common stock issuable upon conversion of Series B Convertible Preferred Stock were excluded from the calculation of diluted earnings per share for the three months ended December 31, 2019 because their inclusion would have been anti-dilutive.
Note 7 – Investment in Joint Ventures
The Holding Company has an interest in Leatherstocking Gas and Leatherstocking Pipeline (the Joint Ventures), each of which is a joint venture with Mirabito Regulated Industries, LLC, accounted for by the equity method.
The following table represents the Holding Company’s investment activity in the Joint Ventures for the three months ended December 31, 2019 and 2018:
2019 | 2018 | |||||||
Beginning balance in investment in joint ventures | $2,597,919 | $2,740,575 | ||||||
Gain (loss) from joint ventures | 3,583 | (6,879 | ) | |||||
Ending balance in joint ventures | $2,601,502 | $2,733,696 |
As of and for the three months ended December 31, 2019 and 2018, the Joint Ventures financial summary is as follows:
2019 | 2018 | |||||||
Total assets | $13,000,000 | $13,300,000 | ||||||
Total liabilities | $7,900,000 | $7,800,000 | ||||||
Net gain (loss) | $7,167 | $(13,758 | ) |
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Note 8 – Income Taxes
Income tax expense for the periods ended December 31 are as follows: | ||||||||
Three Months Ended | Three Months Ended | |||||||
December 31, 2019 | December 31, 2018 | |||||||
Current | $— | $— | ||||||
Deferred | 196,763 | 256,557 | ||||||
Total | $196,763 | $256,557 | ||||||
Actual income tax expense differs from the expected tax expense (computed by applying the federal corporate tax rate of 21% before income tax expense) as follows: | ||||||||
Three Months Ended | Three Months Ended | |||||||
December 31, 2019 | December 31, 2018 | |||||||
Expected federal tax expense | $136,612 | $211,333 | ||||||
State tax expense (net of federal) | 40,068 | 59,126 | ||||||
Federal income sur credit amortization | 14,649 | 14,679 | ||||||
Prior period tax write off | — | (21,232 | ) | |||||
Other, net | 5,434 | (7,349 | ) | |||||
Actual tax expense | $196,763 | $256,557 |
On December 22, 2017, the Federal Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act makes significant changes to the federal tax structure, which will impact the tax liabilities of utility companies. On August 9, 2018 the NYSPSC issued an order in Case 17-M-0815 that required the Company to return to customers the difference between the federal income tax allowance in base rates and the new statutory rate of 21%. The refund to customers began on October 1, 2018. Impacted customers experienced a decrease of 5.20% on their overall bill in the year starting October 1, 2018 and will experience a decrease of 7.83% in the year starting October 1, 2019. The amounts returned to customers were $1,317,719 during the year ended September 30, 2019 and will be $2,112,540 during the year ending September 30, 2020. These refunds will not impact the Company’s earnings. The impact of the change in the Tax Act on deferred regulatory balances will be deferred until the Company’s next base rate case. The Company has recorded those amounts as Regulatory Liabilities on the accompanying consolidated balance sheets.
The PAPUC issued an order in Case M-2018-2641242 that requires the Company to return to customers the difference between the federal income tax allowance in base rates and the new statutory rate of 21%. Pike’s electric customers began receiving a total refund of $73,923 or decrease of 0.67% on their overall bill beginning October 1, 2018. This refund is subject to reconciliation and will remain in effect until Pike’s next base rate case. No refunds were ordered for Pike’s gas operation because amounts were not material. The impact of the change in the Tax Act on deferred regulatory balances will be deferred until the Company’s next base rate case. The Company has recorded those amounts as Regulatory Liabilities on the accompanying consolidated balance sheets.
Note 9 – Preferred Stock
The Holding Company filed a Registration Statement on Form S-1 with the Securities and Exchange Commission with respect to a subscription rights offering to its stockholders to issue up to approximately $11.0 million in preferred stock. The subscription rights were distributed on a one-for-one basis to stockholders of record as of April 14, 2016 and expired on June 20, 2016. The Form S-1 covered 2,469,861 subscription rights for the purchase of up to 140,000 shares of 6% Series A Preferred Stock and up to 360,000 shares of 4.8% Series B Preferred Stock. Each subscription right entitled the holder to purchase either: (i) one-eighth share of the 6% Series A Preferred Stock, par value $0.01 per share, for $25.00 per share, or (ii) one-sixth share of the 4.8% Series B Preferred Stock, par value $0.01 per share, for $20.75 per share, which is convertible in accordance with its terms into 1.2 shares of common stock, subject to adjustment. Of the 140,000 shares of Series A Preferred Stock available, 105,303 shares were subscribed and of the 360,000 shares of Series B Preferred Stock available, 244,263 shares were subscribed. In August of 2017 the Company privately placed an additional 105,297 shares of Series A Preferred Stock.
Series A Preferred Stock accrues cumulative dividends at a rate of 6.0% of the liquidation preference per share ($25.00) and are expected to be paid on or about the 14th day of April, July, October and January of each year. The dates of record for the dividends, are March 31, June 30, September 30 and December 31, immediately preceding the relevant dividend payment date. On September 30, 2023, outstanding shares of Series A Preferred Stock will mature and be redeemed solely in cash at a redemption price equal to the liquidation preference per share plus an amount equal to all accrued but unpaid dividends subject to our having funds legally available for redemption under New York law. The dividends for each of the three month periods ended December 31, 2019 and 2018 were $78,975, and these are recorded as interest expense.
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In accordance with ASC 480 (Distinguishing Liabilities from Equity), because of the mandatory redemption feature this is treated as liability. The issuance costs are treated as debt issuance costs and will be amortized over the life of the instrument. The debt issuance costs reduce the carrying value of the liability. The amortization of the Series A Preferred Stock debt issuance costs was $5,183 for each of the three month periods ended December 31, 2019 and 2018.
Series B Preferred Stock accrues cumulative dividends at a rate of 4.8% of the liquidation preference per share ($20.75) and are expected to be paid on or about the 14th day of April, July, October and January of each year. The dates of record for the dividends, if any, will be March 31, June 30, September 30 and December 31, immediately preceding the relevant dividend payment date. Our president, Michael German along with his wife, owns 57,936 of these shares.
Although by its terms the Series B Preferred Stock is mandatorily redeemable on September 30, 2026, in accordance with ASC 480 it is not considered mandatorily redeemable for accounting purposes as a result of the conversion feature presenting a contingency related to the redemption dates. Accordingly, this is not considered a liability. However, as a result of the decision related to conversion and not reaching redemption resting with the holder, this instrument has been classified as temporary equity in accordance with ASC 480. Upon conversion, the instrument would be reclassified as permanent equity. Dividends were $61,065 for each of the three month periods ended December 31, 2019 and 2018. The issuance costs of approximately $120,000 reduced the initial proceeds and will be accreted until redemption or conversion. During each of the three month periods ended December 31, 2019 and 2018 there was accretion of $3,762.
Note 10 – Regulatory Matters
On June 17, 2016, the Gas Company filed with the NYPSC a three-year plan to implement a levelized increase in revenues from gas delivery service of $3,463,287 in each year over the period June 1, 2017 through May 31, 2020, resulting in total bill impacts on customers in each year of 10.4%.
On June 15, 2017, the NYPSC, in Case 16-G-0369, issued an Order Adopting Terms of Joint Proposal and Establishing Gas Rate Plan (the “June 2017 Order”) adopting without substantive modification a Joint Proposal (the “2017 Joint Proposal”) among the Gas Company, the Staff of the Department of Public Service, and multiple intervenors (which represent large industrial customers) to resolve all issues in Case 16-G-0369. As adopted by the June 2017 Order, the 2017 Joint Proposal is a comprehensive settlement extending for three consecutive Rate Years (the twelve months ending May 31, 2018, 2019 and 2020) and permits Corning Gas to increase its base rates for gas delivery service. The new base rates under the June 2017 Order, when offset by the elimination of existing surcharges at the beginning of Rate Year 1 and levelized over the three Rate Years, result in the following incremental revenue increases over the prior Rate Year: Rate Year 1 - $1,558,553, Rate Year 2 - $1,573,706, and Rate Year 3 - $1,566,594, equating to increases of approximately 6.2%, 5.9% and 5.5%, respectively, as a percentage of total delivery revenues including gas costs. The 2017 Joint Proposal, as adopted, permits a rate of return on common equity of 9.0%, and an “Earnings Sharing Mechanism” that provides for Corning Gas to retain all earnings above 9.00% up to and including 9.50%, and for customers to retain 50% of the earnings above 9.50% up to and including 10.00%, 75% of earnings above 10.00% up to and including 10.50%, and 90% of earnings above 10.50%.
The 2017 Joint Proposal, as adopted, provides true-ups for property taxes, pension costs, plant expenditures, large customer revenue, local production revenue and continues performance metrics for safety and customer satisfaction from the prior rate case. Although the stringency of certain performance measures and the amount of certain negative revenue adjustments for failure to meet specific standards are increased, the 2017 Joint Proposal, as approved by the June 2017 Order, also provides opportunities for positive revenue adjustments for exceeding applicable standards with regard to certain measures. Because the June 2017 Order approving the 2017 Joint Proposal was issued after the June 1, 2017 commencement of Rate Year 1 of the three-year rate plan and new rates did not go into effect until July 1, 2017, the 2017 Order provided for each of the Gas Company and its customers to be placed in the same position in which they would have been if the new rates had gone into effect as of June 1, 2017. Any resulting revenue adjustments in favor of the Gas Company are deferred for future recovery, with interest. The Rate Year 3 rate increase of $1,556,594 became effective June 1, 2019.
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On August 9, 2018 the NYSPSC issued an order in Case 17-M-0815 that required the Company to return to customers the difference between the federal income tax allowance in base rates and the new statutory rate of 21%. The refund to customers began on October 1, 2018. Customers will experience an average decrease of 5.20% on their overall bill in the year starting October 1, 2018 and 7.83% in the year starting October 1, 2019. The amounts returned to customers will be $1,317,719 and $2,112,540 respectively. These refunds will not impact the Company’s allowed earnings.
In addition, the impact of the change in the Tax Act on deferred regulatory balances will be deferred until the Company’s next base rate case. The Company has recorded those amounts as Regulatory Liabilities on the accompanying Consolidated Balance Sheets.
The PAPUC issued an order in Case M-2018-2641242 that require the Company to return to customers the difference between the federal income tax allowance in base rates and the new statutory rate of 21%. Pike’s electric customers are receiving an annual refund of $73,923 or decrease of 0.67% on their overall bill effective October 1, 2018. No refunds were ordered for Pike’s gas operation because amounts were not material. The impact of the change in the Tax Act on deferred regulatory balances will be deferred until the Company’s next base rate case. The Company has recorded those amounts as Regulatory Liabilities on the accompanying Consolidated Balance Sheets.
The PAPUC issued an order on February 7, 2019 in Docket S-2019-3007089 and S-2019-3007332 authorizing Pike to issue debt in the amount of $2,732,154. The Company has issued the total amount authorized by the Commission. The authorization expired on December 31, 2019.
Total Regulatory Assets on the accompanying Consolidated Balance Sheets as of December 31, 2019 amounts to $12,692,999 compared to $12,681,496 at September 30, 2019. The Regulatory Assets include $1,544,347 at December 31, 2019 and $1,544,347 at September 30, 2019 that is subject to Deferred Accounting Petitions with the NYPSC and PAPUC. The remaining items in regulatory assets are either approved in rates, part of annual reconciliations approved by the NYSPSC and PAPUC or approved through various commission directives.
The Gas Company in accordance with the rate order in Case 16-G-0204 is required to make capital expenditures to reach a net plant target of $50,427,717, $53,930,803 and $56,959,911 at May 31, 2018, 2019 and 2020 respectively. The annual net plant target is developed by taking the forecast Rate Year average of the monthly averages of: (1) plant in service, (2) construction work in process, (3) deferred taxes associated with tax depreciation, accelerated recovery of plant and contributions in aid of construction (“CIAC”), and (4) depreciation reserve including accelerated recovery of plant. If the actual net plant in service falls short of the target net plant in service for a particular Rate Year, Corning Gas will defer carrying costs for customers’ benefit equal to the shortfall multiplied by the authorized pre-tax rate of return, as well as depreciation expense associated with the shortfall. If the actual net plant in service exceeds the target net plant in service for a particular Rate Year, no adjustment (i.e., no surcharge to customers) will be made. The determination of any shortfall or excess will be made on a cumulative basis at the end of the three year period. For the period ended May 31, 2018, the Company exceeded the target by $318,396. For the period ended May 31, 2019, the Company exceeded the target by $269,090.
17 |
Note 11 – Segment Reporting
The Company’s reportable segments have been determined based upon the nature of the products and services offered, customer base, availability of discrete internal financial information, homogeneity of products, delivery channel and other factors.
The Gas Company is a gas distribution company providing gas on a commodity and transportation basis to its customers in the Southern Tier of New York State. Pike provides electricity and natural gas services to Pike County, Pennsylvania. The Holding Company is the parent company of all subsidiaries and has a 50% ownership in the Leatherstocking joint ventures. The Appliance Company’s information is presented with the Holding Company as it has little activity.
The following table reflects the results of the segments consistent with the Holding Company’s internal financial reporting process. The following results are used in part, by management, both in evaluating the performance of, and in allocating resources to, each of the segments.
As of and for the three months ended December 31, 2019
Gas Company | Pike | Holding Company | Total Consolidated | |||||||||||||
Total electric utility revenue | $— | $1,607,218 | $— | $1,607,218 | ||||||||||||
Total gas utility revenue | $6,102,218 | $451,981 | $— | $6,554,199 | ||||||||||||
Investment income | $87,680 | $— | $30 | $87,710 | ||||||||||||
Income from joint ventures | $— | $— | $3,583 | $3,583 | ||||||||||||
Net income (loss) | $563,985 | ($47,446 | ) | ($62,456 | ) | $454,083 | ||||||||||
Income tax expense (benefit) | $213,039 | ($17,748 | ) | $1,472 | $196,763 | |||||||||||
Interest expense | $346,210 | $173,585 | $90,919 | $610,714 | ||||||||||||
Depreciation expense | $470,715 | $181,074 | $915 | $652,704 | ||||||||||||
Amortization expense | $85,845 | $104,966 | $17,127 | $207,938 | ||||||||||||
Total assets | $90,609,417 | $28,081,994 | $3,106,711 | $121,798,122 | ||||||||||||
Capital expenditures | $1,893,650 | $484,483 | $— | $2,378,133 |
As of and for the three months ended December 31, 2018
Gas Company | Pike | Holding Company | Total Consolidated | |||||||||||||
Total electric utility revenue | $— | $2,400,528 | $— | $2,400,528 | ||||||||||||
Total gas utility revenue | $6,550,842 | $516,236 | $— | $7,067,078 | ||||||||||||
Investment income | ($83,980 | ) | $— | $— | ($83,980 | ) | ||||||||||
Loss from joint ventures | $— | $— | ($6,879 | ) | ($6,879 | ) | ||||||||||
Net income (loss) | $601,999 | $233,793 | ($85,998 | ) | $749,794 | |||||||||||
Income tax expense (benefit) | $212,478 | $43,549 | $530 | $256,557 | ||||||||||||
Interest expense | $359,386 | $163,589 | $88,015 | $610,990 | ||||||||||||
Depreciation expense | $454,695 | $164,754 | $915 | $620,364 | ||||||||||||
Amortization expense | $53,072 | $77,722 | $8,183 | $138,977 | ||||||||||||
Total assets | $84,015,010 | $26,816,322 | $3,246,356 | $114,077,688 | ||||||||||||
Capital expenditures | $1,297,208 | $353,468 | $— | $1,650,676 |
Note 12 – Subsequent Events
On January 9, 2020 Corning Natural Gas Holding Company signed a term sheet to purchase the 50% of Leatherstocking Gas Company and Leatherstocking Pipeline Company from Mirabito Regulated Industries for $3.2 million. When this purchase is completed Corning Natural Gas Holding Company will own 100% of the Leatherstocking entities’ Pennsylvania assets. A new joint venture will own the Leatherstocking entities’ New York assets. Closing is contingent on regulatory approvals.
On February 11, 2020 the Holding Company board voted to authorize management to place up to $4.5 million in a new series of preferred stock through a private placement. The stock would mature and be redeemed in approximately six years and pay a 6% dividend annually. The proceeds would be used to purchase the 50% of Leatherstocking Gas’s and Leatherstocking Pipeline’s Pennsylvania assets not owned by the Company, as well as to finance mandated capital expenditures. However, there can be no assurances that the preferred offering will be completed on these terms or at all.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements
This report contains statements which, to the extent they are not recitations of historical facts, constitute "forward-looking statements" within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 (Reform Act). The words "estimate", "project", "anticipate", "expect", "intend", "believe", "could" and similar expressions are intended to identify forward-looking statements. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. As forward-looking statements, these statements involve risks, uncertainties and other factors that could cause actual results to differ materially from the expected results. Accordingly, actual results may differ materially from those expressed in any forward-looking statements. Factors that could cause results to differ materially from our management's expectations include, but are not limited to, those listed under Item 1A - "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, in addition to:
* | the effect of any interruption in our supply of natural gas or electricity or a substantial increase in the price of natural gas or electricity, |
* | our ability to successfully negotiate new supply agreements for natural gas and electricity as they expire, on terms favorable to us, or at all, |
* | the effect on our operations of any action by the NYPSC, with respect to Corning Gas or PAPUC, with respect to Pike and our joint venture interest in Leatherstocking Gas, |
* | the effect of any litigation, |
* | the effect on our operations of unexpected changes in legal or regulatory requirements, including environmental and energy consumption regulations and laws, |
* | the amount of natural gas produced and directed through our pipeline by producers, |
* | our ability to obtain additional equity or debt financing to fund our capital expenditure plans and for general corporate purposes, |
* | our successful completion of various capital projects and the use of pipelines, compressor stations and storage by customers and counterparties at levels consistent with our expectations, |
* | The effect of weather on our utility infrastructure, |
* | our ability to retain the services of our senior executives and other key employees, |
* | our vulnerability to adverse economic and industry conditions generally and particularly the effect of those conditions on our major customers, |
* | the effect of any leaks in our transportation and delivery pipelines, and |
* | competition to our gas transportation business from other pipelines. |
* | the effects of state and federal climate legislation and regulations (existing and prospective) on our gas and electric businesses |
* | the possibility of cyber and malware attacks are increasing and could have an impact on company operations |
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.
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Overview
We continue to focus on improving the efficiency of our operations and making capital investments to improve our infrastructure. Corning Gas’s infrastructure improvement program concentrates on the replacement of older distribution mains and customer service lines. In the first three months of fiscal 2020 the Gas Company repaired 119 leaks, replaced 44 bare steel
services and replaced or remediated 4.0 miles of older steel main. In fiscal 2019 the Gas Company repaired 187 leaks and replaced or remediated 9.5 miles of bare steel main and 282 bare steel services. In the first three months of fiscal 2020 Pike replaced approximately 30 poles. In fiscal 2019 Pike replaced approximately 116 poles and did extensive tree trimming to maintain our electric infrastructure. On January 18, 2019 Pike filed a gas Long Term Infrastructure Improvement Plan (“LTIIP”) to accelerate replacement of cast iron, wrought iron and bare steel pipe over 11 years. The PAPUC approved the LTIIP plan on June 13, 2019.
We believe our key performance indicators are net income, stockholders’ equity and the safety and reliability of our systems. Net income decreased by $295,711 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. Because the Holding Company’s principal operations are conducted through Corning Gas and Pike, both regulated utility companies, stockholders’ equity is an important performance indicator. The NYPSC and PAPUC allow Corning Gas, Pike and Leatherstocking the opportunities to earn a just and reasonable return on stockholders’ equity as determined under applicable regulations. Stockholders’ equity is, therefore, a precursor of future earnings potential. As of December 31, 2019, compared to December 31, 2018, stockholders’ equity increased from $33,243,259 to $34,466,160. We plan to continue our focus on building stockholders’ equity. Safety and efficiency indicators include leak repair, main and service replacements and customer service metrics. Key performance indicators:
Three Months Ended December 31, | ||||||||
2019 | 2018 | |||||||
Net income | $454,083 | $749,794 | ||||||
Stockholders' equity | $34,466,160 | $33,243,259 | ||||||
Stockholders' equity per outstanding common share | $11.29 | $10.97 |
Revenue and Margin
Electric and Gas margin, net, decreased $197,316 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The margins were negatively impacted by two regulatory reconciliations one at Pike and one at the Gas Company totaling approximately $194,000 and a decrease in revenue from Pike electric ‘demand related’ customers of approximately $86,000. This negative impact to margin was offset by the rate increase at the Gas Company.
Electric revenue decreased $793,310 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The decrease primarily results from a decrease in electric costs (a pass through to customers) of $638,869, and a decrease in demand related revenue of approximately $86,000. In addition, gross receipts tax billed revenues decreased by approximately $47,000. A corresponding decrease occurred in tax expense.
Retail gas revenue decreased $429,656 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The decrease primarily results from a decline in natural gas costs (a pass through to customers) of $664,455. This decline was offset by the rate increase at the Gas Company.
Other gas revenues decreased $83,223 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The drivers for the changes in other gas revenue were primarily a larger negative impact of the Revenue Decoupling Mechanism (RDM) amortizations and negative contract customer reconciliations for the three months ended December 31, 2019.
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The following table summarizes our utility operating revenue: | ||||||||
Three months ended December 31, | ||||||||
2019 | 2018 | |||||||
Retail electric revenue: | ||||||||
Residential | $815,798 | $1,188,119 | ||||||
Commercial | 806,043 | 1,204,062 | ||||||
Street lights | 30,261 | 34,295 | ||||||
Total retail electric revenue | $1,652,102 | $2,426,476 | ||||||
Other electric revenue: | ||||||||
Customer discounts forfeited | $1,723 | $23,592 | ||||||
Third party billings | (65,071 | ) | (64,997 | ) | ||||
Other | 18,464 | 15,457 | ||||||
Total other electric revenue | (44,884 | ) | (25,948 | ) | ||||
Total electric revenue | $1,607,218 | $2,400,528 | ||||||
Retail gas revenue: | ||||||||
Residential | $4,151,127 | $4,375,942 | ||||||
Commercial | 665,755 | 709,484 | ||||||
Transportation | 1,208,900 | 1,118,428 | ||||||
Wholesale | 513,067 | 764,651 | ||||||
Total retail gas revenue | $6,538,849 | $6,968,505 | ||||||
Other gas revenue: | ||||||||
Local production | $182,384 | $186,274 | ||||||
Customer discounts forfeited | 16,524 | 21,557 | ||||||
Reconnect fees | 1,048 | 1,011 | ||||||
Surcharges | 1,644 | 3,358 | ||||||
Other (see detail below) | (186,250 | ) | (113,627 | ) | ||||
Total other gas revenue | $15,350 | $98,573 | ||||||
Total gas revenue | $6,554,199 | $7,067,078 | ||||||
Total revenue | $8,161,417 | $9,467,606 |
The following table details amounts making up the Other line in the schedule of Other gas revenue above:
Three months ended December 31, | ||||||||
2019 | 2018 | |||||||
Other gas revenues: | ||||||||
Delivery Rate Adjustment (DRA) carrying costs | $2,762 | $2,125 | ||||||
Contract customer reconciliation | (57,054 | ) | 9,141 | |||||
Monthly RDM amortizations | (282,506 | ) | (201,387 | ) | ||||
Local production revenues | 9,417 | 6,853 | ||||||
2017 Jobs Act federal income tax reconciliation | 130,543 | 87,737 | ||||||
Capacity release revenues | 10,843 | — | ||||||
Regulatory liability reserve | — | (16,986 | ) | |||||
All other | (255 | ) | (1,110 | ) | ||||
Total other gas revenues | ($186,250 | ) | ($113,627 | ) |
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Gas purchases are our largest expenses. Purchased gas expense decreased $470,004 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The decrease in costs for the three months ended December 31, 2019 is due primarily to a lower purchase price for natural gas resulting in a decrease of $664,404. The costs were also impacted by the previously mentioned regulatory reconciliation of $194,000 which is not recoverable. The regulatory reconciliation was not billed to customers thereby impacting margin by $194,000.
Electricity costs decreased by $638,869 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The decrease in costs for the three months ended December 31, 2019 is due primarily to lower cost of purchased electricity billed to customers.
Three Months Ended December 31, | ||||||||
2019 | 2018 | |||||||
Utility Gas Revenues | $6,554,199 | $7,067,078 | ||||||
Natural Gas Purchased | 1,824,665 | 2,294,669 | ||||||
Margin | $4,729,534 | $4,772,409 | ||||||
Margin % | 72.16 | % | 67.53 | % | ||||
Utility Electric Revenues | $1,607,218 | $2,400,528 | ||||||
Electricity Purchased | 338,361 | 977,230 | ||||||
Margin | $1,268,857 | $1,423,298 | ||||||
Margin % | 78.95 | % | 59.29 | % |
Operating and Interest Expenses
Operating and maintenance expense increased by $245,235 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The increase primarily results from an accelerated leak repair effort at the Gas Company ($70,000), the timing of underground inspections at Pike ($70,000) and a regulatory reconciliation at the Gas Company ($80,000).
Taxes other than income taxes increased by $4,547 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The increase primarily results from increased property tax expense of $72,479 offset by a decrease of $47,000 in gross receipts tax and decrease of $20,912 in payroll and other taxes.
Depreciation expense increased by $32,340 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The increase results from additional utility plant placed in service.
Interest expense increased by $276 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The minor increase was due to higher levels of debt offset by lower interest rates.
Net Income
As a result of the foregoing, net income decreased by $295,711 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The decrease was mainly due to regulatory reconciliations.
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Liquidity and Capital Resources
The Holding Company does not have any borrowings (excluding Series A Preferred Stock that is classified as debt) at the corporate level and has no access to liquidity except through dividends and distributions from its subsidiaries as well as equity issuances. Its principal liquidity requirements are for investments in the Leatherstocking Joint Ventures to permit those companies to make
the capital expenditures required to provide services to their customers and for dividend payments to the Holding Company’s stockholders.
Under the orders of the NYPSC, the Gas Company’s cost of capital is based on an equity-to-debt ratio of 48%/52%. If additional equity is required for the Gas Company to maintain that ratio when issuing new debt, the Holding Company, as the sole stockholder of the Gas Company, is the only source of such equity, through either equity or debt financings at the Holding Company level. The Gas Company and Pike rely on internally generated cash and short and long-term debt.
The Gas Company’s internally generated cash from operating activities consists of net income, adjusted for non-cash expenses, and changes in operating assets and liabilities. Non-cash items include depreciation and amortization; investment gains and losses, and deferred income taxes. Over or under-recovered gas costs significantly impact cash flow. In addition, there are significant year-to-year changes in regulatory assets that impact cash flow. The Gas Company’s cash flow is seasonal. Cash expenditures are the highest in the summer and fall months when we refill gas storage and conduct our construction programs. Our cash receipts are highest during the heating season. At Pike cash flow is strongest in the winter and summer when customer demand for natural gas and electricity are highest. Given year round electric sales, Pike is less seasonal than the Gas Company.
On April 13, 2016, the Gas Company filed a petition in Case 16-G-0204 with the NYPSC, to defer leak repair and survey costs over and above the amounts permitted to be recovered in rates for 2015. See “Corning Gas Company” under “Regulatory Matters” herein for additional information. We expect this petition to be addressed in the upcoming rate case.
Capital expenditures are the principal use of internally generated cash flow. To fund capital expenditures, the Gas Company and Pike need to draw on both operating cash and new debt. In fiscal year 2020 to date, the Gas Company has spent approximately $4.5 million on projects and safety-related infrastructure improvements. This, in conjunction with our growth projects, creates liquidity pressure on the Holding Company. We anticipate that our aggressive capital construction program will continue to require the Holding Company to raise new debt and/or equity.
Cash flows from financing activities of the Company consist of repayment of long-term debt, new long-term borrowings, borrowings and repayments under our lines-of-credit, and quarterly dividend payments. For the Gas Company’s operations, it has an $8.0 million revolving line of credit with M&T Bank. Interest is a variable rate determined by the Gas Company’s funded debt to EBITDA ratio calculated ninety days after the end of each quarter added to the daily LIBOR rate with no additional collateral or covenants beyond those included in the M&T Bank term notes. The amount outstanding under this line as of December 31, 2019 was $6.6 million with an interest rate of 4.41%. The Gas Company was in compliance with all of its loan covenants as of December 31, 2019.
For Pike’s operations, it has an $2.0 million revolving line of credit with M&T Bank. Interest is a variable rate determined by Pike’s funded debt to EBITDA ratio calculated ninety days after the end of each quarter added to the daily LIBOR rate with no additional collateral or covenants beyond those included in the M&T Bank term notes. The amount outstanding under this line on December 31, 2019 was approximately $1.7 million with an interest rate of 4.56%. Pike was in compliance with all of its loan covenants as of December 31, 2019.
During this quarter, we mainly withdrew gas from storage and as of December 31, 2019, had a balance of $1,173,203 worth of gas in storage, the volume in storage at December 31, 2019 was 568,641 Mcf at an average price of $2.08 per Mcf. At December 31, 2018, the Company had a balance of $1,564,798 worth of gas in storage, the volume in storage at December 31, 2018 was 595,432 Mcf at an average price of $2.45 per Mcf. During the next quarter, the Gas Company expects to continue withdrawing gas from storage to have sufficient gas to supply customers for the winter season.
As of December 31, 2019, we believe that cash flow from operating activities and borrowings under our lines of credit will be sufficient to satisfy our working capital and debt service requirements over the next twelve months. We believe new debt will be required to satisfy our capital expenditures to finance our internal growth needs for the next twelve months. We are confident we can finance them with our current lender.
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Off Balance Sheet Arrangements
We have no off balance sheet arrangements.
Cybersecurity Matters
On December 15, 2019 and ending on December 18, 2019 Pike was impacted by a Ransomware attack. At no time did Pike lose the ability to provide critical services to its customers or effectively respond to system emergencies. Pike lost the ability to utilize internal accounting system and their customer information systems. The Company believes that no customer information or employee data was compromised or stolen this assumption will be confirmed once forensics have been completed. The Company did not pay any ransom and has had no communications with the perpetrators of the event. This event did not impact Corning Gas.
On December 24, 2019 the Gas Company was the victim of a ransomware attack which rendered its accounting system and customer service system inoperable from December 24, 2019 through December 28, 2019. The restoration of the systems was completed by in-house IT Staff as well as two IT firms that were under contract with the Company. The Company did not lose the ability to provide critical services to its customers. The Company did not lose the ability to effectively respond to system emergencies. The Company believes that no data was compromised as a result of this ransomware attack. Prior to this event the Company had engaged KnowBe4 to provide employee cyber security training. The Company had also contracted with AXIO to complete a Cyber Security Capability Maturity Model Evaluation “C2M2” and IT & Cyber Security Risk Management Program. The C2M2 evaluation was completed prior to the event. The IT&CS risk management program is still in development and the Company continues to utilize the expertise of KnowBe4 and AXIO. After the attack the Company has revised its VPN policies, implemented new password protocols and added two factor authentications requirements for all system users. The Company has also added greater visibility to ongoing patching and backup procedures. The Company also contracted for endpoint monitoring and cyber security services with Kroll, a division of Duff & Phelps.
Regulatory Matters
Holding Company
On August 1, 2016, the NYPSC issued an order in Case 16-G-0200 approving the exercise of conversion rights (to common stock) of our 4.8% Series B Convertible Preferred Stock by our three holders of 10% or more of our common stock. The three holders, our President Michael German, funds controlled or with investments managed by Mario Gabelli, and the Article 6 Marital Trust under the First Amended and Restated Jerry Zucker Revocable Trust, reported on filings with the U.S. Securities and Exchange Commission that they acquired 57,936, 73,398 and 0 shares of our Series B Convertible Preferred Stock, respectively. There can be no assurance that any of such shares will actually be converted into our common stock.
The Holding Company’s primary business, through its subsidiaries Corning Gas and Pike, is regulated by the NYPSC and PAPUC, respectively, among other agencies.
Corning Gas Company
On April 13, 2016, Corning Gas filed a petition in Case 16-G-0204 with the NYPSC, to defer leak repair and survey costs over and above the amounts permitted to be recovered in rates for 2015. In this petition we requested that the incremental cost of $349,547 together with the associated income tax effect, be deferred and recovered in a manner to be established in future rate proceedings. The Company recognized this deferral in the quarter ended March 31, 2016. The petition is still pending before the NYSPSC.
On June 15, 2017, the NYPSC issued an Order Adopting Terms of Joint Proposal and Establishing Gas Rate Plan (the “June 2017 Order”) adopting the Joint Proposal without substantive modification in Case 16-G-0369.
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As adopted by the June 2017 Order, the 2017 Joint Proposal defined earlier is a comprehensive settlement extending for three consecutive Rate Years (the twelve months ending May 31, 2018, 2019 and 2020) and permits Corning Gas to increase its base rates for gas delivery service. The new base rates under the June 2017 Order, when offset by the elimination of existing surcharges at the beginning of Rate Year 1 and levelized over the three Rate Years, result in the following incremental revenue increases over the prior Rate Year: Rate Year 1 - $1,558,553, Rate Year 2 - $1,573,706, and Rate Year 3 - $1,556,594, equating to increases of approximately 6.2%, 5.9% and 5.5%, respectively, as a percentage of total delivery revenues including gas costs. The 2017 Joint Proposal, as adopted, permits a rate of return on common equity of 9.0%, and an “Earnings Sharing Mechanism” that provides for Corning Gas to retain all earnings above 9.00% up to and including 9.50%, and for customers to retain (a) 50% of the earnings above 9.50% up to and including 10.00%, (b) 75% of earnings above 10.00% up to and including 10.50%, and (c) 90% of earnings above 10.50%.
The 2017 Joint Proposal provides true-ups for property taxes, pension costs, and plant additions and continues performance metrics for safety and customer satisfaction from the prior rate case. Although the stringency of certain performance measures and the amount of certain negative revenue adjustments for failure to meet specific standards are increased, the 2017 Joint Proposal, as approved by the June 2017 Order, also provides opportunities for positive revenue adjustments for exceeding applicable standards with regard to certain measures. Because the June 2017 Order approving the 2017 Joint Proposal was issued after the June 1, 2017 commencement of Rate Year 1 of the three-year rate plan and new rates did not go into effect until July 1, 2017, the June 2017 Order provides for each of the Gas Company and its customers to be placed in the same position in which they would have been if the new rates had gone into effect as of June 1, 2017. Any resulting revenue adjustments in favor of the Gas Company are deferred for future recovery, with interest. The Rate Year 3 rate increase of $1,556,594 became effective June 1, 2019.
By petition dated June 13, 2017, in Case 17-G-0346, Corning Gas requested authority under Public Service Law §69 to issue approximately $44 million of long-term debt through December 31, 2020. In its petition, Corning Gas requested permission to refinance all or a portion of its existing loans with a ten-year fixed rate loan (“Refunding Debt”). In addition, Corning Gas requested authority to issue new debt through December 31, 2020 to fund its future construction expenditures, repay short-term debt incurred to finance previous years’ construction expenditures, and to refinance its maturing debt obligations (“New Debt”). The NYSPSC, in an order issued November 17, 2017, authorized Corning Gas to issue up to $26 million for Refinancing Debt and up to $18 million for New Debt. The Commission authorization to issue debt granted in Case 17-G-0346 expires on December 31, 2020.
Pike
The acquisition of Pike was subject to the approval of the PAPUC. At its public meeting held on August 11, 2016, the PAPUC approved the Recommended Decision of the Administrative Law Judge, dated June 30, 2016, which approved the Joint Petition for Full Settlement of the Joint Application of Pike, Orange and Rockland Utilities, Inc. (“O&R”) and the Company, and the Pennsylvania Office of Consumer Advocate and the Pennsylvania Officer of Small Business Advocate (the “Settlement”). The Settlement requires Pike and the Holding Company to take a variety of actions including, among a series of other matters, hiring a general manager and other staffing of Pike, which had no employees when owned by O&R, and not filing for a rate increase prior to March 1, 2018.
On March 3, 2018 Pike experienced a major storm. Winter Storm Riley resulted in high winds and wet heavy snow, causing trees to fall to the ground, taking down numerous poles, spans of primary, secondary and service conductors, and damaging numerous pole top transformers. The cost of restoration was approximately $1.4 million. The $1.4 million is comprised of approximately $0.2 million of capital expenditures and $1.2 million of operation and maintenance repairs. On April 20, 2018 Pike filed a petition with PAPUC for permission to defer losses, for accounting and financial reporting purposes, resulting from the operation and maintenance expenses arising from severe storm damage, and to amortize such losses commencing on the date when rates are changed pursuant to the Commission's final order in Pike’s next general rate case. On June 14, 2018 in Docket P-2018-3001395 the PAPUC granted Pike’s deferral petition. On January 14, 2019 Pike filed a petition with the PAPUC requesting a Securities Certificate for issuance of additional debt in the amount of $2,732,154.
The PAPUC issued an order on February 7, 2019 in Docket S-2019-3007089 and S-2019-3007332 authorizing Pike to issue debt in the amount of $2,732,154. The Company has issued the total amount authorized by the Commission. The authorization expired on December 31, 2019.
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Leatherstocking Gas
On February 20, 2015, Leatherstocking Gas, pursuant to Section 68 of the Public Service Law, filed with the NYPSC for a Certificate of Public Convenience and Necessity and for approval of, and permission to exercise, franchises previously granted in the Town of Windsor (Case 15-G-0098) and Village of Windsor (Case 15-G-0099). NYPSC’s review of the applications is pending.
On February 27, 2015, Leatherstocking Gas, pursuant to Public Service Law Section 69, filed with the NYPSC for authority to issue long-term indebtedness in the principal amount of $2,750,000 for the purpose of financing new construction in the Town and Village of Windsor. The Commission review of the application in Case 15-G-0128 is pending.
On January 15, 2019 Leatherstocking Gas filed a petition with the PAPUC requesting a Securities Certificate for issuance of additional debt refinance in the amount of $8,748,742. The authorization request was to refinance approximately. $7 million of debt and the remaining balance was for construction expenditures. The petition was approved on February 28, 2019. The Commission authorization to issue debt granted in Securities Certificate S-2019-3007316 expires on February 28, 2020.
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, 2019, filed on December 23, 2019. There have been no significant changes in our accounting policies during the three months ended December 31, 2019. The adoption of ASU 2016-02 “Leases” did not impact the amount or timing of the Company’s revenues and expenses.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of December 31, 2019, the Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended. Based upon the Company’s evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective as of December 31, 2019.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that was conducted during the last fiscal quarter for the Company, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II.
OTHER INFORMATION
Item 1. | Legal Proceedings. |
The Holding Company and its subsidiaries has lawsuits pending of the type incurred in the normal course of business. The Company expects that any potential losses will be covered by insurance, subject to deductibles, and will not have a material adverse impact on the Company.
Item 1A. | Risk Factors. |
Please refer to risk factors listed under Item 1A – “Risk Factors” of the Holding Company’s Form 10-K for the fiscal year ended September 30, 2019, 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. |
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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 13, 2020 By: /s/ Michael I. German
Michael I. German, Chief Executive Officer and President
(Principal Executive Officer)
Date: February 13, 2020 By: /s/ Firouzeh Sarhangi
Firouzeh Sarhangi, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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