-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M3i+T9XImCgBdzhS0k3sK0oINRqL8t/lxY7Wz4mfn1njyGJm5msZVTondVOT2/u6 5/MNufmA4mLITtRsB96pvA== 0000024751-97-000001.txt : 19970130 0000024751-97-000001.hdr.sgml : 19970130 ACCESSION NUMBER: 0000024751-97-000001 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19970129 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNING NATURAL GAS CORP CENTRAL INDEX KEY: 0000024751 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 160397420 STATE OF INCORPORATION: NY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-00643 FILM NUMBER: 97513154 BUSINESS ADDRESS: STREET 1: 330 W WILLIAM ST STREET 2: P O BOX 58 CITY: CORNING STATE: NY ZIP: 14830 BUSINESS PHONE: 6079363755 MAIL ADDRESS: STREET 1: 330 W WILLIAM STREET STREET 2: P O BOX 58 CITY: CORNING STATE: NY ZIP: 14830 10KSB/A 1 U.S. Securities and Exchange Commission Washington, D.C. 20549 Form 10-KSB (X) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the nine month transition period ended September 30, 1996 Commission file number 0-643 Corning Natural Gas Corporation (Name of small business issuer in its charter) New York 16-0397420 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 330 W. William St., Corning NY 14830 (Address of principal executive offices) (Zip Code) Issuer's telephone number (607) 936-3755 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock - $5.00 par value (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 X No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. (X) Revenues for 9 month period ended September 30, 1996 $ 15,082,135 The aggregate market value of the 336,903 shares of the Common Stock held by non-affiliates of the Registrant at the $22 average of bid and asked prices as of November 1, 1996 was $7,411,866. Number of shares of Common Stock outstanding as of the close of business on November 1, 1996 - 460,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Annual Report to Shareholders for the nine month period ended September 30, 1996, and definitive proxy statement and notice of annual meeting of shareholders, dated January 16, 1997, are incorporated by reference into Part I, Part II and Part III hereof. Information contained in this Form 10-KSB and the Annual Report to shareholders for fiscal 1996 period which is incorporated by reference contains certain forward looking comments which may be impacted by factors beyond the control of the Company, including but not limited to natural gas supplies, regulatory actions and customer demand. As a result, actual conditions and results may differ from present expectations. CORNING NATURAL GAS CORPORATION FORM 10-KSB For the 9 Month Period Ended September 30, 1996 Part I ITEM 1 - DESCRIPTION OF BUSINESS (a) Business Development Corning Natural Gas Corporation (the "Company" or "Registrant"), incorporated in 1904, is a natural gas utility. The Company purchases its entire supply of gas, and distributes it through its own pipeline distribution and transmission systems to residential, commercial, industrial and municipal customers in the Corning, New York area and to two other gas utilities which service the Elmira and Bath, New York areas. The Company is under the jurisdiction of the Public Service Commission of New York State which oversees and sets rates for New York gas distribution companies. The Company also sells, leases and services appliances, primarily gas burning, through its wholly owned subsidiary, Corning Natural Gas Appliance Corporation. (b) Business of Issuer (1) The Company maintains a gas supply portfolio of numerous contracts and is not dependent on a single supplier. Additionally, the Company has capabilities for storing 793,000 Mcf through storage operations with two of its suppliers. The Company had no curtailments during 1996 and expects to have an adequate supply available for its customers during 1997 providing that no abnormal conditions or actions occur. (2) The Company is franchised to supply gas service in all the political subdivisions in which it operates and is adequately protected therewith. (3) Since the Company's business is seasonal by quarters, sales for each quarter of the year vary and are not comparable. Sales for different periods vary depending on variations in temperature, but the Company's Weather Normalization Clause (WNC) serves to stabilize net revenue from the effects of temperature variations. The WNC allows the Company to adjust customer billings to compensate for fluctuations in net revenue caused by temperatures which are higher or lower than the thirty year average temperature for the period. Degree days, which represent the number of degrees that the average daily temperature falls below 65 degrees Fahrenheit, totaled 4,577 for the period January 1 through September 30, 1996 and 4,273 for the same period in 1995. (4) The Company has three major customers, Corning Incorporated, New York State Electric & Gas (NYSEG), and Bath Electric, Gas & Water Systems (BEGWS). The loss of any of these customers could have a significant impact on the Company's financial results. (5) Historically, the Company's competition in the residential market has been primarily from electricity in cooking, water heating and clothes drying, and to a very small degree, in heating. The price of gas remains low in comparison to that of electricity in the Company's service territory and the Company's competitive position in the residential market continues to be very strong. Approximately 99% of the Company's general service customers heat with gas. In recent years competition from oil has developed in the industrial market. The Company has been able to counteract much of this competition, to date, through the transportation of customer owned gas for a transportation charge. The customer arranges for their own gas supply, then moves it through the Company's facilities for a transportation fee. The Company's transportation rate is equal to the lowest unit rate of the appropriate rate classification, exclusive of gas costs, hence the profit margin is maintained. Additionally, under the recent deregulated environment there is opportunity for the Company to increase revenue by selling its upstream pipeline capacity to transportation customers. The Company is authorized to retain 15% of such revenue and 85% is returned to firm customers in the form of lower gas costs. Transportation customers that pay for this capacity are virtually assured that their supply will not be interrupted. Revenues derived from the resale of this capacity were $131,953 for 9 months ended September 30, 1996 and $104,294 for the period January 1 through September 30, 1995. For those willing to bear some risk, the Company has an interruptible transportation rate for its large industrial customers whereby the customer may elect to avoid payment of demand charges but bears the risk of partial or total upstream interruption of service during certain periods. To maintain industrial load in the event that oil prices temporarily drop below the equivalent gas price, the Company continues to maintain a flexible transportation rate schedule. This flexible rate, however, was not utilized in 1996 and has been invoked only once since its inception. In September 1995 the Company purchased the assets of a local gas distribution system, Finger Lakes Gas Company, through the Federal Bankruptcy Court. Finger Lakes Gas served customers in the Hammondsport, NY area and had a customer base of approximately 320 customers. The Company was able to purchase this all plastic system with a bid of $560,000. The Company was pleased to purchase these assets that originally cost over $1.5 million to construct for its relatively low bid. The nearly new, all plastic, system was already connected and serving 320 customers with a potential to add 200 more in the near future. On a per customer basis, this represents a very low investment. The capital to purchase these assets was obtained through short term debt. The Company has not found it necessary to apply for an increase in rates on this part of our system which means the original rates made effective in 1990 remain in effect six years later. Shortly after the Company took possession of the system, Mercury Aircraft, Inc. announced it would purchase the former Taylor Wine Company facilities and centralize their other plants. The reopening of this major facility will most certainly contribute toward the stability and future viability of the new gas system which is now part of the Company. The former Finger Lakes Gas Company's operations, did not have a significant impact on 1995, but contributed in excess of $150,000 to gross margin (revenues less gas cost) for the period ended September 30, 1996. In December, 1994 the New York Public Service Commission instituted a proceeding to address issues related to the merging competitive natural gas market. This proceeding is intended to provide a framework whereby access to facilities on upstream pipelines made available by FERC Order 636 would be available to end use customers on the Local Distribution Company level. New tariff filings were approved and became effective September 1, 1996. The Company considers this a transitional step towards full unbundling of services with future changes made as circumstances warrant. The Company received approval for a rate increase from the New York State Public Service Commission of approximately $124,000 in revenues with an effective date of September 1, 1996. (6) The Company believes compliance with present federal, state and local provisions relating to the protection of the environment will not have any material adverse effect on capital expenditures, earnings and financial position of the Company and its subsidiary. (7) Sixty-seven persons were employed on a full-time basis and six on a part-time basis by the Company in 1996 and 1995. (8) The Company's labor-management relationship is good. Typical labor negotiations are completed in one to two days. The current labor contract was signed September 1, 1995 for a three year period. ITEM 2 - DESCRIPTION OF PROPERTY The Company completed the construction of a new office building at 330 West William Street, Corning, NY in the fall of 1991. This structure is physically connected to the operations center built three years earlier. The Company had outgrown its general offices at 27 East Denison Parkway. The property has been sold, and the gain on the sale was returned to ratepayers in previous years. The Company's pipeline system is thoroughly surveyed each year. Any necessary replacements are included in the construction budget. Approximately 105 miles of transmission main, 279 miles of distribution main, 13,800 services and 86 measuring and regulating stations, along with various other property are distributed throughout the service area. All of the above described property is owned by the Company, except for approximately one mile of 10" gas main which is under a long-term lease and is used primarily to serve Corning Incorporated. All of the above described property which is owned by the Company is adequately insured, and is subject to the lien of the Company's first mortgage indenture. ITEM 3 - LEGAL PROCEEDINGS The Company is not a party to any material pending legal proceedings, nor is the Company aware of any problems of any consequence which it anticipates may result in legal proceedings. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the third quarter of 1996. Additional Item Executive Officers of the Registrant (Including Certain Significant Employees) Business Experience Years Served Name Age During Past 5 Years In This Office Thomas K. Barry 51 Chairman of the Board of Directors 3 President & C.E.O. 12 Edgar F. Lewis 59 Senior Vice President - Operations 16 Kenneth J. Robinson 52 Executive Vice President 5 Financial Vice President & Treasurer 4 Phyllis J. Groeger 56 Secretary 9 Thomas S. Roye 43 Vice President - Administration 5 Assistant Treasurer & Assistant Secretary 4 Gary K. Earley 42 Treasurer 5 Accountant, Rates & Regulations 4 Term of office is for one year. (Normally from April to April) Part II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal market on which the Registrant's common stock is traded, the range of high and low bid quotations for each quarterly period during the past two years, the amount and frequency of dividends, and a description of restrictions upon the Registrant's ability to pay dividends, appear in the table below. The number of stockholders of record of the Registrant's Common Stock was 373 at September 30, 1996. The high and low bid quotations reflect inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions. MARKET PRICE - (OTC) Dividend Quarter Ended High Low Paid March 31, 1996 $ 23 $ 22 $ .315 June 30, 1996 23 22 .315 September 30, 1996 22 21 1/2 .315 March 31, 1995 25 24 $ .31 June 30, 1995 24 1/2 24 .31 September 30, 1995 24 3/4 24 .31 December 31, 1995 24 23 .315 ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion of financial condition and results of operations of the Company appears in the 1996 Annual Report to Shareholders which is incorporated by reference. ITEM 7 - FINANCIAL STATEMENTS The consolidated financial statements, together with the independent auditors' report thereon of KPMG Peat Marwick LLP dated November 8, 1996 are included in the 1996 Annual Report to Shareholders attached hereto, and are incorporated in this Form 10-KSB by reference thereto. ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None Part III ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS The information required regarding the executive officers of the Registrant is included in Part 1 under "Additional Item". ITEM 10 - EXECUTIVE COMPENSATION The information required regarding the compensation of the executive officers appears in the Definitive Proxy Statement attached hereto. ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required regarding the security ownership of certain beneficial owners and management appears in the Definitive Proxy Statement attached hereto. ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required regarding certain relationships and related transactions appears in the Definitive Proxy Statement attached hereto. Part IV ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed with this Form 10-KSB or incorporated herein by reference: (Exhibit numbers correspond to numbers assigned to exhibits in Item 601 of Regulation S-B) Name of Exhibit Exhibit Page 3 A copy of the Corporation's Articles of Incorporation, as currently in effect, including all amendments, was filed with the Company's Form 10-K for December 31, 1987. 3 A copy of the Corporation's complete by-laws, as currently in effect, was filed with the Corporation's report on Form 10-Q for the quarter ended March 31, 1984. 10 A copy of the "Agreement Between Corning Natural Gas Corporation and Local 139", dated September 1, 1995 was filed with Form 10-KSB for December 31, 1995. 10 Consulting Agreement and Employment Contracts with three executive officers were filed with the Company's Form 10-K for December 31, 1987. 10 A copy of the Service Agreement with CNG Page Transmission Corporation was filed with the Company's Form 10-KSB for December 31, 1993. 10 A copy of the Sales Agreement with Bath Electric, Gas and Water was filed with the Company's Form 10-K for December 31, 1989. 10 A copy of the Transportation Agreement between the Company and New York State Electric and Gas Corporation was filed with the Company's Form 10-KSB for December 31, 1992. 10 A copy of the Transportation Agreement between the Company and Corning Incorporated was filed with the Company's Form 10-KSB for December 31, 1992. 10 A copy of the Service Agreement with Columbia Gas Transmission Co. was filed with the Company's 10-KSB for December 31, 1993. 10 A copy of the Service Agreement with Tennessee Gas Pipeline Co. was filed with the Company's 10-KSB for December 3, 1993. 13 A copy of the Corporation's Annual Report to Shareholders for 1996, is filed herewith. 11 22 Information regarding the Company's sole subsidiary was filed as Exhibit 22 with the Company's Form 10-K for the period ended December 31, 1981. 28 Corning Natural Gas Corporation Proxy Statement is filed herewith. 12 99 Order from the U.S. Bankruptcy Court, Northern District of New York re: Approval of Acquisition of Finger Lakes Gas Company was filed with the Company's 10-KSB for the period ended December 31, 1995. 99 Order from the Public Service Commission of New York State re: Approval of Acquisition of Finger Lakes Gas Company was filed with the Company's 10-KSB for the period ended December 31, 1995. (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the three month period ended September 30, 1996. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CORNING NATURAL GAS CORPORATION (Registrant) Date December 26, 1996 THOMAS K. BARRY Thomas K. Barry, Chairman of the Board, President and C.E.O. Date December 26, 1996 GARY K. EARLEY Gary K. Earley, Treasurer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date December 26, 1996 J.E. BARRY J. E. Barry, Director Date December 26, 1996 DONALD R. PATNODE Donald R. Patnode, Director Date December 26, 1996 J.A. FINLEY J.A. Finley, Director EX-13 2 CORNING NATURAL GAS CORPORATION 1996 ANNUAL REPORT Report to Shareholders A variety of circumstances and opportunities have culminated in the production of above average financial results for the first three quarters of 1996 as well as for the past twelve months. We will be discussing the first nine months of the year in addition to twelve month results as we have moved from a December 31 to a September 30 fiscal year. This change, which will end our year during a mild season, actually provides a more realistic annual picture of the financial results of the highly seasonal business nature that is typical for northeastern natural gas distribution companies. The numbers presented to you throughout this report are audited for the nine month period ended September 30, 1996 but are unaudited for the nine months and twelve months ended September 30, 1995. FINANCIAL RESULTS - As previously stated, a number of factors combined in providing outstanding results for the past year. On an individual basis, no particular segment of our business was outstanding except perhaps for overall gas deliveries. Rather exceptionally cold weather, which produced 7.5 percent more degree days than the fifteen year average, did result in 779,000 Mcf more deliveries in the twelve months ended September 30, 1996 than the prior year. Consolidated earnings of $483,000 for the nine months ended September 30, 1996, and $795,000 for the twelve month period ended September 30, 1996 resulted in an increase over the prior period of 56 percent and 37 percent respectively. Incremental revenues derived from non-traditional sources provided as a result of the restructuring process referred to elsewhere in this report account for some of the earnings improvement. The purchase of the Hammondsport, NY gas delivery system generated gross margin of $150,000 for the nine months ended September 30, 1996. The physical acquisition was made without difficulty while sales generated were higher than projections with relatively low operating costs. The Company's Appliance subsidiary also contributed significantly, once again, to our consolidated results. APPLIANCE SUBSIDIARY - The Company's wholly owned subsidiary also continued to improve its contributions to earnings. For the nine months ended September 30, 1996 the Appliance Corporation earned $132,000, an improvement of 24 percent over the same period of 1995. Twelve month earnings, ended September 30, 1996, of $229,000 are 19 percent ahead of the prior year and amount to 29 percent of our 12 month consolidated results. The Company operates three retail stores including one in Elmira, Bath and Corning. We recently moved the Elmira store into a complex of shops adjacent to the new, impressive Wegman's supermarket near downtown Elmira. Eleven burning natural gas fireplace displays were installed at this store as its primary feature. We expect to vastly improve the traffic at this new outlet which opened October 1, 1996 as the Wegmans plaza is projected to eventually attract up to 50,000 customers per week. Both the Corning and Bath outlets were remerchandised at the same time to capitalize on the opening of the Elmira unit. We look forward to a promising future for the Appliance Subsidiary as its growth and contribution to consolidated results play an ever increasing role. ACQUISITION - The purchase of the Hammondsport, NY, distribution system (previously operated by the Finger Lakes Gas Company) has exceeded forecast expectations. We have achieved moderate results in adding new customers on the system which was approximately sixty percent saturated when we purchased it in bankruptcy court. However, projected results were enhanced when the single largest customer was placed on stream very shortly after we purchased the system in September, 1995. This customer, Mercury Aircraft, Inc., accounts for a significant proportion of system deliveries in Hammondsport. The additional revenues generated by this customer have enabled us to provide continued service throughout Hammondsport without any rate adjustments. While the rates that we deliver natural gas to customers in Hammondsport are similar to those in Corning, there has been no rate increase on this system since its original construction in 1990. MAJOR CUSTOMERS - The Company has continued its relationships with its primary industrial and wholesale customers. We provide primarily gas transportation services to our wholesale accounts in Elmira and Bath which amounted to 37 percent of total throughput for the year ending September 30, 1996 which represents an increase of 13 percent. We also maintain excellent relationships with our large industrial users, Corning Incorporated, Pollio Dairy and Dresser Rand. We recently executed a contract with Corning Incorporated wherein the Company will provide the main plant facilities (intown) with all of their requirements either through sales, transportation, and/or storage services for the next three years with potential renewals extending to five years. Such contracts and relationships help us to stabilize our overall throughput and earnings into the future. The Company currently transports nearly one hundred percent of the natural gas used by all of its industrial and wholesale customers and many of its large commercial and municipal accounts. Transportation services now account for approximately two thirds of our total gas deliveries. RATES - The Company had filed a rate application with the NYSPSC in the amount of $368,000 on June 8, 1995 with a requested implementation date of January 1, 1996. Unfortunately, a series of delays and adjustments resulted in a final approval of only $124,000 which did not become effective until September 1, 1996. Thus, this rate adjustment has almost no impact upon earnings as stated in this report. We have managed to keep control of our overhead, particularly when considering that the prior rate increase, which was effective in November, 1993, amounted to only $88,000. Therefore, our rates have only increased a total of $212,000 during the past three years which represents an increase of only 1.5% to the average residential customer. Further, any additional potential increases in our rates will not take place before 1998. Another adjustment that affects rates is that the Company chose, in 1992, to protect its customers and its shareholders from exceptional swings in the weather by instituting the weather normalization into the billing factor. Thus, when the winter is colder than average, the Company reduces its billing factor to residential and commercial customers thereby minimizing excess earnings or losses as a result of warmer or colder than normal weather. During the twelve months ended September 30, 1996, the Company returned $201,000 in the form of reduced rates to its retail and commercial customers as a result of colder than normal weather. Additionally, we previously stated that we were successful in deriving revenues from non-traditional sources. The marketing of excess pipeline capacity on the system benefits both the Company and its customers. Since the Company retains only fifteen percent of its capacity assignment sales, our customers are the beneficiaries of the other eighty-five percent of such sales. Over the past twelve months we have returned $1,030,000 to our customers through lower rates as a direct result of these incremental revenues. OPERATING EXPENSES AND TAXES - On the positive side, our ability to maintain a steady rate structure and control our operating expenses helps to keep gas at affordable prices. For the twelve months ended September 30, 1996, our total operating expenses, including depreciation, actually declined by $78,000 or 2 percent. Unfortunately, general and federal income taxes rose by $450,000 or 27 percent during this same period. During the past year, our Company collected over $1.8 million in general taxes from our customers. Most of these taxes were made up of the much discussed gross revenue tax (GRT) which is a tax on all revenues charged by utilities within the state. Other industries in the state are taxed only upon their earnings. There has been a great deal of discussion across the state regarding the need to reduce energy costs, particularly electric rates, if we are to attract new industries or even maintain existing industry. New York State utility customers pay twice the national average in taxes. Everyone recognizes the need to replace the GRT with a more realistic taxing system, but nothing has yet been accomplished at the state capital in this regard. Governor George Pataki's administration has reduced personal income taxes and eliminated the surtax on businesses and is now discussing a gradual phase-down of the GRT. The Governor was also successful in reforming workman's compensation laws which has resulted in a 17 percent savings in this particular expense to our Company. CAPITAL ADDITIONS - The majority of our capital additions are made to upgrade the pipeline distribution system and to add new customers. During the past nine months we replaced 118 service lines, 3,570 feet of mains and added 50 new services. We have had an ongoing program to replace all outdoor meters with temperature compensated meters which provides for more accurate measurement of gas at weather extremes, particularly important during cold weather. This program will be completed in 1997. Nearly 100 percent of all the pipelines and service lines we have installed since 1970 have been with plastic. We continue to carefully monitor the older steel distribution system while installing corrosion control equipment in the most crucial areas. In the past three years we have installed corrosion protection equipment on an additional 29 miles of mains. We dedicate three full-time employees for leak detection and corrosion control. Each year we also expend a portion of the budget to upgrade the rolling stock and expand computer utilization. Our fleet of 30 service and installation vans, crew trucks, backhoes, special equipment trucks and automobiles are in excellent condition and replacements are made annually based upon usage and condition. SUMMARY - The local economy remains somewhat stagnant as Corning Incorporated and Dresser Rand have downsized and done some restructuring over the past several years. Corning Natural Gas has, however, made advances through its purchase of the Hammondsport gas system, sales of pipeline capacity, expansion of appliance sales in Elmira and through internal cost controls. Having just ended an excellent year, while positioning ourselves to provide a variety of services to our customers at highly competitive rates, we feel quite positive about the future of our industry and our Company. Twelve month earnings of $1.74 per share have positioned us to pay an annualized dividend of $1.28 per share. The dividend to be paid on February 20, 1997 is the Company's 176th consecutive dividend. These results could not have been possible without the commitment of a group of loyal and dedicated employees who strive to upgrade the quality of their work and expand the services provided to our customers. We sincerely thank these employees along with a supportive Board of Directors and all of the customers that help to make us a service driven organization. For the Board of Directors, Thomas K. Barry Chairman of the Board, President & CEO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS During 1996 the Company changed its fiscal year end from December 31 to September 30. The Company believes that the September 30 fiscal year end better represents its natural business cycle. The adjacent table compares the results for the nine months ended September 30, 1996 to the unaudited results for the nine months ended September 30, 1995. The discussion of operating results will focus on these periods. EARNINGS Net income in 1996 was $483,000, or $1.05 a share, compared to net income of $309,000, or $.67 a share in 1995. The earnings improvement results from the acquisition of the former Finger Lakes Gas Company which contributed $150,000 to gross margin (revenue less gas cost), and from revenues derived from non- traditional sources. Recent industry restructuring allows the Company to benefit from such non-traditional sources such as the assignment of unused pipeline capacity, the sale of natural gas to both on-system and off-system customers, and the assignment of storage capacity. Additionally, unregulated subsidiary earnings improved 24 percent to $131,900 in 1996, as discussed below. OPERATING REVENUE Operating revenue of $15,100,000 increased 24 percent in 1996 due primarily to an increase in gas cost billings. The Company's billing rates are adjusted to reflect changes in gas costs (which include current cost as well as prior period reconciliation amounts), keeping the effect of such changes earnings neutral to the Company. The acquisition of the former Finger Lakes Gas Company produced an additional $603,000 in revenue for the nine months ended September 30, 1996. Total gas delivered to customers increased 10 percent to 6,033,000 Mcf in 1996. The acquisition of the former Finger Lakes Gas Company added 111,000 Mcf to the Company's throughput in 1996. Colder weather also increased throughput in 1996 but the Company's weather normalization billing mechanism serves to neutralize the effect of weather. Accordingly, the Company billed $203,000 less to customers through this mechanism in 1996, as expected and designed. Nine Months Ended 9/30/95 9/30/96 Unaudited Operating revenue $15,082,135 12,119,422 Operating expenses and taxes: Natural gas purchased 9,538,759 7,093,144 Operating and maintenance 2,613,231 2,519,090 Taxes other than federal income taxes 1,428,476 1,198,240 Depreciation 356,400 340,012 Federal income taxes 185,570 155,954 Total operating expenses and taxes 14,122,436 11,306,440 Income from utility operations 959,699 812,982 Income from unregulated operations: 131,935 106,038 Other income 10,447 15,679 Income before interest expense 1,102,081 934,699 Interest expense 618,695 625,658 Net income $ 483,386 $ 309,041 Earnings per common share $ 1.05 $ .67 OPERATING EXPENSE The Company's most significant element of cost is purchased natural gas. Purchased gas expense amounted to 68 percent of total operating expenses in 1996 and 63 percent of the total in 1995. Purchased gas expense increased 34% in 1996 due to increased deliveries noted above, higher prior period gas cost reconciliation amounts and higher supplier rates. The Company's average cost of gas per Mcf was $4.47 in 1996 and $4.21 in 1995. Taxes other than income taxes increased $230,000 or 19% primarily due to an increase in state and local taxes levied on gross revenue. Other operating and maintenance expenses did not change significantly. UNREGULATED OPERATIONS The Appliance Corporation subsidiary earnings improved 24 percent to $131,900 in 1996. Increased rental revenues and an improvement in profit margins resulting from strategic pricing contributed to the boost in subsidiary earnings. LIQUIDITY AND CAPITAL RESOURCES Capital expenditures amounting to $682,500 in 1996 were financed with internally generated funds and short-term borrowing. Our change in fiscal year end created several significant variations in balance sheet amounts from December 31, 1995 including accounts receivable, unrecovered or refundable gas costs and notes payable, as the result of much milder weather at September 30. Transition costs deferred and the related liability decreased significantly as this liability is almost entirely paid by the Company and collected from its customers. Gas stored underground at September 30, 1996 increased significantly from December 31, 1995 due to the normal operation of storage. The Company injects gas into storage during the summer months and withdraws it during the winter months. The Company has unsecured bank lines of credit totaling $5,500,000, the terms of which are disclosed in note 6 to the financial statements. The Company continues to explore opportunities to refinance current debt. Management believes that the combination of currently available credit facilities and internally generated funds will provide sufficient financial resources for 1997. REGULATORY MATTERS The Company implemented a rate increase effective September 1, 1996 in the amount of $124,000. However, the increase had no material effect on the fiscal period ended September 30, 1996. In addition, the Company will continue its weather normalization clause whereby customer bills are adjusted to reflect deviations from normal weather patterns. INDUSTRY RESTRUCTURING 1996 saw the culmination of efforts which began in 1994 to provide the perceived benefits of competition in the natural gas industry to all classes of customers, irrespective of size. Tariffs were filed and approved by the Public Service Commission (PSC) to give each and every customer the opportunity to participate in the competitive environment by purchasing gas in the open market rather than from Corning Natural Gas and by utilizing the storage facilities leased by the Company. The Company has also been provided with additional opportunities and responsibilities through non-traditional sources. Opportunities exist for the Company to enhance earnings by assigning unneeded upstream pipeline capacity to others and by marketing gas to both on-system and off-system customers. In each case the Company is allowed to retain 15% of the margin, passing 85% back to firm customers through rates. Efforts to assign unneeded capacity have been quite successful. Competition in the gas marketing business, however, is very keen, with thin margins. It will be some time before the success of the restructuring efforts can be effectively gauged. For a variety of reasons transportation to small volume customers has been slow to catch on, both on Corning's system and throughout the state. At meetings held with customers and marketers, each group expressed interest in participating, however, it was generally agreed that the transition will be gradual. Within the industry there are a variety of directions being taken by individual companies, with some companies taking the extreme position of exiting the merchant function completely and providing only transportation service. This Company has been involved in the entire regulatory process leading up to the current scheme and will continue to keep abreast of changes which may evolve. Since this initiative represents the most sweeping change ever to impact the industry, it is logical that more change will follow. Management is dedicated to not only complying with the regulatory requirements but looking for every opportunity to prosper in the new environment. CORNING NATURAL GAS CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements For The Nine Months Ended September 30, 1996 And The Year Ended December 31, 1995 (1) Summary of Significant Accounting Policies Corning Natural Gas Corporation (the 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. The Company follows the Uniform System of Accounts prescribed by the Public Service Commission of the State of New York (PSC) which has jurisdiction over and sets rates for New York State gas distribution companies. The Company's regulated operations meet the criteria and accordingly, follow the accounting and reporting of SFAS 71 "Accounting for the Effects of Certain Types of Regulation." The Company's financial statements contain the use of estimates and assumptions for reporting certain assets, liabilities, revenue and expenses and actual results could differ from the estimates. The more significant accounting policies are summarized below. Principles of Consolidation and Presentation The consolidated financial statements include the Company and its wholly owned subsidiary, The Corning Natural Gas Appliance Corporation (Appliance Corporation). All significant intercompany accounts and transactions have been eliminated in consolidation. The results of the Appliance Corporation are reported separately as unregulated operations in the consolidated statements of income and retained earnings. Shared expenses are allocated to the Appliance Corporation. It is the Company's policy to reclassify amounts in the prior year's financial statements to conform with the current year's presentation. Utility Plant and Rented Gas Appliances Utility plant is stated at the historical cost of construction. These costs include payroll, fringe benefits, materials and supplies and transportation costs. The Company charges normal repairs to maintenance expense. The Appliance Corporation capitalizes the cost of appliances and the original installation to rented gas appliances. Subsequent repairs are expensed. Depreciation The Company provides for depreciation for accounting purposes using a composite straight-line method based on the estimated economic lives of property. The depreciation rate used for utility plant, expressed as an annual percentage of depreciable property, was 3.3% in 1996 and 1995. At the time utility properties are retired, the original cost plus costs of removal less salvage, are charged to accumulated depreciation. Rented gas appliances are depreciated on a straight-line basis ranging from 10% to 20% per year. Revenue and Natural Gas Purchased The Company records revenue 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 through the end of each month. The Company secured a weather normalization clause in the last major filing as protection against severe weather fluctuations. This affects space heating customers and is activated when degree days are 2% greater or less than a 30 year average. Hence, the effect on revenue fluctuations in weather related gas sales is somewhat neutralized. Gas purchases are recorded based on readings of suppliers' meters as of the end of the month. The Company's rate tariffs include a Gas Adjustment Clause (GAC) which adjusts rates to reflect changes in gas costs from levels established in the rate setting process. In order to match such costs and revenue, the PSC has provided for an annual reconciliation of recoverable GAC costs with applicable revenue billed. Any excess or deficiency in GAC revenue billed is deferred and the balance at the reconciliation date is either refunded or recovered from the customers over a subsequent 12-month period. Federal Income Tax The Company uses the asset and liability method to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. In addition, such deferred tax assets and liabilities will be adjusted for the effects of enacted changes in tax laws and rates. (2) Acquisition of Finger Lakes Gas On September 20, 1995 the Company acquired the assets associated with the distribution system of Finger Lakes Gas Company for $560,000. The assets were purchased at public auction held in Federal Bankruptcy Court. The acquisition was accounted for as a purchase, accordingly, the assets were added to utility plant at their purchase price. The former Finger Lakes Gas Company's operations, which did not have a significant impact on 1995, are included in the consolidated results from the acquisition date. Gross margin (revenue less gas cost) generated was $150,000 for the nine months ended September 30, 1996 and $50,000 for the twelve months ended December 31, 1995. (3) Information About Operating Segments Selected financial information for the Company's identifiable operating segments follows: Identifiable Assets Capital Expenditures Depreciation 1996 1995 1996 1995 1996 1995 Reg. Oper. $18,382,249 20,088,094 475,121 1,272,123 356,400 454,637 Unreg. Oper. 2,175,313 2,131,621 207,355 241,073 174,300 232,219 $20,557,562 22,219,715 682,476 1,513,196 530,730 686,856 ========== ========== ======= ========= ======= ======= The Company's regulated operations have no significant assets which are excluded from recoverability under rate filings. (4) Regulatory Matters Certain costs are deferred and recognized as expenses when they are reflected in rates and recovered from customers as permitted by SFAS 71. These costs are shown as Regulatory Assets. Such costs arise from the traditional cost-of-service rate setting approach where all prudently incurred costs are recoverable through rates. Deferral of these costs is appropriate while the Company's rates are regulated under a cost-of-service approach. In a purely competitive environment, such costs might not have been incurred or deferred. Accordingly, if the Company's rate setting were changed from a cost-of-service approach and it was no longer allowed to defer these costs under SFAS 71, certain of these assets may not be fully recoverable. However, the Company cannot predict the impact, if any, of competition and continues to operate in a cost-of-service based regulatory environment and therefore believes that accounting under SFAS 71 is still appropriate. Below is a summarization of the Regulatory Assets as of September 30, 1996 and December 31, 1995: 1996 1995 Unrecovered gas costs $ --- 1,157,382 Deferred transition costs 29,093 414,504 Deferred debits - accounting for income taxes 1,016,661 1,016,661 Other deferred debits 555,716 275,719 Total-Regulatory Assets $ 1,601,470 2,864,266 ========= ========= Unrecovered gas costs - These costs are recoverable over future years and arise from an annual reconciliation of certain gas revenue and costs (as described in Note 1). Deferred transition costs - The Company is currently collecting transition costs through the GAC as authorized by the PSC, but final policy may require collection from transportation customers as well. Deferred debits - accounting for income taxes - This amount represents the expected future recovery from ratepayers of the tax consequences of temporary differences between the financial reporting basis and tax basis of assets and liabilities. Other deferred debits - The majority of this amount represents timing differences between the Company's rate case filings and financial reporting period for pension and postretirement benefit accounting. The Company expects that its regulatory assets will be fully recoverable from customers. (5) Long-Term Debt A summary of long-term debt as of September 30, 1996 and December 31, 1995 follows: 1996 1995 First Mortgage bonds-10% series due 2008 $1,700,000 $1,700,000 First mortgage bonds- 8 1/4% series all due 2018 3,100,000 3,100,000 Unsecured senior note-9.83% due serially 2016 1,600,000 1,600,000 Total long-term debt 6,400,000 6,400,000 Less current installments 100,000 100,000 Long-term debt less current installments $6,300,000 $6,300,000 ========== ========== The Company will redeem long-term debt as follows: 10% First Mortgage Bonds - $100,000 on December 15th annually with a final $500,000 payment due in 2008. 9.83% Senior Note - $100,000 annually 2007 through 2015 with $700,000 due 2016. Under the Company's bond indenture, retained earnings as of September 30, 1996 in the amount of $796,654 are restricted as to the payment of dividends. The first mortgage bonds are secured by substantially all utility plant. (6) Lines of Credit The Company has lines of credit with local banks to borrow up to $5,500,000 on a short-term basis. Borrowings outstanding under these lines were $2,725,000 at September 30, 1996 and $3,815,000 at December 31, 1995. The lines of credit are unsecured and payable on demand with interest at the prime rate (8.25% at September 30, 1996) less 1/8 to 1/2%. (7) Federal Income Taxes Federal income tax expense (benefit) recorded in the accompanying consolidated statements of income and retained earnings is as follows: 1996 1995 Utility Operations: Current $ 392,304 117,403 Deferred (196,063) 124,746 Investment Tax Credits (10,671) (10,671) 185,570 231,478 Unregulated Operations: Current 97,095 99,966 Deferred (127) 6,630 96,968 106,596 Total federal income tax expenses $ 282,538 338,074 ======== ======== Actual federal income tax expense differs from the expected federal income tax expense (computed by applying the federal corporate tax rate of 34% to income before federal income tax expense) as follows: 1996 1995 Expected tax expense $ 260,414 325,993 Investment tax credits (10,671) (10,671) Other, net 32,795 22,752 $ 282,538 338,074 ======= ======= The tax effects of temporary differences that result in deferred tax assets and deferred tax liabilities at September 30, 1996 and December 31, 1995 are as follows: 1996 1995 Deferred tax assets: Alternative minimum tax carry fwrd $ 0 50,000 Unbilled revenue 29,000 105,000 Supplemental pension reserve 151,000 126,000 Postretirement benefit obligations 106,000 83,000 Allowance for uncollectible accounts 33,000 34,000 Other 45,000 56,000 Total gross deferred tax assets 364,000 454,000 ======= ======= Deferred tax liabilities: Property, plant and equipment, principally due to differences in depreciation $2,075,000 2,025,000 Pension benefit obligations 294,000 209,000 Deficiency of GAC revenue billed 80,000 394,000 FERC Order 636 transition costs 10,000 141,000 Other 158,213 134,403 Total del. income tax liabilities 2,617,213 2,903,403 Net deferred income tax liability $2,253,213 2,449,403 ========= ========= There was no change in the valuation allowance for deferred tax assets during 1996 and 1995. (8) Pension Plan The Company has defined pension plans covering substantially all of its employees. The benefits are based on years of service and the employee's highest average compensation during a specified period. The Company makes annual contributions to the plans equal to amounts determined in accordance with the funding requirements of the Employee Retirement Security Act of 1974. Contributions are intended to provide not only for benefits attributed for service to date, but also for those expected to be earned in the future. The following table sets forth the plan's funded status and amounts recognized on the Company's balance sheet under Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions" (SFAS 87) at September 30, 1996 and December 31, 1995. 1996 1995 Actuarial present value of accumulated benefit obligation (including vested benefits of $5,154,703 in 1996 and $4,892,382 in 1995) $5,268,331 4,985,900 ========= ========== Plan assets at fair value, primarily listed stocks and bonds 7,411,741 6,946,629 Projected benefit obligation 6,517,723 6,314,458 Excess of plan assets over projected benefit obligation 894,018 632,171 Unrecognized net gain being recognized over 10 years in accordance with PSC policy (676,625) (573,499) Unrecognized prior service cost 801,578 861,053 Unrecognized net transition asset at January 1, 1989 being recognized over 20 years (444,486) (474,117) Prepaid pension cost recognized on the balance sheet $ 574,485 445,608 ========= ========== The components of net periodic pension expense under SFAS 87 for the nine months ended September 30, 1996 and the year ended December 31, 1995 are as follows: 1996 1995 Service cost benefits earned during the period $ 154,713 168,062 Interest on projected benefit obligation 335,492 384,451 Actual return on plan assets (572,699) (1,495,481) Net amortization and deferrals 116,004 1,034,354 Net periodic pension expense $ 33,510 91,386 For ratemaking purposes, pension expense represents the amount approved by the PSC in the Company's most recently approved rate case. Pension benefit for ratemaking purposes was approximately $45,000 and $60,000 during the nine months ended September 30, 1996 and the year ended December 31, 1995, respectively. The difference between the pension expense (benefit) for ratemaking purposes and the amount computed under SFAS 87 has been deferred and is not included in the prepaid pension cost noted above. The assumptions used to determine pension expense obligations and pension costs for 1995 and 1996 were 7.25% for weighted average discount rate, 5.0% for rate of compensation increase, and 8.0% for weighted average rate of return on plan assets. (9) Major Customers The Company has three major customers, Corning Incorporated, New York State Electric & Gas (NYSEG) and Bath Electric Gas & Water Systems (BEGWS). The loss of any of these customers could have a significant impact on the Company's financial results. In addition, a significant portion of capacity assignment revenue is generated from Corning Inc. Total revenue and deliveries to these customers were as follows: Mcf % of % of Corning Inc. Deliveries Total Revenue Total 9 Mo. ended 9/30/96 1,580,243 26 $ 549,527 4 Year ended 12/31/95 2,124,993 27 $ 688,907 4 NYSEG 9 Mo. ended 9/30/96 1,575,679 26 $ 197,586 1 Year ended 12/31/95 2,041,628 27 $ 259,659 2 BEGWS 9 Mo. ended 9/30/96 544,200 9 $ 1,503,239 10 Year ended 12/31/95 784,069 10 $ 2,075,703 12 (10) Postretirement Employee Benefits In addition to the Company's defined benefit pension plans, the Company offers postretirement benefits to its employees who meet certain age and service criteria. Currently, the retirees under age 65 pay 60% of their health care premium until Medicare benefits commence at age 65. After age 65, Medicare supplemental coverage is offered with Company payment of the premium. For participants who retire on or after September 2, 1992, the Company cost, as stated above, shall not exceed $150 per month. In addition, the Company offers limited life insurance coverage to active employees and retirees. The postretirement benefit plan is not funded. The Company accrues the cost of providing postretirement benefits, including medical and life insurance coverage, during the active service period of the employee. The following table presents the Company's postretirement benefit plan's status reconciled with amounts recognized in the Company's consolidated balance sheets under Statement of Financial Accounting Standard No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions (SFAS 106) at September 30, 1996 and December 31, 1995: Actuarial present value of accumulated postretirement benefit obligation: 1996 1995 Current retirees $ (670,000) (708,000) Future retirees (347,000) (323,000) $ (1,017,000) (1,031,000) Unrecognized transition obligation at January 1, 1993 being recognized over 20 years 973,000 1,016,000 Unrecognized net gain being recognized over 10 years in accordance with PSC policy (258,000) (253,000) Accrued postretirement benefit cost recognized on the balance sheet $ (302,000) (268,000) =========== =========== The PSC has allowed the Company to recover incremental SFAS 106 cost through rates on a current basis. Due to the timing differences between the Company's rate case filings and financial reporting period, a regulatory asset has been recognized in the amount of approximately $30,000 to be recovered from ratepayers in the future. Net periodic postretirement benefit cost for the nine months ended September 30, 1996 and the year ended December 31, 1995 under SFAS 106 includes the following components: 1996 1995 Service cost $ 10,000 13,000 Interest cost 53,000 75,000 Net amortization and deferrals 22,000 49,000 Net periodic postretirement benefit cost $ 85,000 137,000 ======= ======= For measurement purposes, a 9% annual rate of increase in the per capita cost of covered benefits (health care cost trend rate) was assumed for 1997. The rate is assumed to decrease gradually to 6% by the year 2012 and remain at that level thereafter. A 1% increase in the actual health care cost rate would result in approximately a 4.4% increase in the service and interest cost components to annual net periodic postretirement benefit cost and a 4.3% increase in the accumulated postretirement benefit obligation. The weighted average discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation was 7.52%. (11) Commitments The Company has agreements with six pipeline companies providing for pipeline capacity for terms that extend through 2001. These agreements require the payment of a demand charge for contracted capacity at FERC approved rates. Purchased gas costs incurred under these pipeline capacity agreements during 1996 and 1995 amounted to $3,139,258 and $3,805,687 respectively. The Company also has short- term gas purchase agreements averaging three months in length, with prices tied to various indices. The Company does not anticipate these agreements to be in excess of normal capacity requirements. (12) Disclosures About Fair Value Of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Notes Payable - The carrying amount approximates fair value because of the short-term nature of the borrowings. Long-term debt - The fair value of the Company's long-term debt has been estimated by discounting the future principal and interest cash flows using an interest rate for long-term debt with similar terms, maturities, and credit ratings. The estimated fair value of the Company's financial instruments are as follows at September 30, 1996. Carrying Amount Fair Value Notes Payable $ 2,725,000 2,725,000 Long-term debt $ 6,400,000 7,200,000 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Corning Natural Gas Corporation We have audited the accompanying consolidated balance sheets of Corning Natural Gas Corporation and Subsidiary (the Company) as of September 30, 1996 and December 31, 1995, and the related consolidated statements of income and retained earnings, and cash flows for the nine months ended September 30, 1996 and the year ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Corning Natural Gas Corporation and Subsidiary at September 30, 1996 and December 31, 1995, and the results of their operations and their cash flows for the nine months ended September 30, 1996 and the year ended December 31, 1995 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Rochester, New York November 8, 1996 CORNING NATURAL GAS CORPORATION AND SUBSIDIARY Consolidated Balance Sheets September 30, 1996 and December 31, 1995 Assets 1996 1995 Property, plant and equipment, at original cost: Utility $ 19,616,872 19,309,418 Non-utility - principally rented gas appliances 2,451,396 2,366,834 22,068,268 21,676,252 Less accumulated depreciation (7,846,128) (7,519,218) 14,222,140 14,157,034 Current assets: Cash 180,595 142,905 Accounts receivable, less allowance for uncollectible accounts of $97,000 in 1996 and $117,000 in 1995 789,677 2,225,206 Gas stored underground, at average cost 1,347,099 838,317 Gas and appliance inventories, at average cost or market 653,030 600,527 Prepaid income taxes 334,485 0 Deferred income tax assets 107,000 278,000 Prepaid expenses 432,163 352,363 3,844,049 4,437,318 Deferred charges: Long-term debt issuance costs, net of amortization 243,401 252,718 Deferred income tax assets 257,000 176,000 Urecovered gas costs 0 1,157,382 Deferred transition costs 29,093 414,504 Deferred debits - accounting for income taxes 1,016,661 1,016,661 Other deferred debits 555,716 275,719 2,101,871 3,292,984 Other assets 389,502 332,379 $ 20,557,562 $ 22,219,715 ========== ========== Capitalization and Liabilities ------------------------------ Common stock, $5.00 par value per share. Authorized 1,000,000 shares; issued and outstanding 460,000 shares $ 2,300,000 $ 2,300,000 Additional paid-in capital 653,346 653,346 Retained earnings 2,194,382 2,145,697 5,147,728 5,099,043 Long-term debt, less current installments 6,300,000 6,300,000 Total capitalization 11,447,728 11,399,043 Current liabilities: Current installments of long-term debt 100,000 100,000 Notes payable 2,275,000 3,815,000 Accounts payable 1,146,190 1,206,134 Transition cost liability 29,093 414,504 Customers' deposits and accrued interest 735,398 599,213 Accrued general taxes 141,598 107,587 Accrued federal income taxes 0 91,063 Supplier refunds due customers 532,009 769,606 Accrued expenses 304,332 299,659 Other 19,276 43,839 5,732,896 7,446,605 Deferred credits: Deferred income taxes liability 2,617,213 2,903,403 Refundable gas costs 232,769 0 Other 526,956 470,664 3,376,938 3,374,067 $20,557,562 $22,219,715 =========== =========== Commitments (note 11) See accompanying notes to consolidated financial statements. CORNING NATURAL GAS CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows For The Nine Months Ended September 30, 1996 And The Year Ended December 31, 1995 1996 1995 Cash flows from operating activities: Net income $ 483,386 $ 620,729 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 530,730 686,856 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable 1,435,529 (888,646) Gas stored underground (508,782) 396,451 Gas and appliance inventories (52,503) (103,255) Prepaid expenses (79,800) 8,637 Unrecovered/refundable gas costs 1,390,151 326,208 Other deferred charges 114,731 704,068 Other assets (57,123) (122,679) Increase (decrease) in: Accounts payable (59,944) 114,912 Accrued general taxes 34,011 19,061 Accrued/prepaid federal income taxes (425,548) 413,586 Supplier refunds due customers (237,597) (22,071) Deferred federal income tax (196,190) 131,376 Other liabilities and deferred credits (212,824) (467,868) Net cash provided by operating activities 2,158,227 1,817,365 Cash flows from investing activities: Capital expenditures (682,476) (1,513,196) Gain on disposal of property and equipment 86,640 168,351 Net cash used in investing activities (595,836) (1,344,845) Cash flows from financing activities: Net borrowings (repayments) under line-of-credit agreements (1,090,000) 160,000 Dividends paid (434,701) (572,701) Repayment of long-term debt 0 (100,000) Net cash used in financing activities (1,524,701) (512,701) Net increase (decrease) in cash 37,690 (40,181) Cash at beginning of period 142,905 183,086 Cash at end of period $ 180,595 $ 142,905 =========== ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 515,132 $ 844,035 Income taxes $ 899,754 $ 145,250 See accompanying notes to consolidated financial statements. CORNING NATURAL GAS CORPORATION AND SUBSIDIARY Consolidated Statements of Earnings and Retained Earnings For the Nine Months Ended September 30, 1996 And The Year Ended December 31, 1996 1996 1995 Operating revenue: Residential, commercial and industrial 12,192,896 12,962,838 Transportation 2,757,286 3,497,865 Capacity assignment 131,953 154,023 Total operating revenue 15,082,135 16,614,726 Operating expenses and taxes Natural gas purchased 9,538,759 9,871,848 Operating and maintenance 2,613,231 3,179,716 Taxes other than federal income taxes 1,428,476 1,604,574 Depreciation 356,400 454,637 Federal income taxes 185,570 242,149 Total operating expenses and taxes 14,122,436 15,352,924 Income from utility operations 959,699 1,261,802 Unregulated Operations: Unregulated revenue: Appliance rental 548,718 720,437 Service and merchandising 957,816 1,321,119 Interest Income 15,569 11,720 Total unregulated revenue 1,522,103 2,053,276 Unregulated expenses: 1,390,168 1,849,895 Income from unregulated operations 131,935 203,381 Other income: 10,447 29,356 Income before interest expense 1,102,081 1,494,539 Interest expense: 618,695 873,810 Net income income 483,386 620,729 Retained earnings, beginning of period 2,145,697 2,097,669 Less cash dividends 434,701 572,701 Retained earnings, end of period 2,194,382 2,145,697 ========= ========= Weighted average number of shares outstanding 460,000 460,000 Earnings per common share 1.05 1.35 Dividends per common share 0.95 1.25 See accompanying notes to consolidated financial statements EX-28 3 Corning Natural Gas Corporation 330 W. William Street P.O. Box 58 Corning, New York 14830 NOTICE OF ANNUAL MEETING OF STOCKHOLDERS to be held on Thursday, February 13, 1997 Corning, New York January 16, 1997 To the Common Stockholders of Corning Natural Gas Corporation Notice is hereby given that the Annual Meeting of Stockholders of Corning Natural Gas Corporation will be held at the office of the Company, 330 W. William Street, in the City of Corning, New York, on Thursday, February 13, 1997 at 10:30 A.M., local time, for the following purposes: (1) To fix the number of Directors at seven and to elect a Board of Directors for the ensuing year. (2) To transact such other business as may properly come before the meeting. The stock transfer books will not be closed, but only common stockholders of record at the close of business on January 9, 1997 will be entitled to vote at the meeting or any adjournment thereof. You are cordially invited to attend the meeting and vote your shares. In the event that you cannot attend, please date, sign and mail the enclosed proxy in the enclosed self-addressed envelope. A stockholder who executes and returns a proxy in the accompanying form has the power to revoke such proxy at any time prior to the exercise thereof. By Order of the Board of Directors PHYLLIS J. GROEGER, Secretary CORNING NATURAL GAS CORPORATION PROXY STATEMENT January 16, 1997 By Whom Proxy Solicited and Solicitation Expenses. The accompanying proxy is solicited by the Board of Directors of the Company for use at the Annual Meeting of Stockholders to be held on Thursday, February 13, 1997. Proxies in substantially the accompanying form, properly executed and received prior to or delivered at the meeting and not revoked, will be voted in accordance with the specification made. The expense of soliciting proxies will be borne by the Company. The approximate date upon which this proxy statement and the accompanying proxy will first be mailed to stockholders is January 16, 1997. Right to Revoke Proxy. Any stockholder giving the proxy enclosed with this statement has the power to revoke it at any time prior to the exercise thereof. Such revocation may be by writing (which may include a later dated proxy) received by the Office of the Secretary, Corning Natural Gas Corporation, 330 W. William Street, P.O. Box 58, Corning, New York, 14830, no later than February 12, 1997 if by mail, or prior to the exercise thereof if delivered by hand. Such revocation may also be effected orally at the meeting prior to the exercise of the proxy. Proposals of Stockholders. Stockholders' proposals intended to be presented at the 1998 Annual Meeting of Stockholders must be received by the Office of the Secretary, Corning Natural Gas Corporation, 330 W. William Street, P.O. Box 58, Corning, New York 14830, by September 5, 1997. Voting Securities Outstanding. There were 460,000 shares of common stock outstanding and entitled to vote on January 9, 1997 (the "Record Date"). Each share of common stock is entitled to one vote. Only stockholders of record on the Record Date are entitled to notice of and to vote at the meeting or any adjournment thereof. Abstentions and broker non-votes are each included in calculating the number of shares present and voting for purposes of determining quorum requirements. However, each is tabulated separately. Abstentions are counted in tabulating the votes cast on proposals presented to shareholders, whereas broker non-votes are not counted for purposes of determining whether a proposal has been approved. The following table sets forth the shares of the Company's common stock, and the percent of total outstanding shares represented thereby, beneficially owned* by the nominees for director of the Company, the Chief Executive Officer of the Company, all directors and officers as a group, and all persons or groups known to the Company to beneficially own more than 5% of such stock. * As used in this Proxy Statement, "beneficial ownership" includes direct or indirect, sole or shared power to vote, or to direct the voting of, and/or investment power to dispose of, or to direct the disposition of, shares of the common stock of the Company. Except as otherwise indicated in the footnotes below, the listed beneficial owners held direct and sole voting and investment power with respect to the stated shares. Shares of Stock Beneficially Owned Directly or Indirectly Percent Beneficial Owners as of September 30, 1996 of Class J. Edward Barry (Director) 45,999(1) 10.0% 330 W. William Street Corning, New York Thomas K. Barry (Director and 14,181(2) 3.1% Chief Executive Officer) 330 W. William Street Corning, New York Thomas H. Bilodeau (Director) 3,788(3) 0.8% 1648 Jupiter Cove Dr., Apt. 312 Jupiter, Florida Bradford J. Faxon (Director) 26,210(4) 5.7% 225 Hix Bridge Road Westport, Massachusetts Jay A. Finley (Director) 13,900(5) 3.0% 27 Spring Terrace Corning, New York Liselotte R. Lull and 45,029(6) 9.8% Robert E. Lull 231 Watauga Avenue Corning, New York Jack R. McCormick (Director) 1,469(7) 0.3% 2560 Riverside Avenue Somerset, Massachusetts Donald R. Patnode (Director) 13,753(8) 3.0% 91 Stage Harbor Road Chatham, Massachusetts All directors and officers 122,197(9) 26.4% of the Company, twelve persons as a group (1) Includes 25,066 shares held in trust, with respect to which J. Edward Barry has shared voting and investment power, and 20,933 shares beneficially owned and held in trust on behalf of Virginia S. Barry, with respect to which J. Edward Barry also has shared voting and investment power. Percentage reflects rounding; actual percentage is less than 10 percent. (2) Includes indirect beneficial ownership of 1,000 shares owned by children of Thomas K. Barry, and as to which Thomas K. Barry has shared voting and investment power. Also includes 1,000 shares owned by a daughter of Thomas K. Barry, as to which shares Mr. Barry disclaims beneficial ownership. (3) All shares are held in trusts and Mr. Bilodeau is a beneficiary or contingent beneficiary of such trusts. (4) Includes indirect beneficial ownership of 5,431 shares owned by children of Bradford J. Faxon, and as to which Bradford J. Faxon has shared voting and investment power. (5) Includes indirect beneficial ownership of 6,900 shares owned by Gertrude C. Finley, who has sole voting and investment power over such shares. (6) Includes 23,378 shares owned by Liselotte R. Lull and 21,651 shares owned by Robert E. Lull. (7) All shares are owned jointly with Madeline McCormick. (8) Includes 1,559 shares owned by spouse, who has sole voting and investment power over such shares. Also includes 6,994 shares held in two trusts, of which Donald R. Patnode is co-trustee. (9) Aggregate record or imputed beneficial ownership, with sole or shared voting or investment power. Election of Directors. (Proposal No. 1) It is the intention of the persons named in the enclosed proxy to vote the shares represented by the proxy to fix the number of directors at seven and to elect the nominees listed below to serve until the next Annual Meeting of Stockholders and until their successors are duly elected and qualified. In the event of a vacancy in the list of nominees, an event which the Board of Directors does not anticipate, the holders of the proxies will vote for the election of a nominee acceptable to the remaining nominees. The directors must be elected by a plurality of votes cast. The following is a brief description of each nominee, including his principal employment or professional experience for the past five years. J. Edward Barry, 84, Consultant to the Company. Former Chairman of the Board of Directors 1975 - 1993. A Director since 1953 and Chairman of the Executive and Pension Fund Committees. Father of Thomas K. Barry, Chairman of the Board, Chief Executive Officer and President of the Company. Thomas K. Barry, 51, Chairman of the Board of Directors since 1993, President of the Company since 1983, Chief Executive Officer since 1984. A Director since 1983 and a member of the Executive and Pension Fund Committees. A Director of Fall River Gas Company. Son of J. Edward Barry, Consultant to the Company. Thomas H. Bilodeau, 54, Vice President - Finance, Medical & Environmental Coolers, Inc. since 1990. A Director since 1984 and a member of the Compensation and Audit Committees. A Director of Fall River Gas Company. Bradford J. Faxon, 58, Chairman of the Board of Directors, President and Director of Fall River Gas Company since 1986. A Director since 1984, Chairman of the Compensation Committee and a member of the Pension Fund Committee. Jay A. Finley, 81, Retired; former President of the Company, 1977- 1983. A Director since 1975 and a member of the Executive Committee. Jack R. McCormick, 72, Utility Consultant; current Director and former President (1974-1986) of Fall River Gas Company. A Director since 1985 and a member of the Audit Committee. Donald R. Patnode, 67, Retired; former President of Industrial Filters and Equipment Corporation 1989-1994. A Director since 1964, Chairman of the Audit Committee and a member of the Compensation Committee. Director also of Fall River Gas Company. The Board of Directors does not have a standing nominating committee, or any committee performing similar functions. The Board of Directors has a standing Audit Committee, of which Messrs. D.R. Patnode, J.R. McCormick and T.H. Bilodeau are the members, the function of which is to recommend the selection of independent auditors, review the plan and results of the independent audit and approve each professional service provided by the independent auditors. The Audit Committee had one meeting in 1996. The Board of Directors also has a standing Compensation Committee, of which Messrs. D.R. Patnode, B.J. Faxon and T.H. Bilodeau are the members. This committee met once during 1996. This committee reviews officer performance and duties and decides upon appropriate remuneration. The Board of Directors met four times in 1996. Each Director attended more than 75% of the aggregate number of meetings of the Board and committees on which he served during the year. At the most recent annual meeting of stockholders of the Company, held on April 23, 1996, out of a total of 460,000 shares entitled to vote at the meeting, 425,756 shares (92.6% of the total) were actually voted at the meeting with respect to the election of Directors. Nominees proposed for election by the Board of Directors were elected by requisite vote at such meeting. Each nominee received an affirmative vote of over 99% of the votes cast. Cash Compensation of Executive Officers. The following table sets forth the compensation paid or accrued by the Company and its subsidiary during the fiscal years ended December 31, 1994, 1995 and September 30, 1996 to the Company's Chief Executive Officer. Other than the Chief Executive Officer, no other executive officer of the Company was paid an annual salary and bonus in 1996 that aggregated $100,000. Although only principal capacities are listed, the compensation figures include all compensation received in any capacity, including directorships, for services rendered during the fiscal years indicated. SUMMARY COMPENSATION TABLE Annual Compensation(1) Name and Other Annual Principal Position Year Salary Bonus Compensation Thomas K. Barry 1996 $106,800(2) --- $ 2,970 (2) President and Chief 1995 134,967 --- 3,721 Executive Officer 1994 126,667 --- 3,512 (1) The Company did not pay any long-term compensation to its Chief Executive Officer or to its other executive officers during the fiscal years ended December 31, 1994, 1995 and September 30, 1996. (2) 1996 amounts reflect compensation received with respect to the Company's nine month 1996 fiscal year (ended September 30, 1996) that result from the adoption by the Company of a fiscal year-end of September 30 instead of December 31 each year. A description of the executive officers, other than Mr. Thomas K. Barry, for whom a description is provided above, is set forth below. Kenneth J. Robinson (age 52) is Executive Vice President. Mr. Robinson joined the Company in 1978 as an accountant. Most recently he served as Financial Vice President and Treasurer for 4 years and in his current position for 5 years. Edgar F. Lewis (age 59) is Senior Vice President - Operations. Mr. Lewis' career with the Company dates back to 1956. He has been in charge of operations for the past 24 years; 16 years in his current position. Thomas S. Roye (age 42) is Vice President - Administration. Mr. Roye has served 5 years in his current position and was previously Assistant Treasurer & Assistant Secretary. He has prior utility experience and accounting education and has been employed since 1978. Gary K. Earley (age 42) is Treasurer. Mr. Earley has been a practicing accountant since 1976. He joined the firm in 1987 as an accountant in the rates and regulations department and has served as Treasurer for the past 5 years. Phyllis J. Groeger (age 55) is Corporate Secretary. Mrs. Groeger has been employed since 1973 in a number of positions advancing to Assistant Secretary in 1986 and has been Secretary of the Company for the past 9 years. Compensation Pursuant to Plans. The Company has entered into separate supplemental benefits agreements with Thomas K. Barry and one other executive officer (collectively, the "Supplemental Benefits Agreements"), which provide that the officer covered thereby and retiring after the age of 62 is entitled to receive monthly payments equal to 35% of such officer's monthly salary at retirement for either life or 180 months, whichever is longer. Such amount payable shall increase by 4% annually on the anniversary date of such officer's retirement. Retirement benefits otherwise available upon retirement at age 62 under the Supplemental Benefits Agreements are reduced cumulatively by 4% for each year prior to age 60 in which the covered officer retires; provided, however, that an officer covered under a Supplemental Benefits Agreement receives no retirement benefits thereunder in the event that such officer retires before age 55. Furthermore, the Supplemental Benefits Agreements provide that in the event that an officer covered by a Supplemental Benefits Agreement dies prior to retirement, such officer's designated beneficiary is entitled to receive monthly payments equal to 50% of such officer's monthly salary at death for 180 months. The Company has also entered into an additional, more limited, Supplemental Benefits Agreement with one other employee, which contains terms similar to the foregoing agreements. However, such limited Supplemental Benefits Agreement provides for monthly payments equal to 20% of the subject employee's monthly salary in the event of retirement, monthly payments equal to 35% of his monthly salary in the event of his death prior to retirement, and does not include an annual escalator. Eligibility to enter into a Supplemental Benefits Agreement, or equivalent thereof, is based upon employee performance, service and value to the Company; such eligibility is determined on an individual basis by the Board of Directors. Currently, Mr. Thomas K. Barry and two other executive officers (as discussed, above) are the only employees of the Company covered by a Supplemental Benefits Agreement, and no payments have been made to date under such agreements. The Supplemental Benefits Agreements are in addition to the amounts shown in the Summary Compensation Table and are not subject to limitation. As of September 30, 1996, the estimated annual benefits payable under a Supplemental Benefits Agreement upon retirement at the normal retirement age for Mr. Thomas K. Barry are $ 45,413. The Company also maintains the Corning Natural Gas Corporation Employees Savings Plan (the "Savings Plan"). All non-union employees of the Company who work for more than 1,000 hours per year and who have completed one year of service may participate in the Savings Plan as of the following January 1 or July 1. Under the Savings Plan, participants may contribute up to 15% of their wages. The Company will match one-half of the participant's contributions up to a total of 3% of the participant's wages. Company matching contributions vest in the participants at a rate of 20% per year and become fully vested after five years. Participants may select one of five investment plans, or a combination thereof, for their account. Distribution of amounts accumulated under the Savings Plan occurs upon the termination of employment or death of the participant. The Savings Plan also contains loan and hardship withdrawal provisions. During the nine month fiscal year ended September 30, 1996, no amounts were distributed to executive officers under the Savings Plan. Mr. Thomas K. Barry had $2,970 accrued to his account under the Savings Plan during said period. This accrual is included in the figures appearing in the summary compensation table on page 4. Compensation of Directors. The current annual Director's compensation is $5,000. In addition, Directors are paid $300 for each Board meeting attended. Additionally, the chairmen of the Board's Executive, Audit, Compensation and Pension Fund committees and those directors who serve on more than one committee receive an annual fee of $1,500 for such services. Committee members other than the chairmen are paid $1,000 annually for their services, subject to the limitation that no committee chairman or member may receive more than $1,500 annually for such services regardless of the number of committees on which he serves. As allowed by New York law, the Company currently has in effect an insurance policy, with an effective date of June 1, 1996, with National Union Fire Insurance Company for the indemnification of officers and directors at an annual premium cost of $ 43,000. Employment Contracts and Termination of Employment and Change-in-Control Arrangements. In January of 1992, the Company entered into an employment contract with its President and Chief Executive Officer, Mr. Thomas K. Barry. Under the terms of such employment contract, Mr. Barry is compensated for his duties as an officer and director with such salary as is determined from time to time by the Board of Directors. The term of Mr. Barry's employment contract is five years, unless earlier terminated by an act of either the Company or Mr. Barry. Beginning in 1994, however, the remaining term of Mr. Barry's employment contract is automatically extended for an additional one-year period. Mr. Barry's employment contract further provides that upon any change in control of the Company leading to the termination of Mr. Barry's employment with the Company, the Company shall pay Mr. Barry three times his then-present annual salary, or such lesser amount as may be required to comply with certain provisions of the Internal Revenue Code. Selection of Auditors. KPMG Peat Marwick, Certified Public Accountants of Rochester, New York, have been selected as auditors for the Company for the ensuing year. KPMG Peat Marwick, who served as principal accountants for the Company for the past fiscal year, have no direct or indirect financial interest in the Company or its subsidiaries in the capacity of promoter, underwriter, voting director, officer or employee. A representative of KPMG Peat Marwick will be present at the meeting, with the opportunity to make a statement if such representative desires to do so, and will be available to respond to appropriate questions. Other Matters. Except for the matters set forth above, the Board of Directors knows of no matters which may be presented to the meeting, but if any other matters properly come before the meeting, it is the intention of the persons named in the accompanying form of proxy to vote such proxy in accordance with their judgment in such matters. PLEASE DATE, SIGN AND RETURN THE ENCLOSED PROXY. By Order of the Board of Directors, PHYLLIS J. GROEGER, Secretary Persons whose proxies are solicited by the Board of Directors of the Company may obtain, without charge, a copy of the Company's Annual Report on Form 10-KSB, including the financial statements and schedules thereto, required to be filed with the Securities and Exchange Commission for the Company's most recent fiscal year. The report will be furnished upon request made in writing to: Thomas K. Barry Chairman of the Board of Directors Corning Natural Gas Corporation 330 W. William Street P.O. Box 58 Corning, New York 14830 EX-27 4
UT 9-MOS 12-MOS SEP-30-1996 DEC-31-1995 SEP-30-1996 DEC-31-1995 PER-BOOK PER-BOOK 13140883 13091750 1081257 1065284 3844049 4437318 2101871 3292984 389502 332379 20557562 22219715 2300000 2300000 653346 653346 2194382 2145697 5147728 5099043 0 0 0 0 6300000 6300000 2275000 3815000 0 0 0 0 100000 100000 0 0 0 0 0 0 6734834 6905672 20557562 22219715 15082135 16614726 185570 242149 13936866 15110775 14122436 15352924 959699 1261802 142382 232737 1102081 1494539 618695 873810 483386 620729 0 0 483386 620729 434701 572701 437273 593030 2158227 1817365 1.05 1.35 0 0
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