-----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, JgzO+7ujHtFuoO3jx1RdUaimgf52D+T2wnB25kfucfV9I18oCUZfQRHjf7r4GdLp 1vfhFCAA8kgV4ytFN5VoBA== 0000024751-00-000002.txt : 20000106 0000024751-00-000002.hdr.sgml : 20000106 ACCESSION NUMBER: 0000024751-00-000002 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000104 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 SEC ACT: SEC FILE NUMBER: 000-00643 FILM NUMBER: 501484 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 1 U.S. Securities and Exchange Commission Washington, D.C. 20549 (X) ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 (Fee Required) For the twelve month period ended September 30, 1999 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-ISV. (X) Revenues for 12 month period ended September 30, 1999 $23,022,974 The aggregate market value of the 331,953 shares of the Common Stock held by non-affiliates of the Registrant at the $21.50 average of bid and asked prices as of November 1, 1999 was $7,136,989. Number of shares of Common Stock outstanding as of the close of business on November 1, 1999 - 460,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Annual Report to Shareholders for the twelve month period ended September 30, 1999, and definitive proxy statement and notice of annual meeting of shareholders, dated January 12, 1999 are incorporated by reference into Part I, Part II and Part II hereof. Information contained in this Form 10-KSB and the Annual Report to shareholders for fiscal 1999 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 12 Month Period Ended September 30, 1999 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 operates as five operating segments, the Gas Company, Appliance Corporation, Tax Center International, Corning Realty and Foodmart Plaza.The Gas 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 Gas 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 Appliance Corporation sells, rents and services primarily gas burning appliances. The Tax Center provides tax preparation, accounting and payroll services to approximately 800 clients. Corning Realty is a residential and commercial real estate business with approximately 80 agents operating in three neighboring counties. Foodmart Plaza is a retail complex consisting of eight tenants under multi-year leases anchored by a major supermarket. (b) Business of Issuer (1) The Gas Company maintains a gas supply portfolio of numerous contracts and is not dependent on a single supplier. Additionally, the Gas Company has capabilities for storing 793,000 Mcf through storage operations with two of its suppliers. The Gas Company had no curtailments during fiscal 1999 and expects to have an adequate supply available for its customers during fiscal 2000 providing that no abnormal conditions or actions occur. (2) The Gas Company is franchised to supply gas service in all of the political subdivisions in which it operates. (3) Since the Gas 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 6,241 for the period October 1, 1998 through September 30, 1999 and 5,979 for the same period ended September 30, 1998. (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. Competition from oil still exists 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 an increasingly 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 $128,445 for the 12 months ended September 30, 1999 and $159,872 for the 12 months ended September 30, 1998. On November 3, 1998 the New York State Public Service Commission (PSC) issued a Policy Statement in which they provided their view as to how to best ensure a competitive market, eliminate barriers to competition, provide guidance to LDC's and marketers and address customer inertia. A detailed discussion appears in the Industry Restructuring section of the enclosed Annual Report to Shareholders. The Appliance Corporation faces the challenges of local competition. The home center chains which have been opened in our vicinity offer competition, however, the Appliance Corporation continues to depend on its long standing reputation in the area as a top quality sales and service company. As for the rental section of the appliance business, there really isn't a great deal of competition in our very strong rental water heater market. This stabilizes a substantial portion of our net income. The real estate business is clearly a highly competitive market in which Corning Realty is well positioned.Prudential Ambrose & Shoemaker Real Estate maintains approximately 55% of the local market. Local economy and interest rates play a factor in the outcome of the market, however, Corning Realty continues to hold strong. The impact of competition is less material in the other two areas of our business, the commercial property rented out at our Foodmart Plaza is in demand with limited competition. The services provided by Tax Center are available from various competitors. The Tax Center maintains a steady growth of clients regardless of that competition. (6) The Gas 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 subsidiaries. (7) Ninety-two persons were employed by the Company in 1999 versus seventy-seven for the previous year. (8 The Gas Company expects no shortage of raw materials to impact our business over the next 5 - 10 years. The Energy Information Administration indicates an increase in the efficiency of gas exploration and development is expected to result in increased gas productive capacity. As for the availability of the necessary pipes and valves for safe distribution of natural gas, the Gas Company likewise anticipates no shortages and continues to receive both gas supply and material inventory from various reliable sources. ITEM 2 - DESCRIPTION OF PROPERTY The Company completed 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. That property has been sold, and the gain on the sale was returned to ratepayers. The Gas Company's pipeline system is thoroughly surveyed each year. Any necessary replacements are included in the construction budget. Approximately 105 miles of transmission main, 290 miles of distribution main, 13,800 services and 86 measuring and regulating stations, along with various other property are owned by the Gas Company, except for one short section 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 Gas Company, is adequately insured and is subject to the lien of the Company's first mortgage indenture. The Foodmart Plaza is a retail/commercial complex consisting of a major grocery store and several other businesses located on an approximately 7 acre lot at 328 Park Avenue, South Corning, NY. The main building includes 2 retail stores which covers 48,300 square feet and an additional 6 buildings totaling 10,775 square feet house 7 other businesses. The property is well maintained and its overall condition remains very good. All of the above described property, which is owned by the Appliance Company, is adequately insured and is subject to a lien agreement with a local bank. The Appliance Corporation, Tax Center and Realty businesses are operated out of the Company's West William Street complex in combination with rented office space in various locations. The Tax Center and Realty companies own no buildings at this time. 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 1999. Additional Item Executive Officers of the Registrant (Including Certain Significant Employees) Business Experience Yea rs Served Name Age During Past 5 Years In This Office Thomas K. Barry 54 Chairman of the Board of Directors 6 President & C.E.O. 15 Edgar F. Lewis 62 Senior Vice President - Operations 19 Kenneth J. Robinson 55 Executive Vice President 8 Phyllis J. Groeger 59 Secretary 12 Thomas S. Roye 46 Vice President - Administration 8 Gary K. Earley 45 Treasurer 8 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 344 at September 30, 1999. 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 Declared December 31, 1997 20 20 $ .325 March 31, 1998 20 20 .325 June 30, 1998 20 20 .325 September 30, 1998 20 20 .325 December 31, 1998 20 20 .325 March 31, 1999 21 1/2 20 .325 June 30, 1999 21 1/2 21 1/2 .325 September 30, 1999 21 1/2 21 1/2 .325 The Company incurred $4,700,000 in new long-term debt in 1997. The proceeds of this new issue were used to pay off $3.1 million in short-term debt and retire a 10% First Mortgage Bond with a balance of $1.6 million. The new debt is an unsecured senior note at 7.9 percent interest with a maturity date of September 25, 2017. Canada Life Assurance Company of Toronto is the debt holder; interest payments are made quarterly with sinking fund payments as follows: $355,000 annually starting September, 2006 with a $795,000 payment due September 1, 2017. Under the terms of the $4,700,000 senior note issued September 5, 1997, the Company may not declare or pay any dividend, or cause any other payment from retained earnings except to the extent that consolidated tangible net worth of the Company exceeds $2,000,000. 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 1999 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 LLP dated November 15, 1999 are included in the 1999 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 filed with the Commission on December 30, 1999. 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 filed with the Commission December 30, 1999. ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required regarding certain relationships and related transactions appears in the Definitive Proxy Statement filed with the Commission December 30, 1999. 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) Exhibit Name of Exhibit 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, 1998 was filed with Form 10-KSB for December 31, 1998. 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 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. 13 A copy of the Corporation's Annual Report to Shareholders for 1999, is filed herewith. 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 was filed with the Commission on December 30, 1999 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, 1999. 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 27, 1999 Thomas K. Barry, Chairman of the Board, President and C.E.O. Date December 27, 1999 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 27, 1999 J.E. Barry, Director Date December 27, 1999 Donald R. Patnode,Director Date December 27, 1999 J.A. Finley, Director EX-27 2
UT 12-MOS 12-MOS SEP-30-1999 SEP-30-1998 SEP-30-1999 SEP-30-1998 PER-BOOK PER-BOOK 16,495,300 16,098,681 0 0 4,634,607 4,827,389 2,594,352 2,588,159 2,764,936 1,283,943 26,489,195 24,798,172 2,300,000 2,300,000 653,346 653,346 2,158,820 2,443,133 5,112,166 5,396,479 0 0 0 0 11,223,256 10,459,351 2,165,000 2,325,000 0 0 0 0 0 0 0 0 0 0 0 0 7,988,773 6,617,342 26,489,195 24,798,172 16,276,170 15,354,527 0 0 15,154,747 15,354,527 15,154,747 15,351,527 1,121,423 1,318,768 281,630 280,550 1,403,053 1,599,318 965,105 959,161 437,948 640,157 0 0 437,948 640,157 0 0 965,105 959,161 2,282,189 940,544 0.95 1.39 0 0
EX-28 3 The Company's Proxy Statment was filed with the Commission December 30, 1999. EX-13 4 To our Shareholders The utility industry across the country has slowly been put through a process referred to as deregulation. What has happened to the telecommunications business is gradually now occuring in the gas and electric industry. In short, it is the process of pulling apart the services traditionally provided by one utility, which is referred to as unbundling of services and then repackaging in such a manner that several businesses will provide separate pieces of the service pie to each customer. The net result, hopefully, will be increased competition leading to more choices with better service at lower prices to the end user. Deregulation of the gas and electric business has been slow ot evolve due to the serious ramifications of reliability of supply and provider of last resort issues. Furthermore, the competitively slim profit margins available for marketers have created a certain amount of reluctance to serve small commercial and residential customers. This new direction of serving the customer and the injectionof competition has initiated more than just discussion throughout the utility industry. Our reaction has primarily centered on the concept that we must embrace change, as change will inevitably be the constatn. Not only will we change the way we handle the utility business, but we must also change the way we service customers as well as reconsider the types of service we will provide. These concepts utilimately lead to diversification and that is the focus of this report to shareholders. There is an automobile advertisement that states, "This isn't your father's Oldsmobile." If our Company is to improve and grow we must recognize that it can not continue as a traditional local gas distribution company. The following information will explain the results of the Gas Corporation and the Appliance Corporation over the past year and will also explore the efforts management has taken toward growth through diversification. Let's review the overall results of the Company for the year ended September 30, 1999. Consolidated earnings were $.95 per share, which is down from $1.39 per share the prior year. Some areas of the Company produced excellent results while others were disappointing. Net earnings of the Gas Corporation were $219,700 vs. $391,500 in 1998, while the subsidiary company's net earnings were $218,300 vs. $248,700 in 1998. First, we will examine the results of the parent (Gas) corporation during 1999 and then we will review the Appliance Corporation and wholly owned entities. For the second consecutive year the number of degree days recorded in the northeast U.S. were less than the fifteen-year average. Warmer temperatures resulted in lower than forecast gas deliveries to the Company's firm and transportation customers. Total gas deliveries during 1999 were 682,000 dekatherms more than the total for 1998. However, the Company has contracts with two major customers that were negotiated at a fixed revenue level that accounted for 707,000 additional dekatherms of these deliveries. Thus, we actually delivered slightly less gas to those customers who pay according to volumetric use. This is somewhat surprising considering that the prior year(1998) established the record as the warmest year in our history. To further exacerbate depressing earnings, the Company was required to record a net loss of $61,000 at the end of the year due to the mandated method of accounting for lost and unaccounted for gas. During the prior year the Company had a sizable gain in this area thus the turnaround accounts for a significant change in net income from one year to the next. In last year's report we reviewed several areas of economic development in the Corning area. Several of the new housing projects are just now swinging into high gear. In the Erwin area there are currently 160 new apartments and townhouses in the beginning construction phase with many new single family homes completed and underway. The Corning Incorporated Sullivan Park Science Research Center, also located in Erwin, has physically doubled its size over the past two years and continues its expansion program here. As As Corning Incorporated officials predicted, this facility has more than doubled its gas usage while Corning Incorporated has employed over two hundred new scientists and additional support staff at the research center to invigorate its thrust into new technologies. Our Company provided a five year graduated rate program for this facility as part of a package to encourage economic development in New York State. As our Company progressed throughout last winter it became clear that it would be increasingly difficult to move forward without some rate relief. We have managed to survive on a very small increase in rates of only $212,000 during the past even years. We have been able to cut costs in some areas and have done what is possible to stabilize expenses in other areas, but inflation, albiet moderate, has finally taken its toll. On June 22, 1999 the Board of Directors voted to file a major rate application at the beginning of 2000, which will not become effective until approximately January, 2001. Due to the restructuring of the utility industry, this filing will be rather complex thus a more complete review of this issue is provided further on in this report. At this point we will review the results of the Company's subsidiary and its three limited liability corporations(LLC's). The Appliance Corporation The Appliance Corporation continues to make substantial contributions to consolidated earnings, yet 1999 income of $180,000 does not compare well with the prior year's level of $236,000. The rental portion of the business provided the majority of net income as revenues derived from rental appliances remained relatively stable. Sales of merchandise and service revenues were 4 1/4 percent less than the prior year. Overall gross margins were also reduced to meet more sever competition while uncontrollable cost increases, such as pension expense, all combined to produce depressed earnings from this side of the business. Several adjustments are being implemented to assist in improving results in this area during 2000. Tax Center International In its first full year of operation after purchasing this Company in April, 1998, net income of $75,000 were produced on gross revenues of $275,000, an impressive 27 percent return on revenues. Under the direction of Vice President, Ms. Firouzeh Sarhangi, this business was expanded from a base of 600 clients to over 1,000 clients in the past year. This organization, consisting of five full time employees, provides monthly accounting, payroll and consulting services to small businesses and professional offices and tax services to businesses and individuals. Looking forward, the primary objective will be to secure additional qualified accounting personnel to allow for expansion. Foodmart Plaza This small retail plaza, which was originally constructed in 1956 as the area's leading grocery store produced net income of just over $40,000 during our first full year of ownership. The earings and revenue levels are precisely on target with our expectations. The plaza, which consists of eight various businesses, is 100 percent rented. One store is currently empty but has an active lease through 2004. The Plaza has a property tax assesment court case in process, which, if successfull, will produce a reduction in expenses of approximately $20,000 annually. Improvements were made to the exterior of the buildings and to the expansive parking facilities. The property is well maintained and its overall condition remains very good. Prudential Ambrose & Shoemake Real Estate On December 3, 1998 the Company completed an agreement to purchase the region's largest and most successful real estate company(Ambrose & Shoemaker Better Homes & Gardens). This company was immediately merged with the Prudential Marketplace (Real Estate Company), which the Company purchased just eight months prior to Decemver 1998 to form this area's largest residential real estate organization, Corning Realty Associates that maintains between 55-60 percent of the market. The Company has 15 employees and 70 liscensed sales agents who operate out of four sales offices located in Elmira, Corning, Horseheads and Watkins Glen. The Company has been highly successfull in terms of total commissions produced but recorded a net loss of $77,000 through September 1999, due, in part, to indirect acquisition and start up costs. A comprehensive budget has recently been implemented and some further restructuring of the organization is moving forward to position this business to contribute toward consolidated earnings during 2000. This is a full service real estate business offering residential and commercial listing and sales services as well as auction, rental and property management services. Overview:While financial results for 1999 did not meet expectations, a great deal was accomplished to position the Company for a brighter, more diversified future. As we move into a more competitive arena, the Company has put in place a fine staff of personnel coupled with a mix of service oriented businesses that position us to survive and prosper as we move forward. We remain committed in our policy to pay dividends to our shareholders as we paid $1.30 per share over the past year. The February 2000 dividend will reflect 47 years of consecutive quarterly dividend payments. We are grateful to all the Company's employees who have been highly supportive in our goal to diversify as so many have taken on additional responsibilities to make this possible. We look forward with enthusiasm to a more interesting, productive organization that no longer must depend primarily on cold weather for its success. The Board of Directors is appreciative of the dedication of the employees, the support given by shareholders and the loyalty of its many customers. Thomas K. Barry Chairman of the Board, President and CEO EX-13 5 RETIREMENT Edgar F. Lewis, Senior Vice President - Operations, retired at the beginning of 2000. Ed began his career with Corning Natural Gas in 1956 as an apprentice draftsman on a part time basis while he attended college at Cleveland State University. Upon graduation in June, 1962, Mr. Lewis joined the firm as the Company engineer. In 1971 he became general superintendent of the department. In 1972, in the midst of the Company's recovery from the results of Hurricane Agnes, he was promoted to Vice President - Opererations in 1981. Ed earned a masters of business admin- isrtation degree from Syracuse University in 1980 and was promoted to Senior Vice President-Operations in 1981. Mr. Lewis has worked with the Company through periods of growth, through both difficult and prosperous times, always with determination and devotion to his employees and his work. We greatly appreciate his dedication and wish him well for a long, successful future. EX-13 6 OPERATIONS MANAGEMENT Assuming the management of gas operations is Russell S. Miller who joined the engineering department of the Company as a draftsman in 1989. One of his first responsibilities was to computerize the Company's mapping system utilizing skills he learned while obtaining a degree in computer graphics technology at Corning Community College. Russ grew up in the Corning area, graduated from high school in 1981 then enlisted in the United States Navy where he served for six years as a technician. While trainingto manage the gas operations of the Company, he has served as Gas Supply Manager and is working toward earning an electrical/mechanical technology degree at the Rochester Institute of Technology. EX-13 7 RATES & REGULATION The Company's last rate case was approved to become effective on September 1, 1996. While there has been some moderate customer growth, increased wages, investment in new and replacement gas plant and the effects of inflation now necessitate the filing of a request for increased rates with the Public Service Commission. Because this request must meet additional requirements with regards to the new deregulated environment, the Company will file a major case requiring the use of legal assistance and outside consultants. It is anticipated that the request will be filed prior to the end of January, 2000 with new rates to become effective January 1, 2001. Over the last several years the Company has been involved in the process of transitioning towards the deregulated environment where all customers, including residential, have the ability to purchase natural gas from a marketer of their choice and are not required to purchase from the Company. As has been previously reported, the Company is neutral with respect to profit margin in that no margin has ever been received from the sale of gas. Rates are set by the Public Service Commission based on investment in plant and the cost of operating the distribution system, functions which will not change. On November 3, 1998 the Public Service Commission issued a Policy Statement that clearly stated the concern that the deregulated market would not succeed if local distribution companies (LDC's) were allowed to continue in the merchant function. The Commission is, therefore, requiring that LDC's submit plans indicating how they would transition to a fully deregulated market in which they are no longer a participant in the activity of selling gas. Company personnel have been actively involved in the regulatory process leading towards deregulation and have spent many hours in internal discussion and planning. Along with the request for increased rates the Company will file its plan to exit the merchant function and unbundle rates in accordance with the Commission directive. In this regard, a consultant familiar with all of the complexities associated with this transition has been retained. The plan will address all of the perceived implications of this significant change in the traditional way of conducting business including capacity contract expirations, provider of last resort responsibility, customer motivation and internal operating procedures. A timetable to completely exit the merchant function will be established. The transition to a more competitive environment in which utilities are not active participants in the activity of selling gas is inevitable. The Company supports the efforts of the Public Service Commission to make this transition as smooth and as soon as is practical and we are confidant in our ability to adapt to this new environment. EX-13 8 GAS OPERATIONS It was an exciting and challenging year from an operational standpoint as we endeavored to meet the growth in our community. During the year the Company added 4.6 miles of new main and 159 new services to accommodate the growth within our franchise territory. MUNICIPALITY MAIN IN FEET SERVICES City of Corning 730 14 Town of Campbell 2,040 23 Town of Caton 1,508 9 Town of Corning 1,200 15 Town of Erwin 13,195 51 Town of Southport 1,424 5 Town of Urbana 2,873 24 Village of Addison 275 5 Village of H'Sport 468 5 Village of Sth Cng 360 8 ------- ---- TOTALS 24,073 159 In addition, the Company supervised the installation of a new 7,000' 10 inch diameter plastic main and a new meter station to accommodate the doubling in gas load at Corning Incorporated's Sullivan Park Research Center. Developments for the upcoming year include a new Wal-Mart Plaza in the Town of Erwin and the beginning phase of a new Interstate highway interchange between what is now routes 15 and 17 in the Town of Erwin, which will become Interstates 99 and 86, respectively. The changes to the highway system, coupled with the continued economic success of Corning Incorporated, may act as a catalyst for growth of the commercial and residential sectors within our franchise area. The Company has also been involved in removing or modifying existing pipeline networks to facilitate improvements to municipal water, sewer and transportation systems in our area. This increase in activity has prompted the operations department to continue to develop new and innovative ways to handle the increase in main and service installations, line locations, leak repairs, system modifications, data requests and potential emergencies that occur in a more densely populated area. The operations department continues in its mission to insure the safe, efficient and cost effective operations of the energy delivery system for our customers and shareholders. EX-13 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EARNINGS Consolidated net income amounted to $438,000 or $0.95 per share in 1999 compared to $640,000 or $1.39 per share in 1998. The primary reason for the decline was a loss experienced on the Company's lost and unaccounted for gas incentive mechanism in the amount of $61,000, compared to a benefit of $276,000 that was realized in the previous year. OPERATING REVENUE Utility operating revenue of $16,276,000 declined 2.5 percent even though total gas delivered increased 9 percent to 8,017,000 Mcf. The revenue decline is due to a reduction in the cost of gas, which the Company passes through to customers through a reduction in billing rates. Capacity assignment revenue decreased $31,000 to $128,000 in 1999. This revenue is realized from marketing the Company's unused pipeline capacity and a regulatory incentive that allows the Company to retain 15 percent of such revenue. The revenue reduction was expected as this market becomes increasingly competitive. Unregulated revenue increased from $2,664,000 in 1998 to $6,747,000 in 1999 as the result of completing our first full year of operating with our new acquisitions. Revenue by operating segment can be found in note 3 to the Company's financial statements. UTILITY OPERATING EXPENSE Purchased gas expense of $9,460,000 was basically unchanged from 1998, however, there were two large changes that offset in total. The cost of gas declined in 1999, the Company's average cost of gas was $4.18 per Mcf compared to $4.33 the previous year. Conversely, purchased gas expense increased as the result of an unfavorable swing in the Company's lost and unaccounted for gas incentive mechanism. The Company experienced a loss of $61,000 in 1999, compared to a gain on $276,000 that was realized in 1998. Other operating and maintenance expense remained stable at $3,593,000, an increase of 1 percent from the previous year. Taxes other than federal income taxes decreased 5 percent as the result of a tax rate decrease on October 1, 1998. The Company is subject to the New York public utilities gross receipts tax which is levied on all revenue. Depreciation expense decreased due to some assets becoming fully depreciated. OPERATING SEGMENTS The Company's five operating segments are descrived in Note 3 to the consolidated financial statements, which also include the results by segment for fiscal years 1999 and 1998. The Gas Corporation experienced a reduction in net income from $391,500 in 1998 to $219,700 in 1999. The primary reason for the decline was the loss incurred on the lost and unaccounted for gas incentive mechanism as discussed above. The Appliance Corporation net income of $180,000 was down $57,000 from the previous year. Rental revenue was stable, but a decline in service revenue and a decrease in profit margin on merchandise sales due to severe competition resulted in the earnings reduction. Tax Center International, in its first full year of operation since the Company purchased it, provided earnings of $75,000 on revenue of $275,000, a significant 27 percent profitability rate. In 1998, a partial year, Tax Center earnings amounted to $12,000. The Foodmart Plaza, also in its first full year, exceeded $40,000 in earnings. Fully rented, this is the earnings level expected by the Company. Earnings for 1998 were $19,000. Corning Realty experienced a loss of $77,000 in 1999 due in part to indirect acquisition and start up costs. Some budgeting and restructuring of the organization has been put in place, which is expected to result in a contribution to consolidated earnings. In the previous year Corning Realty experienced a loss of $19,000. A detailed discussion of the operating segments can be found in the President's letter to shareholders at the beginning of this report. LIQUIDITY AND CAPITAL RESOURCES The Company was able to finance its 1999 capital additions for regulated operations of $894,000 through internally generated funds and short-term borrowing. In December 1998, the Appliance Corporation acquired a local real estate company, Ambrose and Shoemaker ffor $1,636,000 funded through a $608,000 five-year note to the seller, $580,000 in cash and #448,000 payable over three years. The Company has $7,500,000 available through lines of credit at local banks, the terms of which are disclosed in note 6 to the consolidated financial statements. It is expected that the combination of currently available credit facilities and internally generated funds will provide sufficient financial resources for the year 2000. REGULATORY MATTERS On November 3, 1998 the Public Service Commission issued a Statement concerning the future of the natural gas industry in New York State. A discussion appears in the Rates and Regulations Section of this report. YEAR 2000 The Company has developed and put in place solutions for these areas. COMPUTER HARDWARE AND SOFTWARE The AS/400 main frame Computer Operating System provided by IBM and all software modules provided by Orcom Systems, Inc. are now Y2K ready through upgrades we have received. All personal computer BIOS have been tested with three test programs for Y2K readiness. Those identified as being not able to correctly rollover to the year 2000 have been replaced, while others have had their BIOS upgraded. The review of software contained on these computers is complete and the Company anticipates no problems with readiness in this area. No PC is being used in an area critical to our operations. TRANSMISSION AND DISTRIBUTION SYSTEM We have only two controllers with imbedded chips on our pipeline system. Both have been tested and are Y2K compliant. We anticipate no problem delivering gas on our system due to Y2K issues since it is a manual system. TELEMETERING SYSTEM The telemetering system is Y2K ready and we anticipate no interruption in the flow of gas to our customers due to our computer system. The personal computer that controls the system reporting and monitoring functions has been replaced. New Y2K compliant software was put in place in May 1999. PHONE SYSTEM The internal telephone system for the Company is now Y2K ready. We will be able to receive emergency calls and generate the proper service orders for all phases of our operations. We do not require the use of PC's in handling our customer's calls and creating service orders. The phone system is on the backup generator and will be operational even if the Main Office loses power. THIRD PARTIES AND IDENTIFIED RISKS The Company is primarily concerned with insuring that we continue to deliver natural gas safely and reliably. We must also be able to respond to our customer's requests for service and emergency calls. Based on our efforts to date, the Company expects to be able to operate its own facilities without interruption and continue normal operations in the Year 2000 and beyond. However, the Company is dependent upon third party products and services, such as utilities and programming uplinks, for the operation of its businesses. As part of its Y2K program, the Company has contacted these third party product and service providers to ascertain whether Y2K compliance issues may exist. While many of these companies may give us assurances that they are fully Y2K compliant, the Company does not have the ability to verify such information. If critical third party systems fail as a result of Y2K issues, the ability of the Company to provide services to its customers may be interrupted. While the Company has prepared a contingency plant to address those risks, there can be no assurance that any such plan would resolve such problems in a satisfactory manner. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This report contains statements which, to the extent they are not recitations of historical fact, constitue "forward-looking statements" within the meanings of the Securities Litigation Reform Act of 1995(Reform Act). In this respect, the words "estimate", "project", "anticipate", "expect", "intend", "believe" 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. A number of important factors affecting the Company's business and financial results could cause actual results to differ materially from those stated in the forward-looking statements. EX-13 10 CORNING NATURAL GAS CORPORATION AND SUBSIDIARY Consolidated Balance Sheets September 30, 1999 and 1998 1999 1998 Property, plant and equipment: Utility $21,667,115 21,396,130 Non-utility-principally rented gas appliances and Plaza property 3,941,231 3,782,327 ------------ ----------- 25,608,346 25,178,457 Less accumulated depreciation ( 9,113,046) ( 9,079,776) ------------ ----------- 16,495,300 16,098,681 ------------ ----------- Current assets: Cash 205,787 284,426 Marketable securities avail for sale 1,021,696 785,361 Accounts receivable, less allow for uncoll accts of $97,000 in 1999 & 1998 1,883,915 1,038,524 Gas stored underground, at average cost 134,650 1,539,727 Gas and appliance inventories 634,348 581,765 Prepaid income taxes 340,328 28,948 Deferred income tax assets 11,000 57,000 Prepaid expenses 402,883 511,638 ------------ ---------- 4,634,607 4,827,389 Deferred charges: Prepaid pension asset 1,380,984 1,173,849 Regulatory assets 196,707 205,830 Deferred debits-accounting for income taxes 1,016,661 1,016,661 Unrecovered gas costs ---- 191,819 ---------- ---------- 2,594,352 2,588,159 Goodwill, net of amort of $131,744 in 1999 and $2,561 in 1998 1,851,625 348,235 Long-term debt issuance costs, net of amort of $168,256 in 1999 and $146,698 in 1998 371,317 392,875 Other assets 541,994 542,833 --------- --------- $26,489,195 24,798,172 ============ ========== See accompanying notes to consolidated finacial statements. 1999 1998 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 2,093,937 2,403,489 Accumulated other comprehsive income-net unrealized gain on securites available for sale (net of income taxes of $33,424 in 1999 and $20,422 in 1998) 64,883 39,644 --------- --------- 5,112,166 5,396,479 Long-term debt, less current installments 11,223,256 10,459,351 ----------- ---------- Total capitalization 16,335,422 15,855,830 ---------- ---------- Current liabilities: Borrowings under lines-of-credit 2,165,000 2,325,000 Accounts Payable 1,404,370 1,266,918 Dividends payable 149,500 ----- Current installments long-term debt 202,774 36,830 Customers' deposits and accrued interest 665,990 728,645 Accrued general taxes 94,441 147,619 Supplier refunds due customers 268,862 70,731 Accrued expenses 668,224 502,755 --------- ---------- Total current liabilities 5,619,161 5,078,498 ---------- --------- Deferred credits: Deferred income tax liabilities 2,413,080 2,353,665 Deferred compensation and post- retirement benefits 1,519,142 1,181,190 Other 602,390 328,989 --------- --------- 4,534,612 3,863,844 --------- --------- $26,489,195 24,798,172 ============ ========== Concentrations and commitments(notes 3 and 10) EX-13 11 CORNING NATURAL GAS CORPORATION AND SUBSIDIARY Consolidated Statements of Income For the years ended September 20, 1999 and 1998 Utility Operations 1999 1998 Operating revenue: Residential, commercial and industrial $12,668,536 13,311,539 Transportation 3,479,189 3,201,884 Capacity assignment 128,445 159,872 ---------- ---------- Total operating revenue 16,276,170 16,673,295 ---------- ---------- Operating expenses and taxes: Natural gas purchased 9,459,613 9,409,388 Operating and maintenance 3,593,462 3,557,025 Taxes other than federal income taxes 1,570,206 1,650,950 Depreciation 488,631 574,372 Federal income taxes 42,835 162,792 ---------- ---------- Total operating expenses and taxes 15,154,747 15,354,527 ---------- ---------- Operating income from utility operations 1,121,423 1,318,768 ---------- ---------- Unregulated Operations Unregulated revenue 6,746,804 2,664,462 Unregulated expenses 6,528,527 2,415,797 --------- ---------- Operating income from unregulated Ops 218,277 248,665 ---------- ---------- Other income(incl net realized gains on marketable securities of $25,375 in 1999 and $31,592 in 1998) 63,353 31,885 ---------- ----------- Income before interest expense 1,403,053 1,599,318 Interest expense-regulated 965,105 959,161 --------- --------- Net income $ 437,948 640,157 =========== ========= Weighted average number of shares outstanding- basic and diluted 460,000 460,000 Basic and diluted earnings per common share $ 0.95 1.39 =========== ========= See accompanying notes to consolidated financial statements. EX-13 12 CORNING NATURAL GAS CORPORATION AND SUBSIDIARY Consolidated Statements of Stockholders' Equity and Comprehensive Income For the years ended September 30, 1999 and 1998 Accumulated Additional other Common paid in Retained comprehensive stock captial earnings income Total ---------------------------------------------------- Balances at Sept 30, 1997 $2,300,000 653,346 2,211,833 44,258 5,209,437 Comprehensive income: Change in unrealized gain on securities available for sale, net of income taxes of $2,377 --- --- --- (4,614) (4,614) Net income --- --- 640,157 --- 640,157 ----------------------------------------------------- Total comprehensive income --- --- 640,157 (4,614) 635,543 Dividends$.975/share --- --- (448,501) --- (448,501) ------------------------------------------------------ Balances at Sept 30, 1998 2,300,000 653,346 2,403,489 39,644 5,396,479 Comprehensive income: Change in unrealized gain on securities available for sale, net of income taxes of $13,002 --- --- --- 25,239 25,239 Net income --- --- 437,948 --- 437,948 ------------------------------------------------------ Total comprehensive income --- --- 437,948 25,239 463,187 Dividends$1.625/share --- --- (747,500) --- (747,500) ------------------------------------------------------- Balances at Sept 30, 1999 $2,300,000 653,346 2,093,937 64,883 5,112,166 ======================================================= Dividends are accrued when declared by the Board of Directors. Dividends declared were $747,500 or $1.63 per share in 1999, and $448,501 or $.98 per share in 1998. Dividends paid were $598,000 and $1.30 per share in 1999, and $598,001 and $1.30 per share in 1998. EX-13 13 CORNING NATURAL GAS CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows For the years ended September 30, 1999 and 1998 1999 1998 Cash flows from operating activities: Net income $ 437,948 640,157 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortizaiton 895,280 837,151 Gain on sale of marketable sec (25,375) (31,592) Deferred income taxes 105,415 (86,301) Changes in assets and liablilities: (Increase)decrease in: Accounts receivable (845,391) (43,309) Gas stored underground 1,405,077 (192,045) Gas and appliance inventories (52,583) 59,951 Prepaid expenses 108,755 69,258 Unrecovered gas costs 191,819 (158,886) Prepaid income taxes (311,380) 436,838 Deferred cgarges-pension/other (198,012) (144,719) Other assets & longterm debt iss 22,397 (156,013) Increase(decrease in: Accounts Payable 137,452 (413,922) Accrued general taxes (53,178) 14,426 Supplier refunds due customers 198,131 (310,263) Other liabilities and def credits 265,834 419,813 -------- --------- Net cash provided by op activities 2,282,189 940,544 ----------- --------- Cash flows from investing activities: Purchase of securities available for sale, net (172,719) (118,861) Acquisitions of businesses, net of cash acquired (600,907) (1,407,068) Capital expenditures, net of minor disposals (1,150,718) (1,270,305) ----------- ------------ Net cash used in investing activi (1,924,344) (2,796,234) ----------- ------------ Cash flows from financing activities: Net borrowings(repaymts)line-of-cred (160,000) 1,550,000 Dividends paid (598,000) (598,000) Borrowings under long-term debt agmt 468,334 940,000 Repayment of long-term debt (146,818) (14,635) ---------- -------------- Net cash provided(used)by financing activities (436,484) 1,877,364 ----------- ------------- Net increase(decrease)in cash (78,639) 21,674 Cash at beginning of year 284,426 262,752 ---------- ----------- EX-13 14 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, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for the years then ended. 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 signifi- cant 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 presently fairly, in all material respects, the financial position of Corning Natural Gas Corporation and Subsidiary at September 30,1999 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ KPMG LLP November 15, 1999 CORNING NATURAL GAS CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements For the Years Ended September 30, 1999 and 1998 (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 Statement of Financial Accounting Standards No. 71 (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 of the Company are summarized below. (a) Principles of Consolidation and Presentation The consolidated financial statements include the Company and its wholly owned subsidiary, the Corning Natural Gas Appliance Corporation. In fiscal 1998, the Corning Natural Gas Appliance Corporation completed the purchase of three businesses which have been established as New York State limited liability subsidiary corporations, as follows:Tax Center International, LLC; The Foodmart Plaza, LLC; and Corning Realty Associates, LLC. In fiscal 1999, the Corning Natural Gas Appliance Corporation completed the purchase of Ambrose and Shoemaker Better Homes and Gardens Real Estate, which has also been established as a New York State limited liability subsidiary corporation. Hereinafter the Appliance Corporation and its limited liability subsidiary corporations are collectively referred to as "Appliance Corportion". 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. Shared expenses are allocated to the Appliance Corporation. It is the Company's policy to reclassify amounts in the prior year financial statements to conform with the current year's presentation. (b) Property, Plant and Equipment 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. Property and equipment acquired pursuant to the acquisitions discussed in note 2 were initially recorded at estimated fair market value. (c)Depreciation The Company provides for depreciation for accounting purposes using a straight-line method based on the estimated economic lives of property, which ranges from 3 to 55 years for all assets except utility plant. The depreciation rate used for utility plant, expressed as an annual percentage of depreciable property, was 2.7% in 1999 and 1998. At the time utility properties are retired, the original cost plus costs of removal less salvage, are charged to accumulated depreciation. (d) Revenue and Natural Gas Purchased The Company records revenues from residential and commercial customers based on meters read on a cycle basis throughout each month, while certain large industrial and utility customers' meters are read at the end of each month. Pursuant to the most recent rate order, capacity assignment revenue is recorded at a rate of 15% of the amount received from released capacity and is recognized upon notification of capacity release from the pipeline company while the remaining 85% is returned to customers through reduced gas cost. The Company secured a weather normalization clause in the last major rate 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. As a result, 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 to or recovered from customers over a subsequent 12-month period. Real estate commissions are recognized at closing while professional services revenues are recognized as services are performed. (e) Marketable Securities Marketable securities, which are intended to fund the Company's deferred compensation plan, are classified as available for sale at September 30, 1999 and 1998. Such securities are reported at fair value based on quoted market prices, with unrealized gains and losses, net of the related income tax effect, excluded from earnings, and reported as a component of accumulated other comprehensive income in stockholders' equity until realized. The cost of securities sold was determined using the specific identification method. A summary of the marketable securities at September 30, 1999 and 1998 is as follows: Net Market C ost Unrealized Unrealized Unrealized value basis gains losse s gains 1999 $ 1,021,696 923,389 130,511 (32, 204) 98,307 1998 $ 785,361 725,295 87,718 (2 7,652) 60,066 (f) Inventories Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. (g) 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. (h) Dividends Dividends are accrued when declared by the Board of Directors. Dividends declared were $747,500 or $1.63 per share in 1999, and $448,501 or $0.98 per share in 1998. Dividends paid were $598,000 and $1.30 per share in 1999, and $598,001 and $1.30 per share in 1998. Under the most restrictive long-term debt covenants, the Company may not declare or pay annual dividends except to the extent that consolidated net worth exceeds $2,000,000. (i) Goodwill Goodwill represents the excess of purchase price over the fair value of the identified net assets of acquired businesses. Goodwill is amortized over 15 years, the estimated period of benefit, on a straight-line basis. Goodwill in excess of associated expected operating cash flows is considered to be impaired and is written down to fair value, which is determined based on either undiscounted future operating cash flows or appraised values, depending on the nature of the asset. (j) Accounting for Impairment SFAS 121, Accounting for the Impairment of Long-Lived Assets to be Disposed Of establishes accounting standards to account for the impairment of long- lived assets, and certain identifiable intangibles. Under SFAS 121 the Company reviews assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. SFAS 121 also requires that a rate-regulated enterprise recognize an impairment when regulatory assets are no longer probable of recovery. (k) Pension and Postretirement Plans On October 1, 1998, the Company adopted Financial Accounting Standards Board Statement No. 132, Employers' Disclosures about Pension and Other Postretire- ment Benefits (Statement 132). Statement 132 revises employers' disclosures about pension and other postretirement benefit plans; it does not change the method of accounting for such plans. (l) Comprehensive Income On October 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and net unrealized gains (losses) on securities and is presented in the consolidated statements of stockholders' equity and comprehensive income. The Statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform to the require- ments of SFAS No. 130. (m) Segment Information Effective September 30, 1999, the Company adopted Financial Accounting Standards Board Statement No. 131, Disclosures About Segments of an Enter- prise and Related Information, which changes the way the Company reports information about its operating segments. The information for fiscal 1998 has been restated in accordance with the requirements of the new standard. (2) Acquisitions In April 1998, the Corning Natural Gas Appliance Corporation completed three acquisitions accounted for by the purchase method, as follows: The Foodmart Plaza, LLC, (Foodmart Plaza) was purchased for $1,202,996, including direct acquisition costs, and financed through cash of $262,996 and a $940,000 ten year note secured by the real property. Located in South Corning, New York, Foodmart Plaza consists of eight tenants under multi-year leases anchored by a major supermarket. Tax Center International, LLC (Tax Center) and Corning Realty Associates, LLC (Corning Realty) were purchased for $374,888, including direct acquisition costs, and were funded through cash of $204,072 and a $170,816 eight year loan agreement with the sellers. Tax Center provides tax preparation, accounting, and payroll services. Corning Realty is a residential and commercial real estate brokerage with agents operating out of offices in Corning and Elmira, New York. In December 1998, the Corning Natural Gas Appliance Corporation acquired a local real estate company, Ambrose and Shoemaker Better Homes and Gardens Real Estate (Ambrose and Shoemaker) for $1,636,589, including direct acquisition costs, funded through cash of $579,923, a $608,333 five year promissory note to the seller, and the remaining $448,333 payable over three years. The purchase price for these acquisitions,including direct acquisition costs, was allocated to assets acquired based upon the estimated fair values, with the excess of the consideration over such estimated fair values recorded as goodwill, as follows: 1998 1999 Foodmart Tax Center/ Ambr ose and Plaza Corning Realty Shoem aker Property, plant and equipment $ 1,175,000 52,088 25,0 00 Goodwill 27,996 322,800 1,611 ,589 ------------ -------- ----------- $ 1,202,996 374,888 1,636,589 ============ ========= =========== Purchase price adjustments of $20,984 related to 1998 direct acquisition costs were recorded in 1999 and are reflected as additional goodwill. The following summarized unaudited pro forma financial information assumes the acquisitions had occurred on October 1 of each year and reflects interest expense and goodwill amortization, net of applicable taxes, related to the acquisitions: Years ended September 30, (unaudited) 1999 1998 --------------------------- Total revenues $ 23,623,000 23,550,300 Net income 457,900 693,400 Basic and diluted earnings per common share 1.00 1.51 The above amounts are based upon certain assumptions and estimates which the Company believes are reasonable. The pro forma results do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed above, nor are they indicative of the results of future combined operations. (3) Information About Operating Segments 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 Corning Natural Gas Corporation (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. The Appliance Corporation sells, rents and services primarily gas burning appliances. The Tax Center provides tax preparation, accounting and payroll services to approximately 800 clients. Corning Realty is a residential and commercial real estate business with approximately 80 agents operating in three neighboring counties. Foodmart Plaza is a retail complex consisting of eight tenants under multi- year leases anchored by a major supermarket. The following table reflects the results of the segments consistent with the 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. Gas Appliance Tax Cornin g Foodmart Company Corporation Center Rea lty Plaza Consolidated Revenue: 1999 $16,276,170 2,276,802 274,855 3,922, 879 272,268 23,022,974 1998 16,673,295 2,323,087 62,668 157, 750 120,957 19,337,757 Net income (loss): 1999 219,671 179,610 75,490 (77,289) 40,466 437,948 1998 391,492 236,349 12,323 (1 9,148) 19,141 640,157 Interest income: 1999 1,991 58,769 - - - 60,760 1998 - 38,263 - - - 38,263 Interest expense: 1999 965,105 - 5,157 101,86 2 93,976 1,166,100 1998 959,161 - 1,761 10,3 06 40,473 1,011,701 Identifiable assets*: 1999 20,493,744 2,690,298 190,264 1,939 ,511 1,203,168 26,516,985 1998 20,670,347 2,497,312 91,241 3 40,935 1,224,923 24,824,758 Depreciation and amortization: 1999 488,631 236,271 5,388 133, 557 31,433 895,280 1998 574,389 242,293 2,018 7,005 11,446 837,151 Income tax expense (benefit): 1999 42,835 135,369 44,846 ( 27,402) 26,595 222,243 1998 162,792 159,978 8,195 (5 ,417) 12,728 338,276 *Identifiable assets include property, plant and equipment, cash, accounts receivable, inventories and other amounts specifically related to each identified segment. Interest income and expense have been displayed in the segment in which it has been earned or incurred. Segment interest expense other than the Gas Company is included within unregulated expenses in the consolidated statements of income. 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: Deliveries Reve nue Mcf % of Total Amoun t % of Total Corning, Inc. Year ended Sept 30, 1999 2,107,000 26 $ 728 ,000 4 Year ended Sept 30, 1998 1,933,000 26 698, 000 4 NYSEG Year ended Sept 30, 1999 2,518,000 31 $ 274 ,000 2 Year ended Sept 30, 1998 1,985,000 27 270,0 00 2 BEGWS Year ended Sept 30, 1999 691,000 8 $ 1,657,000 10 Year ended Sept 30, 1998 731,000 10 1,640 ,000 10 (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 Deferred Charges. Such costs arise from the traditional cost-of-service rate setting approach whereby all prudently incurred costs are generally 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. Accordingly, the Company believes that accounting under SFAS 71 is still appropriate. Below is a summarization of the Company's regulatory assets as of September 30, 1999 and 1998: 1999 1998 Deferred pension and other $ 196,707 205,830 Deferred debits - accounting for income taxes 1,016,661 1,016,661 Unrecovered gas costs - 191,819 ------------ ---------- Total - regulatory assets $ 1,213,368 1,414,310 Deferred pension and other: Approximately $84,000 and $135,000 of these balances represent costs in excess of the amounts currently recoverable through rates at September 30, 1999 and 1998, respectively. The PSC requires such excess costs to be deferred. Remaining balances represent miscellaneous regulatory assets. Deferred debits - accounting for income taxes: These amounts represent 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. 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). The Company expects that its regulatory assets will be fully recoverable from customers. (5) Long-Term Debt A summary of long-term debt at September 30 follows: 1999 1998 Unsecured senior note - 7.9%, due serially with annual payments of $355,000 beginning in 2006 through 2016 and $795,000 due in 2017 $ 4,700,000 4,700 ,000 First mortgage bonds - 8.25%, series all due 2018, secured by substantially all utility plant 3,100,000 3,100 ,000 Unsecured senior note - 9.83%, due serially with annual payments of $100,000 beginning in 2007 through 2015 and $700,000 due in 2016 1,600,000 1,600 ,000 Mortgage note - 8.02% monthly installments through April 2008 912,044 932, 245 Unsecured promissory note - 6.5% monthly installments through April 2006 146,643 163, 936 Note payable - 6.5% monthly installments through January 2004 secured by assets of Corning Realty 520,128 - - Note payable - 7.75% monthly installments through January 2009 secured by assets of Corning Realty 447,215 - - ------------ ---------- Total long-term debt 11,426,030 10,4 96,181 Less current installments 202,774 36,83 0 ------------ ----------- Long-term debt less current installments $ 11,223,256 10,4 59,351 ============= ========== The aggregate maturities of long-term debt for each of the five years subsequent to September 30, 1999 are as follows: 2000 $ 202,774 2001 219,492 2002 234,812 2003 251,001 2004 149,601 2005 and thereafter 10,368,350 (6) Lines of Credit The Company has lines of credit with local banks to borrow up to $7,500,000 on a short-term basis. Borrowings outstanding under these lines were $2,165,000 and $2,325,000 at September 30, 1999 and 1998, respectively. The maximum amount outstanding during the year ended September 30, 1999 and 1998 was $2,840,000 and $2,325,000, respectively. The lines of credit are unsecured and payable on demand with interest at rates which range from the prime rate (8.25% at September 30, 1999) to the prime rate less 3/4%. The weighted average interest rates on outstanding borrowins during fiscal 1999 and 1998 wer 7.24% and 7.8%, respectively. (7) Federal Income Taxes Federal income tax expense (benefit) for the years ended September 30 is as follows: 1999 1998 Utility Operations: Current $ (86,529) 242,955 Deferred 123,251 (86,301) Investment Tax Credits 6,113 6,138 ---------- -------- 42,835 162,79 2 Unregulated Operations: Current 197,244 175,484 Deferred (17,836) - ----------- -------- 179,408 175,48 4 ---------- ------- Total federal income tax expense $ 222,243 338,276 ========== ======= 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: 1999 1998 Expected tax expense $ 224,465 332,667 Investment tax credits 6,113 6,138 Other, net (8,335) (529) ------------ --------- $ 222,243 338,276 The Company is exempt from state income taxes. The tax effects of temporary differences that result in deferred income tax assets and liabilities at September 30 are as follows: 1999 1998 Deferred income tax assets: Unbilled revenue $ 21,118 23,530 Deferred compensation reserve 272,371 229,438 Postretirement benefit obligations 202,063 150,884 Allowance for uncollectible accounts 32,980 32,980 Inventories 32,420 45,912 Other 18,575 1 4,947 --------- -------- Total deferred income tax assets 579,527 497,691 Deferred income tax liabilities: Plant and equipment, principally due to differences in depreciation 2,215,658 2,139, 275 Pension benefit obligations 449,707 426,787 Deficiency of GAC revenue billed 94,405 61,311 Other 221,837 166,9 83 ---------- --------- Total deferred income tax liabilities 2,981,607 2,794,356 --------- --------- Net deferred income tax liability $2,402,080 2,296,665 ========== ========== There was no change in the valuation allowance for deferred income tax assets during the year ended September 30, 1999 or 1998. (8) Pension and Other Postretirement Benefit Plans In 1997, the Company established a trust to fund a deferred compensation plan for certain officers. The fair market value of assets in the trust was $1,021,696 and $785,361 at September 30, 1999 and 1998, respectively, and the plan liability, which is included in deferred compensation, postretirement benefits and other credits on the balance sheet, was $801,091 and $673,416 at September 30, 1999 and 1998, respectively. The assets of the trust are available to general creditors in the event of insolvency. Beginning October 1, 1998, the Company changed the manner in which the plan liability is calculated. The Company believes that the newly elected actuarial method more accurately reflects the obligation to covered participants as of the balance sheet date. This change in accounting method reduced the Company's expense under the Plan by $65,000 in 1999. The Company has defined benefit 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 for benefits attributed for service to date, and those expected to be earned in the future. In addition to the Company's defined benefit pension plans, the Company offers postretirement benefits comprising of medical and life coverages 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 during the active service period of the employee. The following table shows reconciliations of the Company's pension and postretirement plan benefits as of September 30: Pension benefits Postretirement benefits 1999 1998 1999 1998 Change in benefit obligations Benefit obligation at beginning of year $ 8,445,196 7,159,528 1,062,666 941,855 Service cost 283,700 228,817 23,9 94 16,171 Interest cost 541,895 512,415 69,98 6 65,512 Participant contributions - - 18,78 6 - Actuarial gain/(loss) (1,269,615) 868,962 (246 ,840) 104,724 Benefits paid (459,727) (423,378) (84,3 58) (65,596) Amendments 91,189 98,852 48,82 8 - ------------------------------------------------ Benefit obligation at end of year $ 7,632,638 8,445,196 893,0 62 1,062,666 ================================================= Change in plan assts Fair value of plan assets at beginning of year $ 9,658,264 9,102,282 - - Actual return on plan assets 1,138,844 764,923 - - - Company contributions 191,232 214,437 65,572 65,596 Participant contributions - - 18,78 6 - Benefits paid (459,727) (423,378) (84, 358) (65,596) ------------------------------------------------ Fair value of plan assets at end of year $ 10,528,613 9,658,264 - - ================================================== Funded status 2,864,283 1,213,048 (893,062) (1,062,666) Unrecognized actuarial loss (gain) (2,328,796) (864,189) (407,718) (178,753) Unrecognized PSC adjustment 332,762 373,097 - - - Unrecognized prior service cost 838,691 817,339 43,40 3 - Unrecognized net transition asset (obligation) (325,956) (365,446) 802,25 0 859,250 ------------------------------------------------- Prepaid (accrued) benefit cost $ 1,380,984 1,173,849 (455, 127) (382,169) ================================================== Weighted-average assumptions as of September 30, 1999 and 1998 Discount rate 7.75% 6.5% 7.75% 6.5% Expected return on assets 8.0 8.0 - - - Rate of compensation increase 5.0 5.0 - - For measurement purposes, an 8% annual rate of increase in the per capita cost of covered benefits (health care cost trend rate) was assumed for 1998. 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 trend would result in approximately a 4.5% increase in the service and interest cost components of the annual net periodic postretirement benefit cost and a 3.4% increase in the accumulated postretirement benefit obligation. A 1% decreae in the actual health care cost trend would result in approximately a 3.7% decrease in the service and interest cost components of the annual net periodic postretirement benefit cost and a 3.0% decrease in the accumulated postretirement benefit obligation. Pension benefits Postre tirement benefits 1999 1998 1999 1998 Components of net periodic benefit cost Service cost $ 285,161 228,817 23,9 94 16,171 Interest cost 543,856 512,415 6 9,986 65,512 Expected return on plan assets (764,699) (715,243) - - Amortization of prior service 100,017 91,137 5,425 - - Amortization of transition obligation (39,510) (39,510) 57,00 0 57,000 Amortization of PSC adjustment 40,335 40,335 - - - Amortization of unrecognized actuarial (gain) loss (180,288) (262,216) (17,875) (32,153) ---------------------------------------- Net periodic benefit cost (benefit) $ (15,128) (144,265) 138,530 106,5 30 ======================================== For ratemaking and financial statement purposes, pension expense represents the amount approved by the PSC in the Company's most recently approved rate case. Pension expense for ratemaking and financial statement purposes was approximately $39,000 for the years ended September 30, 1999 and 1998. The difference between the pension expense (benefit) for ratemaking and financial statement purposes, and the amount computed above has been deferred and is not included in the prepaid pension cost noted above. Such balances equal $84,000 and $135,000 as of September 30, 1999 and 1998, respectively. The PSC has allowed the Company to recover incremental cost associated with postretirement benefits through rates on a current basis. Due to the timing differences between the Company's rate case filings and financial reporting period, a regulatory liability of $262,924 and $125,605 have been recognized at September 30, 1999 and 1998, respectively. (9) Rentals Under Operating Leases Foodmart Plaza receives income from the rental of retail store space under operating leases. The following is a schedule of minimum future rentals (excluding amounts representing executory costs such as taxes, maintenance and insurance) of operating leases as of September 30, 1999: 2000 $ 267,000 2001 250,450 2002 192,300 2003 52,900 2004 34,875 ------------ Total minimum future rentals $ 797,525 All leases contain renewal options at the end of their respective lease terms. (10) Commitments The Company has agreements with seven 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 Federal Energy Regulatory Commission approved rates. Purchased gas costs incurred under these pipelines capacity agreements during 1999 and 1998 amounted to $3,599,300 and $3,735,000, 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 significantly in excess of normal capacity requirements. -----END PRIVACY-ENHANCED MESSAGE-----