-----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, MYeVCEcn4bmhmoEtQWu3wVAxfQ/DmjcMJDLdJpocCegY7bEKaSKanZEVPfoYR/fR 2UZNl/ocPvrNxMHm4j8Y3A== 0000024751-98-000010.txt : 19990105 0000024751-98-000010.hdr.sgml : 19990105 ACCESSION NUMBER: 0000024751-98-000010 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981231 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: 98779907 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, 1998 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 issurer (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, 1997 $16,673,295 The aggregate market value of the 330,739 shares of the Common Stock held by non-affiliates of the Registrant at the $20 average of bid and asked prices as of November 1, 1998 was $6,614,780. Number of shares of Common Stock outstanding as of the close of business on November 1, 1998 - 460,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Annual Report to Shareholders for the twelve month period ended September 30, 1998, and definitive proxy statement and notice of annual meeting of shareholders, dated February 1 , 1998, 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 1998 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, 1998 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 fiscal 1998 and expects to have an adequate supply available for its customers during fiscal 1999 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. (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 5,979 for the period October 1, 1997 through September 30, 1998 and 6,831 for the same period ended September 30, 1997. (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 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 $159,872 for 12 months ended September 30, 1998 and $242,289 for the 12 months ended September 30, 1997. 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 has been used infrequently since its inception. 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. (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) Seventy-seven persons were employed by the Company in 1998 versus seventy-six for the previous year. 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. 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, 287 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 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 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 1998. 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 53 Chairman of the Board of Directors 5 President & C.E.O 14 Edgar F. Lewis 61 Senior Vice President - Operations 18 Kenneth J. Robinson 54 Executive Vice President 7 Phyllis J. Groeger 58 Secretary 11 Thomas S. Roye 45 Vice President - Administration 7 Gary K. Earley 44 Treasurer 7 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 355 at September 30, 1998. 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, 1997 22 21 1/2 $ .32 June 30, 1997 21 1/4 20 .32 September 30, 1997 21 1/4 20 .32 December 31, 1997 .325 March 31, 1998 $ $ $ .325 June 30, 1998 .325 September 30, 1998 .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. 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 1998 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 7, 1998 are included in the 1998 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) 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 September 30, 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 1998, 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 is filed herewith. 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, 1998. 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 (R egistrant) Date December 21, 1998 THOMAS K. BARRY Thomas K. Barry, Chairman of the Board, President and C.E.O. Date December 21, 1998 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 21, 1998 J.E. BARRY J.E. Barry, Director Date December 21, 1998 DONALD R. PATNODE Donald R. Patnode, Director Date December 21, 1998 J.A. FINLEY J.A. Finley, Director EX-28 2 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 Tuesday, February 9, 1999 Corning, New York January 12, 1999 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 Tuesday, February 9, 1999 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 5, 1999 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 12, 1999 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 Tuesday, February 9, 1999. 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 12, 1999. 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 8, 1999 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 2000 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 14, 1999. As to any proposal that a stockholder intends to present to stockholders without being included in the Company's proxy statement for the Company's 2000 Annual Meeting of Stockholders, the proxies named in management's proxy for the meeting will be entitled to exercise their discretionary authority on that proposal unless the Company receives notice of that matter to be proposed not later than November 30, 1999. Even if proper notice is received on or prior to November 30, 1999, the proxies named in management's proxy for that meeting may nevertheless exercise their discretionary authority with respect to such matter by advising stockholders of such proposals and how they intend to exercise their discretion to vote on such matter, unless the stockholder making the proposal solicits proxies with respect to the proposal as set forth in Rule 14a-4(c) of the Securties Exchange Act of 1934. Voting Securities Outstanding. There were 460,000 shares of common stock outstanding and entitled to vote on January 5, 1999 (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, 1998 of Class J. Edward Barry (Director) 45,999(1) 10.0% 330 W. William Street Corning, New York Thomas K. Barry (Director and 14,293(2) 3.1% Chief Executive Officer) 330 W. William Street Corning, New York Thomas H. Bilodeau (Director) 3,788(3) * 1648 Jupiter Cove Dr., Apt. 312 Jupiter, Florida Bradford J. Faxon (Director) 27,210(4) 5.9% 225 Hix Bridge Road Westport, Massachusetts Jay A. Finley (Director) 17,000(5) 3.7% 27 Spring Terrace Corning, New York Edgar F. Lewis (Sr V-P-Oper) 200(6) * 330 W. William Street Corning, New York Liselotte R. Lull and 45,029(7) 9.8% Robert E. Lull 231 Watauga Avenue Corning, New York Jack R. McCormick (Director) 1,969 * 2560 Riverside Avenue Somerset, Massachusetts Donald R. Patnode (Director) 14,194(8) 3.1% 91 Stage Harbor Road Chatham, Massachusetts Kenneth J. Robinson (Exec V-P) 3,277(9) * 330 W. William Street Corning, New York All directors and officers 129,261(10) 28.1% of the Company, thirteen persons as a group * Less than one percent (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 1,180 shares owned by children of Thomas K. Barry, and as to which Thomas K. Barry has shared voting and investment power. (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 8,500 shares owned by Gertrude C. Finley, who has sole voting and investment power over such shares. (6) All shares are owned jointly with Evelyn Lewis. (7) Includes 23,378 shares owned by Liselotte R. Lull and 21,651 shares owned by Robert E. Lull. (8) Includes 2,000 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) Includes 2,745 shares owned jointly with Sherry Robinson and 500 shares owned by a son of Kenneth J. Robinson, and as to which Kenneth J. Robinson has shared voting and investment power. (10) 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, 86, Consultant to the Company. Former Chairman of the Board of Directors 1975 - 1993; former Chief Executive Officer, President, Executive Vice President, Vice President and Secretary of the Company. 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, 53, 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, 56, 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, 60, 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, 83, Retired; former President of the Company, 1977-1983. A Director since 1975 and a member of the Executive Committee. Jack R. McCormick, 74, 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, 70, 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 1998. 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 1998. This committee reviews officer performance and duties and decides upon appropriate remuneration. The Board of Directors met five times in 1998. 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 February 12, 1998, out of a total of 460,000 shares entitled to vote at the meeting, 441,315 shares (95.9% 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 September 30, 1996, September 30, 1997 and September 30, 1998 to the Company's Chief Executive Officer and to each Executive Officer whose aggregate cash compensation exceeded $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(2) Bonus Compensation(3) Thomas K. Barry 1998 $153,212 --- $12,500 President and Chief 1997 144,887 --- 12,500 Executive Officer 1996 101,970(4) --- 7,800 Kenneth J. Robinson 1998 $106,777 --- --- Exec. Vice President 1997 100,425 --- --- Edgar F. Lewis 1998 $100,511 --- --- Sr. Vice President-Operations (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 Sept- ember30, 1998, 1997 and 1996. (2) The amounts in this column represent the aggregate of cash contributions received and matching contributions made by the Company on behalf of the named executive officers to the Company's 401 (k) Savings Plan (the "Savings Plan"). (3) Consists of director's fees paid to the named executive officers by the Company and its subsidiary. (4) 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 54) 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 7 years. Edgar F. Lewis (age 61) 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 26 years; 18 years in his current position. Thomas S. Roye (age 45) is Vice President-Administration. Mr. Roye has served 7 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. Stanley G. Sleve (age 49) is Vice President-Business Development. Mr. Sleve was employed by the Company in January, 1998 primarily to secure and develop new business. Mr. Sleve has had twenty-four years of project, client and construction management experience with engineering and architectural service firms. Gary K. Early (age 44) 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 7 years. Phyllis J. Groeger (age 58) 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 11 years. Compensation Pursuant to Plans. The Company has entered into separate supplemental benefits agreements with Thomas K. Barry and Kenneth J. Robinson (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 officers 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 Agreement 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, Supple- mental Benefits Agreement with Edgar F. Lewis, 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 his death prior to retirement, and does not include an annual escalator. Eligibility to enter into a Supplemental Benefits Agreement, or equivalent therof, 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, such 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, 1998 the estimated annual benefits payable under a Supplemental Benefits Agreement upon retirement at the normal retirement age for Mr. E.F. Lewis are $20,800, Mr. K.J. Robinson are $38,850 and for Mr. T.K. Barry are $54,950. The Company also maintains the Corning Natural Gas Corporation Employees Savings Plan (the "Savings Plan"). All 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. For non-union employees 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. All participants may select one of seven 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. During the fiscal year ended September 30, 1998, no amounts were distributed to exectutive officers under the Savings Plan. The amounts accrued under the Savings Plan by Messrs. T.K. Barry, K.J. Robinson and E.F. Lewis in fiscal 1998 are included in the compensation figures in the table on Page 5. 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, 1998, with National Union Fire Insurance Company for the indemnification of officers and directors at an annual premium cost of $ 38,000. Employment Contracts and Termination of Employment and Change-in-Control Arrangements. The Company has entered into an employment contract with each of Mr. T.K. Barry and Mr. K.J. Robinson. Under the terms of such employment contracts, each officer 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 each officer's employment contract is for a rolling three year period, unless earlier terminated by an act of either the Company or such officer. Each officer's employment contract further provides that upon any change in control of the Company leading to the termination of such officers employement with the Company, the Company shall pay such officer three times his then-present annual salary and reimbursment of payments for excise tax, if any, required under Section 4999 of the Internal Revenue Code. The Employment Contracts also provide for payment to such officer, upon his retirement, of amounts that, when combined with payments under the pension plan, would provide such officer a total pension benefit, as specified in the Company's pension plan,as if the limitations on pension plan payments under Internal Revenue Code Sections 415(b) and (e) did not apply. Payment of such amounts and downward adjustments of such amounts are made under the same terms as specified in the pension plan. Such contracts also require the Company's continued provision of health care benefits to such officer after retirement, except when the officer is terminated for cause. 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 3
UT 12-MOS 12-MOS SEP-30-1998 SEP-30-1997 SEP-30-1998 SEP-30-1997 PER-BOOK PER-BOOK 13876431 13378436 2222250 1055065 4853975 4997946 3459285 2659118 412817 405131 24824758 22495696 2300000 2300000 653346 653346 2403490 2211833 5396479 5209437 0 0 0 0 9400000 9400000 2325000 775000 0 0 0 0 0 0 0 0 0 0 0 0 7703279 7111259 24824758 22495696 16673295 17835687 162792 245887 15191735 16194344 15354527 16440231 1318768 1395456 280550 244833 1599318 1640289 959161 884538 640157 755751 0 0 640157 755751 448501 738300 1144000 579595 942921 1174531 1.39 1.64 0 0
EX-13 4 To Our Shareholders The national weather service's favorite topic during the 1997-98 winter season was how El Nino affects weather patterns across the country. Indeed, a record setting mild winter throughout the northeast resulted in a 7 percent reduction in gas deliveries to all of the Company's customers over the prior year as of September 30, 1998. A reduction in degree days of over 12 percent from the year ended September 1997 contributed to a reduction of 8.6 percent in gas deliveries to residential and commercial custumers. Earnings declined from $1.64 per share in 1997 to $1.39 per share for fiscal year 1998. The Company produced record high earnings for the year ended September, 1997 which makes the difference in earnings appear more severe than it is. Earnings derived from sources other than gas deliveries contributed toward producing relatively reasonable year end results considering the extremely mild weather conditions. The Company continues to maintain a weather normalization clause within its tariffs. This clause allows the Company to charge a slightly higher rate when the weather is milder than average and operates in the reverse when temperatures are colder than the 15 year average. In fiscal 1998 the Company collected nearly $180,000 from this revenue source to help offset the large reduction in sales to firm customers. The Company also earned nearly $160,000 in incentive capacity assignment revenues. In total, we sold $1,067,000 of capacity assignments of which 85 percent, or $907,000, was returned to our customers in the form of lower rates. The Company was, once again, success- ful in achieving additional incentive arnings through the lost and unaccounted for gas calulation. In essence, we receive credit for minimizing the gas that is lost on the system typically through metering and gas leaks. A long term program of improving the meters we have in service, the ongoing repair of these meters on a regular basis, the degree to which meters are adjusted for accuracy, combined with a vigilant program to search for and repair leaks on the distribution system have enabled us to better account for all the gas that is brought into the system at the city gates. Over the past few years we have received credit, which goes to earnings, primarily due to the positive results of these efforts. The wholly owned Appliance Corporation continues to contribute a substantial portion of consolidated earnings. This year the subsidiary posted income of over $248,000, a 12 percent increase over the prior year. The rental of water heaters and water refining products plays a key role in the ongoing success of this operation. Emphasis is also placed upon the sale and installation of central heating units for residential use and upon the popular room heating natural gas fired fireplace units. The Company carries the area's largest selection of free standing and built-in fireplace/stove units and has several operating displays in its sales offices in Elmira, Bath and Corning. The original goal of the Appliance Corporation, which was started in 1954 during the peak years of the expansion of the gas distribtion system, was to promote the utilization of natural gas through the sale and installation of gas burn- ing appliances consisting primarily of forced air furnaces, boilers, water heaters, clothes dryers and ranges. We have been quite successfl in attaining this goal and in connecting gas lines to nearly every building that is on the distribution system pipelines. This has led to a very high saturation rate which brings us to the next subject of concern and action-diversification. In January, 1998, the Company employed Mr. Stanley Sleve as Manager of Business Development. Mr. Sleve has twenty fouur years of project, client and construction managmenent experience with engineering and architectural service firms. As a result of Mr. Sleve's local connections and actions, the Company, through its subsidiary appliance corporation, has purchased three different businesses. In April, 1998 the company puurchased the Foodmart Plaza, which is a retail comlex consisting of a major grocery store, an Eckerd Drug Store and six other businesses located in four buildings on the property. The property and buildings were purchased for $1.175 million of which $940,000 was financed through a local bank with interest at 8.02percent over ten years. The complex started at this South Corning location in the mid-1950's as one of the areas first large, modern grocery stores. It has a remarkably solid history as the property has been expanded and upgraged over the years and remains in excellent condition. While it apears that The Foodmart Plaza will turn out to be a solid long term investment, the goal is to create growth through high quality, low capitalization, service oriented businesses. The Appliance Corporation has also purchased a tax preparation and financial accounting services business, Tax Center International (TCI), which currently employs five people and provides services to approximately 700 clients. Mrs. Firouzeh Sarhangi, who was the princial owner-operator of TCI, has an employment agreement with the Company and the business has been moved into the Company's Corning office building. We have added new services for our clients and have begun to achieve growth through word of mouth contacts. Also in April 1998, the Appliance Corporation purchased The Corning Realty Associates which has The Prudential Marketplace real estate franchise in the Corning and Elmira area. This is a residential and commercial real estate business operating with twenty three agents with offices in our Corning service center and in a building in Elmira Heights. This subsidiary has a residential real estate market share of approximately ten percent. One of the Company's goals is to maintain as much price stability as possible in the transportion and sale of natural gas. We view this objective as part of an economic package to help attract and sustain business and industry. Additionally, we want to become less dependent upon cold weather to drive earnings and to find new means to increase shareholder value. We believe we have an excellent start in this direction with the diversity in products and services we now offer. Our near term agenda is to grow these new businesses and maximize synergies. This report would be incomplete if we did not continue a dialogue on the status of utility deregulation in New York State and on the economic viability of our service area. Deregulation is a slow, on-going process which can become more complicated and costly to implement than the purported benefits warrant. This subject along with a review of the area's economic growth are reported on in more depth further on in this annual report. While the stock market has experienced sporadic movements in the pas years, the Company's stock price has held steady in the low $20 range. In the past four quarters we have paid out a total of $1.30 per share which is a return of 6 1/2 percent at $20 per share. We continue to support our historic policy of paying a large portion of earnings to our shareholders on a consistent basis. In fact, our February 20, 1999 payment will be the 184th consecutive quarterly dividend. With earnings at $1.39 per share and the dividend payout at $1.30 we need to drive earnings to a higher level through improvements in the Gas Corporation profits as well as through our diversification efforts in order to sustain our goal of moderate increases in dividend payments. Our employees have put in a great deal of personal energy to make so many positive things happen this past year. We were also successful in mutally negotiating a four year contract with IBEW Local Union 139, which commenced September 1, 1998. We take this opportunity to thank our shareholders for their support and to express our gratitude to all our employees for their efforts and their dedication toward making this a stronger, larger, and more diverse organazation. Thomas K. Barry Chairman of the Board, President & CEO EX-13 5 ECONOMIC DEVELOPMENT - CORNING AND VICINITY In last year's report we described several major building developments of the area's largest employer, Corning Incorporated. A new 400,000 square foot opto-electronic components plant was completed early in 1998. This $40 million manufacturing facility now provides 625 new high tech manufacturing jobs and is located in Erwin, adjacent to the expanding Sullivan Science Research Center. This massive facility is still in the midst of a $125 million expansion which will double its size to 650,000 square feet. Corning Incorporated's world headquarters building located in downtown Corning is well on its way toward completion of a $20 milion expansion. Also, work progresses on the major $60 million renovation and addition to the exquisite Corning Glass Museum which is scheduled for a grand opening in April, 2000. This particular project is geared toward attracting 650,000 tourists annually to the Corning area. There are a number of other private and public brick and mortar projects in the works. The completion of the Route 17 bypass around Corning positioned the City to totally rehabilitate Denison Parkway, the old route 17 that ran through the center of the downtown area adjacent to Market Street. This main east-west traffic bearing road was in bad condition mainly due to the trucks that now utilize the bypass. This $4.3 million total rehabilitation has changed the appearance of the City. In addition to constructing a new street and curbs, sidewalk areas were widened, new street lights were installed, along with new trees, shrubs, grass and infrastructure improvements. There are five housing projects in Erwin and three more in the Town of Corning in various phases of development. One of these developments, Woods Edge Housing, will eventually consist of 245 new housing units which will include some apartments. Other projects completed during the year range from a new planetarium at Corning Community College to a new child care center in Erwin to a cancer treatment center in Corning. In the following year we can expect to see major expansions to the YMCA facility, the area's art facility - 171 Cedar Arts Center and to the Ceramics Corridor manufacturing incubator. We are also preparing to close down one of the city's primary bridges for a total rehabilitation. The Three Rivers Development Corporation, which is a non-profit organization dedicated toward the development of housing, commerce, industry and job creation and retention, gets directly and indirectly involved with many of the projects and commercial activities in the area. They have identified 100 projects completed since 1985 in the greater Corning area that amount to over $600 million. They have also quantified another $250 million in approximately 20 planned projects.Thus, while we are located in a relatively small community there is no doubt that it is an active and vibrant community that is healthy and growing. EX-13 6 Highlights - 12 Months Ended September 30 1998 1997 Operating Revenue 16,673,300 17,835,700 New Income $ 640,200 755,800 Earnings Per Common Share $ 1.39 1.64 Gas Deliveries (Mcf) 7,335,000 7,898,000 Degree Day 5,979 6,831 Total Customers 13,919 13,837 Construction Expense $ 971,000 999,700 Property, Plant and Equipment$25,178,457 22,911,900 Common Stock Data - Market Price (OTC) Dividend Quarter Ended High Low Paid December 31, 1996 $ 22 $ 21 1/2 .320 March 31, 1997 22 21 1/2 .320 June 30, 1997 21 1/4 20 .320 September 30, 1997 21 1/4 20 .320 December 31, 1997 21 20 .325 March 31, 1998 21 20 .325 June 30, 1998 20 20 .325 September 30, 1998 21 20 .325 EX-13 7 Industry Restructuring The natural gas industry has been undergoing continuous and dramatic change since the mid-1980's when large customers were given the option to purchase their requirements directly from marketers. Since that time the industry has transitioned to the point that today even residential customers have the option of choosing their gas supplier. However, acceptance of the new competitive environment by small customers, and by marketers to serve the small customers, has been slow to catch on. The electric industry has is also undergoing a transition to the competitive environment with many similar issues to be resolved. While the company is keeping abreast of the electric proceedings, efforts are directed towards the natural gas proceedings. On November 3, 1998 the New York State Public Service Commission (PSC) issued a Policy Statement indicating its view as to how to best ensure a competitive market for natural gas in New York State. The Statement's intended purpose was to facilitate development of a competitive market, eliminate barriers to competition, provide guidance to LDC's and marketers and address customer inertia. It concluded that the most effective way to establish a competitive market is for local distribution companies, such as Corning, to cease selling gas with the theory that separating the monopoly distribution function from the competitive merchant function would maximize competition and customer benefits. The statement did not set a specific date for cessation of sales activities. Rather, a transitional period of three to seven years was suggested as appropriate for individual LDC's to exit the merchant function. There are many issues such as capacity contracts, system reliability, rate design and provider of last resort to be resolved during this transition. The Policy Statement suggests that these issues will be best be resolved both at the individual LDC level and callaboratively with all stakeholders involved. Staff of the PSC plans to initiate a process to address these issues in the near future. As it has been throughout this process, this company will be active in the proceeding. By retaining the distribution function, but no longer selling gas, little will change regarding the operating functions of the company. The company will continue to own and maintain the distribution system, regulate the flow of gas, measure and meter gas, bill customers, be the provider of last resort and handle all emergency calls. Since the company has never made a profit on the actual sale of gas, the profit margin should also remain unchanged. Acceptance by customers in the company's service territory with regards to the option of supplier choice reflects that of customers around the state. Mailings were sent to each individual customer explaining the availability and procedures to be followed and the response was very limited. Presently there are only four marketers that have shown an interest in serving the small volume customers and they are currently serving approximately 125 customers, or less than one percent of the small customer base. Within New York State there are 95 marketers certified to serve small volume customers. These marketers are serving approximately 50,000 customers or less than nine percent of the total available customer base. Less than one percent of the residential customers are currently being served directly by marketers. The ability of the company to comply with the PSC timetable will rely directly upon the acceptance by the market and the marketers, and the initiatives directed by the PSC. As the Company's capacity contracts come up for renewal, starting in 2001, a careful analysis will need to be made with respect to future requirements. The contract requirements and the related company costs which are currently passed on to customers through the gas adj- ustment clause mechanism should decrease significantly, relieving the company of fixed financial obligations as the captive customber base is declining. Industry restructuring has forced managment to take a critical look at traditional revenue sources and make certain strategic planning decisions if the company is to move forward. As was mentioned in the letter to shareholders, the decision was made to look for non-traditional revenue sources to mitigate the uncertainty of the current natural gas market. The natural gas business will continue to be the company's core business and rate stability for our customers will continue to be the highest priority. However, it is very apparent that if the company is to grow, it must diversify its earnings base. That process has begun and will continue into the future. In the end, management is confident that the company will be successful in the new deregulated environment. MANAGMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Earnings Consolidated net income amounted to $640,000 or $1.39 per share in 1998 compared to $756,000 or $1.64 per share in 1997. The primary reason for the decline was the extremely mild winter. Other significant items affecting the Company's operating results are discussed below. Operating Revenue Operating revenue of $16,673,000 declined seven percent in 1998 due primarily to a reduction in gas delivered as a result of mild weather. Total gas delivered to customers amounted to 7,334,858 Mcf in 1998 compared to 7,897,614 Mcf in 1997. However, the Company's weather normalization billing mechanism (discussed briefly in not 1 to the financial statements) retores some of the margin lost in times of warm weather. Accordingly, the Company billed $226,000 more than the previous year through this mechanism. The Company also experienced a decline in capacity assignment revenue in 1998. This revenue is obtained from marketing the Company's unused pipeline capacity and a regulatory incentive that allows the Company to retain fifteen percent of such revenue. Capacity assignment revenue of $160,000 in 1998 was down from $242,000 the previous year, a reduction of $82,000 that was expected due to a mild winter and an increasingly competitive market. Operating Expense Purchased gas expense of $9,409,000 in 1998 decreased 10% due to decreased deliveries noted above. The decline was further driven by a benefit from the Company's lost and unaccounted for gas incentive mechanism. The Company realized a benefit of $276,000 in 1998, up substantially from the $120,000 benefit the preceding year. Other operating and maintenance expense remained stable at $3,557,000, an increase of less than one percent from the previous year. Taxes other than federal income taxes decreased slightly due to lower gross receipts taxes as the result of decreased revenue. The Company is subject to the New York public utilities gross receipts tax which is levied on all revenues. Utility depreciation expense increased five percent to $574,000 due to increased investment in plant. Interest expense increased eight percent in 1998 as the result of higher outstanding debt levels. Unregulated Operations The Appliance Corporation subsidiary earnings increased twelve percent to $249,000 in 1998. The increase results primarily from three newly acquired businesses. In April 1998 the Company's appliance subsidiary completed the purchase of three local existing businesses. A shopping plaza in South Corning was purchased which has multi-year leases with eight businesses housed in 52,000 square feet of rentable space with a major grocery store as the anchor. Also purchased was a real estate management and brokerage organ- azation and a tax and financial services company. The shopping plaza was purchased for $1,175,000 and finaced primarily through a $940,000 ten year note secured by a mortgage on the shopping center real estate. The real estate and financial service companies were purchased for $349,000, funded through a $180,000 eight year, 6.5 percent interest loan agreement with the sellers and the balance through operating funds. The real estate firm is a franchise of The Prudential Marketplace Realty and has twenty three agents operating out of offices in both the Corning and Elmira, New York market. The financial services business, Tax Center International, provides tax preparation, accounting and payroll services and currently serves approx- imately seven hundred clients . These purchases are part of the Company's plan to aggresively explore new opportunities in non-traditional areas. Liquidity and Capital Resources The Company financed its 1998 capital additions for regulated operations of $1,105,000 through internally generated funds and short-term borrowing. Capital additions for the Company's unregulated operations consisted primarily of the three acquisitions discussed above. The Company has $7,500,000 available through lines of credit at local banks, the terms of which are discussed in note 6 to the financial statements. It is expected that the Company's current capital resources will be sufficient for 1999 planned operations. Regulatory Matters In 1998 the New York Public Service Commission issued an order concerning the future of the natural gas industry. A detailed discussion appears on page 10 of this report. Year 2000 The year 2000 issue (Y2K") refers to the inability of certain computerized systems and technologies to recognize and/or correctly process dates beyond December 31, 1999. Corning Natural Gas Corporation has identified those areas within the Company where the potential exists for computer system failure or miscalculations by computer programs could cause a disruption in the Company's operations or services. A Y2K Coordinator was assigned to develop and implement a Y2K plan. The Company has developed and put into place solutions for the following areas: 1) Computer Hardware and Software The AS/400 Main Frame Computer Operating System and all software modules including Customer Information Systems, Meter Reading, Billing for the Gas and Appliance Company, Service Orders, Accounting and Financial Statements, Inventory and Purchase Orders and Accounts Payable are now Y2K compliant through upgrades received from our software provider and IBM. All personal computers identified as being non compliant have been replaced. The review of software contained on these computers is currently being conducted and the Company anticipates no problems with compliance in this area. 2. Telemetering System The telemetering system is Y2K compliant and we anticipate no interruption in the flow of gas to our customers due to our computer system. 3. Phone System The internal telephone system for the Company is now Y2K compliant. 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 customers' calls and creating orders. Costs of Compliance Because the Company is still in the process of identifying and replacing non compliant systems or problems, it is not possible at this time to quantify the total cost incurred with the Y2K program. However, the company expects that it will not be significant. Risks of the Company's Y2K Issues Since the Company has not completed all testing on some of the IT and non-IT systems that may not be Y2K compliant, failure of these systems could have a material impact on the Company's systems. While the Company's Y2K program is designed to identify and remedy these systems in order to avoid interruption of its operations, there can be no assurance that it will be able to identify all non compliant systems or successfully remedy all those identified. 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 will contact 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 complaint, 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 intends to consider contingency plans to address those risks, although no such plans have been identified, there can be no assurance that any such plan would resolve such problems in a satisfactory manner. This could result in lost revenues or the risk of actions against the Company if the businesses of others are disrupted. Cautionary Statement Regarding Forward Looking Statements This report contains statements which, to the extent they are not recitations of historical fact, constiture "forward-looking statements" within the meaning 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 in the Reform Act. A number of important factors affecting the Company's business and finacial results could cause actual results to differ materially from those stated in the forward- looking statements. Accounting Pronouncements In 1999 the Company will be required to adopt the provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general purpose finacial statements. Management expects that the significant component of comprehensive income to be the net unrealized gain/loss on marketable securities available for sale. Management expects that other pronouncements to be adopted in 1999 will have an immaterial impact on the financial statements. EX-10 8 UNION CONTRACT SCHEDULE OF WAGES The following schedule applies to employees hired after 09/01/85. These rates apply only to the following nine job classifications. DESCRIPTION RATE PER HOUR 08/31/98 08/30/99 09/04/00 09/01/01 Line Maintenance Division 1. Line Maintenance Laborer $ 13.77 $ 14.25 $ 14.75 $ 15.26 2. Line Maintenance Helper 14.37 14.87 15.39 15.93 Engineering Division 1. Pipeline Inspector Helper 14.37 14.87 15.39 15.93 Customer Service Division 1. Installer Helper 14.54 15.05 15.58 16.13 Administrative Division 1. Meter Reader - Class A 14.37 14.87 15.39 15.93 2. Meter Reader - Class B 13.43 13.90 14.39 14.89 3. General Laborer - Class A 10.08 10.43 10.80 11.18 4. General Laborer - Class B 9.29 9.62 9.96 10.31 Probationary Division 1. Probationary Employee 8.28 8.57 8.87 9.18 The foregoing schedule of wages as referred to in Section 14 of the Memorandum of the Agreement between the Union and the Company is hereby accepted by the Union and the Company this 28th day of August, 1998. CORNING NATURAL GAS INTERNATIONAL BROTHER-IBEW LOCAL 139 CORPORATION HOOD OF ELECTRICAL WORKERS, AFL-CIO by by by Thomas K. Barry, Charles B. Patton Stephen L. Miles President Business Manager President Date: Date: Date: Page 1 of 2 CORNING NATURAL GAS CORPORATION - LOCAL UNION 139 AGREEMENT DATED SEPTEMBER 1, 1998 TABLE OF CONTENTS Item Page Article Accident Prevention........................... 29 13.7, 13.8 Benefits....................................... 33 16 (All) Bumping Procedure................................... 19 8.5A Call Out (Pay).............................. 9, 12 4.10, 6.3 Compensation....................... 13, 21, 22 7.1, 8.11, 8.14 Definitions..... .................................. 6 4 (All) Effective Date-Wage Increase......................... 27 12.2 Funeral Leave........................................ 17 7.9 Grievance........................................ 30 15 (All) Holidays......................................... 26 11 (All) Inclement Weather Conditions............................ 10 5.6 Jury Duty.............................................. 14 7.4 Lay Offs................................ 19, 20 8.5, 8.5A, 8.6 Leave of Absence....................................... 17 7.8 Meal Allowance......................................... 22 9.1 Membership Entrance Date................................ 4 2.3 Overtime Compensation.............................. 11 6 (All) Personal Leave/Day...... ............................. 13 7.10 Premium Pay Rate....................................... 10 5.3 Probationary Employee................................... 6 4.2 Raingear.............................................. 29 13.6 Safety Shoes...........................................29 13.5 Page 2 of 2 Seniority................................ 19, 20, 21 8.1,8.2,8.3, 8.4,8.7,8.8, 8.9,8.12 Sick Leave Allowance..................................... 14 7.6 Termination Due to Physical Condition................... 19 8.10 Upgrade................................................. 22 8.14 EX-13 9 CORNING NATURAL GAS CORPORATION AND SUBSIDIARIES Financial Statements Year Ended September 30, 1998 and 1997 (With Independent Auditors Report Thereon) CORNING NATURAL GAS CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets September 30, 1998 and 1997 Assets 1998 1997 Property, plant and equipment, at original cost: Utility 21,396,130 20,378,449 Non-utility-principally rented gas appliances and property 3,782,327 2,533,498 ----------- ---------- 25,178,457 22,911,947 Less accumulated depreciation (9,079,776) (8,478,446) ----------- ----------- 16,098,681 14,433,501 Current assets: Cash 284,426 262,752 Marketable securities available for sale, at fair value(cost of $725,295 and $574,842 in 1998 and 1997) 785,361 641,899 Accounts receivable, less allowance for uncollectible accounts of $97,000 in 1998 and 1997 1,038,524 995,215 Gas stored underground, at average cost 1,539,727 1,347,682 Gas and appliance inventories, at lower of average cost or market 581,765 641,716 Prepaid income taxes 55,534 465,786 Deferred income tax assets 57,000 62,000 Prepaid expenses 511,638 580,896 -------- -------- 4,853,975 4,997,946 Deferred charges: Pension and other 1,509,695 1,234,960 Deferred debitd-accounting for income taxes 1,016,661 1,016,661 Unrecovered gas costs 191,819 32,933 Long-term debt issuance costs, net of amortization 392,875 374,564 --------- ---------- 3,111,050 2,659,118 Goodwill, net of amortization 348,235 ---- Other assets 412,817 405,131 --------- ---------- $ 24,824,758 22,495,696 =========== ========== See accompanying notes to consolidated financial statements. CORNING NATURAL GAS CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets, Continued September 30, 1998 and 1997 Capitalization and Liabilities 1998 1997 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 Net unrealized gain on securities available for sale (net of income taxes of $20,422 in 1998 and $22,799 in 1997) 39,644 44,258 Retained earnings 2,403,489 2,211,833 ---------- --------- 5,396,479 5,209,437 Long-term debt, less current installments 10,459,351 9,400,000 Total capitalization 15,855,830 14,609,437 ---------- ---------- Current liabilities: Notes payable 2,325,000 775,000 Accounts payable 1,266,918 1,680,840 Dividends payable ---- 149,500 Current installments of long-term 36,830 ----- Customers' deposits and accrued interest 728,645 673,114 Accrued general taxes 145,170 112,367 Supplier refunds due customers 70,731 380,994 Accrued expenses 502,755 489,316 Other 29,035 20,826 -------- ------- Total current liabilities 5,105,084 4,281,957 --------- --------- Deferred credits: Deferred income tax liabilities 2,353,665 2,444,966 Deferred compensation, postretirement benefits, and other 1,510,179 1,159,336 --------- --------- 3,863,844 3,604,302 --------- --------- $ 24,824,758 22,495,696 ============ ========== Commitments (note 12) See accompanying notes to consolidated financial statements. CORNING NATURAL GAS CORPORATION AND SUBSIDIARIES Consolidated Statements of Income and Retained Earnings For the Years Ended September 30, 1998 and 1997 Utility Operations 1998 1997 Operating revenue: Residential, commercial and industrial $ 13,311,539 13,824,008 Transportation 3,201,884 3,769,390 Capacity assignment 159,872 242,289 ---------- ---------- Total operating revenue 16,673,295 17,835,687 Operating expenses and taxes: Natural gas purchased 9,409,388 10,448,308 Operating and maintenance 3,557,025 3,529,373 Taxes other than federal income taxes 1,650,950 1,668,049 Depreciation 574,372 548,614 Federal income taxes 162,792 245,887 --------- ----------- Total operating expenses and taxes 15,354,527 16,440,231 Income from utility operations 1,318,768 1,395,456 Unregulated Operations Service and merchandising 1,540,959 1,509,250 Appliance rental 743,865 736,762 Professional services and real estate 341,375 ---- Interest income 38,263 21,307 ---------- ---------- Total unregulated revenue 2,664,462 2,267,319 --------- --------- Unregulated expenses 2,415,797 2,045,463 --------- --------- Income from unregulated operations 248,665 221,856 Other income (including net realized gains on marketable securities of $31,592 in 1998 and $20,997 in 1997) 31,885 22,977 Income before interest expense 1,599,318 1,640,289 Interest expense 959,161 884,538 --------- ---------- Net income 640,157 755,751 Retained earnings, beginning of period 2,211,833 2,194,382 Less dividends 448,501 738,300 -------- --------- Retained earnings, end of period $ 2,403,489 2,211,833 ========== ========= Weighted average number of shares outstanding - basic and diluted 460,000 460,000 Basic and diluted earnings per common share 1.39 1.64 See accompanying notes to consolidated financial statements. CORNING NATURAL GAS CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended September 30, 1998 and 1997 1998 1997 Cash flows from operating activities: Net income $ 640,157 755,751 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 837,151 788,368 Gain on sale of marketable securities (31,592) (20,997) Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (43,309) (205,538) Gas stored underground (192,045) (583) Gas and appliance inventories 59,951 11,314 Prepaid expenses 69,258 (148,733) Unrecovered gas costs (158,886) (265,702) Prepaid income taxes 410,252 (131,301) Deferred charges-pension and other (274,735) (650,151) Other assets and long-term debt issuance costs (25,997) (146,792) Increase (decrease) in: Accounts payable (413,922) 534,650 Accrued general taxes 32,803 (29,231) Supplier refunds due customers (310,263) (151,015) Deferred income taxes (86,301) 129,753 Other liabilities and deferred credits 430,399 704,738 -------- -------- Net cash provided by operating activities 942,921 1,174,531 ------- --------- Cash flows from investing activities: Proceeds from sale of marketable securities 182,284 619,798 Purchases of marketable securities (301,145) (1,173,643) Acquisitions of businesses net of cash acquired (1,879,531) ---- Capital expenditures, net of minor disposals (971,035) (999,729) --------- --------- Net cash used in investing activities (2,969,427)(1,553,574) Cash flows from financing activities: Net borrowings (repayments) under line-of-credit agreements 1,550,000 (1,950,000) Dividends paid (598,001) (588,800) Borrowings under long-term debt agreements 1,096,181 4,700,000 Repayment of long-term debt ---- (1,700,000) ---------- ----------- Net cash provided by financing activities 2,048,180 461,200 ---------- ---------- Net increase in cash 21,674 82,157 Cash at beginning of period 262,752 180,595 ---------- -------- Cash at end of period $ 284,426 262,752 ========= ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 933,000 883,000 Income taxes 368,000 732,000 See accompanying notes to consolidated financial statements. CORNING NATURAL GAS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended September 30, 1998 and 1997 (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 subsidiaries, the Corning Natural Gas Appliance Corporation. In April 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 Assoc, LLC (collectively referred to as "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. (b)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. (c)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 2.7% in 1998 and 1997. 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 at rates ranging from 10% to 20% per year. (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. 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. Real estate commissions are recognized at closing while professional services revenues are recognized as services are performed. 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. (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, 1998 and 1997. 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 separate component of 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, 1998 and 1997 is as follows: Net Market Cost Unrealized Unrealized Unrealized Value Basis Gains Losses Gains 1998 $ 785,361 725,295 87,718 (27,652) 60,066 1997 641,899 574,842 71,876 (4,819) 67,057 (f)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. (g)Dividends Dividends are accrued when declared by the Board of Directors. Dividends declared were $448,501 or $0.98 per share in 1998, and $738,300 or $1.61 per share in 1997. Dividends paid were $598,001 and $1.30 per share in 1998, and $588,800 and $1.28 per share in 1997. (h)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 discounted future cash flows or appraised values, depending on the nature of the asset. (i)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. (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, (the Plaza) was purchased for $1,175,000 and financed primarily through a $940,000 ten year note secured by the real property. Located in South Corning, New York, the 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 $349,000, funded through a $180,000 eight year loan agreement with the sellers and the balance through operating funds. 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. Total goodwill related to these transactions was $355,531. Results of operations for the acquired entities have been included in the accompanying financial statements beginning in April 1998. Working capital acquired in connection with these purchases was immaterial. 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, 1998 1997 (unaudited) Total revenues $ 20,024,000 21,421,000 Net earnings 767,000 843,000 Basic earnings per common share 1.67 1.92 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 Selected financial information for the Company's identifiable operating segments follows: Identifiable Assets 1998 1997 Regulated operations $ 21,348,267 20,180,675 Unregulated operations 3,476,491 2,315,021 ------------ ----------- $ 24,824,758 22,495,696 ============ ========== Capital Expenditures 1998 1997 Regulated operations $ 756,953 762,254 Unregulated operations 214,082 237,475 ----------- --------- $ 971,035 999,729 =========== ======== Depreciation and Amortization 1998 1997 Regulated operations $ 574,372 548,614 Unregulated operations 262,779 239,754 ---------- -------- $ 837,151 788,368 ========== ======== 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 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\rquote 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, 1998 and 1997: 1998 1997 Deferred pension and other $ 1,509,695 1,234,960 Deferred debits-accounting for income 1,016,661 1,016,661 taxes Unrecovered gas costs 191,819 32,933 --------- ---------- Total-regulatory assets $ 2,718,175 2,284,554 ========== ========== Deferred pension and other Approximately $1,294,000 and $1,086,000 of these balances represent pension costs in excess of the amounts currently recoverable through rates at September 30, 1998 and 1997, respectively. The PSC requires such excess costs to be deferred. Remaining balances represent miscellaneous regulatory assets. Deferred debits-accounting These amounts represent the expected for income taxes 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, 1998 and 1997 follows: 1998 1997 Unsecured senior note - 7.9% due serially as described below $ 4,700,000 4,700,000 First mortgage bonds - 8 1/4% series all due 2018 3,100,000 3,100,000 Unsecured senior note - 9.83% due serially as described below 1,600,000 1,600,000 Mortgage note - 8.02% monthly installments through April 2008 932,245 --- Unsecured promissory note - 6.5% monthly installments through April 2006 163,936 --- Total long-term debt 10,496,181 9,400,000 Less current installments 36,830 --- ---------- --------- Long-term debt less current installments $ 10,459,351 9,400,000 The Company will redeem long-term debt as follows: 7.9% Senior Note - $355,000 annually from 2006 through 2016 with $795,000 due 2017. The 8 1/4% first mortgage bond is secured by substantially all utility plant. 9.83% Senior Note - $100,000 annually from 2007 through 2015 with $700,000 due 2016. The aggregate maturities of long-term debt for each of the five years subsequent to September 30, 1998 are as follows: 1999 $ 36,830 2000 40,000 2001 43,000 2002 46,000 2003 49,000 (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 $2,325,000 at September 30, 1998 and $775,000 at September 30, 1997. The maximum amount outstanding during the year ended September 30, 1998 and 1997 was $2,325,000 and $3,445,000, 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, 1998) to the prime rate less 3/4%. The weighted average interest rates on outstanding borrowings during fiscal 1998 and 1997 were 7.80% and 7.88%, respectively. (7)Federal Income Taxes Federal income tax expense (benefit) recorded in the accompanying consolidated statements of income and retained earnings is as follows: 1998 1997 Utility Operations: Current $ 249,093 122,335 Deferred (92,439) 133,681 Investment Tax Credits 6,138 (10,129 --------- --------- 162,792 245,887 Unregulated Operations: Current 175,484 122,665 Deferred ---- (3,928) ------- -------- 175,484 118,737 ------- --------- Total federal income tax expense $ 338,276 364,624 ======== ======== 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: 1998 1997 Expected tax expense $ 332,667 380,928 Investment tax credits 6,138 (10,129) Other, net (529) (6,175) --------- -------- $ 338,276 364,624 ========== ======== 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, 1998 and 1997 are as follows: 1998 1997 Deferred income tax assets: Unbilled revenue $ 24,000 27,000 Deferred compensation reserve 229,000 188,000 Postretirement benefit obligations 151,000 102,000 Allowance for uncollectible accounts 33,000 33,000 Inventories 46,000 49,000 Other 15,000 43,000 --------- -------- Total deferred income tax assets $ 498,000 442,000 ========= ======== Deferred income tax liabilities: Property, plant and equipment, principally due to differences in depreciation $ 2,139,000 2,110,000 Pension benefit obligations 427,000 358,000 Deficiency of GAC revenue billed 61,000 90,000 Other 167,665 266,966 ---------- --------- Total deferred income tax liabilities 2,794,665 2,824,966 ----------- --------- Net deferred income tax liability $ 2,296,665 2,382,966 =========== ========== There was no change in the valuation allowance for deferred income tax assets during the year ended September 30, 1998 or 1997. (8)Deferred Compensation and Pension Plans\par 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 $785,361 and $641,899 at September 30, 1998 and 1997, respectively, and the plan liability, which is included in deferred compensation postretirement benefits and other credits on the balance sheet, was $675,000 and $554,000 at September 30, 1998 and 1997, respectively. The assets of the trust are available to general creditors in the event of insolvency. 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. The following table sets forth the plan\rquote s funded status and amounts recognized on the Company's balance sheet at September 30, 1998 and 1997: 1998 1997 Actuarial present value of accumulated benefit obligation (including vested benefits of $6,689,000 in 1998 and $5,707,000 in 1997 $ 6,824,000 5,818,000 ============= ========== Plan assets at fair value, primarily listed stocks and bonds $ 9,658,000 9,102,000 Projected benefit obligation 8,445,000 7,159,000 Excess of plan assets over projected benefit obligation 1,213,000 1,943,000 Unrecognized net gain being recognized over 10 years in accordance with PSC policy (864,000) (1,946,000) Unrecognized prior service cost 817,000 810,000 Unrecognized net transition amount 8,000 8,000 ------------ ---------- Prepaid pension cost included in deferred charges - pension and other on the balance sheet $ 1,174,000 815,000 =============== =========== Effective October 1, 1998 and 1997, the Plan was amended to provide an increase of 3% and 3.5%, respectively, in pension payments to all retirees. The components of net periodic pension expense (benefit) for the years ended September 30, 1998 and 1997 are as follows: 1998 1997 Service cost of benefit earned during the period $ 229,000 218,000 Interest on projected benefit obligation 512,000 467,000 Actual return on plan assets (765,000) (1,824,000) Net amortization and deferrals (120,000) 1,162,000 ----------- ---------- Net periodic pension expense (benefit) $ (144,000) 23,000 ========== ========== 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, 1998 and 1997. 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 $135,000 and $286,000 as of September 30, 1998 and 1997, respectively. The assumptions used to determine net periodic pension expense (benefit) prepaid pension cost were as follows: 1998 1997 Weighted average discount rate 6.50% 7.25% Rate of compensation increase 5.0 % 5.0% Weighted average return on plan assets 8.0 % 8.0% (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: Deliveries Revenue Mcf % of Total Amount % of Total Corning, Inc. Year ended September 30, 1998 1,933,000 26 $788,000 5 Year ended September 30, 1997 2,049,000 26 842,000 5 NYSEG Year ended September 30, 1998 1,985,000 27 $270,000 2 Year ended September 30, 1997 2,135,000 27 266,000 1 BEGWS Year ended September 30, 1998 731,000 10 $1,640,000 10 Year ended September 30, 1997 809,000 10 2,050,000 11 (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 at September 30, 1998 and 1997. Actuarial present value of accumulated postretirement benefit obligation: 1998 1997 Current retirees $ (699,000) (541,000) Future retirees (364,000) (401,000) ---------- --------- (1,063,000) (942,000) Unrecognized transition obligation at January 1, 1993 being recognized over 20 years 859,000 916,000 Unrecognized net gain being recognized over 10 years in accordance with PSC policy (179,000) (315,000) ------------- ----------- Accrued postretirement benefit cost recognized on the balance sheet, included in deferred credits $ (383,000) (341,000) ============ ============ The PSC has allowed the Company to recover incremental cost through rates on a current basis. Due to the timing differences between the Company's rate case filings and financial reporting period, a $126,000 regulatory liability and a $26,000 regulatory asset have been recognized at September 30, 1998 and 1997, respectively. Net periodic postretirement benefit cost for the years ended September 30, 1998 and 1997 includes the following components: 1998 1997 Service costs $ 16,000 13,000 Interest cost 66,000 65,000 Net amortization and deferrals 25,000 22,000 ----------- --------- Net periodic postretirement benefit cost $ 107,000 100,000 ============ ========= 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 2.7% increase in the service and interest cost components of the annual net periodic postretirement benefit cost and a 3.2% 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 6.50%. (11)Rentals Under Operating Leases The Company 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, 1998: 1999 $ 261,000 2000 241,000 2001 239,000 2002 206,000 2003 74,000 -------- Total minimum future rentals $1,021,000 All leases contain renewal options at the end of their respective lease terms. (12)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 1998 and 1997 amounted to $3,735,000 and $3,363,000, 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. (13)Subsequent Event - Acquisition Effective December 3, 1998, the Corning Natural Gas Appliance Corporation completed the acquisition of a company for $1,525,000 as part of its ongoing diversification efforts. The acquisition was accounted for by the purchase method. INDEPENDENT AUDITOR'S 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 Subsidiaries (the Company) as of September 30, 1998 and 1997, and the related 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 overall financial statement presentation We believe that our audits provide a reasonable basis for our opinion. In our opinionm, the consolidated financial statements referred to abover present fairly, in all material respects, the financial position of Corning Natural Gas Corportation and Subsidiaries at September 30, 1998 and 1997, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP November 6, 1998 except as to note 13, which is as of December 3, 1998. -----END PRIVACY-ENHANCED MESSAGE-----