Overview
New York and Pennsylvania government authorities, in response to the COVID-19
pandemic, imposed restrictions on social activities, closed schools and placed
operating restrictions on commercial operations in our franchise areas beginning
in March of 2020. Many
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pandemic related restrictions have been lifted and businesses have re-opened.
The Company is now focused on completing work on inspecting and remediating
interior property/customer services that were restricted during the pandemic,
most of which require work done on customer premises. Our customer service
specialists are working with customers to bring them current on their utility
bills. We are assisting pandemic affected customers to access government funding
designed to help customers pay current and past due utility bills. The Company
has limited service termination options in New York and in Pennsylvania. The
Company is still recovering from the impact of lost revenues, mostly from
commercial customers, due to the pandemic.
On May 19, 2021, the NYPSC issued a rate order (Case 20-G-0101) establishing
rates and a rate plan for the Gas Company for a one year period ending January
31, 2022, denying the Gas Company's request for a rate increase of approximately
$6.2 million and instead ordered a base rate decrease of $766,000, offset by the
termination of an existing tax sur-credit customer refund of approximately $1.3
million, resulting in an overall rate increase of approximately $500,000. The
order was lower than the rate increase recommended by the NYPSC staff. The NYPSC
cited pandemic austerity issues in support of its order. The Gas Company is
appealing this order under Article 78 of the Civil Practice Law and Rules asking
the New York Supreme Court to set aside the order and to remand the case to the
NYPSC for further proceedings. In addition, on July 16, 2021, the Gas Company
filed a three year rate plan with the NYPSC seeking levelized rate increases of
approximately $3,761,000 per year. The results in Case 20-G-0101 adversely
impacted the Company's earnings for fiscal 2021.
In June and July of 2021, the PAPUC issued rate orders approving Pike gas rate
increases of $225,000 and electric rate increases of $1.4 million, beginning on
July 28, 2021. These rate increases occurred late in the Company's fiscal year
and did not materially impact our financial results for fiscal 2021.
We believe our key performance indicators are net income, stockholders' equity
and the safety and reliability of our systems. Net income decreased by
$1,676,455 for FY 2021 compared to FY 2020. Because the Holding Company's
principal operations are conducted through Corning Gas and Pike, both regulated
utility companies, stockholders' equity is an important performance indicator.
The NYPSC and PAPUC allow the Company the opportunity to earn a just and
reasonable return on stockholders' equity as determined under applicable
regulations. Stockholders' equity is, therefore, a precursor of future earnings
potential. As of September 30, 2021, compared to September 30, 2020,
stockholders' equity decreased slightly from $35,933,515 to $35,472,550. We plan
to continue our focus on building stockholders' equity. Safety and efficiency
indicators include leak repair, main and service replacements and customer
service metrics.
For FY 2021, our net income decreased due to transaction costs associated with
the pending Argo merger, higher depreciation expense, increased interest
expense, increased operating costs, and non-recurring income items recognized in
FY 2020, partially offset by the forgiveness of our Paycheck Protection Program
loans in the third quarter of FY 2021. We continue to focus on improving the
efficiency of our operations and making capital investments to improve our
infrastructure. Corning Gas's infrastructure improvement program concentrates on
the replacement of older distribution mains and customer service lines. In FY
2021 the Gas Company repaired 110 leaks, replaced 9.0 miles of bare steel main
and replaced 176 bare steel services. In FY 2020 the Gas Company repaired 184
leaks, replaced 8.6 miles of bare steel main and replaced 229 bare steel
services. Pike replaced approximately 82 utility poles in FY 2021, 150 utility
poles in FY 2020, and did extensive tree trimming to maintain our electric
infrastructure. On January 18, 2019 Pike filed a Long-Term Infrastructure
Improvement Plan ("LTIIP") to accelerate replacement of cast iron, wrought iron
and bare steel pipe over 11 years. The PAPUC approved the LTIIP plan on June 13,
2019.
Key financial performance indicators:
Year Ended September 30,
2021 2020
Net income $ 1,524,903 $ 3,201,358
Stockholders' equity $ 35,472,550 $ 35,933,515Stockholders' equity per outstanding share $ 11.50 $ 11.70
Gas Revenue and Margin
Gas retail operating revenues increased $1,317,197, during FY 2021 compared to
FY 2020. Gas costs increased $0.25 per one thousand cubic feet (Mcf) year over
year. The higher gas costs increased revenues by $464,385. Firm sales increased
by 299,998.6 Mcf which resulted in higher gas cost revenues of $929,681,
However, this increase was offset by a Corning Gas rate decrease net of the pass
back to customers for the federal income tax benefit related to the 2017 Tax Act
amounting to a net decrease of $76,869. Purchased gas costs are subject to a
NYPSC approved reconciliation that permits recovery of all prudently incurred
costs. Therefore, the higher gas cost revenues does not impact net income.
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Other gas revenues increased $159,009 during FY 2021 compared to FY 2020. The
components of this increase are detailed in the tables below:
Retail gas revenue: September 30, 2021 September 30, 2020
Residential $ 16,230,268 $ 15,814,929
Commercial 2,832,210 2,420,930
Transportation 4,770,464 4,407,991
Wholesale 1,859,538 1,731,433
Total retail gas revenue 25,692,480 24,375,283
Other gas revenue:
Local production 509,933 694,237
Customer discounts forfeited 35 40,288
Reconnect fees 514 1,374
Surcharges (829 ) 3,480
All other 659,291 270,556
Total other gas revenue 1,168,944 1,009,935
Total gas operating revenue $ 26,861,424 $ 25,385,218
The following tables further summarize all other income in the other gas revenue
table above:
September 30, 2021 September 30, 2020
Other gas & electric revenues:
2017 Tax Act FIT reconciliation $ 868,544 $ 492,641
RDM amortizations net 316,212 (278,600 )
Contract customer reconciliation (59,532 ) (80,928 )
Regulatory liability reserve (512,839 ) -
Local production revenues 36,043 61,305
Capacity release revenues 35,246 41,187
Customer performance incentive - 32,000
Delivery rate adjustment carrying costs 5,367 6,038
All Other (29,750 ) (3,087 )
$ 659,291 $ 270,556
Gas purchases are our largest expenses. Purchased gas expense increased
$1,158,756 for FY 2021 compared to FY 2020. The increase in costs is due
primarily to higher gas costs of $338,655 and increased fuel deferral of
$792,104, offset by a decrease in prior period customer pass back of $22,003.
We anticipate that the cost of natural gas is likely to increase in the near
term due to the post pandemic demand for energy and current economic conditions.
Increases in the cost of gas should be tempered by our access to low cost local
production gas.
Gas Margin (the excess of utility gas revenues over the cost of natural gas
purchased) for FY 2021 was up $317,450 or approximately 1.60%. Gas margin
percentage decreased 3.12% for FY 2021 compared to FY 2020. Gas revenues
increased 5.82% and purchased gas expense increased 21.06%. The gas margin
percentages were negatively impacted by the higher gas costs of $1,158,756.
Gas Margin: September 30, 2021 September 30, 2020
Utility Gas Revenues $ 26,861,424 $ 25,385,218
Natural Gas Purchased 6,659,993 5,501,237
Gas Margin $ 20,201,431 $ 19,883,981
Gas Margin Percentage 75.21 % 78.33 %
Electric Revenue and Margin
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Utility electric retail operating revenues increased $1,307,351 during FY 2021
compared to FY 2020. This increase was mainly attributable to increased
purchased power costs of $954,392 and increased customer usage of $352,959. The
purchased electricity costs increased by $0.015 per Kilowatt hour when compared
to FY 2020. Purchased electricity costs are subject to a PAPUC approved
reconciliation that permits recovery of all prudently incurred costs.
Accordingly, higher purchased electricity costs does not impact net income.
Other electric revenues increased $66,103 during FY 2021 compared to FY 2020.
The components of this increase are detailed in the tables below:
Retail electric revenue: September 30, 2021 September 30, 2020
Residential 4,136,041 3,449,851
Commercial 3,900,393 3,288,582
Street lights 132,405 123,055
Total retail electric revenue 8,168,839 6,861,488
Other electric revenue:
Customer discounts forfeited 35,942 2,658
Third party billings - 176,645
All other 169,340 (40,124 )
Total other electric revenues 205,282 139,179
Total electric operating revenues $ 8,374,121 $ 7,000,667
Electricity costs increased by $1,047,718 for FY 2021 compared to FY 2020. The
increase in costs for FY 2021 is due primarily to an increase in the price of
purchased electricity of $998,256 and increased fuel deferral of $49,493.
The cost of electricity is likely to increase in the near term as electricity
prices generally follow the prices of natural gas.
Electric Margin (the excess of electric revenues over the cost) was up $325,736
for FY 2021 compared to FY 2020. Electric margin percentage decreased 8.74% for
FY 2021 compared to FY 2020. The electric margin was negatively impacted by the
higher purchased power costs of $1,047,718.
September 30, 2021 September 30, 2020
Utility Electric Revenues $ 8,374,121 $ 7,000,667
Electricity Purchased 2,657,032 1,609,314
Margin $ 5,717,089 $ 5,391,353
68.27 % 77.01 %
Operating and Interest Expenses
Operating and maintenance expense for FY 2021 increased by $2,861,412 compared
to FY 2020. The increase in expenses was due primarily to merger related costs
of $667,585 additional expenses associated with 100% ownership of
Leatherstocking Gas Company of $420,284, leak repair reserve write down of
$174,773, liability reserve of $490,052, insurance costs of $244,663, wages of
$200,000, outside services of $370,598 and all other costs, including pandemic
related costs, in the amount of $293,457.
Taxes other than income taxes increased $51,698 for FY 2021 compared to FY 2020.
The increase results from a property tax increase of $25,222 and gross receipts
tax increase of $37,680 net of decrease in payroll taxes of $11,204.
Depreciation expense for FY 2021 compared to FY 2020 increased by $717,384
primarily due to reduced depreciable lives of certain Pike assets from 11 years
to 5 years, increased depreciable utility plant placed in service, as well as a
full year's depreciation expense for the Leatherstocking Companies.
Interest expense for FY 2021 compared to FY 2020 increased by $866,315 mainly
due to additional interest costs associated with higher levels of outstanding
debt attributed to capital expenditures, the Leatherstocking acquisition, write
down of fixed interest regulatory asset
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in the amount of $231,000 and additional dividends associated with outstanding
Preferred Series A and C shares which are recorded as interest expense.
Effective Tax Rate
Our effective income tax rate was 23.3% for FY 2021 and 23.1% for FY 2020. The
increase in the effective tax rate was impacted by higher non deductible
dividends on preferred stock that are reflected as interest expense on our
income statement, offset by the tax free forgiveness of our PPP loans. See Note
11 "Income Taxes" in the notes to the consolidated financial statements.
Paycheck Protection Program Loans
On various dates in the second and third quarters of FY 2021, the Company's
Paycheck Protection Program Loans ("PPP loans") were forgiven by the United
States Small Business Administration in the following amounts:
Gas Company $ 970,900
Pike $ 137,200
Leatherstocking Gas $ 64,691
The Company recorded these debt forgiveness amounts as other income in the
quarters in which the loans were forgiven. In response to a NYPSC order to show
cause as to why the Gas Company loan forgiveness amount should not be refunded
to its customers, in addition to responding to the show cause order, the Gas
Company recorded a reserve in the third quarter of FY 2021 for approximately
$490,000. While this issue remains unresolved, NYPSC staff in its direct
testimony in Case 20-G-0394 recommended that the Company's reserve be refunded
to customers over a five year amortization period beginning in 2022.
Liquidity and Capital Resources
Internally generated cash from operating activities consists of net income,
adjusted for non-cash expenses and changes in operating assets and liabilities.
Non-cash items include depreciation and amortization, gain or loss on sale of
securities and deferred income taxes. Over or under recovered gas costs could
significantly impact cash flow. In addition, there are significant year-to-year
changes in regulatory assets that impact cash flow. Cash flows used in investing
activities typically consist primarily of capital expenditures and investments
in our joint ventures. For FY 2020 the acquisition of our partner's 50%
interests in the Leatherstocking Companies added approximately $1.9 million to
cash used in investing activities. We estimate capital expenditures to upgrade
our distribution system of approximately $11.3 million in fiscal 2022. We expect
to finance these planned capital expenditures with a combination of cash
provided by operations and issuance of additional long-term debt and equity.
The earnings sharing mechanism approved by the NYPSC in the June 2017 Order
provided for sharing between Corning Gas stockholders and customers of the
earned return on equity (ROE) above certain levels. Under the earnings sharing
mechanism, Corning Gas is allowed to retain all earnings up to and including a
9.5% ROE level, 50% of earnings above 9.5% up to and including 10%, 25% of
earnings above 10% up to and including 10.5%, and 10.0% of earnings above 10.5%.
We believe that these limits do not have a significant effect on our liquidity
because even at those limits we have sufficient cash collected from our earnings
to support operations.
Cash flows from financing activities consist of dividends paid, repayment of
long-term debt, net proceeds from new debt, net proceeds from sales of preferred
shares and changes in the outstanding balances of our lines-of-credit.
On September 30, 2021, we had approximately $52.6 million in long-term debt
outstanding. We made principal payments on outstanding debt during FY 2021
consistent with the requirements of our debt instruments and refinancing
activities.
On January 15, 2021, Corning Gas obtained a short term loan from M&T Bank in the
amount of $850,000 to be used to finance merger transaction costs, and for
general operating expenses and working capital. The loan had an interest rate of
2.6% plus the one month LIBOR interest rate, with a combined floor of 3.1%. This
loan was repaid in full as part of the Gas Company's June 25, 2021 multiple
disbursement term loan.
On June 25, 2021, Corning Gas secured a $4.665 million multiple disbursement
term loan ("Term Loan") from M&T Bank. Corning Gas used $850,000 of the Term
Loan to repay the January 15, 2021 M&T Bank short term loan, and used the
remainder of the loan proceeds for capital expenditures and pipeline repairs.
The Term Loan allowed for multiple draws until October 31, 2021, at which time
the loan converted into a ten-year term loan. The Term loan bore interest at a
variable rate equal to 2.9% plus the one-month LIBOR rate, with a floor of 3.4%,
converting into a 10 year term loan at a variable interest rate.
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On June 25, 2021, Corning Gas obtained a $1.9 million bridge loan ("Bridge
loan") from M&T Bank, the proceeds of which were used for general operating
purposes, and to fund merger related costs. The Bridge loan is a demand note
that bears interest at a variable rate equal to 3.0% plus the one-month LIBOR
rate, with a 3.5% floor.
On September 30, 2021, Corning Gas secured a $3 million demand loan from M&T
Bank, the proceeds of which were used for working capital purposes. The demand
loan bears interest at a variable rate equal to 2.90% plus the greater of the
applicable daily simple Secured Overnight Financing rate (SOFR) or 0.50%.
On October 13, 2020, Pike secured a $1.315 million multiple disbursement loan
from M&T Bank, the proceeds of which were used to fund capital construction
projects. The loan allowed for multiple draws until it converted into a 10 year
long term loan at a fixed interest rate of 3.4%. The Holding Company guarantees
the Pike loan.
On August 19, 2021, Pike obtained a $2.21 million multiple disbursement loan
("Pike Loan") from M&T Bank. The Pike Loan was used for capital expenditures and
for pipeline repairs. The Pike Loan allowed for multiple draws until October 31,
2021, at which time the loan converted into a ten year term loan at a variable
interest rate. The Pike Loan bore interest at 2.9% plus the one month LIBOR rate
with a floor of 3.4%. At October 31, 2021, the Pike note converted into a ten
year term loan at a variable interest rate. The Holding Company guarantees the
Pike Loan.
On February 12, 2021, Leatherstocking Gas obtained an $800,000 multiple
disbursement loan ("Leatherstocking Loan") from Wayne Bank. The Leatherstocking
Loan was used for capital expenditures and for gas pipeline repairs. The
Leatherstocking Loan converted into a ten year term loan on October 31, 2021, at
a fixed interest rate of 4.75%. The Holding Company guarantees the
Leatherstocking Loan.
Corning Gas, Pike and Leatherstocking Gas have revolving lines of credit of $8.5
million, $2.0 million and $1.5 million, respectively. The Company primarily
utilizes these lines of credit to purchase gas and electricity. The Company
believes these lines of credit are sufficient to fund our short term purchasing
needs.
The Gas Company is responsible for managing its gas supply assets. At September
30, 2021, the Gas Company had 586,455 Dth at a cost of $1,366,341 in storage. We
anticipate that the Gas Company will have sufficient gas to supply our customers
for the 2021-2022 winter heating season. The contract with O&R should provide
for sufficient electricity and natural gas to supply Pike for the 2021-2022
winter heating and summer cooling demand. M&T has issued to O&R a letter of
credit in the amount of $1 million as security for the obligations of Pike under
Pike's electric and the gas supply and gas transportation agreement. The
agreements provide for three years of electric and gas supply for the customers
of Pike, with up to three one-year extensions. Leatherstocking Gas purchases its
gas from Cabot Oil on an as needed basis and therefore has no gas in storage. We
anticipate that Leatherstocking will have sufficient gas to supply its customers
for the 2021-2022 winter heating season.
As of September 30, 2021, we believe that cash flow from operating activities
and borrowings under our lines of credit will be sufficient to satisfy debt
service requirements over the next twelve months. We believe new debt and
proceeds from equity will be required to satisfy our capital expenditures to
finance our internal growth needs for the next twelve months.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements.
Contractual Obligations
The following tables summarize the Company's expected future contractual cash
obligations as of September 30, 2021, and the twelve-month periods over which
they occur.
The aggregate maturities of long-term debt for each of the five years subsequent to
September 30, 2021 are as follows:
2022 $ 6,407,545
2023 $ 6,624,807
2024 $ 6,836,192
2025 $ 7,081,604
2026 $ 7,379,639
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The estimated interest payments on the above debts are as follows:
2022 $ 1,839,209
2023 $ 1,562,298
2024 $ 1,276,022
2025 $ 979,873
2026 $ 671,760
The estimated pension plan benefit payments are as follows:
2022 $ 1,485,220
2023 $ 1,493,007
2024 $ 1,529,429
2025 $ 1,599,886
2026 $ 1,596,310
The projected benefit obligation of the benefit plan has been calculated based
on the census and plan provisions, as well as a number of economic and
demographic assumptions. The discount rate for the period ending September 30,
2021 is 3.64% and is assumed to be the rate going forward. A decrease in the
discount rate of 1% could increase the projected benefit obligation by $4.3
million and an increase in the discount rate of 1% could decrease the obligation
by $3.4 million. Either change would impact the estimated pension plan payment
for future periods.
Regulatory Matters
Holding Company
The Holding Company's primary business, through its subsidiaries Corning Gas,
Pike, and Leatherstocking Gas, is regulated by the NYPSC and PAPUC, among other
agencies.
On April 30, 2021, the Company and Argo filed with the NYPSC a Verified Joint
Petition seeking approval, pursuant to Section 70 of the New York Public Service
Law for its merger. This case is pending approval by the Commission and there is
no statutory timeline for the NYPSC to decide this matter.
Also on April 30, 2021, the Company and Argo filed with the PAPUC a Joint
Application requesting certificates of public convenience from the PAPUC and
seeking all other PAPUC approvals necessary for the merger. This case is pending
approval by the Commission and there is no statutory deadline for the PAPUC to
decide this matter.
Gas Company
On August 9, 2018, The NYSPSC issued an order in Case 17-M-0815 that required
Corning Gas to return to customers the difference between the federal income tax
allowance in base rates and the new statutory rate of 21% under the Tax Cuts and
Jobs Act of 2017 (the "Tax Act"). The refund to customers began on October 1,
2018. The customers experienced a decrease of 3.87% on their overall bill in the
year starting October 1, 2018 and experienced a decrease of 3.72% on their
overall bill in the year starting October 1, 2019. The amount estimated to be
returned to customers was $980,964 during FY 2019 and was $1,004,563 during FY
2020. These refunds will not impact the Gas Company's allowed earnings. The
impact of the change in the Tax Act on deferred regulatory balances was deferred
until the Gas Company's base rate case (Case 20-G-0101). The Gas Company has
recorded those amounts as Regulatory Liabilities on the consolidated balance
sheets. The lower tax rate of 21% was included in base rates in Case 20-G-0101
therefore the pass back to customers ceased on February 1, 2021. The impact of
the change in the Tax Act on deferred regulatory balances was reflected in
customer rates in Case 20-G-0101 effective February 1, 2021.
On May 19, 2021, the NYPSC issued a rate order in Case 20-G-0101, establishing
rates and a rate plan for the Gas Company for a one-year period ending on
January 31,2022 ("Rate Year"). The rate order disallowed the Company's request
for an increase in required revenue of $6,223,603, and instead ordered a
reduction of $766,000 from current rates. In the current rate order, the
existing $1.3 million tax sur-credit (an adjustment to rates to refund to
customers an amount owing them due to income tax rate reductions in the 2017 Tax
Cuts and Jobs Act) expired, along with a $30,000 reduction to the annual
Delivery Rate Adjustment. In addition, the NYPSC denied recovery of the Gas
Company's approximately $350,000 leak repair and survey cost reserve established
in FY 2016. The denial of recovery of this reserve resulted in a FY 2021 charge
of approximately $180,000 (pre tax), as the Company had previously established a
reserve for this matter in the amount of $170,000 (pre-tax). The net impact on
the Gas Company's customers was an increase of $505,000 for the Rate Year,
retroactive to February 1, 2021.
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The Gas Company, on July 15, 2021, filed a petition with the State of New York
Supreme Court in Albany County pursuant to Article 78 of the Civil Practice Law
and Rules to review and set aside the NYPSC May 19, 2021 Order that was issued
in PSC cases 20-G-0101 and 16_G-0204 involving the Gas Company's rates for gas
service. The Gas Company's petition claims that the NYPSC's decision was
arbitrary and capricious and an abuse of discretion, affected by errors of law,
and in violation of established regulatory procedure. The Gas Company's petition
requests a judgment: (1) annulling and setting aside the Order as arbitrary and
capricious and an abuse of discretion, affected by errors of law, in violation
of lawful regulatory procedure, and unsupported by substantial evidence in the
record, insofar as the Order implements four areas of "austerity" adjustments
and denies recovery of leak survey and repair costs; (2) remanding this matter
to the NYPSC for further proceedings consistent with the Court's judgment; and
(3) granting such other and further relief as may be just and proper. The
resolution of this matter is pending judicial review.
On July 16, 2021, the Gas Company filed a three-year rate plan (Case 20-G-0394)
with the NYPSC for rate years ending on June 30, 2023, 2024, and 2025. The rate
increases requested for the three year rate plan (as amended) are $6,555,000,
$1,030,000, and $843,000, respectively. In its filing, the gas Company proposes
a rate plan with levelized increases over three years in the amount of
$3,761,000 per year. These rates, if implemented, would impact customer bills by
11.14% in each year.
In March of 2021, the NYPSC issued a "Show Cause" order instructing Corning Gas
to show cause why its PPP loan in the amount of $970,000 should not be refunded
to its customers if and when the loan is forgiven. On May 13, 2021, the Gas
Company responded to the "Show Cause" order supporting its position that it will
use the PPP loan proceeds to fund COVID operating costs, lost commercial
revenues, and customer bad debt increases. On May 21, 2021, the Corning Gas PPP
loan was forgiven. This matter is pending with the NYPSC. The NYPSC Staff has
filed testimony on November 12, 2021 in Case 20-G-0394 on how to resolve the
issues raised in the NYPSC "Show Cause" order. The Company expects that the
issue will be adjudicated in the pending rate case.
By petition dated September 3, 2020 in Case 20-G-0442, Corning Gas requested
authority under Public Service Law Section 69 to issue approximately $29.5
million of long term debt through December 31, 2024. The proceeds are to be used
principally to fund NYPSC mandated system safety and reliability measures,
including replacement of older pipe and regulator stations; and purchase
equipment, computer software and other supplies as necessary to maintain the
distribution system. The NYPSC issued a financing order in April of 2021
permitting the Gas Company to issue long term debt in the amount of $19.1
million, along with certain reporting requirements.
Pike
The PAPUC issued an order in Case M-2018-2641242 that requires Pike to return to
customers the difference between the federal income tax allowance in base rates
and the new statutory rate of 21%. Pike's electric customers received a refund
of $73,923 or decrease of 0.67% on their overall bill effective October 1, 2018.
No refunds were ordered for Pike's gas operation because amounts were not
material. The impact of the change in the Tax Act on deferred regulatory
balances will be deferred until Pike's next base rate case. Pike has recorded
those amounts as Regulatory Liabilities on the consolidated balance sheets. The
lower tax rate of 21%, as well as deferred regulatory balances, was included in
customer rates in Case R-2020-302235.
On October 24, 2020, Pike filed separate rate cases with the PAPUC for an
increase in revenues for its electric services in the amount of $1,933,600 (Case
R-2020-302235) and for an increase in revenues for its gas services in the
amount of $262,200 (Case R-2020-3022134). Pike's current rates have been in
effect since 2014. The rate increase would impact residential customer bills by
17.3% for electric customers, and by 19.7% for gas customers. The base period
(test year) for this filing is the 12 month period ended June 30, 2020. The
filings with the PAPUC reflect returns on equity of 9.75% and pro forma equity
ratios of 48.3% for each case. The primary reasons for the requested rate
increases are PAPUC mandated initiatives including the replacement of gas
distribution equipment, replacement of electric poles and wires, the recovery of
deferred storm related costs, new safety, training, and cyber security
requirement, and increased employee health and welfare benefits costs.
On June 25, 2021, the PAPUC issued a rate order approving a gas rate increase of
$225,000 and on July 15, 2021, the PAPUC issued a rate order approving an
electric rate increase in the amount of $1.4 million. Both rate increases took
effect on July 28, 2021.
On July 15, 2021, the PAPUC issued a securities certificate authorizing Pike to
borrow up to $8,973,695 in long term debt, commencing on the date of issuance of
the securities certificate through December 31, 2025. The securities certificate
requires Pike to file notice of long term borrowings with the PAPUC within 60
days of borrowings.
Leatherstocking Gas
On September 15, 2021, the PAPUC issued a securities certificate to
Leatherstocking Gas permitting Leatherstocking Gas to issue debt securities in
an aggregate principal amount not to exceed $5,348,850. The certificate was
issued in order to allow Leatherstocking to
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restructure two existing long-term loans owed to Wayne Bank. On October 5, 2021,
Leatherstocking Gas and Wayne Bank restructured two promissory notes due in
March and August of 2029, locking in each loan's interest rate at its current
interest rate of 4.75% for the remaining loan terms, and cancelling provisions
calling for a redetermination of the interest rate on the 5th anniversary of the
loans. The Holding Company provided a guarantee of both restructured loans.
Leatherstocking Gas provided notice of this debt restructuring on October 12,
2021.
Environmental Matters
The Company is subject to various federal, state and local laws and regulations
relating to the protection of the environment. The effect (material or not) on
the Company of any new legislative or regulatory measures will depend on the
particular provisions that are ultimately adopted. Environmental regulation
legislative and regulatory measures to address climate change and greenhouse gas
emissions are in various phases of discussion or implementation. Legislation or
regulation that aims to reduce greenhouse gas emissions could also include
greenhouse gas emissions limits and reporting requirements, carbon taxes,
restrictive permitting, increased efficiency standards, and incentives or
mandates to conserve energy or use renewable energy sources. Federal, state or
local governments may provide tax advantages and other subsidies to support
alternative energy sources, mandate the use of specific fuels or technologies,
or promote research into new technologies to reduce the cost and increase the
scalability of alternative energy sources. New York State, for example, passed
the CLCPA that mandates reduced greenhouse gas emissions to 60% of 1990 levels
by 2030, and 15% of 1990 levels by 2050, with the remaining emission reduction
achieved by controlled offsets. The CLCPA also requires electric generators to
meet 70% of demand with renewable energy by 2030. These climate change and
greenhouse gas initiatives could impact the Company's customer base and assets
depending on regulatory treatment afforded in the process. The initiatives could
also increase the Company's cost of environmental compliance by increasing
reporting requirements and requiring the Company to replace all leak prone pipe.
They could also delay or otherwise negatively affect efforts to obtain permits
and other regulatory approvals with regard to existing and new facilities and
impose additional monitoring and reporting requirements. Changing market
conditions and new regulatory requirements, as well as unanticipated or
inconsistent application of existing laws and regulations by administrative
agencies, make it difficult to predict a long-term business impact across twenty
or more years.
Critical Accounting Policies
Our significant accounting policies are described in the notes to the
accompanying Consolidated Financial Statements of this Form 10-K. The
application of generally accepted accounting principles involves certain
assumptions, judgments and estimates that affect reported amounts of assets,
liabilities, revenues and expenses. Thus, the application of these principles
can result in varying results from company to company. The principles and
policies that most significantly impact us are discussed below.
Accounting for Utility Revenue and Cost of Gas Recognition
Corning Gas 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.
Corning Gas does not accrue revenue for gas delivered but not yet billed, as the
NYPSC requires that such accounting be adopted during a rate proceeding, which
we have not done. Currently Corning Gas does not anticipate adopting unbilled
revenue recognition nor does it believe it would have a material impact on
financial results. Our tariffs contain mechanisms that provide for the recovery
of the cost of gas applicable to firm customers, which includes estimates. Under
these mechanisms, we periodically adjust rates to reflect increases and
decreases in the cost of gas and electricity. Annually, we reconcile the
difference between the total gas costs collected from customers and the cost of
gas. We defer any excess or deficiency and subsequently either recover it from,
or refund it to, customers over the following twelve-month period or possibly
longer based on the amounts if the cost for gas significantly exceeds the total
gas costs collected from customers. Quarterly, we reconcile the difference
between electric costs collected from customers and the cost of electricity. The
default service charges for electricity are adjusted every quarter. To the
extent estimates are inaccurate, a regulatory asset on the balance sheet is
increased or decreased. Pike and Leatherstocking Gas read all meters at the end
of the month and therefore have no unbilled revenue. As gas and electricity are
immediately available for use upon delivery to the customer, the gas or
electricity and its delivery are identifiable as a single performance
obligation. The Company recognizes revenues as this performance obligation is
satisfied over time as the Company delivers, and its customers simultaneously
receive and consume, the gas or electricity.
Accounting for Regulated Operations - Regulatory Assets and Liabilities
Corning Gas is subject to regulation by NYPSC, and Pike and Leatherstocking are
subject to regulation by the PAPUC. We record the results of our regulated
activities in accordance with Financial Accounting Standards Board (FASB) ASC
No. 980, which results in differences in the application of generally accepted
accounting principles between regulated and non-regulated businesses. ASC No.
980 requires the recording of regulatory assets and liabilities for certain
transactions that would have been treated as revenue and expense in
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non-regulated businesses. In certain circumstances, FASB ASC No. 980 allows
entities whose rates are determined by third-party regulators to defer costs as
regulatory assets in the balance sheet to the extent that the entity expects to
recover these costs in future rates. Management believes that currently
available facts support the continued application of ASC No. 980 and that all
regulatory assets and liabilities are recoverable or refundable through the
regulatory environment.
Accounting for Income Taxes
The Holding 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 Holding Company's assets and
liabilities at enacted tax rates expected to be in effect when such amounts are
realized or settled. Such deferred tax assets and liabilities will be adjusted
for the effects of enacted changes in tax laws and rates.
Accounting for Joint Ventures
Investments in joint ventures have been recognized in the consolidated financial
statements using the equity method of accounting based on the guidelines
established in FASB ASC 323. In applying this guidance, the Holding Company
recognizes investments in joint ventures as assets at cost. Investments
fluctuate in future periods based on the Holding Company's allocable share of
earnings or losses from the joint ventures which is recognized through earnings.
Pension and Post-Retirement Benefits
The amounts reported in our consolidated financial statements related to pension
and other post-retirement benefits are determined on an actuarial basis, which
requires the use of many assumptions in the calculation of such amounts. These
assumptions include the discount rate, the expected return on plan assets, the
rate of compensation increase and, for other post-retirement benefits, the
expected annual rate of increase in per capita cost of covered medical and
prescription benefits. Changes in actuarial assumptions and actuarial experience
could have a material impact on the amount of our pension and post-retirement
benefit costs and funding requirements. In FY 2020, the mortality assumption was
revised to the sex-distinct Amount-Weighted Pri-2012 Mortality Tables for
employees, healthy annuitants, and contingent survivors with mortality
improvements projected using Scale MP-2019 on a generational basis. The decrease
in discount rate from 3.96% to 3.64% as of September 2020 increased the benefit
obligation. The net effect of changes to the assumptions and discount rate is an
increase of approximately $1.6 million to the pension benefit obligation.
However, we expect to recover substantially all our net periodic pension and
other post-retirement benefit costs attributed to employees in accordance with
NYPSC authorization. For financial reporting purposes, the difference between
the amounts of such costs as determined under applicable accounting principles
is recorded as either a regulatory asset or liability.
For FY 2021, the Pension Plan mortality assumption was revised to the
sex-distinct Amount-Weighted Pri-2012 Mortality Tables for employees, health
annuitants, and contingent survivors with mortality improvements projected using
Scale MP-2020 on a generational basis. The discount rate remained at 3.64% as of
September 30, 2021. The net effect of changes to the assumptions, demographics
and plan experience is an increase of approximately $18,000 to the pension
benefit obligation. However, we expect to recover substantially all of our net
periodic pension and other post-retirement benefit costs attributed to employees
in accordance with NYPSC authorization. For financial reporting purposes, the
difference between the amounts of such costs as determined under applicable
accounting principles is recorded as a regulatory asset or a regulatory
liability.
In FY 2021, the Retiree Group Health Benefits Plan mortality assumption was
revised to the sex-distinct Headcount Weighted Pri-2012 Mortality Tables for
employees, healthy annuitants, and contingent survivors with mortality
improvements projected using Scale MP-2020 on a generational basis. The discount
rate increased from 2.21% to 2.53% as of September 2021 which resulted in a
decrease in the benefit obligation. The net effect of changes to the
assumptions, demographics and plan experience is an increase of approximately
$14,000 to the retiree group health benefit obligation.
Preferred Stock and Temporary Equity
The Holding Company classifies conditionally redeemable convertible preferred
shares, which includes preferred shares subject to redemption upon the
occurrence of uncertain events not solely within control of the Holding Company,
as temporary equity in the mezzanine section of the consolidated balance sheets,
in accordance with the guidance enumerated in ASC No. 480 "Distinguishing
Liabilities from Equity". The Company also analyzes the embedded conversion
feature for bifurcation, based on whether the host instrument has more
equity-like or debt-like characteristics. Dividends are recorded as a reduction
to retained earnings and issuance costs reduce the initial proceeds and are then
accreted over the life of the instrument to the redemption amount.
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The Holding Company records mandatorily redeemable stock as a liability in
accordance with FASB ASC No. 480. Dividends are recorded as interest expense and
issuance costs are treated the same way as debt issuance costs.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements which, to the extent they are not recitations of
historical facts, constitute "forward-looking statements" within the meaning of
the Securities Litigation Reform Act of 1995 ("Reform Act"). The words
"estimate", "project", "anticipate", "expect", "intend", "believe", "could" and
similar expressions are intended to identify forward-looking statements. All
such forward-looking statements are intended to be subject to the safe harbor
protection provided by the Reform Act. Although we believe that the expectations
reflected in these forward-looking statements are based on reasonable
assumptions, we can give no assurance that our expectations will be achieved. As
forward-looking statements, these statements involve risks, uncertainties and
other factors that could cause actual results to differ materially from the
expected results. Accordingly, actual results may differ materially from those
expressed in any forward-looking statements. Factors that could cause results to
differ materially from our management's expectations include, but are not
limited to, those listed under Item 1A - "Risk Factors" of this Annual Report on
Form 10-K for the fiscal year ended September 30, 2021, in addition to:
* The impact of the COVID-19 pandemic,
* Completion of the pending merger with Argo,
* The effect of an interruption in our supply of natural gas or electricity or a
substantial increase in the price of natural gas or electricity,
* Our ability to successfully negotiate new supply agreements for natural gas as
they expire, on terms favorable to us, or at all,
* The effect on our operations of any action by the NYPSC or PAPUC,
* The effect of litigation,
* The effect on our operations of unexpected changes in other applicable legal or
regulatory requirements,
* The amount of natural gas produced and directed through our pipeline by
producers,
* The effect of weather on our utility infrastructure,
* Our ability to obtain additional equity or debt financing to fund our capital
expenditure plans and for general corporate purposes,
* The impact of New York State's Climate Leadership and Community Protection Act
legislation on the Company's ability to recover in cost of service through
depreciation expense its investment in utility plant,
* Our successful completion of various capital projects and the use of pipeline,
compressor stations and storage by customers and
counterparties at levels consistent with our expectations,
* Our ability to retain the services of our senior executives and other key
employees,
* Our vulnerability to adverse general economic and industry conditions generally
and particularly the effect of those conditions on
our major customers,
* The effect of events in our transportation and delivery facilities,
* Competition to our gas supply and transportation business from other pipelines,
and
* The possibility of cyber and malware attacks.
Forward-looking statements speak only as of the date they are made, and we
undertake no obligation to update any forward-looking statement in light of new
information or future events.
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CORNING NATURAL GAS HOLDING CORPORATION 
