CORNING NATURAL GAS HOLDING CORPORATION 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 theU.S. Private Securities Litigation Reform Act of 1995 (Reform Act). The words "estimate", "project", "anticipate", "expect", "intend", "believe", "could" and similar expressions are intended to identify forward-looking statements. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be achieved. As forward-looking statements, these statements involve risks, uncertainties and other factors that could cause actual results to differ materially from the expected results. Accordingly, actual results may differ materially from those expressed in any forward-looking statements. Factors that could cause results to differ materially from our management's expectations include, but are not limited to, those listed under Item 1A - "Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedSeptember 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
and electricity as they expire, on terms favorable to us, or at all,
* the effect on our operations of actions by the NYPSC or PAPUC,
* the effect of litigation,
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* the effect on our operations of unexpected changes in legal or regulatory
requirements, including environmental and energy consumption regulations and
laws,
* the amount of natural gas produced and directed through our pipeline by
producers,
* our successful completion of various capital projects and the use ofpipelines, compressor stations and storage by customers and counterparties
at levels consistent with our expectations,
* The effect of weather on our utility infrastructure,
* our ability to retain the services of our senior executives and other key
employees,* our vulnerability to adverse economic and industry conditions generally and
particularly the effect of those conditions on our major customers,
* the impact of
Act legislation on the Company's sales and its ability to recover in cost
of service through depreciation expense its investment in utility plant,
* the effect of any leaks in our transportation and delivery pipelines,
* competition to our gas 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.
Overview In fiscal 2021, the Company pursued rate cases inNew York andPennsylvania , and its Argo merger case inNew York andPennsylvania . We completed our twoPennsylvania rate cases in the summer of 2021 with new electric and gas rates taking effect onJuly 28, 2021 . OurNew York rate case, which we filed in July of 2021, is under consideration by theNew York Public Service Commission , and we expect new rates to take effect in July of 2022.The Pennsylvania Public Utility Commission approved our merger with Argo onFebruary 3, 2022 . Our regulatory investments have improved our business outlook. Our results atPike for the first quarter of this fiscal year are significantly better than in prior years in terms of higher revenues and margins. We expect similar financial improvements resulting from ourNew York rate case. We look forward to completing our merger with Argo in the second or third quarter of fiscal 2022. Our merger will result in reduced operating costs and will provide us the financial backing to continue to expand our customer base and to invest in capital that will promote safe and reliable energy service
to our customers. As we emerge from the Covid pandemic, our focus continues to be on the safety of our customers, our employees, and the residents of our service territories. We are working with our customers to assist those in need with access to assistance in keeping current with their utility bills. We are also working on investment and joint ventures in renewable energy projects that will promote environmentally friendly clean energy to customers in our service territories. We believe our key performance indicators are net income, stockholders' equity and the safety and reliability of our systems. Net income increased by$281,119 for the three months endedDecember 31, 2021 ("Q1 FY 2022") compared to the three months endedDecember 31, 2020 ("Q1 FY 2021"). Earnings per share increased from$0.04 per share to$0.13 per share in this same time period. Our earnings increase reflects an increase in both gas and electric revenues at Corning and atPike , and gross margin atPike , reduced by Holding Company's non-recurring charge for a loss on the sale of Leatherstocking ofNew York of$164,000 (pre tax), and higher transaction costs at Holding Company. Because the Holding Company's principal operations are conducted throughCorning Gas ,Pike , and Leatherstocking, all regulated utility companies, stockholders' equity is an important performance indicator. The NYPSC and PAPUC allow the Company the opportunities to earn a just and reasonable return on stockholders' equity as determined under applicable regulations. Stockholders' equity is, therefore, a precursor of future earnings potential. As ofDecember 31, 2021 , compared toDecember 31, 2020 , stockholders' equity decreased slightly from$35,679,280 to$35,405,810 . 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. 25 Table of Contents 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 Q1 FY 2022 theGas Company repaired 26 leaks, replaced 93 bare steel services and replaced or remediated 3.7 miles of older steel main. In fiscal 2021 theGas Company repaired 110 leaks and replaced 9.0 miles of bare steel main and 176 bare steel services. In Q1 FY 2022 Pike replaced approximately 11 poles. In fiscal 2021 Pike replaced approximately 82 poles and did extensive tree trimming to maintain our electric infrastructure. OnJanuary 18, 2019 Pike filed a gas Long Term Infrastructure Improvement Plan ("LTIIP") to accelerate replacement of cast iron, wrought iron and bare steel pipe over 11 years. The PAPUC approved the LTIIP plan onJune 13, 2019 . Earnings for Q1 FY 2022 were higher than earnings for Q1 FY 2021 as a result of higher revenues and margins, mostly related to new electric and gas rates atPike which took effect in July of 2021, and negative regulatory adjustments that were incurred in FY 2021 and not FY 2022.
Key financial performance indicators:
Three Months Ended December 31,
2021 2020
Net income $ 464,293 $ 183,174
Stockholders' equity $ 35,405,810 $ 35,679,280
Stockholders' equity per outstanding common share $ 11.48$ 11.57 Gas Revenue and Margin Retail gas revenue increased$1,247,165 for Q1 FY 2022 compared to Q1 FY 2021, all of which was attributable to increased purchased gas prices. Gas revenues were bolstered by new rates at Corning andPike , but were negatively impacted by warmer weather in Q1 FY 2022. Purchased gas costs are subject to a NYPSC and PAPUC approved reconciliation that permits recovery of all prudently incurred costs. Higher gas cost revenues do not impact net income.
Other gas revenue increased
Q1 FY 2022 Q1 FY 2021
Retail gas revenue:
Residential $ 4,687,893 $ 3,946,522
Commercial 907,896 653,697
Transportation 1,260,471 1,230,207
Wholesale 704,200 482,869
Total retail gas revenue 7,560,460 6,313,295
Other gas revenue:
Local production 69,065 175,605
Customer discounts forfeited 6 (28 )
Reconnect fees 541 65
Surcharges 407 (4,677 )
Other (see detail below) 82,171 (62,111 )
Total other gas revenue 152,190 108,854
Total gas operating revenue $ 7,712,650 $ 6,422,149
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The following tables further summarize all other income in the other gas revenue
table above:
Q1 FY 2022 Q1 FY 2021
Other gas revenue:Delivery Rate Adjustment (DRA) carrying costs$ 1,368 $ 2,225 Contract customer reconciliation 3,121 (11,079 ) Monthly Revenue Decoupling Mechanism ('RDM') amortizations 50,484 (183,097 ) Local production revenue (100 )
13,960
2017 Jobs Act federal income tax reconciliation -
103,682
Capacity release revenue 7,180 8,754
All other 20,118 3,444
Total other gas revenue $ 82,171 ($ 62,111 )
Gas purchases are our largest expenses. Purchased gas expense increased
We anticipate that the cost of purchased natural gas will 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 revenue over the cost of natural gas purchased) decreased$24,567 for Q1 FY 2022 compared to Q1 FY 2021 or approximately (0.48%). Gas margin percentage decreased 13.74% for FY 2022 compared to FY 2021. Gas revenues increased 20.09% and purchased gas expense increased 103.57%. The gas margin percentages were negatively impacted by higher purchased gas costs of$1,315,068 . Q1 FY 2022 Q1 FY 2021
Gas Margin:
Utility Gas Revenues
$ 5,127,900 $ 5,152,467 Gas Margin Percentage 66.49% 80.23% Electric Revenue and Margin
Retail electric revenue increased$748,337 for Q1 FY 2022 compared to Q1 FY 2021. This increase was mainly attributable to increased purchased power costs of$488,303 and increased customer usage of$260,034 . Our customer usage increase reflects new electric rates atPike that took effect in July of 2021. Purchased electricity costs are subject to a PAPUC approved reconciliation that permits recovery of all prudently incurred costs. Higher purchased electricity costs do not impact net income.
Other electric revenue increased
Q1 FY 2022 Q1 FY 2021
Retail electric revenue:
Residential $ 1,274,767 $ 977,919
Commercial 1,331,176 887,934
Street lights 40,853 32,606
Total retail electric revenue $ 2,646,796 $ 1,898,459
Other electric revenue:
Third party billings $ 47,974 $ 253
Other 70,853 (1,463 )
Total other electric revenue 118,827 (1,210 )
Total electric operating revenue
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Electricity costs increased by $260,671 for Q1 FY 2022 compared to Q1 FY 2021.
The increase in costs for FY 2022 is due primarily to an increase in the price
of purchased electricity.
The cost of purchased electricity is likely to increase in the near term as electricity prices generally follow the prices of natural gas
Electric margin (the excess of utility electric revenue over the cost of purchased power costs) increased$607,703 for Q1 FY 2022 compared to Q1 FY 2021. Electric margin percentage increased 3.70% for FY 2022 compared to FY 2021. The electric margin was negatively impacted by the higher purchased power costs of$260,621 . The increase in electric margin resulted from new rates which took effect in July of 2021. Q1 FY 2022 Q1 FY 2021 Electric Margin: Utility Electric Revenues$ 2,765,623 $ 1,897,249 Electricity Purchased 1,053,752 793,081 Electric Margin$ 1,711,871 $ 1,104,168 Electric Margin Percentage 61.90% 58.20%
Operating and Interest Expenses
Operating and maintenance expense decreased by$122,273 for Q1 FY 2022 compared to Q1 FY 2021. The decrease primarily results from decrease in expenses related to the COVID pandemic of$68,412 and lower regulatory amortization of$41,569 . Taxes other than income taxes increased by$84,902 for Q1 FY 2022 compared to Q1 FY 2021. The increase results from a property tax increase of$32,769 and gross receipts tax increase of$58,048 net of decrease in payroll taxes of$5,915 . Depreciation expense decreased by$23,600 for Q1 FY 2022 compared to Q1 FY 2021. The decrease results from depreciation expense on new plant in service being outweighed by depreciation expense ending on fully depreciated assets. Interest expense increased by$111,610 for Q1 FY 2022 compared to Q1 FY 2021. The increase was due to higher levels of debt to support our mandated infrastructure improvement program, and additional dividends associated with outstanding Preferred Series D shares which is recorded as interest expense.
Liquidity and Capital Resources
The Holding Company does not have any borrowings (excluding Series A, Series C and Series D Preferred Stock that is classified as debt) at the corporate level and has no access to liquidity except through dividends and distributions from its subsidiaries as well as equity issuances. Its principal liquidity requirements are for investments in all three companies to enhance their ability to make the capital expenditures required to provide services to the utilities' customers.The Gas Company's internally generated cash from operating activities consists of net income, adjusted for non-cash expenses, and changes in operating assets and liabilities. Non-cash items include depreciation and amortization; investment gains and losses, and deferred income taxes. Over or under-recovered gas costs significantly impact cash flow. In addition, there are significant year-to-year changes in regulatory assets that impact cash flow.The Gas Company's cash flow is seasonal. Cash expenditures are the highest in the summer and fall months when we refill gas storage and conduct our construction programs. Our cash receipts are highest during the heating season. AtPike cash flow is strongest in the winter and summer when customer demand for natural gas and electricity are highest. Given year-round electric sales,Pike is less seasonal than theGas Company . Capital expenditures are funded by both operating cash and new debt. In fiscal year 2022 to date, the Company has spent approximately$2.9 million on projects and safety-related infrastructure improvements. This, in conjunction with our growth projects, creates liquidity pressure on the Holding Company. We anticipate that our aggressive capital construction program will continue to require the Company to raise new debt and/or equity. 28 Table of Contents Cash flows from financing activities of the Company consist of new long-term borrowings, repayment of long-term debt, net borrowings and repayments under our lines-of-credit, and quarterly dividend payments. For theGas Company's operations, it has an$8.5 million revolving line of credit with M&T Bank. Interest is a variable rate determined by theGas Company's funded debt to EBITDA ratio calculated ninety days after the end of each quarter added to the daily LIBOR rate with no additional collateral or covenants beyond those included in the M&T Bank term notes. The amount outstanding under this line as ofDecember 31, 2021 was$5.1 million with an interest rate of 3.1%. ForPike's operations, it has an$2.0 million revolving line of credit with M&T Bank. Interest is a variable rate determined byPike's funded debt to EBITDA ratio calculated ninety days after the end of each quarter added to the daily LIBOR rate with no additional collateral or covenants beyond those included in the M&T Bank term notes. The amount outstanding under this line onDecember 31, 2021 was approximately$1.3 million with an interest rate of 3.25%. For Leatherstocking's operations, it has an$1.5 million revolving line of credit withWayne Bank . Interest on the line of credit is the prime rate (3.25% atDecember 31, 2021 ). The line of credit is for an indefinite period, is guaranteed by Leatherstocking Pipeline, and is secured byLeatherstocking Gas and Leatherstocking Pipeline assets. The amount outstanding under this line onDecember 31, 2021 was approximately$0.6 million .
The Company was in compliance with all of its loan covenants as of
During Q1 FY 2022, theGas Company mainly withdrew gas from storage and as ofDecember 31, 2021 , had a balance of$1,384.810 worth of gas in storage, the volume in storage atDecember 31, 2021 was 506,270 Mcf at an average price of$2.74 per Mcf. AtDecember 31, 2020 , the Company had a balance of$954,679 worth of gas in storage, the volume in storage atDecember 31, 2020 was 550,598 Mcf at an average price of$1.73 per Mcf. During the next quarter, theGas Company expects to continue withdrawing gas from storage to have sufficient gas to supply customers for the winter season. As ofDecember 31, 2021 , we believe that cash flow from operating activities and borrowings under our lines of credit will be sufficient to satisfy our working capital and debt service requirements over the next twelve months. We believe new debt will be required to satisfy our capital expenditures and to finance our internal growth needs for the next twelve months. We are confident we can finance them with our current lenders.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies
Our significant accounting policies are described in the notes to the Consolidated Financial Statements in the Holding Company's Form 10-K for the year endedSeptember 30, 2021 , filed onDecember 17, 2021 . There have been no significant changes in our accounting policies during Q1 FY 2022. Executive Promotions
On
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