CORNING NATURAL GAS: Management report and analysis of the financial position and operating results (form 10-Q)

Caution 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 U.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 ended September 30, 2020, 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 natural gas supply agreements

and electricity when they expire, on terms that are favorable to us, or not at all, * the effect on our operations of the actions of NYPSC or PAPUC, * the effect of litigation, * the effect on our operations of unexpected changes in laws or regulations

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 of

pipelines, 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 unfavorable economic and industrial conditions in general and

     particularly the effect of those conditions on our major customers,




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* the impact of from New York State 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,
*    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 on which they are made, and we assume no obligation to update any forward-looking statements in light of new information or future events.


Overview



Our financial results for the quarter and year to date period ended June 30,
2021, and for the comparable quarter and year to date June 30, 2020, were
impacted by several non- recurring, but material events. These events have been
described in more detail throughout this report but are summarized in this
paragraph. We recognized as non- operating income $1.1 million of PPP loan
forgiveness, offset by a regulatory reserve in the amount of $490,000 in 2021.
As a result of our rate case that concluded in May of 2021, we wrote down as an
operating expense a regulatory asset for leak repairs ($175,000) and as interest
expense an accrual of interest income ($231,000), the recovery of which were
denied in our rate case. In addition, we incurred additional merger transaction
costs in the amount of $126,000. In the third quarter of fiscal 2020, we
recognized as a reduction of income tax expense a non- recurring AMT tax credit
refund in the account of $272,000. As a result of these non-recurring items,
earnings for the quarter were $95,000 (after tax) greater than earnings in the
third quarter of fiscal 2020, but operating income for the current fiscal
quarter was $218,000 (after tax) lower than operating income for the comparable
quarter for fiscal 2020. For our fiscal year to date 2021, earnings were
$432,000 (after tax) lower than year to date earnings for fiscal year to date
2020, and operating income for fiscal 2021 was $701,000 (after tax) less than
operating income in fiscal 2020.



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 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 July 1, 2020, the Company finalized the acquisition of its partner’s 50% stake in Leatherstocking Gas Company, LLC, and Leatherstocking Pipeline Company, LLC (the “Leather Stocking Companies”). Since July 1, 2020, the financial information of the Leatherstocking Companies is included in the consolidated financial information of the Company.



We believe our key performance indicators are net income, stockholders' equity
and the safety and reliability of our systems. Net income decreased by $284,739
for the three months and decreased $930,655 for the nine months ended June 30,
2021 compared to the three months and nine months ended June 30, 2020,
respectively. Our decline in earnings is attributable to transaction costs
related to our merger (See Note 1), increased interest expense, depreciation
expense, a rate decrease in Corning offset by higher investment income and
forgiveness of PPP loans. In addition, the Company recognized a large non-
recurring income tax refund in the third quarter of fiscal 2020, which increased
2020 earnings for both the third quarter and for the fiscal year 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 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 of June 30, 2021, compared to June 30, 2020,
stockholders' equity increased from $36,866,581 to $37,243,854. 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.



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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 the first nine months of fiscal 2021 the Gas
Company repaired 77 leaks, replaced 138 bare steel services and replaced or
remediated 7.24 miles of older steel main. In fiscal 2020 the Gas Company
repaired 184 leaks, replaced 229 bare steel services and replaced 8.6 miles of
older steel main. In the first nine months of fiscal 2021 Pike replaced
approximately 74 poles. In fiscal 2020 Pike replaced approximately 150 poles and
did extensive tree trimming to maintain our electric infrastructure. On January
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 on June 13, 2019.



Key financial performance indicators:

                                             Three Months Ended June 30,    

Nine months ended June 30th,

                                                   2021             2020               2021             2020
Net income                              $       272,866     $    557,605     $    2,786,107     $  3,716,762
Stockholders' equity                    $    37,243,854     $ 36,866,581     $   37,243,854     $ 36,866,581
Stockholders' equity per outstanding
common share                            $         12.08     $      12.02     $        12.08     $      12.02




Gas Revenue and Margin



Retail gas revenue decreased $33,362 for the three months ended June 30, 2021
and increased $1,069,382 for the nine months ended June 30, 2021 compared to the
same periods last year. The revenue decrease for the three month period results
from an increase in gas costs recovery of $443,890 offset by a decrease in
delivery revenues of $477,252. The revenue increase for the nine month period
includes higher gas cost recovery of $1,140,018 offset by a decrease in delivery
revenues of $70,636.


Other gas revenues increased $ 245,752 for the three months and $ 240,120 for the nine months ended June 30, 2021 compared to the same periods last year. The components of this increase are detailed in the tables below.


                                             Three months ended June 30,          Nine months ended June 30,
                                                   2021             2020               2021             2020
Retail gas revenue:
Residential                             $     3,440,603      $ 3,753,207     $   14,673,030     $ 14,328,356
Commercial                                      570,433          427,187          2,556,525        2,184,918
Transportation                                1,046,768          937,403          3,936,348        3,679,551
Wholesale                                       366,319          339,688          1,603,141        1,506,837
Total retail gas revenue                $     5,424,123      $ 5,457,485   

$ 22,769,044 $ 21,699,662

Other gas revenue:
Local production                        $       105,206      $   170,495     $      459,692     $    533,743
Customer discounts forfeited                        (26 )           (246 ) 
            (34 )         39,731
Reconnect fees                                      195               22                255            1,374
Surcharges                                        1,072              173               (843 )          1,226
Other (see detail below)                        222,116          (87,633 )          403,243           46,119
Total other gas revenue                 $       328,563      $    82,811   

$ 862,313 $ 622,193

Total gas operating revenue             $     5,752,686      $ 5,540,296   
 $   23,631,357     $ 22,321,855




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The following table details amounts making up the Other line in the schedule of
Other gas revenue above:



                                             Three months ended June 30,          Nine months ended June 30,
                                                  2021              2020               2021             2020
Other gas revenues:
Delivery Rate Adjustment (DRA)
carrying costs                          $          857       $       829     $        3,904       $    4,617
Contract customer reconciliation                   565            21,275            (71,909 )       (113,780 )
Monthly RDM amortizations                      124,162          (250,641 )           38,461         (483,712 )
Local production revenues                       (2,963 )          17,377             23,041           37,200
2017 Jobs Act federal Income tax
reconciliation                                 464,159            89,039            920,923          540,789
Regulatory liability reserve                  (340,929 )               -           (512,839 )              -
Customer performance incentive                       -            32,000                  -           32,000
Capacity release revenues                        7,309             7,190             28,136           33,249
All other                                      (31,044 )          (4,702 )          (26,474 )         (4,244 )
Total other gas revenues                $      222,116       ($   87,633 ) 
 $      403,243       $   46,119




Gas purchases are our largest expenses. Purchased gas expense increased $442,714
for the three months ended June 30, 2021 and $904,965 for the nine months ended
June 30, 2021 compared to the same periods last year. The increase in costs for
the three month period is due primarily to higher gas cost purchases in the
amount of $266,310 and an increase in prior period gas cost recoveries in the
amount of $176,404. The increase in costs for the nine month period is due
primarily to higher gas cost purchases in the amount of $282,804 and an increase
in prior period gas cost recoveries in the amount of $622,161.



Gas margin (the excess of utility gas revenue over the cost of natural gas
purchased) decreased $230,324 for the three months ended June 30, 2021 and
increased $404,537 for the nine months ended June 30, 2021 compared to the same
periods last year. The margin for the three month period was negatively impacted
by decreased customer sales. The margin for the nine month period was positively
impacted by increased customer sales that includes the Leatherstocking Gas
purchase on July 1, 2020. The margin for the nine month period was also
positively affected by regulatory adjustments associated with a PAPUC fuel audit
of $95,158 and prior year gas cost reconciliation of $156,575.





                             Three Months Ended June 30,          Nine Months Ended June 30,
                                   2021             2020               2021             2020
Gas Margin:
Utility Gas Revenues    $     5,752,686      $ 5,540,296     $   23,631,357     $ 22,321,855
Natural Gas Purchased         1,382,120          939,406          6,131,547        5,226,582
Margin                  $     4,370,566      $ 4,600,890     $   17,499,810     $ 17,095,273
Margin %                          75.97 %          83.04 %            74.05 %          76.59 %




Electric Revenue and Margin


Retail electric revenue increased $268,686 for the three months ended June 30,
2021 and $650,427 for the nine months ended June 30, 2021 compared to the same
periods last year. The increase for the three month period results from an
increase in purchased power recovery of $227,836 and an increase in delivery
revenues of $40,850. The increase for the nine month period primarily results
from increased delivery revenues of $797,168 net of recovery of lower purchased
power costs of $146,741.



Other electric revenues increased $15,112 for the three months ended June 30,
2021 and decreased $28,680 for the nine months ended June 30, 2021 compared to
the same periods last year. The components of these decreases are detailed in
the tables below.

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                                             Three months ended June 30,          Nine months ended June 30,
                                                  2021              2020               2021             2020
Retail electric revenue:
Residential                             $      846,231      $    746,204     $    2,768,809      $ 2,364,886
Commercial                                     847,893           680,267          2,472,137        2,228,534
Street lights                                   31,353            30,320             94,814           91,913
Total retail electric revenue           $    1,725,477      $  1,456,791   

$ 5,335,760 $ 4,685,333

Other electric revenue:
Customer discounts forfeited            $       76,701      ($       240 ) 
 $       76,701      $     2,761
Third party billings                           (59,343 )           3,511                  -          104,710
Other                                          (10,581 )         (11,606 )          (16,441 )        (18,531 )
Total other electric revenue            $        6,777      ($     8,335 ) 

$ 60,260 $ 88,940

Total electrical operating income $ 1,732,254 $ 1,448,456

 $    5,396,020      $ 4,774,273




Electricity costs increased $214,394 for the three months ended June 30, 2021
and $705,893 for the nine months ended June 30, 2021 compared to the same
periods last year. The increase for the three month period is due primarily to
increases in purchased power costs of $299,429 and a decrease of prior period
gas cost recoveries of $85,036. The increase for the nine month period is due
primarily to increase in purchased power costs needed to serve our customers of
$615,906 and an unfavorable regulatory adjustment resulting from a PAPUC fuel
audit net of prior period gas cost recoveries amounting to $89,987.



Electric margin (the excess of utility electric revenue over the cost of
purchased power costs) increased $69,404 for the three months ended June 30,
2021 and decreased $84,146 for the nine months ended June 30, 2021 compared to
the same periods last year. The margin for the three month period was positively
impacted by increased revenues. The margin for the nine month period was
negatively impacted by a regulatory adjustment resulting from a PAPUC fuel audit
of $198,823.



                                             Three Months Ended June 30,          Nine Months Ended June 30,
                                                   2021             2020               2021             2020
Electric Margin:
Utility Electric Revenues               $     1,732,254      $ 1,448,456     $    5,396,020      $ 4,774,273
Electricity Purchased                           478,614          264,220   
      1,632,781          926,888
Margin                                  $     1,253,640      $ 1,184,236     $    3,763,239      $ 3,847,385
Margin %                                          72.37 %          81.76 %            69.74 %          80.59 %



Operating and interest expenses

Operating and maintenance expense increased $1,056,597 for the three months
ended June 30, 2021 and increased $2,111,346 for the nine months ended June 30,
2021 compared to the same periods last year. The increase for the three month
period primarily results from additional expenses associated with 100% ownership
of Leatherstocking Gas Company of $183,962, merger costs of $125,913, leak
repair write down of $174,773, regulatory liability reserve of $490,052 and all
other costs-net of $81,897. The increase for the nine month period primarily
results from additional expenses associated with 100% ownership of
Leatherstocking Gas Company of $545,556, merger costs of $551,296, leak repair
write down of $174,773, liability reserve of $490,052 and all other costs,
including pandemic related costs, in the amount of $ 349,669.



Taxes other than income taxes increased $76,216 for the three months ended June
30, 2021 and $40,523 for the nine months ended June 30, 2021 compared to the
same periods last year. The increase for the three month period primarily
results from a property tax increase of $58,694 and gross receipts tax increase
of $10,519 net of decrease in payroll taxes of $2,997. The increase for the nine
month period results from a property tax increase of $42,310 and gross receipts
increase of $9,888 net of decrease in payroll taxes of $11,675.



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Depreciation expense increased by $172,995 for the three months ended June 30,
2021 and $601,671 for the nine months ended June 30, 2021 compared to the same
periods last year. The increases resulted from additional depreciation expense
from utility plant placed in service and depreciation expense associated with
100% ownership of Leatherstocking assets.



Interest expense increased $452,549 for the three months ended June 30, 2021 and
$724,209 for the nine months ended June 30, 2021 compared to the same periods
last year. The increases were due to higher levels of debt to support our
mandated infrastructure improvement program, interest expense associated with
100% ownership of Leatherstocking assets, write down of deferred interest
expense in the amount of $231,000, and additional dividends associated with
outstanding Preferred Series A and C shares which are recorded as interest
expense.




Liquidity and capital resources

The Holding Company does not have borrowings (excluding Series A and Series C
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 the Leatherstocking Companies to permit those companies
to make the capital expenditures required to provide services to their
customers, for dividend payments to the Holding Company's stockholders and to
fund costs associated with the pending merger with Argo.



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. At Pike 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 the Gas Company.



Capital expenditures are funded by both operating cash and new debt. In fiscal
2021 to date, the Company has spent approximately $7.0 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 Holding
Company to raise new debt and/or equity.



Cash flows from financing activities of the Company consist of long-term
borrowings, repayment of long-term debt, net borrowings and repayments under our
lines-of-credit, and quarterly dividend payments. For the Gas Company's
operations, it has an $8.0 million revolving line of credit with M&T Bank.
Interest is a variable rate determined by the Gas 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
of June 30, 2021 was $5.5 million with an interest rate of 3.10%.



Pike has a $2.0 million revolving line of credit with M&T Bank. Interest is a
variable rate determined by Pike'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 on June 30, 2021 was approximately
$1.8 million with an interest rate of 2.87%.



Leatherstocking has a $1.5 million revolving line of credit with Wayne Bank.
Interest on the line of credit is the prime rate (3.25% at June 30, 2021). The
line of credit is for an indefinite period, is guaranteed by Leatherstocking
Pipeline, and is secured by Leatherstocking Gas and Leatherstocking Pipeline
assets. The amount outstanding under this line on June 30, 2021 was
approximately $1.4 million.



The Company was in compliance with all covenants on its loans at June 30, 2021.


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During the three months ended June 30, 2021, the Gas Company mainly withdrew gas
from storage, had a balance of $789,251 worth of gas in storage. The volume in
storage at June 30, 2021 was 390,336 thousand cubic feet ("Mcf") at an average
price of $1.98 per Mcf. At June 23, 2020, the Company had a balance of $709,051
worth of gas in storage. The volume in storage at June 30, 2020 was 380,805 Mcf
at an average price of $1.88 per Mcf. During the next quarter, the Gas Company
expects to be injecting gas into storage to have sufficient gas to supply
customers for the winter season.



As of June 30, 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 lender.



Off-balance sheet provisions

We do not have 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 ended September 30, 2020, filed on December 21, 2020. There have been no
significant changes in our accounting policies during the three or nine months
ended June 30, 2021.

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