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, 29 Table of Contents
* the impact of
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 millionof PPP loan forgiveness, offset by a regulatory reserve in the amount of $490,000in 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 Yorkand Pennsylvaniagovernment 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 Yorkand in Pennsylvania. The Company is still recovering from the impact of lost revenues, mostly from commercial customers, due to the pandemic.
We believe our key performance indicators are net income, stockholders' equity and the safety and reliability of our systems. Net income decreased by
$284,739for the three months and decreased $930,655for the nine months ended June 30, 2021compared 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 Gasand 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 $36,866,581to $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. 30 Table of Contents We continue to focus on improving the efficiency of our operations and making capital investments to improve our infrastructure.
Corning Gas'sinfrastructure improvement program concentrates on the replacement of older distribution mains and customer service lines. In the first nine months of fiscal 2021 the Gas Companyrepaired 77 leaks, replaced 138 bare steel services and replaced or remediated 7.24 miles of older steel main. In fiscal 2020 the Gas Companyrepaired 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, 2019Pike 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
Nine months ended
2021 2020 2021 2020 Net income
$ 272,866 $ 557,605 $ 2,786,107 $ 3,716,762Stockholders' equity $ 37,243,854 $ 36,866,581 $ 37,243,854 $ 36,866,581Stockholders' equity per outstanding common share $ 12.08 $ 12.02 $ 12.08 $ 12.02Gas Revenue and Margin Retail gas revenue decreased $33,362for the three months ended June 30, 2021and increased $1,069,382for the nine months ended June 30, 2021compared to the same periods last year. The revenue decrease for the three month period results from an increase in gas costs recovery of $443,890offset by a decrease in delivery revenues of $477,252. The revenue increase for the nine month period includes higher gas cost recovery of $1,140,018offset by a decrease in delivery revenues of $70,636.
Other gas revenues increased
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 $ 14,328,356Commercial 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
Other gas revenue: Local production
$ 105,206 $ 170,495 $ 459,692 $ 533,743Customer 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
Total gas operating revenue
$ 5,752,686 $ 5,540,296
$ 23,631,357 $ 22,321,85531 Table of Contents 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 $ 4,617Contract 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 $ 46,119Gas purchases are our largest expenses. Purchased gas expense increased $442,714for the three months ended June 30, 2021and $904,965for the nine months ended June 30, 2021compared 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 $266,310and 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 $282,804and 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 $230,324for the three months ended June 30, 2021and increased $404,537for the nine months ended June 30, 2021compared 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 Gaspurchase 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 $95,158and 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 $ 22,321,855Natural Gas Purchased 1,382,120 939,406 6,131,547 5,226,582 Margin $ 4,370,566 $ 4,600,890 $ 17,499,810 $ 17,095,273Margin % 75.97 % 83.04 % 74.05 % 76.59 % Electric Revenue and Margin
Retail electric revenue increased
$268,686for the three months ended June 30, 2021and $650,427for the nine months ended June 30, 2021compared to the same periods last year. The increase for the three month period results from an increase in purchased power recovery of $227,836and an increase in delivery revenues of $40,850. The increase for the nine month period primarily results from increased delivery revenues of $797,168net of recovery of lower purchased power costs of $146,741. Other electric revenues increased $15,112for the three months ended June 30, 2021and decreased $28,680for the nine months ended June 30, 2021compared to the same periods last year. The components of these decreases are detailed in the tables below. 32 Table of Contents 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 $ 2,364,886Commercial 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
Other electric revenue: Customer discounts forfeited
$ 76,701( $ 240)
$ 76,701 $ 2,761Third 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)
Total electrical operating income
$ 5,396,020 $ 4,774,273Electricity costs increased $214,394for the three months ended June 30, 2021and $705,893for the nine months ended June 30, 2021compared to the same periods last year. The increase for the three month period is due primarily to increases in purchased power costs of $299,429and 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 $615,906and 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 $69,404for the three months ended June 30, 2021and decreased $84,146for the nine months ended June 30, 2021compared 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 $ 4,774,273Electricity Purchased 478,614 264,220
1,632,781 926,888 Margin
$ 1,253,640 $ 1,184,236 $ 3,763,239 $ 3,847,385Margin % 72.37 % 81.76 % 69.74 % 80.59 %
Operating and interest expenses
Operating and maintenance expense increased
$1,056,597for the three months ended June 30, 2021and increased $2,111,346for the nine months ended June 30, 2021compared 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 Companyof $183,962, merger costs of $125,913, leak repair write down of $174,773, regulatory liability reserve of $490,052and 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 Companyof $545,556, merger costs of $551,296, leak repair write down of $174,773, liability reserve of $490,052and all other costs, including pandemic related costs, in the amount of $ 349,669. Taxes other than income taxes increased $76,216for the three months ended June 30, 2021and $40,523for the nine months ended June 30, 2021compared to the same periods last year. The increase for the three month period primarily results from a property tax increase of $58,694and gross receipts tax increase of $10,519net of decrease in payroll taxes of $2,997. The increase for the nine month period results from a property tax increase of $42,310and gross receipts increase of $9,888net of decrease in payroll taxes of $11,675. 33 Table of Contents
Depreciation expense increased by
$172,995for the three months ended June 30, 2021and $601,671for the nine months ended June 30, 2021compared 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 $452,549for the three months ended June 30, 2021and $724,209for the nine months ended June 30, 2021compared 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
Liquidity and capital resources
The Holding Companydoes 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'sinternally 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'scash 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 Pikecash flow is strongest in the winter and summer when customer demand for natural gas and electricity are highest. Given year-round electric sales, Pikeis 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 millionon 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'soperations, it has an $8.0 millionrevolving line of credit with M&T Bank. Interest is a variable rate determined by the Gas Company'sfunded 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, 2021was $5.5 millionwith an interest rate of 3.10%. Pikehas a $2.0 millionrevolving line of credit with M&T Bank. Interest is a variable rate determined by Pike'sfunded 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, 2021was approximately $1.8 millionwith an interest rate of 2.87%. Leatherstocking has a $1.5 millionrevolving 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 Gasand Leatherstocking Pipeline assets. The amount outstanding under this line on June 30, 2021was approximately $1.4 million.
The Company was in compliance with all covenants on its loans at
34 Table of Contents During the three months ended
June 30, 2021, the Gas Companymainly withdrew gas from storage, had a balance of $789,251worth of gas in storage. The volume in storage at June 30, 2021was 390,336 thousand cubic feet ("Mcf") at an average price of $1.98per Mcf. At June 23, 2020, the Company had a balance of $709,051worth of gas in storage. The volume in storage at June 30, 2020was 380,805 Mcf at an average price of $1.88per Mcf. During the next quarter, the Gas Companyexpects 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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