**UnitedStatesSecurities and Exchange Commission**

**Washington, D.C. 20549**

**Form 10-Q**

**x****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended June 30, 2006**

**OR**

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the transition period from              to              **

**Commission File Number 0-643**

----

**CorningNatural Gas Corporation**

(Exact name of registrant as specified in its charter)

| **New York**                                                     |   | **16-0397420**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  Incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **330 W  William Street, PO Box 58  Corning, New York**          |   | **14830**                             |
| (Address of  principal executive offices)                        |   | (Zip Code)                            |
|                                                             |   |                                  |
| **(607) 936-3755**                                               |
| (Registrant’s  telephone number, including area code)       |

 

----

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months and (2) has been subject to such filing requirements forthe past 90 days. YES x NO o

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act). YES o NOx

Indicatethe number shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date:

Number of shares of Common Stock outstanding at theend of the quarter:  506,918

There is only one class of Common Stock and noPreferred Stock outstanding.

 

----

# **INDEX**

|                                                                                                                                       | **Part I.   Financial Information** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------|
| ** **                                                                                                                            |
| Item 1. Financial Statements                                                                                                          |
|                                                                                                                                  |
| Consolidated Statements of Income (unaudited) —  Quarter Ended June 30, 2006 and 2005. Nine Months Ended June 30, 2006 and  2005 |
|                                                                                                                                  |
| Consolidated  Balance Sheets — June 30, 2006 (unaudited) and September 30, 2005 (audited)                                        |
|                                                                                                                                  |
| Consolidated Statements of Cash Flows (unaudited) —  Nine Months Ended June 30, 2006 and 2005                                    |
|                                                                                                                                  |
| Notes to Consolidated Financial Statements                                                                                            |
|                                                                                                                                  |
| Item 2.   Management’s Discussion and Analysis of Financial Condition and  Results of Operations                            |
|                                                                                                                                  |
| Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                             |
|                                                                                                                                  |
| Item  4.  Controls and Procedures                                                                                                |
|                                                                                                                                  |
| ** **                                                                                                                            | **Part  II. Other Information**          |
| ** **                                                                                                                            |
| Item 1.  Legal  Proceedings — The Company has nothing to report under this item.                                            |
|                                                                                                                                  |
| Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds — The  Company has nothing to report under this item. |
|                                                                                                                                  |
| Item 3.   Defaults Upon Senior Securities — The Company has nothing to report  under this item.                             |
|                                                                                                                                  |
| Item 4.   Submission of Matters to a Vote of Security Holders — The Company has  nothing to report under this item.         |
|                                                                                                                                  |
| Item 5.  Other  Information — The Company has nothing to report under this item.                                            |
|                                                                                                                                  |
| Item 6.  Exhibits                                                                                                                |
|                                                                                                                                  |
| Signatures                                                                                                                            |

 

2

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CORNING NATURALGAS CORPORATION AND SUBSIDIARY

ConsolidatedStatements of Income

Unaudited

Form 10 Q

 
| ** **                                                       | ** ** | **Quarter Ended**      | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                                       | ** ** | **June 30, 2006** | ** ** | **June 30, 2005**     | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
|                                                             |       |                        |       |                            |       |   |   |   |   |
| Utility Operating  Revenues                                      |       | $                           | 5,534,561  |                            | $          | 4,757,379 |   | $ | 24,541,370 |   | $ | 20,630,489 |   |
|                                                             |       |                        |       |                            |       |   |   |   |   |
| Cost and Expense                                                 |       |                        |       |                            |       |   |   |   |   |
| Natural Gas Purchased                                            |       | 3,845,959                   |       | 2,971,677                       |       | 18,042,660 |   | 13,401,830 |   |
| Operating &  Maintenance Expense                             |       | 1,321,696                   |       | 1,096,664                       |       | 4,121,280 |   | 3,516,412 |   |
| Taxes other than  Federal Income Taxes                           |       | 288,114                     |       | 290,126                         |       | 915,013 |   | 1,019,034 |   |
| Depreciation                                                     |       | 134,299                     |       | 129,533                         |       | 379,407 |   | 384,643 |   |
| Other Deductions, Net                                            |       | 7,723                       |       | 1,413                           |       | 23,023 |   | 4,350 |   |
| Total Costs and  Expenses                                        |       | 5,597,791                   |       | 4,489,413                       |       | 23,481,383 |   | 18,326,269 |   |
|                                                             |       |                        |       |                            |       |   |   |   |   |
| Utility Operating Income  (Loss)                                 |       | (63,230                     | )          | 267,966                         |       | 1,059,987 |   | 2,304,220 |   |
|                                                             |       |                        |       |                            |       |   |   |   |   |
| Other Income and  (Expense)                                      |       |                        |       |                            |       |   |   |   |   |
| Interest Expense                                                 |       | (444,497                    | )          | (298,814                        | )          | (1,184,616 | ) | (947,217 | ) |
| Investment  Income                                               |       | 38,044                      |       | 25,226                          |       | 143,799 |   | 83,950 |   |
|                                                             |       |                        |       |                            |       |   |   |   |   |
| Net Income (Loss) from  Utility Operations, Before Income Tax    |       | (469,683                    | )          | (5,622                          | )          | 19,170 |   | 1,440,953 |   |
|                                                             |       |                        |       |                            |       |   |   |   |   |
| Federal Income Tax  (Expense) Benefit                            |       | 185,810                     |       | 31,881                          |       | 61,898 |   | (643,721 | ) |
|                                                             |       |                        |       |                            |       |   |   |   |   |
| Income (Loss) from  Non-Utility Operations, Net of Income Tax    |       | (34,465                     | )          | 14,998                          |       | (75,990 | ) | 31,284 |   |
|                                                             |       |                        |       |                            |       |   |   |   |   |
| Net Income (Loss) from  Continued Operations                     |       | (318,338                    | )          | 41,257                          |       | 5,078 |   | 828,516 |   |
|                                                             |       |                        |       |                            |       |   |   |   |   |
| Income (Loss) from  Discontinued Operations, Net of Income Tax   |       | (4,263                      | )          | 2,481                           |       | (28,717 | ) | (17,763 | ) |
|                                                             |       |                        |       |                            |       |   |   |   |   |
| Net Income (Loss)                                                |       | (322,601                    | )          | 43,738                          |       | (23,639 | ) | 810,753 |   |
| Other Comprehensive  Income (Loss)                               |       | (54,323                     | )          | 14,022                          |       | (41,998 | ) | 15,938 |   |
| Total Comprehensive  Income (Loss)                               |       | $                           | (376,924   | )                               | $          | 57,760 |   | $ | (65,637 | ) | $ | 826,691 |   |
|                                                             |       |                        |       |                            |       |   |   |   |   |
| Weighted average  earnings (loss) per share-basic & diluted: |       |                        |       |                            |       |   |   |   |   |
| From Continued  Operations                                       |       | $                           | (0.628     | )                               | $          | 0.081 |   | $ | 0.010 |   | $ | 1.634 |   |
| From Discontinued  Operations                                    |       | $                           | (0.008     | )                               | $          | 0.005 |   | $ | (0.057 | ) | $ | (0.035 | ) |
|                                                             |       | $                           | (0.636     | )                               | $          | 0.086 |   | $ | (0.047 | ) | $ | 1.599 |   |
|                                                             |       |                        |       |                            |       |   |   |   |   |
| Weighted average shares outstanding                              |       | 506,918                     |       | 506,918                         |       | 506,918 |   | 506,918 |   |

 

3

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CORNING NATURAL GAS CORPORATION AND SUBSIDIARY

ConsolidatedBalance Sheets

 
| ** **                                                                                          | ** ** | **(Unaudited)**             | ** ** | ** **                       | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------------|------------|
| ** **                                                                                          | ** ** | **June 30, 2006** | ** ** | **September 30, 2005** | ** ** |
| Assets                                                                                              |       |                        |       |                             |       |
|                                                                                                |       |                        |       |                             |       |
| Plant:                                                                                              |       |                        |       |                             |       |
| Utility property, plant and equipment                                                               |       | $                           | 28,278,458 |                             | $          | 26,826,478 |   |
| Non-utility property, plant and equipment                                                           |       | 393,645                     |       | 392,241                          |       |
| Non-utility assets - discontinued operations                                                        |       | 178,130                     |       | 180,930                          |       |
| Less: accumulated depreciation                                                                      |       | (11,102,446                 | )          | (10,567,331                      | )          |
| Total plant utility and non-utility net                                                             |       | 17,747,787                  |       | 16,832,318                       |       |
|                                                                                                |       |                        |       |                             |       |
| Investments:                                                                                        |       |                        |       |                             |       |
| Marketable securities available-for-sale at fair  value                                             |       | 2,526,077                   |       | 2,440,237                        |       |
| Investment in joint venture and associated companies                                                |       | 139,105                     |       | 185,719                          |       |
| Total investments                                                                                   |       | 2,665,182                   |       | 2,625,956                        |       |
|                                                                                                |       |                        |       |                             |       |
| Current assets:                                                                                     |       |                        |       |                             |       |
| Cash and cash equivalents                                                                           |       | 1,019,090                   |       | 255,037                          |       |
| Customer accounts receivable, (net of allowance for uncollectible  accounts of $97,000 and $92,000) |       | 2,423,240                   |       | 1,083,909                        |       |
| Gas stored underground, at average cost                                                             |       | 98,644                      |       | 3,734,795                        |       |
| Gas inventories                                                                                     |       | 360,279                     |       | 271,960                          |       |
| Prepaid expenses                                                                                    |       | 884,074                     |       | 658,857                          |       |
| Current assets - discontinued operations                                                            |       | 418,114                     |       | 309,865                          |       |
| Total current assets                                                                                |       | 5,203,441                   |       | 6,314,423                        |       |
|                                                                                                |       |                        |       |                             |       |
| Deferred debits  and other assets:                                                                  |       |                        |       |                             |       |
| Regulatory assets:                                                                                  |       |                        |       |                             |       |
| Unrecovered gas costs                                                                               |       | 2,547,632                   |       | 3,090,280                        |       |
| Deferred pension and other                                                                          |       | 372,602                     |       | 394,606                          |       |
| Goodwill (net of accumulated amortization of  $521,294 for both periods)                            |       | 1,457,117                   |       | 1,457,117                        |       |
| Unamortized debt issuance cost (net of accumulated amortization  of $281,911 and $269,849)          |       | 242,144                     |       | 254,206                          |       |
| Other                                                                                               |       | 415,507                     |       | 420,528                          |       |
| Note Receivable - discontinued operations                                                           |       | 464,505                     |       | 491,852                          |       |
| Total deferred debits and other assets                                                              |       | 5,499,507                   |       | 6,108,589                        |       |
|                                                                                                |       |                        |       |                             |       |
| Total assets                                                                                        |       | $                           | 31,115,917 |                             | $          | 31,881,286 |   |

 

See accompanyingnotes to consolidated financial statements.

4

----

 
| ** **                                                                                                                                                          | ** ** | **(Unaudited)**             | ** ** | ** **                       | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                          | ** ** | **June 30, 2006** | ** ** | **September 30, 2005** | ** ** |
| Capitalization  and liabilities:                                                                                                                                    |       |                        |       |                             |       |
|                                                                                                                                                                |       |                        |       |                             |       |
| Common  stockholders’ equity:                                                                                                                                  |       |                        |       |                             |       |
| Common stock (common stock $5.00 par value per  share. Authorized 1,000,000 shares; issued and outstanding 507,000 shares at  June 30, 2006 and September 30, 2005) |       | $                           | 2,534,590  |                             | $          | 2,534,590 |   |
| Other paid-in capital                                                                                                                                               |       | 959,512                     |       | 959,512                          |       |
| Retained earnings                                                                                                                                                   |       | 2,936,084                   |       | 2,959,723                        |       |
| Accumulated other comprehensive loss                                                                                                                                |       | (1,462,163                  | )          | (1,420,165                       | )          |
| Total common stockholders’ equity                                                                                                                              |       | 4,968,023                   |       | 5,033,660                        |       |
|                                                                                                                                                                |       |                        |       |                             |       |
| Long-term debt,  less current installments                                                                                                                          |       | 9,098,006                   |       | 9,196,060                        |       |
| Long-term debt,  less current installments - discontinued operations                                                                                                |       | 58,614                      |       | 63,797                           |       |
| Total long-term debt                                                                                                                                                |       | 9,156,620                   |       | 9,259,857                        |       |
|                                                                                                                                                                |       |                        |       |                             |       |
| Current  liabilities:                                                                                                                                               |       |                        |       |                             |       |
| Current portion of long-term debt                                                                                                                                   |       | 592,730                     |       | 612,390                          |       |
| Demand Note Payable                                                                                                                                                 |       | 1,551,663                   |       | 1,836,666                        |       |
| Borrowings under lines-of-credit                                                                                                                                    |       | 5,804,035                   |       | 6,600,000                        |       |
| Accounts payable                                                                                                                                                    |       | 1,223,058                   |       | 270,139                          |       |
| Accrued expenses                                                                                                                                                    |       | 479,070                     |       | 745,119                          |       |
| Customer deposits and accrued interest                                                                                                                              |       | 501,909                     |       | 952,503                          |       |
| Accrued income taxes                                                                                                                                                |       | 562,582                     |       | 460,055                          |       |
| Other current liabilities - discontinued operations                                                                                                                 |       | 94,487                      |       | 317,860                          |       |
| Total current liabilities                                                                                                                                           |       | 10,809,534                  |       | 11,794,732                       |       |
|                                                                                                                                                                |       |                        |       |                             |       |
| Deferred credits  and other liabilities:                                                                                                                            |       |                        |       |                             |       |
| Accrued income taxes                                                                                                                                                |       | 701,260                     |       | 837,727                          |       |
| Deferred compensation                                                                                                                                               |       | 2,066,786                   |       | 1,910,686                        |       |
| Deferred pension costs & post-retirement  benefits                                                                                                              |       | 2,836,136                   |       | 2,429,958                        |       |
| Other                                                                                                                                                               |       | 242,728                     |       | 265,043                          |       |
| Other deferred liabilities - deferred federal income  taxes discontinued operations                                                                                 |       | 192,788                     |       | 192,788                          |       |
| Other deferred credits and other liabilites -  discontinued operations                                                                                              |       | 142,042                     |       | 156,835                          |       |
| Total deferred credits and other liabilities                                                                                                                        |       | 6,181,740                   |       | 5,793,037                        |       |
|                                                                                                                                                                |       |                        |       |                             |       |
| Concentrations  and commitments                                                                                                                                     |       |                        |       |                             |       |
|                                                                                                                                                                |       |                        |       |                             |       |
| Total capitalization and liabilities                                                                                                                                |       | $                           | 31,115,917 |                             | $          | 31,881,286 |   |

 

See accompanyingnotes to consolidated financial statements.

5

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CORNING NATURAL GAS CORPORATION AND SUBSIDIARY

ConsolidatedStatements of Cash Flows

For the Nine Months EndedJune 30, 2006 and 2005

Unaudited

 
| ** **                                                                            | ** ** | **2006**   | ** ** | **2005**    | ** ** |
|---------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|
| Cash flows from  operating activities:                                                |       |       |       |        |       |
| Net income (Loss)                                                                     |       | $          | (23,639    | )           | $          | 810,753 |   |
| Adjustments to reconcile net income (loss) to net  cash used in operating activities: |       |       |       |        |       |
| Depreciation                                                                          |       | 537,915    |       | 464,130     |       |
| Unamortized debt issuance cost                                                        |       | 12,062     |       | 14,601      |       |
| Gain on sale of marketable securities                                                 |       | (105,115   | )          | (54,035     | )          |
| Deferred income taxes                                                                 |       | (33,940    | )          | 24,079      |       |
|                                                                                  |       |       |       |        |       |
| Changes in  assets and liabilities:                                                   |       |       |       |        |       |
| (Increase) decrease in:                                                               |       |       |       |        |       |
| Accounts receivable                                                                   |       | (1,339,331 | )          | (883,441    | )          |
| Gas stored underground                                                                |       | 3,636,151  |       | 2,308,298   |       |
| Gas inventories                                                                       |       | (88,319    | )          | (4,197      | )          |
| Prepaid expenses                                                                      |       | (225,217   | )          | (217,609    | )          |
| Unrecovered gas costs                                                                 |       | 542,648    |       | (409,121    | )          |
| Deferred pension and other                                                            |       | 22,004     |       | 65,988      |       |
| Other                                                                                 |       | (75,881    | )          | 31,948      |       |
| Increase (decrease) in:                                                               |       |       |       |        |       |
| Accounts payable                                                                      |       | 952,919    |       | 713,904     |       |
| Accrued expenses                                                                      |       | (266,049   | )          | 21,417      |       |
| Customer deposit liability                                                            |       | (450,594   | )          | (544,095    | )          |
| Deferred income taxes                                                                 |       | 0          |       | 443,466     |       |
| Deferred compensation                                                                 |       | 156,100    |       | 174,150     |       |
| Deferred pension & post-retirement benefits                                       |       | 406,178    |       | 611,020     |       |
| Other liabilities and deferred credits                                                |       | (260,481   | )          | 70,304      |       |
| Net cash provided by operating activities                                             |       | 3,397,411  |       | 3,641,560   |       |
|                                                                                  |       |       |       |        |       |
| Cash flows from  investing activities:                                                |       |       |       |        |       |
| Purchase of securities available-for-sale                                             |       | (114,523   | )          | (209,309    | )          |
| Sale of securities available-for-sale                                                 |       | 138,414    |       | 35,766      |       |
| Capital expenditures                                                                  |       | (1,453,384 | )          | (737,628    | )          |
| Net cash used in investing activities                                                 |       | (1,429,493 | )          | (911,171    | )          |
|                                                                                  |       |       |       |        |       |
| Cash flows from  financing activities:                                                |       |       |       |        |       |
| Proceeds under lines-of-credit                                                        |       | 7,087,919  |       | 8,675,000   |       |
| Repayment of lines-of-credit                                                          |       | (7,883,884 | )          | (11,500,000 | )          |
| Repayment of long-term debt                                                           |       | (407,900   | )          | (51,198     | )          |
| Net cash used in financing activities                                                 |       | (1,203,865 | )          | (2,876,198  | )          |
| Net increase in cash                                                                  |       | 764,053    |       | (145,809    | )          |
|                                                                                  |       |       |       |        |       |
| Cash and cash equivalents at beginning of period                                      |       | 255,037    |       | 253,863     |       |
|                                                                                  |       |       |       |        |       |
| Cash and cash equivalents at end of period                                            |       | $          | 1,019,090  |        | $          | 108,054 |   |
|                                                                                  |       |       |       |        |       |
| Supplemental  disclosures of cash flow information:                                   |       |       |       |        |       |
| Cash paid during the period for:                                                      |       |       |       |        |       |
| Interest                                                                              |       | $          | 1,216,278  |        | $          | 983,048 |   |
|                                                                                  |       |       |       |        |       |
| Income taxes                                                                          |       | $          | 3,000      |        | $          | 212,194 |   |

 

6

----

**Corning Natural Gas Corporation**

**Notes to Consolidated Financial Statements**

Note A – Basis ofPresentation

Theinformation furnished herewith reflects all adjustments, which are in theopinion of management necessary to a fair statement of the results for theperiod.  Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principals generally accepted in the United States of Americahave been condensed or omitted pursuant to SEC rules and regulations, althoughthe Company believes the disclosures which are made are adequate to make theinformation presented not misleading.

Theconsolidated financial statements contained herein should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s latest annual report on Form 10-K.  These unaudited interim financial statementshave not been audited or certified by a firm of certified public accountants.

Note B – New AccountingStandards

InNovember 2004, the FASB issued SFAS No. 151, “Inventory Costs” (SFAS 151).  This statement amends the guidance in ARB No.43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormalamounts of idle facility expense, freight, handling costs, and wasted material(spoilage).  SFAS 151 requires that thoseitems be recognized as current-period charges. In addition, this statement requires that allocation of fixed productionoverheads to costs of conversion be based upon the normal capacity of the productionfacilities.  The provisions of SFAS 151are effective for inventory cost incurred in fiscal years beginning after June15, 2005.  As such, the Company isrequired to adopt these provisions in the beginning of fiscal 2006.  The adoption of SFAS 151 did not have amaterial impact on the consolidated financial statements.

Note C - Pension andOther Post-retirement Benefit Plans

TheCompany uses June 30 as the measurement date for its plans.

Componentsof Net Periodic Benefit Cost:
|                                     | ** ** | **Nine months ended June 30, 2006** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                          | ** ** | **Pension Benefits**                                    | ** ** | **Other Benefits** | ** ** |
| ** **                          | ** ** | **2006**                                                     | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                          | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                        |       | $                                                            | 302,654    |   | $ | 270,745 |   | $ | 23,417 |   | $ | 25,302 |   |
| Interest cost                       |       | 503,733                                                      |       | 562,884 |   | 42,950 |   | 52,558 |   |
| Expected return  on plan assets     |       | (558,813                                                     | )          | (526,636 | ) | 0 |   | 0 |   |
| Amortization of  prior service cost |       | 30,278                                                       |       | 53,654 |   | 36,559 |   | 36,559 |   |
| Amortization of  net (gain) loss    |       | 331,198                                                      |       | 244,733 |   | (17,024 | ) | (16,420 | ) |
| Net periodic benefit  cost          |       | $                                                            | 609,050    |   | $ | 605,380 |   | $ | 85,902 |   | $ | 97,999 |   |

 

## **PensionPlan Assets**

The Company’s pensionplan weighted-average asset allocations by asset category are as follows:
|                         | ** ** | **Plan Assets**     | ** ** |
|-------------------------|------------|--------------------------|------------|
| ** **              | ** ** | **At June 30** | ** ** |
| **Asset Category** | ** ** | ** **               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Equity  Securities      |       | 56                       | %          | 56 | % |
| Debt Securities         |       | 42                       | %          | 41 | % |
| Other                   |       | 2                        | %          | 3 | % |
|                    |       | 100                      | %          | 100 | % |
|                         |            |                          |            |  |  |  |  |

 

There is no Companycommon stock included in the plan assets.

Amounts recognized in theBalance Sheets consist of:

7

----

 
|                                               | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **2006**                  | ** ** | **2005**                | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                          |       |                      |       |                    |       |   |   |   |   |
| Accrued Benefit  Cost                         |       | $                         | (2,620,841 | )                       | $          | (3,023,498 | ) | $ | (1,100,466 | ) | $ | (1,037,380 | ) |
| Intangible  Assets                            |       | 167,751                   |       | 208,121                 |       | — |   | — |   |
| Accumulated  Other                            |       |                      |       |                    |       |   |   |   |   |
|      Comprehensive Income |       | 1,839,173                 |       | 2,354,643               |       | — |   | — |   |
| Net Amount Recognized                         |       | $                         | (613,917   | )                       | $          | (460,734 | ) | $ | (1,100,466 | ) | $ | (1,037,380 | ) |

 

The accumulated benefitobligation for all defined benefit pension plans is $13,949,368 at September30, 2006 and $13,446,250 at September 30, 2005, respectively.

Information for pensionplans with an accumulated benefit obligation in excess of plan assets:
|                                 | ** ** | **September 30** | ** ** |
|---------------------------------|------------|-----------------------|------------|
|                                 | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                            |       |                  |       |   |   |
| Projected  Benefit Obligation   |       | $                     | 15,438,815 |   | $ | 14,881,213 |   |
| Accumulated  Benefit Obligation |       | 13,949,368            |       | 13,446,250 |   |
| Fair Value of Plan  Assets      |       | 10,120,454            |       | 9,251,719 |   |
|                                 |            |                       |            |  |  |  |  |

 

The plan objective is toprovide real (inflation adjusted) growth in assets vs. benchmark over acomplete market cycle.  The plan’sobjective assumes asset growth will meet or exceed 8% of (risk adjusted) growthover a complete market cycle.  

Investment guidelines arebased upon an investment horizon of greater than five years.  There is a requirement to maintain sufficientliquid reserves to provide for payment of retirement benefits.

The asset allocationguidelines for the plan are as follows:
|                             | ** ** | **Minimum** | ** ** | **Maximum** | ** ** |
|-----------------------------|------------|-------------|------------|-------------|------------|
| Domestic Common  Stock      |       |        |       |        |       |
| Large/Mid Cap               |       | 15          | %          | 50          | %          |
| Small Cap                   |       | 5           | %          | 15          | %          |
| Reits                       |       | 0           | %          | 20          | %          |
| International  Common Stock |       | 10          | %          | 20          | %          |
| Total Equities              |       | 30          | %          | 75          | %          |
| Total Fixed  Income         |       | 20          | %          | 60          | %          |
| Cash                        |       | 0           | %          | 10          | %          |

 

These asset allocationguidelines reflect the plan’s desire for investment return.  They also reflect the full discretion of theInvestment Manager to shift the asset mix within the specified ranges.  

The desired investmentobjective is a long-term rate of return on assets that is approximately8%.  The target rate of return for theplan has been based upon the assumption that future real returns willapproximate the long-term rates of return experienced for each asset class ofthe Investment Policy Statement over a complete business cycle.  The plan’s overall annualized total returnafter deducting advisory, money management and custodial fees, as well as totaltransaction costs should perform above an index comprised of market indicesweighted by the strategic asset allocation of the plan.

In order to accomplishthe investment goals, the Investment Committee believes that the investments ofthe plan must be diversified to provide the Investment Manager with theflexibility to invest in various types of assets.  The Investment Committee recognizes that amoderate amount of risk must be assumed to achieve the Plan’s long-termobjectives.  The Investment Committeebelieves that the Company’s prospects for the future, current financialconditions, and several other factors suggest collectively that the plan cantolerate some interim fluctuations in market value and rates of return in orderto achieve long-term objectives.

8

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## **Contributions**

The Company expects tocontribute $452,181 to its Pension Plan in 2006.  The Post Retirement Benefit Plan is notfunded.

## **EstimatedFuture Benefit Payments**

The following benefitpayments, which reflect expected future service, as appropriate, are expectedto be paid:
|                        | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
|------------------------|------------|-----------------------|------------|---------------------|------------|
|                   |       |                  |       |                |       |
| 2006                   |       | $                     | 598,619    |                | $          | 59,144 |   |
| 2007                   |       | 705,382               |       | 65,155              |       |
| 2008                   |       | 685,733               |       | 65,014              |       |
| 2009                   |       | 666,467               |       | 66,640              |       |
| 2010                   |       | 662,684               |       | 69,606              |       |
| Years 2011 – 2015 |       | 3,430,564             |       | 390,471             |       |
|                        |            |                       |            |                     |            |  |  |

 

Assumed health care costtrend rates have a significant effect on the amounts reported for health careplans.  A one-percentage-point change inassumed health care cost trend rates would have the following effect:
|                                               | ** ** | **1 – Percentage-** | ** ** | **1-Percentage**        | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **Point Increase**            | ** ** | **Point Decrease** | ** ** |
| Effect on total  of service and interest cost |       | $                                  | 3,694      |                    | $          | (3,177 | ) |
| Effect on  postretirement benefit obligation  |       | $                                  | 47,845     |                    | $          | (41,421 | ) |

 

Note D - Segment Overview

Thefollowing table reflects year-to-date results of the segments consistent withthe Company’s internal financial reporting process.  The following results are used in part, bymanagement, both in evaluating the performance of, and in allocating resourcesto, each of these segments.
|                                        | ** ** | **Utility**          | ** ** | **Non-Utility Operations** | ** ** | **Discontinued Operations** | ** ** | ** **   | ** ** |
|----------------------------------------|------------|----------------------|------------|---------------------------------|------------|----------------------------------|------------|--------------|------------|
| ** **                             | ** ** | **Gas Company** | ** ** | **Corning Realty**         | ** ** | **Corning  Mortgage**            | ** ** | **Subtotal** | ** ** | **(2)  Appliance** | ** ** | **(3) Tax  Center** | ** ** | **(4)  Foodmart  Plaza** | ** ** | **Subtotal** | ** ** | **Total  Consolidated** | ** ** |
| Revenue:(1)                            |       |                 |       |                            |       |                             |       |         |       |   |   |   |   |   |   |   |   |   |   |
| 2006                                   |       | $                    | 24,541,370 |                            | $          | 2,190,594                        |       | $            | 290        |   | $ | 2,190,884 |   | $ | 58,195 |   | $ | 0 |   | $ | 0 |   | $ | 58,195 |   | $ | 26,790,449 |   |
| 2005                                   |       | 20,630,489           |       | 2,445,803                       |       | (15,252                          | )          | 2,430,551    |       | 169,484 |   | 29,263 |   | 0 |   | 198,747 |   | 23,259,787 |   |
| Transportation Revenue                 |       |                 |       |                            |       |                             |       |         |       |   |   |   |   |   |   |   |   |   |   |
| 2006                                   |       | 2,259,302            |       | 0                               |       | 0                                |       | 0            |       | 0 |   | 0 |   | 0 |   | 0 |   | 2,259,302 |   |
| 2005                                   |       | 2,360,007            |       | 0                               |       | 0                                |       | 0            |       | 0 |   | 0 |   | 0 |   | 0 |   | 2,360,007 |   |
| Net income (loss):(1)                  |       |                 |       |                            |       |                             |       |         |       |   |   |   |   |   |   |   |   |   |   |
| 2006                                   |       | 81,068               |       | (38,319                         | )          | (37,671                          | )          | (75,990      | )          | (28,717 | ) | 0 |   | 0 |   | (28,717 | ) | (23,639 | ) |
| 2005                                   |       | 797,232              |       | 48,939                          |       | (17,655                          | )          | 31,284       |       | 9,345 |   | (27,108 | ) | 0 |   | (17,763 | ) | 810,753 |   |
| Interest income:(1)                    |       |                 |       |                            |       |                             |       |         |       |   |   |   |   |   |   |   |   |   |   |
| 2006                                   |       | 143,799              |       | 0                               |       | 0                                |       | 0            |       | 79,388 |   | 0 |   | 0 |   | 79,388 |   | 223,187 |   |
| 2005                                   |       | 83,950               |       | 0                               |       | 0                                |       | 0            |       | 121,196 |   | 9,078 |   | 0 |   | 130,274 |   | 214,224 |   |
| Interest expense:(1)                   |       |                 |       |                            |       |                             |       |         |       |   |   |   |   |   |   |   |   |   |   |
| 2006                                   |       | 1,184,616            |       | 48,239                          |       | 4,710                            |       | 52,949       |       | 4,111 |   | 0 |   | 0 |   | 4,111 |   | 1,241,676 |   |
| 2005                                   |       | 947,217              |       | 51,937                          |       | 7,416                            |       | 59,353       |       | 14,801 |   | 0 |   | 0 |   | 14,801 |   | 1,021,371 |   |
| Total assets:                          |       |                 |       |                            |       |                             |       |         |       |   |   |   |   |   |   |   |   |   |   |
| 2006                                   |       | 28,310,743           |       | 1,593,578                       |       | 147,920                          |       | 1,741,498    |       | 1,063,676 |   | 0 |   | 0 |   | 1,063,676 |   | 31,115,917 |   |
| 2005                                   |       | 25,664,926           |       | 1,625,504                       |       | 179,439                          |       | 1,804,943    |       | 795,339 |   | 120,762 |   | 0 |   | 916,101 |   | 28,385,970 |   |
| Capital expenditures:                  |       |                 |       |                            |       |                             |       |         |       |   |   |   |   |   |   |   |   |   |   |
| 2006                                   |       | 1,451,980            |       | 1,404                           |       | 0                                |       | 1,404        |       | 0 |   | 0 |   | 0 |   | 0 |   | 1,453,384 |   |
| 2005                                   |       | 728,023              |       | 9,605                           |       | 0                                |       | 9,605        |       | 0 |   | 0 |   | 0 |   | 0 |   | 737,628 |   |
| Federal income tax  expense (benefit): |       |                 |       |                            |       |                             |       |         |       |   |   |   |   |   |   |   |   |   |   |
| 2006                                   |       | (61,898              | )          | (15,684                         | )          | (19,406                          | )          | (35,090      | )          | (14,793 | ) | 0 |   | 0 |   | (14,793 | ) | (111,781 | ) |
| 2005                                   |       | 643,721              |       | 30,078                          |       | (9,236                           | )          | 20,842       |       | 4,815 |   | (14,760 | ) | 0 |   | (9,945 | ) | 654,618 |   |
|                                        |            |                      |            |                                 |            |                                  |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

9

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(1) Before elimination ofintercompany interest. 

(2) The Appliance Co.discontinued operations in September 2003.

(3) Tax CenterInternational discontinued operations in October 2004.

(4) Foodmartdiscontinued operations in July 2004.

Interestincome and expense have been displayed in the segment in which it has beenearned or incurred.  Segment interestexpense other than the Gas Company is included within unregulated expenses inthe consolidated statements of income.

Therewere no sales of unregistered securities (debt or equity) during the quarterended June 30, 2006.

Note E – Subsequent Event

On May 15, 2006, CorningNatural Gas Corporation (CNG) and C&T Enterprises filed a joint petitionwith the New York State Public Service Commission (PSC) for approval of a stockacquisition and merger.

On July 19, 2006, The PSCapproved the stock acquisition and merger proposal of Corning Natural GasCorporation and C&T Enterprises, Inc, with certain conditions.   The PSC determined that the merger andacquisition is in the public interest, will not adversely affect thedevelopment of competitive markets, and will provide significant customerbenefits.

Also on July 19, 2006,the Company (CNG) filed a preliminary Proxy Statement and Notice of SpecialMeeting of Stockholders with the Securities and Exchange Commission (SEC) fortheir review.  On August 8, 2006, alimited number of comments were received from the SEC.  It is expected that the Company will file itsamended proxy statement expeditiously with a shareholder mailing to follow.

10

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CORNING NATURAL GASCORPORATIONFORM 10-Q for the quarter ended June 30, 2006

**Item2 - Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

# **Overview**

Thecompany’s primary business is natural gas distribution.  We serve approximately 14,000 customersthrough 400 miles of pipeline.  Ourservice territory is very saturated with very little residential growth.  Growth opportunities exist in the industrialmarket, as well as in local production. Focus is given to controlling costs and making timely rate applicationsto the Public Service Commission.  Keyperformance indicators are net income and rate of return.  Other indicators that are tracked includedegree days (a measure of weather), working capital changes and debt leveltrends.

**Earnings**

2006 compared with 2005

Consolidated net lossamounted to $322,600 or ($.636) per share in the third quarter of 2006 comparedto earnings of $43,700 or $.086 per share in the third quarter of 2005.  Consolidated net loss in the nine monthsended June 30, 2006 was $23,600 or ($.047) per share compared to consolidatednet income of $810,700 or $1.599 per share in the nine months ended June 30,2005. The decrease is the result of a significant decrease in local productionrevenues, increased interest expense on short-term borrowings and increasedlegal and consulting services incurred as a result of proceedings before thePSC. Also, reduction in Corning Mortgage earnings due to soft local real estatemarket, as shown in the table below.

Earnings (Loss) by Segment
|                                        | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **YTD**  | ** ** | **YTD**  | ** ** |
|----------------------------------------|------------|-------------|------------|-------------|------------|----------|------------|----------|------------|
| ** **                             | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Utility                                |       | $           | (283,874   | )           | $          | 26,259   |       | $        | 81,068     |   | $ | 797,232 |   |
| Corning Realty                         |       | (25,473     | )          | 21,688      |       | (38,319  | )          | 48,939   |       |
| Corning Mortgage                       |       | (8,991      | )          | (6,690      | )          | (37,671  | )          | (17,655  | )          |
| Total from Continuing Operations       |       | (318,338    | )          | 41,257      |       | 5,078    |       | 828,516  |       |
|                                   |       |        |       |        |       |     |       |     |       |
| Earnings from  Discontinued Operations |       | (4,263      | )          | 2,481       |       | (28,717  | )          | (17,763  | )          |
| Total  Consolidated                    |       | $           | (322,601   | )           | $          | 43,738   |       | $        | (23,639    | ) | $ | 810,753 |   |

 

### **Revenue**

|                            | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **YTD**    | ** ** | **YTD**    | ** ** |
|----------------------------|------------|-------------|------------|-------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | **2006**    | ** ** | **2005**    | ** ** | **2006**   | ** ** | **2005**   | ** ** |
| Utility  Operating Revenue |       |        |       |        |       |       |       |       |       |
| Retail Revenue:            |       |        |       |        |       |       |       |       |       |
| Residential                |       | $           | 3,366,649  |        | $          | 2,894,767  |       | $          | 14,544,409 |   | $ | 11,883,350 |   |
| Commercial                 |       | 714,423     |       | 574,789     |       | 3,287,226  |       | 2,408,746  |       |
| Industrial                 |       | 50,244      |       | 19,426      |       | 229,528    |       | 110,128    |       |
|                       |       | 4,131,316   |       | 3,488,982   |       | 18,061,163 |       | 14,402,224 |       |
| Transportation             |       | 608,466     |       | 556,831     |       | 2,259,302  |       | 2,360,007  |       |
| Wholesale                  |       | 624,479     |       | 443,137     |       | 3,576,710  |       | 2,672,232  |       |
| Local Production           |       | 65,723      |       | 206,308     |       | 269,797    |       | 828,591    |       |
| Other                      |       | 104,577     |       | 62,121      |       | 374,398    |       | 367,435    |       |
|                       |       | $           | 5,534,561  |        | $          | 4,757,379  |       | $          | 24,541,370 |   | $ | 20,630,489 |   |

 

2006 compared with 2005

Utility operating revenueincreased $777,000 in the third quarter of 2006 compared to the third quarterof 2005. Utility operating revenue YTD 2006 increased $3,911,000 compared toYTD 2005 due primarily to an increase from higher gas costs.  Gas costs are charged to customers throughthe Company’s Gas Adjustment Clause.

11

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# **Non-UtilityRevenue**

2006 compared to 2005

Non-utilityrevenue by operating segment can be found in note D to the financialstatements.  Non-utility revenue in 2006decreased $239,700 or 10 percent due to the Corning Realty segment because ofthe competitiveness of that segment.

**OperatingExpenses**

# **Utility**

2006 compared with 2005

Purchase gas expenseincreased $874,300 or 29 percent in the third quarter of 2006 compared to thethird quarter of 2005.  The Company’saverage cost of gas, including reconciliation amounts increased to $17.53 permcf in June 2006 from $9.24 per mcf in June 2005.  Other operating and maintenance expenseincreased by 21 percent.    

# **Non-Utility**

2006 compared with 2005

Corning Realty commissionand fees expense increased by 19 percent in the third quarter of 2006 comparedto the third quarter of 2005 as a result of an increase in referrals paidout.  Realty occupancy and advertisingexpenses decreased $22,000 in the third quarter of 2006 compared to the thirdquarter of 2005 due to a net decrease in advertising costs.

# **OtherIncome and Expense**

Investment incomeincreased $12,800 in the third quarter of 2006 versus 2005.  The change is due to realized gains andlosses on a trust fund established to fund post-retirement compensations tocertain officers.  Interest expenseincreased $145,700 in the third quarter of 2006 compared to the same period in2005 due to rising interest rates.

# **IncomeTaxes**

Utility income taxexpense (benefit) for the quarter ended June 30, 2006 was ($185,800), comparedto ($31,900) for the same period last year. For the nine months ended June 30, 2006, we reported income tax expense(benefit) of ($61,900) compared to $643,700 for the same period last year.

The effective tax ratefor the quarter ended June 30, 2006 was 40 percent, compared to 18 percent inthe prior year period.  The effective taxrate in the prior period reflects an adjustment resulting from prior periodaccelerated depreciation deductions.  Theeffective tax rate for the nine months ended June 30, 2006 was 31 percentcompared to 45 percent in the same period last year.  The effective tax rate in the current periodreflects an adjustment to prior period deferred income taxes.  

# **OperatingSegments**

Note D to the financialstatements, which also contain the results by segment for the nine months endedJune 30, 2006 and 2005.

# **Liquidityand Capital Resources**

Internally generated cashfrom operating activities consists of net income, adjusted for non-cash expensesand changes in operating assets and liabilities.  Non-cash items include depreciation andamortization and deferred income taxes. In the utility segment, over or under recovered gas costs significantlyimpacts cash flow.  In addition, thereare significant year-to-year changes in regulatory assets that impact cashflow.  Cash flows from investingactivities consist primarily of capital expenditures.  Capital expenditures have historicallyexceeded $1 million annually and the same is expected in the coming year.  Cash flows from financing activities consistof repayment of long-term debt and borrowings and repayments under ourlines-of-credit.  For consolidatedoperations, the Company had $6,600,000 for the quarter ended June 30, 2006available through lines of credit at local banks, of which $5,800,000 isoutstanding at June 30, 2006.  Assecurity for the Company’s line of credit, collateral assignments have beenexecuted which assign to the lender various rights in the investment trustaccount, membership

12

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interest in Corning Realty Associates, LLC and proceeds from the noteagreement.  In addition, the lender has apurchase money interest in and to all natural gas purchases by debtor utilizingfunds advanced by the bank under the line-of-credit agreement and all proceedsof sale thereof and accounts receivable pertaining to such sale.  The Company relies heavily on its creditlines and a large portion is utilized throughout the entire year.

 

The Company has reachedan agreement with a Virginia based company, “Virginia Power Energy” to manageall of its gas supply capacity and purchases effective April 2006.

# **Regulatory Matters**

### **Rate Case Decision ofMay 22, 2006**

On May 22, 2006, the NewYork Public Service Commission (the “Commission”) issued a decision in threeproceedings involving the Company:  Case05-G-1359, to examine the Company’s October 31, 2005 filing for increasedrates; Case 05-G-1268, to review the Company’s practices particularly relatingto natural gas supply in light of the difficulties experienced by the Companyin the summer and fall of 2005 in procuring supplies for the 2005-2006 winterheating season; and Case 04-G-1032, to consider the Company’s request fordeferral and recovery of costs formerly allocated to the appliance business thathad been sold in 2003.  The decision,entitled “Order Setting Gas Delivery Service Rates, Adopting PerformanceTargets and Incentives, Allowing Deferral and Rate Recovery of Certain Costs,and Crediting Customers with $1.4 Million of Prior Gas Commodity Costs” (the “MayOrder”), resolved the issues presented in the three proceedings, adopting, withcertain modifications, the provisions of the Gas Rates Joint Proposal (the “JointProposal”) dated March 15, 2006 that had been agreed upon by the Company, theStaff of the Department of Public Service (“Staff”), Multiple Intervenors (anassociation of large customers), and, in part, Fortuna Energy Inc. (a naturalgas exploration and production corporation utilizing Company facilities totransport its natural gas to market).

In the May Order,the Commission authorized the Company to increase its base rates for naturalgas service by approximately $2.7 million of the $3.4 million requested by theCompany in its October 31, 2005 rate filing. Although the Company’s rate filing and the Joint Proposal originallywere based on the assumption that rates would go into effect as of October 1,2006, the Joint Proposal had been amended on April 14, 2006 (the “Amendment”)to propose that the increased rates go into effect as of June 1, 2006 toenhance the Company’s cash flow and access to credit on favorable terms.  The May Order adopted that recommendation onthe condition, also suggested in the Amendment, that the additional amountcollected by the Company as a result of early implementation, calculated to beapproximately $420,000, be returned to customers over the period June 1, 2007through September 30, 2007, to correspond to the period during which it will becollected.  The Commission grantedrecovery of approximately $2.63 million of deferred costs associated with theappliance business, offsetting against that amount $1.4 million of costsidentified in the Joint Proposal as attributable to excessive gas costsincurred in 2005.

The Commissionadopted the hypothetical capital structure of 70 percent debt and 30 percentequity recommended in the Joint Proposal to enhance the Company’s financialoutlook.  In the event that the Companyearns in excess of 11.0 percent on equity using that structure, 50 percent ofthe excess will be retained by shareholders and 50 percent will be deferred tobe applied to the benefit of customers in a manner to be determined by theCommission.

The Commissionfurther adopted the revenue allocation proposals contained in the JointProposal designed to better match revenues with the costs of providing servicein the three distinct areas served by the Company, Corning, Hammondsport andBath (through Bath Electric, Gas and Water Systems, a municipal utility).  In addition, the May Order approved increasesin the customer minimum charge that were designed to collect more of the fixedcosts of serving customers in that component of the bill. Although, for anaverage residential customer using 10 dekatherms per month, the increase in theminimum charge alone would amount to approximately 40.77 percent, viewed as apercentage of the entire bill, including the commodity cost of natural gas, theincrease would be approximately 11 percent.

13

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The May Order alsoadopted a number of measures included in the Joint Proposal designed to enhancesound practices in three major areas: Health and Safety; Gas Procurement and Capacity Asset Management; andAccounting.  Included in the Health andSafety measures are requirements for the testing, repair and replacement ofcertain types of pipe that are determined to pose potential safety concerns andperiodic reporting on results.  GasProcurement and Capacity Asset Management measures include meeting specificdeadlines and quantity requirements for the procurement of natural gassupplies, including storage gas and hedging of future supplies; adherence tospecific Natural Gas Supply and Acquisition Plan requirements, includingprocedures for modification of that Plan; and maintaining capacity contractsand minimizing stranded capacity costs consistent with a Commission PolicyStatement on those matters.  Accountingmeasures include providing to the Commission’s Office of Accounting and Financedaily cash-flow reports; monthly reconciliations of cash balances per theCompany’s books with bank account balances; rolling cash flow forecasts;monthly income statements and balance sheets; and quarterly reports of GeneralLedger activity, long- and short-term debt, and investment activity innon-utility businesses.  The Accounting measuresfurther include separation of the Treasurer and Chief Financial Officerfunctions; reporting on specific opportunities for improvement in accountingand recordkeeping practices; reconciliation of accruals with payments/refundsfor vendors; reconciliation of Federal and State Income Tax returns withamounts recorded on the books; adherence to Commission record-retentionpolicies; exploration of opportunities for new lines of  bank credit; and development of a successionplan for key employees.  Continued use ofthe hypothetical capital structure referred to above is conditioned on theCompany’s adherence to a series of conditions set forth in the Joint Proposaland adopted by the May Order.

Pursuant to theMay Order, if the Company is deficient in any of the enumerated obligations, itwill incur a regulatory liability for the benefit of customers, determined inaccordance with a matrix set forth in the May Order.  The matrix groups different types ofdeficiencies according to their perceived seriousness and assigns differentamounts to those different categories. The minimum amount that can be incurred for a single deficiency is$9,000 and the maximum amount that can be incurred for a series of failures is$519,000.

To enhanceinterest in an acquisition of the Company by a responsible purchaser, the JointProposal included, and the Commission adopted, a “Merger Package” consisting ofa series of commitments from and to a prospective buyer.  Among these measures are an opportunity to “freeze”rates for a three-year period, an increase in the earnings threshold, removalof certain requirements that are intended to apply only if the Company is notsold, and options for passing back to customers the $1.4 million of costsidentified in the Joint Proposal as attributable to excessive gas costs.

On May 24, 2006,the Company agreed unconditionally to accept and abide by the terms andconditions of the May Order and the new rates authorized by the May Order wentinto effect as of June 1, 2006.

## **Critical Accounting Policies**

The Company’s most significantaccounting policies are described below. It is increasingly important tounderstand that the application of generally accepted accounting principlesinvolve certain assumptions, judgments and estimates that affect reportedamounts of assets, liabilities, revenues and expenses. Thus, the application ofthese principles can result in varying results from company to company.  

### **Accountingfor Utility Revenue and Cost of Gas Recognition.** The Company records revenues from residentialand commercial customers based on meters read on a cycle basis throughout eachmonth, while certain large industrial and utility customers’ meters are read atthe end of each month. The Company does not accrue revenue for gas deliveredbut not yet billed, as the New York PSC requires that such accounting must beadopted during a rate proceeding, which the Company has not done. The Company’stariffs contain mechanisms that provide for the recovery of the cost of gasapplicable to firm customers, which includes estimates. Under these mechanisms,the Company periodically adjusts its rates to reflect increases and decreasesin the cost of gas. Annually, the Company reconciles the difference between thetotal gas costs collected from customers and the cost of gas. The Company

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### defers any excess or deficiency and subsequently either recovers itfrom, or refunds it to, customers over the following twelve-month period.  To the extent estimates are inaccurate; aregulatory asset on the balance sheet is increased or decreased.

### **Accountingfor Regulated Operations - Regulatory Assets and Liabilities.**  Asignificant portion of the Company’s business is subject to regulation. TheCompany’s regulated utility records the results of its regulated activities inaccordance with Statement of Financial Accounting Standards (SFAS) No. 71,Accounting for the Effects of Certain Types of Regulation, which results indifferences in the application of generally accepted accounting principlesbetween regulated and non-regulated businesses. SFAS No. 71 requires therecording of regulatory assets and liabilities for certain transactions thatwould have been treated as revenue and expense in non-regulated businesses. Incertain circumstances, SFAS No. 71 allows entities whose rates are determinedby third-party regulators to defer costs as “regulatory” assets in the balancesheet to the extent that the entity expects to recover these costs in futurerates. Management believes that currently available facts support the continuedapplication of SFAS No. 71 and that all regulatory assets and liabilities arerecoverable or refundable through the regulatory environment.  

### **Pensionand Post-Retirement Benefits.**  Theamounts reported in the Company’s financial statements related to its pensionand other post-retirement benefits are determined on an actuarial basis, whichuses 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, forother post-retirement benefits, the expected annual rate of increase in percapita cost of covered medical and prescription benefits.  Changes in actuarial assumptions andactuarial experience could have a material impact on the amount of pension andpost-retirement benefit costs and funding requirements experienced by theCompany.  However, the Company expects torecover substantially all of its net periodic pension and other post-retirementbenefit costs attributed to employees in its Utility segment in accordance withthe applicable regulatory commission authorization. For financial reportingpurposes, the difference between the amounts of such costs as determined underapplicable accounting principles is recorded as either a regulatory asset orliability.

**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

This report containsstatements which, to the extent they are not recitations of historical facts,constitute “forward-looking statements” within the meaning of the SecuritiesLitigation Reform Act of 1995 (Reform Act). In this respect, the words “estimate”, “project”, “anticipate”, “expect”,“intend”, “believe” and similar expressions are intended to identifyforward-looking statements.  All suchforward-looking statements are intended to be subject to the safe harborprotection provided by the Reform Act.  Anumber of important factors affecting the Company’s business and financialresults could cause actual results to differ materially from those stated inthe forward-looking statements.

### **Item3 – Quantitative and Qualitative Disclosures About Market Risk**

Interest Rate Risk

The Company’s exposure tointerest rate risk arises from borrowing under short-term debtinstruments.  At June 30, 2006, theseinstruments consisted of a term loan and bank credit line borrowingsoutstanding of $5,800,000.  The interestrate (prime rate as published in the Wall Street Journal) on these lines was8.25 percent at June 30, 2006.

**Item 4 - Controls and Procedures**

a.  Evaluation of Disclosure Controls and Procedures.  As of the end of the period covered by thisquarterly report Form 10-Q the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingour Chief Executive Officer and our Chief Financial Officer, of theeffectiveness of the design and operation of our “disclosure controls andprocedures” (as defined in the Securities Exchange Act of 1934 Rules13a-15).  Based upon that

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evaluation,or Chief Executive Officer and Chief Financial Officer concluded that, as ofthe Evaluation Date, our disclosure controls and procedures were effective toensure that material information relating to us and our consolidatedsubsidiaries is recorded, processed, summarized and reported in a timelymanner.

b.  Changes in Internal Controls.  There have been no changes in our internalcontrols over financial reporting that occurred during the period covered bythis report that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

**Part II – Other Information**

**Item 6 – Exhibits**

The following documents are filed as exhibits tothis Report:
| 31.1   |   | Certification of Chief Executive Officer and Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                            |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                       |
| 32.1   |   | Certification of Chief Executive Officer and Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,  18 U.S.C. Section 1350                   |
|   |   |                                                                                                                                                                       |
| 99.1   |   | Amended and Restated Employment Agreement by and  between Coring Natural Gas Corporation and Thomas K. Barry executed December  14, 2000.                                  |
|   |   |                                                                                                                                                                       |
| 99.2.  |   | Amended and Restated Employment Agreement by and  between Coring Natural Gas Corporation and Kenneth J. Robinson executed December  14, 2000.                              |
|   |   |                                                                                                                                                                       |
| 99.3.  |   | Amended and Restated Survivor Benefit Deferred  Compensation Agreement by and between Corning Natural Gas Corporation and  Thomas K. Barry executed December 14, 2000.     |
|   |   |                                                                                                                                                                       |
| 99.4.  |   | Amended and Restated Survivor Benefit Deferred Compensation  Agreement by and between Corning Natural Gas Corporation and Kenneth J.  Robinson executed December 14, 2000. |
|   |   |                                                                                                                                                                       |
| 99.5.  |   | Amended and Restated Severance Agreement by and  between Corning Natural Gas Company and Thomas K. Barry executed December 14,  2000.                                      |
|   |   |                                                                                                                                                                       |
| 99.6.  |   | Amended and Restated Severance Agreement by and  between Corning Natural Gas Company and Kenneth J. Robinson executed December  14, 2000.                                  |
|   |   |                                                                                                                                                                       |
| 99.7.  |   | Assignment Agreement by and between Corning Natural  Gas Corporation and Thomas K. Barry executed July 10, 2001.                                                           |
|   |   |                                                                                                                                                                       |
| 99.8.  |   | Assignment Agreement by and between Corning Natural  Gas Corporation and Kenneth J. Robinson executed July 10, 2001.                                                       |

 

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**SIGNATURES**

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.
| Date:           |
|-----------------|
| August 14, 2006 |
|                 |   /s/ Thomas K. Barry |   |
|            |    Thomas K. Barry, Chairman of the Board,  President and CEO |
|            |   |
|            |   |
| Date**:**       |   |
| August 14, 2006 |   |
|            |   /s/  Kenneth J. Robinson |   |
|            |    Kenneth J. Robinson, Executive  Vice President |
|            |   |
|            |   |
| Date:           |   |
| August 14, 2006 |   |
|            |   /s/  Firouzeh Sarhangi |   |
|            |    Firouzeh Sarhangi, Chief Financial  Officer and Treasurer |

 

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