UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549 

  

  

FORM 10-K 

  

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF 

THE SECURITIES EXCHANGE ACT OF 1934 

  

For the fiscal year ended September 30, 2007 

  

OR 

  

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF 

THE SECURITIES EXCHANGE ACT OF 1934 

  

Commission file number: 0-643 

  

  

Corning Natural 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 St. 

Corning, New York 14830 

(Address of principal executive offices, including zip code) 

  
**(607) 936-3755 

(Registrant#s telephone number, including area code) 

  
**Securities registered pursuant to Section 12(b) of the Act: 

None 

  
**Securities registered pursuant to Section 12(g) of the Act: 

Common Stock, par value $5.00 per share 

(Title of class) 

 

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. YES [X] NO[ ]
  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] No [ ]

  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant#s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [X]

  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.

Large accelerated Filer [ ]Accelerated Filer [ ] Non-Accelerated Filer [X]
 

Indicate by check mark whether the registrant is a shell company. YES [ ] NO[X]
  

  
Revenues for 12 month period ended September 30, 2007 $24,298,414

The aggregate market value of the 431,852 shares of the Common Stock held by non-affiliates of the Registrant at the $16.30 average of bid and asked prices as of December 1, 2006 was $6,477,780.

Number of shares of Common Stock outstanding as of the close of business on December 1, 2007 - 809,550.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's Annual Report to Shareholders for the twelve month period ended September 30, 2007, and definitive proxy statement relating to the 2008 annual meeting of shareholders are incorporated by reference into Part I, Part II and Part III hereof.

Information contained in this Form 10-K and the Annual Report to shareholders for fiscal 2007 period which is incorporated by reference contains certain forward looking comments which may be impacted by factors beyond the control of the Company, including but not limited to natural gas supplies, regulatory actions and customer demand. As a result, actual conditions and results may differ from present expectations.
**Page 1
 
**Table of Contents
For the Fiscal Year Ended September 30, 2007**Contents**Part I
Page
Item 1
Description of Business
2
Item 1A
Risk Factors
3
Item 2
Description of Property
4
Item 3
Legal Proceedings
5
Item 4
Submission of Matters to a Vote of Security Holders
5**Part II
Item 5
Market for the Registrant's Common Equity and Related 
Stockholder Matters
5
Item 6
Selected Financial Data
5
Item 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations
6
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
11
Item 8
Financial Statements
11
Item 9
Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure
11
Item 9A
Controls and Procedures
11
Item 9B
Other Information
12**Part III
Item 10
Directors, Executive Officers of the Registrant
12
Item 11
Executive Compensation
12
Item 12
Security Ownership of Certain Beneficial Owners and Management
12
Item 13
Certain Relationships and Related Transactions
12
Item 14
Principal Accountant Fees and Services
12**Part IV
Item 15
Exhibits 
13
Signatures
14**Page 2
 
**PART I**
ITEM 1 - DESCRIPTION OF BUSINESS
**ITEM 1 - DESCRIPTION OF BUSINESS

Corning Natural Gas Corporation (the "Company," "we" or "our"), incorporated in 1904, is a natural gas utility. We distribute natural gas through our own distribution and transmission network to residential, commercial, industrial and municipal customers in the Corning, New York area and to two other gas utilities which service the Elmira and Bath, New York areas. We are franchised to supply gas service in all of the political subdivisions in which we operate. We are under the jurisdiction of the Public Service Commission of New York State which oversees and sets rates for New York gas distribution companies.
**Discontinued Operations**
In August 2006, Corning Natural Gas Appliance Corporation ("Corning Appliance") executed an asset purchase agreement to transfer ownership of the Prudential Ambrose & Shoemaker Real Estate Company (the "Real Estate Company") to Better Living, Inc. The sale of the Real Estate Company was the result of long negotiations between the Company and two other potential buyers. The final agreement with Better Living was determined to be in the best interest of the Company when considering the restrictions placed on the Company.

The sale of the Real Estate Company resulted in all of the assets, furniture, fixtures, receivables and pending contracts being transferred to the new owner, which continues to operate the Real Estate Company as a Prudential franchise. The sale price for the Real Estate Company was $825,000 in cash. 

During the negotiations for the sale of the Real Estate Company, the successful buyer expressed no interest in ownership of the Corning Mortgage Company, which was a mortgage banking company owned by Corning Appliance as a subsidiary. Since the mortgage company was not currently conducting any business and existed in name only, it was determined to have no value in the sale and was excluded from the transaction, and has been dissolved as a company.
**Gas Supply**
We have contracted for gas supply portfolio from various sources to provide natural gas to our distribution system. We maintain storage capacity of approximately 586,000 decatherms ("Dth"). We have a contract with Merrill Lynch Commodities Incorporated to manage our capacity and storage assets. The contract is in place from April 2007 through March 2008.

We have secured the required fixed price and storage gas supply for the 2007-2008 winter season and are managing our forecasting process to assure that we follow our gas supply and acquisition plan. Assuming no extraordinary conditions for the winter season, gas supply, flowing and storage will be adequate to serve our approximately 14,500 customers.

We do not expect a shortage of natural gas to impact our business over the next five to ten years. Natural gas drilling is at record levels and domestic reserves and production are increasing. In addition, LNG imports are growing rapidly We likewise anticipate no shortages of the necessary pipes and valves for safe distribution of natural gas, and continue to receive material inventory from various reliable sources.

For more information regarding our segments, see Note 2 to the accompanying Consolidated Financial Statements of this Form 10-K. 
**Seasonality**
Because our business is seasonal by quarters, sales for each quarter of the year vary and are not comparable. Sales vary depending on variations in temperature, although the Company#s weather normalization clause serves to stabilize net revenue from the effects of temperature variations. The weather normalization clause allows us to adjust customer billings to partially compensate for changes in net revenue caused by weather.
**Significant Customers**
We have three major customers, Corning Incorporated, New York State Electric & Gas, and Bath Electric, Gas & Water Systems. The loss of any of these customers could have a significant impact on our financial results. We recently extended our principal contract with Corning Inc. through September 30, 2010.
**Employees**
We had 51 employees as of September 30, 2007 and 48 as of September 30, 2006.
**Competition**
Historically, the competition in our residential market has been primarily from electricity in cooking, water heating and clothes drying, and to a very small degree, in heating. The price of gas remains low in comparison to that of electricity in our service territory and our competitive position in the residential market continues to be very strong. Approximately 99% of our residential customers heat with gas. Relative to attracting new customers beyond our existing mains, our principal competition is oil and propane. Natural gas enjoys a significant price advantage over these fuels today. 

We face limited competition from oil in the industrial market. We have been able to compete successfully through several mechanisms, including providing customers the option of transporting their own gas. We are able to maintain our profit margin in these situations because our transportation rate is equal to the lowest unit rate of the appropriate rate classification, exclusive of gas costs.
**Environmental Regulation**
We believe we are in compliance with present federal, state and local provisions relating to the protection of the environment. We do not expect that continued compliance with these requirements will not have any material adverse effect on our capital expenditures, earnings and financial position. 

 
**Page 3
ITEM 1A.	RISK FACTORS.
***Our operations could be adversely affected by fluctuations in the price of natural gas.*
Prices for natural gas are subject to volatile fluctuations in response to changes in supply and other market conditions. While these costs are usually passed on to customers pursuant to natural gas adjustment clauses and therefore do not pose a direct risk to earnings, we are unable to predict what effect a sharp increase in natural gas prices may have on our customers# energy consumption or ability to pay. Higher prices to customers can lead to higher bad debt expense and customer conservation. Higher prices may also have an adverse effect on our cash flow as typically we are required to pay for our natural gas prior to receiving payments for the natural gas from our customers.
***Operational issues beyond our control could have an adverse effect on our business.*
Our ability to provide natural gas depends both on our own operations and facilities and that of third parties, including local gas producers and natural gas pipeline operators from whom we receive our natural gas supply. The loss of use or destruction of our facilities or the facilities of third parties due to extreme weather conditions, breakdowns, war, acts of terrorism or other occurrences could greatly reduce potential earnings and cash flows and increase our costs of repairs and replacement of assets. Although we carry property insurance to protect our assets and have regulatory agreements that provide for the recovery of losses for such incidents, our losses may not be fully recoverable through insurance or customer rates. 
***Significantly warmer than normal weather conditions may affect the sale of natural gas and adversely impact our financial position and the results of our operations.*
The demand for natural gas is directly affected by weather conditions. Significantly warmer than normal weather conditions in our service areas could greatly reduce our earnings and cash flows as a result of lower gas sales levels. Although we mitigate the risk of warmer winter weather through the weather normalization clauses in our tariffs, we may not always be able to fully recover all lost revenues as the weather mitigation rate design provides only partial protection for warmer than normal weather. 
***There are inherent risks associated with storing and transporting natural gas, which could cause us to incur significant financial losses.*
There are inherent hazards and operation risks in gas distribution activities, such as leaks, accidental explosions and mechanical problems that could cause substantial financial losses. These risks could, if they occur, result in the loss of human life, significant damage to property, environmental pollution, impairment of operations and substantial losses to us. The location of pipelines and storage facilities near populated areas, including residential areas, commercial business centers and industrial sites, could increase the level of damages resulting from these risks. These activities may subject us to litigation and administrative proceedings that could result in substantial monetary judgments, fines or penalties against us. To the extent that the occurrence of any of these events is not fully covered by insurance, they could adversely affect our financial position and results of operations. 
***Changes in regional economic conditions could reduce the demand for natural gas.*
Our business follows the economic cycle of the customers in our service regions, Corning, Bath and Hammondsport, New York. A falling, slow or sluggish economy that would reduce the demand for natural gas in the areas in which we are doing business by forcing temporary plant shutdowns, closing operations or slow economic growth would reduce our earnings potential.

Many of our commercial and industrial customers use natural gas in the production of their products. During economic downturns, these customers may see a decrease in demand for their products, which in turn my lead to a decrease in the amount of natural gas they require for production. 
***Our earnings may decrease in the event of adverse regulatory actions.*
Our operations are subject to the jurisdiction of the New York Public Service Commission (NYPSC). The NYPSC approves the rates that we may charge to our customers. If we are required in a rate proceeding to reduce the rates we charge our customers, or if we are unable to obtain approval for rate relief from the NYPSC, particularly when necessary to cover increased costs, including costs that may be incurred in connection with mandated infrastructure improvements, our earnings may decrease. 
***Our success depends in large part upon the continued services of a number of significant employees, the loss of which could adversely affect our business, financial condition and results of operation.*
Our success depends in large part upon the continued services of our senior executives and other key employees. Although we have entered into an employment agreement with Michael I. German, our president and chief executive officer, Mr. German and other significant employees who have not entered into employment agreements may terminate their employment at any time. The loss of the services of any significant employee could have a material adverse effect on our business. 

**Page 4
*Concentration of share ownership among our largest shareholders may prevent other shareholders from influencing significant corporate decisions.*****************************************************