CORNING — America is awash in natural gas. The country is pumping out 80 billion cubic feet a day, more than one-quarter of America’s energy mix, to feed our energy demands.
A substantial drop in price since the shale boom has elated both commercial and residential consumers. Furthermore, the discovery of giant natural-gas fields in states such as Texas, Louisiana, Ohio, West Virginia, and Pennsylvania ensure a long-term supply of this energy source, confirmed in December 2014 by the Energy Information Administration, which noted an increase of 10 percent in U.S. gas reserves just in the past year.
Before you don your party hat to celebrate, however, note that a shortage of pipeline in our nation’s delivery system still exists. With 300,000 miles of underground transmission lines and 2.4 million miles of distribution pipes, U.S. gas utilities currently serve 68 million households and 5 million commercial enterprises. That still leaves millions of homes and businesses not served by natural gas.
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“This is the right time to convert a small, local gas company into a regional player,” says Michael I. German, president and CEO of Corning Natural Gas Corp., Inc., a subsidiary of the Corning Natural Gas Holding Corp. (OTC: CNIG).
He lays out the case like this. “Corning is the smallest, publicly traded gas utility in America, with nearly 450 miles of mains, that sells or transports gas to approximately 15,000 customers in 23 towns and villages over 400 square miles of New York state’s Southern Tier. Corning Gas has served this [franchise] area since 1904 … What changed was the development of fracking in the Marcellus Shale area just across the border in Pennsylvania,” German continues. “Couple this development with the announcement in early December by the Federal Energy Regulatory Commission approving Constitution Pipeline company’s proposal to build a 124-mile, 30-inch, natural-gas transmission line from the fields near us to Schoharie County, which opens up virgin territory either underserved or not served by gas. The new pipeline will connect with the Iroquois Pipeline, [thus] enhancing New York state’s gas supply … The availability and price of natural gas make new gas franchises very competitive with the traditional energy sources such as oil, propane, and electricity.”
Corning Natural Gas’s strategy is to grow both the franchised business and the new territory. “Corning’s traditional-utility (franchised) business currently serves about 12,500 residential and 2,500 commercial customers,” notes German. “Corning also provides gas delivery and transportation services to other utilities such as NYSEG (New York State Gas & Electric) in Elmira and BEGWS (Bath Electric Gas & Water Systems) in the village of Bath, as well as major manufacturers including Corning, Inc., Kraft, World Kitchen, and Dresser-Rand. While its franchised area hasn’t expanded, the area is doing well economically, and Corning has launched major expansion efforts throughout our existing service area with new customers in places like Hammondsport, Virgil, and the town of Bath.”
Territorial expansion
Corning Natural Gas’s president points out that while the traditional utility is enjoying growth, the real growth will come from expanding into new territories.
“Joe Mirabito, the CEO of Mirabito Holdings [headquartered in Binghamton], called me up back in 2010 and asked if Corning Natural Gas were interested in a joint venture to sell natural gas to municipalities, residences, and businesses in the Twin Tiers (an area that borders both Northern Pennsylvania and Southern New York),” says German. “Our [subsequent] conversations made it clear that our companies were a good fit. Mirabito brings decades of experience in the energy business to the table, knows the territory well, is very familiar with major potential customers, and can handle all of the back-office requirements. Corning Natural Gas is very familiar with the regulatory side, constructing and maintaining pipeline, operations, and managing the gas supply.”
Gearing up for growth has required substantial capital investment. Since 2007, the company has issued five new-equity offerings raising about $16.5 million.
During the same period, Corning Natural Gas raised $29 million in new debt that has both refinanced old debt at a lower interest rate and funded new construction and an aggressive, 10-year infrastructure upgrade of pipe, services, and other equipment. Corning Natural Gas also invested in information technology by installing new financial-reporting/general-ledger and customer-information systems and made the decision to bring the management of storage and transportation in-house. Two other major efforts included creating the holding company in July 2013 and securing an ample and dependable gas supply with Talisman Energy Inc. (NYSE: TLM), a global, energy company headquartered in Calgary, Alberta (Canada).
Leatherstocking Gas
In November 2010, the Corning Natural Gas Holding Corp. joined with Mirabito Regulated Industries, LLC to form two new ventures called Leatherstocking Gas Co., LLC and Leatherstocking Pipeline Co., LLC to provide natural-gas distribution to unserved and underserved regions of New York state and the Northern Tier of Pennsylvania. (Leatherstocking Pipeline is an unregulated company set up to serve one customer in Lawton, Pa.) Corning Natural Gas and Mirabito each owns 50 percent of the Leatherstocking companies.
Leatherstocking Gas currently has long-term franchises in Broome, Chenango, Delaware, and Otsego counties in New York (the towns and villages of Sidney, Bainbridge, Windsor, Delhi, and Unadilla) and in 16 boroughs and townships in Bradford and Susquehanna Counties in Pennsylvania.
On Oct. 1, 2013, Leatherstocking turned on the natural gas in Bridgewater Township, Pennsylvania, thus inaugurating its first service. “This project initially involved laying 6 miles of plastic pipe to the Endless Mountains Hospital and the Montrose Junior and Senior High School,” asserts German. “Leatherstocking’s strategy is to identify major consumers of gas and run the pipeline first to them. This establishes a cash flow that lets us build [feeder] lines to other customers in the area.
During 2014, Leatherstocking built out its Bridgewater and Montrose distribution system as well as a new system in Dimock and linked more than 150 customers to its gas lines. In March 2014, Constitution Pipeline and Leatherstocking made a joint announcement to install four delivery taps along the proposed 124-mile transmission line for local distribution. One of those taps will provide service to the Amphenol Aerospace plant in Sidney. Now that the pipeline route is confirmed,
Leatherstocking is analyzing possible locations for the remaining taps. This project provides Leatherstocking with the backbone to extend the development of natural-gas distribution franchises in rural communities along the route. The key to our expansion is to answer the basic question: How much do we spend to get a customer?”
To achieve its goals, Corning Natural Gas is engaged in a delicate balancing act of pushing substantial change while simultaneously growing the company’s assets and earnings significantly.
“To meet our goals, we committed $7 million in 2014 to upgrade our existing distribution system by replacing aging pipe, and Leatherstocking spent around $5 million to lay new pipe and for operations,” says German. (Corning Natural Gas’s infrastructure is comprised between 75 percent and 80 percent of plastic or protected steel pipe. The system contains no cast-iron pipe.)
“The upgrade program requires another $4 million annually through 2017. In addition to our stock offerings to attract equity, Corning Natural Gas has established loans with M&T Bank for around $10 million and a line-of-credit with Community Bank for $8 million. Leatherstocking has a loan from Five-Star Bank for $4 million. Going forward, debt retirement is projected at about $2 million annually through 2018 with a $5 million payment due in 2019. In order to fund our projected growth, the company will need to obtain additional equity and/or debt financing,” he adds.
Historically, Corning Natural Gas’s competition in its residential markets has been primarily from “… electricity for cooking, heating water, and clothes drying, and to a small degree, electricity, fuel oil, and propane for heating,” says German. “The price of gas remains low in comparison to alternative fuels in our service territory and our competitive position in the residential, commercial, and industrial markets continues to be strong. Over 90 percent of our residential customers heat with gas. As we expand our distribution system to attract new customers, our principal competition is oil and propane. Corning and Leatherstocking face potential competition from other gas utilities, but they mostly focus on major metropolitan areas, not rural America. Some have suggested that Leatherstocking is using a Sam Walton strategy that keeps us under our competitors’ radar.”
Key statistics
Corning Natural Gas currently has about 300 shareholders, and its stock-trading activity over the counter is limited and sporadic. The five largest stockholders — German, Gabelli Funds, the Zucker Trust, Mitchell Partners, and the Mirabito family — control 61 percent of the shares.
The current market-capitalization is more than $50 million. The share price closed at $20.50 on Jan. 23. The stock has traded in a range between $17 and $25 over the last year.
Corning Natural Gas has no off-balance-sheet arrangements. At year-end 2014, the company had 2.45 million shares outstanding.
Corning Natural Gas is headquartered at 330 W. William St. in Corning. The company headquarters building sits on 7 acres. Corning Natural Gas employs 58 people and generates about $25 million in annual revenue. The leadership team includes German; Firouzeh Sarhangi, CFO and treasurer; Matt Cook, vice president of operations; Russ Miller, vice president of gas supply and marketing; and Stanley Steve, vice president of administration. Freed Maxick CPAs, P.C., which has four offices in Western and Central New York, handles the company’s accounting; Welch & Zink Attorneys of Corning advises on real estate and contracts; and the law firm, Nixon Peabody LLP of Rochester handles corporate governance and regulatory matters.
Mirabito Holdings, Inc. is a family-owned enterprise that provides energy products to homes and businesses throughout upstate New York and in Pennsylvania.
The Business Journal News Network estimates the holding company’s annual revenue at $450 million. The energy-products business includes heating oil, propane, natural gas, coal, gasoline, diesel fuels, kerosene, lubricants, and a complete line of home-heating equipment, installation, and service. The holding company also owns and operates 74 Quickway Food Stores, Mirabito Stores, Manley’s Mighty Marts, and Convenience Express locations throughout Central New York and the Southern Tier. Mirabito Regulated Industries, LLC (MRI) was incorporated in April 2011 as an affiliate of Mirabito Natural Gas, LLC, and MRI owns 50 percent of the two Leatherstocking companies. Mirabito Holdings owns approximately 9 percent of the outstanding shares of Corning Natural Gas Corp. Joseph Mirabito, the CEO of Mirabito Holdings and MRI, and his cousin, William Mirabito, a vice president of Mirabito Holdings, Inc. and MRI, have been directors of the Corning Natural Gas Holding Corporation since its organization in 2013. Mirabito Natural Gas, LLC applied for a Pennsylvania natural-gas, supplier license in 2012.
Opportunities
“There is no end to the [business] opportunities for years to come,” German concludes, “but we have to do it right. Corning Gas is certainly looking for growth — prudent growth — but we have to be careful not to overextend.” The effort by Corning Natural Gas to become a regional player is certainly a challenge, but one that German, a guy who has scaled the 46 high peaks of the Adirondacks, is confident the company can achieve.