<PAGE> 1
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 [FEE REQUIRED]
For the fiscal year ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ...... to ......
Commission file number 0-82
NORTH CAROLINA NATURAL GAS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 56-0646235
------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
150 Rowan Street, Fayetteville, North Carolina 28301
-----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(910) 483-0315
----------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common stock, par value New York Stock Exchange
$2.50 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) had 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) had 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 ]
Estimated aggregate market value of the voting stock held by
nonaffiliates of the registrant at November 24, 1995 ..........$146,546,650
Number of shares of Common Stock outstanding at
November 24, 1995 .................................................6,477,200
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement dated December 6, 1995 relating to the
January 9, 1996 Annual Meeting of Shareholders, are incorporated by
reference into Part III of this annual report.
<PAGE> 2
NORTH CAROLINA NATURAL GAS CORPORATION AND SUBSIDIARIES
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED SEPTEMBER 30, 1995
TABLE OF CONTENTS
Item Page
- ---- ----
PART I.
1. Business 1
Executive Officers of the Registrant 15
2. Properties 16
3. Legal Proceedings 16
4. Submission of Matters to a Vote of Security Holders 16
PART II.
5. Market for Registrant's Common Equity and
Related Stockholder Matters 17
6. Selected Financial Data 18
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
8. Financial Statements, Notes and Supplementary Data 25
9. Changes in and Disagreements on Accounting and
Financial Disclosure 43
10. Management's Responsibility for Financial Statements 43
PART III.
11. Directors and Executive Officers of the Registrant 44
12. Executive Compensation 44
13. Security Ownership of Certain Beneficial Owners
and Management 44
14. Certain Relationships and Related Transactions 45
PART IV.
15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 46
Report of Independent Public Accountants 48
Signatures 49
Index to Exhibits 50
<PAGE> 3
NORTH CAROLINA NATURAL GAS CORPORATION
PART I
Item 1. Business
- -----------------
General -
North Carolina Natural Gas Corporation (Company), whose principal office
is located at 15O Rowan Street, Fayetteville, North Carolina 28301, was
incorporated in 1955 under the laws of the State of Delaware. It is engaged
in the transmission and distribution of natural gas through approximately
1,032 miles of transmission pipeline and approximately 2,544 miles of
distribution mains. Natural gas is sold under regulated rates to
approximately 142,500 customers in 64 cities and towns and four municipal
gas distribution systems in eastern and southcentral North Carolina.
The Company purchases and transports natural gas under long-term
contracts with Transcontinental Gas Pipe Line Corporation (Transco),
Columbia Gas Transmission Corporation (Columbia) and several major oil
and gas producers. Approximately 67% of NCNG's total available gas supply
in 1995 was purchased under long-term contracts, in the spot market or with
non-pipeline suppliers for system supply. The Company also serves propane
gas to approximately 9,000 customers and sells gas appliances and home
insulation services to gas customers and new home builders.
NCNG Exploration Corporation (Exploration) was organized in 1974, Cape
Fear Energy Corporation (Cape Fear) was organized in 1980 and another
subsidiary, NCNG Energy Corporation (Energy), was organized in August 1995,
all under the laws of North Carolina. Exploration and Cape Fear are primarily
engaged in the purchase of natural gas for the Company's system supply and
for sale to large industrial plants and the municipalities served by the
Company of North Carolina regarding gas supply and pipeline projects affecting
the entire state of North Carolina.
Financial Information About Industry Segments
- ---------------------------------------------
The Company is engaged in principally one industry as described above
and has no other reportable industry segments.
Narrative Description of Business
- ---------------------------------
General -
The Company distributes natural gas to residential, commercial,
industrial and municipal customers in a substantial portion of the
southcentral and eastern sections of North Carolina. The population in the
Company's franchised territory is approximately 2,004,000. Principal cities
or towns served include Albemarle, Dunn, Fayetteville, Goldsboro, Greenville,
Kinston, Lumberton, New Bern, Monroe, Roanoke Rapids, Rockingham, Rocky
Mount, Smithfield/Selma, Southern Pines, Wilmington and Wilson.
The Company's service area is attractive to industry due largely to good
climate, favorable labor relations, responsible local and state government,
good transportation, and the proximity of this area to major markets.
<PAGE> 4
Industrial activities in the service area are diverse. The Company
serves customers engaged in the manufacture of brick and ceramics, chemicals,
fertilizers, glass, nuclear fuels, textiles, brick, plywood and other wood
products, and in the processing of aluminum and other metals, tobacco, rubber,
dairy and food products. The Company also provides natural gas service to
three large military bases and two electric utilities.
Following is a summary of operating revenues (in 000's) by major
customer classification for the years 1991 through 1995:
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
Residential & Commercial $ 46,023 $ 47,534 $ 57,163 $ 58,748 $ 51,841
Municipalities for Resale 16,236 21,448 22,312 23,471 20,189
Industrial/electric power
generation 64,342 81,528 93,670 78,118 73,643
------- ------- ------- ------- -------
Total Operating Revenues $126,601 $150,510 $173,145 $160,337 $145,673
======= ======= ======= ======= =======
The above amounts include revenues from both gas sold to customers and
for transportation of customer-owned gas. The Company's revenues from
transportation are lower than from sales because it does not incur or bill
the commodity cost of gas for transported volumes. However, the Company
generally earns the same margin on a dekatherm of gas whether transported
or sold because transportation rates exclude only the commodity cost of gas
which the customer pays directly to his supplier.
Operating revenues increased to $150.5 million in 1992 from $126.6
million in 1991 due to a combination of factors, primarily the shift of
8,165,000 Dt from transportation to sales, the increase in total throughput
and the impact of the December 1991 general rate increase (see "Regulations
and Rates", Page 8). Those increases were partially offset by a decline in
the unit cost of purchased gas passed along to all customers. The shift
from transportation to sales resulted in a revenue increase of $15.5 million
in 1992, but did not impact the Company's margin.
Operating revenues increased to $173.1 million in 1993 from $150.5
million in 1992 due to a combination of factors, primarily the increase
in the customer base and total throughput, increased gas costs passed on
to customers and a full year's impact of the general rate increase.
Operating revenues declined to $160.3 million in 1994 from $173.1
million in 1993 due to a combination of factors, primarily lower gas costs
passed on to customers and the shift to more transportation service and less
sales to large customers in 1994 compared to 1993. The strong customer
growth and slight increase in net throughput volumes increased revenues but
only partially offset these factors causing revenues to decline.
Operating revenues declined to $145.7 million in 1995 from $160.3
million in 1994 primarily due to a reduction in gas costs. The average
commodity cost of gas declined to an average of $1.68 per Dt from $2.21 per
Dt in 1994. However, increased throughput, together with customer growth
which provided additional facilities charges, somewhat offset the decline
in revenues related to lower gas costs.
Natural gas supply -
During 1995, the Company received 8,817,415 Dt of natural gas under its
firm sales contract with Transco. It purchased 26,884,470 Dt in the spot
market or from other non-traditional sources, including long-term contracts
with seven major producers and two national natural gas marketers. The
<PAGE> 5
Company also transported 17,353,172 Dt of customer-owned gas in 1995. The
outlook for natural gas supplies in the Company's service area remains
favorable as both Transco and Columbia are "open access" pipelines, and the
Company has many sources of gas, available on a firm basis. Nationally,
gas supplies are plentiful and no supply curtailments are anticipated,
although pipeline capacity along the east coast of the U.S.A. is expected
to be tight if winter weather is colder than normal.
See Page 12 of this report for additional information regarding federal
regulation of interstate pipelines.
<PAGE> 6
The following table summarizes the supply sources which are under
contract or otherwise available to the Company as of November 1, 1995:
Maximum Contract
Daily Annual Expiration
Deliverability (a) Quantity (a) Date
------------------ ------------ ----------
(DT) (DT)
Transco-
Firm Transportation (FT) 145,935 (b) 53,266,275 2013
Firm Sales (FS) 55,935 20,416,275 2001
General Storage (GSS) 2,070 103,500 2013 (c)
Washington Storage (WSS) 32,154 (d) 2,734,180 1998
Liquefied Gas Storage (LG-A) 5,320 26,600 1991 (g)
Southern Expansion (FT) 16,871 (e) 2,444,553 2005
Eminence Storage (ESS) 39,373 (h) 316,914 2013
Columbia Gas Transmission-
Firm Transportation (FT) 19,801 (b) 7,227,365 2004
Firm Storage Service (FSS) 5,199 223,238 2004
Amerada Hess-
Firm Sales 15,000 (f) 3,732,750 2004
Enron Gas Marketing-
Firm Sales 15,500 (f) 2,340,500 1998
Exxon Company, U.S.A.-
Firm Sales 14,889 (f) 5,434,485 2003
Mobil Natural Gas, Inc.-
Firm Sales 24,889 (f) 9,084,485 1997
Natural Gas Clearinghouse-
Firm Sales 9,967 (f) 1,505,017 1999
Texaco-
Firm Sales 5,000 (f) 1,825,000 1996
Texaco-
Firm Sales 12,500 (f) 2,957,500 1997
Union Pacific-
Firm Sales 9,400 (f) 2,489,400 1996
Chevron 9,621 (f) 3,511,665 1998
Vastar (Arco) 10,000 (f) 1,510,000 1998
LNG Plant (Company owned) 80,000 (i) 1,000,000 N/A
<PAGE> 7
(a) Quantities are shown in dekatherms (Dt) (one Dt equals 1,000,000 Btu
or one Mcf at 1000 Btu/cu. ft.) and are based on current heating
values used by Transco, Columbia and the Company.
(b) Firm Transportation (FT) contracts are for pipeline capacity only.
The Company is responsible for acquiring its own gas supplies to be
transported on a firm basis under the FT contracts. Gas supplies are
available under Transco's FS Agreement, other long-term agreements
(see (f) below), multi-month term agreements or one-month agreements
for supplies purchased in the spot market.
(c) The Company entered into a contract with Transco in 1994 which
expires on March 31, 2013 for 56,267 dekatherms of General Storage
Service provided under Transco's agreements with Consolidated Natural
Gas Transmission Corporation (CNG). The Company anticipates that
Transco will continue to provide the balance of the Company's service
entitlement under its Rate Schedule GSS tariff pending new agreements
between Transco and other storage operators utilized by Transco to
provide General Storage Service
(d) Washington Storage volumes may be withdrawn to the extent that
the basic contract gas from Transco or other suppliers is unavailable
on any day or if the Company elects to take such gas instead of other
supplies.
(e) Winter months only (November through March).
(f) The Amerada Hess, Enron, Exxon, Mobil, Natural Gas Clearinghouse,
Texaco, Chevron, Vastar (Arco) and Union Pacific contracts are for
gas supply only - no pipeline capacity is included. Supplies
purchased from these suppliers flow on the Company's FT contracts
with Transco and Columbia (see (b) above).
(g) The primary term of the Company's contract with Transco for LG-A
storage service expired on October 31, 1991. The Company anticipates
that Transco will continue to provide this service under its Rate
Schedule LG-A tariff.
(h) Transco salt dome storage capacity allocated to customers of Transco
FS sales service by mandate of FERC Order 636. Transco will continue
to schedule injections and withdrawalws of gas from this storage
capacity under agency agreements with the Company and the other FS
sales service customers.
(i) The deliverability away from the LNG Plant is limited by the Company's
pipeline capacity. The Company is currently in the second year of a
four-year project to increase the LNG output to 120,000 Mcf/day.
<PAGE> 8
In addition to its basic year-round firm transportation (FT)
contract with Transco providing 145,935 Dt per day, the Company has
approximately 17,000 Dt per day of additional winter season FT capacity
from Transco's Southern Expansion. The Company has also converted 100% of
its original Columbia sales contract to a combination of firm transportation
and firm storage service under Columbia's November 1, 1993 service
restructuring mandated by the Federal Energy Regulatory Commission's Order
636. The FT contracts enable the Company to acquire gas directly from
producers or other natural gas marketers and have the gas transported on
a firm basis at delivered costs that reflect the market price of natural
gas in any month. Many of the Company's industrial and large commercial
customers have the capability to burn a fuel other than natural gas, and
these customers will generally switch from gas when it costs more than the
alternative fuel (primarily residual oil, distillate oil or propane).
Some of these same customers prefer to acquire their own gas supplies and
the Company works with each pipeline and the customers to arrange
transportation service for them when possible. End-user transportation
volumes increased 29.5% in 1995 from 1994 due primarily to favorable spot
market gas prices available to those customers during the summer period
(April - October) and the relatively high price of oil during the 1995
summer which enabled many large customers to save money on energy costs
by transporting gas rather than purchasing gas from the Company on negotiated
rates that would have matched their oil prices. The Company's primary
objectives are to secure adequate and reliable gas supplies on reasonable
terms and conditions consistent with its obligation to provide service to
its customers at the lowest reasonable cost. Spot market purchases will
continue to be utilized primarily in the off-peak months (generally March
through November) when such transactions offer economic savings compared
to other firm purchase options.
As of November 1, 1995, the Company had entered into long-term gas
supply contracts with major producers of national natural gas marketers
for firm supplies in the winter season totaling 126,767 Dt/day on Transco
and Columbia. Additionally, the Company has a firm sales contract with
Transco to provide gas supplies of 55,935 Dt/day which the Company uses
as its primary "swing" supply to accomodate changes in the level of demand
on its system.
The Company has a liquefied natural gas (LNG) storage plant which
provides 80,000 dekatherms per day to the Company's peak-day delivery
capability.
Franchises -
The Company holds a certificate of public convenience and necessity
granted by the North Carolina Utilities Commission (NCUC) to provide service
to the area now being served. Under North Carolina law, ues, margin and
earnings.
The Company has nonexclusive franchises from 50 municipalities in which
it distributes natural gas and four municipalities to which the Company sells
or transports gas for resale. The expiration dates of those franchsies which
have specific expiration provisions are from 1999 to 2015. The franchises
are substantially uniform in nature. They contain no restrictions of a
materially burdensome nature and are adequate for the Company's business
as presently and as now proposed to be conducted. The Company, in addition,
serves 14 communities from which no franchsies are required.
<PAGE> 9
Seasonal nature of business -
The Company's business is seasonal in nature. Cold weather affects
customer demand in high priority markets and generally results in greater
earnings during the winter months. However, the Company's deliveries to
high load factor industrial customers, together with summer season
deliveries for agricultural crop drying and electricity generation, help
to minimize quarterly variations in throughput volumes and earnings. In
1991, however, the seasonal fluctuation in earnings became more pronounced
due to the increase in pipeline fixed charges. In the Company's December
1991 general rate Order, seasonal rates were adopted, having the effect of
increasing winter period margins and reducing summer period margins compared
to the rates previously in effect, further increasing the seasonal variation
in revenues and earnings. Also, in the Company's October 1995 general rate
Order, residential and commercial rates were increased while industrial
rates were decreased, thus further increasing the seasonal variation in
revenues, margin and earnings.
The Company normally injects gas into storage during periods of warm
weather and withdraws it during periods of cold weather. The storage and
various other contracts as shown on Pages 6 and 7 provide adequate daily
supply to meet the Company's peak day requirements.
Short-term debt is used for the seasonal financing of stored gas
inventories and for the Company's ongoing construction program prior to
obtaining long-term financing. These loans, either conventional notes or
bankers' acceptances, are normally repaid from the funds generated by the
winter sale of the stored gas. At September 30, 1995, $27.0 million in
short-term debt financing that closed on November 10, 1995, the short-term
debt for 1995 was reclassified as long-term debt on the balance sheet.
Nonutility Businesses -
Exploration was formed in 1974 when the NCUC approved and authorized
customer participation in four Exploratin and development programs.
Effective June 7, 1995, the Company and the other three natural gas
distribution utilities in North Carolina sold their combined interests in
all of the Exploration and development programs in which Exploration was
involved. Exploration's share of the net proceeds was $615,000, of which
$144,500 was deposited in an escrow account to remain utnil December 31,
1995 to cover any potential claims presented by the buyers. Exploration
recognized a pretax gain of $58,000 (shareholders' portion) on the sale,
excluding the amount held in escrow. Approximatley 75% of the net proceeds
from the sale, along with net revenues and expenses of the programs prior
to the sale, will be considered in the final amounts due to or from
customers under these programs. As of September 30, 1995, no claims had
been presented and the $144,500 escrow deposit was still intact. In 1995,
NCNG Exploration began marketing natural gas and sold 487,000 DT of off
system which produced a profit margin of $88,000.
Cape Fear was fromed in fiscal 1980 to make investments without
customer participation in future Exploration and drilling programs.
Cape Fear has no material remaining commitments but will make some minor
additional investment for development of successful prospects. The
Company's current activities relate primarily to marketing of natual gas.
In 1995, Cape Fear sold 8.6 million Dt of natural gas to NCNG customers
and earned a profit margin of $173,000 on such sales.
Energy was formed in fiscal year 1995 to work in partnership with
several other companies regarding gas supply and pipeline projects. Energy
has become a 5% equity owner in Pine Needle LNG Company, LLC which owns a
site near Transco's main line north of Greensboro, North Carolina, and plans
to build and operate a 4-Bcf liquefied natural gas (LNG) plant to be in
service by the 1999-2000 winter heating season. Additionally, Energy and
<PAGE> 10
its partners in an attempt to organize another company called Cardinal
Expansion Company, LLC which would take over an existing intrastate pipeline
now owned by Piedmont and Public Service Company and then extend that
pipeline from Burlington, North Carolina, to an interconnection with the
systems of Public Service and NCNG southeast of Raleigh at Clayton, North
Carolina.
Regulations and rates -
The Company is subject to regulation by the NCUC as to rates, service
area, adequacy of service, safety standards, acquisition, extension and
abandonment of facilities, accounting and issuance of securities. The
Company operates only in the State of North Carolina and is not subject
to Federal regulation as a "natural gas company" under the Natural Gas Act.
On October 27, 1995, the NCUC issued its Order granting a general rate
increase amounting to $4,205,000 in annual revenues effective November 1,
1995. The Commission's Order approved, in all material respects, the
Stipulation of Settlement reached among the Company, the Public Staff of
the NCUC, the Carolina Utility Customers Association, Inc. (CUCA) and
other intervenors in the rate case. The Order provides for a rate of
return on net investment of 10.09% but, pursuant to the Stipulation of
Settlement, did not state separately the rate of return on common equity
nor the capital structure used to calculate revenue requirements. The
Order provides for significant rate design changes by increasing residential
and commercial rates while reducing industrial sales and transportation
rates to recognize, among other things, the differences in costs of serving
the various customer classes. The Order establishes several new rate
schedules, including an economic development rate to assist in attracting
new industry to the Copmany's service area and a rate to provide stand-by,
on-peak gas supply service to industrial customers whose gas service would
otherwise be interrupted.
Also as part of the October 27, 1995 rate Order, the NCUC approved:
- Continuation of the Weather Normalization Adjustment (WNA) mechanism
originally approved in 1991 (see below).
- Establishment of the Price Sensitive Volume Adjustment (PSVA)
mechanism to replace the Industrial Sales Tracker (IST) effective
November 1, 1995 (see below). The PSVA, while narrower in scope than
than the IST, protects the Company against loss of load from eight
large, fuel-switchable customers using heavy fuel oil as an
an alternative fuel while providing that all actual margins earned on
deliveries of gas to such cusotmers shall be flowed through to all
other customers.
- An increase in depreciation rates for certain distribution plant.
The increased depreciation rates account for approximately $750,000
of the $4.2 million annual revenue increase.
- The accounting for and recovery in rates of costs associated with
environmental assessment and remediation of a former manufactured
gas plant (MGP) site. The NCUC found that NCNG acted in a reasonable
and prudent manner in responding to the 1991 North Carolina Department
of Environmental Health and Natural Resources Division of
Environmental Management's Notice of Violation of Water Quality
Standards as a result of MGP by-products at the Kinston site.
Accordingly, the NCUC approved the Company's proposal to recover an
annualized amount of MGP costs based on amounts expended, net
of recoveries from third parties, through December 31, 1994.
The NCUC authorized a general rate increase for the Company effective
December 6, 1991 providing $2.6 million in additional revenues, a 12.7%
return on common equity, and approved the establishment of demand/commodity
rates for six large, firm service customers; seasonal rate differentials for
all customer classes; increases in facilities charges and reconnection fees
for residential and commercial customers; and the establishment of a WNA
Rider.
The WNA benefits both the Company and its space heating customers
by reducing large swings in customers' bills and Company revenues due to
fluctuations in winter weather. This WNA Rider increases margins to the
<PAGE> 11
Company on its temperature sensitive load during warmer than normal winter
weather and decreases the margin during colder than normal weather. During
1995, the WNA Rider provided $1,746,000 in revenues to offset lower volume
gas sales to temperature sensitive customers due to 15% warmer than
than normal weather.
The Company's rate tariff for fiscal 1995 contained an IST Rider. The
purpose of the IST is to stabilize the Company's margin (difference between
revenues and purchased gas cost) earned from sales or transportation to
interruptible industrial customers who use heavy fuel oil as an alternative
fuel. To the extent that actual margins realized from sales or
transportation to such customers exceed, or are less than, the margins
included in the Company's 1991 general rate case for IST volumes, refunds
payable or additional receivables are recorded. The actual margin earned
from IST deliveries were more than the base period margin by $1,420,000
in 1995 and less than the base period margin by $3,940,000 in 1994.
The NCUC, in a general rulemaking proceeding, revised its Purchased
Gas Adjustment (PGA) procedures in April 1992. The revised procedures
continue to allow the Company to recover all of its prudently incurred gas
costs, but such procedures provide for several significant changes which
include: (1) the establishment of a benchmark commodity cost of gas which
represents the Company's estimate of the actual commodity cost of gas from
all suppliers that it will incur in a future period; (2) the recovery of
100% of prudently incurred fixed costs of pipeline capacity and storage
costs, including costs of any new capacity added since the last general
rate case; (3) the notice period for requesting PGA rate changes was
reduced to 14 days from 30 days; (4) the establishment of a tariff
provision which allows the Company to recover margin losses from
negotiated rates to non-IST large commercial and industrial customers;
(5) a true-up of fixed gas costs recvoered from the Company's customers;
(6) a true-up of the Company's lost, unaccounted for and Company use
volume compared to such volumes included in the last general rate case;
and (7) an annual review of the Company's gas costs, including the
prudence thereof, by the Public Staff of the NCUC and a hearing before
the NCUC. The Company's third annual review of its gas costs for the 11
months ended October 31, 1994 was held in April 1995. The NCUC found the
Company's gas costs and gas purchasing practices to be prudent, as it had
for the first two annual reviews in 1993 and 1994.
In August 1995, the NCUC issued its Order approving the Company's
first expansion project to utilize the Expansion Fund. The project is
to extend NCNG's transmission pipeline 71 miles from Mount Olive to the
Camp Lejuene Marine Base in Jacksonville, North Carolina. The project,
estimated to be completed in 1997, will bring the first natural gas service
to Duplin and Onslow counties. The Company estimates that the total cost
of the project to construct 16 miles of 10" transmission pipeline and 55
miles of 8" transmission pipeline, together with limited distribution systems
in Faison an Kenansville in Duplin County and Jacksonville and Campe Lejeune
in Onslow County, will be approximately $18.8 million. The Expansion Fund
will provide $12.4 million based on the economic feasibility analysis
approved by the NCUC.
In August 1995, the Company filed with the NCUC its third annual
true-up of lost, unaccounted for and company use volumes for 12 months
ended June 30, 1995. Because such volumes exceeded the base period amounts
included in the 1991 general rate case, the Company recouped $1,235,000 in
1995 from the true-up by charging that amount to the deferred gas cost
account for future recovery in rates from customers.
<PAGE> 12
The Federal Energy Regulatory Commission (FERC) issued its landmark
Order 636 in April 1992. Essentially, Order 636 introduces more competition
into the natural gas industry as pipelines must "unbundle" their merchant
services from their transportation services. The Company's major pipeline
supplier, Transco, largely completed the unbundling of its services in 1991,
and NCNG has been purchasing its gas supplies directly from producers and
marketers operating on the Transco system for a number of years.
Another significant aspect of Order 636 is capacity release and
assignment. To manage its supply portfolio most effectively and also
to permit its large customers and independent marketers selling gas to
end users on the NCNG system to obtain access to firm capacity on Transco,
the Company entered into several agreements which permit end-use customers
or marketers access to the Company's firm transportation on Transco while
paying NCNG a fee for the use of its capacity. While Order 636 transfers
the risk of gas supply management from the pipeline to the local
distribution company such as NCNG, the Company has been working in such an
environment for several years, and has carefully planned for the full
implementation of Order 636. In July 1994, the NCUC isued a rulemaking
order in which it required that all natural gas utilities flow through
to customers 90% of the net compensation received for capacity release
and similar transactions while retaining 10% of such compensation. The
Company has been accounting for such transactions in accordance with
the 90/10 sharing mechanism pursuant to a previous Commission Order issued
in 1993. In 1995, the Company received a total of $1.3 million for fixed
gas cost mitigation from capacity release transactions compared to $1.1
million in 1994.
Both of the Company's interstate pipeline suppliers, Transco and
Columbia, have ongoing rate and certificate matters under jurisdiction
of the Federal Energy Regulatory Commission (FERC). In addition, Columbia
has been operating in bankruptcy since July 1991 but is expected to emerge
from bankruptcy by December 31, 1995. The Company does not expect that
any regulatory decisions or court orders will have a material impact on
its financial position or results of operations because all prudently
incurred gas costs, including interstate pipeline capacity and storage
service costs, are eligible for immediate recovery from the Company's
customers, and refunds from interstate pipelines must be transferred to
the Expansion Fund or directly refunded to the Company's cusotmers.
Competition -
With the exception of four municipalities that operate municipal
gas distribution systems within the Company's service territory, the
Company is the sole distributor of natural gas in its franchise service
territory. Natural gas competes with electricity, residual fuel oil,
propane and, to a lesser extent, coal. The Company has the lowest
residential rates in North Carolina and is in a favorable competitive
position.
During 1995, approximately 68% of total throughput on the Company's
system was to customers having alternative fuel usage capabilities under
interruptible rates. However, the Company's tariffs allow it to negotiate
rates lower than the filed tariff rates and recover the lost margin from
core market customers to keep industrial customers from leaving the system
when the price of their alternative fuel is lower than the gas tariff rate.
The PSVA requires that all margins earned from the eight PSVA customers
must be flowed through to all other customers. Although the Company has
benefited from the favorable spread between the prices of both No. 2 fuel
oil and propane compared to natural gas and has remained competitive in
nearly all instances with No. 6 fuel oil, the market could be affected by
volatility in the price of fuel oil as well as increases in the price of
natural gas.
Environmental matters -
The Company is subject to regulation with regard to environmental
matters by various Federal, state and local authorities. During fiscal
year 1991, the North Carolina Department of Environment, Health and Natural
<PAGE> 13
Resources advised the Company of possible environmental contamination
arising from Company-owned property in Kinston, North Carolina, which
is the former site of a manufactured gas plant (MGP). The Company
retained an environmental services consulting firm which has estimated
the costs of investigation and remediation of this site based on its work
to date to be between $1.4 million and $2.8 million over a four- to
six-year period. The Company owns another site of a former MGP site in
New Bern, North Carolina, and was the former owner of three other similar
sites on which no significant environmental problems have arisen. The
Company believes that any appreciable costs will be recovered from third
parties, including liability insurance carriers, or in natural gas rates.
In its October 17, 1995 rate Order, the NCUC approved the Company's
proposal to recover an annualized amount of MGP costs based on amounts
expended, net of recoveries from third parties, through December 31, 1994.
Other -
Effective October 1, 1993, the Company adopted FASB Statement No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
on a prospective basis. This statement requires accounting for these
benefits on an accrual basis using a single actuarial method which spreads
the expected cost of such benefits to each year of an employee's service
until the employee becomes fully eligible to receive the benefits. Prior
to October 1, 1993, the Company accounted for these benefits on a cash
basis consistent with the then current ratemaking treatment. The costs of
such benefits charged to expense amount to $704,000 in 1995. The NCUC,
in rate cases were Statement No. 106 accounting has been presented, has
expressed its preference for the accrual basis of accounting and,
accordingly, the NCUC approved the same in the Company's most recent general
rate case decided October 27, 1995. The Company is not currently funding
this plan.
The FASB issued Statement No. 112, "Employers' Accounting for
Postemployment Benefits," which requires that all types of benefits provided
to former or inactive employees and their families prior to retirement be
accounted for on an accrual basis. The Company adopted this standard in
fiscal 1995 and it did not have a material impact on the financial
statements. The NCUC in its October 27, 1995 rate Order allowed the
recovery of these costs in rates over a three-year amortization period.
Effective October 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes". The adoption of Statement No. 109 resulted
in cumulative adjustments to the balance sheet and had no effect on
consolidated net income. As a result of Statement No. 109, the Company
reduced accumulated deferred income taxes and recorded related regulatory
assets and liabilities. The regulatory liability related to income taxes,
net, is due primarily to deferred income taxes recognized in years prior to
1987 at rates higher than currently enacted.
NCNG continued to grow the industrial market by attaching 31 new
customers to its system in 1995. One of the largest is Mt. Olive Pickle
Company based in Mount Olive, North Carolina. NCNG completed an expansion
of its 8-inch pipeline approximately 13.5 miles to the town of Mount Olive
in August 1995.
Natural gas expansion funds were authorized for use by the North
Carolina natural gas companies through legislation passed in 1991 by the
North Carolina General Assembly, and an expansion fund for NCNG was
approved by the NCUC in February 1993 to be funded initially by refunds
the Company had received from its pipeline suppliers. As of September
30, 1995, the Company had remitted $10,440,000 of pipeline refunds and
accrued interest to the expansion fund, and it has an additional amount
of $4,785,000 in gas supplier refunds currently available for possible
inclusion in the Company's expansion fund.
During the next two years, the Company plans to expand its pipeline
approximately 72 miles from Mount Olive through Duplin and Onslow counties
to Jacksonville and the Camp Lejeune Marine Base. NCNG received NCUC
approval for this project in August 1995, and preliminary work to acquire
<PAGE> 14
necessary permits and rights-of-way along the route is underway. Of the
approximately $19 million in capital costs of this project, approximately
$12.4 million will be provided by the Company's expansion fund administered
the Commission. Duplin and Onslow counties presently have no natural gas
service, and Jacksonville represents the second most populous area in
NCNG's service territory. The Camp Lejeune Marine Base will be the largest
customer of this pipeline extension. Limited distribution systems are
planned for the towns of Warsaw, Kenansville, and Faison in Duplin County
as well as the City of Jacksonville in Onslow County. The availablity of
money from the expansion fund assures that this project will be profitable
and will add value for NCNG's stockholders as NCNG's investment will be
limited to only that portion that is economically feasible using net
present value analysis techniques. The Duplin/Onslow project will be the
first one funded by the expansion fund.
Employees -
At September 30, 1995, the Company had 541 full time employees.
Employee relations are good and the Company has not had any material work
stoppage due to labor disagreements. The Company has a noncontributory
Employee Retirement Plan for substantially all regular employees, provides
a group life and extended hospital insurance program, and other employee
benefits, including an employee stock purchase plan.
<PAGE> 15
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
Date
Elected
Name and Age* Title An Officer
- ---------------------------- ------------------------ ----------
Calvin B. Wells Chairman, President and 09/11/74
Age-59 Chief Executive Officer
Gerald A. Teele Senior Vice President, Treasurer 01/08/80
Age-51 and Chief Financial Officer
James C. Buie Vice President-Computer Services 01/13/87
Age-48
Terrence D. Davis Vice President-Operations and 01/07/91
Age-50 Industrial Sales
Cecil C. Dew Vice President 01/13/70
Age-65
Stuart B. Dixon Vice President-Government 01/10/89
Age-58 Relations
John M. Monaghan, Jr. Vice President-Gas Supply 01/08/91
Age-43 & Transportation
Louis L. Hanemann Vice President-Human Resources 01/10/89
Age-47
E.J. Mercier, Jr. Vice President-Computer Services 09/07/77
Age-57
____________________________
* As of December 1, 1995
The executive officers of the Company are appointed annually by the Board
of Directors immediately following the annual meeting of stockholders. The
present term of all executive officers expires on January 9, 1996, the date
of the next annual meeting of stockholders.
All of the executive officers have been employed by the Company in the
position indicated or other similar managerial positions for more than five
years except for Terrence D. Davis who was employed on January 7, 1991 as
Vice President. He has over 20 years experience in the natural gas industry.
Prior to joining the Company, he was Vice President of Operations at
Chesapeake Utilities Corporation in Delaware.
There is no family relationship between any of the executive
officers or directors.
There have been no events under any bankruptcy act, no criminal
proceedings and no judgments or injunctions material to the evaluation of
the ability and integrity of any executive officer during the past five
years.
<PAGE> 16
Item 2. Properties
- -------------------
The Company owns approximately 1,032 miles of transmission pipelines of
two to 16 inches in diameter which connect its distribution systems with the
Texas-to-New York transmission system of Transco and the southern end of
Columbia's transmission system. Transco delivers gas to the Company at
various points conveniently located with respect to the Company's
distribution area. Columbia delivers gas to one delivery point near the
North Carolina-Virginia border. Gas is distributed by the Company through
2,544 miles of distribution mains. These trasmission pipelines and
distribution are located primarily on rights-of-way held under easement,
license or permit on lands owned by others.
During fiscal 1995, the Company invested approximately $22.6 million
in new plant facilities. Approximately 7,000 natural gas and 500 propane
residential and small commercial customers were added along with several
new industrial customers. In fiscal 1986, the Company completed and placed
in service a liquefied natural gas storage plant on its system to provide
additional peak day gas supply for future growth in customer demand. The
LNG plant enabled the Company to establish an all-time high peak-day
send-out of 263,419 dektherms on February 8, 1995.
As discussed elsewhere in this report, NCNG Exploration Corporation
and Cape Fear Energy Corporation participated in several oil and gas
Exploration and development programs for several years. The Company's
interest in these oil and gas programs is not material to the Company's
overall operations, and all of the Exploration properties have been sold.
Item 3. Legal Procedures
- -------------------------
None, other than those related to issues before the North Carolina
Utilities Commission and the North Carolina Department of Environment,
Health and Natural Resources discussed above and in Note 10 to the Company's
Consolidated Financial Statements for the year ended September 30, 1995,
and other routine litigation incidental to the Company's business.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matters were submitted to a vote of NCNG's security holders
during the three months ended September 30, 1995.
<PAGE> 17
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters
Principal market - The Company's common stock is traded on the New
York Stock Exchange (NYSE Symbol NCG).
Approximate number of holders of common stock - The number of holders
of record of the Company's common stock as of September 30, 1995: 5,028
Stock price and dividend information -
The table below presents the reported high and low common stock sale
prices a long with cash dividends declared per share for each quarter of
fiscal 1995 and 1994.
QUARTER Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar.31 Dec.31
ENDED 1995 1995 1995 1995 1994 1994 1994 1993
-------- ------- ------- ------- -------- ------- ------- -------
COMMON STOCK
PRICES -
High $22.25 $22.63 $23.38 $23.38 $24.00 $25.13 $27.38 $29.13
Low 20.50 20.88 20.75 19.75 22.00 22.63 24.25 24.88
Cash dividends
per share $.305 $.305 $.305 $.29 $.29 $.29 $.29 $.27
A quarterly dividend of $.305 per share was declared by the Board of
Directors payable on December 15, 1995 to holders of record on December 1,
1995. Cash dividends have been paid on common shares every year since 1969
and the annual dividend rate has been increased each year since 1979.
Under terms of the Company's debt agreements, there are various provisions
relating to the maintenance of certain financial ratios and conditions.
At September 30, 1995, approximately $21,926,000 of the Company's retained
earnings is unrestricted.
<PAGE> 18
Item 6. Selected Financial Data
- --------------------------------
Years Ended September 30
- -----------------------------------------------------------------------------
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------
(Amounts in Thousands Except Per Share Data)
Operating Revenues $145,673 $160,337 $173,145 $150,510 $126,601
Gross Margin 57,917 55,097 54,045 50,162 42,234
Net income 11,809 11,150 10,977 9,697 7,014
Earnings per share (1) 1.84 1.76 1.84 1.79 1.31
Cash dividends declared
per share (1) 1.205 1.14 1.06 .983 .923
Total assets 214,880 205,631 194,178 186,550 151,714
Net utility plant
in service 178,796 164,843 152,543 144,412 127,205
Capital expenditures 22,581 20,756 15,469 23,773 21,200
Long-term debt 62,000 37,000 39,000 45,088 23,452
Common equity 92,778 86,399 80,944 57,413 51,967
Book value per share 14.32 13.57 12.85 10.54 9.65
Average number of
common shares 6,410 6,331 5,981 5,414 5,362
Rate of return on
year-end common equity 12.73% 12.91% 13.56% 16.89% 13.50%
(1) Prior period amounts have been restated to reflect a 3-for-2 common
stock split effective October 30, 1992.
<PAGE> 19
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
- ------------------------------------------------------
General
North Carolina Natural Gas Corporation is engaged primarily in the
business of transporting and distributing natural gas at regulated retail
rates to customers in 64 cities, towns and communities, as well as at
regulated wholesale rates to four municipal gas distribution systems, in
southcentral and eastern North Carolina with approximately 142,500 total
natural gas customers as of September 30, 1995. The Company also has a
propane division with approximately 8,700 customers. NCNG continues to
expand its service area. The Company's financial condition and results
of operations are substantially dependent upon its receiving adequate and
timely increases in rates, which are regulated by the North Carolina
Utilities Commission (NCUC).
Liquidity and Capital Resources
- -------------------------------
The Company has bank lines of credit for a total amount of
$58.5 million, including $40 million on a committed basis. Borrowings
under the lines can include bankers' acceptances and promissory notes
not to exceed 90 days, with a maximum rate of the lending bank's commercial
prime interest rate. At September 30, 1995, $27.0 million was outstanding
at interest rates ranging from 6.05% to 6.17%, compared to debt outstanding
of $26.0 million with interest rates ranging from 5.065% to 5.35% at
September 30, 1994.
The net increase of only $1 million in short-term debt in 1995 was
accomplished because of the record level of net cash provided by operating
activities, which reached $30.5 million in 1995, up from $19.6 million in
1994. The net cash provided by operating activities was generally
sufficient to cover the $22.6 million of capital expenditures and the
$7.7 million of dividend payments in 1995.
North Carolina Natural Gas uses the short-term bank loans temporarily
as needed to finance construction expenditures, and it replaces the bank
loans with permanent financing when total borrowings approach the maximum
available under the lines of credit or when conditions are favorable for
obtaining long-term capital. The Company issued in a private placement $30
million of 7.15% Senior Notes, due 2015, on November 10, 1995, and all of
the short-term debt outstanding at September 30, 1995 was repaid. Because
this financing was immiment, the short-term debt outstanding at September 30,
1995 was classified as long-term debt.
Construction expenditures of $22.6 million in 1995 exceeded the 1994
amount by $1.8 million. The increase is due primarily to a 13.5 mile
extension of the Company's ten-inch transmission line from a point near
Goldsboro to Mount Olive in southern Wayne County. Construction
expenditures related to distribution mains and services to add new
customers were about the same in both years. The Company has budgeted
1996 construction expenditures of $29.4 million, including $8.5 million
for the first phase of a major expansion project into the unserved counties
of Duplin and Onslow, the City of Jacksonville and the Camp Lejeune Marine
Base.
<PAGE> 20
The Company's ratio of long-term debt to total capitalization was
40.8% at September 30, 1995, up from 31.1% at September 30, 1994, due to
the reclassification of short-term debt. The Company does not anticipate
any need to raise additional capital from the long-term debt market or from
the public sale of common stock during the remainder of fiscal 1996.
Management expects that the generation of net cash from operating activities
together with its bank credit lines and other sources will be sufficient
to provide for its construction program and other capital needs during 1996.
The Company expects to raise approximately $2.0 million of additional equity
from its Dividend Reinvestment Plan, its Employee Stock Purchase Plan and
its Key Employee Stock Option Plan in 1996. Common equity realized from
such sources totaled $2.3 million in 1995 and $1.5 million in 1994.
Results of Operations
- ---------------------
Earnings
NCNG earned $11.8 million or $1.84 per share in 1995, compared to
$11.1 million or $1.76 per share in 1994 and $11.0 million or $1.84 per
share in 1993. The 6% increase in earnings in 1995 was due to increased
deliveries of natural gas in the industrial and municipal markets together
with strong customer growth in the core market residential and commercial
sectors. While winter weather was 15% warmer than normal and 12% warmer
than the prior year, total dekatherms (dt) delivered increased nearly 11%
to 52.1 million dt compared to 47.0 million dt in 1995.
The slight increase in earnings in 1994 compared to 1993 was due
to increased earnings in the Company's nonutility division, including
its subsidiaries, and lower utility interest charges, which offset a
decline in operating income. Reduction of sales and transportation
(throughput) volumes in the electric power generation market caused
1994 operating income and net income to decline $472,000 or $.07 per
share.
The increase in earnings in 1993 compared to 1992 was primarily
due to (1) increased margin resulting from increased throughput volumes
to all customer classes due to customer growth and weather that was 5%
colder than the prior year and (2) lower interest expenses. Earnings
per share in both 1994 and 1993 were diluted by the effect of the
786,500 additional shares issued in a public offering in February 1993.
Throughput and Margin
NCNG established several throughput records in 1995, including
total volumes delivered in both winter and summer seasons and a new
peak-day record of 263,419 dt on February 8, 1995. While residential
and commercial sales volumes declined slightly because of the
warmer-than-normal weather, total deliveries to industrial customers
increased over 5.0 million dt to an all-time high of 32,611,000 dt in
1995, and deliveries to the Company's four municipal customers increased
by 366,000 dt. Factors driving the increased throughput volumes to
industrial and municipal cusotmers were customer growth, the expansion of
manufacturing capacity or gas-burning capability at several industrial
plants and the competitive price advantage that natural gas had compared
to oil throughout all of fiscal 1995. Also, the warm winter, which caused
residential and commercial volumes for space heating to decline, resulted
in increased deliveries to industrial customers who otherwise would have
been interrupted more often and for longer periods of time. During the
fourth quarter of fiscal 1995, the Company's deliveries to its electric
utility customers, Public Works Commission of Fayetteville (PWC) and Carolina
Power and Light (CP&L), increased about 900,000 dt compared to the 1994
fourth quarter because of hotter-than-normal weather and the low price of
natural gas. The Company's commodity cost of gas declined about 24% in
1995 compared to 1994 while oil prices were generally higher than the
prior year. In addition, one large industrial customer increased its
average usage of natural gas by approximately 5,000 dt per day beginning
in March 1995.
<PAGE> 21
NCNG continued adding natural gas customers at an above-average
growth rate in 1995. The addition of approximately 7,200 customers in
1995 represents a growth rate of 5.3% compared to the national average
for all natural gas distribution utilities of approximately 1.7%.
Even though warmer-than-normal weather in the winter reduced sales of
gas to residential and commercial customers, the Company realized additional
margin from such customers because of monthly facilities charges to the
growing customer base and the operation of the Weather Normalization
Adjustment (WNA) mechanism which stablizes the Company's margin from
space-heating customers based on normal weather. The WNA contributed
$1,746,000 to margin in 1995 compared to $462,000 in 1994.
The chart compares margins in fiscal years 1995 and 1994
by customer class:
Margin (In Thousands)
-----------------------------------
Increase
-------------
Customer Class 1995 1994 Amount %
- -------------- ---- ---- ------ ---
Residential $17,349 $16,589 $760 4.6%
Commercial and
Small Industrial 10,057 9,449 558 5.9
Industrial & Electric
Power Generation 23,868 23,150 718 3.1
Municipal 6,643 5,859 784 13.4
------ ------- ----- ----
Total $57,917 $55,097 $2,820 5.1%
====== ======= ===== ====
The industrial and electric power generation margin increase is fairly
small in relation to the 5.0 million dt increase in throughput. This is
because approximately 2.9 million dt of the increase went to IST customers,
and the eductions to core market customers. The municipal margin increase
was aided by an increase in contract demand volumes effective January 1994,
continued strong customer growth in all four cities and the WNA.
The Company's net margin growth in 1994 was $1,052,000 but NCNG's
total throughput in 1994 increased only 107,000 dt, or 0.23%, to 47.0
million dt. However, throughput for the Company's firm service and
interruptible industrial customers increased substantially, due to strong
customer growth (up 6.2%) and the recapture of some industrial load that
had been using residual oil in 1993, while throughput to one market
segment - interruptible electric power generation - declined 1,729,000
dt (or 61%). Weather in both 1994 and 1993 was approximatley 4% warmer than
normal, so weather had no significant impact on annual throughput in 1994.
The loss of load in the electric power generation customer, purchased its
power and utilized its generating plant due to a new agreement with CP&L.
However, as mentioned above, most of the summer season load that had been
lost in 1994 was recaptured during the fourth quarter of 1995 so that the
power generation volumes in 1995 were approximately equal to those of 1994.
Revenues and Cost of Gas
In the natural gas distribution industry in recent years, gross
margin rather than revenues has become a more valid indicator of the
results of operations. Two factors account for this change: (1) the
steadily increasing incidence of customers acquiring their own gas supplies
for transportation, and (2) the increased volatility in the commodity price
of natural gas, with a general downward trend over the last five years.
NCNG's transportation volumes have increased every year since 1992. They
reached a record level of 17,335,000 dt in 1995 compared to 13,511,000 dt
in 1994 and 9,480,000 dt in 1993. However,for the first time since 1992,
the Company's sales volumes also increased, growing to 34,715,000 dt in
1995 compared to 33,489,000 dt in 1994 and 37,413,000 dt in 1993. In
general, the margin earned on gas transported is equal to the margin
earned on gas sold; however, transportation which replaces sales
<PAGE> 22
results in lower revenues as transportation rates exclude the
commodity cost of gas which is paid by the customer directly to its
gas supplier. The Company, however, still delivers the gas and earns
transportation revenue equivalent to the margin contained in a comparable
sales rate.
Gas costs declined by approximately $17.5 million in 1995, primarily
due to a significant decline in the commodity cost of gas to an average of
$1.68 per dt from $2.21 per dt in 1994. Additionally, the Company's fixed
gas cost charges decreased somewhat as it increased its efforts in the
capacity release market, generating approximately $1.3 million in capacity
release credits compared to $1.1 million in 1994. The Company's operating
revenues declined $14.6 million to $145.7 million in 1995 from $160.3
million in 1994 because of the reduction in gas costs. However, the
increased throughput, together together with customer growth providing
additional facilities charges, somewhat offset the revenue decline related
to lower gas costs.
Operating revenues declined to $160.3 million in 1994 from $173.1
million in 1993 due to a combination of factors, primarily lower gas costs
and the shift to more transportation service and less sales to large
customers in 1994 compared to 1993. The strong customer growth and slight
increase in net throughput increased revenues but only partially offset
these factors causing revenues to decline.
The Company continued to have significant volumes of negotiated sales
in 1995, although down from the prior year because of the better competitive
pricing position of natural gas compared to oil. Also, such negotiations
did not result in a loss of margin in any year due to the operation of the
IST and the Company's PGA procedures.
Operating Expenses and Taxes
NCNG's total operating expenses and taxes increased to $42.7 million in
1995, up from $40.7 million in 1994 and $39.0 million in 1993. As a
percentage of margin the 1995 amount was 73.7%, down slightly from 1994's
73.9%, while the 1993 amount was 72.1%. Operations and maintenance expenses
increased to $21.1 million in 1995, up from $19.5 million in 1994 and $18.4
million in 1993, primarily because of the Company's growing customer base
which requires more employees (five added in 1995 and 19 added in 1994) to
serve additional cusotmers and expand, operate and maintain the Company's
distribution, transmission and storage facilities. Additionally, the
Company adopted FASB Statement No. 112, "Employers' Accounting of
Postemployment Benefits," effective October 1,1 994 which increased expenses
approximately $195,000 in 1995. Likewise, FASB Statement No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
effective October 1, 1993, increased operations and maintenance expenses
in 1994 approximately $350,000 and an addition $270,000 in 1995. The Company
incurred additional expenses in 1995 related to the administration, customer
service and sales promotion efforts associated with its rapidly growing
customer base. However, the total increase in promotion efforts associated
with its rapidly growing customer base. However, the total increase in
employees was less than 1% while the customer base expanded at the rate of
5.3%. General inflation in wages, services, materials and supplies accounted
for the rest of the increase in expenses over the 1993-95 period.
The Company has had a Key Employee Stock Option Plan since 1990.
The original options granted provide for an exercise price of $13.80. The
Company accrued the compensation cost of the options from 1991 through 1995
and the impact on fiscal year 1995 was not significant. Options to
purchase approximately 35,000 shares at $13.80 per share were exercised in
1995, and 32,100 option shares are exercisable at September 30, 1995. In
October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation." This statement establishes a fair value-based method of
accounting for stock-based employee compensation plans. The Company must
adopt this standard by October 1, 1996 and does not expect that it will have
a material impact on its financial position, results of operations or net
cash flows.
<PAGE> 23
The Company's depreciation rates must be approved by the
North Carolina Utilities Commission, and the composite rate for each of
the years 1993, 1994 and 1995 was 3.2%. Accordingly, the increases in
depreciation expense relate to only the increases in gross plant investment.
The primary component of general taxes is gross receipts taxes related
to operating revenues. The decrease in 1995 is in line with the lower
operating revenues. This category also includes payroll and property
taxes which have increased in each of the years 1993, 1994 and 1995 due to
the Company's growing investment in plant in service and its annualized
payroll.
Income taxes in 1995 are up in line with the increase in pretax income.
There was no appreciable increase in income taxes in 1994 compared to 1993.
For all three years, the effective income tax rates were essentially the same
with the equity component of allowance for funds used during construction
the largest variable influencing the effective tax rate. The Company
adopted FASB Statement No. 109, "Accounting for Income Taxes," in fiscal
year 1994, and the NCUC has approved the Company's method of income tax
accounting in its most recent general rate case Order.
Other Matters
On October 27, 1995, the NCUC issued its Order granting a general
rate increase amounting to $4,205,000 in annual revenues effective November
1, 1995. See Note 2 to the Consolidated Financial Statements for details.
As reported in prior years, the Company retained an environmental
services consulting firm which has estimated the cost of investigation
and remediation of the Kinston manufactured gas plant (MGP) site based
on its work to date to be between $1.4 million and $2.8 million over a
four- to six-year period beginning in 1992. The Company believes that
any appreciable costs not previously provided for will be recovered from
third parties including liability insurance carriers, or in natural gas
rates as the Commission approved in the October 1995 rate Order.
The Company also owns another site of a former MGP site in
New Bern, North Carolina, and was a previous owner of three small
former MGP sites on which no significant problems have arisen.
Significant Trends
The natural gas industry continues to evolve into a more competitive
environment. Fiscal year 1995 marked the Company's second full year
operating under the requirements of FERC Order 636, applicable to all U.S.
interstate pipelines including the two serving the Company. NCNG has a
balanced gas supply portfolio which provides security of supply at the
lowest reasonable cost as the NCUC has found in all of the Company's annual
prudency reviews, the most recent of which was completed in April 1995.
The Company has experienced no major problems due to Order 636.
In response to the burgeoning growth of the natural gas business in
North Carolina, NCNG established a new subsidiary, NCNG Energy Corporation,
in August 1995 to work in partnership with subsidiaries of Transco, Piedmont
Natural Gas Company (Piedmont) and Public Service Company of North Carolina
(Public Service) regarding gas supply and pipeline projects affecting the
entire state. NCNG Energy Corporation has become a 5% equity owner in Pine
Needle LNG Company, LLC, which owns a site near Transco's main line north of
Greensboro, North Carolina and plans to build and operate a 4 Bcf liquefied
natural gas (LNG) plant to be in service by the 1999-2000 winter heating
season. NCNG has committed to take 10% of the capacity for its use as
continued strong growth in customers is expected for the next five years.
Additionally, NCNG Energy and its other partners are engaged in an
<PAGE> 24
attempt to organize another company, called Cardinal Expansion Company,
LLC (Cardinal) which would take over an existing intrastate pipeline now
owned by Piedmont and Public Service and then extend that pipeline from
Burlington, North Carolina to an interconnection with the systems of Public
Service and NCNG southeast of Raleigh at Clayton, North Carolina. The
expanded Cardinal Pipeline would enable the Company to take substantial
additional volumes of natural gas year-round into the middle of its syste
while NCNG Energy will have a 5% equity interest in Cardinal.
In August 1995, the NCUC approved the Company's Jacksonville expansion
project. Of the $18.8 million in capital costs of this project, $12.4
million will be provided by the Company's expansion fund administered by
the Commission. The Camp Lejeune Marine Base will be the largest customer
of this pipeline extension, with service expected to begin in 1997. Limited
distribution systems are planned for the Towns of Warsaw, Kenansville and
Faison in Duplin County as well as the City of Jacksonville in Onslow County.
The $12.4 million amount to be provided by the expansion fund is based on a
net present value analysis approved by the Commission. In addition to the
Jacksonville project, the Company is also considering other expansion projects
that it may seek NCUC approval to construct after the Jacksonville project
has been completed.
<PAGE> 25
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Consolidated Balance Sheets
As of September 30, 1995 1994
------ ------
Assets
GAS UTILITY PLANT:
In Service $263,067,155 $240,270,099
Less-Accumulated Depreciation and
amortization 86,493,283 79,033,948
----------- -----------
176,573,872 161,237,051
Construction work in progress 2,222,026 3,605,664
----------- -----------
178,795,898 164,842,715
----------- -----------
INVESTMENTS:
Nonutility property, less accmulated
depreciation (1995, $2,589,057;
1994, $2,417,285) 3,085,837 2,867,415
Investment in Exploration and development
activities, net of accumulated depletion
and amortization (1995, $3,055,507;
1994, $3,052,534) 87,254 90,227
----------- -----------
3,173,091 2,957,642
----------- -----------
CURRENT ASSETS:
Cash and temporary cash investments 1,639,055 158,432
Restricted temporary cash investments 4,785,259 9,281,583
Accounts receivable, less allowance for
doubtful accounts (1995, $566,109;
1994, $416,049) 12,951,505 11,795,395
Recoverable purchased gas costs - 2,049,124
Inventories, at average cost -
Gas in storage 7,207,177 8,091,210
Materials and supplies 2,367,880 2,634,021
Merchandise 1,310,892 1,415,030
Deferred gas cost - unbilled volumes 327,826 473,136
Prepaid expenses and other 272,422 387,125
----------- -----------
30,862,016 36,285,056
----------- -----------
DEFERRED CHARGES AND OTHER:
Debt discount and expense, being amortized
over lives of related debt 285,786 300,477
Prepaid pension cost 1,217,009 1,178,344
Other 545,959 67,036
----------- -----------
2,048,754 1,545,857
----------- -----------
$214,879,759 $205,631,270
=========== ===========
(The accompanying notes are in integral part of these financial statements.)
<PAGE> 26
Consolidated Balance Sheets
As of September 30, 1995 1994
------ ------
Stockholders' Investment and Liabilities
CAPITALIZATION (see accompanying statements):
Stockholders' investment $ 92,777,912 $ 86,398,741
Long-term debt 62,000,000 37,000,000
----------- -----------
154,777,912 123,398,741
----------- -----------
CURRENT LIABILITIES:
Current maturities of long-term debt 2,000,000 2,000,000
Notes payable - 26,000,000
Accounts payable 12,390,101 9,675,443
Refunds payable 3,646,043 -
Customer deposits 1,964,258 1,994,444
Restricted supplier refunds 4,785,259 9,281,583
Accrued interest 1,625,964 1,599,999
Accrued income and other taxes 1,870,643 1,684,596
Other 2,290,013 2,939,492
----------- -----------
30,572,281 55,175,557
----------- -----------
COMMITMENTS AND CONTINGENCIES
OTHER CREDITS:
Deferred income taxes 20,583,612 18,279,090
Regulatory liability related to
income taxes, net 3,300,446 3,922,719
Unamortized investment tax credits 2,919,828 3,121,692
Postretirement and postemployment
benefit liability 1,645,638 633,666
Miscellaneous 1,080,042 1,099,805
----------- -----------
29,529,566 27,056,972
----------- -----------
$214,879,759 $205,631,270
=========== ===========
(The accompanying notes are in integral part of these financial statements.)
<PAGE> 27
Consolidated Statements of Income
For the Years Ended September 30, 1995 1994 1993
----------- ----------- -----------
OPERATING REVENUES $145,672,779 $160,336,678 $173,145,401
COST OF GAS 87,755,318 105,239,767 119,100,211
----------- ----------- -----------
GROSS MARGIN 57,917,461 55,096,911 54,045,190
----------- ----------- -----------
OPERATING EXPENSES AND TAXES:
Operations 18,256,361 16,739,190 15,512,283
Maintenance 2,814,200 2,738,814 2,872,565
Depreciation 8,048,658 7,372,928 6,891,264
General taxes 7,095,874 7,524,483 7,374,822
Income taxes --
Federal 5,115,500 4,995,000 4,942,000
State 1,351,500 1,323,000 1,360,000
----------- ----------- -----------
TOTAL OPERATING EXPENSES AND TAXES 42,682,093 40,693,415 38,952,934
----------- ----------- -----------
OPERATING INCOME 15,235,368 14,403,496 15,092,256
OTHER INCOME, NET 886,212 722,582 313,276
INCOME (LOSS) FROM SUBSIDIARIES 136,503 79,274 (4,129)
----------- ----------- -----------
GROSS INCOME 16,258,083 15,205,352 15,401,403
----------- ----------- -----------
UTILITY INTEREST CHARGES:
Interest on long-term debt 3,476,458 4,126,636 4,454,556
Other interest 1,744,649 349,980 129,609
Amortization of debt discount
and expense 26,691 78,559 44,546
Allowance for funds used
during construction (798,942) (499,754) (204,386)
----------- ----------- -----------
TOTAL UTILITY INTEREST CHARGES 4,448,856 4,055,421 4,424,325
----------- ----------- -----------
NET INCOME $ 11,809,227 $ 11,149,931 $ 10,977,078
=========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING 6,410,376 6,331,155 5,981,248
EARNINGS PER SHARE $1.84 $1.76 $1.84
(The accompanying notes are an integral part of these financial statements.)
<PAGE> 28
Consolidated Statements of Cash Flows
For the Years Ended September 30, 1995 1994 1993
------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $11,809,227 $11,149,931 $10,977,078
Add (deduct) items which did not use
(provide) cash -
Depreciation charged to:
Operating expenses 8,048,658 7,372,928 6,891,264
Other income 396,934 340,887 296,749
Amortization of deferred charges 43,046 168,954 98,923
Deferred income taxes 1,682,249 1,838,672 1,500,000
Investment tax credits, net (201,864) (202,800) (202,800)
Other 995,184 537,469 (222,975)
Changes in other assets and liabilities:
Accounts receivable, net (1,156,109) 989,329 (921,536)
Gas in storage 884,033 (921,775) (1,098,888)
Materials, supplies and merchandise 370,278 (763,150) 20,755
Accounts payable 2,714,657 (5,048,026) (1,759,499)
Refunds payable and recoverable
purchased gas costs 5,695,168 4,442,298 1,700
Accrued income and other taxes 186,047 (742,965) (2,821,460)
Other (939,631) 439,298 1,047,752
---------- ---------- ----------
Net cash provided by operating activities 30,527,877 19,601,050 13,807,063
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (22,580,779)(20,756,334)(15,468,859)
Proceeds from sale of property - 1,076,210 -
Other, net (36,419) (70,632) (50,121)
---------- ---------- ----------
Net cash used in investing activities (22,617,198)(19,750,756)(15,518,980)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) on notes
payable, net 1,000,000 10,500,000 (7,000,000)
Retirement of long-term debt (2,000,000) (6,088,000) (3,364,000)
Cash dividends paid (7,721,226) (7,215,800) (6,447,579)
Issuance of common stock through
dividend reinvestment plan 1,286,487 1,255,984 1,123,266
Issuance of common stock through
employee stock purchase plan 258,664 264,442 228,846
Issuance of common stock through
public offering - - 17,518,306
Issuance of common stock through
employee stock option plan 746,019 - 131,400
---------- ---------- ----------
Net cash (used in) provided by
financing activities (6,430,056) (1,283,374) 2,190,239
---------- ---------- ----------
Net increase (decrease) in cash and
temporary cash investments 1,480,623 (1,433,080) 478,322
Cash and temporary investments,
beginning of year 158,432 1,591,512 1,113,190
---------- ---------- ----------
Cash and temporary investments,
end of year $1,639,055 $158,432 $1,591,512
========== ========== ==========
Cash paid for:
Interest (net of amounts capitalized) $5,063,788 $4,533,508 $4,796,222
Income taxes (net of refunds) 5,328,827 5,653,288 7,654,079
(The accompanying notes are an integral part of these financial statements.)
<PAGE> 29
Consolidated Statements of Capitalization
As of September 30, 1995 1994
------ ------
STOCKHOLDERS' INVESTMENT:
Common stock, par value $2.50;
12,000,000 shares authorized;
shares outstanding: 1995 - 6,477,200;
1994 - 6,366,544 $ 16,193,000 $ 15,916,360
Capital in excess of par value 27,512,950 25,498,420
Retained earnings 49,071,962 44,983,961
----------- -----------
Total stockholders' investment 92,777,912 86,398,741
----------- -----------
LONG-TERM DEBT:
Debentures, 8 3/4% Series B,
due June 15, 2001 12,000,000 14,000,000
Debentures, 9.21% Series C,
due November 15, 2011 25,000,000 25,000,000
Short-Term Obligations to be Refinanced 27,000,000 -
----------- -----------
64,000,000 39,000,000
Less-Current Maturities (2,000,000) (2,000,000)
----------- -----------
Total long-term debt 62,000,000 37,000,000
----------- -----------
TOTAL CAPITALIZATION $154,777,912 $123,398,741
=========== ===========
CAPITALIZATION RATIOS:
Stockholders' investment 59.2% 68.9%
Long-term debt (including current maturities) 40.8% 31.1%
----------- -----------
100.0% 100.0%
=========== ===========
(The accompanying notes are an integral part of these financial statements.)
<PAGE> 30
Consolidated Statements of Retained Earnings
For the Years Ended September 30, 1995 1994 1993
---- ---- ----
BALANCE AT BEGINNING OF YEAR $44,983,961 $41,049,830 $36,520,331
Net income 11,809,227 11,149,931 10,977,078
Cash dividends on common stock
(per share - $1.205 in 1995;
$1.14 in 1994; and $1.06 in 1993) (7,721,226) (7,215,800) (6,447,579)
---------- ---------- ----------
BALANCE AT END OF YEAR $49,071,962 $44,983,961 $41,049,830
========== ========== ==========
(The accompanying notes are an integral part of these financial statements.)
<PAGE 31>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPLES OF CONSOLIDATION:
Basis of Presentation
- ---------------------
North Carolina Natural Gas Corporation (NCNG or the Company) is in the
business of providing natural gas and propane gas and related services to
151,200 customers in southcentral and eastern North Carolina. The Company's
primary business is the sale and/or transportation of natural gas to over
91,000 residential customers, almost 12,000 commercial and agricultural
customers, 442 industrial and electric utility customers but no individual
customer accounts for as much as 7% of the Company's delivered gas volumes,
revenues or margin. Industrial cusotmers are geographically dispersed
throughout the Company's service area, and they are classified into many
different industries including the manufacture of brick and ceramics,
chemicals, glass, nuclear fuels, textiles, paper and paper board, plywood
and other wood products and the processing of aluminum and other metals,
tobacco, rubber, dairy and food products.
The Company's natural gas business is regulated by the North Carolina
Utilities Commission (NCUC). Its nonutility division serves propane gas to
about 9,000 customers and sells and services gas appliances. Subsidiary
operations, while not material, are described in Note 4.
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, NCNG Exploration Corporation,
Cape Fear Energy Corporation and NCNG Energy Corporation. All significant
intercompany transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Utility Plant
- -------------
Gas utility plant is stated at original cost. Such cost includes
payroll-related costs such as taxes, pension and other fringe benefits,
general and administrative costs and an allowance for funds used during
construction. The Company capitalizes funds used during construction
based on the overall cost of capital, which includes the cost of both debt
and equity funds used to finance construction. The cost of depreciable
property retired, plus the cost of removal less salvage, is charged to
accumulated depreciation.
Depreciation
- ------------
Depreciation is provided using the straight-line method over
the estimated useful lives of the assets. The current rates have been
approved by the NCUC. Depreciation was approximately 3.2% of the cost
of total depreciable property in 1995, 1994 and 1993.
<PAGE> 32
Income Taxes
- ------------
The Company uses comprehensive interperiod income tax allocation
(full normalization) to account for temporary differences in the recognition
of revenues and expenses for financial and income tax reporting purposes.
In fiscal years prior to 1994, income taxes were accounted for under
Accounting Principles Board Opinion No. 11. Effective October 1, 1993,
the Company adopted FASB Statement No. 109, "Accounting for Income Taxes."
Statement No. 109 required, among other things, a change to the liability
method of accounting for deferred income taxes. See Note 3 for more
information regarding income taxes.
The Company uses the deferred method of accounting for investment
tax credits. Investment tax credits generated in prior years were deferred
and are being amortized to income over the service lives, which are
approximately 30 years, of the related property.
Recognition of Revenue
- ----------------------
The Company follows the practice of rendering customer bills on a
cyclical basis throughout each month and recording revenue at the time
of billing. The Company defers the cost of gas delivered but unbilled
due to cycle billing.
Gas in Storage
- --------------
Inventories of gas in storage are maintained on the basis of average
cost. Such cost is recovered from customers at the time the gas is
withdrawn from storage and sold.
Temporary Cash Investments
- --------------------------
Temporary cash investments are securities with maturities of 90 days
or less. For purposes of the Consolidated Statements of Cash Flows,
temporary cash investments are considered cash equivalents.
Restricted Temporary Cash Investments and Restricted Supplier Refunds
- ----------------------------------------------------------------------
In February 1993, the NCUC issued its Order establishing an Expansion
Fund for the Company to be funded initially by refunds the Company had
received from its pipeline suppliers. The investment and use of these
funds have been restricted by a previous Order of the NCUC. Pursuant to
the February 1993 Order, the Company remitted a total of $10,440,000 in
fiscal years 1993 and 1995 to the NCUC for the Expansion Fund. The amount
represented certain pipeline refunds the Company had received, plus accrued
interest earned on funds invested by the Company, since July 1991 when the
North Carolina General Assembley enacted legislation authorizing the NCUC
to establish expansion funds for all natural gas utilities franchised in
North Carolina. At September 30, 1995, the refunds received plus accrued
interest, which had not been remitted to the NCUC, amounted to $4,785,000
and are reported on the consolidated balance sheet in restricted temporary
cash investments and restricted supplier refunds.
Pursuant to the NCUC Orders, the funds not yet transferred to the
Expansion Fund are to remain segregated from the Company's general funds
and, pending further order of the NCUC, may be remitted to the NCUC and
used for expansion of the Company's facilities into unserved areas of the
Company's franchised territory or, if not used for expansion, refunded to
the Company's customers. Amounts remitted to the NCUC through September
30, 1995 are not included in the Company's financial statements because
they are no longer controlled by the Company.
<PAGE> 33
Fair Value of Financial Instruments
- -----------------------------------
FASB Statement No. 107, "Disclosure About Fair Value of Financial
Instruments," requires disclosure of the fair value of financial instruments,
both assets and liabilities, for which it is practicable to estimate fair
value. The fair value of the Company's long-term debt is estimated using
a discounted cash flow methodology. Based on published corporate borrowing
rates for debt instruments with similar terms and average maturities, the
estimated fair value of the Company's long-term debt (including current
maturities) at September 30, 1995 is approximately $63.7 million as compared
to a carrying value of $64.0 million, and at September 30, 1994, the estimated
fair value was approximately $39.7 million as compared to a carrying value
of $39.0 million.
Reclassifications
- -----------------
Certain Financial Statement items in 1994 and 1993 have been
reclassified to conform with the 1995 presentation.
2. REGULATORY AND GAS SUPPLY MATTERS:
On October 27, 1995, the NCUC issued its Order granting a
general rate increase amounting to $4,205,000 in annual revenues
effective November 1, 1995. The Commission's Order approved, in all
material respects, the Stipulation of Settlement reached among the Company,
the Public Staff of the NCUC, the Carolina Utility Customers Association,
Inc. and other intervenors in the rate case. The Order provides for a
rate of return on net investment of 10.09% but, pursuant to the Stipulation
of Settlement, did not state separately the rate of return on common equity
or the capital structure used to calculate revenue requirements. The Order
provides for significant rate design changes by increasing residential and
commercial rates while reducing industrial sales and transportation rates to
recognize, among other things, the differences in costs of service the various
customer classes. The Order establishes several new rate schedules, including
an economic development rate to assist in attracting new industry to the
Company's service area and a rate to provide standby, on-peak gas supply
service to industrial customers whose gas service would otherwise be
interrupted.
Also as part of the October 27, 1995 rate Order, the NCUC approved:
- Continuation of the Weather Normalization Adjustment (WNA) mechanism
originally approved in 1991 (see below).
- Establishment of the Price Sensitive Volume Adjustment (PSVA)
mechanism to replace the Industrial Sales Tracker (IST) effective
November 1, 1995 (see below). The PSVA, while narrower in scope than
the IST, protects the Company against loss of load from eight
large, fuel-switchable customers using heavy fuel oil as an
alternative fuel while providing that all actual margins earned on
deliveries of gas to such customers be flowed through to all other
customers.
- An increase in depreciation rates for certain distribution plant.
The increased depreciation rates account for approximately
$750,000 of the $4.2 million annual revenue increase.
- The accounting for and recovery in rates of costs associated
with environmental assessment and remediation of a former
manufactured gas plant (MGP) site. The NCUC found that NCNG acted
in a reasonable and prudent manner in responding to the 1991 North
Carolina Department of Environmental Health and Natural Resources
Division of Environmental Management's Notice of Violation of Water
Quality Standards as a result of MGP by-products at the Kinston site.
Accordingly, the NCUC approved the Company's proposal to recover an
annualized amount of MGP costs based on amounts expended, net of
recoveries from third parties, through December 31, 1994.
In the general rate case filed in May 1991, the NCUC granted,
effective December 6, 1991, additional annual revenues of $2,565,000
and rates of return of 11.16% and 12.70% on net investment and common
<PAGE> 34
equity, respectively. Additionally, the NCUC allowed the Company to
continue to include in its rate tariff an IST which is designed to stabilize
the Company's margin (difference between revenues and purchased gas costs)
earned from sales and transportation to interruptible industrial customers
who use heavy
Also as part of the December 6, 1991 rate Order, the NCUC
approved the Company's application to establish a WNA for the space
heating market. The WNA stabilizes the Company's winter revenues and
customers' bills by adjusting rates when weather deviates from normal.
The nongas component of rates for space heating customers is adjusted
upward when weather is warmer than normal and downward when weather is
colder than normal. In fiscal 1995, winter weather was 15% warmer than
normal, and accordingly, the WNA increased net billings to customes by
$1,746,000.
In August 1995, the NCUC issued its Order approving the Company's
first expansion project to utilize the Expansion Fund (see Note 1). The
project is to extend NCNG's transmission pipeline 71 miles from Mount Olive
to the Camp Lejeune Marine Base in Jacksonville, North Carolina. The
project, estimated to be completed in 1997, will bring the first natural
gas service to Duplin and Onslow counties. The Company estimates the total
cost of the project to construct 16 miles of 10" transmission pipeline and
55 miles of 8" transmission pipeline, together with limited distribution
systems in Faison an Kenansville in Duplin County and Jacksonvill and Camp
Lejeune in Onslow County, will be approximately $18.8 million. The
Expansion Fund will provide $12.4 million based on the economic feasibility
analysis approved by the NCUC. Subsequent to September 30, 1995, the
Company began acquiring rights-of-way with pipeline consturction scheduled
to begin in June 1996.
The Company's annual review of its gas costs was held in April 1995
for the 11 months ended October 31, 1994. The NCUC found NCNG's gas costs
and gas purchasing practices to be prudent, as it had in prior annual
reviews in 1994 and 1993.
In August 1995, the Company filed with the NCUC its annual true-up
of lost, unaccounted for and company-use volumes for the 12 months ended
June 30, 1995. Because such volumes exceeded the base period amounts
included in the 1991 general rate case, the Company charged $1,235,000 in
1995 to the deferred gas cost account for recovery in rates from customers.
Both of the Company's interstate pipeline suppliers, Transcontinental
Gas Pipe Line Corporation (Transco) and Columbia Gas Transmission
Corporation (Columbia), have ongoing rate and certificate matters under
jurisdiction of the Federal Energy Regulatory Commission (FERC). In
addition, Columbia has been operating in bankruptcy since July 1991 but
is expected to emerge from bankruptcy by December 31, 1995. The Company
does not expect that any regulatory decisions or court orders will have a
material impact on or results of operations because all prudently incurred
gas costs, including interstate pipeline capacity and storage service costs,
are eligible for immediate recovery from the Company's customers, and refunds
from interstate pipelines must be transferred to the Expansion Fund or
directly refunded to the Company's customers.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of."
This Statement imposes stricter criteria for regulatory assets by requiring
that such assets be probable of future recovery at each balance sheet date.
The Company anticipates adopting this standard on October 1, 1996 and does
not expect that adoption will have a material impact on the financial
position or results of operations of the Company based on the current
regulatory structure in which the Company operates. This conclusions may
change in the future as competitive factors influence wholesale and
retail pricing in the gas utility industry.
<PAGE> 35
3. INCOME TAXES:
The components of income tax expense are as follows (in thousands):
For the years ended September 30,
1995 1994 1993
Federal State Federal State Federal State
Income taxes charged
to operations -
Payable currently $4,025 $ 972 $3,937 $ 937 $4,016 $1,000
Deferred to subsequent years 1,289 380 1,256 386 1,124 360
Investment tax credits, net (198) - (198) - (198) -
----- ----- ----- ----- ----- -----
$5,116 $1,352 $4,995 $1,323 $4,942 $1,360
===== ===== ===== ===== ===== =====
Income taxes charged to
other income $ 552 $ 134 $ 429 $ 106 $ 165 $ 42
===== ===== ===== ===== ===== =====
The effective income tax rate, computed by dividing total income tax
expense by the sum of such income tax expense and net income, is 37.7% in
1995, 38.1% in 1994 and 37.2% in 1993.
A reconciliation of income tax expense at the federal statutory rate
to recorded income tax expense is as follows (in thousands):
1995 1994 1993
------ ------ ------
Federal taxes at 35% for 1995 and 1994
and 34.75% for 1993 $6,637 $6,301 $6,076
State income taxes, net of
federal benefit 966 929 915
Amortization of investment tax credits (202) (203) (203)
Amortization fo excess deferred income
taxes returned to customers (222) (222) (222)
Tax credit-supplier refunds -- (17) (133)
Tax effect of allowance for funds used
during construction-equity portion (154) (97) (40)
Other 129 162 116
----- ----- -----
Total income tax expense $7,154 $6,853 $6,509
===== ===== =====
Effective October 1, 1993, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes." The adoption of Statement No. 109 resulted
in cumulative adjustments to the balance sheet and had no effect on
consolidated net income. As a result of Statement No. 109, the Company
reduced accumulated deferred income taxes and recorded related regulatory
assets and liabilities in the net liability amount of approximately $4.5
million at the currently enacted federal and state tax rates, which were
35% and 7.7%, respectively. The regulatory net liability is due primarily
to deferred income taxes recognized in years prior to 1987 at rates higher
than currently enacted.
<PAGE> 36
The major timing differences for 1993 were accelerated tax
depreciation and producer settlement payments. The tax effects of
temporary differences in the carrying amounts of assets and liabilities
in the Consolidated Financial Statements and their respective tax bases
that give rise to deferred tax assets and liabilities are as follows (in
thousands):
1995 1994
Deferred Tax Liabilities:
Accelerated Depreciation $21,936 $19,903
Property Basis Differences 3,705 3,435
------ ------
Total Deferred Tax Liabilities $25,641 $23,338
------ ------
Deferred Tax Assets:
Unamortized Investment Tax Credits $ 1,166 $ 1,245
Regulatory Liability Related
to Income Taxes, net 1,526 1,571
Other 2,365 2,243
------ ------
Total Deferred Tax Assets $ 5,057 $ 5,059
------ ------
Net Deferred Tax Liabilities $20,584 $18,279
====== ======
4. SUBSIDIARY OPERATIONS:
In September 1995, the Company formed a new subsidiary, NCNG Energy
Corporation (Energy) to participate in gas supply and pipeline projects in
North Carolina. Energy has a 5% ownership interest in Pine Needle LNG
Company, LLC (Pine Needle) which plans to build and operate a large liquefied
natural gas (LNG) plant to be located near Transco's main interstate
pipeline north of Greensboro, North Carolina. The LNG Plant is expected to
cost $107 million. It will have a storage capacity of four billion cubic
feet (4 Bcf) of gas and is expected to be in operation prior to the 1999-2000
winter. As of September 30, 1995, Energy had advanced to Pine Needle
$208,000 which is included in the consolidated balance sheet as other
deferred charges. A subsidiary of Transco is a partner and will be the
operator of Pine Needle, and subsidiaries of Piedmont Natural Gas Company
(Piedmont), Public Service Company of North Carolina, Inc. (Public Service)
and Amerada Hess Company as well as The Municipal Gas Authority of Georgia
are also partners in Pine Needle. Piedmont, Public Service and NCNG will be
Pine Needle's largest customers. Pine Needle expects to receive
authorizations from the FERC prior to December 31, 1997 to construct the LNG
plant and provide firm storage services to its customers.
Energy is also involved with subsidiaries of Transco, Piedmont and
Public Service in efforts to organize another limited liability company
which would acquire an existing pipeline and extend it to provide the
capacity to deliver gas from the Pine Needle LNG plant and Transco's
existing pipeline into NCNG's system at a point near Clayton, North Carolina,
on the Wake-Johnston county line. Although no commitments have been
finalized, Energy plans to participate as the owner of a 5% interest in the
new pipeline company, known as Cardinal Expansion Company, LLC.
as Cardinal Expansion Company, LLC.
Cape Fear Energy Corporation's (Cape Fear) primary activities
are natural gas marketing for industrial and municipal customers located
on NCNG's system. Its oil and gas exploration and development activities
and net investment are not significant. Cape Fear's earnings increased to
$104,000 in 1995 from $24,000 in 1994 due to substantially increased sales
volumes.
<PAGE> 37
NCNG Exploration Corporation's (Exploration) interests in all
of the exploration and development programs in which Exploration was
involved were sold effective June 7, 1994. Exploration received net
proceeds of $615,000, of which $144,500 was deposited in an escrow account
to remain until December 31, 1995 to cover any potential claims presented
by the buyers. As of September 30, 1995, no such claims had been presented.
During 1995, Exploration engaged in limited gas marketing activities and
generated a minor amount of net income.
5. SHORT-TERM BORROWING ARRANGEMENTS:
The Company has lines of credit with North Carolina banks for an
aggregate amount of $58,500,000, of which $40,000,000 is on a committed
basis. Under these lines, the Company borrows funds on a short-term basis
in connection with its construction program and also for seasonal financing
of storage gas, usually on a demand basis for a period of 90 days. The
Company also uses bankers' acceptances to finance the cost of gas in storage
for periods up to 180 days. The maximum amount of such bankers' acceptances
is dependent upon the market value of gas in storage, and these loans are
made at rates below the prime rate. At September 30, 1995, $27,000,000
under lines of credit was outstanding at interest rates ranging from 6.05%
to 6.17% and $31,500,000 was available under these arrangements. The amount
outstanding at September 30, 1995 is classified as long-term debt on the
consolidated balance sheet because in September the Company arranged a
private placement of $30,000,000 of its 7.15% Senior Notes due 2015. This
transaction will close on November 10, 1995, and all short-term debt will
be repaid.
In connection with the lines of credit, the Company is expected
to maintain certain annual, average nonrestricted cash balances in the
banks ranging from 5% to 10% of the loans outstanding. In addition, there
are nominal commitment fees on the unused lines of credit. To the extent
that bankers' acceptances are outstanding, no commitment fees are payable.
6. PENSION AND OTHER POSTRETIREMENT BENEFITS:
The Company has a pension plan which provides retirement benefits
for its employees within specified age limits and periods of service.
Plan benefits are based on years of service and the employee's compensation
during the last five years of employment. The Company's funding policy is
to contribute annually an amount equal to the maximum allowable tax-
deductible amount.
The total pension cost was $374,000 in 1995, $222,000 in 1994,
and $131,000 in 1993, of which approximately 20% was capitalized in each
year.
<PAGE> 38
The plan's funded status as of September 30, 1995 and 1994 and
pension costs for 1995, 1994 and 1993 were as follows (in thousands):
Funded Status: 1995 1994
------ ------
Actuarial present value of
accumulated plan benefits:
Vested $15,516 $14,355
Nonvested 98 97
------ ------
Subtotal 15,614 14,452
Effect of salary progression 3,828 3,989
------ ------
Projected benefit obligation 19,442 18,441
Plan assets at market value 21,719 18,920
------ ------
Plan assets in excess of projected
benefit obligation 2,277 479
Unrecognized prior service cost
being amortized over twelve years 640 707
Unrecognized net (gain) loss
being amortized over ten years (1,229) 721
Unrecognized net asset existing at the
date of transition, being amortized over
aprproximately ten years (471) (729)
------ ------
Prepaid pension cost $ 1,217 $ 1,178
====== ======
Pension Cost 1995 1994 1993
------ ------ ------
Net pension cost was comprised of
the following items:
Service cost $ 662 $ 633 $ 610
Interest cost on projected
benefit obligation 1,418 1,346 1,225
Actual return on plan assets (1,813) 299 (1,908)
Amortization of unrecognized
prior service cost 66 66 32
Amortization of transition net asset (258) (258) (258)
Deferred gas (loss) on net assets 299 (1,864) 430
----- ----- -----
Net pension cost $ 374 $ 222 $ 131
===== ===== =====
The expected long-term rate on plan assets was 8%. At September 30,
1995, plan assets were invested approximately 61% in fixed income securities
and 39% in equity securities, including 1% in the common stock of the
Company.
The Company also provides certain health care and life insurance
benefits for retired employees, and substantially all employees may remain
eligible for these benefits when they retire. Effective October 1, 1993, the
Company adopted FASB Statement No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," on a prospective basis. This
statement requires accounting for these benefits on an accrual basis using a
single actuarial method which spreads the expected cost of such benefits to
each year of an employee's service until the employee becomes fully eligible
to receive the benefits. Prior to October 1,1 993, the Company accounted for
these benefits on a cash basis consistent with current ratemaking treatment.
The costs of such benefits charged to expense amounted to $501,000 in 1993.
The NCUC, in rate cases where Statement NO. 106 accounting has been
presented, has expressed its preference for the accrual basis of accounting,
and accordingly, the Commission approved the same in the Company's most
recent general rate case decided on October 27, 1995.
<PAGE> 39
The following tables show the funded status of the plan and the
components of the plan's net costs (in thousands) for fiscal years 1995
and 1994:
Funded Status: 1995 1994
-------------- ----------------
Medical Life Medical Life
-------------- ----------------
Actuarial present value of
benefit obligation:
Retirees and dependents $ 2,292 $ 354 $ 2,112 $ 335
Employees eligible to retire 944 137 818 106
Other Employees 2,136 197 1,966 197
------ ---- ------ ----
Accumulated benefit obligation 5,372 688 4,896 638
Unrecognized net gain (loss) (5) 19 112 38
Unrecognized transition
obligation (4,212) (572) (4,446) (604)
------ ---- ------ ----
Postretirement Benefit Liability $ 1,155 $ 135 $ 562 $ 72
====== ==== ====== ====
Components of Net Cost:
Service cost during the year $ 136 $ 12 $ 128 $ 12
Interest cost on accumulated
benefit obligation 394 51 363 49
Amortization of unrecognized
transition obligation
over 20 years 234 32 234 32
------ ---- ------ -----
Net periodic postretirement
benefit cost $ 764 $ 95 $ 725 $ 93
====== ==== ====== =====
Of the net postretirement medical and life insurance costs recorded
in 1995 and 1994, $704,000 and $670,000, respectively, were charged to
operating expenses and the remainder were charged to construction and
other accounts.
The discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligations (pension, health care and life insurance) were 8% and 6%,
respectively.
An additional assumption used in measuring the accumulated
postretirement medical benefit obligation was a medical care cost trend rate
of 11.5% for 1995, decreasing gradually to 5.5% through the year 2005 and
remaining at that level thereafter. An annual increase in the assumed
medical care cost trend rate by 1% would increase the accumulated medical
benefit obligation at September 30, 1995, by $1,150,000 and the aggregate of
the service and interest cost components of the net retiree medical cost by
$121,000.
The FASB issued Statement No. 112, "Employers' Accounting for
Postemployment Benefits," which requires that all types of benefits provided
to former or inactive employees and their families prior to retirement be
accounted for on an accrual basis. The Company adopted this standard in
fiscal 1995, and it did not have a material impact on the financial
statements. Also, the NCUC in its October 27, 1995 rate Order allowed the
recovery of these costs in rates over a three-year amortization period.
<PAGE> 40
7. STOCKHOLDERS' INVESTMENT:
The changes in common stock and capital in excess of par value
for the three years ended September 30, 1995 were as follows:
Common Stock
-----------------------
Capital in
Shares Excess of
Outstanding Amount of Par Value
----------- ------ ------------
Balance at September 30, 1992 5,448,386 $13,620,965 $ 7,271,571
Issuance through Dividend
Reinvestment Plan (DRP) 44,946 112,365 1,010,901
Issuance through Employee
Stock Purchase Plan (ESPP) 15,992 39,980 188,866
Issuance through exercise of
stock options 5,175 12,938 118,462
Issuance through public
offering of common stock 786,500 1,966,250 15,552,056
--------- ---------- ----------
Balance at September 30, 1993 6,300,999 15,752,498 24,141,856
Issuance through DRP 52,868 132,170 1,123,814
Issuance through ESPP 12,677 31,692 232,750
--------- ---------- ----------
Balance at September 30, 1994 6,366,544 15,916,360 25,498,420
Issuance through DRP 62,448 156,120 1,130,367
Issuance through ESPP 13,258 33,145 225,519
Issuance through exercise of
stock options 34,950 87,375 658,644
--------- ---------- ----------
Balance at September 30, 1995 6,477,200 $16,193,000 $27,512,950
========= ========== ==========
In February 1993, the Company issued common stock through a public
offering at a price of $23.50 per share with net proceeds of $17.5 million
after expenses of the offering.
The Company's common stock was split three-for-two effective October
30, 1992 in the form of a stock dividend. All earnings and dividends per
share amounts in the accompanying consolidated financial statements and
notes thereto reflect the stock split.
At September 30, 1995, there are 788,841 shares of common stock
reserved for issuance under the Company's Dividend Reinvestment Plan and
for other reasons. Under the most restrictive covenants of the Company's
long-term debt agreements, approximately $21,926,000 of the Company's
retained earnings at September 30, 1995 is unrestricted.
8. LONG-TERM DEBT MATURITIES:
Maturities of existing long-term debt during each of the next five
years will be as follows: 1996, $2,000,000; 1997, $2,000,000;
1998, $2,000,000; 1999, $3,250,000, and 2000, $3,250,000.
9. STOCK PURCHASE AND OPTION PLANS:
In 1990, the Company instituted an employee stock purchase plan
and a key employee nonqualified stock option plan. The stock purchase
plan enables employees to contribute up to 6% of their wages toward purchase
of the Company's common stock at 90% of the lower of current or prior
year-end market value. Shares have been purchased by employees since 1991.
Under the terms of the plan, 300,000 shares of authorized but unissued
shares were available for purchase.
<PAGE> 41
Under the terms of the nonqualified stock option plan, a maximum of
150,000 shares are reserved for issuance. The option price is equal to 90%
of the market value of the stock at the grant date. The period during which
these options are exercisable begins five years after, but may not exceed
seven years after, the date of grant. In addition, the plan provides that
an amount equal to 50% of the dividends that would have been paid on the
stock from the date of grant shall be paid in cash to the employee at the
exercise date. The plan provides that retired officers may exercise a pro
rata number of options based on the number of months service after the date
of grant.
Transactions for 1995, 1994 and 1993 are as follows:
Shares
Subject Option Price
to Option Per Share
--------- -----------
Balance at September 30, 1992 86,400 $13.80-$14.10
Exercised upon retirement of two officers (5,175) 13.80
Canceled (8,475) 13.80
------
Balance at September 30, 1993 72,750 $13.80-$14.10
Granted 2,600 24.98
------
Balance at September 30, 1994 75,350 $13.80-$24.98
Exercised (34,950) 13.80
------
Balance at September 30, 1995 40,400 $13.80-$24.98
======
1995 1994 1993
---- ---- ----
Options Exercisable at Year End 32,100 - -
Options Available for Grant at Year End 69,475 69,475 72,075
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation." This statement establishes a fair value-based
method of accounting for stock-based employee compensation plans. The
Company must adopt this standard by October 1, 1996 and does not expect
that it will have a material impact on its financial position, results of
operations or net cash flows.
10. COMMITMENTS AND CONTINGENCIES:
During fiscal year 1991, the North Carolina Department of
Environment, Health and Natural Resources advised the Company of possible
environmental contamination arising from Company-owned property in Kinston,
North Carolina, which is the former site of a manufactured gas plant. The
Company retained an environmental services consulting firm which has
evaluated the site. Based on that firm's investigation to date and actual
expenditures for sites of similar scope and complexity, the cost for
investigation and remediation of this site is estimated to be between $1.4
million and $2.8 million over a four- to six-year period. As of September
30, 1995, the Company had incurred no significant expenditures which were
not covered by reimbursements from third parties, and none of these costs
or reimbursements were then included in the Company's natural gas rates. In
its October 27, 1995 general rat Order, the NCUC approved the Company's
accounting for and recovery in rates of costs associated with the Kinston
site (see Note 2).
The Company owns another site of a former manufactured gas plant in
New Bern, North Carolina, and was the former owner of three other similar
sites on which no environmental problems have arisen. Management believes
that any appreciable investigation or remediation costs not previously
provided for will be recovered from third parties, including insurance
carriers, or in natural gas rates. Based on the anticipated recovery from
these sources, the Company does not believe that the cost of any evaluation
and remediation work will have a material adverse effect on the Company's
financial condition or results of operiods and net cash flows.
<PAGE> 42
The Company is subject to claims and lawsuits arising in the
ordinary course of business. Management does not expect any litigation
from such claims or lawsuits to have a material effect on the Company's
business, financial condition, or results of operations.
Supplementary data -
The following table presents certain financial information for
each quarter during the fiscal years ended September 30, 1995 and 1994
(amounts in thousands, except per share data).
1995
Fourth Third Second First
Operating revenues $24,474 $34,271 $52,513 $34,415
Gross margin 10,737 10,913 21,831 14,436
Operating income 1,586 1,524 8,036 4,089
Net income 433 439 7,621 3,316
Earnings per share .06 .07 1.19 .52
1994
Fourth Third Second First
Operating revenues $26,117 $29,523 $62,615 $42,082
Gross margin 9,617 9,264 21,080 15,136
Operating income 1,148 1,148 7,676 4,431
Net income 28 127 7,301 3,694
Earnings per share .004 .02 1.15 .59
<PAGE> 43
Item 9. Changes in and Disagreements on Accounting
and Financial Disclosures
- ---------------------------------------------------
None.
Item 10. Management's Responsibility for Financial Statements
- --------------------------------------------------------------
Management is responsible for the preparation, presentation and
integrity of the financial statements and other financial information
in this report. The accompanying financial statements have been prepared
in accordance with generally accepted accounting principles applicable to
rate-regulated public utilities, including estimates and judgments made by
management that were necessary to prepare the statements in accordance with
such accounting principles, and are not misstated due to material fraud or
error. To assure the integrity of the underlying financial records
supporting the financial statements, management maintains a system of
internal accounting controls sufficient to provide reasonable assurances
that NCNG assets are properly accounted for, safeguarded and are utilized
only in accordance with management's authorization. The concept of
reasonable assurance recognizes that the costs of a system of internal
controls should not exceed the related benefits derived from it.
The system of internal accounting controls is augmented by NCNG's
Internal Audit Department, which has unrestricted access to all levels of
NCNG management. The Internal Audit Department meets periodically, with
and without the presence of management, with the Audit Committee of the
Board of Directors to discuss, among other things, NCNG's system of internal
accounting controls and the adequacy of the internal audit program. The
Audit Committee is comprised of four directors who are not officers or
employees of NCNG.
The Audit Committee also meets periodically with Arthur Andersen LLP,
NCNG's independent public accountants, with and without the presence of
management, to discuss the results of the annual audit of NCNG's financial
statements and related data. The Audit Committee and Arthur Andersen LLP
also discuss internal accounting control matters that come to the attention
of Arthur Andersen LLP during the course of the audit.
/s/ Calvin B. Wells /s/ Gerald A. Teele
- ------------------------------ ---------------------------
Calvin B. Wells Gerald A. Teele
Chairman, President and Senior Vice President, Treasurer
Chief Executive Officer and Chief Financial Officer
<PAGE> 44
PART III
--------
Item 11. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Directors -
The information for this item covering directors of the Company is
set forth in the section entitled "Election of Directors and Information
as to Members" on Pages 1, 2 and 3 in the Company's Proxy Statement dated
December 6, 1995 relating to the January 9, 1996 Annual Meeting of
Stockholders, which section is hereby incorporated by reference.
Executive officers -
The information for this item concerning executive officers of
the Company is set forth on Page 15 of this annual report.
Item 12. Executive Compensation
- --------------------------------
The information for this item is set forth in the sections entitled
"Executive Compensation", "Key Employee Stock Option Plan", "Employee Stock
Purchase Plan", "Employee Retirement Plans" and "Executive Employment
Agreements in the Event of Change in Control" and "Report of Personnel
Committee on Executive Compensation" on Pages 4, 5, 6, 7, 8, and 9 in the
Company's Proxy Statement dated December 6, 1995 relating to the January 9,
1996 Annual Meeting of Stockholders, which sections are hereby incorporated
by reference.
Item 13. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Security ownership of certain beneficial owners -
There is no person who is known to the Company to be the beneficial
owner of more than five percent of the Company's common stock as of
September 30, 1995.
Security ownership of management -
The information for this item is set forth in the section entitled
"Election of Directors and Information as to Members" on Pages 1, 2 and
3 in the Company's Proxy Statement dated December 6, 1995 relating to
the January 9, 1996 Annual Meeting of Stockholders, which section is
hereby incorporated by reference.
<PAGE> 45
Changes in control -
The Company knows of no contractual arrangements which may at a
subsequent date result in a change in control of the Company.
Item 14. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information for this item is set forth in the section
entitled "Compensation Interlocks and Insider Participation" on Page 8
in the Company's Proxy Statement dated December 6, 1995 relating to the
January 9, 1996 Annual Meeting of Stockholders, which section is hereby
incorporated by reference.
<PAGE> 46
PART IV
-------
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
- --------------------------------------------------
(a) 1. Financial Statements
- -----------------------------
Page
----
Consolidated Balance Sheets as of September 30, 1995 and 1994 25
Consolidated Satements of Income for the Years Ended
September 30, 1995, 1994 and 1993 27
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1995, 1994 and 1993 28
Consolidated Statements of Capitalization as of September 30,
1995 and 1994 29
Consolidated Statements of Retained Earnings for the Years
Ended September 30, 1995, 1994 and 1993 30
Notes to Consolidated Financial Statements for the Years
Ended September 1995, 1994 and 1993 31
Management's Responsibility for Financial Statements 43
No separate financial statements are presented for the Company's
consolidated subsidiaries because the Company and its subsidiaries meet
the requirements for omissions set forth in Regulation S-X, Rule 3-09.
(a) 2. Financial Statement Schedules
- -------------------------------------
The following data and financial statement schedules are included
herein:
PAGE
----
Report of Independent Public Accountants 48
Schedule II - Valuation and Qualifying Accounts
for the Years Ended September 30, 1995, 1994 and 1993 47
All other financial statement schedules are omitted as not applicable,
or nor required, or because the required information is given in the
Consolidated Financial Statements or Notes thereto.
(a) 3. Exhibits
See Index of Exhibits on Pages 50 and 51 of this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three
months ended September 30, 1995.
<PAGE> 47
NORTH CAROLINA NATURAL GAS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
Col. A Col. b Col. C Col. D Col. E
Additions
Charged to
Balance ------------------ Balance
Beginning Operating Other Deductions At End
Description of Period Expenses Income (Note 1) Period
- ----------- --------- -------- ------ ---------- ---------
DEDUCTED IN
BALANCE SHEET FROM
ASSET TO WHICH IT
APPLIES: Allowance
for doubtful accounts
1995 $416,048 $305,358 $102,558 $257,945 $566,019
======== ======== ======== ======== ========
1994 $434,375 $328,840 $ 67,346 $414,513 $416,048
======== ======== ======== ======== ========
1993 $392,321 $218,702 $ 62,790 $239,438 $434,375
======== ======== ======== ======== ========
Note 1:
Deductions represent uncollectible accounts written off,
net of recoveries, as follows -
1995 1994 1993
------ ------ ------
Write off of accounts
considered to be uncollectible $475,259 $505,993 $332,051
Less-Recoveries on accounts
previously written off 217,314 91,480 92,613
------- ------- -------
$257,945 $414,513 $239,438
======= ======= =======
<PAGE> 48
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of North Carolina
Natural Gas Corporation:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of North Carolina Natural Gas Corporation
(a Delaware corporation) and subsidiaries as of September 30, 1995 and
1994 and the related consolidated statements of income, retained earnings,
and cash flows for each of the three years ended September 30, 1995. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of North
Carolina Natural Gas Corporation and subsidiaries as of September 30, 1995
and 1994 and the results of their operations and their cash flows for each
of the three years ended September 30, 1995 in conformity with generally
accepted accounting principles.
As explained in Notes 3 and 6 to the consolidated financial statements,
effective October 1, 1993, the Company changed its methods of accounting for
income taxes and postretirement benefits other than pensions.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
November 8, 1995
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NORTH CAROLINA NATURAL GAS CORPORATION
AND SUBSIDIARIES
--------------------------------------
(Registrant)
By:/s/ Calvin B. Wells
--------------------------------------
Calvin B. Wells
Chairman, President and Chief
Executive Officer
December 12, 1995:
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title
- -------------------------------- -------------------------------
/s/ Calvin B. Wells Chairman, President, and
- ----------------------------------- Chief Executive Officer
Calvin B. Wells (Principal Executive Officer)
/s/ Gerald A. Teele Senior Vice President, Treasurer,
- ----------------------------------- and Chief Financial Officer
Gerald A. Teele (Principal Financial Officer)
/s/ Charles W. Siska, Jr. Controller
- ----------------------------------- (Principal Accounting Officer)
Charles W. Siska, Jr.
/s/ George T. Clark, Jr. /s/ John O. McNairy
- ----------------------------------- --------------------------------
George T. Clark, Jr.-Director John O. McNairy-Director
/s/ Paul A. DelaCourt /s/ William H. Prestage
- ----------------------------------- --------------------------------
Paul A. DelaCourt-Director William H. Prestage-Director
/s/ Frank B. Holding, Jr. /s/ Richard F. Waid
- ----------------------------------- --------------------------------
Frank B. Holding, Jr.-Director Richard F. Waid-Director
/s/ James E.S. Hynes /s/ Calvin B. Wells
- ----------------------------------- --------------------------------
James E.S. Hynes-Director Calvin B. Wells-Director
/s/ Robert T. Johnson
- -----------------------------------
Robert T. Johnson-Director
<PAGE> 50
INDEX OF EXHIBITS
-------------------
The following exhibits are filed as part of this 1995 Form 10-K report.
Those exhibits previously filed and incorporated herein by reference are
identified below by a note reference to the previous filing.
Exhibit
Number
-------
3-1 - Certificate of Incorporation and By-Laws. (1)
3-2 - Amendments of Certificate of Incorporation and By-Laws. (4)
3-3 - Amendment of Certificate of Incorporation. (10)
4-1 - Indenture dated as of September 1, 1984, covering 12 7/8%
Debentures Series A due September 1, 1996. (3)
4-2 - First Supplemental Indenture dated as of June 15, 1986,
supplementing Indenture dated as of September 1, 1994,
and creating 8.75% Debentures, Series B due June 15, 2001. (6)
4-3 - Second Supplemental Indenture dated as of November 1, 1991,
supplementing Indenture dated as of September 1, 1984, and
creating 9.21% Debentures, Series C due November 15, 2011. (10)
10-1 - Service Agreement dated August 31, 1967, with Transcontinental
Gas Pipe Line Corporation covering storage service under Rate
Schedule GSS. (1)
10-2 - Service Agreement dated August 2, 1974, with Transcontinental
Gas Pipe Line Corporation covering storage service under Rate
Schedule LG-A. (1)
10-3 - Precedent Agreement to provide Contract Demand Service of
25,000 Dt/day dated December 19, 1988, with Columbia Gas
Transmission Corporation. (7)
10-4 - Contract Demand Service Agreement dated November 1, 1989,
with Columbia Gas Transmission Corporation. (8)
10-5 - Firm Seasonal Transportation Agreement dated July 2, 1990,
with Columbia Gas Transmission Corporation. (8)
10-6 - Service Agreement dated August 1, 1991, with Transcontinental
Gas Pipeline Corporation covering storage service under Rate
Schedule WSS. (9)
10-7 - Firm Sales Agreement with Transcontinental Gas Pipe Line
Corporation dated August 1, 1991 covering 54,043 Mcf per
day. (9)
10-8 - Firm Transportation Agreement with Transcontinental Gas
Pipe Line Corporation dated February 1, 1991 for 141,000
Mcf per day. (10)
10-9 - Supplemental Retirement Benefit Agreement dated January
13, 1981. (2)
<PAGE> 51
Exhibit
Number
-------
10-10 - Employment Agreements executed in 1985 with certain
Executive Officers. (5)
10-11 - Employment Agreements executed in 1986 with certain
Executive Officers. (6)
10-15 - Natural Gas Service Agreement dated January 9, 1992 with
the City of Wilson. (10)
10-16 - Natural Gas Service Agreement dated January 13, 1992 with
the City of Rocky Mount. (10)
10-17 - Service Area Territory Agreement dated January 13, 1992
with the City of Rocky Mount. (10)
10-18 - Natural Gas Service Agreement dated March 12, 1992 with the
Greenville Utilities Commission. (10)
10-19 - Natural Gas Service Agreement dated March 27, 1992 with the
City of Monroe. (10)
10-20 - Amendment to Natural Gas Service Agreement dated March 27,
1992 with the City of Greenville Utilities Commission. (11)
10-21 - Amendment to Natural Gas Service Agreement dated January 13,
1992 with the City of Rocky Mount. (12)
10-22 - Amendment to Natural Gas Service Agreement dated November 1,
1992 with the City of Monroe.
10-23 - North Carolina Natural Gas Corporation Executive Pension
Restoration Plan dated September 1, 1995.
24 - Consent of Experts
27 - Financial Data Schedule
NOTES:
(1) Filed as exhibits to Form 10-K report for fiscal year ended September
30, 1980
(2) Filed as exhibits to Form 10-K report for fiscal year ended September
30, 1981
(3) Filed as exhibit to Form 10-K report for fiscal year ended September
30, 1984
(4) Filed as exhibits to Form 8-K report dated February 6, 1985
(5) Filed as exhibit to Form 10-K report for fiscal year ended September
30, 1985
(6) Filed as exhibit to Form 10-K report for fiscal year ended September
30, 1986
(7) Filed as exhibit to Form 10-K report for fiscal year ended September
30, 1989
(8) Filed as exhibit to Form 10-K report for fiscal year ended September
30, 1990
(9) Filed as exhibit to Form 10-K report for fiscal year ended September
30, 1991
(10) Filed as exhibit to Form 10-K report for fiscal year ended September
30, 1992
<PAGE> 52
NOTES: (cont'd)
(11) Filed as exhibit to Form 10-K report for fiscal year ended September
30, 1994
(12) Filed as exhibit to Form 10-K report for fiscal year ended September
30, 1994
<PAGE> 53
Exhibit 10-22
Page 1 of 2
SECOND AMENDMENT TO
NATURAL GAS SERVICE AGREEMENT BETWEEN
CITY OF MONROE
AND
NORTH CAROLINA NATURAL GAS CORPORATION
This Second Amendment entered into to be effective on the 1st day of
January, 1995, between City of Monroe, Monroe, N.C. , (as "Customer")
and North Carolina Natural Gas Corporation, a Delaware corporation (as
"Company"),
W I T N E S S E T H:
WHEREAS, Customer and Company are parties to a certain "Natural
Gas Service Agreement By and Between City of Monroe, Monroe, N.C. and
North Carolina Natural Gas Corporation" dated December 6, 1991 ("the
Agreement"); the First Amendment dated November 1, 1992 to such Agreement;
and
WHEREAS, Company and Customer wish to amend that contract as more
fully set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein and in the Agreement, Company and Customer agree as follows:
1. Section 2.01 is deleted in its entirety and the following is substituted
therefor:
2.01 Subject to the terms and provisions of this Agreement,
Company agrees to sell and deliver to Customer and Customer
agrees to purchase and receive from Company, Customer's natural
gas requirements, excluding that portion of Customer's requirements
which are transported pursuant to Article III below. Customer
agrees that the maximum quantity of gas that Company is required
to deliver, either by sale or transportation, shall be 10,500
dekatherms ("Dth") per day and 525 Dth per hour. For purposes of
computing the Charge under Rate Schedules RE-2 and T-6, the
foregoing maximum daily quantity, subject to adjustments as
provided herein, shall constitute the Contract Demand, during
the respective periods to which each maximum is applicable, and
Customer agrees to pay Company therefor as provided in the
applicable rate schedule.
2. This Second Amendment shall become effective on January 1, 1995.
3. Except as specifically provided herein, the Agreement shall continue
in force and affect as previously written.
<PAGE> 54
Exhibit 22
Page 2 of 2
IN WITNESS WHEREOF, this instrument is executed effective as of
the day and year first written above.
CITY OF MONROE
MONROE, N.C.
/s/ Jerry E. Cox
-----------------------------
Title: City Manager
NORTH CAROLINA NATURAL GAS
CORPORATION
/s/ Calvin B. Wells
-----------------------------
Title: President
<PAGE> 55
Exhibit 10-23
Page 1 of 16
NORTH CAROLINA NATURAL GAS CORPORATION
EXECUTIVE PENSION RESTORATION PLAN
Effective September 1, 1995
<PAGE> 56
Exhibit 10-23
Page 2 of 16
NORTH CAROLINA NATURAL GAS CORPORATION
EXECUTIVE PENSION RESTORATION PLAN
THIS AGREEMENT is entered into by North Carolina Natural Gas
Corporation, a corporation duly organized and existing under the laws
of the State of Delaware.
PREAMBLE
The purpose of this Executive Pension Restoration Plan is to restore
to selected Employees any benefits that would have otherwise been paid to
them under the North Carolina Natural Gas Corporation Employees' Pension
Plan had the limits on the amount of benefits imposed by the qualification
requirements of Internal Revenue Code Section 401(a) not applied.
This Plan is effective September 1, 1995.
ARTICLE 1
DEFINITIONS
Except as noted below, all words or phrases used herein shall have
the same meaning as is attributed to them in Article I of the Basic Plan.
Section 1.01 ACCRUED BENEFIT - The monthly "Accrued Benefit" of
a Participant as of any date shall be equal to the difference between a.
and b., as follows:
a. An amount equal to what would have been the Participant's monthly
Accrued Benefit (as defined in the Basic Plan) under the Basic Plan if
it had been determined without regard to the Code Section 415 limits
as set forth in Section 5.08 of the Basic Plan or the Code Section 401(a)
(17) limits on Compensation that may be counted for purposes of
determining benefits as set forth in Section 1.14 of the Basic Plan.
b. The Participant's monthly Accrued Benefit (as defined in the Basic Plan)
under the Basic Plan.
Section 1.02 ACTUARIAL EQUIVALENT - The words "Actuarial Equivalent"
shall have the same meaning as the words "Actuarial Equivalent" in the Basic
Plan.
Section 1.03 BASIC PLAN - The words "Basic Plan" shall mean the North
Carolina Natural Gas Corporation Employees' Pension Plan as it may be
amended from time to time or any successor thereto.
Section 1.04 BASIC BENEFIT - The words "Basic Benefit" shall mean the
monthly pension of the Participant determined in accordance with Section
1.01 and Section 5.01 of the Basic Plan.
<PAGE> 57
Exhibit 10-23
Page 3 of 16
Section 1.05 BOARD - The word "Board" shall mean the Board of
Directors of North Carolina Natural Gas Corporation. The Board has
delegated its duties with regard to this Plan to the Personnel and
Compensation Committee of the Board. Any act of the Personnel and
Compensation Committee of the Board with respect to the Plan shall be
considered an act of the Board.
Section 1.06 COMMITTEE - The word "Committee" shall mean the Committee
consisting of all the members of the Personnel and Compensation Committee of
the Board which shall perform the administrative duties and responsibilities
set forth for it in the Plan.
Section 1.07 COMPANY - The word "Company" shall mean North Carolina
Natural Gas Corporation and any successor thereto.
Section 1.08 EFFECTIVE DATE - The words "Effective Date" shall mean the
Effective Date of the Plan, which is September 1, 1995.
Section 1.09 EMPLOYEE - The word "Employee" shall mean any individual
who is a common law employee of the Company, including officers, but
excluding directors in their capacity as such.
Section 1.10 NORMAL RETIREMENT AGE - The words "Normal Retirement
Age" shall mean the day of the Participant's 65th birthday.
Section 1.11 NORMAL RETIREMENT DATE - The words "Normal Retirement
Date" shall mean the first day of the month coinciding with or following
the Participant's Normal Retirement Age.
Section 1.12 PARTICIPANT - The word "Participant" shall mean an
Employee who is a member of a select group of management or highly
compensated Employees within the meaning of the Employee Retirement Income
Security Act of 1974, as amended, and who is designated by the Committee as
a Participant in the Plan.
Section 1.13 PLAN YEAR - The words "Plan Year" shall mean each
12-month period beginning on October 1 and ending on September 30.
Section 1.14 SPOUSE - The word "Spouse" shall mean an individual to
whom the Participant is legally married on the date of such Participant's
death or on the date his benefits commence, whichever is applicable.
Section 1.15 VESTING SERVICE - For purposes of the Plan, an Employee
shall accrue one year of Vesting Service for each Plan Year in which he
completes 1,000 or more Hours of Service with the Company, beginning with
the Plan Year in which he was hired.
<PAGE> 58
Exhibit 10-23
Page 4 of 16
ARTICLE II
SOURCE OF PAYMENTS
Payment of all benefits due under the Plan shall be made by the
Company from its general assets. Participants and beneficiaries are
general creditors of the Company with regard to the payment of their Plan
benefits, and they shall have no liens or special claims against particular
assets of the Company for the payment of their benefits.
<PAGE> 59
Exhibit 10-23
Page 5 of 16
ARTICLE III
BENEFITS - CONDITIONS
Section 3.01 APPLICATION FORMS - Payment of all benefits under the
Plan shall be pursuant to written application by the Participant or
beneficiary, as the case may be, submitted in such form as the Committee
may direct from time to time.
Section 3.02 NORMAL RETIREMENT - CONDITIONS - Each Participant in
the employ of the Company on his Normal Retirement Age shall be eligible to
retire on his Normal Retirement Date and to receive a benefit as provided in
Section 4.01.
Section 3.03 DELAYED RETIREMENT - CONDITIONS - If a Participant
remains in the active employment of the Company beyond his Normal Retirement
Date, he shall be eligible to retire on his Delayed Retirement Date, which
shall be the first day of the month following his retirement, and to receive
a benefit as provided in Section 4.02.
Section 3.04 EARLY RETIREMENT - CONDITIONS - A Participant who is
receiving payment of Early Retirement Benefits from the Basic Plan may,
with the consent of the Committee, be paid Early Retirement Benefits from
this Plan in accordance with Section 4.03. The date that Early Retirement
payments begin under this Plan will be the same date as Early Retirement
payments begin from the Basic Plan, and such date shall be called his "Early
Retirement Date."
A Participant under this Plan who takes Early Retirement under the Basic
Plan, but who does not have the consent of the Committee to take Early
Retirement under this Plan, shall not be paid benefits from the Plan until
his Normal Retirement Date, at which time he shall be paid in accordance
with Section 4.03.
A Participant who is entitled to an Early Retirement benefit in
accordance with this Section shall begin receiving payments on his Early
Retirement Date (or on his Normal Retirement Date if consent to payment
before his Normal Retirement Date has not been given) under the Basic Form
of Payment, or in accordance with the form of payment provided in Article V.
The amount of the monthly payment for a Participant entitled to
an Early Retirement benefit in accordance with this Section, expressed
in the form of the Basic Form of Payment, shall be the monthly amount
determined in accordance with Section 4.03.
Section 3.05 DEATH BEFORE RETIREMENT BENEFITS ARE PAYABLE - If a
Participant dies while employed by the Company and before retirement
benefits are payable, and the Participant was credited with five or
more years of Vesting Service under the terms of the Basic Plan, his
Spouse shall receive the benefit, if any, provided in Section 4.04. If a
Participant dies before he is credited with five years of Vesting Service,
no death benefits will be paid on behalf of his Spouse or beneficiary.
<PAGE> 60
Exhibit 10-23
Page 6 of 16
Section 3.06 DISABILITY - CONDITIONS - If a Participant becomes
disabled while employed by the Company and such Participant is eligible
to receive disability benefits from a long-term disability program of the
Company, and such Participant is being continued as an active participant
in the Basic Plan because of such disability, he shall continue to be a
Participant in the Plan as provided in Section 4.05. Otherwise, he shall
be terminated from the Plan and shall forfeit all benefits under the Plan
unless he is otherwise eligible for benefits under this Article.
<PAGE> 61
Exhibit 10-23
Page 7 of 16
ARTICLE IV
BENEFITS - METHOD OF CALCULATION
Section 4.01 NORMAL RETIREMENT BENEFIT - A Participant who is still
an Employee of the Company when he attains his Normal Retirement Age shall
be entitled to retire and to receive a monthly Normal Retirement Benefit
which shall be payable on his Normal Retirement Date. The Normal Retirement
Benefit shall be a monthly single life annuity, which is a monthly amount
beginning on his Normal Retirement Date and payable on the first day of each
month thereafter during the Participant's lifetime, with the last payment
being the payment due on the first day of the month of the Participant's
death. The monthly Normal Retirement Benefit shall be an amount equal the
difference between a. and b., as follows:
a. An amount equal to what would have been the Participant's monthly
Accrued Benefit (as defined in the Basic Plan) under the Basic Plan if
it had been determined without regard to the Code Section 415 limits
as set forth in Section 5.08 of the Basic Plan or the Code Section 401
(a)(17) limits on Compensation that may be counted for purposes of
determining benefits as set forth in Section 1.14 of the Basic Plan.
b. The Participant's Basic Benefit.
The monthly single life amount determined in this manner shall
be referred to hereinafter as the "Basic Form of Payment."
Section 4.02 DELAYED RETIREMENT BENEFIT - A Participant who works for
the Company beyond his Normal Retirement Date may retire and begin receiving
a Delayed Retirement Benefit to commence on his Delayed Retirement Date and
continuing each month thereafter during his lifetime, with the last payment
being the payment due on the first day of the month of the Participant's
death. The monthly Delayed Retirement benefit shall be equal to the
difference between a. and b., as follows:
a. An amount equal to what would have been the Participant's monthly
Accrued Benefit (as defined in the Basic Plan) under the Basic Plan on
his Delayed Retirement Date if it had been determined without regard to
the Code Section 415 limits as set forth in Section 5.08 of the Basic Plan
or the Code Section 401(a)(17) limits on Compensation that may be counted
for purposes of determining benefits as set forth in Section 1.14 of the
Basic Plan.
b. The Participant's monthly Delayed Retirement Benefit under the Basic
Plan expressed as a single life annuity commencing on the Delayed
Retirement Date and continuing each month thereafter during his lifetime,
with the last payment being the payment due on the first day of the month
of the Participant's death.
Section 4.03 EARLY RETIREMENT BENEFIT - A Participant who is entitled
to an Early Retirement benefit in accordance with Section 3.04 shall begin
receiving an Early Retirement Benefit to commence on his Early Retirement
Date (or on his Normal Retirement Date if consent to payment before his
Normal Retirement Date in accordance with Section 3.04 has not been given)
<PAGE> 62
Exhibit 10-23
Page 8 of 16
and continuing each month thereafter during his lifetime, with the last
payment being the payment due on the first day of the month of the
Participant's death.
The monthly Early Retirement benefit shall be equal to the difference
between a. and b., with the difference being reduced by c., as follows:
a. An amount equal to what would have been the Participant's monthly
Accrued Benefit (as defined in the Basic Plan) under the Basic Plan on
his Early Retirement Date (or on his Normal Retirement Date if consent to
payment before his Normal Retirement Date in accordance with Section 3.04
has not been given) if it had been determined without regard to the Code
Section 415 limits as set forth in Section 5.08 of the Basic Plan or the
Code Section 401(a)(17) limits on Compensation that may be counted for
purposes of determining benefits as set forth in Section 1.14 of the
Basic Plan.
b. The Participant's monthly Accrued Benefit under the Basic Plan on
his Early Retirement Date (or on his Normal Retirement Date if consent
to payment before his Normal Retirement Date in accordance with Section
3.04 has not been given).
c. The difference between a. and b. shall be reduced by 1/15th for each of
the first five years that the commencement of benefits precedes his Normal
Retirement Date (ages 60 to 65), and by 1/30th for each of the next five
years (ages 55 to 60), with pro rata reduction for full months totaling
less than one year.
Section 4.04 DEATH BEFORE RETIREMENT BENEFITS ARE PAYABLE - If a
Participant dies while still employed by the Company, if he has five or
more years of Vesting Service under the terms of the Basic Plan, if he is
survived by a Spouse, and if the Spouse is paid a death benefit under the
Basic Plan, the Spouse shall be entitled to payment of a death benefit from
this Plan.
The death benefit under the Plan shall be paid to the Spouse beginning
on the same day that the death benefit commences payment to the Spouse under
the Basic Plan, and shall continue on a monthly basis for as long as payments
are made under the Basic Plan to the surviving Spouse.
Such benefit shall be equal to the difference between a. and b. as
follows:
a. An amount equal to what the Participant's spouse would have received
as a monthly death benefit under the Basic Plan if the Participant's Basic
Benefit had been determined without regard to the Code Section 415 limits
as set forth in Section 5.08 of the Basic Plan or the Code Section 401(a)
(17) limits on Compensation that may be counted for purposes of
determining benefits as set forth in Section 1.14 of the Basic Plan.
b. The amount the Participant's spouse receives as a monthly death benefit
under Section 5.06 of the Basic Plan.
Section 4.05 DISABILITY RETIREMENT - If a Participant becomes disabled
as described in Section 3.06, he shall continue to be an active Participant
in the Plan as long as he remains an active Participant in the Basic Plan,
and to accrue benefits during such period. Should he be disabled as
<PAGE> 63
Exhibit 10-23
Page 9 of 16
determined above upon the attainment of his Normal Retirement Date, such
Participant shall be eligible to receive a Normal Retirement Benefit as
provided in Section 4.01.
Should a Participant remain disabled beyond the period for which he
is Disabled within the meaning of the Basic Plan, and, at such time as he
is no longer continued as an active Participant in the Basic Plan, and such
Participant has satisfied the eligibility requirements for Early Retirement
under the Plan, he shall be eligible to receive an Early Retirement Benefit
as provided in Section 4.03.
Section 4.06 OTHER TERMINATION OF EMPLOYMENT AND FORFEITURES - If a
Participant terminates his employment for reasons other than Normal (Plan
Section 4.01), Early (Plan Section 4.03), or Delayed Retirement (Plan
Section 4.02), Disability (Plan Section 4.05), or Death (Section 4.04), he
shall be entitled to a deferred benefit payable beginning on his Normal
Retirement Date. Such benefit shall be his Accrued Benefit as of the date
of determination multiplied by the percentage set forth below based on the
Participant's Vesting Service.
Years of Percentage Payable
Vesting Service As a Benefit
--------------- ------------------
Less than five years 0%
Five years and thereafter 100%
If a Participant terminates employment with the Company and he is not
eligible for a benefit under the provisions of Sections 4.01, 4.02, 4.03,
4.04, or 4.05, he shall forfeit all rights to any benefit from this Plan
unless he is credited with five or more years of Vesting Service.
<PAGE> 64
Exhibit 10-23
Page 10 of 16
ARTICLE V
OPTIONAL RETIREMENT BENEFITS
Section 5.01 ELECTION OF OPTIONAL RETIREMENT BENEFITS - A Participant
entitled to a retirement benefit shall be paid under the same form of
payment that he is paid under the Basic Plan. The amount of any optional
form of payment under this Plan other than the Basic Form of Payment shall
be the Actuarial Equivalent of the benefit that would otherwise be payable
to the Participant under the Basic Form of Payment.
<PAGE> 65
Exhibit 10-23
Page 11 of 16
ARTICLE VI
AMENDMENT AND TERMINATION OF PLAN
Section 6.01 AMENDMENT OF PLAN - The Board shall have the right at any
time to modify, alter, or amend the Plan in whole or in part. Any
modification, alteration, or amendment directed by the Board shall be
executed in writing by an officer, or other executive employee, of the
Company. The Board may delegate its right to modify, alter, or amend the
Plan to an officer, or other executive employee, of the Company by
resolution of the Board.
Section 6.02 TERMINATION OF PLAN - The Board shall have the right at
any time to terminate the Plan by instrument in writing duly executed. Such
termination may be made without the consent of the Participants, or any
other persons.
Upon termination of the Plan, the Board shall deliver a written notice
of termination of the Plan to the Committee, which notice shall show the
effective date of said termination.
If the Plan is terminated, no additional Employees shall enter the Plan.
Each Participant in the Plan shall accrue no additional benefits under the
Plan. For purposes of this Plan, Participants shall be considered to have
terminated employment on the effective date of the termination of the Plan,
and they shall be entitled only to the benefit (if any) equal to their
Accrued Benefit determined as of the date of termination. The Accrued
Benefit determined as of the date of termination shall be paid to the
Participant on their Early Retirement, Normal Retirement, or Delayed
Retirement Date providing the Participant otherwise meets the eligibility
requirements for retirement in accordance with Article III and IV.
<PAGE> 66
Exhibit 10-23
Page 12 of 16
ARTICLE VII
ADMINISTRATION OF THE PLAN
Section 7.01 ALLOCATION OF RESPONSIBILITIES - The Company shall have
the sole responsibility for making the payments provided under the Plan.
The Board shall have the sole authority to amend or terminate, in whole or
in part, this Plan. The Committee shall have the authority to designate
Employees who will be Participants in the Plan, and the Committee shall have
the sole responsibility for the administration of this Plan, which
responsibility is specifically described in this Plan. Each such party
warramts that any directions given, information furnished, or action of
another party as being proper under this Plan, and is not required under
this Plan to inquire into the propriety of any such direction, information,
or action. It is intended under this Plan that each party shall be
responsible for the proper exercise of its own powers, duties,
responsibilities and obligations under this Plan and shall not be responsible
for any act or failure to act of another party. No party guarantees the
assets of the Plan in any manner against investment loss or depreciation
in asset value.
Section 7.02 COMMITTEE - The Plan shall be administered by a Committee
consisting of all of the members of the Personnel and Compensation Committee
of the Board.
The Committee shall elect a Chair from among its members. The Committee
shall also appoint a Secretary who may or may not be a member of the Committee
and who shall keep all records of the meetings of the Committee and any and
all records desired by the Committee.
Section 7.03 PLAN INTERPRETATION - The Committee shall administer the
Plan in accordance with its terms and shall have all powers necessary to
carry out the provisions of the Plan. Not in limitation, but in
amplification of the foregoing, the Committee shall have the power to
construe the Plan and to determine all questions that may arise hereunder,
including all questions relating to the eligibility of Employees to
participate in the Plan and the amount of benefit to which any Participant
or Beneficiary
Section 7.04 RULES AND PROCEDURES - The Committee shall establish
uniform rules and procedures to be followed by Participants and Beneficiaries
in filing applications for benefits, in furnishing and verifying proofs
necessary to determine age, and in any other matter required to administer
the Plan.
Section 7.05 APPLICATIONS FOR BENEFITS - The Committee shall receive
all applications for benefits, shall determine all facts necessary to
establish the right of the applicant to benefits and the amount thereof
under the provisions of the Plan, and shall approve or deny such applications
for benefits.
<PAGE> 67
Exhibit 10-23
Page 13 of 16
Section 7.06 CLAIM REVIEW PROCEDURE - If the Committee determines
that the claim of the applicant to benefits should either be wholly or
partially denied, the applicant shall be given written notice of such
denial. Such notice shall include the following information:
a. The specific reason or reasons for the denial;
b. Specific reference to the Plan provision on which the denial
is based;
c. A description of any additional material or information necessary
for the applicant to perfect his claim and an explanation of why such
material or information is necessary; and
d. An explanation of the claim review procedure set forth in this
section.
If additional material or information is necessary in order for an
applicant to perfect his claim, such applicant shall have a period of 60
days within which to provide to the Committee the necessary additional
material or information in order for his claim to be fully considered. If
the applicant supplies such additional material or information within such
60-day period, the Committee shall treat such application as a new
application for benefits for purposes of this review procedure.
If the applicant fails to supply the requested material or information
within such 60-day period, his claim shall be deemed denied at the expiration
of such period. If an application for benefits is denied (either initially
or after a review of any required additional material or information), the
applicant may request, in writing, a review of his claim, provided such
request is filed within 60 days after receipt by the applicant of a written
notification of denial of his claim.
If an applicant requests a review of his claim in a timely fashion, the
Committee shall permit him or his representative to review any pertinent
documents and to submit any issues and comments with respect to his claim
in writing to the Committee. In addition, the applicant may request a
hearing with respect to any findings or determinations of fact with respect
to his claim. The Committee shall give such applicant at least 10 days
prior notice of the hearing date.
The Committee shall make a decision with regard to such claim not
later than 60 days after receipt of the request for a review of such claim;
provided, however, that an additional 60 days may be allowed if a hearing is
held, and the Committee notifies the applicant in writing of the need for
the additional period of time prior to the expiration of the initial 60-day
period.
The decision on review shall be in writing, shall include specific
reasons for the decision and references to the pertinent Plan provisions
on which the decision is based, and shall be final.
In the event a Participant should fail to receive either an approval
or denial of an application for benefits under this Plan within 60 days
after such application is filed, such claim shall be deemed denied for the
purposes of proceeding with the implementation of the foregoing claims
review procedure.
<PAGE> 68
Section 7.07 COMMITTEE ACTION - The Committee shall act by a majority
of its members at the time in office, and such action may be taken either
by a vote at a meeting or in writing without a meeting. The Committee may
authorize any one or more of its members to execute any document or
documents on behalf of the Committee. The Committee may adopt such rules
and regulations as it deems desirable for the conduct of its affairs and
may appoint such accountants, counsel, specialists and other persons as it
deems desirable for the conduct of its affairs and may appoint such
accountants, counsel, specialists and other persons as it deems necessary or
desirable in connection with the administration of this Plan.
Section 7.08 COMMITTEE RECORDS - The Committee shall keep a record
of all its proceedings and acts and shall keep all such books and accounts,
records, and other data as may be necessary for the proper administration
of the Plan.
Section 7.09 EXPENSES - All expenses of the Plan and the Committee
incurred pursuant to this Plan shall be paid by the Company.
Section 7.10 LIABILITY - No member of the Committee shall incur any
liability for any action or failure to act in connection with the performance
of his duties under the Plan.
Section 7.11 DISQUALIFICATION TO VOTE - A Committee member who is a
Participant shall not vote or act on any matter relating only to himself.
In the event the remaining members are unable to agree as to any such matter,
or in the event there is but one remaining member of the Committee, the Board
shall make such appointments as are required to bring the Committee to full
membership and shall, if required, appoint an alternate Committee member who
shall serve on the Committee at such time as a regular Committee member may
be disqualified from voting.
Section 7.12 INSPECTION OF RECORDS - All acts and determinations of the
Committee shall be duly recorded, and all such records shall be preserved in
the custody of the Committee. Any of the records pertaining to a Participant
shall be made available for inspection by such Participant upon request.
<PAGE> 69
Exhibit 10-23
Page 15 of 16
ARTICLE VIII
MISCELLANEOUS
Section 8.01 HEADINGS - The headings and subheadings in the Plan have
been inserted for convenience of reference only and are to be ignored in any
construction of the provisions hereof.
Section 8.02 CONSTRUCTION - In the construction of the Plan, the
masculine shall include the feminine and the singular the plural in all
cases where such meanings would be appropriate. The Plan shall be construed,
administered, and governed in accordance with substantive laws (but not as to
conflict of laws) of the State of North Carolina, except as such laws may be
preempted by federal law.
Section 8.03 SPENDTHRIFT CLAUSE - No benefit of a Participant or
beneficiary under the Plan shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, or charge,
except as may be expressly permitted herein, and any attempt to so
anticipate, alienate, sell, transfer, assign, pledge, encumber or charge
shall be void, nor shall any such benefit be in any manner payable to any
assignee, receiver or trustee, or be liable for the Participant's or
beneficiary's debts, contracts, liabilities, engagements or torts, or be
subject to any legal process to levy upon or attach.
Section 8.04 CLAIMS - Any payment of benefit to a Participant or
Beneficiary or to their legal representatives in accordance with the
provisions of the Plan shall, to the extent of the method of computation as
well as the amount thereof, constitute full satisfaction of all claims
hereunder against the Trustee, the Committee, and the Plan Sponsor, any of
whom may require such Participant, Beneficiary, or legal representative as
a condition precedent to such payment to execute a receipt and release
therefore in such form as shall be determined by the Trustee or the Committee,
as the case may be.
Section 8.05 FACILITY OF PAYMENT - If any Participant shall be
physically, mentally or legally incapable of receiving or acknowledging
receipt of any payment under the Plan to which he is entitled, the Committee,
upon the receipt of satisfactory evidence of his incapacity and satisfactory
evidence that another person or institution is maintaining him and that no
guardian or committee has been appointed for him, may cause any payment
otherwise payable to him to be made to such person or institution so
maintaining him.
Section 8.06 NO RIGHT TO EMPLOYMENT - Nothing contained herein will
confer upon any Participant the right to be retained in the employment of
the Company, nor will it interfere with the right of the Company to
discharge or otherwise deal with the Participant without regard to the
existence of this Plan.
Section 8.07 CORRECTION OF ERRORS - If any change in records or error
results in any Participant or Beneficiary receiving from the Plan more or
less than he would have been entitled to receive had the records been
correct or had the error not been made, the Committee, upon discovery of
such error, shall correct the error by adjusting, as far as practicable,
later payments.
<PAGE> 70
Exhibit 10-12
Page 16 of 16
Section 8.08 SPECIAL PROVISIONS - The Board may adopt rules modifying
the provisions of the Plan as they relate to a particular Participant or
Participants by adopting an Appendix to the Plan which shall set forth the
modifications.
Section 8.09 REIMBURSEMENT OF EXPENSES - The Company shall reimburse
the Participant or Beneficiary for all legal fees and expenses incurred in
seeking to obtain or enforce any right or benefit provided by the Plan.
Section 8.10 BINDING ON SUCCESSORS - This Agreement shall inure to the
benefit of and be binding upon the Company and its successors. The Company
shall require any successor to all or substantially all of the business
and/or assets of the Company, whether directly or indirectly, by purchase,
merger, consolidation, acquisition of stock, or otherwise, by a written
agreement in form or substance satisfactory to the Participant, expressly
to assume and agree to perform this Agreement in the same manner and
to the same extent as the Company would be required to perform if no such
succession had taken place.
IN WITNESS WHEREOF, North Carolina Natural Gas Corporation has caused
this Agreement to be executed this 31st day of October, 1995.
NORTH CAROLINA NATURAL GAS CORPORATION
By: /s/ Calvin B. Wells
-----------------------------------
President
ATTEST:
/s/ Sally T. Sowers
- ----------------------------
<PAGE> 71
Exhibit 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into North Carolina
Natural Gas Corporation and subsidiaries' previously filed Registration
Statement No. 33-34779.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Atlanta, Georgia
December 18, 1995
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<NAME> NORTH CAROLINA NATURAL GAS CORPORATION
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<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 178796
<OTHER-PROPERTY-AND-INVEST> 3173
<TOTAL-CURRENT-ASSETS> 30862
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<COMMON> 16193
<CAPITAL-SURPLUS-PAID-IN> 27513
<RETAINED-EARNINGS> 49072
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0
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<LONG-TERM-DEBT-NET> 62000
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<CAPITAL-LEASE-OBLIGATIONS> 0
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 58102
<TOT-CAPITALIZATION-AND-LIAB> 214880
<GROSS-OPERATING-REVENUE> 145673
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<OPERATING-INCOME-LOSS> 15235
<OTHER-INCOME-NET> 1023
<INCOME-BEFORE-INTEREST-EXPEN> 16258
<TOTAL-INTEREST-EXPENSE> 4449
<NET-INCOME> 11809
0
<EARNINGS-AVAILABLE-FOR-COMM> 11809
<COMMON-STOCK-DIVIDENDS> 7721
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 30528
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 1.84
</TABLE>
