<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
For the fiscal year ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...........to ..........
Commission file number 0-82
NORTH CAROLINA NATURAL GAS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 56-0646235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Rowan Street, Fayetteville, North Carolina 28301-4993
(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
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Estimate aggregate market value of the voting stock held by nonaffiliates
of the registrant at November 26, 1997........................... $220,116,699
Number of shares of Common Stock outstanding at
November 26, 1997................................................. 6,670,203
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement dated December 5, 1997 relating to the
January 13, 1998 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, 1997
TABLE OF CONTENTS
Item Page
PART I.
1. Business ----------------------------------------------- 3
Executive Officers of the Registrant------------------------- 13
2. Properties -------------------------------------------------- 14
3. Legal Proceedings-------------------------------------------- 14
4. Submission of Matters to a Vote of Security Holders---------- 14
PART II.
5. Market for Registrant's Common Equity and
Related Stockholder Matters--------------------------------- 15
6. Selected Financial Data ---------------------------------- 16
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations --------------------- 17
8. Financial Statements and Supplementary Data------------------ 23
9. Changes in and Disagreements on Accounting and
Financial Disclosures ------------------------------------ 42
10. Management's Responsibility for Financial Statements -------- 42
Report of Independent Public Accountants ------------------- 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 -------------- 44
PART IV.
15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K----------------------------------------- 45
Signatures ----------------------------------------------------------- 48
Index to Exhibits----------------------------------------------------- 49
<PAGE> 3
NORTH CAROLINA NATURAL GAS CORPORATION AND SUBSIDIARIES
PART I
Item 1. Business
- -----------------
General
North Carolina Natural Gas Corporation (NCNG or the 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 1,047 miles of transmission pipeline and approximately 2,662 miles
of distribution mains. Natural gas is sold under regulated rates to
approximately 157,000 customers in 86 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 54% of NCNG's total available gas supply in 1997 was purchased
under long-term contracts, in the spot market or with nonpipeline suppliers for
system supply, and approximately 46% was received for transportation to various
customers. The Company also serves propane gas to approximately 10,200 customers
and sells gas appliances and home insulation services to gas customers and new
home builders.
The Company has five subsidiaries: NCNG Exploration Corporation
(Exploration), Cape Fear Energy Corporation (Cape Fear), NCNG Energy Corporation
(Energy), NCNG Pine Needle Investment Corporation (Pine Needle Investment) and
NCNG Cardinal Pipeline Investment Corporation (Cardinal Pipeline Investment).
For detailed information on these subsidiaries see Nonutility Businesses on page
8.
Financial Information About Industry Segments
The Company is principally engaged in 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 2,581,000. Principal cities or towns served include Albemarle,
Dunn, Fayetteville, Goldsboro, Greenville, Indian Trail, 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.
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, 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.
<PAGE> 4
Following is a summary of operating revenues (in 000's) by major customer
classification for the years 1993 through 1997:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Residential
& Commercial $ 80,270 $ 78,849 $ 51,841 $ 58,748 $ 57,163
Municipalities
for Resale 24,829 31,545 20,189 23,471 22,312
Industrial/
electric power
generation 76,604 86,244 73,642 78,118 93,670
------- -------- ------- ------- -------
Total Operating
Revenues $181,703 $196,638 $145,672 $160,337 $173,145
======= ======= ======= ======= =======
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 (dt) of gas whether transported or sold because
transportation rates exclude only the commodity cost of gas which the customer
pays directly to its supplier.
Operating revenues declined to $181.7 million in 1997 from $196.6 million
in 1996 due primarily to increased transportation service which resulted in
lower sales to large customers. Transportation customers switch from sales to
transportation services when the utilities' benchmark sales rates, as approved
by the North Carolina Utilities Commission (NCUC), are above the spot market
rate for natural gas. See Regulations and Rates on Page 9 for discussion of the
Company's benchmark rate. Partially offsetting this decrease was an average
increase of 14.7% in the commodity cost of gas in 1997 over 1996.
Operating revenues increased to $196.6 million in 1996 from $145.7 million
in 1995 due primarily to: (1) the general rate increase effective November 1,
1995; (2) increased sales volumes caused by customer growth and colder winter
weather; (3) higher natural gas commodity prices; (4) a switch to more sales
service and less transportation volumes in 1996 compared to 1995; and (5) an
increase in the customer base.
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.
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.
Natural gas supply -
During 1997 the Company received 11,696,815 dt of natural gas under its
firm sales contract with Transco. It purchased 19,944,394 dt in the spot market
or from other nontraditional sources, including long-term contracts with
producers or national gas marketers. The Company also transported 26,938,439 dt
of customer-owned gas in 1997. 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 adequate and no supply curtailments are
anticipated.
See Page 10 of this report for additional information regarding federal
regulation of interstate pipelines.
<PAGE> 5
The following table summarizes the supply sources which are under contract
or otherwise available to the Company as of November 1, 1997:
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 98,790 2013
Washington Storage (WSS) 32,154 (c) 2,734,180 1998
Liquefied Gas Storage (LG-A) 5,320 26,600 2016
Southern Expansion (FT) 16,871 (b)(d) 2,444,553 2005
Eminence Storage (ESS) 39,373 (g) 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 (e)(f) 3,732,750 2004
Enron Capital & Trade
Resources Corp-
Firm Sales 15,500 (d)(f) 2,340,500 1998
Exxon Company, U.S.A. -
Firm Sales 14,893 (f) 5,435,945 2003
Duke Energy Trading and
Marketing LLC -
Firm Sales 10,000 (e)(f) 2,580,000 1999
Natural Gas Clearinghouse -
Firm Sales 9,975 (d)(f) 1,506,225 1999
NorAm Energy Services, Inc. -
Firm Sales 4,893 (e)(f) 1,785,945 1999
Texaco -
Firm Sales 21,740 (e)(f) 5,422,740 1998
Amoco -
Firm Sales 5,000 (d)(f) 755,000 1998
Natural Gas Clearinghouse -
Firm Sales 9,624 (f) 3,512,760 1998
LG&E Energy Marketing, Inc. -
Firm Sales 10,000 (e)(f) 2,580,000 1999
Vastar Gas Marketing, Inc. -
Firm Sales 10,000 (d)(f) 1,510,000 1998
LNG Plant (Company owned) 97,200 (h) 1,000,000 N/A
<PAGE>
<PAGE> 6
(a) Quantities are shown in dekatherms (dt) (one dt equals 1,000,000 Btu or one
Mcf at 1,000 Btu/cu. ft.). Transco demand billings were converted from Mcf
determinants to dt determinants on October 1, 1996 as required by FERC Order
582.
(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 the Transco
FS Agreement, other long-term agreements (See (f) below), multi-month term
agreements or agreements of one month or less for supplies purchased in the spot
market.
(c) 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.
(d) Winter months only (November through March).
(e) Provides for a lower daily deliverability volume in the summer period
(April through October).
(f) The Amerada Hess; Enron Capital & Trade Resources Corp.; Exxon Company,
U.S.A.; Duke Energy Trading and Marketing LLC; Natural Gas Clearinghouse (2
contracts); NorAm Energy Services, Inc.; Texaco; Amoco; LG&E Energy Marketing
and Vastar Gas Marketing, Inc. 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) Transco salt dome storage capacity allocated to customers of Transco FS
sales service by mandate of FERC Order 636. Transco schedules injections and
withdrawals of gas from Eminence storage capacity under agency agreements with
the Company and the other FS sales service customers.
(h) Deliverability of Company's transmission pipeline capacity to
distribute supplies withdrawn from storage at the Company's LNG Plant under
normal operating conditions.
<PAGE>
<PAGE> 7
In addition to its basic year-round firm transportation (FT) contract with
Transco and Columbia providing 145,935 dt and 19,801 dt per day, respectively,
the Company has approximately 17,000 dt per day of additional winter season FT
capacity from Transco's Southern Expansion. 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 110% in 1997 from
1996. 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 firm service customers at the lowest reasonable cost.
Spot market purchases will continue to be utilized primarily in the off-peak
months (generally March through November) to supplement purchases under firm
supply agreements.
As of November 1, 1997, the Company had entered into long-term gas supply
contracts with major producers or national natural gas marketers for firm
supplies in the winter season totaling 126,625 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 accommodate changes in the level of demand on its system.
The Company owns and operates a liquefied natural gas (LNG) storage plant
which provides 97,200 dt per day to the Company's peak-day delivery capability.
Franchises -
The Company holds a certificate of public convenience and necessity granted
by the NCUC to provide service to the area now being served. Under North
Carolina law, no company may construct or operate properties for the sale or
distribution of natural gas without having obtained such a certificate, except
that no certificate is required for construction in the ordinary course of
business or for construction into territory contiguous to that already occupied
by a company and not receiving similar service from another utility.
The Company has nonexclusive franchises from 51 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 franchises 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. The Company, in
addition, serves 35 communities from which no franchises are required.
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. 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.
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.
<PAGE> 8
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 5 and 6 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, in the form of conventional notes,
are normally repaid to the banks from the funds generated by the winter sale of
the stored gas. At September 30, 1997, $15.0 million in short-term debt was
outstanding compared to $3.0 million at September30, 1996.
Nonutility Businesses -
In April 1997, the Company formed a new subsidiary, NCNG Pine Needle
Investment Corporation, to participate in gas supply and pipeline projects in
North Carolina. Pine Needle Investment has a 5% ownership interest in Pine
Needle LNG Company, LLC (Pine Needle) which is building and will operate a
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 and is
expected to be in operation prior to the 1999-2000 winter. Transco has two
subsidiaries, one of which will act as a partner and one as the operator of Pine
Needle. Also, 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 partners in Pine
Needle. Piedmont, Public Service and NCNG will be Pine Needles' largest
customers. Pine Needle received authorization from the FERC in December 1996 to
begin construction of the LNG plant and provide firm storage services to its
customers. Construction began in February 1997. In August 1997, Pine Needle
obtained bank financing for the facility and all previous advances made to Pine
Needle were returned to the participants.
Also in April 1997, the Company formed another subsidiary, NCNG Cardinal
Pipeline Investment Corporation which is involved with subsidiaries of Transco,
Piedmont and Public Service in the organization of a limited liability company
to acquire an existing pipeline and extend it to provide the capacity needed 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. In Fiscal 1997, Cardinal Pipeline Investment contributed
approximately $119,000 to participate as the owner of a 5% interest in the new
pipeline company, Cardinal Extension Company, LLC (Cardinal Extension).
The Company has another subsidiary, NCNG Energy Corporation which was
originally formed to participate in Pine Needle and Cardinal Extension. The
investments in these projects were transferred to Pine Needle Investment and
Cardinal Pipeline Investment, respectively, in June 1997. Energy is used for
other energy-related investments.
Cape Fear Energy Corporation's primary activity is natural gas marketing
for industrial and municipal customers located on NCNG's system. Cape Fear's
earnings increased to $276,000 in Fiscal 1997 from $43,000 in Fiscal 1996 due to
substantially increased sales volumes as a result of market conditions which
caused customers to transport more gas.
NCNG Exploration Corporation's interests in all of its exploration and
development programs were sold effective June 7, 1994. During Fiscal 1997,
Exploration engaged in gas marketing activities primarily to gas resellers and
generated net income of $94,000 compared to $381,000 in Fiscal 1996. As of
October 1, 1997, all marketing activities in Exploration have ceased and the
Company was liquidated. Going forward, the gas marketing activities to gas
resellers will be conducted by Energy.
Through its propane division, the Company also engages in the sale of
propane to customers who do not have access to natural gas. Sales of propane
decreased 9% to 6.6 million gallons in 1997 because of warmer-than-normal winter
weather, and pretax income declined to $849,000 in Fiscal 1997 compared to $1.5
million in Fiscal 1996 due to the warmer-than-normal weather and increased
operating costs.
<PAGE> 9
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 $4.2 million 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 Company's service area and a rate to provide standby, on-peak
gas supply service to industrial and other 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. 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 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.
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 Company
on its temperature-sensitive load during warmer-than-normal winter weather and
decreases the margin during colder-than-normal winter weather. In Fiscal 1997,
winter weather was 21% warmer than normal and, accordingly, the WNA increased
net billings to customers by $2.9 million.
<PAGE>10
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-PSVA large commercial and industrial
customers; (5) a true-up of fixed gas costs recovered from the Company's
customers; (6) a true-up of the Company's lost, unaccounted for and Company use
volumes 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 annual
review of its gas costs for the 12 months ended October 31, 1996 was held in
April 1997. The NCUC found the Company's gas costs and gas purchasing practices
to be prudent, as it had in all previous reviews.
In August 1995, the NCUC issued its Order approving the Company's first
expansion project to utilize the Expansion Fund established for the Company's
system under legislation passed by the North Carolina General Assembly in 1991.
The project is to extend NCNG's transmission pipeline 71 miles from Mount Olive
to the Marine Base-Camp Lejeune in Jacksonville, North Carolina. In 1997, the
Company continued acquiring rights-of-way and performing necessary environmental
studies and it is expected that the project will be completed in 1999. (See Note
2 to the Consolidated Financial Statements.) The Company received $455,000 as
its first payment in August 1997 from the Expansion Fund on this project.
In August 1997, 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, 1997.
Because such volumes exceeded the base period amounts included in the 1995
general rate case, the Company recouped $71,000 in 1997 from the true-up by
charging that amount to the deferred gas cost account for future recovery in
rates from customers.
On December 22, 1995, the NCUC issued an Order in Docket No. G-100, Sub 67
revising the sharing mechanism for Buy/Sell and Interstate Pipeline Capacity
Release transactions effective November 1, 1995. This new Order broadened the
scope of covered transactions to include all "secondary market transactions"
that involve use of the Local Distribution Company's firm transportation or
storage capacity rights on pipelines, the capacity costs of which are recovered
from utility customers. This Order changed the customer's and the Company's
portions of the sharing of net compensation from 90%/10% to 75%/25%,
respectively. Total secondary market transactions increased to $3.2 million in
1997 compared to $2.4 million in 1996 due primarily to higher gas prices which
provided the Company with increased opportunities involving these types of
transactions.
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). 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 customers.
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 franchised service territory. Natural gas
competes with electricity, residual fuel oil, distillate fuel oil, propane and,
to a lesser extent, coal. The Company has the lowest residential natural gas
rates in North Carolina and is in a favorable competitive position.
<PAGE> 11
During 1997, approximately 70% of total throughput on the Company's system
was to customers having alternative fuel usage capabilities under interruptible
rates. However, the Company's PGA and PSVA 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 historically 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 most 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 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 to
be between $1.4 million and $2.8 million. The Company owns another 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.
Management believes that any appreciable costs will be recovered from third
parties, including liability insurance carriers, or in natural gas rates. In its
October 27, 1995 Rate Order, the NCUC approved the Company's proposal to recover
through rates an annualized amount of MGP costs based on amounts expended, net
of recoveries from third parties.
Other -
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 had been
restricted by a previous Order of the NCUC. Pursuant to the February 1993 Order,
the Company remitted a total of $3.9 million during the fiscal year ended
September 30, 1997, to the NCUC for the Expansion Fund. These amounts, plus
amounts remitted through September 30, 1996, represent certain pipeline refunds
the Company received, plus accrued interest earned on funds invested by the
Company since July 1991, when the North Carolina General Assembly enacted
legislation authorizing the NCUC to establish expansion funds for all natural
gas utilities franchised in North Carolina. At September 30, 1997, the refunds
received plus accrued interest, which had not been remitted to the NCUC,
amounted to $4.6 million and are reported on the consolidated balance sheet in
restricted cash and temporary cash investments and restricted supplier refunds.
In August 1997, the Company received its first payment of $455,000 from the
Expansion Fund related to the Duplin/Onslow County expansion project (see Note 2
to the Consolidated Financial Statements). At September 30, 1997, $16.2 million
was held by the NCUC for current and future NCUC-approved expansion projects of
the Company.
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, 1997, are not included in the
Company's financial statements because they are no longer controlled by the
Company.
<PAGE>12
Employees -
At September 30, 1997, the Company had 532 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> 13
EXECUTIVE OFFICERS OF THE REGISTRANT
Date
Elected
Name and Age* Title An Officer
- ------------- ------------------------------ ------------
Calvin B. Wells Chairman, President and 09/11/74
Age - 61 Chief Executive Officer
Gerald A. Teele Senior Vice President, Treasurer and 01/08/80
Age - 53 Chief Financial Officer
James C. Buie Vice President - Computer Services 01/13/87
Age - 50
Terrence D. Davis Vice President - Operations and 01/07/91
Age - 52 Industrial Sales
Stuart B. Dixon Vice President - Government Relations 01/10/89
Age - 59
Ronald J. Josephson Vice President - Financial Services 04/17/96
Age - 39
John M. Monaghan, Jr. Vice President - Gas Supply 01/08/91
Age - 45 & Transportation
Louis L. Hanemann Vice President - Human Resource 01/10/89
Age - 49
E. J. Mercier, Jr. Vice President - Customer Service 09/07/77
Age - 59
____________________________
* As of December 1, 1997
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 13, 1998 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 Ronald J. Josephson who was employed on April 17, 1996 as Vice
President-Financial Services. Prior to joining the Company, he was an audit
manager with Arthur Andersen LLP in Atlanta, Georgia.
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> 14
Item 2. Properties
- -------------------
The Company owns approximately 1,047 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 2,662 miles of distribution
mains. These transmission pipelines and distribution mains are located primarily
on rights-of-way held under easement, license or permit on lands owned by
others.
During Fiscal 1997, the Company invested approximately $30.5 million in new
plant facilities. Approximately 7,200 natural gas and 900 propane residential
and small commercial customers were added along with several new industrial
customers. The Company has a liquefied natural gas storage plant on its system
to provide additional peak day gas supply for future growth in customer demand.
As discussed elsewhere in this report, 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.
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 9 to the Company's
Consolidated Financial Statements for the year ended September 30, 1997, 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, 1997.
<PAGE>15
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 November 26, 1997: 4,869
Stock price and dividend information -
The table below presents the reported high and low common stock sale prices
along with cash dividends declared per share for each quarter of fiscal 1997 and
1996.
QUARTER Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31
ENDED 1997 1997 1997 1996 1996 1996 1996 1995
-------- ------- ------- ------- -------- ------- ------- -------
COMMON STOCK
PRICES -
High . . . $35.0000 $33.375 $33.25 $31.375 $31.875 $28.750 $27.25 $25.75
Low . . 31.3125 29.500 28.75 28.000 27.250 24.875 25.00 22.00
Cash
dividends
per share . $ .35 $ .35 $ .35 $ .325 $ .325 $ .325 $ .325 $ .305
A quarterly dividend of $.35 per share was declared by the Board of
Directors payable on December 15, 1997 to holders of record on December 1, 1997.
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, 1997,
approximately $23.3 million of the Company's retained earnings is unrestricted.
<PAGE> 16
Item 6. Selected Financial Data
- ---------------------------------
Years Ended September 30,
- --------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Amounts in Thousands Except Per Share Data)
Operating Revenues $181,703 $196,638 $145,672 $160,337 $173,145
Gross Margin 73,206 68,410 57,917 55,097 54,045
Net income 17,594 15,173 11,809 11,150 10,977
Earnings per share 2.66 2.32 1.84 1.76 1.84
Cash dividends declared
per share 1.375 1.28 1.205 1.14 1.06
Total assets 253,251 232,779 214,880 205,631 194,178
Net utility plant 203,560 184,434 178,796 164,843 152,543
Capital expenditures 30,500 15,831 22,581 20,756 15,469
Long-term debt 61,000 63,000 62,000 37,000 39,000
Common equity 113,223 101,958 92,778 86,399 80,944
Book value per share $16.98 $15.51 $14.32 $13.57 $12.85
Average number of
common shares 6,621 6,526 6,410 6,331 5,981
Rate of return on average
common equity 16.35% 15.58% 13.18% 13.33% 15.87%
<PAGE> 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
- ------------------------------------------------
General
- -------
North Carolina Natural Gas Corporation (NCNG or the Company) is engaged
primarily in the business of transporting and distributing natural gas at
regulated retail rates to customers in 86 cities, towns and communities, as well
as at regulated wholesale rates to four municipal gas distribution systems, in
southcentral and eastern North Carolina. For the fiscal year ended September 30,
1997, NCNG had a peak number of approximately 157,000 total natural gas
customers. The Company also has a propane division with approximately 10,200
customers. NCNG continues to expand its transmission and distribution systems to
keep pace with the economic development in residential, commercial and
industrial growth in its service area. The Company's financial position 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).
Results of Operations
- ---------------------
Earnings -
NCNG earned $17.6 million or $2.66 per share in 1997, compared to
$15.2 million or $2.32 per share in 1996 and $11.8 million or $1.84 per share in
1995. Included in the current year earnings is a nonrecurring after-tax credit
of $0.17 per share related to settlement of a long-standing regulatory matter
(see Note 2 to the Consolidated Financial Statements). Excluding the
nonrecurring credit of $0.17 per share, the 7.3% increase in earnings in 1997
compared to 1996 was primarily due to: (1) higher industrial throughput volumes
driven by customer growth and warmer-than-normal weather which resulted in fewer
curtailments of industrial customers while the weather normalization adjustment
(WNA) stabilized the Company's margins from space-heating customers; (2) an
increase in the residential and commercial customer base of approximately 5%
which resulted in increased facilities charges as well as increased sales
volumes in the summer months; and (3) lower utility interest charges.
While the weather for Fiscal 1997 was 21% warmer than normal and 26% warmer
than 1996, total dekatherms (dt) delivered increased nearly 4.5% to 55.5 million
dt compared to 53.1 million dt in 1996.
The increase in earnings in 1996 compared to 1995 was due to increased
deliveries of natural gas, a general rate increase effective November 1, 1995,
higher residential, commercial and municipal throughput volumes due to
colder-than-normal weather, strong customer growth in the core market
residential and commercial sectors, and higher earnings realized by the
Company's propane division and subsidiary gas marketing activities.
Throughput and Margin -
The Company's total throughput volumes in 1997 increased by 2.4 million dt
to 55.5 million dt. Industrial volumes increased by 4.3 million dt while
wholesale, residential, and commercial volumes decreased 509,000; 952,000 and
412,000 dts, respectively. The overall increase in volumes sold or transported
was primarily the result of increased throughput to interruptible industrial
customers resulting from the addition of new customers, increased production
levels, and fewer interruptions of service during the winter period due to the
warmer-than-normal weather.
<PAGE> 18
NCNG continued adding natural gas customers at an above-average growth rate
in 1997. The addition of about 7,200 customers in 1997 represents a growth rate
of 5%, compared to the national average of less than 2% for all natural gas
distribution utilities. Even though warmer-than-normal weather in the winter
decreased sales of gas to residential and commercial customers, the Company did
not realize a proportional decrease in margins from such customers because of
the operation of the WNA mechanism which stabilizes the Company's margin from
space-heating customers based on normal weather. The WNA provided a margin of
$2.9 million in 1997 compared to a reduction in margin of $1.5 million in 1996
when the weather was colder than normal.
The following chart compares margins in fiscal years 1997 and 1996 by
customer class:
Margin
--------------------------------------------------------
Increase (Decrease)
--------------------
Customer Class 1997 1996 Amount %
-------------- ---- ---- ------ ---
(In Thousands)
Residential $24,723 $24,229 $ 494 2.0%
Commercial and
Small Industrial 15,000 13,771 1,229 8.9
Industrial & Electric
Power Generation 26,029 22,824 3,205 14.0
Municipal (Wholesale) 7,454 7,586 (132) (1.8)
------ ------ ----- ----
TOTAL $73,206 $68,410 $4,796 7.0%
====== ====== ===== ====
The residential, commercial and small industrial margins increased as
compared to last year. The increase in customers as well as the WNA as explained
above, contributed to the margin growth. Industrial and electric power
generation margins increased due to (1) customer growth, (2) higher throughput
volumes because of the addition of new customers, higher production levels and
less curtailment of interruptible customers, and (3) hot summer weather which
led to increased deliveries of gas to electric generators. Municipal margins
decreased due to warmer-than-normal weather and the loss of one large industrial
customer served by one of the cities.
The Company's total margin growth in 1996 was $10.5 million, and NCNG's
total throughput in 1996 increased 1.0 million dt, or 2.0% to 53.1 million dt.
These increases were caused primarily by (1) customer growth of over 5%, and (2)
weather in 1996 that was 5% colder than normal and 24% colder than 1995.
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 and utilizing the
utility for transportation only, and (2) the increased volatility in the
commodity price of natural gas. This volatility in the commodity cost of gas,
which trended upward in 1997, caused NCNG's transportation service volumes to
increase by 14.0 million dt to 26.9 million dt in 1997 compared to 12.9 million
dt in 1996 and 17.3 million dt in 1995. Conversely, the Company's sales service
volumes decreased 11.7 million dt to 28.5 million dt in 1997 compared to 40.2
million dt in 1996 and 34.7 million dt in 1995. In general, the margin earned on
gas transported is equal to the margin earned on gas sold; however,
transportation, which replaces sales, results in lower revenues because
transportation rates exclude the commodity cost of gas which is paid by the
customer directly to its gas supplier. The Company still delivers the gas and
earns transportation revenue equivalent to the margin contained in a comparable
sales rate.
In 1997, the Company's operating revenues and cost of gas decreased $15.0
million and $19.7 million, respectively, primarily due to transportation
customers purchasing their own gas as discussed above. Partially offsetting the
volume-related decrease in the cost of gas were average increases of 14.7% in
the commodity prices of gas in 1997 over 1996.
Operating revenues increased $51.0 million in 1996 over 1995 because of
increased gas costs to sales customers, the switch by industrial customers from
transportation to sales services, a general rate increase effective November 1,
1995 and customer growth. Gas costs increased $40.5 million in 1996 due to a
significant increase in the average commodity cost of gas of 49.5% in 1996
compared to 1995 and a sales volume increase of 5.5 million dt over 1995.
<PAGE> 19
Operating Expenses and Taxes -
NCNG's total operating expenses and taxes increased to $53.3 million in
1997, compared to $49.7 million in 1996 and $42.7 million in 1995. As a
percentage of margin, the 1997 amount was 72.9%, up slightly from 72.6% in 1996,
and down from 73.7% in 1995. Operations and maintenance expenses increased to
$25.5 million in 1997, compared to $23.1 million in 1996 and $21.1 million in
1995. This increase was primarily due to increased customer collections expense,
including an increase in the write-offs for uncollectable accounts, higher
distribution maintenance and transmission operations expenses, including the
increased cost of gas used in Company compressor stations, higher wages and
higher costs associated with customer service and sales promotion efforts for
the rapidly growing customer base.
The Company's depreciation rates must be approved by the NCUC. In
connection with the Company's general rate case effective November 1, 1995, the
composite depreciation rate was increased to 3.5% for 1997 and 1996 from 3.2% in
1995. Accordingly, the increase in depreciation expense for 1996 relates to the
increases in both the depreciation rate and the gross plant investment. In 1997,
depreciation expense increased in line with the increase in depreciable plant
related to customer growth and system strengthening.
The most significant component of general taxes is gross receipts taxes
related to operating revenues. Accordingly, the decrease in general taxes in
1997 is in line with the lower operating revenues. General taxes also include
payroll and property taxes which have increased in each of the three years ended
September 30, 1997, due to the Company's higher compensation expenses and its
additional investment in plant in service.
Income tax expense increased in 1997 and is in line with the increase in
pretax income. The effective income tax rate of 37.3% for 1997 is not
significantly different from 1996 and 1995, with the equity component of
allowance for funds used during construction (AFUDC) the largest variable
influencing the effective tax rate.
Other Income, Net, which consists of income from nonutility operations such
as propane sales, merchandise sales and jobbing, increased to $1.7 million for
1997 compared to $1.0 million in 1996. This increase is due to a $1.1 million
nonrecurring credit as a result of the settlement of the long-standing
regulatory matter, offset by decreased net income from propane operations due to
warmer-than-normal weather and lower merchandise and jobbing sales. Other
Income, Net, increased to $1.0 million in 1996 from $886,000 in 1995 due
primarily to higher propane sales related to a colder-than-normal winter in
1996.
AFUDC increased to $1.1 million in 1997 from $302,000 in 1996 due to an
increase of approximately 100% in construction spending in 1997 compared to
1996. AFUDC decreased to $302,000 in 1996 from $799,000 in 1995 due to a 62%
decrease in construction spending compared to 1995.
Liquidity and Capital Resources
- -------------------------------
The Company has bank lines of credit totaling $36.0 million, including
$24.0 million on a committed basis. At September 30, 1997, $15.0 million was
outstanding at interest rates of about 5.87%, compared to notes payable
outstanding of $3.0 million with interest rates ranging from 5.64% to 5.69% at
September 30, 1996. The increase of $12.0 million was due to increased capital
expenditures in 1997.
<PAGE> 20
The Company's capital requirements reflect the capital-intensive nature of
its business and are attributable principally to its construction program,
retirement of long-term debt and working capital requirements such as
receivables and gas in storage. The Company relies on short-term bank loans and
cash flows from operations to finance construction expenditures, and it replaces
the bank loans with permanent financing when total borrowings approach the
maximum level available under the lines of credit or when conditions are
favorable for obtaining long-term capital.
Construction expenditures of $30 million in 1997 were higher than 1996 by
$14.7 million. This was due primarily to preliminary work done on the
Duplin/Onslow County Expansion project ("the Expansion Project"), significant
additional system-strengthening projects and an additional compressor at the
Battleboro Compressor Station. This spending was partially offset by the receipt
of $455,000 from NCNG's Expansion Fund, which is administered by the NCUC. The
Company has budgeted Fiscal 1998 construction expenditures of $60.7 million,
including $20.3 million for the Expansion Project, approximately $16.3 million
for system strengthening, compressors and related projects, and $10.4 million
for new customer growth. The estimated cost of the Expansion Project has
increased to $24.2 million from the original estimate of $18.8 million. This
increase is due to continued delays and changes related to environmental issues
on the on-base portion of the project. The Company will request approval to use
an additional $4.3 million from the Expansion Fund to cover the incremental
increase in costs of the project. Should the NCUC deny additional funding for
the Expansion Project from the Expansion Fund, the Company has no obligation to
complete the project.
The Company's ratio of long-term debt to total capitalization was 35.7% at
September 30, 1997, down from 38.9% at September 30, 1996, due to a long-term
debt sinking fund payment of $2.0 million and an increase in stockholders'
investment of $11.3 million. Management believes that the generation of net cash
from operating activities together with its bank lines of credit and other
sources will be sufficient to provide for its construction program through
Fiscal 1998. Next summer the Company expects to issue additional long-term debt
for the first time since November 1995. In 1998, the Company expects to raise
approximately $3.0 million of additional equity from its Dividend Reinvestment
Plan, its Employee Stock Purchase Plan and its Key Employee Stock Option Plan.
Common equity realized from such sources totaled $2.8 million in 1997 and $2.4
million in 1996.
Subsequent to year end, the Company's Board of Directors adopted a
Shareholders Rights Plan which is designed to prevent coercive or unfair
takeover tactics or unsolicited attempts to acquire control of the Company in a
transaction that the Board believes is not in the best interest of the Company's
shareholders.
The Shareholder Rights Plan was not adopted as a response to any effort to
acquire the Company or voting control of the Company, and the Board is not aware
of any such effort.
Environmental Issues
- --------------------
The Company continues to work with Federal and State environmental agencies
to assess the environmental impact and explore corrective action at one
manufactured gas plant site in Kinston, North Carolina (see Note 9 to the
Consolidated Financial Statements). The Company also owns another former MGP
site in New Bern, North Carolina, and was a previous owner of three small former
MGP sites. No significant problems have arisen to date. 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 approved by the Commission in the October 1995 Rate Order.
<PAGE> 21
Regulatory Accounting
NCNG is subject to the provisions of Financial Accounting Standards Board
(FASB) Statement No. 71, "Accounting for the Effects of Certain Types of
Regulation." Regulatory assets represent probable future revenues to the Company
representing certain costs that are expected to be recovered from customers
through the ratemaking process. Regulatory liabilities represent probable future
reductions in revenues associated with amounts that are to be credited to
customers through the ratemaking process.
In the event that all or a portion of the Company's operations are no
longer subject to the provisions of Statement No. 71, NCNG would be required to
write off related regulatory assets and liabilities. In addition, the Company
would be required to determine any impairment to the other assets, including
plant, and write down the assets, if impaired, to their fair value. To date, no
such write-downs or write-offs have been made, nor are any expected to be made
in the future.
Competition and Growth
The natural gas industry continues to evolve into a more competitive
environment. The Company has competed successfully with other forms of energy
such as electricity, oil and propane. The principle considerations have been
price and accessibility. The Company has also competed successfully through its
marketing subsidiary with other natural gas marketers in its unbundled sales to
industrial and other large volume customers. Further unbundling of services to
commercial and residential customers could increase competition for commodity
sales services, but not for the distribution of natural gas. The Company does
not expect the NCUC to require further unbundling in the near future. 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 1997.
In response to the growth of the natural gas business in North Carolina,
NCNG established a new subsidiary, NCNG Energy Corporation (Energy), in August
1995 to participate in two partnerships with subsidiaries of Transco, Piedmont
Natural Gas Company (Piedmont) and Public Service Company of North Carolina,
Inc. (Public Service) regarding gas supply and pipeline projects affecting the
entire state. In April 1997, Energy transferred its ownership in these two
projects to two new subsidiaries, NCNG Pine Needle Investment Corporation (Pine
Needle Investment) and NCNG Cardinal Pipeline Corporation (Cardinal Pipeline
Investment). Pine Needle Investment is a 5% equity owner in Pine Needle LNG
Company, LLC, which owns the site and is building and plans to operate a 4 Bcf
liquefied natural gas plant (LNG) at a site near Transco's main line. This plant
is scheduled to be in service by the 1999-2000 winter heating season. NCNG has
committed to take 10% or 400,000 dts of the LNG capacity in order to support
continuing growth in its customer base expected over the next five years.
Additionally, Cardinal Pipeline Investment and its partners, have organized
another company, called Cardinal Expansion Company, LLC (Cardinal), which will
take over an existing intrastate pipeline now owned by Piedmont and Public
Service. The pipeline will be extended from Burlington, North Carolina, to an
interconnection with the systems of Public Service and NCNG southeast of Raleigh
at Clayton, North Carolina. The expanded pipeline would enable NCNG to take
substantial additional volumes of natural gas year round into the middle of its
system. Cardinal Pipeline Investment has a 5% equity interest in Cardinal.
Expansion Projects
- ------------------
The Company has received NCUC approval for one expansion project in
Duplin/Onslow Counties with the Marine Base-Camp Lejeune the largest customer to
be served from this project (see Note 2 to the Consolidated Financial
Statements). The Company is considering another expansion project in Bertie and
<PAGE> 22
Martin Counties and plans to seek NCUC approval in Fiscal 1998 to use expansion
funds to finance a portion of that project.
Year 2000
- ---------
The Year 2000 issue exists because many computer systems and applications
use two-digit date fields to designate a year. As the century date change
occurs, date-sensitive systems will recognize the year 2000 as 1900, or not at
all. This inability to recognize or properly treat the Year 2000 may cause
systems to process critical financial and operational information incorrectly.
NCNG has chosen to replace all critical systems with new software which is Year
2000 compliant. Existing non-Year 2000 compliant systems have been and will
continue to be replaced as the new software systems are installed. All work will
be completed in mid-Fiscal 1999.
Forward-Looking Statements
- --------------------------
Statements made herein and elsewhere in this annual report which are not
historical in fact are forward-looking statements. In connection with the 'Safe
Harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Company cautions that, while it believes such statements to be reasonable and
makes them in good faith, they almost always vary from actual results, and the
differences between assumed facts or basis and actual results can be material,
depending upon the circumstances. Investors should be aware of important factors
that could have a material impact on future results. These factors include, but
are not limited to, weather, the regulatory environment, financial market
conditions, interest rate fluctuations, customers' preferences, unforeseen
competition, and other uncertainties, all of which are difficult to predict, and
most of which are beyond the control of the Company.
<PAGE> 23
Item 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets
as of September 30, 1997 1996
------- ------
Assets
GAS UTILITY PLANT:
In service $303,651,930 $277,212,557
Less - Accumulated depreciation
and amortization 104,267,584 95,577,971
----------- -----------
199,384,346 181,634,586
Construction work in progress 4,175,774 2,799,702
----------- -----------
203,560,120 184,434,288
----------- -----------
INVESTMENTS:
Nonutility property, less
accumulated depreciation (1997,
$2,504,391; 1996, $2,357,794) 4,239,933 3,588,646
Investment in joint ventures, net of
accumulated depletion and amortization
(1997, $3,060,259; 1996, $3,057,671) 301,446 743,872
----------- -----------
4,541,379 4,332,518
----------- -----------
CURRENT ASSETS:
Cash and temporary cash investments 961,986 1,116,794
Restricted cash and temporary
cash investments 4,605,684 5,690,906
Accounts receivable, less allowance
for doubtful accounts (1997, $563,730;
1996, $747,455) 17,359,576 17,301,776
Recoverable purchased gas costs 1,019,619 3,236,612
Inventories, at average cost --
Gas in storage 8,798,765 9,982,528
Materials and supplies 3,386,003 2,724,821
Merchandise 1,351,026 1,308,728
Prepaid income taxes 4,520,909 -
Deferred gas cost - unbilled volumes 646,909 323,621
Prepaid expenses and other 339,309 195,476
----------- -----------
42,989,786 41,881,262
----------- -----------
DEFERRED CHARGES AND OTHER:
Debt discount and expense, being
amortized over lives of related debt 393,201 429,448
Prepaid pension cost 1,389,434 1,440,762
Other 377,259 260,275
----------- -----------
2,159,894 2,130,485
----------- -----------
$253,251,179 $232,778,553
=========== ===========
(The accompanying notes are an integral part of these financial statements.)
<PAGE> 24
Consolidated Balance Sheets
As of September 30,
Stockholders' Investment
and Liabilities 1997 1996
------- ------
CAPITALIZATION (see accompanying
statements):
Stockholders' investment $113,222,601 $101,958,192
Long-term debt 61,000,000 63,000,000
----------- -----------
174,222,601 164,958,192
----------- -----------
CURRENT LIABILITIES:
Current maturities of long-term debt 2,000,000 2,000,000
Notes payable 15,000,000 3,000,000
Accounts payable 16,922,853 16,338,770
Customer deposits 2,080,807 1,964,492
Restricted supplier refunds 4,605,684 5,690,906
Accrued interest 2,293,588 2,333,881
Accrued income and other taxes 1,839,921 4,280,610
Other 2,599,515 2,265,360
----------- -----------
47,342,368 37,874,019
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
OTHER CREDITS:
Deferred income taxes 22,752,964 21,015,394
Regulatory liability related to
income taxes, net 2,232,201 2,923,772
Unamortized investment tax credits 2,523,828 2,720,027
Postretirement and postemployment
benefit liability 2,978,469 2,262,148
Other 1,198,748 1,025,001
----------- -----------
31,686,210 29,946,342
----------- -----------
$253,251,179 $232,778,553
=========== ===========
(The accompanying notes are an integral part of these financial statements.)
<PAGE> 25
Consolidated Statements of Income
For the Years Ended September 30,
1997 1996 1995
------ ------ ------
OPERATING REVENUES $181,702,739 $196,637,646 $145,672,779
COST OF GAS 108,496,926 128,228,053 87,755,318
----------- ----------- -----------
GROSS MARGIN 73,205,813 68,409,593 57,917,461
----------- ----------- -----------
OPERATING EXPENSES AND TAXES:
Operations 21,631,080 19,831,398 18,256,361
Maintenance 3,823,394 3,256,690 2,814,200
Depreciation 10,074,442 9,447,598 8,048,658
General taxes 8,461,731 8,882,369 7,095,874
Income taxes --
Federal 7,422,200 6,531,200 5,115,500
State 1,906,800 1,714,800 1,351,500
----------- ----------- -----------
TOTAL OPERATING EXPENSES
AND TAXES 53,319,647 49,664,055 42,682,093
----------- ----------- -----------
OPERATING INCOME 19,886,166 18,745,538 15,235,368
OTHER INCOME, NET 1,736,242 1,003,662 886,212
INCOME FROM SUBSIDIARIES 373,848 423,990 136,503
----------- ----------- -----------
GROSS INCOME 21,996,256 20,173,190 16,258,083
----------- ----------- -----------
UTILITY INTEREST CHARGES:
Interest on long-term debt 5,278,750 5,215,417 3,476,458
Other interest 174,437 51,562 1,744,649
Amortization of debt
discount and expense 36,247 35,439 26,691
Allowance for funds used
during construction (1,086,892) (302,449) (798,942)
----------- ----------- -----------
TOTAL UTILITY
INTEREST CHARGES 4,402,542 4,999,969 4,448,856
----------- ----------- -----------
NET INCOME $ 17,593,714 $ 15,173,221 $ 11,809,227
=========== =========== ===========
AVERAGE COMMON
SHARES OUTSTANDING 6,621,292 6,526,149 6,410,376
EARNINGS PER SHARE $2.66 $2.32 $1.84
=========== =========== ===========
(The accompanying notes are an integral part of these financial statements.)
<PAGE> 26
Consolidated Statements of Cash Flows
For the Years Ended September 30,
1997 1996 1995
------ ------ ------
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $17,593,714 $15,173,221 $11,809,227
Adjustments to reconcile net
income to net cash provided by
operating activities -
Depreciation charged to:
Operating expenses 10,074,442 9,447,598 8,048,658
Other income 192,563 181,977 396,934
Amortization of deferred charges 38,399 37,604 43,045
Deferred income taxes 1,693,692 431,782 1,682,249
Investment tax credits (196,199) (199,801) (201,864)
Other 76,074 21,602 995,184
Changes in other current assets
and liabilities:
Accounts receivable, net (57,800) (4,350,271) (1,156,109)
Gas in storage 1,183,763 (2,775,351) 884,033
Materials, supplies
and merchandise (1,095,315) (350,572) 370,278
Prepaid Income Taxes (4,520,909) - -
Accounts payable 584,056 3,948,669 2,714,657
Refunds payable and
recoverable purchased gas costs 1,131,771 (5,977,008) 5,695,168
Accrued income and other taxes (2,440,689) 2,409,967 186,047
Other 1,520,785 (120,079) (939,630)
---------- ---------- ----------
Net cash provided by
operating activities 25,778,347 17,879,338 30,527,877
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (30,499,559) (15,831,057) (22,580,779)
Proceeds from Expansion Fund 455,435 - -
Proceeds from sale of property - 60,283 -
Other, net 440,274 (458,782) (36,419)
---------- ---------- ----------
Net cash used in investing
activities (29,603,850) (16,229,556) (22,617,198)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable, net 12,000,000 3,000,000 1,000,000
Issuance of long-term debt, net
of issuance costs - 29,820,898 -
Retirement of long-term debt (2,000,000) (2,000,000) (2,000,000)
Retirement of short-term
obligations to be refinanced - (27,000,000) -
Cash dividends paid (9,103,921) (8,353,594) (7,721,226)
Issuance of common stock
through dividend reinvestment
plan, employee stock purchase plan
and key employee stock option plan 2,774,616 2,360,653 2,291,170
---------- ---------- ----------
Net cash provided by (used in)
financing activities 3,670,695 (2,172,043) (6,430,056)
---------- ---------- ----------
Net increase (decrease) in cash
and temporary cash investments (154,808) (522,261) 1,480,623
Cash and temporary cash
investments, beginning of year 1,116,794 1,639,055 158,432
---------- ---------- ----------
Cash and temporary cash
investments, end of year $961,986 $1,116,794 $1,639,055
========== ========== ==========
Cash paid for:
Interest (net of amounts
capitalized) $5,377,140 $4,720,931 $5,063,788
Income taxes (net of refunds) 16,136,494 7,225,821 5,328,827
(The accompanying notes are an integral part of these financial statements.)
<PAGE>27
Consolidated Statements of Capitalization
as of September 30, 1997 1996
------ ------
STOCKHOLDERS' INVESTMENT:
Common stock, par value $2.50;
12,000,000 shares authorized;
shares outstanding: 1997-6,667,499
1996-6,572,823 $16,668,748 $16,432,058
Capital in excess of par value 32,172,471 29,634,545
Retained earnings 64,381,382 55,891,589
----------- -----------
Total stockholders' investment 113,222,601 101,958,192
----------- -----------
LONG-TERM DEBT:
Debentures, 8.75% Series B,
due June 15, 2001 8,000,000 10,000,000
Debentures, 9.21% Series C,
due November 15, 2011 25,000,000 25,000,000
Senior Notes, 7.15%,
due November 15, 2015 30,000,000 30,000,000
----------- -----------
63,000,000 65,000,000
Less - Current maturities (2,000,000) (2,000,000)
----------- -----------
Total long-term debt 61,000,000 63,000,000
----------- -----------
TOTAL CAPITALIZATION $174,222,601 $164,958,192
=========== ===========
CAPITALIZATION RATIOS:
Stockholders' investment 64.3% 61.1%
Long-term debt (including current maturities) 35.7% 38.9%
----------- -----------
100.0% 100.0%
=========== ===========
(The accompanying notes are an integral part of these financial statements.)
<PAGE>28
Consolidated Statements of Retained Earnings
For the Years Ended September 30,
1997 1996 1995
------ ------ ------
BALANCE AT BEGINNING OF YEAR $55,891,589 $49,071,962 $44,983,961
Net income 17,593,714 15,173,221 11,809,227
Cash dividends on common
stock (per share -
$1.375 in 1997; $1.28 in 1996;
$1.205 in 1995) (9,103,921) (8,353,594) (7,721,226)
---------- ---------- ----------
BALANCE AT END OF YEAR $64,381,382 $55,891,589 $49,071,962
========== ========== ==========
(The accompanying notes are an integral part of these financial statements.)
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of 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, propane gas and related services to 167,000
customers in southcentral and eastern North Carolina. The Company's primary
business is the sale and/or transportation of natural gas to over 98,000
residential customers, almost 13,100 commercial and agricultural customers, 444
industrial and electric utility customers located in 86 towns and cities and
four municipal gas distribution systems which serve nearly 45,400 end users. For
the year ended September 30, 1997, approximately 63% of the natural gas volumes
are delivered to industrial and electric utility customers but no individual
customer accounts for more than 8% of the Company's delivered gas volumes,
revenues or margins. Industrial customers 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 paperboard, 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 provides propane gas and
related services to approximately 10,200 customers and sells and services gas
appliances.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, NCNG Exploration Corporation,
Cape Fear Energy Corporation, NCNG Energy Corporation, NCNG Pine Needle
Investment Corporation, and NCNG Cardinal Pipeline Investment Corporation (see
Note 4). 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 on the straight-line method over the estimated
useful lives of the assets. Depreciation was approximately 3.5% of the cost of
total depreciable property in 1997 and 1996; and 3.2% in 1995.
<PAGE>30
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.
Investment tax credits are deferred and 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 cycle
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 and
recognizes the revenue and related cost of gas in the period in which it is
billed.
Temporary Cash Investments -
- ----------------------------
Temporary cash investments are securities with original maturities of 90
days or less. For purposes of the Consolidated Statements of Cash Flows,
temporary cash investments are considered cash equivalents.
Restricted Cash and 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 had been
restricted by a previous Order of the NCUC. Pursuant to the February 1993 Order,
the Company remitted a total of $3.9 million during the fiscal year ended
September 30, 1997 to the NCUC for the Expansion Fund. These amounts, plus
amounts remitted through September 30, 1996, represent certain pipeline refunds
the Company received, plus accrued interest earned on funds invested by the
Company, since July 1991 when the North Carolina General Assembly enacted
legislation authorizing the NCUC to establish expansion funds for all natural
gas utilities franchised in North Carolina. At September 30, 1997, the refunds
received plus accrued interest, which had not been remitted to the NCUC,
amounted to $4.6 million and are reported on the accompanying consolidated
balance sheet in restricted cash and temporary cash investments and restricted
supplier refunds. In August 1997, the Company received its first payment of
$455,000 from the Expansion Fund related to the Duplin/Onslow County expansion
(see Note 2). At September 30, 1997, $16.2 million was held by the NCUC for
current and future NCUC approved expansion projects of the Company.
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, 1997 are not included in the
Company's financial statements because they are no longer controlled by the
Company.
Reclassifications -
- -------------------
Certain amounts in the 1996 and 1995 consolidated financial statements have
been reclassified to conform with current year presentation.
<PAGE>31
Fair Value of Financial Instruments -
- -------------------------------------
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, 1997 is approximately $67.0 million as compared to a carrying
value of $63.0 million and at September 30, 1996, the estimated fair value was
approximately $66.7 million as compared to a carrying value of $65.0 million.
Restricted temporary cash investments are invested primarily in
certificates of deposit and United States Treasury bills. The carrying value of
these investments and all other financial instruments as reflected in the
accompanying consolidated balance sheets approximates fair market value.
Impairment of Long-Lived Assets
- -------------------------------
On October 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." This statement requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Additionally, the standard requires rate-regulated companies to
write off regulatory assets to earnings whenever those assets no longer meet the
criteria for recognition of a regulatory asset as defined by SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation." When circumstances
indicate that the carrying amount of an asset may be impaired, the Company
estimates the future cash flows expected to result from the use of the asset and
its eventual disposition. If the sum of the undiscounted expected future cash
flows is less than the carrying amount of the asset, the Company recognizes an
impairment loss in accordance with SFAS No. 121. The adoption of SFAS No. 121
did not have a material effect on the Company's financial position or results of
operations.
Accounting for Stock Based Compensation
- ---------------------------------------
On October 1, 1996, the Company adopted the disclosure option of SFAS
No. 123 "Accounting for Stock-Based Compensation." SFAS No. 123 requires
companies which do not choose to account for stock-based compensation as
prescribed by the statement, to disclose the pro forma effects on earnings and
earnings per share as if SFAS No. 123 had been adopted (see Note 8).
New Accounting Pronouncements
- -----------------------------
In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128 "Earnings Per Share" and SFAS No. 129 "Disclosure of Information about
Capital Structure." These statements are required to be adopted in the Company's
fiscal quarter ended December 31, 1997. SFAS No. 128 will require the Company to
change the method currently used to compute earnings per share. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. SFAS No. 129 requires companies to expand
capital structure disclosures for any securities other than ordinary common
stock. The impact of adoption of SFAS No. 128 on primary and fully-diluted
earnings per share is not expected to be material.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. SFAS No. 131 introduces a new model for segment
reporting based on the way senior management organizes segments within a company
for making operating decisions and assessing performance. The Company will adopt
these standards on October 1, 1998 and does not expect the adoption will have a
material impact on the Company's financial statements.
<PAGE>32
2. Regulatory and Gas Supply Matters:
On October 27, 1995, the NCUC issued its Order granting a general rate
increase amounting to approximately $4.2 million in annual revenues effective
November 1, 1995. The NCUC'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 provided 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 provided 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 also established 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 and other customers whose gas service
would otherwise be interrupted.
As part of the October 27, 1995 Rate Order, the NCUC approved continued use
of the Weather Normalization Adjustment (WNA) for the space-heating market,
originally approved in the December 6, 1991 Rate Order. 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 1997, winter weather was 21% warmer than normal
and, accordingly, the WNA increased net billings to customers by $2.9 million.
Also, as a part of the October 27, 1995 Rate Order, the NCUC approved
establishment of the Price Sensitive Volume Adjustment (PSVA). The PSVA 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 should be flowed through
to all other customers. The actual margin earned on gas delivered to PSVA
customers and flowed through to all other customers was $1.1 million for Fiscal
1997.
Finally, the NCUC approved the accounting for and recovery in rates of
costs associated with environmental assessment and remediation of a former
manufactured gas plant (MGP) site in Kinston, North Carolina (see Note 9). The
NCUC found that NCNG acted in a reasonable and prudent manner, and accordingly,
approved the Company's proposal to recover an annualized amount of MGP costs
based on amounts expended, net of recoveries from third parties.
On May 15, 1996, the Company filed with the NCUC to recover net customer
costs of $3.0 million from exploration and development activities. The recovery
is a result of a true-up of distributions of costs and revenue benefits from the
Company's exploration and drilling programs. On February 7, 1997, the NCUC
issued its Order granting a pretax recovery of approximately $1.9 million. The
NCUC's Order approved, in all material respects, the Stipulation of Settlement
reached by the Company and the Public Staff of the NCUC. Due to the uncertainty
of recovery, prior to the Order, no asset or gain was recorded in the Company's
financial statements. As a result of the Order, the Company realized a gain of
$.17 per share in Fiscal 1997. The gain has been recorded in other income in the
accompanying statements of income.
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 through Duplin County and on to
the Marine Base-Camp Lejeune in Jacksonville, North Carolina. In Fiscal 1997,
the Company continued to acquire rights-of-way and perform necessary
environmental studies and it is expected that the project will be completed in
Fiscal 1999. Due to delays caused by the environmental studies, the estimated
cost to complete the project has increased $5.4 million to $24.2 million. The
Expansion Fund is to provide $12.4 million based on the original economic
feasibility analysis provided to, and approved by, the NCUC. The Company intends
to apply to the NCUC in early Fiscal 1998 to request an additional $4.3 million
from the Expansion Fund to cover the increased costs. Should the NCUC not
approve the additional amounts to cover the incremental costs incurred, the
Company is not obligated to continue the project.
<PAGE> 33
The NCUC's annual review of the Company's gas costs was held in April 1997
for the 12 months ended October 31, 1996. The NCUC found NCNG's gas costs and
gas purchasing practices to be prudent, as it had in all previous reviews.
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). 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 refunded
directly to the Company's customers.
3. Income Taxes:
The components of income tax expense are as follows (in thousands):
For the years ended September 30,
------------------------------------------------------
1997 1996 1995
----------------- ---------------- ---------------
Federal State Federal State Federal State
----------------- ---------------- ---------------
Income taxes charged
to operations - (In Thousands)
Payable currently--- $6,833 $1,658 $6,741 $1,656 $4,025 $ 972
Deferred to
subsequent years--- 783 249 (12) 59 1,289 380
Amortization of
investment tax credits- (194) - (198) - (198) -
----- ----- ----- ----- ----- -----
$7,422 $1,907 $6,531 $1,715 $5,116 $1,352
===== ===== ===== ===== ===== =====
Income taxes charged
to other income $1,125 $ 267 $ 803 $ 194 $ 552 $ 134
===== ===== ===== ===== ===== =====
The effective income tax rate, computed by dividing total income tax
expense by the sum of such income tax expense and net income, was 37.9% in 1997
and 1996, and 37.7% in 1995.
A reconciliation of income tax expense at the federal statutory rate to
recorded income tax expense is as follows (in thousands):
For the years ended September 30,
----------------------------------
1997 1996 1995
----------- ---------- ----------
Federal taxes at 35% statutory rate -- $ 9,910 $8,546 $6,637
State income taxes, net of
federal benefit----------------------- 1,413 1,241 966
Amortization of investment tax credits-- (196) (200) (202)
Amortization of excess deferred income
taxes returned to customers-------- (222) (222) (222)
Tax effect of allowance for funds used
during construction - equity portion (240) (66) (154)
Other--------------------------------- 56 (56) 129
------ ----- -----
Total income tax expense--------------- $10,721 $9,243 $7,154
====== ===== =====
Effective October 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes." The adoption of SFAS No. 109 resulted in additional deferred
income taxes and related regulatory assets and liabilities. The net regulatory
liability is due primarily to deferred income taxes recognized in years prior to
1987 at rates higher than currently enacted.
<PAGE>34
The tax effects of temporary differences in the carrying amounts of
assets and liabilities in the consolidated financial statements and
their respective tax bases which give rise to deferred tax assets and
liabilities are as follows (in thousands):
For the years ended September 30,
---------------------------------
1997 1996
--------------- --------------
Deferred tax liabilities:
Accelerated depreciation----------- $24,446 $23,112
Property basis differences--------- 3,872 3,558
Other------------------------------ 930 879
------ ------
Total deferred tax liabilities----- $29,248 $27,549
------ ------
Deferred tax assets:
Unamortized investment tax credits- $ 1,009 $ 1,087
Regulatory liability related to
income taxes, net----------------- 1,088 1,171
Other postretirement benefits------ 1,085 796
Environmental reserves------------- 410 410
Unbilled volumes------------------- 403 471
Other------------------------------ 2,500 2,599
------ ------
Total deferred tax assets---------- $ 6,495 $ 6,534
------ ------
Net deferred tax liabilities-------- $22,753 $21,015
====== ======
4. Subsidiary Operations:
In April 1997, the Company formed a new subsidiary, NCNG Pine Needle
Investment Corporation (Pine Needle Investment), to participate in gas supply
and pipeline projects in North Carolina. Pine Needle Investment has a 5%
ownership interest in Pine Needle LNG Company, LLC (Pine Needle) which is
building and will operate a 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 and is expected to be in operation prior to the 1999-2000
winter. Transco has two subsidiaries, one of which will act as a partner and one
as the operator of Pine Needle. Also, 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 partners in Pine Needle. Piedmont, Public Service and NCNG will be
Pine Needle's largest customers. Pine Needle received authorization from the
FERC in December 1996 to begin construction of the LNG plant and provide firm
storage services to its customers. Construction began in February 1997. In
August 1997, Pine Needle obtained bank financing for the facility and all
previous advances made to Pine Needle were returned to the participants.
Also in April 1997, the Company formed another subsidiary, NCNG Cardinal
Pipeline Investment Corporation (Cardinal Pipeline Investment) which is involved
with subsidiaries of Transco, Piedmont and Public Service in the organization of
a limited liability company to acquire an existing pipeline and extend it to
provide the capacity needed 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. In Fiscal 1997, Cardinal Pipeline
Investment contributed approximately $119,000 to participate as the owner of a
5% interest in the new pipeline company, known as Cardinal Extension Company,
LLC (Cardinal Extension).
<PAGE> 35
The Company has another subsidiary, NCNG Energy Corporation (Energy) which
was originally formed to participate in Pine Needle and Cardinal Extension. The
investments in these projects were transferred to Pine Needle Investment and
Cardinal Pipeline Investment, respectively, in June 1997. Energy is used for
other energy-related investments.
Cape Fear Energy Corporation's (Cape Fear) primary activity are natural gas
marketing for industrial and municipal customers located on NCNG's system. Cape
Fear's earnings increased to $276,000 in Fiscal 1997 from $43,000 in Fiscal 1996
due to substantially increased sales volumes as a result of market conditions
which caused customers to transport more gas.
NCNG Exploration Corporation's (Exploration) interests in all of its
exploration and development programs were sold effective June 7, 1994. During
Fiscal 1997, Exploration engaged in gas marketing activities primarily to gas
resellers and generated net income of $94,300 compared to $381,000 in Fiscal
1996. As of October 1, 1997, all marketing activities in Exploration will cease
and the Company will be liquidated. Going forward, the gas marketing activities
to gas resellers will be conducted by Energy.
5. Short-Term Borrowing Arrangements:
The Company has lines of credit with North Carolina banks for an aggregate
amount of $36.0 million of which $24.0 million 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. Such
borrowings are normally on a demand basis for a period of 90 days. At September
30, 1997, $15.0 million was outstanding under lines of credit at interest rates
ranging from 5.870% to 5.875%.
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.
6. Long-Term Debt Maturities:
As of September 30, 1997, scheduled maturities of existing long-term debt
during each of the next five fiscal years are as follows: 1998, $2.0 million;
1999, $3.25 million; 2000, $3.25 million; 2001, $3.25 million and 2002, $1.25
million.
7. Pension and Other Postretirement and Postemployment Benefits:
The Company has a defined benefit 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 $596,000 in 1997, $386,000 in 1996, and $374,000
in 1995, of which approximately 20% was capitalized in each year.
<PAGE> 36
The plan's funded status as of September 30, 1997 and 1996 and pension
costs for 1997, 1996 and 1995 were as follows (in thousands):
Funded Status: 1997 1996
- ------------------------------------- -------- -------
Actuarial present value of accumulated
plan benefits:
Vested--------------------------------------- $18,572 $16,371
Nonvested------------------------------------ 92 64
------ ------
Subtotal------------------------------------- 18,664 16,435
Effect of salary progression------------------ 5,234 4,344
------ ------
Projected benefit obligation------------------ 23,898 20,779
Plan assets at market value------------------- 27,659 22,548
------ ------
Plan assets in excess of projected benefit
obligation----------------------------------- 3,761 1,769
Unrecognized prior service cost being amortized
over twelve years---------------------------- 508 575
Unrecognized net gain being amortized over
ten years------------------------------------ (2,880) (689)
Unrecognized net asset existing at the date of
transition, being amortized over approximately
ten years------------------------------------ - (214)
------ ------
Prepaid pension cost-------------------------- $ 1,389 $ 1,441
====== ======
Pension Cost: 1997 1996 1995
- ------------------------------------- ------ ------ ------
Net pension cost was comprised of the
following items:
Service cost----------------------- $ 832 $ 731 $ 662
Interest cost on projected benefit
obligation------------------------ 1,738 1,528 1,418
Actual return on plan assets------- (4,968) (1,681) (1,813)
Amortization of unrecognized prior
service cost---------------------- 66 66 66
Amortization of transition net asset- (214) (258) (258)
Deferred gain (loss) on net assets--- 3,142 - 299
------- ------ ------
Net pension cost--------------------- $ 596 $ 386 $ 374
======= ====== ======
For the year ended September 30, 1997, the expected long-term rate of
return on plan assets was 8%. At September 30, 1997, plan assets were invested
approximately 57% in fixed income securities and 43% in equity securities,
including 1% in the common stock of the Company.
The Company also provides certain medical and life insurance benefits for
retired employees, and substantially all employees may remain eligible for these
benefits on a prospective basis when they retire. These benefits are accrued
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. The NCUC approved this treatment in the Company's most
recent general rate case decided on October 27, 1995.
<PAGE>37
The following tables show the funded status of the plan as of September
30, 1997 and 1996 and the components of the plan's net costs (in thousands)for
fiscal years 1997, 1996 and 1995:
Funded Status: 1997 1996
- ---------------------------------------------- ------ ------
Actuarial present value of benefit obligation:
Retirees and dependents---------------------- $2,581 $2,464
Employees eligible to retire----------------- 1,530 995
Other employees------------------------------ 2,844 2,600
----- -----
Accumulated benefit obligation:--------------- 6,955 6,059
Unrecognized net gain (loss)----------------- (305) (104)
Unrecognized transition obligation----------- (3,789) (4,027)
----- -----
Postretirement benefit liability-------------- $2,861 $1,928
===== =====
Components of Net Cost: 1997 1996 1995
- --------------------------------------- ------ ------ ------
Service cost during the year----------- $ 179 $ 164 $ 148
Interest cost on accumulated benefit
obligation--------------------------- 509 439 445
Amortization of unrecognized transition
obligation over 20 years------------- 235 237 266
----- ------ ------
Net periodic postretirement benefit cost-- $ 923 $ 840 $ 859
===== ====== ======
Of the net postretirement medical and life insurance costs recorded in 1997
and 1996, $757,000 and $689,000, respectively, were charged to operating
expenses and the remainder was 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, medical and life insurance) was 8% and 6%, respectively, as of
September 30, 1997 and 1996.
An additional assumption used in measuring the accumulated postretirement
medical benefit obligation as of September 30, 1997 was a medical care cost
trend rate of 9.5%, 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, 1997, by approximately $1.3 million and the
aggregate of the service and interest cost components of the net retiree medical
cost by approximately $147,000.
<PAGE>38
8. Stockholders' Investment:
The changes in common stock and capital in excess of par value for the
three years ended September 30, 1997, were as follows:
Common Stock
--------------------------------
Capital in
Shares Excess of
Outstanding Amount Par Value
------------- ----------- ------------
Balance at September 30, 1994---- 6,366,544 $15,916,360 $25,498,420
Issuance through Dividend
Reinvestment Plan (DRP)--------- 62,448 156,120 1,130,367
Issuance through Employee Stock
Purchase Plan (ESPP)------------ 13,258 33,145 225,519
Issuance through Key Employee
Stock Option Plan (KESOP)------- 34,950 87,375 658,644
--------- ---------- ----------
Balance at September 30, 1995---- 6,477,200 16,193,000 27,512,950
Issuance through DRP------------- 66,314 165,785 1,512,826
Issuance through ESPP------------ 12,959 32,398 220,432
Issuance through KESOP----------- 16,350 40,875 388,337
--------- ---------- ----------
Balance at September 30, 1996---- 6,572,823 16,432,058 29,634,545
Issuance through DRP------------- 63,124 157,810 1,742,461
Issuance through ESPP------------ 12,952 32,380 263,359
Issuance through KESOP ---------- 18,600 46,500 532,106
--------- ---------- ----------
Balance at September 30, 1997---- 6,667,499 $16,668,748 $32,172,471
========= ========== ==========
At September 30, 1997, there are 302,815 shares of common stock reserved
for issuance under the Company's Dividend Reinvestment Plan. Under the most
restrictive covenants of the Company's long-term debt agreements, approximately
$23.3 million of the Company's retained earnings at September 30, 1997 is
unrestricted.
The Company sponsors an employee stock purchase plan, a key employee
nonqualified stock option plan, a long-term incentive plan, a directors deferred
compensation stock plan and a directors deferred retirement compensation stock
plan. The employee stock purchase plan enables employees to contribute up to 6%
of their compensation toward the purchase of the Company's common stock at 90%
of the lower of current or prior year-end market value. At September 30, 1997,
220,802 shares were reserved for issuance under this plan.
Under the terms of the nonqualified stock option plan, 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.
<PAGE>39
Option activity for the three years ended September 30, 1997, is as
follows:
Options Option Price
Outstanding Per Share
----------- ------------
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
Exercised-------------------------------- (16,350) 13.80
------
Balance at September 30, 1996------------- 24,050 $13.80-$24.98
Exercised-------------------------------- (18,600) $13.80-$14.10
------
Balance at September 30, 1997------------- 5,450 $14.10-$24.98
======
1997 1996 1995
------ ------ ------
Options exercisable at year-end--- 2,850 21,450 32,100
Options available for grant at year-end- 69,475 69,475 69,475
====== ====== ======
Under the long-term incentive plan, senior officers of the Company having
the opportunity to make a significant contribution to the Company's long-term
performance are eligible to participate. Awards are made to qualifying
participants in each plan cycle. The plan cycle shall typically be five plan
years, commencing with the first day of the first fiscal year (October 1, 1996),
with the exception of two special plan cycles which shall cover the periods of
Fiscal 1997 through Fiscal 1999 and Fiscal 1997 through Fiscal 2000. Target
awards for each long-term incentive plan participant are established, stated as
a percentage of the participant's salary, by the Compensation Committee of the
Board of Directors. Those target awards are to be converted into a target number
of "performance shares" for each participant by dividing the participant's
target award by the average price of one share of common stock for the twelve
months preceding the end of the plan cycle. The maximum number of performance
shares that may be earned by a participant is equal to two times the
participant's target number of performance shares. As of September 30, 1997, no
shares had been issued and 150,000 shares were reserved under this plan.
Under the directors deferred compensation stock plan and a directors
deferred retirement compensation stock plan, current directors will accrue stock
units in lieu of annual compensation and retirement compensation which will be
converted into common stock of the Company upon retirement. At September 30,
1997, no shares of common stock had been issued and 110,000 shares were reserved
under these plans.
The Company accounts for stock based compensation plans under Accounting
Principles Board Opinion No. 25. The Company adopted SFAS No. 123 for disclosure
purposes on October 1, 1996. Under SFAS No. 123, the fair value of each option
granted after January 1995, has been estimated as of the date of grant using the
Black-Scholes option pricing model. The application of this model resulted in no
change to earnings per share for the year ended September 30, 1997. Because the
SFAS No. 123 method of accounting has not been applied to options granted prior
to January 1, 1995, the resulting effect on pro forma compensation costs may not
be representative of that expected in future years.
9. Commitments and Contingencies:
During Fiscal 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 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 (see Note 2).
<PAGE>40
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 consolidated financial position or
results of operations.
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 consolidated financial
position or results of operations.
<PAGE> 41
Supplementary data-
The following table presents certain financial information for each
quarter during the fiscal years ended September 30, 1997 and 1996
(amounts in thousands, except per share data).
1997
- -------------------------------------------------------------------------------
Fourth Third Second First
------ ----- ------ -----
Operating revenues $28,189 $30,678 $69,381 $53,455
Gross margin 12,341 13,814 27,186 19,865
Operating income 1,233 2,489 9,886 6,278
Net income (146) 1,345 10,906 * 5,489
Earnings per share (.02) .20 1.65 * .83
1996
- -------------------------------------------------------------------------------
Fourth Third Second First
------ ----- ------ -----
Operating revenues $31,420 $44,875 $73,535 $46,808
Gross margin 11,578 13,998 26,314 16,520
Operating income 1,257 2,424 10,111 4,954
Net income 188 1,195 9,523 4,267
Earnings per share .02 .18 1.46 .66
_______________
* includes a nonrecurring credit of $0.17 per share for the settlement of a
regulatory matter.
<PAGE>42
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 and
Chief Executive Officer Chief Financial Officer
<PAGE>43
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, 1997 and 1996, and the related
consolidated statements of income, retained earnings, and cash flows for each of
the three years in the period ended September 30, 1997. 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, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Raleigh, North Carolina
November 7, 1997
<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" on Pages 1, 2 and 3 in the
Company's Proxy Statement dated December 5, 1997 relating to the January 13,
1998 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 13 of this annual report.
Item 12. Executive Compensation
- --------------------------------
The information for this item is set forth in the sections entitled
"Executive Compensation and Stock Option Information," "Annual Incentive Plan,"
"Key Employee Stock Option Plan", "Employee Stock Purchase Plan", "Employee
Retirement Plans," "Executive Employment Agreements in the Event of Change in
Control" and "Report of Personnel and Compensation Committee on Executive
Compensation" on Pages 4, 5, 6, 7, 8, 9, and 10 in the Company's Proxy Statement
dated December 5, 1997 relating to the January 13, 1998 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,
1997.
Security ownership of management -
The information for this item is set forth in the section entitled
"Election of Directors" on Pages 1, 2 and 3 in the Company's Proxy Statement
dated December 5, 1997 relating to the January 13, 1998 Annual Meeting of
Stockholders, which section is hereby incorporated by reference.
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 Committee Interlocks and Insider Participation" on Page 8 in the
Company's Proxy Statement dated December 5, 1997 relating to the January 13,
1998 Annual Meeting of Stockholders, which section is hereby incorporated by
reference.
<PAGE>45
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, 1997 and 1996 23
Consolidated Statements of Income for the Years Ended
September 30, 1997, 1996 and 1995 25
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995 26
Consolidated Statements of Capitalization as of September 30,
1997 and 1996 27
Consolidated Statements of Retained Earnings for the Years
Ended September 30, 1997, 1996 and 1995 28
Notes to Consolidated Financial Statements for the Years
Ended September 1997, 1996 and 1995 29
Management's Responsibility for Financial Statements 42
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 46
Schedule II - Valuation and Qualifying
Accounts for the Years Ended September 30, 1997,
1996 and 1995 47
All other financial statement schedules are omitted as not applicable, or
not 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 48, 49 and 50 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, 1997.
<PAGE> 46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of North Carolina Natural Gas Corporation,
included in this Form 10-K, and have issued our report thereon dated November 7,
1997. Our audit was made for the purpose of forming an opinion on those
statements taken as a whole. The schedule listed in the accompanying index are
the responsibility of the Registrant's management and are presented for purposes
of complying with the Securities and Exchange Commission's rules and are 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 state 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
Raleigh, North Carolina,
November 7, 1997
<PAGE>47
NORTH CAROLINA NATURAL GAS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
Col. A Col. B Col. C Col. D Col. E
- ------ ------ ------ ------ ------
Additions
Balance at Charged to Balance
Beginning Operating Other Deductions At End
Description of Period Expenses Income (Note 1) of Period
- ----------- ---------- --------- ------ ---------- ---------
DEDUCTED IN
BALANCE SHEET
FROM ASSET TO
WHICH IT APPLIES:
Allowance for
doubtful accounts
1997 $ 747,455 $ 716,090 $ 91,735 $991,550 $ 563,730
========= ======== ======= ======= =========
1996 $ 566,019 $ 538,477 $158,111 $515,152 $ 747,455
========= ======== ======= ======= =========
1995 $ 416,048 $ 305,358 $102,558 $257,945 $ 566,019
========= ======== ======= ======= =========
Note 1:
Deductions represent uncollectible accounts written off,
net of recoveries, as follows -
1997 1996 1995
---- ---- ----
Write off of accounts considered
to be uncollectible $1,264,959 $659,112 $475,259
Less-Recoveries on accounts
previously written off 273,409 143,960 217,314
--------- ------- -------
$ 991,550 $515,152 $257,945
========= ======= =======
<PAGE> 48
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 22, 1997:
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/ Ronald J. Josephson Vice President-Financial Services
- ------------------------------- (Principal Accounting Officer)
Ronald J. Josephson
/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>49
INDEX OF EXHIBITS
-----------------
The following exhibits are filed as part of this 1997 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, 1984, 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)
4-4 - Note Purchase Agreement dated as of November 1, 1995 covering
7.15% Senior Notes due November 15, 2015.
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
Transcontinental Gas Pipe Line 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>50
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)
10-12 - Employment Agreements executed in 1991 with certain Executive
Officers. (13)
10-13 - Employment Agreements executed in 1992 with certain Executive
Officers. (13)
10-14 - Employment Agreements executed in 1994 with certain Executive
Officers. (13)
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. (11)
10-22 - Amendment to Natural Gas Service Agreement dated November 1,
1992 with the City of Monroe. (12)
10-23 - North Carolina Natural Gas Corporation Executive Pension
Restoration Plan dated September 1, 1995. (12)
10-24 - Fourth Amendment to Natural Gas Service Agreement dated
December 1, 1995 with the Greenville Utilities Commission,
Greenville, NC. (13)
10-25 - Second Amendment to Natural Gas Service Agreement dated
November 1, 1995 with The City of Rocky Mount, NC. (13)
10-26 - Third Amendment to Natural Gas Service Agreement dated
December 1, 1995 with The City of Wilson, NC. (13)
10-27 - Addendum No. Third dated August 29, 1996 covering Standby
On-Peak Supply Service with the City of Rocky Mount, NC. (13)
10-28 - Addendum No. Four dated August 28, 1996 covering Standby
On-Peak Supply Service with The City of Wilson, NC. (13)
10-29 - Employment Agreements executed in 1996 with certain Executive
Officers. (13)
<PAGE>51
10-30 - First Amendment dated March 10, 1997 to Service Area Territory
Agreement with the City of Rocky Mount, NC
10-31 - Third Amendment to Natural Gas Service Agreement dated March
10, 1997 with the City of Rocky Mount, NC
10-32 - Third Amendment to Natural Gas Service Agreement dated
November 1, 1996 with the City of Monroe, NC
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
(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, 1995
(13) Filed as exhibit to Form 10-K report for fiscal year ended September
30, 1996
<PAGE>52
Exhibit 10-30
Page 1 of 3
FIRST AMENDMENT TO
SERVICE AREA TERRITORY AGREEMENT BETWEEN
THE CITY OF ROCKY MOUNT, NC
AND
NORTH CAROLINA NATURAL GAS CORPORATION
This First Amendment entered into to be effective on the 10th day of March,
1997, between The City of Rocky Mount, North Carolina, (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 The City of Rocky Mount, North Carolina, and North
Carolina Natural Gas Corporation" dated January 13, 1992; and
WHEREAS, Customer and Company are also parties to a certain "Service Area
Territory Agreement By and Between The City of Rocky Mount, North Carolina, and
North Carolina Natural Gas Corporation" dated January 13, 1992 ("the
Agreement"); and
WHEREAS, The City of Rocky Mount desires to serve additional areas which
are outside the territory described in the Service Area Territory Agreement; and
WHEREAS, It is not economically feasible for North Carolina Natural Gas
Corporation to serve these areas from its existing system at this time; and
WHEREAS, The City of Rocky Mount has agreed to make natural gas available
to prospective end users in these areas where economically feasible; and
WHEREAS, Company and Customer wish to amend the Service Area Territory
Agreement as more fully set forth herein;
<PAGE>53
Exhibit 10-30
Page 2 of 3
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein and in the Agreement, Company and Customer agree as follows:
1. To amend the last paragraph on page one (1) of the Agreement by
adding the following:
Subject to cancellation by either Customer or Company in the event
either party elects to cancel the Natural Gas Service Agreement after
the end of the initial term, or any anniversary of subsequent
increments of the Natural Gas Service Agreement.
2. A new paragraph will be inserted as the first full paragraph on page
three (3) of the Agreement, as follows:
As per the attached map, Customer service area shall be amended to
include an area that begins at a point referenced in the Service Area
Territory Agreement dated January 13, 1992 as five hundred yards north
of the intersection of US Highway 64 and SR 1603. Thence running
westerly five hundred yards north of the north right-of-way of US 64
to the existing eastern most town limits of the Town of Nashville.
Thence northerly along the eastern existing town limits of the Town of
Nashville. Thence westerly along the northern existing town limits of
the Town of Nashville. Thence southerly along the western existing
town limits of the Town of Nashville. Thence easterly along the
southern existing town limits of the Town of Nashville. Thence
northerly along the eastern existing town limits of the Town of
Nashville to the intersection of the existing eastern town limits of
the Town of Nashville and SR 1700. Thence easterly along the center
line of SR 1700 to a point five hundred yards west of the west
right-of-way of I-95. Thence southwesterly along a line five hundred
yards west of the western right-of-way of I-95 to a point five hundred
yards west of the west right-of-way of I-95 at the Nash/Wilson county
line. Thence northeasterly along the Nash/Wilson county line to a
point where SR 1739 intersects with the Nash/Wilson county line.
Thence northerly along a straight line to the intersection of Highway
97 and SR 1544. Thence northerly along SR 1544 to the intersection
point of the center line of the Tar River being a reference point of
the Service Area Territory Agreement dated January 13, 1992.
3. To amend the first partial paragraph on page four (4) of the Agreement
by adding the following as the next to last sentence of that paragraph:
Customer has the right to serve an entire residential subdivision
along the boundary lines of this Agreement where the majority of the
land area of the residential subdivision lies within the Customer's
expanded territory.
4. This First Amendment shall become effective on March 10, 1997.
5. Except as specifically provided herein, the Agreement shall continue in
force and effect as previously written.
<PAGE>54
Exhibit 10-30
Page 3 of 3
IN WITNESS WHEREOF, this instrument is executed effective as of the day
and year first written above.
CITY OF ROCKY MOUNT, N.C.
/s/Jean M. Bailey
- --------------------
Attest by City Clerk /s/Frederick E. Turnage
---------------------------------
Title: MAYOR
NORTH CAROLINA NATURAL
GAS CORPORATION
/s/Calvin B. Wells
--------------------------------
Title: President and CEO
<PAGE>55
Exhibit 10-31
Page 1 of 2
THIRD AMENDMENT TO
NATURAL GAS SERVICE AGREEMENT BETWEEN
THE CITY OF ROCKY MOUNT, NC
AND
NORTH CAROLINA NATURAL GAS CORPORATION
This Third Amendment entered into to be effective on the 10th day of March,
1997, between The City of Rocky Mount, North Carolina, (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 The City of Rocky Mount, North Carolina, and North
Carolina Natural Gas Corporation" dated January 13, 1992 ("the Agreement");
the First Amendment dated January 1, 1994; and the Second Amendment dated
November 1, 1995 to such Agreement; and
WHEREAS, Company and Customer wish to further amend the Agreement 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 1.01 is amended to increase the initial term of the Agreement by
ten (10) years, now ending on December 6, 2011.
2. Section 2.01 as previously amended is further amended by adding the
following:
The maximum quantity of gas that Company is required to deliver and
the volume on which the demand charge under Rate Schedules RE-2 and
T-6 will apply increases to 19,000 dekatherms per day effective
November 1, 2001; increases again to 20,000 dekatherms per day
effective November 1, 2003, and increases again to 21,000 dekatherms
per day effective November 1, 2006.
3. 4.01 is deleted in its entirety and the following is substituted
therefor:
4.01 Points of delivery for all natural gas purchased or transported
under this Agreement shall be the outlet side of the Company's meter
and regulator stations at the following locations and other stations
added at mutually agreeable locations in the future. The maximum
delivery point entitlement (MDPE) volumes shown below are subject to
the total contract maximum daily volumes set forth in Section 2.01 as
amended:
<PAGE>56
Exhibit 10-31
Page 2 of 2
1. City Gate Station #1 (Main City Gate) at SR 1155 and Vance Street
with delivery pressure of approximately 60 pounds per square inch
gauge (psig). The MDPE at this delivery point is 900 Mcf per hour and
21,600 Mcf per day.
2. City Gate Station #2 (Battleboro) at the NCNG Compressor Station
near Battleboro at SR 1404 and SR 1407, with delivery pressure of
approximately 60 psig. The MDPE at this delivery point is 284 Mcf per
hour and 6,816 Mcf per day.
3. City Gate Station #3 (Waste Water Treatment Plant) at a point
approximately five (5) miles east of the city limits of the City of
Rocky Mount, North Carolina, on Highway 97 North, with delivery
pressure of approximately 50 psig. The MDPE at this delivery point is
32 Mcf per hour and 768 Mcf per day.
4. City Gate Station #4 (Westmont Drive) located at a point where NCNG
line #74 crosses Westmont Drive, with delivery pressure of
approximately 60 psig. The MDPE at this delivery point is 115 Mcf per
hour and 2,760 Mcf per day.
5. City Gate Station #5 (Hwy. 97 South) located at a point where NCNG
line #74 crosses Highway 97 southwest of the City of Rocky Mount, with
delivery pressure of approximately 60 psig. The initial MDPE at this
delivery point is 5 Mcf per hour and 120 Mcf per day. Customer agrees
to secure property of adequate size (40 ft x 40 ft) to locate a new
City Gate Station #5 at or near this location for the installation of
a new city gate station within ten (10) months of the effective date
of this Amendment. Company agrees to install new delivery and
regulation equipment on this property and increase the MDPE at this
delivery point to 115 Mcf per hour and 2,760 Mcf per day within twelve
(12) months of the effective date of this Amendment.
4. This Third Amendment shall become effective on March 10, 1997.
5. Except as specifically provided herein, the Agreement shall continue in
force and effect as previously written.
IN WITNESS WHEREOF, this instrument is executed effective as of the day
and year first written above.
CITY OF ROCKY MOUNT, NORTH CAROLINA
/s/Frederick E. Turnage
-----------------------------------
CITY SEAL Title: MAYOR
Attest: /s/Jean M. Bailey
-------------------------
CITY CLERK
NORTH CAROLINA NATURAL GAS CORPORATION
/s/Calvin B. Wells
------------------------------------
Title: President and CEO
<PAGE>57
Exhibit 10-32
Page 1 of 4
THIRD AMENDMENT TO
NATURAL GAS SERVICE AGREEMENT BETWEEN
THE CITY OF MONROE, NC
AND
NORTH CAROLINA NATURAL GAS CORPORATION
This Third Amendment entered into to be effective on the 1st day of
November, 1996, between The City of Monroe, North Carolina, (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 The City of Monroe, North Carolina and North Carolina
Natural Gas Corporation" effective December 6, 1991 ("the Agreement"); the First
Amendment effective November 1, 1992; the Second Amendment dated January 1, 1995
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 1.01 is deleted in its entirety and the following is substituted
therefor:
1.1 This amended Agreement shall be effective on November 1, 1996,
and shall be for an initial term of fifteen (15) years from December
6, 1991 and for five (5) year increments thereafter; subject,
however, to cancellation by either party at the expiration date of
the initial term, or any anniversary of subsequent increments by
two years written notice before the date of cancellation.
<PAGE>58
Exhibit 10-32
Page 2 of 4
2. 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 10,800
dekatherms ("Dth) per day and 540 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, and
Customer agrees to pay Company therefor as provided in the
applicable rate schedule.
3. Section 4.01 is deleted in its entirety and the following is substituted
therefor:
4.01 Points of Delivery for all natural gas purchased or transported
under this Agreement shall be the outlet side of the Company's
meter and regulator stations at the following locations and other
stations added at mutually agreeable locations in the future.
The maximum delivery point entitlement (MDPE) volumes shown below
are subject to the total contract maximum daily volume set forth
in Section 2.01 as amended.
1.City Gate Station #1 (Main City Gate) at a point approximately 1400
feet south of the intersection of North Carolina Highway 200 and Olive
Branch Road on the west side of Morgan Mill Road, with two delivery
pressures of approximately 42 pounds per square inch gauge (psig) and
150 psig serving two separate feeds. The MDPE at this delivery point
is 560 Mcf per hour and 11,200 Mcf per day.
2. City Gate Station #2 (Rolling Hills) at a point approximately 900
feet north of US Highway 74 on the east side of Rocky River Road
(State Road 1514), with delivery pressure of approximately 42 psig.
The MDPE at this delivery point is 32 Mcf per hour and 640 Mcf per
day.
3. City Gate Station #3 (Airport) located east of the main Monroe
airport runway on Teledyne Road, with delivery pressure of
approximately 50 psig. The MDPE at this delivery point is 53 Mcf per
hour and 1,060 Mcf per day.
<PAGE>59
Exhibit 10-32
Page 3 of 4
4. City Gate Station #4 (Rocky River Road) located on Rocky River Road
at Hartru (State Road 1007):
Minimum Hourly Daily
Pressure MDPE MDPE
(psig) Mcf Mcf
Prior to March 31, 1997 60 27 540
*March 31 to October 31, 1997 75 60 1,200
*After October 31, 1997 75 144 2,880
*These dates contingent upon approval of this Third Amendment by
January 1, 1997 or will be adjusted accordingly.
5. City Gate Station #5 (Charlotte Plastics) located at Charlotte
Plastics on Old Charlotte Highway with delivery pressure of
approximately 40 psig. The MDPE at this delivery point is 4 Mcf per
hour and 60 Mcf per day.
6. City Gate Station #6 (Unionville) located approximately 1000 feet
east of the intersection of Highway 601 North and Unionville-Indian
Trail Road (State Road 1367), with delivery pressure of approximately
the Company's line # sixteen (16) pressure. The MDPE at this delivery
point is 21 Mcf per hour and 420 Mcf per day.
7. City Gate Station #7 (Crestview) located on Highway 601 North at
Crestview with delivery pressure of approximately 20 psig. The MDPE at
this delivery point is 0.65 Mcf per hour and 13 Mcf per day.
8. City Gate Station #8 (Broadview) located on Highway 601 North at
Broadview with maximum delivery pressure of approximately 20 psig. The
MDPE at this delivery point is 0.65 Mcf per hour and 13 Mcf per day.
4. Section 5.01 is deleted in its entirety and the following is substituted
therefor:
5.01 Except where indicated otherwise in Section 4.01 of the Agreement,
Company shall endeavor to deliver natural gas to Customer at
the Points of Delivery at such pressures as Customer may reasonably
require with an average pressures between 20 and 100 pounds per
square inch absolute (psia). Customer agrees to notify Company of
any deviations of such suggested average pressure guidelines so that
Company can attempt, if possible, to bring pressure back within the
suggested guidelines.
5. This Third Amendment shall become effective on November 1, 1996.
<PAGE>60
Exhibit 10-32
Page 4 of 4
6. Except as specifically provided herein, the Agreement shall continue in
force and effect as previously written.
IN WITNESS WHEREOF, this instrument is executed effective as of the day
and year first written above.
CITY OF MONROE, N.C.
/s/Lewis Fisher
-----------------------------
CITY SEAL Title: MAYOR
Attest: /s/Jeanne M. Deese
--------------------
CITY CLERK
NORTH CAROLINA NATURAL GAS CORPORATION
/s/Calvin B. Wells
------------------------------
CORPORATE SEAL Title: President and CEO
Attest: /s/Sally T. Sowers
----------------------
<PAGE>61
Exhibit 24
Page 1 of 1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 33-31577.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
December 20, 1997
<TABLE> <S> <C>
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<CIK> 0000072596
<NAME> NORTH CAROLINA NATURAL GAS CORPORATION
<MULTIPLIER> 1,000
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<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
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<TOTAL-CURRENT-ASSETS> 42990
<TOTAL-DEFERRED-CHARGES> 2160
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 253251
<COMMON> 16669
<CAPITAL-SURPLUS-PAID-IN> 32173
<RETAINED-EARNINGS> 64381
<TOTAL-COMMON-STOCKHOLDERS-EQ> 113223
0
0
<LONG-TERM-DEBT-NET> 61000
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 62028
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<GROSS-OPERATING-REVENUE> 181703
<INCOME-TAX-EXPENSE> 9329
<OTHER-OPERATING-EXPENSES> 152488
<TOTAL-OPERATING-EXPENSES> 161817
<OPERATING-INCOME-LOSS> 19886
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<INCOME-BEFORE-INTEREST-EXPEN> 21996
<TOTAL-INTEREST-EXPENSE> 4402
<NET-INCOME> 17594
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<EARNINGS-AVAILABLE-FOR-COMM> 17594
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