<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, 1998
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 27, 1998..............................$324,762,762
Number of shares of Common Stock outstanding at November 27, 1998.....10,129,053
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement dated December 4, 1998 relating to the
January 12, 1999 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, 1998
TABLE OF CONTENTS
Item Page
- ---- ----
PART I.
1. Business .................................................... 3
Executive Officers of the Registrant.............................. 12
2. Properties ....................................................... 13
3. Legal Proceedings................................................. 13
4. Submission of Matters to a Vote of Security Holders............... 13
PART II.
5. Market for Registrant's Common Equity and
Related Stockholder Matters.................................. 14
6. Selected Financial Data ....................................... 15
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 16
8. Financial Statements and Supplementary Data....................... 22
Report of Independent Public Accountants.......................... 42
Management's Responsibility for Financial Statements.............. 43
9. Changes in and Disagreements on Accounting and
Financial Disclosures ..................................... 45
PART III.
10. Directors and Executive Officers of the Registrant............... 45
11. Executive Compensation .......................................... 45
12. Security Ownership of Certain Beneficial Owners
and Management ................................................ 45
13. Certain Relationships and Related Transactions................... 45
PART IV.
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K........................................... 46
Signatures ................................................................ 49
Index to Exhibits.......................................................... 46
<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 1,020 miles of transmission pipeline and approximately 2,761 miles
of distribution mains. Natural gas is sold under regulated rates to
approximately 162,000 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 51% of NCNG's total available gas supply in 1998 was purchased
under long-term contracts, in the spot market or with nonpipeline suppliers for
system supply, and approximately 49% was received for transportation to various
customers. The Company also serves propane gas to approximately 11,200 customers
and provides gas appliance sales and services to gas customers and new home
builders.
The Company has four subsidiaries: 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). See Note 4 to the Consolidated Financial
Statements for a discussion of the Company's subsidiaries.
On November 10, 1998, the Company and Carolina Power & Light Company
("CP&L"), a North Carolina corporation, entered into an Agreement and Plan of
Merger providing for a strategic business combination of the Company and CP&L.
(See Note 11 to the Consolidated Financial Statements.)
Financial Information About Industry Segments
- ---------------------------------------------
The Company has two segments: (1) a regulated natural gas transmission and
local distribution segment (LDC), and (2) an unregulated segment which
participates in energy related profit-making ventures. See Note 10 to the
Consolidated Financial Statements for financial information about 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 south-central 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.
<PAGE>4
Industrial activities in the service area are diverse. The Company serves
customers 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.
Following is a summary of regulated operating revenues (in 000's) by major
customer classification and nonregulated operating revenues for the years 1994
through 1998:
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Residential & Commercial $ 80,223 $ 80,270 $ 78,849 $ 51,841 $ 58,748
Municipalities for Resale 21,492 24,829 31,545 20,189 23,471
Industrial/electric power
generation 72,732 76,604 86,244 73,642 78,118
------ ------ ------ ------ ------
Total regulated revenues 174,447 181,703 196,638 145,672 160,337
Nonregulated Revenues 57,468 53,831 38,563 24,508 13,224
------ ------ ------ ------ ------
Total Revenues $ 231,915 $235,534 $235,201 $170,180 $173,561
------- -------- -------- -------- --------
------- -------- -------- -------- --------
The regulated revenues above 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, and related gross receipts
taxes.
The nonregulated revenues include gas marketing revenues from the Company's
marketing subsidiaries as well as the revenues from the Company's propane and
appliance sales and service divisions.
Regulated operating revenues declined to $174.7 million in 1998 from $181.7
million in 1997. While sales volumes remained flat in 1998 compared to 1997,
lower commodity gas prices included in the Company's rates contributed to the
decline in regulated revenues.
Nonregulated revenues increased to $57.9 million in 1998 from $53.8 million
in 1997 due to increased off-system sales by the Company's marketing subsidiary.
This was partially offset by lower propane revenues due to the lower commodity
cost of propane gas and lower revenues from the sale and service of appliances.
Regulated 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. Large industrial and municipal customers switch
from sales to transportation services when the utility's benchmark sales rate,
as approved by the North Carolina Utilities Commission (NCUC), is 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.
Nonregulated revenues increased to $53.8 million in 1997 from $38.6 million
in 1996 due to increased sales volumes of the Company's marketing subsidiary as
large customers switched from utility sales service to transportation service as
discussed in the preceding paragraph.
Regulated 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.
<PAGE>5
Nonregulated revenues increased to $38.6 million in 1996 compared to $24.5
million in 1995 due to increased off-system sales by the Company's marketing
subsidiary, increase sales by the Company's propane division due to customer
growth and an increase in the commodity cost of natural gas and propane.
Regulated 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 total throughput, together with customer growth which provided
additional facilities charges, somewhat offset the decline in revenues related
to lower gas sales.
Nonregulated revenues increased from $24.5 million in 1995 as compared to
$13.2 million in 1994 due to increased sales by the Company's marketing
subsidiaries as a result of a 225% increase in transportation volumes.
Natural gas supply -
During 1998 the Company received 7,865,000 dt of natural gas under its firm
sales contract with Transco. It purchased 21,113,000 dt in the spot market or
from other nontraditional sources, including long-term contracts with producers
or national gas marketers. The Company also transported 26,810,000 dt of
customer-owned gas in 1998. 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>6
The following table summarizes the supply sources which are under contract
or otherwise available to the Company as of November 1, 1998:
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
Firm Sales 11,871 (e)(f) 3,076,521 1999
Conoco, Inc. -
Firm Sales 10,000 (d)(f) 1,510,000 1999
Coral Energy Resources-
Firm Sales 25,000 (e)(f) 6,450,000 2000
Duke Energy Trading and Marketing LLC -
Firm Sales 10,000 (e)(f) 2,580,000 1999
Dynegy, Inc. -
Firm Sales 9,965 (d)(f) 1,504,715 1999
El Paso Energy Marketing Company -
Firm Sales 10,000 (e)(f) 2,580,000 1999
Exxon Company, U.S.A. -
Firm Sales 14,888 (f) 5,434,120 2003
NorAm Energy Services, Inc. -
Firm Sales 4,893 (e)(f) 1,785,945 1999
Sonat Marketing Company
Firm Sales 5,000 (d)(f) 755,000 1999
Southern Company Energy Marketing -
Firm Sales 10,000 (d)(f) 1,510,000 1999
LNG Plant (Company owned) 97,200 (h) 1,000,000 N/A
<PAGE>7
a) Quantities are shown in dekatherms (dt) (one dt equals 1,000,000 Btu or one
Mcf at 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. Service has continued
subsequent to contract expiration under provisions of Transco's FERC tariff.
FERC approval of abandonment would be required to terminate service.
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; Conoco, Inc.; Coral Energy Resources; Duke Energy Trading
and Marketing LLC; Dynegy, Inc.; El Paso Energy Marketing Company; Exxon
Company, U.S.A.; NorAm Energy Services, Inc.; Sonat Marketing Company; and
Southern Company Energy Marketing 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.
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. 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, 1998, 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 126,617 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.
<PAGE>8
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.
On July 28, 1998, the NCUC initiated a review to determine whether the
Company should be allowed to retain its exclusive franchise for seventeen
unserved counties in its service area, including three - Bertie, Martin and
Onslow - that are included in NCUC - approved expansion projects currently in
progress. Hearings were held December 7 and 8, 1998. The Company expects an
Order from the NCUC in February 1999. Management expects that the NCUC will
decide that the Company's exclusive franchise to serve some of these counties -
including the three named above - will be retained, and that losses, if any, of
exclusive franchise rights to serve the other unserved counties will not have a
material adverse impact on the Company because (1) none of the fourteen other
unserved counties are economically feasible to serve as they are rural or
coastal counties located far from existing pipelines and do not have significant
potential natural gas loads, and (2) the Company may reapply to serve such
counties using Expansion Funds or the newly-authorized Natural Gas Bond Funds,
to the extent such funds are available.
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, margins 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.
The Company normally injects gas into storage during periods of warm
weather and withdraws it during periods of cold weather. The storage and various
other contracts as shown on Pages 6 and 7 provide adequate daily supply to meet
the Company's peak-day requirements.
Short-term debt is used for the seasonal financing of stored gas
inventories and for the Company's ongoing construction program prior to
obtaining long-term financing. These loans, 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, 1998, $20.0 million in short-term debt was
outstanding compared to $15.0 million at September-30, 1997.
Unregulated Businesses -
The Company has four subsidiaries which are not regulated by the NCUC. See
Note 4 to the Consolidated Financial Statements.
<PAGE>9
In addition to the Company's subsidiaries, the Company operates a propane
division, which engages in the sale of propane to customers who do not have
access to natural gas. Sales of propane increased 5.3% to 6.9 million gallons in
1998 due to the addition of 1,000 new customers. Pretax income increased to
$1.25 million in Fiscal 1998 compared to $638,000 million in Fiscal 1997 due to
a 15% increase in gross margin on propane sales as a result of addition of
higher margin residential customers.
The Company also operates an appliance sales and service division which
sells, installs and maintains gas appliances. Sales of the appliance division
were $3.9 million in 1998 compared to $4.5 million in 1997. Sales decreased due
to increased competition from large retailers of appliances and a general
downturn in the home appliance market in 1998.
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
<PAGE>10
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 1998, winter weather was 19% warmer
than normal and, accordingly, the WNA increased net billings to customers by
$4.2 million.
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, 1997 was held in
April 1998. 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 1998, the
Company constructed the first 20-mile segment of 10-inch pipeline to Warsaw in
Duplin County; continued acquiring rights-of-way and performing necessary
environmental studies for the remainder of the route; and it is expected that
the project will be completed in late 1999. Also, the Company has filed with the
NCUC for another expansion project in Bertie and Martin Counties. The Company
received an order approving the project November 19, 1998. See Note 2 to the
Consolidated Financial Statements for a discussion of the Company's Expansion
Projects.
In July 1998, 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, 1998.
Because such volumes exceeded the base period amounts included in the 1995
general rate case, the Company recouped $46,000 in 1998 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 decreased to $3.0 million in
1998 compared to $3.2 million in 1997 due primarily to lower gas prices.
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.
<PAGE>11
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.
During 1998, approximately 71% 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 -
On January 13, 1998, the Company's Board of Directors approved a
three-for-two stock split in the form of a dividend effective February 20, 1998,
for stockholders of record January 26, 1998. All shares outstanding, as well as
per share information throughout this Form 10-K for all periods prior to the
effective date, have been adjusted to reflect the stock split.
Employees -
At September 30, 1998, the Company had 515 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, an employee savings plan 401(k),
provides a group life and extended hospital insurance program, and other
employee benefits, including an employee stock purchase plan.
<PAGE>12
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
Date Elected
Name and Age* Title An Officer
- --------------- ------------------------------ -----------
Calvin B. Wells Chairman, President and 09/11/74
Age - 62 Chief Executive Officer
Gerald A. Teele Senior Vice President, Treasurer and 01/08/80
Age - 54 Chief Financial Officer
Terrence D. Davis Senior Vice President - Operations and 01/07/91
Age - 53 Marketing
George M. Baldwin Vice President - Marketing 01/09/96
Age - 38
Ronald J. Josephson Vice President - Financial Services 04/17/96
Age - 40
E. J. Mercier, Jr. Vice President - Customer Service 09/07/77
Age - 60
John M. Monaghan, Jr. Vice President - Gas Supply 01/08/91
Age - 46 & Transportation
____________________________
* As of December 1, 1998
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 12, 1999, 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.
Item 2. Properties
- -------------------
The Company owns approximately 1,020 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 2,761 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 1998, the Company invested approximately $36.6 million in new
plant facilities. Approximately 6,000 natural gas and 1,000 propane residential
and small commercial customers were added along with several new industrial
customers. The Company has a liquefied
<PAGE>13
natural gas storage plant on its system to provide additional peak day gas
supply for future growth in customer demand.
Cape Fear Energy Corporation has 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, 1998, 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, 1998.
<PAGE>14
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 27, 1998: 4,710.
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 1998 and
1997, restated to reflect a 3-for-2 stock split effective February 20, 1998.
QUARTER Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31
ENDED 1998 1998 1998 1997 1997 1997 1997 1996
------- -------- -------- ------- ------- -------- ------- -------
COMMON
STOCK
PRICES -
High . . . $26.500 $27.000 $27.938 $23.292 $23.333 $22.250 $22.167 $20.917
Low . . . $23.063 22.250 $23.250 $20.500 $20.875 $19.667 $19.167 $18.667
Cash
dividends
per
share... $ .250 $ .250 $ .250 $ .233 $ .233 $ .233 $ .233 $ .217
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, 1998,
approximately $30.6 million of the Company's retained earnings was unrestricted.
See Note 8 to the Consolidated Financial Statements.
<PAGE 15>
Item 6. Selected Financial Data
- --------------------------------
Share and per share information has been restated to reflect a 3-for-2
stock split effective February 20, 1998.
Years Ended September 30,
- --------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Amounts in Thousands Except Per Share Data)
Operating
Revenues $231,915 $235,534 $235,201 $170,180 $173,561
Gross Margin 81,314 79,262 74,769 62,819 59,712
Net income 17,148 17,594 15,173 11,809 11,150
Earnings per share 1.70 1.77 1.55 1.23 1.17
Cash dividends declared
per share .983 .917 .853 .803 .76
Total assets 271,438 253,251 232,779 214,880 205,631
Net utility plant 225,139 203,560 184,434 178,796 164,843
Capital expenditures 36,652 30,500 15,831 22,581 20,756
Long-term debt 59,000 61,000 63,000 62,000 37,000
Common equity 123,201 113,223 101,958 92,778 86,399
Book value per
share $ 12.17 $ 11.32 $ 10.34 $ 9.55 $ 9.05
Average number
of common shares
outstanding 10,059 9,932 9,789 9,615 9,497
Rate of return
on average
common equity 14.51% 16.35% 15.58% 13.18% 13.33%
Item 7. Management's Discussion and Analysis of
- ------------------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
The Company
- -----------
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
south-central and eastern North Carolina. For the fiscal year ended September
30, 1998, NCNG had a peak number of approximately 162,000 natural gas customers.
The Company also has unregulated operations which include a propane division
with approximately 11,200 customers, an appliance sales division, as well as
subsidiaries which market gas to on-system and off-system customers. NCNG
continues to expand its transmission and distribution systems to keep pace with
the economic development and residential, commercial and industrial customer
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
On January 13, 1998, the Company's Board of Directors approved a
three-for-two stock split in the form of a 50% stock dividend effective February
20, 1998, for stockholders of
<PAGE>16
record January 26, 1998. All shares outstanding, as well as per share
information for all periods prior to the effective date, have been adjusted to
reflect the stock split.
NCNG earned $17.1 million or $1.70 per share in 1998, compared to
$17.6 million or $1.77 per share in 1997 and $15.2 million or $1.55 per share in
1996. Included in 1997 earnings is a nonrecurring after-tax credit of $0.11 per
share related to the settlement of a long- standing regulatory matter (see Note
2 to the Consolidated Financial Statements). Excluding the nonrecurring credit
of $0.11 per share, the 2.4% increase in earnings in 1998 compared to 1997 was
primarily due to (1) an increase in the residential and commercial customer base
of approximately 3%, which resulted in increased facilities charges as well as
increased sales; (2) higher volumes to firm service industrial and electric
power generation customers; (3) increased earnings from the Company's propane
division; and, (4) lower operations and maintenance expenses as a result of
increased cost control measures and 3% fewer employees.
The increase in earnings in 1997 compared to 1996 was due to (1) higher
industrial throughput volumes driven by customer growth and warmer-than-normal
weather which resulted in fewer curtailments of interruptible 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.
Throughput and Margin -
The weather for Fiscal 1998 was 19% warmer than normal and 2% cooler than
1997. The Company's total throughput volumes in 1998 decreased by 480,000 dt to
55.0 million dt. Commercial and residential volumes increased by 149,000 dt and
188,000 dt, respectively, while wholesale and industrial volumes decreased
223,000 dt and 594,000 dt, respectively. The overall decrease in throughput
volumes was due to decreased volumes to wholesale municipal customers as a
result of warmer-than-normal weather and lower throughput to interruptible
industrial customers resulting from some plant closings and low alternative fuel
prices, primarily #6 oil. This was offset by higher volumes to the residential
and commercial customer classes due to a customer growth rate of approximately
3% and increased volumes to firm service industrial customers.
NCNG continued adding natural gas customers at an above-average growth rate
in 1998. The addition of about 6,000 customers in 1998 represents a growth rate
of 3.5%, 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 per customer 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
$4.2 million of margin in 1998 compared to $2.9 million in 1997.
The following chart compares margins in fiscal years 1998 and 1997 by
customer class:
Margin
-------------------------------------------------
Increase (Decrease)
-------------------------------
Customer Class 1998 1997 Amount %
-------------- ---- ---- ------ -
(In Thousands)
Residential $26,184 $24,723 $ 1,461 5.9%
Commercial and Small
Industrial 16,102 15,000 1,102 7.4
Industrial & Electric
Power Generation 25,289 26,029 (740) (2.8)
Municipal (Wholesale) 7,533 7,454 79 1.1
Nonutility Operations 6,206 6,056 150 2.0
-------- -------- ------- -----
TOTAL $81,314 $79,262 $2,052 2.6%
-------- -------- ------- -----
-------- -------- ------- -----
The residential, commercial and small industrial and municipal margins
increased as compared to last year. The increase in customers, as well as the
effect of the WNA for these
<PAGE>17
customer classes as explained above, contributed to the margin growth.
Industrial and electric power generation margins decreased due to lower sales
volumes to alternative fuel customers due to low oil prices and the loss of
three industrial customers due to plant closings. However, loss in volumes to
these customers was somewhat offset by a 130% increase in volumes to electric
generation customers due to warmer-than-normal weather during the summer months.
Nonutility margin increased due to an increase of 1,000 new propane customers
and weather which was 2% cooler than 1997, higher margins from the Company's
marketing subsidiary, offset by lower appliance sales, and other subsidiary
income.
The Company's total margin growth in 1997 was $4.5 million, and NCNG's
total throughput in 1997 increased 2.4 million dt, or 4.5% to 55.5 million dt.
These increases were caused primarily by (1) customer growth; (2) higher
throughput volumes because of the addition of new customers, higher production
levels and less curtailment of interruptible industrial customers; and (3) hot
summer weather which led to increased deliveries of gas to electric generators.
Municipal margins decreased due to warmer-than-normal winter weather, and the
loss of one large industrial customer served by one of the cities. Nonutility
margins decreased due to lower propane margins as a result of warmer-than-normal
winter weather.
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.
In 1998, NCNG's transportation service volumes were down slightly to 26.8
million dt compared to 26.9 million dt in 1997. However, transportation volumes
in 1997 increased 14.0 million dt from 12.9 million dt in 1996. Sales volumes
for 1998 were also down slightly to 28.1 million dt compared to 28.5 million dt
in 1997. 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. 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 companion
sales rate. In addition, the Company indirectly earns additional margin from
transportation customers who choose to purchase gas from the Company's marketing
subsidiary. The Company's operating revenues and cost of sales include both the
regulated and unregulated business of the Company and its subsidiaries. (See
Note 10 to the Consolidated Financial Statements.)
In 1998, the Company's operating revenues and cost of sales decreased
$3.6 million and $5.7 million, respectively, primarily due to lower throughput
volumes and a 7% decrease in the average cost of gas.
Operating revenues increased slightly in 1997 over 1996 due to higher
throughput volumes. Gas costs decreased $4.2 million in 1997 due to an average
increase of 14.7% in the commodity price of gas which led to an increase in
transportation volumes of gas supplied by unaffiliated gas marketers.
Operating Expenses -
NCNG's total operating expenses, excluding the cost of gas sold, increased
to $48.9 million in 1998, compared to $48.2 million in 1997 and $44.9 million in
1996. As a percentage of margin, the 1998 amount was 60.2%, down slightly from
60.8% in 1997, and up from 60.1% in 1996. Operations and maintenance expenses
decreased to $28.8 million in 1998, compared to $29.5 million in 1997, but
increased from $26.4 million in 1996. The decrease in 1998 was due in part to
lower power costs for liquefaction at the Company's LNG Plant due to
warmer-than- normal weather. This resulted in higher liquefied natural gas
inventory levels at the end of the
<PAGE>18
1998 winter season. Also, distribution expenses were lower due primarily to a 3%
reduction in employees in 1998 compared to 1997. Three small customer service
offices were closed in the fourth quarter of Fiscal 1998. These savings were
somewhat offset due to higher customer collection and meter reading expenses.
Operations and maintenance expenses were higher in 1997 compared to 1996 due to
increased customer collections expense, including an increase in the provision
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 growing customer base.
The Company's depreciation rates must be approved by the NCUC. The
Company's composite depreciation rate was 3.7% for 1998 compared to 3.5% in 1997
and 1996. In 1998, depreciation expense increased in line with the increase in
depreciable plant related to customer growth, system strengthening and
information systems upgrades.
Other Income (Expense), decreased to $134,000 for 1998 compared to
$2.0 million in 1997. This decrease is due to a $1.9 million nonrecurring credit
in 1997 as a result of the settlement of the long-standing regulatory matter.
(See Note 2 of the Consolidated Financial Statements.)
AFUDC increased to $1.2 million in 1998 from $1.1 million in 1997 in line
with increased levels of construction spending and long-term expansion projects
not completed at September 30, 1998. AFUDC increased to $1.1 million in 1997
from $302,000 in 1996 due to an increase of approximately 100% in construction
spending compared to 1996.
Liquidity and Capital Resources -
The Company has bank lines of credit totaling $51.0 million, including
$36.0 million on a committed basis. At September 30, 1998, $20.0 million was
outstanding at an interest rate of 5.62%, compared to outstanding borrowings of
$15.0 million with an interest rate of 5.87% at September 30, 1997. The increase
of $5.0 million was due to increased capital expenditures in 1998.
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, net of monies received from the Expansion Fund,
of $33.0 million in 1998 were higher than 1997 by $3.0 million. This was due
primarily to preliminary work done on the Duplin/Onslow County Expansion
Project, significant additional system- strengthening projects, information
technology costs and an additional compressor at the Monroe Compressor Station.
This spending was partially offset by the receipt of $3.7 million and $455,000
from the Expansion Fund for 1998 and 1997, respectively. The Company has
budgeted for Fiscal 1999 construction expenditures of $67.7 million before
receipt of $11.8 million from the Expansion Fund, including approximately $16.9
million for the Duplin/Onslow Expansion Project, approximately $24.7 million for
system strengthening, compressors and related projects, $11.6 million for new
customer growth and $4.3 million on a new expansion project in Martin and Bertie
Counties. The estimated cost of the Duplin/Onslow Expansion Project has
increased to $24.2 million from the original estimate of $18.8 million. This
increase is due to delays and construction changes related to environmental
issues on the project. The Company has received approval to use an additional
$4.2 million from the Expansion Fund to cover the incremental increase in costs
of the project
The Company's ratio of long term debt to total capitalization was 33.1% at
September 30, 1998, down from 35.7% at September 30, 1997, due to a long-term
debt sinking fund
<PAGE>19
payment of $2.0 million and an increase in stockholders' investment of $10.0
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 1999. In 1999,
the Company expects to raise approximately $2.9 million of additional equity
from its Dividend Reinvestment Plan and its Employee Stock Purchase Plan. Common
equity realized from such sources totaled $2.7 million in 1998 and $2.8 million
in 1997. The Company expects to issue long-term debt to replace short-term
borrowings in 1999.
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 (MGP) 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.
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 1998.
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 Investment Corporation (Cardinal
Pipeline Investment). Pine Needle Investment is a 5% equity owner in Pine Needle
<PAGE>20
LNG Company, LLC, which owns the site and is building and plans to operate a 4
Bcf liquefied natural gas (LNG) plant 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. In addition, the Company has filed with the NCUC
for another expansion project in Bertie and Martin Counties. The Company
received an order approving this project on November 19, 1998. (See note 2 to
the Consolidated Financial Statements.)
Year 2000
- ---------
The Year 2000 issue exists because many computer systems and applications
use two-digit 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 began
evaluation of this problem in 1995. The Company has assessed and identified
internal software and hardware components in both information technology and
noninformation-technology applications. As a result of this assessment, the
Company decided to accelerate the planned replacement of all critical systems
with new software, and in some cases hardware, which is Year 2000 compliant.
Existing non-Year 2000 compliant systems have been or will continue to be
replaced as the new systems are installed. All work will be completed in
mid-calendar 1999. The estimated cost of replacement, including costs incurred
to date, is $6.5 million. The cost of completion and projected completion dates
are estimates, which are derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third-party
vendor compliance and other factors. The Company is capitalizing some costs and
expensing certain costs in accordance with current accounting standards. NCNG
considers these costs to be prudent costs incurred in the ordinary course of
business and, therefore, recoverable through rates.
The Company's Year 2000 plan includes an assessment of critical suppliers,
vendors and major customers to determine the readiness of their Year 2000 plans.
While the Company has monitored and will continue to monitor supplier and vendor
progress on this issue, the Company does not control third-party Year 2000
remediation plans and cannot guarantee all third parties will be Year 2000
compliant. The Company cannot quantify at this time the impact of the failure of
one or more suppliers to deliver critical supplies and services. The Company is
also in the process of establishing a contingency plan and expects to have it
completed by the end of Fiscal 1999.
Proposed Merger
- ---------------
On November 10, 1998, the Company and Carolina Power & Light Company
("CP&L"), a North Carolina corporation, entered into an Agreement and Plan of
Merger providing for a strategic business combination of the Company and CP&L.
(See Note 11 to the Consolidated Financial Statements.)
<PAGE>21
Forward-Looking Statements
- --------------------------
Statements made herein and elsewhere in this report which are not
historical in fact are forward-looking statements. In connection with the "Safe
Harbor" provisions of the Private Securities 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, 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, successful
consummation of the proposed merger and other uncertainties, all of which are
difficult to predict, and most of which are beyond the control of the Company.
<PAGE>22
Item 8. Financial Statements and Supplementary Data
NORTH CAROLINA NATURAL GAS CORPORATION
AND SUBSIDIARIES
FINANCIAL STATEMENTS
(in thousands)
Consolidated Balance Sheets
as of September 30, 1998 1997
------------------- -------------------
Assets
GAS UTILITY PLANT:
In service $322,595 $303,652
Less - Accumulated depreciation
and amortization 115,181 104,268
------------------- -------------------
207,414 199,384
Construction work in progress 17,725 4,176
------------------- -------------------
225,139 203,560
------------------- -------------------
INVESTMENTS:
Nonutility property, less
accumulated depreciation
(1998, $2,687; 1997, $2,504) 4,966 4,240
Investment in joint ventures, net of
accumulated depletion and amortization
(1998, $3,062; 1997, $3,060) 81 301
------------------- -------------------
5,047 4,541
------------------- -------------------
CURRENT ASSETS:
Cash and temporary cash investments 2,042 962
Restricted cash and temporary cash
investments 4,745 4,606
Accounts receivable, less allowance for doubtful
accounts (1998, $777; 1997, $564) 14,011 17,359
Recoverable purchased gas costs - 1,020
Inventories, at average cost --
Gas in storage 8,243 8,799
Materials and supplies 6,417 3,386
Merchandise 1,584 1,351
Prepaid income taxes - 4,521
Deferred gas cost - unbilled volumes 618 647
Prepaid expenses and other 840 339
------------------- -------------------
38,500 42,990
------------------- -------------------
DEFERRED CHARGES AND OTHER:
Debt discount and expense, being
amortized over
lives of related debt 357 393
Prepaid pension cost 1,851 1,390
Other 544 377
------------------- -------------------
2,752 2,160
------------------- -------------------
$271,438 $253,251
=================== ===================
(The accompanying notes are an integral part of these financial statements.)
<PAGE>23
NORTH CAROLINA NATURAL GAS CORPORATION
AND SUBSIDIARIES
FINANCIAL STATEMENTS
(in thousands)
Stockholders' Investment and Liabilities
as of September 30 1998 1997
------------------ -------------------
CAPITALIZATION (see accompanying statements):
Stockholders' investment $123,201 $113,223
Long-term debt 59,000 61,000
------------------ -------------------
182,201 174,223
------------------ -------------------
CURRENT LIABILITIES:
Current maturities of long-term debt 2,000 2,000
Notes payable 20,000 15,000
Accounts payable 15,964 16,561
Customer deposits 2,038 2,081
Restricted supplier refunds 4,745 4,606
Accrued interest 2,103 2,294
Refunds payable 1,930 -
Accrued income and other taxes 2,623 1,839
Other 3,261 2,599
------------------ -------------------
54,664 46,980
------------------ -------------------
COMMITMENTS AND CONTINGENCIES (Note 9)
OTHER CREDITS:
Deferred income taxes 23,440 22,957
Regulatory liability related to income
taxes, net 1,871 2,028
Unamortized investment tax credits 2,328 2,524
Postretirement and postemployment
benefit liability 3,278 2,979
Long-term incentive compensation
and directors' retirement obligations 1,593 535
Other 2,063 1,025
------------------ -------------------
34,573 32,048
------------------ -------------------
$271,438 $253,251
================== ===================
(The accompanying notes are an integral part of these financial statements.)
<PAGE>24
NORTH CAROLINA NATURAL GAS CORPORATION
AND SUBSIDIARIES
FINANCIAL STATEMENTS
(in thousands except per share amounts)
Consolidated Statements of Income
For the Years Ended September 30,
1998 1997 1996
------------------ ---------------- ---------------
OPERATING REVENUES (Note 10) $231,915 $235,534 $235,201
COST OF SALES 150,601 156,272 160,432
------------------ ---------------- ---------------
GROSS MARGIN 81,314 79,262 74,769
------------------ ---------------- ---------------
OPERATING EXPENSES:
Operations 25,062 25,392 22,968
Maintenance 3,740 4,081 3,448
Depreciation 11,567 10,286 9,631
General taxes 8,557 8,461 8,882
------------------ ---------------- ---------------
TOTAL OPERATING EXPENSES 48,926 48,220 44,929
------------------ ---------------- ---------------
OPERATING INCOME 32,388 31,042 29,840
OTHER INCOME (EXPENSE) (Note 2) 133 1,962 (190)
------------------ ---------------- ---------------
INCOME BEFORE INTEREST AND TAXES 32,521 33,004 29,650
------------------ ---------------- ---------------
INTEREST CHARGES:
Interest on long-term debt 5,096 5,278 5,215
Other interest 1,196 459 328
Amortization of debt discount
and expense 36 36 35
Allowance for funds used
during construction (1,248) (1,087) (302)
------------------ ---------------- ---------------
TOTAL INTEREST CHARGES 5,080 4,686 5,276
------------------ ---------------- ---------------
NET INCOME BEFORE TAXES 27,441 28,318 24,374
------------------ ---------------- ---------------
INCOME TAXES
Federal 8,241 8,549 7,301
State 2,052 2,175 1,900
------------------ ---------------- ---------------
NET INCOME $17,148 $17,594 $15,173
================== ================ ===============
AVERAGE COMMON SHARES
OUTSTANDING 10,059 9,932 9,789
BASIC EARNINGS PER SHARE
(Notes 1, 2, and 8) $1.70 $1.77 $1.55
================== ================ ===============
DILUTED EARNINGS PER SHARE
(Notes 1,2, and 8) $1.70 $1.77 $1.55
================== ================ ===============
(The accompanying notes are an integral part of these financial statements.)
<PAGE>25
NORTH CAROLINA NATURAL GAS CORPORATION
AND SUBSIDIARIES
FINANCIAL STATEMENTS
(in thousands)
Consolidated Statements of Cash Flows
For the Years Ended September 30,
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $17,148 $17,594 $15,173
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation 11,567 10,286 9,631
Amortization of deferred
charges 38 38 38
Deferred income taxes 483 1,694 432
Investment tax credits (196) (196) (200)
Other (319) 57 21
Changes in other current assets
and liabilities:
Accounts receivable, net 3,348 (58) (4,350)
Gas in storage 556 1,184 (2,775)
Materials, supplies and
merchandise (5,130) (1,095) (351)
Prepaid income taxes 4,521 (4,521) -
Accounts payable 25 584 3,949
Refunds payable and
recoverable purchased
gas costs 3,089 1,132 (5,977)
Accrued income and other
taxes 315 (2,441) 2,410
Other 2,562 1,521 (121)
--------- --------- ---------
Net cash provided by operating
activities 38,007 25,779 17,880
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (36,652) (30,500) (15,831)
Proceeds from Expansion Fund 3,675 455 -
Proceeds from sale of property - - 60
Other, net 219 440 (459)
--------- --------- ---------
Net cash used in investing
activities (32,758) (29,605) (16,230)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable,
net 5,000 12,000 3,000
Issuance of long-term debt,
net of issuance costs - - 29,821
Retirement of long-term debt (2,000) (2,000) (2,000)
Retirement of short-term
obligations to be refinanced - - (27,000)
Cash dividends paid (9,890) (9,104) (8,354)
Issuance of common stock
through dividend reinvestment
plan, employee stock purchase
plan
and key employee stock option
plan 2,721 2,775 2,361
--------- --------- --------
Net cash (used in) provided by
financing activities (4,169) 3,671 (2,172)
--------- --------- --------
Net increase (decrease) in cash
and temporary cash investments 1,080 (155) (522)
Cash and temporary cash
investments, beginning of year 962 1,117 1,639
--------- --------- --------
Cash and temporary cash
investments, end of year $2,042 $962 $1,117
========= ========= ========
Cash paid for:
Interest (net of amounts
capitalized) $6,022 $5,377 $4,721
Income taxes (net of
refunds) 4,820 16,136 7,226
(The accompanying notes are an integral part of these financial statements.)
<PAGE>26
NORTH CAROLINA NATURAL GAS CORPORATION
AND SUBSIDIARIES
FINANCIAL STATEMENTS
(in thousands)
Consolidated Statements of Capitalization
as of September 30, 1998 1997
---------------- ----------------
STOCKHOLDERS' INVESTMENT:
Common stock, par value $2.50;
24,000 shares authorized;
shares outstanding:
1998-10,125
1997-6,667 (Note 8) $25,312 $16,669
Capital in excess of par value 34,625 32,173
Retained earnings 63,264 64,381
---------------- ---------------
Total stockholders' investment 123,201 113,223
---------------- ----------------
LONG-TERM DEBT:
Debentures, 8.75% Series B,
due June 15, 2001 6,000 8,000
Debentures, 9.21% Series C,
due November 15, 2011 25,000 25,000
Senior Notes, 7.15%,
due November 15, 2015 30,000 30,000
---------------- ----------------
61,000 63,000
Less - Current maturities (2,000) (2,000)
---------------- ----------------
Total long-term debt 59,000 61,000
---------------- ----------------
TOTAL CAPITALIZATION $182,201 $174,223
================ =================
CAPITALIZATION RATIOS:
Stockholders' investment 66.9% 64.3%
Long-term debt (including current
maturities) 33.1% 35.7%
---------------- ----------------
100.0% 100.0%
================ =================
(The accompanying notes are an integral part of these financial statements.)
<PAGE>27
NORTH CAROLINA NATURAL GAS CORPORATION
AND SUBSIDIARIES
FINANCIAL STATEMENTS
(in thousands)
Consolidated Statements of Retained Earnings
For the Years Ended September 30, 1998 1997 1996
------------- -------------- ------------
BALANCE AT BEGINNING OF YEAR $64,381 $55,891 $49,072
Net income 17,148 17,594 15,173
Cash dividends on common stock
(per share - $.983 in 1998;
$.917 in 1997; $.853 in 1996) (9,890) (9,104) (8,354)
Stock split effected in the form
of a stock dividend (Note 8) (8,375) - -
------------- -------------- -------------
BALANCE AT END OF YEAR $63,264 $64,381 $55,891
============= ============== =============
(The accompanying notes are an integral part of these financial statements.)
<PAGE>28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1998)
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 173,000
customers in southcentral and eastern North Carolina. The Company's primary
business is the sale and/or transportation of natural gas to over 101,000
residential customers, over 13,500 commercial and agricultural customers, 457
industrial and electric utility customers located in 86 towns and cities and
four municipal gas distribution systems which serve over 46,900 end users. For
the year ended September 30, 1998, approximately 63% of the natural gas volumes
were delivered to industrial and electric utility customers but no individual
customer accounted for more than 7% of the Company's delivered gas volumes,
revenues or margin. 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 11,200 customers and sells and services gas
appliances.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, 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. The composite depreciation rate was approximately
3.7% of the cost of total depreciable property in 1998; and 3.5% in 1997 and
1996.
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.
<PAGE>29
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. At September 30, 1998, the refunds
received plus accrued interest, which had not been remitted to the NCUC,
amounted to $4.7 million and are reported on the accompanying consolidated
balance sheet in restricted cash and temporary cash investments and restricted
supplier refunds. The Company has received payments of $3.7 million and $455,000
for the twelve months ended September 30, 1998 and 1997, respectively, from the
Expansion Fund related to the Mount Olive/Jacksonville expansion (Note 2). At
September 30, 1998, $14.0 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. In
July 1998, the Company filed with the NCUC to transfer $4.1 million to the Fund.
In November 1998, the request for transfer was approved and transferred to the
Fund. Amounts remitted to the NCUC through September 30, 1998 are not included
in the Company's financial statements because they are no longer controlled by
the Company.
In the November 1998 elections, voters approved a $200 million bond
referendum providing grants, loans or other financing to natural gas local
distribution companies or other entities to extend natural gas to unserved
territories. The Company plans to seek monies from the bonds for future
projects.
Reclassifications -
- -------------------
Certain amounts in the 1997 and 1996 consolidated financial statements have
been reclassified to conform with the current year presentation.
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, 1998 is approximately $68.3 million as compared to a carrying
value of $61.0 million, and at September 30, 1997, the estimated fair value was
approximately $67.0 million as compared to a carrying value of $63.0 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
<PAGE>30
instruments as reflected in the accompanying consolidated balance sheets
approximates fair market value.
Earnings Per Share -
- --------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No.-128, "Earnings Per Share." SFAS No. 128 requires the Company to change
the method used to compute earnings per share (EPS). Primary EPS has been
replaced with Basic EPS. Under the new requirement for calculating Basic EPS,
the dilutive effect of stock options has been excluded. SFAS No. 128 also
replaced fully diluted EPS with diluted EPS. Diluted EPS gives effect to all
dilutive potential common shares that were outstanding during the period.
New Accounting Pronouncements -
- -------------------------------
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. The Company will adopt SFAS No. 130 on October 1,
1998 and does not expect the adoption to have a material impact on the Company's
financial statements. SFAS No. 131 introduces a new model for segment reporting
based on the way senior management organizes segments within the Company for
making operating decisions and assessing performance. The Company has adopted
SFAS No. 131 in the current fiscal year (See Note 10).
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits". SFAS No. 132 is an amendment
of FASB Statements No. 87, "Employers' Accounting for Pensions", No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", and No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions". SFAS No. 132 requires
additional disclosures of the changes in the benefit obligation and plan assets
during the period, including economic events during the period. Economic events
include amendments, combinations, divestitures, curtailments and settlements.
This statement is effective for fiscal years beginning after December 15, 1997.
The Company adopted this standard October 1, 1998 and does not expect the
adoption to have a material effect on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. This statement is effective for fiscal years beginning after June 15,
1999. The Company will adopt this standard October 1, 1999. The impact on the
Company's financial statements is not determinable at this time.
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.
<PAGE>31
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 1998, winter weather was 19% warmer than normal
and, accordingly, the WNA increased net billings to customers by $4.2 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 $461,000 for Fiscal
1998.
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.
In May 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. In February 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
$.11 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 1998,
the Company constructed the first 20-mile segment of 10-inch pipeline to Warsaw
in Duplin County; continued to acquire rights-of-way and perform necessary
environmental studies for the remainder of the route; and it is expected that
the project will be completed in late calendar year 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 was to provide $12.4
million based on the original economic feasibility analysis provided to, and
approved by, the NCUC. In November 1997, the Company applied to the NCUC to
request an additional $4.3 million from the Expansion Fund to cover the
increased costs. In August 1998, the NCUC granted an additional $4.2 million of
Expansion Fund monies to be used for this project.
In April 1998, the Company filed an application with the NCUC to extend its
pipeline 38-miles to provide natural gas service to Bertie and Martin Counties
using the Fund. In July 1998, the Company filed an amendment to extend this
project an additional six miles to Robersonville in Martin County. The amended
main extension project would run approximately 44 miles from Ahoskie to
Robersonville and cost $12.6 million. The negative net present value of the
project requested from the Fund is $7.5-million. Hearings were held in
September, and a Commission Order is expected in November 1998.
The NCUC's annual review of the Company's gas costs for the 12 months ended
October 31, 1997, was held in April 1998. 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
<PAGE>32
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,
----------------------------------------------------------
----------------------------------------------------------
1998 1997 1996
----------------------------------------------------------
Federal State Federal State Federal State
------- ----- ------- ----- ------- -----
Income taxes charged
to operations-
Payable currently-- $7,627 $1,630 $6,833 $1,658 $6,741 $1,656
Deferred to
subsequent years.. 249 77 783 249 (12) 59
Amortization of
investment tax
credits.. (195) -- (194) -- (198) --
------- ----- ------- ----- ------- -----
$7,681 $1,707 $7,422 $1,907 $6,531 $1,715
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
Income taxes
charged to
nonutility
operations........ $ 560 $ 345 $1,127 $ 268 $ 770 $ 185
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
Total................ $8,241 $2,052 $8,549 $2,175 $7,301 $1,900
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
The effective income tax rate, computed by dividing total income tax
expense by the sum of such income tax expense and net income, was 37.5% in 1998
and 37.9% in 1997 and 1996.
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,
------------------------------------
1998 1997 1996
------------------------------------
Federal taxes at 35% statutory rate----- $ 9,604 $ 9,910 $ 8,546
State income taxes, net of federal
benefit------------------------------- 1,334 1,413 1,241
Amortization of investment tax credits-- (196) (196) (200)
Amortization of excess deferred income
taxes returned to customers----------- (369) (222) (222)
Tax effect of allowance for funds
used during construction - equity
portion------------------------------- (437) (240) (66)
Other----------------------------------- 357 59 (98)
------- ------- -------
Total income tax expense---------------- $10,293 $10,724 $ 9,201
------- ------- -------
------- ------- -------
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>33
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 income tax assets and liabilities are as
follows (in thousands):
For the years ended September 30,
-------------------------------
1998 1997
-------------------------------
Deferred tax liabilities:
Accelerated depreciation------------- $25,735 $24,446
Property basis differences----------- 4,184 3,872
Other ------------------------------- 1,017 930
----------- -----------
Total deferred tax liabilities------- $30,936 $29,248
----------- -----------
----------- -----------
Deferred tax assets:
Unamortized investment tax credits--- $ 932 $ 1,009
Regulatory liability related to
income taxes, net------------------ 811 749
Other postretirement benefits-------- 1,204 1,085
Environmental reserves--------------- 410 410
Unbilled volumes--------------------- 1,080 403
Other-------------------------------- 3,059 2,635
----------- -----------
Total deferred tax assets------------- $ 7,496 $ 6,291
----------- -----------
Net deferred income tax liabilities----- $23,440 $22,957
----------- -----------
----------- -----------
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 by May 1, 1999. Transco
has two subsidiaries, one of which acts 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. NCNG has contracted for 400,000 dt, or
10%, of Pine Needle's capacity.
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, known as Cardinal Extension
Company, LLC (Cardinal Extension) 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 June 1998, Cardinal Extension
obtained construction financing for the project and all advances made by
Cardinal Pipeline Investment were returned. Cardinal Pipeline Investment owns a
5% interest in Cardinal Extension. NCNG has contracted for 40,000 dt per day of
firm capacity on the Cardinal Pipeline beginning November 1, 1999.
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
<PAGE>34
projects were transferred to Pine Needle Investment and Cardinal Pipeline
Investment, respectively, in June 1997. Energy is used for other energy-related
investments and sales to natural gas resellers.
Cape Fear Energy Corporation's (Cape Fear) primary activity is natural gas
marketing for industrial and municipal customers located on NCNG's system. Cape
Fear's earnings increased to $334,000 in Fiscal 1998 from $276,000 in Fiscal
1997.
NCNG Exploration Corporation's (Exploration) interests in all of its
exploration and development programs were sold effective June 7, 1994. On
October 1, 1997, all marketing activities in Exploration ceased and the company
was liquidated. The gas marketing activities to gas resellers are being
conducted by Energy.
5. Short-Term Borrowing Arrangements:
The Company has lines of credit with North Carolina banks for an aggregate
amount of $51.0 million of which $36.0 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 or less. At
September 30, 1998, $20.0 million was outstanding under lines of credit at an
interest rate of 5.62%.
In connection with the lines of credit, there are nominal commitment fees
on the unused lines of credit.
6. Long-Term Debt Maturities:
As of September 30, 1998, scheduled maturities of existing long-term debt
during each of the next five fiscal years are as follows: 1999, $2.00 million;
2000, $3.25 million; 2001, $3.25 million; 2002, $1.25 million and 2003, $1.25
million.
<PAGE>35
7. Pension, Postretirement, Postemployment, and Other 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 $377,000 in 1998, $596,000 in 1997, and $386,000
in 1996, of which approximately 20% was capitalized in each year.
The plan's funded status as of September 30, 1998 and 1997 and pension
costs for 1998, 1997 and 1996 were as follows (in thousands):
Funded Status: 1998 1997
---- ----
Actuarial present value of accumulated plan benefits:
Vested...................................... $24,252 $18,572
Nonvested................................... 176 92
--------- -------
Subtotal.................................... 24,428 18,664
Effect of salary progression..................... 3,130 5,234
--------- -------
Projected benefit obligation..................... 27,558 23,898
Plan assets at market value...................... 28,949 27,660
--------- -------
Plan assets in excess of projected benefit
obligation..................................... 1,391 3,762
Unrecognized prior service cost being amortized
over twelve years............................ 442 508
Unrecognized net gain (loss) being amortized
over ten years............................... 18 (2,880)
--------- -------
Prepaid pension cost............................. $ 1,851 $ 1,390
--------- -------
--------- -------
Pension Cost: 1998 1997 1996
--------- -------- --------
Net pension cost was comprised of the
following items:
Service cost-------------------------- $ 859 $ 832 $ 731
Interest cost on projected benefit
obligation-------------------------- 1,716 1,738 1,528
Actual return on plan assets---------- (1,754) (4,968) (1,681)
Amortization of unrecognized prior
service cost------------------------ 66 66 66
Amortization of transition net
asset------------------------------- - (214) (258)
Deferred gain (loss) on net assets---- (510) 3,142 -
--------- -------- --------
Net pension cost $ 377 $ 596 $ 386
--------- -------- --------
--------- -------- --------
For the year ended September 30, 1998, the expected long-term rate of
return on plan assets was 8%. At September 30, 1998, plan assets were invested
approximately 59% in fixed income securities and 41% 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>36
The following tables show the funded status of the plan as of September 30,
1998 and 1997, and the components of the plan's net costs (in thousands) for
fiscal years 1998, 1997 and 1996:
Funded Status: 1998 1997
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Retirees and dependents -------------------- $2,900 $2,581
Employees eligible to retire---------------- 1,258 1,530
Other employees----------------------------- 2,602 2,844
------ ------
Accumulated benefit obligation:------------------ 6,760 6,955
Unrecognized net gain (loss)---------------- 88 (305)
Unrecognized transition obligation---------- (3,552) (3,789)
------ ------
Postretirement benefit liability----------------- $3,296 $2,861
------ ------
------ ------
Components of Net Cost: 1998 1997 1996
- --------------------------------------------------------------------------------
Service cost during the year------------ $ 185 $ 179 $ 164
Interest cost on accumulated benefit
obligation---------------------------- 479 509 439
Amortization of unrecognized transition
obligation over 20 years-------------- 231 235 237
------- -------- ---------
Net periodic postretirement benefit
cost----------------------------------- $ 895 $ 923 $ 840
------- -------- ---------
------- -------- ---------
Of the net postretirement medical and life insurance costs recorded in 1998
and 1997, $730,000 and $757,000, 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 6.5% and 4%, respectively, as of
September 30, 1998 and 1997.
An additional assumption used in measuring the accumulated postretirement
medical benefit obligation as of September 30, 1998 was a medical care cost
trend rate of 9.0%, decreasing gradually to 4.5% through the year 2006 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, 1998, by approximately $1.3 million and the
aggregate of the service and interest cost components of the net retiree medical
cost by approximately $145,000.
In April 1998, the Company adopted an employee savings plan which qualifies
under Section 401(k) of the Internal Revenue Code. Participating employees may
defer up to 15% of pretax salary, but not more than statutory limits. The
Company contributes fifty cents for each dollar a participant contributes, with
a maximum contribution of 3% of a participant's earnings. Matching contributions
were $109,000 in 1998.
<PAGE>37
8. Stockholders' Investment:
On January 13, 1998, the Company's Board of Directors approved a
three-for-two stock split in the form of a dividend effective February 20, 1998,
for stockholders of record January 26, 1998. All shares outstanding, as well as
per share information for all periods prior to the effective date, have been
adjusted to reflect the stock split.
The changes in common stock and capital in excess of par value for the
three years ended September 30, 1998, were as follows (in thousands):
Common Stock
-----------------------------------
Capital in
Shares Excess of
Outstanding Amount Par Value
Balance at September 30, 1995------ 6,477 $16,193 $27,513
Issuance through Dividend
Reinvestment Plan (DRP)---------- 66 166 1,513
Issuance through Employee
Stock Purchase Plan (ESPP)------- 13 32 221
Issuance through Key Employee
Stock Option Plan (KESOP)-------- 16 41 388
------ ------ ------
Balance at September 30, 1996------ 6,572 16,432 29,635
Issuance through DRP--------------- 63 158 1,743
Issuance through ESPP-------------- 13 32 263
Issuance through KESOP-------------. 19 47 532
------ ------ ------
Balance at September 30, 1997------ 6,667 16,669 32,173
Issuance through DRP--------------- 93 231 2,086
Issuance through ESPP-------------- 12 29 274
Issuance through KESOP------------- 3 8 92
Issuance through Stock Dividend---- 3,350 8,375 --
------ ------ ------
------ ------ ------
Balance at September 30, 1998------ 10,125 $25,312 $34,625
------ ------ ------
------ ------ ------
At September 30, 1998, there are 352,422 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
$30.6 million of the Company's retained earnings at September 30, 1998 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 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, 1998, 305,187
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. In Fiscal 1998, the Board of Directors canceled all shares available for
grant under the key employee nonqualified stock option plan.
<PAGE>38
Option activity for the three years ended September 30, 1998, is as follows
(restated to reflect a three-for-two stock split in the form of a stock dividend
effective February 20, 1998):
Options Option Price
Outstanding Per Share
-------------------------------------
Balance at September 30, 1995------ 60,600 $9.20-$16.65
Exercised--------------------- (24,525) $ 9.20
---------
Balance at September 30, 1996------ 36,075 $9.20-$16.65
Exercised--------------------- (27,900) $9.20-$ 9.40
---------
Balance at September 30, 1997------ 8,175 $9.40-$16.65
Exercised--------------------- (4,275) $ 9.40
---------
Balance at September 30, 1998 3,900 $16.65
---------
---------
---------------------------------
1998 1997 1996
---------------------------------
Options exercisable at year end--------------- -- 2,850 21,450
Options available for grant at year end------- -- 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, 1998, 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,
1998, 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, 1998.
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
<PAGE>39
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).
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.
10. Operating Segments:
NCNG adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," during the fourth quarter of Fiscal 1998. SFAS No. 131
established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. NCNG's chief
operating decision group is the Company's senior executive management team which
is comprised of the President and Chief Executive Officer, Senior Vice
Presidents and Vice Presidents of each department.
The Company has two segments: (1) a regulated natural gas transmission and
local distribution segment (LDC), and (2) an unregulated segment which
participates in related profit- making ventures. The customers of the regulated
LDC include residential, commercial, industrial, electric generation, and
wholesale classes. The unregulated segment consists of natural gas marketing
(see Note 4), propane sales and appliance sales and services. The customers of
the natural gas marketing subsidiaries are industrial, wholesale and electric
generation classes. The unregulated propane business delivers and sells propane
to residential, commercial and small industrial customers. The appliance sales
and services business sells primarily to the residential and commercial customer
classes. The Company operates in a single geographic area of south-central and
eastern North Carolina.
The segments follow the same accounting policies as described in the
Summary of Significant Accounting Policies and Principles of Consolidation.
Because the Company earns full margins on the transportation of natural gas in
its regulated segment, management evaluates the performance of the unregulated
natural gas marketing subsidiaries based on the additional margin added from
their sales and their ability to maintain contact with customers who choose to
transport on the regulated LDC's system. The Company evaluates the performance
of the propane business and the appliance sales and service operations based on
each unit's ability to earn a required rate of return on investment, as
determined by the senior executive management team, and their ability to add
regulated natural gas and unregulated propane gas customers through conversion
of electric heat pumps, water heaters and other appliances to natural gas or
propane systems. Operating expenses, taxes and interest are allocated to the
unregulated segment in accordance with NCUC guidelines.
<PAGE>40
The following table reconciles reportable segment revenues and expenses for
the twelve months ended September 30 (in thousands):
1998 1997 1996
------------------------------------------------------------------
Regulated Regulated Regulated
--------- --------- ---------
Unregulated Unregulated Unregulated
----------- ----------- -----------
Total Total Total
----- ----- -----
---------------------- -------------------- -----------------
Revenues $174,447 $181,703 $196,638
$57,468 $53,831 $38,563
$231,915 $235,534 $235,201
Cost of Gas 99,339 108,497 128,228
51,262 47,775 32,204
150,601 156,272 160,432
---------------------- -------------------- -----------------
Gross Margin 75,108 73,206 68,410
6,206 6,056 6,359
81,314 79,262 74,769
---------------------- -------------------- -----------------
Operating
Expenses 45,025 43,991 41,418
3,901 4,229 3,511
48,926 48,220 44,929
Other (Income)
Expense - - -
(134) (1,961) 190
(134) (1,961) 190
Interest
Expense, net 4,795 4,403 5,000
285 283 276
5,080 4,686 5,276
---------------------- -------------------- -----------------
Income
Before Taxes 25,288 24,812 21,992
2,154 3,505 2,382
27,442 28,317 24,374
Income Taxes 9,388 9,329 8,246
906 1,395 955
10,294 10,724 9,201
---------------------- -------------------- -----------------
Net Income $15,900 $15,483 $13,746
$1,248 $2,110 $1,427
$17,148 $17,593 $15,173
---------------------- -------------------- -----------------
---------------------- -------------------- -----------------
Property $340,320 $307,828 $280,013
$7,653 $6,744 $5,947
$347,973 $314,572 $285,960
---------------------- -------------------- -----------------
Depreciation 115,181 104,268 95,578
2,687 2,504 2,358
117,868 106,772 97,936
---------------------- -------------------- -----------------
Net Property $225,139 $203,560 $184,435
$4,966 $4,240 $3,589
$230,105 $207,800 $188,024
---------------------- -------------------- -----------------
---------------------- -------------------- -----------------
Capital
Expenditures
(net) $ 32,001 $ 29,201 $15,086
$976 $844 $ 685
$32,977 $30,045 $15,771
---------------------- -------------------- -----------------
---------------------- -------------------- -----------------
Other Income/Expense, for the twelve months ended September 30, 1997, includes a
one-time pretax credit of $1.9 million related to the recovery of past
exploration and development costs. (See Note 2).
11. Subsequent Event:
On November 10, 1998, the Company and Carolina Power & Light Company
("CP&L"), a North Carolina company, entered into an Agreement and Plan of Merger
(the "Agreement") providing for a strategic business combination of the Company
and CP&L. Pursuant to the Agreement a newly formed subsidiary of CP&L will be
merged with and into the Company. Under the Agreement, the holders of the
Company's $2.50 par value common stock (the "Company Common Stock") would
receive a number of shares of CP&L common stock based on an exchange ratio to be
determined by dividing $35 by the average closing price of CP&L stock during the
twenty consecutive trading days prior to and including the fifth trading day
prior to the closing date of the transaction. The exchange ratio will not exceed
0.8594 nor be less than 0.7032. The transaction will be accounted for as a
pooling of interests.
The Agreement has been approved by the Boards of Directors of the Company
and CP&L. Consummation of the Merger is subject to certain closing conditions,
including approval by the shareholders of the Company. A shareholders' meeting
to consider such approval will be held as early as practicable. Consummation of
the Merger is also subject to receipt of a favorable opinion of counsel that the
Merger will qualify as a tax-free reorganization, the effectiveness of a
registration statement to be filed by CP&L in respect of its common stock to be
issued in the Merger and certain regulatory approvals or filings, including
approvals by or filings with the
<PAGE>41
North Carolina Utilities Commission, the South Carolina Public Service
Commission, the Securities and Exchange Commission and such filings and
approvals as may be required by any applicable state securities or "blue
sky"laws.
CP&L is an investor-owned electric utility which serves nearly 1.2 million
customers in eastern North Carolina, the Asheville area and the Pee Dee Region
of South Carolina.
<PAGE> 42
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, 1998 and 1997, and the related
consolidated statements of income, retained earnings, and cash flows for each of
the three years in the period ended September 30, 1998. 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, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended September 30, 1998, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Raleigh, North Carolina
November 5, 1998, except for
Note 11, as to which the date is
November 10, 1998.
<PAGE>43
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,
Chief Executive Officer Treasurer and
Chief Financial Officer
<PAGE>44
Supplementary data-
The following table presents certain financial information for each quarter
during the fiscal years ended September 30, 1998 and 1997 (amounts in thousands,
except per share data). Per share information has been restated to reflect the
3-for-2 stock split effective February 20, 1998.
1998
_______________________________________________________________________________
Fourth Third Second First
------ ----- ------ -----
Operating revenues $40,816 $46,176 $75,696 $69,227
Gross margin 28,399 30,588 45,116 46,498
Operating income 1,339 3,685 17,672 9,826
Net income 108 1,522 10,148 5,370
Basic earnings per share .01 .15 1.01 .53
Diluted earnings per share .01 .15 1.01 .53
1997
_______________________________________________________________________________
Fourth Third Second First
------ ----- ------ -----
Operating revenues $40,861 $43,506 $86,740 $67,427
Gross margin 27,690 28,750 54,117 45,715
Operating income 907 3,386 18,647 10,063
Net income (146) 1,345 10,906 * 5,489
Basic earnings (loss) per share (.01) .13 1.10 * .55
Diluted earnings (loss) per share (.01) .13 1.10 * .55
* includes a nonrecurring credit of $0.11 per share for the settlement of a
regulatory matter.
<PAGE>45
Item 9. Changes in and Disagreements on Accounting and Financial Disclosures
- ----------------------------------------------------------------------------
None.
PART III
--------
Item 10. 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 4, 1998 relating to the January 12,
1999 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 12 of this annual report.
Item 11. Executive Compensation
- ---------------------------------
The information for this item is set forth in the sections entitled
"Executive Compensation and Stock Option Information, "Annual Incentive Plan,"
"Long-Term Incentive Plan," "Key Employee Stock Option Plan", "Employee Stock
Purchase Plan", "Employee Retirement Plans," "Employee Retirement Savings Plan,"
"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 4, 1998
relating to the January 12, 1999 Annual Meeting of Stockholders, which sections
are hereby incorporated by reference.
Item 12. 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,
1998.
Security ownership of management -
The information for this item is set forth in the section entitled
"Proposal One. Election of Directors" on Pages 1 and 2 in the Company's Proxy
Statement dated December 4, 1998 relating to the January 12, 1999 Annual Meeting
of Stockholders, which section is hereby incorporated by
reference.
Changes in control -
On November 10, 1998, the Company and Carolina Power & Light Company
("CP&L"), a North Carolina corporation, entered into an Agreement and Plan of
Merger providing for a strategic business combination of the Company and CP&L. A
copy of the agreement is included in the Company's Form 8-K filed November 25,
1998, and is hereby incorporated by reference.
Item 13. 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 9 in the
Company's Proxy Statement dated December 4, 1998 relating to the January 12,
1999 Annual Meeting of Stockholders, which section is hereby incorporated by
reference.
<PAGE>46
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) 1. Financial Statements
- -----------------------------
Page
Consolidated Balance Sheets as of September 30, 1998 and 1997 22
Consolidated Statements of Income for the Years Ended
September 30, 1998, 1997 and 1996 24
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1997 and 1996 25
Consolidated Statements of Capitalization as of September 30,
1998 and 1997 26
Consolidated Statements of Retained Earnings for the Years
Ended September 30, 1998, 1997 and 1996 27
Notes to Consolidated Financial Statements for the Years
Ended September 1998, 1997 and 1996 28
Management's Responsibility for Financial Statements 43
No separate financial statements are presented for the Company's
consolidated subsidiaries because the Company and its subsidiaries meet the
requirements for omissions set forth in Regulation S-X, Rule 3-09.
(a) 2. Financial Statement Schedules
- ------------------------------------
The following data and financial statement schedules are included herein:
Page
Report of Independent Public Accountants 47
Schedule II - Valuation and Qualifying Accounts for the Years
Ended September 30, 1998, 1997 and 1996 48
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 50, 51 and 52 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, 1998.
<PAGE>47
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 5,
1998, except for Note 11, as to which the date is November 10, 1998. 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 is the responsibility of
the Registrant's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Raleigh, North Carolina,
November 5, 1998
<PAGE>48
NORTH CAROLINA NATURAL GAS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
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
1998 $ 563,730 $ 769,300 $ 117,910 $ 673,630 $ 777,310
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
1997 $ 747,455 $ 716,090 $ 91,735 $ 991,550 $ 563,730
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
1996 $ 566,019 $ 538,477 $ 158,111 $ 515,152 $ 747,455
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Note 1: Deductions represent uncollectible accounts written off, net of
recoveries, as follows -
1998 1997 1996
----------- ----------- -----------
Write off of accounts
considered to be
uncollectible $ 719,881 $ 1,264,959 $ 659,112
Less-Recoveries on
accounts previously
written off 46,251 273,409 143,960
----------- ----------- -----------
$ 673,630 $ 991,550 $ 515,152
----------- ----------- -----------
----------- ----------- -----------
<PAGE>49
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTH CAROLINA NATURAL GAS CORPORATION
AND SUBSIDIARIES
--------------------------------------
(Registrant)
By: /s/Calvin B Wells
-----------------------------------
Calvin B. Wells
Chairman, President and
Chief Executive Officer
December 15, 1998:
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 of the Board of Directors,
- -----------------------------------
Calvin B. Wells President,
and Chief Executive Officer
(Principal Executive Officer)
/s/Gerald A Teele Senior Vice President, Treasurer,
- -----------------------------------
Gerald A. Teele and Chief Financial Officer
(Principal Financial Officer)
/s/Ronald J Josephson Vice President-Financial Services
- -----------------------------------
Ronald J. Josephson (Principal Accounting Officer)
/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
- -----------------------------------
James E. S. Hynes - Director
/s/ Robert T Johnson
- -----------------------------------
Robert T. Johnson - Director
<PAGE>50
INDEX OF EXHIBITS
The following exhibits are filed as part of this 1998 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)
10-10- Employment Agreements executed in 1985 with certain Executive Officers.
(5)
<PAGE>51
Exhibit
Number
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.
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>52
Exhibit
Number
10-30- First Amendment dated March 10, 1997 to Service Area Territory Agreement
with the City of Rocky Mount, NC. (14)
10-31- Third Amendment to Natural Gas Service Agreement dated March 10, 1997
with the City of Rocky Mount, NC. (14)
10-32- Third Amendment to Natural Gas Service Agreement dated November 1, 1996
with the City of Monroe, NC. (14)
10-33- Fourth Amendment to Natural Gas Service Agreement dated November 1, 1997
with the City of Monroe. (15)
10-34- Employment Agreement executed in 1998 with certain Executive Officer.
(16)
10-35 - Savings Plan Adoption Agreement dated June 1, 1998.
10-36- Fifth Amendment to Natural Gas Service Agreement dated June 1, 1998 with
the City of Monroe.
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
l
(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
(14) Filed as exhibit to Form 10-K report for fiscal year ended September 30,
1997
(15) Filed as exhibit to Form 10-Q report for the quarterly period ended
December 31, 1997
(16) Filed as exhibit to Form 10-Q report for the quarterly period ended March
31, 1998
<PAGE>53
Exhibit 10-35
Page 1 of 38
PRINCIPAL
FINANCIAL GROUP
PROTOTYPE FOR
SAVINGS PLANS
This Plan is a 401(K) Profit Sharing Plan
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ADOPTION AGREEMENT - PLUS
IRS SERIAL NO.:D347609B
ADOPTION AGREEMENT PLAN NO.:001
TO BE USED WITH BASIC PLAN NO.:03
APPROVED: OCTOBER 26, 1992
103
<PAGE>54
Exhibit 10-35
Page 2 of 38
TABLE OF CONTENTS
A. ADOPTION AGREEMENT .................................................1
B. EMPLOYER............................................................1
C. PLAN NAME...........................................................1
D. EFFECTIVE DATE......................................................1
E. YEARLY DATE.........................................................2
F. FISCAL YEAR.........................................................2
G. NAMED FIDUCIARY.....................................................2
H. PLAN ADMISTRATOR....................................................2
I. PREDECESSOR.........................................................3
J. ELIGIBLE EMPLOYEE...................................................4
K. ENTRY REQUIREMENTS..................................................5
L. ENTRY DATE..........................................................7
M. PAY.................................................................7
N. ELECTIVE DEFERRAL CONTRIBUTIONS.....................................9
O. MATCHING CONTRIBUTIONS.............................................10
P. OTHER EMPLOYER CONTRIBUTIONS AND FORFEITURES.......................12
Q. NET PROFITS AND CONTRIBUTION REQUIREMENTS..........................15
R. CONTRIBUTION MODIFICATIONS.........................................17
S. VOLUNTARY CONTRIBUTIONS............................................18
T, INVESTMENT.........................................................18
U. VESTING PERCENTAGE.................................................21
V, VESTING SERVICE....................................................22
W, WITHDRAWAL BENEFITS................................................24
X. RETIREMENT AND THE START OF BENEFITS...............................25
Y. FORMS OF DISTRIBUTION..............................................27
Z. ADOPTING EMPLOYERS.................................................31
<PAGE>55
Exhibit 10-35
Page 3 of 38
Internal Revenue Service Department of the Treasury
Plan Description: Prototype
Non-standarized Profit
Sharing Plan with CODA
FFN: 50307440003-001
Case: 9200863
EIN: 42-0127290
GPD: 03 Plan: 001 Serial Washington, DC 20224
No: D3476096
Person to Contact: Ms. Wiggins
PRINCIPAL MUTUAL LIFE
INSURANCE CO
Telephone Number: (202) 622-8380
711 HIGH STREET
Refer Reply to: E:EP:Q:8
DES MOINES, IA 50309
DateL 10/26/92
Dear Applicant:
In our opinion, the amendment to the form of the plan identified above does not
in and of itself adversely affect the plan's acceptability under section 401 of
the Internal Revenue Code. This opinion relates only to the amendment to the
form of the plan. It is not an opinion as to the acceptability of any other
amendemnt or of the form of the plan as a whole, or as to the effect of other
Federal or local statues.
You must furnish a copy of this letter to each employer who adopts this plan.
You are also required to sent a copy of the approved form of the plan, any
approved amendments and related documents to each Key District Director of
Internal Revenue Service in whose jurisdiction there are adopting employers.
An employer who adopts the amended form of the plan after the date of the
amendment should apply for a determination Ketter by filing an application with
the Key District Director of Internal Revenue on Form 5307, Short Form
Applicationfor Determination for Employee Benefit Plan.
This letter with respect to the amendment to the form of the plan does not
affect the applicability to the plan of the continued, interim and extended
reliance provisions of sections 13 and 17.03 of Rev. Proc. 89-9, 1989-1 C.B.780.
The applicability of such provisions may be determined by reference to the
inital opinion letter issued with respect to the plan.
If you, the sponsoring organization, have any questions concerning the IRS
processing of this case, please call the above telephone number. This number is
only for use of the sponsoring organization. Individual particpants and/or
adopting employers with questions concerning the plan should contact the
sponsoring organization. The plan's adoption agreement must include the
sponsoring organization's address and telephone number for inquiries by adopting
employers.
If you write to the IRS regarding this plan, please provide your telephone
number qnd the most covenient time for us to call in case we need more
information. Whether you call or write, please refer to the Letter Serial Number
and File Folder Number shown in the heading of this letter.
You should keep this letter as apermanent record. Please notify us if you modify
or discontinue sponorship of this plan.
Sincerely yours,
Chief, Employee Plans Qualifications Branch
<PAGE>56
Exhibit 10-35
Page 4 of 38
THE PRINCIPAL FINANCIAL GROUP PROTOTYPE FOR
SAVINGS PLANS
ADOPTION AGREEMENT - PLUS
Use black ink to complete the Adoption Agreement
-----
.
A. Select (1) or (2). A. This ADOPTION AGREEMENT is
--
1) If selected, check (a) 1) __ the Employer's first adoption of The
or (b). If this Plan Principal Financial Group Prototype for
--
is a restatement, Savings Plans. Together with PRINCIPAL
check (b). FINANCIAL GROUP PROTOTYPE BASIC SAVINGS
PLAN, it constitutes
a) __ a new plan.
(b) If selected, fill in b) __ a restatement of an existing plan (and
the restatement date. trust). That plan was qualifiable under
401(a) of the Internal Revenue Code.The
provisions of this restatement are
effective on _________, ____. This is the
RESTATEMENT DATE.
2) If selected, fill in 2) X Amendment No. 2 to the Plan. It replaces
- -
the amendment number all prior amendments to the Plan and the
and date first Adoption Agreement. The provisions of
. this amendment are effective on June 1,
------
1998.
----
B. Fill in exact, legal B. The terms we, us and our, as they are used in
name. this Plan, refer to the EMPLOYER.
We, NORTH CAROLINA NATURAL GAS CORPORATION
-----------------------------------------
_____________________________________________
_____________________________________________
_____________________________________________
_____________________________________________
are the Employer.
C. For example: ABC, Inc. C. The PLAN'S NAME is NORTH CAROLINA NATURAL GAS
---------------------------
Savings Plan. CORPORATION RETIREMENT SAVINGS PLAN
---------------------------------------------
_____________________________________________
_____________________________________________
_____________________________________________
_____________________________________________
D. Fill in the date your D. Our retirement plan became effective on April
-----
Prior Plan started if 1, 1998 This the EFFECTIVE DATE.
-- ----
this Plan is a
restatement. If this
Plan is new, use the
first day of the first
Plan Year.
<PAGE>57
Exhibit 10-35
Page 5 of 38
E. Fill in Effective Date E. The YEARLY DATE is the first day of each Plan
and check (1), (2) or Year. The Yearly Date is April 1, 1998 and
-- ------- ----
(3)
1) __ the same day of each following year.
2) The first Plan Year is 2) X each following January 1 (month and
---------
short. day).
3) A later Plan Year is 3) __ (a) each following ______________ (month
short. and day) through (b) ______________________
B) First day of short year and (c) each following ____________________
(use same month and day (month and day).
as in (a)).
(c) First day of new Plan If the first date in Item E is after the
Year. Effective Date, Yearly Dates, before the first
date in Item E above, shall be determined under
the provisions of the Prior Plan (Plan) before
that date.
F. The FISCAL YEAR is our taxable year and ends
on September 30 (month and day).
------------
G. We are the NAMED FIDUCIARY, unless otherwise
specified in (1) below.
1) Principal Life Insurance 1) __ _______________________________________
Company may not be named. _____________________________________________
---
_____________________________________________
_____________________________________________
is the Named Fiduciary.
H. We are the PLAN ADMINISTRATOR, unless otherwise
specified in (1) below.
1) Principal Life Insurance 1) __ _______________________________________
Company may not be ______________________________________________
--- ______________________________________________
named. ______________________________________________
is the Plan Administrator. The address, phone
number and tax filing number of the Plan
Administrator are the same as the Employer's
unless otherwise specified below.
Address:
______________________________________________
______________________________________________
______________________________________________
Phone No.: ___________________________________
Tax Filing No.: ______________________________
<PAGE>58
Exhibit 10-35
Page 6 of 38
I. Select any items below I. A PREDECESSOR employer is a firm of which we
which apply. were once a part or a firm absorbed by us
because of a change of name, merger,
acquisition or a change of corporate status.
1) If this Plan is a 1) __ A Predecessor is deemed to be the
continuation of a plan Employer for purposes of determining:
of a Predecessor employer,
service with that a) __ Entry Service.
Predecessor must be
treated as service with b) __ Vesting Service
you.
c) __ Hours of Service required to be
eligible for an Employer Contribution.
d) __ Pay.
2) __ Service with or pay from a Predecessor
shall be counted only if service continued
----
with us without interruption. This item
shall not apply if Plan is a continuation of
a plan of that Predecessor.
3) __ Service with or pay from a Predecessor
shall include service or pay while a
-------
proprietor or partner. (If this item is not
checked, such service or pay shall not be
counted.)
4) __ Service with or pay from a Predecessor
shall be counted only as to a Predecessor
----
which
a) __ maintained a qualified pension or
profit sharing plan (or)
b) __ is named below:
b) Exact, legal name(s). ___________________________________________
___________________________________________
___________________________________________
___________________________________________
___________________________________________
___________________________________________
<PAGE>59
Exhibit 10-35
Page 7 of 38
J. Select (1) or (2). Use J. An ELIGIBLE EMPLOYEE is
--
Item Z to identify the
Controlled Group and 1) X a Employee of ours or of an Adopting
-
Affiliated Service Group Employer listed in Item Z.
members whose Employees
may participate in the
plan.
2) If selected, check the 2) __ an Employee of ours or of an Adopting
requirements in (a), Employer listed in Item Z Provided the
(c),(d) and (e) below Employee meets the requirement(s) selected
which apply. below.
a) __ Employed in the following employment
classification:
i) __ Paid on a salaried basis.
ii) __ Paid on a commission basis.
iii) __ Paid on an hourly rate basis
iv) __ Represented for collectibe
bargaining purposes by
A. __ any bargaining unit.
B. Bargaining unit's name. B. __ ______________________________
____________________________________
____________________________________
____________________________________
v) __ Not represented for collective
bargaining purposes by
A. __ any bargaining unit for which
retirement benefits have been the
subject of good faith bargaining
between Employee representative and
us.
B. Bargaining unit's name. B. __ ______________________________
__________________________________
__________________________________
__________________________________
b) If more than one b) If more than one employment
employmentclassification classificationis selected, the Employee
is selectedin (a), must meet
check (i) or (ii).
i) __ each one of the employment
classifications selected above.
ii)__ any one of the employment
classifications selected above.
<PAGE>60
Exhibit 10-35
Page 8 of 38
c) If selected, check (i), c) __ Not covered under any other qualified
(ii) or both.
i) __ profit sharing plan (or)
ii) __ pension plan
to which we contribute.
d) __ Employed at the following location or
divisions or in the following positions:
____________________________________________
____________________________________________
____________________________________________
____________________________________________
____________________________________________
e) _ Not employed at the following location
or divisions or in the following
positions:
____________________________________________
____________________________________________
____________________________________________
____________________________________________
____________________________________________
K. ENTRY REQUIREMENTS
1) Select (a) or (b). 1) SERVICE REQUIRED to become an Active Member:
---
a) __ Service is not required.
---
b) If selected, check (i) b) X The minimum Entry Service required is
-
or (ii). Up to 1 year
--
may be used (6 mnoths i) X 1 (one) whole year.
-
if Entry Date is Yearly
Date).
ii) If selected, fill in ii) __ ______/12 of a year.
numerator of fraction
(e.g. 6/12 for half a Note: If a fractional part of a year
-----
year). is required, the Hours Method may not
be used to determine Entry Service.
2) Select (a) or (b). (Use 2) ENTRY SERVICE, subject to the provisions
--
only if service is of Plan Section 1/02, shall be determined
required for entry.) as follows:
a) __ ELAPSED TIME METHOD. Entry Service
is the total of an Employee's countable
Periods of Service without regard to
Hours of Service.
<PAGE>61
Exhibit 10-35
Page 9 of 38
b) Only available if one b) X HOURS METHOD. A year of Entry Service
-
year is used in K(1) is an Entry Service Period which has
above ended and in which an Employee has 1,000
Hours of Service, unless a lesser number
is specified in (i) below.
i) Optional reduced Hours i) __ __________ Hours of Service.
of Service requirement.
ii) Optional crediting of ii) __ A year of Entry Service shall be
Entry Service before credited before the end of the Entry
Entry Service Period Service Period if the Employee has
ends. the number of Hours of Service
specified above.
iii) An ENTRY SERVICE PERIOD is the 12-
consecutive month period beginning on
an Employee's Hire Date and each
following 12-consecutive month period
ending on the last day of the Plan
Year including the 12-consecutive
month period ending on the last day
of the first Plan Year after his Hire
Date, unless otherwise specified in
A. below. (See Plan Section 1.02 for
the crediting of Entry Service during
the first two periods.)
A. Optional Entry Service A. X An Entry Service Period is the
-
Period, continues on 12-consecutive month period
employment beginning on an Employee's Hire
anniversaries. Date and each following 12-
consecutive month period beginning
on an anniversary of that Hire
Date.
iv) An ENTRY BREAK in service, when the
Hours Method is used, is an Entry
Service Period in which an Employee
is credited with not more than one-
half of the Hours of Service required
for a year of Entry Service, unless
otherwise specified in A. Below.
A. Optional Hours of A. __ _____or fewer Hours of Service.
Service requirement.
Fill in up to 500 hours
but less than hours
required for year of
Entry Service.
3) Select (a) or (b). 3) AGE REQUIRED to become an Active Member:
--
a) __ A minimum age is not required.
---
b) Not over age 21 (20 1/2 b) X The Employee must be 21 or older.
- --
if Entry Date is Yearly
Date).
4) This waiver applies 4) __ The requirement(s) for entry checked
only on the date you below shall be waived on ______________,
fill in. __________. This date shall be an Entry
Date if the Eligible Employee has met all
the other entry requirements.
a) __ Service requirement.
b) __ Age requirement.
<PAGE>62
Exhibit 10-35
Page 10 of 38
L. Select one of the L. ENTRY DATE. An Eligible Employee may enter
---
following dates. the Plan as an Active Member on the earliest
1) X Monthly Date.
-
2) _ Semi-yearly Date,
3) _ Quarterly Date,
4) If selected, age and 4) _ Yearly Date,
service required in
Item K can't be over 5) _ date,
age 20 1/2 or more
age 20 1/2 or more than on or after the date this Plan became
6 months, respectively. effective, on which he meets all the entry
requiremnts. This date is his ENTRY DATE.
M. PAY
1) COMPENSATION for purposes of Plan Section
3.06 is as defined therein, under
Information required to be reported under
Code Sections 6041 and 6051 (Wages, Tips and
Other Compensation Box on Form W-2), which
is actually paid or made available by us for
the Limitation Year, unless otherwise
specified in (a) or (b) below.
a) Optional 415 (c)(3) a) _ 415 safe-harbor compensation
definition of Pay. as defined in Plan Section 3.06.
b) Optional W-2 definition b) _ Code Section 3401(a) wages (wages for
of Pay. purposes of income tax withholding) as
defined in Plan Section 3.06.
2) Optional provision to 2) _ The definition of Compensation above shall
continue old definition apply on and after the 1994 Limitation Year.
until 1994 Limitation The definition of Compensation on any date
Year. before the 1994 Limitation Year shall be
determined in accordance with the provisions
of the Prior Plan.
3) PAY for purposes of Plan Section 1.02 is the
same as compensation for purposes of Plan
Section 3.06 as specified in (1) above.
4) Optional provision to 4) _ The definition of Pay in this Item M shall
continue old definition apply on and after the first Yearly Date in
until 1994 Plan Year. 1994. The definition of Pay on any date
before the first Yearly Date in 1994 shall
be determined in accordance with the
provisions of the Prior Plan.
<PAGE>63
Exhibit 10-35
Page 11 of 38
Pay shall include elective contributions.
Elective contributions are amounts excludable
from the gross income of the Employee under
Code Sections 125, 402(a)(8), 402(h) or
403(b), and contributed by us, at the
Employee's election, to a Code Section 401(k)
arrangement, a simplified employee pension,
cafeteria plan or tax-sheltered annuity.
Elective contributions also include Pay
deferred under a Code Section 457 plan
maintained by us and Employee contributions
"picked up" by a governmental entity and,
pursuant to Code Section 414(h)(2), treated
as our contributions.
5) Safe harbor fringe 5) For purposes of Elective Deferral
benefit exclusion. Contributions only Pay shall not include
reimbursements or other expense allowances,
fringe benefits (cash or non-cash), moving
expenses, deferred compensation, and welfare
benefits, unless otherwise specified in (a)
below.
a) Optional provision to a) X Pay for all purposes under the Plan
-
exclude fringe benefits shall not include reimbursements or other
for all purposes. expense allowances, fringe benefits (cash
or non-cash), moving expenses, deferred
compensation, and welfare benefits.
6) ANNUAL PAY is, on any given date, an
Employee's Pay for the latest Pay Year
ending on or before that date.
7) The PAY YEAR is the one-year period ending
on the last day of each Plan Year, unless
a different Pay Year is specified in (a)
below.
a) Optional Pay Year. a) _ The one-year period ending on each
________________(month and day).
Select any modifications Pay is modified as follows:
below which apply.
8) _ An Employee's Annual Pay over $________
shall be excluded.
9) __ If a Member's Entry Date occurs after
______________, Pay before such Entry Date
shall be excluded.
<PAGE>64
Exhibit 10-35
Page 12 of 38
Item (10) shall apply to the Pay used for
purposes of determining the allocation or
amount of specified Contributions. Item (10)
shall not apply to the Pay used for purposes
---
of determining the allocation of
Contributions if an Integration Level is used
to determine the allocation of Contributions.
10) Optional exclusions. 10) _ Pay for purposes of determining the
allocation or amount of
a) _ All Employer Contributions
b) _ Elective Deferral Contributions
c) _ Additional Contributions
d) _ Discretionary Contributions
excludes
--------
e) _ bonuses
f) _ commissions
g) _ overtime pay
h) Specify type of special h) other special pay _____________________
pay excluded _______________________________________
_______________________________________
Item (11) shall only apply to the Pay used for
----
purposes of determining excess amounts under
Plan Section 3.07.
11)X Pay shall include only amounts received
-
while an Active Member of the Plan for the
period described in Plan Section 3.07.
N. ELECTIVE DEFERRAL CONTRIBUTIONS for a Member
are equal to a portion of Pay as specified in
the written elective deferral agreement with
us. The elective deferral agreement to start
Elective Deferral Contributions may be
effective on a Member's Entry Date )Reentry
Date, if appplicable) or any following Semi-
yearly Date, unless otherwise specified in (1)
below.
1) Optional effective 1) X Following a Member's Entry Date (Reentry
dates for elective Date, if applicable), a Member's elective
deferral agreements. deferral agreement may become effective on
If selected, check any
)a), (b), (c) or (d).
--
a) _ Monthly Date.
b) X Quarterly Date.
-
c) _ Yearly Date.
d) _ date.
<PAGE>65
Exhibit 10-35
Page 13 of 38
The Member shall make any change or terminate
the elective deferral agreement by filing a
new elective deferral agreement. A Member's
elective deferral agreement making a change
may be effective on any date an elective
deferral agreement to start Elective Deferral
Contributions could be effective. A Member's
elective deferral agreement to stop Elective
Deferral Contributions may be effective on
any date. The elective deferral agreement
must be in writing and effective before the
beginning of the pay period in which Elective
Deferral Contributions are to start, change
or stop. A Member may not defer more than 20%
of Pay for the Plan Year. Elective Deferral
Contributions shall be limited as needed to
meet nondiscrimination tests.
2) Optional minimum. 2) _ _____% of Pay is the minimum Elective
Deferral Contribution.
3) _ Elective Deferral Contributions must be
a whole percentage of Pay.
4) Optional maximum. 4) X 15% of Pay is the maximum Elective
-
(Consider using 20% Deferral Contribution.
reduced by the amount
of other Contributions
made for the Member.)
O. X We shall make MATCHING CONTRIBUTIONS.
-
1) If Item O is selected, 1) The percentage of Elective Deferral
check (a) or (b). Contributions matched is
--
a) Not more than 100%. a) _ ________%.
b) X determined by us, but won't be more
-
than 100%.
i) Optional minimum i) _ ____% is the minimum percentage.
percentage.
ii) Optional maximum ii) _ ___% is the maximum percentage.
percentage. Less than
100%.
2) Optional limit on 2) X Elective Deferral Contributions which are
-
Elective Deferral over the percentage of Pay below won't be
Contributions matched. matched.
If selected, check
(a) or (b). Limit can a) _ _____%.
--
help meet
nondiscrimination
tests. b) X A percentage determined by us.
-
i) Optional minimum i) _ ___% is the minimum percentage.
percentage.
ii) Optional maximum ii) _ ___% is the maximum percentage.
percentage.
<PAGE>66
Exhibit 10-35
Page 14 of 38
3) If Item O is selected, 3) Matching Contributions are made
check (a) or (b).
a) X as Elective Deferral Contributions are
-
made.
4) If (3)(a) is selected, 4) X At the end of the Plan Year we may make
-
this option may be used make more Matching Contributions for Members
to adjust the Matching who made Elective Deferral Contributions for
Contributions at the for the Plan Year shall be made as
end of the Plan Year. specified below.
a) Optional. Match at end a) X The Matching Contributions made at the
-
of yearonly those meeting end of the Plan Year shall only be made
requirements in Item Q. for those meeting the requirements in
Item Q.
b) If (4) is selected, b) The percentage of Elective Deferral
check (i) or (ii). Contributions matched is
--
i) Not more than 100%. i) _ ___%.
ii) X determined by us, but won't be more
than 100%.
A. Optional minimum A. _ ___% is the minimum percentage.
percentage.
B. Optional maximum B. _ ___% is the maximum percentage.
percentage. Less than
100%.
c) Optional limit on c) X Elective DeferralContributions which
-
Elective Deferral are over the percentage of Pay below
Contributions matched won't be matched.
if (4) is selected. If
selected, check (i) or i) _ ___%.
--
(ii). Limit will help
meet nondiscrimination ii) X A percentage determined by us.
-
tests.
A. Optional minimum A. _ ___% is the minimum percentage.
percentage.
B. Optional maximu;m B. _ ___% is the maximum percentage.
percentage.
<PAGE>67
Exhibit 10-35
Page 15 of 38
5) If selected, Matching 5) _ Matching Contributions are Qualified
Contributiions may be Matching Contributions. Qualified Match-
tested for ing Contributions are 100% vested and
nondiscrimination with subject to the withdrawal restrictions of
the Elective Deferral Code Section 401(k).
Contributions.
a) Optional if (5) is a) _ Qualified Matching Contributions shall
selected. Nonhighly be made only for Nonhighly Compensated
Compensated Employees for Nonhighly Compensated Employees.
only.
6) Optional maximum on 6) _ Our Matching Contributions for a Member
Matching Contributions. during any Plan Year shall not be more than
$ _____.
7) Forfeitures of Matching Contributions which
relate to excess amounts as provided in Plan
Section 3.07 shall be used to offset our
first Contribution after the Forfeiture
occurs, unless otherwise specified in (a)
below.
a) Optional treatment of a) _ Forfeitures of Matching Contributions
forfeitures which which relate to excess amounts as
relate to excess provided in Plan Section 3.07 shall be
amounts. allocated to those meeting the require-
ments in Item jQ who do not have an
excess amount using the allocation
formula in P(3)(a) and shall be deemed to
be Matching Contributions.
P. OTHER EMPLOYER CONTRIBUTIONS AND
FORFEITURES
1) These contributions are 1) _ QUALIFIED NONELECTIVE CONTRIBUTIONS.
are used in the Qualified Nonelective Contributions are 100%
nondiscrimination tests. vested and subject to the withdrawal
If selected, check (a) restrictions of Code Section 401(k).
or (b).
--
a) Qualified Nonelective a) _ We shall make Qualified Nonelective
Contributions are a set Contributions equal to the following:
amount. If selected,
check the contribution
formula, (i) or (ii).
--
i) If selected, check A i) _ PAY FORMULA. An amount equal to
or B.
--
A. _ ___% of Pay for the period for
each Member who is an Active Member
on the last day of that period.
B. _ ___% of Annual Pay at the end of
the Plan Year for Members who meet
the requirements in Item Q.
<PAGE>68
Exhibit 10-35
Page 16 of 38
ii) If selected, check A ii) _ SERVICE FORMULA. An amount equal to
or B.
--
A. _ $ ___ for the pay period for
each Member who is an Active
Member on the last day of that
period.
B._ $ ___ at the end of the Plan
Year for Members who meet the
requirements in Item Q.
b) Qualified Nonelective b) _ Qualified Nonelective Contributions may
Contributions are be made for each Plan Year in an amount
determined by you each determined by us. Our Qualified
year. Nonelective Contributions shall be
allocated to those meeting the
requirements in Item Q using the
allocation formula in P(3)(a).
c) Optional. Nonhighly c) _ Qualified Nonelective Contributions
Compensated Employees shall be made only for or allocated only
only. to Nonhighly Compensated Employees.
2) These contributions are 2) _ We shall make ADDITIONAL CONTRIBUTIONS
a set amount. If equal to the following:
selected, check the
contribution formula,
(a) or (b).
--
a) If selected, check a) _ PAY FORMULA. An amount equal to
(i) or (ii).
--
i) _ ___% of Pay for the pay period for
each Member who is an Active Member
on the last day of that period.
ii) _ ___% of Annual Pay at the end of
the Plan Year for Members who meet the
requirements in Item Q.
b) If selected, check (i), b) _ SERVICE FORMULA. An amount equal to
(ii), (iii) or (iv).
--
i) _ $ ___ for the pay period for each
Member who is an Active Member on the
last day of that period.
ii) _ $___ at the end of the Plan Year
for Members who meet the requirements
in Item Q.
iii) No contribution for iii) _ $ ___ for each Hour of Service he
paid nonworking hours has performed during the pay period
---------
such as vacation. for each Member who is an Active
Member during the pay period.
iv) Congribution is made iv) _ $ ___ for each Hour of Service
for paid nonworking credited during the pay period for
--------
hours such as vacation. each Member who is an Active Member
during the pay period.
<PAGE>69
Exhibit 10-35
Page 17 of 38
3) These contributions are 3) _ DISCRETIONARY CONTRIBUTIONS may be made
determined by you each for each Plan Year in an amount determined
year. If selected, check by us. The amount of our Discretionary
the allocation formula, Contributions and Forfeitures, if
(a) or (b). applicable, allocated to a person meeting
--
the requirements in Item Q shall be equal to
the following:
a) _ PAY FORMULA. An amount equal to our
Discretionary Contributions and
Forfeitures, if applicable, multiplied by
the ratio of such person's Annual Pay to
the total Annual Pay of all such persons.
b) _ INTEGRATED FORMULA. An amount equal to
a percentage of the person's Annual Pay
up to the Integration Level plus a
percentage (equal to 2 times the first
percentage) of his Annual Pay over the
Integration Level. The first percentage
shall be the Maximum Integration Rate,
unless otherwise specified in (i) below.
i) Optional percentage. If i) _ ___% (If this percentage exceeds the
selected, fill in a Maximum Integration Rate, the Maximum
percentage up to the Integration Rate shall apply.)
Maximum Integration
Rate. If our Discretionary Contributions and
Forfeitures, if applicable, are not great
enough to provide this allocation, the
percentage above shall be proportionally
reduced.
If our Discretionary Contributions and
Forfeitures, if applicable, are more than
enough to provide the allocation above,
any amount remaining shall be allocated
in the same manner as provided in the
Pay Formula, Item P(3)(a).
ii) The MAXIMUM INTEGRATION RATE shall
be determined according to the
following schedule:
INTEGRATION
INTEGRATION LEVEL RATE
100% of TWB 5.7%
Less than 100%, but more
than 80% of TWB 5.4%
More than the greater of
$10,000 or 20% of TWB, but
not more than 80% of TWB 4.3%
Not more than the greater
of $10,000 or 20% of TWB 5.7%
<PAGE>70
Exhibit 10-35
Page 18 of 38
"TWBF" means the taxable wage base as
in effect on the latest Yearly Date.
"Taxable wage base" means the maximum
amount of earnings which may be
considered for wages for a year under
Code Section 3121(a)(1).
On any date the protion of the rate of
tax under Code Section 311(a)(in
effect on the latest Yearly Date)
which is attributable to old age
insurance exceeds 5.7%, such rate
rate shall be substituted for 5.7% and
5.4% and 4.3% shall be increased
proportionately.
iii) The INTEGRATION LEVEL is the taxable
wage base (as defined in (ii) above)
as in effect on the latest Yearly
Date, unless otherwise specified in A.
or B. below.
A. Optional dollar amount. A. _ $ ___.
Must be less than such
taxable wage base.
B. Optional percentage of B. _ ____% of such taxable wage base.
such taxable wage base.
Must be less than 100%.
4) Not applicable if 4) If P(3) is selected, FORFEITURES shall be
Vesting Percentabe is reallocated to remaining Members and if
100%. P(3) is not selected, Forfeitures shall be
used to offset our first Contribution made
after the Forfeiture is determined, unless
otherwise specified in (a) or (b) below. If
P(3) is selected, Forfeitures shall be
allocated with our Dioscretionary
Contributions and deemed to be Discretionary
Contributions. (See Plan Section 3.05.)
a) Optional treatment of a) _ Forfeitures shall not be allocated with
Forfeitures if P(3) is our Discretionary Contributions, but
not selected, but P (2) shall be used to offset our first
is selected. Contributuion made after the Forfeiture
is determined.
b) Optional treatment of b) _ Forfeitures shall not be used to offset
Forfeitures if P(3) is our first Contribution, but shall be
not selected, but P(2) allocated to those meeting the
is selected. requirements in Item Q using the
allocation formula in P(3)(a) and shall
be deemed to be Addiotional
Contributions.
Q. NET PROFITS AND CONTRIBUTION REQUIREMENTS
1) Our Contributions shall be made out of our
current or accumulated NET PROFITS unless
otherwise specified below.
a) X Our Contributions may be made without
-
regard to our current or accumulated Net
Profits.
<PAGE> 71
Exhibit 10-35
Page 19 of 38
2) If annual contributions 2) REQUIREMENTS FOR CONTRIBUTIONS. The
are subject to these allocation of our Contributions is subject
requirements or is to the provisions of Article III and Article
Forfeitures are X of the Plan. Our Contributions which are
reallocated (see items subject to the requirements of this Item Q
O(7) and P(4)), select and Forfeitures shall be allocated as of
(a), (b), (c) or (d) the last day of the Plan Year to each
--
below. If advanced
funding is used, (a) a) _ person who was an Active Member at any
must be checked. time during the Plan Year.
b) _ Active Member on that date.
c) _ person who was an Active Member at any
time during the Plan Year and who has at
least 1,000 Hours of Service during the
latest Accrual Service Period ending on
or before that date, unless a lesser
number is specified in (i) below.
i) Optional reduced Hours i) _ ___ Hours of Service.
of Service requirement.
d) X Active Member opn that date who has at
-
least 1,000 Hours of Service during the
latest Accrual Service Period ending on
or before that date, unless a lesser
number is specified in (i) below.
i) Optional reduced Hours i) _ ___ Hours of Service.
of Service requirement.
The allocation requirements in (b), (c) or
(d) are modified as follows:
e) Optional allocation e) X Our Contributions shall also be
-
requirement. Do not use allocated to each person who was an
---
with (a) above. Active Member at any time during the Plan
Year and who has retired, become Totally
Disabled, or died.
3) The ACCRUAL SERVICE PERIODis the 12-
consecutive month period ending on the last
day of each Plan Year, unless a different
period is specified in (a) below.
a) Optional Accrual a) _ The 12-consecutive month period ending
Service Perios if you on each _________ (month and day).
use hours in (2) above.
<PAGE> 72
Exhibit 10-35
Page 20 of 38
R. CONTRIBUTION MODIFICATIONS
Contribution Limitations: The Annual Additions
-------------------------
for a Member during a Limitation Year shall not
---
be more than the Maximum Permissible Amount.
(See Plan Sections 3.06 and 10.05.)
1) For Limitations Years beginning after
December 31, 1991, for purposes of applying
the limitations of Plan Section 3.06,
Compensation for a Limitation Year is the
Compensation actually paid or made available
during such Limitation Year.
2) Fill in last day of the 2) The LIMITATION YEAR is the 12-consecutive
Limitation Year, month period ending on each December 31
-----------
Normally, the last day (month and day).
of the Plan Year is used.
You must match the 3) If the Member is covered under another
Limitation Years of all qualified defined contribution plan
your other plans. maintained by the Employer, as defined in
If you or an Employer, as Plan Section 3.06, other than a Master or
defined in Plan Section Prototype Plan.
3.06, maintained or ever
maintained another a) _ The provisions of (f) through (k) of
qualified plan is (or was) Plan Section 3.06 will apply as if the
a member orcould become a other plan were a Master or Prototype
member, you must complete Plan.
(3) and (4) of this Item R. b) _ The method described on the attached
page shall be used to limit total Annual
Additions to the Maximum Permissible
Amount, and will properly reduce the
Excess Amounts, in a manner which
precludes Employer discretion.
4) If the Member is or has ever ben a member in
a defined benefit plan maintained by the
Employer, as defined in Plan Section 3.06,
the method described on the attached page
shall be used to satisfy the 1.0 limitation
of Code Section 415, in a manner which
precludes Employer discretion.
5) Optional maximum 5) _ The amount of our Contributions for any
allocation.
a) _ Plan Year
b) _ Limitation Year
allocated to a person meeting the require-
ments in Item Q shall not be more than (the
lesser of)
c) _ $____(or)
d) Less than 25%. d) _ ____% of his Annual Pay (Compensation
for the Limitation Year if (b) above is
selected).
<PAGE> 73
Exhibit 10-35
Page 21 of 38
In Years when this Plan is Top-heavy Plan Requirements: The amount and
----------------------------
a Top-heavy Plan, special allocation of Contributions shall be subject to
minimum and maximum the provisions of Article X of the Plan in
Contribution provisions Years when this is a Top-heavy Plan.
apply. Use Items (6)
through (9), as needed, 6) _ Key Employees who are Employees on the
to meet the requirements last day of the Year shall also receive the
for your plans which are minimum allocation required in Years when
top-heavy or toe xtend is a Top-heavy Plan.
the minimums to other
employees or Years. The 7) _ A ___% (not less than 3%) minimum
items you select here allocation shall apply in Years when this is
override any provisions a Top-Heavy Plan.
of Article X to the
contrary. 8) _ The minimum allocation in (6) and (7)
above and in Article X shall apply in all
Years without regard to whether or not this
is a Top-heavy Plan or to the requirements
in Item Q.
9) X The method described on the attached page
-
shall be used to meet the minimum allocation
and benefit requirements in Years when this
is a Top-heavy Plan, in a manner which
precludes Employer discretion.
Present Value: For purposes of establishing
Present Value to compute the Top-heavy Ratio,
any benefit shall be discounted only for 7 1/2%
interest and mortality according to the 1971
Group Annuity Table (Male) without the 7%
margin but with projection by Scale E from 1971
to the later of (a) 1974, or (b) the year
determined by adding the age to 1920, and
wherein for females the male age six years
younger is used, unless otherwise specified in
(10) and (11) below:
10) _ Interest rate ___%.
11) _ Mortality table: _______________________
___________________________________________
___________________________________________
S. VOLUNTARY CONTRIBUTIONS are not permitted,
---
unless otherwise specified in (1) below.
1) Select if Voluntary 1) _ Voluntary Contributions are permitted.
Contributions are
permitted.
T. Select (1) or (2) and T. INVESTMENT
--
complete (3).
1) If selected, fill in the 1) X The Plan is trusteed. Plan assets may be
-
names of all trustees. invested in an Annuity Contract and other
(Consider naming two or funding vehicle(s).
more.) Complete (a) and
(b).
We have named the following person(s) to act as
TRUSTEE under the Trust:
GERALD A TEELE
----------------------------------------------
TERRENCE D. DAVIS
----------------------------------------------
E. J. MERCIER, JR.
----------------------------------------------
______________________________________________
______________________________________________
______________________________________________
______________________________________________
______________________________________________
<PAGE> 74
Exhibit 10-35
Page 22 of 38
a) If the Plan is trusteed, a) LIFE INSURANCE
select (i) or (ii).
--
i) _ With the Trustee's consent and
subject to the limits and provisions
of Artivle IV of the Plan, an Active
Member may elect to have his Account
applied to purchase life insurance
coverage on his life.
ii) X Life insurance coverage is not
-
provided under this Plan.
b) If the Plan is trusteed, b) LOANS
select (i) or (ii).
--
i) _ The Trustee shall not make a loan
to a Member.
ii)X The Trustee may make a loan to a
-
Member from the Trust Fund, subject to
the provisions of Plan Section 5.06.
iii) Fill in the person or iii)DIRECTOR - HUMAN RESOURCES ia the
--------------------------
position authorized to Loan Administrator.
administer the Member
loan program. Principal
Life Insurance Company
may not be used.
---
iv)Optional minimum loan iv X The minimum amount of any loan is
-
amount. Fill in up to $1,000.
------
$1,000. If none is
selected, there is no
minimum.
v) Optional maximum loan v) _ The maximum amount of any loan is
amount. Fill in up to loan is the lesser of 50% of the
$49,999. If none is Member's Vested Account or $ _______,
selected, the maximum reduced by any outstanding loan
is the lesser of 50% balance.
Vested Account or
$50,000, reduced by any
loan balance.
vi)Optional number of vi The number of outstanding loans shall
outstanding loans. be limited to one, unless otherwise
specified in A. or B. below.
A. _ The number shall be limited to
__________.
B. _ The number shall not be limited.
<PAGE> 75
Exhibit 10-35
Page 23 of 38
vii)Optional number of vii)The number of loans approved in a 12-
loans approved in any month period shall be limited to one,
12-month period. unless otherwise specified in A. or B.
below.
A. _ The number shall be limited to
_____________.
B. _ The number shall not be limited.
2) _ The Plan is not trusteed. Plan assets
---
shall be invested only in an Annuity
Contract.
3) Subject to the provisions of Articles IV and
VIIA of the Plan and the Annuity Contract,
the investment of that part of a Member's
Account resulting from
a) Select (i), (ii) or a) our Contributions other than Elective
--
(iii). Deferral Contributions shall be directed
by
i) _ the Member with the Trustee's
consent(our consent, if not trusteed).
ii) X the Member.
-
iii) _ the Trustee (us, if not trusteed).
b) Select (i), (ii) or b) Elective Deferral Contributions shall be
--
(iii). directed by
i) _ the Member with the Trustee's
consent(our consent, if not trusteed).
ii) X the Member.
-
iii) _ the Trustee(us, if not trusteed).
c) Select (i), (ii) or c) Member Contributions and Rollover
--
(iii) Contributions shall be directed by
i) _ the Member with the Trustee's
consent(our consent, if not trusteed).
ii) X the Member.
-
iii) _ the Trustee (us, if not trusteed).
<PAGE> 76
Exhibit 10-35
Page 24 of 38
U. VESTING PERCENTAGE is used to determine the
nonforfeitable percentage of a Member's Account
resulting from our Contributions.
The Vesting Percentage for a Member who is an
Employee who is an Employee on the date he
reaches Normal Retirement Age, meets the
requirement(s) for Early Retirement Date,
becomes Totally Disabled or dies, whichever
occurs first, shall be 100% on such date.
1) Check any other Employer 1) Fully Vested Contributions. Elective
Contributions which areo Deferral Contributions are 100% vested. The
also 100% vested. following Employer Contributions are 100%
vested. The following Employer Contributions
are also 100% vested at all time.
a) _ All other Employer Contributions.
b) _ Additional Contributions.
c) _ Matching Contributions.
d) _ Discretionary Contributions.
2) Select one of the 2) A Member's Account resulting from our
schedules below if some Contributions which are not 100% vested is
Employer Contributions subject to the Vesting Percentage
aren't 100% vested determined below.
when made.
Vesting
Service Vesting Percentage
e) If selected, fill in the (a) (b) (c) (d) (e)
percentages. The schedule _ _ _ _ X
must provide full (100%)
vesting after 5 years of Less
Vesting Service or must than 1 0 0 0 0 0
---
at all times be as great 1 0 0 0 0 20
---
as the Vesting Percentage 2 0 20 0 0 40
---
which the schedule in 3 100 40 0 20 60
---
(d) would provide. 4 60 0 40 80
---
5 80 100 60 100
---
6 100 80 ___
7 100 ___
A Member's Vesting Percentage determined above
shall never be reduced in later years. If this
Plan is or ever has been a Top-heavy Plan, the
minimum vesting provisions of Article X shall
apply.
<PAGE> 77
Exhibit 10-35
Page 25 of 38
V. Select (1) or (2). V. VESTING SERVICE, subject to the provisions of
(Don't use this item if Plan Section 1.02, shall be determined as
if all Employer follows:
Contributions are fully
vested and Early 1) _ ELAPSED TIME METHOD. Vesting Service is the
---
Retirement Date is not total of an Employee's countable Periods of
based on Vesting Service without regard to Hours of Service.
Service.)
Use (a), (b) or both only a) _ The Elapsed Time Method is used to
if the method of crediting determine servie on and after _____________,
service has changed. _______
The Plan must use either
the Elapsed Time Method or b) _ The Elapsed Time Method is used to
the Hours Method after the determine service before__________. _______.
date the Plan became
subject to ERISA.
2) X HOURS METHOD. A year of Vesting Service
-
is a Vesting Service Period in which an
Employee has 1,000 Hours of Service, unless
a lesser number is specified in (a) below.
a) Optional reduced Ho a) _ _____ Hours of Service.
of Service.
b) A VESTING SERVICE PERIOD is the 12-
consecutive month period ending on the
last day of each Plan Year, unless
otherwise specified in (i) or (ii) below.
i) Optional Vesting Service i) _ The 12-consecutive month period end-
Period. ing on each _____________ (month and
day).
ii)Optional Vesting Service ii) _ The 12-consecutive month period
Period which changes. ending on
A. each ____________(month and day)
through
B. Month and day used in A. B. ____________________, ______
and
C. Month and day on which C. each following __________________
new period ends. (month and day).
<PAGE> 78
Exhibit 10-35
Page 26 of 38
c) A VESTING BREAK in service, when the
Hours Method is used, is a Vesting
Service Period in which an Employee is
credited with not more than one-half of
the Hours of Service required for a year
of Vesting Service, unless otherwise
specified in (i) below.
i) Optional Hours of i) _ ____ or fewer Hours of Service.
Service requirement.
Fill in up to 500 hours,
but less than hours
required for year of
Vesting Service.
d) and e). See comment for d) X The Hours Method is used to determine
-
V (1)(a) and (b). service on and after April 1. 1998.
e) _ The Hours Method is used to determine
service before _______, _____.
Select any modifications Vesting Service is modified as follows:
below which apply. If the
Hours Method is used, any 3) X Service before April 1, 1998
- ------- ----
data you use should be the
first day of a service
period.
a) Not available for service a) X is the total of an Employee's countable
-
afterthe date the Plan service with us, expressed in whole years
became subject to ERISA. and fractional parts of a year (counting
a partial month as a complete month).
b) _ shall be determined under the
provisions of the Plan in effect on the
day before that date.
4) If selected, fill in a 4) _ Service before _________, _______ shall
date on or before the not be counted.
Effective Date.
5) Not over age 18. 5) _ Service before an Employee attains age ___
shall not be counted. (If the Hours Method
---
is used, service during the Vesting Service
Period in which he attains this age shall
not be excluded because of this item.)
<PAGE> 79
Exhibit 10-35
Page 27 of 38
W. WITHDRAWAL BENEFITS
1) A Member may withdraw, in a single sum, any
part of his Vested Account resulting from
Voluntary Contributions. A Member may make
only two such withdrawals in any twelve-
month period, unless otherwise specified in
(a) below.
a) Optional frequency for a) _ A Member may make
withdrawal of Voluntary
Contributions. i) _ such a withdrawal at any time.
selected check (i) or
--
(ii). ii) _ only ______ such withdrawal(s) in
any twelve-month period.
2) Optional 401(k) hardship 2) X Unless otherwise specified in (a) below,
-
withdrawal. a Member may withdraw any part of his
Vested Account which does not result from
Voluntary Contributions, Qualified
Matching Contributions or Qualified
Nonelective kContributions in the event of
undue financial hardship. Withdrawals from
the Member's Account resulting from
Elective Deferral Contributions shall be
limited to the amount of the Member's
Elective Deferral Contributions (and
earnings thereon accrued as of December 31,
1998). The withdrawal is subject to the
provisions of Plan Section 5.05.
a) Optional restriction on a) X Such withdrawal shall be limited to the
-
hardship withdrawal. amount of the Member's Elective Deferral
Contributions (and earnings thereon
accrued as of December 31, 1998).
3) Optional withdrawal 3) X A Member may withdraw any part of his
-
after age 59 1/2. Vested Account which does not result from
Voluntary Contributions at any time after
he attains age 50 1/2. A Member may make
only two such withdrawals in any
twelve-month period unless otherwise
specified in (a) below.
a) Optional frequency for a) X A Member may make
-
withdrawal after age
59 1/2. If selected, i) X such a withdrawal at any time.
-
check (i) or (ii).
--
ii) _ only _____ such withdrawal(s) on
any twelve-month period.
4) Optional withdrawal 4) _ A percentage of a Member's Vested Account
after 5 years as an which does not result from Voluntary
Active Member. Must have Contributions, Elective Deferral
Matching Contributions Contributions, Qualified Matching
that are not qualified, Contributions or Qualified Nonelective
Additional Contributions Contributions may be withdrawn after he has
or Discretionary been an Active Member for at least five (5)
Contributions. If . years.
selected, check (a),
(b), (c) or (d) The percentage which may be withdrawn is
--
a) _ 25%.
b) _ 25% or 50%, as he requests.
<PAGE> 80
Exhibit 10-35
Page 28 of 38
c) _ 25%, 50% OR 75%, as he requests.
d) _ any percentage up to ____%, as he
requests.
A Member shall not make another withdrawal
under this item until he has been an Active
Member for at least five (5) years since his
last withdrawal.
Note: Withdrawals are subject to the
-----
qualified election procedures of Article VI.
X. RETIREMENT AND THE START OF BENEFITS
1) Normal Retirement Age 1) NORMAL RETIREMENT AGE is the age at which
may not exceed any the Member's Account shall become
mandatory retirement age nonforfeitable if he is an Employee. A
imposed by you on your Employee. A Member's Normal Retirement Age
Employees. Must use (a) is 65, unless otherwise specified in (a) or
or (b) if manadatory age (b) below.
is younger than 65.
a) Optional Normal a) _ Age ___.
Retirement Age . Fill
in age younger than 65.
b) Optional Normal b) _ The older of age ____ or his age on the
Retirement Age.Select
(i) or (ii) and fill in
--
up to age 65.
i) Fill in up to 5 years. i) _ date ___ years after the first day
of the Plan Year in which his Entry
Date occurred.
ii) Fill in up to 5 years. ii) _ earlier of the date ___ years after
his Hire Date or the date 5 years
after the first day of the Plan Year
in which his Entry Date occurred.
iii)Optional maximum Normal iii)_ A Member's Normal Retirement Age
Normal Retirement Age if Retirement Age shall not be older
(b) is selected. Fill in than age _____.
up to age 70.
c) _ A Member's Normal Retirement Age shall
not be older than normal retirement age
---
under the Plan on the day before any
change in the Normal Retirement Age
provisions, if he was a Member of such
date.
<PAGE> 81
Exhibit 10-35
Page 29 of 38
(2) Select (a) or (b). 2) EARLY RETIREMENT DATE
--+
a) If selected, check and a) X Early Retirement Date is the first day
-
complete any of the month before a Member's Normal
requirements below Retirement Date which he selects for the
which apply. An start of retirement benefits. This day
Employee's Account is shall be on or after the date the Member
100% vested when the ceases to be an Employee and the date the
requirements are met. following requirement(s) are met.
i) X He is age 55.
- --
ii) X He has 5 years of Vesting Service.
- -
iii)_ He is within ____ years of Normal
Retirement Date.
iv) _ He has been an Active Member
_____ years.
b) _ Early retirement is not permitted.
---
3) Optional modification 3) Section 5.03 permits an Employee to elect to
of the start of benefits. start benefits after he ceases to be an
Check (a) or (b). Employee. The start of benefits is modified
--
as follows:
a) _ Benefit payments from that part of a
Member's Vested Account resulting from
our Contributions shall not begin before
the Member retires, becomes Totally
Disabled or dies. A small Vested Account
may be paid earlier in a single sum (See
Plan Section 9.10.)
i) Optional. Restriction i) _ Such restriction shall not apply to
does not apply to that part of a Member's Vested Account
Elective Deferral resulting from Elective Deferral
Contributions. Deferral Contributions.
b) If selected, check (i) b) _ The Member may elect to receive his
or (ii). Member Contribution in a single sum. Any
--
other benefit payment under Plan Section
5.03 shall not begin before the Member
has ceased to be an Employee for a period
of time.Payment of a small Vested Account
will also be delayed. (see Plan Section
9.10.) The period of time is
i) _ ______ month(s).
ii) _ _____ year(s).
<PAGE> 82
Exhibit 10-35
Page 30 of 38
Y. FORMS OF DISTRIBUTION
1) If selected, check 1) _ A Member may not receive a single sum
------
(a) or (b). payment of that part of his Vested Account
--
resulting from our Contributions
a) _ at any time.
b) _ before the Member retires or becomes
Totally Disabled.
A small Vested Account may be paid in a
single sum. (See Plan Section 9.10.)
<PAGE> 83
Exhibit 10-35
Page 31 of 38
BLANK PAGE
<PAGE> 84
Exhibit 10-35
Page 32 of 38
By executing this Adoption Agreement, we, the Employer adopt "Principal
Financial Group Prototype for Savings Plans" for the exclusive benefit of our
employees. Our selections and specifications contained in this Adoption
Agreement and the terms, provisions and conditions provided in Principal
Financial Group Prototype Basic Savings Plan constitute our PLAN. No other basic
plan may be used with this Adoption Agreement.
It is understood that Principal Life Insurance Company is not a party to our
Plan and shall not be responsible for any tax or legal aspects of our Plan. We
assume responsibility for these matters. We acknowledge that we have counseled,
to the extent necessary, with selected legal and tax advisors. The obligations
of Principal Life Insurance Company shall be governed solely by the provisions
of its contracts and policies. Principal Life Insurance Company shall not be
required to look into any action taken by the Plan Administrator, Named
Fiduciary, Trustee or us and shall be fully protected in taking, permitting or
omitting any action on the basis of our actions. Principal Life Insurance
Company shall incur no liability or responsibility for carrying out actions as
directed by the Plan Administrator, Named Fiduciary, Trustee or us.
This Plan is an important legal document. It may not fit your situation. You
will want to consult with your lawyer on whether it does or not and on its tax
and legal implications, for which neither Principal Life Insurance Company nor
its agents can assume responsibility.
Failure to properly fill out this Adoption Agreement may result in
disqualification of this Plan. Principal Life Insurance Company will inform you
of any amendments made to the Plan or of the abandonment of the Plan. The
address of Principal Life Insurance Company is 711 High Street, Des Moines, Iowa
50392-0001. When you first adopt the prototype, Principal Life will assgin a
contact person and give you a toll-free number. If you have not been assigned a
contact person, call 1-800-543-4015, Extension 75397, for assistance.
The opinion letter issued by the National Office of the Internal
Revenue Service applies to the prototype form. You may not rely on it
as evidence that your Plan is qualified under Code Section 401. In
order to obtain reliance with respect to the qualification of your
plan, you must apply to your Key District Office for a determination
letter.
(Complete in black ink.)
This Adoption Agreement is executed October 30, 98.
----------- ------
(month and day)(year)
FOR THE EMPLOYER
By /s/Gerald A. Teele
----------------------------------
(signature)
Senior Vice President/CFO
-------------------------------------
(title)
- By my signature above, I hereby
execute this Adoption Agreement on
behalf of each Adopting Employer
identified in Item Z.
ACKNOWLEDGEMENT BY NAME FIDUCIARY
(IF OTHER THAN THE EMPLOYER OR TRUSTEE)
By___________________________________
(signature)
Amend No. 2, Effective June 1, 1998 Annuity Contract No.: GA 4-32869
-------
<PAGE> 85
Exhibit 10-35
Page 33 of 38
BLANK PAGE
<PAGE> 86
Exhibit 10-35
Page 34 of 38
Z. ADOPTING EMPLOYERS
There are no Adopting Employers under this Plan.
<PAGE> 87
Exhibit 10-35
Page 35 of 38
BLANK PAGE
<PAGE> 88
Exhibit 10-35
Page 36 of 38
FOR THE TRUSTEE(S)
By /s/Gerald A. Teele
-------------------------------------------------------------------
(signature)
Title: SENIOR VICE PRESIDENT/CFO
-------------------------------------------------------------------
Address: 150 ROWAN STREET
-------------------------------------------------------------------
FAYETTEVILLE NC 28302-0909
-------------------------------------------------------------------
By /s/Terrance D. Davis
-------------------------------------------------------------------
(signature)
Title: SENIOR VICE PRESIDENT/CFO
-------------------------------------------------------------------
Address: 150 ROWAN STREET
-------------------------------------------------------------------
FAYETTEVILLE NC 28302-0909
-------------------------------------------------------------------
By /s/ E. J. Mercier, Jr
-------------------------------------------------------------------
(signature)
Title: VICE PRESIDENT/CFO
-------------------------------------------------------------------
Address: 150 ROWAN STREET
-------------------------------------------------------------------
FAYETTEVILLE NC 28302-0909
-------------------------------------------------------------------
By
-------------------------------------------------------------------
(signature)
Title:
-------------------------------------------------------------------
Address:
-------------------------------------------------------------------
Amend No 2, Effective June 1, 1998 Annuity Contract No.: GA 4-32869
-------
<PAGE> 89
Exhibit 10-35
Page 37 of 38
FOR THE TRUSTEE(S)
By
-------------------------------------------------------------------
(signature)
Title:
-------------------------------------------------------------------
Address:
-------------------------------------------------------------------
By
-------------------------------------------------------------------
(signature)
Title:
-------------------------------------------------------------------
Address:
-------------------------------------------------------------------
By
-------------------------------------------------------------------
(signature)
Title:
-------------------------------------------------------------------
Address:
-------------------------------------------------------------------
By
-------------------------------------------------------------------
(signature)
Title:
-------------------------------------------------------------------
Address:
-------------------------------------------------------------------
Amend No 2, Effective June 1, 1998 Annuity Contract No.: GA 4-32869
<PAGE> 90
Exhibit 10-35
Page 38 of 38
Item R(3)(b) The method used to limit Annual Additions to the Maximum
Permissible Amount:
Item R(4) The method used to satisfy the 1.0 limitation of Code Section 415:
The Projected Annual Benefit shall be limited first. If the Member's annual
benefit(s) equal his Projected Annual Benefit, as limited, then Annual Additions
to the defined contribution plan(s) shall be limited to the extent needed to
reduce the sum to 1.0. First, the voluntary contributions the Member may make
for the Limitation Year shall be limited. Next, any forfeitures reallocated to
the Member shall be reallocated to remaining Members to the extent necessary to
reduce the decimal to 1.0. Last, to the extent necessary, employer contributions
for the Limitation Year shall be reallocated or limited, and any required and
optional employee contributions to which such employer contributions were geared
shall be reduced in proportion. If, for the Limitation Year, the Member has an
AnnualAddition under more than one defined contribution plan or welfare benefit
fund or individual medical account maintained by the Employer, as defined in
Plan kSection 3.06. any reduction above shall be made using the same method used
to limit Annual Additions to the Maximum Permissible Amount.
Item R(9) The method used to meet the minimum contribution and allocation
requirements in Years when this is a Top-heavy Plan.
To meet the minimum in Item R and Article X, the minimum accrued
benefit shall be provided under our defined benefit plan for a Non-key
Employuee who is covered under our defined benefit plan and who would
otherwise be entitled to a minimum defined contribution plan allocation or
contribution. Any selection or modification made in Items R(6), and R(8)
shall also apply.
<PAGE> 91
Exhibit 10-36
Page 1 of 2
FIFTH AMENDMENT TO
NATURAL GAS SERVICE AGREEMENT BETWEEN
THE CITY OF MONROE, NC
AND
NORTH CAROLINA NATURAL GAS CORPORATION
This Fifth Amendment entered into to be effective on the 1st day of June,
1998, 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 effective December 6, 1991 ("the Agreement"); the First Amendment
effective November 1, 1992; the Second Amendment dated January 1, 1995; the
Third Amendment dated November 1, 1996; the Fourth Amendment dated November 1,
1997 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:
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 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.
City Gate Stations #3 (Airport), #7 (Crestview), and #8
(Broadview) are to be abandoned by mutual consent on or before
June 1, 1999.
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 53 Mcf per hour and 1060
Mcf per day.
3. 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 June 1, 1998* 60 27 540
June 1, 1998* to October 31, 1998 75 60 1,200
After October 31, 1998 * 75 144 2,800
<PAGE> 92
Exhibit 10.36
Page 2 of 2
*These dates contingent upon approval of the Fifth Amendment by
June 1, 1998 or will adjusted accordingly.
4.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 11
Mcf per hour and 220 Mcf per day.
5.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.
2. This Fifth Amendment shall become effective on June 1, 1998.
3. 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.
-------------------------------------
CITY SEAL
Title: MAYOR
-------------------------------
Attest::
------------------------------
CITY CLERK
NORTH CAROLINA NATURAL GAS CORPORATION
--------------------------------------
CORPORATE SEAL
Title:
-------------------------------
Attest::
------------------------------
<PAGE> 93
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 11, 1998
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000072596
<NAME> NORTH CAROLINA NATURAL GAS CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $225,139
<OTHER-PROPERTY-AND-INVEST> 5,047
<TOTAL-CURRENT-ASSETS> 38,500
<TOTAL-DEFERRED-CHARGES> 2,752
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 271,438
<COMMON> 25,312
<CAPITAL-SURPLUS-PAID-IN> 34,625
<RETAINED-EARNINGS> 63,264
<TOTAL-COMMON-STOCKHOLDERS-EQ> 123,201
0
0
<LONG-TERM-DEBT-NET> 59,000
<SHORT-TERM-NOTES> 20,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 2,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 67,237
<TOT-CAPITALIZATION-AND-LIAB> 271,438
<GROSS-OPERATING-REVENUE> 231,915
<INCOME-TAX-EXPENSE> 10,293
<OTHER-OPERATING-EXPENSES> 199,527
<TOTAL-OPERATING-EXPENSES> 209,820
<OPERATING-INCOME-LOSS> 32,654
<OTHER-INCOME-NET> 133
<INCOME-BEFORE-INTEREST-EXPEN> 32,521
<TOTAL-INTEREST-EXPENSE> 5,080
<NET-INCOME> 17,148
0
<EARNINGS-AVAILABLE-FOR-COMM> 17,148
<COMMON-STOCK-DIVIDENDS> 9,890
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 38,007
<EPS-PRIMARY> 1.70
<EPS-DILUTED> 1.70
</TABLE>
