<PAGE>1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $2.50 par value 10,096,956
- ----------------------------- -----------------------------
Class Number of Shares
<PAGE>2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NORTH CAROLINA NATURAL GAS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
ASSETS
June 30, September 30,
1998 1997
(unaudited) (audited)
------------- -------------
Gas Utility Plant
In service $ 312,561 $ 303,652
Less-Accumulated depreciation and amortization (112,416) (104,268)
------------- -------------
200,145 199,384
Construction work in progress 19,457 4,176
------------- -------------
Utility Plant, net 219,602 203,560
------------- -------------
Nonutility Property 7,490 6,744
Less-Accumulated depreciation (2,633) (2,504)
------------- -------------
Nonutility Property, net 4,857 4,240
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Current Assets
Cash and temporary cash investments 1,508 962
Restricted cash and temporary cash investments 4,683 4,606
Accounts receivable, less reserve 16,475 17,359
Recoverable purchased gas costs - 1,020
Inventories, at average cost -
Gas in storage 7,270 8,799
Materials and supplies 7,587 3,386
Merchandise 1,594 1,351
Deferred gas cost-unbilled volumes 572 647
Prepaid income taxes - 4,521
Other current assets 270 339
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Total Current Assets 39,959 42,990
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Investment in joint ventures 467 301
Deferred charges and other assets 3,100 2,160
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Total Assets $ 267,985 $ 253,251
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------------- -------------
(The accompanying notes are an integral part of these balance sheets)
<PAGE>3
NORTH CAROLINA NATURAL GAS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
CAPITALIZATION AND LIABILITIES
June 30, September 30,
1998 1997
(unaudited) (audited)
------------- -------------
Capitalization
Stockholders' investment:
Common stock, par value $2.50;
24,000 shares authorized;
shares issued and outstanding: 06/30/98-10,095;
09/30/97-10,001 $ 25,237 $ 25,003
Capital in excess of par value 34,024 32,173
Retained earnings 65,681 56,047
------------- -------------
Total Stockholders' Investment 124,942 113,223
------------- -------------
Long-term debt 59,000 61,000
------------- -------------
Total Capitalization 183,942 174,223
------------- -------------
Current Liabilities
Current maturities of long-term debt 2,000 2,000
Notes payable 13,000 15,000
Accounts payable 18,064 16,923
Refunds payable 3,237 -
Customer deposits 2,204 2,081
Restricted supplier refunds 4,683 4,606
Accrued interest 871 2,294
Accrued income and other taxes 1,708 1,840
Other current liabilities 4,597 2,598
------------- -------------
Total Current Liabilities 50,364 47,342
------------- -------------
Other Credits
Deferred income taxes 23,375 22,709
Regulatory liability related to income taxes, net 2,077 2,232
Unamortized investment tax credits 2,377 2,523
Postretirement and postemployment benefit liability 3,288 2,979
Other 2,562 1,243
------------- -------------
Total Other Credits 33,679 31,686
------------- -------------
Total Capitalization and Liabilities $ 267,985 $ 253,251
------------- -------------
(The accompanying notes are an integral part of these balance sheets)
<PAGE>4
NORTH CAROLINA NATURAL GAS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
For the Three Months Ended June 30, 1998 and 1997
(in thousands except per share amounts)
1998 1997
------------- -------------
Operating Revenues $ 32,643 $ 30,678
Cost of Gas 17,873 16,864
------------- -------------
Gross Margin 14,770 13,814
------------- -------------
Operating Expenses and Taxes:
Operations and Maintenance 6,591 6,118
Depreciation 2,856 2,540
General Taxes 1,756 1,678
Income Taxes 953 989
------------- -------------
Total Operating Expenses and Taxes 12,156 11,325
------------- -------------
Operating Income 2,614 2,489
Other Income (Loss), net 26 (89)
------------- -------------
Income Before Utility Interest Charges 2,640 2,400
Utility Interest Charges 1,117 1,055
------------- -------------
Net Income $ 1,523 $ 1,345
------------- -------------
------------- -------------
Average Common Shares Outstanding (Note 2) 10,075 9,958
------------- -------------
------------- -------------
Basic Earnings Per Share (Notes 2 and 5) $ 0.15 $ 0.13
------------- -------------
------------- -------------
Diluted Earnings Per Share (Notes 2 and 5) $ 0.15 $ 0.13
------------- -------------
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Dividends Declared Per Share (Note 2) $ 0.25 $ 0.23
------------- -------------
------------- -------------
(The accompanying notes are an integral part of these statements)
<PAGE>5
NORTH CAROLINA NATURAL GAS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
For the Nine Months Ended June 30, 1998 and 1997
(in thousands except per share amounts)
1998 1997
------------- -------------
Operating Revenues $ 148,650 $ 153,513
Cost of Gas 84,970 92,649
------------- ------------
Gross Margin 63,680 60,864
------------- ------------
Operating Expenses and Taxes:
Operations and Maintenance 19,530 18,588
Depreciation 8,433 7,482
General Taxes 6,970 6,854
Income Taxes 9,292 9,287
------------- ------------
Total Operating Expenses and Taxes 44,225 42,211
------------- ------------
Operating Income 19,455 18,653
Other Income, net 1,307 2,366
------------- ------------
Income Before Utility Interest Charges 20,762 21,019
Utility Interest Charges 3,722 3,280
------------- ------------
Net Income $17,040 $17,739
------------- ------------
------------- ------------
Average Common Shares Outstanding (Note 2) 10,044 9,914
------------- ------------
------------- ------------
Basic Earnings Per Share (Notes 2 and 5) $1.70 $1.79
------------- ------------
------------- ------------
Diluted Earnings Per Share (Notes 2 and 5) $1.70 $1.79
------------- ------------
------------- ------------
Dividends Declared Per Share (Note 2) $0.73 $0.69
------------- ------------
------------- ------------
(The accompanying notes are an integral part of these statements)
<PAGE>6
NORTH CAROLINA NATURAL GAS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
For the Twelve Months Ended June 30, 1998 and 1997
(in thousands except per share amounts)
1998 1997
------------- ------------
Operating Revenues $ 176,840 $ 184,933
Cost of Gas 100,818 112,490
------------- ------------
Gross Margin 76,022 72,443
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Operating Expenses and Taxes:
Operations and Maintenance 26,397 24,750
Depreciation 11,025 9,906
General Taxes 8,578 8,473
Income Taxes 9,334 9,406
------------- ------------
Total Operating Expenses and Taxes 55,334 52,535
------------- ------------
Operating Income 20,688 19,908
Other Income, net 1,052 2,398
------------- ------------
Income Before Utility Interest Charges 21,740 22,306
Utility Interest Charges 4,845 4,379
------------- ------------
Net Income $ 16,895 $ 17,927
------------- ------------
------------- ------------
Average Common Shares Outstanding (Note 2) 10,030 9,896
------------- ------------
------------- ------------
Basic Earnings Per Share (Notes 2 and 5) $ 1.68 $ 1.81
------------- ------------
------------- ------------
Diluted Earnings Per Share (Notes 2 and 5) $ 1.68 $ 1.81
------------- ------------
------------- ------------
Dividends Declared Per Share (Note 2) $ 0.97 $ 0.90
------------- ------------
------------- ------------
(The accompanying notes are an integral part of these statements)
<PAGE>7
NORTH CAROLINA NATURAL GAS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended June 30, 1998 and 1997
(in thousands except per share amounts)
1998 1997
------------- ------------
Cash Flows From Operating Activities:
Net Income $ 17,040 $ 17,739
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 8,643 7,667
Change in deferred income taxes and
deferred investment tax credits, net 475 (244)
Change in other current assets and liabilities 11,730 2,570
Other (685) 1,377
------------- ------------
Net cash provided by operating activities 37,203 29,109
------------- ------------
Cash Flows From Investing Activities:
Property additions (28,717) (24,635)
Proceeds from Expansion Fund 1,548 -
Other, net (167) (882)
------------- ------------
Net cash used in investing activities (27,336) (25,517)
------------- ------------
Cash Flows From Financing Activities:
Increase (decrease) in notes payable (2,000) 3,000
Retirement of Long-term debt (2,000) (2,000)
Cash dividends paid (7,365) (6,774)
Issuance of common stock through dividend
reinvestment, employee stock purchase, and key
employee stock option plans 2,044 2,337
------------- ------------
Net cash used in financing activities (9,321) (3,437)
------------- ------------
Net increase in cash and temporary cash investments 546 155
Cash and temporary cash investments,
beginning of period 962 1,117
------------- ------------
Cash and temporary cash investments, end of period $ 1,508 $ 1,272
------------- ------------
------------- ------------
Cash paid for:
Interest, net of amounts capitalized $ 4,393 $ 5,281
Income taxes, net of refunds 4,750 16,136
(The accompanying notes are an integral part of these statements)
<PAGE>8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
Note 1: The condensed financial statements included in this report reflect only
normal recurring adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the periods shown. Because
of the seasonal nature of the Company's business, the results of operations
for the three and nine month periods ended June 30, 1998 are not
necessarily indicative of the results for the full year. These financial
statements have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested
that these condensed financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's annual
report for the fiscal year ended September 30, 1997.
Note 2: On January 13, 1998, the Company's Board of Directors approved a
three-for-two stock split in the form of a stock dividend effective
February 20, 1998, for Stockholders of record on January 26, 1998. All
shares issued and outstanding, as well as per share information for all
periods prior to the effective date, have been adjusted to reflect the
split.
Note 3: At June 30, 1998, the Company had $4.7 million in restricted supplier
refunds, of which $202,000 were received in the current quarter. Upon order
of the North Carolina Utilities Commission (NCUC), the Company has invested
all of these funds in U. S. Treasury securities until such time as the
Commission orders the funds transferred to an Expansion Fund (the Fund).
The Fund is administered by the Commission pursuant to legislation passed
in July 1991, and it encourages the expansion of natural gas service into
unserved areas of the State, including substantial portions of the
Company's franchised service territory which would otherwise not be
economically feasible to serve. As of June 30, 1998, the Company has
transferred a total of $14.3 million to the Fund and has $15.9 million,
including interest, in the fund. The total amount available in the Fund and
in restricted supplier refunds not yet transfer to the Fund was $20.6
million as of June 30, 1998. These Funds are available to the Company only
upon application to the NCUC for an expansion project approved by the NCUC.
On August 28, 1995, the Company was granted approval by the NCUC to extend
natural gas service into Duplin and Onslow Counties using expansion fund
dollars totaling $12.4 million. Due to delays and additional work caused by
environmental studies, the estimated costs to complete the project
increased $5.4 million. The NCUC has authorized the Company to use an
additional $4.3 million from the Fund to cover the increase in negative net
present value of the project. As of June 30,
<PAGE>9
1998 the Company, as approved by the NCUC, has received cumulative payments
of $2.0 million from the Fund for that project.
On April 29, 1998, the Company filed an application with the NCUC to
provide natural gas service to Bertie and Martin counties using the Fund.
On July 8, 1998 the Company filed an amendment to extend this project an
additional six miles to Robersonville, NC. The amended main extension
project would run approximately 40 miles from Ahoskie, NC to Robersonville,
NC and cost $12.6 million. The negative net present value of the project
requested from the Fund is $7.5 million. This amendment was accepted for
filing by the NCUC on July 31, 1998. A hearing on the Company's amended
application is scheduled for September 9, 1998.
Note 4: On May 15, 1996, the Company filed with the NCUC to recover net customer
costs of $3.0 million from exploration and development activities. The
recovery is a result of a true-up of distribution costs and revenue
benefits from the Company's past exploration and drilling programs. On
February 7, 1997, the NCUC issued its order granting a pretax recovery of
$1.9 million. The Commission's Order approved, in all material respects,
the Stipulation of Settlement reached by the Company and the Public Staff.
Due to the uncertainty of recovery, prior to the Final Order no asset or
gain was recorded in the Company's financial statements. As a result of the
above, the Company realized an $.11 increase in earnings per share in the
nine and twelve month periods ended June 30, 1997.
Note 5: 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. The adoption of SFAS No. 128 had no effect on the Basic and
Diluted EPS for the three, nine and twelve month periods ended June 30,
1998 and 1997.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Post Retirement 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 plans to adopt
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
<PAGE>10
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.
<PAGE>11
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(1) Material Changes in Financial Condition
---------------------------------------
Current cash requirements are financed primarily through internally
generated cash, the issuance of new common stock through dividend reinvestment,
employee stock purchase and key employee stock option plans along with committed
bank lines of credit totaling $36.0 million. At June 30, 1998, loans totaling
$13.0 million were outstanding under the lines of credit compared to $15.0
million outstanding at September 30, 1997.
The Company's business is seasonal in nature as fluctuations in weather
dictate injecting and withdrawing from Company storage and billings to
residential and commercial customers. Injections of natural gas into storage and
a reduction in customer billings occur during the periods of warm weather (April
through October). Withdrawals from storage and increased customer billings occur
during periods of cold weather (November through March). In addition, the cost
of gas included in storage and rates is subject to changes in market conditions.
This seasonality is the primary reason for the lower volumes of gas in storage
as of June 30, 1998, which is somewhat offset by higher average gas costs. This
also accounts for the lower level of accounts receivable in the current quarter.
Recoverable Purchased Gas Costs and Refunds Payable primarily represent the
difference between the Company's benchmark gas cost rate charged to customers
and the actual cost of gas, including demand charges. If the Company's benchmark
rate charged to customers exceeds the actual cost of gas, Recoverable Purchased
Gas Costs will decrease and Refunds Payable will increase. Should the benchmark
rate charged to customers be less than the actual cost of gas, Refunds Payable
will decrease and Recoverable Purchased Gas Costs will increase. It is the
Company's policy to manage the benchmark cost of gas to minimize, if possible,
large over or under recoveries.
Net cash provided by operating activities increased $8.1 million for the
nine months ended June 30, 1998, as compared to the same period last year. This
increase was due primarily to (1) an increase in Refunds Payable and a decrease
in Recoverable Purchased Gas Cost due to a higher benchmark cost of gas in
rates; (2) a decrease in payments for Federal Income Taxes due to prepaid income
taxes at the end of fiscal year 1997; and (3) an increase in accounts payable
due to the timing of gas purchases and purchase commitments in connection with
the Company's construction program.
Construction spending was $27.2 million, after giving effect to monies
received from the Fund, for the nine months ended June 30, 1998, compared to
$24.6 million for the same period last year. Construction expenditures for the
remainder of Fiscal Year 1998 are projected to be $16.0 million. Management
believes that the Company's lines of credit and cash provided from operating
activities will be sufficient to satisfy the Company's anticipated short-term
cash requirements during the remainder of fiscal year 1998. The Company expects
to issue long-term debt to replace short-term borrowings in early Fiscal Year
1999.
<PAGE>12
Net cash used in financing activities increased $5.9 million for the nine
months ended June 30, 1998, as compared to the same period last year. The
increase was due to strong cash flows from operating activities allowing the
Company to lower short-term debt levels by $2.0 million for the nine months
ended June 30, 1998, as compared to increased borrowings of $3.0 million in the
same period last year.
(2) Material Changes in Results of Operations
-----------------------------------------
Net income increased $178,000 for the three month period ended June 30,
1998, as compared to the same period last year. The three month period ended
June 30, 1998 was positively affected by increased margins due to continued
customer growth in the higher margin residential and commercial natural gas
markets and increased income from the Company's propane operations as compared
to the same period last year.
Net income decreased, $699,000, and $1.0 million, respectively, for the
nine and twelve month periods ended June 30, 1998, as compared to the same
periods last year. Both prior year periods ended June 30, 1997, include a
nonrecurring credit of $1.1 million related to the settlement of a long-standing
regulatory matter (see Note 4). Excluding the nonrecurring credit, net income
increased $439,000 and $96,000 for the nine and twelve month periods ended June
30, 1998. Affecting both periods were (1) a peak month customer growth rate of
4.3%; and (2) a shift in the sales mix away from lower margin industrial
customers to higher margin residential and commercial customers. These positive
factors were offset by higher utility interest charges, higher depreciation and
higher operations and maintenance expenses as a result of the greater investment
in plant and maintenance activities necessary to support the growing customer
base.
The chart below compares margins for the three, nine and twelve month
periods by customer class (000's omitted):
GROSS MARGIN BY CUSTOMER CLASS
------------------------------
3 Months 9 Months 12 Months
---------------- ---------------- ----------------
1998 1997 1998 1997 1998 1997
------- ------- ------- ------- ------- -------
Residential $ 5,301 $ 4,691 $23,106 $21,584 $26,244 $24,585
Commercial 2,869 2,608 13,855 12,625 16,230 14,933
Industrial 5,628 5,544 19,953 20,073 25,909 25,396
Municipal 972 971 6,766 6,582 7,639 7,529
------- ------- ------- ------- ------- -------
Total $14,770 $13,814 $63,680 $60,864 $76,022 $72,443
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Gross margin increased $956,000, $2.8 million, and $3.6 million,
respectively, for the three, nine and twelve month periods ended June 30, 1998,
compared to the same periods last year. Positively affecting all periods were
(1) increased customer growth in the higher margin residential and commercial
markets which the Company serves; (2) customer growth
<PAGE>13
behind the city gates of the wholesale municipal customers served by the
Company; and (3) a shift in the sales mix away from lower margin industrial
customers to higher margin residential and commercial customers. The Company's
Weather Normalization Adjustment (WNA) ratemaking mechanism largely mitigates
the change in margin from residential and commercial customers (including those
customers served by the four municipal customers) due to yearly fluctuations in
weather patterns, but is in effect only from November 16 to April 15 of each
year.
Gross margin for the industrial class of customers was down for the nine
month period ended June 30, 1998 as compared to the same nine month period last
year. This was due to a reduction in minimum contract billings in the 1998
period as compared to the same period in 1997, and a reduction in volumes
delivered during the nine months ended June 30, 1998 to interruptible customers
due to more cold weather curtailments of service to this customer rate class as
compared to the same winter period last year. In addition, the Company
experienced loss of load to alternative fuel customers who, due to lower oil
prices compared to the same period last year, switched fuel sources. Eight of
these customers are covered under the Company's Price Sensitive Volume
Adjustment (PSVA), which keeps the Company margin neutral by crediting any
margin earned to all other customers and protecting the Company against large
volume losses. However, a portion of the volumes lost from these customers
switching to an alternative fuel was offset by increased volumes to customers
which contribute greater margin.
The chart below shows total throughput volumes (in thousands of dt) for the
three, nine and twelve month periods ended June 30, 1998 and 1997 by customer
class:
THROUGHPUT VOLUMES (mdt) BY CUSTOMER CLASS
------------------------------------------
3 Months 9 Months 12 Months
---------------- ---------------- ----------------
1998 1997 1998 1997 1998 1997
------- ------- ------- ------- ------- -------
Residential 1,112 1,049 6,056 5,852 6,390 6,165
Commercial 1,136 1,113 5,270 4,993 6,428 6,103
Industrial 8,889 9,100 23,780 24,476 33,371 33,153
Municipal 1,555 1,712 7,515 7,614 8,954 9,026
------- ------- ------- ------- ------- -------
Total 12,692 12,974 42,621 42,935 55,143 54,447
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
<PAGE>14
The following chart shows the same total throughput volume classified by
sales and transportation:
THROUGHPUT VOLUMES (Mdt) BY TYPE OF SERVICE
-------------------------------------------
3 Months 9 Months 12 Months
---------------- ---------------- ----------------
1998 1997 1998 1997 1998 1997
------- ------- ------- ------- ------- -------
Sales 5,379 4,747 24,145 24,623 28,040 30,106
Transportation 7,313 8,227 18,476 18,312 27,103 24,341
------- ------- ------- ------- ------- -------
Total 12,692 12,974 42,621 42,935 55,143 54,447
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
The Company earns the same profit margin on transportation of
customer-owned gas as it earns from bundled sales service to those customers.
However, changes in the mix of transportation and sales volumes can have a
significant impact on operating revenues and cost of gas, because the commodity
cost of gas associated with transportation volumes is paid by the customer
directly to the customer's supplier and is, therefore, not incurred or billed by
the Company. Transportation volumes decreased for the three month period ended
June 30, 1998, as compared to the same period last year. This was due to the
loss of industrial customers to alternative fuel, primarily oil, as a result of
a significant decrease in the price of oil in relation to natural gas.
Transportation volumes increased for the nine and twelve month periods as
compared to same periods last year due to a higher benchmark commodity cost of
gas in the Company's rates during the winter months, causing more transportation
customers to secure their own commodity.
Weather in the Company's service area was 51%, 3.0%, and 3.0% warmer for
the three, nine and twelve month periods ended June 30, 1998, respectively,
compared to the same periods last year. However, customer growth resulted in
overall increased deliveries to weather-sensitive residential, commercial and
municipal customers. Industrial volumes decreased in the three and nine month
periods due to lower prices of competitive fuel, primarily oil, to duel fuel,
price-sensitive customers.
Operating revenues increased $2.0 million for the three month period ended
June 30, 1998, as compared to the same period last year. Operating revenues
decreased $4.9 million and $8.1 million for the nine and twelve month periods
ended June 30, 1998 as compared to the same periods last year. The increase in
the three month period and the decreases in the nine and twelve month periods
were caused by mix changes between transportation and sales volumes to
industrial and municipal customers. For the three month period ended June 30,
1998, market prices exceeded the Company's benchmark price causing a shift from
transportation services to sales services. In addition, some alternative fuel
customers, who normally transport, switched to oil due to a steep decline in oil
prices. Conversely, due to market prices which were less than the Company's
benchmark prices of gas during the nine and twelve month periods, there were
some shifts to transportation services from sales.
<PAGE>15
Cost of gas increased $1.0 million for the three month period ended June
30, 1998, as compared to the same period last year. This was due to decreased
transportation of customer-owned gas and higher sales by the Company and an
increase in the average commodity cost of gas as compared to last year. Cost of
gas decreased $7.7 million and $11.7 million for the nine and twelve month
periods ended June 30, 1998, respectively, as compared to the same periods last
year. These decreases were caused primarily by increased transportation of
customer-owned gas and lower sales of gas by the Company, and decreases in the
average commodity cost of gas in each period as compared to the same periods
last year.
Operating and maintenance expenses increased $473,000, $942,000 and $1.6
million, respectively, for the three, nine and twelve month periods ended June
30, 1998, as compared to the same periods last year. Affecting all periods were
(1) increased transmission and distribution expenses to support the Company's
customer growth rate; (2) increased employee compensation costs associated with
the increased customer base and inflation; and (3) higher employee medical
claims.
Depreciation expense increased in all periods as compared to the same
periods last year due to the addition of utility plant in service, primarily
transmission and distribution plant related to expansion and customer growth.
Income taxes decreased slightly for the three, nine and twelve month
periods ended June 30, 1998, as compared to the same periods last year. These
decreases were caused by lower utility income as a result of higher utility
interest expenses incurred to fund the Company's transmission and distribution
expenditures.
Other income net increased $115,000 for the three month period ended June
30, 1998, as compared to the same period last year. This was primarily due to
increased income from the Company's propane operations. Other income, net,
decreased $1.1 million and $1.3 million, respectively, for both the nine and
twelve month periods ended June 30, 1998 as compared to the same periods last
year. Affecting both the nine and twelve month periods was a nonrecurring
after-tax credit of $1.1 million related to the settlement of a long-standing
regulatory matter (see Note 4).
Utility interest expense increased $62,000, $442,000 and $466,000,
respectively, for the three, nine and twelve month periods ended June 30, 1998,
as compared to the same periods last year. These increases were due primarily to
increased interest expense related to higher levels of short-term borrowings
used to finance a customer growth rate of more than 4%. This was offset somewhat
by an increase in allowance for funds used during construction and lower
interest expense on long-term debt due to scheduled debt repayments.
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
non- information technology applications. As a result of this assessment, the
Company has decided
<PAGE>16
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 and 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 part 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
and vendors 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.
Statements make herein and elsewhere in this quarterly 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, and other
uncertainties, all of which are difficult to predict, and most of which are
beyond the control of the Company.
<PAGE>17
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in the Rights of the Company's Security Holders
-------------------------------------------------------
None.
Item 3. Default Upon Senior Securities
------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
None.
(b) Reports on Form 8-K
-------------------
None.
<PAGE>18
SIGNATURE
---------
Pursuant to the requirements of the Securities 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
--------------------------------------
(Registrant)
Date: August 14, 1998 /s/Gerald A. Teele
-----------------------------------------------
Gerald A. Teele
Senior Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 1998 /s/Ronald J. Josephson
-----------------------------------------------
Ronald J. Josephson
Vice President-Financial Services
(Principal Accounting Officer)
<PAGE>19
NORTH CAROLINA NATURAL GAS CORPORATION AND SUBSIDIARIES
-------------------------------------------------------
INDEX OF EXHIBITS
-----------------
The following exhibit is filed as part of this Form 10-Q for the period
ended June 30, 1998:
Exhibit
Number
- -------
10-34 - Employment Agreements executed in 1998 with certain
Executive Officers
27 - Financial Data Schedule
<PAGE>20
Exhibit 10-34
Page 1 of 6
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT made this 28th day of July, 1998, between NORTH CAROLINA NATURAL
GAS CORPORATION, a Delaware corporation, (the "Company"), and GEORGE M. BALDWIN,
(the "Executive");
The Executive is presently employed by the Company as Vice
President-Marketing;
The Board of Directors of the Company (the "Board") recognizes that the
Executive's contribution to the growth and success of the Company has been
substantial. The Board desires to provide for the continued employment of the
Executive and to specify certain aspects of the Executive's employment
arrangements with the Company in order to reinforce and encourage the continued
attention and dedication to the Company of the Executive as a member of the
Company's management, in the best interests of the Company and its shareholders.
The Executive is willing to commit himself to continue to serve the Company.
In order to effect the foregoing, the Company and the Executive wish to
enter into an employment agreement providing certain severance benefits in the
event that the Executive's employment is terminated following a change of
control in the Company. Nothing in this Agreement, however, shall alter the
Company's right to terminate the Executive's employment prior to a change in
control as defined herein.
Accordingly, in consideration of the promises and the respective covenants
and agreements of the parties herein contained, and intending to be legally
bound hereby, the parties hereto agree as follows:
<PAGE>21
Exhibit 10-34
Page 2 of 6
1. Operation of Agreement.
-----------------------
The effective date of this Agreement shall be the date on which a Change in
Control of the Company occurs. A "Change in Control" shall be deemed to have
occurred if (i) the Company consolidates or merges into or with another
corporation as a result of which the Company is not the surviving corporation,
or (ii) a majority of the outstanding shares of the Company is acquired by any
other corporation or other person or group. "Group" shall mean persons who act
in concert as described in Section 14(d)(2) of the Securities Exchange Act of
1934, as amended.
2. Period of Employment.
---------------------
The Company shall continue the Executive in its employ for a period of
three years commencing upon a Change in Control (the "Period of Employment"), in
the position and duties and responsibilities set forth below.
3. Position, Duties, Responsibilities.
-----------------------------------
During the period of Employment, the Executive shall continue to exercise
such authority and perform such executive duties as are substantially equivalent
to and reasonably commensurate with his position immediately prior to the Change
in Control, with consideration being given to the size of the Surviving
Corporation if the Company is merged into another corporation.
4. Compensation and Related Matters.
---------------------------------
(a) Salary. During the period of Employment, the Company shall pay to the
-------
Executive a salary not less than his annual rate of salary in effect at the
change in control, payable in a manner consistent with the Company's policy.
Compensation of the Executive by salary payments shall not be deemed exclusive
and shall not prevent the Executive from participating in any other compensation
or benefit plan of the Company.
<PAGE> 22
Exhibit 10-34
Page 3 of 6
(b) Other Benefits. During the period of Employment, the Company shall
----------------
maintain in full force and effect, and the Executive shall be entitled to
continue to participate in, all of its employee benefit plans and arrangements
in effect at the Change in Control, or plans or arrangements providing the
Executive with at least equivalent benefits thereunder based on all service with
the Company, including without limitation any pension and retirement plan, life
insurance, health and accident plan, and disability income plan.
The Company shall not make any changes in any employee benefit plans or
arrangements which would adversely affect the Executive's rights or benefits
thereunder, unless such change occurs pursuant to a program applicable to all
executives of the Company and does not result in a proportionately greater
reduction in the rights of, or benefits to, the Executive as compared with any
other executive of the Company. Nothing paid to the Executive under any employee
benefit plan presently in effect or made available in the future shall be deemed
to be in lieu of the salary payable to the Executive pursuant to paragraph (a)
of this Section.
5. Termination Following Change in Control.
----------------------------------------
(a) If, after a Change in Control shall have occurred, the Executive's
employment by the Company shall be terminated, then the Executive shall be
entitled to the benefits provided below, unless such termination is (i) because
of his Death or Retirement, (ii) by the Company for Cause or Disability, or
(iii) by the Executive other than for Good Reason, or such terms as defined in
paragraph (b) of this Section.
(1) The Executive's salary shall be continued for two (2) years and eleven
(11) months, provided that if the Executive shall obtain a position with another
employer at a lesser salary, the amount of the salary paid hereunder shall be
reduced to the difference, if any, between the salary continued hereunder and
the Executive's salary in the position obtained with another
<PAGE>23
Exhibit 10-34
Page 4 of 6
employer, and (2) the Executive shall be entitled to continue to participate in
any pension or retirement plan, life insurance, health and accident plan and
disability income plan for two (2) years and eleven (11) months at a level which
is not materially less than that in effect at the time of Change in Control
provided that if the Executive shall obtain a position with another employer,
the benefit plans as set out above shall be discontinued sixty (60) days after
the date the Executive is so employed.
(2) The Company shall also reimburse the Executive for all legal fees and
expenses incurred in seeking to obtain or enforce any right or benefit provided
by this Agreement.
(b) Definitions of terms as used herein are as follows:
(1) Disability. Termination by the Company of the Executive's employment
-----------
based on "Disability" shall mean termination because of his absence from his
duties with the Company on a full time basis for 180 consecutive business days,
as a result of his incapacity due to physical or mental illness.
(2) Retirement. Termination by the Company or the Executive of his
-----------
employment based on "Retirement" shall mean termination in accordance with the
Company's retirement policy, including early retirement, generally applicable to
its salaried employees.
(3) Cause. Termination by the Company of the Executive's employment for
------
"Cause" shall mean termination upon (i) the willful and continued failure by him
substantially to perform his duties with the Company (other than any such
failure resulting from his incapacity due to physical or mental illness), or
(ii) the willful engaging by him in misconduct which is materially injurious to
the Company, monetarily or otherwise.
(4) Good Reason. Termination by the Executive of his employment for "Good
------------
Reason" shall mean termination subsequent to a Change in Control based on (i)
the assignment to the Executive of any duties which are materially inconsistent
with his position as described above; or
<PAGE>24
Exhibit 10-34
Page 5 of 6
(ii) a reduction by the Company in the Executive's base salary or other benefits
as described above or as the same may be increased from time to time; or (iii)
the failure by the Company to obtain the assumption of this Agreement by any
successor as contemplated herein.
6. Successors; Binding Agreement.
------------------------------
The Company shall require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company by agreement in form and substance
satisfactory to the Executive expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. As used in this
Agreement, "Company" shall mean the Company as defined and any successor to its
business and/or assets as aforesaid which executes and delivers the agreement
provided for in this paragraph or which otherwise becomes bound by all the terms
and provisions of this Agreement by operation of law.
7. Miscellaneous.
--------------
No provisions of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing signed by
the Executive and such officer as may be specifically designated by the Board of
Directors of the Company. No waiver by either party hereto at any time of any
breach by the other party of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement.
<PAGE>25
Exhibit 10-34
Page 6 of 6
8. Governing Law.
--------------
The provisions of this Agreement shall be construed in accordance with the
laws of the State of North Carolina.
9. Counterparts.
-------------
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together will constitute one
and the same instrument.
10. Severability.
-------------
In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, the remaining
provisions of this Agreement shall be unaffected thereby and shall remain in
full force and effect.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and seal, and,
pursuant to the authorization of its Board of Directors, the Company has caused
these presents to be executed in its name on its behalf, and its corporate seal
to be hereunto affixed and attested by its Secretary, all as of the day and year
first above written.
/s/George M. Baldwin
________________________________(SEAL)
GEORGE M. BALDWIN, Executive
NORTH CAROLINA NATURAL GAS CORPORATION
/s/Calvin B. Wells
BY____________________________________
President
ATTEST:
/s/Sally T. Sowers
BY___________________________
Sally T. Sowers, Secretary
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