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 December 31, 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 10,148,752
- ----------------------------- -----------------------------
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
December 31, September 30,
1998 1998
(unaudited) (audited)
------------- -------------
Gas Utility Plant
In service $ 326,914 $ 322,595
Less-Accumulated depreciation and amortization 117,887 115,181
------------- -------------
209,027 207,414
Construction work in progress 24,243 17,725
------------- -------------
Utility Plant, net 233,270 225,139
------------- -------------
Nonutility Property 7,988 7,653
Less-Accumulated depreciation 2,744 2,687
------------- -------------
Nonutility Property, net 5,244 4,966
------------- -------------
Current Assets
Cash and temporary cash investments 2,938 2,042
Restricted cash and temporary cash investments 3,167 4,745
Accounts receivable, less reserve 16,343 14,011
Inventories, at average cost -
Gas in storage 9,336 8,243
Materials and supplies 6,909 6,417
Merchandise 1,150 1,584
Deferred gas cost-unbilled volumes 4,151 618
Other current assets 805 840
------------- -------------
Total Current Assets 44,799 38,500
------------- -------------
Investment in joint ventures 81 81
Deferred charges and other assets 3,484 2,752
------------- -------------
Total Assets $286,878 $271,438
============= =============
(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
December 31, September 30,
1998 1998
(unaudited) (audited)
------------ -------------
Capitalization
Stockholders' investment:
Common stock, par value $2.50;
24,000 shares authorized;
shares issued and outstanding: 12/31/98-10,147;
09/30/98-10,125 $ 25,369 $ 25,312
Capital in excess of par value 35,238 34,625
Retained earnings 65,583 63,264
------------ -------------
Total Stockholders' investment 126,190 123,201
------------ -------------
Long-term debt 59,000 59,000
------------ -------------
Total Capitalization 185,190 182,201
------------ -------------
Current Liabilities
Current maturities of long-term debt 2,000 2,000
Notes payable 36,000 20,000
Accounts payable 14,216 15,964
Refunds payable 2,466 1,930
Customer deposits 2,500 2,038
Restricted supplier refunds 3,167 4,745
Accrued interest 850 2,103
Accrued income and other taxes 2,845 2,623
Other current liabilities 2,779 3,261
------------ -------------
Total Current Liabilities 66,823 54,664
------------ -------------
Other Credits
Deferred income taxes 23,494 23,440
Regulatory liability related to income taxes, net 1,973 1,871
Unamortized investment tax credits 2,278 2,328
Postretirement and postemployment benefit liability 3,352 3,278
Long-term Incentive compensation and directors'
retirement obligation 1,695 1,593
Other 2,073 2,063
------------ -------------
Total Other Credits 34,865 34,573
------------ -------------
Total Capitalization and Liabilities $ 286,878 $ 271,438
============ =============
(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 December 31, 1998 and 1997
(in thousands except per share amounts)
1998 1997
-------------- -------------
Operating Revenues $ 50,042 $ 69,227
Cost of Sales 29,510 46,498
-------------- -------------
Gross Margin 20,532 22,729
-------------- -------------
Operating Expenses and Taxes:
Operations and Maintenance 6,783 7,474
Depreciation 3,027 2,809
General Taxes 1,922 2,625
-------------- --------------
Total Operating Expenses and Taxes 11,732 12,908
-------------- --------------
Operating Income 8,800 9,821
Other Income (Expense) 179 4
-------------- --------------
Income Before Interest and Taxes 8,979 9,825
Interest Charges 1,194 1,266
-------------- --------------
Net Income Before Income Taxes 7,785 8,559
Income Taxes 2,934 3,190
-------------- --------------
Net Income $ 4,851 $ 5,369
============== ==============
Average Common Shares Outstanding (Note 2) 10,131 10,008
============== ==============
Basic Earnings Per Share (Notes 2 and 6) $ 0.48 $ 0.54
============== ==============
Diluted Earnings Per Share (Notes 2 and 6) $ 0.48 $ 0.54
============== ==============
Dividends Declared Per Share (Note 2) $ 0.250 $ .0233
============= ==============
(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 Twelve Months Ended December 31, 1998 and 1997
(in thousands except per share amounts)
1998 1997
------------- --------------
Operating Revenues $ 212,730 $ 237,334
Cost of Sales 133,612 157,055
------------- --------------
Gross Margin 79,118 80,279
------------- --------------
Operating Expenses and Taxes:
Operations and Maintenance 28,112 30,064
Depreciation 11,786 10,588
General Taxes 7,854 8,810
------------- --------------
Total Operating Expenses and Taxes 47,752 49,462
------------- --------------
Operating Income 31,366 30,817
Other Income (Expense) 308 1,949
------------- --------------
Income Before Interest and Taxes 31,674 32,766
Interest Charges 5,007 4,674
------------- --------------
Net Income Before Income Taxes 26,667 28,092
Income Taxes 10,037 10,618
------------- --------------
Net Income $ 16,630 $ 17,474
============= ==============
Average Common Shares Outstanding (Note 2) 10,090 9,968
============= ==============
Basic Earnings Per Share (Notes 2 and 6) $ 1.650 $ 1.750
============= ==============
Diluted Earnings Per Share (Notes 2 and 6) $ 1.650 $ 1.750
============= ==============
Dividends Declared Per Share (Note 2) $ 1.000 $ 0.933
============= ==============
(The accompanying notes are an integral part of these statements)
<PAGE> 6
NORTH CAROLINA NATURAL GAS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended December 31, 1998 and 1997
(in thousands except per share amounts)
1998 1997
---------- ----------
Cash Flows From Operating Activities:
Net Income $ 4,851 $ 5,369
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,027 2,809
Change in deferred income taxes and
deferred investment tax credits, net (139) 159
Change in other current assets and liabilities (11,155) (6,258)
Other 1,610 66
---------- ----------
Net cash provided by (used in) operating activities (1,806) 2,145
---------- ----------
Cash Flows From Investing Activities:
Property additions (12,850) (9,219)
Proceeds from Expansion Fund 1,415 295
Other, net - (81)
---------- ----------
Net cash used in investing activities (11,435) (9,005)
---------- ----------
Cash Flows From Financing Activities
Increase in notes payable 16,000 10,000
Cash dividends paid (2,532) (2,335)
Issuance of common stock through dividend reinvestment,
employee stock purchase, and key employee stock
option plans 669 509
---------- ----------
Net cash provided by financing activities 14,137 8,174
---------- ----------
Net increase in cash and temporary cash investments 896 1,314
Cash and temporary cash investments,
beginning of period 2,042 962
---------- ----------
Cash and temporary cash investments, end of period $ 2,938 $ 2,276
---------- ----------
Cash paid for:
Interest, net of amounts capitalized $ 1,483 $ 2,841
Income taxes, net of refunds $ 1,355 -
(The accompanying notes are an integral part of these statements)
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
December 31, 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-month period ended December 31, 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, 1998.
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. Shares
outstanding and per share information for all periods presented prior to
February 20, 1998 have been adjusted to reflect the stock split.
Note 3 Long-Term Debt at December 31, 1998:
Amount Due
Within
Issue One Year Total
- ----- ---------------- ----------------
7.15% Senior Notes,
due 11/15/15 $ - $ 30,000,000
9.21% Debentures, Series C,
due 11/15/11 - 25,000,000
8.75% Debentures, Series B,
due 06/15/01 2,000,000 4,000,000
---------------- ----------------
Long-Term Debt $ 2,000,000 $ 59,000,000
=============== ================
Note 4: At December 31, 1998, the Company had $3.2 million in restricted
supplier refunds, of which $2.9 million was 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 the Company's
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
<PAGE> 8
substantial portions of the Company's franchised service territory. As of
December 31, 1998, the Company had transferred a total of $18.9 million to
the Fund and has $17.4 million, including interest, in the Fund. The total
amount available in the Fund and in restricted supplier refunds not yet
transferred to the Fund was $20.6 million as of December 31, 1998. These
funds are available to the Company only upon application to the NCUC for an
expansion project approved by the NCUC.
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 Lejune in Jacksonville, North
Carolina. In Fiscal 1998, the Company constructed the first 20-mile segment
of 10-inch pipeline to Warsaw in Duplin County. The Company continues 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 1999. Due to changes in construction procedures
and delays caused by the environmental studies, the estimated cost to
complete the project has increased $5.5 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. This
amendment was accepted for filing by the NCUC on July 31, 1998. A hearing
on the Company's amended application was held in September 1998, and the
NCUC issued its Order approving the project on November 19, 1998.
Note 5: 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
of the NCUC. 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 $.11 per share of income in the
twelve-months ended December 31, 1997. This income has been recorded in
Other Income (Expense) in the accompanying financial statements.
Note 6: In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, "Earnings Per Share". SFAS No. 128 required 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
<PAGE> 9
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.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." 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 adopted SFAS No. 130 on October 1, 1998
and it did not have a material impact on the Company's financial
statements.
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.
Note 7: 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, propane sales and
<PAGE> 10
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 southcentral
and eastern North Carolina.
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> 11
The following table reconciles reportable segment revenues and expenses for
the three and twelve-months ended December 31 (in thousands):
Three Months Ended Three Months Ended
December 31, 1998 December 31, 1997
-------------------------- -----------------------------
Regulated Unregulated Total Regulated Unregulated Total
---------- -------- -------- -------- -------- --------
Revenues $ 35,963 $ 14,079 $ 50,042 $ 58,458 $ 10,769 $ 69,227
Cost of Sales 17,422 12,088 29,510 37,767 8,731 46,498
---------- -------- -------- -------- -------- --------
Gross Margin 18,541 1,991 20,532 20,691 2,038 22,729
Operating
Expenses 10,498 1,234 11,732 11,748 1,160 12,908
Other (Income)
Expense (33) (146) (179) (4) - (4)
Interest
Expense, net 1,121 73 1,194 1,189 77 1,266
---------- -------- -------- -------- -------- --------
Income
Before Taxes 6,955 830 7,785 7,758 801 8,559
Income Taxes 2,602 332 2,934 2,877 313 3,190
---------- -------- -------- -------- -------- --------
Net Income $ 4,353 $ 498 $ 4,851 $ 4,881 $ 488 $ 5,369
========== ======== ======== ======== ======== ========
Property $ 351,157 $ 7,988 $359,145 $316,087 $ 7,337 $323,424
Accumulated
Depreciation 117,887 2,744 120,631 106,957 2,543 109,500
---------- -------- -------- -------- -------- --------
Net Property $ 233,270 $ 5,244 $238,514 $209,130 $ 4,794 $213,924
========== ======== ======== ======== ======== ========
Capital
Expenditures
(net) $ 11,086 $ 349 $ 11,435 $ 8,405 $ 600 $ 9,005
========== ======== ======== ======== ======== ========
<PAGE> 12
Twelve Months Ended Twelve Months Ended
December 31, 1998 December 31, 1997
------------------------------ -----------------------------
Regulated Unregulated Total Regulated Unregulated Total
---------- -------- -------- -------- -------- --------
Revenues $ 151,952 $ 60,778 $212,730 $186,707 $ 50,627 $237,334
Cost of Sales 78,995 54,617 133,612 112,674 44,381 157,055
---------- -------- -------- -------- -------- --------
Gross Margin 72,957 6,161 79,118 74,033 6,246 80,279
Operating
Expenses 43,773 3,979 47,752 45,173 4,289 49,462
Other (Income)
Expense (157) (151) (308) (53) (1,896) (1,949)
Interest
Expense, net 4,727 280 5,007 4,386 288 4,674
---------- -------- -------- -------- -------- --------
Income
Before Taxes 24,614 2,053 26,667 24,527 3,565 28,092
Income Taxes 9,221 816 10,037 9,226 1,392 10,618
---------- -------- -------- -------- -------- --------
Net Income $ 15,393 $ 1,237 $ 16,630 $ 15,301 $ 2,173 $ 17,474
========== ======== ======== ======== ======== ========
Property $ 351,157 $ 7,988 $359,145 $316,087 $ 7,337 $323,424
Accumulated
Depreciation 117,887 2,744 120,631 106,957 2,543 109,500
---------- -------- -------- -------- -------- --------
Net Property $ 233,270 $ 5,244 $238,514 $209,130 $ 4,794 $213,924
========== ======== ======== ======== ======== ========
Capital
Expenditures
(net) $ 35,658 $ 575 $ 36,233 $ 29,742 $ 1,077 $ 30,819
========== ======== ======== ======== ======== ========
Other (Income) Expense, for the twelve-months ended December 31, 1997,
includes a one-time pretax credit of $1.9 million related to the recovery
of past exploration and development costs.
Note 8: On November 10, 1998, the Company and Carolina Power & Light ("CP&L"),
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 wholly-owned 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 would receive 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
<PAGE> 13
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 which
presently intends that the 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 North Carolina Utilities Commission, the
South Carolina Public Service Commission, the Securities and Exchange
Commission, the filing of an exemption statement on Form U-3A-2 with the
SEC pursuant to the Public Utility Holding Company Act, 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> 14
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
and an employee stock purchase plan along with short-term loans from committed
and uncommitted bank lines. During the quarter ended December 31, 1998, the
Company increased its committed bank lines of credit by $3.0 million to $39.0
million. In addition to its committed bank lines of credit, the Company has
uncommitted lines bank lines of credit totaling $30 million. At December 31,
1998, loans totaling $36.0 million were outstanding under the lines of credit
compared to $20.0 million outstanding at September 30, 1998. The additional bank
loans in the current quarter were necessary to provide funds for the Company's
ongoing construction program and to finance the normal seasonal increases in
working capital, principally accounts receivable and recoverable purchased gas
costs.
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 in customers' rates is subject to changes in
market conditions. Natural gas volumes in storage as of December 31, 1998, as
compared to September 30, 1998, were higher as a result of the seasonality of
the business and lower demand due to weather which was 25% warmer than normal
and 27% warmer than the same quarter last year. Also, this seasonality and the
higher gas costs included in customer' rates accounts for the higher level of
accounts receivable and deferred gas cost-unbilled volumes in the current
quarter.
Refunds payable primarily represent the difference between the Company's
benchmark gas cost rate charged to customers and the actual cost of gas. The
increase in refunds payable is due to the market price of natural gas being
lower than the benchmark rate included in the Company's rates in the last
quarter of calendar 1998. The balance will be refunded in rates to customers in
future periods.
Accounts payable decreased $1.7 million during the first quarter of fiscal
year 1998 compared to September 30, 1998. The primary reason for this decrease
was lower gas cost payables due to lower gas purchases and lower commodity
prices of gas, both as a result of warmer-than-normal weather which has reduced
natural gas consumption and resulted in historically low natural gas prices
during what is normally a high-demand season.
Net cash provided by operating activities decreased $4.0 million for the
three-months ended December 31, 1998, as compared to the same period last year.
This decrease was due primarily to a decrease in accounts payable, as discussed
above, and the timing of purchases
<PAGE> 15
of material for construction activities for the three-months ended December 31,
1998 compared to the same period last year.
Construction spending was $11.4 million, after giving effect to monies
received from the Expansion Fund for the three-months ended December 31, 1998,
compared to $8.9 million for the same period in 1997. Construction expenditures
for the remainder of fiscal year 1999 are projected at $36.0 million, net of an
estimated $10.4 million of monies expected to be received from the Expansion
Fund. 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 fiscal year 1999.
Net cash provided by financing activities increased $6.0 million for the
three-months ended December 31, 1998, as compared to the same period last year.
The primary reason for this was an increase of $6.0 million in short-term
borrowings necessary to finance the Company's construction programs.
(2) Material Changes in Results of Operations
-----------------------------------------
Net income decreased $518,000 and $844,000 for the three-month and
twelve-month periods ended December 31, 1998, as compared to the same periods
last year. The decrease for both periods was caused by (1) lower sales and
margin as a result of weather which was 25% warmer than normal and 27% warmer
than the same period last year; (2) historically low oil prices (oil competes
directly with natural gas for alternative fuel customers); (3) the loss of some
volumes due to plant closings in early fiscal 1998; and (4) increased
depreciation expense due to higher levels of depreciable assets. Partially
offsetting these factors were lower operations and maintenance expenses and
general taxes.
<PAGE> 16
The chart below compares margins for the three-month and twelve-month
periods ended December 31, 1998 and 1997 by customer class (in thousands):
GROSS MARGIN BY CUSTOMER CLASS
------------------------------
3 Months 12 Months
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
Regulated:
Residential $6,052 $6,554 $25,682 $25,302
Commercial 3,699 4,121 15,679 15,524
Industrial 6,460 7,441 24,308 25,675
Municipal 2,330 2,575 7,288 7,532
Unregulated: 1,991 2,038 6,161 6,246
------- ------- ------- -------
Total $20,532 $22,729 $79,118 $80,279
======== ======= ======= =======
Regulated gross margin decreased $2.2 million in the three-month period
ended December 31, 1998, as compared to the same period last year. This decrease
was among all classes of customers. The decrease was due to weather which was
warmer than normal as well as warmer than the same period last year;
historically low oil prices which caused alternative fuel customers to switch to
#6 oil; and slower customer growth. Unnregulated gross margin for the
three-months ended December 31, 1998 was down slightly due to a $166,000
decrease in margins from the Company's propane operations as a result of warmer-
than-normal weather and a $62,000 decrease in margin from the Company's
merchandise sales and services due to slower customer growth. These decreases
were somewhat offset by an increase in margin of $181,000 from the Company's
natural gas marketing subsidiary as more customers switched from utility sales
to transportation services due to lower spot market prices for natural gas as
compared to the regulated utility's benchmark rate.
Regulated gross margin decreased $1.1 million in the twelve-month period
ended December 31, 1998 as compared to the same period last year. Industrial and
Municipal gross margin decreased due to historically low oil prices which caused
alternative fuel customers to switch to #6 oil, some plant closings in the
Company's service area in early fiscal 1998, and warmer-than-normal weather
which reduced deliveries to residential and commercial customers and end users
of the Company's Municipal customers. Residential and commercial gross margin
increased for the twelve-month period ended December 31, 1998 as compared to the
same period last year due to customer growth in these higher margin customer
classes in early 1998. However, these increases were somewhat offset by lower
margins due to warmer-than-normal weather. The Company's Weather Normalization
Adjustment (WNA) included in its rates provided $1.5 million and $5.5 Million
for the three and twelve month periods ended December 31, 1998. However, this
was not enough to fully offset the effects of
<PAGE> 17
abnormally warm weather due to customers having little or no use to apply the
WNA. Unregulated gross margin was down slightly as a result of a decrease in
propane margin of $183,000 due to warmer-than-normal weather and a decrease of
$104,000 in margin from merchandise sales and service.
The chart below shows total throughput volumes (in thousands of dt) for the
three- and twelve-month periods ended December 31, 1998 and 1997 by customer
class:
THROUGHPUT VOLUMES (Mdt) BY CUSTOMER CLASS
------------------------------------------
3 Months 12 Months
----------------- ---------------------
1998 1997 1998 1997
----- ----- ------ -----
Residential 1,131 1,589 5,915 6,265
Commercial 1,089 1,366 4,970 5,224
Industrial 8,012 8,275 34,249 34,985
Municipal 2,521 2,801 8,564 9,008
----- ----- ------- -------
Total 12,753 14,031 53,698 55,482
====== ====== ======= =======
The following chart shows the same total throughput volume classified by
sales and transportation:
THROUGHPUT VOLUMES (Mdt) BY TYPE OF SERVICE
-------------------------------------------
3 Months 12 Months
------------------ --------------------
1998 1997 1998 1997
------ ------ ------ ------
Sales 5,377 10,183 23,360 30,045
Transportation 7,376 3,848 30,338 25,437
------ ------- ------ ------
Total 12,753 14,031 53,698 55,482
====== ====== ====== ======
Throughput volumes decreased 1.3 Mdt for the three-month period ended
December 31, 1998 as compared to the same period last year. The decrease in
volumes was due to weather which was warmer than normal and warmer than the same
period last year, historically low oil prices which resulted in alternative fuel
customers switching to #6 oil, and slower customer growth. However,
transportation volumes increased 91% over the same three-month period last year
due to the spot market price of natural gas being lower than the Company's
benchmark price of gas included in its regulated rates. This caused large
industrial and electric generation customers who can purchase gas from
alternative sources, including the Company's marketing subsidiary, to buy gas on
the spot market and transport it on the Company's system rather than purchase
bundled sales service from the utility.
<PAGE> 18
Throughput volumes decreased 1.8 Mdt in the twelve-month period ended
December 31, 1998 as compared to the same period last year. The decrease in
volumes was due to warmer-than-normal weather, the loss of some customers due to
plant closings in early 1998, historically low oil prices compared to natural
gas, causing alternative fuel customers to switch to an alternative fuel source,
primarily #6 oil. Transportation volumes increased 3% for the twelve-month
period ended December 31, 1998 due to the spot market price of natural gas being
lower than the Company's benchmark price of gas in its regulated utility rates
for most of the last half of the year.
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
significant impacts 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 nor billed
by the Company.
Operating revenues decreased $19.1 million and $24.6 million for the
three-month and twelve-month periods ended December 31, 1998, as compared to the
same periods last year. These decreases were caused by lower sales volumes due
to warmer-than-normal weather; historically low oil prices causing alternative
fuel customers to switch fuels and slower customer growth and switch to
transportation service from bundled sales service by many of the Company's large
customers.
Cost of goods sold decreased $17.0 million and $23.4 million for the
three-month and twelve-month periods ended December 31, 1998, as compared to the
same periods last year. This was caused by lower sales volumes due to
warmer-than-normal weather; historically low oil prices causing alternative fuel
customers to switch fuels, primarily to #6 oil, slower customer growth, and a
declining commodity cost of natural gas due to lower market prices. With more
customers transporting their own natural gas, the Company's system supply
purchases dropped significantly.
Operating and maintenance expenses decreased $691,000 and $2.0 million,
respectively, for the three-month and twelve-month periods ended December 31,
1998, as compared to the same periods last year. Affecting both periods were;
(1) a reduction in medical claims paid by the Company as compared to the same
period last year due to an improvement in the Company's claims paid; (2) a
reduction in general and administration and outside services expenses due to
aggressive management of such costs; (3) lower losses on uncollectible accounts
due to lower accounts receivable balances and increased collection efforts; (4)
lower commodity costs of natural gas used in the Company's compressor stations
and liquefied natural gas plant; and (5) lower transmission and distribution
expenses due to slower customer growth. These lower costs were somewhat offset
by higher distribution maintenance expenses.
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.
General taxes decreased in the three-month and twelve-month periods ended
December 31, 1998, as compared to the same periods last year. The most
significant tax is
<PAGE> 19
the state gross receipts tax which is directly related to gross revenue, which
decreased substantially in both periods as compared to 1997.
Other income decreased $1.6 million for the twelve-month period ended
December 31, 1998, as compared to the same period last year. The primary reason
for this decrease was caused by a nonrecurring credit of $1.9 million related to
the settlement of a long-standing regulatory matter.
Interest charges increased $333,000 for the three-month period ended
December 31, 1998 as compared to the same period last year. This increase was
caused primarily by higher construction expenditures which led to increased
borrowings under the Company's credit facilities.
(3) Other
-----
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 to accelerate the planned replacement of all critical
systems with new software, and in some cases hardware, which is Year 2000 ready.
Existing non-Year 2000 ready 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 made 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
<PAGE> 20
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> 21
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
- ------- ---------------------------------------------------
(a) Date of the meeting or of the action without a meeting:
January 12, 1999
(b) Whether the meeting was an annual or a special meeting:
Annual Meeting
(c) Names of each director elected at the meeting and the number of
votes cast for, against or withheld, and abstentions:
Paul A. DelaCourt For: 9,018,462
Against or Withheld: 127,923
Frank B. Holding, Jr. For: 9,012,401
Against or Withheld: 133,984
John O. McNairy For: 9,019,651
Against or Withheld: 126,734
<PAGE> 22
(d) Names of each director whose term of office as director continued
after the meeting:
George T. Clark, Jr. James E. S. Hynes
Robert T. Johnson William H. Prestage
Richard F. Waid Calvin B. Wells
(e) Brief description of each matter voted upon and the number of
votes cast for, against or withheld, and abstentions:
None.
Item 5. Other Information
- ------- -----------------
None.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits
--------
None.
(b) Reports on Form 8-K
-------------------
On November 25, 1998, the Company filed on Form 8-K an agreement
and plan of merger between North Carolina Natural Gas Corporation
and Carolina Power & Light Company.
<PAGE> 23
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)
/s/ Gerald A. Teele
Date: February 11, 1999 ---------------------------------------
Gerald A. Teele
Senior Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
Date: February 11, 1999 /s/ Ronald J. Josephson
---------------------------------------
Ronald J. Josephson
Vice President-Financial Services
(Principal Accounting Officer)
<PAGE> 24
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 December 31, 1998:
Exhibit
Number
- ----------------
27 - Financial Data Schedule
<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> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $233,270
<OTHER-PROPERTY-AND-INVEST> 5,325
<TOTAL-CURRENT-ASSETS> 44,799
<TOTAL-DEFERRED-CHARGES> 3,484
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 286,878
<COMMON> 25,369
<CAPITAL-SURPLUS-PAID-IN> 35,238
<RETAINED-EARNINGS> 65,583
<TOTAL-COMMON-STOCKHOLDERS-EQ> 126,190
0
0
<LONG-TERM-DEBT-NET> 59,000
<SHORT-TERM-NOTES> 36,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 2,000
0
<CAPITAL-LEASE-OBLIGATIONS> 565
<LEASES-CURRENT> 153
<OTHER-ITEMS-CAPITAL-AND-LIAB> 62,970
<TOT-CAPITALIZATION-AND-LIAB> 286,878
<GROSS-OPERATING-REVENUE> 50,042
<INCOME-TAX-EXPENSE> 2,934
<OTHER-OPERATING-EXPENSES> 38,308
<TOTAL-OPERATING-EXPENSES> 41,242
<OPERATING-INCOME-LOSS> 8,800
<OTHER-INCOME-NET> 179
<INCOME-BEFORE-INTEREST-EXPEN> 8,979
<TOTAL-INTEREST-EXPENSE> 1,194
<NET-INCOME> 4,851
0
<EARNINGS-AVAILABLE-FOR-COMM> 4,851
<COMMON-STOCK-DIVIDENDS> 2,532
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> (1,806)
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
</TABLE>
