<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
<TABLE>
<CAPTION>
(MARK ONE)
<C> <S>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO____________
</TABLE>
COMMISSION FILE NUMBER 1-6196
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PIEDMONT NATURAL GAS COMPANY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<C> <C>
NORTH CAROLINA
(State or other jurisdiction of 56-0556998
incorporation or organization) (I.R.S. Employer Identification No.)
1915 REXFORD ROAD, CHARLOTTE, NORTH
CAROLINA 28211
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (704) 364-3120
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<C> <C>
Common Stock, no par value New York Stock Exchange
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant as of January 9, 1998.
Common Stock, no par value -- $949,208,114
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT JANUARY 9, 1998
----- ------------------------------
<C> <C>
Common Stock, no par value 30,298,404
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders on
February 27, 1998, are incorporated by reference into Part III.
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<PAGE> 2
PIEDMONT NATURAL GAS COMPANY, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I. Page
<S> <C>
Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
Part II.
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 38
Part III.
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 42
Item 12. Security Ownership of Certain Beneficial Owners
and Management 42
Item 13. Certain Relationships and Related Transactions 42
Part IV.
Item 14. Exhibits, Financial Statement Schedule, and
Reports on Form 8-K 43
Signatures 51
</TABLE>
<PAGE> 3
PART I
Item 1. Business
Piedmont Natural Gas Company, Inc. (the Company), incorporated in 1950,
is an energy and services company primarily engaged in the transportation and
sale of natural gas and the sale of propane to over 648,000 residential,
commercial and industrial customers in North Carolina, South Carolina and
Tennessee.
The Company is the second-largest natural gas utility in the southeast,
serving over 600,000 natural gas customers. The Company and its non-utility
subsidiaries and divisions are also engaged in acquiring, marketing and
arranging for the transportation and storage of natural gas for large-volume
purchasers, and in the sale of propane to over 48,000 customers in the Company's
three-state service area.
In the Carolinas, the service area is comprised of numerous cities,
towns and communities including Anderson, Greenville and Spartanburg in South
Carolina and Charlotte, Salisbury, Greensboro, Winston-Salem, High Point,
Burlington and the Hickory area in North Carolina. In Tennessee, the service
area is the metropolitan area of Nashville, including portions of eight
adjoining counties. The Company's propane market is in and adjacent to its
natural gas market in all three states.
Operating revenues shown in the consolidated financial statements
represent revenues from utility operations only. Such revenues totaled
$775,517,000 for the year ended October 31, 1997, of which 41% was from
residential customers, 25% from commercial customers, 25% from industrial
customers, 8% from secondary market sales and 1% from various sources. Revenues
from non-utility operations, less related costs and income taxes, are shown in
the consolidated financial statements in other income. Non-utility revenues as a
percentage of total revenues, including utility operations, were 5% in 1997. No
single non-utility activity accounted for greater than 4% of total revenues.
Income from non-utility activities as a percentage of total net income was 5% in
1997. No single non-utility activity accounted for more than 2% of net income.
The Company is principally engaged in the gas distribution industry and
has no other reportable industry segments.
The Company's utility operations are subject to regulation by the North
Carolina Utilities Commission (NCUC) and the Tennessee Regulatory Authority
(TRA) as to the issuance of securities, and by those commissions and by the
Public Service Commission of South Carolina (PSCSC) as to rates, service area,
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adequacy of service, safety standards, extensions and abandonment of facilities,
accounting and depreciation. The Company is also subject to or affected by
various federal regulations.
The Company holds non-exclusive franchises for natural gas service in
all communities where required, with expiration dates from 1998 to 2044. The
earliest date at which a franchise for a major service area expires is 1999. The
franchises are adequate for operation of the gas distribution business and do
not contain restrictions which are of a materially burdensome nature. In most
cases, the loss of a franchise would not have a material effect on operations.
The Company has never failed to obtain the renewal of a franchise; however, this
is not necessarily indicative of future action.
The Company's utility business and its non-utility propane activities
are seasonal in nature as variations in weather conditions generally result in
greater earnings during the winter months. The Company normally injects natural
gas into storage during periods of warm weather (principally April 1 through
October 31) for withdrawal from storage during periods of cold weather
(principally November 1 through March 31) when sufficient quantities of flowing
pipeline gas are not available to meet customer demand. During 1997, the amount
of natural gas in storage varied from 5.9 million dekatherms (one dekatherm
equals 1,000,000 BTUs) to 18.1 million dekatherms, and the aggregate commodity
cost of this gas in storage varied from $13,477,000 to $42,459,000.
The following is a five-year comparison of gas sales and other
statistics for the years ended October 31, 1993 through 1997:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES (in thousands):
Sales and Transportation:
Residential $319,722 $292,010 $229,546 $240,314 $221,632
Commercial 195,862 180,415 135,933 165,805 154,894
Industrial 191,565 184,118 133,205 165,989 173,943
For Resale 266 2,748 3,323 815 1
-------- -------- ------- -------- --------
Total 707,415 659,291 502,007 572,923 550,470
Secondary Market Sales 64,411 22,152 - - -
Miscellaneous 3,691 3,612 3,216 2,431 2,290
-------- -------- -------- -------- --------
Total $775,517 $685,055 $505,223 $575,354 $552,760
======== ======== ======== ======== ========
GAS VOLUMES - DEKATHERMS (in thousands):
System Throughput:
Residential 38,339 43,357 33,513 36,093 34,277
Commercial 28,476 31,040 22,867 28,931 28,179
Industrial 68,236 64,054 67,735 60,966 57,505
For Resale 27 581 1,478 140 192
------- -------- -------- ------- -------
Total 135,078 139,032 125,593 126,130 120,153
======== ======== ======== ======= =======
Secondary Market Sales 24,547 9,724 - - -
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NUMBER OF RETAIL CUSTOMERS BILLED (12 month average):
Residential 495,739 468,803 446,118 420,861 396,394
Commercial 62,258 59,905 57,803 56,147 54,451
Industrial 2,697 2,687 2,711 2,010 1,822
-------- ------- ------- ------- -------
Total 560,694 531,395 506,632 479,018 452,667
======== ======= ======= ======= =======
AVERAGE PER RESIDENTIAL CUSTOMER:
Gas Used - Dekatherms 77.34 92.48 75.12 85.76 86.47
Revenue $644.94 $622.88 $514.54 $571.00 $559.12
Revenue Per Dekatherm $8.34 $6.73 $6.85 $6.66 $6.47
COST OF GAS (in thousands):
Natural Gas Purchased $362,249 $327,968 $155,683 $242,609 $267,217
Liquefied Petroleum Gas (LPG) 77 160 60 204 -
Transportation Gas Received (Not
Delivered) (1,840) 1,024 (181) (616) (216)
Natural Gas Withdrawn from
(Injected into) Storage, net 2,597 (8,078) 6,094 4,106 (894)
Other Storage 318 (40) 860 1,058 316
Other Adjustments 97,264 73,099 85,051 93,214 62,465
-------- -------- -------- -------- --------
Total $460,665 $394,133 $247,567 $340,575 $328,888
======== ======== ======== ======== ========
COST OF GAS PER DEKATHERM OF GAS SOLD $3.81 $3.17 $2.76 $3.29 $3.11
SUPPLY AVAILABLE FOR DISTRIBUTION - DEKATHERMS (in thousands):
Natural Gas Purchased 129,797 127,799 86,372 106,556 106,507
LPG 10 121 13 52 -
Transportation Gas 32,026 24,550 41,589 22,299 14,281
Natural Gas Withdrawn from (Injected
into) Storage, net (3) (1,142) (750) (1,646) (41)
Other Storage 16 16 (15) 25 33
Company Use (121) (152) (118) (159) (171)
-------- ------- ------- ------- -------
Total 161,725 151,192 127,091 127,127 120,609
======== ======= ======= ======= =======
UTILITY CAPITAL EXPENDITURES (in thousands) $93,482 $98,258 $100,825 $105,787 $84,242
GAS MAINS - MILES OF 3" EQUIVALENT 17,800 16,900 16,700 16,300 15,900
DEGREE DAYS - SYSTEM AVERAGE:
Actual 3,471 3,993 3,144 3,567 3,659
Normal 3,611 3,606 3,617 3,630 3,637
Percentage of Actual to Normal 96% 111% 87% 98% 101%
PROPANE OPERATIONS:
Revenues (in thousands) $36,816 $44,046 $33,414 $34,972 $32,120
Volumes Sold (gallons in millions) 36.7 49.3 38.4 41.3 37.2
Customers (at year end) 48,100 48,100 48,500 46,900 42,600
</TABLE>
During 1997, the Company delivered 135.1 million dekatherms of natural
gas to its customers, of which 32.7 million dekatherms were transported for
large industrial customers. This compares with 139 million dekatherms delivered
in 1996, of which 24.4 million dekatherms were transported. In addition to this
system throughput, secondary-market sales volumes increased to 24.5 million
dekatherms in 1997 compared with 9.7 million dekatherms in 1996.
Sales to temperature-sensitive customers, whose consumption varies with
the weather, were 66.8 million dekatherms in 1997, compared with 74.4 million
dekatherms in 1996. Weather which was
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4% warmer than normal was experienced in 1997, compared with 11%
colder-than-normal weather in 1996. The Company sold or transported 68.2 million
dekatherms to industrial users in 1997, compared with 64.1 million dekatherms in
1996. Industrial sales are the most price-sensitive of the Company's markets and
are largely a function of the Company's ability to obtain supplies of natural
gas competitively priced with other industrial fuels.
Except as set forth below, all natural gas distributed is transported
to the Company by one of eight interstate pipelines, Transcontinental Gas Pipe
Line Corporation (Transco), Tennessee Gas Pipeline Company (Tennessee Pipeline),
Texas Eastern Transmission Corporation (Texas Eastern), Columbia Gas
Transmission Company (Columbia Gas), Columbia Gulf Transmission Corporation
(Columbia Gulf), National Fuel Gas Supply Corporation (National Fuel), Texas Gas
Transmission Corporation (Texas Gas) and CNG Transmission Corporation (CNG).
As of November 1, 1997, the Company has contracted to purchase the
following daily pipeline firm transportation capacity in dekatherms of natural
gas:
<TABLE>
<S> <C>
Transco (including certain upstream arrangements with CNG,
Texas Gas and National Fuel) 487,600
Tennessee Pipeline 74,100
Texas Eastern 1,700
Columbia Gas (through arrangements with Transco
and Columbia Gulf) 36,000
Columbia Gulf 5,000
-------
Total 604,400
=======
</TABLE>
The Company has the following additional daily peaking capacity in
dekatherms of natural gas through local peaking facilities, storage contracts
and third party city gate arrangements to meet the firm demands of its markets.
This availability varies from five days to one year.
<TABLE>
<S> <C>
Liquefied Natural Gas 230,000
Liquefied Petroleum Gas 8,000
Transco Storage 86,000
Columbia Gas Storage 72,000
Tennessee Pipeline Storage 55,900
CNG Storage 7,000
Third Party City Gate Arrangements 37,100
-------
Total 496,000
=======
</TABLE>
The Company utilizes a "best cost" gas purchasing philosophy that seeks
to purchase gas on a short- or long-term basis by weighing cost against supply
security and reliability factors. Of the 129.8 million dekatherms of natural gas
purchased in 1997, approximately 14% was purchased under short-term contracts of
less than one year, 14% under contracts of from one to three years and 72% under
contracts of over three years.
The Company owns or has under contract 21.3 million dekatherms of
storage capacity, either in the form of underground storage or liquefied natural
gas. This capability is used to
4
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supplement regular pipeline supplies on colder winter days when demand
increases.
For further information on gas supply and regulation, see "Gas Supply
and Rate Proceedings" included in Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7 of this report.
Currently, approximately 36% of annual gas deliveries are made to
industrial or large commercial customers who have the capability to burn a fuel
other than natural gas. The alternative fuels are primarily fuel oil or propane
and, to a much lesser extent, coal or wood. The ability to maintain or increase
deliveries of gas to these customers depends on a number of factors, including
weather conditions, governmental regulations, the price of gas from suppliers
and the price of alternate fuels. Under existing regulations of the FERC, it is
possible for certain large commercial or industrial customers located in
proximity to the interstate pipelines delivering gas to the Company to bypass
the Company and take delivery of gas directly from the pipeline or from a third
party connecting with the pipeline. To date, the Company has experienced only
minimal bypass activity in part because of the Company's ability to negotiate
competitive rates and service terms.
In the residential and small commercial markets, natural gas competes
primarily with electricity for such uses as cooking and water heating and with
electricity and fuel oil for space heating.
During 1997, the Company's largest customer contributed $10,096,000,
or 1%, to total revenues.
The amount of research and development costs incurred in connection
with Company-sponsored research is immaterial. The Company contributes to gas
industry-sponsored research projects; however, the amounts contributed to such
projects are minimal.
Compliance with federal, state and local environmental protection laws
had no material effect on capital expenditures, earnings or competitive position
during 1997. For further information on environmental issues, see "Environmental
Matters" included in Management's Discussion and Analysis of Financial Condition
and Results of Operations in Item 7 of this report.
As of October 31, 1997, the Company had 1,904 employees, compared with
1,973 employees as of October 31, 1996.
5
<PAGE> 8
Item 2. Properties
The Company's properties consist primarily of distribution systems and
related facilities to serve its utility customers. The Company has constructed
and owns approximately 495 miles of lateral pipelines up to 16 inches in
diameter which connect the distribution systems of the Company with the
transmission systems of its pipeline suppliers. Natural gas is distributed
through approximately 17,800 miles (three-inch equivalent) of distribution
mains. The lateral pipelines and distribution mains are located on or under
public streets and highways, or private property with the permission of the
individual owners.
The Company either owns or leases for varying periods district and
regional offices for its utility and non-utility operations.
Item 3. Legal Proceedings
There are a number of lawsuits pending against the Company for damages
alleged to have been caused by negligence of employees. The Company has
liability insurance which it believes is adequate to cover any material
judgments which may result from these lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) The Company's Common Stock is traded on the New York Stock Exchange
(NYSE). The following table provides information with respect to the high and
low sales prices on the NYSE (symbol PNY) for each quarterly period for the
years ended October 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 High Low 1996 High Low
- ---------- ---- --- ---------- ---- ---
<S> <C> <C> <C> <C> <C>
January 31 25 3/8 23 January 31 24 7/8 21
April 30 24 3/4 22 April 30 24 1/4 20 3/4
July 31 26 5/8 23 3/8 July 31 24 1/8 20 1/2
October 31 30 15/16 23 13/16 October 31 25 3/4 23 1/8
</TABLE>
(b) As of January 9, 1998, the Company's Common Stock was owned by
19,207 shareholders of record.
(c) Information with respect to quarterly dividends paid on Common
Stock for the years ended October 31, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
Dividends Paid Dividends Paid
1997 Per Share 1996 Per Share
- ---------- -------------- ---------- --------------
<S> <C> <C> <C>
January 31 29 (cent) January 31 27.5(cent)
April 30 30.5(cent) April 30 29 (cent)
July 31 30.5(cent) July 31 29 (cent)
October 31 30.5(cent) October 31 29 (cent)
</TABLE>
The Company's articles of incorporation and note agreements under which
long-term debt was issued contain provisions which restrict the amount of cash
dividends that may be paid on Common Stock. As of October 31, 1997, all of the
Company's retained earnings was free of such restrictions.
7
<PAGE> 10
Item 6. Selected Financial Data
Selected financial data for the years ended October 31, 1993 through
1997, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- -------- -------- --------
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Margin $314,852 $290,922 $257,656 $234,779 $223,872
Operating Revenues $775,517 $685,055 $505,223 $575,354 $552,760
Net Income $54,074 $48,562 $40,310 $35,506 $37,534
Earnings per Share of Common Stock $1.81 $1.67 $1.45 $1.35 $1.45
Cash Dividends Declared Per Share of
Common Stock $1.205 $1.145 $1.085 $1.025 $.965
Average Shares of Common Stock Outstanding 29,883 29,161 27,890 26,346 25,960
Total Assets $1,098,156 $1,067,086 $964,895 $889,233 $797,748
Long-Term Debt (less current maturities) $381,000 $391,000 $361,000 $313,000 $278,000
Rate of Return on Average Common Equity 13.42% 13.11% 12.27% 12.10% 13.65%
Long-Term Debt to Total Capitalization Ratio 47.58% 50.32% 50.42% 50.89% 49.38%
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
The gas distribution business is highly weather sensitive and seasonal
and requires the use of short-term debt at times to meet working capital
requirements. This weather sensitivity and seasonality cause short-term cash
requirements to vary significantly during the year. Short-term debt is also used
to finance construction pending the issuance of long-term debt or equity.
The Company has committed bank lines of credit totaling $75,000,000 to
finance cash requirements not generated internally. Additional uncommitted lines
are also available on an as needed, if available, basis. Borrowings under the
lines include bankers' acceptances, transactional borrowings and overnight
cost-plus loans based on the lending bank's cost of money, with a maximum rate
of the lending bank's commercial prime interest rate. Outstanding borrowings
against the lines of credit during 1997 ranged from zero to a high of
$60,000,000 and interest rates ranged from 5.40% to 7.15% during the year. At
October 31, 1997, $25,000,000 of short-term debt was outstanding at a weighted
average interest rate of 5.83%.
The Company had $391,000,000 of long-term debt outstanding at October
31, 1997. Annual sinking fund requirements and maturities of this debt are
$10,000,000 in 1998 through 2000,
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<PAGE> 11
$40,000,000 in 2001 and $10,000,000 in 2002. Long-term debt retired in 1997
totaled $10,000,000.
At October 31, 1997, the Company's capitalization ratio consisted of
48% long-term debt and 52% common equity. The embedded cost of long-term debt at
that date was 8.33%. The return on average common equity in 1997 was 13.42%.
Cash provided from operations and from the issuance of Common Stock
through dividend reinvestment and stock purchase plans was sufficient to fund
capital expenditures of $95,076,000, payments of debt principal and interest of
$43,324,000 and dividend payments to shareholders of $36,008,000.
The Company's capital expansion program is very important in meeting
the growth in the demand for natural gas evidenced by the growth in the customer
base. Capital expenditures for 1997 were $93,482,000 for utility operations and
$1,594,000 for non-utility activities. Capital expenditures totaling
$100,303,000 for utility operations, primarily to serve customer growth, and
$1,920,000 for non-utility activities are budgeted for 1998.
Competition and Accounting for Regulated Activities
The natural gas industry, including producers, pipelines and local gas
distribution companies (LDCs), has undergone significant changes in recent years
as it moves toward a more deregulated marketplace. In response to the changing
competitive situation, the Company is assessing the nature of its business and
is exploring alternatives to the traditional utility role of purchase, sale and
transportation of natural gas. Non-traditional ratemaking initiatives and
market-based pricing of products and services will provide additional challenges
and opportunities for the Company. The Company anticipates that opportunities
for non-regulated sales will increase as competition intensifies and further
retail market unbundling occurs.
The Company accounts for its regulated activities in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71,"Accounting for the
Effects of Certain Types of Regulation" (FAS 71). FAS 71 provides that
rate-regulated public utilities account for and report assets and liabilities
consistent with the economic effect of the manner in which independent
third-party regulators establish rates. In applying FAS 71, the Company has
capitalized certain costs and benefits as regulatory assets and liabilities,
respectively, pursuant to orders of the state utility regulatory commissions,
either in
9
<PAGE> 12
general rate proceedings or expense deferral proceedings, in order to provide
for recovery of or refunds to utility customers in future periods. As
competition increases and the Company is further subjected to the impact of
deregulation, the Company may not be able to continue to apply FAS 71 to all or
parts of its business. If this were to occur, the Company would be required to
apply accounting standards utilized by non-regulated enterprises. At such time
as the Company determines that the provisions of FAS 71 no longer apply, costs
previously deferred as regulatory assets in the consolidated balance sheet would
be eliminated. The composition and amount of regulatory assets are shown in Note
1 to the consolidated financial statements.
While the Company believes the provisions of FAS 71 continue to apply
to its regulated operations, the changing nature of the business requires
continual assessment of the impact of those changes on its accounting policies.
Gas Supply and Regulatory Proceedings
To meet customer requirements, the Company must acquire sufficient gas
supplies and pipeline capacity to ensure delivery to its distribution system
while also ensuring that supply and capacity levels will allow it to remain
competitive. The Company has a diversified portfolio of local peaking
facilities, transportation and storage contracts with interstate pipelines and
supply contracts with major producers and marketers to satisfy the supply and
deliverability requirements of its customers.
In the Company's opinion, present rules and regulations of the North
Carolina Utilities Commission (NCUC), the Public Service Commission of South
Carolina (PSCSC) and the Tennessee Regulatory Authority (TRA) permit the pass
through of interstate pipeline capacity and storage service costs and similar
costs that may be incurred under orders or regulations of the FERC. The majority
of the Company's natural gas supply is purchased from sources in non-regulated
transactions. The Company is permitted to recover 100% of its prudently incurred
gas costs, subject to annual prudence reviews in North Carolina and South
Carolina covering historical twelve-month periods. For the latest applicable
periods, the NCUC and the PSCSC found the Company to be prudent in its gas
purchasing practices and allowed 100% recovery of its gas costs.
In May 1996, the TRA approved a two-year experimental performance
incentive plan effective July 1, 1996. The plan eliminates annual prudence
reviews and establishes an incentive sharing mechanism based on differences in
the actual cost of gas
10
<PAGE> 13
purchased and benchmark rates, together with income from marketing
transportation and storage capacity in the secondary market, subject to an
overall annual cap of $1,600,000 on gains or losses by the Company. Secondary
market transactions include sales for resale, off-system sales, capacity release
and other interstate transactions designed to reduce fixed gas costs during
off-peak periods. The benefits of the incentive plan are the elimination of
annual gas purchase prudence reviews, reduction of gas costs for ratepayers and
potential earnings to shareholders by sharing in gas cost reductions.
Secondary market transactions permit the Company to market short-term
gas supplies and transportation services by contract with its customers. These
sales contribute the smallest per-unit margin; however, the program allows the
Company to act as an independent marketer of natural gas and provide
transportation in order to generate operating margin from sources not restricted
by the capacity of the Company's distribution system. In North Carolina, a
sharing mechanism is in effect where 75% of any margin earned is refunded to
firm customers. Sales in Tennessee are included in the rate-sharing mechanism
under the performance incentive plan discussed above.
Approximately 36% of annual gas deliveries are made to industrial or
large commercial customers who have the capability to burn a fuel other than
natural gas. The alternative fuels are primarily fuel oil or propane and, to a
much lesser extent, coal or wood. The ability to maintain or increase deliveries
of gas to these customers depends on a number of factors, including weather
conditions, governmental regulations, the price of gas from suppliers and the
price of alternate fuels. Under existing regulations of the FERC, it is possible
for certain large commercial or industrial customers located in proximity to the
interstate pipelines delivering gas to the Company to bypass the Company and
take delivery of gas directly from the pipeline or from a third party connecting
with the pipeline. To date, the Company has experienced only minimal bypass
activity in part because of the Company's ability to negotiate competitive rates
and service terms. The future level of bypass activity cannot be predicted.
The NCUC, in 1996, ordered the establishment of an expansion fund for
the Company and approved initial funding to enable the extension of natural gas
service into unserved areas of the state. The North Carolina State Treasurer
currently holds $17,912,000 in the Company's expansion fund account. This amount
along with other supplier refunds, including interest earned to date, is
included in restricted cash in the consolidated financial statements. The use of
such funds will be at the
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<PAGE> 14
discretion of the NCUC as individual project applications for unserved areas are
filed by the Company and approved by the NCUC. As of October 31, 1997, no funds
had been used for expansion.
In 1994, the Company filed a petition with the NCUC for a certificate
of public convenience and necessity to serve four counties in North Carolina not
presently receiving natural gas service. The Company requested permission to use
expansion funds to offset a portion of the cost of the construction. Another
company also filed an application to serve the four counties; however, this
company did not request permission to use expansion funds. In January 1996, the
NCUC granted a final certificate to the competing applicant. The Company
appealed that order to the Supreme Court of North Carolina and in July 1997 the
Court ruled to uphold the decision of the NCUC awarding the franchise to the
competing applicant.
In November 1995, the PSCSC issued an order permitting the Company to
increase its rates in South Carolina, effective November 7, 1995, by $7,800,000
annually. The Consumer Advocate for the State of South Carolina appealed the
order to the Circuit Court of Richland County, South Carolina. The Court
dismissed the appeal and affirmed the PSCSC's original order in its entirety in
May 1997. In August 1997, the Consumer Advocate filed an appeal with the Supreme
Court of South Carolina. The outcome of this appeal cannot be determined at this
time.
In December 1996, the TRA issued an order in a general rate case
proceeding permitting the Company to increase its margin in Tennessee, effective
January 1, 1997, by $4,400,000 annually. The TRA's decision was confirmed by a
written decision in February 1997. The Tennessee Consumer Advocate filed several
pleadings with the TRA arguing, among other things, that the Company was not
entitled to recover the increased rates prior to the date of the TRA's February
order. All parties in this proceeding, including the Company, petitioned the TRA
to reconsider its February order. In June 1997, the TRA issued an order denying
all motions and upholding its previous orders. In August 1997, the Consumer
Advocate petitioned the Court of Appeals for a review of the TRA's orders. The
outcome of this proceeding cannot be determined at this time.
Results of Operations
Net income for 1997 was $54,074,000, compared with $48,562,000 in 1996
and $40,310,000 in 1995. The increase in net income in 1997, compared with 1996,
was primarily due to regulatory rate changes which increased rates and updated
gas cost components, secondary market transactions and an increase in
12
<PAGE> 15
interest income, partially offset by increases in operations and maintenance
expenses, depreciation, general taxes and utility interest charges. The increase
in net income in 1996, compared with 1995, was primarily due to regulatory rate
changes which increased rates and updated gas cost components, increased
delivered volumes to customers due to customer growth and 11% colder-than-normal
weather, secondary market transactions and increased earnings from propane
operations, partially offset by increases in operations and maintenance
expenses, depreciation, general taxes and utility interest charges. Compared
with the prior year, weather in the Company's service area was 13% warmer in
1997, 27% colder in 1996 and 12% warmer in 1995. Volumes of gas delivered to
customers were 135.1 million dekatherms in 1997, compared with 139 million
dekatherms in 1996, a decrease of 3%, and 125.6 million dekatherms in 1995. In
addition to this system throughput, secondary-market sales volumes increased to
24.5 million dekatherms in 1997 compared with 9.7 million dekatherms in 1996 and
zero in 1995.
Operating revenues were $775,517,000 in 1997, $685,055,000 in 1996 and
$505,223,000 in 1995. The increase in operating revenues in 1997 over 1996 was
primarily due to higher rates from general rate increases in North Carolina and
Tennessee and increased volumes in secondary market sales. The increase in
operating revenues in 1996 over 1995 was primarily due to higher rates billed
from increased commodity costs of natural gas, increased delivered volumes to
weather-sensitive residential and commercial customers, the shift from
transportation to sales of gas and secondary market sales. The weather
normalization adjustment mechanism (WNA) in effect in all three states is
designed to offset the impact that unusually cold or warm weather has on
customer billings and margin. Weather 4% warmer than normal was experienced in
1997, compared with 11% colder-than-normal weather in 1996 and 13%
warmer-than-normal weather in 1995.
In the Company's general rate proceedings, the state regulatory
commissions authorize the Company to recover a margin (applicable rate less cost
of gas) on each unit of gas sold. Each commission has also authorized the
Company to negotiate lower rates to certain of its industrial customers when
necessary to remain competitive. The Company is permitted to recover margin
losses resulting from these negotiated transactions through rates. The ability
to recover such negotiated margin reductions is subject to continuing regulatory
approvals.
Cost of gas was $460,665,000 in 1997, $394,133,000 in 1996 and
$247,567,000 in 1995. The increase in 1997, compared with 1996, was primarily
due to increases in commodity costs billed to
13
<PAGE> 16
customers and secondary market sales. The increase in 1996, compared with 1995,
was primarily due to an increase in delivered volumes, the shift from
transportation to sales, higher commodity prices from suppliers and higher
pipeline demand charges, partially offset by a decrease in reservation fees.
Increases or decreases in purchased gas costs from suppliers had no significant
impact on margin as substantially all changes were passed on to customers
through purchased gas adjustment procedures.
Margin was $314,852,000 in 1997, $290,922,000 in 1996 and $257,656,000
in 1995. The increases were primarily due to regulatory approved changes and
rate increases and increased volumes of gas delivered, including secondary
market transactions. WNA surcharges of $10,599,000 and $10,415,000 were
collected in 1997 and 1995, respectively, compared with WNA credits of
$11,621,000 in 1996. The margin earned per dekatherm of gas delivered on the
system increased by $.21 in 1997 over 1996 and by $.04 in 1996 over 1995.
Other operations and maintenance expenses increased from $110,497,000
to $126,849,000 over the three-year period 1995 to 1997. The increases were
primarily due to increases in outside labor and consulting fees, rents,
advertising, payroll and provisions for uncollectibles. As part of a plan to
reduce overall operating expenses and further prepare for increased competition,
the Company, in 1997, eliminated 93 positions which reduced the utility
workforce by 5% from the employee count as of the end of the previous fiscal
year. The workforce reduction plan resulted in a charge to operations expense of
$1,823,000 in the fourth quarter.
Depreciation expense increased from $31,944,000 to $39,187,000 over the
three-year period 1995 to 1997 primarily due to the growth in plant in service.
General taxes increased from $27,392,000 to $32,882,000 over the
three-year period 1995 to 1997 primarily due to increases in property taxes
resulting from rate increases and additions to taxable property and gross
receipts taxes on higher revenues.
Other income, net of income taxes, decreased to $4,084,000 in 1997 from
$5,000,000 in 1996 primarily due to decreases in earnings from propane
operations and energy marketing services. Such decreases were partially offset
by increases in earnings from merchandise and jobbing operations and interest
earned on temporary cash investments. Other income, net of income taxes,
increased to $5,000,000 in 1996 from $4,476,000 in 1995
14
<PAGE> 17
primarily due to increases from propane operations and interest earned on
temporary cash investments. Such increases were partially offset by decreases in
earnings from energy marketing services and merchandise operations.
Utility interest charges were $33,996,000 in 1997, $31,067,000 in 1996
and $29,478,000 in 1995. The increases were primarily due to increases in the
balances outstanding on long-term debt and for 1997, to increases in the
balances outstanding on refunds due customers. For 1996, the increases were also
due to increases in the balances outstanding on short-term debt.
Environmental Matters
The Company has owned, leased or operated manufactured gas plant (MGP)
facilities at 12 sites in its three-state service area, nine of which involve
other parties who either owned the property or operated the facilities. In
October 1997, the Company entered into a settlement with one of the third
parties pursuant to which the Company paid the third party $5,250,000. The third
party assumed responsibility for all costs of investigation, monitoring,
assessment, evaluation, removal, remedy or remedial action (Response Costs)
incurred at the nine MGP sites and indemnified the Company from any and all
actions, causes of action, claims and demands arising out of or relating to such
Response Costs. The settlement does not cover any third-party claims for
personal injury, death, property damage, diminution of property value or natural
resources. No such claims are pending or, to the knowledge of the Company,
threatened.
The Company is authorized by its three state regulatory commissions to
utilize deferral accounting, or the creation of a regulatory asset, for
expenditures made in connection with environmental matters. The Company had
previously established an environmental liability and associated regulatory
asset of $4,000,000 for future environmental costs. In October 1997, the Company
increased the regulatory asset to $6,610,000 and decreased the environmental
liability to $1,360,000 to account for the settlement relating to the nine
sites. In addition, as of October 31, 1997, the regulatory asset includes
$306,000, net of recoveries from customers, for other environmental costs,
primarily legal fees and engineering assessments.
The estimate of the regulatory asset and environmental liability on the
remaining three sites, included in the amounts above, was based on a generic MGP
site study. Site-specific evaluations have not been performed. Resolution of
these matters
15
<PAGE> 18
and further evaluations of the sites could significantly affect recorded
amounts; however, the Company believes that the ultimate resolution of these
matters will not have a material adverse effect on financial position or results
of operations.
Accounting Pronouncements
Effective January 1, 1998, the Company will adopt SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" (FAS 125). The Company does not expect the adoption of FAS 125
to have a material effect on financial position or results of operations.
Effective January 31, 1998, the Company will adopt SFAS No. 128,
"Earnings Per Share" (FAS 128). Adoption of FAS 128 will require the Company to
present a diluted earnings per share amount which currently is only impacted by
shares issuable under the Long-Term Incentive Plan. The Company does not expect
the adoption of FAS 128 to have a material effect on earnings per share.
Other Matters
Piedmont Interstate Pipeline Company (Piedmont Interstate), a wholly
owned subsidiary, is a 35% member of Pine Needle LNG Company, L.L.C. (Pine
Needle), a North Carolina limited liability company that is currently
constructing a liquified natural gas (LNG) peak-demand facility in North
Carolina with peaking service scheduled to be available during the winter of
1999-2000. Storage capacity will be four billion cubic feet with vaporization
capability of 400 million cubic feet per day. The Company has subscribed to
one-half of this capacity. Pine Needle has made arrangements to finance the
construction through construction loans, with permanent financing at the end of
the construction period. A portion of this permanent financing will include an
estimated equity contribution of $18,700,000 by Piedmont Interstate.
The Company has developed plans to address the exposures related to the
impact on its computer systems of the Year 2000, including plans to address
modifications to and replacements of key financial and operational systems
required by December 31, 1999. The financial impact of making the required
changes is not expected to be material to financial position or results of
operations.
16
<PAGE> 19
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements and schedules required
by this Item are listed in Item 14(a)1 and 2 in Part IV of this report.
17
<PAGE> 20
CONSOLIDATED BALANCE SHEETS
October 31, 1997 and 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(in thousands)
<S> <C> <C>
Utility Plant:
Utility plant in service $1,224,001 $1,141,535
Less accumulated depreciation 342,418 306,419
---------- ----------
Utility plant in service, net 881,583 835,116
Construction work in progress 32,771 26,913
---------- ----------
Total utility plant, net 914,354 862,029
---------- ----------
Other Physical Property, at cost (net of
accumulated depreciation of $15,947,000 in 1997
and $14,569,000 in 1996) 27,382 27,072
---------- ----------
Current Assets:
Cash and cash equivalents 5,210 4,994
Restricted cash 21,385 20,481
Receivables (less allowance for doubtful
accounts of $2,027,000 in 1997 and
$1,960,000 in 1996) 32,367 32,378
Inventories:
Gas in storage 47,676 50,065
Materials, supplies and merchandise 6,781 7,451
Deferred cost of gas 7,327 6,796
Refundable income taxes 7,115 31,949
Other 4,295 3,873
---------- ----------
Total current assets 132,156 157,987
---------- ----------
Deferred Charges and Other Assets:
Unamortized debt expense (amortized
over life of related debt on a
straight-line basis) 2,759 3,033
Other 21,505 16,965
---------- ----------
Total deferred charges and other assets 24,264 19,998
---------- ----------
Total $1,098,156 $1,067,086
========== ==========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 21
<TABLE>
<CAPTION>
CAPITALIZATION AND LIABILITIES 1997 1996
---------- ----------
(in thousands)
<S> <C> <C>
Capitalization:
Stockholders' equity:
Cumulative preferred stock - no par
value - 175,000 shares authorized $ - $ -
Common stock - no par value - 100,000,000
shares authorized; outstanding, 30,193,014
shares in 1997 and 29,548,868 shares in 1996 262,576 246,907
Retained earnings 157,250 139,184
---------- ----------
Total stockholders' equity 419,826 386,091
Long-term debt 381,000 391,000
---------- ----------
Total capitalization 800,826 777,091
---------- ----------
Current Liabilities:
Current maturities of long-term debt and sinking
fund requirements 10,000 10,000
Notes payable 25,000 39,000
Accounts payable 65,103 60,150
Customers' deposits 6,629 6,114
Deferred income taxes 10,276 17,727
Taxes accrued 11,041 9,940
Refunds due customers 15,097 68
Other 12,383 10,656
---------- ----------
Total current liabilities 155,529 153,655
---------- ----------
Deferred Credits and Other Liabilities:
Unamortized federal investment tax credits 8,381 8,939
Accumulated deferred income taxes 105,249 93,812
Other 28,171 33,589
---------- ----------
Total deferred credits and other liabilities 141,801 136,340
---------- ----------
Total $1,098,156 $1,067,086
========== ==========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 22
STATEMENTS OF CONSOLIDATED INCOME
For the Years Ended October 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(in thousands except per share amounts)
<S> <C> <C> <C>
Operating Revenues $775,517 $685,055 $505,223
Cost of Gas 460,665 394,133 247,567
-------- -------- --------
Margin 314,852 290,922 257,656
-------- -------- --------
Other Operating Expenses:
Operations 110,689 105,822 94,088
Maintenance 16,160 15,776 16,409
Depreciation 39,187 36,039 31,944
Income taxes 31,948 27,609 22,511
General taxes 32,882 31,047 27,392
-------- -------- --------
Total other operating expenses 230,866 216,293 192,344
-------- -------- --------
Operating Income 83,986 74,629 65,312
-------- -------- --------
Other Income:
Non-utility activities, net of
income taxes 2,813 4,376 3,785
Other income, net of income taxes 1,271 624 691
-------- -------- --------
Total other income 4,084 5,000 4,476
-------- -------- --------
Income Before Utility Interest Charges 88,070 79,629 69,788
-------- -------- --------
Utility Interest Charges:
Interest on long-term debt 32,429 30,120 26,354
Allowance for borrowed funds used
during construction (credit) (712) (783) (1,095)
Other interest 2,279 1,730 4,219
-------- -------- --------
Total utility interest charges 33,996 31,067 29,478
-------- -------- --------
Net Income $ 54,074 $ 48,562 $ 40,310
======== ======== ========
Average Shares of Common
Stock Outstanding 29,883 29,161 27,890
Earnings Per Share of Common Stock $1.81 $1.67 $1.45
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 23
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Years Ended October 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $54,074 $48,562 $40,310
------- ------- -------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 43,441 40,107 35,712
Deferred income taxes 3,983 13,053 15,014
Amortization of investment
tax credits (558) (558) (558)
Allowance for funds used during
construction (1,418) (1,419) (1,690)
Changes in assets and liabilities:
Restricted cash (904) (2,533) (2,987)
Receivables 11 (11,260) 1,479
Inventories 3,059 (10,061) 4,671
Other assets, net 19,269 (18,053) (11,841)
Accounts payable 4,953 21,847 2,399
Refunds due customers 15,029 (22,221) 165
Other liabilities, net (1,484) 1,460 8,211
------- ------- --------
Total adjustments 85,381 10,362 50,575
------- ------- --------
Net cash provided by operating activities 139,455 58,924 90,885
------- ------- --------
Cash Flows from Investing Activities:
Utility construction expenditures (92,057) (96,759) (99,180)
Other (1,594) (2,876) (3,311)
------- ------- --------
Net cash used in investing activities (93,651) (99,635) (102,491)
------- ------- --------
Cash Flows from Financing Activities:
Increase (Decrease) in bank loans, net (14,000) 25,500 (50,000)
Proceeds from issuance of
long-term debt - 40,000 55,000
Retirement of long-term debt (10,000) (7,000) (5,000)
Sale of common stock, net of expenses - - 33,023
Issuance of common stock through
dividend reinvestment and
employee stock plans 14,420 14,787 8,435
Dividends paid (36,008) (33,393) (30,564)
------- ------- --------
Net cash provided by (used in)
financing activities (45,588) 39,894 10,894
------- ------- --------
Net Increase (Decrease) in Cash and
Cash Equivalents 216 (817) (712)
Cash and Cash Equivalents at
Beginning of Year 4,994 5,811 6,523
------- ------- --------
Cash and Cash Equivalents at End of Year $ 5,210 $ 4,994 $ 5,811
======= ======= ========
Cash Paid During the Year for:
Interest $33,324 $31,435 $27,310
Income taxes $34,636 $52,087 $30,087
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 24
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
For the Years Ended October 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance at Beginning of Year $139,184 $124,015 $114,400
Net Income 54,074 48,562 40,310
-------- -------- --------
Total 193,258 172,577 154,710
-------- -------- --------
Deduct:
Dividends declared on common
stock ($1.205 a share in 1997,
$1.145 in 1996 and $1.085 in 1995) 36,008 33,393 30,564
Capital stock expense - - 131
-------- -------- --------
Total 36,008 33,393 30,695
-------- -------- --------
Balance at End of Year $157,250 $139,184 $124,015
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
A. Operations and Principles of Consolidation.
Piedmont Natural Gas Company, Inc. (the Company), an
investor-owned public utility, is primarily engaged in the sale and
transportation of natural gas to residential, commercial and industrial
customers in the Piedmont region of North Carolina and South Carolina and the
metropolitan Nashville, Tennessee, area. The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries.
Significant intercompany transactions have been eliminated in consolidation
where appropriate.
B. Utility Plant and Depreciation.
Utility plant is stated at original cost, including direct labor and
materials, allocable overheads and an allowance for borrowed and equity funds
used during construction (AFUDC). The weighted average accrual rate for AFUDC
was 9.46% for 1997, 9.39% for 1996 and 9.47% for 1995. The portion of AFUDC
attributable to equity funds is included in other income, and the portion
attributable to borrowed funds is shown as a reduction of utility interest
charges. The costs of property retired are removed from utility plant and such
costs, including removal costs net of salvage, are charged to accumulated
depreciation.
Depreciation expense is computed using the straight-line method applied
to average depreciable costs. The ratio of depreciation provisions to average
depreciable property balances was 3.41% for 1997, 3.40% for 1996 and 3.29% for
1995.
In accordance with the Company's operations procedures, long-lived
assets and certain identifiable intangibles are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. These reviews did not result in a material effect on the
results of operations or financial condition.
C. Inventories.
Inventories are maintained on the basis of the average cost charged
thereto.
D. Deferred Purchased Gas Adjustment.
Rate schedules include purchased gas adjustment provisions that permit
the recovery of purchased gas costs. Purchased gas adjustment factors are
revised periodically without formal rate proceedings to reflect changes in the
cost of purchased gas. Charges to cost of gas are based on the amount
recoverable under
23
<PAGE> 26
approved rate schedules. The net of any over- or under-recovered amounts is
included in refunds due customers.
E. Income Taxes.
Deferred income taxes are provided for differences between book and tax
income, principally attributable to accelerated tax depreciation and the timing
of the recording of revenues and cost of gas. Deferred investment tax credits
are being amortized to income over the estimated useful life of the related
property.
F. Operating Revenues.
Revenues are recognized from meters read on a monthly cycle basis which
results in unrecognized revenue from the cycle date through month end. The cost
of gas delivered to customers but not yet billed under the cycle billing method
is deferred.
G. Earnings Per Share.
Earnings per share are computed based on the weighted average number of
shares of Common Stock outstanding during each year. Effective January 31, 1998,
the Company will adopt Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share" (FAS 128). Adoption of FAS 128 will require the
Company to present a diluted earnings per share amount which currently is only
impacted by shares issuable under the Long-Term Incentive Plan. The Company does
not expect the adoption of FAS 128 to have a material effect on earnings per
share.
H. Rate-Regulated Basis of Accounting
SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation" (FAS 71), provides that rate-regulated public utilities account for
and report assets and liabilities consistent with the economic effect of the
manner in which independent third-party regulators establish rates. In applying
FAS 71, the Company has capitalized certain costs and benefits as regulatory
assets and liabilities, respectively, pursuant to orders of the state utility
regulatory commissions, either in general rate proceedings or expense deferral
proceedings, in order to provide for recovery of or refunds to utility customers
in future periods.
The Company monitors the regulatory and competitive environment in
which it operates to determine that its regulatory assets continue to be
probable of recovery. If the Company, at some point in the future, determines
that all or a portion of these regulatory assets no longer meet the criteria for
continued application of FAS 71, then the Company would be required to write off
that portion which it could not recover.
24
<PAGE> 27
The amounts recorded as regulatory assets and liabilities in the
consolidated balance sheets at October 31, 1997 and 1996, are shown in the table
below.
<TABLE>
<CAPTION>
1997 1996
------- ------
(in thousands)
<S> <C> <C>
Regulatory Assets
Unamortized debt expense $ 2,759 $3,033
Environmental 6,916 4,184
Pipeline transition costs 3,578 -
Other 2,486 773
------- ------
Total $15,739 $7,990
======= ======
Regulatory Liabilities
Refunds due customers $15,097 $ 68
Excess deferred taxes 13,327 13,272
Deferred incentive plan 563 55
Pipeline transition costs - 2,171
------- -------
Total $28,987 $15,566
======= =======
</TABLE>
I. Statement of Cash Flows.
For purposes of reporting cash flows, all highly liquid debt
instruments purchased with an original maturity of three months or less are
considered to be cash equivalents.
J. Segment Reporting.
The Company is principally engaged in the gas distribution industry and
has no other reportable industry segments.
K. Use of Estimates.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
L. Reclassifications.
Certain financial statement items for 1996 and 1995 have been
reclassified to conform with the 1997 presentation.
2. Regulatory Matters
The Company's utility operations are subject to regulation by the North
Carolina Utilities Commission (NCUC) and the Tennessee Regulatory Authority
(TRA) as to the issuance of securities, and by those commissions and by the
Public Service Commission of South Carolina (PSCSC) as to rates, service area,
25
<PAGE> 28
adequacy of service, safety standards, extensions and abandonment of facilities,
accounting and depreciation.
The Company has been operating in an unbundled environment with all of its
interstate pipelines for several years under Federal Energy Regulatory
Commission (FERC) Order 636. In the Company's opinion, present rules and
regulations of the NCUC, the PSCSC and the TRA permit the pass through to
customers of interstate pipeline capacity and storage service costs and similar
costs that may be incurred under Order 636. Through 1997, the Company has
recovered substantially all such costs through purchased gas adjustment
procedures.
In 1996, the NCUC ordered the establishment of an expansion fund for the
Company and approved initial funding to enable the extension of natural gas
service into unserved areas of the state. The North Carolina State Treasurer
currently holds approximately $17,912,000 as of its last report for credit to
the Company's expansion fund account. This amount along with other supplier
refunds, including interest earned to date, is included in restricted cash. The
use of such funds will be at the discretion of the NCUC as individual project
applications for unserved areas are filed by the Company and approved by the
NCUC. As of October 31, 1997, no funds had been used for expansion.
In 1994, the Company filed a petition with the NCUC for a certificate of
public convenience and necessity to serve four counties in North Carolina not
presently receiving natural gas service. The Company requested permission to use
expansion funds to offset a portion of the cost of construction in the four
counties. Another company also filed an application to serve the four counties;
however, this company did not request permission to use expansion funds. In
January 1996, the NCUC granted a final certificate to the competing applicant.
The Company appealed that order to the Supreme Court of North Carolina in
November 1996, and in July 1997, the Court ruled to uphold the decision of the
NCUC awarding the franchise to the competing applicant.
In November 1995, the PSCSC issued an order permitting the Company to
increase its rates in South Carolina, effective November 7, 1995, by $7,800,000
annually. The Consumer Advocate for the State of South Carolina appealed the
order to the Circuit Court of Richland County, South Carolina. The Court
dismissed the appeal and affirmed the PSCSC's original order in its entirety in
May 1997. In August 1997, the Consumer Advocate filed an appeal with the Supreme
Court of South Carolina. The outcome of this appeal cannot be determined at this
time.
26
<PAGE> 29
In December 1996, the TRA issued an order in a general rate case proceeding
permitting the Company to increase its margin in Tennessee, effective January 1,
1997, by $4,400,000 annually. The TRA's decision was confirmed by a written
decision in February 1997. The Tennessee Consumer Advocate filed several
pleadings with the TRA arguing, among other things, that the Company was not
entitled to recover the increased rates prior to the date of the TRA's February
Order. All parties in this proceeding, including the Company, petitioned the TRA
to reconsider its February Order. In June 1997, the TRA issued an order denying
all motions and upholding its previous orders. In August 1997, the Consumer
Advocate petitioned the Court of Appeals for a review of the TRA's orders. The
outcome of this proceeding cannot be determined at this time.
3. Long-Term Debt
Long-term debt at October 31, 1997 and 1996, is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Senior Notes:
9.19%, due 2001 $ 30,000 $ 30,000
10.02%, due 2003 24,000 28,000
10.06%, due 2004 14,000 16,000
10.11%, due 2004 28,000 32,000
9.44%, due 2006 35,000 35,000
8.51%, due 2017 35,000 35,000
Medium-Term Notes:
6.23%, due 2003 45,000 45,000
6.87%, due 2023 45,000 45,000
8.45%, due 2024 40,000 40,000
7.40%, due 2025 55,000 55,000
7.50%, due 2026 40,000 40,000
-------- --------
Total 391,000 401,000
Less current maturities 10,000 10,000
-------- --------
Total $381,000 $391,000
======== ========
</TABLE>
Annual sinking fund requirements and maturities through 2002 are
$10,000,000 in 1998 through 2000, $40,000,000 in 2001 and $10,000,000 in 2002.
The Company's articles of incorporation and note agreements under which
long-term debt was issued contain provisions which restrict the amount of cash
dividends that may be paid on Common
27
<PAGE> 30
Stock. At October 31, 1997, all of the Company's retained earnings was free of
such restrictions.
4. Capital Stock
The changes in Common Stock for the years ended October 31, 1995, 1996
and 1997, are summarized as follows:
<TABLE>
<CAPTION>
Shares Amount
---------- --------
(in thousands)
<S> <C> <C>
Balance, October 31, 1994 26,576,543 $187,592
Public Offering 1,725,000 33,154
Issue to Participants in the Employee
Stock Purchase Plan (SPP) 29,133 523
Issue to the Dividend Reinvestment and
Stock Purchase Plan (DRIP) 409,860 7,912
Issue to Participants in the
Long-Term Incentive Plan (LTIP) 94,468 1,783
---------- --------
Balance, October 31, 1995 28,835,004 230,964
Issue to SPP 27,713 577
Issue to DRIP 635,046 14,210
Issue to LTIP 51,105 1,156
---------- --------
Balance, October 31, 1996 29,548,868 246,907
Issue to SPP 24,948 555
Issue to DRIP 568,482 13,865
Issue to LTIP 50,716 1,249
---------- --------
Balance, October 31, 1997 30,193,014 $262,576
========== ========
</TABLE>
At October 31, 1997, 2,371,802 shares of Common Stock were reserved for
issuance as follows:
<TABLE>
<S> <C>
SPP 245,628
DRIP 1,071,913
LTIP 1,054,261
---------
Total 2,371,802
=========
</TABLE>
5. Financial Instruments and Related Fair Value
The Company has committed bank lines of credit totaling $75,000,000 to
finance current cash requirements. Additional uncommitted lines are also
available on an as needed, if available, basis. Borrowings under the lines, with
maturity dates of less than 90 days, include bankers' acceptances, transactional
borrowings and overnight cost-plus loans based on the lending bank's cost of
money, with a maximum rate of the lending bank's commercial prime interest rate.
At October 31, 1997, the lines of credit were on either a fee
28
<PAGE> 31
basis or compensating balance basis, with average annual balance requirements of
$300,000.
At October 31, 1997, outstanding notes payable consisted of $15,000,000
in bankers' acceptances and $10,000,000 in overnight cost-plus loans. The
weighted average interest rate on such borrowings was 5.83%.
The Company's principal business activity is the sale and transportation of
natural gas to customers located in North Carolina, South Carolina and
Tennessee. At October 31, 1997, gas receivables totaled $23,684,000 and other
receivables totaled $10,710,000. The uncollected balance of installment
receivables transferred with recourse was $23,184,000 and $26,584,000 at October
31, 1997 and 1996, respectively. The Company has provided an adequate allowance
for any receivables which may not be ultimately collected, including the
receivables transferred with recourse.
Effective January 1, 1998, the Company will adopt SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" (FAS 125). The Company does not expect the adoption of FAS 125 to
have a material effect on financial position or results of operations.
The carrying amounts in the consolidated balance sheets of cash and cash
equivalents, restricted cash, receivables, notes payable and accounts payable
approximate their fair values due to the short-term maturities of these
financial instruments. Based on quoted market prices of similar issues having
the same remaining maturities, redemption terms and credit ratings, the
estimated fair values of long-term debt at October 31, 1997 and 1996, including
current portion, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
(in thousands)
<S> <C> <C> <C> <C>
Long-term debt $391,000 $425,148 $401,000 $442,116
</TABLE>
The use of different market assumptions or estimation methodologies may
have a material effect on the estimated fair values. The fair value amounts are
not intended to reflect principal amounts that the Company will ultimately be
required to pay.
The Company engages in minimal derivative products activities, such as
exchange traded futures and over-the-counter forward contracts, to manage
commodity price and basis risk when appropriate. The hedging
29
<PAGE> 32
activities permit the Company to translate physical market activities into a
common pricing index against which transaction values will be measured at the
margin. Under internal Company guidelines, limited speculative positions are
permitted in the derivatives market or in the form of fixed price gas supply
contracts. The Company does not hold or issue derivative financial instruments
for trading purposes. The Company's derivative products activity is not material
to financial position or results of operations.
6. Employee Benefit Plans
The Company has a defined-benefit pension plan for the benefit of
substantially all full-time regular employees. Plan benefits are generally based
on credited years of service and the level of compensation during the five
consecutive years of the last ten years prior to retirement during which the
participant received his or her highest compensation. The Company's policy is to
fund the plan in an amount not in excess of the amount that is deductible for
income tax purposes under applicable federal regulations. Plan assets consist
primarily of marketable securities with a minor investment in commercial real
estate and cash equivalents.
The plan is amended from time to time in accordance with changes in tax
law. The unrecognized prior service costs, if any, resulting from amendments are
amortized over the average remaining service life of active employees.
A reconciliation of the funded status of the plan to the amounts recognized
in the consolidated financial statements at October 31, 1997 and 1996, is
presented below:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 73,189 $ 66,537
========= =========
Accumulated benefit obligation $ 79,104 $ 73,818
========= =========
Projected benefit obligation for service
rendered to date $(112,330) $(106,962)
Plan assets at fair value 141,540 117,646
--------- ---------
Plan assets in excess of projected
benefit obligation 29,210 10,684
Unrecognized net gain and effects
of changes in assumptions (39,703) (23,238)
Unrecognized prior service cost 3,805 4,222
Unrecognized net obligation at transition 90 105
--------- ---------
Accrued pension cost $ (6,598) $ (8,227)
========= =========
</TABLE>
30
<PAGE> 33
Net periodic pension cost, excluding trustee fees and other expenses, for
the years ended October 31, 1997, 1996 and 1995, includes the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Service cost $5,146 $5,215 $4,212
Interest cost 7,251 6,891 6,704
Return on plan assets (24,827) (17,127) (19,009)
Net asset gain (loss) deferred 14,688 7,766 10,544
Other 135 432 358
------ ------ ------
Net periodic pension cost $2,393 $3,177 $2,809
====== ====== ======
Actuarial assumptions used were:
Weighted average discount rate 6.75% 7.0 % 6.75%
Rate of increase in future compensation
levels 4.75% 5.0 % 5.0 %
Expected long-term rate of return 9.5 % 9.5 % 9.5 %
</TABLE>
The Company provides certain postretirement health care and life insurance
benefits to substantially all full-time regular employees. As of October 31,
1997, the liability associated with such benefits was funded in irrevocable
trust funds which can only be used to pay the benefits.
A reconciliation of the funded status of the plan to the amounts recognized
in the consolidated financial statements at October 31, 1997 and 1996, is
presented below:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $(13,994) $(11,129)
Fully eligible active plan participants (5,147) (5,442)
Other active plan participants (2,800) (2,847)
-------- --------
Total (21,941) (19,418)
Plan assets at fair value 4,709 3,137
-------- --------
Accumulated postretirement benefit obligation
in excess of plan assets (17,232) (16,281)
Unrecognized net gain and effects of
changes in assumptions 3,705 852
Unrecognized transition obligation 14,878 15,808
-------- --------
Prepaid postretirement benefit cost $ 1,351 $ 379
======== ========
</TABLE>
31
<PAGE> 34
Net periodic postretirement benefit cost for the years ended October 31,
1997, 1996 and 1995, includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Service cost $ 627 $ 657 $ 578
Interest Cost 1,367 1,342 1,405
Return on plan assets (377) (289) (226)
Amortization of transition obligation 930 930 930
Other 25 - (24)
------ ------ ------
Net periodic postretirement benefit cost $2,572 $2,640 $2,663
====== ====== ======
Actuarial assumptions used were:
Weighted average discount rate 7.0 % 7.25% 7.25%
Weighted average rate of return
on plan assets 9.5 % 9.5 % 8.0 %
Average assumed annual rate of salary increase
for the applicable life insurance plans 4.75% 5.0 % 5.0 %
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for the medical plans is 8.5% for 1998,
declining gradually to 4.25% in 2005 and remaining at that level thereafter. The
health care cost trend rate assumption has a significant effect on the amounts
reported. A one-percentage point increase in this rate would increase the
accumulated postretirement benefit obligation at October 31, 1997, by $1,237,000
and the aggregate of the service and interest cost components of net periodic
postretirement benefit cost by $82,000.
The Company maintains salary investment plans which are profit sharing
plans under Section 401(a) of the Internal Revenue Code of 1986, as amended (the
Tax Code), which include qualified cash or deferred arrangements under Tax Code
Section 401(k). Employees who have completed six months of service are eligible
to participate. Participants are permitted to defer a portion of their base
salary to the plans, with the Company matching a portion of the participants'
contributions. All contributions vest immediately. For the years ended October
31, 1997, 1996 and 1995, the Company contributed $2,172,000, $2,173,000 and
$1,932,000, respectively, to the plans.
32
<PAGE> 35
7. Income Taxes
The components of income tax expense for the years ended October 31,
1997, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Federal State Federal State Federal State
------- ------ ------- ------ ------- ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income taxes charged to operations:
Current $24,074 $5,311 $11,966 $3,215 $ 6,809 $1,886
Deferred 2,696 425 11,224 1,762 12,176 2,198
Amortization of
investment tax
credits (558) - (558) - (558) -
------- ------ ------- ------ ------- ------
Total 26,212 5,736 22,632 4,977 18,427 4,084
------- ------ ------- ------ ------- ------
Income taxes charged to other income:
Current 2,101 (261) 2,683 568 1,937 353
Deferred 127 735 52 16 485 155
------- ------ ------- ------ ------- ------
Total 2,228 474 2,735 584 2,422 508
------- ------ ------- ------ ------- ------
Total income tax expense $28,440 $6,210 $25,367 $5,561 $20,849 $4,592
======= ====== ======= ====== ======= ======
</TABLE>
A reconciliation of income tax expense at the federal statutory rate to
recorded income tax expense for the years ended October 31, 1997, 1996 and 1995,
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Federal taxes at 35% $31,054 $27,822 $23,013
State income taxes, net of
federal benefit 4,037 3,614 2,987
Amortization of investment tax credits (558) (558) (558)
Other, net 117 50 (1)
------- ------- -------
Total income tax expense $34,650 $30,928 $25,441
======= ======= =======
</TABLE>
At October 31, 1997 and 1996, deferred income taxes consisted of the
following temporary differences:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Excess of tax over book depreciation and tax and
book asset basis differences $110,746 $101,797
Revenues and cost of gas 14,384 21,609
Long-term incentive plan (4,027) (3,176)
Regulatory liability related to SFAS No. 109 (4,622) (4,608)
Pension expense 800 (3,388)
Alternative minimum tax - (558)
Other, net (1,756) (137)
-------- --------
Net deferred income taxes $115,525 $111,539
======== ========
</TABLE>
33
<PAGE> 36
Total deferred income tax liabilities were $132,808,000 and $130,536,000
and total deferred income tax assets were $17,283,000 and $18,997,000 at October
31, 1997 and 1996, respectively.
8. Subsidiary and Non-Utility Activities
Piedmont Energy Company, a wholly owned subsidiary of the Company, is a 51%
member of Resource Energy Services Company, L.L.C. (Resource Energy), a North
Carolina limited liability company. Resource Energy offers natural gas
acquisition, transportation and storage services to industrial users and other
utilities in the southeast, mid-Atlantic and midwest regions of the United
States. If such customers are on the Company's distribution system, revenues for
transporting this gas are included in utility operating revenues.
Piedmont Intrastate Pipeline Company, a wholly owned subsidiary of the
Company, is a 36% member of Cardinal Pipeline Company, L.L.C. (Cardinal), a
North Carolina limited liability company that owns and operates a natural gas
pipeline from a connection with an interstate pipeline to facilities owned by
the Company and facilities owned by another utility company, also a member.
Because the investment in Cardinal is treated as utility assets for ratemaking
purposes, the Company includes its share of the assets and operations of
Cardinal in utility operations.
Piedmont Interstate Pipeline Company (Piedmont Interstate), a wholly owned
subsidiary of the Company, is a 35% member of Pine Needle LNG Company, L.L.C.
(Pine Needle), a North Carolina limited liability company that is currently
constructing a liquified natural gas (LNG) peak-demand facility in North
Carolina with the peaking service scheduled to be available during the winter of
1999-2000. Storage capacity will be four billion cubic feet with vaporization
capability of 400 million cubic feet per day. The Company has subscribed to
one-half of this capacity. Pine Needle has made arrangements to finance the
construction through construction loans, with permanent financing at the end of
the construction period. A portion of this permanent financing will include an
estimated equity contribution of $18,700,000 by Piedmont Interstate.
Piedmont Propane Company, a wholly owned subsidiary of the Company, markets
propane and propane appliances to residential, commercial and industrial
customers within and adjacent to the Company's three-state natural gas service
area.
Operating revenues shown in the consolidated financial statements represent
revenues from utility operations only. Non-utility revenues as a percentage of
total revenues, including utility operations, were 5% in 1997, 7% in 1996 and 8%
in 1995.
34
<PAGE> 37
No single non-utility activity accounted for greater than 6% of total revenues
in any year. Income from non-utility activities as a percentage of total net
income was 5% in 1997 and 9% in 1996 and 1995. No single non-utility activity
accounted for more than 6% of net income in any year.
9. Environmental Matters
The Company has owned, leased or operated manufactured gas plant (MGP)
facilities at 12 sites in its three-state service area, nine of which involve
other parties who either owned the property or operated the facilities. In
October 1997, the Company entered into a settlement with one of the third
parties pursuant to which the Company paid the third party $5,250,000. The third
party assumed responsibility for all costs of investigation, monitoring,
assessment, evaluation, removal, remedy or remedial action (Response Costs)
incurred at the nine MGP sites and indemnified the Company from any and all
actions, causes of action, claims and demands arising out of or relating to such
Response Costs. The settlement does not cover any third party claims for
personal injury, death, property damage, diminution of property value or natural
resources. No such claims are pending or, to the knowledge of the Company,
threatened.
The Company is authorized by its three state regulatory commissions to
utilize deferral accounting, or the creation of a regulatory asset, for
expenditures made in connection with environmental matters. The Company had
previously established an environmental liability and associated regulatory
asset of $4,000,000 for future environmental costs. In October 1997, the Company
increased the regulatory asset to $6,610,000 and decreased the environmental
liability to $1,360,000 to account for the settlement relating to the nine
sites. In addition, as of October 31, 1997, the regulatory asset includes
$306,000, net of recoveries from customers, for other environmental costs,
primarily legal fees and engineering assessments.
The estimate of the regulatory asset and environmental liability on the
remaining three sites, included in the amounts above, is based on a generic MGP
site study. Site-specific evaluations have not been performed. Resolution of
these matters and further evaluations of the sites could significantly affect
recorded amounts; however, the Company believes that the ultimate resolution of
these matters will not have a material adverse effect on financial position or
results of operations.
35
<PAGE> 38
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of the Company is responsible for the preparation and
integrity of the accompanying consolidated financial statements and related
notes. The statements were prepared in conformity with generally accepted
accounting principles appropriate in the circumstances and include amounts which
are necessarily based on management's best estimates and judgments made with due
consideration to materiality. Financial information presented elsewhere in this
report is consistent with that in the financial statements.
Management has established and is responsible for maintaining a
comprehensive system of internal accounting controls which it believes provides
reasonable assurance that Company policies and procedures are complied with,
assets are safeguarded and transactions are executed according to management's
authorization. This system is continually reviewed for effectiveness and
modified in response to changing business conditions and operations and as a
result of recommendations by the external and internal auditors.
The Audit Committee of the Board of Directors, consisting solely of outside
Directors, meets periodically with Deloitte & Touche LLP, the internal auditors
and representatives of management to discuss auditing and financial reporting
matters. The Audit Committee reviews audit plans and results and the Company's
accounting, financial reporting and internal control practices, procedures and
results. Both Deloitte & Touche LLP and the internal auditors have full and free
access to all levels of management.
36
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
Piedmont Natural Gas Company, Inc.
We have audited the accompanying consolidated balance sheets of Piedmont
Natural Gas Company, Inc. and subsidiaries (the Company) as of October 31, 1997
and 1996, and the related statements of consolidated income, retained earnings
and cash flows for each of the three years in the period ended October 31, 1997.
Our audits also included the supplemental consolidated financial statement
schedule listed in Item 14. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at October 31, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended October 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
December 19, 1997
37
<PAGE> 40
QUARTERLY FINANCIAL DATA
Quarterly financial data for 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
Earnings
Operating Operating Net Per Share of
Revenues Margin Income Income Common Stock
--------- -------- --------- ------- ------------
(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
1997
January 31 $312,533 $118,370 $43,387 $37,312 $1.26
April 30 $259,306 $109,119 $39,623 $32,274 $1.08
July 31 $103,997 $ 47,143 $ 3,692 $(5,777) $(.19)
October 31 $ 99,681 $ 40,220 $(2,716) $(9,735) $(.32)
1996
January 31 $239,160 $106,453 $38,904 $34,098 $1.18
April 30 $259,472 $105,395 $37,887 $32,451 $1.12
July 31 $ 95,744 $ 40,186 $ 79 $(8,326) $(.28)
October 31 $ 90,679 $ 38,888 $(2,241) $(9,661) $(.33)
</TABLE>
The pattern of quarterly earnings is the result of the highly seasonal
nature of the business as variations in weather conditions generally result in
greater earnings during the winter months. Earnings per share are calculated
based on the weighted average number of shares outstanding during the quarter.
The annual amount may differ from the total of the quarterly amounts due to
changes in the number of shares outstanding during the year.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
38
<PAGE> 41
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required under this item with respect to directors is
contained in the Company's proxy statement filed with the Securities and
Exchange Commission (SEC) on or about January 15, 1998, and is incorporated
herein by reference.
The names, ages and positions of all of the executive officers of the
Company as of October 31, 1997, are listed below along with their business
experience during the past five years.
So far as practicable, all elected officers are elected at the first
meeting of the Board of Directors held following the annual meeting of
shareholders in each year and hold office until the meeting of the Board
following the annual meeting of shareholders in the next subsequent year and
until their respective successors are elected and qualify. All other officers
hold office during the pleasure of the Board. There are no family relationships
among these officers. There are no arrangements or understandings between any
officer and any other person pursuant to which the officer was selected except
for employment agreements with Messrs. Denny, Dzuricky, Killough, Maxheim,
Schiefer and Skains.
Business Experience
Name, Age and Position During Past Five Years
- ---------------------- ----------------------
John H. Maxheim, 63 Elected in 1984.
Chairman of the Board, President
and Chief Executive Officer
Ware F. Schiefer, 59 Elected in 1995.
Executive Vice President Prior to his election, he
was Senior Vice
President-Marketing and
Gas Supply.
David J. Dzuricky, 46 Elected in 1995.
Senior Vice President-Finance From 1993 until his
election, he was Vice
President and Treasurer
of Consolidated Natural
Gas Company, Pittsburgh,
Pennsylvania. From 1992
to 1993, he was Vice
President and Treasurer
39
<PAGE> 42
of Virginia Natural Gas
Company, Norfolk,
Virginia.
Ray B. Killough, 49 Elected in 1993. Prior
Senior Vice President-Operations to his election, he was
Vice President-
Engineering.
Thomas E. Skains, 41 Elected in 1995.
Senior Vice President-Gas Supply Prior to his election, he
and Services was Senior Vice
President, Transportation
and Customer Services, of
Transcontinental Gas Pipe
Line Corporation,
Houston, Texas.
Ted C. Coble, 54 Elected in 1982.
Vice President and Treasurer, and
Assistant Secretary
Stephen D. Conner, 49 Elected in 1990.
Vice President-Corporate
Communications
J. William Denny, 62 Elected in 1985.
Vice President-Nashville Division
Charles W. Fleenor, 47 Elected in 1987.
Vice President-Gas Services
Paul C. Gibson, 58 Elected in 1986.
Vice President-Rates
Barry L. Guy, 53 Elected in 1986.
Vice President and Controller
Donald F. Harrow, 42 Elected in 1992.
Vice President-Governmental Relations
Dale C. Hewitt, 52 Elected in 1993. Prior
Vice President-North Carolina to his election, he was
Operations District Manager of the
Company's Greensboro, North
Carolina, operations.
40
<PAGE> 43
Richard A. Linville, 50 Elected in August 1997.
Vice President-Human Resources Prior to his election, he
was Vice President-Human
Resources of Harriet and
Henderson Yarns, Inc.,
Henderson, North Carolina.
Kevin M. O'Hara, 39 Elected in 1993. Prior to
Vice President-Corporate Planning his election, he was
Director-Information
Services Plans and
Controls.
William R. Pritchard, Jr., 54 Elected in 1986.
Vice President-Information
Services
Martin C. Ruegsegger, 47 Elected in February 1997.
Vice President, Corporate Counsel From 1993 to his election,
and Secretary he was Corporate Secretary.
Prior to 1993, he was
General Counsel for Bell
South Business Systems,
Inc., and Bell South
Communications, Inc.,
Atlanta, Georgia.
David L. Trusty, 40 Elected in August 1997,
Vice President-Marketing effective November 1997.
Prior to his election, he was
Vice President-Marketing
of the Nashville Division.
Ranelle Q. Warfield, 40 Elected in August 1997,
Vice President-Customer Services effective November 1997.
From 1993 to her election,
she was Director-Marketing.
Prior to 1993, she was
Director-Residential Sales.
Bartlett C. Winkler, 61 Elected in August 1997,
Vice President-Piedmont Propane effective November 1997.
Prior to his election, he was
Vice President-Marketing.
41
<PAGE> 44
William D. Workman, III, 57 Elected in 1993.
Vice President-South Carolina Prior to his election, he
Operations was Senior Director for
Facilities and Civic
Affairs of Fluor Daniel,
Inc., Greenville, South
Carolina.
Item 11. Executive Compensation
Information required under this item is contained in the Company's
proxy statement filed with the SEC on or about January 15, 1998, and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information with respect to security ownership of certain beneficial
owners is contained in the Company's proxy statement filed with the SEC on or
about January 15, 1998, and is incorporated herein by reference.
(b) Security Ownership of Management
Information with respect to security ownership of directors and
officers is contained in the Company's proxy statement filed with the SEC on or
about January 15, 1998, and is incorporated herein by reference.
(c) Changes in Control
The Company knows of no arrangements or pledges which may result in a
change in control.
Item 13. Certain Relationships and Related Transactions
Information with respect to certain transactions with directors is
contained in the Company's proxy statement filed with the SEC on or about
January 15, 1998, and is incorporated herein by reference.
42
<PAGE> 45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and
its subsidiaries and the related independent auditors' report for the year ended
October 31, 1997, are included in Item 8 of this report as follows:
Page
----
Consolidated Balance Sheets - October 31, 1997 and 1996 18
Statements of Consolidated Income - Years Ended
October 31, 1997, 1996 and 1995 20
Statements of Consolidated Cash Flows - Years Ended
October 31, 1997, 1996 and 1995 21
Statements of Consolidated Retained Earnings - Years
Ended October 31, 1997, 1996 and 1995 22
Notes to Consolidated Financial Statements 23
Management's Responsibility for Financial Reporting 36
Independent Auditors' Report 37
(a) 2. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Page
----
II Valuation and Qualifying Accounts 53
Schedules other than those listed above and certain other
information are omitted for the reason that they are not required or are not
applicable, or the required information is shown in the financial statements or
notes thereto.
(a) 3. EXHIBITS
Where an exhibit is filed by incorporation by reference
to a previously filed registration statement or report,
such registration statement or report is identified in
parentheses. Upon written request of a shareholder, the
Company will provide a copy of the exhibit at a nominal
charge.
3.1 Copy of Articles of Incorporation of the Company, filed
in the Department of State of the State of North Carolina
on December 13, 1993 (Exhibit No. 2, Registration
Statement on Form 8-B, dated March 2, 1994).
43
<PAGE> 46
3.2 Copy of By-Laws of the Company as amended (Exhibit No. 2,
Registration Statement on Form 8-B, dated March 2, 1994).
3.3 Articles of Amendment of the Company (Exhibit No. 3,
Amendment to Form 10-Q for the period ended April 30,
1997).
4.1 Copy of Note Agreement, dated as of August 30, 1988,
between the Company and Jefferson-Pilot Life Insurance
Company, et al (Exhibit 4.26, Form 10-K for the fiscal
year ended October 31, 1988).
4.2 Copy of Note Agreement, dated as of June 15, 1989,
between the Company and The Mutual Life Insurance Company
of New York (Exhibit 4.27, Form 10-K for the fiscal year
ended October 31, 1989).
4.3 Copy of Note Agreement, dated as of August 31, 1989,
between the Company and Teachers Insurance and Annuity
Association of America (Exhibit 4.28, Form 10-K for the
fiscal year ended October 31, 1989).
4.4 Copy of Note Agreement, dated as of July 30, 1991,
between the Company and The Prudential Insurance Company
of America (Exhibit 4.29, Form 10-K for the fiscal year
ended October 31, 1991).
4.5 Copy of Note Agreement, dated as of September 21, 1992,
between the Company and Provident Life and Accident
Insurance Company (Exhibit 4.30, Form 10-K for the fiscal
year ended October 31, 1992).
4.6 Copy of Indenture, dated as of April 1, 1993, between the
Company and Citibank, N.A., Trustee (Exhibit 4.1,
Registration Statement No. 33-60108).
4.7 Copy of Medium-Term Note, Series A, dated as of July 23,
1993 (Exhibit 4.7, Form 10-K for the fiscal year ended
October 31, 1993).
4.8 Copy of Medium-Term Note, Series A, dated as of October
6, 1993 (Exhibit 4.8, Form 10-K for the fiscal year ended
October 31, 1993).
4.9 Copy of Medium-Term Note, Series A, dated as of September
19, 1994 (Exhibit 4.9, Form 10-K for the fiscal year
ended October 31, 1994).
44
<PAGE> 47
4.10 Copy of Pricing Supplement of Medium-Term Notes, Series
B, dated October 3, 1995 (Exhibit 4.10, Form 10-K for the
fiscal year ended October 31, 1995).
4.11 Copy of Pricing Supplement of Medium-Term Notes, Series
B, dated October 4, 1996 (Exhibit 4.11, Form 10-K for the
fiscal year ended October 31, 1996).
10.1 Copy of Employment Agreement between Tennessee Natural
Resources, Inc., and J. William Denny, dated April 27,
1984 (Exhibit 10.17, Registration Statement No. 33-
4767).
10.2 Copy of the Company's Executive Long-Term Incentive Plan,
as amended through December 2, 1994 (Exhibit 10.3, Form
10-K for the fiscal year ended October 31, 1994).
10.3 Copy of Employment Agreement between the Company and John
H. Maxheim, dated February 26, 1993 (Exhibit 10.4, Form
10-K for the fiscal year ended October 31, 1993).
10.4 Copy of Articles of Organization of Cardinal Pipeline
Company, L.L.C., dated April 5, 1994 (Exhibit 10.1, Form
10-Q for the quarterly period ended April 30, 1994).
10.5 Copy of Operating Agreement of Cardinal Pipeline Company,
L.L.C., dated March 23, 1994 (Exhibit 10.2, Form 10-Q for
the quarterly period ended April 30, 1994).
10.6 Copy of Construction, Operating and Management Agreement
by and between Public Service Company of North Carolina,
Inc. and Cardinal Pipeline Company, L.L.C., dated March
23, 1994 (Exhibit 10.3, Form 10-Q for the quarterly
period ended April 30, 1994).
10.7 Copy of Service Agreement under Rate Schedule LG-A, dated
January 15, 1971, between the Company and
Transcontinental Gas Pipe Line Corporation (Exhibit 67,
Registration Statement No. 2-59631).
10.8 Copy of Service Agreement (5,900 Mcf per day) (Contract
No. 4995), dated August 1, 1991, between the Company and
Transcontinental Gas Pipe Line Corporation (Exhibit
10.20, Form 10-K for the fiscal year ended October 31,
1991).
45
<PAGE> 48
10.9 Copy of Service Agreement under Rate Schedule WSS
(69,701 dekatherms per day) (Contract No. 26419-001),
dated August 1, 1991, between the Company and
Transcontinental Gas Pipe Line Corporation (Exhibit
10.10, Form 10-K for the fiscal year ended October
31,1995).
10.10 Copy of Service Agreement FT-Incremental Mainline (6,222
Mcf per day) (Contract No. 2268), dated August 1, 1991,
between the Company and Transcontinental Gas Pipe Line
Corporation (Exhibit 10.16, Form 10-K for the fiscal year
ended October 31, 1992).
10.11 Copy of Service Agreement (FT, 205,200 Mcf per day)
(Contract No. 3702), dated February 1, 1992, between the
Company and Transcontinental Gas Pipe Line Corporation
(Exhibit 10.20, Form 10-K for the fiscal year ended
October 31, 1992).
10.12 Copy of Service Agreement (Contract #800059) (SCT, 1,677
Dt/day), dated June 1, 1993, between the Company and
Texas Eastern Transmission Corporation (Exhibit 10.28,
Form 10-K for the fiscal year ended October 31, 1993).
10.13 Copy of Gas Transportation Agreement for Use Under FT-A
Rate Schedule (Contract No. 237) (FTA, 130,000 Dt/day),
dated September 1, 1993, between the Company and
Tennessee Gas Pipeline Company (Exhibit 10.30, Form 10-K
for the fiscal year ended October 31, 1993).
10.14 Copy of Gas Storage Contract for Use Under Rate Schedule
FS (Contract No. 2400) (672,091 Dt total capacity), dated
September 1, 1993, between the Company and Tennessee Gas
Pipeline Company (Exhibit 10.31, Form 10-K for the fiscal
year ended October 31, 1993).
10.15 Copy of Service Agreement under Rate Schedule GSS, dated
October 1, 1993, between the Company and Transcontinental
Gas Pipe Line Corporation (Exhibit 10.22, Form 10-K for
the fiscal year ended October 31, 1995).
10.16 Copy of FTS Service Agreement (23,000 Dt/day), dated
November 1, 1993, between the Company and Columbia Gas
Transmission Corporation (Exhibit 10.24, Form 10-K for
the fiscal year ended October 31, 1994).
46
<PAGE> 49
10.17 Copy of Service Agreement under Rate Schedule FSS
(2,263,920 Dt total capacity) (Contract No. 38015),
dated November 1, 1993, between the Company and Columbia
Gas Transmission Corporation (Exhibit 10.25, Form 10-K
for the fiscal year ended October 31, 1994).
10.18 Copy of Service Agreement under Rate Schedule SST
(Winter: 10,000 Dt/day; Summer: 5,000 Dt/day) (Contract
No. 38052), dated November 1, 1993, between the Company
and Columbia Gas Transmission Corporation (Exhibit
10.26, Form 10-K for the fiscal year ended October 31,
1994).
10.19 Copy of FSS Service Agreement (10,000 dekatherms per day
daily storage quantity) (Contract No. 38017), dated
November 1, 1993, between the Company and Columbia Gas
Transmission Corporation (Exhibit 10.26, Form 10-K for
the fiscal year ended October 31, 1995).
10.20 Copy of SST Service Agreement (37,000 dekatherms per day)
(Contract No. 38054), dated November 1, 1993, between the
Company and Columbia Gas Transmission Corporation
(Exhibit 10.27, Form 10-K for the fiscal year ended
October 31, 1995).
10.21 Copy of Service Agreement (20,504 Mcf per day), dated
June 6, 1994, between the Company and Transcontinental
Gas Pipe Line Corporation (Exhibit 10.29, Form 10-K for
the fiscal year ended October 31, 1995).
10.22 Copy of FTS-1 Service Agreement (5,000 dekatherms per
day) (Contract No. 43462), dated September 14, 1994,
between the Company and Columbia Gulf Transmission
Company (Exhibit 10.30, Form 10-K for the fiscal year
ended October 31, 1995).
10.23 Copy of FTS 1 Service Agreement (23,455 Dt per
day)(Contract No. 43461), dated September 14, 1994,
between the Company and Columbia Gulf Transmission
Company. (Exhibit 10.23, Form 10-K for the fiscal year
ended October 31, 1996).
10.24 Copy of Letter of Agreement of Amendment No. 1 to Gas
Storage Service Agreement (50,798 Mcf maximum storage
withdrawal per day) (Contract No. 6815), dated July 1,
1995, between the Company and Tennessee Gas Pipeline
Company. (Exhibit 10.24, Form 10-K for the fiscal year
ended October 31, 1996).
47
<PAGE> 50
10.25 Copy of Letter of Agreement of Amendment No. 1 to Gas
Storage Service Agreement (6,190 Mcf maximum storage
withdrawal per day) (Contract No. 2400), dated July 1,
1995, between the Company and Tennessee Gas Pipeline
Company. (Exhibit 10.25, Form 10-K for the fiscal year
ended October 31, 1996).
10.26 Copy of Firm Transportation Agreement (FT/NT), dated
September 22, 1995, between the Company and Texas Gas
Transmission Corporation. (Exhibit 10.26, Form 10-K for
the fiscal year ended October 31, 1996).
10.27 Copy of Service Agreement Applicable to Transportation of
Natural Gas Under Rate Schedule FT (X-74 Assignment)
(12,875 Dt per day), dated October 18, 1995, between the
Company and CNG Transmission Corporation. (Exhibit 10.27,
Form 10-K for the fiscal year ended October 31,
1996).
10.28 Copy of FT Service Agreement #01632 (24,995 Dt per day,
NIPPS), dated October 18, 1995, between the Company and
National Fuel Gas Supply Corporation. (Exhibit 10.28,
Form 10-K for the fiscal year ended October 31, 1996).
10.29 Copy of Service Agreement (Southern Expansion, FT 53,000
Mcf per day peak winter months, 47,700 Mcf per day
shoulder winter months) (Contract No. 0.4189), dated
November 1, 1995, between the Company and
Transcontinental Gas Pipe Line Corporation. (Exhibit
10.29, Form 10-K for the fiscal year ended October 31,
1996).
10.30 Copy of Service Agreement (24,140 Mcf per day) (Contract
No. 1.1996 NIPPS), dated November 1, 1995, between the
Company and Transcontinental Gas Pipe Line Corporation.
(Exhibit 10.30, Form 10-K for the fiscal year ended
October 31, 1996).
10.31 Copy of Service Agreement (12,785 Mcf per day) (Contract
No. 1.1994, FT/NT), dated November 1, 1995, between the
Company and Transcontinental Gas Pipe Line Corporation.
(Exhibit 10.31, Form 10-K for the fiscal year ended
October 31, 1996).
10.32 Copy of Rate Schedule GSS Service Agreement, dated May
15, 1996, between the Company and CNG Transmission
Corporation. (Exhibit 10.32, Form 10-K for the fiscal
year ended October 31, 1996).
48
<PAGE> 51
10.33 Copy of Employment Agreement between the Company and
David J. Dzuricky, dated May 31, 1996. (Exhibit 10.33,
Form 10-K for the fiscal year ended October 31, 1996).
10.34 Copy of Employment Agreement between the Company and Ray
B. Killough, dated May 31, 1996. (Exhibit 10.34, Form
10-K for the fiscal year ended October 31, 1996).
10.35 Copy of Employment Agreement between the Company and Ware
F. Schiefer, dated May 31, 1996. (Exhibit 10.35, Form
10-K for the fiscal year ended October 31, 1996).
10.36 Copy of Employment Agreement between the Company and
Thomas E. Skains, dated May 31, 1996. (Exhibit 10.36,
Form 10-K for the fiscal year ended October 31, 1996).
10.37 Copy of Service Agreement (SE95/96), dated June 25, 1996,
between the Company and Transcontinental Gas Pipe Line
Corporation. (Exhibit 10.37, Form 10-K for the fiscal
year ended October 31, 1996).
10.38 Copy of FSS Service Agreement (25,000 dekatherms per day)
(Contract No. 49775), dated November 22, 1995, between
the Company and Columbia Gas Transmission Corporation.
10.39 Copy of SST Service Agreement (25,000 dekatherms per day
peak winter months, 12,500 dekatherms per day shoulder
months) (Contract No. 49773), dated November 22, 1995,
between the Company and Columbia Gas Transmission
Corporation.
12 Computation of Ratio of Earnings to Fixed Charges.
23 Independent Auditors' Consent.
27 Financial Data Schedule (for Securities and Exchange
Commission use only).
99 Annual Report on Form 11-K.
49
<PAGE> 52
(b) Reports on Form 8-K
On October 10, 1997, the Company filed a report on Form 8-K
regarding settlement with a third party on certain environmental
matters at nine manufactured gas plant sites.
50
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PIEDMONT NATURAL GAS COMPANY, INC.
----------------------------------
(Registrant)
Date January 26, 1998 By: /s/ John H. Maxheim
---------------- -------------------
John H. Maxheim
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John H. Maxheim Chairman of the Board, January 26, 1998
- --------------------- President and Chief
John H. Maxheim Executive Officer, and
Director
/s/ David J. Dzuricky Senior Vice President- January 26, 1998
- ---------------------- Finance
David J. Dzuricky (Principal Financial
Officer)
/s/ Barry L. Guy Vice President and January 26, 1998
- --------------------- Controller (Principal
Barry L. Guy Accounting Officer)
51
<PAGE> 54
Signature Title Date
--------- ----- ----
/s/ Jerry W. Amos Director January 26, 1998
- -----------------------------
Jerry W. Amos
Director January 26, 1998
- -----------------------------
C. M. Butler III
/s/ Sam J. DiGiovanni Director January 26, 1998
- -----------------------------
Sam J. DiGiovanni
/s/ John W. Harris Director January 26, 1998
- -----------------------------
John W. Harris
/s/ Muriel W. Helms Director January 26, 1998
- -----------------------------
Muriel W. Helms
/s/ John F. McNair III Director January 26, 1998
- -----------------------------
John F. McNair III
/s/ Ned R. McWherter Director January 26, 1998
- -----------------------------
Ned R. McWherter
/s/ Walter S. Montgomery, Jr. Director January 26, 1998
- -----------------------------
Walter S. Montgomery, Jr.
/s/ Donald S. Russell, Jr. Director January 26, 1998
- -----------------------------
Donald S. Russell, Jr.
/s/ John E. Simkins, Jr. Director January 26, 1998
- -----------------------------
John E. Simkins, Jr.
52
<PAGE> 55
Schedule II
PIEDMONT NATURAL GAS COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Valuation and Qualifying Accounts
For the Years Ended October 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
Balance at Additions Balance
Beginning Charged to Deductions at End
Description of Period Costs and Expenses (A) of Period
- --------------------------------------------------------------------------------
(in thousands)
Allowance for doubtful accounts:
<S> <C> <C> <C> <C>
1997 $1,960 $3,922 $3,855 $2,027
1996 972 2,846 1,858 1,960
1995 947 1,805 1,780 972
</TABLE>
(A) Uncollectible accounts written off, net of recoveries and adjustments.
53
<PAGE> 56
Piedmont Natural Gas Company, Inc.
Form 10-K
For the Fiscal Year Ended October 31, 1997
Exhibits
--------
10.38 Copy of FSS Service Agreement (25,000 dekatherms per day)
(Contract No. 49775), dated November 22, 1995, between
the Company and Columbia Gas Transmission Corporation.
10.39 Copy of SST Service Agreement (25,000 dekatherms per day
peak winter months, 12,500 dekatherms per day shoulder
months)(Contract No. 49773), dated November 22, 1995
between the Company and Columbia Gas Transmission
Corporation.
12 Computation of Ratio of Earnings to Fixed Charges.
23 Independent Auditors' Consent.
27 Financial Data Schedule (for Securities and Exchange use
only).
99 Annual Report on Form 11-K.
<PAGE> 1
Exhibit 10.38
SERVICE AGREEMENT NO. 49775
CONTROL NO. 1995-04-30-0024
FSS SERVICE AGREEMENT
THIS AGREEMENT, made and entered into this 22nd day of November, 1995, by and
between:
COLUMBIA GAS TRANSMISSION CORPORATION
("SELLER")
AND
PIEDMONT NATURAL GAS CO
("BUYER")
WITNESSETH: That in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
Section 1. Service to be Rendered. Seller shall perform and Buyer shall receive
the service in accordance with the provisions of the effective FSS Rate Schedule
and applicable General Terms and Conditions of Seller's FERC Gas Tariff, Second
Revised Volume No. 1 (Tariff), on file with the Federal Energy Regulatory
Commission (Commission), as the same may be amended or superseded in accordance
with the rules and regulations of the Commission. Seller shall store quantities
of gas for Buyer up to but not exceeding Buyer's Storage Contract Quantity as
specified in Appendix A, as the same may be amended from time to time by
agreement between Buyer and Seller, or in accordance with the rules and
regulations of the Commission. Service hereunder shall be provided subject to
the provisions of Part 284.223 of Subpart G of the Commission's regulations.
Buyer warrants that service hereunder is being provided on behalf of BUYER.
Section 2. Term. Service under this Agreement shall commence as of APRIL 01,
1997, or upon completion of facilities and shall continue in full force and
effect until OCTOBER 31, 2012, and from YEAR-TO-YEAR thereafter unless
terminated by either party upon 2 YEARS' written notice to the other prior to
the end of the initial term granted or any anniversary date thereafter.
Pre-granted abandonment shall apply upon termination of this Agreement, subject
to any right of first refusal Buyer may have under the Commission's regulations
and Seller's Tariff.
Section 3. Rates. Buyer shall pay the charges and furnish the Retainage
percentage
<PAGE> 2
SERVICE AGREEMENT NO. 49775
CONTROL NO. 1995-04-30-0024
FSS SERVICE AGREEMENT
set forth in the above-referenced Rate Schedule and specified in Seller's
currently effective Tariff, unless otherwise agreed to by the parties in writing
and specified in Seller's currently effective Tariff, unless otherwise agreed to
by the parties in writing and specified as an amendment of this Service
Agreement.
Section 4. Notices. Notices to Seller under this Agreement shall be addressed to
it at Post Office Box 1273, Charleston, West Virginia 25325-1273, Attention:
Manager-Agreements Administration and notices to Buyer shall be addressed to it
at:
PIEDMONT NATURAL GAS CO
1915 REXFORD ROAD
CHARLOTTE, NC 28211
ATTN: CHUCK FLEENOR;
until changed by either party by written notice.
Section 5. Superseded Agreements. This Service Agreement supersedes and
cancels, as of the effective date hereof, the following Service Agreements: N/A.
PIEDMONT NATURAL GAS CO
By: /s/ C.W. Fleenor
------------------
Name: Chuck W. Fleenor
Title: Vice President - Gas Supply
Date: November 22, 1995
COLUMBIA GAS TRANSMISSION CORPORATION
By: /s/ S.M. Warnick
------------------
Name: Stephen M. Warnick
Title: Vice President
Date: November 27, 1995
<PAGE> 3
Revision No.
Control No. 1995-04-30-0024
Appendix A to Service Agreement No. 49775
Under Rate Schedule FSS
Between (Seller) COLUMBIA GAS TRANSMISSION CORPORATION
and (Buyer) PIEDMONT NATURAL GAS CO
Storage Contract Quantity 1,500,034 Dth
Maximum Daily Storage Quantity 25,000 Dth per day
CANCELLATION OF PREVIOUS APPENDIX A
Service changes pursuant to this Appendix A shall become effective as of APRIL
01, 1997. This Appendix A shall cancel and supersede the previous Appendix A
effective as of N/A, to the Service Agreement referenced above. With the
exception of this Appendix A, all other terms and conditions of said Service
Agreement shall remain in full force and effect.
PIEDMONT NATURAL GAS CO
By: /s/ C.W. Fleenor
----------------
Name: Chuck W. Fleenor
Title: Vice President - Gas Supply
Date: November 22, 1995
COLUMBIA GAS TRANSMISSION CORPORATION
By: /s/ S.M. Warnick
----------------
Name: Stephen M. Warnick
Title: Vice President
Date: November 27, 1995
<PAGE> 4
Revision No.
Control No. 1995-04-30-0024
Appendix A to Service Agreement No. 49775
Under Rate Schedule FSS
Between (Seller) COLUMBIA GAS TRANSMISSION CORPORATION
and (Buyer) PIEDMONT NATURAL GAS CO
GFNT / THIS SERVICE AGREEMENT AND ITS EFFECTIVENESS ARE
SUBJECT TO PRECEDENT AGREEMENT NO. 47762 BETWEEN BUYER AND
SELLER DATED MAY 11, 1995.
<PAGE> 1
Exhibit 10.39
SERVICE AGREEMENT NO. 49773
CONTROL NO. 1995-04-30-0025
SST SERVICE AGREEMENT
THIS AGREEMENT, made and entered into this 22nd day of November, 1995, by and
between:
COLUMBIA GAS TRANSMISSION CORPORATION
("SELLER")
AND
PIEDMONT NATURAL GAS CO
("BUYER")
WITNESSETH: That in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
Section 1. Service to be Rendered. Seller shall perform and Buyer shall receive
service in accordance with the provisions of the effective SST Rate Schedule and
applicable General Terms and Conditions of Seller's FERC Gas Tariff, Second
Revised Volume No. 1 (Tariff), on file with the Federal Energy Regulatory
Commission (Commission), as the same may be amended or superseded in accordance
with the rules and regulations of the Commission. The maximum obligation of
Seller to deliver gas hereunder to or for Buyer, the designation of the points
of delivery at which Seller shall deliver or cause gas to be delivered to or for
Buyer, and the points of receipt at which Buyer shall deliver or cause gas to be
delivered, are specified in Appendix A, as the same may be amended from time to
time by agreement between Buyer and Seller, or in accordance with the rules and
regulations of the Commission. Service hereunder shall be provided subject to
the provisions of Part 284.223 of Subpart G of the Commission's regulations.
Buyer warrants that service hereunder is being provided on behalf of BUYER.
Section 2. Term. Service under this Agreement shall commence as of NOVEMBER 01,
1997, or upon completion of facilities and shall continue in full force and
effect until OCTOBER 31, 2012, and from YEAR-to-YEAR thereafter unless
terminated by either party upon 2 YEARS' written notice to the other prior to
the end of the initial term granted or any anniversary date thereafter.
Pre-granted abandonment shall apply upon termination of this Agreement, subject
to any right of first refusal Buyer may have under the Commission's regulations
and Seller's Tariff.
Section 3. Rates. Buyer shall pay Seller the charges and furnish Retainage as
described in the above-referenced Rate Schedule, unless otherwise agreed to by
the parties in writing and specified as an amendment to this Service Agreement.
<PAGE> 2
SERVICE AGREEMENT NO. 49773
CONTROL NO. 1995-04-30-0025
SST SERVICE AGREEMENT (CONTINUED)
Section 4. Notices. Notices to Seller under this Agreement shall be addressed to
it at Post Office Box 1273, Charleston, West Virginia 25325-1273. Attention:
Manager - Agreements Administration and notices to Buyer shall be addressed to
it at:
PIEDMONT NATURAL GAS CO
1915 REXFORD ROAD
CHARLOTTE, NC 28211
ATTN: CHUCK FLEENOR
until changed by either party by written notice.
Section 5. Superseded Agreements. This Service Agreement supersedes and cancels,
as of the effective date hereof, the following Service Agreements: N/A
PIEDMONT NATURAL GAS CO
By: /s/ C.W. Fleenor
----------------
Name: Chuck W. Fleenor
Title: Vice President-Gas Supply
Date: November 22, 1995
COLUMBIA GAS TRANSMISSION CORPORATION
By: /s/ S.M. Warnick
----------------
Name: Stephen M. Warnick
Title: Vice President
Date: November 27, 1995
<PAGE> 3
Revision No.
Control No. 1995-04-30-0025
Appendix A to Service Agreement No. 49773
Under Rate Schedule SST
Between (Seller) COLUMBIA GAS TRANSMISSION CORPORATION
and (Buyer) PIEDMONT NATURAL GAS CO
October through March Transportation Demand 25,000 Dth/day
April through September Transportation Demand 12,500 Dth/day
Primary Receipt Points
Scheduling Scheduling Maximum Daily
Point No. Point Name Quantity (Dth/Day)
- --------------------------------------------------------------------------------
STOW STORAGE WITHDRAWALS 25,000
<PAGE> 4
Revision No.
Control No. 1995-04-30-0025
Appendix A to Service Agreement No. 49773
Under Rate Schedule SST
Between (Seller) COLUMBIA GAS TRANSMISSION CORPORATION
and (Buyer) PIEDMONT NATURAL GAS CO
Primary Delivery Points
<TABLE>
<CAPTION>
F
o
Scheduling o
Point No. t Maximum S1/
n Maximum Delivery
o Daily Pressure
Scheduling Measuring t Measuring Delivery Obligation
Point Name Point No. e Point Name Obligation (PSIG)
(Dth/Day)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
124 PIEDMONT NATURAL GAS 833097 TRC BOSWELL TAVERN 25,000 750
</TABLE>
<PAGE> 5
Revision No.
Control No. 1995-04-30-0025
Appendix A to Service Agreement No. 49773
Under Rate Schedule SST
Between (Seller) COLUMBIA GAS TRANSMISSION CORPORATION
and (Buyer) PIEDMONT NATURAL GAS CO.
S1 / IF A MAXIMUM PRESSURE IS NOT SPECIFICALLY STATED, THEN
SELLER'S OBLIGATION SHALL BE AS STATED IN SECTION 13 (DELIVERY
PRESSURE) OF THE GENERAL TERMS AND CONDITIONS
GFNT / THIS SERVICE AGREEMENT AND ITS EFFECTIVENESS ARE SUBJECT TO
PRECEDENT AGREEMENT NO. 47762 BETWEEN BUYER AND SELLER DATED
MAY 11, 1995.
UNLESS STATION SPECIFIC MDDOS ARE SPECIFIED IN A SEPARATE FIRM
SERVICE AGREEMENT BETWEEN SELLER AND BUYER, SELLER'S AGGREGATE
MAXIMUM DAILY DELIVERY OBLIGATION, UNDER THIS AND ANY OTHER
SERVICE AGREEMENT BETWEEN SELLER AND BUYER, AT THE STATIONS
LISTED ABOVE SHALL NOT EXCEED THE MDDO QUANTITIES SET FORTH
ABOVE FOR EACH STATION. ANY STATION SPECIFIC MDDOS IN A
SEPARATE FIRM SERVICE AGREEMENT BETWEEN SELLER AND BUYER SHALL
BE ADDITIVE TO THE INDIVIDUAL STATION MDDOS SET FORTH ABOVE.
<PAGE> 6
Revision No.
Control No. 1995-04-30-0025
Appendix A to Service Agreement No. 49773
Under Rate Schedule SST
Between (Seller) COLUMBIA GAS TRANSMISSION CORPORATION
and (Buyer) PIEDMONT NATURAL GAS CO
The Master List of Interconnects (MLI) as defined in Section 1 of the General
Terms and Conditions of Seller's Tariff is incorporated herein by reference for
the purposes of listing valid secondary receipt and delivery points.
Service changes pursuant to this Appendix A shall become effective as of
NOVEMBER 01, 1997, or upon completion of facilities. This Appendix A shall
cancel and supersede the previous Appendix A effective as of N/A , to the
Service Agreement referenced above. With the exception of this Appendix A, all
other terms and conditions of said Service Agreement shall remain in full force
and effect.
PIEDMONT NATURAL GAS CO
By: /s/ C.W. Fleenor
----------------
Name: Chuck W. Fleenor
Title: Vice President-Gas Supply
Date: November 22, 1995
COLUMBIA GAS TRANSMISSION CORPORATION
By: /s/ S.M. Warnick
----------------
Name: Stephen M. Warnick
Title: Vice President
Date: November 27, 1995
<PAGE> 1
Exhibit 12
PIEDMONT NATURAL GAS COMPANY, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
For Fiscal Years Ended October 31, 1993 through 1997
(in thousands except ratio amounts)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings:
Net income from
continuing operations $ 54,074 $ 48,562 $ 40,310 $35,506 $37,534
Income taxes 34,650 30,928 25,442 21,407 23,427
Fixed charges 39,263 37,009 35,651 29,736 26,715
-------- -------- -------- ------- -------
Total Adjusted Earnings $127,987 $116,499 $101,403 $86,649 $87,676
======== ======== ======== ======= =======
Fixed Charges:
Interest $ 36,949 $ 34,511 $ 33,224 $27,671 $24,870
Amortization of debt
expense 346 345 336 334 192
One-third of rental expense 1,968 2,153 2,091 1,731 1,653
-------- -------- -------- ------- -------
Total Fixed Charges $ 39,263 $ 37,009 $ 35,651 $29,736 $26,715
======== ======== ======== ======= =======
Ratio of Earnings to Fixed
Charges 3.26 3.15 2.84 2.91 3.28
==== ==== ==== ==== ====
</TABLE>
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
Piedmont Natural Gas Company, Inc.:
We consent to the incorporation by reference in Post-Effective Amendment No. 3
to Registration Statement No. 2-67478 on Form S-8, in Post-Effective Amendment
No. 2 to Registration Statement No. 33-3815 on Form S-8, in Registration
Statement No. 333-01855 on Form S-3, in Post-Effective Amendment No. 1 to
Registration Statement No. 33-59369 on Form S-3, in Registration Statement No.
33-61093 on Form S-8, in Registration Statement No. 333-26161 on Form S-3, in
Registration Statement No. 333-34433 on Form S-8, in Registration Statement No.
333-34435 on Form S-8, and in Registration Statement No. 333-35213 on Form S-3
of our report dated December 19, 1997, appearing in the Annual Report on Form
10-K of Piedmont Natural Gas Company, Inc. for the year ended October 31, 1997.
/s/ DELOITTE & TOUCHE LLP
Charlotte, North Carolina
January 26, 1998
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PIEDMONT NATURAL GAS COMPANY FOR THE YEAR ENDED
OCTOBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 914,354
<OTHER-PROPERTY-AND-INVEST> 27,382
<TOTAL-CURRENT-ASSETS> 132,156
<TOTAL-DEFERRED-CHARGES> 24,264
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,098,156
<COMMON> 262,576
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 157,250
<TOTAL-COMMON-STOCKHOLDERS-EQ> 419,826
0
0
<LONG-TERM-DEBT-NET> 381,000
<SHORT-TERM-NOTES> 25,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 10,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 262,330
<TOT-CAPITALIZATION-AND-LIAB> 1,098,156
<GROSS-OPERATING-REVENUE> 775,517
<INCOME-TAX-EXPENSE> 31,948
<OTHER-OPERATING-EXPENSES> 659,583
<TOTAL-OPERATING-EXPENSES> 691,531
<OPERATING-INCOME-LOSS> 83,986
<OTHER-INCOME-NET> 4,084
<INCOME-BEFORE-INTEREST-EXPEN> 88,070
<TOTAL-INTEREST-EXPENSE> 33,996
<NET-INCOME> 54,074
0
<EARNINGS-AVAILABLE-FOR-COMM> 54,074
<COMMON-STOCK-DIVIDENDS> 36,008
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 139,455
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
Exhibit 99
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------
FORM 11-K
-------------
For Annual Reports of
Employee Stock Purchase, Savings and Similar Plans
Pursuant to Section 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended October 31, 1997
Commission file number 1-6196
A. Full title of the plans and address of the plans, if different from that of
the issuer named below:
Piedmont Natural Gas Company Employee Stock Purchase Plan
Piedmont Natural Gas Company Employee Stock Ownership Plan
B. Name of issuer of the securities held pursuant to the plans and the address
of its principal executive office:
PIEDMONT NATURAL GAS COMPANY, INC.
1915 Rexford Road
Charlotte, North Carolina 28211
<PAGE> 2
PIEDMONT NATURAL GAS COMPANY EMPLOYEE STOCK PURCHASE PLAN
There were no material changes in the provisions of the Piedmont
Natural Gas Company Employee Stock Purchase Plan (ESPP) during the year ended
October 31, 1997. Financial statements are not required under Article 6A of
Regulation S-X since the shares purchased by employees under the ESPP are not
held by a trustee. Participating employees are furnished a statement after each
stock purchase date (June 30 and December 31) showing the number of shares and
the purchase price of any stock purchased for them and the balance remaining to
their credit. At October 31, 1997, 582 employees participated in the ESPP.
1
<PAGE> 3
PIEDMONT NATURAL GAS COMPANY EMPLOYEE STOCK OWNERSHIP PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS
October 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets:
1997 1996
---------- ----------
<S> <C> <C>
Investment in Common Stock of Piedmont Natural
Gas Company, Inc., at market value - 231,860
and 240,457 shares (cost $2,662,664 and
$2,621,591) at 1997 and 1996, respectively $6,492,080 $5,891,197
Receivable on sale of stock 75,522 135
Short-term investment fund, at cost which
approximates market 482 223
Other 56 1
---------- ----------
Total Assets and Net Assets Available
for Plan Benefits $6,568,140 $5,891,556
========== ==========
</TABLE>
See notes to financial statements.
2
<PAGE> 4
PIEDMONT NATURAL GAS COMPANY EMPLOYEE STOCK OWNERSHIP PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
For the Years Ended October 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Dividend and interest income $ 281,528 $ 269,400 $ 256,811
Gain (loss) on sale of assets (Note 3) 44,876 (30,109) 65,663
Net appreciation in fair value
of investment in Common Stock 764,046 624,623 361,882
Withdrawals by participants (413,866) (165,310) (415,884)
---------- ---------- ----------
Net increase 676,584 698,604 268,472
Net assets available for benefits:
Beginning of year 5,891,556 5,192,952 4,924,480
---------- ---------- ----------
End of year $6,568,140 $5,891,556 $5,192,952
========== ========== ==========
</TABLE>
See notes to financial statements.
3
<PAGE> 5
PIEDMONT NATURAL GAS COMPANY EMPLOYEE STOCK OWNERSHIP PLAN
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE PLAN
The Piedmont Natural Gas Company Employee Stock Ownership Plan (ESOP)
was established to enable employees to acquire Common Stock of the
Company. Through 1986, the Company contributed to the ESOP amounts
equal to a tax credit based on aggregate compensation paid or accrued
to all employees under the ESOP. The Tax Reform Act of 1986 eliminated
the tax credit allowance, and no Company contributions have been made
since 1987.
The ESOP is administered by an ESOP Administration Committee approved
by the Company's Board of Directors. The Company pays the
administrative expenses of the ESOP. The Trust Client Services
department of Wachovia Bank of North Carolina, N.A., serves as the
trustee and custodian of the ESOP. The ESOP is subject to the
provisions of the Employee Retirement Income Security Act of 1974
(ERISA).
A participant in the ESOP is defined as an active eligible employee
with a balance in his or her ESOP account. An employee is eligible to
participate following the later of the date on which he or she
completes at least 1,000 hours of service during a period of 12
consecutive months or attains age 21. However, employees who reached
eligibility subsequent to the termination of Company contributions are
not considered participants as no contributions have been credited to
them.
Separate accounts are maintained for each participant to reflect the
allocation of contributions and subsequent dividend and investment
income. Any income credited to participants is reinvested in Common
Stock. The ESOP provides for immediate vesting.
Distributions from the ESOP are made either at early retirement (age 55
and 10 years of service), at normal retirement (age 65), at actual
retirement for a participant who remains employed after attaining
normal retirement age, at permanent disability or at death of the
participant. The Administration Committee of the ESOP may, in its sole
discretion, direct an earlier distribution following a participant's
termination of employment.
4
<PAGE> 6
A participant who has reached age 55 and completed ten years of
participation in the ESOP has the right to diversify a portion of his
or her account balance each year during the qualified election period.
The Company may terminate the ESOP at any time and may either cause the
ESOP to continue operations until the ESOP trustee has distributed all
benefits or cause the assets of the ESOP to be liquidated and
distributed.
2. BASIS OF ACCOUNTING
The financial statements are presented on the accrual basis of
accounting.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from
those estimates.
The investment in the Company's Common Stock is valued at fair market
value on October 31, 1997 and 1996, determined by quoted market values
on the New York Stock Exchange. Dividend income is accrued on the
ex-dividend date. Purchases and sales of securities are recorded on a
trade-date basis. Realized gains and losses from security transactions
are reported on the average cost method.
Certain prior year amounts have been reclassified to conform to the
1997 presentation.
3. GAIN (LOSS) ON SALE OF ASSETS
The gain (loss) on sale of assets for the years ended October 31, 1997,
1996 and 1995, is computed as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Gross proceeds $448,975 $ 1,397 $195,724
Historical cost 404,099 31,506 130,061
-------- -------- --------
Gain (loss) $ 44,876 $(30,109) $ 65,663
======== ======== ========
</TABLE>
5
<PAGE> 7
4. NET ASSETS AVAILABLE FOR BENEFITS
Net assets available for benefits adjusted for the payable to
participants for withdrawal for the years ended October 31, 1997, 1996
and 1995, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net assets available for
benefits at end of year $6,568,140 $5,891,556 $5,192,952
Payable to participants
for withdrawals 205,919 156,025 70,795
---------- ---------- ----------
Net assets available for
benefits adjusted for
payable to participants
for withdrawals $6,362,221 $5,735,531 $5,122,157
========== ========== ==========
</TABLE>
5. TAX STATUS
The ESOP is qualified under Sections 401 and 409 of the Internal
Revenue Code of 1986, as amended (the Tax Code). The Internal Revenue
Service has informed the Company by letter that the ESOP, as designed,
is qualified, and the trust established under the ESOP is exempt from
income taxes under Section 501(a) of the Tax Code. The ESOP has been
amended since receiving the determination letter. However, the ESOP
administrator and tax counsel believe that the ESOP is currently
designed and being operated in compliance with the applicable
requirements of the Code.
The amount of the distribution under the ESOP is taxed to the recipient
as ordinary income, with the taxable amount attributed to Common Stock
distributed to a participant being the lesser of the cost to the trust
or its fair market value on the date of distribution. Any increase in
the value of the Common Stock is not taxed during the period that the
stock is held by the trust nor upon its distribution to the
participant. If stock is sold by a participant after distribution, the
sale is subject to capital gain or loss treatment, depending on the
sales price of the stock.
6
<PAGE> 8
INDEPENDENT AUDITORS' REPORT
Piedmont Natural Gas Company
Employee Stock Ownership Plan:
We have audited the accompanying statements of net assets available for benefits
of the Piedmont Natural Gas Company Employee Stock Ownership Plan (the Plan) as
of October 31, 1997 and 1996, and the related statements of changes in net
assets available for benefits for each of the three years in the period ended
October 31, 1997. These financial statements are the responsibility of the
Plan's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of the Plan as of
October 31, 1997 and 1996, and the changes in net assets available for benefits
for each of the three years in the period ended October 31, 1997 in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
January 5, 1998
7
