UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 - For the fiscal year ended September 30, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 1-11429
PUBLIC SERVICE COMPANY OF NORTH CAROLINA,
INCORPORATED (Exact name of registrant as
specified in its charter)
NORTH CAROLINA 56-0233140
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
400 COX ROAD, P. O. BOX 1398
GASTONIA, NORTH CAROLINA 28053-1398
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (704) 864-6731
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $1 PER SHARE NEW YORK STOCK EXCHANGE
(Title of Class) (Name of each exchange on
which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
----------------------
Estimated aggregate market value of the voting stock held by nonaffiliates of
the registrant at November 28, 1997 . . . . . . . . . . . $403,047,718
----------------------
Number of shares of Common Stock, $1 par value, outstanding at
November 28, 1997 . . . . . . . . . . .. . . . . . . . . 19,903,591
Documents incorporated by reference:
1
<PAGE>
Portions of the proxy statement dated December 19, 1997, relating to
the January 30, 1998 annual meeting of shareholders, are incorporated by
reference into Part III of this annual report.
2
<PAGE>
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
-------------
TABLE OF CONTENTS
Item Page
PART I.
1. Business.............................................. 2
Executive Officers of the Registrant.................. 12
2. Properties............................................ 13
3. Legal Proceedings..................................... 14
4. Submission of Matters to a Vote of Security Holders... 14
PART II.
5. Market for the Registrant's Common Stock and
Related Shareholder Matters......................... 14
6. Selected Financial Data............................... 15
7. Management's Discussion and Analysis of Results
of Operations and Financial Condition............... 16
8. Financial Statements and Supplementary Data........... 27
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................. 47
PART III.
10. Directors and Executive Officers of the Registrant.... 47
11. Executive Compensation................................ 47
12. Security Ownership of Certain Beneficial Owners
and Management...................................... 48
13. Certain Relationships and Related Transactions........ 48
PART IV.
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................. 48
Signatures............................................ 55
Exhibit Index......................................... 56
3
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PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED
PART I
Item 1. Business
General
Public Service Company of North Carolina, Incorporated (PSNC) is a
public utility engaged primarily in transporting, distributing and selling
natural gas to approximately 311,000 residential, commercial and industrial
customers in North Carolina. It was organized as a North Carolina corporation in
1938, and its corporate office is located at 400 Cox Road, P. O. Box 1398,
Gastonia, North Carolina 28053-1398, telephone (704) 864-6731.
In connection with its natural gas distribution business, PSNC
promotes, sells and installs both new and replacement cooking, water heating,
laundry, space heating, cooling and humidity control natural gas appliances and
equipment. PSNC, through a nonregulated subsidiary, provides conversion and
maintenance services for natural gas-fueled vehicles (NGVs) in selected cities
in and beyond its franchised territory. PSNC, through a subsidiary and a
multi-state joint venture with Sonat Marketing Company, L.P., also participates
in nonregulated businesses such as natural gas brokering and supply services.
During fiscal years 1997, 1996 and 1995, no single customer account
contributed more than 2% of PSNC's total operating revenues.
PSNC has no reportable industry segments. Revenues attributable to
natural gas distribution, merchandise and jobbing, and gas marketing and other
activities for each of the fiscal years in the three-year period ended September
30, 1997 were as follows (in thousands):
1997 1996 1995
-------- -------- --------
Natural Gas Distribution(1) $337,930 $308,882 $247,893
Merchandise and Jobbing(2) 10,053 9,444 8,675
Gas Marketing/Other
Activities(1) 19,938 20,179 8,656
-------- -------- --------
Total $367,921 $338,505 $265,224
======== ======== ========
(1) See "Results of Operations" on page 16 of this annual
report.
(2) Primarily the sale and installation of gas appliances.
4
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Service Territory
PSNC's 33-county franchised service territory includes Raleigh, Durham
and the Research Triangle Park area in the north central portion of the state;
this area accounts for approximately 61% of PSNC's customers and 53% of its
throughput (total gas sales and transportation) in fiscal 1997. PSNC's central
area includes the cities of Gastonia, Concord and Statesville which are located
in the greater Charlotte metropolitan area; this area accounts for 27% of PSNC's
customers and 32% of its throughput. PSNC's western area includes Asheville,
Hendersonville and Brevard, and accounts for the remaining 12% of customers and
15% of throughput. PSNC's diversified industrial base in its service territory
includes manufacturers of textiles, chemicals, ceramics and clay products,
glass, automotive products, minerals, pharmaceuticals, plastics, metals,
electronic equipment, furniture and a variety of food and tobacco products.
PSNC's utility operations are regulated by the North Carolina Utilities
Commission (NCUC).
Over 2.3 million people reside in PSNC's franchised territory. During
the past three fiscal years, PSNC has added approximately 42,800 new customers
to its natural gas transmission and distribution systems. Of those customers,
29,200 were residential, 11,500 were commercial, and 2,100 were industrial. The
resulting 5.4% average annual growth rate is nearly three times the national
industry average. PSNC's average annual customer growth rate since fiscal 1987
has been 5.3%. PSNC attributes this growth rate to two primary factors:
o The population in PSNC's franchised territory has grown faster
than the national average in recent years, and PSNC estimates
that it serves approximately one-third of that population.
PSNC continually expands its transmission and distribution
systems when economically feasible to enable it to reach new
customers.
o The continued growth of the North Carolina economy, including
areas within PSNC's service territory. Also, the State's
relatively low unemployment rate has been below the national
average in recent years.
Business Strategy
PSNC is expanding its transmission and distribution systems to deliver
more natural gas throughout its service territory. Of its total construction
expenditures of $60.3 million in fiscal 1997, $60.4 million in fiscal 1996 and
$61.1 million in fiscal 1995, approximately $46.5 million, $45.6 million and
$49.7 million, respectively, were expended on the construction of transmission
and distribution pipelines.
PSNC is focusing on the following marketing priorities:
o Retaining existing customers by marketing the replacement of
old appliances and equipment with new gas equipment.
o Increasing demand for natural gas by marketing additional gas
equipment to PSNC's existing customers.
o Adding new customers either on its existing distribution
system or by economical short distribution main extensions.
5
<PAGE>
In addition, PSNC is evaluating the introduction of emerging gas
technologies to increase the long-term demand for natural gas. PSNC has
identified the conversion of gasoline-fueled vehicles to NGVs as an opportunity
to increase the demand for natural gas in the future. PSNC was the first local
distribution company (LDC) in North Carolina to offer NGV conversions to the
public and private sectors. PSNC also has identified natural gas cooling
technology as an opportunity to increase the demand for natural gas and has
begun marketing such technology. The implementation in 1992 of the Federal
Energy Regulatory Commission (FERC) Order Nos. 636, 636-A and 636-B (Order 636)
created new off-system marketing opportunities for PSNC and its marketing
affiliate.
PSNC's internal focus has been to streamline its organizational
structure and improve the performance of management and employees. PSNC has also
focused on increasing employee efficiency, improving its number of customers per
employee ratio over the last three years from 236 at September 30, 1994, to 277
at September 30, 1997. At November 30, 1997, PSNC had 284 winter period
customers per employee.
Gas Supply
Effective August 1, 1991, PSNC's primary pipeline supplier,
Transcontinental Gas Pipe Line Corporation (Transco), became the first major
pipeline to offer unbundled open-access transportation and storage services. The
primary advantage is that PSNC now chooses and manages its gas supply,
transportation and storage service requirements separately rather than having to
rely upon a pipeline supplier whose service options are bundled together and
then offered as a single city gate sales service. Unbundled open-access
transportation and storage services, however, do shift the risk of ensuring an
adequate supply of gas from the interstate pipelines to LDCs.
As a result of FERC Order 636, which restructured the interstate
natural gas transportation industry, PSNC's gas purchasing practices have
changed significantly during the past few years. The FERC approved Transco's
restructuring settlement effective November 1, 1993, and essentially preserved
Transco's existing firm service settlement with PSNC. PSNC has not experienced
any material adverse effect on its financial position or results of operations
as a result of the order. Further, management believes it will provide gas
services marketing opportunities both on and off the existing pipeline system
for PSNC and its subsidiaries which should provide an overall net benefit to
PSNC.
PSNC purchases for resale most of the natural gas that it delivers
(throughput) to its customers. The balance of its throughput is natural gas
purchased by certain large volume commercial and industrial customers directly
from various producers and marketers. This gas is transported to these customers
by PSNC at a rate which enables PSNC to earn a margin equivalent to that which
it would have earned by selling the same quantity of gas to these customers.
Quantities of transported gas represented approximately 36%, 26% and 38% of
PSNC's total throughput for fiscal 1997, 1996 and 1995, respectively.
Management believes that PSNC's gas supply portfolio will enable it to
continue to provide secure service on a cost-competitive basis. This balance of
security and cost control, along with flexibility to adapt to changing
conditions, is achieved through a mix
6
<PAGE>
of long-term contractual obligations, coupled with short-term or spot market
purchases. PSNC's utility gas purchasing practices are reviewed annually by the
NCUC.
The following table summarizes the natural gas supply sources and
transportation arrangements available to PSNC under contract with Transco and
CNG Transmission Company (CNG). All amounts are shown in dekatherms (DT), a unit
of heating value equal to one million British Thermal Units (BTU). PSNC's
backhaul arrangement with CNG makes available additional daily capacity of
60,000 DT and is for a combination of storage and firm transportation. Natural
gas purchased by PSNC from other sources is transported by Transco and CNG.
Natural gas purchased directly from Williams Energy Services Company, a Transco
marketing affiliate, accounted for 33% and 30%, respectively, of PSNC's supply
in fiscal 1997 and 1996.
<TABLE>
<CAPTION>
Daily Contract
Deliver- Annual Expiration
Type of Contract ability Quantity Date
- ------------------------- -------- ---------- ----------
<S> <C> <C> <C>
Firm Sales Service (1) 33,542 12,242,830 3/31/00
Firm Sales Service (1) 41,928 15,303,720 3/31/01
Firm Transportation 164,151 59,915,115 1/31/12
Firm Transportation 5,175 1,888,875 10/31/07
Incremental Firm Transportation 2,264 826,360 3/16/01
Winter Firm Transportation
(December 1 through
February 28) 4,347 391,230 7/31/11
Southern Expansion Firm
Transportation:
November and March 35,397
December through February 39,330 5,698,917 10/31/05
Southeast Expansion Firm
Transportation:
Phase 1 6,064 2,213,360 11/01/14
Phase 2 20,759 7,577,035 11/01/15
Phase 3 17,804 6,498,460 11/01/15
CNG Firm Transportation 30,331 11,070,815 (2)
(1) These are separate and concurrent contracts.
(2) These represent multiple contracts which expire on
dates ranging from 10/31/99 to 10/31/16.
</TABLE>
As discussed further in Note 2 to the financial statements, PSNC and a
subsidiary of Piedmont Natural Gas Company, Inc. (Piedmont) formed Cardinal
Pipeline Company, LLC (Cardinal) in March 1994 to construct an intrastate
transmission pipeline. It was placed into service in December 1994, and provides
additional daily capacity to PSNC's eastern service territory in and around the
Durham and Raleigh areas. The NCUC granted an increase in annual revenues of
$3,063,000 to recover PSNC's cost of the investment, effective January 26, 1995.
In September 1995, PSNC, Piedmont, Transco, and North Carolina Natural Gas
Corporation (NCNG) signed a letter of intent to form Cardinal Extension Company,
LLC (Cardinal Extension) to purchase and extend the Cardinal pipeline. As
proposed, the pipeline will be extended 67 miles from the termination point of
the original Cardinal Pipeline to a point southeast of Raleigh and will provide
140 million cubic feet per day (MCF/Day) of additional firm capacity (100
MCF/Day for PSNC and 40 MCF/Day for NCNG). The extension is estimated to cost
7
<PAGE>
$75 million. Through their respective subsidiaries, PSNC will own approximately
33%, Piedmont will own approximately 17%, Transco will own approximately 45% and
NCNG will own approximately 5% of Cardinal Extension. On November 6, 1997, the
NCUC issued an order granting a certificate of public convenience and necessity
authorizing Cardinal Extension to construct, own and operate the pipeline
extension. Subject to the approval of appropriate state and federal agencies,
construction is scheduled to begin in early 1999. The facilities are expected to
be in service on or before November 1, 1999.
To balance peak winter demands of residential and commercial customers
with their much-reduced summer usage, PSNC uses underground natural gas storage
services and liquefied natural gas (LNG) peaking facilities. During periods of
reduced usage, PSNC purchases natural gas to replenish the supplies in the LNG
facilities owned by PSNC and in contract storage services from its pipeline
suppliers. The ability to maintain maximum delivery from these storage
facilities for an extended period of time is limited. Information about PSNC's
storage arrangements, in dekatherms, is shown in the following table.
<TABLE>
<CAPTION>
Daily Contract
Deliver- Expiration
Storage Facility ability Capacity Date
- ------------------------ -------- --------- -----------
<S> <C> <C> <C>
CNG General Storage 29,669 1,776,000 3/31/16
Transco General Storage 33,218 1,923,485 3/31/13
Transco Washington
Storage (1) 32,870 2,794,500 3/31/99
Transco LNG Storage 5,175 25,875 10/31/16
Transco Eminence Storage 47,221 475,111 10/31/13
Cove Point LNG Storage 25,000 250,000 4/15/07
PSNC LNG Storage (2) 100,000 1,040,000 N/A
Columbia Gas Transmission 11,778 1,060,020 10/31/12
(1) No peak day delivery assured by contract.
(2) Amounts shown represent maximum peak day capacity.
</TABLE>
As discussed further in Note 2 to the financial statements, Pine Needle
LNG Company, LLC (Pine Needle) was formed by subsidiaries of Transco, Piedmont,
NCNG, Amerada Hess, and PSNC, and the Municipal Gas Authority of Georgia. PSNC
signed an amendment to the operating agreement of Pine Needle to add PSNC's
subsidiary, PSNC Blue Ridge Corporation (Blue Ridge), as an owner of Pine
Needle. The facility is estimated to cost $107 million and will be located near
Transco's transmission pipeline northwest of Greensboro, North Carolina. It will
have a storage capacity of four billion cubic feet with vaporization capability
of 400 million cubic feet per day. Blue Ridge will own 17% of Pine Needle, and
PSNC will have the right to use 25% of the facility's gas storage capacity and
withdrawal capabilities. On November 27, 1996, the FERC issued an order granting
a certificate of public convenience and necessity authorizing the construction
and operation of Pine Needle. Liquefaction is expected to begin in May 1999 in
time for withdrawal service to begin in the 1999 winter heating season.
Competition
Although PSNC is the sole distributor of natural gas in its service
area, it faces competition from suppliers of alternate fuels and other types of
energy. Competition is strongest for sales to large volume commercial and
industrial customers having alternate
8
<PAGE>
fuel capability but exists for all other customer classes as well.
During fiscal 1997, approximately 38% of gas delivered by PSNC was
delivered to large volume commercial and industrial customers having alternate
fuel capability. The primary alternate fuels available to these customers are
fuel oil and propane, and, to a lesser extent, coal and combustible wood
products. The NCUC has approved a rate structure that allows PSNC to negotiate
reduced rates in order to match the cost of alternate fuels to individual
customers and recover the lost margin from other classes of customers. PSNC
anticipates that the need to negotiate reduced rates with these customers will
continue.
Electricity is the primary competition to natural gas in the
residential and commercial markets where the predominate uses of energy are for
space heating, water heating and cooking. Currently, natural gas enjoys a
competitive price advantage over electricity for these purposes, enabling PSNC
in recent years to obtain a significant share of the new residential
construction in its service area where natural gas is available.
Regulation and Rates
PSNC's natural gas transmission and distribution business is subject to
regulation by the NCUC, including rates, issuance of securities, adequacy of
service, safety standards, extension and abandonment of facilities, accounting
and depreciation rates. The NCUC has seven commissioners appointed by the
Governor of North Carolina for staggered eight-year terms. In an order issued in
PSNC's last general rate case, the NCUC approved an increase in annual revenues
of $2,701,000, effective as of October 1, 1996. The order allows PSNC an
opportunity to earn a 10.37% overall return on its net utility investment.
PSNC's rates include a weather normalization adjustment mechanism
(WNA). The WNA was initially approved in 1991 and is in effect for bills
rendered during the period from November 1 through April 30 of each year. The
WNA applies only to residential and small general service rates and affects only
the non-gas portion of PSNC's rates. Sales to large-volume customers are not
normalized because natural gas usage for such customers is significantly less
weather-sensitive. The WNA increases tariff rates if weather is warmer than
normal and decreases rates if weather is colder than normal. This prevents the
under- or over-collection of non-gas costs due to variations in the quantity of
natural gas delivered when weather deviates from normal. The WNA does not change
the seasonality of PSNC's earnings and cash flow; however, it does reduce
fluctuations caused by abnormal weather.
PSNC also operates under two other rate provisions that serve to reduce
fluctuations in PSNC's earnings. First, its Rider D rate mechanism allows PSNC
to recover, in any manner authorized by the NCUC, margin losses on negotiated
gas sales to large commercial and industrial customers with alternate fuel
capability. The Rider D rate mechanism also allows PSNC to recover from
customers all prudently incurred gas costs, including changes in natural gas
prices. Second, PSNC operates with "full margin" transportation rates. These
rates allow PSNC to earn the same margin on gas delivered to customers
regardless of whether the gas is sold by PSNC to the customer or is only
transported by PSNC.
PSNC's rates are established using a base cost of gas approved by the
NCUC
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which may be modified periodically to reflect changes in the market price of
natural gas and changes in the rates charged by PSNC's pipeline suppliers. PSNC
may file revised tariffs with the NCUC coincident with these changes or it may
track the changes in its deferred accounts for subsequent rate consideration.
The rules of the NCUC allow recovery of all prudently incurred gas costs. Also,
the NCUC reviews PSNC's gas purchasing practices annually.
On November 6, 1997, the NCUC issued an order permitting PSNC, on a
two-year trial basis, to establish its commodity cost of gas for large
commercial and industrial customers on the basis of market prices for natural
gas. PSNC will continue to establish a benchmark cost of gas for residential and
small commercial customers pursuant to its existing procedures.
In April 1992, the NCUC adopted rules to implement the expansion fund
program established by the North Carolina General Assembly in July 1991. This
act permits the establishment of expansion funds to be used by each North
Carolina LDC to expand natural gas service to areas that they are certificated
to serve that would otherwise not be economically feasible to serve. Separate
funds have been established for use solely in each LDC's certificated service
territory. Sources for expansion funds may be each LDC's respective supplier
refunds, special surcharges or other sources permitted by the NCUC. Subject to
the NCUC's rules and availability of funds, the LDCs will be allowed to utilize
the expansion funds to the extent necessary to make such projects feasible on a
net present value basis. The balance of the funding for projects will be
supplied by the LDC. Nine counties in PSNC's franchised territory are currently
unserved as are certain areas in other counties. On June 3, 1993, the NCUC
entered an order creating an expansion fund for PSNC in the Office of the State
Treasurer. PSNC began providing natural gas service in McDowell County during
December 1996. This was the first project undertaken by PSNC using monies from
its expansion fund. PSNC spent $14,237,000 on the project, of which $7,781,000
was received from the expansion fund.
PSNC's next expansion project will be in western Haywood County; PSNC
currently serves the eastern part of this county. The current estimated cost of
this project is $7,182,000. On April 22, 1997, the NCUC approved the project and
authorized disbursements from the expansion fund of $4,127,000. PSNC expects to
begin providing partial service to western Haywood County by December 1997.
On November 14, 1996, PSNC filed an application with the NCUC
requesting deferral accounting treatment for the costs of a project to ensure
that PSNC's computer operating systems function properly in the year 2000. PSNC
requested that total estimated contractor labor of $3,000,000 be deferred for
subsequent recovery in a future rate case. On April 29, 1997, the NCUC issued an
order authorizing the deferral of each year's costs and requiring a three-year
amortization of these costs beginning in the year incurred. PSNC began
amortizing these costs in September 1997 and will seek to recover any
unamortized costs at the time of its next general rate case.
Franchises
Effective July 15, 1996, the NCUC granted PSNC certificates of public
convenience and necessity to serve seven counties in western North Carolina.
PSNC's certificated service territory now consists of all or parts of 33
counties in North Carolina.
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Under North Carolina law, no company may construct or operate properties for the
sale or distribution of natural gas without having obtained such a certificate,
except that no certificate is required for construction in the ordinary course
of business or for construction into territory contiguous to that already
occupied by an LDC and not receiving similar service from another public
utility.
PSNC has nonexclusive franchises from 68 municipalities in which it
delivers natural gas; the other communities served by PSNC have not required
franchises. The expiration dates of those franchises having specific expiration
provisions range from 1998 to 2029. The franchises contain no restrictions of a
materially burdensome nature and are adequate for PSNC's business as presently,
and as proposed to be, conducted. These franchises have been routinely renewed
by the municipalities when they expire.
Non-utility Businesses
In December 1996, PSNC Production Corporation (PSNC Production) and
Sonat Marketing Company L.P. (Sonat Marketing), a subsidiary of Sonat Inc.,
created Sonat Public Service Company L.L.C. (Sonat Public Service). PSNC
Production and Sonat Marketing each owns 50% of the new company. PSNC Production
transferred its gas brokering activities to Sonat Public Service, which now
serves 350 accounts both on and off PSNC's system. Clean Energy Enterprises,
Inc. continued its activities in the refueling of natural gas vehicles and the
conversion of gasoline-fueled vehicles to natural gas. In 1994, PSNC sold its
propane operation to Empiregas, Inc., and PSNC Propane Corporation was dissolved
in September 1997.
Environmental Matters
PSNC is subject to regulation with regard to environmental matters by
various federal, state and local authorities. PSNC owns or has owned portions of
six sites in North Carolina on which manufactured gas plants (MGPs) were
formerly operated. Evaluations have revealed that MGP residuals are present or
suspected at several of the sites. PSNC has recorded a total liability of
$3,705,000, which represents the minimum amount of the range of $3,705,000 to
$50,145,000 expected for investigating and monitoring the extent of
environmental degradation and of implementing remedial procedures. See Note 7 to
the financial statements for further details regarding this and other
environmental matters related to PSNC.
Employees
At November 30, 1997, PSNC had XXXX full-time employees compared with
1,148 at November 30, 1996. PSNC considers its relationship with its employees
to be good and has never experienced a strike or work stoppage. PSNC has
collective bargaining agreements with the International Chemical Workers Union
Council of the United Food and Commercial Workers locals representing
approximately 312 construction and service employees. These three-year
collective bargaining agreements will expire in December 1999.
Seasonality
Due to the seasonal nature of PSNC's business, the first six months of
its fiscal year are generally the most profitable. During fiscal 1997, the
quarters ended December
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31 and March 31 together accounted for approximately 74% and 76% of PSNC's
natural gas sales revenues and volumes, respectively. The quarters ending June
30 and September 30 are generally PSNC's least profitable quarters due to
decreased demand for natural gas related to lower space heating requirements.
12
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<TABLE>
<CAPTION>
OPERATING STATISTICS
For the Fiscal Years Ended September 30,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES - GAS:
Residential Sales $183,391,700 $162,967,260 $135,846,213 $137,986,651 $127,119,020
Commercial Sales 84,120,824 74,444,770 57,783,940 67,679,342 66,124,813
Industrial Sales 46,147,690 52,460,676 31,483,864 49,970,780 80,861,975
Gas Transported for Others 22,695,985 17,737,092 21,746,901 17,031,426 4,848,112
Miscellaneous 1,573,982 1,272,281 1,032,096 1,036,857 1,035,221
------------ ------------ ------------ ------------ ------------
Total $337,930,181 $308,882,079 $247,893,014 $273,705,056 $279,989,141
============ ============ ============ ============ ============
GAS SUPPLY (DT):
Natural Gas Purchased 46,544,234 51,841,058 37,790,467 47,390,194 54,772,352
Less Increase (Decrease) in Storage 2,055,564 471,720 (257,091) 1,466,236 104,399
Less Unbilled, Unaccounted For,
Company Use and Other 2,519,194 2,518,774 1,979,901 2,156,027 2,166,864
---------- ---------- ---------- ---------- ----------
Total Gas Sold 41,969,476 48,850,564 36,067,657 43,767,931 52,501,089
========== ========== ========== ========== ==========
GAS DELIVERED (DT):
Residential Sales 19,760,537 22,398,288 17,566,948 18,781,482 18,058,000
Commercial Sales 12,769,424 13,925,422 10,827,444 12,261,918 13,031,684
Industrial Sales 9,439,515 12,526,854 7,673,265 12,724,531 21,411,405
Gas Transported for Others 23,143,824 16,795,268 22,551,006 15,120,391 4,678,292
---------- ---------- ---------- ---------- ----------
Total 65,113,300 65,645,832 58,618,663 58,888,322 57,179,381
========== ========== ========== ========== ==========
NUMBER OF CUSTOMERS (AT YEAR END):
Residential 264,129 248,940 246,877 234,957 223,004
Commercial/small industrial 39,349 38,624 (2) 29,497 27,806 26,772
Large commercial/industrial 2,419 (3) 1,677 389 376 377
------- ------- ------- ------- -------
Total 305,897 289,241 276,763 263,139 250,153
======= ======= ======= ======= =======
PER RESIDENTIAL CUSTOMER:
Average Gas Used (DT) 74.82 89.98 71.16 79.94 80.98
Average Revenue $694.36 $654.67 $550.28 $587.31 $570.05
Revenue per DT $9.28 $7.28 $7.73 $7.35 $7.04
ANNUAL HEATING DEGREE DAYS (1):
Actual 3,253 3,856 3,030 3,415 3,477
Normal 3,384 3,402 3,384 3,384 3,384
Percent of Normal 96% 113% 90% 101% 103%
PEAK DAY DELIVERY (DT) 406,742 433,045 403,581 420,597 350,131
(1) Degree day information is based on the system average. Fiscal
1996 reflects an additional day for leap year.
(2) Increase reflects the reclassification of approximately 8,000
customers from residential to commercial/small industrial
classification, and 1,300 from commercial/small industrial to
large commercial/industrial classification during fiscal 1996.
(3) Increase reflects the reclassification of approximately 700
customers from commercial/small industrial to large
commercial/industrial during fiscal 1997.
</TABLE>
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<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE REGISTRANT
<S> <C> <C>
Date Elected
Name and Age (1) Title (1) An Officer
- ----------------------- ----------------------------- ------------
Charles E. Zeigler, Jr. Chairman, President and 11/01/86
Age - 51 Chief Executive Officer
John D. Grawe Senior Vice President - 10/03/94
Age - 49 Operations
George F. Kast (2) Senior Vice President - 08/24/87
Age - 51 Information Systems
Jerry W. Richardson Senior Vice President - 02/23/82
Age - 52 Engineering
Fred L. Schmidt Senior Vice President - 01/04/93
Age - 56 Human Resources
Robert D. Voigt Senior Vice President - 09/01/81
Age - 46 Organizational Development
Franklin H. Yoho Senior Vice President - 02/01/91
Age - 38 Marketing and Gas Supply
Herbert B. Cox Vice President - 05/01/90
Age - 53 Operations Services
J. Paul Douglas Vice President - 12/21/94
Age - 50 Corporate Counsel and
Secretary
Jack G. Mason Vice President - 03/01/95
Age - 40 Treasurer and Chief Financial
Officer
Boyce C. Morrow, Jr. Vice President - 03/01/90
Age - 53 Governmental Relations
Sharon D. Boone Controller and 03/01/95
Age - 44 Assistant Secretary
(1) As of November 30, 1997.
(2) Resigned effective October 15, 1997.
</TABLE>
The present terms of all officers extend to January 30, 1998, the date
of the next annual meeting of shareholders and the annual meeting of the board
of directors, or until their successors are elected and qualified.
All of the executive officers have served in executive positions with
PSNC for the past five years with the exception of Fred L. Schmidt, J. Paul
Douglas, John D. Grawe, Jack G. Mason and Sharon D. Boone.
Fred L. Schmidt was employed by PSNC on January 4, 1993. Prior to
joining PSNC, he was employed by RJR Nabisco, Incorporated in Winston-Salem,
North Carolina as Director - Employee Relations, Compensation and Benefits, and
Human Resources Information Systems.
J. Paul Douglas was employed by PSNC on December 21, 1994. Prior to
joining PSNC, he was employed by Conoco Inc. as counsel from March 1991 to
December 1994. Prior to Conoco, he was a partner with the law firm of Katten,
Muchin, Zavis and
14
<PAGE>
Dombroff from February 1990 to March 1991 and a partner with the law firm of
Grove, Jaskiewicz, Gilliam and Cobert from February 1984 to February 1990.
John D. Grawe was employed by PSNC on October 3, 1994. Prior to joining
PSNC, he was employed by Wisconsin Power and Light Company, most recently
serving as Director of Gas Engineering and Operations.
Jack G. Mason was employed by PSNC on July 5, 1979. During the past
five years, prior to serving as Vice President-Treasurer and Chief Financial
Officer, Mr. Mason held the positions of Director - Financial Projects and
Assistant Treasurer, Assistant Treasurer, Assistant Treasurer and Assistant
Controller and Treasurer.
Sharon D. Boone was employed by PSNC on November 15, 1982. During the
past five years, prior to serving as Controller and Assistant Secretary, Ms.
Boone held the positions of Manager - Plant Accounting and Tax Services, Manager
- - Corporate Accounting, and Director - Corporate Accounting.
Item 2. Properties
PSNC owns 728 miles of transmission pipelines of 2 to 24 inches in
diameter that connect its distribution systems with the Texas to New York
pipeline transmission system of Transco. Transco delivers natural gas to PSNC at
various points on Transco's pipeline in North Carolina. Natural gas is
distributed by PSNC through its 6,387 miles of distribution mains. These
transmission pipelines and distribution mains are located primarily on
rights-of-ways held under easement, license or permit on lands owned by others.
PSNC also owns 64% of Cardinal Pipeline Company, LLC, which owns a 37.5 mile
transmission pipeline, as discussed more fully in Note 2 to the financial
statements.
PSNC's Energy Center, which consists of its LNG liquefaction, storage
and vaporization facility, is located on a 70-acre tract of land in Cary, North
Carolina.
PSNC also owns 18 commercial office buildings, a measurement operations
building, a building that houses training, engineering and a call center, eleven
service center buildings, 15 service buildings, and an energy control building;
PSNC leases six commercial office buildings for its own use. One of the service
buildings also houses training facilities. Another service building is jointly
occupied by a NGV conversion facility.
15
<PAGE>
Item 3. Legal Proceedings
As more fully disclosed in Part I under "Environmental Matters" and in
Part II in Note 7 to the financial statements, PSNC owns or has owned portions
of sites at which manufactured gas plants were formerly operated and is
cooperating with the North Carolina Department of Environment, Health and
Natural Resources to investigate these sites.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of PSNC's security holders during
the three months ended September 30, 1997.
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters
PSNC's common stock is traded on the New York Stock Exchange under the
ticker symbol "PGS." PSNC's stock quotations are listed in most publications,
including newspapers, as "PubSvcNC" or "PubSNC." Prior to March 1, 1995, PSNC
was traded in the over-the-counter market and was included in the NASDAQ
National Market System under the symbol "PSNC." At November 30, 1997, there were
approximately 12,773 holders of record of PSNC's common stock.
The table below presents the reported high and low common stock sale
prices along with cash dividends declared per share for each quarter of fiscal
1997 and 1996.
Cash
Quarter Dividends
Ended High Low Declared
------- ------- ------- ---------
Fiscal
1997
-------
Sep 30 $21 7/8 $18 3/4 $.2300
Jun 30 20 16 3/4 .2300
Mar 31 19 17 3/8 .2200
Dec 31 19 3/8 17 1/8 .2200
Fiscal
1996
------
Sep 30 18 5/8 15 7/8 .2200
Jun 30 17 15 1/8 .2200
Mar 31 17 7/8 15 7/8 .2125
Dec 31 18 3/4 15 1/4 .2125
On November 13, 1997, the Board of Directors declared a regular
quarterly cash dividend on PSNC's common stock of 23(cent) per share, payable on
January 1, 1998 to shareholders of record on December 10, 1997. PSNC has paid
regular quarterly cash dividends on its common stock since 1958, and has
increased cash dividends paid to shareholders each calendar year since 1970.
16
<PAGE>
<TABLE>
<CAPTION>
Item 6. Selected Financial Data
For the Fiscal Years Ended September 30, 1997 1996 1995 1994 1993
- ---------------------------------------- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Operating revenues (000's)........................ $337,930 $308,882 $247,893 $273,705 $279,989
Gross margin (000's).............................. $155,926 $140,744 $130,828 $118,327 $112,105
Net income (000's)................................ $ 26,347 $ 23,898 $ 21,421 $ 19,976 (2) $ 14,219
Earnings per average common share ................ $ 1.35 $ 1.26 $ 1.16 $ 1.17 (2) $ .90
Cash dividends declared per common share ......... $ .90 $ .865 $ .835 $ .805 $ .775
Average number of common shares
outstanding (000's) ............................. 19,550 18,995 18,509 17,012 15,812
Capital expenditures (000's)...................... $ 60,310 $ 60,428 $ 61,119 $ 45,469 $ 40,127
Total assets (000's).............................. $585,142 $524,889 $456,995 $427,939 $400,946
Common equity (000's)............................. $207,368 $188,635 $173,372 $160,555 $123,662
Long-term debt (000's) (1)........................ $180,850 $140,150 $100,700 $113,680 $124,518
(1) Excludes current maturities.
(2) Includes $1,511,000 or $0.09 per share related to sale of propane assets.
</TABLE>
17
<PAGE>
Item 7. Management's Discussion and Analysis of Results
of Operations and Financial Condition
Results of Operations
Net Margin
For the Fiscal Years Ended September 30, 1997 1996 1995
- ---------------------------------------- -------- -------- ------
(Amounts in thousands except
degree day and customer data)
Gross margin $155,926 $140,744 $130,828
Less - Franchise taxes 10,819 9,885 7,943
-------- -------- --------
Net margin $145,107 $130,859 $122,885
======== ======== ========
Total throughput (DT):
Residential 19,760 22,398 17,567
Commercial/small industrial 12,373 14,307 11,855
Large commercial/industrial 32,980 28,941 29,197
------ ------ ------
65,113 65,646 58,619
====== ====== ======
System average degree days: (1)
Actual 3,253 3,856 3,030
Normal 3,384 3,402 3,384
Percent of normal 96% 113% 90%
Weather normalization adjustment
income (refund), net of
franchise taxes $ 5,960 $(8,733) $ 5,800
Customers at end of period: (2)
Residential 264,129 248,940 246,877
Commercial/small industrial 39,349 38,624 29,497
Large commercial/industrial 2,419 1,677 389
------- ------- -------
305,897 289,241 276,763
======= ======= =======
(1) The increase in normal degree days in 1996 is due to an additional
day for leap year.
(2) Reflected in customers at September 30, 1997 is the
reclassification of approximately 700 customers from commercial/small industrial
to large commercial/industrial. Reflected in customers at September 30, 1996 is
the reclassification of approximately 8,000 customers from residential to
commercial/small industrial, and 1,300 from commercial/small industrial to large
commercial/industrial.
Total throughput and net margin, defined as operating revenues less
cost of gas and franchise taxes, are more meaningful comparative statistics than
gas sales volumes and operating revenues when analyzing PSNC's utility operating
results. This is because certain large-volume customers purchase gas directly
from gas producers or other gas suppliers and
18
<PAGE>
transport it through PSNC's pipeline system. PSNC's operating revenues and
expenses do not include the commodity cost of this transported gas; however,
PSNC earns a margin on the transported gas which is equivalent to the margin
that PSNC would earn if it purchased and resold gas to these customers. Also,
various temporary collection and refund mechanisms affect both operating
revenues and cost of gas equally.
Fiscal 1997
o Net margin increased by $14,248,000, or 11%, in fiscal 1997 as compared
to fiscal 1996 primarily due to the general rate increase effective
October 1, 1996 and to an increased customer base. This general rate
increase accounted for approximately $6,200,000 of the variance from
fiscal 1996. The volumes of gas delivered to residential and
commercial/small industrial customers decreased 12% and 14%,
respectively, due to weather that was 16% warmer as compared to the
prior fiscal year. Throughput for lower-margin industrial and large
commercial customers increased 14% as compared to fiscal 1996. This
reflects decreased weather-related service curtailments to these
customers during the year as compared to fiscal 1996, along with an
increase in the customer base. Net throughput-related variances for
all customer classes totaled approximately $7,775,000, including a
variance of $14,693,000 related to the operation of the weather
normalization adjustment (WNA) mechanism. After adjusting for the
customer reclassifications as previously discussed, residential,
commercial/small industrial and large commercial/industrial customers
increased 6%, 4% and 2%, respectively, as compared to fiscal 1996.
Fiscal 1996
o Net margin increased by $7,974,000, or 6%, in fiscal 1996 as compared
to fiscal 1995 primarily due to throughput-related variances associated
with an increased customer base. Also reflected in this increase is
approximately $1,645,000 related to the Cardinal Pipeline rate increase
effective January 26, 1995. The volumes of gas delivered to residential
and commercial/small industrial customers increased 28% and
21%, respectively, due to weather that was 27% colder as compared to
the prior fiscal year. Throughput for lower-margin industrial and
large commercial customers decreased 1% as compared to fiscal 1995.
This reflects increased weather-related service curtailments to these
customers during the year as compared to fiscal 1995. Net throughput-
related variances for all customer classes totaled approximately
$6,098,000, including a variance of $14,533,000 related to the
operation of the WNA mechanism. Net margin for fiscal 1996 also
increased due to a $732,000 refund in fiscal 1995 related to income ta
credits taken in prior periods. These increases were partially offset
by a $734,000 charge to expense related to the resolution of accounting
issues associated with PSNC's Southern Expansion costs as discussed in
Note 2 to the financial statements. After adjusting for the customer
reclassifications as previously discussed, residential, commercial/
small industrial and large commercial/industrial customers increased
4%, 8% and 3%, respectively, as compared to fiscal 1995.
19
<PAGE>
Fiscal 1995
o Net margin increased by $13,324,000, or 12%, in fiscal 1995 as compared
to fiscal 1994 primarily due to rate increases associated with the
October 7, 1994 general rate case order and the approval of rates for
the Cardinal Pipeline effective January 26, 1995. Rate increases that
affected PSNC's residential and commercial/small industrial customers
account for approximately $11,723,000 of the increase. The quantities
of gas delivered to residential and commercial/small industrial
customer bases declined 6% and 5%, respectively, due to 13% warmer
weather as compared to the prior fiscal year. This decrease was
somewhat offset by increases in customer bases of 5% and 6%,
respectively. Net throughput-related variances for these customers
totaled approximately $2,956,000, including $5,938,000 related to the
operation of the WNA. The quantities of gas delivered to large
commercial/industrial customers increased 6% due to a 3% increase in
the customer base and to higher operating levels by some of these
customers. This increase resulted in additional net margin of
approximately $1,346,000; however, the increase was offset by a price-
related decline of approximately $1,539,000 due to both changes in the
sales mix and the general rate case order, and to a decline of $430,000
from the prior year in penalty billings for unauthorized gas usage.
The twelve-month period also reflects a $732,000 refund ordered by the
North Carolina Utilities Commission (NCUC) in the October 7, 1994 rate
case order that related to income tax credits taken in prior periods.
Operating Expenses
Other operating expenses increased 10% during fiscal 1997. This
increase is due primarily to net expenses of $1,034,000 related to the voluntary
early retirement program offered in the first quarter of fiscal 1997. On a
straight comparison basis without this expense, other operating expenses
increased 8% as compared to fiscal 1996. Salary and employee benefits, outside
consulting expenses, employee training programs, and expenses related to the
outsourcing of meter reading also contributed to the increase. Partially
offsetting the increases were reduced expenses for hospitalization insurance due
to PSNC's recent affiliation with a health maintenance organization provider.
Other operating expenses increased 7% during fiscal 1996. This increase
reflects higher salary expenses and employee benefits and increased expenses for
uncollectibles, which are based on revenues. These increases were partially
offset by reduced outside consulting expenses related to information systems and
employee benefits. Prior fiscal year expenses were reduced by adjustments
related to group life and hospitalization insurance due to favorable experience
and the transfer of a large number of employees to a less costly health
maintenance organization provider. On a straight comparison basis without these
insurance adjustments, operating expenses for fiscal 1996 increased 5%.
Other operating expenses increased 4% during fiscal 1995. This increase
reflects higher salary expenses and the payroll reallocations implemented during
November 1994 to standardize labor distributions. Also contributing to the
increase were employee severance expenses related to departmental
reorganizations, fees related to listing on the New York Stock Exchange, and
expenses for outside consulting services related to information systems
20
<PAGE>
and employee benefits. These increases were partially offset by the
reclassification of certain sales compensation expenses to merchandising and
jobbing, and adjustments related to group life insurance and hospitalization
insurance due to favorable experience realized by PSNC, along with the transfer
of a large number of employees to a less costly health maintenance organization
provider.
Maintenance expenses increased 17% in fiscal 1997 due primarily to
telecommunications expenses and higher salaries. Also contributing to the
increase were charges of $143,000 related to the early retirement severance
packages. On a straight comparison basis without this expense, maintenance
expenses increased 14% as compared to fiscal 1996. Maintenance expenses
increased 20% in fiscal 1996 and decreased 8% in fiscal 1995 due to the $750,000
reversal of expenses related to the investigation of former manufactured gas
plant (MGP) sites, originally recorded in fiscal 1992. The reversing entry was
recorded in fiscal 1995. On a straight comparison basis without this adjustment,
maintenance expenses for fiscal 1996 increased 2%.
Depreciation expense for all three fiscal years increased due to plant
additions. Depreciation expense for fiscal 1995 also reflected higher
depreciation rates approved in the October 1994 general rate case order. General
taxes increased during fiscal 1997 and 1996 due to an increase in franchise tax
expense reflecting an increase in revenues. The decrease in general taxes during
fiscal 1995 is due to a reduction in franchise tax expense reflecting a decrease
in revenues.
Other Income (Deductions)
Other income (deductions) increased $535,000 during fiscal 1997. Other
interest income increased $792,000 over fiscal 1996 due to interest on amounts
due from customers through the operation of the Rider D rate mechanism.
Winter-period increases in the market price of natural gas resulted in PSNC
recording uncollected gas costs, along with increased demand costs, which
totaled $18,385,000 at September 30, 1997. Prior to December 1996, income from
secondary market transactions was recorded as other income. Income from
secondary market transactions are now recorded in subsidiary operations.
Secondary market transactions are any transactions that utilize capacity rights
on interstate pipelines. PSNC Production Corporation (PSNC Production) and Sonat
Marketing Company L.P. (Sonat Marketing), a subsidiary of Sonat Inc., created
Sonat Public Service Company L.L.C. (Sonat Public Service) in December 1996.
Upon creation of Sonat Public Service, $4,845,000 of restricted cash received by
PSNC Production from Sonat Marketing was deferred, and during fiscal 1997,
$816,000 of this amount was recognized as subsidiary income. With the formation
of Sonat Public Service, PSNC Production and Sonat Marketing split evenly the
25% share of net income from the earnings from these transactions. PSNC also
realized a $205,000 improvement in merchandise and jobbing. This improvement was
reduced by approximately $231,000 related to the early retirement severance
package. Without this expense, merchandise and jobbing would have improved by
approximately $436,000.
Other income (deductions) increased $3,132,000 during fiscal 1996.
Other interest income increased $1,133,000 over fiscal 1995 due to interest on
amounts due from customers through the operation of the Rider D rate mechanism.
Winter-period increases in the market price of natural gas resulted in PSNC
recording uncollected gas costs, along with increased demand costs, which
totaled $17,925,000 at September 30, 1996. Income from
21
<PAGE>
nonregulated subsidiary operations exceeded fiscal 1995 by $925,000 due largely
to gains realized from natural gas brokering activities. Income from secondary
market transactions increased $582,000 over the prior year. PSNC realized
increases in both the amount of margin generated and an increase in the
shareholder portion of these margins from 10% to 25%, pursuant to an order of
the NCUC effective November 1, 1995. PSNC also realized a $265,000 gain from the
sale of property and a $250,000 improvement in merchandise and jobbing.
Other income (deductions) decreased $4,350,000 during fiscal 1995 due
mainly to proceeds received in fiscal 1994 from the sale of PSNC Propane
Corporation and the absence of operating income from propane operations. PSNC
Propane Corporation was sold for a $.09 per share after-tax capital gain. Other
income (deductions) also decreased due to a loss in merchandise and jobbing
largely due to a reclassification of certain sales commission expenses to
merchandise and jobbing from other operating expenses in connection with the
October 1994 general rate case order. Also contributing to the decrease was the
fiscal 1994 reclassification of income from pipeline capacity sales from
operating revenues to other income.
Interest Deductions
Interest deductions for fiscal 1997 increased $2,512,000 over fiscal
1996. This increase was due mainly to increased interest expense on long-term
debt of $2,887,000 resulting from the December 1996 issuance of $50,000,000 of
7.45% Senior Debentures due 2026. Interest expense on short-term debt decreased
$299,000 due to lower average short-term bank loans outstanding.
Interest deductions for fiscal 1996 increased $1,885,000 over fiscal
1995. This increase was due mainly to increased interest expense on long-term
debt of $1,136,000 resulting from the January 1996 issuance of $50,000,000 of
6.99% Senior Debentures due 2026. Interest expense on short-term debt increased
$845,000 due to higher average short-term bank loans outstanding.
Interest deductions for fiscal 1995 decreased $391,000 due mainly to
lower interest expense on declining balances in long-term debt. The declining
balance in long-term debt was due to sinking fund payments and to the early
redemption in May 1994 of the 9 7/8% First Mortgage Bonds due 1995. These
decreases were partially offset by increased interest expense due to higher
rates on higher average short-term bank loans outstanding.
Liquidity and Capital Resources
PSNC's primary capital needs are the funding of its continuing
construction program and the seasonal funding of its stored gas inventories.
PSNC uses short-term bank loans temporarily, together with internally generated
funds, long-term debt and equity financing to fund its continuing construction
program. PSNC has committed lines of credit with seven commercial banks which
vary monthly depending upon seasonal requirements and a five-year revolving line
of credit with one bank. For the twelve-month period beginning April 1, 1997,
total lines of credit with these banks range from a minimum of $37,000,000 to a
winter-period maximum of $81,000,000. At September 30, 1997, committed lines of
credit totaled $61,000,000, and uncommitted annual lines of credit totaled
$80,000,000. Lines of credit
22
<PAGE>
are evaluated periodically by management and renegotiated to accommodate
anticipated short-term financing needs. Management believes these lines are
currently adequate to finance budgeted construction expenditures, stored gas
inventories and other corporate needs. At September 30, 1997 and 1996, PSNC's
total short-term bank loans outstanding were $38,000,000 and $59,500,000,
respectively.
During September 1996, PSNC made the final additional payment allowed
on its 10% Senior Debentures due 2003 of $1,250,000. During September 1995, PSNC
paid an additional $2,500,000, the maximum additional annual payment permitted
pursuant to the terms of this debenture agreement.
PSNC also generates equity capital through its dividend reinvestment,
employee stock purchase and nonqualified stock option plans. During fiscal 1997,
1996 and 1995, the dividend reinvestment plan generated $7,277,000, $5,187,000
and $5,069,000, respectively, of additional equity capital. In August 1996, the
dividend reinvestment plan was amended to allow the initial purchase of shares
directly from PSNC and also to increase the amount of cash individual
shareholders could invest. The employee stock purchase plan generated
$1,318,000, $1,198,000 and $1,174,000, respectively, of additional equity
capital. The nonqualified stock option plan generated net equity capital of
$1,181,000, $1,232,000 and $447,000 for the respective three fiscal years.
On December 20, 1995, PSNC filed with the Securities and Exchange
Commission a registration statement covering up to an aggregate amount of
$125,000,000 of senior unsecured debt. On January 10, 1996, PSNC sold
$50,000,000 of 6.99% Senior Debentures due 2026 in a public offering. The net
proceeds of $49,314,000 were used to pay down a significant portion of the then
outstanding short-term bank debt. On December 17, 1996, PSNC sold $50,000,000 of
7.45% Senior Debentures due 2026 in a public offering. The net proceeds of
$49,404,000 were used to pay down a significant portion of the then outstanding
short-term bank debt. At September 30, 1997, $25,000,000 remained on the shelf
registration.
The ratio of long-term debt to total capitalization was 46.6% at
September 30, 1997, 42.6% at September 30, 1996 and 36.7% at September 30, 1995.
PSNC's goal is to maintain a capital structure with a ratio of long-term debt to
total capitalization in the 45% range with periodic moderate fluctuations.
For fiscal 1997, 1996 and 1995, construction expenditures were
$60,310,000, $60,428,000 and $61,119,000, respectively. For fiscal 1998, PSNC's
Board of Directors approved a budget of $69,781,000 for PSNC's ongoing
construction program. PSNC anticipates spending $45,000,000 to $60,000,000
annually on its construction program for the next several years.
As discussed more fully in Note 4 to the financial statements, PSNC and
its subsidiaries sponsor a noncontributory defined benefit pension plan covering
substantially all employees. During fiscal 1997 and 1996, contributions were
$3,306,000 and $2,855,000, respectively. The increase in fiscal 1997 is due to
the funding requirement of the previously mentioned voluntary early retirement
program. Projected fiscal 1998 plan contributions total $2,582,000.
23
<PAGE>
PSNC paid from its assets $3,555,000 of special termination benefits to
eligible employees in connection with a voluntary early retirement program
available from October 14, 1996 until November 27, 1996. This amount was
recorded during the first quarter of fiscal 1997 in addition to regular pension
benefits paid from plan assets. As a result of the voluntary early retirement
program, PSNC recognized a pension gain of approximately $1,739,000, which
lowered pension expense in fiscal 1997. PSNC estimates a permanent savings in
annual salaries of approximately $1,100,000 beginning in the second quarter of
fiscal 1997 and an increase in annual pension expense of $200,000 beginning in
fiscal 1998.
Restricted cash and temporary investments and restricted supplier
refunds relate to refunds of $9,888,000 received from PSNC's pipeline supplier
that have not yet been deposited into the expansion fund in the Office of the
State Treasurer. This fund was created by an order of the NCUC, dated June 3,
1993, to finance the construction of natural gas lines into unserved areas of
PSNC's service territory that otherwise would not be economically feasible to
serve.
On August 21, 1995, the NCUC approved an expansion project into
McDowell County to be funded from PSNC's expansion fund in an amount up to
$8,194,000. PSNC began providing natural gas service in McDowell County in
December 1996. Construction expenditures as of September 30, 1997 relating to
this project were approximately $14,237,000, of which $7,781,000 was refunded to
PSNC from the expansion fund during fiscal 1997. PSNC's next expansion project
will be in Haywood County. PSNC currently provides natural gas service to the
eastern part of this county. The current estimated cost to expand service to
western Haywood County, including Waynesville, Clyde and Lake Junaluska, is
$7,182,000. On December 30, 1996, PSNC filed an application with the NCUC
requesting expansion funds for this project. On April 22, 1997, the NCUC
approved this project and authorized disbursements from the expansion fund of
$4,127,000. PSNC expects to begin providing partial service to this county by
December 1997.
Net accounts receivable increased $8,717,000 as compared to September
30, 1996. This increase was due primarily to gas brokering and transportation
pooling activities.
Stored gas inventories increased $5,027,000 as compared to September
30, 1996. This increase was due to additional quantities of natural gas stored
and the addition of another storage service.
Net deferred gas costs fluctuate in response to the operation of PSNC's
Rider D rate mechanism. This mechanism allows PSNC to recover all prudently
incurred gas costs from customers. It also allows PSNC to recover margin losses
on negotiated sales to large commercial and industrial customers with alternate
fuel capability. On a monthly basis, any difference in amounts paid and
collected is recorded for subsequent refund to or collection from PSNC's
customers. Deferred gas costs at September 30, 1997 and September 30, 1996
reflect undercollections from customers primarily related to the unanticipated
surge in natural gas prices during the respective winter periods. PSNC's
deferred gas costs balances are approved by the NCUC in annual gas cost prudence
reviews and are refunded to or collected from customers over a subsequent
twelve-month period. Amounts that have not been refunded to or collected from
customers bear interest at an annual rate of 10% as required by the NCUC. PSNC's
strategy is to manage the balance of deferred gas costs to a minimal level over
a twelve-month period. On November 6, 1997, the NCUC issued an order
24
<PAGE>
permitting PSNC, on a two-year trial basis, to establish its commodity cost of
gas for large commercial and industrial customers on the basis of market prices
for natural gas. PSNC will continue to establish a benchmark cost of gas for
residential and small commercial customers pursuant to its existing procedures.
The balance in long-term restricted cash is due to the restricted cash
contribution from Sonat Marketing. Sonat Marketing contributed $4,944,000 for
its 50% ownership in Sonat Public Service, of which $4,845,000 is currently
restricted. Sonat Marketing is entitled to a partial refund of its contribution
if the economics of the transaction are adversely modified by any regulatory
body over a five-year period. Restricted cash will be released annually in equal
amounts beginning in December 1998 and extending through December 2001.
The $420,000 increase in the asset for debt expense relates to expenses
associated with the 7.45% Senior Debentures due 2026 sold on December 17, 1996.
Other assets increased $1,325,000 primarily due to deferred charges
related to costs of a project to ensure that PSNC's computer operating systems
function properly in the year 2000. These charges are being amortized to income
over a three-year period beginning September 1997 per an NCUC order dated April
29, 1997.
The increase in accounts payable at September 30, 1997 as compared to
September 30, 1996 is due to additional secondary market transactions and to
natural gas purchased at higher costs.
The increase in other current liabilities at September 30, 1997 as
compared to September 30, 1996 is primarily due to recording the current portion
of the deferred revenue associated with the creation of Sonat Public Service.
The noncurrent portion is recorded in deferred revenues.
The $21,500,000 decrease in interim bank loans at September 30, 1997 as
compared to September 30, 1996 relates to the sale on December 17, 1996 of
$50,000,000 of 7.45% Senior Debentures due 2026, the net proceeds of which were
used to pay down a significant portion of the then outstanding short-term bank
loans.
The increase in accrued interest at September 30, 1997 as compared to
September 30, 1996 reflects interest on the 7.45% Senior Debentures due 2026
sold on December 17, 1996.
Deferred credits and other liabilities increased primarily due to
deferred revenue of $3,100,000, which is the noncurrent portion of the deferred
revenue received from the creation of Sonat Public Service. Also contributing to
the increase was additional deferred income taxes of $3,205,000. These increases
were partially offset by the previously discussed pension gain.
As discussed more fully in Note 7 to the financial statements, PSNC
owns or has owned portions of six sites in North Carolina on which MGPs were
formerly operated. Evaluations of these sites have revealed that MGP residuals
are present or suspected at several of the sites. The North Carolina Department
of Environment, Health and Natural Resources (NCDEHNR) has recommended that no
further action be taken with respect to one
25
<PAGE>
site. An environmental consulting firm retained by PSNC estimated that the
minimum aggregate costs to investigate and monitor the extent of environmental
degradation and to implement remedial procedures with respect to the remaining
five sites may range from $3,705,000 to $50,145,000 over a 30-year period. PSNC
is unable to determine the rate at which costs may be incurred over this time
period. In October 1994, PSNC entered into an administrative order of consent
with NCDEHNR to investigate the Durham, North Carolina, site in accordance with
standards and methods approved by NCDEHNR. At September 30, 1997, PSNC had
recorded a total liability and a corresponding regulatory asset of the minimum
amount of the range, or $3,705,000.
As discussed more fully in Note 2 to the financial statements, PSNC and
a subsidiary of Piedmont Natural Gas Company, Inc. (Piedmont) formed Cardinal
Pipeline Company, LLC (Cardinal) in March 1994 to construct an intrastate
transmission pipeline. The pipeline was placed into service in December 1994 at
a cost of approximately $26,000,000, of which PSNC owns 64%, and extends 37.5
miles to provide additional daily capacity to PSNC's eastern service territory
in and around the Durham and Raleigh areas. In September 1995, PSNC, Piedmont,
Transcontinental Gas Pipe Line Corporation (Transco) and North Carolina Natural
Gas Corporation (NCNG) signed a letter of intent to form Cardinal Extension
Company, LLC (Cardinal Extension), to purchase and extend the existing Cardinal
Pipeline. As proposed, the extension will span approximately 67 miles from the
termination point of the original Cardinal Pipeline to a point southeast of
Raleigh. This project is estimated to cost $75,000,000. PSNC, through a
subsidiary, will own approximately 33% of the new 104.5-mile pipeline, and will
contribute its net book investment in the existing pipeline plus additional
equity capital of approximately $1,000,000 for its ownership share. On December
23, 1996, Cardinal Extension filed an application with the NCUC for approval of
this project. A public hearing was held on May 20, 1997, and on November 6,
1997, the NCUC issued an order approving the proposed project. Subject to the
approvals by state and federal agencies, construction is scheduled to begin in
early 1999, and the facilities are expected to be in service on or before
November 1, 1999.
As discussed more fully in Note 2 to the financial statements, Pine
Needle LNG Company, LLC (Pine Needle) was formed by subsidiaries of Transco,
Piedmont, NCNG, Amerada Hess, and PSNC, and the Municipal Gas Authority of
Georgia. Pine Needle will own and operate a four billion cubic foot liquefied
natural gas storage facility in North Carolina. Construction began in 1997 at an
estimated cost of $107,000,000. The facility is expected to be operational by
May 1999. PSNC, through its subsidiary, PSNC Blue Ridge Corporation (Blue
Ridge), will own 17% of the facility, and PSNC has contracted to use 25% of the
facility's gas storage capacity and withdrawal capabilities. At September 30,
1997, Blue Ridge's investment in Pine Needle totaled $421,000. Blue Ridge will
make capital contributions approximating $9,000,000 during the construction
period.
Effects of Inflation
The margin charged to PSNC's firm gas customers may not be increased
without a general rate case. Accordingly, in the absence of authorized rate
increases and except for changes in the cost of gas sold, which are passed along
to customers on a timely basis through various rate adjustment mechanisms, PSNC
must look to performance improvement and higher throughput to offset
inflationary increases in its cost of operations. Current rates only permit PSNC
to recover its historical cost of utility plant and give no recognition to the
26
<PAGE>
replacement cost of these facilities. PSNC's last general rate case was filed
March 1, 1996 and became effective October 1, 1996. Management continually
reviews operations and economic conditions to assess the need for filing for
general rate relief.
Recently Issued but Not Yet Effective Accounting Statements
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." This statement establishes standards for computing and presenting
earnings per share (EPS). It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires reconciliation of the computation of basic EPS
to diluted EPS. Basic EPS excludes dilution and is computed by dividing income
available to shareholders by the weighted average number of common shares
outstanding for the period. This statement will be adopted by PSNC beginning
October 1, 1997.
In February 1997, the FASB issued SFAS No.129, "Disclosure of
Information About Capital Structure." This statement applies to all entities,
public and nonpublic. It supersedes specific disclosure requirements of
Accounting Principles Board (APB) Opinions No. 10 and No. 15 and SFAS No. 47 and
consolidates them in this statement. There is no change in disclosure
requirements for entities previously subject to these requirements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. "Comprehensive Income" is the total of net income and all
other non-owner changes in equity. This statement will be adopted by PSNC
effective October 1, 1998. PSNC does not anticipate the adoption of this
statement to have a material impact.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information." This statement introduces a new model
for segment reporting based on the way senior management organizes segments
within a company for making operating decisions and assessing performance. This
statement will be adopted by PSNC effective October 1, 1998. PSNC does not
anticipate the adoption of this statement to have a material impact.
Forward-looking Statements
Statements contained in this document and the notes to the financial
statements which are not historical in nature are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are subject to risks and uncertainties that may cause
future results to differ materially from those set forth in such forward-looking
statements. PSNC undertakes no obligation to update forward-looking statements
to reflect events or circumstances after the date hereof. Such risks and
uncertainties with respect to PSNC include, but are not limited to, its ability
to successfully implement internal performance goals, performance issues with
natural gas suppliers and transporters, the capital-intensive nature of PSNC's
business, regulatory issues (including rate relief to recover increased capital
and operating costs), competition, weather, exposure to environmental issues and
liabilities, variations in natural gas prices and general and
27
<PAGE>
specific economic conditions. From time to time, subsequent to the date of the
filing of this document, PSNC may include forward-looking statements in oral
statements or other written documents.
28
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
Public Service Company of North Carolina, Incorporated and Subsidiaries
Consolidated Statements of Income
<CAPTION>
For the Fiscal Years Ended September 30, 1997 1996 1995
- ---------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues $337,930,181 $308,882,079 $247,893,014
Cost of gas 182,003,740 168,137,830 117,065,047
------------ ------------ ------------
Gross margin 155,926,441 140,744,249 130,827,967
------------ ------------ ------------
Operating Expenses and Taxes:
Other operating expenses 55,180,279 50,074,438 47,006,721
Maintenance 6,007,234 5,128,699 4,261,832
Provision for depreciation 22,387,370 19,748,947 18,156,134
General taxes 16,924,868 16,005,669 13,823,123
Income taxes -
Federal 12,535,400 11,579,200 10,776,500
State 3,175,800 2,917,300 2,743,800
------------ ------------ ------------
Total operating expenses and taxes 116,210,951 105,454,253 96,768,110
------------ ------------ ------------
Operating income 39,715,490 35,289,996 34,059,857
------------ ------------ ------------
Other Income (Deductions):
Allowance for equity funds used
during construction - - 18,244
Merchandise and jobbing 121,554 (83,582) (333,914)
Subsidiary operations, net of
income taxes 1,677,391 1,327,561 402,344
Interest income and other 2,086,826 2,106,868 132,543
------------ ------------ ------------
Total other income (deductions) 3,885,771 3,350,847 219,217
------------ ------------ ------------
Gross income 43,601,261 38,640,843 34,279,074
------------ ------------ ------------
Interest Deductions:
Interest on long-term debt 15,139,409 12,252,379 11,115,979
Amortization of debt expense 163,173 151,978 137,122
Other interest 2,293,555 2,589,033 1,974,268
Allowance for borrowed funds used
during construction (341,429) (250,765) (369,522)
------------ ------------ ------------
Total interest deductions 17,254,708 14,742,625 12,857,847
------------ ------------ ------------
Net income $ 26,346,553 $ 23,898,218 $ 21,421,227
============ ============ ============
Average common shares outstanding 19,549,656 18,995,035 18,509,049
Earnings per average common share $1.35 $1.26 $1.16
===== ===== =====
Cash dividends declared per common share $.90 $.865 $.835
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
29
<PAGE>
Public Service Company of North Carolina, Incorporated and Subsidiaries
Consolidated Balance Sheets
September 30, 1997 1996
- ------------------------------------------- ------------ ------------
Assets
- ------
Gas Utility Plant:
In service $679,488,467 $619,831,020
Less - Accumulated depreciation 203,224,735 183,529,378
------------ ------------
Net plant in service 476,263,732 436,301,642
Construction work in progress 4,738,227 9,386,643
------------ ------------
481,001,959 445,688,285
------------ ------------
Non-utility Property, net of
accumulated depreciation (1997 -
$143,128 and 1996 - $134,789) 641,666 691,145
------------ ------------
Current Assets:
Cash and temporary investments 1,641,371 3,360,640
Restricted cash and temporary investments 9,887,844 6,394,634
Receivables, less allowance for
doubtful accounts (1997 - $2,521,983 and
1996 - $2,481,943) 26,616,667 17,899,381
Inventories, at average cost -
Materials, supplies and merchandise 7,644,432 6,704,622
Stored gas 20,890,195 15,862,819
Deferred gas costs, net 19,337,797 17,525,347
Prepayments 2,403,445 2,275,674
------------ ------------
88,421,751 70,023,117
------------ ------------
Deferred Charges and Other Assets:
Long-term restricted cash 4,845,120 -
Debt expense 1,838,815 1,418,463
Other 8,392,229 7,067,699
------------ ------------
15,076,164 8,486,162
------------ ------------
$585,141,540 $524,888,709
============ ============
Capitalization and Liabilities
- ------------------------------
Capitalization (see statements):
Common equity $207,367,763 $188,635,405
Long-term debt 180,850,000 140,150,000
------------ ------------
388,217,763 328,785,405
------------ ------------
Current Liabilities:
Current maturities of long-term debt 9,300,000 6,800,000
Accounts payable 27,799,188 20,300,451
Accrued taxes 4,303,522 3,074,823
Customer prepayments and deposits 6,978,565 6,013,886
Accrued interest 4,447,660 3,096,993
Cash dividends declared 4,534,095 4,222,283
Restricted supplier refunds 9,887,844 6,394,634
Other 5,149,824 3,960,098
------------ ------------
72,400,698 53,863,168
Interim bank loans, due within one year 38,000,000 59,500,000
------------ ------------
110,400,698 113,363,168
------------ ------------
Deferred Credits and Other Liabilities:
Income taxes, net 59,437,911 56,232,845
Deferred revenue 3,099,888 -
Investment tax credits 3,780,581 4,210,269
Accrued pension cost 9,531,887 12,213,788
Other 10,672,812 10,083,234
----------- ------------
86,523,079 82,740,136
------------ ------------
$585,141,540 $524,888,709
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
30
<PAGE>
Public Service Company of North Carolina, Incorporated and Subsidiaries
Consolidated Statements of Capitalization
September 30, 1997 1996
- ------------------------------------------ ------------ -----------
Common Equity:
Common stock, $1 par, 30,000,000
shares authorized; shares outstanding
1997 - 19,770,843 and 1996 - 19,204,385 $ 19,770,843 $ 19,204,385
Capital in excess of par value 123,474,119 114,007,859
Retained earnings 64,122,801 55,423,161
------------ ------------
207,367,763 188,635,405
------------ ------------
Long-term Debt:
Senior debentures (unsecured) -
8.65% due 2002 12,500,000 15,000,000
10% due 2003 11,250,000 11,250,000
10% due 2004 34,400,000 38,700,000
8.75% due 2012 32,000,000 32,000,000
6.99% due 2026 50,000,000 50,000,000
7.45% due 2026 50,000,000 -
------------ ------------
190,150,000 146,950,000
Less - Current maturities 9,300,000 6,800,000
------------ ------------
180,850,000 140,150,000
------------ ------------
$388,217,763 $328,785,405
============ ============
Consolidated Statements of Retained Earnings
For the Fiscal Years Ended September 30, 1997 1996 1995
- ---------------------------------------- ----------- ----------- -----------
Balance, beginning of year $55,423,161 $48,027,708 $42,142,636
Add - Net income 26,346,553 23,898,218 21,421,227
----------- ----------- -----------
81,769,714 71,925,926 63,563,863
Deduct - Cash dividends declared
on common stock and other 17,646,913 16,502,765 15,536,155
----------- ------------ -----------
Balance, end of year $64,122,801 $55,423,161 $48,027,708
=========== ============ ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
31
<PAGE>
<TABLE>
Public Service Company of North Carolina, Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
For the Fiscal Years Ended September 30, 1997 1996 1995
- ---------------------------------------- ----------- ----------- -------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $26,346,553 $23,898,218 $21,421,227
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation charged to operating expenses 22,387,370 19,748,947 18,156,134
Depreciation charged to other accounts 2,528,055 2,821,518 2,350,489
Amortization of debt expense and other 175,592 151,978 137,122
Provision for doubtful accounts 1,396,636 1,706,466 1,404,268
Amortization of investment tax credits, net (429,688) (435,156) (435,154)
Deferred income taxes, net 3,205,066 3,627,210 4,136,329
----------- ----------- -----------
55,609,584 51,519,181 47,170,415
Change in assets and liabilities:
Receivables (10,113,922) (6,001,263) 1,639,855
Inventories (5,967,186) (4,849,607) 2,690,078
Deferred gas costs, net (1,812,450) (13,833,212) (2,958,509)
Deferred revenues 3,099,888 - -
Prepayments (127,771) (186,824) 482,864
Accounts payable 7,498,737 (111,061) 4,755,558
Accrued taxes 1,228,699 1,251,185 (3,963,760)
Customer prepayments and deposits 964,679 272,239 171,656
Accrued interest 1,350,667 645,473 138,428
Other (4,911,920) 1,602,404 268,917
Accrued pension cost (2,681,901) (717,013) (2,600,758)
----------- ----------- -----------
Net cash provided by operating activities 44,137,104 29,591,502 47,794,744
----------- ----------- -----------
Cash Flows from Investing Activities:
Construction expenditures (60,310,383) (60,428,321) (61,118,541)
Non-utility property and other 875,413 (1,801,879) (1,015,502)
----------- ----------- -----------
Net cash used in investing activities (59,434,970) (62,230,200) (62,134,043)
----------- ----------- -----------
Cash Flows from Financing Activities:
Issuance of common stock through dividend
reinvestment, stock purchase and stock
option plans 9,809,642 7,674,585 6,762,526
Increase (decrease) in interim bank loans, net (21,500,000) 8,500,000 28,000,000
Sale of senior debentures, net 49,404,056 49,313,951 -
Retirement of long-term debt (6,800,000) (14,230,000) (7,740,000)
Retirement of common stock (33,670) (58,056) (71,811)
Cash dividends (17,301,431) (16,194,228) (14,152,550)
----------- ----------- -----------
Net cash provided by financing
activities 13,578,597 35,006,252 12,798,165
----------- ----------- -----------
Net increase (decrease) in cash and
temporary investments (1,719,269) 2,367,554 (1,541,134)
Cash and temporary investments at beginning
of year 3,360,640 993,086 2,534,220
----------- ----------- -----------
Cash and temporary investments at end of year $ 1,641,371 $ 3,360,640 $ 993,086
=========== =========== ===========
Cash paid during the year for:
Interest (net of amount capitalized) $15,514,606 $13,787,781 $12,137,583
Income taxes $12,935,000 $11,480,000 $13,486,095
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
32
<PAGE>
Public Service Company of North Carolina, Incorporated
and Subsidiaries
Notes to Consolidated Financial Statements
For the Fiscal Years Ended September 30, 1997, 1996 and 1995
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Segment Data
The consolidated financial statements include Public Service
Company of North Carolina, Incorporated's (PSNC), wholly-owned
subsidiaries, Clean Energy Enterprises, Inc., PSNC Blue Ridge
Corporation, PSNC Production Corporation, PSNC Propane Corporation
(dissolved in fiscal 1997), and PSNC Cardinal Pipeline Company. Through
its subsidiaries, PSNC also owns an interest in Cardinal Pipeline
Company, LLC, Cardinal Extension Company, LLC and Pine Needle LNG
Company, LLC. On December 2, 1996, PSNC Production Corporation and
Sonat Marketing Company L.P., a subsidiary of Sonat Inc., created Sonat
Public Service Company L.L.C. PSNC Production Corporation and Sonat
Marketing Company L.P. each owns 50% of this multi-state joint venture.
All significant intercompany transactions have been eliminated in
consolidation.
PSNC and its subsidiaries operate in one dominant business
segment, distribution of natural gas. PSNC, through various
subsidiaries and a joint venture also participates in nonregulated
businesses such as natural gas brokering and supply services and the
conversion and fueling of natural gas vehicles.
Utility Plant
Utility plant is stated at the historical cost of construction.
Included in historical cost are certain construction-related costs such
as taxes, pensions and other fringe benefits, as well as the estimated
cost of funds used during construction (AFUDC). PSNC capitalizes AFUDC
on a pre-tax basis for both the cost of short-term debt and the allowed
overall cost rate.
Depreciation
PSNC provides for depreciation on a straight-line basis by the
application of specific rates to the various classes of depreciable
property. These rates, which have been approved by the North Carolina
Utilities Commission (NCUC), approximate 3.9% of the cost of
depreciable property for each of the fiscal years 1997, 1996 and 1995,
on a composite basis.
Revenues
Certain customers (primarily residential and commercial) are
billed on a cycle basis while other customers are billed as of the end
of each month. Revenues are recorded at the time of billing. The cost
of gas delivered but unbilled is deferred and recognized in the period
in which the related revenue is billed.
33
<PAGE>
Income Taxes
PSNC accounts for income taxes pursuant to the Statement of
Financial Accounting Standards (SFAS) No. 109, which requires a
liability method of accounting for income taxes. Under this method, the
deferred tax liability represents the tax effect of temporary
differences between the financial statement and tax bases of assets and
liabilities and is measured using current tax rates.
PSNC uses deferral accounting for investment tax credits, which
amortizes the credits to income over the service life of related
property.
Cash and Temporary Investments
For purposes of reporting cash flows, cash and temporary
investments include cash on hand and investments with original
maturities of 45 days or less. Investments may include repurchase
agreements, U.S. Treasury bills, federal agency securities,
certificates of deposit and high-grade commercial paper.
Since fiscal 1992, PSNC has received refunds from its pipeline
transporters for which the investment and use have been restricted by
an order of the NCUC. Pursuant to an order of the NCUC, these funds are
to remain segregated from PSNC's general funds and will be used for
expansion of PSNC's facilities into unserved territories. These
refunds, along with interest earned thereon, are periodically
transferred to the Office of the State Treasurer. The balance not
transferred is reported in restricted cash and temporary investments
and restricted supplier refunds on the accompanying consolidated
balance sheets.
Long-term Restricted Cash and Deferred Revenue
The balance in long-term restricted cash reflects the restricted
cash contribution from Sonat Marketing Company L.P. (Sonat Marketing).
PSNC Production Corporation (PSNC Production) and Sonat Marketing,
created Sonat Public Service Company L.L.C. (Sonat Public Service) in
December 1996. Sonat Marketing contributed $4,944,000 for its 50%
ownership, of which $4,845,000 is currently restricted. Sonat Marketing
is entitled to a partial refund of its contribution if the economics of
the transaction are adversely modified by any regulatory body over a
five-year period. Restricted cash will be released annually in equal
amounts beginning in December 1998 and extending through December 2001.
The contribution was recorded as deferred revenue and is being
recognized by the company over the five-year period. The noncurrent
portion is reflected in deferred revenue with the current portion
reflected in other current liabilities on the accompanying consolidated
balance sheets.
Debt Expense
PSNC amortizes issuance costs for its debentures over the life
of the related debt. PSNC is amortizing the redemption premium and the
unamortized issuance costs on its previously refunded Series K First
Mortgage Bonds over 15 years, in accordance with the treatment
authorized by the NCUC.
34
<PAGE>
Fair Value of Financial Instruments
Financial instruments include cash and temporary investments and
long-term debt. The amount reported for cash and temporary investments
are considered to be reasonable approximations of their fair values due
to their short-term nature. The carrying amount of long-term debt
(including current maturities) at September 30, 1997 and September 30,
1996, is $190,150,000 and $146,950,000, respectively, as compared to a
fair market value of $207,729,000 and $158,369,000, respectively. The
fair market value of these instruments is based on current market
prices and yields for similar issues.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
certain estimates and assumptions. These 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.
2. REGULATORY MATTERS
PSNC's Rider D rate mechanism authorizes the recovery of all
prudently incurred gas costs from customers on a monthly basis. Any
difference in amounts paid and collected for these costs is deferred
for subsequent refund to or collection from customers. Additionally,
PSNC can recover its margin losses on negotiated gas sales to certain
large commercial and industrial customers in any manner authorized by
the NCUC. At September 30, 1997, the balance of net gas costs to be
collected from customers pursuant to Rider D was approximately
$18,385,000 as compared to $17,925,000 at September 30, 1996.
In PSNC's 1991 general rate case order, a weather normalization
adjustment (WNA) mechanism was authorized. This mechanism allows PSNC
to adjust its winter-period gas sales rates to certain customers to
avoid undercollections or overcollections of its non-gas costs due to
weather fluctuations from normal.
On September 25, 1996, the NCUC issued an order in PSNC's
general rate case filed in March 1996. The order, effective October 1,
1996, granted additional annual revenues of $2,701,000 and allowed a
10.37% overall return on PSNC's net utility investment. It also
approved the continuation of the previously mentioned WNA and Rider D
mechanisms.
Effective November 1, 1990, PSNC obtained additional firm
capacity from Transcontinental Gas Pipe Line Corporation's (Transco)
Southern Expansion project. On October 16, 1995, the Federal Energy
Regulatory Commission (FERC) issued an order on remand, from the United
States Court of Appeals for the District of Columbia Circuit, requiring
Transco to file revised tariff sheets for Southern Expansion service
provided from November 1, 1990, through October 31, 1991. As a result
of this order, PSNC received additional charges for the period April 5,
1991, through October 31, 1991, and recorded additional expense of
$734,000 during the fourth quarter of fiscal 1996. Based upon a prior
NCUC order, PSNC could not collect these charges from its customers
through the Rider D mechanism. PSNC believes the October 16, 1995,
order to be the final order
35
<PAGE>
regarding Southern Expansion charges incurred prior to November 1,
1991, and anticipates no further exposure from this issue.
PSNC began providing natural gas service in McDowell County
during December 1996. This was the first project undertaken by PSNC
using monies from its NCUC approved expansion fund. The original
estimate to complete this project was approximately $14,500,000, of
which $8,193,500 would be financed by PSNC's expansion fund and local
government assistance payments. Through September 30, 1997, $14,237,000
was spent on the project, of which $7,781,000 was received from the
expansion fund. PSNC will receive an additional $412,500 over the next
five years in the form of local government assistance payments.
PSNC currently provides natural gas service to the eastern
portion of Haywood County and began extending service to western
Haywood County, including Waynesville, Clyde and Lake Junaluska, in
September 1997. The current estimated cost to expand service to this
area is $7,182,000. On December 30, 1996, PSNC filed an application
with the NCUC requesting expansion funds for this project. On April 22,
1997, the NCUC approved this project and authorized disbursements from
the expansion fund of $4,127,000. PSNC expects to begin providing
partial service to this county by December 1997.
PSNC and a subsidiary of Piedmont Natural Gas Company, Inc.
(Piedmont) formed Cardinal Pipeline Company, LLC (Cardinal) in March
1994, to construct and operate a 24-inch, 37.5-mile natural gas
pipeline. It was placed into service on December 31, 1994, and provides
130 million cubic feet per day (MCF/Day) of additional firm capacity
(70 MCF/Day for PSNC and 60 MCF/Day for Piedmont). In September 1995,
PSNC, Piedmont, Transco, and North Carolina Natural Gas Corporation
(NCNG) signed a letter of intent to form Cardinal Extension Company,
LLC (Cardinal Extension) to purchase and extend the Cardinal pipeline.
As proposed, the pipeline will extend 67 miles from the termination
point of the original Cardinal Pipeline to a point southeast of Raleigh
and will provide 140 MCF/Day of additional firm capacity (100 MCF/Day
for PSNC and 40 MCF/Day for NCNG). The extension will be
project-financed at an estimated cost $75,000,000. Through their
respective subsidiaries, PSNC will own approximately 33%, Piedmont will
own approximately 17%, Transco will own approximately 45%, and NCNG
will own approximately 5% of Cardinal Extension. PSNC, through a
subsidiary, will contribute to Cardinal Extension its net book
investment in the existing pipeline plus additional equity capital of
approximately $1,000,000. On December 23, 1996, Cardinal Extension
filed an application with the NCUC for approval of this project. A
public hearing was held on May 20,1997. Subject to the approval of
state and federal agencies, construction is scheduled to begin in early
1999. The facilities are expected to be in service on or before
November 1, 1999.
Pine Needle LNG Company, LLC (Pine Needle) was formed by
subsidiaries of Transco, Piedmont, NCNG, Amerada Hess, and PSNC, and
the Municipal Gas Authority of Georgia. Pine Needle will own and
operate a liquefied natural gas storage facility, with an estimated
cost of $107,000,000. This facility will be located near Transco's
pipeline northwest of Greensboro, North Carolina, and will have a
storage capacity of four billion cubic feet with vaporization
capability of 400 million cubic feet per day. On April 30, 1996, the
FERC made a preliminary determination to grant Pine Needle certificate
authority to construct, own and
36
<PAGE>
operate the LNG storage facility. It approved a 12.75% return on equity
for the project and stated that the debt component of the rate
structure will be determined after permanent financing is obtained. On
May 30, 1996, the NCUC filed an application for rehearing of the
preliminary determination. On November 27, 1996, the FERC issued an
order granting a certificate of convenience and necessity authorizing
the construction and operation of Pine Needle, and denying the NCUC's
request for rehearing. The NCUC then filed a petition for review of
FERC's November 27 order with the United States Court of Appeals for
the District of Columbia Circuit. On October 7, 1997, Pine Needle and
the NCUC signed an agreement relating to the NCUC's appeal of the Pine
Needle certificate order. Based upon this agreement between Pine Needle
and the NCUC, the NCUC filed a motion on October 20, 1997 to withdraw
its petition for review. Liquefaction is expected to begin in May 1999
in time for withdrawal service to begin in the 1999 winter heating
season. PSNC Blue Ridge Corporation (Blue Ridge) will make capital
contributions totaling approximately $9,000,000 during the construction
period. Through September 30, 1997, Blue Ridge has invested $421,000 in
the facility.
On November 14, 1996, PSNC filed an application with the NCUC
requesting deferral accounting treatment for the costs of a project to
ensure that PSNC's computer operating systems function properly in the
year 2000 (Year 2000 costs). Similar costs will be incurred by
businesses worldwide, and the Emerging Issues Task Force of the
Financial Accounting Standards Board has determined that these costs
should be expensed as incurred. PSNC requested that total estimated
contractor labor of $3,000,000 be deferred for subsequent recovery in a
future rate case. On April 29, 1997, the NCUC issued an order
authorizing the deferral of each year's costs and requiring a
three-year amortization of these costs beginning in the year incurred.
PSNC began amortizing these costs in September 1997 and will seek to
recover any unamortized costs at the time of its next general rate
case. At September 30, 1997, the unamortized balance of Year 2000 costs
were $1,692,000.
37
<PAGE>
3. COMMON STOCK
The changes in common stock and capital in excess of par value
for the three years ended September 30, 1997 were as follows:
Common Stock
$1 Par, Authorized
30,000,000 Shares Capital in
Shares Excess of
Outstanding Amount Par Value
----------- ----------- ------------
September 30, 1994 18,212,047 $18,212,047 $100,200,706
Issuance through dividend
reinvestment plan (DRP) 349,315 349,315 4,720,158
Issuance through employee
stock purchase plan (ESPP) 90,574 90,574 1,083,265
Issuance through nonqualified
stock option plan (NSOP) - net 37,410 37,410 481,804
Compensation expense - NSOP - - 113,583
Recognition of permanent tax
differences related to stock
options exercised - - 55,800
----------- ----------- ------------
September 30, 1995 18,689,346 18,689,346 106,655,316
Issuance through DRP 326,618 326,618 4,860,612
Issuance through ESPP 92,405 92,405 1,105,164
Issuance through NSOP - net 96,016 96,016 1,193,770
Compensation expense - NSOP - - 29,197
Recognition of permanent tax
differences related to stock
options exercised - - 163,800
----------- ----------- ------------
September 30, 1996 19,204,385 19,204,385 114,007,859
Issuance through DRP 406,388 406,388 6,870,434
Issuance through ESPP 81,349 81,349 1,236,505
Issuance through NSOP - net 78,721 78,721 1,136,237
Compensation expense - NSOP - - 95,884
Recognition of permanent tax
differences related to stock
options exercised - - 127,200
----------- ----------- ------------
September 30, 1997 19,770,843 $19,770,843 $123,474,119
=========== =========== ============
38
<PAGE>
Stock Compensation Plans
At September 30, 1997, PSNC had two stock-based compensation plans,
which are described below. PSNC applies Accounting Principles Board (APB)
Opinion No. 25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its employee stock
purchase plan. For fiscal 1997, 1996 and 1995, the compensation cost that has
been charged against income for its nonqualified stock option plan was $96,000,
$29,000 and $114,000, respectively. In October 1995, the FASB issued its SFAS
No. 123, "Accounting for Awards of Stock-Based Compensation to Employees." This
statement defines a fair value method of accounting for stock options or similar
equity instruments and was adopted by PSNC effective October 1, 1996. SFAS No.
123 permits companies to continue to account for stock-based compensation awards
under existing accounting rules, but requires disclosure in a note to the
financial statements of the pro forma net income and earnings per share as if
PSNC had adopted the new method of accounting. Had compensation cost for PSNC's
two stock-based plans been determined consistent with the fair value method for
compensation expense encouraged under SFAS No. 123, PSNC's net income and
earnings per share (EPS) would have been reduced to the pro forma amounts shown
below:
1997 1996 1995
---- ---- ----
Net income As reported $26,346,553 $23,898,218 $21,421,227
Pro forma $25,971,801 $23,469,513 $21,018,334
Primary EPS As reported $1.35 $1.26 $1.16
Pro forma $1.33 $1.24 $1.14
Nonqualified Stock Option Plans
In accordance with PSNC's 1992 Nonqualified Stock Option Plan, options
to purchase an aggregate of up to 600,000 shares of PSNC's common stock can be
granted to officers and key employees of PSNC annually beginning October 1,
1992. Options are granted at 90% of the fair market value determined on the date
of the grant, are exercisable beginning two years from the date of the grant and
expire five years from the date of the grant. An exception to the two-year
exercise date is allowed upon the retirement, disability or death of a
participant.
Options granted, exercised and canceled for the three years ended
September 30, 1997 were as follows:
Options Exercise Price
Outstanding Per Share
----------- --------------
September 30, 1994 348,431
Granted 120,000 $12.86
Exercised (46,095) $10.56 to $15.57
Canceled (1,479) $15.57
-------
September 30, 1995 420,857
Granted 120,000 $14.29
Exercised (101,624) $10.56 to $15.57
Canceled (11,994) $12.86 to $15.57
-------
September 30, 1996 427,239
Granted 118,967 $16.59
Exercised (81,532) $10.56 to $16.59
Canceled (736) $14.29
-------
September 30, 1997 463,938
=======
39
<PAGE>
On September 3, 1997, PSNC registered with the Securities and Exchange
Commission (SEC) an additional 1,560,000 shares of common stock to be reserved
for use in the 1997 Nonqualified Stock Option Plan.
Employee Stock Purchase Plan
Under the 1992 Employee Stock Purchase Plan, PSNC is authorized to
issue up to 720,000 shares to its full-time employees, nearly all of whom are
eligible to participate. Under the terms of the plan, employees may choose each
year to have from 2% to 10% of their base salary or wages withheld to purchase
PSNC's common stock. The purchase price of stock is 90% of the lower of its
beginning-of-year or end-of-year fair market value as defined in the plan.
Seventy-two percent of eligible employees participated in the plan during fiscal
1997. In fiscal 1997, 1996 and 1995, PSNC issued to employees 81,349, 92,405 and
90,574 shares, respectively.
At September 30, 1997, there were 1,262,228 common shares reserved for
issuance under PSNC's Stock Purchase and Automatic Dividend Reinvestment Plan,
1,560,000 common shares reserved for granting under the 1997 Nonqualified Stock
Option Plan and 287,869 common shares reserved for issuance under the Employee
Stock Purchase Plan.
4. PENSION AND POSTRETIREMENT PLANS
PSNC and its subsidiaries sponsor a noncontributory defined
benefit pension plan covering substantially all employees. The benefits
are based on years of service and the employee's compensation during
the five consecutive years of employment that will produce the highest
average pay. Contributions to the plan are determined on an annual
basis with the amount of such contributions being within the minimum
required for funding standard account purposes and the maximum
deductible for federal income tax purposes.
Net pension cost in fiscal 1997, 1996 and 1995 consisted of the
following components (amounts in thousands):
1997 1996 1995
------ ------ -----
Service cost $2,156 $2,034 $1,977
Interest cost 3,282 2,972 3,173
Actual return on assets (8,328) (2,845) (3,320)
Net amortization 5,253 (23) 228
------ ------ ------
Net pension cost $2,363 $2,138 $2,058
====== ====== ======
The table below sets forth the amount recognized on PSNC's
consolidated balance sheets at September 30, 1997 and 1996 (amounts in
thousands):
1997 1996
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits in
1997 of $28,692 and 1996 of $29,405 $29,852 $30,434
======= =======
40
<PAGE>
Projected benefit obligation $42,920 $44,458
Plan assets at fair value 39,253 38,503
------- -------
Plan assets under projected
benefit obligation 3,667 5,955
Unrecognized transition amount 1,716 2,539
Unrecognized net gain 8,301 8,444
Unrecognized prior service cost (4,152) (4,724)
------- -------
Accrued pension cost $ 9,532 $12,214
======= =======
Actuarial assumptions:
Weighted average discount rate 7.50% 7.75%
Rate of increase in future
compensation levels 3.50%-6.50% 3.75%-6.75%
Weighted average expected
long-term rate of return 8% 8%
The majority of plan assets is invested in equities, with the
balance primarily in fixed income investments. The fair value of PSNC's
own common stock held by the plan at the respective 1997 and 1996
measurement dates was approximately $3,251,000 and $2,731,000.
The decrease in accrued pension cost at September 30, 1997 is
due to the recognition of $1,739,000 of unrecognized net gains and
assets in the pension plan related to the voluntary early retirement
program. This accelerated recognition was in accordance with SFAS No.
88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits."
PSNC offers medical, life and dental insurance coverage to its
qualified salaried and hourly retirees. These benefits are unfunded.
Retirees are required to contribute for the cost of the coverage.
PSNC's policy is to review the contributions required from retirees on
an annual basis and to increase retiree contributions as necessary.
Effective October 1, 1993, PSNC adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The
standard provides for the accrual of the costs of retiree medical, life
and dental insurance benefits over the working lifetime of the
employees.
Based on the actuarial valuation of October 1, 1993, the
adoption of SFAS No. 106 resulted in a transition obligation of
approximately $7,400,000. The following table reconciles the plan's
funded status to the accrued benefit cost as of September 30, 1997 and
1996 (amounts in thousands):
1997 1996
------- ------
Fair value of plan assets $ - $ -
Accumulated postretirement
benefit obligation (APBO):
Retirees and dependents $ 3,853 $ 2,507
Other fully eligible participants 917 1,445
Other active participants 2,833 3,380
------- -------
7,603 7,332
Unrecognized prior service cost (531) (574)
41
<PAGE>
Unrecognized net gain 498 256
Unrecognized transition obligation (3,547) (3,768)
------- -------
Accrued postretirement benefit cost $ 4,023 $ 3,246
======= =======
The net periodic postretirement benefit cost for fiscal
September 30, 1997, 1996 and 1995 consists of the following components
(amounts in thousands):
1997 1996 1995
------ ------ ------
Service cost $ 255 $ 258 $ 326
Interest cost on APBO 554 525 599
Amortization of
transition obligation 222 258 369
Net amortization 38 19 (21)
------ ------ ------
Net periodic postretirement
benefit cost $1,069 $1,060 $1,273
====== ====== ======
As of the 1997 measurement date, the assumed health care cost
trend rate used in determining the APBO was 7.75% in 1997, 8.25% in
1998, 7.25% in 1999, 6.75% in 2000, then decreasing annually to an
ultimate trend rate of 5% in 2004. A one-percentage point increase in
the assumed health care cost trend rate would increase the APBO by
approximately 9%. The service and interest cost components of the net
periodic postretirement benefit cost would increase approximately 13%.
The net periodic postretirement benefit cost was calculated using a
weighted average discount rate of 7.75%. The APBO at the measurement
date was determined using a weighted average discount rate of 7.50%.
5. SHORT-TERM BORROWING ARRANGEMENTS
PSNC has committed lines of credit with seven commercial banks
which vary monthly depending upon seasonal requirements and a five-year
revolving line of credit with one bank. For the twelve-month period
beginning April 1, 1997, total lines of credit with these banks range
from a minimum of $37,000,000 to a winter-period maximum of
$81,000,000. PSNC also has uncommitted annual lines of credit totaling
$80,000,000. There are no restrictions on the withdrawal of cash
balances maintained with these banks. The banks are compensated for the
committed lines of credit through the payment of commitment fees. At
September 30, 1997 and 1996, there were $38,000,000 and $59,500,000 of
short-term loans outstanding, respectively.
PSNC borrows funds on a short-term basis primarily for its
construction program and for the seasonal financing of stored gas. The
loans are generally arranged for periods of up to 90 days at rates
below the prime rate. Bankers' acceptance loans are arranged for
periods of up to 180 days at rates below the prime rate. At September
30, 1997 and 1996, PSNC had no bankers' acceptance loans outstanding.
Certain information related to short-term borrowings is as
follows (dollars in thousands):
42
<PAGE>
1997 1996
------- ------
At year end -
Amount outstanding $38,000 $59,500
Weighted average rate 5.91% 5.69%
During the year -
Maximum amount outstanding $81,500 $82,500
Average daily amount outstanding $36,381 $39,944
Weighted average rate 5.75% 5.99%
The weighted average rate is determined by dividing the total
short-term interest expense for the fiscal year by the average daily
amount outstanding during the fiscal year.
6. INCOME TAXES
Income tax expense is shown on the consolidated statements of
income within the captions listed below. Immediately following are the
components of income tax expense (amounts in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Federal State Federal State Federal State
------- ------ ------- ------ ------- ------
Income Statement Captions:
Operating expenses
and taxes $12,535 $3,176 $11,579 $2,917 $10,777 $2,744
Other income (deductions) 866 226 763 202 162 19
------- ------ ------- ------ ------- ------
$13,401 $3,402 $12,342 $3,119 $10,939 $2,763
======= ====== ======= ====== ======= ======
Income Tax Expense:
Currently payable $11,246 $2,782 $ 9,892 $2,427 $ 8,320 $2,023
Deferred 2,585 620 2,885 692 3,054 740
Investment tax credits, net (430) - (435) - (435) -
------- ------ ------- ------ ------- ------
$13,401 $3,402 $12,342 $3,119 $10,939 $2,763
======= ====== ======= ====== ======= ======
A reconciliation of the statutory federal income tax rate to the
effective tax rate is as follows (dollars in thousands):
1997 1996 1995
------- ------- ------
Statutory federal income tax rate 35% 35% 35%
Expected federal income tax expense
at federal statutory rate $14,720 $13,438 $12,230
Less: State income tax benefit 1,112 1,022 962
Amortization of ITC 430 435 435
Tax on subsidiary income 587 465 141
Other 56 (63) (85)
------- ------- -------
Federal income tax expense $12,535 $11,579 $10,777
======= ======= =======
The components of the net deferred tax liabilities as of
September 30, 1997 and 1996, are as follows (amounts in thousands):
43
<PAGE>
1997 1996
-------- -------
Deferred tax assets:
Regulatory liabilities - income tax amounts $ 4,653 $ 4,887
Pension expense 2,775 3,719
Unamortized ITC 1,476 1,648
Postretirement benefits 1,311 1,046
Deferred gain on Sonat joint venture 1,633 679
Other 1,520 842
-------- --------
$ 13,368 $ 12,821
-------- --------
Deferred tax liabilities:
Depreciation and property related items $ 61,151 $ 57,512
Excess deferred taxes due to a change
in the statutory rate 10,138 10,591
Regulatory assets - income tax amounts 594 647
Year 2000 costs 677 -
Other 246 304
-------- --------
$ 72,806 $ 69,054
-------- --------
Net deferred tax liabilities $ 59,438 $ 56,233
======== ========
7. ENVIRONMENTAL MATTERS
PSNC owns or has owned portions of six sites in North Carolina
on which manufactured gas plants (MGPs) were formerly operated.
Intrusive investigation (including drilling, sampling and analysis) has
begun at only one site and the remaining sites have been evaluated
using historical records and observations of current site conditions
made during visits to the sites. These evaluations have revealed that
MGP residuals are present or suspected at several of the sites. The
North Carolina Department of Environment, Health and Natural Resources
(NCDEHNR) has recommended that no further action be taken with respect
to one site. In March and April 1994, an environmental consulting firm
retained by PSNC estimated that the aggregate cost of investigating and
monitoring the extent of environmental degradation and of implementing
remedial procedures with respect to the remaining five sites may range
from $3,705,000 to $50,145,000 over a 30-year period. PSNC is unable to
determine the rate at which costs may be incurred over this time
period. The estimated cost range has not been discounted to present
value. The range includes costs of investigating and monitoring the
sites at the low end of the range and investigating, monitoring and
extensively remediating the sites at the high end of the range. PSNC's
associated actual costs for these sites will depend on a number of
factors, such as actual site conditions, third-party claims and
recoveries from other potentially responsible parties (PRPs). Another
North Carolina public utility or its predecessors also operated the MGP
sites in Raleigh, Durham and Asheville, and PSNC is in discussion with
that utility regarding potential cost sharing arrangements for
investigation and potential remediation costs of four of the sites. At
this time, PSNC has not reached a definitive agreement regarding such
arrangements.
An order of the NCUC dated May 11, 1993 authorized deferral
accounting for all costs associated with the investigation and
remediation of MGP sites. As of September 30, 1997, PSNC has recorded a
liability and associated regulatory asset of the minimum amount of the
range, or $3,705,000.
44
<PAGE>
The NCUC concluded that it is proper and in the public interest
to allow recovery of prudently incurred clean-up costs from current
customers as reasonable operating expenses even though the MGP sites
are not used and useful in providing gas service to current customers.
However, the NCUC will not allow recovery of carrying costs on deferred
amounts. Amounts incurred to date are not material. Management intends
to request recovery of additional MGP clean-up costs not recovered from
other PRPs in future rate case filings, and believes that all costs
deemed by the NCUC to be prudently incurred will be recoverable in gas
rates.
8. LONG-TERM DEBT
On December 20, 1995, PSNC filed with the SEC a registration
statement covering up to an aggregate amount of $125,000,000 of
unsecured debt securities. On January 10, 1996, PSNC sold $50,000,000
of 6.99% Senior Debentures due 2026 under the registration statement.
The net proceeds of $49,314,000 were used to pay down a significant
portion of the then outstanding short-term bank debt.
On December 17, 1996, PSNC sold $50,000,000 of 7.45% Senior
Debentures due 2026 under the registration statement. The net proceeds
of $49,404,000 were used to pay down a significant portion of the then
outstanding short-term bank debt. At September 30, 1997, $25,000,000
remained on the shelf registration.
Scheduled maturities of long-term debt during each of the next
five fiscal years are as follows as of September 30, 1997: 1998,
$9,300,000; 1999, $9,300,000; 2000, $11,800,000; 2001, $6,800,000; and
2002, $8,050,000.
Under terms of the debt agreements, there are various
provisions relating to the maintenance of certain financial ratios and
conditions, the most significant of which could restrict payment of
dividends. At September 30, 1997, PSNC is in compliance in all material
respects with the requirements of its debt agreements.
9. CONSTRUCTION PROGRAM
The construction program for fiscal 1998, as presently
planned, provides for expenditures of $69,781,000.
10. CONTINGENT LIABILITIES
PSNC is party to certain legal actions. Although it is
impossible to predict the outcomes with certainty, based upon the
opinions of legal counsel, management does not expect the dispositions
of these matters to have a materially adverse effect on PSNC's
financial position or results of operations.
45
<PAGE>
11. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents certain financial information for
each quarter during the fiscal years ended September 30, 1997 and 1996
(amounts in thousands, except per share data):
1997
Fourth Third Second First
------- ------- -------- ------
Operating revenues $34,024 $60,106 $150,146 $93,653
Gross margin 17,914 29,391 67,169 41,452
Operating income (loss) (1,630) 4,543 25,765 11,038
Net income (loss) (5,231) 1,285 22,387 7,906
Earnings (loss) per share (1) (.26) .07 1.15 .41
1996
Fourth Third Second First
------- ------- ------ ------
Operating revenues $33,100 $58,807 $142,053 $74,922
Gross margin 16,303 26,425 61,500 36,516
Operating income (loss) (2,165) 3,905 23,177 10,374
Net income (loss) (5,250) 1,441 20,577 7,131
Earnings (loss) per share (1) (.27) .08 1.09 .38
(1) The sum of the quarterly earnings (loss) per share amounts does
not equal the annual earnings per share amount reflected in the
consolidated statement of income due to the effect of changes in
average common shares outstanding during the fiscal year.
46
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of
Public Service Company of North Carolina, Incorporated:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of Public Service Company of North Carolina,
Incorporated (PSNC), a North Carolina corporation, and subsidiaries as of
September 30, 1997 and 1996, and the related consolidated statements of income,
retained earnings and cash flows for each of the three years in the period ended
September 30, 1997. These financial statements are the responsibility of PSNC'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 financial position of Public Service
Company of North Carolina, Incorporated and subsidiaries as of September 30,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 1997, in conformity with
generally accepted accounting principles.
s/Arthur Andersen LLP
Charlotte, North Carolina,
October 30, 1997
47
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation, presentation and
integrity of the financial statements and other financial information in this
report. The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles applicable to rate-regulated
public utilities, including estimates and judgments made by management that were
necessary to prepare the statements in accordance with such accounting
principles, and are not misstated due to material fraud or error. To assure the
integrity of the underlying financial records supporting the financial
statements, management maintains a system of internal accounting controls
sufficient to provide reasonable assurances that PSNC assets are properly
accounted for, safeguarded and are utilized only in accordance with management's
authorization. The concept of reasonable assurance recognizes that the costs of
a system of internal controls should not exceed the related benefits derived
from it.
The system of internal accounting controls is augmented by PSNC's
internal audit department, which has unrestricted access to all levels of PSNC
management. The internal audit department meets periodically, with and without
the presence of management, with the Audit Committee of the Board of Directors
to discuss, among other things, PSNC's system of internal accounting controls
and the adequacy of the internal audit program. The Audit Committee is comprised
of four directors who are not officers or employees of PSNC.
The Audit Committee also meets periodically with Arthur Andersen LLP,
PSNC's independent public accountants, with and without the presence of
management, to discuss the results of the annual audit of PSNC's financial
statements and related data. The Audit Committee and Arthur Andersen LLP also
discuss internal accounting control matters that come to the attention of Arthur
Andersen LLP during the course of the audit.
s/Charles E. Zeigler, Jr. s/Jack G. Mason
- ------------------------- --------------------------
Charles E. Zeigler, Jr. Jack G. Mason
Chairman, President and Vice President - Treasurer
Chief Executive Officer and Chief Financial Officer
48
<PAGE>
Supplementary Data
The information for this item is contained in Note 11 entitled
"SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)" on page 44 of
this annual report.
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
The information for this item is set forth in the sections
entitled "Election of Directors" and "The Board of Directors and
Committees of the Board Compliance with Section 16(a)" in PSNC's proxy
statement dated December 19, 1997, relating to the January 30, 1998
annual meeting of shareholders, which section is incorporated herein by
reference.
Executive Officers
The information for this item is set forth on page 12 of this
annual report.
Item 11. Executive Compensation
The information for this item is set forth in the sections
entitled "Executive Compensation," "Employee Retirement Plans,"
"Performance Graph" and "The Board of Directors and Committees of the
Board" in PSNC's proxy statement dated December 19, 1997, relating to
the January 30, 1998 annual meeting of shareholders, which section is
incorporated herein by reference (specifically excluding disclosures in
such sections relating to Items 402(k) and (l) of Regulation S-K).
49
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information for this item is set forth in the section
entitled "Common Stock Ownership By Directors and Executive Officers"
in PSNC's proxy statement dated December 19, 1997, relating to the
January 30, 1998 annual meeting of shareholders, which section is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information for this item is set forth in the sections
entitled "Election of Directors" and "Compensation Committee Interlocks
and Insider Participation" in PSNC's proxy statement dated December 19,
1997, relating to the January 30, 1998 annual meeting of shareholders,
which sections are incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Page
(a) 1. Financial statements -
Consolidated Statements of Income for the
Fiscal Years Ended September 30, 1997,
1996 and 1995 27
Consolidated Balance Sheets at
September 30, 1997 and 1996 28
Consolidated Statements of Capitalization
at September 30, 1997 and 1996 29
Consolidated Statements of Retained
Earnings for the Fiscal Years Ended
September 30, 1997, 1996 and 1995 29
Consolidated Statements of Cash Flows for
the Fiscal Years Ended September 30, 1997,
1996 and 1995 30
Notes to Consolidated Financial Statements
for the Fiscal Years Ended September 30,
1997, 1996 and 1995 31-44
Report of Independent Public Accountants 45
Management's Responsibility for Financial Statements 46
50
<PAGE>
Page
2. Financial statement schedules -
The following financial statement schedules
are included herein:
Supplemental Schedules:
Report of Independent Public Accountants 51
Schedule II - Reserves for the Fiscal Years Ended
September 30, 1997, 1996 and 1995 52-54
All other financial statement schedules are omitted as not
applicable, not required, or the required information is included in the
consolidated financial statements and notes thereto.
3. Exhibits -
See Exhibit Index on page 56 of this annual report.
(b) Reports on Form 8-K -
There were no reports on Form 8-K filed during the three months
ended September 30, 1997.
51
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into PSNC's previously filed
Registration Statements on Form S-3 (File Nos. 33-65205 and 33-10637) and Form
S-8 (File Nos. 33-49153, 33-48909 and 333-34845).
s/Arthur Andersen LLP
Charlotte, North Carolina,
December 22, 1997
52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Public Service Company of North
Carolina, Incorporated included in this Form 10-K, and have issued our report
thereon dated October 30, 1997. Our audit was made for the purpose of forming an
opinion on those statements taken as a whole. The schedules listed in the
accompanying index are the responsibility of the Registrant's management and are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
s/Arthur Andersen LLP
Charlotte, North Carolina,
October 30, 1997
53
<PAGE>
</TABLE>
<TABLE>
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - RESERVES
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------ ---------- -------------------- ---------- ----------
Additions
Charged To
Balance At -------------------- Balance
Beginning Operating Other At End
Description Of Period Expenses Income Deductions(1) Of Period
- ------------------------------ ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
DEDUCTED IN BALANCE SHEET FROM
ASSET TO WHICH IT APPLIES:
Allowance for doubtful
accounts $2,481,943 $1,320,162 $76,474 $1,356,596 $2,521,983
========== ========== ======= ========== ==========
(1) Deductions represent uncollectible accounts written off, net of
recoveries, as follows -
Write-off of accounts considered to be uncollectible $2,156,932
Less - Recoveries on accounts previously written off 800,336
----------
$1,356,596
==========
</TABLE>
54
<PAGE>
<TABLE>
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - RESERVES
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------ ---------- -------------------- ---------- ----------
Additions
Charged To
Balance At -------------------- Balance
Beginning Operating Other At End
Description Of Period Expenses Income Deductions(1) Of Period
- ------------------------------ ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
DEDUCTED IN BALANCE SHEET FROM
ASSET TO WHICH IT APPLIES:
Allowance for doubtful
accounts $2,037,855 $1,635,210 $71,256 $1,262,378 $2,481,943
========== ========== ======= ========== ==========
(1) Deductions represent uncollectible accounts written off, net of
recoveries, as follows -
Write-off of accounts considered to be uncollectible $1,969,469
Less - Recoveries on accounts previously written off 707,091
----------
$1,262,378
==========
</TABLE>
55
<PAGE>
<TABLE>
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - RESERVES
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------ ---------- -------------------- ---------- ----------
Additions
Charged To
Balance At -------------------- Balance
Beginning Operating Other At End
Description Of Period Expenses Income Deductions(1) Of Period
- ------------------------------ ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
DEDUCTED IN BALANCE SHEET FROM
ASSET TO WHICH IT APPLIES:
Allowance for doubtful
accounts $1,467,887 $1,335,441 $68,827 $834,300 $2,037,855
========== ========== ======= ======== ==========
(1) Deductions represent uncollectible accounts written off, net of
recoveries, as follows -
Write-off of accounts considered to be uncollectible $1,496,453
Less - Recoveries on accounts previously written off 662,153
----------
$ 834,300
==========
</TABLE>
56
<PAGE>
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.
PUBLIC SERVICE COMPANY
OF NORTH CAROLINA, INCORPORATED
(Registrant)
s/Charles E. Zeigler, Jr.
Charles E. Zeigler, Jr.
Chairman, President and
December 22, 1997 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 indicated on December 22, 1997.
s/Charles E. Zeigler, Jr. s/Jack G. Mason
Charles E. Zeigler, Jr. Jack G. Mason
Chairman, President and Vice President - Treasurer
Chief Executive Officer and Chief Financial Officer
(Principal executive officer) (Principal financial and
accounting officer)
s/William C. Burkhardt s/William L. O'Brien, Jr.
William C. Burkhardt - Director William L. O'Brien, Jr. - Director
s/William A. V. Cecil s/D. Wayne Peterson
William A. V. Cecil - Director D. Wayne Peterson - Director
s/Bert Collins s/Ben R. Rudisill, II
Bert Collins - Director Ben R. Rudisill, II - Director
s/John W. Copeland s/G. Smedes York
John W. Copeland - Director G. Smedes York - Director
s/Van E. Eure
Van E. Eure - Director
57
<PAGE>
EXHIBIT INDEX
The following documents are filed as a part of this annual report on
Form 10-K for the fiscal year ended September 30, 1997. Those exhibits
previously filed and incorporated herein by reference are identified below with
an asterisk and with a reference to the previous filing.
Exhibit
Number
*3-A-4 - Amended and Restated Charter, dated February 1, 1991.
(File No. 0-1218, 10-K--1992, Exhibit 3-A-4).
*3-I - By-laws, as amended to date. (File No. 0-1218, 10-Q--March 31,
1994, Exhibit 3-I).
*4-A - Debenture Purchase Agreement, dated as of June 15, 1987, for
$25,000,000 of 8.65% Senior Debentures due August 31, 2002.
(File No. 0-1218, 10-K--1987, Exhibit 4-A).
*4-B - Debenture Purchase Agreement, dated as of September 15, 1988, for
$25,000,000 of 10% Senior Debentures due October 1, 2003. (File
No. 0-1218, 10-K--1988, Exhibit 4-B).
*4-C - Debenture Purchase Agreement, dated as of December 5, 1989, for
$43,000,000 of 10% Senior Debentures due December 1, 2004. (File
No. 0-1218, 10-K--1989, Exhibit 4-C).
*4-D - Debenture Purchase Agreement, dated as of June 25, 1992, for
$32,000,000 of 8.75% Senior Debentures due June 30, 2012. (File
No. 0-1218, 10-Q--June 30, 1992, Exhibit 4-D).
*4-E-1 - Indenture dated as of January 1, 1996, as supplemented by a First
Supplemental Indenture dated as of January 1, 1996, between
PSNC and First Union National Bank of North Carolina, as trustee.
(File No. 1-11429, 10-Q--December 31, 1995, Exhibit 4-E-1).
*4-E-2 - Specimen of the certificate representing the $50,000,000
aggregate principal amount of 6.99% Senior Debentures Due 2026
issued by PSNC on January 16, 1996. (File No. 1-11429, 10-Q--
December 31, 1995, Exhibit 4-E-2).
*4-E-3 - Second Supplemental Indenture dated as of December 15, 1996 to
Indenture dated as of January 1, 1996, between PSNC and First
Union National Bank of North Carolina, as trustee. (File No.
1-11429, 10-Q--December 31, 1996, Exhibit 4-E-3).
58
<PAGE>
Exhibit
Number
*4-E-4 - Specimen of the certificate representing the $50,000,000
aggregate principal amount of 7.45% Senior Debentures Due 2026
issued by PSNC on December 15, 1996 is included in Exhibit 4-E-3.
(File No. 1-11429, 10-Q--December 31, 1996, Exhibit 4-E-4).
*10-A-9 - Firm Sales Service Agreement under Rate Schedule FS, dated
August 1, 1991, between PSNC and Transcontinental Gas Pipe Line
Corporation. (File No. 0-1218, 10-Q--March 31, 1992, Exhibit
10-A-9).
*10-A-10 - Firm Sales Service Agreement under Rate Schedule FS, dated August
1, 1991, between PSNC and Transcontinental Gas Pipe Line
Corporation. (File No. 0-1218, 10-Q--March 31, 1992,
Exhibit 10-A-10).
*10-A-11 - Firm Sales Service Agreement under Rate Schedule FS, dated August
1, 1991, between PSNC and Transcontinental Gas Pipe Line
Corporation. (File No. 0-1218, 10-Q--March 31, 1992, Exhibit
10-A-11).
*10-A-13 - Firm Transportation Service Agreement under Rate Schedule FT,
dated August 1, 1991, between PSNC and Transcontinental Gas Pipe
Line Corporation. (File No. 0-1218, 10-K--1992, Exhibit 10-A-13).
*10-A-15 - Firm Transportation Service Agreement under Rate Schedule FT,
dated February 1, 1992, between PSNC and Transcontinental Gas
Pipe Line Corporation. (File No. 0-1218, 10-K--1993, Exhibit
10-A-15).
*10-A-16 - Firm Transportation Service Agreement under Rate Schedule FT-NN,
dated October 8, 1993, between PSNC and CNG Transmission
Corporation. (File No. 0-1218, 10-K--1993, Exhibit 10-A-16).
*10-A-17 - Firm Transportation Service Agreement under Rate Schedule FT-NN-
GSS, dated October 8, 1993, between PSNC and CNG Transmission
Corporation. (File No. 0-1218, 10-K--1993, Exhibit 10-A-17).
*10-A-18 - Firm Transportation Service Agreement under Rate Schedule FT-A,
dated November 1, 1993, between PSNC and Tennessee Gas Pipeline
Company. (File No. 0-1218, 10-K--1993, Exhibit 10-A-18).
*10-A-19 - Firm Transportation Service Agreement under Rate Schedule FT-1,
dated November 1, 1993, between PSNC and Texas Eastern
Transmission Corporation. (File No. 0-1218, 10-K--1993, Exhibit
10-A-19).
*10-A-20 - Firm Transportation Service Agreement under Rate Schedule FT,
dated November 1, 1993, between PSNC and Texas Gas Transmission
Corporation. (File No. 0-1218, 10-K--1993, Exhibit 10-A-20).
59
<PAGE>
Exhibit
Number
*10-A-21 - Firm Transportation Service Agreement under Rate Schedule FT,
dated October 1, 1993, between PSNC and Transcontinental Gas Pipe
Line Corporation. (File No. 0-1218, 10-K--1993, Exhibit 10-A-21).
*10-A-22 - Firm Transportation Service Agreement under Rate Schedule FT,
dated June 6, 1994, between PSNC and Transcontinental Gas Pipe
Line Corporation. (File No. 1-11429, 10-K--September 30, 1995,
Exhibit 10-A-22).
*10-A-23 - Firm Transportation Service Agreement under Rate Schedule FT,
dated April 30, 1995, between PSNC and Transcontinental Gas Pipe
Line Corporation. (File No. 1-11429, 10-K--September 30, 1995,
Exhibit 10-A-23).
*10-A-24 - Firm Transportation Service Agreement under Rate Schedule FT,
dated January 24, 1996, between PSNC and Transcontinental Gas
Pipe Line Corporation. (File No. 1-11429, 10-Q--June 30, 1996,
Exhibit 10-A-24).
*10-A-25 - General Storage Service Agreement under Rate Schedule GSS,
dated October 17, 1995, between PSNC and CNG Transmission
Corporation. (File No. 1-11429, 10-Q--June 30, 1996, Exhibit 10-
A-25).
*10-A-26 - Firm Transportation Service Agreement under Rate Schedule FT-
NN-GSS, dated October 17, 1995, between PSNC and CNG
Transmission Corporation. (File No. 1-11429, 10-Q--June 30,
1996, Exhibit 10-A-26).
*10-A-27 - Firm Transportation Service Agreement under Rate Schedule FT,
dated January 24, 1996, between PSNC and CNG Transmission
Corporation. (File No. 1-11429, 10-Q--June 30, 1996, Exhibit 10-
A-27).
*10-A-28 - Firm Transportation Service Agreement under Rate Schedule FT-
NN, dated October 17, 1995, between PSNC and CNG
Transmission Corporation. (File No. 1-11429, 10-Q--June 30,
1996, Exhibit 10-A-28).
*10-A-29 - Firm Transportation Service Agreement under Rate Schedule FT,
dated January 19, 1996, between PSNC and Texas Gas
Transmission Corporation. (File No. 1-11429, 10-Q--June 30,
1996, Exhibit 10-A-29).
60
<PAGE>
Exhibit
Number
*10-A-30 - Firm Transportation Service Agreement under Rate Schedule FT-1,
dated October 30, 1995, between PSNC and Texas Eastern
Transmission Corporation. (File No. 1-11429, 10-Q--June 30,
1996, Exhibit 10-A-30).
*10-A-31 - Interruptible Transportation Service Agreement under Rate
Schedule IT, dated January 23, 1996, between PSNC and
Transcontinental Gas Pipe Line Corporation. (File No. 1-11429, 10-
Q--June 30, 1996, Exhibit 10-A-31).
*10-A-32 - Firm Transportation Agreement dated November 1, 1995, between
PSNC and Transcontinental Gas Pipe Line Corporation. (File No.
1-11429, 10-Q--December 31, 1996, Exhibit 10-A-32).
*10-A-33 - Amended and Restated Natural Gas Sales Agreement between PSNC
and Transco Energy Marketing Company dated November 1, 1990.
(File No. 1-11429, 10-Q--June 30, 1997, Exhibit 10-A-33).
*10-A-33.1 - Amendment of Amended and Restated Natural Gas Sales Agreement
between PSNC and Transco Energy Marketing Company dated
November 1, 1990. (File No. 1-11429, 10-Q--June 30, 1997, Exhibit
10-A-33.1).
*10-A-34 - Firm Transportation Service Agreement under Rate Schedule FT, dated
August 1, 1991, between PSNC and Transcontinental Gas Pipe Line
Corporation. (File No. 1-11429, 10-Q--June 30, 1997, Exhibit 10-A-
34).
*10-A-35 - Firm Storage Service Agreement under Rate Schedule FSS, dated
November 7, 1995, between PSNC and Columbia Gas Transmission
Corporation. (File No. 1-11429, 10-Q--June 30, 1997, Exhibit 10-A-
35).
*10-A-36 - Storage Service Transportation Agreement under Rate Schedule SST,
dated November 7, 1995, between PSNC and Columbia Gas
Transmission Corporation. (File No. 1-11429, 10-Q--June 30, 1997,
Exhibit 10-A-36).
*10-A-37 - Interruptible Transportation Service Agreement under Rate Schedule
ITS, dated March 31, 1997, between PSNC and Columbia Transmission
Corporation. (File No. 1-11429, 10-Q--June 30, 1997, Exhibit 10-A-
37).
*10-A-38 - Gas Sales Agreement (Southern Expansion) dated November 1, 1990
between PSNC and Transco Energy Marketing Company. (File No.
1-11429, 10-Q--June 30, 1997, Exhibit 10-A-38).
61
<PAGE>
Exhibit
Number
*10-B-4 - Liquefied Natural Gas Storage Service Agreement under Rate Schedule
LG-A, dated August 5, 1974, between PSNC and Transcontinental Gas
Pipe Line Corporation. (Registration No. 2-53708, Exhibit 5.6).
10-B-4.1 - Amendment dated May 16, 1996 to the Liquefied Natural Gas
Storage Service Agreement under Rate Schedule LG-A, between
PSNC and Transcontinental Gas Pipe Line Corporation.
*10-B-5 - Eminence Storage Service Agreement under Rate Schedule ESS, dated
November 1, 1993, and Amendment, dated December 1, 1993,
between PSNC and Transcontinental Gas Pipe Line Corporation. (File
No. 0-1218, 10-K--1993, Exhibit 10-B-5).
*10-B-6 - Washington Storage Service Agreement under Rate Schedule WSS,
dated August 1, 1991, between PSNC and Transcontinental Gas Pipe
Line Corporation. (File No. 0-1218, 10-Q--March 31, 1994, Exhibit
10-B-6).
*10-B-7 - Amendment dated December 1, 1994 to the Eminence Storage Service
Agreement under Rate Schedule ESS, between PSNC and
Transcontinental Gas Pipe Line Corporation. (File No. 1-11429,
10-Q--December 31, 1996, Exhibit 10-B-7).
*10-B-8 - General Storage Service Agreement under Rate Schedule GSS, dated
July 1, 1996, between PSNC and Transcontinental Gas Pipe Line
Corporation. (File No. 1-11429, 10-Q--December 31, 1996, Exhibit
10-B-8).
*10-C-2 - 1992 Nonqualified Stock Option Plan. (Registration No. 33-48909,
Exhibit 4).
*10-C-3 - 1997 Nonqualified Stock Option Plan. (Registration No. 333-34845).
*10-D-3 - Construction, Operating and Management Agreement by and between
Public Service Company of North Carolina, Inc. and Cardinal
Pipeline Company, LLC, dated March 23, 1994. (File No. 0-1218,
10-Q--March 31, 1994, Exhibit 10-D-3).
*10-D-4 - Construction, Operation and Maintenance Agreement by and between
Pine Needle Operating Company and Pine Needle LNG Company, LLC
dated August 8, 1995. (File No. 1-11429, 10-Q--December 31, 1996,
Exhibit 10-D-4).
*10-D-5 - Operating Agreement of Pine Needle LNG Company, LLC dated August
8, 1995. (File No. 1-11429, 10-Q--December 31, 1996, Exhibit
10-D-5).
62
<PAGE>
*10-D-5.1 - Amendment to Operating Agreement of Pine Needle LNG Company, LLC
dated October 1, 1995. (File No. 1-11429, 10-Q--December 31, 1996,
Exhibit 10-D-5.1).
10-D-6 - Service Agreement under Rate Schedule LNG-1 between Pine Needle
LNG Company, LLC and Public Service Company of North Carolina,
Inc. dated January 29, 1997.
*10-E - Underwriting Agreement, dated January 10, 1996, between PSNC
and Morgan Stanley & Co. Incorporated. (File No. 1-11429, 10-Q--
December 31, 1995, Exhibit 10-E).
*10-F - Form of Severance Agreement between the Company and its Executive
Officers. (File No. 1-11429, 10-Q--June 1997, Exhibit 10-F).
11 - Statement re computation of per share earnings.
*19 - Letter regarding change in method of accounting for the commodity
cost of gas purchased and delivered to customers but not billed and
recorded as revenue during the current period. (File No. 0-1218,
10-Q--March 31, 1981, Exhibit 19).
21 - Subsidiaries of Registrant.
23 - Consent of Independent Public Accountants. (Set forth on page 50
of this annual report).
27 - Financial Data Schedule.
63
<PAGE>
EXHIBIT 11
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED
AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
Earnings available for common $26,346,553 $23,898,218 $21,421,227
----------- ----------- -----------
Average common shares outstanding 19,549,656 18,995,035 18,509,049
Additional dilutive effect of
outstanding options (as determined
by the application of the treasury
stock method) 101,829 72,358 54,281
----------- ----------- -----------
Average common shares outstanding as
adjusted 19,651,485 19,067,393 18,563,330
----------- ----------- -----------
Earnings per share, as adjusted $1.34 $1.25 $1.15
===== ===== =====
This calculation is submitted in accordance with Regulation S-K item 601(b)(11)
although not required by footnote 2 to paragraph 14 of APB Opinion No. 15
because it results in dilution of less than 3%.
64
<PAGE>
EXHIBIT 21
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED
SUBSIDIARIES OF REGISTRANT (1)
Cardinal Pipeline Company, LLC (2)
Cardinal Extension Company, LLC (3)
Clean Energy Enterprises, Inc.
PSNC Blue Ridge Corporation
PSNC Cardinal Pipeline Company
PSNC Production Corporation
Pine Needle LNG Company LLC (4)
Sonat Public Service Company L.L.C. (5)
(1) The above subsidiaries are incorporated or organized
in the State of North Carolina, with the exception of
Sonat Public Service Company L.L.C., which is a
Delaware LLC. PSNC Exploration Corporation was
dissolved August 1996. PSNC Propane Corporation was
dissolved September 1997.
(2) 64% ownership by PSNC.
(3) Estimated 33% ownership by PSNC Cardinal Pipeline
Company at end of construction.
(4) 17% ownership by PSNC Blue Ridge Corporation.
(5) 50% ownership by PSNC Production Corporation.
65
<PAGE>
Exhibit 10-B-4.1
AMENDMENT TO SERVICE AGREEMENT
THIS AMENDMENT ("Amendment") is entered into this l5 day of May, 1996, by and
between TRANSCONTINENTAL GAS PIPE LINE CORPORATION, a Delaware corporation,
hereinafter referred to as "Seller", first party, and PUBLIC SERVICE COMPANY OF
NORTH CAROLINA, INC., a North Carolina Corporation, hereinafter referred to as
"Buyer", second party.
WITNESSETH:
WHEREAS, Seller and Buyer are parties to that certain Service Agreement, dated
August 5, 1974, under Seller's Rate Schedule LG-A ("Service Agreement") pursuant
to which Seller provides liquefied natural gas storage service for Buyer up to a
total volume of 25,000 Mcf of natural gas per day which is Buyer's Liquefaction
Capacity Volume; and
WHEREAS, Seller and Buyer now desire to extend the primary term of the Service
Agreement.
NOW THEREFORE, Seller and Buyer hereby agree to amend the Service Agreement as
follows:
1. Article IV of the Service Agreement is hereby deleted in its entirety and
replaced by the following:
ARTICLE IV
TERM OF AGREEMENT
This agreement shall be effective as of November 1, 1974 and shall remain in
force and effect until 8:00 a.m. Eastern Standard Time October 31, 2016, and
thereafter until terminated by Seller or Buyer upon at least one hundred eighty
(180) days prior written notice; provided, however, this agreement shall
terminate immediately and, subject to the receipt of necessary authorizations,
if any, Seller may discontinue service hereunder if (a) Buyer, in Seller's
reasonable judgement fails to demonstrate creditworthiness, and (b) Buyer fails
to provide adequate security in accordance with Section 32 of the General Terms
and Conditions of Seller's Volume No 1 Tariff."
2. This Amendment shall be effective as of the date first above written.
3. Except as herein amended, the Service Agreement shall remain in full force
and effect pursuant to the terms thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be signed
by their respective officers or representatives thereunto duly authorized.
TRANSCONTINENTAL GAS PIPE PUBLIC SERVICE COMPANY OF
LINE CORPORATION ("Seller") NORTH CAROLINA, INC. ("Buyer")
By: s/Frank J. Ferazzi By: s/Franklin H. Yoho
Vice President Senior Vice President-
Customer Service Marketing & Gas Supply
66
<PAGE>
Exhibit 10-D-6
SERVICE AGREEMENT
between
PINE NEEDLE LNG COMPANY, LLC
and
PUBLIC SERVICE COMPANY OF NORTH CAROLINA
67
January 29, 1997
<PAGE>
SERVICE AGREEMENT
THIS AGREEMENT entered into this 29 day of January, 1997, by and between PINE
NEEDLE LNG COMPANY, LLC, a North Carolina limited liability company, hereinafter
referred to as "Pine Needle," and PUBLIC SERVICE COMPANY OF NORTH CAROLINA,
hereinafter referred to as "Customer,"
WITNESSETH
WHEREAS, by order issued November 27, 1996, in Docket No. CP96-52, the Federal
Energy Regulatory Commission granted a certificate of public convenience and
necessity to Pine Needle to construct and operate a liquefied natural gas
storage facility in Guilford County, North Carolina; and
WHEREAS, Pine Needle's LNG storage facility, which is proposed to be in service
by May 1, 1999, will have a total storage capacity of 4 Bcf of gas, with the
ability to vaporize 400 MMcf/day and to liquefy at a net rate of 20 MMcf/day;
and
WHEREAS, Customer has requested firm storage service at Pine Needle's LNG
storage facility under Pine Needle's Rate Schedule LNG-1 and has executed with
Pine Needle a Precedent Agreement dated September 22, 1995 for such service; and
WHEREAS, Pine Needle is willing to provide the requested firm storage service
for Customer pursuant to the terms and provisions of this Service Agreement,
Rate Schedule LNG-1, and the Precedent Agreement.
NOW, THEREFORE, Pine Needle and Customer agree as follows:
ARTICLE I
SERVICE TO BE RENDERED
Subject to the terms and provisions of this agreement and of Pine Needle's Rate
Schedule LNG-1, as amended from time to time, Pine Needle agrees to liquefy
natural gas; store such gas in liquefied form; and vaporize and deliver such gas
to Customer or for Customer's account as follows:
To withdraw from storage and vaporize the gas stored in liquefied form by Pine
Needle for Customer's account up to a maximum quantity on any day of the
dekatherm equivalent of 100,000 Mcf, which quantity shall be Customer's
Vaporization Quantity. 1/
To liquefy natural gas for Customer up to a maximum quantity on any day of the
dekatherm,equivalent of 5,000 Mcf, which shall be Customer's Liquefaction
Quantity. 1/
To store in liquefied form for Customer's account up to a total quantity of the
dekatherm equivalent of 1,000,000 Mcf, which quantity shall be Customer's
Storage Capacity.
1/ In addition to these quantities, Pine Needle shall retain quantities of gas
for fuel and gas otherwise used or lost and unaccounted for pursuant to Rate
Schedule LNG-1.
68
<PAGE>
SERVICE AGREEMENT (CONTINUED)
ARTICLE ll
POINT OF RECEIPT AND DELIVERY
1. The Point of Receipt for all gas tendered to Pine Needle for liquefaction
hereunder shall be at the following point(s):
The interconnection between Pine Needle's 10-inch inlet pipeline and
Transcontinental Gas Pipe Line Corporation's ("Transco") mainline
system at milepost 1356.95 on Transco's mainline in Guilford County,
North Carolina.
2. The Point of Delivery for all gas delivered by Pine Needle to Customer or
for the account of Customer shall be at the following point(s):
The interconnection between Pine Needle's 24-inch outlet pipeline and
Transco's mainline system at milepost 1356.95 on Transco's mainline in
Guilford County, North Carolina.
ARTICLE lll
TERM OF AGREEMENT
This agreement shall be effective as of the date that Pine Needle's
facilities necessary to provide service hereunder to Customer have been
constructed and are ready for liquefaction of gas, as determined by Pine
Needle in its sole opinion, hereinafter referred to as the "In-Service
Date," and shall remain in force and effect for a primary term of twenty
(20) years from and after the In-Service Date, and year to year
thereafter, subject to termination by either party upon two (2) years
prior written notice to the other.
ARTICLE IV
RATE SCHEDULE AND PRICE
1. Customer shall pay Pine Needle for service rendered hereunder in
accordance with Pine Needle's Rate Schedule LNG-1 and the applicable
provisions of the General Terms and Conditions of Pine Needle's FERC Gas Tariff
as filed with the Federal Energy Regulatory Commission, and as the same
may be amended or superseded from time to time. Such rate schedule and
General Terms and Conditions are bv this reference made a part hereof.
2. Pine Needle shall have the unilateral right to propose, file and make
effective with the Federal Energy Regulatory Commission, or other regulatory
authority having jurisdiction, changes and revisions to the rates and rate
design proposed pursuant to Section 4 of the Natural Gas Act, or to propose,
file and make effective superseding rates or rate schedules, for the purposes of
changing the rates, charges, rate design, terms and conditions of service and
other provisions thereof effective as to Customer; provided however that the (i)
firm character of service, (ii) term of agreement (as set forth in Article lll
above), (iii) quantities, and (iv) points of receipt and delivery shall not be
subject to unilateral change under this paragraph. Customer shall have the right
to file with the Commission or other regulatory authority in opposition to any
such filings or proposals by Pine Needle.
69
<PAGE>
SERVICE AGREEMENT (CONTINUED)
ARTICLE V
MISCELLANEOUS
1. The subject headings of the Articles of this agreement are inserted for
the purpose of convenient reference and are not intended to be a part of
this agreement nor to be considered in the interpretation of the same.
2. This agreement supersedes and cancels as of the effective date hereof the
following contracts between the parties hereto: None.
3. No waiver by either party of any one or more defaults by the other in the
performance of any provisions of this agreement shall operate or be construed as
a waiver of any future default or defaults, whether of alike or different
character.
4. This agreement shall be interpreted, performed and enforced in accordance
with the laws of the State of North Carolina.
5. This agreement shall be binding upon, and inure to the benefit of the
parties hereto and their respective successors and assigns.
6. Notices to either party shall be in writing and shall be considered as
duly delivered when mailed to the other party at the following address:
(a) If to Pine Needle:
Pine Needle LNG Company, LLC
c/o Pine Needle Operating Company
P.O.Box 1396
(2800 Post Oak Boulevard 77056)
Houston, Texas 77251-1396
Attention: Director - Customer Services and Scheduling
(b) If to Customer:
Public Service Company of North Carolina
P.O. Box 1398
(400 Cox Road 28054)
Gastonia, North Carolina 28053-1398
Attention: Vice President, Marketing & Gas Supply
Such addresses may be changed from time to time by mailing appropriate notice
thereof to the other party.
70
<PAGE>
SERVICE AGREEMENT (CONTINUED)
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
signed by their respective officers or representatives thereunto duly
authorized.
PINE NEEDLE LNG COMPANY, LLC
by its agent
PINE NEEDLE OPERATING COMPANY
By: s/Frank J. Ferazzi
Vice President
PUBLIC SERVICE COMPANY OF NORTH CAROLINA
By: s/Franklin H. Yoho
71
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 481,002
<OTHER-PROPERTY-AND-INVEST> 642
<TOTAL-CURRENT-ASSETS> 88,422
<TOTAL-DEFERRED-CHARGES> 15,076
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 585,142
<COMMON> 19,771
<CAPITAL-SURPLUS-PAID-IN> 123,474
<RETAINED-EARNINGS> 64,123
<TOTAL-COMMON-STOCKHOLDERS-EQ> 207,368
<PAGE>
0
0
<LONG-TERM-DEBT-NET> 180,850
<SHORT-TERM-NOTES> 38,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 9,300
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 149,623
<TOT-CAPITALIZATION-AND-LIAB> 585,141
<GROSS-OPERATING-REVENUE> 337,930
<INCOME-TAX-EXPENSE> 15,711
<OTHER-OPERATING-EXPENSES> 100,500
<TOTAL-OPERATING-EXPENSES> 116,211
<OPERATING-INCOME-LOSS> 39,715
<OTHER-INCOME-NET> 3,886
<INCOME-BEFORE-INTEREST-EXPEN> 43,601
<TOTAL-INTEREST-EXPENSE> 17,254
<NET-INCOME> 26,347
0
<EARNINGS-AVAILABLE-FOR-COMM> 26,347
<COMMON-STOCK-DIVIDENDS> 17,301
<TOTAL-INTEREST-ON-BONDS> 15,139
<CASH-FLOW-OPERATIONS> 44,137
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.34
</TABLE>
