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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, 1998
( ) 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. ( X )
----------------------
Estimated aggregate market value of the voting stock held by nonaffiliates of
the registrant at November 30, 1998 . . . . . . . . . . . . . . $495,217,957
---------------------
Number of shares of Common Stock, $1 par value, outstanding at November 30, 1998
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,368,862
Documents incorporated by reference:
Portions of the proxy statement dated December 16, 1998, relating to
the January 29, 1999 annual meeting of shareholders, are incorporated by
reference into Part III of this annual report.
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<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, 1998
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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..........................29
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................................52
PART III.
10. Directors and Executive Officers of the Registrant...................52
11. Executive Compensation...............................................52
12. Security Ownership of Certain Beneficial Owners
and Management.....................................................53
13. Certain Relationships and Related Transactions.......................53
PART IV.
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................................53
Signatures...........................................................60
Exhibit Index........................................................61
1
<PAGE>
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 334,000 residential, commercial and industrial
customers in North Carolina. PSNC 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 1998, 1997 and 1996, 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, 1998 were as follows (in thousands):
1998 1997 1996
-------- -------- --------
Natural Gas Distribution(1) $330,672 $337,930 $308,882
Merchandise and Jobbing(2) 10,096 10,053 9,444
Gas Marketing/Other
Activities(1) 35,604 19,938 20,179
-------- -------- --------
Total $376,372 $367,921 $338,505
======== ======== ========
(1) See "Results of Operations" on page 16 of this annual
report.
(2) Primarily the sale and installation of gas appliances.
2
<PAGE>
Service Territory
PSNC's 31-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 52% of its
throughput (total gas sales and transportation) in fiscal 1998. 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
customers and 33% of 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 2.5 million people reside in PSNC's franchised territory. During
the past three fiscal years, PSNC has added approximately 45,000 new customers
to its natural gas transmission and distribution systems. Of those customers,
39,900 were residential, 5,000 were commercial, and 100 were industrial. The
resulting 5.2% annual growth rate is nearly three times the national industry
average. PSNC's compounded annual customer growth rate since fiscal 1988 has
been 5.1%. 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 $65.3 million in fiscal 1998, $60.3 million in fiscal 1997 and
$60.4 million in fiscal 1996, approximately $48.3 million, $46.5 million and
$45.6 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.
3
<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 245 at September 30, 1995 to 304
at September 30, 1998. At November 30, 1998, PSNC had 320 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 PSNC.
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. Furthermore, management believes that Order No. 636
and the Transco settlement order 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 37%, 36% and 26% of
PSNC's total throughput for fiscal 1998, 1997 and 1996, 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
4
<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
70,000 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 21% and 33%, respectively, of PSNC's supply
in fiscal 1998 and 1997.
Daily Contract
Deliver- Annual Expiration
Type of Contract ability Quantity Date
- ------------------------- -------- ---------- ----------
Firm Sales Service (1) 33,542 12,242,830 3/31/02
Firm Sales Service (1) 41,928 15,303,720 3/31/02
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 3/16/02
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)
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(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.
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) to construct and operate 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. In 1995, PSNC, Piedmont, Transco, and North Carolina
Natural Gas Corporation (NCNG) formed Cardinal Extension Company, LLC (Cardinal
Extension) to purchase and extend the Cardinal pipeline. As proposed, the
pipeline will be extended 67.5 miles from the existing termination point of
Cardinal Pipeline at Haw River, North Carolina, to a point southeast of Raleigh
and will provide 140 million cubic feet per day (mmcf/day) of additional firm
capacity (100 mmcf/day for PSNC and 40 mmcf/day for NCNG). The extension is
estimated to cost $75 million. Through their respective subsidiaries, PSNC will
own approximately 33%, Piedmont will own approximately 17%, Transco will own
5
<PAGE>
approximately 45% and NCNG will own approximately 5% of Cardinal Extension.
Construction began in November 1998, and 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.
Daily Contract
Deliver- Expiration
Storage Facility ability Capacity Date
- ------------------------ -------- --------- ----------
CNG General Storage (1) 39,669 2,476,000 3/31/16
Transco General Storage 33,218 1,923,485 3/31/13
Transco Washington
Storage (2) 32,870 2,794,500 3/31/00
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 4/15/06
PSNC LNG Storage (3) 100,000 1,040,000 N/A
Columbia Gas Transmission (4) 23,556 2,120,040 10/31/13
(1) 700,000 of this capacity expires 3/31/08; 696,000 expires
3/31/13; and 1,080,000 expires 3/31/16.
(2) No peak day delivery assured by contract.
(3) Amounts shown represent maximum peak day capacity.
(4) 50% of this capacity expires 10/31/12; balance expires 10/31/13.
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 to own
and operate a liquefied natural gas storage facility. The facility 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 mmcf/day. PSNC's subsidiary, PSNC Blue Ridge
Corporation, will own 17% of Pine Needle. PSNC has contracted to use 25% of the
facility's gas storage capacity and withdrawal capabilities. Construction began
in 1997 at an estimated cost of $107 million. 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
6
<PAGE>
strongest for sales to large-volume commercial and industrial customers having
alternate fuel capability but exists for all other customer classes as well.
During fiscal 1998, approximately 37% 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 filed in April 1998, the NCUC granted PSNC an
increase in annual revenue of $12,400,000 effective as of November 1, 1998. The
order allows PSNC an opportunity to earn a 9.82% overall return on its net
utility investment. Parties to the rate case have 30 days from the date of the
order to file a notice of appeal and exceptions. On November 30, 1998, the NCUC
granted a motion filed by the Carolina Utility Customers Association, Inc.
(CUCA), a party to PSNC's general rate case, to extend the time for filing a
notice of appeal and exceptions until December 21, 1998. On December 18, 1998,
CUCA formally appealed the general rate case order by filing a notice of appeal
and exceptions with the NCUC. Management has not had an opportunity to review
this notice and exceptions.
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
undercollection or overcollection 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
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<PAGE>
transportation rates. These rates allow PSNC to earn the same margin on gas
delivered to customers regardless of whether the gas is sold or only transported
by PSNC to the customer.
PSNC's rates are established using a base cost of gas approved by the
NCUC 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 transporters.
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 each month for
large commercial and industrial customers on the basis of market prices for
natural gas. This procedure allows PSNC to better manage its deferred gas costs
balance by ensuring that the amount paid for natural gas to serve these
customers approximates the amount collected from them. 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. Seven 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. On April 22, 1997, the NCUC approved PSNC's application to
use expansion funds to extend service to western Haywood county, including
Waynesville, Clyde and Lake Junaluska. This project was completed in July 1998.
On July 6, 1998, PSNC filed an application with the NCUC to extend natural gas
service into Alexander County. Most of Alexander County lies within PSNC's
franchised service territory and is not currently provided natural gas service.
An order is expected during the first quarter of calendar 1999.
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. 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.
Approximately $4,000,000 of these costs have been incurred to date. The NCUC
allowed recovery of a majority of the unamortized Year 2000 costs in the general
rate case order issued on October 30, 1998.
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Franchises
Effective July 15, 1996, the NCUC granted PSNC certificates of public
convenience and necessity to serve seven additional counties in western North
Carolina. PSNC's certificated service territory now consists of all or parts of
31 counties in North Carolina. 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.
On December 8, 1998, the NCUC transferred the franchise for Macon
County to the City of Toccoa, Georgia, and the Municipal Gas Authority of
Georgia. On March 9, 1998, the NCUC approved a financing plan and authorized the
transfer of the franchise for Warren County to Frontier Energy, LLC. PSNC
voluntarily relinquished these franchises and supports efforts to provide
natural gas service to rural areas.
PSNC has nonexclusive franchises from 65 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 1999 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), each owning
50% of the new company. PSNC Production transferred its gas brokering activities
to Sonat Public Service, which now serves approximately 500 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.
Environmental Matters
PSNC is subject to regulation with regard to environmental matters by
various federal, state and local authorities. PSNC owns, or has owned, all or
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 consolidated financial statements for further details regarding this and
other environmental matters related to PSNC.
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Employees
At November 30, 1998, PSNC had 1,047 full-time employees compared with
1,125 at November 30, 1997. 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 300 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 1998, the
quarters ended December 31 and March 31 together accounted for approximately 75%
of PSNC's natural gas sales revenues and volumes. 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.
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<TABLE>
<CAPTION>
OPERATING STATISTICS
For the Fiscal Years Ended September 30,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES - GAS:
Residential Sales $183,813,279 $183,391,700 $162,967,260 $135,846,213 $137,986,651
Commercial Sales 78,956,618 84,120,824 74,444,770 57,783,940 67,679,342
Industrial Sales 39,737,329 46,147,690 52,460,676 31,483,864 49,970,780
Gas Transported for Others 26,802,284 22,695,985 17,737,092 21,746,901 17,031,426
Miscellaneous 1,362,259 1,573,982 1,272,281 1,032,096 1,036,857
------------ ------------ ------------ ------------ ------------
Total $330,671,770 $337,930,181 $308,882,079 $247,893,014 $273,705,056
============ ============ ============ ============ ============
GAS SUPPLY (DT):
Natural Gas Purchased 46,207,910 46,544,234 51,841,058 37,790,467 47,390,194
Less Increase (Decrease) in Storage 1,686,462 2,055,564 471,720 (257,091) 1,466,236
Less Unbilled, Unaccounted For,
Company Use and Other 2,192,820 2,519,194 2,518,774 1,979,901 2,156,027
---------- ---------- ---------- ---------- ----------
Total Gas Sold 42,328,628 41,969,476 48,850,564 36,067,657 43,767,931
========== ========== ========== ========== ==========
GAS DELIVERED (DT):
Residential Sales 20,795,108 19,760,537 22,398,288 17,566,948 18,781,482
Commercial Sales 12,324,159 12,769,424 13,925,422 10,827,444 12,261,918
Industrial Sales 9,209,361 9,439,515 12,526,854 7,673,265 12,724,531
Gas Transported for Others 25,110,949 23,143,824 16,795,268 22,551,006 15,120,391
---------- ---------- ---------- ---------- ----------
Total 67,439,577 65,113,300 65,645,832 58,618,663 58,888,322
========== ========== ========== ========== ==========
NUMBER OF CUSTOMERS (AT YEAR END):
Residential 278,760 264,129 248,940 246,877 234,957
Commercial/small industrial 40,538 39,349 38,624 (2) 29,497 27,806
Large commercial/industrial 2,433 2,419 (3) 1,677 389 376
------- ------- ------- ------- -------
Total 321,731 305,897 289,241 276,763 263,139
======= ======= ======= ======= =======
PER RESIDENTIAL CUSTOMER:
Average Gas Used (DT) 74.60 74.82 89.98 71.16 79.94
Average Revenue $659.42 $694.36 $654.67 $550.28 $587.31
Revenue per DT $8.84 $9.28 $7.28 $7.73 $7.35
ANNUAL HEATING DEGREE DAYS (1):
Actual 3,366 3,253 3,856 3,030 3,415
Normal 3,384 3,384 3,402 3,384 3,384
Percent of Normal 99% 96% 113% 90% 101%
PEAK DAY DELIVERY (DT) 416,198 406,742 433,045 403,581 420,597
</TABLE>
(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.
11
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Date Elected
Name and Age (1) Title (1) An Officer
<S> <C> <C>
Charles E. Zeigler, Jr. Chairman, President and 11/01/86
Age - 52 Chief Executive Officer
Jack G. Mason Vice President - Finance 03/01/95
Age - 41
Boyce C. Morrow, Jr. Vice President - 03/01/90
Age - 54 External Affairs
Jerry W. Richardson Vice President - Engineering 02/23/82
Age - 53 and System Logistics
Robert D. Voigt Vice President - 09/01/81
Age - 47 Organizational Development
Franklin H. Yoho Vice President - Marketing 02/01/91
Age - 39 and Gas Supply
Sharon D. Boone Controller and 03/01/95
Age - 45 Assistant Secretary
J. Paul Douglas Corporate Counsel and 12/21/94
Age - 51 Secretary
</TABLE>
(1) As of November 30, 1998.
The present terms of all officers extend to January 29, 1999, 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 J. Paul Douglas, Jack G.
Mason and Sharon D. Boone.
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 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.
Jack G. Mason was employed by PSNC on July 5, 1979. During the past
five years, prior to serving as Vice President - Finance, Mr. Mason held the
positions of Vice President-Treasurer and Chief Financial Officer, Director -
Financial Projects and Assistant Treasurer, Assistant Treasurer, and Assistant
Treasurer and Assistant Controller.
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.
12
<PAGE>
Item 2. Properties
PSNC owns 750 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 6,727 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 64.5% of Cardinal Pipeline Company, LLC, which owns a 37.5 mile
transmission pipeline, as discussed more fully in Note 2 to the consolidated
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 and engineering, 11 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.
13
<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, all or
portions of sites at which manufactured gas plants were formerly operated
and is cooperating with the North Carolina Department of Environment 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, 1998.
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, 1998, there were
approximately 12,700 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
1998 and 1997.
Cash
Quarter Dividends
Ended High Low Declared
Fiscal
1998
Sep 30 $23 7/16 $23 1/16 $.2400
Jun 30 22 1/8 21 3/4 .2400
Mar 31 20 1/2 20 1/4 .2300
Dec 31 23 5/16 22 7/8 .2300
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
On November 18, 1998, the Board of Directors declared a regular
quarterly cash dividend on PSNC's common stock of 24(cent) per share, payable on
January 1, 1999 to shareholders of record on December 10, 1998. PSNC has paid
consecutive quarterly cash dividends on its common stock since 1958, and has
increased cash dividends paid to shareholders each calendar year since 1970.
14
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
For the Fiscal Years Ended September 30, 1998 1997 1996 1995 1994
- ---------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues (000's)........................ $330,672 $337,930 $308,882 $247,893 $273,705
Gross margin (000's).............................. $156,371 $155,926 $140,744 $130,828 $118,327
Net income (000's)................................ $ 24,837 $ 26,347 $ 23,898 $ 21,421 $ 19,976 (2)
Basic earnings per average common share .......... $ 1.24 $ 1.35 $ 1.26 $ 1.16 $ 1.17 (2)
Diluted earnings per average common share......... $ 1.23 $ 1.34 $ 1.25 $ 1.15 $ 1.17 (2)
Cash dividends declared per common share ......... $ .94 $ .90 $ .865 $ .835 $ .805
Average number of common shares
outstanding (000's) ............................. 20,103 19,550 18,995 18,509 17,012
Capital expenditures (000's)...................... $ 65,329 $ 60,310 $ 60,428 $ 61,119 $ 45,469
Total assets (000's).............................. $618,753 $585,142 $524,889 $456,995 $427,939
Common equity (000's)............................. $222,839 $207,368 $188,635 $173,372 $160,555
Long-term debt (000's) (1)........................ $171,550 $180,850 $140,150 $100,700 $113,680
</TABLE>
(1) Excludes current maturities.
(2) Includes $1,511,000 or $0.09 per share related to sale of propane assets.
15
<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, 1998 1997 1996
- ---------------------------------------- -------- -------- --------
(Amounts in thousands except
degree day and customer data)
Gross margin $156,371 $155,926 $140,744
Less - franchise taxes 10,589 10,819 9,885
-------- -------- --------
Net margin $145,782 $145,107 $130,859
======== ======== ========
Total throughput (DT):
Residential 20,795 19,760 22,398
Commercial/small industrial 12,618 12,373 14,307
Large commercial/industrial 34,027 32,980 28,941
------ ------ ------
67,440 65,113 65,646
====== ====== ======
System average degree days: (1)
Actual 3,366 3,253 3,856
Normal 3,384 3,384 3,402
Percent colder (warmer) than normal (1%) (4%) 13%
Weather normalization adjustment
income (refund), net of
franchise taxes $ (113) $ 5,960 $(8,733)
Customers at end of period: (2)
Residential 278,760 264,129 248,940
Commercial/small industrial 40,538 39,349 38,624
Large commercial/industrial 2,433 2,419 1,677
------- ------- -------
321,731 305,897 289,241
======= ======= =======
(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 Public Service Company
of North Carolina, Incorporated's (PSNC) utility operating results. This is
because certain large-volume
16
<PAGE>
customers purchase gas directly from gas producers or other gas suppliers and
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 that is equivalent to the margin that
PSNC would earn if it purchased and resold gas to these large-volume customers.
Also, various temporary collection and refund mechanisms affect both operating
revenues and cost of gas equally.
Fiscal 1998
o Net margin increased by $675,000 in fiscal 1998 as compared to fiscal 1997.
The volumes of gas delivered to residential and commercial/small industrial
customers increased 5% and 2%, respectively, due primarily to an increased
customer base and to weather that was 3% colder than the prior fiscal year. Off-
setting these increases was a decrease in consumption per degree day by these
customers. Natural gas usage by residential and small commercial customers,
excluding the impact of weather, decreased 5% and 3%, respectively, as compared
to the same period last year. Throughput for lower-margin large commercial and
industrial customers increased 3% as compared to fiscal 1997. This reflects
decreased weather-related service curtailments to these customers during the
year, along with an increase in the customer base. Net throughput-related
increases for all customer classes totaled approximately $407,000, including a
reduction of $6,073,000 related to the operation of the weather normalization
adjustment (WNA) mechanism. The WNA accounts only for differences in consumption
caused by temperature variations from normal. It does not adjust PSNC's earnings
for any non-temperature related changes in consumption. Also impacting margin
growth was the effect of warmer weather, as compared to last year, during the
months of October and May which are not included in the WNA mechanism period.
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 fiscal
1996. Throughput for lower-margin large commercial and industrial 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
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.
17
<PAGE>
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
large commercial and industrial 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 tax 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 consolidated 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.
Operating Expenses
Other operating expenses decreased approximately 1% during fiscal 1998.
This decrease includes a reduction in net expenses related to the nonrecurring
charges associated with the voluntary early retirement program incurred during
the first quarter of fiscal 1997. On a straight comparison basis without this
reduction, other operating expenses increased 1% as compared to fiscal 1997.
Health insurance costs, outside consulting expenses and expenses related to the
adoption of a retirement plan for the Board of Directors contributed to this
increase. The outside consulting services are associated with PSNC's Year 2000
compliance program, discussed later. Partially offsetting the increases were
lower uncollectible provision expenses, lower liquefied natural gas (LNG)
facility power usage and no incentive compensation costs recognized in fiscal
1998.
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 health insurance due to the
enrollment of all PSNC employees 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,
18
<PAGE>
which are based on revenues. These increases were partially offset by reduced
outside consulting expenses related to information systems and employee
benefits. Fiscal 1995 expenses were reduced by adjustments related to group life
and health 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%.
Maintenance expenses decreased 13% in fiscal 1998. This decrease
includes a decrease in net expenses related to the voluntary early retirement
program incurred during the first quarter of fiscal 1997. On a straight
comparison basis without the voluntary early retirement program expense,
maintenance expenses decreased 11%. This decrease is due primarily to lower
telecommunications expenses, lower LNG equipment replacement expenses and other
general operational improvements.
Maintenance expenses increased 17% in fiscal 1997 due primarily to
higher telecommunications expenses and salaries. Also contributing to the
increase were charges of $143,000 related to the voluntary early retirement
program. On a straight comparison basis without this expense, maintenance
expenses increased 14% as compared to fiscal 1996.
Maintenance expenses increased 20% in fiscal 1996 due to the $750,000
reversal in fiscal 1995 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. General taxes increased during fiscal 1998 reflecting an increase in
PSNC's property taxes, offset somewhat by lower franchise tax expense. The
increase during fiscal 1997 and 1996 was due to increased franchise tax expense,
reflecting an increase in revenues. Any increase or decrease in franchise tax
expense is offset by a corresponding amount in operating revenues.
Other Income (Deductions)
Other income (deductions) decreased $366,000 during fiscal 1998. This
is primarily the result of a $975,000 decrease in interest income compared to
fiscal 1997 on amounts due from customers through the operation of the Rider D
rate mechanism, defined later in Management's Discussion and Analysis. During
fiscal 1998, through an increment in its rates, PSNC collected previously
undercollected gas costs and was able to match its benchmark gas cost more
closely to market prices. This resulted in a lower Rider D receivable balance of
$12,860,000 at September 30, 1998. Partially offsetting the decrease in interest
income was a $673,000 increase in merchandise and jobbing income. This increase
reflects a decrease in expenses related to the voluntary early retirement
program incurred during the first quarter of fiscal 1997. On a straight
comparison basis without the voluntary early retirement program expense,
merchandise and jobbing operations increased by approximately $442,000. This
improvement
19
<PAGE>
continues to reflect management's emphasis on profitable merchandise and jobbing
activities.
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 is 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), an affiliate 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 cash received by PSNC
Production from Sonat Marketing was deferred, and during fiscal 1997, $816,000
of this deferred revenue was recognized as subsidiary income. With the formation
of Sonat Public Service, PSNC Production and Sonat Marketing split evenly PSNC's
25% share of net income from the earnings from secondary market transactions.
PSNC also realized a $205,000 improvement in merchandise and jobbing. This
improvement was reduced by approximately $231,000 related to the voluntary early
retirement program. Without this expense, merchandise and jobbing income 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 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 North Carolina Utilities
Commission (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
income.
Interest Deductions
Interest deductions for fiscal 1998 increased approximately $524,000
over fiscal 1997. This reflects the increase in interest expense on short-term
debt resulting from higher average short-term bank loans outstanding during the
period. Also contributing to the net increase is the December 1996 issuance of
$50,000,000 of long-term debt.
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 17, 1996 issuance of $50,000,000
of 7.45% Senior
20
<PAGE>
Debentures due 2026. Interest expense on short-term debt decreased $299,000 due
to lower average short-term bank loans outstanding during the period.
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 during the
period.
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 six 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, 1998, total
lines of credit with these banks range from a minimum of $39,000,000 to a
winter-period maximum of $85,000,000. At September 30, 1998, committed lines of
credit totaled $70,000,000 and uncommitted annual lines of credit totaled
$35,000,000. Lines of credit 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,
1998 and 1997, PSNC's total short-term bank loans outstanding were $70,500,000
and $38,000,000, respectively.
In December 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. In January 1996, PSNC sold $50,000,000 of
6.99% Senior Debentures due 2026 in a public offering. In December 1996, PSNC
sold $50,000,000 of 7.45% Senior Debentures due 2026 in a public offering. The
net proceeds of both issues were used to pay down a significant portion of the
then outstanding short-term bank debt. PSNC has not issued any long-term debt
since December 1996, resulting in an increase in short-term bank loans
outstanding. At September 30, 1998, $25,000,000 remained on the shelf
registration.
During September 1996, PSNC made the final additional payment allowed
on its 10% Senior Debentures due 2003 of $1,250,000.
PSNC also generates equity capital through its dividend reinvestment,
employee stock purchase and nonqualified stock option plans. During fiscal 1998,
1997 and 1996, the dividend reinvestment plan generated $6,799,000, $7,277,000
and $5,187,000, 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 can invest. The employee stock purchase plan generated $1,359,000,
$1,318,000 and $1,198,000, respectively, of additional equity capital. The
nonqualified stock option plans generated
21
<PAGE>
net equity capital of $1,639,000, $1,215,000 and $1,290,000 for the three fiscal
years, respectively.
The ratio of long-term debt to total capitalization was 43.5% at
September 30, 1998, 46.6% at September 30, 1997 and 42.6% at September 30, 1996.
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 1998, 1997 and 1996, construction expenditures were
$65,329,000, $60,310,000 and $60,428,000, respectively. For fiscal 1999, PSNC's
Board of Directors approved a budget of $45,000,000 for PSNC's ongoing
construction program. PSNC anticipates spending $45,000,000 to $50,000,000
annually on its construction program for the next several years.
As discussed more fully in Note 4 to the consolidated financial
statements, PSNC and its subsidiaries sponsor a noncontributory defined benefit
pension plan covering substantially all employees. During fiscal 1998 and 1997,
cash contributions were $4,213,000 and $3,306,000, respectively.
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.
Restricted cash and temporary investments and restricted supplier
refunds relate to refunds of $10,247,000 received from PSNC's pipeline
transporters that have not yet been deposited into PSNC's 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 April 22, 1997, the NCUC approved PSNC's application to use
expansion funds to extend service to western Haywood County, including
Waynesville, Clyde and Lake Junaluska. This project was completed in July 1998.
PSNC spent $5,653,000 on the project, of which $4,127,000 was reimbursed from
its expansion fund. On July 6, 1998, PSNC filed an application with the NCUC to
extend natural gas service into Alexander County. Most of Alexander County lies
within PSNC's franchised service territory and is not currently provided natural
gas service. The cost of the project is estimated to be $6,188,000. PSNC has
requested the NCUC to approve a $4,918,000 reimbursement from its expansion
fund. Hearings on this matter were held during November 1998. An order from the
NCUC is expected during the first quarter of calendar 1999.
Net accounts receivable decreased $5,781,000 as compared to September
30, 1997. This decrease was due primarily to reduced gas brokering and
transportation pooling activities and lower gas sales revenues.
22
<PAGE>
Stored gas inventories increased $3,515,000 as compared to September
30, 1997. This increase was due to additional quantities of natural gas stored
as a result of a warm winter in fiscal 1998.
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. The decrease in deferred gas costs at September 30, 1998 resulted
from PSNC's partial collection through rates of the balance at September 30,
1997. The large balance at September 30, 1997 was due to an unanticipated surge
in natural gas prices during the 1996-1997 winter period. PSNC's deferred gas
costs balances are approved by the NCUC in annual gas cost 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. Deferred gas costs at
September 30, 1998 and September 30, 1997 reflect undercollections from
customers. 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 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. This procedure allows PSNC to better manage its deferred
gas costs balance by ensuring that the amount paid for natural gas to serve
these customers approximates the amount collected from them. 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.
Other assets increased $2,133,000 primarily due to deferred charges
related to costs of a project to ensure that PSNC's computer operating systems
function properly in year 2000. These charges are being expensed over a
three-year period beginning September 1997 pursuant to an NCUC order dated April
29, 1997.
The decrease in accounts payable of $7,784,000 from September 30, 1997
is due to reduced secondary market activity and natural gas purchased at a lower
cost.
Accrued taxes decreased from September 30, 1997 primarily due to
reduced net income in fiscal 1998.
The decrease in other current liabilities from September 30, 1997 is
due to no cash incentive compensation being accrued in fiscal 1998.
23
<PAGE>
Deferred credits and other liabilities increased primarily due to
additional deferred income taxes of $7,088,000 and increased deferred
compensation due to the adoption of a Board of Directors' retirement plan. These
increases were partially offset by a decrease in accrued pension costs and a
reduction in the noncurrent portion of deferred revenue received from the
creation of Sonat Public Service.
As discussed more fully in Note 7 to the consolidated financial
statements, PSNC owns, or has owned, all or portions of six sites in North
Carolina on which manufactured gas plants (MGPs) were formerly operated.
Evaluations of these sites have revealed that residuals from MGPs are present or
suspected at several of the sites. The North Carolina Department of Environment
and Natural Resources (NCDENR) has recommended that no further action be taken
with respect to one 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 NCDENR to investigate the Durham, North
Carolina, site in accordance with standards and methods approved by NCDENR. At
September 30, 1998, PSNC had recorded a total liability and a corresponding
regulatory asset of the minimum amount of the range, or $3,705,000. Amounts
incurred to date are not material. Management intends to request recovery of
additional MGP clean-up costs not recovered from other potentially responsible
parties in future rate case filings, and believes that all costs deemed by the
NCUC to be prudently incurred will be recoverable in gas rates.
As discussed more fully in Note 2 to the consolidated 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. PSNC owns 64.5%
of the pipeline, which extends 37.5 miles to provide additional daily capacity
to PSNC's eastern service territory in and around the Durham and Raleigh areas.
In December 1995, PSNC, Piedmont, Transcontinental Gas Pipe Line Corporation
(Transco) and North Carolina Natural Gas Corporation (NCNG) formed Cardinal
Extension Company, LLC (Cardinal Extension) to purchase and extend the existing
Cardinal Pipeline. As proposed, the pipeline will be extended 67.5 miles from
the existing termination point of Cardinal Pipeline at Haw River, NC, 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 105-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 November
6, 1997, the NCUC issued an order approving the proposed project and the merger
of Cardinal Pipeline and Cardinal Extension. Construction began in November
1998, and the facilities are expected to be in service on or before November 1,
1999.
As discussed more fully in Note 2 to the consolidated 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
24
<PAGE>
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. Blue Ridge will make capital
contributions approximating $9,000,000 at the end of the construction period.
Year 2000 Readiness
The Year 2000 issue exists because many computer systems and
applications, including those with embedded chips in equipment or facilities,
use two digit date fields rather than four digit date fields to designate the
applicable year. As a result, these date-sensitive applications may not properly
recognize the year 2000 or years thereafter, or process data containing them,
potentially causing critical systems including, but not limited to, business and
operational systems to function improperly or not at all.
PSNC's overall goal is to address Year 2000 compliance requirements by
mid- 1999 and to continue developing and testing its contingency plan throughout
1999. PSNC began its Year 2000 efforts in 1995 interviewing vendors and gaining
awareness. An assessment of PSNC's Year 2000 impact was performed in 1996, and
PSNC began addressing its major business computer systems. A decision was made
to renovate the customer information system and to replace the financial and the
materials management systems. The renovation of PSNC's customer information
system was completed in September 1998, and Year 2000 compliant financial and
materials management systems are to be implemented early calendar 1999.
During 1998, PSNC established a centrally managed, company-wide Year
2000 compliancy program office. PSNC's project scope was expanded to include:
business continuity planning; "embedded" systems containing microprocessors,
i.e., automated meter reading and process control equipment; end-user computing
hardware and software, i.e., personal computers; facility equipment, such as
heating and cooling systems and facsimile devices; and business relationships
with PSNC's customers and key suppliers.
The assessment of critical supplier and third-party vendor progress,
although external to PSNC, will continue throughout calendar 1999. PSNC cannot
quantify the impact of any failure by a critical supplier or third-party vendor
at this time. PSNC is presently developing a contingency plan which will address
the mitigation of risks and continuance of operations if critical suppliers or
third-party vendors have a failure.
While PSNC believes that it has minimized the risks of encountering
serious problems associated with the Year 2000 issue, it still faces the risk
that some systems and processes that are not Year 2000 compliant either will not
be identified or will not be corrected before 2000. Additionally, PSNC has no
assurance that the Year 2000 issues of other entities will not have a material
impact on PSNC's systems or results of operations.
25
<PAGE>
Year 2000 Costs
The estimated cost of completion, including costs incurred to date, is
$17,000,000. This estimated cost includes external contractors and service
providers, the purchase of computer hardware and software, and dedicated
internal resources. A portion of PSNC's costs will not be incremental costs, but
a redeployment of existing resources. PSNC does not track the cost and time of
internal employees who are not fully dedicated to the Year 2000 effort.
The project completion dates and costs are estimates based on numerous
assumptions. These assumptions include the continued availability of personnel
resources and third-party vendor compliance.
Approximately $12,500,000 to replace existing systems is being
capitalized as plant. Approximately $4,500,000 to modify existing computer
systems is being expensed over a three-year period in accordance with an NCUC
order discussed further in Note 2 to the consolidated financial statements.
These costs are estimates based on PSNC's analysis to date and are subject to
change after the modifications of its systems are completed.
Risk Assessment
At this time, PSNC believes its most "reasonably likely worst case
scenario" is that its customers could experience some temporary disruptions in
their gas service. The natural gas that PSNC distributes and sells to its sales
customers, and the natural gas that it transports and delivers to its
transportation customers, comes principally from the producing areas along the
Gulf of Mexico (including the states of Alabama, Louisiana, Mississippi, and
Texas, and adjacent offshore areas). Prior to PSNC's receipt of that gas, it
must be extracted and processed to be useable. It is then delivered to an
interstate pipeline company (or companies) for transportation to PSNC or to
storage for PSNC's account; the gas that is stored for PSNC's account must then
be withdrawn and delivered to PSNC by an interstate pipeline, generally in the
winter. A disruption in PSNC's service to its customers could be caused by a
disruption in the extraction or processing of this gas, the transmission and/or
storage of such gas or finally the distribution of such gas by PSNC.
Even if the flow of gas is not disrupted, customers may not be able to
use the available gas if electrical service is disrupted and certain electronic
controls do not work.
Although PSNC does not believe that these disruptions will occur, it
has no assurance that such disruptions will not occur, and PSNC has assessed the
impact of such a scenario and continues to evaluate this scenario. PSNC believes
that its contingency plans will lessen the impact of any disruption.
If such disruption does occur, PSNC does not believe that it will have
a material adverse impact on its financial position, cash flows or results of
operations.
26
<PAGE>
Contingency Plans
PSNC is preparing contingency plans so that its critical operational
and business processes can be expected to continue to function on January 1,
2000 and thereafter. These plans are intended to lessen both internal risks as
well as potential risks in the supply chain of PSNC's suppliers and customers.
PSNC is currently assessing critical suppliers and vendors to determine their
Year 2000 readiness. While PSNC continues to monitor supplier and vendor
progress on this issue, PSNC does not control third-party Year 2000 remediation
plans and cannot guarantee that all third parties will be Year 2000 compliant
and able to provide their products and services to PSNC on January 1, 2000 and
thereafter. PSNC cannot quantify at this time the financial impact of the
failure of one or more of its suppliers to deliver critical supplies or
services. PSNC expects to have its contingency plans completed by the end of
fiscal 1999.
The above information is based on PSNC's current best estimates, which
were derived using numerous assumptions of future events, including the
availability and future costs of certain technological and other resources,
third-party modifications and remediation actions and other factors. Given the
complexity of the issues and possible as yet unidentified risks, actual results
may vary from those anticipated and discussed above. Specific factors that might
cause such differences include, among others, the availability and cost of
personnel trained in this area, the ability to locate and correct all affected
computer code, the timing and success of remedial efforts of third-party
suppliers and similar uncertainties.
Effects of Inflation
The margin charged to PSNC's 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 improvements 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
replacement cost of these facilities. Management continually reviews operations
and economic conditions to assess the need for filing for general rate relief.
PSNC's last general rate case was filed April 2, 1998, and new rates approved by
the NCUC became effective November 1, 1998. Parties to the rate case have 30
days from the date of the order to file a notice of appeal and exceptions. On
November 30, 1998, the NCUC granted a motion filed by the Carolina Utility
Customers Association, Inc., a party to PSNC's general rate case, to extend the
time for filing a notice of appeal and exceptions until December 21, 1998.
Recently Issued but Not Yet Effective Accounting Statements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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.
27
<PAGE>
"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.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement revises
certain footnote disclosures and adds new disclosures related to pensions and
other postretirement benefit plans. It does not change the measurement and
recognition requirements for those plans. Therefore, this statement will not
have any impact on PSNC's consolidated financial position, results of operations
or cash flows. This statement will be adopted by PSNC effective October 1, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. This statement will be adopted by
PSNC effective October 1, 1999. PSNC has not yet quantified the impact of
adopting SFAS No. 133 on its financial statements and has not determined the
method of adoption.
Forward-looking Statements
Statements contained in this document and the notes to the consolidated
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 implement successfully 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 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, 1998 1997 1996
- ---------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues $330,671,770 $337,930,181 $308,882,079
Cost of gas 174,300,672 182,003,740 168,137,830
------------ ------------ ------------
Gross margin 156,371,098 155,926,441 140,744,249
------------ ------------ ------------
Operating Expenses and Taxes:
Other operating expenses 54,686,569 55,180,279 50,074,438
Maintenance 5,230,133 6,007,234 5,128,699
Provision for depreciation 25,049,337 22,387,370 19,748,947
General taxes 17,183,052 16,924,868 16,005,669
Income taxes -
Federal 12,209,518 12,535,400 11,579,200
State 2,917,294 3,175,800 2,917,300
------------ ------------ ------------
Total operating expenses and taxes 117,275,903 116,210,951 105,454,253
------------ ------------ ------------
Operating income 39,095,195 39,715,490 35,289,996
------------ ------------ ------------
Other Income (Deductions):
Merchandise and jobbing 795,024 121,554 (83,582)
Subsidiary operations, net of
income taxes 1,692,527 1,677,391 1,327,561
Interest income and other 1,032,563 2,086,826 2,106,868
------------ ------------ ------------
Total other income (deductions) 3,520,114 3,885,771 3,350,847
------------ ------------ ------------
Gross income 42,615,309 43,601,261 38,640,843
------------ ------------ ------------
Interest Deductions:
Interest on long-term debt 15,039,896 15,139,409 12,252,379
Amortization of debt expense 162,068 163,173 151,978
Other interest 3,145,329 2,293,555 2,589,033
Allowance for borrowed funds used
during construction (568,986) (341,429) (250,765)
------------ ------------ ------------
Total interest deductions 17,778,307 17,254,708 14,742,625
------------ ------------ ------------
Net income $ 24,837,002 $ 26,346,553 $ 23,898,218
============ ============ ============
Average common shares outstanding 20,103,103 19,549,656 18,995,035
Basic earnings per share $1.24 $1.35 $1.26
Diluted common shares outstanding 20,220,580 19,649,925 19,065,261
Diluted earnings per share $1.23 $1.34 $1.25
Cash dividends declared per common share $ .94 $ .90 $.865
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
29
<PAGE>
Public Service Company of North Carolina, Incorporated and Subsidiaries
Consolidated Balance Sheets
September 30, 1998 1997
- ------------------------------------------- ------------ ------------
Assets
- ------
Gas Utility Plant:
In service $736,504,603 $679,488,467
Less - Accumulated depreciation 224,204,295 203,224,735
------------ ------------
Net plant in service 512,300,308 476,263,732
Construction work in progress 7,216,568 4,738,227
------------ ------------
519,516,876 481,001,959
Non-utility Property, net of
accumulated depreciation (1998 -
$178,066 and 1997 - $143,128) 594,650 641,666
------------ ------------
Current Assets:
Cash and temporary investments 3,277,211 1,641,371
Restricted cash and temporary investments 10,247,060 9,887,844
Receivables, less allowance for
doubtful accounts (1998 - $2,086,128
and 1997 - $2,521,983) 20,836,080 26,616,667
Inventories, at average cost -
Materials, supplies and merchandise 6,992,053 7,644,432
Stored gas 24,405,529 20,890,195
Deferred gas costs, net 13,576,225 19,337,797
Prepayments 2,260,204 2,403,445
------------ ------------
81,594,362 88,421,751
Deferred Charges and Other Assets:
Long-term restricted cash 4,845,120 4,845,120
Debt expense 1,676,747 1,838,815
Other 10,524,858 8,392,229
------------ ------------
17,046,725 15,076,164
$618,752,613 $585,141,540
Capitalization and Liabilities
Capitalization (see statements):
Common equity $222,839,331 $207,367,763
Long-term debt 171,550,000 180,850,000
------------ ------------
394,389,331 388,217,763
Current Liabilities:
Current maturities of long-term debt 9,300,000 9,300,000
Accounts payable 20,015,220 27,799,188
Accrued taxes 1,180,306 4,303,522
Customer prepayments and deposits 7,020,931 6,978,565
Accrued interest 4,346,204 4,447,660
Cash dividends declared 4,864,161 4,534,095
Restricted supplier refunds 10,247,060 9,887,844
Other 4,183,535 5,149,824
------------ ------------
61,157,417 72,400,698
Interim bank loans, due within one year 70,500,000 38,000,000
------------ ------------
131,657,417 110,400,698
Deferred Credits and Other Liabilities:
Income taxes, net 66,526,252 59,437,911
Deferred revenue 2,120,976 3,099,888
Investment tax credits 3,410,949 3,780,581
Accrued pension cost 7,984,530 9,531,887
Other 12,663,158 10,672,812
------------ ------------
92,705,865 86,523,079
$618,752,613 $585,141,540
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, 1998 1997
- ------------------------------------------ ------------ ------------
Common Equity:
Common stock, $1 par, 30,000,000
shares authorized; shares outstanding
1998 - 20,274,332 and 1997 - 19,770,843 $ 20,274,332 $ 19,770,843
Capital in excess of par value 132,787,058 123,474,119
Retained earnings 69,777,941 64,122,801
------------ ------------
222,839,331 207,367,763
----------- -----------
Long-term Debt:
Senior debentures (unsecured) -
8.65% due 2002 10,000,000 12,500,000
10% due 2003 8,750,000 11,250,000
10% due 2004 30,100,000 34,400,000
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 50,000,000
------------ ------------
180,850,000 190,150,000
Less - Current maturities 9,300,000 9,300,000
------------ ------------
171,550,000 180,850,000
------------ ------------
$394,389,331 $388,217,763
============ ============
Consolidated Statements of Retained Earnings
For the Fiscal Years Ended September 30, 1998 1997 1996
- ---------------------------------------- ----------- ----------- -----------
Balance, beginning of year $64,122,801 $55,423,161 $48,027,708
Add - Net income 24,837,002 26,346,553 23,898,218
----------- ----------- -----------
88,959,803 81,769,714 71,925,926
Deduct - Cash dividends declared
on common stock and other 19,181,862 17,646,913 16,502,765
----------- ----------- -----------
Balance, end of year $69,777,941 $64,122,801 $55,423,161
=========== =========== ===========
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, 1998 1997 1996
- ---------------------------------------- ----------- ----------- -----------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net income $24,837,002 $26,346,553 $23,898,218
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation charged to operating expenses 25,049,496 22,387,370 19,748,947
Depreciation charged to other accounts 2,786,873 2,528,055 2,821,518
Amortization of debt expense and other 162,068 175,592 151,978
Provision for doubtful accounts 866,786 1,396,636 1,706,466
Amortization of investment tax credits, net (369,632) (429,688) (435,156)
Deferred income taxes, net 7,088,341 3,205,066 3,627,210
----------- ----------- -----------
60,420,934 55,609,584 51,519,181
Change in assets and liabilities:
Receivables 4,913,801 (10,113,922) (6,001,263)
Inventories (2,862,815) (5,967,186) (4,849,607)
Deferred gas costs, net 5,761,572 (1,812,450) (13,833,212)
Deferred revenues (978,912) 3,099,888 -
Prepayments 143,426 (127,771) (186,824)
Accounts payable (7,783,968) 7,498,737 (111,061)
Accrued taxes (3,123,216) 1,228,699 1,251,185
Customer prepayments and deposits 42,366 964,679 272,239
Accrued interest (101,456) 1,350,667 645,473
Accrued pension cost (1,547,357) (2,681,901) (717,013)
Other (538,331) (4,911,920) 1,602,404
----------- ----------- -----------
Net cash provided by operating activities 54,346,044 44,137,104 29,591,502
----------- ----------- -----------
Cash Flows from Investing Activities:
Construction expenditures (65,328,731) (60,310,383) (60,428,321)
Non-utility property and other (1,525,824) 875,413 (1,801,879)
----------- ----------- -----------
Net cash used in investing activities (66,854,555) (59,434,970) (62,230,200)
----------- ----------- -----------
Cash Flows from Financing Activities:
Issuance of common stock through dividend
reinvestment, stock purchase and stock
option plans 9,796,147 9,809,642 7,674,585
Increase (decrease) in interim bank loans, net 32,500,000 (21,500,000) 8,500,000
Sale of senior debentures, net - 49,404,056 49,313,951
Retirement of long-term debt (9,300,000) (6,800,000) (14,230,000)
Retirement of common stock (269,299) (33,670) (58,056)
Cash dividends (18,582,497) (17,301,431) (16,194,228)
----------- ----------- -----------
Net cash provided by financing activities 14,144,351 13,578,597 35,006,252
----------- ----------- -----------
Net increase (decrease) in cash and
temporary investments 1,635,840 (1,719,269) 2,367,554
Cash and temporary investments at beginning
of year 1,641,371 3,360,640 993,086
----------- ----------- -----------
Cash and temporary investments at end of year $ 3,277,211 $ 1,641,371 $ 3,360,640
=========== =========== ===========
Cash paid during the year for:
Interest (net of amount capitalized) $17,900,642 $15,514,606 $13,787,781
Income taxes $12,102,000 $12,935,000 $11,480,000
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
32
<PAGE>
Public Service Company of North Carolina, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
For the Fiscal Years Ended September 30, 1998, 1997 and 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Segment Data
The accompanying consolidated financial statements include the
accounts of Public Service Company of North Carolina, Incorporated
(PSNC) and its subsidiary companies, Clean Energy Enterprises, Inc.,
PSNC Blue Ridge Corporation, PSNC Production Corporation, Cardinal
Pipeline Company, LLC, PSNC Propane Corporation (dissolved in fiscal
1997) and PSNC Cardinal Pipeline Company (collectively, the "Company").
Investments in other affiliates in which the Company has a 20% to 50%
interest and/or the ability to exercise significant influence over
operating and financial policies are accounted for under the equity
method. Equity investees of Company include Cardinal Extension Company,
LLC (Note 2), Pine Needle LNG Company, LLC (Note 2) and Sonat Public
Service Company L.L.C. (Sonat Public Service). Sonat Public Service is
a 50%-50% joint venture between PSNC Production Corporation and Sonat
Marketing Company L.P. All material intercompany transactions and
balances among PSNC and its subsidiary companies have been eliminated
in the accompanying consolidated financial statements.
PSNC and its subsidiaries operate in one dominant business
segment, distribution of natural gas. PSNC, through various
subsidiaries and Sonat Public Service, 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 4.0% of the cost of
depreciable property for each of the fiscal years 1998, 1997 and 1996,
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 PSNC Production 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, 1998 and September 30,
1997, is $180,850,000 and $190,150,000, respectively, as compared to a
fair market value of $195,044,000 and $207,729,000, respectively. The
fair market value of these instruments is based on current market
prices and yields for similar issues.
Stock-Based Compensation
PSNC has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25), and
related interpretations in accounting for its employee stock options.
PSNC has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." This statement defines a fair value method
of accounting for stock options or similar equity instruments. SFAS No.
123 permits companies to continue to account for stock-based
compensation awards under APB 25, 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.
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, 1998, the balance of net gas costs to be
collected from customers pursuant to Rider D was $12,860,000 as
compared to $18,385,000 at September 30, 1997. 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 each month on the basis of market prices for natural gas.
This procedure allows PSNC to better manage its deferred gas costs
balance by ensuring that the amount paid for natural gas to serve
these customers approximates the amount collected from them. PSNC
will continue to establish a benchmark cost of gas for residential and
small commercial customers pursuant to its existing procedures.
In PSNC's 1991 general rate case order, the NCUC authorized a
weather normalization adjustment (WNA). This mechanism allows PSNC to
adjust its
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<PAGE>
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 October 30, 1998, the NCUC issued an order in PSNC's general
rate case filed in April 1998. That order, effective November 1, 1998,
granted PSNC additional annual revenue of $12,400,000 and allowed a
9.82% overall rate of return on PSNC's net utility investment. It also
approved the continuation of the previously mentioned WNA and Rider D
mechanisms and full margin transportation rates. Parties to the rate
case have 30 days from the date of the order to file a notice of appeal
and exceptions.
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 regarding Southern Expansion charges
incurred prior to November 1, 1991, and anticipates no further exposure
from this matter.
On April 22, 1997, the NCUC approved PSNC's application to use
expansion funds to extend service to western Haywood County, including
Waynesville, Clyde and Lake Junaluska. This project was completed in
July 1998. PSNC spent $5,653,000 on the project, of which $4,127,000
was reimbursed from the expansion fund.
On July 6, 1998, PSNC filed an application with the NCUC to
extend natural gas service into Alexander County. Most of Alexander
County lies within PSNC's franchised service territory and is not
currently provided natural gas service. PSNC estimates that the cost of
the project will be $6,188,000 and has requested the NCUC to approve
the use of $4,918,000 from PSNC's expansion fund to make this project
economically feasible. Hearings were held on this matter during
November 1998. An order from the NCUC is expected during the first
quarter of calendar 1999.
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, extending from Wentworth to near Haw River, North Carolina,
where it interconnects with PSNC and Piedmont. It was placed into
service on December 31, 1994, and provides 130 million cubic feet per
day (mmcf/day) of additional firm capacity (70 mmcf/day for PSNC and 60
mmcf/day for Piedmont). In 1995, PSNC, Piedmont, Transco and North
Carolina Natural Gas Corporation (NCNG) formed Cardinal Extension
Company, LLC (Cardinal Extension) to purchase and extend the Cardinal
pipeline. As proposed, the pipeline will be extended 67.5 miles from
the existing termination point of Cardinal Pipeline at Haw River to a
point southeast of Raleigh and will provide 140 mmcf/day of additional
firm capacity (100 mmcf/day for PSNC and 40 mmcf/day for NCNG). The
extension will be project-financed at an estimated cost of $75,000,000.
Through their respective subsidiaries, PSNC will
36
<PAGE>
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 November
6, 1997, the NCUC issued an order approving this project and the merger
of Cardinal Pipeline and Cardinal Extension, with the surviving entity
being named Cardinal Pipeline Company, LLC. Construction began in
November 1998. 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 to own and operate a liquefied
natural gas storage facility, with an estimated cost of $107,000,000.
Pursuant to a final FERC order, this facility is being constructed on a
site 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 mmcf/day. Liquefaction is expected to
begin in May 1999 in time for withdrawal service to begin in the 1999
winter heating season. PSNC's subsidiary, PSNC Blue Ridge Corporation,
will make an equity capital contribution of approximately $9,000,000 at
the end of the construction period.
On April 29, 1997, the NCUC issued an order authorizing deferral
accounting for contract labor costs for a project to ensure that PSNC's
computer operating systems function properly in year 2000. PSNC has
incurred approximately $4,000,000 of these costs to date. The order
required a three-year amortization of these costs beginning in the year
incurred. PSNC began amortizing these costs in September 1997. The NCUC
allowed recovery of a majority of the unamortized Year 2000 costs in
the general rate case order issued on October 30, 1998.
37
<PAGE>
3. COMMON STOCK
The changes in common stock and capital in excess of par value
for the three years ended September 30, 1998 were as follows:
Common Stock
$1 Par, Authorized
30,000,000 Shares Capital in
Shares Excess of
Outstanding Amount Par Value
----------- ----------- -----------
September 30, 1995 18,689,346 $18,689,346 $106,655,316
Issuance through dividend
reinvestment plan (DRP) 326,618 326,618 4,860,612
Issuance through employee
stock purchase plan (ESPP) 92,405 92,405 1,105,164
Issuance through nonqualified
stock option plan (NSOP) - net 96,016 96,016 1,222,967
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 1,232,121
Recognition of permanent tax
differences related to stock
options exercised - - 127,200
----------- ----------- ------------
September 30, 1997 19,770,843 19,770,843 123,474,119
Issuance through DRP 330,808 330,808 6,468,023
Issuance through ESPP 82,203 82,203 1,276,613
Issuance through NSOP - net 90,478 90,478 1,359,703
Recognition of permanent tax
differences related to stock
options exercised - - 208,600
----------- ----------- ------------
September 30, 1998 20,274,332 $20,274,332 $132,787,058
=========== =========== ============
38
<PAGE>
Stock Compensation Plans
In October 1995, the Financial Accounting Standards Board (FASB) issued
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.
At September 30, 1998, PSNC had three stock-based compensation plans.
PSNC applies APB 25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its Employee Stock
Purchase Plan or its 1997 Nonqualified Stock Option Plan. For fiscal 1997 and
1996, the compensation cost that had been charged against income for the 1992
Nonqualified Stock Option Plan was $187,397 and $167,904, respectively. Had
compensation cost for PSNC's three 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. For purposes of pro forma disclosures, the
estimated fair value of options is recorded in its entirety in the year granted.
1998 1997 1996
----------- ----------- -----------
Net Income As reported $24,837,002 $26,346,553 $23,898,218
Pro forma $23,584,100 $25,971,801 $23,469,513
Basic EPS As reported $1.24 $1.35 $1.26
Pro forma $1.17 $1.33 $1.24
Diluted EPS As reported $1.23 $1.34 $1.25
Pro forma $1.17 $1.32 $1.23
Nonqualified Stock Option Plans
PSNC has two nonqualified stock option plans, a 1992 Nonqualified Stock
Option Plan and a 1997 Nonqualified Stock Option Plan. 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. Options are granted at 90% of the fair market value of PSNC's
common stock 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; an exception is also allowed
upon a change in control as defined in the plan. Under PSNC's 1997 Nonqualified
Stock Option Plan, options to purchase an aggregate of up to 1,560,000 shares of
PSNC's common stock can be granted to officers and key employees of PSNC.
Options are granted at the fair market value of PSNC's common stock 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. As a result of the
options being granted at the fair market value, no compensation expense is
recorded. An exception to the two-year exercise date is allowed upon the
retirement, disability or death of a participant; an exception is also allowed
upon a change in control as defined in the plan.
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<PAGE>
Options granted, exercised and canceled under both plans for the three
years ended September 30, 1998 were as follows:
Options Weighted-Average
Outstanding Exercise Price
September 30, 1995 420,857 $13.17
Granted 120,000 $14.29
Exercised (101,624) $11.65
Canceled (11,994) $14.61
-------
September 30, 1996 427,239 $13.81
Granted 118,967 $16.59
Exercised (81,532) $13.72
Canceled (736) $14.29
-------
September 30, 1997 463,938 $14.54
Granted 624,000 $20.64
Exercised (111,375) $14.60
Canceled (20,879) $16.88
-------
September 30, 1998 955,684 $18.46
=======
For purposes of pro forma disclosure, the fair value of each option
grant was estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions used for nonqualified stock option grants
in fiscal 1998, 1997 and 1996, respectively:
1998 1997 1996
-------------- ----------- ----------
Risk free interest rate(s) 5.5% and 5.8% 6.00% 5.80%
Volatility factor 15.30% 22.70% 34.12%
Dividend yield 4.53% 5.10% 5.10%
Expected life 4.5 years 4.5 years 4.5 years
The weighted average fair value of nonqualified stock options granted
during 1998, 1997 and 1996 was $2.54, $3.66 and $4.20, respectively. The number
of shares and weighted average price of those shares exercisable at the end of
the fiscal year were 231,403 shares at $13.49 for 1998, 231,612 shares at $13.61
for 1997 and 198,176 shares at $14.06 for 1996. As of September 30, 1998, the
955,684 outstanding options had a weighted average remaining contractual life of
3.6 years and exercise prices ranging from $12.86 to $21.25.
Employee Stock Purchase Plan
Under the 1992 Employee Stock Purchase Plan, as amended and restated
effective January 1, 1998, PSNC is authorized to issue up to 1,266,000 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 1998. In fiscal 1998,
1997 and 1996, PSNC issued to employees 82,203, 81,349 and 92,405 shares,
respectively.
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<PAGE>
For purposes of pro forma disclosure, the fair value of each employee
stock purchase plan grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in fiscal 1998, 1997 and 1996, respectively:
1998 1997 1996
---------- ---------- --------
Risk free interest rate 5.43% 5.55% 5.18%
Volatility factor 15.30% 22.18% 23.56%
Dividend yield 4.53% 5.10% 5.10%
Expected life 1 year 1 year 1 year
The weighted average fair value of each employee stock purchase plan
grant during 1998, 1997 and 1996 was $6.10, $2.32 and $2.28, respectively.
At September 30, 1998, there were 931,420 common shares reserved for
issuance under PSNC's Stock Purchase and Automatic Dividend Reinvestment Plan,
1,936,231 common shares reserved for granting under the 1992 and 1997
Nonqualified Stock Option Plans and 205,666 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 1998, 1997 and 1996 consisted of the
following components (amounts in thousands):
1998 1997 1996
------ ------ ------
Service cost $2,073 $2,156 $2,034
Interest cost 3,050 3,282 2,972
Actual return on assets (3,154) (8,328) (2,845)
Net amortization 697 5,253 (23)
------ ------ ------
Net pension cost $2,666 $2,363 $2,138
====== ====== ======
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<PAGE>
The table below sets forth the amount recognized on PSNC's consolidated
balance sheets at September 30, 1998 and 1997 (amounts in thousands):
1998 1997
-------- -------
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits in
1998 of $32,525 and 1997 of $28,692 $33,910 $29,852
======= =======
Projected benefit obligation $46,609 $42,920
Plan assets at fair value 43,711 39,253
------- -------
Plan assets under projected
benefit obligation 2,898 3,667
Unrecognized transition amount 1,406 1,716
Unrecognized net gain 7,261 8,301
Unrecognized prior service cost (3,580) (4,152)
------- -------
Accrued pension cost $ 7,985 $ 9,532
======= =======
Actuarial assumptions:
Weighted average discount rate 6.75% 7.50%
Rate of increase in future
compensation levels 2.75%-5.75% 3.50%-6.50%
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 1998 and 1997
measurement dates was approximately $2,453,000 and $3,251,000.
PSNC offers medical, life and dental insurance coverage to its
qualified salaried and hourly retirees. These benefits are unfunded.
Retirees are required to contribute to 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 Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (SFAS No. 106). The standard provides for
the accrual of the costs of retiree medical, life and dental insurance
benefits over the working lifetime of the employees.
42
<PAGE>
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, 1998 and 1997 (amounts in thousands):
1998 1997
------- -------
Fair value of plan assets $ - $ -
Accumulated postretirement benefit
obligation (APBO):
Retirees and dependents $ 4,271 $ 3,853
Other fully eligible participants 1,209 917
Other active participants 3,502 2,833
------- -------
8,982 7,603
Unrecognized prior service cost (488) (531)
Unrecognized net gain (480) 498
Unrecognized transition obligation (3,326) (3,547)
------- -------
Accrued postretirement benefit cost $ 4,688 $ 4,023
======= =======
The net periodic postretirement benefit cost for fiscal
September 30, 1998, 1997 and 1996 consists of the following components
(amounts in thousands):
1998 1997 1996
------ ------ ------
Service cost $ 247 $ 255 $ 258
Interest cost on APBO 554 554 525
Amortization of
transition obligation 222 222 258
Net amortization 34 38 19
------ ------ -----
Net periodic postretirement
benefit cost $1,057 $1,069 $1,060
====== ====== ======
As of the 1998 measurement date, the assumed health care cost
trend rate used in determining the APBO was 8.25% in 1998, 7.75% in
1999, 7.25% in 2000, 6.75% in 2001, then decreasing annually to an
ultimate trend rate of 4.25% in 2008. A one percentage point increase
in the assumed health care cost trend rate would increase the APBO by
approximately 3%. The service and interest cost components of the net
periodic postretirement benefit cost would increase approximately 5%.
The net periodic postretirement benefit cost was calculated using a
weighted average discount rate of 7.50%. The APBO at the measurement
date was determined using a weighted average discount rate of 6.75%.
5. SHORT-TERM BORROWING ARRANGEMENTS
PSNC has committed lines of credit with six 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, 1998, total lines of credit with these banks range
from a minimum of $39,000,000 to a winter-period maximum of
$85,000,000. PSNC also has uncommitted annual lines of credit totaling
$35,000,000. There are no restrictions on the withdrawal of cash
balances maintained with these banks. The banks are compensated for
43
<PAGE>
the committed lines of credit through the payment of commitment fees.
At September 30, 1998 and 1997, there were $70,500,000 and $38,000,000
of short-term bank 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, 1998 and 1997, PSNC had no bankers' acceptance loans outstanding.
Certain information related to short-term borrowings is as
follows (dollars in thousands):
1998 1997
------- -------
At year end -
Amount outstanding $70,500 $38,000
Weighted average rate 5.96% 5.91%
During the year -
Maximum amount outstanding $73,500 $81,500
Average daily amount outstanding $49,914 $36,381
Weighted average rate 5.95% 5.75%
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>
1998 1997 1996
--------------- --------------- ---------------
Federal State Federal State Federal State
<S> <C> <C> <C> <C> <C> <C>
Income Statement Captions:
Operating expenses
and taxes $12,210 $2,917 $12,535 $3,176 $11,579 $2,917
Other income (deductions) 917 211 866 226 763 202
------- ------ ------- ------ ------- ------
$13,127 $3,128 $13,401 $3,402 $12,342 $3,119
======= ====== ======= ====== ======= ======
Income Tax Expense:
Currently payable $ 7,681 $1,781 $11,246 $2,782 $ 9,892 $2,427
Deferred 5,816 1,347 2,585 620 2,885 692
Investment tax credits, net (370) - (430) - (435) -
------- ------ ------- ------ ------- ------
$13,127 $3,128 $13,401 $3,402 $12,342 $3,119
======= ====== ======= ====== ======= ======
</TABLE>
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<PAGE>
A reconciliation of the statutory federal income tax rate to the
effective tax rate is as follows (dollars in thousands):
1998 1997 1996
------- ------- -------
Statutory federal income tax rate 35% 35% 35%
Expected federal income tax expense
at federal statutory rate $13,987 $14,720 $13,438
Less: State income tax benefit 1,022 1,112 1,022
Amortization of ITC 370 430 435
Tax on subsidiary income 592 587 465
Other (207) 56 (63)
------- ------- -------
Federal income tax expense $12,210 $12,535 $11,579
======= ======= =======
The components of the net deferred tax liabilities as of
September 30, 1998 and 1997, are as follows (amounts in thousands):
1998 1997
------- -------
Deferred tax assets:
Regulatory liabilities - income tax amounts $ 4,510 $ 4,653
Pension expense 2,503 2,775
Unamortized ITC 1,323 1,476
Postretirement benefits 1,545 1,311
Deferred gain on Sonat joint venture 1,243 1,633
Other 1,897 1,520
------- -------
$13,021 $13,368
Deferred tax liabilities:
Depreciation and property related items $67,280 $61,151
Excess deferred taxes due to a change
in the statutory rate 9,963 10,138
Regulatory assets - income tax amounts 537 594
Year 2000 costs 1,314 677
Other 453 246
------- -------
$79,547 $72,806
Net deferred tax liabilities $66,526 $59,438
======= =======
7. ENVIRONMENTAL MATTERS
PSNC owns, or has owned, all or 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 and Natural
Resources 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
45
<PAGE>
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, 1998, PSNC has recorded a
liability and associated regulatory asset of the minimum amount of the
range, or $3,705,000.
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 Securities and
Exchange Commission 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, 1998, $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, 1998: 1999,
$9,300,000; 2000, $11,800,000; 2001, $6,800,000; 2002, $8,050,000; and
2003, $7,500,000.
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, 1998, PSNC is in compliance in all material
respects with the requirements of its debt agreements.
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<PAGE>
9. CONSTRUCTION PROGRAM
The construction program for fiscal 1999, as presently
planned, provides for expenditures of approximately $45,000,000.
10. CONTINGENT LIABILITIES
PSNC is a party to certain legal actions. Although it is
impossible to predict the outcomes with certainty, after consultation
with legal counsel, management does not expect the dispositions of
these matters to have a materially adverse effect on PSNC's financial
position, results of operations or cash flows.
PSNC is also a party to certain legal actions involving
potential environmental liability as more fully discussed in Note 7.
47
<PAGE>
11. EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
This statement establishes standards for computing and presenting EPS. It
requires 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 is
computed by dividing income available to shareholders by the weighted average
number of shares outstanding for the period. Diluted EPS gives effect to all
dilutive potential common shares that were outstanding during the period. Prior
period EPS has been restated to conform to the new statement. This statement was
adopted by PSNC beginning October 1, 1997.
Twelve Months Ended
September 30, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS
Net income $ 24,837,002 20,103,103 $ 1.24
Effect of dilutive securities (Options) 117,477
----------
Diluted EPS
Net income $ 24,837,002 20,220,580 $ 1.23
==========
Twelve Months Ended
September 30, 1997
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS
Net income $26,346,553 19,549,656 $1.35
Effect of dilutive securities (Options) 100,269
----------
Diluted EPS
Net income $26,346,553 19,649,925 $1.34
==========
Twelve Months Ended
September 30, 1996
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS
Net income $23,898,218 18,995,035 $1.26
Effect of dilutive securities (Options) 70,226
----------
Diluted EPS
Net income $23,898,218 19,065,261 $1.25
==========
48
<PAGE>
12. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents certain financial information for
each quarter during the fiscal years ended September 30, 1998 and 1997
(amounts in thousands, except per share data):
<TABLE>
<CAPTION>
1998
Fourth Third Second First
<S> <C> <C> <C> <C>
Operating revenues $32,151 $54,532 $140,205 $103,784
Gross margin 18,520 28,642 68,486 40,724
Operating income (loss) (2,042) 4,123 26,226 10,790
Net income (loss) (5,682) 802 22,524 7,193
Basic earnings (loss) per share (.28) .04 1.12 .36
Diluted earnings (loss) per share (.28) .04 1.11 .36
</TABLE>
<TABLE>
<CAPTION>
1997
Fourth Third Second First
<S> <C> <C> <C> <C>
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
Basic earnings (loss) per share (1) (.26) .07 1.15 .41
Diluted earnings (loss) per share (1) (.26) .07 1.14 .41
</TABLE>
(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.
49
<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, 1998 and 1997, and the related consolidated statements of income,
retained earnings and cash flows for each of the three years in the period ended
September 30, 1998. These financial statements are the responsibility of 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,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles.
s/Arthur Andersen LLP
Charlotte, North Carolina,
October 30, 1998
50
<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 - Finance
Chief Executive Officer
51
<PAGE>
Supplementary Data
The information for this item is contained in Note 12 entitled
"SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)" on page 49
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 16, 1998, relating to the January 29, 1999
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 16, 1998, relating to
the January 29, 1999 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).
52
<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 16, 1998, relating to the
January 29, 1999 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 16,
1998, relating to the January 29, 1999 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, 1998,
1997 and 1996 29
Consolidated Balance Sheets at
September 30, 1998 and 1997 30
Consolidated Statements of Capitalization
at September 30, 1998 and 1997 31
Consolidated Statements of Retained
Earnings for the Fiscal Years Ended
September 30, 1998, 1997 and 1996 31
Consolidated Statements of Cash Flows for
the Fiscal Years Ended September 30, 1998,
1997 and 1996 32
Notes to Consolidated Financial Statements
for the Fiscal Years Ended September 30,
1998, 1997 and 1996 33-49
Report of Independent Public Accountants 50
Management's Responsibility for Financial Statements 51
53
<PAGE>
Page
2. Financial statement schedules -
The following financial statement schedules
are included herein:
Supplemental Schedules:
Report of Independent Public Accountants 56
Schedule II - Reserves for the Fiscal Years Ended
September 30, 1998, 1997 and 1996 57-59
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 61 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, 1998.
54
<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 21, 1998
55
<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, 1998. 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, 1998
56
<PAGE>
<TABLE>
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - RESERVES
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
<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
- ------------------------------ ---------- ---------- -------- ---------- ----------
DEDUCTED IN BALANCE SHEET FROM
ASSET TO WHICH IT APPLIES:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts $2,521,983 $786,480 $80,306 $1,302,641 $2,086,128
========== ======== ======= ========== ==========
</TABLE>
(1) Deductions represent uncollectible accounts written off, net of recoveries,
as follows -
Write-off of accounts considered to be uncollectible $2,039,104
Less - Recoveries on accounts previously written off 736,463
----------
$1,302,641
==========
57
<PAGE>
<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
========== ========== ======= ========== ==========
</TABLE>
(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
==========
58
<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
========== ========== ======= ========== ==========
</TABLE>
(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
==========
59
<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 21, 1998 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 21, 1998.
s/Charles E. Zeigler, Jr. s/Jack G. Mason
Charles E. Zeigler, Jr. Jack G. Mason
Chairman, President and Vice President - Finance
Chief Executive Officer (Principal financial and
(Principal executive officer) 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
60
<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, 1998. 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-A-4.1 - Amendment to Amended and Restated Charter, dated April 10, 1997.
(8-K/A--April 14, 1997, Exhibit A).
*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).
61
<PAGE>
Exhibit
Number
*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).
*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 Corpora-
tion. (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 Corpora-
tion. (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).
62
<PAGE>
Exhibit
Number
*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).
*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).
63
<PAGE>
Exhibit
Number
*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).
*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).
64
<PAGE>
Exhibit
Number
*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).
*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. (File No. 1-11429,
10-K--1997, Exhibit 10-B-4.1).
*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 Cor-
poration. (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 Pipe-
line 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).
65
<PAGE>
Exhibit
Number
*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).
*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. (File No. 1-11429, 10-K--1997,
Exhibit 10-D-6).
*10-D-7 - Amended Operating Agreement of Cardinal Extension Company,
LLC, dated December 19, 1996. (File No. 1-11429, 10-Q--
December 31, 1997, Exhibit 10-D-7).
*10-D-8 - Amended Construction, Operation and Maintenance Agreement by
and between Cardinal Operating Company and Cardinal Extension
Company, LLC, dated December 19, 1996. (File No. 1-11429,
10-Q--December 31, 1997, Exhibit 10-D-8).
*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).
*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 55
of this annual report).
27 - Financial Data Schedule.
66
<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) 64.5% 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.
67
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