UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ............ to ............
Commission file number 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)
(704) 864-6731
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of Common Stock, $1 par value, outstanding
at July 31, 1998.....................................................20,248,230
<PAGE>
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED
AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
The condensed financial statements included herein have been prepared
by the registrant without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Although certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, the registrant believes that the
disclosures herein are adequate to make the information presented not
misleading. It is recommended that these condensed financial statements be read
in conjunction with the financial statements and the notes thereto included in
the registrant's latest annual report on Form 10-K.
1
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended Twelve Months Ended
June 30 June 30 June 30
------------------ ------------------ -------------------
1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
-------- -------- -------- -------- -------- --------
Operating revenues $ 54,532 $ 60,106 $298,520 $303,906 $332,545 $337,006
Cost of gas 25,890 30,715 160,669 165,894 176,779 182,691
-------- -------- -------- -------- -------- --------
Gross margin 28,642 29,391 137,851 138,012 155,766 154,315
-------- -------- -------- -------- -------- --------
Operating expenses and taxes:
Operating and maintenance 14,500 15,138 45,028 46,223 59,993 60,360
Provision for depreciation 6,265 5,605 18,520 16,521 24,387 21,725
General taxes 3,409 3,518 14,533 14,414 17,043 17,018
Income taxes 345 587 18,633 19,509 14,835 16,032
-------- -------- -------- -------- -------- --------
24,519 24,848 96,714 96,667 116,258 115,135
-------- -------- -------- -------- -------- --------
Operating income 4,123 4,543 41,137 41,345 39,508 39,180
Other income, net 742 822 2,643 2,878 3,650 3,632
Interest deductions 4,063 4,080 13,261 12,646 17,870 16,485
-------- -------- -------- -------- -------- --------
Net income $ 802 $ 1,285 $ 30,519 $ 31,577 $ 25,288 $ 26,327
======== ======== ======== ======== ======== ========
Average common shares
outstanding 20,178 19,639 20,051 19,482 19,976 19,408
Basic earnings per share $.04 $.07 $1.52 $1.62 $1.27 $1.36
Diluted common shares
outstanding 20,307 19,738 20,172 19,579 20,089 19,498
Diluted earnings per share $.04 $.07 $1.51 $1.61 $1.26 $1.35
Cash dividends declared
per share $.24 $.23 $.70 $.67 $.93 $.89
2
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
Jun 30 Sep 30 Jun 30
1998 1997 1997
-------- -------- --------
Gas utility plant $730,182 $684,227 $666,749
Less - Accumulated depreciation 221,472 203,225 198,560
-------- -------- --------
508,710 481,002 468,189
-------- -------- --------
Non-utility property, net 606 642 654
-------- -------- --------
Current assets:
Cash and temporary investments 3,571 1,641 1,965
Restricted cash and temporary investments 10,109 9,888 9,732
Receivables, less allowance for
doubtful accounts 23,471 26,617 32,174
Materials and supplies 8,721 7,645 7,597
Stored gas inventory 18,773 20,890 15,337
Deferred gas costs, net 6,822 19,338 13,081
Prepayments and other 2,636 2,403 2,454
-------- -------- --------
74,103 88,422 82,340
-------- -------- --------
Deferred charges and other assets 18,217 15,076 19,103
-------- -------- --------
Total $601,636 $585,142 $570,286
======== ======== ========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common equity -
Common stock, $1 par $ 20,189 $ 19,771 $ 19,662
Capital in excess of par value 130,977 123,474 121,486
Retained earnings 80,324 64,123 73,900
-------- -------- --------
231,490 207,368 215,048
Long-term debt 174,050 180,850 183,350
-------- -------- --------
405,540 388,218 398,398
-------- -------- --------
Current liabilities:
Maturities of long-term debt 9,300 9,300 9,300
Accounts payable 21,218 27,799 19,558
Accrued taxes 11,493 4,303 9,057
Customer prepayments and deposits 5,819 6,978 3,859
Cash dividends and interest 7,480 8,983 7,156
Restricted supplier refunds 10,109 9,888 9,732
Other 4,070 5,150 4,771
-------- -------- --------
69,489 72,401 63,433
Interim bank loans 38,000 38,000 23,000
-------- -------- --------
107,489 110,401 86,433
-------- -------- --------
Deferred credits and other liabilities:
Income taxes, net 62,105 59,438 58,684
Investment tax credits 3,324 3,780 3,677
Accrued pension cost 8,991 9,532 9,205
Deferred revenues 2,366 3,100 3,345
Other 11,821 10,673 10,544
-------- -------- --------
88,607 86,523 85,455
-------- -------- --------
Total $601,636 $585,142 $570,286
======== ======== ========
3
<PAGE>
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In thousands)
Twelve Months Ended
June 30
-------------------
1998 1997
------- -------
Balance beginning of period $73,900 $64,953
Add - Net income 25,288 26,327
Deduct - Common stock dividends
and other 18,864 17,380
------- -------
Balance end of period $80,324 $73,900
======= =======
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended Twelve Months Ended
June 30 June 30
------------------ -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $30,519 $31,577 $25,288 $26,327
Adjustments to reconcile net income
to net cash provided by operating
activities -
Depreciation, depletion and other 20,836 19,115 27,835 25,365
Deferred income taxes, net 2,667 2,451 3,421 2,661
------- ------- ------- -------
54,022 53,143 56,544 54,353
Change in operating assets and liabilities:
Receivables, net 2,535 (15,982) 7,751 (10,234)
Inventories 1,039 (367) (4,562) (6,953)
Accounts payable (6,581) (743) 1,661 (4,083)
Accrued pension cost (541) (3,008) (215) (2,474)
Other 14,645 6,239 8,795 (1,099)
------- ------- ------- -------
65,119 39,282 69,974 29,510
------- ------- ------- -------
Cash Flows From Investing Activities:
Construction expenditures (47,472) (40,401) (67,381) (57,140)
Non-utility and other (3,004) (3,872) 1,743 (4,300)
------- ------- ------- -------
(50,476) (44,273) (65,638) (61,440)
------- ------- ------- -------
Cash Flows From Financing Activities:
Sale of senior debentures, net of expenses - 49,404 - 49,404
Issuance of common stock through
dividend reinvestment, stock purchase
and stock option plans 8,093 7,807 10,096 9,736
Increase (decrease) in interim bank
loans, net - (36,500) 15,000 (1,000)
Retirement of long-term debt
and common stock (7,069) (4,334) (9,569) (10,642)
Cash dividends (13,737) (12,782) (18,257) (16,979)
------- ------- ------- -------
(12,713) 3,595 (2,730) 30,519
------- ------- ------- -------
Net increase (decrease) in cash and
temporary investments 1,930 (1,396) 1,606 (1,411)
Cash and temporary investments
at beginning of period 1,641 3,361 1,965 3,376
------- ------- ------- -------
Cash and temporary investments
at end of period $ 3,571 $ 1,965 $ 3,571 $ 1,965
======= ======= ======= =======
Cash paid during the period for:
Interest (net of amount capitalized) $15,135 $12,796 $17,854 $16,403
Income taxes 8,812 11,560 10,187 15,195
4
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements and notes should
be read in conjunction with the financial statements and notes included in
PSNC's 1997 Annual Report. In the opinion of management, all adjustments
necessary for a fair statement of the results of operations for the interim
periods have been recorded. Certain amounts previously reported have been
reclassified to conform with the current period's presentation.
PSNC's business is seasonal in nature; therefore, the financial results
for any interim period are not necessarily indicative of those which may be
expected for the annual period.
2. In October 1995, the Financial Accounting Standards Board (FASB) issued its
Statement of Financial Accounting Standards (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 beginning 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 (EPS) as if PSNC had adopted the new method of accounting. Currently PSNC
has two stock-based compensation plans which are described in Note 3 to the
financial statements in PSNC's 1997 Annual Report. PSNC will continue to apply
current accounting rules and adopt only the disclosure requirements for these
plans. As a result, adoption of the new statement did not directly impact PSNC's
financial position or results of operations.
3. 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.
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1998 June 30, 1997
------------------------------------------ ------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income $ 802,000 20,178,000 $ .04 $ 1,285,000 19,639,000 $ .07
Effect of dilutive 129,000 99,000
securities (Options) ---------- ----------
Diluted EPS
Net income $ 802,000 20,307,000 $ .04 $ 1,285,000 19,738,000 $ .07
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
June 30, 1998 June 30, 1997
---------------------------------------------- -------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income $30,519,000 20,051,000 $1.52 $31,577,000 19,482,000 $1.62
Effect of dilutive 121,000 97,000
securities (Options) ---------- ----------
Diluted EPS
Net income $30,519,000 20,172,000 $1.51 $31,577,000 19,579,000 $1.61
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Twelve Months Ended Twelve Months Ended
June 30, 1998 June 30, 1997
------------------------------------------- ---------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
Basic EPS ----------- ------------- --------- ------------ ------------- -----------
Net income $25,288,000 19,976,000 $1.27 $26,327,000 19,408,000 $1.36
Effect of dilutive 113,000 90,000
securities (Options) ---------- ----------
Diluted EPS
Net income $25,288,000 20,089,000 $1.26 $26,327,000 19,498,000 $1.35
========== ==========
</TABLE>
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Changes in Results of Operations
(Amounts in thousands except
degree day and customer data) Three Months Ended June 30
---------------------------------
Increase
1998 1997 (Decrease) %
-------- -------- -------- ---
Gross margin $ 28,641 $ 29,391 $ (750) (3)
Less - Franchise taxes 1,727 1,905 (178) (9)
-------- -------- --------
Net margin $ 26,914 $ 27,486 $ (572) (2)
======== ======== ========
Total volume throughput (DT):
Residential 3,169 3,277 (108) (3)
Commercial/small industrial 2,198 2,246 (48) (2)
Large commercial/industrial 7,695 8,138 (443) (5)
-------- -------- --------
13,062 13,661 (599) (4)
======== ======== ========
System average degree days:
Actual 228 406 (178) (44)
Normal 258 258
Percent colder (warmer) than normal (12%) 57%
Weather normalization adjustment
income, net of franchise taxes $ 285 $ 907 $ (622)
Customers at end of period:
Residential 276,990 262,780 14,210 5
Commercial/small industrial 40,669 39,385 1,284 3
Large commercial/industrial 2,433 2,405 28 1
-------- -------- --------
320,092 304,570 15,522 5
======== ======== ========
Net margin for the three months ended June 30, 1998 decreased $572,000 as
compared to the same period last year. This decrease in net margin is
attributable to the items shown below (in thousands):
Commercial/ Large
Small Commercial/
Residential Industrial Industrial Other Total
----------- ---------- ---------- ----- ------
Price variance * $ (51) $ (8) $ (164) $ - $ (223)
Volume variances, net (456) (52) (162) - (670)
Other - - - 321 321
------ ------ ------- ------ ------
Total $ (507) $ (60) $ (326) $ 321 $ (572)
====== ====== ======= ====== ======
*Includes changes in sales mix.
7
<PAGE>
MANAGEMENT'S DISCUSSION (Continued)
This decrease in net margin is due primarily to a decrease in the volume of
natural gas sold related to weather that was 44% warmer than the same period
last year.
(Amounts in thousands except
degree day data) Nine Months Ended June 30
--------------------------------
Increase
1998 1997 (Decrease) %
-------- -------- --------- ---
Gross margin $137,851 $138,012 $ (161) -
Less - Franchise taxes 9,580 9,754 (174) (2)
-------- -------- ---------
Net margin $128,271 $128,258 $ 13 -
======== ======== =========
Total volume throughput (DT):
Residential 19,717 18,653 1,064 6
Commercial/small industrial 11,297 11,011 286 3
Large commercial/industrial 26,731 25,597 1,134 4
-------- -------- ---------
57,745 55,261 2,484 4
======== ======== =========
System average degree days:
Actual 3,360 3,231 129 4
Normal 3,367 3,367
Percent colder (warmer) than normal - (4%)
Weather normalization adjustment
income, net of
franchise taxes $ 113 $ 5,961 $ (5,848)
Net margin for the nine months ended June 30, 1998 increased $13,000 as
compared to the same period last year. This increase in net margin is
attributable to the items shown below (in thousands):
Commercial/ Large
Small Commercial/
Residential Industrial Industrial Other Total
----------- ---------- ---------- ----- ------
Price variance * $ (78) $ 61 $ 9 $ - $ (8)
Volume variances, net (53) (437) 615 - 125
Other - - - (104) (104)
------- ------ ------- ----- -------
Total $ (131) $ (376) $ 624 $(104) $ 13
======= ====== ======= ===== =======
* Includes changes in sales mix.
8
<PAGE>
This increase in net margin is due primarily to an increase in the number
of customers served.
(Amounts in thousands except
degree day data) Twelve Months Ended June 30
--------------------------------
Increase
1998 1997 (Decrease) %
-------- -------- --------- ---
Gross margin $155,765 $154,315 $ 1,450 1
Less - Franchise taxes 10,644 10,785 (141) (1)
-------- -------- ---------
Net margin $145,121 $143,530 $ 1,591 1
======== ======== =========
Total volume throughput (DT):
Residential 20,825 19,672 1,153 6
Commercial/small industrial 12,658 12,456 202 2
Large commercial/industrial 34,114 32,300 1,814 6
-------- -------- ---------
67,597 64,428 3,169 5
======== ======== =========
System average degree days:
Actual 3,382 3,242 140 4
Normal 3,384 3,384
Percent colder (warmer) than normal - (4%)
Weather normalization adjustment
income, net of franchise taxes $ 113 $ 5,963 $ (5,850)
Net margin for the twelve months ended June 30, 1998 increased $1,591,000
as compared to the same period last year. This increase in net margin is
attributable to the items shown below (in thousands):
Commercial/ Large
Small Commercial/
Residential Industrial Industrial Other Total
----------- ---------- ---------- ------- -------
Price variance * $ 396 $ 192 $ (860) $ - $ (272)
Volume variances, net 564 (533) 1,170 - 1,201
Resolution-S.Expansion - - - 734 734
Other - - - (72) (72)
------- ------ ------- ------- -------
Total $ 960 $ (341) $ 310 $ 662 $ 1,591
======= ====== ======= ======= =======
* Includes changes in sales mix.
This increase in net margin is due primarily to an increase in the number
of customers served and the general rate increase effective October 1, 1996.
9
<PAGE>
MANAGEMENT'S DISCUSSION (Continued)
For the nine- and twelve-month periods, the weather normalization
adjustment (WNA) mechanism more than offset the impact that increased
consumption by residential and small commercial customers had on net margin
because consumption per degree day by these customers was lower than the
historical average used in the WNA mechanism. Natural gas usage per residential
and small commercial customers, excluding the impact of weather, decreased
5% and 3%, respectively, as compared to the same periods last year.
Operating and maintenance expenses for three, nine and twelve months
ended June 30, 1998 decreased 4%, 3% and 1%, respectively. The change for both
the nine- and twelve-month periods includes a decrease in net expenses related
to the voluntary early retirement program incurred during the first quarter of
fiscal 1997. Net of this one-time charge, operating and maintenance expenses
remained relatively flat for both periods. Affecting all three periods presented
is an increase in costs associated with employee training, outside consulting
services, employee wages and health insurance costs. The outside consulting
services are associated with the company's Year 2000 compliance plan further
discussed in Changes in Financial Condition. Additionally, postage increased for
the nine- and twelve-month periods, and meter reading and pipe locating costs
increased for all three periods. These increased costs are a result of an
increase in the number of customers served. Offsetting these increases for all
three periods are lower legal expenses, uncollectible provision expenses,
liquefied natural gas facility power usage and incentive compensation costs.
Lower overtime wages for the quarter ended June 30, 1998 partially offset the
increase in labor costs for that period.
Depreciation expense increased 12% for the three, nine and twelve
months ended June 30, 1998 due to utility plant additions.
Other income for the three and nine months ended June 30, 1998
decreased $80,000 and $235,000 as compared to the same periods last year, while
remaining relatively flat for the twelve-month period. Affecting all periods is
lower interest income associated with the Rider D rate mechanism. During fiscal
1998, through an increment in its rates, the company collected previously
undercollected gas costs and was able to more closely match its benchmark gas
cost with market prices. This resulted in a lower Rider D receivable balance.
The company's handling of the Rider D rate mechanism is discussed in Changes in
Financial Condition. Partially offsetting these decreases is increased
merchandising and jobbing income of $223,000, $581,000 and $661,000,
respectively. The change in merchandising and jobbing income for both the nine-
and twelve-month periods includes a decrease in net expenses related to the
voluntary early retirement program offered during the first quarter of fiscal
1997.
In December 1996, PSNC and Sonat Marketing Company L.P. formed Sonat
Public Service Company L.L.C., with each owning 50%. 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 net
of tax. Income from this joint
10
<PAGE>
venture increased for the nine- and twelve-month periods, offsetting the
decrease in Rider D interest.
Interest deductions for the nine and twelve months ended June 30, 1998
increased 5% and 8%, respectively, as compared to the same periods last year.
These increases reflect the increase in interest expense on short-term debt
resulting from higher average bank loans outstanding during the period. Also
contributing to the increase for the nine- and twelve-month periods is an
increase in interest expense associated with the December 17, 1996 issuance of
$50,000,000 of 7.45% Senior Debentures due 2026.
The change in earnings per share for all three periods reflects
increases of 3% in the average number of common shares outstanding as compared
to the same periods for the prior year. These increases are primarily due to
shares issued through PSNC's dividend reinvestment, employee stock purchase and
stock option plans.
On April 28, 1998, the Board of Directors increased PSNC's quarterly
cash dividend by $.01 per share, from $.23 to $.24, payable July 1, 1998 to
shareholders of record June 10, 1998.
Changes in Financial Condition
The capital expansion program, through the construction of lines,
services, systems, and facilities, and the purchase of equipment, is designed to
help PSNC meet the growing demand for its product. PSNC's fiscal 1998
construction budget is $69,781,000, compared to actual construction expenditures
for fiscal 1997 of $60,310,000. The construction program is regularly reviewed
by management and is dependent upon PSNC's continuing ability to generate
adequate funds internally and to sell new issues of debt and equity securities
on acceptable terms. Construction expenditures during the nine and twelve months
ended June 30, 1998 were $47,472,000 and $67,381,000, respectively, as compared
to $40,401,000 and $57,140,000 for the same periods for the prior year.
PSNC is preparing all of its computer systems to be Year 2000
compliant. The company is nearing completion of the renovation of its mainframe
system and is in the process of identifying any compliance problems with its
non-mainframe systems. Approximately $12,000,000 to replace existing systems is
being capitalized into plant. Approximately $3,300,000 to modify existing
systems is being amortized over a three-year period in accordance with a North
Carolina Utilities Commission (NCUC) order discussed further in Regulatory
Matters. These costs are estimates based on PSNC's analysis to date and are
subject to change after the modification of its systems is completed. PSNC is
seeking recovery of Year 2000 compliance costs in its general rate case filed on
April 2, 1998. PSNC is also in the process of identifying key third parties with
which it interfaces and is actively addressing Year 2000 compliance issues and
contingencies with those parties.
11
<PAGE>
MANAGEMENT'S DISCUSSION (Continued)
PSNC generally finances its operations with internally generated funds,
supplemented with bank lines of credit to satisfy seasonal requirements. PSNC
also borrows under its bank lines of credit to finance portions of its
construction expenditures pending refinancing through the issuance of equity or
long-term debt at a later date depending upon prevailing market conditions. 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 $70,000,000. 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 a
portion of construction expenditures, stored gas inventories and other corporate
needs.
Restricted cash and temporary investments and restricted supplier
refunds relate to refunds of $10,108,000 received from PSNC's pipeline
transportation provider that have not been deposited into the expansion fund in
the Office of the State Treasurer. This fund was created by an order of the NCUC
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.
The decrease in receivables at June 30, 1998 as compared to June 30,
1997 includes a $7,500,000 loan made to a real estate developer for the purpose
of constructing office and warehouse space for PSNC. This receivable was paid
upon PSNC's acquisition of the property in August 1997.
As of June 30, 1998, September 30, 1997, and June 30, 1997, net
deferred gas costs include $828,000, $1,279,000 and $1,621,000, respectively, of
gas costs related to unbilled volumes. The balance of net deferred gas costs
fluctuates in response to the operation of PSNC's Rider D rate mechanism. This
mechanism allows PSNC to recover from customers all prudently incurred gas
costs. On a monthly basis, any difference in amounts paid and collected for
these costs is recorded for subsequent refund to or collection from PSNC's
customers. It also allows PSNC to recover margin losses on negotiated sales to
large commercial and industrial customers with alternate fuel capability. Net
deferred gas costs at June 30, 1998, September 30, 1997, and June 30, 1997
reflect undercollections from customers. PSNC's deferred gas costs balances are
approved by the NCUC in annual gas cost reviews and are collected from or
refunded to customers over a subsequent twelve-month period. Amounts that have
not been collected from or refunded to customers bear interest at an annual rate
of 10% as required by the NCUC. PSNC's strategy is to manage the balance of
deferred gas costs to a minimal level. On November 6, 1997, the NCUC issued an
order permitting PSNC, on a two-year trial basis, to establish its commodity
cost of gas monthly for large
12
<PAGE>
commercial and industrial customers on the basis of market prices for natural
gas. PSNC will continue to establish a benchmark cost of gas for residential and
small commercial customers pursuant to its existing procedures, which are based
upon market prices projected for the succeeding twelve months.
At June 30, 1998, deferred charges and other assets include unamortized
Year 2000 compliance costs of $2,913,000 discussed further in Regulatory
Matters. Deferred charges and other assets also include the restricted cash
contribution from Sonat Marketing Company L.P. PSNC Production Corporation, a
subsidiary of PSNC, and Sonat Marketing Company L.P., a subsidiary of Sonat
Inc., created Sonat Public Service Company L.L.C. Sonat Marketing contributed
$4,944,000 for its 50% ownership of which approximately $4,845,000 is currently
restricted. Sonat Marketing is entitled to a partial refund of its contribution
not yet earned 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 decrease in accounts payable at June 30, 1998 as compared to
September 30, 1997 is primarily due to reduced secondary market activity and
natural gas purchased at a lower cost.
On December 17, 1996, PSNC sold $50,000,000 of 7.45% Senior Debentures
due 2026 in a public offering. The net proceeds of $49,404,000 were used to pay
down a significant portion of the then outstanding short-term bank debt. There
has been no long-term financing since that time, resulting in an increase in
short-term bank loans.
Regulatory Matters
PSNC currently provides natural gas service to the eastern portion of
Haywood County. 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, and authorized disbursements from the
expansion fund of $4,127,000. Through June 30, 1998, PSNC had spent $4,423,000
on the project, of which $2,409,000 was reimbursed from the expansion fund. In
July 1998, PSNC received $408,000 from the fund and requested an additional
$501,000.
On July 6, 1998, PSNC filed an application with the NCUC requesting
expansion funds in the amount of $5,330,000 to extend natural gas service into
Alexander County. Most of Alexander County lies within PSNC's franchised service
territory and is currently not provided natural gas service. PSNC estimates that
the cost of the project will be $6,188,000. A hearing on this application has
been set for November 18, 1998.
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, of which PSNC owns 64.5%. It
was placed in 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
13
<PAGE>
MANAGEMENT'S DISCUSSION (Continued)
September 1995, PSNC, Piedmont, Transcontinental Gas Pipe Line Corporation
(Transco) and North Carolina Natural Gas Corporation (NCNG) signed a letter of
intent to form Cardinal Extension Company, LLC (Cardinal Extension) to purchase
and extend the Cardinal Pipeline. As proposed, the pipeline will be extended 67
miles from the termination point of the original Cardinal Pipeline near Haw
River to a point southeast of Raleigh, will provide 140 mmcf/day of additional
capacity (100 mmcf/day for PSNC and 40 mmcf/day for NCNG) and will cost an
estimated $75,000,000. Through their respective subsidiaries, PSNC will own
approximately 33%, Piedmont will own approximately 17%, Transco will own
approximately 45%, and NCNG will own approximately 5% of the combined 104.5-mile
pipeline. PSNC will contribute to Cardinal Extension its net book investment in
the existing pipeline plus additional equity capital of approximately $1,000,000
for its 33% interest. On November 6, 1997, the NCUC issued an order granting
Cardinal Extension a certificate to construct the new facilities and merge with
Cardinal. No appeals of this order were filed within the statutory review
period. 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. This facility will be located
near Transco's pipeline northwest of Greensboro, North Carolina, and will have a
storage capacity of four billion cubic feet with vaporization capability of 400
mmcf/day. The Federal Energy Regulatory Commission (FERC) granted Pine Needle a
certificate to construct, own and operate this facility. The NCUC filed a
petition for review of the FERC order with the United States Court of Appeals
for the District of Columbia. In late 1997, Pine Needle and the NCUC signed an
agreement relating to the NCUC's appeal, and the NCUC withdrew its petition.
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 deferred
accounting for contract labor costs of approximately $3,300,000 for a project to
ensure that PSNC's computer operating systems function properly in the year
2000. The order required a three-year amortization of these costs beginning in
the year incurred. PSNC began amortizing these costs in September 1997 and is
seeking to recover unamortized costs in its general rate case filed on April 2,
1998.
PSNC filed a general rate case with the NCUC on April 2, 1998 asking
for a 7.5% or $21,500,000 increase in annual revenue. A hearing on this filing
has been scheduled to begin on August 25, 1998. A general rate order from the
NCUC is expected on or about November 1, 1998.
14
<PAGE>
Recently Issued but Not Yet Effective Accounting Statements
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. However, PSNC does not
anticipate the adoption of this statement to have a material impact on PSNC's
consolidated financial position, results of operations or cash flows.
Forward-looking Statements
Statements contained in this document and the notes to the financial
statements which are not historical in nature are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are subject to risks and uncertainties that may cause
future results to differ materially from those set forth in such forward-looking
statements. PSNC undertakes no obligation to update forward-looking statements
to reflect events or circumstances after the date hereof. Such risks and
uncertainties with respect to PSNC include, but are not limited to, its ability
to successfully implement internal performance goals, performance issues with
natural gas suppliers and transporters, the capital-intensive nature of PSNC's
business, regulatory issues (including rate relief to recover increased capital
and operating costs), legislative issues, 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.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As more fully disclosed in Part I under "Environmental Matters" and in
Part II in Note 7 to the financial statements in the Annual Report on Form 10-K
for the period ending September 30, 1997, PSNC owns or has owned portions of
sites at which manufactured gas plants were formerly operated and is cooperating
with the North Carolina Department of Environment and Natural Resources to
investigate these sites.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Shareholder proposals relating to the company's 1999 annual meeting of
shareholders to be considered for inclusion in the proxy statement to be
provided to shareholders in connection with the solicitation of proxies by the
Board for use at such meeting must be received by the company no later than
August 24, 1998. Any other proposal that a shareholder wishes to bring before
the 1999 annual meeting of shareholders must be received by the company no later
than November 6, 1998. All proposals must comply with the requirements and
conditions established by the Securities and Exchange Commission. All proposals
must be mailed to the Secretary of the company at Post Office Box 1398,
Gastonia, North Carolina 28053-1398.
Item 6. Exhibits and Reports on Form 8-K
(a) Part I Exhibits:
27 - Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during three months
ended June 30, 1998.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PUBLIC SERVICE COMPANY
OF NORTH CAROLINA, INCORPORATED
(Registrant)
Date 08/12/98 /s/Charles E. Zeigler, Jr.
Charles E. Zeigler, Jr.
Chairman, President and
Chief Executive Officer
Date 08/12/98 /s/Jack G. Mason
Jack G. Mason
Vice President - Treasurer
and Chief Financial Officer
17
<PAGE>
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