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 March 31, 1998
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ............ to ............
Commission file number 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 28053-1398
GASTONIA, NORTH CAROLINA (Zip Code)
(Address of principal executive offices)
(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 April 30, 1998.....................................................20,164,945
<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 Six Months Ended Twelve Months Ended
March 31 March 31 March 31
------------------ ------------------ -------------------
1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
-------- -------- -------- -------- -------- ------
Operating revenues $140,205 $150,146 $243,988 $243,800 $338,119 $335,707
Cost of gas 71,719 82,977 134,779 135,179 181,604 184,358
-------- -------- -------- -------- -------- --------
Gross margin 68,486 67,169 109,209 108,621 156,515 151,349
-------- -------- -------- -------- -------- --------
Operating expenses and taxes:
Operating and maintenance 15,761 15,328 30,528 31,085 60,630 58,687
Provision for depreciation 6,177 5,521 12,255 10,916 23,727 20,971
General taxes 6,266 6,503 11,124 10,896 17,152 16,968
Income taxes 14,056 14,052 18,288 18,922 15,078 16,181
-------- -------- -------- -------- -------- --------
42,260 41,404 72,195 71,819 116,587 112,807
-------- -------- -------- -------- -------- --------
Operating income 26,226 25,765 37,014 36,802 39,928 38,542
Other income, net 833 1,064 1,900 2,057 3,729 3,899
Interest deductions 4,535 4,442 9,198 8,566 17,887 15,958
-------- -------- -------- -------- -------- --------
Net income $ 22,524 $ 22,387 $ 29,716 $ 30,293 $ 25,770 $ 26,483
======== ======== ======== ======== ======== ========
Average common shares
outstanding 20,081 19,513 19,987 19,404 19,841 19,265
Basic earnings per share $1.12 $1.15 $1.49 $1.56 $1.30 $1.37
Diluted common shares
outstanding 20,210 19,616 20,107 19,504 19,941 19,344
Diluted earnings per share $1.11 $1.14 $1.48 $1.55 $1.29 $1.37
Cash dividends declared
per share $.23 $.22 $.46 $.44 $.92 $.88
</TABLE>
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
Mar 31 Sep 30 Mar 31
1998 1997 1997
-------- -------- --------
Gas utility plant $714,610 $684,227 $652,405
Less - Accumulated depreciation 215,604 203,225 194,610
-------- -------- --------
499,006 481,002 457,795
-------- -------- --------
Non-utility property, net 618 642 664
-------- -------- --------
Current assets:
Cash and temporary investments 4,541 1,641 3,782
Restricted cash and temporary investments 9,776 9,888 6,564
Receivables, less allowance for
doubtful accounts 47,528 26,617 51,794
Materials and supplies 8,013 7,645 7,206
Stored gas inventory 10,815 20,890 9,567
Deferred gas costs, net 9,026 19,338 18,601
Prepayments and other 2,801 2,403 2,474
-------- -------- --------
92,500 88,422 99,988
-------- -------- --------
Deferred charges and other assets 16,889 15,076 16,141
-------- -------- --------
Total $609,013 $585,142 $574,588
======== ======== ========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common equity -
Common stock, $1 par $ 20,097 $ 19,771 $ 19,546
Capital in excess of par value 129,244 123,474 119,662
Retained earnings 84,376 64,123 77,138
-------- -------- --------
233,717 207,368 216,346
Long-term debt 174,050 180,850 183,350
-------- -------- --------
407,767 388,218 399,696
-------- -------- --------
Current liabilities:
Maturities of long-term debt 9,300 9,300 9,300
Accounts payable 32,992 27,799 20,288
Accrued taxes 13,929 4,303 14,124
Customer prepayments and deposits 4,579 6,978 3,591
Cash dividends and interest 8,761 8,983 8,643
Restricted supplier refunds 9,776 9,888 6,564
Other 3,911 5,150 4,398
-------- -------- --------
83,248 72,401 66,908
Interim bank loans 30,500 38,000 23,500
-------- -------- --------
113,748 110,401 90,408
-------- -------- --------
Deferred credits and other liabilities:
Income taxes, net 61,183 59,438 57,717
Investment tax credits 3,337 3,780 3,697
Accrued pension cost 8,929 9,532 9,119
Deferred revenues 2,610 3,100 3,589
Other 11,439 10,673 10,362
-------- -------- --------
87,498 86,523 84,484
-------- -------- --------
Total $609,013 $585,142 $574,588
======== ======== ========
3
<PAGE>
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In thousands)
Twelve Months Ended
March 31
1998 1997
------- -------
Balance beginning of period $77,138 $67,709
Add - Net income 25,770 26,483
Deduct - Common stock dividends
and other 18,532 17,054
------- -------
Balance end of period $84,376 $77,138
======= =======
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended Twelve Months Ended
March 31 March 31
----------------- -------------------
1998 1997 1998 1997
------- ------- ------- ------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $29,716 $30,293 $25,770 $26,483
Adjustments to reconcile net income
to net cash provided by operating
activities -
Depreciation, depletion and other 14,092 12,512 27,042 24,687
Deferred income taxes, net 1,745 1,484 3,466 2,710
------- ------- ------- -------
45,553 44,289 56,278 53,880
Change in operating assets and liabilities:
Receivables, net (21,789) (35,262) 3,359 (3,849)
Inventories 9,707 5,795 (2,054) (6,453)
Accounts payable 5,193 (13) 12,704 (23,638)
Accrued pension cost (603) (3,095) (191) (3,583)
Other 15,275 7,641 8,023 2,443
------- ------- ------- -------
53,336 19,355 78,119 18,800
------- ------- ------- -------
Cash Flows From Investing Activities:
Construction expenditures (31,121) (23,976) (67,455) (61,271)
Non-utility and other (1,894) (1,399) 379 (2,640)
------- ------- ------- -------
(33,015) (25,375) (67,076) (63,911)
------- ------- ------- -------
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 6,254 5,841 10,222 9,242
Increase (decrease) in interim bank
loans, net (7,500) (36,000) 7,000 13,500
Retirement of long-term debt
and common stock (7,060) (4,329) (9,564) (10,637)
Cash dividends (9,115) (8,475) (17,942) (16,705)
------- ------- ------- -------
(17,421) 6,441 (10,284) 44,804
------- ------- ------- -------
Net increase (decrease) in cash and
temporary investments 2,900 421 759 (307)
Cash and temporary investments
at beginning of period 1,641 3,361 3,782 4,089
------- ------- ------- -------
Cash and temporary investments
at end of period $ 4,541 $ 3,782 $ 4,541 $ 3,782
======= ======= ======= =======
Cash paid during the period for:
Interest (net of amount capitalized) $ 9,342 $ 7,109 $17,747 $14,937
Income taxes 7,280 7,120 13,095 13,520
</TABLE>
4
<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 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
March 31, 1998 March 31, 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 $22,524,000 20,081,000 $1.12 $22,387,000 19,513,000 $1.15
Effect of dilutive 129,000 103,000
securities (Options) ----------- ----------
Diluted EPS
Net income $22,524,000 20,210,000 $1.11 $22,387,000 19,616,000 $1.14
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
March 31, 1998 March 31, 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 $29,716,000 19,987,000 $1.49 $30,293,000 19,404,000 $1.56
Effect of dilutive 120,000 100,000
securities (Options) ----------- ----------
Diluted EPS
Net income $29,716,000 20,107,000 $1.48 $30,293,000 19,504,000 $1.55
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Twelve Months Ended Twelve Months Ended
March 31, 1998 March 31, 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 $25,770,000 19,841,000 $1.30 $26,483,000 19,265,000 $1.37
Effect of dilutive 100,000 79,000
securities (Options) ----------- ----------
Diluted EPS
Net income $25,770,000 19,941,000 $1.29 $26,483,000 19,344,000 $1.37
========== ==========
</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 March 31
------------------------------------------
Increase
1998 1997 (Decrease) %
-------- -------- ---------- ---
Gross margin $ 68,486 $ 67,169 $ 1,317 2
Less - Franchise taxes 4,506 4,827 (321) (7)
-------- -------- --------
Net margin $ 63,980 $ 62,342 $ 1,638 3
======== ======== ========
Total volume throughput (DT):
Residential 10,425 9,499 926 10
Commercial/small industrial 5,492 5,195 297 6
Large commercial/industrial 9,729 8,732 997 11
-------- -------- --------
25,646 23,426 2,220 10
======== ======== ========
System average degree days:
Actual 1,655 1,512 143 10
Normal 1,820 1,820
Percent (warmer) than normal (9%) (17%)
Weather normalization adjustment
income, net of franchise taxes $ 3,034 $ 5,842 $ (2,808)
Customers at end of period:
Residential 283,184 268,244 14,940 6
Commercial/small industrial 41,165 39,815 1,350 3
Large commercial/industrial 2,431 2,399 32 1
-------- -------- --------
326,780 310,458 16,322 5
======== ======== ========
Net margin for the three months ended March 31, 1998 increased $1,638,000
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 * $ (170) $ (44) $ 28 $ - $ (186)
Volume variances, net 1,241 49 481 - 1,771
Other - - - 53 53
------ ------ ------- ------ ------
Total $1,071 $ 5 $ 509 $ 53 $1,638
====== ====== ======= ====== ======
*Includes changes in sales mix.
7
<PAGE>
MANAGEMENT'S DISCUSSION (Continued)
This increase in net margin is due primarily to an increase in the number
of customers served.
(Amounts in thousands except
degree day data) Six Months Ended March 31
-----------------------------------------
Increase
1998 1997 (Decrease) %
-------- -------- --------- ---
Gross margin $109,209 $108,621 $ 588 -
Less - Franchise taxes 7,853 7,849 4 -
-------- -------- ---------
Net margin $101,356 $100,772 $ 584 -
======== ======== =========
Total volume throughput (DT):
Residential 16,549 15,375 1,174 8
Commercial/small industrial 9,098 8,766 332 4
Large commercial/industrial 19,035 17,459 1,576 9
-------- -------- ---------
44,682 41,600 3,082 7
======== ======== =========
System average degree days:
Actual 3,132 2,825 307 11
Normal 3,109 3,109
Percent colder (warmer) than normal 1% (9%)
Weather normalization adjustment
income (refund), net of
franchise taxes $ (398) $ 5,054 $ (5,452)
Net margin for the six months ended March 31, 1998 increased $584,000 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 * $ (27) $ 68 $ 170 $ - $ 211
Volume variances, net 403 (385) 778 - 796
Other - - - (423) (423)
------- ------ ------- ----- -------
Total $ 376 $ (317) $ 948 $(423) $ 584
======= ====== ======= ===== =======
* 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 March 31
-----------------------------------------
Increase
1998 1997 (Decrease) %
-------- -------- --------- ---
Gross margin $156,515 $151,349 $ 5,166 3
Less - Franchise taxes 10,823 10,750 73 1
-------- -------- ---------
Net margin $145,692 $140,599 $ 5,093 4
======== ======== =========
Total volume throughput (DT):
Residential 20,934 20,005 929 5
Commercial/small industrial 12,705 12,759 (54) -
Large commercial/industrial 34,557 31,710 2,847 9
-------- -------- ---------
68,196 64,474 3,722 6
======== ======== =========
System average degree days:
Actual 3,560 3,154 406 13
Normal 3,384 3,384
Percent colder (warmer) than normal 5% (7%)
Weather normalization adjustment
income, net of franchise taxes $ 508 $ 3,113 $ (2,605)
Net margin for the twelve months ended March 31, 1998 increased
$5,093,000 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 * $ 2,395 $ 602 $(1,659) $ - $ 1,338
Volume variances, net 2,483 (591) 1,954 - 3,846
Resolution - S. Expansion - - - 734 734
Other - - - (825) (825)
------- ------ ------- ------- -------
Total $ 4,878 $ 11 $ 295 $ (91) $ 5,093
======= ====== ======= ======= =======
* 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 three periods presented, the weather normalization adjustment
(WNA) more than offset the positive impact that the increase in consumption by
residential and small commercial customers had on net margin. For six months
ended March 31, 1998, consumption per degree day by these customers was lower
than the historical average consumption per degree day used in the WNA
mechanism. Natural gas usage per residential and small commercial customer,
excluding the impact of weather, decreased 6% and 5%, respectively, as compared
to the same period last year.
Operating and maintenance expenses for both the three and twelve months
ended March 31, 1998 increased 3% as compared to the same periods last year,
while decreasing 2% for the six-month period. The change for both the six- and
twelve-month periods includes a decrease in net expenses of $1,034,000 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
increased 2% for the six-month period and 5% for the twelve-month period. Also
affecting the six- and twelve-month periods is reduced power usage at PSNC's
liquefied natural gas facility. All three periods reflect increased costs
associated with employee training, outside consulting services in the
information systems area, employee wages and health insurance costs. The outside
consulting services are associated with the company's Year 2000 compliancy plan
further discussed in Changes in Financial Condition. Additionally, meter
reading, postage and pipe locating costs increased for all three periods. These
increased costs are a result of an increase in the number of customers served.
Partially offsetting these increases are lower uncollectible provision expenses
and lower incentive compensation costs.
Depreciation expense increased for the three, six and twelve months
ended March 31, 1998 due to utility plant additions. For the six- and
twelve-month periods, general taxes increased 2% and 1%, respectively. This
increase is due primarily to increased property taxes which are based on higher
plant balances for the respective periods. General taxes for the three-month
period decreased 4%. This decrease is due primarily to franchise taxes based on
decreased operating revenues for the period.
Other income for the three, six and twelve months ended March 31, 1998
decreased $231,000, $157,000 and $170,000, respectively. The decrease for all
periods is primarily the result of 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 lower
Rider D balances. The company's handling of the Rider D rate mechanism is
discussed in Changes in Financial Condition. The decrease in other income for
the twelve-month period ended March 31, 1998 is due to a $265,000 non-recurring
gain related to the sale of land in June 1996 recognized in the twelve months
ended March 31, 1997. Partially offsetting these decreases for the six- and
twelve-month periods is increased merchandising and jobbing
10
<PAGE>
income of $357,000 and $506,000, respectively. The change in merchandising and
jobbing income for both the six- and twelve-month periods includes a decrease in
net expenses of $235,000 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 venture increased for all three periods,
partially offsetting the decrease in Rider D interest.
Interest deductions for the three, six and twelve months ended March
31, 1998 increased 2%, 7% and 12%, 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.
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.
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 six and twelve months
ended March 31, 1998 were $31,121,000 and $67,455,000, respectively, as compared
to $23,976,000 and $61,271,000 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 $3,000,000 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. PSNC is seeking recovery of Year 2000 costs in its general rate case
filed on April 2, 1998. These costs are estimates based on PSNC's analysis to
date and are subject to change when the analysis of its systems is completed.
PSNC is also in the process of identifying key third parties with which it
11
<PAGE>
MANAGEMENT'S DISCUSSION (Continued)
interfaces and is actively addressing Year 2000 compliance issues and
contingencies with those parties.
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 seven commercial banks which vary monthly
depending upon seasonal requirements and a five-year revolving line of credit
with one bank. For the twelve-month period beginning April 1, 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 $9,776,000 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.
PSNC's business is seasonal in nature as fluctuations in weather
dictate natural gas storage injections and withdrawals. Injections of natural
gas into storage occur during periods of warm weather (April through October).
Withdrawals from storage occur during periods of cold weather (November through
March). This seasonality is the primary reason for lower volumes of gas in
storage as of March 31, 1998 as compared to September 30, 1997. Seasonality also
accounts for the increase in accounts receivable for the same period.
For the periods ended March 31, 1998, September 30, 1997, and March 31,
1997, net deferred gas costs include $5,023,000, $1,279,000 and $5,264,000,
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 March 31, 1998, September 30, 1997,
and March 31, 1997 reflect undercollections from customers.
12
<PAGE>
PSNC's deferred gas costs balances are approved by the NCUC in annual gas cost
prudence 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
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.
Deferred charges and other assets include unamortized Year 2000 costs
of $2,284,000 discussed further in Regulatory Matters. Deferred charges and
other assets also include the restricted cash contribution from Sonat Marketing
Company L.P. PSNC's subsidiary, PSNC Production Corporation, 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 increase in accounts payable at March 31, 1998 of $12,704,000 as
compared to March 31, 1997 is primarily the result of increased quantities of
natural gas purchased at higher costs and increased natural gas brokering and
transportation pooling activities.
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. PSNC began providing partial service to this area
of Haywood County in February 1998. Through March 31, 1998, PSNC spent
$3,212,000 on the project, of which $1,728,000 was received from the expansion
fund. PSNC requested an additional reimbursement of $681,000 in April 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
13
<PAGE>
MANAGEMENT'S DISCUSSION (Continued)
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 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 and 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, through a subsidiary, will contribute to Cardinal 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 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. Right-of-way acquisition has started, and construction will begin in
mid-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. 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 $3,000,000 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 general rate order from
the NCUC is expected on or about November 1, 1998.
14
<PAGE>
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
At the Annual Meeting of Shareholders held on January 30, 1998, the
following members were re-elected to serve on the Board of Directors for a term
expiring at the annual meeting in the month and year indicated or until their
successors are elected and qualified.
Director Term Ending Votes in Favor Votes Withheld
------------------------ ----------- -------------- --------------
William C. Burkhart January 2001 16,028,270 247,960
Van E. Eure January 2001 15,958,575 317,655
William L. O'Brien, Jr. January 2001 16,023,497 252,733
Ben R. Rudisill, II January 2001 15,980,320 295,910
The following are directors whose term of office continued after the
meeting: William A.V. Cecil, Bert Collins, John W. Copeland, D. Wayne Peterson,
G. Smedes York, and Charles E. Zeigler, Jr.
The amendments to PSNC's Employee Stock Purchase Plan increasing the
number of shares available for issuance from 720,000 to 1,020,000, extending the
term of the plan from ten to fifteen years, and reducing the waiting period for
participation in the Plan from one year to six months of continuous service were
approved at the Annual Meeting of Shareholders. As amended, the Employee Stock
Purchase Plan will terminate on January 1, 2003.
For - 15,688,671 Against - 374,625 Abstain - 212,933
The shareholders also ratified the selection of Arthur Andersen LLP as
PSNC's independent public accountants for the fiscal year ending September 30,
1998.
For - 16,084,746 Against - 84,393 Abstain - 107,090
16
<PAGE>
Item 5. Other Information
None.
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 March 31, 1998.
17
<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 05/13/98 /s/Charles E. Zeigler, Jr.
Charles E. Zeigler, Jr.
Chairman, President and
Chief Executive Officer
Date 05/13/98 /s/Jack G. Mason
Jack G. Mason
Vice President - Treasurer
and Chief Financial Officer
18
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