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 December 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
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 January 31, 1999...................................................20,517,485
<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 (Unaudited)
(In thousands, except per share amounts)
Three Months Ended Twelve Months Ended
December 31 December 31
------------------ -------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
-------- -------- -------- --------
Operating revenues $ 73,201 $103,784 $300,089 $348,060
Cost of gas 33,401 63,060 144,642 192,862
-------- -------- -------- --------
Gross margin 39,800 40,724 155,447 155,198
-------- -------- -------- --------
Operating expenses and taxes:
Operating and maintenance 19,217 14,766 64,368 60,197
Provision for depreciation 6,693 6,078 25,664 23,072
General taxes 3,896 4,858 16,221 17,389
Income taxes 2,158 4,232 13,053 15,073
-------- -------- -------- --------
31,964 29,934 119,306 115,731
-------- -------- -------- --------
Operating income 7,836 10,790 36,141 39,467
Other income, net 744 1,067 3,198 3,961
Interest deductions 4,814 4,664 17,928 17,795
-------- -------- -------- --------
Net income $ 3,766 $ 7,193 $ 21,411 $ 25,633
======== ======== ======== ========
Average common shares outstanding 20,359 19,893 20,220 19,699
Basic earnings per share $.18 $.36 $1.06 $1.30
Diluted common shares outstanding 20,553 20,011 20,349 19,791
Diluted earnings per share $.18 $.36 $1.05 $1.30
Cash dividends declared per share $.24 $.23 $.95 $.91
See notes to consolidated financial statements.
</TABLE>
2
<PAGE>
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
ASSETS
Dec 31 Sep 30 Dec 31
1998 1998 1997
-------- -------- --------
Gas utility plant $754,798 $743,721 $697,678
Less - Accumulated depreciation 231,783 224,204 210,067
-------- -------- --------
523,015 519,517 487,611
-------- -------- --------
Non-utility property, net 583 595 630
-------- -------- --------
Current assets:
Cash and temporary investments 4,347 3,277 7,642
Restricted cash and temporary investments 14,174 10,247 9,645
Receivables, less allowance for
doubtful accounts 45,573 20,836 55,739
Materials and supplies 6,774 6,992 8,142
Stored gas inventory 24,367 24,406 18,944
Deferred gas costs, net 19,389 13,576 27,784
Prepayments and other 2,461 2,260 2,093
-------- -------- --------
117,085 81,594 129,989
-------- -------- --------
Deferred charges and other assets 15,725 17,047 16,255
-------- -------- --------
Total $656,408 $618,753 $634,485
======== ======== ========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common equity -
Common stock, $1 par $ 20,378 $ 20,274 $ 19,918
Capital in excess of par value 134,742 132,787 126,052
Retained earnings 68,654 69,778 66,475
-------- -------- --------
223,774 222,839 212,445
Long-term debt 164,750 171,550 174,050
-------- -------- --------
388,524 394,389 386,495
-------- -------- --------
Current liabilities:
Maturities of long-term debt 9,300 9,300 9,300
Accounts payable 31,972 20,015 46,152
Accrued taxes 224 1,180 6,091
Customer prepayments and deposits 9,048 7,021 8,233
Cash dividends and interest 7,744 9,210 7,284
Restricted supplier refunds 14,174 10,247 9,645
Other 7,859 4,184 4,069
-------- -------- --------
80,321 61,157 90,774
Interim bank loans 94,500 70,500 69,500
-------- -------- --------
174,821 131,657 160,274
-------- -------- --------
Deferred credits and other liabilities:
Income taxes, net 67,865 66,527 60,468
Investment tax credits 3,311 3,411 3,667
Accrued pension cost 6,128 7,985 9,490
Deferred revenues 1,876 2,121 2,855
Other 13,883 12,663 11,236
-------- -------- --------
93,063 92,707 87,716
-------- -------- --------
Total $656,408 $618,753 $634,485
======== ======== ========
See notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (Unaudited)
(In thousands)
Twelve Months Ended
December 31
1998 1997
------- -------
Balance beginning of period $66,475 $59,051
Add - Net income 21,411 25,633
Deduct - Common stock dividends
and other 19,232 18,209
------- -------
Balance end of period $68,654 $66,475
======= =======
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended Twelve Months Ended
December 31 December 31
------------------ -------------------
1998 1997 1998 1997
------- ------- ------- ------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 3,766 $ 7,193 $21,411 $25,633
Adjustments to reconcile net income
to net cash provided by operating
activities -
Depreciation, depletion and other 7,513 6,970 29,038 26,588
Deferred income taxes, net 1,339 1,030 7,397 3,088
------- ------- ------- -------
12,618 15,193 57,846 55,309
Change in operating assets and liabilities:
Receivables, net (24,914) (29,438) 9,438 (2,191)
Inventories 257 1,449 (4,054) (5,697)
Accounts payable 11,957 18,353 (14,180) (2,039)
Accrued pension cost (1,856) (42) (3,362) (1,156)
Other (1,492) (7,842) 7,556 (3,216)
------- ------- ------- -------
(3,430) (2,327) 53,244 41,010
------- ------- ------- -------
Cash Flows From Investing Activities:
Construction expenditures (11,077) (13,451) (62,954) (61,474)
Non-utility and other 1,127 (993) 594 394
------- ------- ------- -------
(9,950) (14,444) (62,360) (61,080)
------- ------- ------- -------
Cash Flows From Financing Activities:
Issuance of common stock through
dividend reinvestment, stock purchase
and stock option plans 2,114 2,866 9,044 10,908
Increase in interim bank
loans, net 24,000 31,500 25,000 39,500
Retirement of long-term debt
and common stock (6,800) (7,060) (9,290) (9,564)
Cash dividends (4,864) (4,534) (18,933) (17,613)
------- ------- ------- -------
14,450 22,772 5,821 23,231
------- ------- ------- -------
Net increase in cash and
temporary investments 1,070 6,001 (3,295) 3,161
Cash and temporary investments
at beginning of period 3,277 1,641 7,642 4,481
------- ------- ------- -------
Cash and temporary investments
at end of period $ 4,347 $ 7,642 $ 4,347 $ 7,642
======= ======= ======= =======
Cash paid during the period for:
Interest (net of amount capitalized) $ 6,133 $ 6,328 $17,706 $17,679
Income taxes 280 930 11,452 13,865
See notes to consolidated financial statements.
4
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements and notes should
be read in conjunction with the audited consolidated financial statements and
notes included in PSNC's 1998 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. During the quarter ended December 31, 1998, PSNC recorded net restructuring
charges of $4,027,000 in connection with Plan 2001, a three-year operating plan
for translating PSNC's vision, mission, strategies and corporate goals into
specific actions. These charges consisted of severance benefits of approximately
$4,200,000, a one-time payment to 152 employees of approximately $1,100,000 in
connection with an automobile fleet restructuring and a net curtailment loss on
post-retirement benefit obligations of approximately $447,000 offset by pension
gains of approximately $1,720,000. The severance charges are the result of a
plan approved by the Board of Directors to eliminate approximately 200 positions
from PSNC's workforce by August 1999 through the involuntary termination of
selected employees or job classifications. Severance benefit arrangements under
the plan were communicated to employees during the first quarter of fiscal 1999.
The net curtailment loss on post-retirement benefits and the pension gains
relate directly to the severance activity. The net one-time impact on quarterly
earnings from all of the above items was a decrease of $0.12 per share.
3. 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. Comprehensive income is the
total of net income and all other non-owner changes in equity. This statement
was adopted by PSNC effective October 1, 1998. At December 31, 1998,
comprehensive income does not differ materially from net income.
4. In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." This information introduces a new model for
segment reporting based on the way senior management organizes segments within a
company for operating decisions and assessing performance. This statement was
adopted by PSNC October 1, 1998 and becomes effective for its 1999 annual
financial statements.
5
<PAGE>
5. 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
effective October 1, 1997.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
December 31, 1998 December 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 $3,766,000 20,359,000 $.18 $7,193,000 19,893,000 $.36
Effect of dilutive
securities (Options) 194,000 118,000
----------- -----------
Diluted EPS
Net income $3,766,000 20,553,000 $.18 $7,193,000 20,011,000 $.36
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
Twelve Months Ended Twelve Months Ended
December 31, 1998 December 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 $21,411,000 20,220,000 $1.06 $25,633,000 19,699,000 $1.30
Effect of dilutive
securities (Options) 129,000 92,000
----------- -----------
Diluted EPS
Net income $21,411,000 20,349,000 $1.05 $25,633,000 19,791,000 $1.30
========== ==========
</TABLE>
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Changes in Results of Operations
(Amounts in thousands except
degree day and customer data) Three Months Ended December 31
------------------------------------------
Increase
1998 1997 (Decrease) %
-------- -------- -------- --
Gross margin $ 39,800 $ 40,724 $ (924) (2)
Less - Franchise taxes 2,361 3,347 (986) (29)
-------- -------- --------
Net margin $ 37,439 $ 37,377 $ 62 -
======== ======== ========
Total volume throughput (DT):
Residential 4,274 6,124 (1,850) (30)
Commercial/small industrial 2,732 3,607 (875) (24)
Large commercial/industrial 8,343 9,306 (963) (10)
-------- -------- ---------
15,349 19,037 (3,688) (19)
======== ======== =========
System average degree days:
Actual 1,078 1,477 (399) (27)
Normal 1,292 1,292
Percent colder (warmer) than normal (17%) 14%
Weather normalization adjustment
income (refund), net of
franchise taxes $ 4,037 $ (3,433) $ 7,470
Customers at end of period:
Residential 293,779 280,393 13,386 5
Commercial/small industrial 41,797 40,724 1,073 3
Large commercial/industrial 2,429 2,425 4 -
-------- -------- ---------
338,005 323,542 14,463 4
======== ======== =========
Net margin for the three months ended December 31, 1998 increased
$62,000 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 * $ 818 $ 214 $ (589) $ - $ 443
Volume variances, net (12) (307) (779) - (1,098)
Other - - - 717 717
------ ------ ------- ------ -------
Total $ 806 $ (93) $(1,368) $ 717 $ 62
====== ====== ======= ====== =======
*Includes changes in sales mix.
7
<PAGE>
MANAGEMENT'S DISCUSSION (Continued)
The increase in net margin is the result of offsetting factors. The
increase in net margin is attributable to the general rate increase effective
November 1, 1998, an increase in the number of customers served and, as a result
of the warmer weather, a lower volume and cost of unaccounted-for gas. These
increases were offset by a reduction in the volume of gas sold as a result of
warmer than normal weather. The impact of warm weather on usage per customer
more than offset the impact of PSNC's weather normalization adjustment (WNA) on
margin. Throughput to non-WNA large commercial and industrial customers
decreased 10% as compared to the same period in fiscal 1998 as a result of the
warmer weather.
(Amounts in thousands except
degree day data) Twelve Months Ended December 31
-----------------------------------
Increase
1998 1997 (Decrease) %
-------- -------- -------- --
Gross margin $155,447 $155,198 $ 249 -
Less - Franchise taxes 9,604 11,143 (1,539) (14)
-------- -------- --------
Net margin $145,843 $144,055 $ 1,788 1
======== ======== ========
Total volume throughput (DT):
Residential 18,945 20,008 (1,063) (5)
Commercial/small industrial 11,742 12,409 (667) (5)
Large commercial/industrial 33,064 33,560 (496) (1)
-------- -------- --------
63,751 65,977 (2,226) (3)
======== ======== ========
System average degree days:
Actual 2,967 3,417 (450) (13)
Normal 3,382 3,382
Percent colder (warmer) than normal (12%) 1%
Weather normalization adjustment
income, net of franchise taxes $ 7,356 $ 3,315 $ 4,041
8
<PAGE>
Net margin for the twelve months ended December 31, 1998 increased
$1,788,000 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 * $ 579 $ 156 $ (817) $ (10) $ (92)
Volume variances, net 1,062 (336) (440) - 286
Other - - - 1,594 1,594
------ ------- ------- ------- -------
Total $1,641 $ (180) $(1,257) $ 1,584 $ 1,788
====== ======= ======= ======= =======
* Includes changes in sales mix.
The increase in net margin is due primarily to the general rate
increase effective November 1, 1998, an increase in the number of customers
served and, as a result of the warmer weather, a lower volume and cost of
unaccounted-for gas. Partially offsetting these increases is a reduction in the
volume of gas sold as a result of warmer than normal weather.
Operating and maintenance expenses for the three months ended December
31, 1998 increased $4,451,000 or 30% as compared to the same period last year
and $4,171,000 or 7% for the twelve-month period. The change for both periods is
primarily the result of net restructuring charges recognized during the first
quarter of fiscal 1999 of $4,027,000 in connection with Plan 2001, discussed
further in Note 2 to the accompanying unaudited consolidated financial
statements. These charges consisted of severance benefits of approximately
$4,200,000, a one-time payment to 152 employees of approximately $1,100,000 in
connection with an automobile fleet restructuring and a net curtailment loss on
post-retirement benefit obligations of approximately $447,000 offset by pension
gains of approximately $1,720,000. On a straight comparison basis without this
restructuring charge, operating and maintenance expenses increased 3% for the
quarter and remained relatively flat for the twelve-month period.
PSNC estimates that implementation of Plan 2001 over the course of
fiscal 1999 should produce approximately $9,800,000 of pre-tax annualized cost
savings and incremental margin. Additionally, PSNC expects Plan 2001 initiatives
during the fiscal 2000-01 period to provide approximately $6,000,000 of pre-tax
annualized cost savings and incremental margin.
9
<PAGE>
MANAGEMENT'S DISCUSSION (Continued)
Depreciation expense increased for the three and twelve months ended
December 31, 1998 due to utility plant additions. For the three- and
twelve-month periods, general taxes decreased 20% and 7%, respectively. These
decreases are due primarily to decreased franchise taxes based on decreased
operating revenues for the respective periods.
Other income for the three and twelve months ended December 31, 1998
decreased $323,000 and $763,000, respectively. This is primarily the result of a
decrease in interest income on amounts due from customers through the operation
of the 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.
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 average Rider D receivable balance.
Additionally, contributing to the decrease in both periods is a $210,000 pre-tax
write-down due to an anticipated loss on PSNC Production Corporation's
investment in American Gas Finance Company, a limited liability company
established by natural gas utilities to provide financing for residential
energy- efficiency improvements. Somewhat offsetting both these items is an
increase in merchandising and jobbing income of $84,000 and $378,000 for the
three- and twelve-month periods.
Interest deductions for the three and twelve months ended December 31,
1998 increased 3% and 1% as compared to the same periods last year. This
reflects the increase in interest expense on short-term debt resulting from
higher average short-term bank loans outstanding during the period. Somewhat
offsetting this is a decrease in interest expense on long-term debt resulting
from lower average long-term debt outstanding.
The change in diluted earnings per share for both the three- and
twelve-month periods reflects an increase of 3% in the average number of common
shares outstanding as compared to the same periods last year. These increases
are primarily due to shares issued through PSNC's dividend reinvestment 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 1999
construction
10
<PAGE>
budget is approximately $45,000,000, compared to actual construction
expenditures for fiscal 1998 of $65,329,000. This 31% reduction in budgeted
construction expenditures is partially due to the completion of PSNC's bare
main replacement program and management's emphasis on improving the return made
on capital investments. 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 three and twelve
months ended December 31, 1998 were $11,077,000 and $62,954,000, respectively,
as compared to $13,451,000 and $61,474,000 for the same periods ended
December 31, 1997.
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. At December 31, 1998, committed lines of credit
totaled $85,000,000 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.
Restricted cash and temporary investments and restricted supplier
refunds relate to refunds of $14,174,000 received from PSNC's pipeline
transporters 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 North Carolina
Utilities Commission (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.
Net accounts receivable decreased $10,166,000 as compared to December
31, 1997 due primarily to lower gas sales revenues and reduced gas brokering and
transportation pooling activities.
Stored gas inventories increased $5,423,000 as compared to December 31,
1997 due primarily to acquiring additional storage capacity through two existing
storage services.
As of December 31, 1998, September 30, 1998 and December 31, 1997, net
deferred gas costs include $9,195,000, $863,000 and $14,799,000,
11
<PAGE>
MANAGEMENT'S DISCUSSION (Continued)
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 December 31, 1998 and September 30,
1998 primarily represent undercollections from customers. 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 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 subsequent twelve months.
Deferred charges and other assets decreased as compared to September
30, 1998 due primarily to a decrease in long-term restricted cash. Long-term
restricted cash represents a restricted cash contribution from Sonat Marketing
Company L.P. (Sonat Marketing). PSNC's subsidiary, PSNC Production Corporation,
and Sonat Marketing created Sonat Public Service Company L.L.C. (Sonat Public
Service) in December 1996. Upon creation of Sonat Public Service, Sonat
Marketing contributed $4,944,000 for its 50% ownership in Sonat Public Service,
of which $4,845,000 was restricted. Restricted cash of equal amounts are being
released annually beginning in December 1998 through December 2001. PSNC
Production received its first cash payment of $1,211,000 in December 1998,
lowering the balance in long-term restricted cash to $3,634,00 at December 31,
1998. Sonat Marketing is entitled to a partial refund of its contribution if the
economics of the transaction is adversely modified by any regulatory body over a
five-year period.
Accounts payable decreased $14,180,000 as compared to December 31, 1997
due primarily to lower volumes of natural gas purchased at a lower cost and
reduced secondary market activity.
Accrued taxes decreased as compared to December 31, 1997 due to an
overpayment of 1998 income taxes which has been applied to 1999 income taxes.
12
<PAGE>
Other current liabilities increased from September 30, 1998 and
December 31, 1997 due primarily to recording accrued unpaid severance charges of
approximately $3,600,000 in the first quarter of fiscal 1999.
The change in deferred credits and other liabilities from September 30,
1998 includes a decrease in accrued pension cost of $1,720,000 offset by an
increase of $447,000 in post-retirement benefits, both related to the company's
severance activity.
Regulatory Matters
On October 30, 1998, the NCUC issued an order in PSNC's general rate
case filed in April 1998. The 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 Weather Normalization Adjustment, Rider D mechanisms and full margin
transportation rates. The Carolina Utility Customers Association, Inc. (CUCA), a
party to PSNC's general rate case, has formally appealed the general rate case
order. Management cannot predict the outcome of this appeal.
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 use of $4,918,000 from its expansion fund to make this project
economically feasible. A hearing was held on this matter on November 18, 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. PSNC owns 64.5% of the
pipeline, which extends 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, 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 Cardinal Pipeline. As proposed,
the new pipeline will extend approximately 67 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 capacity (100 mmcf/day for
PSNC and 40 mmcf/day for NCNG). The extension will be project-financed at
13
<PAGE>
MANAGEMENT'S DISCUSSION (Continued)
an estimated cost of approximately $75,000,000. Through their respective
subsidiaries, PSNC will own approximately 33%, Piedmont will own approximately
17%, Transco will own approximately 45% and NCNG will own approximately 5% of
Cardinal Extension. PSNC, through a subsidiary, will contribute to Cardinal
Extension its net book investment in the existing pipeline plus additional
equity capital of approximately $1,000,000. On 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. Pine Needle will own and operate a liquefied natural gas
storage facility, with an estimated cost of $107,000,000. Pursuant to a final
Federal Energy Regulatory Commission 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. 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.
On November 14, 1996, PSNC filed an application with the NCUC
requesting deferral accounting 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. Approximately $4,000,000 of these costs have been incurred to date.
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.
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 readiness requirements by
mid-1999 and to continue developing and testing its contingency plan
14
<PAGE>
throughout 1999. PSNC began its Year 2000 efforts in 1995 by interviewing
vendors and gaining awareness of this issue. An assessment of PSNC's Year 2000
impact was performed in 1996, and PSNC began addressing its major business
computer systems. PSNC decided to renovate its customer information system and
to replace its financial and the materials management systems. The renovation of
PSNC's customer information system was completed in September 1998, and Year
2000 ready financial and materials management systems are to be implemented
early calendar 1999.
During 1998, PSNC established a centrally managed, company-wide Year
2000 project office. PSNC's Year 2000 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 to address the
mitigation of risks and continuance of operations if critical suppliers or
third-party vendors have a failure. PSNC has a verbal mutual agreement with its
major pipeline transporter to begin developing a contingency plan in mid-1999.
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 ready 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.
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.
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
the NCUC order discussed more fully in Regulatory Matters. Approximately
$4,000,000 of these costs has been incurred. These costs are estimates based on
PSNC's analysis to date and are subject to change after the modifications of its
systems are completed.
15
<PAGE>
MANAGEMENT'S DISCUSSION (Continued)
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.
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. 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.
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 external 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 or
operational impact of the failure of one or more of its suppliers to deliver
critical supplies or
16
<PAGE>
services. PSNC expects to have its contingency plans prepared by June 1999 with
testing continuing throughout calendar 1999.
The foregoing 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
trained personnel, the ability to locate and correct all affected computer code,
the timing and success of remedial efforts of third-party suppliers and similar
uncertainties.
Each of the components of PSNC's Year 2000 program is progressing, and
the company believes it is taking all reasonable steps necessary to be able to
operate successfully through and beyond the turn of the century.
Forward-looking Statements
Statements contained in this document and the notes to the financial
statements that 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 internal performance goals successfully,
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, unanticipated problems related to internal Year 2000 initiatives as well
as potential adverse consequences related to third-party Year 2000 compliance,
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.
17
<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, 1998, PSNC owns, or has owned, all or
portions of six sites in North Carolina on 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
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 the three months
ended December 31, 1998.
18
<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 2-12-99 /s/Charles E. Zeigler, Jr.
Charles E. Zeigler, Jr.
Chairman, President and
Chief Executive Officer
Date 2-12-99 /s/Jack G. Mason
Jack G. Mason
Vice President - Finance
<PAGE> 19
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