-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LX67Zu2K4Dqa2dFwo/XLyfeNyb1VXbrqW7f2YRC/d+osPHgwBT7XXk02Ggpg7zLU cP05ilF6QR4sPwm38xWjCQ== 0000081025-98-000004.txt : 19980602 0000081025-98-000004.hdr.sgml : 19980602 ACCESSION NUMBER: 0000081025-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC SERVICE CO OF NORTH CAROLINA INC CENTRAL INDEX KEY: 0000081025 STANDARD INDUSTRIAL CLASSIFICATION: 4924 IRS NUMBER: 560233140 STATE OF INCORPORATION: NC FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11429 FILM NUMBER: 98617806 BUSINESS ADDRESS: STREET 1: 400 COX RD STREET 2: PO BOX 1398 CITY: GASTONIA STATE: NC ZIP: 28053 BUSINESS PHONE: 7048646731 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED 03/31/98 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 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
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 -------- -------- -------- -------- -------- ------ 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
2 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 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 ======= =======
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Six Months Ended Twelve Months Ended March 31 March 31 ----------------- ------------------- 1998 1997 1998 1997 ------- ------- ------- ------ 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
4 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 NOTES TO FINANCIAL STATEMENTS (Continued)
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 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 =========== ==========
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 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 ========== ==========
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 ----------- ------------- --------- ----------- ------------- --------- 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 ========== ==========
6 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 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 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 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 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 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 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 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 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 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 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 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 EX-27 2 FDS FOR THE 1998 FORM 10-Q MARCH 31, 1998
UT 1,000 6-MOS SEP-30-1998 OCT-01-1997 MAR-31-1998 PER-BOOK 499,006 618 92,500 16,889 0 609,013 20,097 129,244 84,376 233,717 0 0 174,050 30,500 0 0 9,300 0 0 0 161,446 609,013 243,988 18,288 53,907 72,195 37,014 1,900 38,914 9,198 29,716 0 29,716 9,115 0 53,336 1.49 1.48
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