-----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, HFtylHJbjOCA72epexBndMzw8osVz18MxqzGq1yAJEPInVokz815CUqou7xYv+HU md9uwQKaUZezTDTPnCCkoQ== 0000081025-98-000006.txt : 19980813 0000081025-98-000006.hdr.sgml : 19980813 ACCESSION NUMBER: 0000081025-98-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC SERVICE CO OF NORTH CAROLINA INC CENTRAL INDEX KEY: 0000081025 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [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: 98683235 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 06/30/98 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 June 30, 1998 OR ( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ............ to ............ Commission file number 1-11429 PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-0233140 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 COX ROAD, P.O. BOX 1398 GASTONIA, NORTH CAROLINA 28053-1398 (Address of principal executive offices) (Zip Code) (704) 864-6731 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of Common Stock, $1 par value, outstanding at July 31, 1998.....................................................20,248,230 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 Nine Months Ended Twelve Months Ended June 30 June 30 June 30 ------------------ ------------------ ------------------- 1998 1997 1998 1997 1998 1997 -------- -------- -------- -------- -------- -------- Operating revenues $ 54,532 $ 60,106 $298,520 $303,906 $332,545 $337,006 Cost of gas 25,890 30,715 160,669 165,894 176,779 182,691 -------- -------- -------- -------- -------- -------- Gross margin 28,642 29,391 137,851 138,012 155,766 154,315 -------- -------- -------- -------- -------- -------- Operating expenses and taxes: Operating and maintenance 14,500 15,138 45,028 46,223 59,993 60,360 Provision for depreciation 6,265 5,605 18,520 16,521 24,387 21,725 General taxes 3,409 3,518 14,533 14,414 17,043 17,018 Income taxes 345 587 18,633 19,509 14,835 16,032 -------- -------- -------- -------- -------- -------- 24,519 24,848 96,714 96,667 116,258 115,135 -------- -------- -------- -------- -------- -------- Operating income 4,123 4,543 41,137 41,345 39,508 39,180 Other income, net 742 822 2,643 2,878 3,650 3,632 Interest deductions 4,063 4,080 13,261 12,646 17,870 16,485 -------- -------- -------- -------- -------- -------- Net income $ 802 $ 1,285 $ 30,519 $ 31,577 $ 25,288 $ 26,327 ======== ======== ======== ======== ======== ======== Average common shares outstanding 20,178 19,639 20,051 19,482 19,976 19,408 Basic earnings per share $.04 $.07 $1.52 $1.62 $1.27 $1.36 Diluted common shares outstanding 20,307 19,738 20,172 19,579 20,089 19,498 Diluted earnings per share $.04 $.07 $1.51 $1.61 $1.26 $1.35 Cash dividends declared per share $.24 $.23 $.70 $.67 $.93 $.89 2
CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS Jun 30 Sep 30 Jun 30 1998 1997 1997 -------- -------- -------- Gas utility plant $730,182 $684,227 $666,749 Less - Accumulated depreciation 221,472 203,225 198,560 -------- -------- -------- 508,710 481,002 468,189 -------- -------- -------- Non-utility property, net 606 642 654 -------- -------- -------- Current assets: Cash and temporary investments 3,571 1,641 1,965 Restricted cash and temporary investments 10,109 9,888 9,732 Receivables, less allowance for doubtful accounts 23,471 26,617 32,174 Materials and supplies 8,721 7,645 7,597 Stored gas inventory 18,773 20,890 15,337 Deferred gas costs, net 6,822 19,338 13,081 Prepayments and other 2,636 2,403 2,454 -------- -------- -------- 74,103 88,422 82,340 -------- -------- -------- Deferred charges and other assets 18,217 15,076 19,103 -------- -------- -------- Total $601,636 $585,142 $570,286 ======== ======== ======== CAPITALIZATION AND LIABILITIES Capitalization: Common equity - Common stock, $1 par $ 20,189 $ 19,771 $ 19,662 Capital in excess of par value 130,977 123,474 121,486 Retained earnings 80,324 64,123 73,900 -------- -------- -------- 231,490 207,368 215,048 Long-term debt 174,050 180,850 183,350 -------- -------- -------- 405,540 388,218 398,398 -------- -------- -------- Current liabilities: Maturities of long-term debt 9,300 9,300 9,300 Accounts payable 21,218 27,799 19,558 Accrued taxes 11,493 4,303 9,057 Customer prepayments and deposits 5,819 6,978 3,859 Cash dividends and interest 7,480 8,983 7,156 Restricted supplier refunds 10,109 9,888 9,732 Other 4,070 5,150 4,771 -------- -------- -------- 69,489 72,401 63,433 Interim bank loans 38,000 38,000 23,000 -------- -------- -------- 107,489 110,401 86,433 -------- -------- -------- Deferred credits and other liabilities: Income taxes, net 62,105 59,438 58,684 Investment tax credits 3,324 3,780 3,677 Accrued pension cost 8,991 9,532 9,205 Deferred revenues 2,366 3,100 3,345 Other 11,821 10,673 10,544 -------- -------- -------- 88,607 86,523 85,455 -------- -------- -------- Total $601,636 $585,142 $570,286 ======== ======== ======== 3 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (In thousands) Twelve Months Ended June 30 ------------------- 1998 1997 ------- ------- Balance beginning of period $73,900 $64,953 Add - Net income 25,288 26,327 Deduct - Common stock dividends and other 18,864 17,380 ------- ------- Balance end of period $80,324 $73,900 ======= =======
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Nine Months Ended Twelve Months Ended June 30 June 30 ------------------ ------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Cash Flows From Operating Activities: Net income $30,519 $31,577 $25,288 $26,327 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation, depletion and other 20,836 19,115 27,835 25,365 Deferred income taxes, net 2,667 2,451 3,421 2,661 ------- ------- ------- ------- 54,022 53,143 56,544 54,353 Change in operating assets and liabilities: Receivables, net 2,535 (15,982) 7,751 (10,234) Inventories 1,039 (367) (4,562) (6,953) Accounts payable (6,581) (743) 1,661 (4,083) Accrued pension cost (541) (3,008) (215) (2,474) Other 14,645 6,239 8,795 (1,099) ------- ------- ------- ------- 65,119 39,282 69,974 29,510 ------- ------- ------- ------- Cash Flows From Investing Activities: Construction expenditures (47,472) (40,401) (67,381) (57,140) Non-utility and other (3,004) (3,872) 1,743 (4,300) ------- ------- ------- ------- (50,476) (44,273) (65,638) (61,440) ------- ------- ------- ------- Cash Flows From Financing Activities: Sale of senior debentures, net of expenses - 49,404 - 49,404 Issuance of common stock through dividend reinvestment, stock purchase and stock option plans 8,093 7,807 10,096 9,736 Increase (decrease) in interim bank loans, net - (36,500) 15,000 (1,000) Retirement of long-term debt and common stock (7,069) (4,334) (9,569) (10,642) Cash dividends (13,737) (12,782) (18,257) (16,979) ------- ------- ------- ------- (12,713) 3,595 (2,730) 30,519 ------- ------- ------- ------- Net increase (decrease) in cash and temporary investments 1,930 (1,396) 1,606 (1,411) Cash and temporary investments at beginning of period 1,641 3,361 1,965 3,376 ------- ------- ------- ------- Cash and temporary investments at end of period $ 3,571 $ 1,965 $ 3,571 $ 1,965 ======= ======= ======= ======= Cash paid during the period for: Interest (net of amount capitalized) $15,135 $12,796 $17,854 $16,403 Income taxes 8,812 11,560 10,187 15,195 4
NOTES TO FINANCIAL STATEMENTS 1. The accompanying unaudited consolidated financial statements and notes should be read in conjunction with the financial statements and notes included in PSNC's 1997 Annual Report. In the opinion of management, all adjustments necessary for a fair statement of the results of operations for the interim periods have been recorded. Certain amounts previously reported have been reclassified to conform with the current period's presentation. PSNC's business is seasonal in nature; therefore, the financial results for any interim period are not necessarily indicative of those which may be expected for the annual period. 2. In October 1995, the Financial Accounting Standards Board (FASB) issued its Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Awards of Stock-Based Compensation to Employees. This statement defines a fair value method of accounting for stock options or similar equity instruments and was adopted by PSNC beginning October 1, 1996. SFAS No. 123 permits companies to continue to account for stock-based compensation awards under existing accounting rules, but requires disclosure in a note to the financial statements of the pro forma net income and earnings per share (EPS) as if PSNC had adopted the new method of accounting. Currently PSNC has two stock-based compensation plans which are described in Note 3 to the financial statements in PSNC's 1997 Annual Report. PSNC will continue to apply current accounting rules and adopt only the disclosure requirements for these plans. As a result, adoption of the new statement did not directly impact PSNC's financial position or results of operations. 3. In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. This statement establishes standards for computing and presenting EPS. It requires presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires reconciliation of the computation of basic EPS to diluted EPS. Basic EPS is computed by dividing income available to shareholders by the weighted average number of shares outstanding for the period. Diluted EPS gives effect to all dilutive potential common shares that were outstanding during the period. Prior period EPS has been restated to conform to the new statement. This statement was adopted by PSNC beginning October 1, 1997. 5 NOTES TO FINANCIAL STATEMENTS (Continued)
Three Months Ended Three Months Ended June 30, 1998 June 30, 1997 ------------------------------------------ ------------------------------------------ Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- --------- Basic EPS Net income $ 802,000 20,178,000 $ .04 $ 1,285,000 19,639,000 $ .07 Effect of dilutive 129,000 99,000 securities (Options) ---------- ---------- Diluted EPS Net income $ 802,000 20,307,000 $ .04 $ 1,285,000 19,738,000 $ .07 =========== ==========
Nine Months Ended Nine Months Ended June 30, 1998 June 30, 1997 ---------------------------------------------- ------------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- ---------- Basic EPS Net income $30,519,000 20,051,000 $1.52 $31,577,000 19,482,000 $1.62 Effect of dilutive 121,000 97,000 securities (Options) ---------- ---------- Diluted EPS Net income $30,519,000 20,172,000 $1.51 $31,577,000 19,579,000 $1.61 ========== ==========
Twelve Months Ended Twelve Months Ended June 30, 1998 June 30, 1997 ------------------------------------------- --------------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount Basic EPS ----------- ------------- --------- ------------ ------------- ----------- Net income $25,288,000 19,976,000 $1.27 $26,327,000 19,408,000 $1.36 Effect of dilutive 113,000 90,000 securities (Options) ---------- ---------- Diluted EPS Net income $25,288,000 20,089,000 $1.26 $26,327,000 19,498,000 $1.35 ========== ==========
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 June 30 --------------------------------- Increase 1998 1997 (Decrease) % -------- -------- -------- --- Gross margin $ 28,641 $ 29,391 $ (750) (3) Less - Franchise taxes 1,727 1,905 (178) (9) -------- -------- -------- Net margin $ 26,914 $ 27,486 $ (572) (2) ======== ======== ======== Total volume throughput (DT): Residential 3,169 3,277 (108) (3) Commercial/small industrial 2,198 2,246 (48) (2) Large commercial/industrial 7,695 8,138 (443) (5) -------- -------- -------- 13,062 13,661 (599) (4) ======== ======== ======== System average degree days: Actual 228 406 (178) (44) Normal 258 258 Percent colder (warmer) than normal (12%) 57% Weather normalization adjustment income, net of franchise taxes $ 285 $ 907 $ (622) Customers at end of period: Residential 276,990 262,780 14,210 5 Commercial/small industrial 40,669 39,385 1,284 3 Large commercial/industrial 2,433 2,405 28 1 -------- -------- -------- 320,092 304,570 15,522 5 ======== ======== ======== Net margin for the three months ended June 30, 1998 decreased $572,000 as compared to the same period last year. This decrease in net margin is attributable to the items shown below (in thousands): Commercial/ Large Small Commercial/ Residential Industrial Industrial Other Total ----------- ---------- ---------- ----- ------ Price variance * $ (51) $ (8) $ (164) $ - $ (223) Volume variances, net (456) (52) (162) - (670) Other - - - 321 321 ------ ------ ------- ------ ------ Total $ (507) $ (60) $ (326) $ 321 $ (572) ====== ====== ======= ====== ====== *Includes changes in sales mix. 7 MANAGEMENT'S DISCUSSION (Continued) This decrease in net margin is due primarily to a decrease in the volume of natural gas sold related to weather that was 44% warmer than the same period last year. (Amounts in thousands except degree day data) Nine Months Ended June 30 -------------------------------- Increase 1998 1997 (Decrease) % -------- -------- --------- --- Gross margin $137,851 $138,012 $ (161) - Less - Franchise taxes 9,580 9,754 (174) (2) -------- -------- --------- Net margin $128,271 $128,258 $ 13 - ======== ======== ========= Total volume throughput (DT): Residential 19,717 18,653 1,064 6 Commercial/small industrial 11,297 11,011 286 3 Large commercial/industrial 26,731 25,597 1,134 4 -------- -------- --------- 57,745 55,261 2,484 4 ======== ======== ========= System average degree days: Actual 3,360 3,231 129 4 Normal 3,367 3,367 Percent colder (warmer) than normal - (4%) Weather normalization adjustment income, net of franchise taxes $ 113 $ 5,961 $ (5,848) Net margin for the nine months ended June 30, 1998 increased $13,000 as compared to the same period last year. This increase in net margin is attributable to the items shown below (in thousands): Commercial/ Large Small Commercial/ Residential Industrial Industrial Other Total ----------- ---------- ---------- ----- ------ Price variance * $ (78) $ 61 $ 9 $ - $ (8) Volume variances, net (53) (437) 615 - 125 Other - - - (104) (104) ------- ------ ------- ----- ------- Total $ (131) $ (376) $ 624 $(104) $ 13 ======= ====== ======= ===== ======= * Includes changes in sales mix. 8 This increase in net margin is due primarily to an increase in the number of customers served. (Amounts in thousands except degree day data) Twelve Months Ended June 30 -------------------------------- Increase 1998 1997 (Decrease) % -------- -------- --------- --- Gross margin $155,765 $154,315 $ 1,450 1 Less - Franchise taxes 10,644 10,785 (141) (1) -------- -------- --------- Net margin $145,121 $143,530 $ 1,591 1 ======== ======== ========= Total volume throughput (DT): Residential 20,825 19,672 1,153 6 Commercial/small industrial 12,658 12,456 202 2 Large commercial/industrial 34,114 32,300 1,814 6 -------- -------- --------- 67,597 64,428 3,169 5 ======== ======== ========= System average degree days: Actual 3,382 3,242 140 4 Normal 3,384 3,384 Percent colder (warmer) than normal - (4%) Weather normalization adjustment income, net of franchise taxes $ 113 $ 5,963 $ (5,850) Net margin for the twelve months ended June 30, 1998 increased $1,591,000 as compared to the same period last year. This increase in net margin is attributable to the items shown below (in thousands): Commercial/ Large Small Commercial/ Residential Industrial Industrial Other Total ----------- ---------- ---------- ------- ------- Price variance * $ 396 $ 192 $ (860) $ - $ (272) Volume variances, net 564 (533) 1,170 - 1,201 Resolution-S.Expansion - - - 734 734 Other - - - (72) (72) ------- ------ ------- ------- ------- Total $ 960 $ (341) $ 310 $ 662 $ 1,591 ======= ====== ======= ======= ======= * Includes changes in sales mix. This increase in net margin is due primarily to an increase in the number of customers served and the general rate increase effective October 1, 1996. 9 MANAGEMENT'S DISCUSSION (Continued) For the nine- and twelve-month periods, the weather normalization adjustment (WNA) mechanism more than offset the impact that increased consumption by residential and small commercial customers had on net margin because consumption per degree day by these customers was lower than the historical average used in the WNA mechanism. Natural gas usage per residential and small commercial customers, excluding the impact of weather, decreased 5% and 3%, respectively, as compared to the same periods last year. Operating and maintenance expenses for three, nine and twelve months ended June 30, 1998 decreased 4%, 3% and 1%, respectively. The change for both the nine- and twelve-month periods includes a decrease in net expenses related to the voluntary early retirement program incurred during the first quarter of fiscal 1997. Net of this one-time charge, operating and maintenance expenses remained relatively flat for both periods. Affecting all three periods presented is an increase in costs associated with employee training, outside consulting services, employee wages and health insurance costs. The outside consulting services are associated with the company's Year 2000 compliance plan further discussed in Changes in Financial Condition. Additionally, postage increased for the nine- and twelve-month periods, and meter reading and pipe locating costs increased for all three periods. These increased costs are a result of an increase in the number of customers served. Offsetting these increases for all three periods are lower legal expenses, uncollectible provision expenses, liquefied natural gas facility power usage and incentive compensation costs. Lower overtime wages for the quarter ended June 30, 1998 partially offset the increase in labor costs for that period. Depreciation expense increased 12% for the three, nine and twelve months ended June 30, 1998 due to utility plant additions. Other income for the three and nine months ended June 30, 1998 decreased $80,000 and $235,000 as compared to the same periods last year, while remaining relatively flat for the twelve-month period. Affecting all periods is lower interest income associated with the Rider D rate mechanism. During fiscal 1998, through an increment in its rates, the company collected previously undercollected gas costs and was able to more closely match its benchmark gas cost with market prices. This resulted in a lower Rider D receivable balance. The company's handling of the Rider D rate mechanism is discussed in Changes in Financial Condition. Partially offsetting these decreases is increased merchandising and jobbing income of $223,000, $581,000 and $661,000, respectively. The change in merchandising and jobbing income for both the nine- and twelve-month periods includes a decrease in net expenses related to the voluntary early retirement program offered during the first quarter of fiscal 1997. In December 1996, PSNC and Sonat Marketing Company L.P. formed Sonat Public Service Company L.L.C., with each owning 50%. Prior to December 1996, income from secondary market transactions was recorded as other income. Income from secondary market transactions is now recorded in subsidiary operations net of tax. Income from this joint 10 venture increased for the nine- and twelve-month periods, offsetting the decrease in Rider D interest. Interest deductions for the nine and twelve months ended June 30, 1998 increased 5% and 8%, respectively, as compared to the same periods last year. These increases reflect the increase in interest expense on short-term debt resulting from higher average bank loans outstanding during the period. Also contributing to the increase for the nine- and twelve-month periods is an increase in interest expense associated with the December 17, 1996 issuance of $50,000,000 of 7.45% Senior Debentures due 2026. The change in earnings per share for all three periods reflects increases of 3% in the average number of common shares outstanding as compared to the same periods for the prior year. These increases are primarily due to shares issued through PSNC's dividend reinvestment, employee stock purchase and stock option plans. On April 28, 1998, the Board of Directors increased PSNC's quarterly cash dividend by $.01 per share, from $.23 to $.24, payable July 1, 1998 to shareholders of record June 10, 1998. Changes in Financial Condition The capital expansion program, through the construction of lines, services, systems, and facilities, and the purchase of equipment, is designed to help PSNC meet the growing demand for its product. PSNC's fiscal 1998 construction budget is $69,781,000, compared to actual construction expenditures for fiscal 1997 of $60,310,000. The construction program is regularly reviewed by management and is dependent upon PSNC's continuing ability to generate adequate funds internally and to sell new issues of debt and equity securities on acceptable terms. Construction expenditures during the nine and twelve months ended June 30, 1998 were $47,472,000 and $67,381,000, respectively, as compared to $40,401,000 and $57,140,000 for the same periods for the prior year. PSNC is preparing all of its computer systems to be Year 2000 compliant. The company is nearing completion of the renovation of its mainframe system and is in the process of identifying any compliance problems with its non-mainframe systems. Approximately $12,000,000 to replace existing systems is being capitalized into plant. Approximately $3,300,000 to modify existing systems is being amortized over a three-year period in accordance with a North Carolina Utilities Commission (NCUC) order discussed further in Regulatory Matters. These costs are estimates based on PSNC's analysis to date and are subject to change after the modification of its systems is completed. PSNC is seeking recovery of Year 2000 compliance costs in its general rate case filed on April 2, 1998. PSNC is also in the process of identifying key third parties with which it interfaces and is actively addressing Year 2000 compliance issues and contingencies with those parties. 11 MANAGEMENT'S DISCUSSION (Continued) PSNC generally finances its operations with internally generated funds, supplemented with bank lines of credit to satisfy seasonal requirements. PSNC also borrows under its bank lines of credit to finance portions of its construction expenditures pending refinancing through the issuance of equity or long-term debt at a later date depending upon prevailing market conditions. PSNC has committed lines of credit with six commercial banks which vary monthly depending upon seasonal requirements and a five-year revolving line of credit with one bank. For the twelve-month period beginning April 1, 1998, total lines of credit with these banks range from a minimum of $39,000,000 to a winter-period maximum of $85,000,000. PSNC also has uncommitted annual lines of credit totaling $70,000,000. Lines of credit are evaluated periodically by management and renegotiated to accommodate anticipated short-term financing needs. Management believes these lines are currently adequate to finance a portion of construction expenditures, stored gas inventories and other corporate needs. Restricted cash and temporary investments and restricted supplier refunds relate to refunds of $10,108,000 received from PSNC's pipeline transportation provider that have not been deposited into the expansion fund in the Office of the State Treasurer. This fund was created by an order of the NCUC to finance the construction of natural gas lines into unserved areas of PSNC's service territory that otherwise would not be economically feasible to serve. The decrease in receivables at June 30, 1998 as compared to June 30, 1997 includes a $7,500,000 loan made to a real estate developer for the purpose of constructing office and warehouse space for PSNC. This receivable was paid upon PSNC's acquisition of the property in August 1997. As of June 30, 1998, September 30, 1997, and June 30, 1997, net deferred gas costs include $828,000, $1,279,000 and $1,621,000, respectively, of gas costs related to unbilled volumes. The balance of net deferred gas costs fluctuates in response to the operation of PSNC's Rider D rate mechanism. This mechanism allows PSNC to recover from customers all prudently incurred gas costs. On a monthly basis, any difference in amounts paid and collected for these costs is recorded for subsequent refund to or collection from PSNC's customers. It also allows PSNC to recover margin losses on negotiated sales to large commercial and industrial customers with alternate fuel capability. Net deferred gas costs at June 30, 1998, September 30, 1997, and June 30, 1997 reflect undercollections from customers. PSNC's deferred gas costs balances are approved by the NCUC in annual gas cost reviews and are collected from or refunded to customers over a subsequent twelve-month period. Amounts that have not been collected from or refunded to customers bear interest at an annual rate of 10% as required by the NCUC. PSNC's strategy is to manage the balance of deferred gas costs to a minimal level. On November 6, 1997, the NCUC issued an order permitting PSNC, on a two-year trial basis, to establish its commodity cost of gas monthly for large 12 commercial and industrial customers on the basis of market prices for natural gas. PSNC will continue to establish a benchmark cost of gas for residential and small commercial customers pursuant to its existing procedures, which are based upon market prices projected for the succeeding twelve months. At June 30, 1998, deferred charges and other assets include unamortized Year 2000 compliance costs of $2,913,000 discussed further in Regulatory Matters. Deferred charges and other assets also include the restricted cash contribution from Sonat Marketing Company L.P. PSNC Production Corporation, a subsidiary of PSNC, and Sonat Marketing Company L.P., a subsidiary of Sonat Inc., created Sonat Public Service Company L.L.C. Sonat Marketing contributed $4,944,000 for its 50% ownership of which approximately $4,845,000 is currently restricted. Sonat Marketing is entitled to a partial refund of its contribution not yet earned if the economics of the transaction are adversely modified by any regulatory body over a five-year period. Restricted cash will be released annually in equal amounts beginning in December 1998 and extending through December 2001. The decrease in accounts payable at June 30, 1998 as compared to September 30, 1997 is primarily due to reduced secondary market activity and natural gas purchased at a lower cost. On December 17, 1996, PSNC sold $50,000,000 of 7.45% Senior Debentures due 2026 in a public offering. The net proceeds of $49,404,000 were used to pay down a significant portion of the then outstanding short-term bank debt. There has been no long-term financing since that time, resulting in an increase in short-term bank loans. Regulatory Matters PSNC currently provides natural gas service to the eastern portion of Haywood County. On April 22, 1997, the NCUC approved PSNC's application to use expansion funds to extend service to western Haywood County, including Waynesville, Clyde and Lake Junaluska, and authorized disbursements from the expansion fund of $4,127,000. Through June 30, 1998, PSNC had spent $4,423,000 on the project, of which $2,409,000 was reimbursed from the expansion fund. In July 1998, PSNC received $408,000 from the fund and requested an additional $501,000. On July 6, 1998, PSNC filed an application with the NCUC requesting expansion funds in the amount of $5,330,000 to extend natural gas service into Alexander County. Most of Alexander County lies within PSNC's franchised service territory and is currently not provided natural gas service. PSNC estimates that the cost of the project will be $6,188,000. A hearing on this application has been set for November 18, 1998. PSNC and a subsidiary of Piedmont Natural Gas Company, Inc. (Piedmont) formed Cardinal Pipeline Company, LLC (Cardinal) in March 1994, to construct and operate a 24-inch, 37.5-mile natural gas pipeline, of which PSNC owns 64.5%. It was placed in service on December 31, 1994, and provides 130 million cubic feet per day (mmcf/day) of additional firm capacity (70 mmcf/day for PSNC and 60 mmcf/day for Piedmont). In 13 MANAGEMENT'S DISCUSSION (Continued) September 1995, PSNC, Piedmont, Transcontinental Gas Pipe Line Corporation (Transco) and North Carolina Natural Gas Corporation (NCNG) signed a letter of intent to form Cardinal Extension Company, LLC (Cardinal Extension) to purchase and extend the Cardinal Pipeline. As proposed, the pipeline will be extended 67 miles from the termination point of the original Cardinal Pipeline near Haw River to a point southeast of Raleigh, will provide 140 mmcf/day of additional capacity (100 mmcf/day for PSNC and 40 mmcf/day for NCNG) and will cost an estimated $75,000,000. Through their respective subsidiaries, PSNC will own approximately 33%, Piedmont will own approximately 17%, Transco will own approximately 45%, and NCNG will own approximately 5% of the combined 104.5-mile pipeline. PSNC will contribute to Cardinal Extension its net book investment in the existing pipeline plus additional equity capital of approximately $1,000,000 for its 33% interest. On November 6, 1997, the NCUC issued an order granting Cardinal Extension a certificate to construct the new facilities and merge with Cardinal. No appeals of this order were filed within the statutory review period. The facilities are expected to be in service on or before November 1, 1999. Pine Needle LNG Company, LLC (Pine Needle) was formed by subsidiaries of Transco, Piedmont, NCNG, Amerada Hess, and PSNC, and the Municipal Gas Authority of Georgia to own and operate a liquefied natural gas storage facility, with an estimated cost of $107,000,000. This facility will be located near Transco's pipeline northwest of Greensboro, North Carolina, and will have a storage capacity of four billion cubic feet with vaporization capability of 400 mmcf/day. The Federal Energy Regulatory Commission (FERC) granted Pine Needle a certificate to construct, own and operate this facility. The NCUC filed a petition for review of the FERC order with the United States Court of Appeals for the District of Columbia. In late 1997, Pine Needle and the NCUC signed an agreement relating to the NCUC's appeal, and the NCUC withdrew its petition. Liquefaction is expected to begin in May 1999 in time for withdrawal service to begin in the 1999 winter heating season. PSNC's subsidiary, PSNC Blue Ridge Corporation, will make an equity capital contribution of approximately $9,000,000 at the end of the construction period. On April 29, 1997, the NCUC issued an order authorizing deferred accounting for contract labor costs of approximately $3,300,000 for a project to ensure that PSNC's computer operating systems function properly in the year 2000. The order required a three-year amortization of these costs beginning in the year incurred. PSNC began amortizing these costs in September 1997 and is seeking to recover unamortized costs in its general rate case filed on April 2, 1998. PSNC filed a general rate case with the NCUC on April 2, 1998 asking for a 7.5% or $21,500,000 increase in annual revenue. A hearing on this filing has been scheduled to begin on August 25, 1998. A general rate order from the NCUC is expected on or about November 1, 1998. 14 Recently Issued but Not Yet Effective Accounting Statements In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement revises certain footnote disclosures and adds new disclosures related to pensions and other postretirement benefit plans. It does not change the measurement and recognition requirements for those plans. Therefore, this statement will not have any impact on PSNC's consolidated financial position, results of operations or cash flows. This statement will be adopted by PSNC effective October 1, 1998. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. This statement will be adopted by PSNC effective October 1, 1999. PSNC has not yet quantified the impact of adopting SFAS No. 133 on its financial statements and has not determined the method of adoption. However, PSNC does not anticipate the adoption of this statement to have a material impact on PSNC's consolidated financial position, results of operations or cash flows. Forward-looking Statements Statements contained in this document and the notes to the financial statements which are not historical in nature are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause future results to differ materially from those set forth in such forward-looking statements. PSNC undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date hereof. Such risks and uncertainties with respect to PSNC include, but are not limited to, its ability to successfully implement internal performance goals, performance issues with natural gas suppliers and transporters, the capital-intensive nature of PSNC's business, regulatory issues (including rate relief to recover increased capital and operating costs), legislative issues, competition, weather, exposure to environmental issues and liabilities, variations in natural gas prices and general and specific economic conditions. From time to time, subsequent to the date of the filing of this document, PSNC may include forward-looking statements in oral statements or other written documents. 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings As more fully disclosed in Part I under "Environmental Matters" and in Part II in Note 7 to the financial statements in the Annual Report on Form 10-K for the period ending September 30, 1997, PSNC owns or has owned portions of sites at which manufactured gas plants were formerly operated and is cooperating with the North Carolina Department of Environment and Natural Resources to investigate these sites. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information Shareholder proposals relating to the company's 1999 annual meeting of shareholders to be considered for inclusion in the proxy statement to be provided to shareholders in connection with the solicitation of proxies by the Board for use at such meeting must be received by the company no later than August 24, 1998. Any other proposal that a shareholder wishes to bring before the 1999 annual meeting of shareholders must be received by the company no later than November 6, 1998. All proposals must comply with the requirements and conditions established by the Securities and Exchange Commission. All proposals must be mailed to the Secretary of the company at Post Office Box 1398, Gastonia, North Carolina 28053-1398. Item 6. Exhibits and Reports on Form 8-K (a) Part I Exhibits: 27 - Financial Data Schedule. (b) Reports on Form 8-K There were no reports on Form 8-K filed during three months ended June 30, 1998. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED (Registrant) Date 08/12/98 /s/Charles E. Zeigler, Jr. Charles E. Zeigler, Jr. Chairman, President and Chief Executive Officer Date 08/12/98 /s/Jack G. Mason Jack G. Mason Vice President - Treasurer and Chief Financial Officer 17 EX-27 2 FDS FOR THE 1998 FORM 10-Q JUNE 30, 1998
UT 1,000 9-Mos SEP-30-1998 OCT-01-1997 JUN-30-1998 PER-BOOK 508,710 606 74,103 18,217 0 601,636 20,189 130,977 80,324 231,490 0 0 174,050 38,000 0 0 9,300 0 0 0 148,796 601,636 298,520 18,633 78,081 96,714 41,137 2,643 43,780 13,261 30,519 0 30,519 13,737 0 65,119 1.52 1.51
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