-----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, ND0QePKNHnhTTDkk4M8B+ujBSagsEPWV7DVEO3qk+zQ7xCAEwpSGVVaM9FNC6CWc 2k8S5kx6Xu1xjG5vwCdB2Q== 0000081025-99-000003.txt : 19990215 0000081025-99-000003.hdr.sgml : 19990215 ACCESSION NUMBER: 0000081025-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 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: 99533390 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 12/31/98 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 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 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 (Unaudited) (In thousands, except per share amounts) Three Months Ended Twelve Months Ended December 31 December 31 ------------------ ------------------- 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.
2 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 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 ======= =======
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Three Months Ended Twelve Months Ended December 31 December 31 ------------------ ------------------- 1998 1997 1998 1997 ------- ------- ------- ------ 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
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 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.
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 ----------- ------------- --------- ----------- ------------- --------- 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 =========== ==========
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 ----------- ------------- --------- ----------- ------------- --------- 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 ========== ==========
6 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 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 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 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 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 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 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 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 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 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 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 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 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 19 EX-27 2 FDS FOR THE FORM 10-Q FOR DECEMBER 31, 1998
UT 1000 3-mos SEP-30-1999 OCT-01-1998 DEC-31-1998 PER-BOOK 523,015 583 117,085 15,725 0 656,408 20,378 134,742 68,654 223,774 0 0 164,750 94,500 0 0 9,300 0 0 0 164,084 656,408 73,201 2,158 29,806 31,964 7,836 744 8,580 4,814 3,766 0 3,766 4,864 3,594 (3,430) 0.18 0.18
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