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, 1997 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 April 30, 1997................ .................................19,619,700 1 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. 2 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 ------------------ ------------------ ------------------- 1997 1996 1997 1996 1997 1996 -------- -------- -------- -------- -------- -------- Operating revenues $150,146 $142,053 $243,800 $216,975 $335,707 $285,343 Cost of gas 82,977 80,553 135,179 118,959 184,358 147,050 -------- -------- -------- -------- -------- -------- Gross margin 67,169 61,500 108,621 98,016 151,349 138,293 -------- -------- -------- -------- -------- -------- Operating expenses and taxes: Operating and maintenance 15,328 14,389 31,085 27,601 58,687 53,584 Provision for depreciation 5,521 4,897 10,916 9,694 20,971 18,918 General taxes 6,503 6,229 10,896 9,933 16,968 15,082 Income taxes 14,052 12,808 18,922 17,238 16,181 14,786 -------- -------- -------- -------- -------- -------- 41,404 38,323 71,819 64,466 112,807 102,370 -------- -------- -------- -------- -------- -------- Operating income 25,765 23,177 36,802 33,550 38,542 35,923 Other income, net 1,064 1,074 2,057 1,508 3,899 1,742 Interest deductions 4,442 3,674 8,566 7,351 15,958 13,702 -------- -------- -------- -------- -------- -------- Net income $ 22,387 $ 20,577 $ 30,293 $ 27,707 $ 26,483 $ 23,963 ======== ======== ======== ======== ======== ======== Average common shares outstanding 19,513 18,959 19,404 18,865 19,265 18,749 Earnings per share $1.15 $1.09 $1.56 $1.47 $1.37 $1.28 Cash dividends declared per share $.22 $.2125 $.44 $.425 $.88 $.85 3 CONSOLIDATED BALANCE SHEETS (In thousands) ASSETS Mar 31 Sep 30 Mar 31 1997 1996 1996 -------- -------- -------- Gas utility plant $652,405 $629,218 $595,263 Less - Accumulated depreciation 194,610 183,529 175,582 -------- -------- -------- 457,795 445,689 419,681 -------- -------- -------- Non-utility property, net 664 691 716 -------- -------- -------- Current assets: Cash and temporary investments 3,782 3,361 4,089 Restricted cash and temporary investments 11,410 6,395 5,467 Receivables, less allowance for doubtful accounts 51,794 17,899 49,813 Materials and supplies 7,206 6,705 5,937 Stored gas inventory 9,567 15,863 4,383 Deferred gas costs, net 18,601 17,525 17,996 Prepayments and other 2,474 2,275 2,118 -------- -------- -------- 104,834 70,023 89,803 -------- -------- -------- Deferred charges and other assets 11,295 8,486 8,405 -------- -------- -------- Total $574,588 $524,889 $518,605 ======== ======== ======== CAPITALIZATION AND LIABILITIES Capitalization: Common equity - Common stock, $1 par $ 19,546 $ 19,204 $ 18,979 Capital in excess of par value 119,662 114,008 110,769 Retained earnings 77,138 55,423 67,709 -------- -------- -------- 216,346 188,635 197,457 Long-term debt 183,350 140,150 143,900 -------- -------- -------- 399,696 328,785 341,357 -------- -------- -------- Current liabilities: Maturities of long-term debt 9,300 6,800 9,300 Accounts payable 20,288 20,301 43,926 Accrued taxes 14,124 3,075 13,064 Customer prepayments and deposits 3,591 6,014 3,172 Cash dividends and interest 8,643 7,319 7,695 Restricted supplier refunds 6,564 6,395 5,467 Other 4,398 3,960 3,009 -------- -------- -------- 66,908 53,864 85,633 Interim bank loans 23,500 59,500 10,000 -------- -------- -------- 90,408 113,364 95,633 -------- -------- -------- Deferred credits and other liabilities: Income taxes, net 57,717 56,233 55,007 Investment tax credits 3,697 4,210 4,129 Accrued pension cost 9,119 12,214 12,703 Deferred revenues 3,589 - 155 Other 10,362 10,083 9,621 -------- -------- -------- 84,484 82,740 81,615 -------- -------- -------- Total $574,588 $524,889 $518,605 ======== ======== ======== 4 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (In thousands) Twelve Months Ended March 31 ------------------- 1997 1996 -------- ------- Balance beginning of period $67,709 $59,740 Add - Net income 26,483 23,963 Deduct - Common stock dividends and other 17,054 15,994 ------- ------- Balance end of period $77,138 $67,709 ======= ======= CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Six Months Ended Twelve Months Ended March 31 March 31 ----------------- ------------------- 1997 1996 1997 1996 ------- ------- -------- ------- Cash Flows From Operating Activities: Net income $30,293 $27,707 $26,483 $23,963 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation, depletion and other 12,512 11,819 24,687 22,840 Deferred income taxes, net 1,484 2,401 2,710 4,822 ------- ------- ------- ------- 44,289 41,927 53,880 51,625 Change in operating assets and liabilities: Receivables, net (35,262) (37,414) (3,849) (22,989) Inventories 5,795 7,398 (6,453) 2,106 Accounts payable (13) 23,514 (23,638) 25,750 Accrued pension cost (3,095) (228) (3,583) (280) Other 7,641 (5,051) 2,443 (16,897) ------- ------- ------- ------- 19,355 30,146 18,800 39,315 ------- ------- ------- ------- Cash Flows From Investing Activities: Construction expenditures (23,976) (23,133) (61,271) (57,066) Non-utility and other (1,399) (561) (2,640) (1,530) ------- ------- ------- ------- (25,375) (23,694) (63,911) (58,596) ------- ------- ------- ------- Cash Flows From Financing Activities: Sale of senior debentures, net of expenses 49,404 49,314 49,404 49,314 Issuance of common stock through dividend reinvestment, stock purchase and stock option plans 5,841 4,274 9,242 7,175 Increase (decrease) in interim bank loans, net (36,000) (41,000) 13,500 (6,500) Retirement of long-term debt and common stock (4,329) (7,980) (10,637) (15,525) Cash dividends (8,475) (7,964) (16,705) (15,706) ------- ------- ------- ------- 6,441 (3,356) 44,804 18,758 ------- ------- ------- ------- Net increase (decrease) in cash and temporary investments 421 3,096 (307) (523) Cash and temporary investments at beginning of period 3,361 993 4,089 4,612 ------- ------- ------- ------- Cash and temporary investments at end of period $ 3,782 $ 4,089 $ 3,782 $ 4,089 ======= ======= ======= ======= Cash paid during the period for: Interest (net of amount capitalized) $ 7,109 $ 5,960 $14,937 $11,923 Income taxes 7,120 5,080 13,520 10,914 5 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 1996 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 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 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 1996 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 will not directly impact PSNC's financial position or results of operations. 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 1997 1996 (Decrease) % -------- -------- --------- -- Gross margin $ 67,169 $ 61,500 $ 5,669 9 Less - Franchise taxes 4,827 4,566 261 6 -------- -------- -------- Net margin $ 62,342 $ 56,934 $ 5,408 9 ======== ======== ======== Total volume throughput (DT): Residential 9,499 12,068 (2,569) (21) Commercial/small industrial 5,195 6,593 (1,398) (21) Large commercial/industrial 8,732 6,893 1,839 27 -------- -------- -------- 23,426 25,554 (2,128) (8) ======== ======== ======== System average degree days: Actual 1,512 2,073* (561) (27) Normal 1,820 1,838* (18) (1) Percent of normal 83% 113% Weather normalization adjustment income (refund), net of franchise taxes $ 5,842 $ (4,762) $ 10,604 Customers at end of period: (1) Residential 268,244 259,122 9,122 4 Commercial/small industrial 39,815 36,654 3,161 9 Large commercial/industrial 2,399 392 2,007 NMF -------- -------- -------- 310,458 296,168 14,290 5 ======== ======== ======== * Reflects an additional day for leap year. (1) During the twelve months ended March 31, 1997, approximately 2,600 customers were reclassified from residential to commercial/small industrial, and approximately 2,000 from commercial/small industrial to large commercial/industrial. Net margin for the three months ended March 31, 1997 increased $5,408,000 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 * General rate increase effective 10/96 $3,564 $1,394 $(1,997) $ - $2,961 Volume variances, net 712 (537) 1,957 - 2,132 Other - - - 315 315 ------ ------ ------- ------ ------ Total $4,276 $ 857 $ (40) $ 315 $5,408 ====== ====== ======= ====== ====== * Includes changes in sales mix. 7 This increase in net margin is due primarily to the general rate increase effective October 1, 1996 and an increase in the number of customers served. (Amounts in thousands except degree day data) Six Months Ended March 31 ----------------------------------------- Increase 1997 1996 (Decrease) % -------- -------- --------- -- Gross margin $108,621 $ 98,016 $ 10,605 11 Less - Franchise taxes 7,849 6,984 865 12 -------- -------- --------- Net margin $100,772 $ 91,032 $ 9,740 11 ======== ======== ========= Total volume throughput (DT): Residential 15,375 17,769 (2,394) (13) Commercial/small industrial 8,766 10,314 (1,548) (15) Large commercial/industrial 17,459 14,689 2,770 19 -------- -------- --------- 41,600 42,772 (1,172) (3) ======== ======== ========= System average degree days: Actual 2,825 3,527* (702) (20) Normal 3,109 3,127* (18) (1) Percent of normal 91% 113% Weather normalization adjustment income (refund), net of franchise taxes $ 5,054 $ (6,792) $ 11,846 * Reflects an additional day for leap year. Net margin for the six months ended March 31, 1997 increased $9,740,000 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* General rate increase effective 10/96 $ 5,763 $2,274 $(3,201) $ - $ 4,836 Volume variances, net 2,292 (538) 2,972 - 4,726 Other - - - 178 178 ------- ------ ------- ----- ------- Total $ 8,055 $1,736 $ (229) $ 178 $ 9,740 ======= ====== ======= ===== ======= * Includes changes in sales mix. This increase in net margin is due primarily to the general rate increase effective October 1, 1996 and an increase in the number of customers served. 8 MANAGEMENT'S DISCUSSION (Continued) (Amounts in thousands except degree day data) Twelve Months Ended March 31 ----------------------------------------- Increase 1997 1996 (Decrease) % -------- -------- --------- -- Gross margin $151,349 $138,293 $ 13,056 9 Less - Franchise taxes 10,750 9,143 1,607 18 -------- -------- --------- Net margin $140,599 $129,150 $ 11,449 9 ======== ======== ========= Total volume throughput (DT): Residential 20,005 21,329 (1,324) (6) Commercial/small industrial 12,759 13,680 (921) (7) Large commercial/industrial 31,710 28,471 3,239 11 -------- -------- --------- 64,474 63,480 994 2 ======== ======== ========= System average degree days: Actual 3,154 3,778* (624) (17) Normal 3,384 3,402* (18) (1) Percent of normal 93% 111% Weather normalization adjustment income (refund), net of franchise taxes $ 3,113 $ (5,788) $ 8,901 * Reflects an additional day for leap year. Net margin for the twelve months ended March 31, 1997 increased $11,449,000 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* General rate increase effective 10/96 $ 5,854 $2,352 $(3,143) $ - $ 5,063 Volume variances, net 3,641 190 3,654 - 7,485 Resolution - S. Expansion - - - (734) (734) Other - - - (365) (365) ------- ------ ------- ------- ------- Total $ 9,495 $2,542 $ 511 $(1,099) $11,449 ======= ====== ======= ======= ======= * 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, 1996. 9 Operating and maintenance expenses for the three, six and twelve months ended March 31, 1997 increased 7%, 13% and 10%, respectively, as compared to the same periods last year. For the six and twelve months ended March 31, 1997, approximately $1,440,000 of the increase resulted from expenses related to the voluntary early retirement program offered during the first quarter of fiscal 1997, as discussed in Note 11 to the financial statements in PSNC's 1996 Annual Report. Net of this one-time charge, operating and maintenance expenses increased 7% for both the six- and twelve-month periods ended March 31, 1997. Operating and maintenance expenses increased for all three periods due to increases in costs associated with outsourcing meter reading, the provision for uncollectible accounts, which is based on revenues, increased professional fees, outside services for consultants in the information systems and public relations areas, employee education and other employee-related benefits. Also contributing for the increase for the six- and twelve-month periods was increased power usage at PSNC's liquefied natural gas facility. Partially offsetting the six and twelve month increases were reduced expenses for hospitalization insurance due to an adjustment in December 1996 to eliminate the health insurance reserve since the Company is now affiliated with a health maintenance organization provider. Depreciation expense increased for the three, six and twelve months ended March 31, 1997 due to utility plant additions. General taxes for the three, six and twelve months ended March 31, 1997 increased 4%, 10%, and 13%, respectively, as compared to the same periods last year. These increases are mainly due to increased franchise taxes based on operating revenues that increased 6%, 12%, and 18% as compared to the same periods last year. Other income for the three months ended March 31, 1997 decreased $10,000 as compared to the same period last year. Improvements in merchandising operations resulted in an increase of $216,000, which was offset by a $157,000 decrease in miscellaneous income related to a decrease in secondary market transactions due to warmer than normal weather. Also contributing was a $55,000 decrease in subsidiary net income related to a decrease in natural gas brokering activities due to warmer than normal weather. For the six- and twelve-month periods, other income increased $549,000 and $2,157,000, respectively. These increases are primarily due to interest income associated with deferred gas costs and improved merchandising operations, offset by a one-time expense of $235,000 for the merchandise and jobbing salaries related to the voluntary early retirement program. The six-month period ended March 31, 1997 included a decrease of $194,000 related to the previously mentioned decrease in secondary market transactions. The twelve-month period included a $265,000 gain from the sale of land during June 1996. Interest deductions for the three, six and twelve months ended March 31, 1997 increased 21%, 17% and 16%, respectively, as compared to the same periods last year. The primary reason for the increase in the three-month period is the interest expense increase due to the December 17, 1996 issuance of $50,000,000 of 7.45% Senior Debentures due 2026. Interest deductions for the six- and twelve-month periods also increased due to the January 10, 1996 issuance of $50,000,000 of 6.99% Senior 10 MANAGEMENT'S DISCUSSION (Continued) Debentures due 2026. Offsetting the increases in all periods is a decrease in interest expense on short-term debt resulting from decreased interest rates. 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 last year. These increases are primarily due to shares issued through PSNC's stock purchase and automatic 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 1997 construction budget is approximately $64,400,000, compared to actual construction expenditures for fiscal 1996 of $60,428,000. 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, 1997 were $23,976,000 and $61,271,000, respectively, as compared to $23,133,000 and $57,066,000 for the same periods a year ago. 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. 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, 1997, lines of credit with these banks range from a minimum of $37,000,000 to a winter-period maximum of $81,000,000. PSNC also has uncommitted annual lines of credit with four of these banks totaling $80,000,000. 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. 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 debt. At March 31, 1997, restricted cash and temporary investments were $11,410,000, an increase of $5,015,000 from September 30, 1996. This net increase was due primarily to the restricted cash contribution from Sonat Marketing Company L.P. (Sonat Marketing). As discussed in Note 11 to the financial statements in PSNC's 1996 Annual Report, PSNC Production Corporation and Sonat Marketing, a subsidiary of Sonat Inc., created Sonat Public Service Company L.L.C. Sonat Marketing contributed $4,944,000 11 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. Restrictions on the cash investment will be released annually in equal amounts over a four-year period. Stored gas inventories increased $5,184,000 as compared to March 1996. This increase was due to additional quantities stored, an increase in the average cost of natural gas and the addition of a storage service. The increase in deferred charges and other assets as compared to September 30, 1996 was primarily the result of the deferred debt expense associated with the December 17, 1996 sale of 7.45% Senior Debentures previously discussed and investments in PSNC's subsidiaries. The decrease in accounts payable at March 31, 1997 of $23,638,000 as compared to March 31, 1996 is the result of a reduction in gas purchases for the period due to weather, which was 54% warmer. The increase in other current liabilities at March 31, 1997 is primarily due to recording the current portion of the deferred revenue associated with the creation of Sonat Public Service Company L.L.C. The noncurrent portion is recorded in the deferred revenue account. The decrease in accrued pension cost at March 31, 1997 is due to the recognition of $1,475,000 of the unrecognized net gains and assets in the pension plan during December 1996, related to the voluntary early retirement program. Regulatory Matters PSNC began providing natural gas service in McDowell County during December 1996. This was the first project undertaken by PSNC using monies from its North Carolina Utilities Commission (NCUC) approved expansion fund. The original estimate to complete this project was approximately $14,500,000, of which $8,193,500 will be financed by PSNC's expansion fund. Through March 31, 1997, $14,015,000 was spent on the project. A total of $7,781,000 has been received from the expansion fund. PSNC will receive an additional $412,500 over the next five years in the form of local government assistance payments that will be deposited into its expansion fund. PSNC currently provides natural gas service to the eastern portion of Haywood County and plans to extend service to western Haywood County, including Waynesville, Clyde and Lake Junaluska by late 1997 or early 1998. The current estimated cost to serve this area is $7,182,000. On December 30, 1996, PSNC filed an application with the NCUC requesting expansion funds for this project. On April 22, 1997, the NCUC approved this project and authorized disbursements from the expansion fund of $4,127,000. 12 The Cardinal Pipeline was placed into service in December 1994 and provides additional daily capacity to PSNC's eastern service territory in and around the Durham and Raleigh areas. In September 1995, PSNC, Piedmont Natural Gas Company, Inc. (Piedmont), Transcontinental Gas Pipe Line Corporation (Transco), and North Carolina Natural Gas Corporation (NCNG) signed a letter of intent to form a limited liability company (LLC) to purchase and extend the Cardinal Pipeline. As proposed, the pipeline will be extended 67 miles from Burlington to a point southeast of Raleigh, will add 140 million cubic feet per day of additional firm capacity (100 million for PSNC and 40 million for NCNG), and will cost an estimated $75 million. On December 23, 1996, the LLC filed an application with the NCUC for approval of this project. A public hearing is scheduled for May 20, 1997. Pine Needle LNG Co., LLC was formed by subsidiaries of Transco, Piedmont, NCNG, Amerada Hess, PSNC and the Municipal Gas Authority of Georgia. This liquefied natural gas storage facility, estimated to cost $107 million, will be located near Transco's pipeline northwest of Greensboro and will have a storage capacity of four billion cubic feet with vaporization capability of 400 million cubic feet per day. On April 30, 1996, the Federal Energy Regulatory Commission (FERC) made a preliminary determination to grant a certificate authorizing the construction and operation of Pine Needle. It approved a 12.75% return on equity for the project and stated that the debt component of the rate structure will be determined after permanent financing is obtained. The NCUC filed an application for rehearing of this order, which FERC denied on November 27, 1996, and the NCUC filed a petition for review of FERC's November 27 order with the United States Court of Appeals for the District of Columbia Circuit; the Company cannot predict the outcome of this appeal. On March 5, 1997, the FERC issued an order denying the requests for rehearing of a landowner and the NC Department of Environment, Health, and Natural Resources; as of May 8, 1997, the Company had not received any notice that any party had a filed a timely petition for review of this order. On November 14, 1996, PSNC filed an application with the NCUC requesting deferred accounting for the costs of a project to ensure that PSNC's computer operating systems function properly in the year 2000. Similar costs will be incurred by businesses worldwide and the Emerging Issues Task Force of the Financial Accounting Standards Board has determined that these costs should be expensed as incurred. PSNC requested that approximately $3,000,000 of estimated contractor labor be deferred for subsequent recovery in a future rate case. On January 30, 1997, the Public Staff of the NCUC responded to the application by stating that such costs are neither extraordinary nor material, and should be expensed as incurred. 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. PSNC will seek to recover any unamortized costs at the time of its next general rate case. 13 EXHIBIT 11 PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share amounts) Three Months Ended Six Months Ended Twelve Months Ended March 31 March 31 March 31 ------------------------ ----------------------- ------------------- 1997 1996 1997 1996 1997 1996 -------- -------- -------- -------- -------- ------ Net income $ 22,387 $ 20,577 $ 30,293 $ 27,707 $ 26,483 $ 23,963 -------- -------- -------- -------- -------- -------- Average common shares outstanding 19,513 18,959 19,404 18,865 19,265 18,749 Additional dilutive effect of outstanding options (as determined by the application of the treasury stock method) 103 95 103 92 83 77 -------- -------- -------- -------- -------- -------- Average common shares outstanding as adjusted 19,616 19,054 19,507 18,957 19,348 18,826 -------- -------- -------- -------- -------- -------- Earnings per share, as adjusted $1.14 $1.08 $1.55 $1.46 $1.37 $1.27 ===== ===== ===== ===== ===== ===== This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. 14 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, 1996, 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, Health 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 31, 1997, the following members were elected or reelected 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 A. V. Cecil January 2000 14,589,796 886,830 H. Max Craig, Jr. January 2000 15,342,506 134,120 G. Smedes York January 2000 15,359,432 117,194 The following eight directors are the other directors whose term of office continued after the meeting: William C. Burkhardt, Bert Collins, John W. Copeland, Van E. Eure, William L. O'Brien, Jr., D. Wayne Peterson, Ben R. Rudisill, II, and Charles E. Zeigler, Jr. The Company's 1997 Nonqualified Stock Option Plan pursuant to which the Board of Directors may grant certain key employees options to purchase shares of the Company's Common Stock was approved at the Annual Meeting of Shareholders. For- 10,969,116 Against- 638,121 Abstain- 279,447 Broker non-votes- 3,589,942 The shareholders also ratified the selection of Arthur Andersen LLP as PSNC's independent public accountants for the fiscal year ending September 30, 1997. For - 15,347,233 Against - 55,583 Abstain - 73,810 Item 5. Other Information None. 15 Item 6. Exhibits and Reports on Form 8-K (a) Part I Exhibits: 11 - Statement re: computation of per share earnings. 27 - Financial Data Schedule. (b) Reports on Form 8-K: PSNC filed one report, dated April 10, 1997, on Form 8-K during the quarter ending March 31, 1997, pursuant to Item 5 of that form. No financial statements were filed as part of that report. 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 5-13-97 /s/Charles E. Zeigler, Jr. - ------------- ------------------------------- Charles E. Zeigler, Jr. Chairman, President and Chief Executive Officer Date 5-13-97 /s/Jack G. Mason - ------------- ------------------------------- Jack G. Mason Vice President - Treasurer and Chief Financial Officer 17