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, 1999
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ............ to ............
Commission file number 1-11429
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0233140
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 COX ROAD, P.O. BOX 1398 28053-1398
GASTONIA, NORTH CAROLINA (Zip Code)
(Address of principal executive offices)
(704) 864-6731
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of Common Stock, $1 par value, outstanding
at April 30, 1999.....................................................20,577,967
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 Six Months Ended Twelve Months Ended
March 31 March 31 March 31
------------------ ------------------ -------------
1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- -------- -------
Operating revenues $134,326 $140,205 $207,528 $243,988 $294,211 $338,119
Cost of gas 63,747 71,719 97,149 134,779 136,670 181,604
-------- -------- -------- -------- -------- --------
Gross margin 70,579 68,486 110,379 109,209 157,541 156,515
-------- -------- -------- -------- -------- --------
Operating expenses and taxes:
Operating and maintenance 18,164 15,761 37,381 30,528 66,770 60,630
Provision for depreciation 6,742 6,177 13,435 12,255 26,229 23,727
General taxes 6,248 6,266 10,143 11,124 16,203 17,152
Income taxes 13,666 14,056 15,825 18,288 12,663 15,078
-------- -------- -------- -------- -------- --------
44,820 42,260 76,784 72,195 121,865 116,587
-------- -------- -------- -------- -------- --------
Operating income 25,759 26,226 33,595 37,014 35,676 39,928
Other income, net 913 833 1,657 1,900 3,277 3,729
Interest deductions 4,648 4,535 9,462 9,198 18,042 17,887
-------- -------- -------- -------- -------- --------
Net income $ 22,024 $ 22,524 $ 25,790 $ 29,716 $ 20,911 $ 25,770
======== ======== ======== ======== ======== ========
Average common shares
outstanding 20,546 20,081 20,453 19,987 20,336 19,841
Basic earnings per share $1.07 $1.12 $1.26 $1.49 $1.03 $1.30
Diluted common shares
outstanding 20,778 20,210 20,652 20,107 20,478 19,941
Diluted earnings per share $1.06 $1.11 $1.25 $1.48 $1.02 $1.29
Cash dividends declared
per share $.24 $.23 $.48 $.46 $.96 $.92
See notes to consolidated financial statements.
2
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands)
ASSETS
Mar 31 Sep 30 Mar 31
1999 1998 1998
Gas utility plant $765,964 $743,721 $714,610
Less - Accumulated depreciation 239,368 224,204 215,604
-------- -------- --------
526,596 519,517 499,006
-------- -------- --------
Non-utility property, net 572 595 618
-------- -------- --------
Current assets:
Cash and temporary investments 2,943 3,277 4,541
Restricted cash and temporary investments 18,590 10,247 9,776
Receivables, less allowance for
doubtful accounts 50,342 20,836 47,528
Materials and supplies 6,160 6,992 8,013
Stored gas inventory 13,878 24,406 10,815
Deferred gas costs, net 5,961 13,576 9,026
Prepayments and other 2,322 2,260 2,801
-------- -------- --------
100,196 81,594 92,500
-------- -------- --------
Deferred charges and other assets 15,780 17,047 16,889
-------- -------- --------
Total $643,144 $618,753 $609,013
======== ======== ========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common equity -
Common stock, $1 par $ 20,568 $ 20,274 $ 20,097
Capital in excess of par value 138,456 132,787 129,244
Retained earnings 85,730 69,778 84,376
-------- -------- --------
244,754 222,839 233,717
Long-term debt 157,250 171,550 174,050
-------- -------- --------
402,004 394,389 407,767
-------- -------- --------
Current liabilities:
Maturities of long-term debt 6,800 9,300 9,300
Accounts payable 26,593 20,015 32,992
Accrued taxes 13,917 1,180 13,929
Customer prepayments and deposits 4,877 7,021 4,579
Cash dividends and interest 8,673 9,210 8,761
Restricted supplier refunds 18,590 10,247 9,776
Other 6,037 4,184 3,911
-------- -------- --------
85,487 61,157 83,248
Interim bank loans 62,500 70,500 30,500
-------- -------- --------
147,987 131,657 113,748
-------- -------- --------
Deferred credits and other liabilities:
Income taxes, net 69,219 66,527 61,183
Investment tax credits 2,980 3,411 3,337
Accrued pension cost 4,834 7,985 8,929
Deferred revenues 1,632 2,121 2,610
Other 14,488 12,663 11,439
-------- -------- --------
93,153 92,707 87,498
-------- -------- --------
Total $643,144 $618,753 $609,013
======== ======== ========
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (Unaudited)
(In thousands)
Twelve Months Ended
March 31
1999 1998
------- -------
Balance beginning of period $84,376 $77,138
Add - Net income 20,911 25,770
Deduct - Common stock dividends
and other 19,557 18,532
------- -------
Balance end of period $85,730 $84,376
======= =======
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Six Months Ended Twelve Months Ended
March 31 March 31
----------------- --------------
1999 1998 1999 1998
------- ------- -------- -------
Cash Flows From Operating Activities:
Net income $25,790 $29,716 $20,911 $25,770
Adjustments to reconcile net income
to net cash provided by operating
activities -
Depreciation, depletion and other 15,223 14,092 29,627 27,042
Deferred income taxes, net 2,693 1,745 8,036 3,466
------- ------- ------- -------
43,706 45,553 58,574 56,278
Change in operating assets and liabilities:
Receivables, net (30,221) (21,789) (3,518) 3,359
Inventories 11,360 9,707 (1,210) (2,054)
Accounts payable 6,578 5,193 (6,399) 12,704
Accrued pension cost (3,151) (603) (4,095) (191)
Other 21,319 15,275 7,248 8,023
------- ------- ------- -------
49,591 53,336 50,600 78,119
------- ------- ------- -------
Cash Flows From Investing Activities:
Construction expenditures (22,243) (31,121) (56,451) (67,455)
Non-utility and other 784 (1,894) 1,152 379
------- ------- ------- -------
(21,459) (33,015) (55,299) (67,076)
------- ------- ------- -------
Cash Flows From Financing Activities:
Issuance of common stock through
dividend reinvestment, stock purchase
and stock option plans 6,101 6,254 9,644 10,222
Increase (decrease) in interim bank
loans, net (8,000) (7,500) 32,000 7,000
Retirement of long-term debt
and common stock (17,060) (7,060) (19,564) (9,564)
Cash dividends (9,507) (9,115) (18,979) (17,942)
------- ------- ------- -------
(28,466) (17,421) 3,101 (10,284)
------- ------- ------- -------
Net increase (decrease) in cash and
temporary investments (334) 2,900 (1,598) 759
Cash and temporary investments
at beginning of period 3,277 1,641 4,541 3,782
------- ------- ------- -------
Cash and temporary investments
at end of period $ 2,943 $ 4,541 $ 2,943 $ 4,541
======= ======= ======= =======
Cash paid during the period for:
Interest (net of amount capitalized) $ 9,577 $ 9,342 $18,136 $17,747
Income taxes 1,435 7,280 6,257 13,095
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 combined one-time impact on
quarterly earnings from all of the above items was a decrease of $0.12 per share
net of tax.
3. In June 1997, the Financial 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. For the three months ended March 31, 1999,
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
the 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. 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.
6. On February 16, 1999, PSNC and SCANA Corporation (SCANA), a South Carolina
corporation, entered into an Agreement and Plan of Merger (Agreement) providing
for a strategic business combination of the two companies. Pursuant to the
Agreement, PSNC will be merged with and into a wholly owned subsidiary of SCANA.
Under the terms of the Agreement, the holders of PSNC's $1.00 par value common
stock will receive consideration valued at $33.00 per share. Each shareholder
may elect to receive 100 percent of the consideration in SCANA common stock, 100
percent in cash, or a combination thereof, subject to the total cash allocated
to PSNC shareholders being no higher than 50 percent of the total consideration
received by PSNC shareholders. PSNC shareholders who elect to receive stock will
receive between 1.02 and 1.45 shares of SCANA common stock depending upon the
average price of SCANA common stock in the 20 business day period ending on
the trading day immediately preceding the day of the closing of the mergers.
This equates to a collar of between $22.75 and $32.40 for each share of
SCANA's common stock. SCANA will allocate $700 million in cash for
payment to PSNC and SCANA shareholders under the election process. A maximum
of approximately $350 million, under a right of first refusal, will be allocated
to PSNC's shareholders who elect to receive cash. The transaction will be
accounted for as a purchase.
The Agreement has been approved by the Boards of Directors of PSNC and
SCANA. Consummation of the merger is subject to certain closing conditions,
including the approvals by both companies' common shareholders and the
appropriate governmental and regulatory bodies. In addition, the merger was
conditioned upon the effectiveness of a joint proxy statement/registration
statement filed on May 11, 1999 with respect to the SCANA common stock to be
issued pursuant to the merger and to solicit shareholder votes for approval of
the merger. The joint proxy statement/registration statement became effective
May 12, 1999. A shareholders meeting to vote on the merger will be held at
9:30 a.m. on Thursday, July 1, 1999 at PSNC's corporate office. A SCANA
shareholders meeting will be held simultaneously.
Operating and maintenance expenses for the three months ended
March 31, 1999 include merger-related charges of $1,594,000, or $0.05 per share
after tax. Excluding these charges, diluted earnings per share for the second
quarter of fiscal 1999 would have been $1.11, equal to the comparable period of
the prior year.
Currently, ten key executives have severance agreements with PSNC.
Under these severance agreements, approximately $4,223,000 in the aggregate may
be payable to them in connection with the merger.
6
PSNC sponsors a deferred compensation plan for outside directors and a
retirement plan for all directors. Upon a change in control, approximately
$2,656,000 will be payable in cash to directors pursuant to these plans. Of this
amount, approximately $177,000 will be expensed for the deferred compensation
plan, and approximately $472,000 will be expensed for the retirement plan.
PSNC has two nonqualified stock option plans, a 1992 Nonqualified Stock
Option Plan and a 1997 Nonqualified Stock Option Plan. In accordance with the
plans, options are exercisable beginning two years and expiring five years from
the date of the grant. An exception to the two-year exercise date is allowed
upon the retirement, disability or death of a participant. An exception is also
allowed upon a change in control as defined in the plans. Approximately 722,000
options, including 524,000 options that are unexercisable, are currently
outstanding. All of these stock options become exercisable upon a change in
control. The Agreement states, at the election of the optionee, participants in
the plans can receive cash payments equal to the differential between each
option exercise price and $33.00 per share for each option outstanding at
the date of the transaction. These payments will be made from the approximately
$350 million allocated by SCANA to PSNC's shareholders, as discussed above.
SCANA is a holding company principally engaged, through subsidiaries,
in electric and natural gas utility operations, telecommunications and other
energy-related businesses. SCANA's subsidiaries serve approximately 517,000
electric customers in South Carolina and more than 500,000 natural gas customers
in South Carolina and Georgia. SCANA also has significant investments in
telecommunications companies that serve more than 350,000 customers throughout
the Southeast.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. The following tables summarize the effect on earnings per share of dilutive
securities as required by SFAS No. 128:
Three Months Ended Three Months Ended
March 31, 1999 March 31, 1998
------------------------------------------------ ----------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------------ -----------------------------------------------
Basic EPS
Net income $22,024,000 20,546,000 $1.07 $22,524,000 20,081,000 $1.12
Effect of dilutive
securities (Options) 232,000 129,000
----------- ----------
Diluted EPS
Net income $22,024,000 20,778,000 $1.06 $22,524,000 20,210,000 $1.11
=========== ==========
Six Months Ended Six Months Ended
March 31, 1999 March 31, 1998
--------------------------------------------- ----------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
Basic EPS
Net income $25,790,000 20,453,000 $1.26 $29,716,000 19,987,000 $1.49
Effect of dilutive
securities (Options) 199,000 120,000
----------- -----------
Diluted EPS
Net income $25,790,000 20,652,000 $1.25 $29,716,000 20,107,000 $1.48
========== ===========
Twelve Months Ended Twelve Months Ended
March 31, 1999 March 31, 1998
------------------------------------------------ ----------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- -------
Basic EPS
Net income $20,911,000 20,336,000 $1.03 $25,770,000 19,841,000 $1.30
Effect of dilutive
securities (Options) 142,000 100,000
----------- -----------
Diluted EPS
Net income $20,911,000 20,478,000 $1.02 $25,770,000 19,941,000 $1.29
========== ===========
8
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
1999 1998 (Decrease) %
Gross margin $ 70,579 $ 68,486 $ 2,093 3
Less - Franchise taxes 4,318 4,506 (188) (4)
-------- -------- --------
Net margin $ 66,261 $ 63,980 $ 2,281 4
======== ======== ========
Total volume throughput (DT):
Residential 10,734 10,425 309 3
Commercial/small industrial 5,561 5,492 69 1
Large commercial/industrial 8,774 9,729 (955) (10)
-------- -------- --------
25,069 25,646 (577) (2)
======== ======== ========
System average degree days:
Actual 1,726 1,655 71 4
Normal 1,814 1,814
Percent colder (warmer) than normal (5%) (9%)
Weather normalization adjustment
income (refund), net of
franchise taxes $ 3,044 $ 3,034 $ 10
Customers at end of period:
Residential 298,711 283,184 15,527 5
Commercial/small industrial 41,975 41,165 810 2
Large commercial/industrial 2,431 2,431 - -
-------- -------- --------
343,117 326,780 16,337 5
======== ======== ========
Net margin for the three months ended March 31, 1999 increased $2,281,000
as compared to the same period last year. This increase in net margin is
attributable to the items shown below (in thousands):
Commercial/ Large
Small Commercial/
Residential Industrial Industrial Other Total
Price variance * $2,496 $ 430 $(1,203) $ - $1,723
Volume variances, net 1,361 224 (515) - 1,070
Other - - - (512) (512)
------ ------ ------- ------ ------
Total $3,857 $ 654 $(1,718) $ (512) $2,281
====== ====== ======= ====== ======
*Includes changes in sales mix.
9
MANAGEMENT'S DISCUSSION (Continued)
The increase in net margin is attributable to the general rate increase which
was effective November 1, 1998 and an increase in the number of customers
served. Furthermore, throughput to non-weather normalization adjustment (WNA)
large commercial and industrial customers decreased 10% as compared to the same
period in fiscal 1998 as a result of the warmer than normal weather for the
period and price competition with alternate fuels.
(Amounts in thousands except
degree day data) Six Months Ended March 31
---------------------------------
Increase
1999 1998 (Decrease) %
Gross margin $110,379 $109,209 $ 1,170 1
Less - Franchise taxes 6,679 7,853 (1,174) (15)
-------- -------- ---------
Net margin $103,700 $101,356 $ 2,344 2
======== ======== =========
Total volume throughput (DT):
Residential 15,008 16,549 (1,541) (9)
Commercial/small industrial 8,293 9,098 (805) (9)
Large commercial/industrial 17,117 19,035 (1,918) (10)
-------- -------- ---------
40,418 44,682 (4,264) (10)
======== ======== =========
System average degree days:
Actual 2,804 3,132 (328) (10)
Normal 3,106 3,106
Percent colder (warmer) than normal (10%) 1%
Weather normalization adjustment
income (refund), net of
franchise taxes $ 7,080 $ (398) $ 7,478
Net margin for the six months ended March 31, 1999 increased $2,344,000 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 * $ 3,313 $ 644 $(1,791) $ - $2,166
Volume variances, net 1,349 (83) (1,294) - (28)
Other - - - 206 206
------- ------ ------- ---- ------
Total $ 4,662 $ 561 $(3,085) $206 $2,344
======= ====== ======= ==== ======
* Includes changes in sales mix.
10
The increase in net margin is due primarily to the general rate increase
effective November 1, 1998 and an increase in the number of customers served.
Although natural gas deliveries decreased over the same period the prior year,
due to weather that was 10% warmer than the prior period, the WNA helped offset
the impact that the warmer than normal weather had on net 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 than normal weather for
the period and price competition with alternate fuels.
(Amounts in thousands except
degree day data) Twelve Months Ended March 31
---------------------------------
Increase
1999 1998 (Decrease) %
Gross margin $157,541 $156,515 $ 1,026 1
Less - Franchise taxes 9,415 10,823 (1,408) (13)
-------- -------- ---------
Net margin $148,126 $145,692 $ 2,434 2
======== ======== =========
Total volume throughput (DT):
Residential 19,254 20,934 (1,680) (8)
Commercial/small industrial 11,812 12,705 (893) (7)
Large commercial/industrial 32,109 34,557 (2,448) (7)
-------- -------- ---------
63,175 68,196 (5,021) (7)
======== ======== =========
System average degree days:
Actual 3,038 3,560 (522) (15)
Normal 3,382 3,382
Percent colder (warmer) than normal (10%) 5%
Weather normalization adjustment
income, net of franchise taxes $ 7,366 $ 508 $ 6,858
Net margin for the twelve months ended March 31, 1999 increased
$2,434,000 as compared to the same period last year. This increase in net margin
is attributable to the items shown below (in thousands):
Commercial/ Large
Small Commercial/
Residential Industrial Industrial Other Total
Price variance * $ 2,934 $ 453 $ (2,227) $ - $ 1,160
Volume variances, net 1,183 (162) (1,436) - (415)
Other - - - 1,689 1,689
------- ----- -------- ------ -------
Total $ 4,117 $ 291 $ (3,663) $1,689 $ 2,434
======= ===== ======== ====== =======
* Includes changes in sales mix.
11
MANAGEMENT'S DISCUSSION (Continued)
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. Although natural gas deliveries decreased over the same
period the prior year, due to weather that was 15% warmer than the prior period,
the WNA helped offset the impact that the warmer than normal weather had on net
margin. Throughput to non-WNA large commercial and industrial customers
decreased 7% as compared to the same period in fiscal 1998 as a result of the
warmer than normal weather for the period and price competition with alternate
fuels.
Operating and maintenance expenses for the three, six and twelve months
ended March 31, 1999 increased 15%, 22% and 10%, respectively, as compared to
the same periods last year. The increase for the three months ended March 31,
1999 is due primarily to $1,594,000 of costs related to the proposed business
combination with SCANA Corporation discussed further in Note 6 to the
accompanying unaudited consolidated financial statements. The change for the
six- and twelve-month periods also includes 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. Excluding acquisition and restructuring
charges, operating and maintenance expenses increased 5% and 4% for the three-
and six-month periods, respectively, and remained 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.
Depreciation expense increased for the three, six and twelve months
ended March 31, 1999 due to utility plant additions. General taxes decreased for
all three periods due primarily to decreased franchise taxes based on decreased
operating revenues for the respective periods.
Other income for the three months ended March 31, 1999 increased
$80,000, while decreasing $243,000 and $452,000 for the six- and twelve-month
periods, respectively, as compared to the same periods for the prior year. The
decrease for the six- and twelve-month periods 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 under collected 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
12
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. Partially offsetting these items is
an increase in merchandising and jobbing income of $163,000, $247,000 and
$563,000 for the three-, six- and twelve-month periods, respectively.
Interest deductions for the three, six and twelve months ended March
31, 1999 increased 3%, 3% and 1%, respectively, 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. Also, included in this increase is $200,000 of debt expense recognized
due to the prepayment on February 26, 1999 of the remaining $10,000,000 of 8.65%
senior debentures due 2002. Partially offsetting these increases 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 the three-, six- and
twelve-month periods reflects an increase of 3% in the average number of diluted
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. In March 1999, PSNC began purchasing shares
on the open market to satisfy the requirements of these 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 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 six and twelve months
ended March 31, 1999 were $22,243,000 and $56,451,000, respectively, as compared
to $31,121,000 and $67,455,000 for the same periods for the prior year.
PSNC generally finances its operations with internally generated funds,
supplemented with bank lines of credit to satisfy seasonal requirements. PSNC
also
13
MANAGEMENT'S DISCUSSION (Continued)
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 five 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, 1999, total
committed lines of credit range from a minimum of $40,000,000 to a winter-period
maximum of $81,000,000, and uncommitted annual lines of credit total
$45,000,000. 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 $18,590,000 received from PSNC's pipeline
transportation provider that have not been deposited into the expansion fund in
the Office of the State Treasurer. This fund was created by an order of the NCUC
to finance the construction of natural gas lines into unserved areas of PSNC's
service territory that otherwise would not be economically feasible to serve.
PSNC's business is seasonal in nature as fluctuations in weather
dictate natural gas storage injections and withdrawals. Injections of natural
gas into storage occur during periods of warm weather (April through October).
Withdrawals from storage occur during periods of cold weather (November through
March). This seasonality is the primary reason for lower volumes of gas in
storage as of March 31, 1999 as compared to September 30, 1998. Seasonality also
accounts for the increase in accounts receivable for the same period.
As of March 31, 1999, September 30, 1998, and March 31, 1998, net
deferred gas costs include $4,391,000, $863,000 and $5,023,000, respectively, of
gas costs related to unbilled volumes. The remaining balance of net deferred gas
costs fluctuates in response to the operation of PSNC's Rider D rate mechanism.
This mechanism allows PSNC to recover from customers all prudently incurred gas
costs. On a monthly basis, any difference in amounts paid and collected for
these costs is recorded for subsequent refund to or collection from PSNC's
customers. It also allows PSNC to recover margin losses on negotiated sales to
large commercial and industrial customers with alternate fuel capability. Net
deferred gas costs at March 31, 1999, September 30, 1998 and March 31, 1998
reflect 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
14
cost of gas monthly for large commercial and industrial customers on the basis
of market prices for natural gas. PSNC will continue to establish a benchmark
cost of gas for residential and small commercial customers pursuant to its
existing procedures, which are based upon market prices projected for the
succeeding twelve months.
Deferred charges and other assets 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), a subsidiary of Sonat Inc. PSNC's subsidiary,
PSNC Production Corporation (PSNC Production), 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, 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 payment of $1,211,000 in December 1998,
lowering the balance in long-term restricted cash to $3,634,000 at March 31,
1999. Sonat Marketing is entitled to a partial refund of its contribution if the
economics of the transaction are adversely modified by any regulatory body over
a five-year period. PSNC has not determined what operating or financial impacts,
if any, the proposed mergers of PSNC and SCANA Corporation or Sonat Inc. and El
Paso Energy Corporation will have on the joint venture.
The decrease in long-term debt at March 31, 1999 reflects the
prepayment of the remaining $10,000,000 of 8.65% senior debentures due 2002.
The decrease in accounts payable at March 31, 1999 of $6,399,000 as
compared to March 31, 1998 is primarily the result of natural gas purchased at
lower costs and decreased natural gas brokering and transportation pooling
activities.
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 mechanism 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 February 22, 1999, the NCUC approved PSNC's application to use
expansion funds to extend natural gas service into Alexander County, and
authorized
15
MANAGEMENT'S DISCUSSION (Continued)
disbursements from the fund of $4,301,000. Most of Alexander County lies within
PSNC's certificated service territory and is not currently provided natural gas
service. PSNC estimates that the project will be completed prior to April 2000
at a cost of $6,188,000.
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 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 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. The new
pipeline will extend 67 miles from the existing termination point of Cardinal
Pipeline near Haw River to a point southeast of Raleigh and will provide 140
mmcf/day of additional capacity (100 mmcf/day for PSNC and 40 mmcf/day for
NCNG). The extension is project-financed with 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, 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 owns and operates a liquefied natural gas
storage facility, built at a cost of approximately $107,000,000. This facility
is located on a site near Transco's pipeline northwest of Greensboro, North
Carolina, and has a storage capacity of four billion cubic feet with
vaporization capability of 400 mmcf/day. The facility became operational on May
1, 1999. PSNC, through its subsidiary, PSNC Blue Ridge Corporation (Blue Ridge),
owns 17% of the facility, and PSNC has contracted to use 25% of the facility's
gas storage capacity and withdrawal capabilities. Blue Ridge made its required
capital contribution of $9,095,000 on May 3, 1999.
On March 24, 1999, PSNC filed an application with the NCUC requesting
authorization to issue and sell up to $150,000,000 of senior unsecured debt
securities. This amount includes $25,000,000 of senior debt previously
authorized by the NCUC that has not been issued and sold. On April 14, 1999, the
NCUC issued an order permitting PSNC to issue and sell senior unsecured debt as
described and requested in its application. PSNC will use these funds primarily
to repay all of its then outstanding short-term bank loans and to finance the
construction of facilities. A registration statement under Form S-3 will be
filed with the Securities and Exchange Commission during the third quarter
fiscal 1999.
16
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 $4,200,000 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. 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. Year 2000 ready
financial and materials management systems were implemented on April 1, 1999.
Upgrades to the Supervisory Control and Data Acquisition (SCADA) system that
monitors the flow of gas through PSNC's distribution system are targeted for
completion in June 1999. Assessment of embedded chips within critical equipment
continues, with a target completion date of June 1999. Our remaining activities
include completion of scheduled desktop hardware and software upgrades and
additional forward date testing of our computer systems that will continue
throughout 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 Year 2000 project office reports
daily to the chief information officer. Frequent formal and informal discussions
are held with the chief financial officer as the Year 2000 project executive.
The audit committee of the board of directors is updated quarterly by the chief
financial officer and the internal audit department. The full board is updated
by the audit committee. Senior officers of PSNC are updated monthly on the
project team's status, and they participate in making contingency planning
decisions related to their functional areas.
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
17
MANAGEMENT'S DISCUSSION (Continued)
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. The majority of these costs are currently being recovered in
rates charged to PSNC's customers. 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 $10,000,000 of these costs has been
incurred. 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 $4,200,000 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.
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 a "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 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
18
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
Business continuity planning is underway, with a target date of June
1999 for the initial version of a plan based on worst case scenarios. Testing of
the plan will continue throughout 1999. The plan will address the mitigation of
risks associated with key business processes and those processes critical to the
delivery of gas services. It will include the short-term localized impact of
losing one or more of the following services: electricity, telecommunications,
water/sewer, gas pressure, information technology systems and staffing (order
does not imply priority). PSNC is not implying that disruption will occur, but
that the risk does exist.
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.
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.
Year 2000 Communications
PSNC meets quarterly with the other North Carolina gas utilities to
exchange information and discuss the best practices that may be used to address
Year 2000 requirements. Additionally, PSNC frequently participates in industry
and community forums attended by representatives of the electric and
telecommunications industries. Electric and telecommunications service providers
to PSNC will be further evaluated during the business continuity planning
process.
19
SCANA Corporation reviewed PSNC's Year 2000 program strategy during its
due diligence efforts prior to the execution of the merger agreement referred to
in Note 6 to the accompanying consolidated financial statements. PSNC will
continue to share information with SCANA throughout the due diligence and
integration process.
PSNC will distribute a customer bill insert and additional customer
awareness information mid-1999.
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.
20
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 audited consolidated 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
At the Annual Meeting of Shareholders held on January 29, 1999, the
following members were re-elected to serve on the Board of Directors for a term
expiring at the annual meeting in the month and year indicated or until their
successors are elected and qualified.
Director Term Ending Votes in Favor Votes Withheld
Bert Collins January 2002 16,780,420 120,813
John W. Copeland January 2002 16,750,221 151,012
D. Wayne Peterson January 2002 16,748,957 152,276
Charles E. Zeigler, Jr. January 2002 16,754,941 146,293
The following are directors whose term of office continued after the
meeting: William C. Burkhardt, William A.V. Cecil, Van E. Eure, William L.
O'Brien, Jr., Ben R. Rudisill II, and G. Smedes York.
The shareholders approved an amendment to PSNC's Employee Stock
Purchase Plan to restate the total number of shares authorized under the Plan
after taking into effect the 3-for-2 stock split of the Common Stock that
occurred in January 1993. After giving effect to the stock split, the total
authorized shares under the Plan are 1,265,706.
For - 16,177,424 Against - 470,402 Abstain - 265,378
The shareholders also ratified the selection of Arthur Andersen LLP as
PSNC's independent public accountants for the fiscal year ending September 30,
1999.
For - 16,707,971 Against - 92,654 Abstain - 100,607
21
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Part I Exhibits:
27 - Financial Data Schedule.
Part II Exhibits:
10-A-33.2 Amendment of Amended and Restated Natural Gas
Sales Agreement between PSNC and Transco Energy
Marketing Company dated November 1, 1990.
10-A-39 Firm Transportation Service Agreement under
Rate Schedule FT Service, dated June 26, 1998,
between PSNC and Cardinal Extension Company, LLC.
10-A-40 Firm Transportation Service Agreement under Rate
Schedule FT Service, dated June 26, 1998, between
PSNC and Cardinal Extension Company, LLC.
10-A-41 Amendment to Firm Service Agreements (Exhibits
10-A-9, 10-A-10 and 10-A-11) under Rate Schedule
FT, dated August 1, 1991, between PSNC and
Transcontinental Gas Pipe Line Corporation,
dated August 1, 1991.
(b) Reports on Form 8-K
PSNC filed on February 22, 1999 a current report on
Form 8-K which included the Agreement and Plan of Merger
between Public Service Company of North Carolina, Incorporated
and SCANA Corporation.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PUBLIC SERVICE COMPANY
OF NORTH CAROLINA, INCORPORATED
(Registrant)
Date 05/14/99 /s/ Charles E. Zeigler, Jr.
Charles E. Zeigler, Jr.
Chairman, President and
Chief Executive Officer
Date 05/14/99 /s/ Jack G. Mason
Jack G. Mason
Vice President - Finance
23