CONSOLIDATED BALANCE SHEETS
- ------------------
Piedmont Natural
Gas Company, Inc.
and Subsidiaries
- ------------------
October 31, 2003
and 2002
- ------------------
------------------------------------------------------------------
ASSETS
<Table>
<Caption>
-----------------------------------------------------------------------------------------
IN THOUSANDS 2003 2002
-----------------------------------------------------------------------------------------
UTILITY PLANT:
Utility plant in service $2,330,528 $1,689,743
Less accumulated depreciation 576,823 572,445
-----------------------------------------------------------------------------------------
Utility plant in service, net 1,753,705 1,117,298
Construction work in progress 58,594 41,225
-----------------------------------------------------------------------------------------
Total utility plant, net 1,812,299 1,158,523
-----------------------------------------------------------------------------------------
OTHER PHYSICAL PROPERTY, at cost (net of accumulated
depreciation of $1,740 in 2003 and $1,531 in 2002) 1,115 1,078
-----------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents 11,172 5,100
Restricted cash 6,749 8,028
Receivables (less allowance for doubtful accounts
of $2,743 in 2003 and $810 in 2002) 58,662 37,504
Unbilled utility revenues 34,630 --
Inventories:
Gas in storage 121,723 65,688
Materials, supplies and merchandise 4,774 2,860
Deferred cost of gas -- 13,592
Refundable income taxes 23,758 10,329
Prepayments 31,085 19,215
Other 15,091 13,470
-----------------------------------------------------------------------------------------
Total current assets 307,644 175,786
-----------------------------------------------------------------------------------------
INVESTMENTS, DEFERRED CHARGES AND OTHER ASSETS:
Investments in non-utility activities, at equity 96,191 80,342
Goodwill 50,924 7,109
Unamortized debt expense (amortized over life of
related debt on a straight-line basis) 3,748 3,841
Other 24,485 18,409
-----------------------------------------------------------------------------------------
Total investments, deferred charges and
other assets 175,348 109,701
-----------------------------------------------------------------------------------------
Total $2,296,406 $1,445,088
=========================================================================================
</Table>
See notes to consolidated financial statements.
26
------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
<Table>
<Caption>
-----------------------------------------------------------------------------------------
IN THOUSANDS 2003 2002
-----------------------------------------------------------------------------------------
CAPITALIZATION:
Stockholders' equity:
Cumulative preferred stock -- no par
value -- 175 shares authorized $ -- $ --
Common stock -- no par value -- 100,000
shares authorized; outstanding, 33,655 in
2003 and 33,090 in 2002 372,651 352,553
Retained earnings 259,476 240,026
Accumulated other comprehensive income (1,932) (2,983)
-----------------------------------------------------------------------------------------
Total stockholders' equity 630,195 589,596
Long-term debt 460,000 462,000
-----------------------------------------------------------------------------------------
Total capitalization 1,090,195 1,051,596
-----------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt and sinking
fund requirements 2,000 47,000
Notes payable 109,500 46,500
Commercial paper 445,559 --
Accounts payable 90,901 51,093
Income taxes accrued 612 --
Customers' deposits 16,408 11,611
Deferred income taxes 16,949 1,384
General taxes accrued 19,594 15,094
Refunds due customers 5,382 15,635
Other 18,257 16,814
-----------------------------------------------------------------------------------------
Total current liabilities 725,162 205,131
-----------------------------------------------------------------------------------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 188,503 158,275
Unamortized federal investment tax credits 5,042 5,593
Asset retirement obligations 245,879 --
Other 41,625 24,493
-----------------------------------------------------------------------------------------
Total deferred credits and other liabilities 481,049 188,361
-----------------------------------------------------------------------------------------
Total $2,296,406 $1,445,088
=========================================================================================
</Table>
See notes to consolidated financial statements.
27
CONSOLIDATED STATEMENTS OF INCOME
- ------------------
Piedmont Natural
Gas Company, Inc.
and Subsidiaries
- ------------------
For the Years Ended
October 31, 2003,
2002 and 2001
- ------------------
------------------------------------------------------------------
<Table>
<Caption>
IN THOUSANDS EXCEPT PER SHARE AMOUNTS 2003 2002 2001
--------------------------------------------------------------------------------------------
OPERATING REVENUES $ 1,220,822 $ 832,028 $1,107,856
COST OF GAS 837,942 496,234 769,878
--------------------------------------------------------------------------------------------
MARGIN 382,880 335,794 337,978
--------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Operations 131,439 112,421 114,358
Maintenance 20,668 21,006 19,064
Depreciation 63,164 57,593 52,060
General taxes 24,410 23,863 23,952
Income taxes 40,093 30,784 34,575
--------------------------------------------------------------------------------------------
Total operating expenses 279,774 245,667 244,009
--------------------------------------------------------------------------------------------
OPERATING INCOME 103,106 90,127 93,969
--------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Non-utility activities, at equity 17,972 19,207 16,271
Allowance for equity funds used during
construction 1,128 1,986 1,767
Non-operating income 2,560 1,238 1,119
Non-operating expense (863) (727) (927)
Income taxes (8,524) (9,010) (7,300)
--------------------------------------------------------------------------------------------
Total other income (expense), net of tax 12,273 12,694 10,930
--------------------------------------------------------------------------------------------
UTILITY INTEREST CHARGES:
Interest on long-term debt 37,740 39,056 37,789
Allowance for borrowed funds used during
construction (1,135) (1,438) (4,910)
Other 3,592 2,986 6,535
--------------------------------------------------------------------------------------------
Total utility interest charges 40,197 40,604 39,414
--------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARY 75,182 62,217 65,485
LESS MINORITY INTEREST IN INCOME OF CONSOLIDATED
SUBSIDIARY 820 -- --
--------------------------------------------------------------------------------------------
NET INCOME $ 74,362 $ 62,217 $ 65,485
============================================================================================
AVERAGE SHARES OF COMMON STOCK:
Basic 33,391 32,763 32,183
Diluted 33,503 32,937 32,420
EARNINGS PER SHARE OF COMMON STOCK:
Basic $ 2.23 $ 1.90 $ 2.03
Diluted $ 2.22 $ 1.89 $ 2.02
</Table>
See notes to consolidated financial statements.
28
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------
Piedmont Natural
Gas Company, Inc.
and Subsidiaries
- ------------------
For the Years Ended
October 31, 2003,
2002 and 2001
- ------------------
------------------------------------------------------------------
<Table>
<Caption>
IN THOUSANDS 2003 2002 2001
------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 74,362 $ 62,217 $ 65,485
------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 64,161 58,393 53,069
Amortization of investment tax credits (550) (556) (558)
Allowance for funds used during construction (2,263) (3,424) (6,677)
Undistributed earnings from equity investments (17,972) (19,207) (16,271)
Changes in assets and liabilities:
Restricted cash 1,934 (964) 32,732
Receivables (32,151) (11,606) 29,247
Inventories (34,547) 4,614 588
Other assets (21,251) 8,054 47,484
Accounts payable 10,597 9,949 (47,169)
Refunds due customers 2,577 (16,050) (1,204)
Deferred income taxes 45,792 14,104 (8,193)
Other liabilities 8,915 3,402 12,916
------------------------------------------------------------------------------------------
Total adjustments 25,242 46,709 95,964
------------------------------------------------------------------------------------------
Net cash provided by operating activities 99,604 108,926 161,449
------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Utility construction expenditures (77,935) (80,112) (83,536)
Capital contributions to equity investments (2,224) (4,492) (16,929)
Capital distributions from equity investments 10,188 22,143 15,885
Purchase of gas distribution systems 2,153 (26,000) (6,625)
Purchase of NCNG and EasternNC, net of cash
received of $7,185 (450,168) -- --
Other (118) (112) (361)
------------------------------------------------------------------------------------------
Net cash used in investing activities (518,104) (88,573) (91,566)
------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in notes payable 63,000 14,500 (67,500)
Increase in commercial paper 445,559 -- --
Proceeds from issuance of long-term debt -- -- 60,000
Retirement of long-term debt (47,000) (2,000) (32,000)
Issuance of common stock through dividend
reinvestment and employee stock plans 17,925 18,546 15,389
Dividends paid (54,912) (51,909) (48,909)
------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 424,572 (20,863) (73,020)
------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,072 (510) (3,137)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,100 5,610 8,747
------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,172 $ 5,100 $ 5,610
==========================================================================================
CASH PAID DURING THE YEAR FOR:
Interest $ 40,268 $ 39,696 $ 39,977
Income taxes $ 30,554 $ 34,166 $ 51,430
NONCASH INVESTING AND FINANCING ACTIVITIES RELATED TO
ACQUISITIONS OF NCNG AND EASTERNNC:
Fair value/book value of assets acquired $ 511,135
Cash paid (457,353)
Adjustment of estimated working capital to actual 2,010
---------
Liabilities assumed $ 55,792
=========
</Table>
See notes to consolidated financial statements.
29
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------
Piedmont Natural
Gas Company, Inc.
and Subsidiaries
- ------------------
For the Years Ended
October 31, 2003,
2002 and 2001
- ------------------
------------------------------------------------------------------
<Table>
<Caption>
Accumulated
Other
Common Retained Comprehensive
In thousands except per share amounts Stock Earnings Income Total
--------------------------------------------------------------------------------------------
BALANCE, OCTOBER 31, 2000 $314,230 $213,142 $ -- $527,372
--------
COMPREHENSIVE INCOME:
Net Income 65,485 65,485
Other comprehensive income:
Cumulative effect of adoption of
Statement 133 209
Unrealized loss of equity
investments hedging activities,
net of tax of ($777) (1,438)
Reclassification of equity
investments hedging activities
included in net income, net of
tax of ($79) (148) (1,377)
--------
Total comprehensive income 64,108
COMMON STOCK ISSUED 17,808 17,808
DIVIDENDS DECLARED ($1.52 per share) (48,909) (48,909)
--------------------------------------------------------------------------------------------
BALANCE, OCTOBER 31, 2001 332,038 229,718 (1,377) 560,379
--------
COMPREHENSIVE INCOME:
Net income 62,217 62,217
Other comprehensive income:
Unrealized loss of equity
investments hedging activities,
net of tax of ($1,699) (2,571)
Reclassification of equity
investments hedging activities
included in net income, net of
tax of $620 965 (1,606)
--------
Total comprehensive income 60,611
COMMON STOCK ISSUED 20,515 20,515
DIVIDENDS DECLARED ($1.585 per share) (51,909) (51,909)
--------------------------------------------------------------------------------------------
BALANCE, OCTOBER 31, 2002 352,553 240,026 (2,983) 589,596
--------
COMPREHENSIVE INCOME:
Net income 74,362 74,362
Other comprehensive income:
Unrealized loss of equity
investments hedging activities,
net of tax of ($869) (1,326)
Reclassification of equity
investments hedging activities
included in net income, net of
tax of $1,553 2,377 1,051
--------
Total comprehensive income 75,413
COMMON STOCK ISSUED 20,098 20,098
DIVIDENDS DECLARED ($1.645 per share) (54,912) (54,912)
--------------------------------------------------------------------------------------------
BALANCE, OCTOBER 31, 2003 $372,651 $259,476 $(1,932) $630,195
============================================================================================
</Table>
<Table>
<Caption>
-----------------------------------------------------------------------------------------
IN THOUSANDS 2003 2002 2001
-----------------------------------------------------------------------------------------
RECONCILIATION OF ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance, beginning of year $(2,983) $(1,377) $ --
Cumulative effect of adoption of Statement 133 -- -- 209
Current year reclassification to net income 2,377 965 (148)
Current year change (1,326) (2,571) (1,438)
-----------------------------------------------------------------------------------------
Balance, end of year $(1,932) $(2,983) $(1,377)
=========================================================================================
</Table>
See notes to consolidated financial statements.
30
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- ------------------
Note 1:
- ------------------
SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
- ------------------
------------------------------------------------------------------
A. OPERATIONS AND PRINCIPLES OF CONSOLIDATION.
Piedmont Natural Gas Company, Inc. (Piedmont), is an energy
services company primarily engaged in the distribution of natural
gas to residential, commercial and industrial customers in the
Piedmont and eastern regions of North Carolina, the Piedmont
region of South Carolina and the metropolitan Nashville,
Tennessee, area. Our subsidiaries are invested in joint venture,
energy-related businesses, including unregulated retail natural
gas and propane marketing, interstate natural gas storage,
intrastate natural gas transportation and regulated natural gas
distribution. Our utility operations are regulated by three state
regulatory commissions. For further information on regulatory
matters, see Note 3 to the consolidated financial statements.
The consolidated financial statements reflect the accounts of
Piedmont, its wholly owned subsidiaries and its 50% equity
investment in Eastern North Carolina Natural Gas Company
(EasternNC). Our equity interest in EasternNC is considered to be
a controlling interest and we have consolidated EasternNC for
presentation in the accompanying consolidated financial
statements. EasternNC is a regulated utility that is engaged in
the distribution of natural gas to residential, commercial and
industrial customers in eastern North Carolina. For further
information on EasternNC, see Note 2 to the consolidated financial
statements.
Investments in non-utility activities are accounted for under
the equity method as we do not have controlling voting interests
or otherwise exercise control over the management of such
companies. Our ownership interest in each entity is recorded in
"Investments in non-utility activities, at equity" in the
consolidated balance sheets. Earnings or losses from equity
investments are recorded in "Non-utility activities, at equity" in
"Other Income (Expense)" in the consolidated statements of income.
Revenues and expenses of all other non-utility activities are
included in "Non-operating income" in "Other Income (Expense)" in
the consolidated statements of income. Significant inter-company
transactions have been eliminated in consolidation where
appropriate; however, we have not eliminated inter-company profit
on sales to affiliates in accordance with Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting For The Effects of
Certain Types of Regulation" (Statement 71).
Effective at the close of business on September 30, 2003, we
purchased North Carolina Natural Gas Corporation (NCNG) and an
equity interest in EasternNC. For further information on the
acquisitions, see Note 2 to the consolidated financial statements.
The transactions were accounted for using the purchase method of
accounting for business combinations and considering Statement 71.
Accordingly, the accompanying consolidated financial statements
include the results of NCNG and EasternNC since September 30,
2003.
B. RATE-REGULATED BASIS OF ACCOUNTING.
Statement 71 provides that rate-regulated public utilities
account for and report assets and liabilities consistent with the
economic effect of the manner in which independent third-party
regulators establish rates. In applying Statement 71, we
capitalize certain costs and benefits as regulatory assets and
liabilities, respectively, pursuant to orders of the state
regulatory commissions, either in general rate proceedings or
expense deferral proceedings, in order to provide for recovery
from or refund to utility customers in future periods.
We monitor the regulatory and competitive environment in which
we operate to determine that our regulatory assets continue to be
probable of recovery. If we were to determine that all or a
portion of these regulatory assets no longer met the criteria for
continued application of Statement 71, we would write off that
portion which we could not recover, net of any regulatory
liabilities which would be deemed no longer necessary. Our reviews
have not resulted in any write offs of any regulatory assets or
liabilities.
The amounts recorded as regulatory assets and liabilities in
the consolidated balance sheets as of October 31, 2003 and 2002,
are summarized as follows:
<Table>
<Caption>
IN THOUSANDS 2003 2002
--------------------------------------------------------------------------------
Regulatory Assets:
Unamortized debt expense $ 3,748 $ 3,841
Environmental costs 5,442 6,153
Demand-side management costs 5,711 6,211
Deferred EasternNC operations and maintenance costs 2,913 --
Deferred NCNG integration costs 3,064 --
Deferred pension and other retirement benefits costs 3,094 542
Other 2,492 2,987
--------------------------------------------------------------------------------
Total $ 26,464 $19,734
================================================================================
Regulatory Liabilities:
Asset retirement obligations $245,879 $ --
Refunds due customers 5,382 15,635
Deferred taxes 12,601 13,013
Environmental liability due customers 3,471 --
--------------------------------------------------------------------------------
Total $267,333 $28,648
================================================================================
</Table>
31
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
C. UTILITY PLANT AND DEPRECIATION.
Utility plant is stated at original cost, including direct labor
and materials, allocable overheads and an allowance for borrowed
and equity funds used during construction (AFUDC). For the years
ended October 31, 2003, 2002 and 2001, AFUDC totaled $2,263,000,
$3,424,000 and $6,677,000, respectively. The portion of AFUDC
attributable to equity funds is included in "Other Income
(Expense)" and the portion attributable to borrowed funds is shown
as a reduction of "Utility Interest Charges" in the consolidated
statements of income. The costs of property retired are removed
from utility plant and charged to accumulated depreciation.
We compute depreciation expense using the straight-line method
over a period of 5 to 72 years. The composite weighted-average
depreciation rates were 3.61% for 2003, 3.55% for 2002 and 3.45%
for 2001.
Effective November 1, 2002, we adopted SFAS No. 143,
"Accounting for Asset Retirement Obligations" (Statement 143),
which addresses accounting and reporting for legal asset
retirement obligations associated with the retirement of
long-lived assets. Statement 143 requires entities to record the
fair value of a liability for an asset retirement obligation in
the period in which the liability is incurred if a reasonable
estimate of fair value can be made. We have determined that asset
retirement obligations exist for our underground mains and
services; however, the fair value of the obligation cannot be
determined because the end of the system life is indeterminable.
Depreciation rates for utility plant are approved by our
regulatory commissions. In North Carolina, we are required to
conduct a depreciation study every five years and propose new
depreciation rates for approval. No such five-year requirement
exists in South Carolina or Tennessee; however, we periodically
propose revised rates in those states based on depreciation
studies. The approved depreciation rates are comprised of two
components, one based on average service life and one based on
cost of removal. Therefore, we accrue estimated costs of removal
of long-lived assets through depreciation expense. In connection
with the adoption of Statement 143, the cost of removal component
of accumulated depreciation, that is, the "non-legal" asset
retirement obligations, was reclassified to a regulatory liability
"Asset retirement obligations" which totaled $245,879,000 as of
October 31, 2003. Prior to adoption, this component was in
"accumulated depreciation" and totaled $179,958,000 as of October
31, 2002.
D. GOODWILL, EQUITY INVESTMENTS AND LONG-LIVED ASSETS.
All of our goodwill is attributable to the regulated utility
segment. We evaluate goodwill for impairment annually or more
frequently if impairment indicators arise using the present value
and invested capital techniques. The present value technique is
based on discounted cash flows to estimate fair value. The
invested capital technique is based on market multiples of
companies that are representative of our peers in the natural gas
distribution industry. These calculations are dependent on several
subjective factors, including the timing of future cash flows,
future growth rates and the discount rate. An impairment charge
would be recognized if the carrying value of the reporting unit's
goodwill exceeded its fair value. Through October 31, 2003, no
impairment has been recognized.
The following presents the balance in goodwill as of October
31, 2002 and 2003, and the changes for the year ended October 31,
2003. For further information on acquisitions, see Note 2 to the
consolidated financial statements.
<Table>
<Caption>
In thousands
---------------------------------------------------------------------
Balance as of October 31, 2001 $ --
Acquisition of NCGS 7,109
---------------------------------------------------------------------
Balance as of October 31, 2002 7,109
Acquisition adjustment for NCGS (2)
Acquisition of NCNG 42,150
Acquisition of EasternNC 1,139
Minority interest in EasternNC:
At acquisition 1,348
Income for the year (820)
---------------------------------------------------------------------
Balance as of October 31, 2003 $50,924
=====================================================================
</Table>
We review for impairment our investments in non-utility
activities accounted for under the equity method and our
long-lived assets whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Our
reviews conducted during 2003 did not result in any impairment
charges; however, we did write down our investment in propane
marketing activities during 2002. For further information on our
equity investments, see Note 10 to the consolidated financial
statements.
E. INVENTORIES.
We maintain inventories on the basis of average cost. Cost for gas
in storage is defined as the amount recoverable under rate
schedules approved by the state regulatory commissions.
32
F. DEFERRED PURCHASED GAS ADJUSTMENT.
Rate schedules include purchased gas adjustment provisions that
permit the recovery of gas costs. We periodically revise rates
without formal rate proceedings to reflect changes in the cost of
gas. Charges to cost of gas are based on the amount recoverable
under approved rate schedules. The net of any over- or
under-recoveries of gas costs are added to or deducted from cost
of gas and included in "Refunds due customers" in the consolidated
balance sheets.
G. TAXES.
We provide deferred income taxes for differences between the book
and tax basis of assets and liabilities, principally attributable
to accelerated tax depreciation, equity investments and the timing
of the recording of revenues and cost of gas. We amortize deferred
investment tax credits to income over the estimated useful life of
the related property.
General taxes consist primarily of property taxes, payroll
taxes and franchise taxes. Also included to a lesser degree are
gross receipts taxes, excise tax on natural gas used by us and a
state regulatory fee. Such taxes are not included in revenues and
expenses.
H. OPERATING REVENUES.
In the quarter ended January 31, 2003, we performed an analysis of
our revenue recognition practices and began recording revenues and
cost of gas related to volumes delivered but not yet billed.
Recording unbilled revenues changes the timing of revenue
recognition from the cycle-billing method to the accrual method
which is based on when the service is provided. The effect of the
change was to increase net income $5,823,000 and earnings per
share $.17 for the year ended October 31, 2003. Prior to 2003, we
recognized revenues from meters read on a monthly cycle basis and
deferred the cost of gas for volumes delivered but not yet billed.
I. EARNINGS PER SHARE.
We compute basic earnings per share using the weighted average
number of shares of Common Stock outstanding during each period. A
reconciliation of basic and diluted earnings per share for the
years ended October 31, 2003, 2002 and 2001, is presented below:
<Table>
<Caption>
IN THOUSANDS EXCEPT PER SHARE AMOUNTS 2003 2002 2001
-----------------------------------------------------------------------------------------
Net Income $74,362 $62,217 $65,485
=========================================================================================
Average shares of Common Stock outstanding for basic
earnings per share 33,391 32,763 32,183
Contingently issuable shares under the Long-Term Incentive
Plan 112 174 237
-----------------------------------------------------------------------------------------
Average shares of dilutive stock 33,503 32,937 32,420
=========================================================================================
Earnings Per Share:
Basic $ 2.23 $ 1.90 $ 2.03
Diluted $ 2.22 $ 1.89 $ 2.02
</Table>
J. STATEMENT OF CASH FLOWS.
For purposes of reporting cash flows, we consider instruments
purchased with an original maturity at date of purchase of three
months or less to be cash equivalents.
K. RECENTLY ISSUED ACCOUNTING STANDARDS.
We will adopt FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46), in our second quarter ending
April 30, 2004. We believe that FIN 46 applies to our equity
investments, all of which were acquired prior to February 1, 2003.
We have evaluated the impact of FIN 46 on our equity method
investments and concluded that we are not the primary beneficiary
as we do not absorb a majority of the expected losses nor are we
entitled to a majority of the residual returns. Accordingly, we
believe the adoption of FIN 46 will not have a material effect on
financial position or results of operations.
In December 2003, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits
(Revised)" (Statement 132). Statement 132 requires additional
disclosures about assets, obligations, cash flows and net periodic
benefit cost of defined benefit pension plans and other
postretirement benefit plans. We will adopt Statement 132 in our
second quarter beginning February 1, 2004. We believe the adoption
of Statement 132 will not have a material effect on financial
position or results of operations.
L. USE OF ESTIMATES.
We make estimates and assumptions when preparing the consolidated
financial statements. These estimates and assumptions affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from estimates.
33
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
M. RECLASSIFICATIONS.
We have reclassified certain financial statement items for 2002
and 2001 to conform with the 2003 presentation.
- ------------------
Note 2:
- ------------------
ACQUISITIONS
- ------------------
-----------------------------------------------------------------
Effective at the close of business on September 30, 2003, we
purchased for $417,500,000 in cash 100% of the common stock of
NCNG from Progress Energy, Inc. (Progress). NCNG, a natural gas
distributor, served approximately 176,000 customers in eastern
North Carolina, including 57,000 customers served by four
municipalities who were wholesale customers of NCNG. The purchase
price for the NCNG common stock was increased by the amount of
NCNG's working capital on the closing date. Based on a preliminary
working capital schedule, the closing date working capital was
$32,353,000. The preliminary working capital amount will be
adjusted to actual under the terms of the purchase agreement in
2004. NCNG was merged into Piedmont immediately following the
closing.
We also purchased for $7,500,000 in cash Progress' equity
interest in EasternNC. EasternNC is a regulated utility that has a
certificate of public convenience and necessity to provide natural
gas service to 14 counties in eastern North Carolina that
previously were not served with natural gas. Progress' equity
interest in EasternNC consisted of 50% of EasternNC's outstanding
common stock and 100% of EasternNC's outstanding preferred stock.
We are obligated to purchase additional authorized but unissued
shares of such preferred stock for $14,400,000.
We funded the purchases with short-term debt of $445,266,000
under a commercial paper program which is discussed in Note 6. On
December 19, 2003, we sold $200,000,000 of medium-term notes and
redeemed a portion of the outstanding commercial paper with the
net proceeds.
We recorded the assets purchased at fair value, except for
utility plant, franchises and consents and miscellaneous
intangible property that were recorded at book value in accordance
with Statement 71. Goodwill of $42,150,000 for NCNG and $1,139,000
for EasternNC was recorded in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets" (Statement 142), and will
be subject to impairment analysis in future periods. Substantially
all of the goodwill is expected to be deductible for tax purposes.
All goodwill was assigned to the utility segment.
The following table summarizes the preliminary purchase price
allocation of assets acquired and liabilities assumed as of
September 30, 2003.
<Table>
<Caption>
In thousands NCNG EasternNC Total
---------------------------------------------------------------------------------------------
Utility plant, net $381,567 $ 8,952 $390,519
Investments, at equity 5,450 -- 5,450
Current assets 60,203 7,723 67,926
Goodwill 42,150 1,139 43,289
Minority interest -- 1,348 1,348
Non-current assets 2,603 -- 2,603
---------------------------------------------------------------------------------------------
Total assets acquired 491,973 19,162 511,135
Current liabilities (32,879) (11,646) (44,525)
Non-current liabilities (11,251) (16) (11,267)
---------------------------------------------------------------------------------------------
Net assets acquired $447,843 $ 7,500 $455,343
=============================================================================================
</Table>
We are in the process of evaluating and measuring certain
assets acquired and liabilities assumed in the acquisition,
primarily working capital. The allocation of the purchase price is
subject to refinement according to terms specified in the stock
purchase agreement and will be completed in 2004.
The primary reasons for these acquisitions are consistent with
our strategy of pursuing profitable growth in our core natural gas
distribution business in the Southeast. The reasons for the
acquisitions and the factors that contributed to the goodwill
include:
- A reasonable purchase price slightly above book value,
- The prospect of entering a market contiguous to our existing
North Carolina service areas where, as a combined company,
we could realize on-going system benefits,
- The prospect of acquiring an operation that could be
integrated into our existing business systems and processes,
and
- The opportunity to grow within a regulatory environment with
which we are familiar.
Our consolidated results of operations for 2003 include the
operations of NCNG and EasternNC since September 30, 2003. The
following information for the years ended October 31, 2003 and
2002, is provided on an
34
unaudited pro forma basis, assuming the acquisitions and the
related permanent financing had occurred as of November 1, 2001:
<Table>
<Caption>
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2003 2002
-------------------------------------------------------------------------------------
Operating revenues $1,581,849 $1,145,958
Income from continuing operations 76,808 67,967
Net income 76,808 67,967
Earnings per share $ 2.03 $ 1.82
-------------------------------------------------------------------------------------
</Table>
This unaudited pro forma information is not necessarily
indicative of the results of operations had the acquisitions
actually occurred at the beginning of our fiscal year 2002, nor is
it indicative of future results.
Effective September 30, 2002, we purchased for $26,000,000 in
cash substantially all of the natural gas distribution assets and
certain of the liabilities of North Carolina Gas Service (NCGS), a
division of NUI Utilities, Inc. The initial purchase price was
reduced by $2,153,000 in 2003 due to adjusting estimated working
capital to actual. Final determination of the purchase price
allocation resulted in goodwill of $7,107,000. The transaction
added 14,000 customers to our distribution system in the counties
of Rockingham and Stokes, North Carolina.
Effective January 1, 2001, we purchased for cash the natural
gas distribution assets of Atmos Energy Corporation located in the
city of Gaffney and portions of Cherokee County, South Carolina.
The acquisition was at book value of $6,625,000 and added 5,400
customers to our operations.
- ------------------
Note 3:
- ------------------
REGULATORY
MATTERS
- ------------------
-----------------------------------------------------------------
Our utility operations are subject to regulation by the North
Carolina Utilities Commission (NCUC), the Public Service
Commission of South Carolina (PSCSC) and the Tennessee Regulatory
Authority (TRA) as to rates, service area, adequacy of service,
safety standards, extensions and abandonment of facilities,
accounting and depreciation. We are also subject to regulation by
the NCUC as to the issuance of securities. The utility operations
of EasternNC are subject to regulation by the NCUC.
In 1996, the NCUC ordered us to establish an expansion fund to
enable the extension of natural gas service into unserved areas of
the state. The expansion fund was funded with supplier refunds,
plus investment income earned, that would otherwise be refunded to
customers. In accordance with an NCUC order in 2002, we no longer
deposit such refunds in the expansion fund. As of October 31,
2003, the balance of $6,094,000 in our expansion fund held by the
state is included in "Restricted cash" with an offsetting
liability included in "Refunds due customers" in the consolidated
balance sheets.
In 2002, the PSCSC approved a gas cost hedging plan for the
purpose of cost stabilization for customers. This plan is limited
to 60% of our annual normalized sales volumes for South Carolina
and operates off of historical pricing indices that are tied to
future projected gas prices as traded on a national exchange. All
properly accounted for costs incurred in accordance with the plan,
except for certain personnel and administrative costs that are
recovered in rates as operations and maintenance expenses, are
deemed to be prudently incurred and are recovered in rates as a
gas cost. We began hedging activities in April 2002 under the
approved program.
Effective November 1, 2002, we implemented a hedging program
in North Carolina under the terms of a generic order issued by the
NCUC on February 26, 2002, as later clarified by a
Piedmont-specific order dated October 18. This plan is limited to
60% of the annual normalized sales volumes for North Carolina and
operates off of pricing indices that are tied to future projected
gas prices as traded on a national exchange. We believe the plan
is designed with limited subjective discretion in making purchases
with little or no risk of speculation in the market. Prudently
incurred gas costs associated with the hedging program are not
pre-approved by the NCUC but are treated as gas costs subject to
the annual gas cost prudency review based on information available
at the time of the hedge, not at the time of the prudency review.
Through October 31, 2003, we have recovered 100% of gas costs
subject to prudency review.
On October 28, 2002, the NCUC issued an order approving an
annual revenue increase of $13,889,000, effective November 1,
2002. This order also approved changes in cost allocations and
rate design and changes in tariffs and service regulations.
On October 29, 2002, the PSCSC issued an order approving an
annual revenue increase of $8,381,000, effective November 1, 2002.
This order also approved new depreciation rates and changes in
cost allocations and rate design and changes in tariffs and
service regulations.
On March 31, 2003, NCNG filed an application with the NCUC
requesting an increase in rates and charges along with changes in
cost allocations and rate design and changes in tariffs and
service regulations. On September 2, a settlement agreement
supported by all parties in the proceeding was filed with the
NCUC. The agreement provided for, among other things, an annual
increase in NCNG's regulatory margin of $29,444,000. The NCUC
issued an order in accordance with the agreement on October 30,
effective November 1, 2003.
On April 29, 2003, we filed an application with the TRA
requesting an annual increase in revenues along with changes in
cost allocations and rate design and changes in tariffs and
service regulations. On September 9, a settlement agreement with
the Tennessee Consumer Advocate was filed with the TRA that, among
other things,
35
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
increased revenues by $10,300,000 annually. On September 22, the
TRA approved the settlement agreement and authorized increased
rates, effective November 1, 2003.
On October 27, 2003, we filed a joint motion for clarification
of the right of EasternNC to defer and collect its operations and
maintenance expenses under prior NCUC orders. As part of
EasternNC's certificate authorization, the NCUC recognized that
EasternNC would not have a sufficient customer base from which to
immediately collect its operations and maintenance expenses. The
NCUC allowed EasternNC to defer its operations and maintenance
expenses for up to eight years or until the first rate case order.
The NCUC set the cap on deferred expenses at $15,000,000. On
December 1, 2003, the NCUC confirmed that these deferred expenses
should be treated as a regulatory asset for future recovery from
customers to the extent they are deemed prudent and proper.
Operations and maintenance costs totaling $2,913,000, including
those expensed prior to September 30, 2003, have been deferred as
a regulatory asset.
- ------------------
Note 4:
- ------------------
LONG-TERM DEBT
- ------------------
------------------------------------------------------------------
All of our long-term debt is unsecured. Long-term debt as of
October 31, 2003 and 2002, is summarized as follows:
<Table>
<Caption>
IN THOUSANDS 2003 2002
---------------------------------------------------------------------------------
Senior Notes:
10.06%, due 2004 $ 2,000 $ 4,000
9.44%, due 2006 35,000 35,000
8.51%, due 2017 35,000 35,000
Medium-Term Notes:
6.23%, due 2003 -- 45,000
7.35%, due 2009 30,000 30,000
7.80%, due 2010 60,000 60,000
6.55%, due 2011 60,000 60,000
6.87%, due 2023 45,000 45,000
8.45%, due 2024 40,000 40,000
7.40%, due 2025 55,000 55,000
7.50%, due 2026 40,000 40,000
7.95%, due 2029 60,000 60,000
---------------------------------------------------------------------------------
Total 462,000 509,000
Less current maturities 2,000 47,000
---------------------------------------------------------------------------------
Total $460,000 $462,000
=================================================================================
</Table>
Annual sinking fund requirements and maturities over the next
five years are $2,000,000 in 2004, zero in 2005, $35,000,000 in
2006 and zero in 2007 and 2008.
On December 19, 2003, we sold $100,000,000 of 5% and
$100,000,000 of 6% medium-term notes available under a shelf
registration filed with the Securities and Exchange Commission.
The 5% note due 2013 and the 6% note due 2033 are each to be
redeemed in a single payment at maturity.
The amount of cash dividends that may be paid on Common Stock
is restricted by provisions contained in our note agreements under
which long-term debt was issued, with those for the senior notes
being the most restrictive. We cannot pay or declare any dividends
or make any other distribution on any class of stock or make any
investments in subsidiaries or permit any subsidiary to do any of
the above (all of the foregoing being "restricted payments")
except out of net earnings available for restricted payments. As
of October 31, 2003, net earnings available for restricted
payments were $352,389,000. Retained earnings as of this date were
$259,476,000; therefore, none of our retained earnings were
restricted.
We are subject to default provisions related to our long-term
debt. The default provisions of our senior notes are:
- Failure to make principal, interest or sinking fund
payments,
- Interest coverage of 1.75 times,
- Total debt cannot exceed 70% of total capitalization,
- Funded debt of all subsidiaries in the aggregate cannot
exceed 15% of total company capitalization,
- Failure to make payments on any capitalized lease
obligation,
- Bankruptcy, liquidation or insolvency, and
- Final judgment against us in excess of $1 million that after
60 days is not discharged, satisfied or stayed pending
appeal.
36
The default provisions of our medium-term notes are:
- Failure to make principal, interest or sinking fund
payments,
- Failure after the receipt of a 90-day notice to observe or
perform for any covenant or agreement on the part of
Piedmont in the notes or in the indenture under which the
notes were issued, and
- Bankruptcy, liquidation or insolvency.
Failure to satisfy any of the default provisions results in
total outstanding issues of debt becoming due. There are cross
default provisions in all debt agreements. Based upon our
calculations, we met the default provisions as of October 31,
2003.
- ------------------
Note 5:
- ------------------
CAPITAL STOCK
- ------------------
------------------------------------------------------------------
Changes in Common Stock for the years ended October 31, 2001, 2002
and 2003, are summarized as follows:
<Table>
<Caption>
In thousands Shares Amount
-------------------------------------------------------------------------------
Balance, October 31, 2000 31,914 $314,230
Issued to participants in the Employee Stock Purchase
Plan (ESPP) 16 476
Issued to the Dividend Reinvestment and Stock Purchase
Plan (DRIP) 461 14,913
Issued to participants in the Long-Term Incentive Plan
(LTIP) 72 2,419
-------------------------------------------------------------------------------
Balance, October 31, 2001 32,463 332,038
Issued to ESPP 16 507
Issued to DRIP 546 18,039
Issued to LTIP 65 1,969
-------------------------------------------------------------------------------
Balance, October 31, 2002 33,090 352,553
Issued to ESPP 17 550
Issued to DRIP 484 17,375
Issued to LTIP 64 2,173
-------------------------------------------------------------------------------
Balance, October 31, 2003 33,655 $372,651
===============================================================================
</Table>
As of October 31, 2003, 2,910,000 shares of Common Stock were
reserved for issuance as follows:
<Table>
ESPP 132,000
DRIP 2,089,000
LTIP 689,000
-----------------------------------------------------------------------
Total 2,910,000
=======================================================================
</Table>
- ------------------
Note 6:
- ------------------
FINANCIAL
INSTRUMENTS
AND RELATED
FAIR VALUE
- ------------------
------------------------------------------------------------------
Various banks provide lines of credit totaling $200,000,000 on a
fee basis to finance current cash requirements. We have additional
uncommitted lines of credit totaling $68,000,000 on a no fee and
as needed, if available, basis. Short-term borrowings under the
lines, with maturity dates of less than 90 days, include LIBOR
cost-plus loans, transactional borrowings and overnight cost-plus
loans based on the lending bank's cost of money, with a maximum
rate of the lending bank's commercial prime interest rate.
In addition to these bank lines of credit, we also have a
commercial paper program. This program was put in place to provide
for the temporary financing of our acquisitions of NCNG and the
equity interest in EasternNC. We can issue up to $450,000,000 in
unsecured promissory notes that are backed by a $450,000,000
credit agreement expiring June 22, 2004. The notes issued under
this program on September 29, 2003, were sold at a discount from
face values at LIBOR cost-plus rates with maturities ranging from
1 to 30 days. On December 19, 2003, we sold $200,000,000 of
long-term debt. The net proceeds of $198,334,000 were used to
redeem commercial paper. For further information on long-term
debt, see Note 4 to the consolidated financial statements.
As of October 31, 2003, outstanding borrowings under the lines
of credit are included in "Notes payable" in the consolidated
balance sheets and consisted of $109,500,000 in LIBOR cost-plus
loans at a weighted average interest rate of 1.58%. As of October
31, 2003, outstanding borrowings under the commercial paper
program were $445,559,000 at a weighted average interest rate of
1.16%.
Our principal business activity is the distribution of natural
gas. As of October 31, 2003, gas receivables were $51,227,000 and
other receivables were $7,435,000, net of an allowance for
doubtful accounts of $2,743,000. We believe that we have provided
an adequate allowance for any receivables which may not be
ultimately collected.
The carrying amounts in the consolidated balance sheets of
cash and cash equivalents, restricted cash, receivables, notes
payable and accounts payable approximate their fair values due to
the short-term nature of these financial instruments. Based on
quoted market prices of similar issues having the same remaining
maturities,
37
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
redemption terms and credit ratings, the estimated fair value
amounts of long-term debt as of October 31, 2003 and 2002,
including current portion, were as follows:
<Table>
<Caption>
2003 2002
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
IN THOUSANDS AMOUNT VALUE AMOUNT VALUE
------------------------------------------------------------------------------------------------
Long-term debt $462,000 $506,882 $509,000 $589,503
</Table>
The use of different market assumptions or estimation
methodologies could have a material effect on the estimated fair
value amounts. The fair value amounts do not reflect principal
amounts that we will ultimately be required to pay.
We purchase natural gas for our regulated operations for
resale under tariffs approved by the state regulatory commissions
having jurisdiction over the service area where the customer is
located. We recover the cost of gas purchased for regulated
operations through purchased gas cost recovery mechanisms. We
structure the pricing, quantity and term provisions of our gas
supply contracts to maximize flexibility and minimize cost and
risk for our customers. We have a management-level Energy Risk
Management Committee that monitors risks in accordance with our
risk management policies.
During the year ended October 31, 2003, we purchased and sold
financial options for natural gas for our Tennessee gas purchase
portfolio. As of October 31, 2003, we had forward positions for
December 2003 through March 2004. The cost of these options and
all other gas costs incurred are components of and are recovered
under the guidelines of the Tennessee Incentive Plan. This plan
establishes an incentive-sharing mechanism based on differences in
the actual cost of gas purchased and benchmark amounts determined
by published market indices. These differences, after applying a
monthly 1% positive or negative deadband, together with margin
from marketing transportation and capacity in the secondary market
and margin from secondary market sales of gas, are subject to an
overall annual cap of $1,600,000 for shareholder gains or losses.
The net gains or losses on gas costs within the deadband (99% to
101% of the benchmark) are not subject to sharing under the plan
and are allocated to customers. Any net gains or losses on gas
costs outside the deadband are combined with capacity management
benefits and shared between customers and shareholders, subject to
the annual cap. The net overall annual performance results are
collected from or refunded to customers, subject to the cap.
During the year ended October 31, 2003, we purchased and sold
financial options for natural gas for our South Carolina gas
purchase portfolio. As of October 31, 2003, we had forward
positions for December 2003 through March 2004. The costs of these
options are pre-approved by the PSCSC for recovery from customers
subject to our following the provisions of the gas cost hedging
plan. The hedging program uses a matrix of historic,
inflation-adjusted gas prices over the past four years plus the
current season, with a heavier weighting on current data, as the
basis for determining the purchase of financial instruments. The
hedging portfolio is diversified over a rolling 24 months with a
short-term focus (one to 12 months) and a long-term focus (13 to
24 months). Hedges are executed within the parameters of the
matrix compared with NYMEX monthly prices as reviewed on a daily
basis. We believe the plan is very structured in composition and
designed to limit subjective discretion in making hedging
decisions.
During the year ended October 31, 2003, we purchased and sold
financial options for natural gas for our North Carolina gas
purchase portfolio. As of October 31, 2003, we had forward
positions for December 2003 through March 2004. The operation of
the hedging program is identical to that of the South Carolina
hedging program.
There is no income statement impact of the North Carolina and
South Carolina programs as all costs and related gain or loss
amounts are passed through to customers under regulatory gas cost
recovery mechanisms and are recorded in "Refunds due customers," a
regulatory liability. We mark the derivative instruments to market
under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (Statement 133), with a corresponding entry to
"Refunds due customers." As of October 31, 2003, the amount in
"Refunds due customers" is net of $6,300,000 due from customers
for the costs of the North Carolina and South Carolina hedging
programs and the related mark-to-market adjustments.
- ------------------
Note 7:
- ------------------
LEASES
- ------------------
------------------------------------------------------------------
We lease certain buildings, land and equipment for use in our
operations under noncancelable capital and operating leases.
EasternNC leases one of its primary real properties under a
noncancelable operating lease that expires in July 2007, and
EasternNC has capital leases for equipment.
For the years ended October 31, 2003, 2002 and 2001, operating
lease rentals totaled $4,543,000, $4,520,000 and $4,400,000,
respectively.
38
Future minimum lease obligations, excluding taxes and other
expenses, for leases in effect as of October 31, 2003, are payable
as follows:
<Table>
<Caption>
Capital Operating
In thousands Leases Leases
---------------------------------------------------------------------------------
2004 $14 $ 4,786
2005 -- 4,024
2006 -- 2,775
2007 -- 1,797
2008 -- 1,122
Thereafter -- 2,519
---------------------------------------------------------------------------------
Total minimum obligations 14 $17,023
=========
Less amount representing interest --
---------------------------------------------------------------------------------
Present value of net minimum obligations 14
Less current portion 14
---------------------------------------------------------------------------------
Long-term portion $--
=================================================================================
</Table>
- ------------------
Note 8:
- ------------------
EMPLOYEE
BENEFIT
PLANS
- ------------------
------------------------------------------------------------------
We have a defined-benefit pension plan for the benefit of eligible
full-time employees. An employee becomes eligible on the January 1
or July 1 following either the date on which he or she attains age
30 or attains age 21 and completes 1,000 hours of service during
the 12-month period commencing on the employment date. Plan
benefits are generally based on credited years of service and the
level of compensation during the five consecutive years of the
last ten years prior to retirement during which the participant
received the highest compensation. Our policy is to fund the plan
in an amount not in excess of the amount that is deductible for
income tax purposes. Plan assets consist primarily of marketable
securities and cash equivalents. We amend the plan from time to
time in accordance with changes in tax law.
We provide certain postretirement health care and life
insurance benefits to eligible full-time employees. Employees are
first eligible to retire and receive these benefits at age 55 with
ten or more years of service after the age of 45. The liability
associated with such benefits is funded in irrevocable trust funds
that can only be used to pay the benefits.
In connection with the acquisition of NCNG discussed in Note 2
to the consolidated financial statements, we acquired pension and
other postretirement benefit obligations (OPEB) related to former
employees of NCNG. Cash equal to the liability for the pension
benefits, estimated to be $34,481,000 as of October 31, 2003, will
be transferred from Progress in 2004 and is expected to be
maintained in a separate "frozen" plan for the next several years.
The transferred active pension plan participants began accruing
benefits under the Piedmont pension plan as of October 1, 2003. As
of October 31, 2003, the estimated OPEB obligation of $9,718,000
for former employees of NCNG is included in "Other" in "Deferred
Credits and Other Liabilities" in the consolidated balance sheets.
There are no assets attributable to this liability to be
transferred from Progress.
39
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
A reconciliation of changes in the plans' benefit obligations
and fair value of assets for the years ended October 31, 2003 and
2002, and a statement of the funded status as recorded in the
consolidated balance sheets as of October 31, 2003 and 2002, are
presented below:
<Table>
<Caption>
2003 2002 2003 2002
-------------------- --------------------
In thousands Pension Benefits Other Benefits
--------------------------------------------------------------------------------------------------
Change in benefit obligation:
Obligation at beginning of year $149,693 $148,011 $ 25,632 $ 24,987
Obligation of NCNG at date of acquisition -- -- 9,718 --
Service cost 6,060 5,456 808 542
Interest cost 10,114 9,729 2,128 1,696
Plan amendments -- 2,474 5,894 --
Actuarial (gain) loss 7,544 (9,031) 1,844 524
Benefit payments (8,160) (6,946) (2,344) (2,117)
Recognized liabilities of the NCNG plan 34,481 -- -- --
--------------------------------------------------------------------------------------------------
Obligation at end of year $199,732 $149,693 $ 43,680 $ 25,632
==================================================================================================
Change in fair value of plan assets:
Fair value of plan assets at beginning of year $125,056 $135,981 $ 11,311 $ 11,210
Actual return (loss) on plan assets 11,765 (3,979) 379 88
Employer contributions 979 -- 2,590 1,721
Administrative expenses (290) -- -- --
Recognized assets of the NCNG Plan 34,481 -- -- --
Benefit payments (8,160) (6,946) (1,841) (1,708)
--------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $163,831 $125,056 $ 12,439 $ 11,311
==================================================================================================
Funded status:
Funded status at end of year $(35,901) $(24,637) $(31,241) $(14,321)
Unrecognized transition obligation -- 13 8,791 9,670
Unrecognized prior-service cost 7,160 8,092 5,035 --
Unrecognized actuarial gain (loss) 20,853 10,570 6,275 4,192
--------------------------------------------------------------------------------------------------
Accrued benefit liability $ (7,888) $ (5,962) $(11,140) $ (459)
==================================================================================================
</Table>
Net periodic benefit cost for the years ended October 31,
2003, 2002 and 2001, includes the following components:
<Table>
<Caption>
2003 2002 2001 2003 2002 2001
------------------------------ ------------------------
In thousands Pension Benefits Other Benefits
-------------------------------------------------------------------------------------------------------
Service cost $ 6,060 $ 5,456 $ 4,890 $ 808 $ 542 $ 573
Interest cost 10,114 9,729 9,278 2,128 1,696 1,636
Expected return on plan assets (13,375) (14,976) (14,359) (817) (913) (839)
Amortization of transition obligation 14 14 14 879 879 879
Amortization of prior-service cost 931 903 762 859 -- --
Amortization of actuarial (gain) loss (840) (872) (1,781) 198 46 --
-------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 2,904 $ 254 $ (1,196) $4,055 $2,250 $2,249
=======================================================================================================
</Table>
In determining the market-related value of plan assets, we use
the following methodology. Each year, the asset gain or loss is
determined by comparing the fund's actual return to the expected
return, based on the disclosed expected return on investment
assumption. Each year's asset gain or loss is then recognized
ratably over a five-year period. Thus, the market-related value of
assets as of the balance sheet date is determined by adjusting the
market value of assets by the portion of the prior five years'
gains or losses that has not yet been recognized. This method has
been applied consistently in all years presented. The discount
rate can vary from plan year to plan year. October 31 is the
measurement date for the plans. The benchmark consistently used in
determining the discount rate is Moody's AA bond index (adjusted
to be an equivalent annual rate), plus no more than 25 basis
points. As of October 31, 2003, the benchmark was 6.20%.
We amortize unrecognized prior-service cost over the average
remaining service period for active employees. We amortize the
unrecognized transition obligation over the average remaining
service period for active employees expected to receive benefits
under the plan as of the date of transition. We amortize gains and
losses in excess of
40
10% of the greater of the benefit obligation and the
market-related value of assets over the average remaining service
period of active employees. The method of amortization in all
cases is straight-line.
The weighted average assumptions used in the measurement of
the benefit obligation as of October 31, 2003, 2002 and 2001, are
presented below:
<Table>
<Caption>
2003 2002 2001 2003 2002 2001
------------------ ------------------
Pension Benefits Other Benefits
-----------------------------------------------------------------------------------------------
Discount rate 6.25% 7.00% 6.75% 6.25% 7.00% 7.00%
Expected long-term rate of return on plan assets 8.50% 9.50% 9.50% 8.50% 9.50% 9.25%
Rate of compensation increase 3.97% 3.97% 4.75% 3.97% 3.97% 4.50%
</Table>
The assumed health care cost trend rates used in measuring the
accumulated postretirement benefit obligation for the medical
plans for participants aged less than 65 are 10% for 2003,
declining gradually to 5% in 2010 and remaining at that level
thereafter. For those participants aged greater than 65, the
assumed health care cost trend rates are 13% for 2003, declining
gradually to 5% in 2012 and remaining at that level thereafter.
The health care cost trend rate assumptions have a significant
effect on the amounts reported. A change of 1% in the assumed
health care cost trend rates would have the following effects:
<Table>
<Caption>
In thousands 1% Increase 1% Decrease
---------------------------------------------------------------------------------------
Effect on total of service and interest cost components of
net periodic postretirement health care benefit cost for
the year ended October 31, 2003 $ 123 $ (114)
Effect on the health care component of the accumulated
postretirement benefit obligation as of October 31, 2003 $1,985 $(1,713)
</Table>
We maintain salary investment plans which are profit-sharing
plans under Section 401(a) of the Internal Revenue Code of 1986,
as amended (the Tax Code), which include qualified cash or
deferred arrangements under Tax Code Section 401(k). Employees who
have completed six months of service are eligible to participate.
Participants may defer a portion of their base salary to the plans
and we match a portion of their contributions. For the years ended
October 31, 2003, 2002 and 2001, our matching contributions
totaled $2,315,000, $2,244,000 and $2,189,000, respectively. All
contributions vest immediately. There are numerous investment
options available to enable participants to diversify their
accounts. Participants may invest in Piedmont stock up to a
maximum of 20% of their account.
- ------------------
Note 9:
- ------------------
INCOME TAXES
- ------------------
------------------------------------------------------------------
The components of income tax expense for the years ended October
31, 2003, 2002 and 2001, are as follows:
<Table>
<Caption>
2003 2002 2001
---------------- ---------------- ----------------
IN THOUSANDS FEDERAL STATE FEDERAL STATE FEDERAL STATE
--------------------------------------------------------------------------------------------------
Income taxes charged to operations:
Current $(4,581) $ (959) $15,482 $4,410 $23,959 $4,558
Deferred 38,252 7,931 10,711 737 4,933 1,683
Amortization of investment tax credits (550) -- (556) -- (558) --
--------------------------------------------------------------------------------------------------
Total 33,121 6,972 25,637 5,147 28,334 6,241
--------------------------------------------------------------------------------------------------
Income taxes charged to other income:
Current 7,685 1,561 5,424 952 4,685 1,036
Deferred (623) (99) 2,174 460 1,299 280
--------------------------------------------------------------------------------------------------
Total 7,062 1,462 7,598 1,412 5,984 1,316
--------------------------------------------------------------------------------------------------
Total income tax expense $40,183 $8,434 $33,235 $6,559 $34,318 $7,557
==================================================================================================
</Table>
A reconciliation of income tax expense at the federal
statutory rate to recorded income tax expense for the years ended
October 31, 2003, 2002 and 2001, is as follows:
<Table>
<Caption>
IN THOUSANDS 2003 2002 2001
-----------------------------------------------------------------------------------------
Federal taxes at 35% $43,043 $35,704 $37,576
State income taxes, net of federal benefit 5,482 4,263 4,912
Amortization of investment tax credits (550) (556) (558)
Other, net 642 383 (55)
-----------------------------------------------------------------------------------------
Total income tax expense $48,617 $39,794 $41,875
=========================================================================================
</Table>
41
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
As of October 31, 2003 and 2002, deferred income taxes
consisted of the following temporary differences:
<Table>
<Caption>
IN THOUSANDS 2003 2002
---------------------------------------------------------------------------------
Utility plant $178,133 $151,584
Equity investments 17,369 16,648
Revenues and cost of gas 25,035 5,172
Other, net (15,085) (13,745)
---------------------------------------------------------------------------------
Net deferred income taxes $205,452 $159,659
=================================================================================
</Table>
As of October 31, 2003 and 2002, total deferred income tax
liabilities were $217,476,000 and $169,918,000 and total deferred
income tax assets were $12,024,000 and $10,259,000, respectively.
We are currently under audit by the Internal Revenue Service
for the year ended October 31, 2001. We are not aware of any
potential tax issues that would materially affect financial
position. Although the ultimate outcome of the audit and the final
impact cannot be predicted with certainty, we believe that the
resolution of the audit will not have a material adverse effect on
financial position.
- ------------------
Note 10:
- ------------------
EQUITY
INVESTMENTS
- ------------------
------------------------------------------------------------------
The consolidated financial statements include the accounts of
wholly owned subsidiaries whose investments in joint venture,
energy-related businesses are accounted for under the equity
method. Piedmont Greenbrier Pipeline Company, LLC, is a wholly
owned subsidiary of Piedmont Natural Gas Company. Another wholly
owned subsidiary of Piedmont Natural Gas Company, Piedmont Energy
Partners, Inc., is a holding company for certain other wholly
owned subsidiaries. These subsidiaries include Piedmont Intrastate
Pipeline Company, Piedmont Interstate Pipeline Company, Piedmont
Propane Company and Piedmont Energy Company. Our ownership
interest in each entity is recorded in "Investments in non-utility
activities, at equity" in the consolidated balance sheets.
Earnings or losses from equity investments are recorded in
"Non-utility activities, at equity" in "Other Income (Expense)" in
the consolidated statements of income.
As of October 31, 2003, the amount of our retained earnings
that represents undistributed earnings of 50% or less owned
entities accounted for by the equity method was $23,056,000.
PIEDMONT INTRASTATE PIPELINE COMPANY
Piedmont Intrastate Pipeline Company owns 21.48% of the membership
interests in Cardinal Pipeline Company, L.L.C., a North Carolina
limited liability company. With the acquisition of NCNG, we
acquired an additional 5.03% interest in Cardinal over our
previous interest of 16.45%. The other members are subsidiaries of
The Williams Companies, Inc., and SCANA Corporation. Cardinal owns
and operates an intrastate natural gas pipeline in North Carolina
and is regulated by the NCUC. Cardinal has firm service agreements
with local distribution companies, including Piedmont, for 100% of
the firm transportation capacity on the pipeline. Cardinal is
dependent on the Williams-Transco pipeline system to deliver gas
into its system for service to its customers. Cardinal's long-term
debt is secured by Cardinal's assets and by each member's equity
investment in Cardinal.
We have related party transactions with Cardinal as a
transportation customer. We record in cost of gas the
transportation costs charged by Cardinal. For the years ended
October 31, 2003, 2002 and 2001, these gas costs were $1,713,000,
$1,475,000 and $1,475,000, respectively. As of October 31, 2003
and 2002, we owed Cardinal $394,000 and $123,000, respectively.
Summarized unaudited financial information provided to us by
Cardinal for 100% of Cardinal as of and for the twelve months
ended September 30, 2003, 2002 and 2001, is presented below.
<Table>
<Caption>
IN THOUSANDS 2003 2002 2001
-----------------------------------------------------------------------------------------
Current assets $ 9,218 $11,339 $ 7,988
Non-current assets 93,333 95,256 97,897
Current liabilities 4,054 5,416 3,187
Non-current liabilities 41,280 43,200 45,120
Revenues 16,880 17,124 17,124
Gross profit 16,880 17,124 17,124
Income before income taxes 9,211 9,401 10,005
</Table>
PIEDMONT INTERSTATE PIPELINE COMPANY
Piedmont Interstate Pipeline Company owns 40.0587% of the
membership interests in Pine Needle LNG Company, L.L.C., a North
Carolina limited liability company. With the acquisition of NCNG,
we acquired an additional 5.0587% interest in Pine Needle over our
previous interest of 35%. The other members are subsidiaries of
The Williams Companies, Inc., SCANA Corporation and Amerada Hess
Corporation, and the Municipal Gas Authority of Georgia. Pine
Needle owns an interstate liquefied natural gas (LNG) storage
facility in North Carolina and is regulated by the Federal Energy
Regulatory Commission (FERC). Storage capacity of the facility is
fully subscribed
42
under firm service agreements with customers. We subscribe to
approximately 64% of this capacity to provide gas for peak-use
periods when demand is the highest. Pine Needle enters into
interest-rate swap agreements to modify the interest
characteristics of its long-term debt. Movements in the
mark-to-market value of these agreements are recorded in
"Accumulated other comprehensive income" in the consolidated
balance sheets as a hedge under Statement 133. Pine Needle's
long-term debt is secured by Pine Needle's assets and by each
member's equity investment in Pine Needle.
We have related party transactions with Pine Needle as a
customer. We record in cost of gas the storage costs charged by
Pine Needle. For the years ended October 31, 2003, 2002 and 2001,
these gas costs were $10,649,000, $10,898,000 and $11,266,000,
respectively. As of October 31, 2003 and 2002, we owed Pine Needle
$1,033,000 and $895,000, respectively.
Summarized unaudited financial information provided to us by
Pine Needle for 100% of Pine Needle as of and for the twelve
months ended September 30, 2003, 2002 and 2001, is presented
below.
<Table>
<Caption>
IN THOUSANDS 2003 2002 2001
------------------------------------------------------------------------------------------
Current assets $11,931 $12,662 $ 10,494
Non-current assets 97,425 98,309 101,060
Current liabilities 9,088 6,495 3,375
Non-current liabilities 50,759 55,856 55,908
Revenues 20,013 20,253 20,271
Gross profit 20,013 20,253 20,271
Income before income taxes 9,320 10,357 10,916
</Table>
PIEDMONT PROPANE COMPANY
Piedmont Propane Company owns 20.69% of the membership interests
in US Propane, L.P. The other members are subsidiaries of TECO
Energy, Inc., AGL Resources, Inc., and Atmos Energy Corporation.
US Propane owns all of the general partnership interest and
approximately 26% of the limited partnership interest in Heritage
Propane Partners, L.P. (Heritage Propane), a marketer of propane
through a nationwide retail distribution network. Heritage Propane
utilizes hedging transactions to provide protection against
significant fluctuations in prices. Movements in the
mark-to-market value of these agreements are recorded in
"Accumulated other comprehensive income" in the consolidated
balance sheets as a hedge under Statement 133 and SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" (Statement 149). Heritage Propane also buys and sells
financial instruments for trading purposes through a wholly owned
subsidiary. Financial instruments utilized in connection with the
liquids marketing activity are accounted for using the
mark-to-market method of accounting.
In July 2002, we recorded a pre-tax loss in value of
$1,366,000 on our investment in US Propane due to an other than
temporary decline in the value of the general partnership interest
in Heritage Propane. This other than temporary loss was calculated
based on estimated future cash flow projections that reflect
actual and projected customer growth assumptions for Heritage
Propane.
The limited partnership agreement of US Propane requires that
in the event of liquidation, all limited partners would be
required to restore capital account deficiencies, including any
unsatisfied obligations of the partnership. Under the agreement,
our maximum capital account restoration is $10,000,000. As of
October 31, 2003, our capital account was positive.
On November 7, 2003, we, along with the other members of US
Propane, entered into an agreement to sell the general and limited
partnership interests in Heritage Propane to a third party for
$130,000,000. Our share of the sales proceeds is expected to be
$26,897,000. In connection with the sale, US Propane will retain
approximately 180,000 common units of Heritage Propane for
ultimate distribution to US Propane's members. Subject to
regulatory approvals and financing conditions, closing is expected
to occur in January 2004.
Summarized audited financial information for Heritage Propane
for 100% of Heritage Propane as of and for its fiscal years ended
August 31, 2003, 2002 and 2001, is presented below.
<Table>
<Caption>
IN THOUSANDS 2003 2002 2001
--------------------------------------------------------------------------------------------
Current assets $ 94,138 $ 95,387 $138,263
Non-current assets 644,701 621,877 619,904
Current liabilities 151,027 122,069 127,655
Non-current liabilities 360,762 420,021 423,748
Minority interest 4,002 3,564 5,350
Revenues 571,476 462,325 543,975
Gross profit 274,320 224,140 237,419
Income before income taxes 32,165 4,902 19,710
</Table>
43
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
PIEDMONT ENERGY COMPANY
Piedmont Energy Company owns 30% of the membership interests in
SouthStar Energy Services LLC, a Delaware limited liability
company. The remaining non-controlling 70% interest is owned by a
subsidiary of AGL Resources, Inc. Key governance provisions in the
LLC agreement require unanimous approval of the members. SouthStar
sells natural gas to residential, commercial and industrial
customers in the southeastern United States; however, SouthStar
conducts most of its business in the unregulated retail gas market
in Georgia.
The Operating Policy of SouthStar contains a provision for the
disproportionate sharing of earnings in excess of a threshold per
annum, cumulative pre-tax return of 17%. This threshold is not
reached until all prior period losses are recovered. Earnings
below the 17% return threshold are allocated to members based on
their ownership percentages. Earnings above the threshold are
allocated at various percentages based on actual margin generated
in four defined geographic service areas. The earnings test is
based on SouthStar's fiscal year ending December 31. As of October
31, 2003 and 2002, we recognized as equity earnings only the
amounts that we believe have been earned as the calculation
methodologies and interpretations of the Operating Policy that
impact the members' disproportionate earnings sharing percentages
had not been agreed to by the members. Accordingly, we recorded
pre-tax earnings from SouthStar for the years ended October 31,
2003 and 2002, at overall percentages of 20% and 24%,
respectively.
On December 31, 2003, we entered into an agreement in
principle with the other member of SouthStar that addressed a
number of matters under the LLC Agreement and the Operating
Policy, including the resolution of certain disproportionate
sharing issues. Based on this agreement in principle and
consistent with the understandings reached by the members that are
yet to be documented, we estimate that we will record an increase
in pre-tax earnings from SouthStar of $2,491,000 in the first
quarter of our fiscal year 2004.
SouthStar utilizes financial contracts to hedge the variable
cash flows associated with changes in the price of natural gas.
These financial contracts, in the form of futures, options and
swaps, are considered to be derivatives and fair value is based on
selected market indices. Those derivative transactions that
qualify as cash flow hedges are reflected in SouthStar's balance
sheet at the fair values of the open positions, with the
corresponding unrealized gain or loss included in "Accumulated
other comprehensive income" under Statement 133 and Statement 149.
Those derivative transactions that are not designated as hedges
are reflected in SouthStar's balance sheet with the corresponding
unrealized gain or loss included in cost of sales in SouthStar's
income statement. SouthStar does not enter into or hold
derivatives for trading or speculative purposes. SouthStar also
enters into weather derivative contracts for hedging purposes in
order to preserve margins in the event of warmer-than-normal
weather in the winter months. These contracts are accounted for
using the intrinsic value method under the guidelines of Emerging
Issues Task Force Issue No. 99-2, "Accounting for Weather
Derivatives."
Atlanta Gas Light Company (AGLC), under the terms of its
tariffs with the Georgia Public Service Commission, has required
SouthStar's members to guarantee SouthStar's ability to pay AGLC's
fees for local delivery service. Piedmont Energy Company, through
its parent Piedmont Energy Partners, has guaranteed its 30% share
of SouthStar's obligation with AGLC with a letter of credit with a
bank in the amount of $15,000,000 that expires on July 30, 2004.
On November 25, 2003, Piedmont Energy Company increased its
guarantee with an additional letter of credit of $3,108,000 that
expires on August 4, 2004.
We have related party transactions with SouthStar which
purchases wholesale gas supplies from us. For the years ended
October 31, 2003, 2002 and 2001, such operating revenues totaled
$898,000, $10,744,000 and $12,192,000, respectively. As of October
31, 2003 and 2002, SouthStar owed us $1,000 and $1,162,000,
respectively.
Summarized unaudited financial information provided to us by
SouthStar for 100% of SouthStar as of and for the twelve months
ended September 30, 2003, 2002 and 2001, is presented below.
<Table>
<Caption>
IN THOUSANDS 2003 2002 2001
--------------------------------------------------------------------------------------------
Current assets $168,302 $134,113 $140,125
Non-current assets 1,099 1,228 2,688
Current liabilities 48,568 61,990 33,891
Non-current liabilities -- -- 35,464
Revenues 727,871 606,191 817,687
Gross profit 99,618 124,315 117,306
Income before income taxes 55,805 54,308 23,708
</Table>
PIEDMONT GREENBRIER PIPELINE COMPANY
As of October 31, 2003, Piedmont Greenbrier Pipeline Company, LLC,
owned 33% of the membership interests in Greenbrier Pipeline
Company, LLC (Greenbrier). The other member was a subsidiary of
Dominion Resources, Inc. Greenbrier was formed to build an
interstate gas pipeline from West Virginia to North Carolina. On
November 6, 2003, we sold our interest in Greenbrier to Dominion
Resources for our book value of $9,199,000.
44
Summarized unaudited financial information provided to us by
Greenbrier for 100% of Greenbrier as of and for the twelve months
ended September 30, 2003, 2002 and 2001, is presented below.
<Table>
<Caption>
IN THOUSANDS 2003 2002 2001
----------------------------------------------------------------------------------------
Current assets $ 305 $ 2,501 $2,343
Non-current assets 27,702 18,684 --
Current liabilities 130 380 --
Non-current liabilities -- -- --
Revenues 2 -- --
Gross profit 2 -- --
Income before income taxes 380 317 --
</Table>
- ------------------
Note 11:
- ------------------
BUSINESS
SEGMENTS
- ------------------
------------------------------------------------------------------
Due to organizational changes, largely resulting from the
acquisitions of NCNG and the equity interest in EasternNC, we
redefined our reportable business segments effective October 1,
2003. Based on products and services, regulatory environments and
our current corporate organization and business decision-making
activities, we have two reportable business segments, regulated
utility and non-utility activities. Operations of our regulated
utility segment are conducted by the parent company and by
EasternNC. Operations of our non-utility activities segment
comprise all of our other ventures. These operations are primarily
conducted by Piedmont Intrastate Pipeline Company, Piedmont
Interstate Pipeline Company, Piedmont Energy Company, Piedmont
Propane Company and Piedmont Greenbrier Pipeline Company. We have
restated all prior periods presented to reflect the change in
reportable segments.
Operations of the regulated utility segment are reflected in
operating income in the consolidated statements of income.
Operations of the non-utility activities segment are included in
"Other Income (Expense)" in the consolidated statements of income
in either "Non-utility activities, at equity" or "Non-operating
income."
We evaluate the performance of the regulated utility segment
based on margin, operations and maintenance expenses and operating
income. We evaluate the performance of the non-utility activities
segment based on income from non-utility activities, at equity,
and investment in non-utility activities, at equity. All of our
operations are within the United States. No single customer's
revenues to us exceed 10% of our consolidated revenues.
45
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Operations by segment for the years ended October 31, 2003,
2002 and 2001, are presented below:
<Table>
<Caption>
Regulated Non-Utility
In thousands Utility Activities Total
---------------------------------------------------------------------------------------------------
2003
Revenues from external customers $1,220,822 $ -- $1,220,822
Margin 382,880 -- 382,880
Operations and maintenance expenses 152,107 73 152,180
Depreciation 63,164 -- 63,164
Operating income 143,199 (132) 143,067
Income before income taxes and minority interest 106,150 17,649 123,799
Total assets 2,214,566 112,690 2,327,256
Income from non-utility activities, at equity -- 17,972 17,972
Investments in non-utility activities, at equity -- 96,191 96,191
Construction expenditures 80,405 -- 80,405
---------------------------------------------------------------------------------------------------
2002
Revenues from external customers $ 832,028 $ -- $ 832,028
Margin 335,794 -- 335,794
Operations and maintenance expenses 133,427 348 133,775
Depreciation 57,593 -- 57,593
Operating income 120,911 (465) 120,446
Income before income taxes and minority interest 83,525 18,486 102,011
Total assets 1,397,900 95,302 1,493,202
Income from non-utility activities, at equity -- 19,207 19,207
Investments in non-utility activities, at equity -- 80,342 80,342
Construction expenditures 83,831 -- 83,831
---------------------------------------------------------------------------------------------------
2001
Revenues from external customers $1,107,856 $ -- $1,107,856
Margin 337,978 (264) 337,714
Operations and maintenance expenses 133,422 314 133,736
Depreciation 52,060 5 52,065
Operating income 128,544 (547) 127,997
Income before income taxes and minority interest 92,038 15,322 107,360
Total assets 1,353,152 83,567 1,436,719
Income from non-utility activities, at equity -- 16,271 16,271
Investments in non-utility activities, at equity -- 82,287 82,287
Construction expenditures 90,573 -- 90,573
---------------------------------------------------------------------------------------------------
</Table>
A reconciliation to the consolidated financial statements for
the years ended October 31, 2003, 2002 and 2001, is presented
below:
<Table>
<Caption>
IN THOUSANDS 2003 2002 2001
--------------------------------------------------------------------------------------------------
Operating Income:
Segment operating income $ 143,067 $ 120,446 $ 127,997
Utility income taxes (40,093) (30,784) (34,575)
Non-utility activities 132 465 547
--------------------------------------------------------------------------------------------------
Operating income $ 103,106 $ 90,127 $ 93,969
==================================================================================================
Net Income:
Income before income taxes and minority interest for
reportable segments $ 123,799 $ 102,011 $ 107,360
Income taxes 48,617 39,794 41,875
Minority interest 820 -- --
--------------------------------------------------------------------------------------------------
Net income $ 74,362 $ 62,217 $ 65,485
==================================================================================================
Consolidated Assets:
Total assets for reportable segments $2,327,256 $1,493,202 $1,436,719
Eliminations/Adjustments (30,850) (48,114) (43,061)
--------------------------------------------------------------------------------------------------
Consolidated assets $2,296,406 $1,445,088 $1,393,658
==================================================================================================
</Table>
46
- ------------------
Note 12:
- ------------------
ENVIRONMENTAL
MATTERS
- ------------------
------------------------------------------------------------------
Our three state regulatory commissions have authorized us to
utilize deferral accounting, or to create a regulatory asset, in
connection with environmental costs. Accordingly, we have
established regulatory assets for environmental costs incurred and
for estimated environmental liabilities.
In 1997, we entered into a settlement with a third party with
respect to nine manufactured gas plant (MGP) sites that we have
owned, leased or operated and paid an amount that released us from
any investigation and remediation liability. Although no such
claims are pending or, to our knowledge, threatened, the
settlement did not cover any third-party claims for personal
injury, death, property damage and diminution of property value or
natural resources. Three other MGP sites that we also have owned,
leased or operated were not included in the settlement.
In 2002, in connection with the acquisition of certain assets
and liabilities of NCGS discussed in Note 2 to the consolidated
financial statements, we acquired the liability for an MGP site
located in Reidsville, North Carolina. Based on a limited
assessment performed by a third party on this site and its
similarity to the three sites not covered by the settlement noted
above, we increased our environmental liability in the fourth
quarter of 2002 by $1,508,000, with an offsetting increase to a
regulatory asset, to reflect a liability of $637,000 for each of
the four sites.
As of October 31, 2003, our undiscounted environmental
liability totaled $2,868,000, consisting of $2,548,000 for the
four MGP sites and $320,000 for underground storage tanks not yet
remediated. This liability is not net of any anticipated
recoveries.
As of October 31, 2003, our regulatory assets for
environmental costs totaled $5,442,000, net of recoveries from
customers, in connection with the estimated liabilities for the
MGP sites and underground storage tanks and for environmental
costs incurred, primarily legal fees and engineering assessments.
The portion of the regulatory assets representing actual costs
incurred is being amortized as recovered in rates from customers
in all three states.
Further evaluations of the MGP sites and the underground
storage tank sites could significantly affect recorded amounts;
however, we believe that the ultimate resolution of these matters
will not have a material adverse effect on financial position or
results of operations.
In connection with the NCNG general rate case proceeding
discussed in Note 3 to the consolidated financial statements, the
NCUC ordered an environmental regulatory liability of $3,471,000
be established for refund to customers over the three-year period
beginning November 1, 2003. This liability was derived from
deducting deferred MGP costs from a prior payment made to NCNG by
its insurers.
47
INDEPENDENT AUDITORS' REPORT
Piedmont Natural Gas Company, Inc.
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheets of
Piedmont Natural Gas Company, Inc. and subsidiaries ("Piedmont")
as of October 31, 2003 and 2002, and the related consolidated
statements of income, stockholders' equity and cash flows for each
of the three years in the period ended October 31, 2003. These
financial statements are the responsibility of Piedmont's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Piedmont at October 31, 2003 and 2002, and the results of its
operations and its cash flows for each of the three years in the
period ended October 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
-s- Deloitte & Touche LLP
January 9, 2004
25