Public Service Company of North Carolina, Incorporated Condensed Consolidated Balance Sheets (Unaudited)

Transcription

1 Public Service Company of North Carolina, Incorporated Condensed Consolidated Balance Sheets September 30, December 31, Thousands of dollars Assets Gas Utility Plant $1,492,719 $1,436,603 Accumulated Depreciation (402,058) (387,143) Goodwill, net of writedown of $229, , ,824 Gas Utility Plant, Net 1,300,485 1,259,284 Nonutility Property and Investments, Net 35,448 36,507 Current Assets: Cash and cash equivalents 1,008 14,801 Receivables, net of allowance for uncollectible accounts of $549 and $825 77, ,262 Receivables-affiliated companies 41,537 5,180 Inventories (at average cost): Stored gas 50,471 49,748 Materials and supplies 11,625 7,156 Prepayments and other 7,229 3,984 Total Current Assets 189, ,131 Deferred Debits and Other Assets: Regulatory assets 61,103 73,949 Other 1,600 1,938 Total Deferred Debits and Other Assets 62,703 75,887 Total $1,588,313 $1,612,809 1

2 Public Service Company of North Carolina, Incorporated Condensed Consolidated Balance Sheets September 30, December 31, Thousands of dollars Capitalization and Liabilities Capitalization: Common Equity $695,627 $689,618 Long-Term Debt, net 351, ,726 Total Capitalization 1,047,574 1,042,344 Current Liabilities: Short-term borrowings - 32,300 Current portion of long-term debt 1, Accounts payable 23,032 34,207 Accounts payable-affiliated companies 4,718 5,406 Customer deposits and customer prepayments 15,908 18,094 Taxes accrued 5,478 1,394 Interest accrued 2,920 6,252 Dividends declared 8,500 5,975 Other 5,036 6,982 Total Current Liabilities 66, ,601 Deferred Credits and Other Liabilities: Deferred income taxes, net 195, ,088 Pension and other postretirement benefits 66,972 80,074 Regulatory liabilities 180, ,719 Asset retirement obligations 24,966 24,135 Other 6,729 6,848 Total Deferred Credits and Other Liabilities 474, ,864 Commitments and Contingencies (Note 8) - - Total $1,588,313 $1,612,809 See Notes to Condensed Consolidated Financial Statements. 2

3 Public Service Company of North Carolina, Incorporated Condensed Consolidated Statements of Operations Three Months Ended Nine Months Ended September 30, September 30, Thousands of dollars Operating Revenues $53,939 $45,499 $361,051 $263,031 Cost of Gas 22,587 15, , ,378 Margin 31,352 29, , ,653 Operating Expenses: Operation and maintenance 20,974 21,248 65,119 65,940 Depreciation and amortization 10,651 10,317 31,723 30,586 Other taxes 2,624 2,593 7,995 7,851 Total Operating Expenses 34,249 34, , ,377 Operating Income (Loss) (2,897) (4,462) 57,055 53,276 Other Income (Expense): Other revenues 3,447 5,614 13,123 15,327 Other expenses (2,920) (2,855) (8,800) (8,730) Interest charges, net of allowance for borrowed funds used during construction of $111, $20, $234 and $75 (5,501) (5,987) (16,625) (17,925) Allowance for equity funds used during construction Total Other Expense (4,601) (3,160) (11,513) (11,065) Income (Loss) Before Income Taxes and Earnings from Equity Method Investments (7,498) (7,622) 45,542 42,211 Income Tax Benefit (Expense) 2,671 2,569 (18,854) (17,881) Income (Loss) Before Earnings from Equity Method Investments (4,827) (5,053) 26,688 24,330 Earnings from Equity Method Investments 962 1,421 2,706 3,565 Net Income (Loss) ($3,865) ($3,632) $29,394 $27,895 See Notes to Condensed Consolidated Financial Statements. 3

4 Public Service Company of North Carolina, Incorporated Condensed Consolidated Statements of Comprehensive Income Three Months Ended Nine Months Ended September 30, September 30, Thousands of dollars Net Income (Loss) Other Comprehensive Income (Loss), net of tax: Unrealized gains (losses) on cash flow hedging activities arising during period, net of tax of $(50), $(93), $48 and $(147) Losses on cash flow hedging activities reclassified to net income, net of tax of $20, $16, $58 and $31 Employee benefit plan remeasurement and curtailment gains arising during the period, net of tax of $391, $-, $391, $- Amortization of deferred employee benefit plan costs reclassified to net income, net of tax of $49, $5, $104 and $55 Other Comprehensive Income (Loss) Total Comprehensive Income (Loss) ($3,865) ($3,632) $29,394 $27,895 (77) (143) 73 (225) (111) 921 (94) ($3,236) ($3,743) $30,315 $27,801 Accumulated other comprehensive loss totaled $1,481 as of September 30, 2013 and $2,402 as of December 31, See Notes to Condensed Consolidated Financial Statements. 4

5 Public Service Company of North Carolina, Incorporated Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, Thousands of dollars Cash Flows From Operating Activities: Net income $29,394 $27,895 Adjustments to reconcile net income to net cash provided from operating activities: Distributions from equity method investment, net of earnings 883 (2,385) Deferred income taxes, net 15,519 (12,123) Depreciation and amortization 32,127 30,981 Allowance for equity funds used during construction (789) (263) Changes in certain assets and liabilities: Receivables 84,998 17,875 Inventories (12,986) 15,035 Regulatory assets (2,064) (1,881) Regulatory liabilities (8) (5) Accounts payable (13,913) (12,499) Taxes accrued 4,084 23,618 Other assets (3,564) (2,192) Other liabilities (3,090) 9,577 Net Cash Provided From Operating Activities 130,591 93,633 Cash Flows From Investing Activities: Utility property additions and construction expenditures (51,111) (46,064) Nonutility property additions - (4,255) Proceeds from investments and sale of assets 445 8,301 Short-term investment - affiliate (230,700) (156,900) Proceeds from short-term investment - affiliate 191, ,600 Net Cash Used For Investing Activities (89,566) (47,318) Cash Flows From Financing Activities: Repayment of long-term debt (738) (3,975) Dividends (22,525) (32,150) Contributions from parent 745 1,271 Short-term borrowings, net (32,300) (10,000) Net Cash Used for Financing Activities (54,818) (44,854) Net Increase (Decrease) in Cash and Cash Equivalents (13,793) 1,461 Cash and Cash Equivalents, January 1 14,801 1,446 Cash and Cash Equivalents, September 30 $1,008 $2,907 Supplemental Cash Flow Information: Cash paid for - Interest (net of capitalized interest of $234 and $75) $18,645 $15,501 - Income taxes 7,005 13,052 Noncash Investing and Financing Activities: Accrued construction expenditures $4,298 $2,118 See Notes to Condensed Consolidated Financial Statements. 5

6 PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2013 The following notes should be read in conjunction with the Notes to Consolidated Financial Statements appearing in Public Service Company of North Carolina, Incorporated s (PSNC Energy) financial statements for the year ended December 31, These are interim financial statements and, due to the seasonality of PSNC Energy s business and matters that may occur during the rest of the year, the amounts reported in the Condensed Consolidated Statements of Operations are not necessarily indicative of amounts expected for the full year. In the opinion of management, the information furnished herein reflects all adjustments, all of a normal recurring nature, which are necessary for the fair statement of the results for the interim periods reported. PSNC Energy has evaluated subsequent events through November 18, 2013, which is the date these financial statements are issued. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Asset Management and Supply Service Agreements PSNC Energy utilizes asset management and supply service agreements with counterparties for certain natural gas storage facilities. Such counterparties held 47% and 44% of PSNC Energy s natural gas inventory at September 30, 2013 and December 31, 2012, respectively, with a carrying value of $23.2 million and $19.6 million, respectively, through either capacity release or agency relationships. Under the terms of the asset management agreements, PSNC Energy receives storage asset management fees. The agreements expire March 31, Reclassifications from Accumulated Other Comprehensive Income (AOCI) Reclassifications of losses from AOCI into earnings, net of taxes, were as follows: Income Statement Thousands of dollars Line Item Affected Three months ended September 30, Interest rate contracts $ (31) $ (24) Decrease in earnings from equity method investments Deferred employee benefit plan costs (675) (8) Increase in other expenses Total reclassifications $ (706) $ (32) Nine months ended September 30, Interest rate contracts $ (89) $ (47) Decrease in earnings from equity method investments Deferred employee benefit plan costs (759) (84) Increase in other expenses Total reclassifications $ (848) $ (131) 6

7 2. RATE AND OTHER REGULATORY MATTERS Rate Matters PSNC Energy is subject to a Rider D rate mechanism which allows it to recover from customers all prudently incurred gas costs and certain uncollectible expenses related to gas cost. The Rider D rate mechanism also allows PSNC Energy to recover, in any manner authorized by the North Carolina Utilities Commission (NCUC), losses on negotiated gas and transportation sales. PSNC Energy s rates are established using a benchmark cost of gas approved by the NCUC, which may be periodically adjusted to reflect changes in the market price of natural gas. PSNC Energy revises its tariffs with the NCUC as necessary to track these changes and accounts for any over- or under-collection of the delivered cost of gas in its deferred accounts for subsequent rate consideration. The NCUC reviews PSNC Energy s gas purchasing practices annually. In addition, PSNC Energy utilizes a customer usage tracker which allows it to adjust its base rates semi-annually for residential and commercial customers based on average per customer consumption. In September 2013, in connection with PSNC Energy s 2013 Annual Prudence Review, the NCUC determined that PSNC Energy s gas costs, including all hedging transactions, were reasonable and prudently incurred during the 12 months ended March 31, Regulatory Assets and Regulatory Liabilities PSNC Energy has significant cost-based, rate-regulated operations and recognizes in its financial statements certain revenues and expenses in different time periods than do enterprises that are not rate-regulated. As a result, PSNC Energy has recorded regulatory assets and regulatory liabilities which are summarized in the following tables. Substantially all of its regulatory assets are either explicitly excluded from rate base or are effectively excluded from rate base due to their being offset by related liabilities. September 30, December 31, Thousands of dollars Regulatory Assets: Environmental remediation costs $ 4,505 $ 4,507 Asset retirement obligations 17,025 16,015 Deferred employee benefit plan costs 29,280 45,290 Other 10,293 8,137 Total Regulatory Assets $ 61,103 $ 73,949 Regulatory Liabilities: Asset removal costs $ 180,110 $ 168,658 Other Total Regulatory Liabilities $ 180,139 $ 168,719 Environmental remediation costs represent costs associated with the assessment and clean-up of manufactured gas plant (MGP) sites currently or formerly owned by PSNC Energy. These regulatory assets are expected to be recovered over periods of up to approximately 16 years. Asset retirement obligations (ARO) represent the regulatory asset associated with conditional AROs related to transmission and distribution properties. These regulatory assets are expected to be recovered over the related property lives, which may range up to approximately 90 years. Employee benefit plan costs of regulated utilities have historically been recovered as they have been recorded under generally accepted accounting principles. Deferred employee benefit plan costs represent amounts of pension and other postretirement benefit costs which were accrued as liabilities and treated as regulatory assets pursuant to an NCUC order. These deferred costs are expected to be recovered through utility rates, primarily over average service periods of participating employees, or up to approximately 12 years. Asset removal costs represent estimated net collections through depreciation rates of amounts to be incurred for the removal of assets in the future. 7

8 The NCUC has reviewed and approved through specific orders most of the items shown as regulatory assets. Other regulatory assets include, but are not limited to, certain costs which have not been approved for recovery by the NCUC. In recording such costs as regulatory assets, management believes the costs will be allowable under existing rate-making concepts that are embodied in rate orders received by PSNC Energy. The costs are not currently being recovered, but are expected to be recovered through rates in future periods. However, ultimate recovery is subject to NCUC approval. In the future, as a result of deregulation or other changes in the regulatory environment or changes in accounting requirements, PSNC Energy could be required to write off its regulatory assets and liabilities. Such an event could have a material effect on PSNC Energy s results of operations, liquidity or financial position in the period the write-off would be recorded. 3. LIQUIDITY PSNC Energy is party to a five-year credit agreement of $100 million. In October 2013, the term of the credit agreement was extended by one year and will expire in October The credit agreement is used for general corporate purposes, including liquidity support for PSNC Energy s commercial paper program and working capital needs. The committed long-term facility is a revolving line of credit under credit agreements with a syndicate of banks. Wells Fargo Bank, National Association, Bank of America, N.A. and Morgan Stanley Bank, N.A. each provide 10.7% of the credit facility, JP Morgan Chase Bank, N.A., Mizuho Corporate Bank, Ltd., TD Bank N.A., Credit Suisse AG, Cayman Islands Branch and UBS Loan Finance LLC each provide 8.9%, and Branch Banking and Trust Company, Union Bank, N.A. and U.S. Bank National Association each provide 6.3%. Two other banks provide the remaining support. PSNC Energy pays fees to the banks as compensation for maintaining committed lines of credit. Such fees were not material in any period presented. At September 30, 2013, $100 million of the line of credit was available. At December 31, 2012, $67.7 million of the line of credit was available. 4. INCOME TAXES No material changes in the status of PSNC Energy s tax positions have occurred through September 30, During the third quarter of 2013, the State of North Carolina passed legislation that will lower the state corporate income tax rate from 6.9% to 6.0% in 2014 and 5% in The change in income tax rates is not expected to have a material impact on PSNC Energy s financial position, results of operations or cash flows. Additionally, during the third quarter of 2013, the Internal Revenue Service issued final regulations regarding the capitalization of certain costs for income tax purposes and re-proposed certain other related regulations (collectively referred to as tangible personal property regulations). These regulations did not have a material impact on PSNC Energy s financial position, results of operations or cash flows. 5. DERIVATIVE FINANCIAL INSTRUMENTS PSNC Energy recognizes all derivative instruments as either assets or liabilities in the statement of financial position and measures those instruments at fair value. PSNC Energy recognizes changes in the fair value of derivative instruments either in earnings, as a component of other comprehensive income (loss), or within regulatory assets or regulatory liabilities, depending upon the intended use of the derivative and the resulting designation. Policies and procedures and risk limits are established to control the level of market, credit, liquidity and operational and administrative risks assumed by PSNC Energy. The Board of Directors of SCANA Corporation (SCANA), PSNC Energy s parent, has delegated to a Risk Management Committee the authority to set risk limits, establish policies and procedures for risk management and measurement, and oversee and review the risk management process and infrastructure. The Risk Management Committee, which is comprised of certain officers, including PSNC Energy's Risk Management Officer and SCANA s senior officers, apprises the Audit Committee of the Board of Directors with regard to the management of risk and brings to the Audit Committee's attention any areas of concern. Written policies define the physical and financial transactions that are approved, as well as the authorization requirements and limits for transactions. 8

9 PSNC Energy hedges natural gas purchasing activities using over-the-counter options and New York Mercantile Exchange (NYMEX) futures contracts and options. PSNC Energy s tariffs also include a provision for the recovery of actual gas costs incurred, including any costs of hedging. PSNC Energy records premiums, transaction fees, margin requirements and any realized gains or losses from its hedging program in deferred accounts as a regulatory asset or liability for the over- or under-recovery of gas costs. These derivative financial instruments are not designated as hedges for accounting purposes. Cash settlements of these instruments are classified as operating activities in the condensed consolidated statements of cash flows. Quantitative Disclosures Related to Derivatives PSNC Energy was party to natural gas derivative contracts for 8,820,000 Million British Thermal Units (MMBTU) at September 30, 2013 and 5,170,000 MMBTU at December 31, The fair value of commodity derivatives, none of which were designated as hedging instruments, totaled $1.4 million and $0.7 million at September 30, 2013 and December 31,2012, respectively. Such amounts are reflected in the balance sheet within prepayments and other. PSNC Energy did not have any other derivatives or other financial instruments that could be offset in the statement of financial position during any period presented. Credit Risk Considerations Certain of PSNC Energy s derivative instruments contain contingent provisions that require PSNC Energy to provide collateral upon the occurrence of specific events, primarily credit downgrades. As of September 30, 2013 and December 31, 2012, PSNC Energy has posted no collateral related to derivatives with contingent provisions that are in a net liability position. If all of the contingent features underlying these instruments were fully triggered as of September 30, 2013 and December 31, 2012, PSNC Energy would be required to post no collateral to its counterparties. PSNC Energy had no derivative instruments with contingent provisions that were in a net liability position as of September 30, 2013 or December 31, FAIR VALUE MEASUREMENTS, INCLUDING DERIVATIVES PSNC Energy uses unadjusted NYMEX prices to determine fair value for commodity derivative assets and liabilities and considers such measures of fair value to be Level 1 for exchange traded instruments and Level 2 for over-thecounter instruments. Fair value measurements, and the level within the fair value hierarchy in which the measurements fall, were as follows: Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Thousands of dollars September 30, 2013 December 31, 2012 Assets Derivative financial instruments $ 1,354 $ 719 There were no fair value measurements based on significant other observable inputs (Level 2) or significant unobservable inputs (Level 3) for either period presented. In addition, there were no transfers of fair value amounts into or out of Levels 1, 2 or 3 during the periods presented. Financial instruments for which the carrying amount may not equal estimated fair value at September 30, 2013 and December 31, 2012 were as follows: September 30, 2013 December 31, 2012 Estimated Estimated Thousands of dollars Carrying Amount Fair Value Carrying Amount Fair Value Long-term debt $ 352,979 $ 406,626 $ 353,717 $ 428,686 Fair values of long-term debt instruments are based on net present value calculations using independently sourced market data that incorporate a developed discount rate using similarly rated long-term debt, along with benchmark interest rates. As such, the aggregate fair values presented above are considered to be Level 2. Early settlement of long-term debt may not be possible or may not be considered prudent. 9

10 Carrying values of short-term borrowings approximate fair value, which are based on quoted prices from dealers in the commercial paper market. The resulting fair value is considered to be Level EMPLOYEE BENEFIT PLANS PSNC Energy participates in SCANA s noncontributory defined benefit pension plan, which covers substantially all regular, full-time employees, and also participates in SCANA s unfunded postretirement health care and life insurance programs, which provide benefits to active and retired employees. Components of net periodic benefit cost recorded by PSNC Energy were as follows: Pension Benefits Other Postretirement Benefits Thousands of dollars Three months ended September 30, Service cost $ 595 $ 615 $ 163 $ 141 Interest cost 993 1, Expected return on assets (1,596) (1,616) - - Prior service cost amortization Loss due to curtailment 1, Transition obligation amortization Amortization of actuarial loss Net periodic benefit cost $ 1,577 $ 844 $ 645 $ 673 Nine months ended September 30, Service cost $ 1,993 $ 1,791 $ 582 $ 477 Interest cost 2,989 3,395 1,096 1,191 Expected return on assets (4,820) (4,697) - - Prior service cost amortization Loss due to curtailment 1, Transition obligation amortization Amortization of actuarial loss 1,514 1, Net periodic benefit cost $ 3,233 $ 2,498 $ 2,260 $ 2,144 In the third quarter 2013, SCANA announced that its pension benefit will no longer be offered to employees hired or rehired after December 31, 2013, and pension benefits for existing participants will no longer accrue for services performed or compensation earned effective December 31, As a result, SCANA recorded a curtailment charge due to the accelerated amortization of prior service cost. Approximately $0.7 million of the curtailment charge was applicable to regulatory utility operations and was deferred within regulatory assets. 8. COMMITMENTS AND CONTINGENCIES Environmental PSNC Energy is responsible for environmental clean-up at five sites in North Carolina on which MGP residuals are present or suspected. PSNC Energy s actual remediation costs for these sites will depend on a number of factors, such as actual site conditions, third-party claims and recoveries from other potentially responsible parties. PSNC Energy has recorded a liability and associated regulatory asset of approximately $2.9 million, the estimated remaining liability at September 30, PSNC Energy expects to recover through rates any costs allocable to it arising from the remediation of these sites. Claims and Litigation PSNC Energy is engaged in various claims and litigation incidental to its business operations which management anticipates will be resolved without material adverse impact on PSNC Energy s results of operations, cash flows or financial condition. 10

11 Monroe Pipeline Capital Lease PSNC Energy is obligated under a capital lease for gas transmission capacity that ends in Under terms of the lease, PSNC Energy will make payments of $6 million over six years at an interest rate of 5.42%. Lease payments are included in gas costs, as authorized by the NCUC, and deferred as a regulatory asset for future recovery from customers. The leased asset is recorded in gas utility plant, and the associated liability is recorded in long-term debt on the balance sheet. 9. AFFILIATED TRANSACTIONS PSNC Energy owns, through its wholly owned subsidiaries, 17% of Pine Needle LNG Company, L.L.C. (Pine Needle), an LNG storage facility in North Carolina, and 33.2% of Cardinal, an intrastate natural gas pipeline. PSNC Energy accounts for each of these investments using the equity method. PSNC Energy records as cost of gas the storage and transportation costs charged by its equity method investees. For the three and nine months ended September 30, 2013, these costs totaled $3.1 million and $9.5 million, respectively. For the three and nine months ended September 30, 2012, these costs totaled $3.8 million and $10.6 million, respectively. PSNC Energy owed these investees $1.0 million at September 30, 2013 and $1.3 million at December 31, PSNC Energy received cash distributions representing earnings on invested capital from these investees of $1.1 million and $3.6 million for the three and nine months ended September 30, 2013, respectively. PSNC Energy received no such cash distributions from these investees for the three months ended September 30, 2012, and received cash distributions of $1.2 million for the nine months ended September 30, Pine Needle and Cardinal use interest rate swaps designated as cash flow hedges to manage interest rate risk on variable rate debt instruments by converting them synthetically to a fixed rate. PSNC Energy s share of the effective portion of changes in the fair value of these interest rate swaps are recorded in AOCI in PSNC Energy s condensed consolidated balance sheets. Sales to an affiliate for natural gas and transportation services for the nine months ended September 30, 2013 and 2012 were $2.0 million and $0.7 million, respectively. Purchases of natural gas from an affiliate for the nine months ended September 30, 2013 and 2012 were $0.2 million and $0.1 million, respectively. Such sales and purchases of natural gas for the three months ended September 30, 2013 and 1012 were not significant. PSNC Energy participates in a utility money pool. Money pool borrowings and investments bear interest at shortterm market rates. PSNC Energy s interest income and expense on money pool transactions for the three and nine months ended September 30, 2013 were not significant. PSNC Energy had money pool investments of $38.9 million at September 30, 2013 and no money pool investments at December 31,