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Due to increased competition, especially for the Midwest Pipelines, relatively slow growth is expected for future operations of the Corporation’s Natural Gas Transmission segment. The Natural Gas Transmission segment continues to offer selective discounting to maximize revenues from existing capacity and to advance projects that provide expanded services to meet the specific needs of customers. Several projects have been announced that position the Natural Gas Transmission segment to meet increasing demand for gas in northeast markets by providing continuous paths from new supplies in both eastern and western Canada in addition to traditional domestic supply basins. The Corporation is seeking to significantly grow its Energy Services segment. Deregulation of energy markets in the U.S. and abroad is providing substantial opportunities for the Energy Services business units to capitalize on their broad capabilities. Growth is expected to be achieved through acquisitions, construction of greenfield projects and expansion of existing facilities as value-added opportunities present themselves. The strong real estate market in the southeast continues to present substantial growth opportunities for Crescent Resources. In 1997, Crescent Resources initiated development of significant office and industrial facilities in each of its established markets to capitalize on market conditions. |
Operations Outlook. The Electric Operations segment is expected to grow moderately,
consistent with historical trends. Expansion will be primarily as a result of continued
economic growth in its service territory. In 1997, as a result of the merger, the Corporation
signed various agreements with the NCUC, PSCSC and the FERC in which the Corporation agreed
to cap base rates to retail and wholesale electric customers at existing levels through
2000. In addition, the Corporation signed agreements with the other joint owners of Catawba
providing for a cap on certain rates charged under interconnection agreements. In response
to these rate agreements and competitive pressures, the Electric Operations segment is
striving to maintain low costs and competitive rates for its customers and to provide high
quality customer service. The Corporation does not expect a negative impact as a result
of such agreements on its results of operations or financial position. (See further discussion
in the Electric Competition section below.)Electric Competition. The Energy Policy Act of 1992 (EPACT) and the FERC’s subsequent rulemaking activities are major drivers towards a more competitive market for electric operations. EPACT amended provisions of the Public Utility Holding Corporation Act of 1935 (PUHCA) and Part II of the Federal Power Act to remove certain barriers to electric competition. EPACT permits utilities to participate in the development of independent electric generating plants for sales to wholesale customers, and also permits the FERC to order transmission access for third parties to transmission facilities owned by another entity. It does not, however, permit the FERC to issue an order requiring transmission access to retail customers. The FERC, responsible in large measure for implementation of the EPACT, has moved vigorously to implement its mandate, interpreting the statute broadly and issuing orders for third-party transmission service and a number of rules of general applicability, including Orders 888 and 889.
Open-access transmission for wholesale customers as defined by the FERC’s final rules provides energy suppliers, including the Corporation, with opportunities to sell and deliver capacity and energy at market-based prices. The Corporation and several of the Corporation’s non-regulated subsidiaries were granted authority by the FERC to act as power marketers in late 1995. The Electric Operations obtained from the FERC open-access rights to sell at market-based rates up to 2,500 megawatts of capacity and energy from its own assets. Open-access provides another supply option through which the Corporation can purchase at attractive rates a portion of capacity and energy requirements resulting in lower overall costs to customers and thus improving the Corporation’s competitive position. Open-access also provides the Corporation’s existing wholesale customers with competitive opportunities to seek other suppliers for their capacity and energy requirements.
Wholesale sales represented approximately
9.4 percent of the Corporation’s total gigawatt-hour sales for the Electric Operations segment
in 1997. Supplemental sales to the other joint owners of Catawba comprised the majority of
wholesale sales. Such supplemental sales will continue to decline in 1998 as a result of the
retention of larger portions of ownership entitlement by theother joint owners. Two of the
Catawba joint owners gave notice of their intent to end their supplemental capacity
requirements on January 1, 2001 and January 1, 2002, respectively. In addition, as a
result of the merger, the other joint owners have the right to end their supplemental
capacity requirements as of January 1, 2001 with written notice to the Corporation due
by December 31, 1999. Another joint owner gave notice of its intent to end its
interconnection agreement with the Corporation effective January 1, 2006 (see Note 6
to the Consolidated Financial Statements).
Competition for retail electric customers is not generally allowed in the Corporation’s service territory. However, there are discussions and events at the national level and within certain states regarding retail competition which are resulting in changes in the industry. Such changes will impact all entities owning electric generating assets.
During 1997, both North and South Carolina have taken steps to address retail competition among electric utilities. In May 1997, North Carolina passed a bill that created a study commission to assess deregulation of electric utilities in the state. The commission’s report to the state General Assembly is expected to be completed by early 1999. Members of the study commission include legislators, utility representatives, customers and a member of an environmental group.
South Carolina has considered several proposals during 1997 to restructure the electric industry, the most significant of which would have provided retail customers with a choice of suppliers by January 1, 1998. None of these proposals has been approved. However, in May 1997, the PSCSC requested interested parties to file restructuring proposals for the electric industry. On June 30, 1997, the Corporation filed its proposal for introducing electric competition in South Carolina with the PSCSC. The Corporation’s plan proposes that electric generation be deregulated while transmission and distribution continue to be regulated by the FERC and the PSCSC, respectively, providing for an orderly transition to competition that takes all stakeholders into consideration. The Corporation’s plan also provides for recovery of stranded investment. The PSCSC held hearings on August 19, 1997 on the various restructuring proposals it received and presented its report to the state legislature on February 3, 1998. The report proposes a five year transition period before starting full-fledged electric competition. In addition, customers could receive two separate electric bills, one from the distribution company, and one from the generator or supplier of electricity. The report leaves the final decisions to the General Assembly of South Carolina.
Currently, the electric utility industry is predominantly regulated on a basis designed
to recover the cost of providing electric power to its customers. If cost-based regulation
were to be discontinued in the industry, for any reason, including competitive pressure on
the cost-based prices of electricity, profits could be reduced and electric utilities might
be required to reduce their regulatory asset balances to reflect a market basis less than
cost. Discontinuance of cost-based regulation would also require affected utilities to write
off their associated regulatory assets. The regulatory assets of the Corporation are included
in the Consolidated Balance Sheets. The portion of these regulatory assets related to
electric operations is $1.7 billion, including primarily purchased capacity costs, debt
expense, and deferred taxes related to regulatory assets. Currently, the Corporation is
recovering substantially all of these regulatory assets through its wholesale and retail
electric rates and would attempt to continue to recover these assets should cost-based
regulation be discontinued. In addition, the Corporation would seek to recover the costs
of its electric generating facilities in excess of the market price of power at the time
of transition. The Corporation seeks to move toward an orderly transition to retail
competition that provides for consideration of the interests of all stakeholders in
the retail electric sales arena. Management cannot predict the potential impact, if any,
of these competitive forces on the Corporation’s future financial position and consolidated
results of operations.
Nuclear Decommissioning Costs. The Corporation’s estimated site-specific nuclear decommissioning costs, including the cost of decommissioning plant components not subject to radioactive contamination, total approximately $1.3 billion stated in 1994 dollars based on decommissioning studies completed in 1994. In order to fund these costs, the Corporation contributes to an external decommissioning trust fund and maintains an internal reserve.
The balance of the external funds as of December 31, 1997 and 1996, was $471.1 million and $362.6 million respectively. The balance of the internal reserve as of December 31, 1997 and 1996, was $210.8 million and $207.8 million, respectively, and is reflected in Accumulated Depreciation and Amortization in the Consolidated Balance Sheets.
Both the NCUC and the PSCSC have granted the Corporation recovery of estimated decommissioning costs through retail rates over the expected remaining service periods of the Corporation’s nuclear plants. Management is of the opinion that funding of the decommissioning costs will not have a material adverse effect on the consolidated results of operations and financial position of the Corporation. (See Note 12 to the Consolidated Financial Statements.)
Environmental. The Corporation is subject to federal, state and local regulations regarding air and water quality, hazardous and solid waste disposal and other environmental matters.
Manufactured Gas Plants and Superfund Sites. The Corporation was an operator of manufactured gas plants until the early 1950s. The Corporation has entered into a cooperative effort with the State of North Carolina and other owners of certain former manufactured gas plant sites to investigate and, where necessary, remediate these contaminated sites. The State of South Carolina has expressed interest in entering into a similar arrangement. The Corporation is considered by regulators to be a potentially responsible party and may be subject to future liability at nine federal Superfund sites and one state Superfund site. While the cost of remediation of the remaining sites may be substantial, the Corporation will share in any liability associated with remediation of contamination at such sites with other potentially responsible parties. Management is of the opinion that resolution of these matters will not have a material adverse effect on the consolidated results of operations or financial position of the Corporation.
PCB (Polychlorinated Biphenyl) Assessment and Clean-up Programs. TETCO, a wholly owned subsidiary of the Corporation, is currently conducting PCB assessment and clean-up programs at certain of its compressor station sites under conditions stipulated by a U.S. Consent Decree. The programs include on- and off-site assessment, installation of on-site source control equipment and groundwater monitoring wells, and on- and off-site clean-up work. TETCO expects to complete these clean-up programs during 1998. Groundwater monitoring activities will continue at several sites beyond 1998.
In 1987, the Commonwealth of Kentucky instituted a suit in state court against TETCO, alleging improper disposal of PCBs at TETCO’s three compressor station sites in Kentucky. This suit is still pending. In 1996, TETCO completed clean-up of these sites under the U.S. Consent Decree.
The Corporation has also identified environmental contamination at certain sites on the PEPL and Trunkline systems and is undertaking clean-up programs at these sites. The contamination resulted from the past use of lubricants containing PCBs and the prior use of wastewater collection facilities and other on-site disposal areas. Soil and sediment testing, to date, has detected no significant off-site contamination. The Corporation has communicated with the Environmental Protection Agency (EPA) and appropriate state regulatory agencies on these matters. Environmental clean-up programs are expected to continue until 2002.
At December 31, 1997 and 1996, the Corporation had accrued liabilities for remaining estimated clean-up costs on the TETCO, PEPL and Trunkline systems, which were included in Environmental Clean-up Liabilities in the Consolidated Balance Sheets. These cost estimates represent gross clean-up costs expected to be incurred, have not been discounted or reduced by customer recoveries and do not include fines, penalties or third-party claims. Costs expected to be recovered from customers are included in the Consolidated Balance Sheets as of December 31, 1997 and 1996, as Regulatory Assets and Deferred Debits.
The federal and state clean-up programs are not expected to interrupt or diminish the Corporation’s ability to deliver natural gas to customers. Based on the Corporation’s experience to date and costs incurred for clean-up operations, management believes the resolution of matters relating to the environmental issues discussed above will not have a material adverse effect on the consolidated results of operations or financial position of the Corporation.
Air Quality Control. The Clean Air Act Amendments of 1990 require a two-phase reduction by electric utilities in aggregate annual emissions of sulfur dioxide and nitrogen oxide by 2000. The Corporation currently meets all requirements of Phase I. The Corporation supports the national objective of protecting air quality in the most cost-effective manner, and has already reduced emissions by operating plants efficiently, using nuclear and hydroelectric generation and implementing various compliance strategies. To meet Phase II requirements by 2000, the Corporation’s current strategy includes using low-sulfur coal, purchasing sulfur dioxide emission allowances, and installing low-nitrogen oxide burners and emission monitoring equipment. Construction activities needed to comply with Phase II requirements are substantially complete, and future one-time capital costs associated with meeting Phase II requirements range from $14 million to $24 million. Additional annual operating expenses of approximately $25 million for low-sulfur coal premiums, emission allowance purchases and other compliance activities will occur after 2000. This strategy is contingent upon developments in future markets for emission allowances, low-sulfur coal, future regulatory and legislative actions, and advances in clean air technologies.
Additionally, the Corporation would be effected by a proposed call for new State Implementation Plans (SIP) issued by the EPA to 22 states related to existing and new national ambient air quality standards for ozone. Costs to the Corporation related to the SIP call may range from $123 million to $517 million, depending on final EPA implementation plans and schedules.
In 1994, the State of Missouri issued a Notice of Violation to PEPL alleging violations of Missouri air pollution regulations at the Corporation’s Houstonia compressor station. The Corporation is in negotiations with the State to resolve this matter. The State is seeking a penalty and correction of the alleged violations.
In December 1997, the United Nations held negotiations in Kyoto, Japan to determine how to achieve worldwide stabilization of greenhouse gas emissions, including carbon dioxide emissions from fossil-fired generating facilities. Because this matter is in the early stages of discussion, the Corporation cannot estimate the effects on future consolidated results of operations or financial position of the Corporation.
Litigation and Contingencies. For information concerning litigation and other commitments and contingencies, see Note 15 to the Consolidated Financial Statements.
Computer Systems Changes For The Year 2000. The Corporation is incurring incremental costs to modify existing computer systems to accommodate the year 2000 and beyond. The Corporation is currently making modifications to its programs and is of the opinion that remaining modifications will be completed before they become problematic. Management is of the opinion that the costs associated with these modifications will not have a material adverse effect on the consolidated results of operations or financial position of the Corporation.
Forward-Looking Statements. From time to time, the Corporation may make statements regarding its expectations, intent or beliefs about future events. These statements are intended as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. The Corporation cautions that assumptions, projections and expectations about future events may and often do vary from actual results, the differences between assumptions, projections and expectations and actual results can be material, and there can be no assurance that the forward-looking statements will be realized. The following are some of the factors that could cause actual achievements and events to differ materially from those expressed or implied in such forward-looking statements: state and federal legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rate structures, and affect the speed and degree to which competition enters the electric and natural gas industries; industrial, commercial and residential growth in the service territories of the Corporation and its subsidiaries; the weather and other natural phenomena; the timing and extent of changes in commodity prices and interest rates; changes in environmental and other laws and regulations to which the Corporation and its subsidiaries are subject or other external factors over which the Corporation has no control; the results of financing efforts; growth in opportunities for the Corporation’s subsidiaries and diversified operations; and the effect of the Corporation’s accounting policies, in each case during the periods covered by the forward-looking statements.
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