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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-----------------------
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 - For the transition period from
__________ to __________
Commission file number: 1-11429
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0233140
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
400 COX ROAD, P. O. BOX 1398
GASTONIA, NORTH CAROLINA 28053-1398
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (704) 864-6731
Securities registered pursuant to Section 12(b)of the Act:
COMMON STOCK, PAR VALUE $1 PER SHARE NEW YORK STOCK EXCHANGE
(Title of Class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
----------------------
Estimated aggregate market value of the voting stock held by nonaffiliates of
the registrant at November 30, 1999. . . . . . . . . . . . . . . $661,067,180
----------------------
Number of shares of Common Stock, $1 par value, outstanding at November 30, 1999
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,577,967
Documents incorporated by reference:
NONE
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<PAGE>
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED
FORM 10-K
ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
-------------
TABLE OF CONTENTS
Item Page
PART I.
1. Business............................................................. 2
Executive Officers of the Registrant................................ 13
2. Properties......................................................... 14
3. Legal Proceedings....................................................15
4. Submission of Matters to a Vote of Security Holders..................15
PART II.
5. Market for the Registrant's Common Stock and
Related Shareholder Matters....................................... 15
6. Selected Financial Data..............................................16
7. Management's Discussion and Analysis of Results
of Operations and Financial Condition..............................17
8. Financial Statements and Supplementary Data..........................31
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................................57
PART III.
10. Directors and Executive Officers of the Registrant...................57
11. Executive Compensation...............................................59
12. Security Ownership of Certain Beneficial Owners
and Management.....................................................63
13. Certain Relationships and Related Transactions.......................64
PART IV.
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................................64
Signatures...........................................................71
Exhibit Index........................................................72
1
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PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED
PART I
Item 1. Business
General
Public Service Company of North Carolina, Incorporated (PSNC) is a
public utility engaged primarily in transporting, distributing and selling
natural gas to approximately 351,000 residential, commercial and industrial
customers in North Carolina. PSNC was organized as a North Carolina corporation
in 1938, and its corporate office is located at 400 Cox Road, P. O. Box 1398,
Gastonia, North Carolina 28053-1398, telephone (704) 864-6731.
In connection with its natural gas distribution business, PSNC
promotes, sells and installs both new and replacement cooking, water heating,
laundry, space heating, cooling and humidity control natural gas appliances and
equipment. PSNC, through a nonregulated subsidiary, provides conversion and
maintenance services for natural gas-fueled vehicles (NGVs) in selected cities
in and beyond its franchised territory. PSNC, through a subsidiary, PSNC
Production Corporation (PSNC Production), and a multi-state joint venture, also
participates in nonregulated businesses such as natural gas brokering and supply
services. (See Item 1, Non-utility Businesses.)
During fiscal 1999, 1998 and 1997, no single customer account
contributed more than 2% of PSNC's total operating revenues.
PSNC has no reportable industry segments. Revenues attributable to
natural gas distribution, merchandise and jobbing, and gas marketing and other
activities for each of the fiscal years in the three-year period ended September
30, 1999 were as follows (in thousands):
1999 1998 1997
-------- -------- --------
Natural Gas Distribution(1) $298,854 $330,672 $337,930
Merchandise and Jobbing(2) 10,354 10,096 10,053
Gas Marketing/Other
Activities(1) 38,169 35,604 19,938
-------- -------- --------
Total $347,377 $376,372 $367,921
======== ======== ========
(1) See "Results of Operations" on page 17 of this annual
report.
(2) Primarily the sale and installation of gas appliances.
2
<PAGE>
Proposed Merger
On February 16, 1999, PSNC and SCANA Corporation (SCANA), a South
Carolina corporation, entered into an Agreement and Plan of Merger, which was
amended and restated on May 10, 1999, providing for a strategic business
combination of the two companies. SCANA is a holding company principally
engaged, through subsidiaries, in electric and natural gas utility operations,
telecommunications and other energy-related businesses. See Note 11 to the
consolidated financial statements for further discussion about the proposed
merger.
Service Territory
PSNC's 31-county franchised service territory includes Raleigh, Durham
and the Research Triangle Park area in the north central portion of the state;
this area accounts for approximately 61% of PSNC's customers and 53% of its
throughput (total gas sales and transportation) in fiscal 1999. PSNC's central
area includes the cities of Gastonia, Concord and Statesville which are located
in the greater Charlotte metropolitan area; this area accounts for 26% of
customers and 31% of throughput. PSNC's western area includes Asheville,
Hendersonville and Brevard, and accounts for the remaining 13% of customers and
16% of throughput. PSNC's diversified industrial base in its service territory
includes manufacturers of textiles, chemicals, ceramics and clay products,
glass, automotive products, minerals, pharmaceuticals, plastics, metals,
electronic equipment, furniture and a variety of food and tobacco products.
PSNC's utility operations are regulated by the North Carolina Utilities
Commission (NCUC).
Over 2.5 million people reside in PSNC's franchised territory. During
the past three fiscal years, PSNC has added approximately 49,800 new customers
to its natural gas transmission and distribution systems. Of those customers,
46,300 were residential, 3,450 were commercial, and 50 were industrial. The
resulting 5.4% annual growth rate is nearly three times the national industry
average. PSNC's compounded annual customer growth rate since fiscal 1989 has
been 5%. PSNC attributes this growth rate to two primary factors:
o The population in PSNC's franchised territory has grown faster
than the national average in recent years, and PSNC estimates
that it serves approximately one-third of that population.
PSNC continually expands its transmission and distribution
systems when economically feasible to enable it to reach new
customers.
o The continued growth of the North Carolina economy, including
areas within PSNC's service territory. Also, the State's
relatively low unemployment rate has been below the national
average in recent years.
Business Strategy
PSNC is expanding its transmission and distribution systems to deliver
more natural gas throughout its service territory. Of its total construction
expenditures of $43.6 million in fiscal 1999, $65.3 million in fiscal 1998 and
$60.3 million in fiscal 1997, approximately $29.2 million, $48.3 million and
$46.5 million, respectively, were expended on the construction of transmission
and distribution pipelines.
3
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PSNC is focusing on the following marketing priorities:
o Retaining existing customers by marketing the replacement of old
appliances and equipment with new gas equipment.
o Increasing demand for natural gas by marketing additional gas
equipment to PSNC's existing customers.
o Adding new customers either on its existing distribution system or
by economical short distribution main extensions.
In addition, PSNC is evaluating the introduction of emerging gas
technologies to increase the long-term demand for natural gas. PSNC has
identified the conversion of gasoline-fueled vehicles to NGVs as an opportunity
to increase the demand for natural gas in the future. PSNC was the first local
distribution company (LDC) in North Carolina to offer NGV conversions to the
public and private sectors. PSNC also has identified natural gas cooling
technology as an opportunity to increase the demand for natural gas and has
begun marketing such technology. The implementation in 1992 of the Federal
Energy Regulatory Commission (FERC) Order Nos. 636, 636-A and 636-B (Order 636)
created new off-system marketing opportunities for PSNC and its marketing
affiliate.
PSNC's internal focus has been to streamline its organizational
structure and improve the performance of management and employees. PSNC has also
focused on increasing employee efficiency, improving its number of customers per
employee ratio over the last three years from 252 at September 30, 1996 to 381
at September 30, 1999. At November 30, 1999, PSNC had 400 customers per
employee.
Gas Supply
Effective August 1, 1991, PSNC's primary pipeline supplier,
Transcontinental Gas Pipe Line Corporation (Transco), became the first major
pipeline to offer unbundled open-access transportation and storage services.
The primary advantage is that PSNC now chooses and manages its gas supply,
transportation and storage service requirements separately rather than having to
rely upon a pipeline supplier whose service options are bundled together and
then offered as a single city gate sales service. Unbundled open-access
transportation and storage services, however, do shift the risk of ensuring an
adequate supply of gas from the interstate pipelines to PSNC.
As a result of Order 636, which restructured the interstate natural gas
transportation industry, PSNC's gas purchasing practices have changed
significantly during the past few years. The FERC approved Transco's
restructuring settlement effective November 1, 1993, and essentially preserved
Transco's existing firm service settlement with its customers, including PSNC.
PSNC has not experienced any material adverse effect on its financial position
or results of operations as a result of the order. Furthermore, management
believes that Order 636 and the Transco settlement order will provide both PSNC
and its affiliates with marketing opportunities for gas services both on and off
PSNC's existing pipeline system, which should provide an overall net benefit to
PSNC.
PSNC purchases for resale a majority of the natural gas that it
delivers (throughput) to its customers. The balance of its throughput is natural
gas purchased by
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certain large-volume commercial and industrial customers directly from various
producers and marketers. This gas is transported to these customers by PSNC at a
rate that enables PSNC to earn a margin equivalent to that which it would have
earned by selling the same quantity of gas to these customers. Quantities of
transported gas represented 42%, 37% and 36% of PSNC's total throughput for
fiscal 1999, 1998 and 1997, respectively.
Management believes that PSNC's gas supply portfolio will enable it to
continue to provide secure service on a cost-competitive basis. This balance of
security and cost control, along with flexibility to adapt to changing
conditions, is achieved through a mix of long-term contractual obligations,
coupled with short-term or spot market purchases. PSNC's utility gas purchasing
practices are reviewed annually by the NCUC.
The following table summarizes the natural gas supply sources and
transportation arrangements available to PSNC under contract with Transco and
CNG Transmission Company (CNG). All amounts are shown in dekatherms (DT), a unit
of heating value equal to one million British Thermal Units (BTU). Natural gas
purchased by PSNC from other sources is transported by Transco and CNG. Natural
gas purchased directly from Williams Energy Services Company, a Transco
marketing affiliate, accounted for 26% and 21%, respectively, of PSNC's supply
in fiscal 1999 and 1998.
Daily Contract
Deliver- Annual Expiration
Type of Contract ability Quantity Date
- ------------------------- -------- ---------- ----------
Firm Sales Service (1) 33,542 12,242,830 3/31/02
Firm Sales Service (1) 41,928 15,303,720 3/31/02
Firm Transportation 164,151 59,915,115 1/31/12
Firm Transportation 5,175 1,888,875 10/31/07
Incremental Firm Transportation 2,264 826,360 3/16/03
Winter Firm Transportation
(December 1 through
February 28) 4,347 391,230 7/31/11
Southern Expansion Firm
Transportation:
November and March 35,397
December through February 39,330 5,698,917 10/31/05
Southeast Expansion Firm
Transportation:
Phase 1 6,064 2,213,360 11/01/14
Phase 2 20,759 7,577,035 11/01/15
Phase 3 17,804 6,498,460 11/01/15
CNG Firm Transportation 30,331 11,070,815 (2)
(1) These are separate and concurrent contracts.
(2) These represent multiple contracts which expire on
dates ranging from 10/31/00 to 10/31/16.
As discussed further in Note 2 to the consolidated financial statements,
PSNC and a subsidiary of Piedmont Natural Gas Company, Inc. (Piedmont) formed
Cardinal Pipeline Company, LLC (Cardinal Pipeline) to construct and operate an
intrastate transmission pipeline. It was placed into service in December 1994
and provides additional daily capacity to PSNC's eastern service territory in
and around the Durham and Raleigh areas. In 1995, PSNC, Piedmont, Transco, and
North Carolina Natural Gas Corporation (NCNG)
5
<PAGE>
formed Cardinal Extension Company, LLC (Cardinal Extension) to purchase and
extend the Cardinal pipeline. On November 6, 1997, the NCUC issued an order
approving this project and the merger of Cardinal Pipeline and Cardinal
Extension, with the surviving entity being named Cardinal Pipeline Company, LLC.
The pipeline was extended 67.5 miles from the existing termination point of
Cardinal Pipeline at Haw River, North Carolina, to a point southeast of Raleigh
and provides 140 million cubic feet per day (mmcf/day) of additional firm
transportation service (100 mmcf/day for PSNC and 40 mmcf/day for NCNG). The
extension is estimated to cost approximately $76 million. The facilities were
placed in service and permanent financing was completed on November 1, 1999.
Through their respective subsidiaries, PSNC owns 33.21%, Piedmont owns 16.46%,
Transco owns 45.30% and NCNG owns 5.03% of Cardinal Pipeline Company, LLC.
To balance peak winter demands of residential and commercial customers
with their much-reduced summer usage, PSNC uses underground natural gas storage
services and liquefied natural gas (LNG) peaking facilities. During periods of
reduced usage, PSNC purchases natural gas to replenish the supplies in the LNG
facilities owned by PSNC and in contract storage services from its pipeline
suppliers. The ability to maintain maximum delivery from these storage
facilities for an extended period of time is limited. Information about PSNC's
storage arrangements, in dekatherms, is shown in the following table.
Daily Contract
Deliver- Expiration
Storage Facility ability Capacity Date
- ------------------------ -------- --------- ----------
CNG General Storage (1) 62,669 3,856,000 3/31/16
Transco General Storage 33,218 1,923,485 3/31/13
Transco Washington
Storage (2) 32,870 2,794,500 3/31/01
Transco LNG Storage 5,175 25,875 10/31/16
Transco Eminence Storage 47,221 475,111 10/31/13
Cove Point LNG Storage 25,000 250,000 4/15/06
PSNC LNG Storage (3) 100,000 1,040,000 N/A
Pine Needle LNG Storage 103,500 1,035,000 4/30/19
Columbia Gas Transmission (4) 35,335 3,180,150 10/31/14
(1) 700,000 of this capacity expires 3/31/08; 1,380,000 expires 3/31/09;
696,000 expires 3/31/13; and 1,080,000 expires 3/31/16.
(2) No peak day delivery assured by contract.
(3) Amounts shown represent maximum peak day capacity.
(4) 33% of this capacity expires 10/31/12; 33% expires 10/31/13; balance
expires 10/31/14.
As discussed further in Note 2 to the consolidated financial
statements, Pine Needle LNG Company, LLC (Pine Needle) was formed by
subsidiaries of Transco, Piedmont, NCNG, Amerada Hess, and PSNC, and the
Municipal Gas Authority of Georgia to own and operate a liquefied natural gas
storage facility. The facility is located near Transco's transmission pipeline
northwest of Greensboro, North Carolina, and has storage capacity of four
billion cubic feet with vaporization capability of 400 mmcf/day.
6
<PAGE>
PSNC's subsidiary, PSNC Blue Ridge Corporation (Blue Ridge), owns 17% of Pine
Needle, and PSNC has contracted to use 25% of the facility's gas storage
capacity and withdrawal capabilities. The facility was built at an estimated
cost of $107 million and became operational in May 1999.
Competition
Although PSNC is the sole distributor of natural gas in its service
area, it faces competition from suppliers of alternate fuels and other types of
energy. Competition is strongest for sales to large-volume commercial and
industrial customers having alternate fuel capability but exists for all other
customer classes as well.
During fiscal 1999, approximately 36% of PSNC's throughput was
delivered to large-volume commercial and industrial customers having alternate
fuel capability. The primary alternate fuels available to these customers are
fuel oil and propane, and, to a lesser extent, coal and combustible wood
products. The NCUC has approved a rate structure that allows PSNC to negotiate
reduced rates in order to match the cost of alternate fuels to individual
customers and recover the lost margin from other classes of customers. PSNC
anticipates that the need to negotiate reduced rates with these customers will
continue.
Electricity is the primary competition to natural gas in the
residential and commercial markets where the predominate uses of energy are
space heating, water heating and cooking. Currently, natural gas enjoys a
competitive price advantage over electricity for these purposes, enabling PSNC
in recent years to obtain a significant share of the new residential
construction in its service area where natural gas is available.
Regulation and Rates
PSNC's natural gas transmission and distribution business is subject to
regulation by the NCUC, including rates, issuance of securities, adequacy of
service, safety standards, extension and abandonment of facilities, accounting
and depreciation rates. The NCUC has seven commissioners appointed by the
Governor of North Carolina for staggered eight-year terms. In an order issued on
October 30, 1998 in PSNC's last general rate case, the NCUC granted PSNC an
increase in annual revenue of $12,400,000 effective as of November 1, 1998. The
order allows PSNC an opportunity to earn a 9.82% overall return on its net
utility investment. On December 18, 1998, the Carolina Utility Customers
Association, Inc. (CUCA), a party to PSNC's general rate case, formally appealed
the general rate case order. The Supreme Court of North Carolina heard oral
arguments on CUCA's appeal on October 13, 1999. While management is not able to
predict the ultimate outcome of this appeal, management does not believe that
such outcome will have material adverse impact on PSNC's financial position,
results of operations or cash flows.
PSNC's rates include a weather normalization adjustment mechanism
(WNA). The WNA was initially approved in 1991 and is in effect for bills
rendered during the period from November 1 through April 30 of each year. The
WNA applies only to residential and small general service rates and affects only
the non-gas portion of PSNC's rates. Sales to large-volume customers are not
normalized because natural gas usage for such customers is significantly less
weather-sensitive. The WNA increases tariff rates if weather is warmer than
normal and decreases rates if weather is colder than normal.
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This prevents the undercollection or overcollection of non-gas costs due to
variations in the quantity of natural gas delivered when weather deviates from
normal. The WNA does not change the seasonality of PSNC's earnings and cash
flow; however, it does reduce fluctuations caused by abnormal weather.
PSNC also operates under two other rate provisions that serve to reduce
fluctuations in PSNC's earnings. First, its Rider D rate mechanism allows PSNC
to recover, in any manner authorized by the NCUC, margin losses on negotiated
gas sales to large commercial and industrial customers with alternate fuel
capability. The Rider D rate mechanism also allows PSNC to recover from
customers all prudently incurred gas costs, including changes in natural gas
prices. Second, PSNC operates with full margin transportation rates. These rates
allow PSNC to earn the same margin on gas delivered to customers regardless of
whether the gas is sold or only transported by PSNC to the customer.
PSNC's rates are established using a base cost of gas approved by the
NCUC which may be modified periodically to reflect changes in the market price
of natural gas and changes in the rates charged by PSNC's pipeline transporters.
PSNC may file revised tariffs with the NCUC coincident with these changes or it
may track the changes in its deferred accounts for subsequent rate
consideration. The rules of the NCUC allow recovery of all prudently incurred
gas costs. Also, the NCUC reviews PSNC's gas purchasing practices annually.
On November 6, 1997, the NCUC issued an order permitting PSNC, on a
two-year trial basis, to establish its commodity cost of gas each month for
large commercial and industrial customers on the basis of market prices for
natural gas. This procedure allows PSNC to manage its deferred gas costs balance
better by ensuring that the amount paid for natural gas to serve these customers
approximates the amount collected from them. PSNC has filed an application with
the NCUC for authority to make this procedure permanent. CUCA has intervened in
opposition of its continuance. The NCUC issued an order scheduling a hearing in
February 2000 on PSNC's application, and authorized PSNC to continue to use this
mechanism pending issuance of a final order sometime in 2000. While management
cannot predict the outcome of PSNC's application, it does not expect the
decision to have a material financial impact. PSNC will continue to establish a
benchmark cost of gas each month for residential and small commercial customers
pursuant to its existing procedures.
In April 1992, the NCUC adopted rules to implement the expansion fund
program established by the North Carolina General Assembly in July 1991. This
act permitted the establishment of expansion funds to be used by each North
Carolina LDC to expand natural gas service to areas that they are certificated
to serve that would otherwise not be economically feasible to serve. Separate
funds have been established for use solely in each LDC's certificated service
territory. Sources for expansion funds may be each LDC's respective supplier
refunds, special surcharges or other sources permitted by the NCUC. Subject to
the NCUC's rules and availability of funds, the LDCs are allowed to utilize the
expansion funds to the extent necessary to make such projects feasible on a net
present value basis. The balance of the funding for projects is supplied by the
LDC. Six counties in PSNC's franchised territory are currently unserved as are
certain areas in other counties. On June 3, 1993, the NCUC entered an order
creating an expansion fund for PSNC in the Office of the State Treasurer. PSNC
began providing natural gas service in McDowell County during December 1996.
This was the first project
8
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undertaken by PSNC using monies from its expansion fund. On April 22, 1997, the
NCUC approved PSNC's application to use expansion funds to extend service to
western Haywood county, including Waynesville, Clyde and Lake Junaluska. This
project was completed in July 1998. On February 22, 1999, the NCUC approved
PSNC's application to use expansion funds to extend natural gas service into
Alexander County. Most of Alexander County lies within PSNC's certificated
service territory and does not currently have natural gas service. PSNC
estimates that the project will be completed prior to April 2000.
On April 29, 1997, the NCUC issued an order authorizing the deferral
accounting for contract labor costs for a project to ensure that PSNC's computer
operating systems function properly in year 2000. The order required a
three-year amortization of these costs beginning in the year incurred. PSNC has
incurred approximately $4,600,000 of these costs to date. PSNC began amortizing
these costs in September 1997. The NCUC allowed recovery of a majority of the
unamortized Year 2000 costs in the general rate case order issued on October 30,
1998.
On May 17, 1999, PSNC and SCANA filed an application with the NCUC
requesting authorization to engage in a business combination transaction. Public
hearings were held during July and August, and a hearing before the NCUC was
completed on September 29, 1999. On December 7, 1999, the NCUC issued an order
approving the merger of the two companies. As specified in the NCUC order, PSNC
will reduce its rates by approximately $2 million ($1 million effective six
months after the transaction closing date and another $1 million effective
eighteen months after the closing date) and has agreed to a five-year moratorium
on general rate cases. The request for approval of the transaction by the
Securities and Exchange Commission is still pending.
Franchises
Effective August 16, 1996, the NCUC granted PSNC certificates of public
convenience and necessity to serve seven additional counties in western North
Carolina. PSNC's certificated service territory now consists of all or parts of
31 counties in North Carolina. Under North Carolina law, no company may
construct or operate properties for the sale or distribution of natural gas
without having obtained such a certificate, except that no certificate is
required for construction in the ordinary course of business or for construction
into territory contiguous to that already occupied by an LDC and not receiving
similar service from another public utility.
On December 8, 1998, the NCUC transferred the franchise for Macon
County to the City of Toccoa, Georgia, and the Municipal Gas Authority of
Georgia. On March 9, 1998, the NCUC approved a financing plan and authorized the
transfer of the franchise for Warren County to Frontier Energy, LLC. PSNC
voluntarily relinquished these franchises and supports efforts to provide
natural gas service to rural areas.
PSNC has nonexclusive franchises from 64 municipalities in which it
delivers natural gas; the other communities served by PSNC have not required
franchises. The expiration dates of those franchises having specific expiration
provisions range from 2000 to 2029. The franchise for the City of Apex expired
on October 7, 1999 and is in the process of being renewed. The franchises
contain no restrictions of a materially
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burdensome nature and are adequate for PSNC's business as presently, and as
proposed to be, conducted. These franchises have been routinely renewed by the
municipalities when they expire.
Non-utility Businesses
In December 1996, PSNC Production, a subsidiary of PSNC, and Sonat
Marketing Company L.P. (Sonat Marketing), a subsidiary of Sonat Inc., created
Sonat Public Service Company L.L.C. (Sonat Public Service), each owning 50% of
the new company. PSNC Production transferred its gas brokering activities to
Sonat Public Service, which now serves approximately 500 accounts both on and
off PSNC's system. As discussed in Note 13 to the consolidated financial
statements, on November 29, 1999, pursuant to the change in control provisions
of the "Amended and Restated Limited Liability Company Agreement of Sonat Public
Service Company L.L.C.," PSNC Production submitted a "Buy-Sell Notice" to El
Paso Energy Corporation (El Paso), which purchased Sonat Inc. on October 25,
1999, and offered to purchase the membership interest of Sonat Marketing in
Sonat Public Service. On December 17, 1999, El Paso responded and elected to
sell its 50% interest in Sonat Public Service to PSNC Production. The proposed
effective date of the purchase is December 31, 1999.
Clean Energy Enterprises, Inc. continued its activities in the
refueling of natural gas vehicles and the conversion of gasoline-fueled vehicles
to natural gas.
Environmental Matters
PSNC is subject to regulation with regard to environmental matters by
various federal, state and local authorities. PSNC owns, or has owned, all or
portions of six sites in North Carolina on which manufactured gas plants (MGPs)
were formerly operated. Evaluations have revealed that MGP residuals are present
or suspected at several of the sites. PSNC has recorded a total liability of
$3,705,000, which represents the minimum amount of the range of $3,705,000 to
$50,145,000 expected for investigating and monitoring the extent of
environmental degradation and of implementing remedial procedures over a 30-year
period. See Note 7 to the consolidated financial statements for further details
regarding this and other environmental matters related to PSNC.
Employees
At November 30, 1999, PSNC had 879 full-time employees compared to
1,047 at November 30, 1998. This 16% decrease is related to Plan 2001, a
three-year operating plan for translating PSNC's vision, mission, strategies and
corporate goals into specific actions. Plan 2001 is discussed further in Note 10
to the consolidated financial statements.
PSNC considers its relationship with its employees to be good and has
never experienced a strike or work stoppage. PSNC has collective bargaining
agreements with the International Chemical Workers Union Council of the United
Food and Commercial Workers locals representing approximately 300 construction
and service employees. Collective bargaining agreements that expired in December
1999 have been renegotiated. These renegotiated three-year collective bargaining
agreements will expire in December 2002.
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Seasonality
Due to the seasonal nature of PSNC's business, the first six months of
its fiscal year are generally the most profitable. During fiscal 1999, the
quarters ended December 31 and March 31 together accounted for approximately 70%
of PSNC's natural gas sales revenues and volumes. The quarters ending June 30
and September 30 are generally PSNC's least profitable quarters due to decreased
demand for natural gas related to lower space heating requirements.
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<TABLE>
<CAPTION>
OPERATING STATISTICS
For the Fiscal Years Ended September 30,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES - GAS:
Residential Sales $173,611,126 $183,813,279 $183,391,700 $162,967,260 $135,846,213
Commercial Sales 69,924,498 78,956,618 84,120,824 74,444,770 57,783,940
Industrial Sales 25,900,724 39,737,329 46,147,690 52,460,676 31,483,864
Gas Transported for Others 28,016,334 26,802,284 22,695,985 17,737,092 21,746,901
Miscellaneous 1,400,919 1,362,260 1,573,982 1,272,281 1,032,096
------------ ------------ ------------ ------------ ------------
Total $298,853,601 $330,671,770 $337,930,181 $308,882,079 $247,893,014
============ ============ ============ ============ ============
GAS SUPPLY (DT):
Natural Gas Purchased 41,807,724 46,207,910 46,544,234 51,841,058 37,790,467
Less Increase (Decrease) in Storage 1,908,903 1,686,462 2,055,564 471,720 (257,091)
Less Unbilled, Unaccounted For,
Company Use and Other 2,302,625 2,192,820 2,519,194 2,518,774 1,979,901
---------- ---------- ---------- ---------- ----------
Total Gas Sold 37,596,196 42,328,628 41,969,476 48,850,564 36,067,657
========== ========== ========== ========== ==========
GAS DELIVERED (DT):
Residential Sales 19,529,630 20,795,108 19,760,537 22,398,288 17,566,948
Commercial Sales 11,367,102 12,324,159 12,769,424 13,925,422 10,827,444
Industrial Sales 6,699,464 9,209,361 9,439,515 12,526,854 7,673,265
Gas Transported for Others 27,647,962 25,110,949 23,143,824 16,795,268 22,551,006
---------- ---------- ---------- ---------- ----------
Total 65,244,158 67,439,577 65,113,300 65,645,832 58,618,663
========== ========== ========== ========== ==========
NUMBER OF CUSTOMERS (AT YEAR END):
Residential 295,277 278,760 264,129 248,940 246,877
Commercial/small industrial 41,668 40,538 39,349 38,624 29,497
Large commercial/industrial 2,118 2,433 2,419 1,677 389
------- ------- ------- ------- -------
Total 339,063 (4) 321,731 305,897 (3) 289,241 (2) 276,763
======= ======= ======= ======= =======
PER RESIDENTIAL CUSTOMER:
Average Gas Used (DT) 66.14 74.60 74.82 89.98 71.16
Average Revenue $587.98 $659.42 $694.36 $654.67 $550.28
Revenue per DT $8.89 $8.84 $9.28 $7.28 $7.73
SYSTEM AVERAGE DEGREE DAYS (1):
Actual 3,049 3,366 3,253 3,856 3,030
Normal 3,382 3,382 3,382 3,400 3,382
Percent of Normal 90% 99% 96% 113% 90%
PEAK DAY DELIVERY (DT) 487,537 416,198 406,742 433,045 403,581
</TABLE>
- ----------------
(1) Fiscal 1996 reflects an additional day for leap year.
(2) Reflects the reclassification of approximately 8,000 customers
from residential to commercial/small industrial classification,
and 1,300 from commercial/small industrial to large
commercial/industrial classification during fiscal 1996.
(3) Reflects the reclassification of approximately 700 customers from
commercial/small industrial to large commercial/industrial during
fiscal 1997.
(4) Reflects the reclassification of approximately 300 customers from
large commercial/ industrial to commercial/small industrial
during fiscal 1999.
12
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Date Elected
Name and Age (1) Title (1) An Officer
<S> <C> <C>
Charles E. Zeigler, Jr. Chairman, President and 11/01/86
Age - 53 Chief Executive Officer
Jack G. Mason Vice President - Finance 03/01/95
Age - 42
Boyce C. Morrow, Jr. Vice President - 03/01/90
Age - 55 External Affairs
Jerry W. Richardson Vice President - Engineering 02/23/82
Age - 54 and System Logistics
Robert D. Voigt Vice President - 09/01/81
Age - 48 Organizational Development
Franklin H. Yoho Vice President - Marketing 02/01/91
Age - 40 and Gas Supply
Sharon D. Boone Controller and 03/01/95
Age - 46 Assistant Secretary
J. Paul Douglas Corporate Counsel and 12/21/94
Age - 52 Secretary
</TABLE>
- ---------------
(1) As of November 30, 1999.
The present terms of all officers extend to April 28, 2000, the date of
the next annual meeting of shareholders and the annual meeting of the Board of
Directors, or until their successors are elected and qualified.
All of the executive officers have served in executive positions with
PSNC for the past five years with the exception of J. Paul Douglas, Jack G.
Mason and Sharon D. Boone.
J. Paul Douglas was employed by PSNC on December 21, 1994. Prior to
joining PSNC, he was employed by Conoco Inc. as counsel from March 1991 to
December 1994. Prior to Conoco, he was a partner with the law firm of Katten,
Muchin, Zavis and Dombroff from February 1990 to March 1991 and a partner with
the law firm of Grove, Jaskiewicz, Gilliam and Cobert from February 1984 to
February 1990.
Jack G. Mason was employed by PSNC on July 5, 1979. During the past
five years, prior to serving as Vice President - Finance, Mr. Mason held the
positions of Vice President-Treasurer and Chief Financial Officer, Director -
Financial Projects and Assistant Treasurer, Assistant Treasurer, and Assistant
Treasurer and Assistant Controller.
Sharon D. Boone was employed by PSNC on November 15, 1982. During the
past five years, prior to serving as Controller and Assistant Secretary, Ms.
Boone held the positions of Manager - Plant Accounting and Tax Services, Manager
- - Corporate Accounting, and Director - Corporate Accounting.
13
<PAGE>
Item 2. Properties
PSNC owns 761 miles of transmission pipelines of 2 to 24 inches in
diameter that connect its distribution systems with the Texas to New York
pipeline transmission system of Transco. Transco delivers natural gas to PSNC at
various points on Transco's pipeline in North Carolina. Natural gas is
distributed by PSNC through its 6,857 miles of distribution mains. These
transmission pipelines and distribution mains are located primarily on
rights-of-ways held under easement, license or permit on lands owned by others.
Through its subsidiary, PSNC Cardinal Pipeline Company, PSNC also owns 33.21% of
Cardinal Pipeline Company, LLC, which owns a 105-mile transmission pipeline, as
discussed more fully in Note 2 to the consolidated financial statements.
PSNC's Energy Center, which consists of its LNG liquefaction, storage
and vaporization facility, is located on a 70-acre tract of land in Cary, North
Carolina. Through its subsidiary, Blue Ridge, PSNC also owns 17% of Pine Needle
LNG Company, LLC, which owns and operates a liquefied natural gas storage
facility with storage capacity of four billion cubic feet, as discussed more
fully in Note 2 to the consolidated financial statements.
PSNC also owns 18 commercial office buildings, a measurement operations
building, a building that houses training and engineering, 11 service center
buildings, 15 service buildings, and an energy control building; PSNC leases
five commercial office buildings for its own use. One of the service buildings
also houses training facilities. Another service building is jointly occupied by
a NGV conversion facility.
14
<PAGE>
Item 3. Legal Proceedings
As more fully disclosed in Part I under "Environmental Matters" and in
Part II in Note 7 to the consolidated financial statements, PSNC owns, or has
owned, all or portions of sites at which manufactured gas plants were formerly
operated and is cooperating with the North Carolina Department of Environment
and Natural Resources to investigate these sites.
Item 4. Submission of Matters to a Vote of Security Holders
None. The Annual Meeting of Shareholders has been delayed until Friday,
April 28, 2000 due to the pending merger with SCANA. If required, the meeting
will be held at PSNC's corporate office at 9:00 a.m. If necessary, the formal
notice of the meeting, proxy statement and form of proxy will be mailed on or
about April 1, 2000, to holders of record of common stock on March 31, 2000.
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters
PSNC's common stock is traded on the New York Stock Exchange under the
ticker symbol "PGS." PSNC's stock quotations are listed in most publications,
including newspapers, as "PubSvcNC" or "PubSNC." Prior to March 1, 1995, PSNC
was traded in the over-the-counter market and was included in the NASDAQ
National Market System under the symbol "PSNC." At November 30, 1999, there were
approximately 12,000 holders of record of PSNC's common stock.
The table below presents the reported high and low common stock sale
prices along with cash dividends declared per share for each quarter of fiscal
1999 and 1998.
Cash
Quarter Dividends
Ended High Low Declared
------- ---------- -------- ---------
Fiscal
1999
-------
Sep 30 $31 7/16 $29 1/16 $.2475
Jun 30 30 28 1/16 .2475
Mar 31 29 15/16 22 5/16 .2400
Dec 31 26 1/16 21 9/16 .2400
Fiscal
1998
-------
Sep 30 24 1/2 19 1/8 .2400
Jun 30 22 3/16 19 7/8 .2400
Mar 31 22 7/8 19 1/8 .2300
Dec 31 24 3/8 19 7/16 .2300
On November 11, 1999, the Board of Directors declared a regular
quarterly cash dividend on PSNC's common stock of 24.75(cent) per share, payable
on January 1, 2000 to shareholders of record on December 10, 1999. PSNC has paid
consecutive quarterly cash dividends on its common stock since 1958, and has
increased cash dividends paid to shareholders each calendar year since 1970.
15
<PAGE>
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
For the Fiscal Years Ended September 30, 1999 1998 1997 1996 1995
- ---------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating revenues (000's)........................ $298,854 $330,672 $337,930 $308,882 $247,893
Net margin (000's)................................ $156,770 $145,782 $145,107 $130,859 $122,885
Net income (000's) (1)............................ $ 24,451 $ 24,837 $ 26,347 $ 23,898 $ 21,421
Basic earnings per average common share (2)....... $ 1.19 $ 1.24 $ 1.35 $ 1.26 $ 1.16
Diluted earnings per average common share (2)..... $ 1.18 $ 1.23 $ 1.34 $ 1.25 $ 1.15
Cash dividends declared per common share ......... $ .975 $ .94 $ .90 $ .865 $ .835
Average number of common shares
outstanding (000's) ............................. 20,515 20,103 19,550 18,995 18,509
Capital expenditures (000's)...................... $ 43,567 $ 65,329 $ 60,310 $ 60,428 $ 61,119
Total assets (000's).............................. $648,571 $618,753 $585,142 $524,889 $456,995
Common equity (000's)............................. $233,164 $222,839 $207,368 $188,635 $173,372
Long-term debt (000's) (3)........................ $157,250 $171,550 $180,850 $140,150 $100,700
</TABLE>
- ---------------
(1) Fiscal 1999 includes $8,238,000 related to merger and restructuring charges.
(2) Fiscal 1999 includes $0.28 per share related to merger and restructuring
charges.
(3) Excludes current maturities.
16
<PAGE>
Item 7. Management's Discussion and Analysis of Results
of Operations and Financial Condition
Results of Operations
Net Margin
For the Fiscal Years Ended September 30, 1999 1998 1997
- ---------------------------------------- -------- -------- --------
(Amounts in thousands except
degree day and customer data)
Gross margin $165,412 $156,371 $155,926
Less - franchise taxes 8,642 10,589 10,819
-------- -------- --------
Net margin $156,770 $145,782 $145,107
======== ======== ========
Total throughput (DT):
Residential 19,530 20,795 19,760
Commercial/small industrial 12,117 12,618 12,373
Large commercial/industrial 33,597 34,027 32,980
------ ------ ------
65,244 67,440 65,113
====== ====== ======
System average degree days:
Actual 3,049 3,366 3,253
Normal 3,382 3,382 3,382
Percent warmer than normal 10% 1% 4%
Weather normalization adjustment
income (refund), net of
franchise taxes $ 7,361 $ (113) $ 5,960
Customers at end of period: (1)
Residential 295,277 278,760 264,129
Commercial/small industrial 41,668 40,538 39,349
Large commercial/industrial 2,118 2,433 2,419
------- ------- -------
339,063 321,731 305,897
======= ======= =======
(1)Reflected in customers at September 30, 1999 is the reclassification of
approximately 300 customers from large commercial/industrial to commercial/small
industrial. Reflected in customers at September 30, 1997 is the reclassification
of approximately 700 customers from commercial/small industrial to large
commercial/industrial.
Total throughput and net margin, defined as operating revenues less
cost of gas and franchise taxes, are more meaningful comparative statistics than
gas sales volumes and operating revenues when analyzing Public Service Company
of North Carolina, Incorporated's (PSNC) utility operating results. This is
because certain large-volume customers purchase gas directly from gas producers
or other gas suppliers and transport
17
<PAGE>
it through PSNC's pipeline system. PSNC's operating revenues and expenses do not
include the commodity cost of this transported gas; however, PSNC earns a margin
on the transported gas that is equivalent to the margin that PSNC would earn if
it purchased and resold gas to these large-volume customers. Also, various
temporary collection and refund mechanisms affect both operating revenues and
cost of gas equally.
Fiscal 1999
o Net margin increased by $10,988,000, or 8%, in fiscal 1999 as compared to
fiscal 1998 primarily due to the general rate increase effective November 1,
1998 and to an increased customer base. This general rate increase accounted
for approximately $7,380,000 of the increase from fiscal 1998. The volumes of
gas delivered to residential, commercial/small industrial and lower-margin
large commercial/industrial customers decreased 6%, 4% and 1%, respectively,
primarily due to weather that was 9% warmer than the prior fiscal year.
Additionally, consumption per degree day, excluding the impact of weather,
decreased 5% for both residential and commercial/small industrial customers
as compared to the same period in fiscal 1998. Net throughput-related
variances for all customer classes totaled approximately $2,840,000, including
an increase of $7,424,000 related to the operation of the weather
normalization adjustment(WNA) mechanism. The WNA accounts only for differences
in consumption caused by temperature variations from normal. It does not
adjust PSNC's earnings for any non-temperature related changes in consumption.
After adjusting for the customer reclassification as previously discussed,
residential and commercial/small industrial customers increased 6% and 2%,
respectively, while large commercial/industrial customers remained constant as
compared to fiscal 1998.
Fiscal 1998
o Net margin increased by $675,000 in fiscal 1998 as compared to fiscal 1997.
The volumes of gas delivered to residential and commercial/small industrial
customers increased 5% and 2%, respectively, due primarily to an increased
customer base and to weather that was 3% colder than the prior fiscal year.
Offsetting these increases was a decrease in consumption per degree day by
these customers. Natural gas usage by residential and commercial/small
industrial customers, excluding the impact of weather, decreased 5% and 3%,
respectively, as compared to the same period in fiscal 1997. Throughput for
lower-margin large commercial/industrial customers increased 3% as compared to
fiscal 1997. This reflects decreased weather-related service curtailments to
these customers during the year, along with an increase in the customer base.
Net throughput-related increases for all customer classes totaled approxi-
mately $407,000, including a reduction of $6,073,000 related to the operation
of the WNA mechanism. Also impacting margin growth was the effect of warmer
weather, as compared to fiscal 1997, during the months of October and May
which are not included in the WNA mechanism period.
18
<PAGE>
Fiscal 1997
o Net margin increased by $14,248,000, or 11%, in fiscal 1997 as compared to
fiscal 1996 primarily due to the general rate increase effective October 1,
1996 and to an increased customer base. This general rate increase accounted
for approximately $6,200,000 of the variance from fiscal 1996. The volumes of
gas delivered to residential and commercial/small industrial customers
decreased 12% and 14%, respectively, due to weather that was 16% warmer as
compared to fiscal 1996. Throughput for lower-margin large commercial/
industrial customers increased 14% as compared to fiscal 1996. This reflects
decreased weather-related service curtailments to these customers during the
year as compared to fiscal 1996, along with an increase in the customer base.
Net throughput-related variances for all customer classes totaled approxi-
mately $7,775,000, including a variance of $14,693,000 related to the
operation of the WNA mechanism. After adjusting for the customer reclassi-
fications as previously discussed, residential, commercial/small industrial
and large commercial/industrial customers increased 6%, 4% and 2%,
respectively, as compared to fiscal 1996.
Operating Expenses
Other operating expenses increased 20% during fiscal 1999. This
increase includes net restructuring charges of $4,343,000 in connection with
Plan 2001 discussed further in Note 10 to the consolidated financial statements.
The increase also includes $3,895,000 of costs incurred related to the proposed
business combination with SCANA Corporation (SCANA) discussed further in Note 11
to the consolidated financial statements. On a straight comparison basis without
these restructuring and merger costs, other operating expenses increased 5%.
Also, employee cash compensation awards, an increase in deferred compensation
and retirement fees for the Board of Directors, and the amortization of deferred
Year 2000 costs contributed to the increase. These increases more than offset
savings generated by Plan 2001 initiatives.
Diluted earnings per share of $1.18 for fiscal 1999 include $0.15 per
share (partially tax deductible) of merger-related expenses and $0.13 per share
net of tax of one-time net restructuring costs related to the implementation of
Plan 2001. Exclusive of these charges, diluted earnings per share for fiscal
1999 were $1.46 as compared to $1.23 for fiscal 1998.
Other operating expenses decreased 1% during fiscal 1998. This decrease
includes a reduction in net expenses related to the nonrecurring charges
associated with the voluntary early retirement program incurred during the first
quarter of fiscal 1997. On a straight comparison basis without this reduction,
other operating expenses increased 1% as compared to fiscal 1997. Health
insurance costs, outside consulting expenses and expenses related to the
adoption of a retirement plan for the Board of Directors contributed to this
increase. The outside consulting services are associated with PSNC's Year 2000
compliance program. Partially offsetting the increases were lower uncollectible
provision expenses, lower liquefied natural gas (LNG) facility power usage and
no incentive compensation costs recognized in fiscal 1998.
19
<PAGE>
Other operating expenses increased 10% during fiscal 1997. This
increase was due primarily to net expenses of $1,034,000 related to the
voluntary early retirement program offered in the first quarter of fiscal 1997.
On a straight comparison basis without this expense, other operating expenses
increased 8% as compared to fiscal 1996. Salary and employee benefits, outside
consulting expenses, employee training programs and expenses related to the
outsourcing of meter reading also contributed to the increase. Partially
offsetting the increases were reduced expenses for health insurance due to the
enrollment of all PSNC employees with a health maintenance organization
provider.
Maintenance expenses decreased 3% and 13% in fiscal 1999 and 1998,
respectively. The decrease in 1998 includes a decrease in net expenses related
to the voluntary early retirement program incurred during the first quarter of
fiscal 1997. On a straight comparison basis without the voluntary early
retirement program expense, maintenance expenses decreased 11%. This decrease
was due primarily to lower telecommunications expenses, lower LNG equipment
replacement expenses and other general operational improvements.
Maintenance expenses increased 17% in fiscal 1997 due primarily to
higher telecommunications expenses and salaries. Also contributing to the
increase were charges of $143,000 related to the voluntary early retirement
program. On a straight comparison basis without the voluntary early retirement,
maintenance expenses increased 14% as compared to fiscal 1996.
Depreciation expense increased 3%, 12% and 13% in fiscal 1999, 1998 and
1997, respectively, due to plant additions. The lower than normal increase in
depreciation expense in fiscal 1999 is due to fewer plant additions and a
revision to vintage year accounting made in the third quarter for certain plant
accounts.
General taxes decreased during fiscal 1999 primarily due to lower
franchise tax expense resulting from the elimination of franchise taxes by the
North Carolina General Assembly effective on August 1, 1999. The franchise tax
was replaced by an excise tax. Franchise taxes were included in PSNC's billing
rates and were recorded as both revenue and expense. The new excise tax is added
to customer bills based on the volume of natural gas consumed. PSNC remits the
amounts collected to the state and does not include the excise tax in either
revenue or expense. General taxes increased during fiscal 1998 reflecting an
increase in PSNC's property taxes, offset somewhat by lower franchise tax
expense. The increase in general taxes during fiscal 1997 was due to increased
franchise tax expense, reflecting an increase in revenues.
Other Income (Deductions)
Other income (deductions) increased $754,000 during fiscal 1999. This
is primarily due to an increase in income from subsidiary operations. Under the
terms of the performance clauses in the joint venture agreement between PSNC
Production Corporation (PSNC Production) and Sonat Marketing Company L.P. (Sonat
Marketing), PSNC Production recognized an additional $1,175,000 of deferred
revenue in fiscal 1999. Offsetting the increase in other income is a $204,000
pre-tax write off on PSNC
20
<PAGE>
Production's investment in American Gas Finance Company, a limited liability
company established by the American Gas Association to provide financing for
residential energy- efficiency improvements.
Other income (deductions) decreased $366,000 during fiscal 1998. This
was primarily the result of a $975,000 decrease in interest income compared to
fiscal 1997 on amounts due from customers through the operation of the Rider D
rate mechanism. During fiscal 1998, through an increment in its rates, PSNC
collected previously undercollected gas costs and was able to match its
benchmark gas cost more closely to market prices. This resulted in a lower Rider
D receivable balance of $12,860,000 at September 30, 1998. Partially offsetting
the decrease in interest income was a $673,000 increase in merchandise and
jobbing income. This increase reflects a decrease in expenses related to the
voluntary early retirement program incurred during the first quarter of fiscal
1997. On a straight comparison basis without the voluntary early retirement
program expense, merchandise and jobbing operations increased by approximately
$442,000.
Other income (deductions) increased $535,000 during fiscal 1997. Other
interest income increased $792,000 over fiscal 1996 due to interest on amounts
due from customers through the operation of the Rider D rate mechanism.
Winter-period increases in the market price of natural gas resulted in PSNC
recording uncollected gas costs, along with increased demand costs, which
totaled $18,385,000 at September 30, 1997. Prior to December 1996, income from
secondary market transactions was recorded as other income. Income from
secondary market transactions is now recorded in subsidiary operations.
Secondary market transactions are any transactions that utilize capacity rights
on interstate pipelines. Upon creation of Sonat Public Service, $4,845,000 of
cash received by PSNC Production from Sonat Marketing was deferred, and during
fiscal 1997, $816,000 of this deferred revenue was recognized as subsidiary
income. With the formation of Sonat Public Service, PSNC Production and Sonat
Marketing split evenly PSNC's 25% share of net income from the earnings from
secondary market transactions. PSNC also realized a $205,000 improvement in
merchandise and jobbing. This improvement was reduced by approximately $231,000
related to the voluntary early retirement program. Without this expense,
merchandise and jobbing income would have increased by approximately $436,000.
Interest Deductions
Interest deductions for fiscal 1999 increased approximately $245,000
over fiscal 1998. This increase includes $200,000 of debt expense and prepayment
premium recognized due to the prepayment in February 1999 of the remaining
$10,000,000 of 8.65% Senior Debentures due 2002. The increase also reflects an
increase in interest expense on short-term debt resulting from higher average
short-term bank loans outstanding during the period. Offsetting this increase is
lower interest on long-term debt due to the previously mentioned prepayment and
scheduled sinking fund payments.
Interest deductions for fiscal 1998 increased approximately $524,000
over fiscal 1997. This increase resulted from an increase in interest expense on
short-term debt
21
<PAGE>
resulting from higher average short-term bank loans outstanding during the
period and the December 1996 issuance of $50,000,000 of long-term debt.
Interest deductions for fiscal 1997 increased $2,512,000 over fiscal
1996. This increase was due mainly to increased interest expense on long-term
debt of $2,887,000 resulting from the December 17, 1996 issuance of $50,000,000
of 7.45% Senior Debentures due 2026. Interest expense on short-term debt
decreased $299,000 due to lower average short-term bank loans outstanding during
the period.
Liquidity and Capital Resources
PSNC's primary capital needs are the funding of its continuing
construction program and the seasonal funding of its stored gas inventories.
PSNC uses short-term bank loans, together with internally generated funds,
long-term debt and equity financing to fund its continuing construction program.
PSNC has committed lines of credit with five commercial banks which vary monthly
depending upon seasonal requirements and a five-year revolving line of credit
with one bank. For the twelve-month period beginning April 1, 1999, total lines
of credit with these banks range from a minimum of $55,000,000 to a
winter-period maximum of $75,000,000. PSNC also has total uncommitted lines of
credit ranging from $70,000,000 to $100,000,000. At September 30, 1999,
committed lines of credit totaled $60,000,000 and uncommitted lines of credit
totaled $100,000,000. Lines of credit are evaluated periodically by management
and renegotiated to accommodate anticipated short-term financing needs.
Management believes these lines are currently adequate to finance budgeted
construction expenditures, stored gas inventories and other corporate needs. At
September 30, 1999 and 1998, PSNC's total short-term bank loans outstanding were
$104,000,000 and $70,500,000, respectively.
In December 1995, PSNC filed with the Securities and Exchange
Commission (SEC) a registration statement covering up to an aggregate amount of
$125,000,000 of senior unsecured debt. In January 1996, PSNC sold $50,000,000 of
6.99% Senior Debentures due 2026 in a public offering. In December 1996, PSNC
sold $50,000,000 of 7.45% Senior Debentures due 2026 in a public offering. The
net proceeds of both issues were used to pay down a significant portion of the
then outstanding short-term bank debt. PSNC has not issued any long-term debt
since December 1996, resulting in an increase in short-term bank loans
outstanding. On May 21, 1999, PSNC filed with the SEC a registration statement
(amended on June 7, 1999) covering up to an aggregate of $150,000,000 of senior
unsecured debt securities. This amount includes $25,000,000 of senior unsecured
debt registered in December 1995 that has not been issued and sold. At September
30, 1999, $150,000,000 remained on the shelf registration.
On February 26, 1999, PSNC prepaid the remaining $10,000,000 of 8.65%
Senior Debentures due 2002 at a prepayment price of 101.85%. PSNC financed the
prepayment through the use of short-term debt.
22
<PAGE>
PSNC also generates equity capital through its dividend reinvestment
(DRP), employee stock purchase and nonqualified stock option plans. During
fiscal 1999, 1998 and 1997, the DRP generated $3,272,000, $6,799,000 and
$7,277,000, respectively, of additional equity capital. The decrease in equity
funds generated through the DRP from the prior year reflects a change in April
1999 to open market purchases to satisfy the requirements of the DRP and the
exercise of stock options. This change was made because of the requirements of
the proposed merger with SCANA discussed further in Note 11 to the consolidated
financial statements. The employee stock purchase plan generated $1,295,000,
$1,359,000 and $1,318,000, respectively, of additional equity capital. The
employee stock purchase plan was terminated in June 1999 because of the
requirements of the proposed merger with SCANA. The nonqualified stock option
plans generated net equity capital of $1,700,000, $1,639,000 and $1,215,000,
respectively.
The ratio of long-term debt to total capitalization was 40.3% at
September 30, 1999, 43.5% at September 30, 1998 and 46.6% at September 30, 1997.
PSNC's goal is to maintain a capital structure with a ratio of long-term debt to
total capitalization in the 45% range with periodic moderate fluctuations.
For fiscal 1999, 1998 and 1997, construction expenditures were
$43,567,000, $65,329,000 and $60,310,000, respectively. For fiscal 2000, PSNC
has budgeted $41,000,000 for its ongoing construction program. PSNC anticipates
spending $40,000,000 to $45,000,000 annually on its construction program for the
next several years.
As discussed more fully in Note 4 to the consolidated financial
statements, PSNC and its subsidiaries sponsor a noncontributory defined benefit
pension plan covering substantially all employees. During fiscal 1999 and 1998,
cash contributions were $3,679,000 and $4,213,000, respectively.
The decrease in restricted cash and temporary investments and
restricted supplier refunds from the prior year is due to depositing $19,808,000
in refunds received from PSNC's pipeline transporters into PSNC's expansion fund
in the Office of the State Treasurer during the fourth quarter of fiscal 1999.
This fund was created by an order of the North Carolina Utilities Commission
(NCUC), dated June 3, 1993, to finance the construction of natural gas lines
into unserved areas of PSNC's service territory that otherwise would not be
economically feasible to serve. Offsetting the decrease in restricted cash and
temporary investments is a reclassification of $3,634,000 from long-term
restricted cash at September 30, 1999. This reclassification is discussed
further in Note 1 to the consolidated financial statements.
On February 22, 1999, the NCUC approved PSNC's application to use
expansion funds to extend natural gas service into Alexander County and
authorized disbursements from the fund of approximately $4,301,000. Most of
Alexander County lies within PSNC's franchised service territory and does not
currently have natural gas service. PSNC estimates that the project will be
completed prior to April 2000 at a cost of approximately $6,188,000.
23
<PAGE>
Net accounts receivable increased $3,090,000 as compared to September
30, 1998. This increase reflects an increase in sales due to a 5% increase in
customers and the impact of PSNC's general rate increase effective November 1,
1998.
Stored gas inventories increased $5,687,000 as compared to September
30, 1998. This increase is due to the addition of the Pine Needle storage
facility on May 1, 1999 and to an increase in storage capacity in existing
storage facilities.
Net deferred gas costs fluctuate in response to the operation of PSNC's
Rider D rate mechanism. This mechanism allows PSNC to recover all prudently
incurred gas costs from customers. It also allows PSNC to recover margin losses
on negotiated sales to large commercial/industrial customers with alternate fuel
capability. On a monthly basis, any difference in amounts paid and collected is
recorded for subsequent refund to or collection from PSNC's customers. The
$5,322,000 increase in deferred gas costs at September 30, 1999 resulted from an
increase in undercollections from customers due to higher gas costs. PSNC's
deferred gas costs balances are approved by the NCUC in annual gas cost reviews
and are refunded to or collected from customers over a subsequent twelve-month
period. Amounts that have not been refunded to or collected from customers bear
interest at an annual rate of 10% as required by the NCUC. Deferred gas costs at
September 30, 1999 and September 30, 1998 reflect undercollections from
customers. PSNC's strategy is to manage the balance of deferred gas costs to a
minimal level over a twelve-month period. On November 6, 1997, the NCUC issued
an order permitting PSNC, on a two-year trial basis, to establish its commodity
cost of gas for large commercial and industrial customers on the basis of market
prices for natural gas. This procedure allows PSNC to manage its deferred gas
costs balance better by ensuring that the amount paid for natural gas to serve
these customers approximates the amount collected from them. PSNC has filed an
application with the NCUC for authority to make this procedure permanent. The
Carolina Utility Customers Association, Inc. (CUCA) has intervened in opposition
of its continuance. The NCUC issued an order scheduling a hearing in February
2000 on PSNC's application, and authorized PSNC to continue to use this
mechanism pending issuance of a final order sometime in 2000. While management
cannot predict the outcome of PSNC's application, it does not expect the
decision to have a material financial impact. PSNC will continue to establish a
benchmark cost of gas for residential and commercial/small industrial customers
pursuant to its existing procedures.
The $9,943,000 increase in other assets is primarily due to the capital
contribution of $9,095,000 by PSNC's subsidiary, PSNC Blue Ridge Corporation
(Blue Ridge), to Pine Needle LNG Company, LLC (Pine Needle) on May 3, 1999. As
discussed more fully in Note 2 to the consolidated financial statements, Pine
Needle was formed by subsidiaries of Transcontinental Gas Pipe Line Corporation
(Transco), Piedmont Natural Gas Company, Inc. (Piedmont), North Carolina Natural
Gas Corporation (NCNG), Amerada Hess, and PSNC, and the Municipal Gas Authority
of Georgia. Pine Needle owns and operates a liquefied natural gas storage
facility in North Carolina, built at a cost of approximately $107,000,000. The
facility became operational on May 1, 1999. PSNC, through its subsidiary, Blue
Ridge, owns 17% of the facility, and PSNC has contracted to use 25% of the
facility's gas storage capacity and withdrawal capabilities.
24
<PAGE>
The decrease in long-term debt of $14,300,000, as compared to September
30, 1998, is due to the prepayment on February 26, 1999 of the remaining
$10,000,000 of 8.65% Senior Debentures due 2002 and to scheduled sinking fund
payments.
Accounts payable increased $4,632,000 as compared to September 30,
1998. This is primarily due to increased secondary market activity and natural
gas purchased at a higher cost.
Deferred credits and other liabilities increased primarily due to
additional deferred income taxes of $7,897,000 and increased deferred and
retirement compensation for the Board of Directors. These increases were
partially offset by a decrease in accrued pension costs which includes a
curtailment gain of $881,507 and a settlement gain of $881,634 related to PSNC's
severance activity under Plan 2001 discussed further in Note 10 to the
consolidated financial statements.
As discussed more fully in Note 7 to the consolidated financial
statements, PSNC owns, or has owned, all or portions of six sites in North
Carolina on which manufactured gas plants (MGPs) were formerly operated.
Evaluations of these sites have revealed that residuals from MGPs are present or
suspected at several of the sites. The North Carolina Department of Environment
and Natural Resources (NCDENR) has recommended that no further action be taken
with respect to one site. An environmental consulting firm retained by PSNC
estimated that the minimum aggregate costs to investigate and monitor the extent
of environmental degradation and to implement remedial procedures with respect
to the remaining five sites may range from $3,705,000 to $50,145,000 over a
30-year period. PSNC is unable to determine the rate at which costs may be
incurred over this time period. In October 1994, PSNC entered into an
administrative order of consent with NCDENR to investigate the Durham, North
Carolina, site in accordance with standards and methods approved by NCDENR. At
September 30, 1998, PSNC had recorded a total liability and a corresponding
regulatory asset of the minimum amount of the range, or $3,705,000. Amounts
incurred to date are not material. Management intends to request recovery of
additional MGP clean-up costs not recovered from other potentially responsible
parties in future rate case filings, and believes that all costs deemed by the
NCUC to be prudently incurred will be recoverable in gas rates.
As discussed more fully in Note 2 to the consolidated financial
statements, PSNC and a subsidiary of Piedmont formed Cardinal Pipeline Company,
LLC (Cardinal Pipeline) in March 1994 to construct an intrastate gas
transmission pipeline. The pipeline was placed into service in December 1994 at
a cost of approximately $26,000,000. PSNC owned 64.4% of the pipeline, which
extends 37.5 miles to provide additional daily capacity to PSNC's eastern
service territory in and around the Durham and Raleigh areas. In December 1995,
PSNC, Piedmont, Transco and NCNG formed Cardinal Extension Company, LLC
(Cardinal Extension) to purchase and extend the existing Cardinal pipeline. On
November 6, 1997, the NCUC issued an order approving this project and the merger
of Cardinal Pipeline and Cardinal Extension, with the surviving entity being
named Cardinal Pipeline Company, LLC. The pipeline was extended 67.5 miles from
the existing termination point of Cardinal Pipeline at Haw River, North
Carolina, to a point southeast of Raleigh. This extension is estimated to cost
approximately $76,000,000. The facilities were placed in service and permanent
financing was completed on
25
<PAGE>
November 1, 1999. PSNC, through a subsidiary, owns 33.21% of Cardinal Pipeline
Company, LLC. PSNC contributed its net book investment in the existing pipeline
plus additional equity capital of approximately $1,500,000 for its ownership
share in the first quarter of fiscal 2000.
Year 2000 Readiness
Pursuant to Section 7(b) of the "Year 2000 Information and Readiness
Disclosure Act," Pub. L. 105-271 (October 19, 1998) (hereinafter Year 2000 Act),
PSNC hereby designates the information contained herein as a "Year 2000
Readiness Disclosure" as defined in Section 3(9) of the Year 2000 Act.
The Year 2000 issue exists because many computer systems and
applications, including those with embedded chips in equipment or facilities,
use two-digit date fields rather than four-digit date fields to designate the
applicable year. As a result, these date-sensitive applications may not properly
recognize the year 2000 or years thereafter, or process data containing them,
potentially causing critical systems including, but not limited to, business and
operational systems to function improperly or not at all.
PSNC began its Year 2000 efforts in 1995 by interviewing vendors and
gaining awareness of this issue. An assessment of PSNC's Year 2000 impact was
performed in 1996, and PSNC began addressing its major business computer
systems. PSNC decided to renovate its customer information system and to replace
its financial and materials management systems. The renovation of PSNC's
customer information system was completed in September 1998. Year 2000 ready
financial and materials management systems were implemented on April 1, 1999.
Upgrades to the Supervisory Control and Data Acquisition (SCADA) system that
monitors the flow of gas through PSNC's distribution system have been completed.
Remaining activities include completion of scheduled software upgrades.
Additional forward date testing of computer systems will continue throughout
calendar 1999.
During 1998, PSNC established a centrally managed, company-wide Year
2000 project office. PSNC's Year 2000 project scope was expanded to include:
business continuity planning; embedded systems containing microprocessors, i.e.,
automated meter reading and process control equipment; end-user computing
hardware and software, i.e., personal computers; facility equipment, such as
heating and cooling systems and facsimile devices; and business relationships
with PSNC's customers and key suppliers. The Year 2000 project office reports
daily to the chief information officer. Frequent formal and informal discussions
are held with the chief financial officer as the Year 2000 project executive.
The Audit Committee of the Board of Directors is updated quarterly by the chief
financial officer and the internal audit department. The full Board is updated
by the Audit Committee. Senior officers of PSNC are updated monthly on the
project team's status, and they participate in making contingency planning
decisions related to their functional areas.
While PSNC believes that it has minimized the risks of encountering
serious problems associated with the Year 2000 issue, it still faces the risk
that some systems and processes that are not Year 2000 ready either will not be
identified or will not be
26
<PAGE>
corrected before 2000. Additionally, PSNC has no assurance that the Year 2000
issues of other entities will not have a material impact on PSNC's systems or
results of operations.
Year 2000 Costs
The estimated cost of completion, including costs incurred to date, is
$17,500,000. This estimated cost includes external contractors and service
providers, the purchase of computer hardware and software, and dedicated
internal resources. The majority of these costs are currently being recovered in
rates charged to PSNC's customers. A portion of PSNC's costs will not be
incremental costs, but a redeployment of existing resources. PSNC does not track
the cost and time of internal employees who are not fully dedicated to the Year
2000 effort.
Approximately $12,500,000 to replace existing systems is being
capitalized as utility plant. Approximately $12,000,000 of these costs has been
incurred. Approximately $5,000,000 to modify existing computer systems is being
expensed over a three-year period in accordance with the NCUC order discussed
more fully in Note 2 to the consolidated financial statements. Approximately
$4,600,000 of these costs has been incurred. These costs are estimates based on
PSNC's analysis to date and are subject to change after the modifications of its
systems are completed.
The project completion dates and costs are estimates based on numerous
assumptions. These assumptions include the continued availability of personnel
resources and third-party vendor compliance.
Risk Assessment
At this time, PSNC believes a "worst case scenario" is that its
customers could experience some temporary disruptions in their gas service. The
natural gas that PSNC distributes and sells to its sales customers, and the
natural gas that it transports and delivers to its transportation customers,
comes principally from the producing areas along the Gulf of Mexico (including
the states of Alabama, Louisiana, Mississippi and Texas, and adjacent offshore
areas). Prior to PSNC's receipt of that gas, it must be extracted and processed
to be useable. It is then delivered to an interstate pipeline company (or
companies) for transportation to PSNC or to storage for PSNC's account; the gas
that is stored for PSNC's account must then be withdrawn and delivered to PSNC
by an interstate pipeline, generally in the winter. A disruption in PSNC's
service to its customers could be caused by a disruption in the extraction or
processing of this gas, the transmission and/or storage of such gas or finally
the distribution of such gas by PSNC.
Even if the flow of gas is not disrupted, customers may not be able to
use the available gas if electrical service is disrupted and electronic controls
do not work.
Although PSNC does not believe that these disruptions will occur, it
has no assurance that such disruptions will not occur. PSNC has assessed the
impact of such a scenario and continues to evaluate this scenario. PSNC believes
that its contingency plans will lessen the impact of any disruption.
27
<PAGE>
If such disruption does occur, PSNC does not believe that it will have
a material adverse impact on its financial position, cash flows or results of
operations.
Contingency Plans
Business continuity planning is underway. Testing of the plan will
continue throughout 1999. The plan addresses the mitigation of risks associated
with key business processes and those processes critical to the delivery of gas
services. Detailed plans are being developed for coverage during the century
rollover. PSNC's continuity planning also includes the short-term localized
impact of losing one or more of the following services: electricity,
telecommunications, water/sewer, gas pressure, information technology systems
and staffing (order does not imply priority). PSNC is not implying that
disruption will occur, but that the risk does exist.
The assessment of critical supplier and third-party vendor progress,
although external to PSNC, will continue throughout calendar 1999. PSNC cannot
quantify the impact of any failure by a critical supplier or third-party vendor
at this time. PSNC is presently developing a contingency plan to address the
mitigation of risks and continuance of operations if critical suppliers or
third-party vendors have a failure. PSNC met with its major pipeline transporter
on August 25, 1999 and discussed the transporter's Year 2000 status and its
business continuity plans. Close communication between PSNC and the transporter
is planned during the century rollover.
The foregoing information is based on PSNC's current best estimates,
which were derived using numerous assumptions of future events, including the
availability and future costs of certain technological and other resources,
third-party modifications and remediation actions and other factors. Given the
complexity of the issues and possible as yet unidentified risks, actual results
may vary from those anticipated and discussed above. Specific factors that might
cause such differences include, among others, the availability and cost of
trained personnel, the ability to locate and correct all affected computer code,
the timing and success of remedial efforts of third-party suppliers and similar
uncertainties.
Each of the components of PSNC's Year 2000 program is progressing, and
PSNC believes it is taking all reasonable steps necessary to be able to operate
successfully through and beyond the turn of the century.
Year 2000 Communications
PSNC meets quarterly with the other North Carolina gas utilities to
exchange information and discuss the best practices that may be used to address
Year 2000 requirements. Additionally, PSNC frequently participates in industry
and community forums attended by representatives of the electric and
telecommunications industries.
SCANA reviewed PSNC's Year 2000 program strategy during its due
diligence efforts prior to the execution of the merger agreement referred to in
Note 11 to the consolidated financial statements. PSNC will continue to share
information with SCANA throughout the merger integration process.
28
<PAGE>
A bill insert and additional awareness information were sent to
customers in July 1999.
Effects of Inflation
The margin charged to PSNC's gas customers may not be increased without
a general rate case. Accordingly, in the absence of authorized rate increases
and except for changes in the cost of gas sold, which are passed along to
customers on a timely basis through various rate adjustment mechanisms, PSNC
must look to performance improvements and higher throughput to offset
inflationary increases in its cost of operations. Current rates only permit PSNC
to recover its historical cost of utility plant and give no recognition to the
replacement cost of these facilities. Management continually reviews operations
and economic conditions to assess the need for filing for general rate relief.
PSNC's last general rate case was filed April 2, 1998, and new rates approved by
the NCUC became effective November 1, 1998. CUCA, a party to PSNC's general rate
case, formally appealed the general rate case order. The Supreme Court of North
Carolina heard oral argument on CUCA's appeal on October 13, 1999. While
management is not able to predict the ultimate outcome of this appeal,
management does not believe that such outcome will have a material adverse
impact on PSNC's financial position, cash flows or results of operations.
Recently Issued but Not Yet Effective Accounting Statements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," delaying
the effectiveness of SFAS No. 133 to fiscal years beginning after June 15, 2000.
SFAS No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. This statement becomes effective for PSNC on October 1, 2000.
PSNC has not yet quantified the impact of adopting SFAS No. 133 on its financial
statements and has not determined the method of adoption.
29
<PAGE>
Forward-looking Statements
Statements contained in this document and the notes to the consolidated
financial statements which are not historical in nature are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements are subject to risks and uncertainties that may
cause future results to differ materially from those set forth in such
forward-looking statements. PSNC undertakes no obligation to update
forward-looking statements to reflect events or circumstances after the date
hereof. Such risks and uncertainties with respect to PSNC include, but are not
limited to, its ability to implement successfully internal performance goals,
performance issues with natural gas suppliers and transporters, the
capital-intensive nature of PSNC's business, regulatory issues (including rate
relief to recover increased capital and operating costs), legislative issues,
competition, weather, exposure to environmental issues and liabilities,
variations in natural gas prices, the proposed business combination with SCANA,
unanticipated problems related to internal Year 2000 initiatives as well as
potential adverse consequences related to third-party Year 2000 compliance, and
general and specific economic conditions. From time to time, subsequent to the
date of the filing of this document, PSNC may include forward-looking statements
in oral statements or other written documents.
30
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
Public Service Company of North Carolina, Incorporated and Subsidiaries
Consolidated Statements of Income
<CAPTION>
For the Fiscal Years Ended September 30, 1999 1998 1997
- ---------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues $298,853,601 $330,671,770 $337,930,181
Cost of gas 133,441,749 174,300,672 182,003,740
------------ ------------ ------------
Gross margin 165,411,852 156,371,098 155,926,441
------------ ------------ ------------
Operating Expenses and Taxes:
Other operating expenses 65,545,120 54,686,569 55,180,279
Maintenance 5,051,559 5,230,133 6,007,234
Provision for depreciation 25,900,452 25,049,337 22,387,370
General taxes 15,226,300 17,183,052 16,924,868
Income taxes -
Federal 12,607,526 12,209,518 12,535,400
State 2,881,141 2,917,294 3,175,800
------------ ------------ ------------
Total operating expenses and taxes 127,212,098 117,275,903 116,210,951
------------ ------------ ------------
Operating income 38,199,754 39,095,195 39,715,490
------------ ------------ ------------
Other Income (Deductions):
Merchandise and jobbing 825,221 795,024 121,554
Subsidiary operations, net of
income taxes 2,998,500 1,692,527 1,677,391
Interest income and other 450,382 1,032,563 2,086,826
------------ ------------ ------------
Total other income (deductions) 4,274,103 3,520,114 3,885,771
------------ ------------ ------------
Gross income 42,473,857 42,615,309 43,601,261
------------ ------------ ------------
Interest Deductions:
Interest on long-term debt 13,657,084 15,039,896 15,139,409
Amortization of debt expense 352,710 162,068 163,173
Other interest 4,642,816 3,145,329 2,293,555
Allowance for borrowed funds used
during construction (629,703) (568,986) (341,429)
------------ ------------ ------------
Total interest deductions 18,022,907 17,778,307 17,254,708
------------ ------------ ------------
Net income $ 24,450,950 $ 24,837,002 $ 26,346,553
============ ============ ============
Average common shares outstanding 20,515,369 20,103,103 19,549,656
Basic earnings per share $1.19 $1.24 $1.35
Diluted common shares outstanding 20,734,028 20,220,580 19,649,925
Diluted earnings per share $1.18 $1.23 $1.34
Cash dividends declared per common share $.975 $ .94 $ .90
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
31
<PAGE>
Public Service Company of North Carolina, Incorporated and Subsidiaries
Consolidated Balance Sheets
September 30, 1999 1998
- ------------------------------------------- ------------ ------------
Assets
- ------
Gas Utility Plant:
In service $767,862,164 $736,504,603
Less - Accumulated depreciation 241,086,700 224,204,295
------------ ------------
Net plant in service 526,775,464 512,300,308
Construction work in progress 7,469,452 7,216,568
------------ ------------
534,244,916 519,516,876
------------ ------------
Non-utility Property, net of
accumulated depreciation (1999 -
$221,178 and 1998 - $178,066) 551,538 594,650
------------ ------------
Current Assets:
Cash and temporary investments 7,247,956 3,277,211
Restricted cash and temporary investments 3,655,854 10,247,060
Receivables, less allowance for
doubtful accounts (1999 - $1,737,815
and 1998 - $2,086,128) 23,926,218 20,836,080
Inventories, at average cost -
Materials, supplies and merchandise 6,411,857 6,992,053
Stored gas 30,092,053 24,405,529
Deferred gas costs, net 18,897,959 13,576,225
Prepayments 1,565,754 2,260,204
------------ ------------
91,797,651 81,594,362
Deferred Charges and Other Assets:
Long-term restricted cash - 4,845,120
Debt expense 1,509,037 1,676,747
Other 20,467,374 10,524,858
------------ ------------
21,976,411 17,046,725
------------ ------------
$648,570,516 $618,752,613
============ ============
Capitalization and Liabilities
Capitalization (see statements):
Common equity $233,163,933 $222,839,331
Long-term debt 157,250,000 171,550,000
------------ ------------
390,413,933 394,389,331
Current Liabilities:
Current maturities of long-term debt 6,800,000 9,300,000
Accounts payable 24,647,294 20,015,220
Accrued taxes 3,490,273 1,180,306
Customer prepayments and deposits 6,697,980 7,020,931
Accrued interest 4,141,686 4,346,204
Cash dividends declared 5,093,047 4,864,161
Restricted supplier refunds 22,014 10,247,060
Other 4,909,586 4,183,535
------------ ------------
55,801,880 61,157,417
Interim bank loans, due within one year 104,000,000 70,500,000
------------ ------------
159,801,880 131,657,417
Deferred Credits and Other Liabilities:
Income taxes, net 74,423,087 66,526,252
Deferred revenue - 2,120,976
Investment tax credits 3,060,728 3,410,949
Accrued pension cost 5,012,547 7,984,530
Other 15,858,341 12,663,158
------------ ------------
98,354,703 92,705,865
$648,570,516 $618,752,613
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
32
<PAGE>
Public Service Company of North Carolina, Incorporated and Subsidiaries
Consolidated Statements of Capitalization
September 30, 1999 1998
- ------------------------------------------ ------------ ------------
Common Equity:
Common stock, $1 par, 30,000,000
shares authorized; shares outstanding
1999 - 20,577,967 and 1998 - 20,274,332 $ 20,577,967 $ 20,274,332
Capital in excess of par value 139,171,847 132,787,058
Retained earnings 73,414,119 69,777,941
------------ ------------
233,163,933 222,839,331
------------ ------------
Long-term Debt:
Senior debentures (unsecured) -
8.65% due 2002 - 10,000,000
10% due 2003 6,250,000 8,750,000
10% due 2004 25,800,000 30,100,000
8.75% due 2012 32,000,000 32,000,000
6.99% due 2026 50,000,000 50,000,000
7.45% due 2026 50,000,000 50,000,000
------------ ------------
164,050,000 180,850,000
Less - Current maturities 6,800,000 9,300,000
------------ ------------
157,250,000 171,550,000
------------ ------------
$390,413,933 $394,389,331
============ ============
Consolidated Statements of Retained Earnings
For the Fiscal Years Ended September 30, 1999 1998 1997
- ---------------------------------------- ----------- ----------- -----------
Balance, beginning of year $69,777,941 $64,122,801 $55,423,161
Add - Net income 24,450,950 24,837,002 26,346,553
----------- ----------- -----------
94,228,891 88,959,803 81,769,714
Deduct - Cash dividends declared
on common stock and other 20,814,772 19,181,862 17,646,913
----------- ----------- -----------
Balance, end of year $73,414,119 $69,777,941 $64,122,801
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
33
<PAGE>
<TABLE>
Public Service Company of North Carolina, Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
For the Fiscal Years Ended September 30, 1999 1998 1997
- ---------------------------------------- ----------- ----------- -----------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net income $24,450,950 $24,837,002 $26,346,553
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation charged to operating expenses 25,900,452 25,049,496 22,387,370
Depreciation charged to other accounts 2,772,998 2,786,873 2,528,055
Amortization of debt expense and other 167,710 162,068 175,592
Provision for doubtful accounts 725,094 866,786 1,396,636
Amortization of investment tax credits, net (350,221) (369,632) (429,688)
Deferred income taxes, net 7,896,835 7,088,341 3,205,066
----------- ----------- -----------
61,563,818 60,420,934 55,609,584
Change in assets and liabilities:
Receivables, net (3,815,232) 4,913,801 (10,113,922)
Inventories (5,106,328) (2,862,815) (5,967,186)
Deferred gas costs, net (5,321,734) 5,761,572 (1,812,450)
Deferred revenues (2,120,976) (978,912) 3,099,888
Prepayments 694,450 143,426 (127,771)
Accounts payable 4,632,074 (7,783,968) 7,498,737
Accrued taxes 2,309,967 (3,123,216) 1,228,699
Customer prepayments and deposits (322,951) 42,366 964,679
Accrued interest (204,518) (101,456) 1,350,667
Accrued pension cost (2,971,983) (1,547,357) (2,681,901)
Other 944,533 (538,331) (4,911,920)
----------- ----------- -----------
Net cash provided by operating activities 50,281,120 54,346,044 44,137,104
----------- ----------- -----------
Cash Flows from Investing Activities:
Construction expenditures (43,566,624) (65,328,731) (60,310,383)
Non-utility property and other (5,125,853) (1,525,824) 875,413
----------- ----------- -----------
Net cash used in investing activities (48,692,477) (66,854,555) (59,434,970)
----------- ----------- -----------
Cash Flows from Financing Activities:
Issuance of common stock through dividend
reinvestment, stock purchase and stock
option plans 6,267,988 9,796,147 9,809,642
Increase (decrease) in interim bank loans, net 33,500,000 32,500,000 (21,500,000)
Sale of senior debentures, net - - 49,404,056
Retirement of long-term debt (16,800,000) (9,300,000) (6,800,000)
Retirement of common stock and other (802,741) (269,299) (33,670)
Cash dividends (19,783,145) (18,582,497) (17,301,431)
----------- ----------- -----------
Net cash provided by financing activities 2,382,102 14,144,351 13,578,597
----------- ----------- -----------
Net increase (decrease) in cash and
temporary investments 3,970,745 1,635,840 (1,719,269)
Cash and temporary investments at beginning
of year 3,277,211 1,641,371 3,360,640
----------- ----------- -----------
Cash and temporary investments at end of year $ 7,247,956 $ 3,277,211 $ 1,641,371
=========== =========== ===========
Cash paid during the year for:
Interest (net of amount capitalized) $17,577,180 $17,900,642 $15,514,606
Income taxes $ 7,415,170 $12,102,000 $12,935,000
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
34
<PAGE>
Public Service Company of North Carolina, Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
For the Fiscal Years Ended September 30, 1999, 1998 and 1997
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Segment Data
The accompanying consolidated financial statements include the
accounts of Public Service Company of North Carolina, Incorporated
(PSNC) and its subsidiary companies, Clean Energy Enterprises, Inc.,
PSNC Blue Ridge Corporation, PSNC Production Corporation, Cardinal
Pipeline Company, LLC, PSNC Propane Corporation (dissolved in fiscal
1997) and PSNC Cardinal Pipeline Company (collectively, the "Company").
Investments in other affiliates in which the Company has a 20% to 50%
interest and/or the ability to exercise significant influence over
operating and financial policies are accounted for under the equity
method. Equity investees of the Company include Cardinal Pipeline
Company, LLC, Pine Needle LNG Company, LLC and Sonat Public Service
Company L.L.C., which is a 50%-50% joint venture between PSNC
Production Corporation and Sonat Marketing Company L.P. All material
intercompany transactions and balances among PSNC and its subsidiary
companies have been eliminated in the accompanying consolidated
financial statements.
PSNC and its subsidiaries operate in one dominant business
segment, distribution of natural gas. PSNC, through various
subsidiaries and Sonat Public Service Company L.L.C., also participates
in nonregulated businesses such as natural gas brokering and supply
services and the conversion and fueling of natural gas vehicles.
Utility Plant
Utility plant is stated at the historical cost of construction.
Included in historical cost are certain construction-related costs such
as taxes, pensions and other fringe benefits, as well as the estimated
cost of funds used during construction (AFUDC). PSNC capitalizes AFUDC
on a pre-tax basis for both the cost of short-term debt and the allowed
overall cost rate.
Depreciation
PSNC provides for depreciation on a straight-line basis by the
application of specific rates to the various classes of depreciable
property. These rates, which have been approved by the North Carolina
Utilities Commission (NCUC), approximate 3.9%, 4.0% and 3.9% of the
cost of depreciable property for fiscal years 1999, 1998 and 1997,
respectively, on a composite basis.
Revenues
Certain customers (primarily residential and commercial) are
billed on a cycle basis while other customers are billed as of the end
of each month. Revenues are recorded at the time of billing. The cost
of gas delivered but unbilled is deferred and recognized in the period
in which the related revenue is billed.
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<PAGE>
Income Taxes
PSNC accounts for income taxes pursuant to the Statement of
Financial Accounting Standards (SFAS) No. 109, which requires a
liability method of accounting for income taxes. Under this method, the
deferred tax liability represents the tax effect of temporary
differences between the financial statement and tax bases of assets and
liabilities and is measured using current tax rates.
PSNC uses deferral accounting for investment tax credits, which
amortizes the credits to income over the service life of related
property.
Cash and Temporary Investments
For purposes of reporting cash flows, cash and temporary
investments include cash on hand and investments with original
maturities of 45 days or less. Investments may include repurchase
agreements, U.S. Treasury bills, federal agency securities,
certificates of deposit and high-grade commercial paper.
Since fiscal 1992, PSNC has received refunds from its pipeline
transporters for which the investment and use have been restricted by
an order of the NCUC. Pursuant to an order of the NCUC, these funds are
segregated from PSNC's general funds and will be used for expansion of
PSNC's facilities into unserved territories. These refunds, along with
interest earned thereon, are periodically transferred to the Office of
the State Treasurer. The balance not transferred is reported in
restricted cash and temporary investments and restricted supplier
refunds on the accompanying consolidated balance sheets.
Long-term Restricted Cash and Deferred Revenue
The balance in long-term restricted cash at September 30, 1998
reflects the restricted cash contribution from Sonat Marketing Company
L.P. (Sonat Marketing). PSNC Production Corporation (PSNC Production)
and Sonat Marketing created Sonat Public Service Company L.L.C. (Sonat
Public Service) in December 1996. Sonat Marketing contributed
$4,944,000 for its 50% ownership, of which $4,845,000 was restricted,
to be released annually in equal amounts over a four-year period
beginning in December 1998. PSNC Production received its first payment
of $1,211,000 in December 1998. The balance of $3,634,000 in long-term
restricted cash was reclassified as a current asset at September 30,
1999 due to the imminent dissolution of Sonat Public Service within the
next twelve months. PSNC plans to begin settlement procedures to
dissolve Sonat Public Service during the first quarter of fiscal 2000.
Sonat Marketing's contribution was recorded as deferred revenue
and is being recognized by PSNC Production over a five-year period. The
remaining balance in deferred revenue was reclassified as a current
liability at September 30, 1999 due to the imminent dissolution of
Sonat Public Service as previously mentioned.
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Debt Expense
PSNC amortizes issuance costs for its debentures over the life
of the related debt. PSNC is amortizing the redemption premium and the
unamortized issuance costs on its previously refunded Series K First
Mortgage Bonds over 15 years, in accordance with the treatment
authorized by the NCUC.
Fair Value of Financial Instruments
Financial instruments include cash and temporary investments and
long-term debt. The amounts reported for cash and temporary investments
are considered to be reasonable approximations of their fair values due
to their short-term nature. The carrying amount of long-term debt,
including current maturities, at September 30, 1999 and September 30,
1998, is $164,050,000 and $180,850,000, respectively, as compared to a
fair market value of $162,325,000 and $195,044,000, respectively. The
fair market value of these instruments is based on current market
prices and yields for similar issues.
Stock-Based Compensation
PSNC has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25), and
related interpretations in accounting for its employee stock options.
PSNC has adopted the disclosure- only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." This statement defines a fair value method
of accounting for stock options or similar equity instruments. SFAS No.
123 permits companies to continue to account for stock-based
compensation awards under APB 25, but requires disclosure in a note to
the financial statements of the pro forma net income and earnings per
share as if PSNC had adopted the new method of accounting.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
certain estimates and assumptions. These 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
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. REGULATORY MATTERS
PSNC's Rider D rate mechanism authorizes the recovery of all
prudently incurred gas costs from customers on a monthly basis. Any
difference in amounts paid and collected for these costs is deferred
for subsequent refund to or collection from customers. Additionally,
PSNC can recover its margin losses on negotiated gas sales to certain
large commercial/industrial customers in any manner authorized by the
NCUC. At September 30, 1999, the balance of net gas costs to be
collected from customers pursuant to Rider D was $17,780,000 as
compared to $12,860,000 at September 30, 1998. On November 6, 1997, the
NCUC issued an order permitting PSNC, on a two-year trial basis, to
establish its commodity cost of gas for large commercial and industrial
customers on the basis of market prices for natural gas. This procedure
allows PSNC to manage its
37
<PAGE>
deferred gas costs balance better by ensuring that the amount paid for
natural gas to serve these customers approximates the amount collected
from them. PSNC has filed an application with the NCUC for authority to
make this procedure permanent. The Carolina Utility Customers
Association, Inc. (CUCA) has intervened in opposition of its
continuance. The NCUC issued an order scheduling a hearing in February
2000 on PSNC's application, and authorized PSNC to continue to use this
mechanism pending issuance of a final order sometime in 2000. While
management cannot predict the outcome of PSNC's application, it does
not expect the decision to have a material financial impact. PSNC will
continue to establish a benchmark cost of gas for residential and
commercial/small industrial customers pursuant to its existing
procedures.
In PSNC's 1991 general rate case order, the NCUC authorized a
weather normalization adjustment (WNA) mechanism. This mechanism allows
PSNC to adjust its winter-period gas sales rates to certain customers
to avoid undercollections or overcollections of its non-gas costs due
to weather fluctuations from normal.
On October 30, 1998, the NCUC issued an order in PSNC's general
rate case filed in April 1998. The order, effective November 1, 1998,
granted PSNC additional annual revenue of approximately $12,400,000 and
allowed a 9.82% overall rate of return on PSNC's net utility
investment. It also approved the continuation of the previously
mentioned WNA and Rider D mechanisms and full margin transportation
rates. CUCA, a party to PSNC's general rate case, formally appealed the
general rate case order on December 18, 1998. The Supreme Court of
North Carolina heard oral arguments on CUCA's appeal on October 13,
1999. While management is not able to predict the ultimate outcome of
this appeal, management does not believe that such outcome will have a
material adverse impact on PSNC's financial position, results of
operations or cash flows.
On April 22, 1997, the NCUC approved PSNC's application to use
expansion funds to extend service to western Haywood County, including
Waynesville, Clyde and Lake Junaluska. This project was completed in
July 1998. PSNC spent $5,653,000 on the project, of which $4,127,000
was reimbursed from the expansion fund.
On February 22, 1999, the NCUC approved PSNC's application to
use expansion funds to extend natural gas service into Alexander
County, and authorized disbursements from the fund of approximately
$4,301,000. Most of Alexander County lies within PSNC's certificated
service territory and does not currently have natural gas service. PSNC
estimates that the project will be completed prior to April 2000 at a
cost of approximately $6,188,000.
PSNC and a subsidiary of Piedmont Natural Gas Company, Inc.
(Piedmont) formed Cardinal Pipeline Company, LLC (Cardinal Pipeline) in
March 1994, to construct and operate a 24-inch, 37.5-mile natural gas
pipeline. PSNC owned 64.4% of the pipeline, which extends from
Wentworth to near Haw River, North Carolina, where it interconnects
with PSNC and Piedmont. It was placed into service on December 31,
1994, and provides 130 million cubic feet per day (mmcf/day) of
additional firm capacity (70 mmcf/day for PSNC and 60 mmcf/day for
Piedmont). In 1995, PSNC, Piedmont, Transcontinental Gas Pipe Line
Corporation (Transco) and North Carolina Natural Gas Corporation (NCNG)
formed Cardinal Extension Company, LLC (Cardinal Extension) to purchase
and extend
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the Cardinal pipeline. On November 6, 1997, the NCUC issued an order
approving this project and the merger of Cardinal Pipeline and Cardinal
Extension, with the surviving entity being named Cardinal Pipeline
Company, LLC. The pipeline was extended 67.5 miles from the existing
termination point of Cardinal Pipeline at Haw River to a point
southeast of Raleigh and will provide 140 mmcf/day of additional firm
capacity (100 mmcf/day for PSNC and 40 mmcf/day for NCNG). The
extension is estimated to cost approximately $76,000,000. The
facilities were placed in service and permanent financing was completed
on November 1, 1999. Through their respective subsidiaries, PSNC owns
33.21%, Piedmont owns 16.46%, Transco owns 45.30% and NCNG owns 5.03%
of Cardinal Pipeline Company, LLC. PSNC, through a subsidiary,
contributed its net book investment in the existing pipeline plus
additional equity capital of approximately $1,500,000 in the first
quarter of fiscal 2000 for its ownership share.
Pine Needle LNG Company, LLC (Pine Needle) was formed by
subsidiaries of Transco, Piedmont, NCNG, Amerada Hess, and PSNC, and
the Municipal Gas Authority of Georgia. Pine Needle owns and operates a
liquefied natural gas storage facility, built at a cost of
approximately $107,000,000. The facility is located on a site near
Transco's pipeline northwest of Greensboro, North Carolina, and has a
storage capacity of four billion cubic feet with vaporization
capability of 400 mmcf/day. The facility became operational on May 1,
1999. PSNC, through its subsidiary, PSNC Blue Ridge Corporation (Blue
Ridge), owns 17% of the facility, and PSNC has contracted to use 25% of
the facility's gas storage capacity and withdrawal capabilities. Blue
Ridge made its required capital contribution of $9,095,000 on May 3,
1999.
On March 24, 1999, PSNC filed an application with the NCUC
requesting authorization to issue and sell up to $150,000,000 of senior
unsecured debt securities. This amount includes $25,000,000 of senior
unsecured debt previously authorized by the NCUC that has not been
issued and sold. On April 14, 1999, the NCUC issued an order permitting
PSNC to issue and sell senior unsecured debt as described and requested
in its application. A registration statement under Form S-3 was filed
with the Securities and Exchange Commission on May 21, 1999 and amended
under Form S-3/A on June 7, 1999. PSNC plans to use this debt primarily
to repay outstanding short-term bank loans incurred to finance the
construction of facilities.
On April 29, 1997, the NCUC issued an order authorizing deferral
accounting for contract labor costs for a project to ensure that PSNC's
computer operating systems function properly in year 2000. The order
required a three-year amortization of these costs beginning in the year
incurred. PSNC has incurred approximately $4,600,000 of these costs to
date. PSNC began amortizing these costs in September 1997. The NCUC
allowed recovery of a majority of the unamortized Year 2000 costs in
the general rate case order issued on October 30, 1998.
On May 17, 1999, PSNC and SCANA Corporation (SCANA) filed an
application with the NCUC requesting authorization to engage in a
business combination transaction (Note 11). Public hearings were held
during July and August, and a hearing before the NCUC was completed on
September 29, 1999. Briefs and proposed orders were filed by November
3, 1999. An order is expected from the NCUC before the end of calendar
1999.
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3. COMMON STOCK
The changes in common stock and capital in excess of par value
for the three years ended September 30, 1999 were as follows:
Common Stock
$1 Par, Authorized
30,000,000 Shares
--------------------- Capital in
Shares Excess of
Outstanding Amount Par Value
----------- ----------- ------------
September 30, 1996 19,204,385 $19,204,385 $114,007,859
Issuance through dividend
reinvestment plan (DRP) 406,388 406,388 6,870,434
Issuance through employee
stock purchase plan (ESPP) 81,349 81,349 1,236,505
Issuance through nonqualified
stock option plan (NSOP) - net 78,721 78,721 1,232,121
Recognition of permanent tax
differences related to stock
options exercised - - 127,200
----------- ----------- -----------
September 30, 1997 19,770,843 19,770,843 123,474,119
Issuance through DRP 330,808 330,808 6,468,023
Issuance through ESPP 82,203 82,203 1,276,613
Issuance through NSOP - net 90,478 90,478 1,359,703
Recognition of permanent tax
differences related to stock
options exercised - - 208,600
----------- ----------- ------------
September 30, 1998 20,274,332 20,274,332 132,787,058
Issuance through DRP 138,705 138,705 3,133,328
Issuance through ESPP 62,355 62,355 1,233,624
Issuance through NSOP - net 102,575 102,575 1,391,837
Recognition of permanent tax
differences related to stock
options exercised - - 626,000
----------- ----------- ------------
September 30, 1999 20,577,967 $20,577,967 $139,171,847
=========== =========== ============
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Stock Compensation Plans
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, "Accounting for Awards of Stock-Based Compensation to Employees."
This statement defines a fair value method of accounting for stock options or
similar equity instruments and was adopted by PSNC effective October 1, 1996.
SFAS No. 123 permits companies to continue to account for stock-based
compensation awards under existing accounting rules, but requires disclosure in
a note to the financial statements of the pro forma net income and earnings per
share as if PSNC had adopted the new method of accounting.
At September 30, 1999, PSNC had three stock-based compensation plans.
PSNC applies APB 25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its Employee Stock
Purchase Plan or its 1997 Nonqualified Stock Option Plan. For fiscal 1997, the
compensation cost that had been charged against income for the 1992 Nonqualified
Stock Option Plan was $187,000. Had compensation cost for PSNC's three
stock-based plans been determined consistent with the fair value method for
compensation expense encouraged under SFAS No. 123, PSNC's net income and
earnings per share (EPS) would have been the pro forma amounts shown below. For
purposes of pro forma disclosures, the estimated fair value of options is
recorded in its entirety in the year granted.
1999 1998 1997
----------- ----------- -----------
Net income As reported $24,450,950 $24,837,002 $26,346,553
Pro forma $23,723,285 $23,584,100 $25,971,801
Basic EPS As reported $1.19 $1.24 $1.35
Pro forma $1.16 $1.17 $1.33
Diluted EPS As reported $1.18 $1.23 $1.34
Pro forma $1.14 $1.17 $1.32
Nonqualified Stock Option Plans
PSNC has two nonqualified stock option plans, a 1992 Nonqualified Stock
Option Plan (1992 Plan) and a 1997 Nonqualified Stock Option Plan (1997 Plan).
In accordance with the 1992 Plan, options to purchase an aggregate of up to
600,000 shares of PSNC's common stock can be granted to officers and key
employees of PSNC. Under the 1992 Plan, options are granted at 90% of the fair
market value of PSNC's common stock determined on the date of the grant. Under
the 1997 Plan, options to purchase an aggregate of up to 1,560,000 shares of
PSNC's common stock can be granted to officers and key employees of PSNC.
Options are granted at the fair market value of PSNC's common stock determined
on the date of the grant. As a result of the options being granted at the fair
market value, no compensation expense is recorded. Options from the 1992 Plan
and the 1997 Plan are exercisable beginning two years from the date of the grant
and expire five years from the date of the grant. Exceptions to the two-year
exercise date are allowed upon the retirement, disability or death of a
participant. An exception is also allowed upon a change in control as defined in
the plans. As a result of the shareholder approval on July 1, 1999 of the
pending merger with SCANA (Note 11), which is considered a change in control as
defined in the plans, all outstanding options are exercisable.
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<PAGE>
Options granted, exercised and canceled under both plans for the three
years ended September 30, 1999 were as follows:
Options Weighted-Average
Outstanding Exercise Price
September 30, 1996 427,239 $13.81
Granted 118,967 $16.59
Exercised (81,532) $13.72
Canceled (736) $14.29
-------
September 30, 1997 463,938 $14.54
Granted 624,000 $20.64
Exercised (111,375) $14.60
Canceled (20,879) $16.88
-------
September 30, 1998 955,684 $18.46
Granted - -
Exercised (149,212) $14.66
Canceled (101,680) $20.54
-------
September 30, 1999 704,792 $18.97
=======
For purposes of pro forma disclosure, the fair value of each option
grant was estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions used for nonqualified stock option grants
in fiscal 1998 and 1997, respectively:
1998 1997
------------- ---------
Risk free interest rate(s) 5.5% and 5.8% 6.00%
Volatility factor 15.30% 22.70%
Dividend yield 4.53% 5.10%
Expected life 4.5 years 4.5 years
The weighted average fair value of nonqualified stock options granted
during fiscal 1998 and 1997 was $2.54 and $3.66, respectively. The number of
shares and weighted average price of those shares exercisable at the end of each
fiscal year were 704,792 shares at $18.97 for 1999, 231,403 shares at $13.49 for
1998 and 231,612 shares at $13.61 for 1997. As of September 30, 1999, the
704,792 outstanding options had a weighted average remaining contractual life of
2.9 years and exercise prices ranging from $12.86 to $21.25.
Employee Stock Purchase Plan
Under the 1992 Employee Stock Purchase Plan, as amended and restated
effective January 1, 1998, PSNC is authorized to issue up to 1,266,000 shares to
its full-time employees, nearly all of whom are eligible to participate. Under
the terms of the plan, employees may choose each year to have from 2% to 10% of
their after-tax base salary or wages withheld to purchase PSNC's common stock.
The purchase price of stock is 90% of the lower of its beginning-of-year or
end-of-year fair market value as defined in the plan. Due to the requirements of
the proposed merger with SCANA (Note 11), on March 23, 1999, PSNC's Board of
Directors terminated the plan effective June 30, 1999 and returned all plan
contributions to participants with interest. In fiscal 1999, 1998 and 1997, PSNC
issued to employees 62,355, 82,203 and 81,349 shares, respectively.
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For purposes of pro forma disclosure, the fair value of each employee
stock purchase plan grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in fiscal 1999, 1998 and 1997, respectively:
1999 1998 1997
---------- ---------- ----------
Risk free interest rate 4.58% 5.43% 5.55%
Volatility factor 14.96% 15.30% 22.18%
Dividend yield 3.85% 4.53% 5.10%
Expected life 1 year 1 year 1 year
The weighted average fair value of each employee stock purchase plan
grant during fiscal 1999, 1998 and 1997 was $6.52, $6.10 and $2.32,
respectively.
At September 30, 1999, there were 792,715 common shares reserved for
issuance under PSNC's Stock Purchase and Automatic Dividend Reinvestment Plan,
1,833,045 common shares reserved for granting under the 1997 Plan and 143,311
common shares reserved for issuance under the Employee Stock Purchase Plan. Due
to the requirements of the proposed merger with SCANA, PSNC began purchasing
shares on the open market in April 1999 to satisfy the requirements of the Stock
Purchase and Automatic Dividend Reinvestment and the Nonqualified Stock Option
Plans. PSNC does not anticipate issuing any shares from the plan reserves in the
future.
4. PENSION AND POSTRETIREMENT PLANS
PSNC and its subsidiaries sponsor a noncontributory defined
benefit pension plan covering substantially all employees. The benefits
are based on years of service and the employee's compensation during
the five consecutive years of employment that will produce the highest
average pay. Contributions to the plan are determined on an annual
basis with the amount of such contributions being within the minimum
required for funding standard account purposes and the maximum
deductible for federal income tax purposes.
During fiscal 1999, PSNC recognized pension gains of $1,763,000
and a net curtailment loss on postretirement benefit obligations of
$499,000 directly related to its severance activity under Plan 2001
discussed further in Note 10.
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The following disclosure is in accordance with SFAS No. 87,
"Employers' Accounting for Pensions," and SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits"
(amounts in thousands):
Pension Plan
------------
1999 1998 1997
------ ------ ------
Change in benefit obligation
Benefit obligation at beginning
of year $46,609 $42,920 $44,458
Service cost 2,261 2,074 2,156
Interest cost 3,048 3,050 3,282
Settlement payments (7,200) - (9,441)
Benefits paid (518) (2,909) (1,442)
Curtailment (gain)/loss (1,212) - 2,360
Actuarial loss 1,098 1,474 1,547
------- ------- -------
Benefit obligation at end of year $44,086 $46,609 $42,920
======= ======= =======
Change in plan assets
Fair value of plan assets at
beginning of year $43,712 $39,253 $38,503
Actual return on plan assets 5,284 3,155 8,328
Employer contributions 3,679 4,213 3,306
Benefits paid (7,718) (2,909) (10,884)
------- ------- --------
Fair value of plan assets at
end of year $44,957 $43,712 $39,253
======= ======= =======
Reconciliation of funded status
Funded status $ 872 $(2,897) $(3,667)
Unrecognized actuarial gain (7,624) (7,262) (8,301)
Unrecognized transition asset (938) (1,406) (1,716)
Unrecognized prior service cost 2,677 3,580 4,152
------- ------- -------
Net amount recognized at year-end $(5,013) $(7,985) $(9,532)
======= ======= =======
Amounts recognized in the statement
of financial position
Accrued benefit liability $(5,013) $(7,985) $(9,532)
------- ------- -------
Net amount recognized at year-end $(5,013) $(7,985) $(9,532)
======= ======= =======
Components of net periodic
benefit cost
Service cost $ 2,261 $ 2,073 $ 2,156
Interest cost 3,048 3,050 3,282
Expected return on plan assets (3,100) (2,715) (3,052)
Amortization of prior service
cost 572 572 572
Amortization of transitional
asset (311) (310) (310)
Recognized actuarial gain - (4) (285)
------- ------- -------
Net periodic benefit cost $ 2,470 $ 2,666 $ 2,363
======= ======= =======
Weighted-average assumptions as of
September 30
Discount rate 7.50% 6.75% 7.50%
Expected long-term rate of return
on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase Age- Age- Age-
related related related
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<PAGE>
The majority of plan assets is invested in equities, with the
balance primarily in fixed income investments. The fair value of PSNC's
own common stock held by the plan at the respective 1999 and 1998
measurement dates was approximately $1,323,000 and $2,453,000.
PSNC offers medical, life and dental insurance coverage to its
qualified salaried and hourly retirees. These benefits are not funded.
Retirees are required to contribute to the cost of the coverage. PSNC's
policy is to review the contributions required from retirees on an
annual basis and to increase retiree contributions as necessary.
Effective October 1, 1993, PSNC adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The
standard provides for the accrual of the costs of retiree medical, life
and dental insurance benefits over the working lifetime of the
employees. The following disclosure is in accordance with SFAS No. 106
and SFAS No. 132 (amounts in thousands):
Postretirement Plan
-------------------
1999 1998 1997
------ ------ ------
Change in benefit obligation
Benefit obligation at
beginning of year $ 8,982 $ 7,603 $ 7,332
Service cost 297 247 255
Interest cost 590 554 554
Benefits paid (550) (392) (293)
Curtailment gain (317) - -
Actuarial (gain)/loss 269 970 (245)
------- ------- -------
Benefit obligation at end of year $ 9,271 $ 8,982 $ 7,603
======= ======= =======
Change in plan assets
Fair value of plan assets at
beginning of year $ - $ - $ -
Employer contributions 550 392 293
Benefits paid (550) (392) (293)
------- ------- -------
Fair value of plan assets at
end of year $ - $ - $ -
======= ======= =======
Reconciliation of funded status
Funded status $(9,271) $(8,982) $(7,603)
Unrecognized actuarial
(gain)/loss 269 481 (498)
Unrecognized transition
obligation 2,791 3,325 3,547
Unrecognized prior service cost 402 488 531
------- ------- -------
Net amount recognized at year-end $(5,809) $(4,688) $(4,023)
======= ======= =======
Amounts recognized in the statement
of financial position consist of:
Accrued benefit liability $(5,809) $(4,688) $(4,023)
------- ------- -------
Net amount recognized at year-end $(5,809) $(4,688) $(4,023)
======= ======= =======
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Components of net periodic
benefit cost
Service cost $ 297 $ 247 $ 255
Interest cost 590 554 554
Amortization of prior service cost 43 43 43
Amortization of transitional
obligation 222 222 222
Recognized actuarial (gain)/loss 19 (9) (5)
------- ------- -------
Net periodic benefit cost $ 1,171 $ 1,057 $ 1,069
======= ======= =======
Weighted average assumptions as of
September 30
Discount rate 7.50% 6.75% 7.50%
Rate of compensation increase Age- Age- Age-
related related related
As of the 1999 measurement date, the assumed pre-65 health care
cost trend rate used in determining the Accumulated Postretirement
Benefit Obligation (APBO) was 7.75% in 1999, 7.25% in 2000, 6.75% in
2001, 6.50% in 2002, then decreasing annually to an ultimate trend rate
of 4.25% in 2008. The assumed post-65 health care cost trend rate used
in determining the APBO was 10.75% in 1999,10.25% in 2000, 9.75% in
2001, 9.25% in 2002, then decreasing annually to an ultimate trend rate
of 4.25% in 2012. A one percentage point increase in the assumed health
care cost trend rate would increase the APBO by approximately 3%. The
service cost and interest cost components of the net periodic
postretirement benefit cost would increase approximately 5%. A one
percentage point decrease in the assumed health care cost trend rate
would decrease the APBO by approximately 3%. The service cost and
interest cost components of the net periodic postretirement benefit
cost would decrease approximately 4%. The net periodic postretirement
benefit cost was calculated using the weighted average discount rate of
6.75%. The APBO at the measurement date was determined using a weighted
average discount rate of 7.50%.
5. SHORT-TERM BORROWING ARRANGEMENTS
PSNC has committed lines of credit with five commercial banks,
which vary monthly depending upon seasonal requirements, and a
five-year revolving line of credit with one bank. For the twelve-month
period beginning April 1, 1999, total lines of credit with these banks
range from a minimum of $55,000,000 to a winter-period maximum of
$75,000,000. PSNC also has total uncommitted annual lines of credit
ranging from $70,000,000 to $100,000,000. There are no restrictions on
the withdrawal of cash balances maintained with these banks. The banks
are compensated for the committed lines of credit through the payment
of commitment fees. At September 30, 1999 and 1998, there were
$104,000,000 and $70,500,000 of short-term bank loans outstanding,
respectively.
PSNC borrows funds on a short-term basis primarily for its
construction program and for the seasonal financing of stored gas. The
loans are generally arranged for periods of up to 90 days at rates
below the prime rate. Bankers' acceptance loans are arranged for
periods of up to 180 days at rates below the prime rate. At September
30, 1999 and 1998, PSNC had no bankers' acceptance loans outstanding.
46
<PAGE>
Certain information related to short-term borrowings is as
follows (dollars in thousands):
1999 1998
-------- -------
At year end -
Amount outstanding $104,000 $70,500
Weighted average rate 6.40% 5.96%
During the year -
Maximum amount outstanding $104,500 $73,500
Average daily amount outstanding $78,660 $49,914
Weighted average rate 5.56% 5.95%
The weighted average rate is determined by dividing the total
short-term interest expense for the fiscal year by the average
daily amount outstanding during the fiscal year.
6. INCOME TAXES
Income tax expense is shown on the consolidated statements of
income within the captions listed below. Immediately following are the
components of income tax expense (amounts in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
Federal State Federal State Federal State
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Captions:
Operating expenses
and taxes $12,607 $2,881 $12,210 $2,917 $12,535 $3,176
Other income (deductions) 1,621 401 917 211 866 226
------- ------ ------- ------ ------- ------
$14,228 $3,282 $13,127 $3,128 $13,401 $3,402
======= ====== ======= ====== ======= ======
Income Tax Expense:
Currently payable $ 8,565 $1,939 $ 7,681 $1,781 $11,246 $2,782
Deferred 6,013 1,343 5,816 1,347 2,585 620
Investment tax credits, net (350) - (370) - (430) -
------- ------ ------- ------ ------- ------
$14,228 $3,282 $13,127 $3,128 $13,401 $3,402
======= ====== ======= ====== ======= ======
</TABLE>
A reconciliation of the statutory federal income tax rate to the
effective tax rate is as follows (dollars in thousands):
1999 1998 1997
------- ------- -------
Statutory federal income tax rate 35% 35% 35%
Expected federal income tax expense
at federal statutory rate $13,979 $13,987 $14,720
Less: State income tax benefit 1,010 1,022 1,112
Amortization of ITC 350 370 430
Nondeductible merger costs (735) - -
Tax on subsidiary income 1,049 592 587
Other (302) (207) 56
------- ------- -------
Federal income tax expense $12,607 $12,210 $12,535
======= ======= =======
47
<PAGE>
The components of the net deferred tax liabilities as of September 30,
1999 and 1998 are as follows (amounts in thousands):
1999 1998
------- -------
Deferred tax assets:
Regulatory liabilities - income tax amounts $ 4,501 $ 4,510
Pension expense 2,111 2,503
Unamortized ITC 1,178 1,323
Postretirement benefits 1,992 1,545
Deferred gain on Sonat joint venture 376 1,243
Directors' deferred compensation 1,029 -
Other 1,606 1,897
------- -------
$12,793 $13,021
------- -------
Deferred tax liabilities:
Depreciation and property related items $74,938 $67,280
Excess deferred taxes due to a change
in the statutory rate 10,123 9,963
Regulatory assets - income tax amounts 481 537
Year 2000 costs 1,021 1,314
Other 653 453
------- -------
$87,216 $79,547
------- -------
Net deferred tax liabilities $74,423 $66,526
======= =======
7. ENVIRONMENTAL MATTERS
PSNC owns, or has owned, all or portions of six sites in North
Carolina on which manufactured gas plants (MGPs) were formerly
operated. Intrusive investigation (including drilling, sampling and
analysis) has begun at only one site and the remaining sites have been
evaluated using historical records and observations of current site
conditions made during visits to the sites. These evaluations have
revealed that MGP residuals are present or suspected at several of the
sites. The North Carolina Department of Environment and Natural
Resources has recommended that no further action be taken with respect
to one site. In March and April 1994, an environmental consulting firm
retained by PSNC estimated that the aggregate cost of investigating and
monitoring the extent of environmental degradation and of implementing
remedial procedures with respect to the remaining five sites may range
from $3,705,000 to $50,145,000 over a 30-year period. PSNC is unable to
determine the rate at which costs may be incurred over this time
period. The estimated cost range has not been discounted to present
value. The range includes costs of investigating and monitoring the
sites at the low end of the range and investigating, monitoring and
extensively remediating the sites at the high end of the range. PSNC's
associated actual 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 (PRPs). Another
North Carolina public utility or its predecessors also operated the MGP
sites in Raleigh, Durham and Asheville, and PSNC is in discussion with
that utility regarding potential cost sharing arrangements for
investigation and potential remediation costs of four of the sites. At
this time, PSNC has not reached a definitive agreement regarding such
arrangements.
48
<PAGE>
An order of the NCUC dated May 11, 1993 authorized deferral
accounting for all costs associated with the investigation and
remediation of MGP sites. As of September 30, 1999, PSNC has recorded a
liability and associated regulatory asset of the minimum amount of the
range, or $3,705,000.
The NCUC concluded that it is proper and in the public interest
to allow recovery of prudently incurred clean-up costs from current
customers as reasonable operating expenses even though the MGP sites
are not used and useful in providing gas service to current customers.
However, the NCUC will not allow recovery of carrying costs on deferred
amounts. Amounts incurred to date are not material. Management intends
to request recovery of additional MGP clean-up costs not recovered from
other PRPs in future rate case filings, and believes that all costs
deemed by the NCUC to be prudently incurred will be recoverable in gas
rates.
8. LONG-TERM DEBT
On December 20, 1995, PSNC filed with the Securities and
Exchange Commission (SEC) a registration statement covering up to an
aggregate amount of $125,000,000 of unsecured debt securities. On
January 10, 1996, PSNC sold $50,000,000 of 6.99% Senior Debentures due
2026 under the registration statement. The net proceeds of $49,314,000
were used to pay down a significant portion of the then outstanding
short-term bank debt.
On December 17, 1996, PSNC sold $50,000,000 of 7.45% Senior
Debentures due 2026 under the December 20, 1995 registration statement.
The net proceeds of $49,404,000 were used to pay down a significant
portion of the then outstanding short-term bank debt.
On May 21, 1999, PSNC filed with the SEC a registration
statement (amended on June 7, 1999) covering up to an aggregate of
$150,000,000 of senior unsecured debt securities. This amount includes
$25,000,000 of senior unsecured debt registered on December 20, 1995
that has not been issued and sold. At September 30, 1999, $150,000,000
remained on the shelf registration.
On February 26, 1999, PSNC prepaid the remaining $10,000,000
of 8.65% Senior Debentures due 2002 at a prepayment price of 101.85%.
PSNC financed the prepayment through the use of short-term debt.
Scheduled maturities of long-term debt during each of the next
five fiscal years are as follows as of September 30, 1999: 2000,
$6,800,000; 2001, $6,800,000; 2002, $5,550,000; 2003, $7,500,000; and
2004, $7,500,000.
Under terms of the debt agreements, there are various
provisions relating to the maintenance of certain financial ratios and
conditions, the most significant of which could restrict payment of
dividends. At September 30, 1999, PSNC is in compliance in all material
respects with the requirements of its debt agreements.
49
<PAGE>
9. CONSTRUCTION PROGRAM
The construction program for fiscal 2000, as presently
planned, provides for expenditures of approximately $41,000,000.
10. RESTRUCTURING (Plan 2001)
During fiscal 1999, PSNC recorded net restructuring charges of
$4,343,000 in connection with Plan 2001, a three-year operating plan
for translating PSNC's vision, mission, strategies and corporate goals
into specific actions. These charges consisted of severance benefits of
$3,681,000, a one-time payment to 152 employees of $1,094,000 in
connection with an automobile fleet restructuring, a net curtailment
loss on postretirement benefit obligations of $499,000 offset by
pension gains of $1,763,000 and $832,000 of other restructuring
charges. The severance charges are the result of a plan approved by the
Board of Directors which eliminated approximately 150 positions from
PSNC's workforce through the involuntary termination of selected
employees or job classifications. Severance benefit arrangements under
the plan were communicated to employees during the first quarter of
fiscal 1999. The net curtailment on postretirement benefits and the
pension gains relate directly to the severance activity. The combined
one-time impact on quarterly earnings from all of the above items was a
decrease of $0.13 per share net of tax.
11. PROPOSED MERGER WITH SCANA CORPORATION (SCANA)
On February 16, 1999, PSNC and SCANA Corporation (SCANA), a
South Carolina corporation, entered into an Agreement and Plan of
Merger (Agreement), which was amended and restated on May 10, 1999,
providing for a strategic business combination of the two companies.
SCANA is a holding company principally engaged, through subsidiaries,
in electric and natural gas utility operations, telecommunications and
other energy-related businesses. SCANA's subsidiaries serve
approximately 522,000 electric customers in South Carolina and more
than 678,000 natural gas customers in South Carolina and Georgia. SCANA
also has significant investments in telecommunications companies that
serve more than 438,000 customers throughout the Southeast.
Pursuant to the Agreement, PSNC will be merged with and into a
wholly owned subsidiary of SCANA. Under the terms of the Agreement, the
holders of PSNC's $1.00 par value common stock will receive
consideration valued at $33.00 per share, subject to a 17.5% collar
above and below the market price of SCANA common stock at the time of
the Agreement. Each shareholder may elect to receive 100 percent of the
consideration in SCANA common stock, 100 percent in cash, or a
combination thereof, subject to the total cash allocated to PSNC
shareholders being no higher than 50 percent of the total consideration
received by PSNC shareholders. PSNC shareholders who elect to receive
stock will receive between 1.02 and 1.45 shares of SCANA common stock
depending upon the average market price of SCANA common stock over a 20
trading-day period preceding the election deadline date. Accordingly,
the value of SCANA common stock delivered to PSNC shareholders will
equal $33.00 if the average market price of SCANA common stock is
between $22.75 and $32.40. If the average market price of SCANA common
stock during such period is more or less than this range, the value of
the SCANA shares delivered to holders of PSNC
50
<PAGE>
common stock would be more than or less than $33.00. SCANA will
allocate $700 million in cash for payment to PSNC and SCANA
shareholders under the election process. A maximum of approximately
$350 million, under a right of first refusal, will be allocated to
PSNC's shareholders who elect to receive cash. The transaction will be
accounted for as a purchase.
The Agreement has been approved by the Boards of Directors of
PSNC and SCANA. Consummation of the merger is subject to certain
closing conditions, including the approvals by both companies' common
shareholders and of certain governmental and regulatory bodies,
including the NCUC and the SEC. In addition, the merger was conditioned
upon the effectiveness of a joint proxy statement/registration
statement filed on May 11, 1999 with respect to the SCANA common stock
to be issued pursuant to the merger and to solicit shareholder votes
for approval of the merger. The joint proxy statement/registration
statement became effective May 12, 1999.
In separate meetings held on Thursday, July 1, 1999,
shareholders of PSNC and SCANA approved a merger transaction under
which PSNC will become a wholly owned subsidiary of SCANA.
Operating and maintenance expenses for the twelve months ended
September 30, 1999 include merger-related charges of $3,895,000, or
$0.15 per share net of tax (partially tax deductible).
Currently, ten key executives have severance agreements with
PSNC. Under these severance agreements, approximately $5,000,000 in the
aggregate may be payable to them in connection with the merger.
PSNC sponsors a deferred compensation plan for outside
directors and a retirement plan for all directors. Upon a change in
control, such as consummation of the merger with SCANA, approximately
$2,850,000 will be payable in cash to directors pursuant to these
plans. Of this amount, approximately $87,000 will be expensed for the
deferred compensation plan, and approximately $351,000 will be expensed
for the retirement plan.
As discussed more fully in Note 3, PSNC has a 1992
Nonqualified Stock Option Plan and a 1997 Nonqualified Stock Option
Plan. In accordance with the plans, outstanding options are exercisable
upon a change in control. Approval by PSNC shareholders of the proposed
merger with SCANA constitutes a change in control as defined in the
plans. At September 30, 1999, approximately 705,000 options are
outstanding and exercisable. The Agreement states, at the election of
the optionee, participants in the plans can receive cash payments equal
to the differential between each option exercise price and $33.00 per
share for each option outstanding at the date of the transaction. All
participants have elected the cash payment option. These payments of
approximately $9,900,000 will be made from the approximately $350
million allocated by SCANA to PSNC's shareholders, as previously
discussed.
51
<PAGE>
12. CONTINGENT LIABILITIES
PSNC is a party to certain legal actions. Although it is
impossible to predict the outcomes with certainty, after consultation
with legal counsel, management does not expect the dispositions of
these matters to have a materially adverse effect on PSNC's financial
position, cash flows or results of operations.
PSNC is also a party to certain legal actions involving
potential environmental liability as more fully discussed in Note 7.
13. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS
On November 29, 1999, pursuant to the change in control
provisions of the "Amended and Restated Limited Liability Company
Agreement of Sonat Public Service Company L.L.C.," PSNC Production
submitted a "Buy-Sell Notice" to El Paso Energy Corporation (El Paso),
which purchased Sonat Inc. on October 25, 1999, and offered to purchase
the membership interest of Sonat Marketing in Sonat Public Service. On
December 17, 1999, El Paso responded and elected to sell its 50%
interest in Sonat Public Service to PSNC Production. The proposed
effective date of the purchase is December 31, 1999.
On December 7, 1999, the NCUC issued an order approving the
merger of PSNC and SCANA. As specified in the NCUC order, PSNC will
reduce its rates by approximately $2 million ($1 million effective six
months after the transaction closing date and another $1 million
effective eighteen months after the closing date) and has agreed to a
five-year moratorium on general rate cases. The request for approval of
the transaction by the SEC is still pending.
52
<PAGE>
14. EARNINGS PER SHARE
The following tables summarize the effect on earnings per share of
dilutive securities as required by SFAS No. 128. Shares needed to satisfy
exercised stock options are currently being acquired through open market
purchases. Therefore, the number of shares outstanding is not expected to
increase as a result of stock options being exercised.
Twelve Months Ended
September 30, 1999
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS
Net income $24,450,950 20,515,369 $ 1.19
Effect of dilutive securities (Options) 218,659
----------
Diluted EPS
Net income $24,450,950 20,734,028 $ 1.18
==========
Twelve Months Ended
September 30, 1998
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS
Net income $24,837,002 20,103,103 $1.24
Effect of dilutive securities (Options) 117,477
----------
Diluted EPS
Net income $24,837,002 20,220,580 $1.23
==========
Twelve Months Ended
September 30, 1997
Income Shares Per Share
(Numerator) (Denominator) Amount
Basic EPS
Net income $26,346,553 19,549,656 $1.35
Effect of dilutive securities (Options) 100,269
----------
Diluted EPS
Net income $23,346,553 19,649,925 $1.34
==========
53
<PAGE>
15. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents certain financial information for
each quarter during the fiscal years ended September 30, 1999 and 1998
(amounts in thousands, except per share data):
<TABLE>
<CAPTION>
1999
--------------------------------------
Fourth Third Second First
------- ------- -------- -------
<S> <C> <C> <C> <C>
Operating revenues $37,263 $54,063 $134,326 $73,201
Net margin 22,549 30,521 66,261 37,439
Operating income (loss) (352) 4,957 25,759 7,836
Net income (loss) (3,075) 1,736 22,024 3,766
Basic earnings (loss) per share (1) (.15) .08 1.07 .18
Diluted earnings (loss) per share (1) (.15) .08 1.06 .18
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------
Fourth Third Second First
------- ------- -------- --------
<S> <C> <C> <C> <C>
Operating revenues $32,151 $54,532 $140,205 $103,784
Net margin 17,510 26,915 63,980 37,377
Operating income (loss) (2,042) 4,123 26,226 10,790
Net income (loss) (5,682) 802 22,524 7,193
Basic earnings (loss) per share (.28) .04 1.12 .36
Diluted earnings (loss) per share (.28) .04 1.11 .36
</TABLE>
(1) The sum of the quarterly earnings (loss) per share amounts does
not equal the annual earnings per share amount reflected in the
consolidated statement of income due to the effect of changes in
average common shares outstanding during the fiscal year.
54
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of
Public Service Company of North Carolina, Incorporated:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of Public Service Company of North Carolina,
Incorporated (PSNC), a North Carolina corporation, and subsidiaries as of
September 30, 1999 and 1998, and the related consolidated statements of income,
retained earnings and cash flows for each of the three years in the period ended
September 30, 1999. These financial statements are the responsibility of PSNC's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the financial statements referred to above present
fairly, in all material respects, the financial position of Public Service
Company of North Carolina, Incorporated and subsidiaries as of September 30,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 1999, in conformity with
generally accepted accounting principles.
s/Arthur Andersen LLP
Charlotte, North Carolina,
November 4, 1999
(except with respect to the matters
discussed in Note 13, as to which
the date is December 17, 1999)
55
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation, presentation and
integrity of the financial statements and other financial information in this
report. The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles applicable to rate-regulated
public utilities, including estimates and judgments made by management that were
necessary to prepare the statements in accordance with such accounting
principles, and are not misstated due to material fraud or error. To assure the
integrity of the underlying financial records supporting the financial
statements, management maintains a system of internal accounting controls
sufficient to provide reasonable assurances that PSNC assets are properly
accounted for, safeguarded and are utilized only in accordance with management's
authorization. The concept of reasonable assurance recognizes that the costs of
a system of internal controls should not exceed the related benefits derived
from it.
The system of internal accounting controls is augmented by PSNC's
internal audit department, which has unrestricted access to all levels of PSNC
management. The internal audit department meets periodically, with and without
the presence of management, with the Audit Committee of the Board of Directors
to discuss, among other things, PSNC's system of internal accounting controls
and the adequacy of the internal audit program. The Audit Committee is comprised
of four directors who are not officers or employees of PSNC.
The Audit Committee also meets periodically with Arthur Andersen LLP,
PSNC's independent public accountants, with and without the presence of
management, to discuss the results of the annual audit of PSNC's financial
statements and related data. The Audit Committee and Arthur Andersen LLP also
discuss internal accounting control matters that come to the attention of Arthur
Andersen LLP during the course of the audit.
s/Charles E. Zeigler, Jr. s/Jack G. Mason
- ------------------------------- ------------------------
Charles E. Zeigler, Jr. Jack G. Mason
Chairman, President and Vice President - Finance
Chief Executive Officer
56
<PAGE>
Supplementary Data
The information for this item is contained in Note 15 entitled
"SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)" on page 54
this annual report.
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
Set forth below is a table showing the names and ages of the
one nominee for election and of the eight continuing members of the
Board, together with biographical information on each of them for the
past five years. William A.V. Cecil, whose term is expiring, is
retiring from the Board of Directors under its mandatory retirement
policy and will not stand for reelection.
Name, Age and Year
First Became a Director Biographical Information
- -------------------------------- -------------------------
Nominee for Election as Director Whose Term Expires in 2003
G. SMEDES YORK (58) President and Treasurer, York Properties, Inc.,
Director since 1984 Sam Bass Camera Shop, Inc., and York
Construction Company; President, York Inns,
Inc., Raleigh, North Carolina; and Director,
Spectator Publications, Inc.
Nominees for Election as Directors Whose Terms Expire in 2002
BERT COLLINS (65) President and Chief Executive Officer, North
Director since 1993 Carolina Mutual Life Insurance Company, an
insurance company located in Durham, North
Carolina; and Director, Wachovia Bank.
JOHN W. COPELAND (64) Retired President, Ruddick Corporation, the
Director since 1996 holding company for American & Efird, Inc.
and Harris-Teeter, Inc.; Director, Ruddick
Corporation; President and Director,
Copeland Business Service, Inc. and Copeland
Foundation, Inc.
57
<PAGE>
D. WAYNE PETERSON (63) Retired President, National Integrated
Director since 1996 Services, Sprint, Kansas City, Missouri, a
major domestic and international telecom-
munications company.
CHARLES E. ZEIGLER, JR. (53) Chairman, President and Chief Executive
Director since 1988 Officer of the Company; Director, J.A.
Jones, Incorporated.
Continuing Directors Whose Terms Expire in 2001
WILLIAM C. BURKHARDT (62) President and Chief Executive Officer of Austin
Director since 1989 Quality Foods, Inc., Cary, North Carolina, a
baker and distributor of Austin Quality
Snacks.
VAN E. EURE (44) Owner, General Manager and President, The
Director since 1993 Angus Barn, Ltd., which owns a restaurant
located in Raleigh, North Carolina.
WILLIAM L. O'BRIEN, JR. (60) Senior Vice President, O'Brien/Atkins
Director since 1986 Associates, P.A., an architectural and
engineering firm located in Research
Triangle Park, North Carolina.
BEN R. RUDISILL, II (56) President and Treasurer, Rudisill Enterprises,
Director since 1996 Inc., Gastonia, North Carolina, a beverage
distributor and food broker;
Co-owner and Vice President, Tar
Heel Leasing Company, an auto and
equipment leasing company; and
Director, Gaston Federal Savings &
Loan.
Executive Officers
The information for this item is set forth on page 13 of this
annual report.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and persons who own
more than 10% of the Company's Common Stock, to file with the Securities and
Exchange Commission reports of ownership and changes in ownership of Common
Stock. Officers, directors and greater than 10% beneficial owners are required
by Securities and Exchange Commission regulation to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on review of the copies of such reports furnished to the
Company or written representations that no other reports were required, the
Company believes that, during fiscal 1999, all filing requirements applicable to
its officers, directors and greater than 10% beneficial owners were complied
with.
58
<PAGE>
Item 11. Executive Compensation
Compensation of Directors
Directors who are not employees of the Company receive common stock
units valued at $21,275 for each annual retainer fee, $800 for each board
meeting attended and $700 for each committee meeting attended. Reimbursement of
expenses for attending each meeting is paid in cash. Prior to the Deferred
Compensation Plan for Outside Directors as Amended and Restated, which became
effective July 1, 1998, certain directors elected to defer their cash
compensation or receive common stock units under the Company's Deferred
Compensation Plan for outside directors. Any associated common stock units for
those outside directors have been included in the following table.
Prior to July 1,1998, upon retirement from the Board after age 65 and
after serving as a director for eight years or more, a director was entitled to
lifetime retirement compensation equal to the amount of the annual retainer fee
in effect on the date of retirement. Retired directors at July 1, 1998 remain
under this annual cash annuity plan. For current directors, this previous annual
cash annuity plan was converted to actuarially equivalent common stock units,
respectively, for each director. Those common stock units were granted on July
1, 1998, the effective date of the Deferred Compensation Plan for Outside
Directors as Amended and Restated, and are included in the following table.
<TABLE>
<CAPTION>
Fiscal 1999 Cumulative
---------------------------------------------------------------------------
Stock Value of Value of Cash Stock Value of Value of Cash
Name Units Stock Units Compensation (1) Units Stock Units Compensation
- ---- ----- ----------- ---------------- ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Burkhardt ..... 1,945 $ 59,822 $ -- 22,631 $695,905 $ --
Mr. Cecil ......... 1,475 45,368 -- 9,566 294,169 --
Mr. Collins ....... 1,447 44,494 -- 7,299 224,443 --
Mr. Copeland ...... 1,467 45,108 2,868 6,998 215,177 66,101
Ms. Eure .......... 1,246 38,305 -- 5,974 183,700 --
Mr. O'Brien, Jr. .. 1,401 43,072 -- 5,866 180,382 --
Mr. Peterson ...... 1,517 46,641 -- 9,949 305,923 --
Mr. Rudisill,II ... 1,413 43,441 -- 7,131 219,288 --
Mr. York .......... 1,469 45,185 -- 8,483 260,858 --
Mr. Zeigler, Jr.... 82 2,523 -- 2,455 75,483 --
</TABLE>
(1) Reflects interest on prior cash balances.
The Company's By-laws provide that no director shall be eligible for
reelection who, on the date of his or her proposed election, shall have reached,
or who, within the twelve-month period immediately after such date, would reach
70 years of age.
59
<PAGE>
EXECUTIVE COMPENSATION
The Summary Compensation Table below includes compensation paid by the
Company for services rendered for the fiscal years ended September 30, 1999,
1998 and 1997 for the Chief Executive Officer and the four other most highly
compensated executive officers (as of September 30, 1999) as determined by total
salary and bonus payments.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term
---------------------------------------------- Compensation
Other Annual Awards All Other
Name and Principal Position Year Salary (1) Bonus Compensation (2) Options (#) Compensation (3)
- --------------------------- ---- ---------- ------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Charles E. Zeigler, Jr. 1999 $339,540 $221,825 $158,556 - $5,000
Chairman, President and 1998 324,480 - 75,536 32,319 4,939
Chief Executive Officer 1997 310,020 94,340 26,440 5,889 4,689
Franklin H. Yoho 1999 175,020 81,673 95,628 - 5,000
Vice President -- 1998 166,800 - 16,284 18,791 4,939
Marketing and Gas Supply 1997 160,020 32,255 27,086 3,539 4,689
Robert D. Voigt 1999 170,040 79,349 95,628 - 5,000
Vice President -- 1998 162,300 - 37,480 17,683 4,838
Organizational Development 1997 155,040 32,195 59,583 3,539 4,613
Jerry W. Richardson 1999 170,040 79,349 77,975 - 5,000
Vice President -- 1998 144,060 - 40,613 15,448 4,322
Engineering and System Logistics 1997 138,660 22,190 58,292 2,949 4,160
Boyce C. Morrow, Jr. 1999 165,000 76,997 79,686 - 1,650
Vice President -- 1998 129,360 - 35,178 15,665 1,294
External Affairs 1997 124,260 20,595 10,350 2,949 1,243
</TABLE>
(1) For the years indicated, includes amounts contributed on a pre-tax basis to
the Special Savings and Retirement Plan (the Company's 401(k) plan) by each
of the named executive officers.
(2) For the years indicated, includes the difference between the price paid
by the named executive officers for Common Stock of the Company
purchased from the Company upon the exercise of stock options and the
fair market value of such Common Stock. Also includes for the years
indicated the amount paid to the named executive officers for dividend
equivalents accrued during the fiscal year under the Dividend
Equivalents Rights Plan.
(3) For the years indicated, consists of contributions by the Company to the
Special Savings and Retirement Plan.
The Company has severance agreements with ten key executives. Under
these agreements, the following severance amounts would be paid to the following
individuals: Charles E. Zeigler, Jr., $1,381,224; Franklin H. Yoho, $547,940;
Robert D. Voigt, $533,053; Jerry W. Richardson, $524,715; and Boyce C. Morrow,
Jr. $508,225.
Option Grants in Last Fiscal Year
No stock options were granted in the fiscal year ending September 30, 1999
to the Chief Executive Officer and the four other most highly compensated
executive officers.
60
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values
The following table shows the aggregated stock option exercises in the
fiscal year ended September 30, 1999 and the stock option values for the Chief
Executive Officer and the four other most highly compensated executive officers
(as of September 30, 1999). All stock options outstanding became exercisable
effective with the PSNC shareholders' approval on July 1, 1999 of the pending
merger with SCANA.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Acquired Value Options at FY-End (#) Options at FY-End ($)
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles E. Zeigler, Jr.......... 7,298 $110,528 51,987 - $162,067 -
Franklin H. Yoho................ 4,407 66,744 30,606 - 96,008 -
Robert D. Voigt................. 4,407 66,744 29,498 - 93,257 -
Jerry W. Richardson............. 3,635 55,052 24,723 - 78,861 -
Boyce C. Morrow, Jr............. 3,672 55,612 25,513 - 80,027 -
</TABLE>
EMPLOYEE RETIREMENT PLANS
The table below illustrates the approximate amounts of annual normal
retirement benefits payable under the Company's retirement plans.
<TABLE>
<CAPTION>
Annual Benefits at Retirement with Years of Credited Service
-------------------------------------------------------------------------------------------
Average
Compensation 10 15 20 25 30 35
- ------------ ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$120,000 $24,851 $ 37,277 $ 49,702 $ 62,128 $ 74,553 $ 86,979
140,000 29,351 44,027 58,702 73,378 88,053 102,729
160,000 33,851 50,777 67,702 84,628 101,553 118,479
180,000 38,351 57,527 76,702 95,878 115,053 134,229
200,000 42,851 64,277 85,702 107,128 128,553 149,979
220,000 47,351 71,027 94,702 118,378 142,053 165,729
240,000 51,851 77,777 103,702 129,628 155,553 181,479
260,000 56,351 84,527 112,702 140,878 169,053 197,229
280,000 60,851 91,277 121,702 152,128 182,553 212,979
300,000 65,351 98,027 130,702 163,378 196,053 228,729
320,000 69,851 104,777 139,702 174,628 209,553 244,479
340,000 74,351 111,527 148,702 185,878 223,053 260,229
360,000 78,851 118,277 157,702 197,128 236,553 275,979
</TABLE>
The Company has a noncontributory, defined benefit retirement plan (the
"Retirement Plan") and a benefit restoration plan (the "Restoration Plan")
(collectively, the "Retirement Plans"), which cover all full-time employees,
including officers, upon their attaining age 21 and completing one year of
service. The purpose of the Restoration Plan is to provide certain employees
with retirement benefits which they otherwise
61
<PAGE>
would have received under the Retirement Plan formula but which may not be paid
to them under the Retirement Plan due to limitations on benefits imposed by the
Internal Revenue Code.
A participant in the Retirement Plans becomes fully vested prior to normal
retirement at age 65 upon the completion of five years of service. Benefits are
also provided under the Retirement Plans in the event of early retirement at or
after age 55 and the completion of at least ten years of service and in the
event of retirement for disability after completion of five years of service.
Benefits under the Retirement Plans are based upon application of a formula to
the specified average compensation and years of credited service (up to a
maximum of 35 years) at normal retirement age. Benefit amounts are computed on a
straight life annuity basis. Compensation covered by the Retirement Plans
consists of the amount shown as "Salary" in the Summary Compensation Table. The
benefits are not subject to any deduction for social security payments.
Estimated credited years of service under the Retirement Plans for the
individuals named in the Summary Compensation Table are as follows: Charles E.
Zeigler, Jr., 12.8 years, Franklin H. Yoho, 10.6 years, Robert D. Voigt, 24.2
years, Jerry W. Richardson, 31.0 years, and Boyce C. Morrow, Jr., 9.4 years.
62
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
COMMON STOCK OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is the number of shares of Common Stock of the Company
beneficially owned by the directors, the Chief Executive Officer, the other
executive officers named in the Summary Compensation Table, and the directors
and executive officers as a group, on November 30, 1999. The directors also own
equivalent value Common Stock units as set forth in the Compensation of
Directors section in Item 11.
Percent
of
Name Shares (1)(2) Class
William A. V. Cecil ..........................8,496 *
G. Smedes York ...............................7,019 *
William L. O'Brien, Jr. ......................5,771 *
Bert Collins ................................ 5,175 *
John W. Copeland ............................ 3,771 *
Ben R. Rudisill, II ........................ 2,565 *
William C. Burkhardt .........................2,333 *
D. Wayne Peterson ............................2,000 *
Van E. Eure .................................. -- *
Charles E. Zeigler, Jr. .....................74,575(3) *
Franklin H. Yoho ........................... 35,619(4) *
Robert D. Voigt .............................49,405(5) *
Jerry W. Richardson .........................39,057(6) *
Boyce C. Morrow, Jr. ........................27,531(7) *
Directors and executive officers
as a group (17 persons) ..................319,197(8) 1.5%
- ---------------
* Indicates beneficial ownership of less than 1% of the shares of Common
Stock of the Company outstanding on November 30, 1999.
(1) Includes shares, if any, held by each person's immediate family members.
(2) Includes each person's beneficial interest in full shares of the Company's
Common Stock, if any, credited to his or her account in the Company's
Stock Purchase and Automatic Dividend Reinvestment Plan.
(3) Of this number, 18,837 shares are owned directly by Mr. Zeigler, Jr.,
1,278 shares are owned by Mr. Zeigler, Jr.'s spouse and 2,473 shares
are owned by a trust over which Mr. Zeigler, Jr. as trustee has
investment and voting power. Also includes options to purchase 51,987
shares of Common Stock exercisable within 60 days of November 30, 1999.
(4) Includes options to purchase 30,606 shares of Common Stock exercisable
within 60 days of November 30, 1999.
(5) Includes options to purchase 29,498 shares of Common Stock exercisable
within 60 days of November 30, 1999.
(6) Includes options to purchase 24,723 shares of Common Stock exercisable
within 60 days of November 30, 1999.
63
<PAGE>
(7) Includes options to purchase 25,513 shares of Common Stock exercisable
within 60 days of November 30, 1999.
(8) Includes options to purchase 211,545 shares of Common Stock exercisable
within 60 days of November 30, 1999.
Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Page
(a) 1. Financial statements -
Consolidated Statements of Income for the
Fiscal Years Ended September 30, 1999,
1998 and 1997 31
Consolidated Balance Sheets at
September 30, 1999 and 1998 32
Consolidated Statements of Capitalization
at September 30, 1999 and 1998 33
Consolidated Statements of Retained
Earnings for the Fiscal Years Ended
September 30, 1999, 1998 and 1997 33
Consolidated Statements of Cash Flows for
the Fiscal Years Ended September 30, 1999,
1998 and 1997 34
Notes to Consolidated Financial Statements
for the Fiscal Years Ended September 30,
1999, 1998 and 1997 35-54
Report of Independent Public Accountants 55
Management's Responsibility for Financial Statements 56
64
<PAGE>
Page
2. Financial statement schedules -
The following financial statement schedules are
included herein:
Supplemental Schedules:
Report of Independent Public Accountants 67
Schedule II - Reserves for the Fiscal Years Ended
September 30, 1999, 1998 and 1997 68-70
All other financial statement schedules are omitted as not
applicable, not required, or the required information is included in the
consolidated financial statements and notes thereto.
3. Exhibits -
See Exhibit Index on page 72 of this annual report.
(b) Reports on Form 8-K -
There were no reports on Form 8-K filed during the three months
ended September 30, 1999.
65
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into PSNC's previously filed
Registration Statements on Form S-3 (File Nos. 33-65205, 33-10637 and 33-79107)
and Form S-8 (File Nos. 33-49153, 33-48909 and 333-34845).
s/Arthur Andersen LLP
Charlotte, North Carolina,
December 23, 1999
66
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Public Service Company of North
Carolina, Incorporated included in this Form 10-K, and have issued our report
thereon dated November 4, 1999 (except with respect to the matters discussed in
Note 13, as to which the date is December 17, 1999). Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The
schedules listed in the accompanying index are the responsibility of the
Registrant's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
s/Arthur Andersen LLP
Charlotte, North Carolina,
November 4, 1999
67
<PAGE>
<TABLE>
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - RESERVES
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------ ---------- -------------------- ---------- ----------
Additions
Charged To
Balance At -------------------- Balance
Beginning Operating Other At End
Description Of Period Expenses Income Deductions(1) Of Period
- ------------------------------ ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
DEDUCTED IN BALANCE SHEET FROM
ASSET TO WHICH IT APPLIES:
Allowance for doubtful
accounts $2,086,128 $637,865 $87,229 $1,073,407 $1,737,815
========== ======== ======= ========== ==========
</TABLE>
(1) Deductions represent uncollectible accounts written off, net of recoveries,
as follows -
Write-off of accounts considered to be uncollectible $1,697,378
Less - Recoveries on accounts previously written off 623,971
----------
$1,073,407
==========
68
<PAGE>
<TABLE>
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - RESERVES
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------ ---------- -------------------- ---------- ----------
Additions
Charged To
Balance At -------------------- Balance
Beginning Operating Other At End
Description Of Period Expenses Income Deductions(1) Of Period
- ------------------------------ ---------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
DEDUCTED IN BALANCE SHEET FROM
ASSET TO WHICH IT APPLIES:
Allowance for doubtful
accounts $2,521,983 $786,480 $80,306 $1,302,641 $2,086,128
========== ======== ======= ========== ==========
</TABLE>
(1) Deductions represent uncollectible accounts written off, net of recoveries,
as follows -
Write-off of accounts considered to be uncollectible $2,039,104
Less - Recoveries on accounts previously written off 736,463
----------
$1,302,641
==========
69
<PAGE>
<TABLE>
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED AND SUBSIDIARIES
SCHEDULE II - RESERVES
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------ ---------- -------------------- ---------- ----------
Additions
Charged To
Balance At -------------------- Balance
Beginning Operating Other At End
Description Of Period Expenses Income Deductions(1) Of Period
- ------------------------------ ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
DEDUCTED IN BALANCE SHEET FROM
ASSET TO WHICH IT APPLIES:
Allowance for doubtful
accounts $2,481,943 $1,320,162 $76,474 $1,356,596 $2,521,983
========== ========== ======= ========== ==========
</TABLE>
(1) Deductions represent uncollectible accounts written off, net of recoveries,
as follows -
Write-off of accounts considered to be uncollectible $2,156,932
Less - Recoveries on accounts previously written off 800,336
----------
$1,356,596
==========
70
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PUBLIC SERVICE COMPANY
OF NORTH CAROLINA, INCORPORATED
(Registrant)
s/Charles E. Zeigler, Jr.
Charles E. Zeigler, Jr.
Chairman, President and
December 23, 1999 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on December 23, 1999.
s/Charles E. Zeigler, Jr. s/Jack G. Mason
Charles E. Zeigler, Jr. Jack G. Mason
Chairman, President and Vice President - Finance
Chief Executive Officer (Principal financial and
(Principal executive officer) accounting officer)
s/William C. Burkhardt s/William L. O'Brien, Jr.
William C. Burkhardt - Director William L. O'Brien, Jr. - Director
s/William A. V. Cecil s/D. Wayne Peterson
William A. V. Cecil - Director D. Wayne Peterson - Director
s/Bert Collins s/Ben R. Rudisill, II
Bert Collins - Director Ben R. Rudisill, II - Director
s/John W. Copeland s/G. Smedes York
John W. Copeland - Director G. Smedes York - Director
s/Van E. Eure
Van E. Eure - Director
71
<PAGE>
EXHIBIT INDEX
The following documents are filed as a part of this annual report on
Form 10-K for the fiscal year ended September 30, 1999. Those exhibits
previously filed and incorporated herein by reference are identified below with
an asterisk and with a reference to the previous filing.
Exhibit
Number
*3-A-4 - Amended and Restated Charter, dated February 1, 1991. (File No.
0-1218, 10-K--1992, Exhibit 3-A-4).
*3-A-4.1 - Amendment to Amended and Restated Charter, dated April 10, 1997.
(8-K/A--April 14, 1997, Exhibit A).
*3-I - By-laws, as amended to date. (File No. 0-1218, 10-Q--March 31,
1994, Exhibit 3-I).
*4-B - Debenture Purchase Agreement, dated as of September 15, 1988, for
$25,000,000 of 10% Senior Debentures due October 1, 2003.
(File No. 0-1218, 10-K--1988, Exhibit 4-B).
*4-C - Debenture Purchase Agreement, dated as of December 5, 1989, for
$43,000,000 of 10% Senior Debentures due December 1, 2004.
(File No. 0-1218, 10-K--1989, Exhibit 4-C).
*4-D - Debenture Purchase Agreement, dated as of June 25, 1992, for
$32,000,000 of 8.75% Senior Debentures due June 30, 2012.
(File No. 0-1218, 10-Q--June 30, 1992, Exhibit 4-D).
*4-E-1 - Indenture dated as of January 1, 1996, as supplemented by a First
Supplemental Indenture dated as of January 1, 1996, between
PSNC and First Union National Bank of North Carolina, as trustee.
(File No. 1-11429, 10-Q--December 31, 1995, Exhibit 4-E-1).
*4-E-2 - Specimen of the certificate representing the $50,000,000
aggregate principal amount of 6.99% Senior Debentures Due 2026
issued by PSNC on January 16, 1996. (File No. 1-11429,
10-Q--December 31, 1995, Exhibit 4-E-2).
72
<PAGE>
Exhibit
Number
*4-E-3 - Second Supplemental Indenture dated as of December 15, 1996 to
Indenture dated as of January 1, 1996, between PSNC and First
Union National Bank of North Carolina, as trustee.
(File No. 1-11429, 10-Q--December 31, 1996, Exhibit 4-E-3).
*4-E-4 - Specimen of the certificate representing the $50,000,000
aggregate principal amount of 7.45% Senior Debentures Due 2026
issued by PSNC on December 15, 1996 is included in Exhibit 4-E-3.
(File No. 1-11429, 10-Q--December 31, 1996, Exhibit 4-E-4).
*10-A-9 - Firm Sales Service Agreement under Rate Schedule FS, dated
August 1, 1991, between PSNC and Transcontinental Gas Pipe Line
Corporation. (File No. 0-1218, 10-Q--March 31, 1992,
Exhibit 10-A-9).
*10-A-10 - Firm Sales Service Agreement under Rate Schedule FS, dated
August 1, 1991, between PSNC and Transcontinental Gas Pipe Line
Corporation. (File No. 0-1218, 10-Q--March 31, 1992,
Exhibit 10-A-10).
*10-A-11 - Firm Sales Service Agreement under Rate Schedule FS, dated
August 1, 1991, between PSNC and Transcontinental Gas Pipe Line
Corporation. (File No. 0-1218, 10-Q--March 31, 1992,
Exhibit 10-A-11).
*10-A-13 - Firm Transportation Service Agreement under Rate Schedule FT,
dated August 1, 1991, between PSNC and Transcontinental Gas Pipe
Line Corporation. (File No. 0-1218, 10-K--1992, Exhibit 10-A-13).
*10-A-15 - Firm Transportation Service Agreement under Rate Schedule FT,
dated February 1, 1992, between PSNC and Transcontinental Gas Pipe
Line Corporation. (File No. 0-1218, 10-K--1993, Exhibit 10-A-15).
*10-A-16 - Firm Transportation Service Agreement under Rate Schedule FT-NN,
dated October 8, 1993, between PSNC and CNG Transmission
Corporation. (File No. 0-1218, 10-K--1993, Exhibit 10-A-16).
*10-A-17 - Firm Transportation Service Agreement under Rate Schedule FT-NN-
GSS, dated October 8, 1993, between PSNC and CNG Transmission
Corporation. (File No. 0-1218, 10-K--1993, Exhibit 10-A-17).
*10-A-18 - Firm Transportation Service Agreement under Rate Schedule FT-A,
dated November 1, 1993, between PSNC and Tennessee Gas Pipeline
Company. (File No. 0-1218, 10-K--1993, Exhibit 10-A-18).
*10-A-19 - Firm Transportation Service Agreement under Rate Schedule FT-1,
dated November 1, 1993, between PSNC and Texas Eastern
Transmission Corporation. (File No. 0-1218, 10-K--1993,
Exhibit 10-A-19).
73
<PAGE>
Exhibit
Number
*10-A-20 - Firm Transportation Service Agreement under Rate Schedule FT,
dated November 1, 1993, between PSNC and Texas Gas Transmission
Corporation. (File No. 0-1218, 10-K--1993, Exhibit 10-A-20).
*10-A-21 - Firm Transportation Service Agreement under Rate Schedule FT,
dated October 1, 1993, between PSNC and Transcontinental Gas Pipe
Line Corporation. (File No. 0-1218, 10-K--1993, Exhibit 10-A-21).
*10-A-22 - Firm Transportation Service Agreement under Rate Schedule FT,
dated June 6, 1994, between PSNC and Transcontinental Gas Pipe
Line Corporation. (File No. 1-11429, 10-K--September 30, 1995,
Exhibit 10-A-22).
*10-A-23 - Firm Transportation Service Agreement under Rate Schedule FT,
dated April 30, 1995, between PSNC and Transcontinental Gas Pipe
Line Corporation. (File No. 1-11429, 10-K--September 30, 1995,
Exhibit 10-A-23).
*10-A-24 - Firm Transportation Service Agreement under Rate Schedule FT,
dated January 24, 1996, between PSNC and Transcontinental Gas
Pipe Line Corporation. (File No. 1-11429, 10-Q--June 30, 1996,
Exhibit 10-A-24).
*10-A-25 - General Storage Service Agreement under Rate Schedule GSS,
dated October 17, 1995, between PSNC and CNG Transmission
Corporation. (File No. 1-11429, 10-Q--June 30, 1996,
Exhibit 10-A-25).
*10-A-26 - Firm Transportation Service Agreement under Rate Schedule FT-
NN-GSS, dated October 17, 1995, between PSNC and CNG
Transmission Corporation. (File No. 1-11429, 10-Q--June 30,
1996, Exhibit 10-A-26).
*10-A-27 - Firm Transportation Service Agreement under Rate Schedule FT,
dated January 24, 1996, between PSNC and CNG Transmission
Corporation. (File No. 1-11429, 10-Q--June 30, 1996,
Exhibit 10-A-27).
*10-A-28 - Firm Transportation Service Agreement under Rate Schedule FT-
NN, dated October 17, 1995, between PSNC and CNG
Transmission Corporation. (File No. 1-11429, 10-Q--June 30,
1996, Exhibit 10-A-28).
74
<PAGE>
Exhibit
Number
*10-A-29 - Firm Transportation Service Agreement under Rate Schedule FT,
dated January 19, 1996, between PSNC and Texas Gas
Transmission Corporation. (File No. 1-11429, 10-Q--June 30,
1996, Exhibit 10-A-29).
*10-A-30 - Firm Transportation Service Agreement under Rate Schedule FT-1,
dated October 30, 1995, between PSNC and Texas Eastern
Transmission Corporation. (File No. 1-11429, 10-Q--June 30,
1996, Exhibit 10-A-30).
*10-A-31 - Interruptible Transportation Service Agreement under Rate
Schedule IT, dated January 23, 1996, between PSNC and
Transcontinental Gas Pipe Line Corporation. (File No. 1-11429,
10-Q--June 30, 1996, Exhibit 10-A-31).
*10-A-32 - Firm Transportation Agreement dated November 1, 1995, between
PSNC and Transcontinental Gas Pipe Line Corporation. (File No.
1-11429, 10-Q--December 31, 1996, Exhibit 10-A-32).
*10-A-33 - Amended and Restated Natural Gas Sales Agreement between PSNC
and Transco Energy Marketing Company dated November 1, 1990.
(File No. 1-11429, 10-Q--June 30, 1997, Exhibit 10-A-33).
*10-A-33.1 - Amendment of Amended and Restated Natural Gas Sales Agreement
between PSNC and Transco Energy Marketing Company dated
November 1, 1990. (File No. 1-11429, 10-Q--June 30, 1997,
Exhibit 10-A-33.1).
*10-A-33.2 - Amendment of Amended and Restated Natural Gas Sales Agreement
between PSNC and Transco Energy Marketing Company dated
November 1, 1990. (File No. 1-11429, 10-Q--March 31, 1999,
Exhibit 10-A-33.2).
*10-A-34 - Firm Transportation Service Agreement under Rate Schedule FT,
dated August 1, 1991, between PSNC and Transcontinental Gas Pipe
Line Corporation. (File No. 1-11429, 10-Q--June 30, 1997,
Exhibit 10-A-34).
*10-A-35 - Firm Storage Service Agreement under Rate Schedule FSS, dated
November 7, 1995, between PSNC and Columbia Gas Transmission
Corporation. (File No. 1-11429, 10-Q--June 30, 1997,
Exhibit 10-A-35).
*10-A-36 - Storage Service Transportation Agreement under Rate Schedule SST,
dated November 7, 1995, between PSNC and Columbia Gas
Transmission Corporation. (File No. 1-11429, 10-Q--June 30, 1997,
Exhibit 10-A-36).
75
<PAGE>
Exhibit
Number
*10-A-37 - Interruptible Transportation Service Agreement under Rate Sche-
dule ITS, dated March 31, 1997, between PSNC and Columbia Trans-
mission Corporation. (File No. 1-11429, 10-Q--June 30, 1997,
Exhibit 10-A-37).
*10-A-38 - Gas Sales Agreement (Southern Expansion) dated November 1, 1990
between PSNC and Transco Energy Marketing Company.
(File No.1-11429, 10-Q--June 30, 1997, Exhibit 10-A-38).
*10-A-39 - Firm Transportation Service Agreement under Rate Schedule FT
Service, dated June 26, 1998, between PSNC and Cardinal
Extension Company, LLC. (File No. 1-11429, 10-Q--March 31,
1999, Exhibit 10-A-39).
*10-A-40 - Firm Transportation Service Agreement under Rate Schedule FT
Service, dated June 26, 1998, between PSNC and Cardinal
Extension Company, LLC. (File No. 1-11429, 10-Q--March 31,
1999, Exhibit 10-A-40).
*10-A-41 - Amendment to Firm Service Agreements (Exhibits 10-A-9, 10-A-10
and 10-A-11) under Rate Schedule FT, dated August 1, 1991,
between PSNC and Transcontinental Gas Pipe Line Corporation,
dated August 1, 1991. (File No. 1-11429, 10-Q--March 31, 1999,
Exhibit 10-A-41).
*10-A-42 - Storage Service Transportation Agreement under Rate Schedule
SST, dated November 7, 1995, between PSNC and Columbia Gas
Transmission Corporation. (File No. 1-11429, 10-Q--June 30,
1999, Exhibit 10-A-42).
*10-A-43 - Firm Storage Service Agreement under Rate Schedule FSS, dated
November 7, 1995, between PSNC and Columbia Gas Transmission
Corporation. (File No. 1-11429, 10-Q--June 30, 1999,
Exhibit 10-A-43).
*10-A-44 - Firm Storage Service Agreement under Rate Schedule FSS dated
November 7, 1995, between PSNC and Columbia Gas Transmission
Corporation. (File No. 1-11429, 10-Q--June 30, 1999,
Exhibit 10-A-44).
*10-A-45 - Storage Service Transportation Agreement under Rate Schedule SST,
dated November 7, 1995, between PSNC and Columbia Gas
Transmission Corporation. (File No. 1-11429, 10-Q--June 30,
1999, Exhibit 10-A-45).
*10-B-4 - Liquefied Natural Gas Storage Service Agreement under Rate Sche-
dule LG-A, dated August 5, 1974, between PSNC and Trans-
continental Gas Pipe Line Corporation. (Registration No. 2-53708,
Exhibit 5.6).
76
<PAGE>
Exhibit
Number
*10-B-4.1 - Amendment dated May 16, 1996 to the Liquefied Natural Gas
Storage Service Agreement under Rate Schedule LG-A, between PSNC
and Transcontinental Gas Pipe Line Corporation. (File No.
1-11429, 10-K--1997, Exhibit 10-B-4.1).
*10-B-5 - Eminence Storage Service Agreement under Rate Schedule ESS, dated
November 1, 1993, and Amendment, dated December 1, 1993,
between PSNC and Transcontinental Gas Pipe Line Corporation.
(File No. 0-1218, 10-K--1993, Exhibit 10-B-5).
*10-B-6 - Washington Storage Service Agreement under Rate Schedule WSS,
dated August 1, 1991, between PSNC and Transcontinental Gas Pipe
Line Corporation. (File No. 0-1218, 10-Q--March 31, 1994,
Exhibit 10-B-6).
*10-B-7 - Amendment dated December 1, 1994 to the Eminence Storage Service
Agreement under Rate Schedule ESS, between PSNC and
Transcontinental Gas Pipe Line Corporation. (File No. 1-11429,
10-Q--December 31, 1996, Exhibit 10-B-7).
*10-B-8 - General Storage Service Agreement under Rate Schedule GSS, dated
July 1, 1996, between PSNC and Transcontinental Gas Pipe Line
Corporation. (File No. 1-11429, 10-Q--December 31, 1996,
Exhibit 10-B-8).
*10-C-2 - 1992 Nonqualified Stock Option Plan. (Registration No. 33-48909,
Exhibit 4).
*10-C-3 - 1997 Nonqualified Stock Option Plan. (Registration No.
333-34845).
*10-D-3 - Construction, Operating and Management Agreement by and between
Public Service Company of North Carolina, Inc. and Cardinal
Pipeline Company, LLC, dated March 23, 1994. (File No. 0-1218,
10-Q--March 31, 1994, Exhibit 10-D-3).
*10-D-4 - Construction, Operation and Maintenance Agreement by and between
Pine Needle Operating Company and Pine Needle LNG Company, LLC
dated August 8, 1995. (File No. 1-11429, 10-Q--December 31, 1996,
Exhibit 10-D-4).
*10-D-5 - Operating Agreement of Pine Needle LNG Company, LLC dated August
8, 1995. (File No. 1-11429, 10-Q--December 31, 1996,
Exhibit 10-D-5).
*10-D-5.1 - Amendment to Operating Agreement of Pine Needle LNG Company, LLC
dated October 1, 1995. (File No. 1-11429, 10-Q--December 31,
1996, Exhibit 10-D-5.1).
77
<PAGE>
Exhibit
Number
*10-D-6 - Service Agreement under Rate Schedule LNG-1 between Pine Needle
LNG Company, LLC and Public Service Company of North Carolina,
Inc. dated January 29, 1997. (File No. 1-11429, 10-K--1997,
Exhibit 10-D-6).
*10-D-7 - Amended Operating Agreement of Cardinal Extension Company,
LLC, dated December 19, 1996. (File No. 1-11429,
10-Q--December 31, 1997, Exhibit 10-D-7).
*10-D-8 - Amended Construction, Operation and Maintenance Agreement by
and between Cardinal Operating Company and Cardinal Extension
Company, LLC, dated December 19, 1996. (File No. 1-11429,
10-Q--December 31, 1997, Exhibit 10-D-8).
*10-E - Underwriting Agreement, dated January 10, 1996, between PSNC
and Morgan Stanley & Co. Incorporated. (File No. 1-11429,
10-Q--December 31, 1995, Exhibit 10-E).
*10-F - Form of Severance Agreement between the Company and its
Executive Officers. (File No. 1-11429, 10-Q--June 1997,
Exhibit 10-F).
*19 - Letter regarding change in method of accounting for the commodity
cost of gas purchased and delivered to customers but not billed
and recorded as revenue during the current period.
(File No. 0-1218, 10-Q--March 31, 1981, Exhibit 19).
21 - Subsidiaries of Registrant.
23 - Consent of Independent Public Accountants. (Set forth on page 66
of this annual report).
27 - Financial Data Schedule.
78
<PAGE>
EXHIBIT 21
PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED
SUBSIDIARIES OF REGISTRANT (1)
Clean Energy Enterprises, Inc.
PSNC Blue Ridge Corporation
PSNC Cardinal Pipeline Company
PSNC Production Corporation
Pine Needle LNG Company, LLC (2)
Sonat Public Service Company L.L.C. (3)
Cardinal Pipeline Company, LLC (4)
(1) The above subsidiaries are incorporated or organized
in the State of North Carolina, with the exception of
Sonat Public Service Company L.L.C., which is a
Delaware LLC.
(2) 17% ownership by PSNC Blue Ridge Corporation.
(3) 50% ownership by PSNC Production Corporation.
(4) 33.21% ownership by PSNC Cardinal Pipeline Company.
79
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