-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DigGb9mbAXFXSpeTpGnxW5M+n+uTbdVsTuVjtgmmidUR9vtDlT9VoIEUClmykuKn Us/025bUSD6HSfkekbnQUQ== /in/edgar/work/20000811/0000081025-00-000011/0000081025-00-000011.txt : 20000921 0000081025-00-000011.hdr.sgml : 20000921 ACCESSION NUMBER: 0000081025-00-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC SERVICE CO OF NORTH CAROLINA INC CENTRAL INDEX KEY: 0000081025 STANDARD INDUSTRIAL CLASSIFICATION: [4924 ] IRS NUMBER: 562128483 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11429 FILM NUMBER: 693231 BUSINESS ADDRESS: STREET 1: 400 COX RD STREET 2: PO BOX 1398 CITY: GASTONIA STATE: NC ZIP: 28053-1398 BUSINESS PHONE: 7048646731 MAIL ADDRESS: STREET 1: 400 COX RD CITY: GASTONIA STATE: NC ZIP: 28053 10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification No. 1-11429 Public Service Company of North Carolina, 56-2128483 Incorporated (A South Carolina Corporation) 400 Cox Road, P. O. Box 1398 Gastonia, North Carolina 28053-1398 (704) 864-6731 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of Common Stock, no par value, outstanding at July 31, 2000 ....................................................1,0001 1Held beneficially and of record by SCANA Corporation. The registrant meets the conditions set forth in General Instructions H(1) (a) and (b) of Form 10-Q and therefore is filing this form with the reduced disclosure format allowed under General Instruction H(2). TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 3 Consolidated Statements of Income and Retained Earnings for the Periods Ended June 30, 2000 and 1999 4 Consolidated Statements of Cash Flows for the Periods Ended June 30, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Narrative Analysis of Results of Operations 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 Exhibit Index 15 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED CONSOLIDATED BALANCE SHEETS As of June 30, 2000 and December 31, 1999 (Unaudited) - ------------------------------------------------------------------------------- June 30 December 31 2000 1999 - ------------------------------------------------------------------------------- (Millions of Dollars) Assets Gas utility plant $ 779 $768 Less - Accumulated depreciation 257 245 Acquisition adjustment, net of accumulated amortization (Note 3) 461 - - ------------------------------------------------------------------------------- Gas utility plant, net 983 523 - ------------------------------------------------------------------------------- Nonutility property and investments, net of accumulated depreciation 34 31 - ------------------------------------------------------------------------------- Current assets: Cash and temporary investments 10 9 Restricted cash and temporary investments - 3 Receivables (including unbilled revenues), less allowance for doubtful accounts 41 59 Inventories (at average cost): Stored gas inventory 27 29 Materials and supplies 6 7 Deferred gas costs, net (Note 2) 6 27 Other 2 1 - ---------------------------------------------------- --------------------- Total current assets 92 135 - ---------------------------------------------------- --------------------- Deferred charges and other assets: Pension asset 9 - Other 14 9 - ----------------------------------------------------- --------------------- Total deferred charges and other assets 23 9 - ----------------------------------------------------- --------------------- Total $1,132 $698 ===================================================== ===================== Capitalization and Liabilities Capitalization: Common equity (Note 3) $ 714 $232 Long-term debt 151 151 - ----------------------------------------------------- --------------------- Total capitalization 865 383 - ----------------------------------------------------- --------------------- Current liabilities: Short-term borrowings 100 138 Current portion of long-term debt 7 7 Accounts payable 39 50 Accrued taxes 7 5 Customer prepayments and deposits 4 7 Dividends declared and interest accrued 7 8 Other 1 2 - ----------------------------------------------------- --------------------- Total current liabilities 165 217 - ---------------------------------------------------- --------------------- Deferred credits and other liabilities: Deferred income taxes, net 76 75 Deferred investment tax credits 3 3 Accrued pension cost - 3 Other 23 17 - ----------------------------------------------------- --------------------- Total deferred credits and other liabilities 102 98 - ---------------------------------------------------- --------------------- Total $1,132 $698 ===================================================== ===================== See Notes to Consolidated Financial Statements. PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS For the Periods Ended June 30, 2000 and 1999 (Unaudited) ----------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 -------------------------------------------------- ---------- --------------- (Millions of Dollars) Operating revenues $80 $54 $250 $188 Cost of gas 52 22 156 85 ---------------------------------------------------------------------------- Gross margin 28 32 94 103 ----------------------------------------------------------------------------- Operating expenses and taxes: Operation and maintenance 19 16 35 34 Provision for depreciation 10 6 21 12 Other taxes 1 3 3 10 ----------------------------------------------------------------------------- Total operating expenses 30 25 59 56 ----------------------------------------------------------------------------- Operating income (2) 7 35 47 Other income 1 1 2 2 Interest charges 5 4 10 9 ----------------------------------------------------------------------------- Income before income taxes (6) 4 27 40 Income taxes (1) 2 13 16 ----------------------------------------------------------------------------- Income before cumulative effect of accounting change (5) 2 14 24 Cumulative effect of accounting change, net of taxes (Note 2) - - 7 - ----------------------------------------------------------------------------- Net income/(loss) (5) 2 21 24 Retained earnings at beginning of period 20 86 73 69 Common stock cash dividends declared and other (5) (6) (84) (11) ----------------------------------------------------------------------------- ============================================================================= Retained earnings at end of period $10 $82 $ 10 $ 82 ============================================================================= See Notes to Consolidated Financial Statements. PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Periods Ended June 30, 2000 and 1999 (Unaudited) ------------------------------------------------------------------------------ Six Months Ended June 30 2000 1999 ----------------------------------------------------------------------------- (Millions of Dollars) Cash Flows From Operating Activities: $21 $24 Net income Adjustments to reconcile net income to net cash provided from operating activities: Cumulative effect of accounting change (7) - Depreciation, amortization and other 23 14 Deferred income taxes, net 1 1 Change in operating assets and liabilities: Decrease in receivables, net 24 17 Decrease in inventories 3 5 Increase in pension asset (9) - Decrease in accounts payable (11) (11) Decrease in accrued pension cost (3) - Decrease in deferred gas cost 21 12 Other, net 6 10 ---------------------------------------------------------------------------- Net Cash Provided from Operating Activities 69 72 ----------------------------------------------------------------------------- Cash Flows From Investing Activities: Construction expenditures (15) (21) Non-utility and other (3) (10) ---------------------------------------------------------------------------- Net Cash Used for Investing Activities (18) (31) ---------------------------------------------------------------------------- Cash Flows From Financing Activities: Issuance of common stock - 4 Decrease in short-term borrowings, net (38) (25) Retirement of long-term debt and common stock (1) (11) Cash dividends (11) (10) ----------------------------------------------------------------------------- Net Cash Used for Financing Activities (50) (42) ----------------------------------------------------------------------------- Net increase (decrease) in cash and temporary investments 1 (1) Cash and temporary investments at January 1 9 4 ----------------------------------------------------------------------------- -------------------------------------------------------- -------------------- Cash and temporary investments at June 30 $10 $ 3 =========================================================== ================= Supplemental cash flow information: Cash paid during the period for: Interest (net of capitalized interest of $0.4 for 2000 and $0.3 for 1999) $11 $ 9 Income taxes 16 3 In connection with the acquisition of Public Service Company of North Carolina, Inc. by SCANA Corporation, $21 million in common stock was cancelled. The application of push-down accounting for the acquisition resulted in a $467 million acquisition adjustment. See Notes to Consolidated Financial Statements. PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (Unaudited) The following notes should be read in conjunction with the Notes to Consolidated Financial Statements appearing in Public Service Company of North Carolina, Inc.'s (PSNC) Annual Report on Form 10-K for the fiscal year ended September 30, 1999. These are interim financial statements, and due to the seasonality of PSNC's business, the amounts reported in the Consolidated Statements of Income are not necessarily indicative of amounts expected for the year. In the opinion of management, the information furnished herein reflects all adjustments necessary for a fair statement of the results of operations for the interim periods reported. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: A. Basis of Accounting PSNC accounts for its regulated utility operations, assets and liabilities in accordance with the provisions of Statement of Financial Accounting Standards No. 71 (SFAS 71). The accounting standard requires cost-based rate-regulated utilities to recognize in their financial statements revenues and expenses in different time periods than do enterprises that are not rate regulated. As a result, PSNC has recorded, as of June 30, 2000, approximately $18.1 million and $0.3 million of regulatory assets and liabilities, respectively, including amounts recorded for deferred income tax liabilities of approximately $0.2 million. The regulatory assets are recoverable through rates. In the future, as a result of deregulation or other changes in the regulatory environment, PSNC may no longer meet the criteria for continued application of SFAS 71 and could be required to write off its regulatory assets and liabilities. Such an event could have a material adverse effect on PSNC's results of operations in the period that a write-off would be required, but it is not expected that cash flows or financial position would be materially affected. B. Change in Fiscal Year On March 27, 2000 PSNC filed a transition report on Form 10-Q/A with the Securities and Exchange Commission(SEC) to change its fiscal year end to December 31 from September 30 effective January 1, 2000. C. Recently Issued Accounting Bulletin In December 1999 the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." In June 2000 the SEC amended the Bulletin to delay the implementation date until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The Bulletin, which will be implemented by PSNC by the fourth quarter of 2000, provides the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues. PSNC does not expect the adoption of this Bulletin to have a material impact on PSNC's results of operations, cash flows or financial position. D. Reclassifications Certain amounts from prior periods have been reclassified to conform with the 2000 presentation. 2. CUMULATIVE EFFECT OF ACCOUNTING CHANGE Effective January 1, 2000 PSNC changed its method of accounting for operating revenues from cycle billing to full accrual. The cumulative effect of this change was approximately $6.6 million, net of tax. Accruing unbilled revenues more closely matches revenues and expenses. Unbilled revenues represent the estimated amount customers will be charged for service received, but that has not yet been billed, as of the end of the accounting period. Previously these revenues were recognized as operating revenues as customers were billed. In addition, at December 31, 1999, the gas costs associated with unbilled revenues were deferred. Beginning January 1, 2000 these costs are no longer deferred. If this method had been applied retroactively, net income/(loss) would have been ($2.4) million and $24.4 million for the three and six months ended June 30, 1999, respectively, compared to $1.7 million and $23.8 million, respectively, as previously reported. 3. ACQUISITION BY SCANA CORPORATION On February 10, 2000 the acquisition of PSNC by SCANA Corporation (SCANA) was consummated in a business combination accounted for as a purchase. As a result, PSNC became a wholly owned subsidiary of SCANA. Pursuant to the Agreement and Plan of Merger, PSNC shareholders were paid approximately $212 million in cash and 17 million shares of SCANA common stock. PSNC has recorded a utility plant acquisition adjustment of approximately $467 million, which reflects the excess of SCANA's purchase price over the fair value of PSNC's net assets at January 1, 2000. The adjustment is being amortized over 35 years on the straight-line basis. Common equity at June 30, 2000 includes the acquisition adjustment. PSNC agreed to pay approximately $5 million to ten key executives under severance agreements related to the acquisition. Severance benefits of approximately $2.7 million have been paid to seven key executives whose positions were eliminated. In addition, approximately $3.1 million was paid to former directors of PSNC in connection with deferred compensation and retirement plans, and approximately $8.1 million was paid to participants in PSNC's nonqualified stock option plans. 4. ACQUISITION OF SONAT PUBLIC SERVICE COMPANY Effective December 31, 1999 PSNC Production Corporation (PSNC Production), a wholly owned subsidiary of PSNC, purchased the remaining 50% membership interest in Sonat Public Service Company, L.L.C. (Sonat). As a result, Sonat became a wholly owned subsidiary of PSNC Production. PSNC Production paid $5.3 million to acquire this interest. Sonat was subsequently renamed SCANA Public Service Company, L.L.C. (SCANA Public Service). 5. RATE MATTERS On December 30, 1999 PSNC filed an application with the North Carolina Utilities Commission (NCUC) to extend natural gas service to Madison, Jackson and Swain Counties. Pursuant to state statutes, the NCUC required PSNC to forfeit its exclusive franchises to serve six counties in western North Carolina effective January 31, 2000 because these counties were not receiving any natural gas service. Madison, Jackson and Swain Counties were included in the forfeiture order. On June 29, 2000 the NCUC approved PSNC's requests for reinstatement of its exclusive franchises for Madison, Jackson and Swain Counties and disbursement of up to $28.4 million from PSNC's expansion fund for this project. PSNC estimates that the cost of this project will be approximately $31.4 million. On December 7, 1999 the NCUC issuedan order approving the acquisition of PSNC by SCANA. As specified in the NCUC order, PSNC will reduce its rates by approximately $2 million ($1 million in August 2000 and another $1 million in August 2001) and has agreed to a five-year moratorium on general rate cases. General rate relief can be obtained during this period to recover costs associated with materially adverse governmental actions and force majeure events. On December 30, 1999 the Carolina Utility Customer Association, Inc. (CUCA) filed an appeal of this order. On June 15, 2000 CUCA filed a motion with the North Carolina Court of Appeals to withdraw its appeal. On February 22, 1999 the NCUC approved PSNC's application to use expansion funds to extend natural gas service into Alexander County, and authorized disbursements from the fund of approximately $4.3 million based upon budgeted construction costs of approximately $6.2 million. Most of Alexander County lies within PSNC's certificated service territory and did not previously have natural gas service. The project was completed and customers began receiving natural gas service in March 2000. On October 30, 1998 the NCUC issued an order in PSNC's general rate case filed in April 1998. The order, effective November 1, 1998, granted PSNC additional annual revenue of $12.4 million and allowed a 9.82 percent overall rate of return on PSNC's net utility investment. It also approved the continuation of the Weather Normalization Adjustment and Rider D mechanisms and full margin transportation rates. On February 4, 2000 in response to an appeal by CUCA, the Supreme Court of North Carolina affirmed the NCUC order. On November 6, 1997 the NCUC issued an order permitting PSNC, on a 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 better by ensuring that the amount paid for natural gas to serve these customers approximates the amount collected from them. PSNC's request for permanent approval of this mechanism was approved by an NCUC order issued April 6, 2000. 6. CONTINGENCIES With respect to commitments at June 30, 2000, reference is made to Note 12 to Consolidated Financial Statements appearing in PSNC's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. Contingencies at June 30, 2000 are as follows: PSNC owns, or has owned, all or portions of seven 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 . 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 sites may range from $3.7 million to $50.1 million over a 30-year period. Subsequently, an environmental due diligence review of PSNC conducted in February 1999 estimated that the cost to remediate the sites would range between$11.3 million and $21.9 million. During the second quarter of 2000, the review was finalized and the estimated liability was recorded. 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 the cost 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). An order of the NCUC dated May 11, 1993 authorized deferral accounting for all costs associated with the investigation and remediation of MGP sites. At June 30, 2000, PSNC has recorded a liability and associated regulatory asset of $10.2 million, which reflects the minimum amount of the range net of shared cost recovery from other PRPs. 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. 7. SEGMENT OF BUSINESS INFORMATION PSNC's reportable segments are listed in the following table. Gas Distribution uses operating income to measure profitability, while Energy Marketing, which is comprised solely of SCANA Public Service (formerly Sonat), uses net income to measure profitability. Affiliate revenue is derived from transactions between reportable segments. Prior to December 31, 1999 Sonat was an equity investment and not a segment of business (see Note 4). Disclosure of Reportable Segments (Millions of Dollars) - -------------------------------------------------------------------------------- Three months ended Gas Energy All Adjustments/ Consolidated June 30, 2000 Distribution Marketing Other Eliminations Total - -------------------------------------------------------------------------------- External Revenue $ 55 $25 - - $ 80 Intersegment Revenue - - - - - Operating Income/(Loss) (2) n/a n/a - (2) Net Income/(Loss) n/a - $ 1 $ (6) (5) Segment Assets 1,117 20 59 (64) 1,132 - -------------------------------------------------------------------------------- Three months ended Gas Energy All Adjustments/ Consolidated June 30, 1999 Distribution Marketing Other Eliminations Total - -------------------------------------------------------------------------------- External Revenue $54 n/a $ 1 $ (1) $ 54 Intersegment Revenue - n/a 20 (20) - Operating Income 7 n/a n/a - 7 Net Income n/a n/a 1 1 2 Segment Assets 628 n/a 46 (32) 642 - -------------------------------------------------------------------------------- Six months ended Gas Energy All Adjustments/ Consolidated June 30, 2000 Distribution Marketing Other Eliminations1 Total - -------------------------------------------------------------------------------- External Revenue $221 $55 - $ (26) $ 250 Intersegment Revenue - 1 $30 (31) - Operating Income 33 n/a n/a 2 35 Net Income n/a 1 3 17 21 Segment Assets 1,117 20 59 (64) 1,132 - -------------------------------------------------------------------------------- Six months ended Gas Energy All Adjustments/ Consolidated June 30, 1999 Distribution Marketing Other Eliminations Total - -------------------------------------------------------------------------------- External Revenue $188 n/a $ 4 $ (4) $188 Intersegment Revenue - n/a 20 (20) - Operating Income 47 n/a n/a - 47 Net Income n/a n/a 1 23 24 Segment Assets 628 n/a 46 (32) 642 1 Includes cumulative effect of accounting change Item 2. Management's Narrative Analysis of Results of Operations. PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS The following discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in Public Service Company of North Carolina, Inc.'s (PSNC) Annual Report on Form 10-K for the fiscal year ended September 30, 1999. Statements included in this narrative analysis (or elsewhere in this quarterly report) which are not statements of historical fact are intended to be, and are hereby identified as, forward-looking statements for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers are cautioned that such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties, and that actual results could differ materially from those indicated by such forward-looking statements. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to, the following: (1) that the information is of a preliminary nature and may be subject to further and/or continuing review and adjustment, (2) changes in the utility regulatory environment, (3) changes in the economy in PSNC's service territory, (4) the impact of competition from other energy suppliers, (5) the management of PSNC's operations, (6) variations in prices of natural gas, (7) growth opportunities, (8) the results of financing efforts, (9) changes in PSNC's accounting policies, (10) weather conditions in areas served by PSNC, (11) inflation, (12) exposure to environmental issues and liabilities, (13) changes in environmental regulation, and (14) the other risks and uncertainties described from time to time in PSNC's periodic reports filed with the Securities and Exchange Commission. PSNC disclaims any obligation to update any forward-looking statements. Capital Expansion Program PSNC's capital expansion program, through the construction of lines, services, systems, and facilities, and the purchase of equipment, is designed to help PSNC meet the growing demand for its product. PSNC's calendar 2000 construction budget is approximately $38 million, compared to actual construction expenditures for calendar 1999 of $44.5 million. The construction program is reviewed regularly by management and is dependent upon PSNC's continuing ability to generate adequate funds internally and to sell new issues of debt on acceptable terms. Construction expenditures during the six months ended June 30, 2000 were $15 million compared to $20.9 million for the same period last year. Earnings and Dividends Net income for the six months ended June 30, 2000 and 1999 was as follows: ------------------------------------------------------------------------- Six Months Ended June 30, (Millions of Dollars) 2000 1999 ---------------------------------------------------- -------------------- Net income derived from: Operations $14.2 $23.8 Change in accounting 6.6 - ==================================================== ==================== Total net income $20.8 $23.8 ==================================================== ==================== Net income from operations decreased approximately $9.6 million. This was primarily due to increased depreciation and amortization expense due to the amortization of the utility plant acquisition adjustment (see Note 3 to the Consolidated Financial Statements) and additional plant. The decrease in net income was partially offset by the change in accounting for unbilled revenues (see Note 2 to the Consolidated Financial Statements). Due to the seasonal nature of PSNC's business, 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. PSNC's Board of Directors authorized payment of dividends on common stock held by SCANA, as follows: Declaration Date Dividend Amount Quarter Ended Payment Date February 22, 2000 $6 million March 31, 2000 April 1, 2000 April 27, 2000 $5 million June 30, 2000 July 1, 2000 Gas Distribution The decrease in gross margin for the six months ended June 30, 2000, when compared to the corresponding period in 1999, is as follows: - ------------------------------------------------------------------------- (Dollars in Millions) Six Months Ended June 30, - ------------------------------------------------------------------------- 2000 1999 Change % Change ---- ---- ------ -------- Gas operating revenue $195.3 $188.4 $ 6.9 3.7% Less: Cost of gas 103.5 85.6 17.9 20.9% ============================================================ Gross margin $ 91.8 $102.8 $(11.0) (10.7%) ======================================================================== The decrease in gross margin for the six months ended June 30, 2000 includes a change in accounting for unbilled revenue (see Note 2 to the Consolidated Financial Statements) and the elimination of franchise taxes in August 1999 (see Other Operating Expenses of Management's Narrative Analysis of Results of Operations), which was partially offset by five percent customer growth . Energy Marketing The energy marketing sales margin (including affiliated transactions) for the six months ended June 30, 2000 is as follows: --------------------------------------------------------------------- (Millions of Dollars) Six Months Ended June 30, --------------------------------------------------------------------- Net income derived from: Gas revenue $56.2 Less: Cost of gas 54.1 --------------------------------------------------------------------- Margin $ 2.1 ===================================================================== Energy Marketing consists of SCANA Public Service Company, L.L.C., which became a wholly owned subsidiary of PSNC effective December 31, 1999 (see Note 4 to the Consolidated Financial Statements). Other Operating Expenses Operating and maintenance expenses for the six months ended June 30, 2000 increased approximately $0.7 million compared to the same period in 1999, which is not significant. Depreciation and amortization expense increased approximately $8.4 million for the six months ended June 30, 2000 as compared to the same period in 1999 due primarily to the amortization of the utility plant acquisition adjustment (see Note 3 to the Consolidated Financial Statements). The decrease in other taxes for the six months ended June 30, 2000 as compared to the same period in 1999 resulted primarily from the elimination of franchise taxes by the State of North Carolina effective 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 operating revenues and general tax expense. The new excise tax is added to customer bills based on the volume of natural gas consumed. PSNC does not include the excise tax in either operating revenues or general tax expense, as this tax is a pass-through from the customer to the State of North Carolina. PART II. OTHER INFORMATION Item 1. Legal Proceedings As more fully disclosed in Part I, Item 1, in Note 6 to the Consolidated Financial Statements, in this Form 10-Q, under "Contingencies" and in Part II in Note 7 to the financial statements in the Annual Report on Form 10-K for the period ending September 30, 1999, PSNC owns, or has owned, all or portions of seven sites in North Carolina on which manufactured gas plants were formerly operated and is cooperating with the North Carolina Department of Environment and Natural Resources to investigate these sites. Item 6. Exhibits and Reports on Form 8-K (a) Part I Exhibits: Exhibits filed with this Quarterly Report on Form 10-Q are listed in the following Exhibit Index. (b) Reports on Form 8-K: The Company filed on April 3, 2000 a Current Report on Form 8-K dated March 27, 2000 changing its certifying accountant. The Company filed on April 14, 2000 a Current Report on Form 8-K/A dated March 27, 2000 amending its April 3, 2000 filing to include an exhibit regarding change in certifying accountant. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED (Registrant) August 11, 2000 s/M.R. Cannon M.R. Cannon, Controller (Principal accounting officer) EXHIBIT INDEX The following documents are filed as a part of this interim report on Form 10-Q for the period ended June 30, 2000. 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 2.01* Agreement and Plan of Merger, dated as of February 16, 1999 as amended and restated as of May 10, 1999, by and among PSNC, SCANA Corporation, New Sub I, Inc. and New Sub II, Inc. (Filed as Exhibit 2.1 to SCANA Corporation's Registration Statement on Form S-4 on May 11, 1999 (File No. 333-78227) and incorporated by reference herein) 3.01* Articles of Incorporation of New Sub II, Inc., dated February 12, 1999 (Filed as Exhibit 3-A to PSNC's Form 10-Q for the quarter ended March 31, 2000) 3.02* Articles of Amendment of New Sub II, Inc. as adopted on February 10, 2000 (Filed as Exhibit 3-B to PSNC's Form 10-Q for the quarter ended March 31, 2000) 3.03* Articles of Correction of PSNC dated February 11, 2000 (Filed as Exhibit 3-C to PSNC's Form 10-Q for the quarter ended March 31, 2000) 4.01* Debenture Purchase Agreement, dated as of September 15, 1988, for $25 million of 10% Senior Debentures due October 1, 2003 (Filed as Exhibit 4-B to PSNC's Form 10-K for the year ended September 30, 1988, File No. 0-1218) 4.02* Debenture Purchase Agreement, dated as of December 5, 1989, for $43 million of 10% Senior Debentures due December 1, 2004 (Filed as Exhibit 4-C to PSNC's Form 10-K for the year ended September 30, 1989, File No. 0-1218) 4.03* Debenture Purchase Agreement, dated as of June 25, 1992, for $32 million of 8.75% Senior Debentures due June 30, 2012 (Filed as Exhibit 4-D to PSNC's Form 10-Q for the quarter ended June 30, 1992, File No. 0-1218) 4.04* 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 (Filed as Exhibit 4-E-1 to PSNC's Form 10-Q for the quarter ended December 31, 1995, File No. 1-11429) 4.05* Specimen of the certificate representing the $50 million aggregate principal amount of 6.99% Senior Debentures Due 2026 issued by PSNC on January 16, 1996 (Filed as Exhibit 4-E-2 to PSNC's Form 10-Q for the quarter ended December 31, 1995, File No. 1-11429) 4.06* 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 (Filed as Exhibit 4-E-3 to PSNC's Form 10-Q for the quarter ended December 31, 1996, File No. 1-11429) 4.07* Specimen of the certificate representing the $50 million aggregate principal amount of 7.45% Senior Debentures Due 2026 issued by PSNC on December 15, 1996 (Filed as Exhibit 4-E-4 to PSNC's Form 10-Q for the quarter ended December 31, 1996, File No. 1-11429) Exhibit Number 10.01* Operating Agreement of Pine Needle LNG Company, LLC dated August 8, 1995 (Filed as Exhibit 10-D-5 to PSNC's on Form 10-Q for the quarter December 31, 1996, File No. 1-11429) 10.02* Amendment to Operating Agreement of Pine Needle LNG Company, LLC dated October 1, 1995 (Filed as Exhibit 10-D- 5.1 to PSNC's Form 10-Q for the quarter ended December 31, 1996, File No. 1-11429) 10.03* Amended Operating Agreement of Cardinal Extension Company, LLC, dated December 19, 1996 (Filed as Exhibit 10-D-7 on PSNC's Form 10-Q for the quarter ended December 31, 1997, File No. 1-11429) 10.04* Amended Construction, Operation and Maintenance Agreement by and between Cardinal Operating Company and Cardinal Extension Company, LLC, dated December 19, 1996 (Filed as Exhibit 10-D-8 on PSNC's Form 10-Q for the quarter ended December 31, 1997, File No. 1-11429) 10.05* Form of Severance Agreement between PSNC and its Executive Officers. (Filed as Exhibit 10-F to PSNC's Form 10-Q for the quarter ended June 1997, File No. 1-11429) 10.06 Service Agreement between PSNC and SCANA Services, Inc., effective April 1, 2000 (Filed herewith on page 17) 27.01 Financial Data Schedule (Filed herewith) EX-10 2 0002.txt SERVICE AGREEMENT Exhibit 10.06 Service Agreement This Service Agreement (this "Agreement") is entered into as of the 1st day of April, 2000, by and between Public Service Company of North Carolina, Inc., a South Carolina corporation (the "Company") and SCANA Services, Inc., a South Carolina corporation ("SCANA Services"). WHEREAS, SCANA Services is a direct or indirect wholly owned subsidiary of SCANA Corporation; WHEREAS, SCANA Services has been formed for the purpose of providing administrative, management and other services to subsidiaries of SCANA Corporation; and WHEREAS, the Company believes that it is in the interest of the Company to provide for an arrangement whereby the Company may, from time to time and at the option of the Company, agree to purchase such administrative, management and other services from SCANA Services; NOW, THEREFORE, in consideration of the mutual covenants contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: I. SERVICES. SCANA Services supplies, or will supply, certain administrative, management or other services to Company similar to those supplied to other subsidiaries of SCANA Corporation. Such services are and will be provided to the Company only at the request of the Company. Exhibit I hereto lists and describes all of the services that are available from SCANA Services. II. PERSONNEL. SCANA Services provides and will provide such services by utilizing the services of their executives, accountants, financial advisers, technical advisers, attorneys and other persons with the necessary qualifications. If necessary, SCANA Services, after consultation with the Company, may also arrange for the services of nonaffiliated experts, consultants and attorneys in connection with the performance of any of the services supplied under this Agreement. III. COMPENSATION AND ALLOCATION. As and to the extent required by law, SCANA Services provides and will provide such services at cost. Exhibit I hereof contains rules for determining and allocating such costs. IV. NORTH CAROLINA PROVISIONS. (A) PSNC hereby agrees that: (1) it will not incur a charge hereunder except in accordance with North Carolina law and the rules, regulations and orders of the North Carolina Utilities Commission (the "NCUC") promulgated thereunder; (2) it will not seek to reflect in rates any cost incurred hereunder to the extent disallowed by the NCUC; and (3) it will not incur a charge hereunder except for charges determined in accordance with Rules 90 and 91 of the Act. (B) PSNC and SCANA Services acknowledge that as a result of the agreements contained in Sections IV(A)(1) and (A)(3), PSNC will not accept services from SCANA Services if the cost to be charged for such service, as calculated pursuant to Rules 90 and 91 of the Act, differs from the amount of charges PSNC is permitted to incur under North Carolina law and the rules, regulations and orders of the NCUC promulgated thereunder. V. TERMINATION AND MODIFICATION. The Company may terminate this Agreement by providing 60 days written notice of such termination to SCANA Services. SCANA Services may terminate this Agreement by providing 60 days written notice of such termination to the Company. This Agreement is subject to termination or modification at any time to the extent its performance may conflict with the provisions of the Public Utility Holding Company Act of 1935, as amended, or with any rule, regulation or order of the Securities and Exchange Commission adopted before or after the making of this Agreement. This Agreement shall be subject to the approval of any state commission or other state regulatory body whose approval is, by the laws of said state, a legal prerequisite to the execution and delivery or the performance of this Agreement. VI. SERVICE REQUESTS. The Company and SCANA Services will prepare a Service Request on or before April 1 of each year listing services to be provided to the Company by SCANA Services and any special arrangements related to the provision of such services for the coming year, based on services provided during the past year. The Company and SCANA Services may supplement the Service Request during the year to reflect any additional or special services that the Company wishes to obtain from SCANA Services, and the arrangements relating thereto. VII. BILLING AND PAYMENT. Unless otherwise set forth in a Service Request, payment for services provided by SCANA Services shall be by making remittance of the amount billed or by making appropriate accounting entries on the books of the Company and SCANA Services. Billing will be made on a monthly basis, with the bill to be rendered by the 25th of the month, and remittance or accounting entries completed within 30 days of billing. VIII. NOTICE. Where written notice is required by this Agreement, all notices, consents, certificates, or other communications hereunder shall be in writing and shall be deemed given when mailed by United States registered or certified mail, postage prepaid, return receipt requested, addressed as follows: 1. To the Company: H. Thomas Arthur General Counsel SCANA Corporation 1426 Main Street Columbia, SC 29201 2. To SCANA Services: H. Thomas Arthur General Counsel SCANA Corporation 1426 Main Street Columbia, SC 29201 IX. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of South Carolina, without regard to their conflict of laws provisions. X. MODIFICATION. No amendment, change or modification of this Agree- ment shall be valid, unless made in writing and signed by all parties hereto. XI. ENTIRE AGREEMENT. This Agreement, together with its exhibits, constitutes the entire understanding and agreement of the parties with respect to its subject matter, and effective upon the execution of this Agreement by the respective parties hereof and thereto, any and all prior agreements, understandings or representations with respect to this subject matter are hereby terminated and canceled in their entirety and are of no further force or effect. XII. WAIVER. No waiver by any party hereto of a breach of any provision of this Agreement shall constitute a waiver of any preceding or succeeding breach of the same or any other provision hereof. XIII. ASSIGNMENT. This Agreement shall inure to the benefit and shall be binding upon the parties and their respective successors and assigns. No assignment of this Agreement or any party's rights, interests or obligations hereunder may be made without the other party's consent, which shall not be unreasonably withheld, delayed or conditioned. XIV. SEVERABILITY. If any provision or provisions of this Agreement shall be held by a court of competent jurisdiction to be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall in no way be affected or impaired thereby. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of this 9th day of May 2000. SCANA SERVICES, INC. By: s/Kevin B. Marsh Name: Kevin B. Marsh Title: Senior Vice President and Chief Financial Officer PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INC. By: s/H. Thomas Arthur Name: H. Thomas Arthur Title: Senior Vice President and General Counsel EXHIBIT I Description of Services, Cost Accumulation, Assignment and Allocation Methodologies for SCANA Services, Inc. This document sets forth the methodologies used to accumulate the costs of services performed by SCANA Services, Inc. ("SCANA Services") and to assign or allocate such costs to other subsidiaries and business units within SCANA Corporation ("Client Entities"). Cost of Services Performed SCANA Services maintains an accounting system that enables costs to be identified by Cost Center, Account Number or Project, Activity, Resource, and Event ("Account Codes"). The primary inputs to the accounting system are time records of hours worked by SCANA Services employees, accounts payable transactions and journal entries. Charges for labor are made at the employees' effective hourly rate, including the cost of pensions, other employee benefits and payroll taxes. To the extent practicable, costs of services are directly assigned to the applicable Account Codes. The full cost of providing services also includes certain indirect costs, e.g., departmental overheads, administrative and general costs, and taxes. Indirect costs are associated with the services performed in proportion to the directly assigned costs of the services or other relevant cost allocators. Cost Assignment and Allocation SCANA Services costs will be directly assigned, distributed or allocated to Client Entities in the manner prescribed below. 1. Costs accumulated in Account Codes for services specifically performed for a single Client Entity will be directly assigned or charged to such Client Entity. 2. Costs accumulated in Account Codes for services specifically performed for two or more Client Entities will be distributed among and charged to such Client Entities using methods determined on a case-by-case basis consistent with the nature of the work performed and based on one of the allocation methods described below. 3. Costs accumulated in Account Codes for services of a general nature which are applicable to all Client Entities or to a class or classes of Client Entities will be allocated among and charged to such Client Entities by application of one or more of the allocation methods described below. Allocation Methods The following methods will be applied, as indicated in the Description of Services section that follows, to allocate costs for services of a general nature. 1. Information Systems Chargeback Rates - Rates for services, including but not limited to Software, Consulting, Mainframe, Midtier and Network Connectivity Services, are based on the costs of labor, materials and Information Services overheads related to the provision of each service. Such rates are applied based on the specific equipment employed and the measured usage of services by Client Entities. These rates will be determined annually based on actual experience and may be adjusted for any known and reasonably quantifiable events, or at such time as may be required due to significant changes. 2. Margin Revenue Ratio - "Margin" is equal to the excess of sales revenues over the applicable cost of sales, i.e., cost of fuel for generation and gas for resale. The numerator is equal to margin revenues for a specific Client Entity and the denominator is equal to the combined margin revenues of all the applicable Client Entities. This ratio will be evaluated annually based on actual results of operations for the previous calendar year and may be adjusted for any known and reasonably quantifiable events, or at such time, based on results of operations for a subsequent twelve-month period, as may be required due to significant changes. 3. Number of Customers Ratio - A ratio based on the number of retail electric and/or gas customers. This ratio will be determined annually based on the actual number of customers at the end of the previous calendar year and may be adjusted for any known and reasonably quantifiable events, or at such time as may be required due to significant changes. 4. Number of Employees Ratio - A ratio based on the number of employees benefitting from the performance of a service. This ratio will be determined annually based on actual counts of applicable employees at the end of the previous calendar year and may be adjusted for any known and reasonably quantifiable events, or at such time as may be required due to significant changes. 5. Three-Factor Formula - This formula will be determined annually based on the average of gross property (original cost of plant in service, excluding depreciation), payroll charges (salaries and wages, including overtime, shift premium and holiday pay, but not including pension, benefit and company-paid payroll taxes) and gross revenues during the previous calendar year and may be adjusted for any known and reasonably quantifiable events, or at such time as may be required due to significant changes. 6. Telecommunications Chargeback Rates - Rates for use of telecommunications services other than those encompassed by Information Systems Chargeback Rates are based on the costs of labor, materials, outside services and Telecommunications overheads. Such rates are applied based on the specific equipment employment and the measured usage of services by Client Entities. These rates will be determined annually based on actual experience and may be adjusted for any known and reasonably quantifiable events, or at such time as may be required due to significant changes. 7. Gas Sales Ratio - A ratio based on the actual number of dekatherms of natural gas sold by the applicable gas distribution or marketing operations. This ratio will be determined annually based on actual results of operations for the previous calendar year and may be adjusted for any known and reasonably quantifiable events, or at such time, based on results of operations for a subsequent twelve-month period, as may be required due to significant changes. Description of Services A description of each of the services performed by SCANA Services, which may be modified from time to time, is presented below. As discussed above, where identifiable, costs will be directly assigned or distributed to Client Entities. For costs accumulated in Account Codes which are for services of a general nature that cannot be directly assigned or distributed, the method or methods of allocation are also set forth. Substitution or changes may be made in the methods of allocation hereinafter specified, as may be appropriate, and will be provided to state regulatory agencies and to each affected Client Entity. 1. Information Systems Services - Provides electronic data processing services. Costs of a general nature are allocated using the Information Systems Chargeback Rates. 2. Customer Services - Provides billing, mailing, remittance processing, call center and customer communication services for electric and gas customers. Costs of a general nature are allocated using the Margin Revenue Ratio. 3. Marketing and Sales - Establishing strategies, provides oversight for marketing, sales and branding of utility and related services and conducts marketing and sales programs. Costs of a general nature are allocated using the Number of Customers Ratio. 4. Employee Services - Includes Human Resources which establishes and administers policies and oversees compliance with regulations in the areas of employment, compensation and benefits, processes payroll and administers corporate training. Also includes employee communications, facilities management and mail services. Costs of a general nature are allocated using the Number of Employees Ratio. 5. Corporate Compliance - Oversees compliance with all laws, regulations and policies applicable to all of SCANA Corporation's businesses and directs compliance training. Costs of general nature are allocated using the Number of Employees Ratio. 6. Purchasing - Provides procurement services. Costs of a general nature are allocated using the Three-Factor Formula. 7. Financial Services - Provides treasury, accounting, tax, financial planning, rate and auditing services services. Costs of a general nature are allocated using the Three-Factor Formula. 8. Risk Management - Provides insurance, claims, security, environmental and safety services. Costs of a general nature are allocated using the Three-Factor Formula. 9. Public Affairs - Maintains relationships with government policy makers, conducts lobbying activities and provides community relations functions. Costs of a general nature are allocated using the Three-Factor Formula. 10. Legal Services - Provides various legal services and general legal oversight; handles claims. Costs of a general nature are allocated using the Three-Factor Formula. 11. Investor Relations - Maintains relationships with the financial community and provides shareholder services. Costs of a general nature are allocated using the Three-Factor Formula. 12. Telecommunications - Provides telecommunications services, primarily the use of telephone equipment. Costs are allocated using the Telecommunications Chargeback Rates. 13. Gas Supply and Capacity Management - Provides gas supply and capacity management services. Costs of a general nature are allocated using the Gas Sales Ratio. 14. Strategic Planning - Develops corporate strategies and business plans. Costs of a general nature are allocated using the Three-Factor Formula. 15. Executive - Provides executive and general administrative services. Costs of a general nature are allocated using the Three-Factor Formula. EXHIBIT II FORM OF INITIAL SERVICE REQUEST The undersigned requests all of the services listed in Exhibit I from SCANA Services Company. The services requested hereunder shall commence on April 1, 2000 and be provided through March 31, 2001. PUBLIC SERVICE COMPANY OF NORTH CAROLINA By: s/H. Thomas Arthur Name: H. Thomas Arthur Title: Senior Vice President and General Counsel EX-27 3 0003.txt FDS --
UT THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2000 AND THE CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS AND OF CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS DEC-31-1999 JUN-30-2000 PER-BOOK 983 34 92 23 0 1,132 0 704 10 714 0 0 151 100 0 0 7 0 0 0 160 1,132 250 13 215 228 22 2 24 10 21 0 21 11 6 69 0 0
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