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SCANA, PSNC Joining Carolina Forces

SCANA, PSNC Joining Carolina Forces

Columbia, SC-based SCANA Corp. nearly doubled its regulated gas customer base in the fast-growing Carolinas last week with the purchase of Public Service Company of North Carolina (PSNC) for $900 million, including the assumption of about $250 million in PSNC debt. The combination will serve 517,000 electric, 760,000 gas customers in the Carolinas and Georgia and 350,000 telecommunications customers throughout the Southeast. Total annual revenues for the combined company will be about $2 billion and market capitalization will be about $6 billion.

"This acquisition is about growth, opportunity and maximizing shareholder value in the face of the dramatic changes taking place in today's utility industry," said SCANA CEO William B. Timmerman. The combination "offers us the opportunity to extend our natural gas service area into some of the fastest growing markets in North Carolina while nearly doubling our natural gas customer base." The deal gives SCANA a major presence in North Carolina gas markets, which are growing at about 5%/year, a rate that is double the national average and double SCANA's own markets. It also reflects a continuation of SCANA's strategy to focus on retail markets in the Southeast rather than wholesale marketing or exploration and production, two businesses it exited over the past 14 months.

For PSNC, a combination with a larger partner provides more financial strength to compete with neighboring Raleigh, NC-based Carolina Power &amp Light, which announced a plan last November to acquire North Carolina Natural Gas and make it a wholly owned subsidiary. CP&ampL anticipates receiving regulatory approval for the acquisition by mid-1999. PSNC, based in Gastonia, sells gas to 340,000 customers in cities such as Raleigh, Durham, Chapel Hill, Concord, Gastonia and locations west of Charlotte.

PSNC announced a strategic restructuring plan announced late last year to better prepare for competition. "The advanced operational goals we set for ourselves last year under our plan are well served by partnering our highly competitive natural gas distribution franchise in North Carolina with SCANA's diversified electric, natural gas, and telecommunications businesses throughout the Southeast," said PSNC Chairman Charles E. Zeigler Jr. "Through this combination, we obtain the critical mass that facilitates significant growth opportunities for the benefit of all our vital constituencies. Today, we have taken our boldest step yet to position ourselves in the highly competitive energy industry of the next century."

Under the terms of the agreement, shareholders of PSNC will receive consideration valued at $33/share, a 45% premium to PSNC's closing price on Feb. 16. PSNC shares rose $6.69/share in trading yesterday to close at $29.44. SCANA shares dropped 75 cents to close at $26.06. SCANA shareholders have the right to exchange their current SCANA common shares for new shares of SCANA common stock, or $30 per share in cash. This represents a premium of about 10% over SCANA's five-day average trading price through Tuesday, when it closed at $26.75.

However, SCANA's Timmerman indicated it might take a couple years for the transaction to have a positive impact on earnings. "We've got some models that suggest there might be a 1-2% dilution in earnings" in 2000, he said. "After that, it becomes increasingly accretive" because of savings generated by combining work forces and by PSNC's continuing restructuring, which is expected to reduce its work force to 850 people by 2001 from 1,100 last year. PSNC and SCANA utility South Carolina Electric &amp Gas are expected to continue operating as separate utility subsidiaries of the SCANA holding company.

Moody's Investors Service placed the debt ratings of SCANA on review for possible downgrade, but confirmed the long-term and commercial paper ratings South Carolina Electric &amp Gas (SCE&ampG), leaving its stable outlook unchanged. Moody's noted that the deal shifts SCANA's capital structure from 49% debt to capital to 58%. But SCANA also intends to withhold an additional $40 million per year by cutting its quarterly dividend by 11 cents per share. Moody's confirmed the ratings of PSNC and changed its outlook to positive.

Timmerman said the decision to change the common stock dividend "was not an easy one, but it was a decision our board considered appropriate to give us the flexibility to deal with the demands of a more competitive utility industry while implementing our growth strategies." He said increasing competition requires that the company retain more of its earnings to make additional investments in core and non-core business opportunities. "We believe this strength-through-growth strategy will increase future earnings, providing a sound basis for future growth in our dividends and stock price."

Rocco Canonica

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