Piedmont Natural Gas Company, Inc.

-----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, VZfYqZBHaKZHjlCoEUyiByIi7KlqaEZH6N3NEqyvra0Jltw7jjkYA3xHXakq7Oz3 Oumr7mOK1JRFke0IAXSNgg== 0000950144-03-000618.txt : 20030123 0000950144-03-000618.hdr.sgml : 20030123 20030123141646 ACCESSION NUMBER: 0000950144-03-000618 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20021031 FILED AS OF DATE: 20030123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIEDMONT NATURAL GAS CO INC CENTRAL INDEX KEY: 0000078460 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 560556998 STATE OF INCORPORATION: NC FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06196 FILM NUMBER: 03522156 BUSINESS ADDRESS: STREET 1: 1915 REXFORD RD CITY: CHARLOTTE STATE: NC ZIP: 28211 BUSINESS PHONE: 7043643120 MAIL ADDRESS: STREET 1: P.O. BOX 33068 CITY: CHARLOTTE STATE: NC ZIP: 28233 10-K 1 g80206e10vk.htm PIEDMONT NATURAL GAS COMPANY, INC. Piedmont Natural Gas Company, Inc.

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 [NO FEE REQUIRED]
		For the fiscal year ended October 31, 2002

		Or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
		For the Transition period from _______________ to _______________

		Commission file number 1-6196

Piedmont Natural Gas Company, Inc.
(Exact name of registrant as specified in its charter)


North Carolina		56-0556998

(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1915 Rexford Road, Charlotte, North Carolina		28211

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (704) 364-3120

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:


Title of each class		Name of each exchange on which registered

Common Stock, no par value		New York Stock Exchange

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 o

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

State the aggregate market value of the voting stock held by nonaffiliates of the registrant as of January 13, 2003.

Common Stock, no par value — $1,160,769,792

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.


Class		Outstanding at January 13, 2003

Common Stock, no par value		33,177,794

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders on February 28, 2003, are incorporated by reference into Part III.

Piedmont Natural Gas Company, Inc.

2002 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS


		Page

Part I

Item 1.	Business	1
Item 2.	Properties	6
Item 3.	Legal Proceedings	6
Item 4.	Submission of Matters to a Vote of Security Holders	6

Part II

Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	7
Item 6.	Selected Financial Data	8
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
Item 7A	Quantitative and Qualitative Disclosure about Market Risk	30
Item 8.	Financial Statements and Supplementary Data	31
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	62

Part III

Item 10.	Directors and Executive Officers of the Registrant	63
Item 11.	Executive Compensation	65
Item 12.	Security Ownership of Certain Beneficial Owners and Management	66
Item 13.	Certain Relationships and Related Transactions	66

Part IV

Item 14.	Exhibits, Financial Statement Schedule, and Reports on Form 8-K	67

	Signatures	77

PART I

Item 1. Business

Piedmont Natural Gas Company, Inc., incorporated in 1950, is an energy services company primarily engaged in the distribution of natural gas to 740,000 residential, commercial and industrial customers in North Carolina, South Carolina and Tennessee. We are the second-largest natural gas utility in the Southeast. Piedmont is also invested in a number of non-utility, energy-related businesses, including companies involved in unregulated retail natural gas and propane marketing and interstate and intrastate natural gas storage and transportation. We also sell residential and commercial gas appliances in Tennessee.

In the Carolinas, our service area is comprised of numerous cities, towns and communities including Anderson, Greenville, Spartanburg and Gaffney in South Carolina and Charlotte, Salisbury, Greensboro, Winston-Salem, High Point, Burlington, Hickory, Spruce Pine and Reidsville in North Carolina. In Tennessee, our service area is the metropolitan area of Nashville.

We have two reportable business segments, domestic natural gas distribution and retail energy marketing services. Based on products and services and regulatory environments, operations of our domestic natural gas distribution segment are conducted by the parent company and by Piedmont Intrastate Pipeline Company, Piedmont Interstate Pipeline Company and Piedmont Greenbrier Pipeline Company through their investments in ventures accounted for under the equity method. Piedmont Intrastate is a 16.45% member of Cardinal Pipeline Company, L.L.C., which owns and operates a 104-mile intrastate natural gas pipeline in North Carolina. Piedmont Interstate is a 35% member of Pine Needle LNG Company, L.L.C., which owns a liquefied natural gas (LNG) storage facility in North Carolina. Piedmont Greenbrier Pipeline has a 33% equity interest in Greenbrier Pipeline Company, LLC, which proposes to build a 280-mile interstate gas pipeline originating in West Virginia and extending through Virginia to North Carolina. Operations of our retail energy marketing services segment are conducted by Piedmont Energy Company through its 30% interest in SouthStar Energy Services LLC, accounted for under the equity method. SouthStar sells natural gas to residential, commercial and industrial customers in the southeastern United States.

Our propane activities are conducted by Piedmont Propane Company through its ownership of 20.69% of the membership interest in US Propane, L.P., accounted for under the equity method. US Propane owns all of the general partnership interest and approximately 31% of the limited partnership interest in Heritage Propane Partners, L.P.

Operating revenues shown in the consolidated financial statements represent revenues from utility operations only. The cost of purchased gas is a component of operating revenues. Increases or decreases in purchased gas costs from suppliers are passed on to customers through purchased gas adjustment procedures. Therefore, our operating revenues are impacted by changes in gas costs as well as by changes in volumes of gas sold and transported. Operating revenues for the year ended October 31, 2002, totaled $832 million, of which 43% was from residential customers, 23% from commercial customers, 12% from industrial and power generation customers, 21% from secondary market activity and 1% from various other sources. Revenues from non-utility operations, less related costs, are shown in “Other Income (Expense)” in the statements of consolidated income in “Non-utility activities, at equity” or “Other.” For further information on equity investments and segments, see Notes 9 and 10 to the consolidated financial statements beginning on page 50 in Item 8 of this report.

Our utility operations are subject to regulation by the North Carolina Utilities Commission (NCUC), the Public Service Commission of South Carolina (PSCSC) and the Tennessee Regulatory Authority (TRA) as to rates, service area, adequacy of service, safety standards, extensions and abandonment of facilities, accounting and depreciation. We are also subject to regulation by the NCUC as to the issuance of securities. We are also subject to or affected by various federal and state regulations.

We hold non-exclusive franchises for natural gas service in more than 90 communities we serve, with expiration dates from 2003 to 2050. The franchises are adequate for the operation of our gas distribution business and do not contain restrictions which are of a materially burdensome nature. Two franchises that expired in 2000 and one franchise that expired in 2002 are currently being negotiated; however, we continue to operate in those areas with no significant impact on our business. We believe that these franchises will be renewed with no material adverse impact on us. We have never failed to obtain the renewal of a franchise; however, this is not necessarily indicative of future action. In most cases, the loss of a franchise would not have a material effect on operations.

Our utility business is seasonal in nature as variations in weather conditions generally result in greater revenues and earnings during the winter months. We normally inject natural gas into storage during summer months (principally April 1 through October 31) for withdrawal from storage during winter months (principally November 1 through March 31) when customer demand is higher. During the year ended October 31, 2002, the amount of natural gas in storage varied from 4.9 million dekatherms (one dekatherm equals 1,000,000 BTUs) to 22.2 million dekatherms, and the aggregate commodity cost of this gas in

storage varied from $17.2 million to $91.7 million.

The following is a five-year comparison of gas sales and other statistics for the years ended October 31, 1998 through 2002:


					2002			2001			2000			1999			1998

OPERATING REVENUES (in thousands):
		Sales and Transportation:
			Residential		$	358,027		$	525,650		$	343,476		$	295,108		$	323,777
			Commercial			191,988			299,672			207,087			168,731			189,341
			Industrial			103,251			129,732			202,120			143,129			162,336
			For Resale			374			371			249			254			87


				Total		653,640			955,425			752,932			607,222			675,541
		Secondary Market Sales				173,592			145,712			73,505			75,734			86,333
		Miscellaneous				4,796			6,719			3,940			3,514			3,403

Total					$	832,028		$	1,107,856		$	830,377		$	686,470		$	765,277


GAS VOLUMES — DEKATHERMS (in thousands):
		System Throughput:
			Residential			40,047			47,869			40,520			38,111			41,142
			Commercial			25,892			31,002			29,315			26,668			28,528
			Industrial			58,414			54,285			61,144			64,171			64,165
			For Power Generation			1,734			1,169			4,081			6,991			9,141
			For Resale			41			29			20			29			17


				Total		126,128			134,354			135,080			135,970			142,993


	Secondary Market Sales					55,679			29,545			21,072			34,792			33,953


NUMBER OF RETAIL CUSTOMERS BILLED (12 month average):
		Residential				620,642			601,682			577,314			549,610			522,874
		Commercial				72,323			71,069			68,879			66,409			63,878
		Industrial				2,589			2,770			2,702			2,764			2,778


				Total		695,554			675,521			648,895			618,783			589,530


AVERAGE PER RESIDENTIAL CUSTOMER:
		Gas Used – Dekatherms				64.53			79.56			70.19			69.34			78.69
		Revenue			$	576.87		$	873.63		$	594.95		$	536.94		$	619.23
		Revenue Per Dekatherm			$	8.94		$	10.98		$	8.48		$	7.74		$	7.87

COST OF GAS (in thousands):
		Natural Gas Purchased			$	408,564		$	670,380		$	426,329		$	290,501		$	337,400
		Transportation Gas Received (Not Delivered)				(157	)		214			(868	)		(1,236	)		339
		Natural Gas Withdrawn from (Injected into) Storage, net				9,693			115			(20,144	)		(3,111	)		(2,750	)
		Other Storage				1,927			(983	)		(4,937	)		(4,937	)		333
		Capacity Demand Charges				89,103			80,622			94,095			91,661			94,831
		Other Adjustments				(12,896	)		19,530			17,571			(6,916	)		12,269


				Total	$	496,234		$	769,878		$	512,046		$	365,962		$	442,422

COST OF GAS PER DEKATHERM OF GAS SOLD					$	4.23		$	6.94		$	4.17		$	3.05		$	3.45

SUPPLY AVAILABLE FOR DISTRIBUTION — DEKATHERMS (in thousands):
		Natural Gas Purchased				136,206			121,465			126,228			130,633			138,870
		Transportation Gas				48,179			44,285			31,896			44,322			42,091
		Natural Gas Withdrawn from (Injected into) Storage, net				(1,416	)		1,598			(712	)		(373	)		(3,301	)
		Other Storage				(45	)		50			(259	)		(2,132	)		27
		Company Use				(139	)		(167	)		(161	)		(154	)		(110	)


				Total		182,785			167,231			156,992			172,296			177,577


		2002			2001			2000			1999			1998

UTILITY CONSTRUCTION EXPENDITURES (in thousands)		$	83,718		$	90,212		$	108,650		$	102,020		$	93,513

GAS MAINS – MILES OF 3” EQUIVALENT			20,500			19,500			18,900			18,400			18,200

DEGREE DAYS – SYSTEM AVERAGE:
	Actual		3,004			3,821			3,097			3,124			3,339
	Normal		3,534			3,541			3,563			3,597			3,612
	Percentage of Actual to Normal		85	%		108	%		87	%		87	%		92	%

During the year ended October 31, 2002, 60.1 million dekatherms of gas were sold to or transported for large industrial and power generation customers, compared with 55.5 million dekatherms in 2001. Deliveries to temperature-sensitive residential and commercial customers, whose consumption varies with the weather, totaled 65.9 million dekatherms in 2002, compared with 78.9 million dekatherms in 2001. Weather, as measured by degree days, was 15% warmer than normal in 2002 and 8% colder than normal in 2001.

As of November 1, 2002, we have contracted for the following pipeline firm transportation capacity in dekatherms of daily deliverability:


Williams-Transco (including certain upstream arrangements with Dominion and Texas Gas)		482,700
El Paso-Tennessee Pipeline		106,100
Duke-Texas Eastern		1,700
NiSource-Columbia Gas (through arrangements with Transco and Columbia Gulf)		23,000
NiSource-Columbia Gulf		28,000

	Total	641,500

In addition, we have the following seasonal or peaking capacity in dekatherms of daily deliverability through local peaking facilities and storage contracts to meet the firm demands of our markets. This availability varies from five days to one year:


Piedmont LNG		207,000
Piedmont LPG		8,000
Williams-Transco Storage		78,700
NiSource-Columbia Gas Storage		91,200
El Paso-Tennessee Pipeline Storage		55,900
Dominion-DTI Storage		7,000
Pine Needle LNG		222,000

	Total	669,800

We own or have under contract 25.3 million dekatherms of storage capacity, either in the form of underground storage or LNG. This capability is used to supplement regular pipeline supplies on colder winter days when demand increases.

We utilize a “best cost” gas purchasing philosophy that seeks to purchase gas on a portfolio basis by weighing cost against supply security and reliability factors. For further information on gas supply and regulation, see “Gas Supply and

Regulatory Proceedings” beginning on page 16 in Item 7 of this report in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

During the year ended October 31, 2002, 35% of gas deliveries were made to industrial or large commercial customers which have the capability to burn a fuel other than natural gas. The alternative fuels are primarily fuel oil and propane and, to a much lesser extent, coal or wood. The ability to maintain or increase deliveries of gas to these customers depends on a number of factors, including weather conditions, governmental regulations, the price of gas from suppliers and the price of alternate fuels. Under existing regulations of the Federal Energy Regulatory Commission (FERC), certain large-volume customers located in proximity to the interstate pipelines delivering gas to us could attempt to bypass us and take delivery of gas directly from the pipeline or from a third party connecting with the pipeline. To date, only minimal bypass activity has been experienced, in part because of our ability to negotiate competitive rates and service terms. The future level of bypass activity cannot be predicted.

In the residential and small commercial markets, natural gas competes primarily with electricity for such uses as cooking, water heating and space heating.

During the year ended October 31, 2002, our largest customer contributed $1.7 million, or .2%, to total operating revenues.

We spend an immaterial amount for research and development costs. We contribute to gas industry-sponsored research projects; however, the amounts contributed to such projects are not material.

Compliance with federal, state and local environmental protection laws has no material effect on construction expenditures, earnings or competitive position. For further information on environmental issues, see “Environmental Matters” beginning on page 28 in Item 7 of this report in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

At October 31, 2002, we had 1,715 employees, compared with 1,657 at October 31, 2001.

Item 2. Properties

Our properties consist primarily of distribution systems and related facilities to serve our utility customers. We have approximately 670 miles of lateral pipelines up to 16 inches in diameter that connect our distribution systems with the transmission systems of our pipeline suppliers. We distribute natural gas through approximately 20,500 miles (three-inch equivalent) of distribution mains. The lateral pipelines and distribution mains are located on or under public streets and highways, or private property with the permission of the individual owners.

We own or lease for varying periods district and regional offices for our operations.

Item 3. Legal Proceedings

There are a number of lawsuits pending against us in the ordinary course of business for damages alleged to have been caused by our employees. We have liability insurance which we believe is adequate to cover any material judgments that may result from these lawsuits.

Item 4. Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

(a) Our Common Stock (symbol PNY) is traded on the New York Stock Exchange (NYSE). The following table provides information with respect to the high and low sales prices on the NYSE for each quarterly period for the years ended October 31, 2002 and 2001.


2002	High		Low		2001	High		Low

January 31		36.60		30.55	January 31		39.44		29.19
April 30		37.95		31.79	April 30		36.55		31.75
July 31		38.00		27.35	July 31		36.00		32.15
October 31		37.21		31.55	October 31		35.10		29.19

(b) At January 13, 2003, our Common Stock was owned by 16,186 shareholders of record.

(c) Information with respect to quarterly dividends paid on Common Stock for the years ended October 31, 2002 and 2001, is as follows:


	Dividends Paid		Dividends Paid
2002	Per Share	2001	Per Share

January 31	38.5¢	January 31	36.5¢
April 30	40.0¢	April 30	38.5¢
July 31	40.0¢	July 31	38.5¢
October 31	40.0¢	October 31	38.5¢

The amount of cash dividends that may be paid on Common Stock is restricted by provisions contained in our articles of incorporation and in note agreements under which long-term debt was issued. At October 31, 2002, all retained earnings were free of such restrictions.

Item 6. Selected Financial Data

Selected financial data for the years ended October 31, 1998 through 2002 is as follows:


In thousands except per share amounts		2002			2001			2000*			1999			1998

Margin		$	335,794		$	337,978		$	318,331		$	320,508		$	322,855
Operating Revenues		$	832,028		$	1,107,856		$	830,377		$	686,470		$	765,277
Net Income		$	62,217		$	65,485		$	64,031		$	58,207		$	60,313
Earnings per Share of Common Stock:
	Basic	$	1.90		$	2.03		$	2.03		$	1.88		$	1.98
	Diluted	$	1.89		$	2.02		$	2.01		$	1.86		$	1.96
Cash Dividends Per Share of Common Stock		$	1.585		$	1.52		$	1.44		$	1.36		$	1.28
Average Shares of Common Stock:
	Basic		32,763			32,183			31,600			31,013			30,472
	Diluted		32,937			32,420			31,779			31,242			30,717
Total Assets		$	1,445,088		$	1,393,658		$	1,445,003		$	1,288,657		$	1,162,844
Long-Term Debt (less current maturities)		$	462,000		$	509,000		$	451,000		$	423,000		$	371,000
Rate of Return on Average Common Equity			10.82	%		12.04	%		12.57	%		12.25	%		13.74	%
Long-Term Debt to Total Capitalization Ratio			43.93	%		47.60	%		46.10	%		46.24	%		44.74	%

* The results for 2000 were impacted by the contribution of substantially all of Piedmont Propane Company’s assets in exchange for a partnership interest in Heritage Propane Partners, L.P. This transaction resulted in $5.1 million in net income, or earnings per share of $.16.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Documents we file with the Securities and Exchange Commission (SEC) may contain forward-looking statements. In addition, our senior management and other authorized spokespersons may make forward-looking statements in print or orally to analysts, investors, the media and others. Forward-looking statements concern, among others, plans, objectives, proposed capital expenditures and future events or performance. Such statements reflect our current expectations and involve a number of risks and uncertainties. Although we believe that our expectations are based on reasonable assumptions, actual results may differ materially from those suggested by the forward-looking statements. Important factors that could cause actual results to differ include:

• Regulatory issues, including those that affect allowed rates of return, terms and condition of service, rate structures and financings. In addition to the impact of our three state regulatory commissions, we purchase natural gas transportation and storage services from interstate and intrastate pipeline companies whose rates and services are

regulated by the Federal Energy Regulatory Commission (FERC) and the North Carolina Utilities Commission (NCUC), respectively.

• Residential, commercial and industrial growth in our service territories. The ability to grow our customer base and the pace of that growth are impacted by general business and economic conditions such as interest rates, inflation, fluctuations in the capital markets and the overall strength of the economy in our local markets and the country.

• Deregulation, unanticipated impacts of restructuring and competition in the energy industry. We face competition from electric companies and energy marketing and trading companies. As a result of deregulation, we expect this highly competitive environment to continue.

• The potential loss of large-volume industrial customers to alternate fuels or to bypass or the shift by such customers to special competitive contracts at lower per-unit margins.

• The ability to meet internal performance goals. Regulatory issues, customer growth, deregulation, economic and capital market conditions, the cost and availability of natural gas and weather conditions can impact our performance goals.

• The capital-intensive nature of our business, including governmental approvals, development project delays or changes in project costs. Weather, general economic conditions and the cost of funds to finance our capital projects can materially alter the cost of a project.

• Changes in the availability and cost of natural gas. To meet customer requirements, we must acquire sufficient gas supplies and pipeline capacity to ensure delivery to our distribution system while also ensuring that our supply and capacity contracts will allow us to remain competitive. Natural gas is an unregulated commodity subject to market supply and demand and price volatility. We have a diversified portfolio of local peaking facilities, transportation and storage contracts with interstate pipelines and supply contracts with major producers and marketers to satisfy the supply and delivery requirements of our customers. Because these producers, marketers and pipelines are subject to operating and financial risks associated with exploring, drilling, producing, gathering, marketing and transporting natural gas, their risks also increase our exposure to supply and price fluctuations. We engage in hedging activity to minimize price volatility for our customers.

• Changes in weather conditions. Weather conditions and other natural phenomena can have a large impact on our earnings. Severe weather conditions can impact our suppliers and the pipelines that deliver gas to our distribution system. Extended mild or severe weather, either during the winter period or the summer period, can

have a significant impact on the demand for and the cost of natural gas.

• Changes in environmental requirements and cost of compliance.

• Earnings from our equity investments. We have investments in unregulated retail energy marketing services, interstate liquefied natural gas (LNG) storage operations, intrastate and interstate pipeline operations and unregulated retail propane operations. These companies have risks that are inherent to their industries and, as an equity investor, we assume such risks.

All of these factors are difficult to predict and many are beyond our control. Accordingly, while we believe these forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. When used in our documents or oral presentations, the words “anticipate,” “believe,” “intend,” “plan,” “estimate,” “expect,” “objective,” “projection,” “budget,” “forecast,” “goal” or similar words or future or conditional verbs such as “will,” “would,” “should,” “could” or “may” are intended to identify forward-looking statements.

Factors relating to regulation and management are also described or incorporated in our Annual Report on Form 10-K, as well as information included in, or incorporated by reference from, future filings with the SEC. Some of the factors that may cause actual results to differ have been described above. Others may be described elsewhere in the Annual Report to Shareholders. There also may be other factors besides those described above or incorporated in the Form 10-K that could cause actual conditions, events or results to differ from those in the forward-looking statements.

Forward-looking statements reflect our current expectations only as of the date they are made. We assume no duty to update these statements should expectations change or actual results differ from current expectations except as required by applicable laws and regulations. Please reference our web site at www.piedmontng.com for current information.

Our Business

Piedmont Natural Gas Company, Inc., began operations in 1951, and is an energy services company primarily engaged in the distribution of natural gas to 740,000 residential, commercial and industrial customers in North Carolina, South Carolina and Tennessee. Piedmont is also invested in a number of non-utility, energy-related businesses, including companies involved in unregulated retail natural gas and propane marketing and interstate and intrastate natural gas storage and transportation.

We also sell residential and commercial gas appliances in Tennessee.

Our utility operations are subject to regulation by the NCUC, the Public Service Commission of South Carolina (PSCSC) and the Tennessee Regulatory Authority (TRA) as to rates, service area, adequacy of service, safety standards, extensions and abandonment of facilities, accounting and depreciation. We are also subject to regulation by the NCUC as to the issuance of securities. We are also subject to or affected by various federal and state regulations.

We continually assess the nature of our business and explore alternatives to traditional utility regulation. Non-traditional ratemaking initiatives and market-based pricing of products and services provide additional challenges and opportunities for us.

We have two reportable business segments, domestic natural gas distribution and retail energy marketing services. For further information on segments, see Note 10 to the consolidated financial statements.

Liquidity and Capital Resources

We finance current cash requirements primarily from operating cash flows and short-term borrowings. Outstanding short-term borrowings under committed bank lines of credit totaling $150 million ranged from zero to $57 million during the year ended October 31, 2002, and interest rates ranged from 2.0663% to 2.6875%. At October 31, 2002, $46.5 million of short-term debt was outstanding at a weighted average interest rate of 2.2323%. Borrowings under these lines include LIBOR cost-plus loans, transactional borrowings and overnight cost-plus loans based on the lending bank’s cost of money, with a maximum rate of the lending bank’s commercial prime interest rate. The maximum annual fee for the committed lines of credit is $198,000. We have additional uncommitted lines of credit totaling $73 million on a no fee and as needed, if available, basis. At October 31, 2002, our current assets were less than our current liabilities due primarily to the $45 million long-term debt maturity in 2003; however, the lines of credit are adequate to provide the necessary near-term liquidity.

Our utility operations are weather sensitive. The primary

factor that impacts our cash flows from operations is weather. Warmer weather can lead to lower total margin from fewer volumes of natural gas sold or transported. Colder weather can increase volumes sold to weather-sensitive customers, but extremely cold weather may lead to conservation by our customers in order to reduce their consumption. Weather outside the normal range of temperatures can lead to reduced operating cash flows, thereby increasing the need for short-term borrowings to meet current cash requirements. During 2002, 55% of our sales and transportation revenues were from residential customers and 29% were from commercial customers, both of which are weather-sensitive customer classes. We have a weather normalization adjustment (WNA) mechanism in all three states that partially offsets the impact of unusually cold or warm weather on bills rendered in November through March for these weather-sensitive customers. The mechanism is most effective in a reasonable temperature range relative to normal weather using 30 years of history.

During 2002, 66% of our cash needs were funded through internal operations. The level of short-term borrowings can vary significantly due to changes in the wholesale prices of natural gas that are charged by suppliers and to increased gas supplies required to meet our customers’ needs during cold weather and to meet our storage needs. Short-term debt generally increases when wholesale prices for natural gas increase because we must pay suppliers for the gas before we recover our costs from customers through their monthly bills. We sell common stock and long-term debt to cover cash requirements when market and other conditions favor such long-term financing. During 2002, we issued $18.5 million of equity through dividend reinvestment and stock purchase plans but none on the open market. We did not sell any long-term debt during the year. We anticipate selling long-term debt in the fourth quarter of 2003 under the $250 million combined debt and equity shelf registration statement filed with the SEC in 2001. Unless otherwise specified at the time such securities are offered for sale, the net proceeds will be used for general corporate purposes, including construction of additional facilities, repayment of short-term debt and working capital needs. Pending such use, we may temporarily invest the net proceeds in investment grade securities.

Our debt ratings are “A2” from Moody’s and “A” from Standard & Poor’s (S&P). We are well within the debt default provisions established for our senior notes, medium-term notes, short-term bank lines of credit and accounts receivable financings. Following the announcement of our proposed acquisition of North Carolina Natural Gas, as discussed in Note 2 to the consolidated financial statements, Moody’s and S&P placed our debt ratings under review for possible downgrade. The purchase price of $425 million will initially be funded with short-term debt that will be refinanced within six to nine months through the issuance of long-term debt and equity securities. While this acquisition will be positive in the long run by permitting us to expand our customer service base

with an additional 176,000 customers in North Carolina, it would have the initial effect of increased debt levels and reduced fixed charge coverages. See further discussion of this acquisition in Gas Supply and Regulatory Proceedings.

At October 31, 2002, we had $509 million of long-term debt outstanding. Annual sinking fund requirements and maturities of this debt over the next five years are $47 million in 2003, $2 million in 2004, zero in 2005, $35 million in 2006 and zero in 2007. We retired $2 million of long-term debt in 2002.

The financial condition of the pipelines and marketers that supply and deliver natural gas to our system can increase our exposure to supply and price fluctuations. The Williams Companies, Inc., whose subsidiary Transcontinental Gas Pipe Line Corporation (Transco) is the major pipeline which serves our Carolina service areas and whose subsidiary Williams Energy Services Company (Wesco) is a wholesale supplier of commodity natural gas service, has experienced financial difficulties. Wesco currently provides natural gas to us under several supply contracts. In all cases with Transco and Wesco, and with other suppliers with whom we have smaller contracts, the products and services are received by us prior to payment or are subject to payment netting agreements. We believe our risk exposure to the financial condition of these companies is minimal based on receipt of the products and other services prior to payment and the availability of other marketers of natural gas to meet our supply needs if necessary.

The natural gas business is seasonal in nature resulting in fluctuations primarily in balances in accounts receivable from customers, inventories of stored natural gas and accounts payable to suppliers in addition to short-term borrowings discussed above. Our accounts receivable and accounts payable balances were higher at October 31, 2002, compared with 2001, due in part to the purchase of the North Carolina Gas Service gas distribution system from NUI Utilities, Inc., as discussed in Note 2 to the consolidated financial statements. From April 1 to October 31, we build up natural gas inventories by injecting gas into storage for sale in the colder months. Most of our annual earnings are realized in the winter period, which is the first five months of our fiscal year.

We have a substantial capital expansion program for construction of distribution facilities, purchase of equipment and other general improvements funded through sources noted above. The capital expansion program supports our approximately 4% current annual growth in customer base. Utility construction expenditures for 2002 were $83.7 million. Utility construction expenditures totaling $85.3 million, primarily to serve customer growth, are budgeted for 2003. Due to growth in our service area, significant utility construction expenditures are expected to continue. Short-term debt may be used to finance construction

pending the issuance of long-term debt or equity.

During 2002, cash provided from operations, from bank lines of credit and from the issuance of common stock through dividend reinvestment and stock purchase plans was sufficient to fund construction expenditures, pay debt principal and interest of $41.7 million and pay dividends to shareholders of $51.9 million.

Our expected future contractual obligations at October 31, 2002, for long-term debt, pipeline and storage capacity and gas supply and operating leases are as follows:


In millions	Payments Due by Period

			Less than		1-3		4-5		After
Contractual Obligations	Total		1 Year		Years		Years		5 Years

Long-term debt	$	509	$	47	$	37	$	—	$	425
Pipeline and storage capacity and gas supply		861		97		247		141		376
Operating leases		14		4		7		1		2

At October 31, 2002, our capitalization consisted of 44% in long-term debt and 56% in common equity. Our long-term targeted capitalization ratio is 45% in long-term debt and 55% in common equity. The embedded cost of long-term debt at October 31, 2002, was 7.71%. The return on average common equity for 2002 was 10.82%.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. We make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods reported. Actual results may differ significantly from these estimates and assumptions. We base our estimates on historical experience, where applicable, and other relevant factors that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate estimates and assumptions and make adjustments in subsequent periods to reflect more current information if we determine that modifications in assumptions and estimates are warranted.

Our domestic natural gas distribution segment is subject to regulation by certain state and federal authorities. We have accounting policies that conform to Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effect of Certain Types of Regulation” (Statement 71), and are in accordance with accounting requirements and ratemaking practices prescribed by the regulatory authorities. The application of these accounting policies allows us to defer expenses and income on the balance sheet as regulatory assets and liabilities when it is

probable that those expenses and income will be allowed in the rate-setting process in a period different from the period in which they would have been reflected in the income statement by an unregulated company. We then recognize these deferred regulatory assets and liabilities through the income statement in the period in which the same amounts are reflected in rates. At October 31, 2002, we had $19.7 million of regulatory assets and $28.6 million of regulatory liabilities, including deferred income tax liabilities of $13 million. If, for any reason, we cease to meet the criteria for application of regulatory accounting treatment for all or part of our operations, we would eliminate from the balance sheet the regulatory assets and liabilities related to these portions ceasing to meet such criteria and include them in the income statement for the period in which the discontinuance of regulatory accounting treatment occurs. Such an event could have a material effect on our results of operations in the period this action was recorded.

We believe the following represents the more significant judgments and estimates used in preparing our consolidated financial statements. For further discussion of significant accounting policies, see Notes 1, 9 and 11 to the consolidated financial statements.

Allowance for Uncollectible Accounts. We evaluate the collectibility of our trade accounts receivable based on our recent loss history and an overall assessment of past due trade accounts receivable amounts outstanding.

Employee Benefits. We have a defined-benefit pension plan for the benefit of eligible full-time employees. Several statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liability related to the plan. These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases, within certain guidelines. In addition, our actuarial consultants also use subjective factors such as withdrawal and mortality rates to estimate the projected benefit obligation. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact on the amount of pension expense recorded in future periods.

Self Insurance. We are self-insured for certain losses related to general liability, group medical benefits and workers’ compensation. We maintain stop loss coverage with third-party insurers to limit our total exposure. Our liabilities represent estimates of the ultimate cost of claims incurred as of the balance sheet date. The estimated liabilities are not discounted and are established based upon analyses of historical data and actuarial estimates. We, along with independent actuaries, review

the liabilities at least annually to ensure that they are appropriate. While we believe these estimates are reasonable based on the information available, our financial results could be impacted if actual trends, including the severity or frequency of claims or fluctuations in premiums, differ from our estimates.

Long-Term Incentive Plan. We have a Long-Term Incentive Plan (LTIP) covering five-year performance periods under which units are awarded to participants. Each unit is equivalent in value to one share of common stock. Following the end of the performance period, awards are distributed in the form of shares of common stock and cash withheld to pay taxes if performance measures are met. During the performance period, we calculate the expense and liability for the LTIP based on performance levels achieved or expected to be achieved and the estimated market value of common stock as of the distribution date. While we believe these estimates are reasonable based on the information available, actual amounts, which are not known until after the end of the performance period, could differ from our estimates.

Gas Supply and Regulatory Proceedings

To meet customer requirements, we acquire sufficient gas supplies and pipeline capacity to ensure delivery to meet the demands of our distribution system while also ensuring that supply and capacity contracts allow us to remain competitive. We have a diversified portfolio of local peaking facilities, transportation and storage contracts with interstate pipelines and supply contracts with major producers and marketers to satisfy the supply and delivery requirements of our customers.

In our opinion, present rules and regulations of our three state regulatory commissions permit the pass-through of interstate pipeline capacity and storage service costs that may be incurred under orders or regulations of the FERC, as well as commodity gas costs from natural gas suppliers. The majority of our natural gas supply is purchased from producers and marketers in non-regulated transactions. Our rate schedules include provisions permitting the recovery of prudently incurred gas costs. The NCUC and the PSCSC require annual prudence reviews covering a historical twelve-month period. For the most recent period, the NCUC and the PSCSC found us to be prudent in our gas purchasing practices and allowed 100% recovery of our gas costs.

for expansion funds as currently determined by the NCUC, we petitioned the NCUC on January 30, 2002, for permission to deposit supplier refunds held in escrow at that time and future supplier refunds in the appropriate gas costs deferred accounts for refund to customers. On February 21, the NCUC agreed and ordered that these supplier refunds be placed in the deferred accounts. At October 31, 2002, the balance in our expansion fund was $5.8 million and is included in “Restricted cash” and “Refunds due customers” in the consolidated balance sheets.

Effective January 1, 2001, we purchased for cash the natural gas distribution assets of Atmos Energy Corporation located in the city of Gaffney and portions of Cherokee County, South Carolina. The acquisition was at net book value of $6.6 million and added 5,400 customers to our operations.

In September 2001, we filed a petition with the PSCSC seeking approval of a gas cost hedging plan for the purpose of cost stabilization for customers. On March 26, 2002, the PSCSC issued an order approving the plan on an experimental basis. The PSCSC ruled that all properly accounted for costs incurred in accordance with the plan, with the exception of certain personnel and administrative costs, would be deemed prudently incurred and would be recoverable in rates as a gas cost. We began hedging activities in April under the approved program.

On February 26, 2002, the NCUC issued an order in the generic proceeding that concluded, among other things, that hedging costs should be treated as gas costs and that pre-approval of a hedging program would be inconsistent with the procedures for the annual gas costs prudency reviews. In its order, the NCUC stated that hedging is an option that must be considered in connection with the gas purchasing practices of a local distribution company. The NCUC recognized that the review of the prudency of a decision to hedge or not to hedge, just like the review of the prudency of other gas purchasing decisions, must be made on the basis of the information available at the time the decision is made, not on the basis of the information available at the time of the annual prudency review proceeding. On April 10, we again asked the NCUC for approval to operate a hedging plan on an experimental basis for a period of two years and for reconsideration of the NCUC’s conclusion on the pre-approval of a hedging program. On October 18, the NCUC denied our request for pre-approval; however, the NCUC commended us for our hedging plan proposal and our contribution to the understanding of hedging by the NCUC. The NCUC made it clear that while it would not pre-approve the plan,

it recognized that the plan is experimental in nature and did not wish to be understood as having disapproved the plan or expressed the opinion that adoption of the plan would result in disallowances in an annual review of gas costs. Nothing in the order precluded us from implementing the plan if we chose to do so subject to the terms of the order in the generic proceeding. Given the favorable comments and assurances by the NCUC in both orders, we implemented a hedging program in North Carolina effective November 1, 2002.

On March 28, 2002, we filed an application with the NCUC requesting an annual increase in revenues of $28.2 million, an increase of 6.8%. In addition, we requested changes in cost allocations and rate design and changes in tariffs and service regulations. On August 5, a stipulation among Piedmont, the Public Staff of the NCUC and Carolina Utility Customers Association, Inc., an intervenor, was filed with the NCUC. The stipulation resolved all outstanding issues among the stipulating parties and provided for an annual increase in revenues of $13.9 million. A hearing was held on August 27. At the hearing and based on further residential rate design changes agreed to by us, the only intervenor who did not sign the stipulation did not oppose the stipulation. On October 28, the NCUC issued an order approving an annual revenue increase of $13.9 million, effective November 1, 2002.

On May 3, 2002, we filed an application with the PSCSC requesting an annual increase in revenues of $15.3 million, an increase of 10.5%. In addition, we requested approval of new depreciation rates, changes in cost allocations and rate design and changes in tariffs and service regulations. A hearing was held on September 4 and 5. On October 29, the PSCSC issued an order approving an annual revenue increase of $8.4 million, effective November 1, 2002. The Consumer Advocate of South Carolina has requested a rehearing of the order and we are unable to predict the outcome of that request.

Effective September 30, 2002, we purchased substantially all of the natural gas distribution assets and certain of the liabilities, including potential remediation costs of a manufactured gas plant site, of North Carolina Gas Service (NCGS), a division of NUI Utilities, Inc., for $26 million in cash. The transaction added 14,000 customers to our distribution system in the counties of Rockingham and Stokes, North Carolina. Included in the assets acquired was NCGS’s expansion fund in the amount of $2.2 million. At October 31, 2002, this amount is included in “Restricted cash” and “Refunds due customers” in the consolidated balance sheets.

On October 16, 2002, we entered into an agreement to purchase for $425 million in cash the stock of North Carolina Natural Gas (NCNG), a natural gas distribution subsidiary of Progress Energy, Inc., serving 176,000 customers in eastern North Carolina, and

Progress Energy’s 50% investment in Eastern North Carolina Natural Gas Company (EasternNC). EasternNC is a joint venture with Albemarle Pamlico Economic Development Corporation to bring natural gas service to 14 counties in eastern North Carolina. The transaction is subject to approvals by various regulatory agencies and is expected to close in mid-2003.

In 1996, the TRA approved a performance incentive plan, effective July 1, 1996, that eliminated annual prudence reviews in Tennessee and established an incentive-sharing mechanism based on differences in the actual cost of gas purchased and benchmark amounts determined by published market indices, together with margin from marketing transportation and capacity in the secondary market and from secondary market sales of gas. The plan is subject to an overall annual cap of $1.6 million on gains or losses by us. The benefits of the incentive plan are the elimination of annual gas purchase prudence reviews, reduction of gas costs for customers and potential earnings to shareholders by sharing in gas cost reductions. Initially approved for a two-year period, the plan now continues each July 1 until we notify the TRA of termination 90 days before the end of a plan year or until the plan is modified, amended or terminated by the TRA.

Secondary market transactions permit us to market gas supplies and transportation services by contract with wholesale or off-system customers. These sales contribute smaller per-unit wholesale margins to earnings; however, the program allows us to act as a wholesale marketer of natural gas and transportation capacity in order to generate operating margin from sources not restricted by the capacity of our retail distribution system. In North Carolina, a sharing mechanism is in effect where 75% of any margin earned is refunded to customers. In connection with the South Carolina rate case discussed above, this same sharing mechanism is in place in South Carolina effective November 1, 2002. Secondary market transactions in Tennessee are included in the performance incentive plan discussed above.

In 2002, 35% of gas deliveries were made to industrial or large commercial customers which have the capability to burn a fuel other than natural gas. The alternative fuels are primarily fuel oil and propane and, to a much lesser extent, coal or wood. The ability to maintain or increase deliveries of gas to these customers depends on a number of factors, including weather conditions, governmental regulations, the price of gas from suppliers and the price of alternate fuels. Under existing regulations of the FERC, certain large-volume customers located in proximity to the interstate pipelines delivering gas to us could attempt to bypass us and take delivery of gas directly from the pipeline or from a third party connecting with the pipeline. To date, only minimal bypass activity has been experienced, in part because of our ability to negotiate competitive rates and service terms. The future level of bypass activity cannot be predicted.

In 2001, we requested special accounting treatment from the NCUC, the PSCSC and the TRA to allow us to defer for recovery in future rates the amounts of accounts receivable that were written off during 2001 in excess of amounts recovered through base rates. These higher write-offs resulted from the high gas prices and abnormally cold weather experienced during the 2000-2001 winter season. The PSCSC and the TRA approved deferral of only the gas cost portion of the excess write-offs, which totaled $1.3 million, for recovery under normal purchased gas cost adjustment (PGA) procedures. The NCUC did not approve our request.

Equity Investments

Piedmont Energy Partners, Inc. (PEP), is a wholly owned subsidiary that is a holding company for various other wholly owned non-utility subsidiaries.

Piedmont Intrastate Pipeline Company, a wholly owned subsidiary of PEP, is a 16.45% member of Cardinal Pipeline Company, L.L.C. (Cardinal), a North Carolina limited liability company. The other members are subsidiaries of The Williams Companies, Inc., SCANA Corporation and Progress Energy, Inc. Cardinal owns and operates a 104-mile intrastate natural gas pipeline in North Carolina and is regulated by the NCUC. Cardinal has firm service agreements with local distribution companies, including Piedmont Natural Gas Company, for 100% of the 270 million cubic feet per day of firm transportation capacity on the pipeline. Cardinal is dependent on the Williams-Transco pipeline system to deliver gas into its system for service to its customers. Cardinal’s long-term debt is secured by Cardinal’s assets and by each member’s equity investment in Cardinal. In accordance with the NCUC’s order authorizing Cardinal to construct, own and operate the pipeline, Cardinal will file a general rate case on or before January 15, 2003.

Piedmont Interstate Pipeline Company, a wholly owned subsidiary of PEP, is a 35% member of Pine Needle LNG Company, L.L.C. (Pine Needle), a North Carolina limited liability company. The other members are subsidiaries of The Williams Companies, Inc., SCANA Corporation, Progress Energy, Inc., and Amerada Hess Corporation and the Municipal Gas Authority of Georgia. Pine Needle owns a liquefied natural gas (LNG) storage facility in North Carolina and is regulated by the FERC. Storage capacity of the facility is four billion cubic feet with vaporization capability of 400 million cubic feet per day and is fully subscribed under firm service agreements with customers. We subscribe to slightly more than one-half of this capacity to provide gas for peak-use periods when demand is the highest. Pine Needle enters into interest-rate swap agreements to modify the interest characteristics of its long-term debt. Movements in the mark-to-market value of these agreements are recorded in “Accumulated other comprehensive income” in the consolidated

balance sheets as a hedge under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (Statement 133). Pine Needle’s long-term debt is secured by Pine Needle’s assets and by each member’s equity investment in Pine Needle. On August 1, 2002, Pine Needle filed a rate increase request with the FERC. We expect an order and new rates to be effective in early 2003.

Piedmont Propane Company, a wholly owned subsidiary of PEP, owns 20.69% of the membership interest in US Propane, L.P. The other partners are subsidiaries of TECO Energy, Inc., AGL Resources, Inc., and Atmos Energy Corporation. US Propane owns all of the general partnership interest and approximately 31% of the limited partnership interest in Heritage Propane Partners, L.P. (Heritage Propane), a marketer of propane through a nationwide retail distribution network. Heritage Propane competes with electricity, natural gas and fuel oil, as well as with other companies in the retail propane distribution business. The propane business, like natural gas, is seasonal, with weather conditions significantly affecting the demand for propane. Heritage Propane purchases propane at numerous supply points for delivery primarily via railroad tank cars and common carrier transport. Heritage Propane’s profitability is also sensitive to changes in the wholesale prices of propane. Heritage Propane utilizes hedging transactions to provide price protection against significant fluctuations in prices. Movements in the mark-to-market value of these agreements are recorded in “Accumulated other comprehensive income” in the consolidated balance sheets as a hedge under Statement 133. Heritage Propane also buys and sells financial instruments for trading purposes through a wholly owned subsidiary. Financial instruments used in connection with this liquids trading activity are marked to market.

In July 2002, we recorded a pre-tax loss in value of $1.4 million on our investment in US Propane due to an other than temporary decline in the value of the general partnership interest in Heritage Propane. This other than temporary loss was calculated based on estimated future cash flow projections that reflect actual and projected customer growth assumptions for Heritage Propane.

The limited partnership agreement of US Propane requires that in the event of liquidation, all limited partners would be required to restore capital account deficiencies, including any unsatisfied obligations of the partnership. Under the agreement, our maximum capital account restoration is $10 million. At October 31, 2002, our capital account was positive.

Piedmont Energy Company, a wholly owned subsidiary of PEP, has a 30% interest in SouthStar Energy Services LLC (SouthStar), a Delaware limited liability company. The other members are subsidiaries of AGL Resources, Inc., and Dynegy Inc. SouthStar sells natural gas to residential, commercial and industrial customers in the southeastern United States. SouthStar was formed

and began marketing natural gas in Georgia in 1998 when that state implemented full natural gas retail competition. SouthStar conducts most of its business in Georgia, and the unregulated retail gas market in that state is highly competitive.

The Operating Policy of SouthStar contains a provision for the disproportionate sharing of earnings in excess of a threshold per annum, cumulative pre-tax return of 17%. This threshold is not reached until all prior period losses are recovered. Earnings below the 17% return threshold are allocated to members based on their ownership percentages. Earnings above the threshold are allocated at various percentages based on actual margin generated in four defined service areas. The earnings test is based on SouthStar’s fiscal year ending December 31, therefore, the actual impact, if any, of disproportionate sharing is not known until after December 31. At October 31, 2002, we estimated that a portion of SouthStar’s earnings for calendar year 2002 will be above the threshold, and that disproportionate sharing will occur for the first time. We reduced our portion of the equity earnings from SouthStar for the twelve months ended October 31, 2002, by $778,000, pre-tax, to reflect our estimate that our earnings from SouthStar will be at a level of approximately 26% of total earnings, rather than our equity ownership percentage of 30% of total earnings. Based on various calculation methodologies and interpretations of the Operating Policy, our pre-tax earnings reduction for 2002 due to disproportionate sharing could range from zero to $1.1 million.

SouthStar manages commodity price and weather risks through hedging activities using derivative financial instruments, physical commodity contracts and option-based weather derivative contracts. Financial contracts in the form of futures, options and swaps are used to hedge the price volatility of natural gas. These derivative transactions qualify as cash flow hedges. Movements in the mark-to-market value of these agreements are recorded in “Accumulated other comprehensive income” in the consolidated balance sheets as a hedge under Statement 133. Weather derivative contracts are used to preserve margins in the event of warmer-than-normal weather during the winter period. Such contracts are accounted for using the intrinsic value method under the guidelines of Emerging Issues Task Force Issue No. 99-2, “Accounting for Weather Derivatives.”

Currently, SouthStar has exposure to supply fluctuations due to the financial condition of Dynegy. Dynegy has managed SouthStar’s capacity asset agreements and has supplied the majority of its gas. SouthStar is only obligated to purchase gas at market prices from Dynegy. Dynegy has announced that it is exiting the gas supply and capacity management businesses and is in the process of providing an orderly transition for its customers. SouthStar will perform in-house certain activities now provided by Dynegy. SouthStar’s portfolio of suppliers has been significantly expanded to mitigate the exposure to Dynegy. Also,

Atlanta Gas Light Company (AGLC), under the terms of its tariffs with the Georgia Public Service Commission, has required SouthStar’s members to guarantee SouthStar’s ability to pay AGLC’s bills for local delivery service. Piedmont Energy Company, through its parent, has guaranteed its 30% share of SouthStar’s obligation with AGLC with a letter of credit with a bank in the amount of $13.4 million that expires on August 5, 2003.

Piedmont Greenbrier Pipeline Company, LLC, a North Carolina limited liability company, is a wholly owned subsidiary that has a 33% equity interest in Greenbrier Pipeline Company, LLC (Greenbrier), a Delaware limited liability company. The other member is a subsidiary of Dominion Resources, Inc. Greenbrier, formed in 2001, proposes to build a 280-mile interstate gas pipeline linking multiple gas supply basins and storage to markets in the Southeast, with initial capacity of 600,000 dekatherms of natural gas per day to commence service in 2005. The pipeline would originate in Kanawha County, West Virginia, and extend through southwest Virginia to Granville County, North Carolina. This pipeline will broaden our access to competitive gas supplies and will also serve new power generation facilities in the region. The pipeline is expected to cost $497 million, with $150 million of the cost expected to be contributed as equity by the owners and the remainder expected to be provided by project-financed debt. As of October 31, 2002, we have made capital contributions to Greenbrier totaling $6.8 million. We have signed a precedent agreement for firm transportation service with Greenbrier. On October 30, 2002, the FERC gave preliminary approval to the project regarding non-environmental issues. Construction of the pipeline is subject to a number of conditions, including final certificate approval by the FERC.

Results of Operations

Net income for 2002 was $62.2 million, compared with $65.5 million in 2001 and $64 million in 2000. Net income for 2002 decreased $3.3 million from 2001 primarily for the reasons listed below.

• Decrease in margin due to warmer weather resulting in fewer volumes of gas delivered to customers (system throughput).

• Increase in depreciation expense.

• Increase in interest expense.

These changes were partially offset by an increase in volumes delivered to industrial customers and an increase in earnings from unregulated retail energy marketing services.

Net income for 2001 increased $1.5 million over 2000 primarily for the reasons listed below.

• Rates charged to customers increased due to general rate increases in Tennessee effective July 1, 2000, and in North Carolina effective November 1, 2000.

• Even though total system throughput decreased, volumes delivered to residential and commercial customers from whom we earn a higher margin increased.

• Increase in the allowance for funds used during construction (AFUDC).

• Increase in interest income.

• Increase in earnings from unregulated retail energy marketing services.

• Increase in earnings from non-utility LNG operations.

• Increase in earnings from secondary market transactions.

• Addition of Gaffney customers in January 2001.

These changes were partially offset for the reasons listed below.

• Increase in operations and maintenance expenses.

• Increase in depreciation expense.

• Increase in general taxes.

• Increase in interest charges.

• Decrease in earnings from propane operations.

Compared with the prior year, weather in our service area, as measured by degree days, was 21% warmer in 2002, 23% colder in 2001 and 1% warmer in 2000. System throughput was 126.1 million dekatherms in 2002, compared with 134.4 million dekatherms in 2001, a decrease of 6%, and 135.1 million dekatherms in 2000. In addition to system throughput, secondary market sales volumes were 55.7 million dekatherms in 2002, compared with 29.5 million dekatherms in 2001 and 21.1 million dekatherms in 2000.

Operating revenues were $832 million in 2002, $1,107.9 million in 2001 and $830.4 million in 2000. Operating revenues for 2002 decreased $275.9 million from 2001 primarily for the reasons listed below.

• The commodity cost of gas decreased significantly during the winter of 2001-2002 resulting in a corresponding decrease in rates charged to customers.

• Decreased system throughput to all customer classes except industrial due to warmer weather.

These decreases were partially offset by increased secondary market activity.

Operating revenues for 2001 increased $277.5 million over 2000 primarily for the reasons listed below.

• The commodity cost of gas increased significantly during

the winter of 2000-2001 resulting in a corresponding increase in rates charged to customers.

• Increased customer growth and 23% colder weather.

• System throughput to higher-margin residential and commercial customers increased nine million dekatherms.

• Rates increased due to general rate increases as noted above.

• Increased secondary market activity.

• Addition of Gaffney customers in January 2001.

The WNA generated revenues from customers of $19.8 million in 2002, refunds to customers of $8.5 million in 2001 and revenues of $19.3 million in 2000. The WNA is designed to offset the impact that unusually cold or warm weather has on residential and commercial customer billings and margin. Weather 15% warmer than normal was experienced in 2002, compared with 8% colder than normal in 2001 and 13% warmer than normal in 2000.

In general rate proceedings, the state regulatory commissions authorize us to recover a margin, applicable rate less cost of gas, on each unit of gas sold. The commissions also authorize us to negotiate lower rates to industrial customers when necessary to remain competitive. We are generally permitted to recover margin losses resulting from these negotiated transactions. The ability to recover such negotiated margin reductions is subject to continuing regulatory approvals.

Cost of gas for 2002 was $496.2 million, compared with $769.9 million in 2001 and $512 million in 2000. Cost of gas for 2002 decreased $273.7 million from 2001 primarily due to decreases in the wholesale commodity cost of gas from suppliers and decreases in volumes sold to residential and commercial customers.

Cost of gas for 2001 increased $257.9 million over 2000 primarily due to increases in the commodity cost of gas from suppliers. Wholesale market prices during the winter of 2000-2001 were more than double the prices of the previous winter. Increases in wholesale prices resulted in lower volumes sold to customers due to customer conservation and the loss of industrial volumes to oil due to price competition. We also curtailed interruptible industrial customers for system management during a portion of the 2000-2001 winter period. Increases or decreases in purchased gas costs from suppliers are passed on to customers through PGA procedures.

Margin (operating revenues less cost of gas) for 2002 was $335.8 million, compared with $338 million in 2001 and $318.3 million in 2000. Margin increased or decreased due to the changes in revenues and cost of gas noted above. The margin earned per dekatherm of system throughput increased by $.12 in 2002 over 2001 and by $.13 in 2001 over 2000.

Operations and maintenance expenses were $133.4 million in 2002 and 2001 and $127 million in 2000. Even though operations and maintenance expenses were even for 2002 and 2001, the following increases and decreases were experienced.

• Increase in payroll expense due to positions being filled by employees rather than by outside labor.

• Increase in other corporate expense due to increases in fees for committed lines of credit and net service fees to banks and increases in training expenses.

• Increase in employee benefits expense due to pension expense recorded in 2002 with pension income recorded in 2001 and increased health insurance premiums.

• Decrease in outside labor as explained above.

• Decrease in the provision for uncollectibles due to warmer weather and lower gas prices.

Operations and maintenance expenses for 2001 increased $6.4 million over 2000 primarily for the reasons listed below.

• Increase in transportation expense due to higher fuel costs and increases in license fees and taxes.

• Increase in utilities expense due to the installation of new communications units in service trucks and the higher volume of telephone calls to our customer information centers.

• Increase in bank charges for activity fees and for fees associated with higher committed bank lines.

• Increase in the provision for uncollectibles due to higher charge-offs for customers who could not pay their bills due to higher gas prices and colder-than-normal weather.

• Amortization of North Carolina environmental expense as recovered from customers beginning in November 2000.

These increases were partially offset by the following decreases.

• Decrease in employee benefits expense due primarily to a decrease in pension expense and the shift of the payment of administrative fees from benefit plan assets rather than by the sponsor.

• Decrease in outside consultants expense due to a reduction in the need for information systems upgrades.

Depreciation expense increased from $48.9 million to $57.6 million over the three-year period 2000 to 2002 primarily due to growth in plant in service.

General taxes increased from $18.8 million to $23.9 million over the three-year period 2000 to 2002 primarily due to increases in property taxes due to growth in plant in service, franchise

taxes due to a rate increase and payroll taxes due to increased payroll.

Other income (expense), net of income taxes, was $12.7 million in 2002, compared with $10.9 million in 2001 and $11.3 million in 2000. Other income (expense) for 2000 includes $5.1 million from a business combination affecting our propane operations. Other income (expense) for 2000 without this transaction would have been $6.2 million.

Prior to August 2000, Piedmont Propane Company marketed propane and propane appliances to residential, commercial and industrial customers within and adjacent to our three-state natural gas service area. In August, US Propane, L.P., was formed to combine our propane operations with the propane operations of three other companies. Piedmont Propane owns 20.69% of the membership interest in US Propane. Immediately after formation, US Propane combined with Heritage Holdings, Inc., the general partner of Heritage Propane Partners, L.P. (Heritage Propane), by contributing all of its assets to Heritage Holdings for $181.4 million in cash, assumed debt and common and limited partnership units and purchasing all of the outstanding stock of Heritage Holdings for $120 million. At the time of the combination, US Propane owned all of the general partnership interest and approximately 34% of the limited partnership interest in Heritage Propane. This combination, including a gain on the transfer of the propane assets, transaction costs and certain employee benefit plans’ gains and charges, contributed $5.1 million to net income in 2000.

Income from non-utility activities, at equity, before taxes, for 2002 increased $2.9 million over 2001 primarily due to an increase in earnings from unregulated retail energy marketing services. This increase was partially offset by a decrease in earnings from propane due to warmer weather experienced in 2002.

Income from non-utility activities, at equity, before taxes, for 2001 increased $8.7 million over 2000 primarily due to increases in earnings from unregulated retail energy marketing services, non-utility LNG operations and propane.

The equity portion of AFUDC, before taxes, was $2 million in 2002, compared with $1.8 million in 2001 and zero in 2000. AFUDC is allocated between equity and debt based on actual amounts computed and the ratio of construction work in progress to average short-term borrowings.

Other, before taxes, for 2002 was $511,000, compared with $192,000 in 2001 and $11 million in 2000. Other in 2000 includes the effect of the propane business combination discussed above. The increase in 2002 over 2001 was primarily due to an increase in earnings from merchandise operations and interest income. The decrease in 2001 from 2000, excluding the propane business

combination discussed above, was primarily due to a decrease in income from propane operations which we operated in 2000, partially offset by an increase in interest income.

Utility interest charges were $40.6 million in 2002, compared with $39.4 million in 2001 and $37 million in 2000. Utility interest charges for 2002 increased $1.2 million over 2001 primarily due to the following reasons.

• Increase in interest on long-term debt due to higher balances outstanding.

• Decrease in the portion of AFUDC attributable to borrowed funds.

These changes were partially offset by the following decreases.

• Decrease in interest on short-term debt due to lower balances outstanding at lower interest rates.

• Decrease in interest charged on refunds due customers due to lower balances outstanding.

Utility interest charges for 2001 increased $2.4 million over 2000 primarily due to the following reasons.

• Increase in interest on long-term debt due to higher balances outstanding.

• Increase in interest charged on refunds due customers due to higher balances outstanding.

These increases were partially offset by the following changes.

• Decrease in interest on short-term debt due to lower balances outstanding at lower interest rates.

• Increase in the portion of AFUDC attributable to borrowed funds.

Environmental Matters

Our three state regulatory commissions have authorized us to utilize deferral accounting, or to create a regulatory asset, in connection with environmental costs. Accordingly, we have established regulatory assets for environmental costs incurred and for estimated environmental liabilities.

In 1997, we entered into a settlement with a third party with respect to nine manufactured gas plant (MGP) sites that we have owned, leased or operated and paid an amount that released us from any investigation and remediation liability. Three other MGP sites that we also have owned, leased or operated were not included in the settlement.

In September 2002, in connection with the purchase of the operations of NCGS discussed in Note 2 to the consolidated financial statements, we acquired the liability for an MGP site located in Reidsville, North Carolina. We had a limited assessment performed by a third party that consisted of an evaluation of documents, a site visit and an interview with an employee of the seller. This study concluded that a comprehensive baseline risk assessment would cost $150,000 and the maximum cost to remediate the site would be $487,000. Based on this study and the similar nature of the three sites not covered by the settlement, we increased our environmental liability in the fourth quarter of 2002 by $1.5 million, with an offsetting increase to a regulatory asset, to reflect a liability of $637,000 for each of the four sites.

At October 31, 2002, our undiscounted environmental liability totaled $2.9 million, consisting of $2.6 million for the four MGP sites and $320,000 for underground storage tanks not yet remediated. This liability is not net of any anticipated recoveries.

At October 31, 2002, our regulatory assets for environmental costs totaled $6.2 million, net of recoveries from customers, in connection with the estimated liabilities for the MGP sites and underground storage tanks and for environmental costs incurred, primarily legal fees and engineering assessments. The portion of the regulatory assets representing actual costs incurred is being amortized as recovered in current approved rates from customers in all three states.

Further evaluations of the MGP sites and the underground storage tank sites could significantly affect recorded amounts; however, we believe that the ultimate resolution of these matters will not have a material adverse effect on financial position or results of operations.

Accounting Pronouncements

Effective November 1, 2002, we will adopt SFAS No. 141, “Business Combinations” (Statement 141). Statement 141 requires that business combinations be accounted for using the purchase method. Statement 141 also establishes new rules for recognizing intangible assets resulting from a purchase business combination. The adoption of Statement 141 will not have a material effect on financial position or results of operations.

Effective November 1, 2002, we will adopt SFAS No. 142, “Goodwill and Other Intangible Assets” (Statement 142). Statement 142 provides new guidance for accounting for the acquisition of intangibles (but not those acquired in a business combination) and the manner in which intangibles, including goodwill, should be

accounted for subsequent to their initial recognition. The adoption of Statement 142 will not have a material effect on financial position or results of operations.

Effective November 1, 2002, we will adopt SFAS No. 143, “Accounting for Asset Retirement Obligations” (Statement 143). Statement 143 addresses financial accounting and reporting for asset retirement obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and operation of the asset. Statement 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which the liability is incurred if a reasonable estimate of fair value can be made. We have determined that asset retirement obligations exist for our underground mains and services, however, the fair value of the obligation cannot be determined because the end of the system life is indeterminable.

Effective November 1, 2002, we will adopt SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (Statement 144). Statement 144 provides one accounting model to be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. The adoption of Statement 144 will not have a material effect on financial position or results of operations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

All financial instruments discussed below are held by us for purposes other than trading.

We are potentially exposed to market risk due to changes in interest rates and the cost of gas. Exposure to interest rate changes relates to both short- and long-term debt. Exposure to gas cost variations relates to the supply of and demand for natural gas.

Interest Rate Risk

We have short-term bank lines of credit available to provide working capital and general corporate funds. The level of borrowings under the lines varies from period to period, depending upon many factors, including our investments in capital projects. Future short-term interest expense and payments will be impacted by both short-term interest rates and borrowing levels.

At October 31, 2002, we had $46.5 million of short-term debt outstanding at a weighted average interest rate of 2.23%. The carrying amount of our short-term debt approximates fair value.

Information about our long-term debt at October 31, 2002, that is sensitive to changes in interest rates is presented below.


	Expected Maturity Date
																				Fair Value
														There-						at October
	2003			2004			2005		2006			2007		after			Total			31, 2002

	(dollars in millions)
Fixed Rate Long-term Debt	$	47		$	2		$	—	$	35		$	—	$	425		$	509		$	589,503
Average Interest Rate		6.39	%		10.06	%		—		9.44	%		—		7.55	%		7.59	%

Commodity Price Risk

In the normal course of business, we utilize contracts of various duration for the forward sales and purchase of natural gas. We manage our gas supply costs through a portfolio of short- and long-term procurement contracts with various suppliers. Due to cost-based rate regulation, we have limited exposure to changes in commodity prices as substantially all changes in purchased gas costs from suppliers are passed on to customers through purchased gas adjustment procedures.

For further information on market risk, see “Liquidity and Capital Resources” beginning on page 11 in Item 7 of this report in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 8. Financial Statements and Supplementary Data

Consolidated financial statements and schedules required by this item are listed in Item 14(a)1 and 2 in Part IV of this report on page 67.

Consolidated Balance Sheets
October 31, 2002 and 2001


Assets In thousands				2002		2001

Utility Plant:
	Utility plant in service			$	1,689,743	$	1,569,774
		Less accumulated depreciation			572,445		511,477

			Utility plant in service, net		1,117,298		1,058,297
	Construction work in progress				41,225		56,402

			Total utility plant, net		1,158,523		1,114,699

Other Physical Property, at cost (net of accumulated depreciation of $1,531 in 2002 and $1,341 in 2001)					1,078		1,163

Current Assets:
	Cash and cash equivalents				5,100		5,610
	Restricted cash				8,028		7,064
	Receivables (less allowance for doubtful accounts of $810 in 2002 and $592 in 2001)				37,504		25,898
	Inventories:
		Gas in storage			65,688		70,220
		Materials, supplies and merchandise			2,860		2,942
	Deferred cost of gas				13,592		16,310
	Refundable income taxes				10,329		22,271
	Prepayments				32,685		24,986

			Total current assets		175,786		175,301

Investments, Deferred Charges and Other Assets:
	Investments in non-utility activities, at equity				80,342		82,287
	Unamortized debt expense (amortized over life of related debt on a straight-line basis)				3,841		4,130
	Other				25,518		16,078

			Total investments, deferred charges and other assets		109,701		102,495

			Total	$	1,445,088	$	1,393,658

See notes to consolidated financial statements.


Capitalization and Liabilities In thousands				2002			2001

Capitalization:
	Stockholders’ equity:
		Cumulative preferred stock – no par value – 175 shares authorized		$	—		$	—
		Common stock – no par value – 100,000 shares authorized; outstanding, 33,090
			in 2002 and 32,463 in 2001		352,553			332,038
		Retained earnings			240,026			229,718
		Accumulated other comprehensive income			(2,983	)		(1,377	)

			Total stockholders’ equity		589,596			560,379
	Long-term debt				462,000			509,000

			Total capitalization		1,051,596			1,069,379

Current Liabilities:
	Current maturities of long-term debt and sinking fund requirements				47,000			2,000
	Notes payable				46,500			32,000
	Accounts payable				51,093			41,144
	Customers’ deposits				11,611			9,487
	Deferred income taxes				1,384			2,344
	General taxes accrued				15,094			14,544
	Refunds due customers				15,635			31,685
	Other				16,814			16,023

			Total current liabilities		205,131			149,227

Deferred Credits and Other Liabilities:
	Deferred income taxes				158,275			143,211
	Unamortized federal investment tax credits				5,593			6,149
	Other				24,493			25,692

			Total deferred credits and other liabilities		188,361			175,052

			Total	$	1,445,088		$	1,393,658

See notes to consolidated financial statements.

Statements of Consolidated Income
For the Years Ended October 31, 2002, 2001 and 2000


In thousands except per share amounts			2002			2001			2000

Operating Revenues			$	832,028		$	1,107,856		$	830,377
Cost of Gas				496,234			769,878			512,046

Margin				335,794			337,978			318,331

Operating Expenses:
	Operations			112,421			114,358			109,942
	Maintenance			21,006			19,064			17,059
	Depreciation			57,593			52,060			48,894
	General taxes			23,863			23,952			18,761
	Income taxes			30,784			34,575			33,975

		Total operating expenses		245,667			244,009			228,631

Operating Income				90,127			93,969			89,700

Other Income (Expense):
	Non-utility activities, at equity			19,207			16,271			7,639
	Allowance for equity funds used during construction			1,986			1,767			—
	Other			511			192			11,024
	Income taxes			(9,010	)		(7,300	)		(7,381	)

		Total other income (expense)		12,694			10,930			11,282

Utility Interest Charges:
	Interest on long-term debt			39,056			37,789			33,890
	Allowance for borrowed funds used during construction			(1,438	)		(4,910	)		(3,321	)
	Other			2,986			6,535			6,382

		Total utility interest charges		40,604			39,414			36,951

Net Income			$	62,217		$	65,485		$	64,031

Average Shares of Common Stock:
	Basic			32,763			32,183			31,600
	Diluted			32,937			32,420			31,779
Earnings Per Share of Common Stock:
	Basic		$	1.90		$	2.03		$	2.03
	Diluted		$	1.89		$	2.02		$	2.01

See notes to consolidated financial statements.

Statements of Consolidated Cash Flows
For the Years Ended October 31, 2002, 2001 and 2000


In thousands					2002			2001			2000

Cash Flows from Operating Activities:
	Net income				$	62,217		$	65,485		$	64,031

	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				58,393			53,069			52,090
		Amortization of investment tax credits				(556	)		(558	)		(558	)
		Allowance for funds used during construction				(3,424	)		(6,677	)		(3,321	)
		Net gain on propane business combination, net of tax				—			—			(5,063	)
		Undistributed earnings from equity investments				(19,207	)		(16,271	)		(7,639	)
		Changes in assets and liabilities:
			Restricted cash			(964	)		32,732			360
			Receivables			(11,606	)		29,247			(22,677	)
			Receivables from affiliate			—			—			22,354
			Inventories			4,614			588			(18,553	)
			Other assets			8,054			47,484			(59,441	)
			Accounts payable			9,949			(47,169	)		23,719
			Refunds due customers			(16,050	)		(1,204	)		6,685
			Deferred income taxes			14,104			(8,193	)		14,612
			Other liabilities			3,402			12,916			(8,433	)

				Total adjustments		46,709			95,964			(5,865	)

Net cash provided by operating activities						108,926			161,449			58,166

Cash Flows from Investing Activities:
	Utility construction expenditures					(80,112	)		(83,536	)		(105,329	)
	Capital contributions to equity investments					(4,492	)		(16,929	)		(7,771	)
	Capital distributions from equity investments					22,143			15,885			4,255
	Purchase of gas distribution systems					(26,000	)		(6,625	)		—
	Investment in propane partnership					—			—			(30,552	)
	Proceeds from propane business combination					—			—			36,748
	Other					(112	)		(361	)		(909	)

Net cash used in investing activities						(88,573	)		(91,566	)		(103,558	)

Cash Flows from Financing Activities:
	Increase (Decrease) in notes payable					14,500			(67,500	)		20,000
	Proceeds from issuance of long-term debt					—			60,000			60,000
	Retirement of long-term debt					(2,000	)		(32,000	)		(2,000	)
	Issuance of common stock through dividend reinvestment and employee stock plans					18,546			15,389			15,452
	Dividends paid					(51,909	)		(48,909	)		(45,487	)

Net cash provided by (used in) financing activities						(20,863	)		(73,020	)		47,965

Net Increase (Decrease) in Cash and Cash Equivalents						(510	)		(3,137	)		2,573
Cash and Cash Equivalents at Beginning of Year						5,610			8,747			6,174

Cash and Cash Equivalents at End of Year					$	5,100		$	5,610		$	8,747

Cash Paid During the Year for:
	Interest				$	39,696		$	39,977		$	34,971
	Income taxes				$	34,166		$	51,430		$	85,848

See notes to consolidated financial statements.

Statements of Consolidated Stockholders’ Equity
For the Years Ended October 31, 2002, 2001 and 2000


								Accumulated
								Other
			Common		Retained			Comprehensive
In thousands except per share amounts			Stock		Earnings			Income			Total

Balance, October 31, 1999			$	297,149	$	194,598		$	—		$	491,747
Net Income						64,031						64,031
Common Stock Issued				17,081								17,081
Dividends Declared ($1.44 per share)						(45,487	)					(45,487	)

Balance, October 31, 2000				314,230		213,142			—			527,372

Comprehensive Income:
	Net income					65,485						65,485
	Other comprehensive income:
		Equity investments hedging activities, net of tax of ($856)							(1,377	)		(1,377	)

	Total comprehensive income											64,108
Common Stock Issued				17,808								17,808
Dividends Declared ($1.52 per share)						(48,909	)					(48,909	)

Balance, October 31, 2001				332,038		229,718			(1,377	)		560,379

Comprehensive Income:
	Net income					62,217						62,217
	Other comprehensive income:
		Equity investments hedging activities, net of tax of ($1,079)							(1,606	)		(1,606	)

	Total comprehensive income											60,611
Common Stock Issued				20,515								20,515
Dividends Declared ($1.585 per share)						(51,909	)					(51,909	)

Balance, October 31, 2002			$	352,553	$	240,026		$	(2,983	)	$	589,596


In thousands			2002			2001			2000

Reconciliation of Accumulated Other
	Comprehensive Income:
		Balance, beginning of period	$	(1,377	)	$	—		$	—
		Cumulative effect of adoption of Statement 133		—			209			—
		Current period reclassification to earnings		406			(148	)		—
		Current period change		(2,012	)		(1,438	)		—

		Balance, end of period	$	(2,983	)	$	(1,377	)	$	—

See notes to consolidated financial statements.

Notes To Consolidated Financial Statements

1. Summary of Significant Accounting Policies

A. Operations and Principles of Consolidation.

Piedmont Natural Gas Company, Inc., is an investor-owned public utility primarily engaged in the sale and transportation of natural gas to residential, commercial and industrial customers in the Piedmont region of North Carolina and South Carolina and the metropolitan Nashville, Tennessee, area.

The consolidated financial statements include the accounts of wholly owned subsidiaries whose investments in non-utility activities are accounted for under the equity method. Our ownership interest in each entity is recorded in “Investments in non-utility activities, at equity” in the consolidated balance sheets. Earnings or losses from equity investments are recorded in “Non-utility activities, at equity” in “Other Income (Expense)” in the statements of consolidated income. Revenues and expenses of all other non-utility activities are included in “Other” in “Other Income (Expense)” in the statements of consolidated income. Significant inter-company transactions have been eliminated in consolidation where appropriate. In accordance with Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting For The Effects of Certain Types of Regulation” (Statement 71), we have not eliminated inter-company profit on sales to affiliates.

B. Rate-Regulated Basis of Accounting.

Statement 71 provides that rate-regulated public utilities account for and report assets and liabilities consistent with the economic effect of the manner in which independent third-party regulators establish rates. In applying Statement 71, we have capitalized certain costs and benefits as regulatory assets and liabilities, respectively, pursuant to orders of the state regulatory commissions, either in general rate proceedings or expense deferral proceedings, in order to provide for recovery of or refunds to utility customers in future periods.

We monitor the regulatory and competitive environment in which we operate to determine that our regulatory assets continue to be probable of recovery. If we determine that all or a portion of these regulatory assets no longer meet the criteria for continued application of Statement 71, we would write off that portion which we could not recover, net of any regulatory liabilities which would be deemed no longer necessary. Our review has not resulted in any write offs of any regulatory assets or liabilities.

The amounts recorded as regulatory assets and liabilities in the consolidated balance sheets at October 31, 2002 and 2001, are summarized as follows:


In thousands			2002		2001

Regulatory Assets:
	Unamortized debt expense		$	3,841	$	4,130
	Environmental costs			6,153		5,767
	Demand-side management costs			6,211		5,382
	Deferred Year 2000 costs			195		391
	Deferred pension expense			542		745
	Other			2,792		2,163

		Total	$	19,734	$	18,578

Regulatory Liabilities:
	Refunds due customers		$	15,635	$	31,685
	Deferred income taxes			13,013		13,037

		Total	$	28,648	$	44,722

C. Utility Plant and Depreciation.

Utility plant is stated at original cost, including direct labor and materials, allocable overheads and an allowance for borrowed and equity funds used during construction (AFUDC). AFUDC totaled $3,424,000 for 2002, $6,677,000 for 2001 and $3,321,000 for 2000. The portion of AFUDC attributable to equity funds is included in “Other Income (Expense)” and the portion attributable to borrowed funds is shown as a reduction of “Utility Interest Charges” in the statements of consolidated income. The costs of property retired are removed from utility plant and such costs, including removal costs net of salvage, are charged to accumulated depreciation.

We compute depreciation expense using the straight-line method over a period of 5 to 72 years. The composite weighted-average depreciation rates were 3.55% for 2002, 3.45% for 2001 and 3.49% for 2000.

We review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Our reviews have not resulted in a material effect on results of operations or financial condition; however, we did write down our investment in propane during 2002 as discussed in Note 9.

D. Inventories.

We maintain inventories on the basis of average cost. Cost for gas in storage is defined as the amount recoverable under rate schedules approved by the state regulatory commissions.

E. Deferred Purchased Gas Adjustment.

Rate schedules include purchased gas adjustment provisions that permit the recovery of gas costs. We periodically revise rates without formal rate proceedings to reflect changes in the cost of gas. Charges to cost of gas are based on the amount recoverable under approved rate schedules. The net of any over- or under-recoveries of gas costs are added to or deducted from cost of gas and included in “Refunds due customers” in the

consolidated balance sheets.

F. Income Taxes.

We provide deferred income taxes for differences between the book and tax basis of assets and liabilities, principally attributable to accelerated tax depreciation and equity investments, and the timing of the recording of revenues and cost of gas. We amortize deferred investment tax credits to income over the estimated useful life of the related property.

G. Operating Revenues.

We recognize revenues from meters read on a monthly cycle basis which results in unrecognized revenue from the cycle date through month end. We defer the cost of gas for volumes delivered to customers but not yet billed under the cycle-billing method.

H. Earnings Per Share.

We compute basic earnings per share using the weighted average number of shares of Common Stock outstanding during each period. A reconciliation of basic and diluted earnings per share for the years ended October 31, 2002, 2001 and 2000, is presented below:


In thousands except per share amounts		2002		2001		2000

Net Income		$	62,217	$	65,485	$	64,031

Average shares of Common Stock outstanding for basic earnings per share			32,763		32,183		31,600
Contingently issuable shares under the Long-Term Incentive Plan			174		237		179

Average shares of dilutive stock			32,937		32,420		31,779

Earnings Per Share:
	Basic	$	1.90	$	2.03	$	2.03
	Diluted	$	1.89	$	2.02	$	2.01

I. Statement of Cash Flows.

For purposes of reporting cash flows, we consider instruments purchased with an original maturity at date of purchase of three months or less to be cash equivalents.

J. Recently Issued Accounting Standards.

Effective November 1, 2002, we will adopt SFAS No. 142,

“Goodwill and Other Intangible Assets” (Statement 142). Statement 142 provides new guidance for accounting for the acquisition of intangibles (but not those acquired in a business combination) and the manner in which intangibles, including goodwill, should be accounted for subsequent to their initial recognition. The adoption of Statement 142 will not have a material effect on financial position or results of operations.

Effective November 1, 2002, we will adopt SFAS No. 143, “Accounting for Asset Retirement Obligations” (Statement 143). Statement 143 addresses financial accounting and reporting for asset retirement obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and operation of the asset. Statement 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which the liability is incurred if a reasonable estimate of fair value can be made. We have determined that asset retirement obligations exist for our underground mains and services; however, the fair value of the obligation cannot be determined because the end of the system life is indeterminable.

K. Use of Estimates.

We make estimates and assumptions when preparing the consolidated financial statements. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimates.

L. Reclassifications.

We have reclassified certain financial statement items for 2001 and 2000 to conform with the 2002 presentation.

2. Regulatory Matters

In 1996, the NCUC ordered us to establish an expansion fund to enable the extension of natural gas service into unserved areas of the state. The expansion fund was funded with supplier refunds, plus investment income earned, that would otherwise be refunded to customers. During 2000 and 2001, the NCUC allowed us to use $38,527,000 of expansion funds to extend natural gas service to the counties of Avery, Mitchell and Yancey. As we believe that we have no other anticipated projects that qualify for expansion funds as currently determined by the NCUC, we petitioned the NCUC on January 30, 2002, for permission to deposit supplier refunds held in escrow at that time and future supplier refunds in the appropriate gas costs deferred accounts for refund to customers. On February 21, the NCUC agreed and ordered that these supplier refunds be placed in the deferred accounts. At October 31, 2002, the balance in our expansion fund was $5,843,000 and is included in “Restricted cash” and “Refunds due customers” in the consolidated balance sheets.

Effective January 1, 2001, we purchased for cash the natural gas distribution assets of Atmos Energy Corporation located in the city of Gaffney and portions of Cherokee County, South Carolina. The acquisition was at net book value of $6,625,000 and added 5,400 customers to our operations.

In October 2001, we filed an application with the NCUC seeking approval to implement an experimental natural gas hedging program. At the time, the NCUC was engaged in a generic investigation into the hedging of natural gas commodity costs, and the NCUC took no action on our application pending further proceedings in the generic investigation. On February 26, 2002, the NCUC issued an order in the generic proceeding that concluded, among other things, that hedging costs should be treated as gas costs and that pre-approval of a hedging program would be inconsistent with the procedures for the annual gas costs prudency reviews. In its order, the NCUC stated that hedging is an option that must be considered in connection with the gas purchasing practices of a local distribution company. The NCUC recognized that the review of the prudency of a decision to hedge or not to hedge, just like the review of the prudency of other gas purchasing decisions, must be made on the basis of the information available at the time the decision is made, not on the basis of the information available at the time of the annual prudency

review proceeding. On April 10, we again asked the NCUC for approval to operate a hedging plan on an experimental basis for a period of two years and for reconsideration of the NCUC’s conclusion on the pre-approval of a hedging program. On October 18, the NCUC denied our request for pre-approval; however, the NCUC commended us for our hedging plan proposal and our contribution to the understanding of hedging by the NCUC. The NCUC made it clear that while it would not pre-approve the plan, it recognized that the plan is experimental in nature and did not wish to be understood as having disapproved the plan or expressed the opinion that adoption of the plan would result in disallowances in an annual review of gas costs. Nothing in the order precluded us from implementing the plan if we chose to do so subject to the terms of the order in the generic proceeding. Given the favorable comments and assurances by the NCUC in both orders, we implemented a hedging program in North Carolina effective November 1, 2002.

On March 28, 2002, we filed an application with the NCUC requesting an annual increase in revenues of $28,182,000, an increase of 6.8%. In addition, we requested changes in cost allocations and rate design and changes in tariffs and service regulations. On August 5, a stipulation among Piedmont, the Public Staff of the NCUC and Carolina Utility Customers Association, Inc., an intervenor, was filed with the NCUC. The stipulation resolved all outstanding issues among the stipulating parties and provided for an annual increase in revenues of $13,889,000. A hearing was held on August 27. At the hearing and based on further residential rate design changes agreed to by us, the only intervenor who did not sign the stipulation did not oppose the stipulation. On October 28, the NCUC issued an order approving an annual revenue increase of $13,889,000, effective November 1, 2002.

On May 3, 2002, we filed an application with the PSCSC requesting an annual increase in revenues of $15,337,000, an increase of 10.5%. In addition, we requested approval of new depreciation rates, changes in cost allocations and rate design and changes in tariffs and service regulations. A hearing was held on September 4 and 5. On October 29, the PSCSC issued an order approving an annual revenue increase of $8,381,000, effective November 1, 2002. The Consumer Advocate of South Carolina has requested a rehearing of the order and we are unable to predict the outcome of that request.

Effective September 30, 2002, we purchased substantially all of the natural gas distribution assets and certain of the liabilities, including potential remediation costs of a manufactured gas plant site, of North Carolina Gas Service (NCGS), a division of NUI Utilities, Inc., for $26,000,000 in cash. The transaction added 14,000 customers to our distribution system in the counties of Rockingham and Stokes, North Carolina. Included in the assets acquired was NCGS’s expansion fund in the amount of

$2,185,000. At October 31, 2002, this amount is included in “Restricted cash” and “Refunds due customers” in the consolidated balance sheets.

On October 16, 2002, we entered into an agreement to purchase for $425,000,000 in cash the stock of North Carolina Natural Gas (NCNG), a natural gas distribution subsidiary of Progress Energy, Inc., serving 176,000 customers in eastern North Carolina, and Progress Energy’s 50% investment in Eastern North Carolina Natural Gas Company (EasternNC). EasternNC is a joint venture with Albemarle Pamlico Economic Development Corporation to bring natural gas service to 14 counties in eastern North Carolina. The transaction is subject to approvals by various regulatory agencies and is expected to close in mid-2003.

3. Long-Term Debt

Long-term debt at October 31, 2002 and 2001, is summarized as follows:


In thousands				2002		2001

Senior Notes:
	10.06%, due 2004			$	4,000	$	6,000
		9.44%, due 2006			35,000		35,000
		8.51%, due 2017			35,000		35,000
Medium-Term Notes:
		6.23%, due 2003			45,000		45,000
		7.35%, due 2009			30,000		30,000
		7.80%, due 2010			60,000		60,000
		6.55%, due 2011			60,000		60,000
		6.87%, due 2023			45,000		45,000
		8.45%, due 2024			40,000		40,000
		7.40%, due 2025			55,000		55,000
		7.50%, due 2026			40,000		40,000
		7.95%, due 2029			60,000		60,000

			Total		509,000		511,000
Less current maturities					47,000		2,000

			Total	$	462,000	$	509,000

Annual sinking fund requirements and maturities over the next five years are $47,000,000 in 2003, $2,000,000 in 2004, zero in 2005, $35,000,000 in 2006 and zero in 2007.

4. Capital Stock

The changes in Common Stock for the years ended October 31, 2000, 2001 and 2002, are summarized as follows:


In thousands		Shares		Amount

Balance, October 31, 1999			31,295	$	297,149
	Issue to participants in the Employee Stock Purchase Plan (SPP)		20		517
	Issue to the Dividend Reinvestment and Stock Purchase Plan (DRIP)		548		14,935
	Issue to participants in the Long-Term Incentive Plan (LTIP)		51		1,629

Balance, October 31, 2000			31,914		314,230
	Issue to SPP		16		476
	Issue to DRIP		461		14,913
	Issue to LTIP		72		2,419

Balance, October 31, 2001			32,463		332,038
	Issue to SPP		16		507
	Issue to DRIP		546		18,039
	Issue to LTIP		65		1,969

Balance, October 31, 2002			33,090	$	352,553

At October 31, 2002, 1,475,000 shares of Common Stock were reserved for issuance as follows:


SPP		149,000
DRIP		573,000
LTIP		753,000

	Total	1,475,000

5. Financial Instruments and Related Fair Value

Various banks provide lines of credit totaling $150,000,000 to finance current cash requirements. We have additional uncommitted lines of credit totaling $73,000,000 on a no fee and as needed, if available, basis. Short-term borrowings under the lines, with maturity dates of less than 90 days, include LIBOR cost-plus loans, transactional borrowings and overnight cost-plus loans based on the lending bank’s cost of money, with a maximum rate of the lending bank’s commercial prime interest rate. At October 31, 2002, the committed lines of credit were on a fee basis, with a maximum annual fee of $198,000.

At October 31, 2002, outstanding borrowings under the lines of credit are included in “Notes payable” in the consolidated balance sheets and consisted of $34,000,000 in LIBOR cost-plus loans and $12,500,000 in overnight cost-plus loans. The weighted average interest rate on such borrowings was 2.23%.

Our principal business activity is the distribution of natural gas. At October 31, 2002, gas receivables totaled $33,003,000 and other receivables totaled $4,501,000, net of an allowance for doubtful accounts of $810,000. The uncollected balance of installment receivables that were transferred with recourse to a third party several years ago was $13,474,000 and $17,184,000 at October 31, 2002 and 2001, respectively. We believe that we have provided an adequate allowance for any receivables which may not be ultimately collected, including the receivables transferred with recourse.

The carrying amounts in the consolidated balance sheets of cash and cash equivalents, restricted cash, receivables, notes payable and accounts payable approximate their fair values due to the short-term nature of these financial instruments. Based on quoted market prices of similar issues having the same remaining maturities, redemption terms and credit ratings, the estimated fair values of long-term debt at October 31, 2002 and 2001, including current portion, were as follows:


	2002				2001

	Carrying		Fair		Carrying		Fair
In thousands	Amount		Value		Amount		Value

Long-term debt	$	509,000	$	589,503	$	511,000	$	565,161

The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair values. The fair value amounts are not intended to reflect principal amounts that we will ultimately be required to pay.

We purchase natural gas for our regulated operations for resale under tariffs approved by the state regulatory commissions having jurisdiction over the service territory where the customer is located. We recover the cost of gas purchased for regulated operations through purchased gas adjustment mechanisms. We structure the pricing, quantity and term provisions of our gas supply contracts to maximize flexibility and minimize cost and risk for our customers. We have a management-level Energy Risk Management Committee that monitors risks in accordance with our risk management policies.

During the year ended October 31, 2002, we purchased financial call options for natural gas for our Tennessee gas purchase portfolio. At October 31, 2002, such options were for gas supply for delivery in December 2002 through February 2003. The cost of these options and all other gas costs incurred are components of and are recovered under the guidelines of the Tennessee Incentive Plan. This plan establishes an incentive-sharing mechanism based on differences in the actual cost of gas purchased and benchmark amounts determined by published market indices. These differences, after applying a monthly 1% positive or negative deadband, together with margin from marketing transportation and capacity in the secondary market and margin from secondary market sales of gas, are subject to an overall annual cap of $1,600,000 for shareholder gains or losses. The net gains or losses on gas procurement costs within the deadband (99% to 101% of the benchmark) are not subject to sharing under the plan and are allocated to customers. Any net gains or losses on gas procurement costs outside the deadband are combined with capacity management benefits and shared between customers and shareholders. This amount is subject to the overall annual cap and is placed in a regulatory asset to be collected from or refunded to customers.

Beginning in April 2002, we purchased and sold financial options for natural gas for our South Carolina gas purchase portfolio under the experimental hedging program approved by the PSCSC. At October 31, 2002, such options were for gas supply for delivery in November 2002 through March 2003. The costs of these options are pre-approved by the PSCSC for recovery from customers. This plan operates off of pricing indices that are tied to future projected gas prices as traded on a national exchange and is limited to 60% of our annual normalized sales volumes for South Carolina. The hedging program uses a matrix of historic, inflation-adjusted gas prices over the past four years plus the current season, with a heavier weighting on current data, as the basis for determining the purchase of financial instruments. The supply cost portfolio is diversified over a rolling 24 months with a short-term focus (one to 12 months) and a long-term focus (13 to 24 months). Purchases are executed within the parameters of the matrix compared with NYMEX monthly prices as reviewed on a daily basis. The plan is designed with limited subjective discretion in making purchases with little or no risk of speculation in the market.

6. Leases

We lease certain buildings, land and equipment for use in our operations. These leases are accounted for as operating leases. Operating lease rentals totaled $4,520,000 in 2002, $4,400,000 in 2001 and $4,153,000 in 2000.

Future minimum lease obligations, excluding taxes and other expenses, for leases in effect at October 31, 2002, are as follows (in thousands):


2003		$	3,907
2004			3,240
2005			2,502
2006			1,615
2007			893
Thereafter			2,487

	Total minimum payments	$	14,644

7. Employee Benefit Plans

We have a defined-benefit pension plan for the benefit of eligible full-time employees. An employee becomes eligible on the January 1 or July 1 following either the date on which he or she attains age 21 and completes 1,000 hours of service during the 12-month period commencing on the employment date or attains age 30. Plan benefits are generally based on credited years of service and the level of compensation during the five consecutive years of the last ten years prior to retirement during which the participant received the highest compensation. Our policy is to fund the plan in an amount not in excess of the amount that is deductible for

income tax purposes. Plan assets consist primarily of marketable securities and cash equivalents. We amend the plan from time to time in accordance with changes in tax law.

We provide certain postretirement health care and life insurance benefits to eligible full-time employees. Employees are first eligible to retire and receive these benefits at age 55 with 10 or more years of service after the age of 45. The liability associated with such benefits is funded in irrevocable trust funds which can only be used to pay the benefits.

A reconciliation of the changes in the plans’ benefit obligations and fair value of assets for the years ended October 31, 2002 and 2001, and a statement of the funded status as recorded in the consolidated balance sheets at October 31, 2002 and 2001, are presented below:


			2002			2001			2002			2001

In thousands			Pension Benefits						Other Benefits

Change in benefit obligation:
	Obligation at beginning of year		$	148,011		$	122,712		$	24,987		$	21,868
	Service cost			5,456			4,890			542			573
	Interest cost			9,729			9,279			1,696			1,636
	Plan amendments			2,474			—			—			—
	Actuarial (gain) loss			(9,031	)		18,056			524			3,235
	Benefit payments			(6,946	)		(6,926	)		(2,117	)		(2,325	)

		Obligation at end of year	$	149,693		$	148,011		$	25,632		$	24,987

Change in fair value of plan assets:
	Fair value of plan assets at beginning of year		$	135,981		$	161,034		$	11,210		$	10,355
	Actual return (loss) on plan assets			(3,979	)		(18,127	)		88			485
	Employer contributions			—			—			1,721			2,110
	Benefit payments			(6,946	)		(6,926	)		(1,708	)		(1,740	)

		Fair value of plan assets at end of year	$	125,056		$	135,981		$	11,311		$	11,210

Funded status:
	Funded status at end of year		$	(24,637	)	$	(12,030	)	$	(14,321	)	$	(13,777	)
	Unrecognized transition obligation			13			27			9,670			10,550
	Unrecognized prior-service cost			8,092			6,519			—			—
	Unrecognized actuarial (gain) loss			10,570			(225	)		4,192			2,887

		Accrued benefit liability	$	(5,962	)	$	(5,709	)	$	(459	)	$	(340	)

Net periodic benefit cost for the years ended October 31, 2002, 2001 and 2000, includes the following components:


		2002			2001			2000			2002			2001			2000

In thousands		Pension Benefits									Other Benefits

Service cost		$	5,456		$	4,890		$	5,203		$	542		$	573		$	581
Interest cost			9,729			9,278			9,040			1,696			1,636			1,793
Expected return on plan assets			(14,976	)		(14,359	)		(13,488	)		(913	)		(839	)		(568	)
Amortization of transition obligation			14			14			15			879			879			930
Amortization of prior-service cost			903			762			824			—			—			—
Curtailment expense			—			—			—			—			—			660
Amortization of actuarial (gain) loss			(872	)		(1,781	)		(1,651	)		46			—			42

	Net periodic benefit cost	$	254		$	(1,196	)	$	(57	)	$	2,250		$	2,249		$	3,438

The curtailment expense included in the net periodic benefit cost for 2000 was the result of the contribution of substantially all of Piedmont Propane Company’s assets in exchange for a partnership interest in Heritage Propane Partners, L.P., as discussed in Note 9.

We amortize unrecognized prior-service cost over the average remaining service period for active employees. We amortize the unrecognized net transition obligation over the average remaining service period for active employees expected to receive benefits under the plan as of the date of transition. We amortize gains and losses in excess of 10% of the greater of the benefit obligation and the market-related value of assets over the average remaining service period of active employees. The method of amortization in all cases is straight-line.

The weighted average assumptions used in the measurement of the benefit obligation at October 31, 2002, 2001 and 2000, are presented below:


	2002			2001			2000			2002			2001			2000

	Pension Benefits									Other Benefits

Discount rate		7.00	%		6.75	%		7.50	%		7.00	%		7.00	%		7.75	%
Expected long-term rate of return on plan assets		9.50	%		9.50	%		9.50	%		9.50	%		9.25	%		9.50	%
Rate of compensation increase		3.97	%		4.75	%		5.50	%		3.97	%		4.50	%		4.50	%

We anticipate that the discount rate and the expected long-term rate of return on plan assets to be used at the next valuation date of January 1, 2003, will be lower than the rate used in 2002 to reflect the prolonged general weakness in the economy.

The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation for the medical plans for participants aged less than 65 are 11.5% for 2002 and 10% for 2003, declining gradually to 5% in 2010 and remaining at that level thereafter. For those participants aged greater than 65, the assumed health care cost trend rates are 14.5% for 2002 and 13% for 2003, declining gradually to 5% in 2012 and remaining at that level thereafter. The health care cost trend rate assumptions have a significant effect on the amounts reported. A one-percentage point change in the assumed health care cost trend rates would have the following effects:


In thousands	1% Increase		1% Decrease

Effect on total of service and interest cost components of net periodic postretirement health care benefit cost for the year ended October 31, 2002	$	89	$	(79	)
Effect on the health care component of the accumulated postretirement benefit obligation as of October 31, 2002	$	1,334	$	(1,184	)

We maintain salary investment plans which are profit-sharing plans under Section 401(a) of the Internal Revenue Code of 1986, as amended (the Tax Code), which include qualified cash or deferred arrangements under Tax Code Section 401(k). Employees who have completed six months of service are eligible to participate. Participants are permitted to defer a portion of their base salary to the plans and we match a portion of the participants’ contributions. All contributions vest immediately. There are numerous investment options available to enable participants to diversify their accounts. Participants can also invest in company stock up to a maximum of 20% of their account. For the years ended October 31, 2002, 2001 and 2000, we contributed $2,244,000, $2,189,000 and $2,273,000, respectively, in matching contributions to the plans.

8. Income Taxes

The components of income tax expense for the years ended October 31, 2002, 2001 and 2000, are as follows:


							2002					2001					2000
In thousands				Federal			State		Federal			State		Federal			State

Income taxes charged to operations:
	Current			$	15,482		$	4,410	$	23,959		$	4,558	$	21,675		$	4,615
	Deferred				10,711			737		4,933			1,683		6,784			1,459
	Amortization of investment tax credits				(556	)		—		(558	)		—		(558	)		—

		Total			25,637			5,147		28,334			6,241		27,901			6,074

Income taxes charged to other income:
	Current				5,424			952		4,685			1,036		829			183
	Deferred				2,174			460		1,299			280		5,242			1,127

		Total			7,598			1,412		5,984			1,316		6,071			1,310

			Total income tax expense	$	33,235		$	6,559	$	34,318		$	7,557	$	33,972		$	7,384

A reconciliation of income tax expense at the federal statutory rate to recorded income tax expense for the years ended October 31, 2002, 2001 and 2000, is as follows:


In thousands		2002			2001			2000

Federal taxes at 35%		$	35,704		$	37,576		$	36,892
State income taxes, net of federal benefit			4,263			4,912			4,800
Amortization of investment tax credits			(556	)		(558	)		(558	)
Other, net			383			(55	)		222

	Total income tax expense	$	39,794		$	41,875		$	41,356

At October 31, 2002 and 2001, deferred income taxes consist of the following temporary differences:


In thousands		2002			2001

Utility plant		$	151,584		$	139,481
Equity investments			16,648			14,014
Revenues and cost of gas			1,378			9,839
Other, net			(9,951	)		(17,779	)

	Net deferred income taxes	$	159,659		$	145,555

Total deferred income tax liabilities were $169,918,000 and $154,950,000 and total deferred income tax assets were $10,259,000 and $9,395,000 at October 31, 2002 and 2001, respectively.

9. Equity Investments

The consolidated financial statements include the accounts of wholly owned subsidiaries whose investments in non-utility activities are accounted for under the equity method. Some of these subsidiaries are subsidiaries of Piedmont Energy Partners, Inc., which acts as a holding company for these investments. Our ownership interest in each entity is recorded in “Investments in non-utility activities, at equity” in the consolidated balance sheets. Earnings or losses from equity investments are recorded in

“Non-utility activities, at equity” in “Other Income (Expense)” in the statements of consolidated income.

Piedmont Intrastate Pipeline Company

Piedmont Intrastate Pipeline Company is a 16.45% member of Cardinal Pipeline Company, L.L.C., a North Carolina limited liability company. The other members are subsidiaries of The Williams Companies, Inc., SCANA Corporation and Progress Energy, Inc. Cardinal owns and operates a 104-mile intrastate natural gas pipeline in North Carolina and is regulated by the NCUC. Cardinal has firm service agreements with local distribution companies, including Piedmont Natural Gas Company, for 100% of the 270 million cubic feet per day of firm transportation capacity on the pipeline. Cardinal is dependent on the Williams-Transco pipeline system to deliver gas into its system for service to its customers. Cardinal’s long-term debt is secured by Cardinal’s assets and by each member’s equity investment in Cardinal.

We have related party transactions with Cardinal as a transportation customer. We record in cost of gas the transportation costs charged by Cardinal. These gas costs were $1,475,000 for 2002, 2001 and 2000. At October 31, 2002 and 2001, we owed Cardinal $123,000.

Summarized unaudited financial information provided to us by Cardinal for 100% of Cardinal for the twelve months ended September 30, 2002, 2001 and 2000, and at September 30, 2002, 2001 and 2000, is presented below.


In thousands	2002		2001		2000

Current assets	$	11,339	$	7,988	$	14,573
Non-current assets		95,256		97,897		99,534
Current liabilities		5,416		3,187		1,233
Non-current liabilities		43,200		45,120		48,000
Revenues		17,124		17,124		15,697
Gross profit		17,124		17,124		15,697
Income before income taxes		9,401		10,005		9,519

Piedmont Interstate Pipeline Company

Piedmont Interstate Pipeline Company is a 35% member of Pine Needle LNG Company, L.L.C., a North Carolina limited liability company. The other members are subsidiaries of The Williams Companies, Inc., SCANA Corporation, Progress Energy, Inc., and Amerada Hess Corporation, and the Municipal Gas Authority of Georgia. Pine Needle owns a liquefied natural gas (LNG) storage facility in North Carolina and is regulated by the Federal Energy Regulatory Commission (FERC). Storage capacity of the facility is four billion cubic feet with vaporization capability of 400 million cubic feet per day and is fully subscribed under firm service agreements with customers. We subscribe to slightly more than one-half of this capacity to provide gas for peak-use periods when demand is the highest. Pine Needle enters into interest-rate

swap agreements to modify the interest characteristics of its long-term debt. Movements in the mark-to-market value of these agreements are recorded in “Accumulated other comprehensive income” in the consolidated balance sheets as a hedge under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (Statement 133). Pine Needle’s long-term debt is secured by Pine Needle’s assets and by each member’s equity investment in Pine Needle.

We have related party transactions with Pine Needle as a customer. We record in cost of gas the storage costs charged by Pine Needle. These gas costs were $10,898,000, $11,266,000 and $10,581,000 in 2002, 2001 and 2000, respectively. At October 31, 2002 and 2001, we owed Pine Needle $895,000 and $920,000, respectively.

Summarized unaudited financial information provided to us by Pine Needle for 100% of Pine Needle for the twelve months ended September 30, 2002, 2001 and 2000, and at September 30, 2002, 2001 and 2000, is presented below.


In thousands	2002		2001		2000

Current assets	$	12,662	$	10,494	$	10,626
Non-current assets		98,309		101,060		104,009
Current liabilities		6,495		3,375		2,789
Non-current liabilities		55,856		55,908		53,500
Revenues		20,253		20,271		19,597
Gross profit		20,253		20,271		19,597
Income before income taxes		10,357		10,916		10,512

Piedmont Propane Company

Piedmont Propane Company owns 20.69% of the membership interest in US Propane, L.P. The other partners are subsidiaries of TECO Energy, Inc., AGL Resources, Inc., and Atmos Energy Corporation. US Propane was formed in 2000 to combine our propane operations with the propane operations of these other companies. In August 2000, US Propane combined with Heritage Holdings, Inc., the general partner of Heritage Propane Partners, L.P. (Heritage Propane), a marketer of propane through a nationwide retail distribution network, by contributing all of its assets to Heritage Holdings for $181,395,000 in cash, assumed debt and common and limited partnership units and purchasing all of the outstanding stock of Heritage Holdings for $120,000,000. This combination, including a gain on the transfer of the propane assets, transaction costs and certain employee benefit plans’ gains and charges, resulted in an increase in our net income in 2000 of $5,063,000, or earnings per share of $.16.

US Propane owns all of the general partnership interest and approximately 31% of the limited partnership interest in Heritage Propane. Heritage Propane competes with electricity, natural gas and fuel oil, as well as with other companies in the retail propane distribution business. The propane business, like natural

gas, is seasonal, with weather conditions significantly affecting the demand for propane. Heritage Propane’s profitability is also sensitive to changes in the wholesale prices of propane. Heritage Propane utilizes hedging transactions to provide price protection against significant fluctuations in prices. Movements in the mark-to-market value of these agreements are recorded in “Accumulated other comprehensive income” in the consolidated balance sheets as a hedge under Statement 133. Heritage Propane also buys and sells financial instruments for trading purposes through a wholly owned subsidiary. Financial instruments used in connection with this liquids trading activity are marked to market.

In July 2002, we recorded a pre-tax loss in value of $1,366,000 on our investment in US Propane due to an other than temporary decline in the value of the general partnership interest in Heritage Propane. The other than temporary loss was calculated based on estimated future cash flow projections that reflect actual and projected customer growth assumptions for Heritage Propane.

The limited partnership agreement of US Propane requires that in the event of liquidation, all limited partners would be required to restore capital account deficiencies, including any unsatisfied obligations of the partnership. Under the agreement, our maximum capital account restoration is $10,000,000. At October 31, 2002, our capital account was positive.

Summarized audited financial information provided to us by Heritage Propane for 100% of Heritage Propane for its fiscal years ended August 31, 2002 and 2001, and the eight months ended August 31, 2000, and at August 31, 2002, 2001 and 2000, is presented below.


In thousands	2002		2001		2000

Current assets	$	95,387	$	138,263	$	84,869
Non-current assets		621,877		619,904		530,910
Current liabilities		122,069		127,655		102,212
Non-current liabilities		420,021		423,748		361,990
Minority interest		3,564		5,350		4,821
Revenues		621,390		715,453		63,072
Gross profit		383,205		408,897		33,110
Income before income taxes		4,902		19,710		(3,467	)

Piedmont Energy Company

Piedmont Energy Company has a 30% interest in SouthStar Energy Services LLC, a Delaware limited liability company. The other members are subsidiaries of AGL Resources, Inc., and Dynegy Inc. SouthStar sells natural gas to residential, commercial and industrial customers in the southeastern United States. SouthStar was formed and began marketing natural gas in Georgia in 1998 when that state implemented full natural gas retail competition.

SouthStar conducts most of its business in Georgia, and the unregulated retail gas market in that state is highly competitive.

SouthStar’s members to guarantee SouthStar’s ability to pay AGLC’s bills for local delivery service. Piedmont Energy Company, through its parent Piedmont Energy Partners, has guaranteed its 30% share of SouthStar’s obligation with AGLC with a letter of credit with a bank in the amount of $13,400,000 that expires on August 5, 2003.

In 2000, the members of SouthStar entered into a capital contributions agreement that requires each member to contribute additional capital for SouthStar to pay invoices for goods or services provided from any member or affiliates of members whenever funds are not available to pay these invoices. These capital contributions are repaid as funds become available, but are subordinate to SouthStar’s revolving line of credit with a bank. During 2001, we contributed $13,800,000 under this agreement, of which $6,000,000 was repaid. There were no contributions or repayments during 2002.

We have related party transactions with SouthStar which purchases wholesale gas supplies from us. We record this activity in operating revenues at negotiated market prices. Such operating revenues totaled $10,744,000, $12,192,000 and $8,680,000 in 2002, 2001 and 2000, respectively. At October 31, 2002 and 2001, SouthStar owed us $1,162,000 and $1,015,000, respectively.

Summarized unaudited financial information provided to us by SouthStar for 100% of SouthStar for the twelve months ended September 30, 2002, 2001 and 2000, and at September 30, 2002, 2001 and 2000, is presented below.


In thousands	2002		2001		2000

Current assets	$	134,113	$	140,125	$	149,391
Non-current assets		1,228		2,688		11,722
Current liabilities		61,990		33,891		152,693
Non-current liabilities		—		35,464		—
Revenues		606,191		817,687		499,260
Gross profit		124,315		117,306		53,181
Income before income taxes		54,308		23,708		11,569

Piedmont Greenbrier Pipeline Company

Piedmont Greenbrier Pipeline Company, LLC, has a 33% equity interest in Greenbrier Pipeline Company, LLC (Greenbrier). The other member is a subsidiary of Dominion Resources, Inc. Greenbrier, formed in 2001, proposes to build a 280-mile interstate gas pipeline linking multiple gas supply basins and storage to markets in the Southeast, with initial capacity of 600,000 dekatherms of natural gas per day to commence service in 2005. The pipeline would originate in Kanawha County, West Virginia, and extend through southwest Virginia to Granville County, North Carolina. The pipeline is expected to cost $497,000,000, with $150,000,000 of the cost expected to be contributed as equity by the owners and the remainder expected to be provided by project-financed debt. As of October 31, 2002, we

have made capital contributions to Greenbrier totaling $6,761,000. We have signed a precedent agreement for firm transportation service with Greenbrier. On October 30, 2002, the FERC gave preliminary approval to the project regarding non-environmental issues. Construction of the pipeline is subject to a number of conditions, including final certificate approval by the FERC.

Summarized unaudited financial information provided to us by Greenbrier for 100% of Greenbrier for the twelve months ended October 31, 2002, and at October 31, 2002 and 2001, is presented below.


In thousands	2002		2001

Current assets	$	2,501	$	2,343
Non-current assets		18,684		—
Current liabilities		380		—
Non-current liabilities		—		—
Revenues		—		—
Gross profit		—		—
Income before income taxes		317*		—

• Consists of AFUDC of $319 and operations and maintenance expenses of $2.

10. Business Segments

Activities included in “Other” in the segment tables consist primarily of propane operations conducted by Piedmont Propane Company. All of our activities other than the utility operations of the parent are included in “Other Income (Expense)” in the statements of consolidated income.

We evaluate performance based on margin, operations and maintenance expenses, operating income and income before taxes. All of our operations are within the United States. No single customer’s revenues to us exceed 10% of our consolidated revenues.

Operations by segment for the years ended October 31, 2002, 2001 and 2000, are presented below:


			Retail
	Domestic		Energy
	Natural Gas		Marketing
In thousands	Distribution		Services			Other			Total

2002
Revenues from external customers*	$	832,028	$	—		$	—		$	832,028
Margin		335,794		—			—			335,794
Operations and maintenance expenses		133,427		117			231			133,775
Depreciation and amortization		57,593		—			—			57,593
Operating income*		120,872		(152	)		(274	)		120,446
Interest expense		40,604		59			3			40,666
Other income (expense)		8,440		14,683			(970	)		22,153
Income before income taxes		88,715		14,473			(1,177	)		102,011
Total assets		1,433,351		23,718			36,133			1,493,202
Construction expenditures		83,831		—			—			83,831
2001
Revenues from external customers*	$	1,107,856	$	—		$	—		$	1,107,856
Margin		337,978		—			(264	)		337,714
Operations and maintenance expenses		133,422		37			277			133,736
Depreciation and amortization		52,060		—			5			52,065
Operating income*		128,519		(29	)		(493	)		127,997
Interest expense		39,414		465			—			39,879
Other income (expense)		8,611		9,021			1,552			19,184
Income before income taxes		97,750		8,526			1,084			107,360
Total assets		1,384,952		24,717			27,050			1,436,719
Construction expenditures		90,573		—			—			90,573
2000
Revenues from external customers*	$	830,377	$	—		$	29,967		$	860,344
Margin		318,331		(9	)		11,926			330,248
Operations and maintenance expenses		127,004		6			8,998			136,008
Depreciation and amortization		48,894		—			1,744			50,638
Operating income*		123,632		(34	)		651			124,249
Interest expense		40,272		358			340			40,970
Other income (expense)		9,863		1,200			8,859			19,922
Income before income taxes		93,258		2,732			9,397			105,387
Total assets		1,437,950		9,055			34,959			1,481,964
Construction expenditures		108,804		—			755			109,559

* Operating revenues and operating income shown in the consolidated financial statements represent utility operations only.

A reconciliation to the consolidated financial statements for the years ended October 31, 2002, 2001 and 2000, is presented below:


In thousands				2002			2001			2000

Net Income:
	Income before income taxes for reportable segments			$	103,188		$	106,276		$	95,990
	Income before income taxes for other non-utility activities				(1,177	)		1,084			9,397
	Income taxes				39,794			41,875			41,356

		Net income		$	62,217		$	65,485		$	64,031

Consolidated Assets:
	Total assets for reportable segments			$	1,457,069		$	1,409,669		$	1,447,005
	Other assets				36,133			27,050			34,959
	Eliminations/Adjustments				(48,114	)		(43,061	)		(36,961	)

			Consolidated assets	$	1,445,088		$	1,393,658		$	1,445,003

11. Environmental Matters

In September 2002, in connection with the purchase of the operations of NCGS discussed in Note 2, we acquired the liability for an MGP site located in Reidsville, North Carolina. We had a limited assessment performed by a third party that consisted of an evaluation of documents, a site visit and an interview with an employee of the seller. This study concluded that a comprehensive baseline risk assessment would cost $150,000 and the maximum cost to remediate the site would be $487,000. Based on this study and the similar nature of the three sites not covered by the settlement, we increased our environmental liability in the fourth quarter of 2002 by $1,508,000, with an offsetting increase to a regulatory asset, to reflect a liability of $637,000 for each of the four sites.

At October 31, 2002, our undiscounted environmental liability totaled $2,868,000, consisting of $2,548,000 for the four MGP sites and $320,000 for underground storage tanks not yet remediated. This liability is not net of any anticipated recoveries.

At October 31, 2002, our regulatory assets for environmental costs totaled $6,153,000, net of recoveries from customers, in

connection with the estimated liabilities for the MGP sites and underground storage tanks and for environmental costs incurred, primarily legal fees and engineering assessments. The portion of the regulatory assets representing actual costs incurred is being amortized as recovered in current approved rates from customers in all three states.

Management’s Responsibility For Financial Reporting

The management of Piedmont Natural Gas Company is responsible for the preparation and integrity of the accompanying consolidated financial statements and related notes. We prepared the statements in conformity with accounting principles generally accepted in the United States of America appropriate in the circumstances and included amounts which are necessarily based on our best estimates and judgments made with due consideration to materiality. Financial information presented elsewhere in this report is consistent with that in the consolidated financial statements.

We have established and are responsible for maintaining a comprehensive system of internal accounting controls which we believe provides reasonable assurance that policies and procedures are complied with, assets are safeguarded and transactions are executed according to management’s authorization. We continually review this system for effectiveness and modify it in response to changing business conditions and operations and as a result of recommendations by internal and external auditors.

The Audit Committee of the Board of Directors, consisting solely of independent Directors, meets at least quarterly with Deloitte & Touche LLP, the internal auditors and representatives of management to discuss auditing and financial reporting matters. The Audit Committee reviews audit plans and results and accounting, financial reporting and internal control practices, procedures and results. Both Deloitte & Touche LLP and the internal auditors have full and free access to all levels of management.

/s/ Barry L. Guy

Barry L. Guy
Vice President and Controller

Independent Auditors’ Report

Piedmont Natural Gas Company, Inc.

We have audited the accompanying consolidated balance sheets of Piedmont Natural Gas Company, Inc. and subsidiaries (Piedmont Natural Gas) as of October 31, 2002 and 2001, and the related statements of consolidated income, stockholders’ equity and cash flows for the three years in the period ended October 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of Piedmont Natural Gas’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Piedmont Natural Gas at October 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP

Charlotte, North Carolina
December 12, 2002

Quarterly Financial Data (Unaudited) (In thousands except per share amounts)


											Earnings
											Per Share of
											Common Stock
	Operating				Operating			Net
	Revenues		Margin		Income			Income			Basic			Diluted

2002
January 31	$	288,757	$	123,202	$	46,605		$	41,170		$	1.26		$	1.26
April 30	$	293,865	$	118,568	$	43,112		$	41,845		$	1.28		$	1.27
July 31	$	127,928	$	47,862	$	1,628		$	(8,977	)	$	(.27	)	$	(.27	)
October 31	$	121,478	$	46,162	$	(1,218	)	$	(11,821	)	$	(.36	)	$	(.36	)
2001
January 31	$	467,573	$	128,602	$	49,645		$	50,302		$	1.57		$	1.56
April 30	$	408,012	$	119,630	$	45,181		$	39,869		$	1.24		$	1.23
July 31*	$	121,779	$	43,637	$	(916	)	$	(16,805	)	$	(.52	)	$	(.52	)
October 31	$	110,492	$	46,109	$	59		$	(7,881	)	$	(.24	)	$	(.24	)

The pattern of quarterly earnings is the result of the highly seasonal nature of the business as variations in weather conditions generally result in greater earnings during the winter months. Basic earnings per share are calculated using the weighted average number of shares outstanding during the quarter. The annual amount may differ from the total of the quarterly amounts due to changes in the number of shares outstanding during the year.

*The results for 2001 were impacted by a change in estimate for lost and unaccounted for gas in unbilled revenues by SouthStar Energy Services LLC, of which we own a 30% interest and account for under the equity accounting method. Our portion of the adjustment was $(5) million, net of tax, or $(.15) per share.

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

Information required under this item with respect to directors is contained in our proxy statement filed with the Securities and Exchange Commission (SEC) on or about January 20, 2003, and is incorporated herein by reference.

All of our officers’ names, ages and positions as of October 31, 2002, are listed below along with their business experience during the past five years.

So far as practicable, all elected officers are elected at the first meeting of the Board of Directors held following the annual meeting of shareholders in each year and hold office until the meeting of the Board following the annual meeting of shareholders in the next subsequent year and until their respective successors are elected and qualify. All other officers hold office during the pleasure of the Board. There are no family relationships among these officers.

There are no arrangements or understandings between any officer and any other person pursuant to which the officer was selected except for employment agreements and severence agreements with Messrs. Dzuricky, Killough, Schiefer, Skains and Yoho which were in effect during the year ended October 31, 2002.


	Business Experience
Name, Age and Position	During Past Five Years

Ware F. Schiefer, 64* Chief Executive Officer		Elected in February 2002. From 2000 to 2002, he was President and Chief Executive Officer. From 1999 to 2000, he was President and Chief Operating Officer. Prior to 1999, he was Executive Vice President.

Thomas E. Skains, 46* President and Chief Operating Officer		Elected February 2002. Prior to 2002, he was Senior Vice President — Marketing and Supply Services.


	Business Experience
Name, Age and Position	During Past Five Years

David J. Dzuricky, 51 Senior Vice President and Chief Financial Officer		Elected in 1995.

Ray B. Killough, 54 Senior Vice President — Operations		Elected in 1993.

Franklin H. Yoho, 42		Elected in March 2002. From 2000 to his election, he was Vice President, Business Development, CT Communications, Concord, North Carolina. Prior to 2000, he was Senior Vice President, Marketing and Gas Supply, Public Service Company of North Carolina, Gastonia, North Carolina.

John L. Clark, Jr., 59 Vice President — Tennessee Operations		Elected in 1998. Prior to his election, he was Vice President — Operations of the Nashville Division.

Ted C. Coble, 59 Vice President and Treasurer, and Assistant Secretary		Elected in 1982.

Stephen D. Conner, 54 Vice President — Corporate Communications		Elected in 1990.

Nick Emanuel, 53 Vice President — Engineering		Elected in 1998. Prior to his election, he was Director — Engineering.

Charles W. Fleenor, 52 Vice President — Gas Services		Elected in 1987.

Paul C. Gibson, 63 Vice President — Rates		Elected in 1986.

Barry L. Guy, 58 Vice President and Controller		Elected in 1986.

Donald F. Harrow, 47 Vice President — Governmental Relations		Elected in 1992.


	Business Experience
Name, Age and Position	During Past Five Years

Dale C. Hewitt, 57 Vice President — North Carolina Operations		Elected in 1993.

Richard A. Linville, 55 Vice President — Human Resources		Elected in 1997.

June B. Moore, 49 Vice President — Information Services		Elected in August 2000. From 1997 to her election, she was Director — Information Architecture Group.

Kevin M. O’Hara, 44 Vice President — Corporate Planning		Elected in 1993.

Martin C. Ruegsegger, 52 Vice President, Corporate Counsel and Secretary		Elected in 1997.

David L. Trusty, 45 Vice President — Marketing		Elected in 1997.

Ranelle Q. Warfield, 45 Vice President — Sales		Elected in 1997.

William D. Workman III, 62 Vice President — South Carolina Operations		Elected in 1993.

Ronald J. Turner, 56 Assistant Treasurer		Elected in 1976.

*Mr. Schiefer will retire on February 28, 2003, at the Company’s annual meeting of shareholders. Mr. Skains has been elected President and Chief Executive Officer effective upon Mr. Schiefer’s retirement.

Item 11. Executive Compensation

Information required under this item is contained in our proxy statement filed with the SEC on or about January 20, 2003, and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

(a) Security Ownership of Certain Beneficial Owners

Information with respect to security ownership of certain beneficial owners is contained in our proxy statement filed with the SEC on or about January 20, 2003, and is incorporated herein by reference.

(b) Security Ownership of Management

Information with respect to security ownership of directors and officers is contained in our proxy statement filed with the SEC on or about January 20, 2003, and is incorporated herein by reference.

We know of no arrangements or pledges which may result in a change in control.

Item 13. Certain Relationships and Related Transactions

Information with respect to certain transactions with directors is contained in our proxy statement filed with the SEC on or about January 20, 2003, and is incorporated herein by reference.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) 1. FINANCIAL STATEMENTS

The following consolidated financial statements of the Company and its subsidiaries and the related independent auditors’ report for the year ended October 31, 2002, are included in Item 8 of this report as follows:


	Page

Consolidated Balance Sheets — October 31, 2002 and 2001		32
Statements of Consolidated Income — Years Ended October 31, 2002, 2001 and 2000		34
Statements of Consolidated Cash Flows — Years Ended October 31, 2002, 2001 and 2000		35
Statements of Consolidated Stockholders’ Equity — Years Ended October 31, 2002, 2001 and 2000		36
Notes to Consolidated Financial Statements		37
Management’s Responsibility for Financial Reporting		60
Independent Auditors’ Report		61

(a) 2. SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT SCHEDULE


	Page

Schedule II Valuation and Qualifying Accounts		83

Schedules other than those listed above and certain other information are omitted for the reason that they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.

(a) 3. EXHIBITS


			Where an exhibit is filed by incorporation by reference to a previously filed registration statement or report, such registration statement or report is identified in parentheses. Upon written request of a shareholder, we will provide a copy of the exhibit at a nominal charge.

	3.1		Articles of Incorporation of the Company, filed in the Department of State of the State of North Carolina on December 14, 1993 (Exhibit No. 2, Registration Statement on Form 8-B, dated March 2, 1994).


	3.2		Copy of Certificate of Merger (New York) and Articles of Merger (North Carolina), each dated March 1, 1994, evidencing merger of Piedmont Natural Gas Company, Inc., with and into PNG Acquisition Company, with PNG Acquisition Company being renamed “Piedmont Natural Gas Company, Inc.” (Exhibits 3.2 and 3.1 to the Registration Statement on Form 8-B, dated March 2, 1994).

	3.3		By-Laws of the Company, as amended, dated February 25, 2001 (Exhibit No. 3.1, Form 10-Q for the quarter ended January 31, 2001).

	3.4		Articles of Amendment of the Company (Exhibit No. 3, Amendment to Form 10-Q for the period ended April 30, 1997).

	4.1		Note Agreement, dated as of June 15, 1989, between the Company and The Mutual Life Insurance Company of New York (Exhibit 4.27, Form 10-K for the fiscal year ended October 31, 1989).

	4.2		Note Agreement, dated as of July 30, 1991, between the Company and The Prudential Insurance Company of America (Exhibit 4.29, Form 10-K for the fiscal year ended October 31, 1991).

	4.3		Note Agreement, dated as of September 21, 1992, between the Company and Provident Life and Accident Insurance Company (Exhibit 4.30, Form 10-K for the fiscal year ended October 31, 1992).

	4.4		Indenture, dated as of April 1, 1993, between the Company and Citibank, N.A., Trustee (Exhibit 4.1, Registration Statement No. 33-60108).

	4.5		Medium-Term Note, Series A, dated as of July 23, 1993 (Exhibit 4.7, Form 10-K for the fiscal year ended October 31, 1993).

	4.6		Medium-Term Note, Series A, dated as of October 6, 1993 (Exhibit 4.8, Form 10-K for the fiscal year ended October 31, 1993).

	4.7		Medium-Term Note, Series A, dated as of September 19, 1994 (Exhibit 4.9, Form 10-K for the fiscal year ended October 31, 1994).


	4.8		Pricing Supplement of Medium-Term Notes, Series B, dated October 3, 1995 (Exhibit 4.10, Form 10-K for the fiscal year ended October 31, 1995).

	4.9		Pricing Supplement of Medium-Term Notes, Series B, dated October 4, 1996 (Exhibit 4.11, Form 10-K for the fiscal year ended October 31, 1996).

	4.10		Rights Agreement, dated as of February 27, 1998, between the Company and Wachovia Bank, N.A., as Rights Agent, including the Rights Certificate (Exhibit 10.1, Current Report on Form 8-K dated February 27, 1998).

	4.11		Form of Master Global Note (executed September 9, 1999, substantially as filed as Exhibit 4.4, Registration Statement No. 333-26161).

	4.12		Pricing Supplement of Medium-Term Notes, Series C, dated September 15, 1999 (Rule 424(b)(3) Pricing Supplement to Registration Statement Nos. 33-59369 and 333-26161).

	4.13		Pricing Supplement of Medium-Term Notes, Series C, dated September 15, 1999 (Rule 424(b)(3) Pricing Supplement to Registration Statement Nos. 33-59369 and 333-26161).

	4.14		Pricing Supplement No. 3 of Medium-Term Notes, Series C, dated September 26, 2000 (Rule 424(b)(3) Pricing Supplement to Registration Statement No. 333-26161).

	4.15		Form of Master Global Note (executed June 4, 2001, substantially as filed as Exhibit 4.4, Registration Statement No. 333-62222).

	4.16		Pricing Supplement No. 1 of Medium-Term Notes, Series D, dated September 18, 2001 (Rule 424(b)(3) Pricing Supplement to Registration Statement No. 333-62222).

	10.1		Executive Long-Term Incentive Plan (Exhibit 99.1, Registration Statement No. 333-34435).

	10.2		Service Agreement (5,900 Mcf per day) (Contract No. 4995), dated August 1, 1991, between the Company and Transcontinental Gas Pipe Line Corporation (Exhibit 10.20, Form 10-K for the fiscal year ended October 31, 1991).


	10.3		Service Agreement FT-Incremental Mainline (6,222 Mcf per day) (Contract No. 2268), dated August 1, 1991, between the Company and Transcontinental Gas Pipe Line Corporation (Exhibit 10.16, Form 10-K for the fiscal year ended October 31, 1992).

	10.4		Service Agreement (FT, 205,200 Mcf per day) (Contract No. 3702), dated February 1, 1992, between the Company and Transcontinental Gas Pipe Line Corporation (Exhibit 10.20, Form 10-K for the fiscal year ended October 31, 1992).

	10.5		Service Agreement (Contract #800059) (SCT, 1,677 dt/day), dated June 1, 1993, between the Company and Texas Eastern Transmission Corporation (Exhibit 10.28, Form 10-K for the fiscal year ended October 31, 1993).

	10.6		FTS Service Agreement (23,000 Dt/day), dated November 1, 1993, between the Company and Columbia Gas Transmission Corporation (Exhibit 10.24, Form 10-K for the fiscal year ended October 31, 1994).

	10.7		Service Agreement under Rate Schedule FSS (2,263,920 dekatherm storage capacity quantity, 37,000 dekatherm maximum daily storage deliverability) (Contract No. 38015), dated November 1, 1993, between the Company and Columbia Gas Transmission Corporation (Exhibit 10.25, Form 10-K for the fiscal year ended October 31, 1994).

	10.8		Service Agreement under Rate Schedule SST (Winter: 10,000 Dt/day; Summer: 5,000 Dt/day) (Contract No. 38052), dated November 1, 1993, between the Company and Columbia Gas Transmission Corporation (Exhibit 10.26, Form 10-K for the fiscal year ended October 31, 1994).

	10.9		FSS Service Agreement (10,000 dekatherms per day daily storage quantity) (Contract No. 38017), dated November 1, 1993, between the Company and Columbia Gas Transmission Corporation (Exhibit 10.26, Form 10-K for the fiscal year ended October 31, 1995).

	10.10		SST Service Agreement (37,000 dekatherms per day) (Contract No. 38054), dated November 1, 1993, between the Company and Columbia Gas Transmission Corporation (Exhibit 10.27, Form 10-K for the fiscal year ended October 31, 1995).


	10.11		Service Agreement (20,504 Mcf per day), dated June 6, 1994, between the Company and Transcontinental Gas Pipe Line Corporation (Exhibit 10.29, Form 10-K for the fiscal year ended October 31, 1995).

	10.12		FTS-1 Service Agreement (5,000 dekatherms per day) (Contract No. 43462), dated September 14, 1994, between the Company and Columbia Gulf Transmission Company (Exhibit 10.30, Form 10-K for the fiscal year ended October 31, 1995).

	10.13		FTS 1 Service Agreement (23,455 Dt per day)(Contract No. 43461), dated September 14, 1994, between the Company and Columbia Gulf Transmission Company (Exhibit 10.23, Form 10-K for the fiscal year ended October 31, 1996).

	10.14		Firm Transportation Agreement (FT/NT), dated September 22, 1995, between the Company and Texas Gas Transmission Corporation (Exhibit 10.26, Form 10-K for the fiscal year ended October 31, 1996).

	10.15		Service Agreement Applicable to Transportation of Natural Gas Under Rate Schedule FT (X-74 Assignment) (12,875 Dt per day), dated October 18, 1995, between the Company and CNG Transmission Corporation (Exhibit 10.27, Form 10-K for the fiscal year ended October 31, 1996).

	10.16		Service Agreement (Southern Expansion, FT 53,000 Mcf per day peak winter months, 47,700 Mcf per day shoulder winter months) (Contract No. 0.4189), dated November 1, 1995, between the Company and Transcontinental Gas Pipe Line Corporation (Exhibit 10.29, Form 10-K for the fiscal year ended October 31, 1996).

	10.17		Service Agreement (12,785 Mcf per day) (Contract No. 1.1994, FT/NT), dated November 1, 1995, between the Company and Transcontinental Gas Pipe Line Corporation (Exhibit 10.31, Form 10-K for the fiscal year ended October 31, 1996).

	10.18		Rate Schedule GSS Service Agreement, dated May 15, 1996, between the Company and CNG Transmission Corporation (Exhibit 10.32, Form 10-K for the fiscal year ended October 31, 1996).


	10.19		Employment Agreement between the Company and David J. Dzuricky, dated December 1, 1999 (Exhibit 10.37, Form 10-K for the fiscal year ended October 31, 1999).

	10.20		Employment Agreement between the Company and Ray B. Killough, dated December 1, 1999 (Exhibit 10.38, Form 10-K for the fiscal year ended October 31, 1999).

	10.21		Employment Agreement between the Company and Ware F. Schiefer, dated December 1, 1999 (Exhibit 10.39, Form 10-K for the fiscal year ended October 31, 1999).

	10.22		Employment Agreement between the Company and Thomas E. Skains, dated December 1, 1999 (Exhibit 10.40, Form 10-K for the fiscal year ended October 31, 1999).

	10.23		Employment Agreement between the Company and Franklin H. Yoho, dated March 18, 2002.

	10.24		Severance Agreement between the Company and David J. Dzuricky, dated December 1, 1999 (Exhibit 10.41, Form 10-K for the fiscal year ended October 31, 1999).

	10.25		Severance Agreement between the Company and Ray B. Killough, dated December 1, 1999 (Exhibit 10.42, Form 10-K for the fiscal year ended October 31, 1999).

	10.26		Severance Agreement between the Company and Ware F. Schiefer, dated December 1, 1999 (Exhibit 10.43, Form 10-K for the fiscal year ended October 31, 1999).

	10.27		Severance Agreement between the Company and Thomas E. Skains, dated December 1, 1999 (Exhibit 10.44, Form 10-K for the fiscal year ended October 31, 1999).

	10.28		Severance Agreement between the Company and Franklin H. Yoho, dated March 18, 2002.

	10.29		Consulting Agreement between the Company and John H. Maxheim, dated March 1, 2000 (Exhibit 10.1, Form 10-Q for the quarter ended January 31, 2001).

	10.30		Service Agreement (SE95/96), dated June 25, 1996, between the Company and Transcontinental Gas Pipe Line Corporation (Exhibit 10.37, Form 10-K for the fiscal year ended October 31, 1996).


	10.31		FSS Service Agreement (25,000 dekatherms per day) (Contract No. 49775), dated November 22, 1995, between the Company and Columbia Gas Transmission Corporation (Exhibit 10.38, Form 10-K for the fiscal year ended October 31, 1997).

	10.32		SST Service Agreement (25,000 dekatherms per day peak winter months, 12,500 dekatherms per day shoulder months) (Contract No. 49773), dated November 22, 1995, between the Company and Columbia Gas Transmission Corporation (Exhibit 10.39, Form 10-K for the fiscal year ended October 31, 1997).

	10.33		FSS Service Agreement (1,150,166 dekatherms storage capacity quantity, 19,169 dekatherms maximum daily storage deliverability) (Contract No. 49777), dated November 22, 1995, between the Company and Columbia Gas Transmission Corporation (Exhibit 10.39, Form 10-K for the fiscal year ended October 31, 1998).

	10.34		Columbia Gas SST Service Agreement (19,169 dekatherms per day) dated November 22, 1995, between the Company and Columbia Gas Transmission Corporation (Exhibit 10.40, Form 10-K for the fiscal year ended October 31, 1998).

	10.35		Transco Sunbelt Service Agreement & Precedent Agreement (41,400 dekatherms of transportation contract quantity per day), dated January 24, 1997, between the Company and Transcontinental Gas Pipe Line Corporation (Exhibit 10.41, Form 10-K for the fiscal year ended October 31, 1998).

	10.36		CNG Service Agreement (7,000 dekatherms per day), dated May 15, 1996, between the Company and CNG Transmission Corporation (Exhibit 10.42, Form 10-K for the fiscal year ended October 31, 1998).

	10.37		Form of Director Retirement Benefits Agreement between the Company and its outside directors, dated September 1, 1999 (Exhibit 10.54, Form 10-K for the fiscal year ended October 31, 1999).


	10.38		Service Agreement under Rate Schedule GSS (Storage withdrawal of 68,955 Mcf per day, Storage capacity of 3,858,940 Mcf), dated July 1, 1996, between the Company and Transcontinental Gas Pipe Line Corporation (Exhibit 10.55, Form 10-K for the fiscal year ended October 31, 1999).

	10.39		Service Agreement, dated January 29, 1997, between the Company and Pine Needle LNG Company, LLC (Exhibit 10.57, Form 10-K for the fiscal year ended October 31, 1999).

	10.40		Firm Transportation Agreement (60,000 Mcf per day), dated June 26, 1998, between the Company and Cardinal Extension Company, LLC (Exhibit 10.58, Form 10-K for the fiscal year ended October 31, 1999).

	10.41		Service Agreement (15,000 dekatherms per day), dated September 13, 2000, between the Company and Pine Needle LNG Company, LLC (Exhibit 10.50, Form 10-K for the fiscal year ended October 31, 2000).

	10.42		Letter of Right of First Refusal, dated September 13, 2000, between the Company and Pine Needle LNG Company, LLC (Exhibit 10.51, Form 10-K for the fiscal year ended October 31, 2000).

	10.43		Letter of Agreement of Amendment No. 343 to Gas Transportation Agreement (dated September 1, 1993 — Contract No. 237) (FTA, 74,100 dekatherms per day), dated August 3, 1998, between the Company and Tennessee Gas Pipeline Company (Exhibit 10.52, Form 10-K for the fiscal year ended October 31, 2000).

	10.44		Letter of Agreement of Amendment No. 2A to Gas Storage Contract (dated September 1, 1993 — Contract No. 2400), dated August 3, 1998, between the Company and Tennessee Gas Pipeline Company (Exhibit 10.53, Form 10-K for the fiscal year ended October 31, 2000).

	10.45		Letter of Agreement of Amendment No. 2A to Gas Storage Contract (dated May 1, 1994 — Contract No. 6815), dated August 3, 1998, between the Company and Tennessee Gas Pipeline Company (Exhibit 10.54, Form 10-K for the fiscal year ended October 31, 2000).


	10.46		Service Agreement under FT-A Rate Schedule (Contract No. 24706) (55,900 dekatherms per day), dated August 12, 1998, between the Company and Tennessee Gas Pipeline Company (Exhibit 10.55, Form 10-K for the fiscal year ended October 31, 2000).

	10.47		Service Agreement under Rate Schedule WSS — Open Access (Contract No. 3.8399) (75,206 dekatherms per day maximum withdrawal quantity; storage capacity quantity of 6,392,383 dekatherms), dated April 1, 2001, between the Company and Transcontinental Gas Pipe Line Corporation (Exhibit 10.48, Form 10-K for the fiscal year ended October 31, 2001).

	10.48		Amended and Restated Operating Agreement of Greenbrier Pipeline Company, LLC, dated September 1, 2001.

	10.49		Precedent Agreement for Firm Transportation Service (Greenbrier Pipeline Company), dated September 1, 2001, between the Company and Greenbrier Pipeline Company, LLC.

	12		Computation of Ratio of Earnings to Fixed Charges.

	23		Independent Auditors' Consent.

	99.1		Annual Report on Form 11-K — Piedmont Natural Gas Company, Inc. Salary Investment Plan.

	99.2		Annual Report on Form 11-K — Piedmont Natural Gas Company, Inc. Payroll Investment Plan.

(b) Reports on Form 8-K


		On August 13, 2002, we filed a Form 8-K regarding a press release reporting that our Chief Executive Officer and Chief Financial Officer had voluntarily signed and filed sworn statements on August 9, 2002, with the Securities and Exchange Commission certifying the filings made by us with the SEC in 2001 and 2002. These filings include our 10-K for fiscal year ended October 31, 2001, our 10-Qs for our first and second quarters of fiscal year ending October 31, 2002, our 8-Ks filed subsequent to the 10-K for fiscal year ended October 31, 2001 and our proxy statement issued in January 2002 for fiscal year ended October 31, 2001.


		On October 1, 2002, we filed a Form 8-K regarding a press release announcing the completion of the purchase of North Carolina Gas Service, the North Carolina natural gas division of NUI Corporation.

		On October 18, 2002, we filed a Form 8-K regarding a press release announcing an agreement to purchase the stock of North Carolina Natural Gas, a natural gas distribution subsidiary of Progress Energy, and Progress Energy’s 50% investment in Eastern North Carolina Natural Gas Company for approximately $425 million in cash.

		On October 30, 2002, we filed a Form 8-K regarding a press release announcing orders issued by the North Carolina Utilities Commission and the Public Service Commission of South Carolina approving rate increases totaling $22.3 million.

		On November 6, 2002, subsequent to our year end, we filed a report on Form 8-K regarding a press release providing earnings guidance for fiscal year 2003 and reaffirming our previous earnings guidance for fiscal year 2002.

		On December 23, 2002, subsequent to our year end, we filed a Form 8-K regarding a press release announcing that Ware F. Schiefer, Chief Executive Officer and Vice Chairman of the Board, would be retiring at the annual meeting of shareholders on February 28, 2003, and that Thomas E. Skains had been elected to the position of President and Chief Executive Officer effective upon Mr. Schiefer’s retirement. Further, John H. Maxheim, current Chairman of the Board, will retire as Chairman and as a Board member at the February 28 meeting.

		On January 8, 2003, subsequent to our year end, we filed a report on Form 8-K regarding a press release announcing that our Board of Directors had elected Kim R. Cocklin to the position of Senior Vice President and General Counsel, effective February 3, 2003.

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, on January 23, 2003.


		Piedmont Natural Gas Company, Inc.
				(Registrant)

		By:		/s/ Ware F. Schiefer

				Ware F. Schiefer
				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 as of January 23, 2003.


Signature		Title


/s/ Ware F. Schiefer Ware F. Schiefer		Chief Executive Officer and Director

/s/ Thomas E. Skains Thomas E. Skains		President and Chief Operating Officer and Director


/s/ David J. Dzuricky David J. Dzuricky		Senior Vice President and Chief Financial Officer (Principal Financial Officer)


/s/ Barry L. Guy Barry L. Guy		Vice President and Controller (Principal Accounting Officer)


Signature		Title


/s/ Jerry W. Amos Jerry W. Amos		Director



C. M. Butler III		Director



/s/ D. Hayes Clement D. Hayes Clement		Director



/s/ Malcolm E. Everett III Malcolm E. Everett III		Director



/s/ John W. Harris John W. Harris		Director



/s/ Aubrey B. Harwell, Jr. Aubrey B. Harwell, Jr.		Director



Muriel W. Helms		Director



/s/ John H. Maxheim John H. Maxheim		Chairman of the Board and Director



/s/ Ned R. McWherter Ned R. McWherter		Director



/s/ Donald S. Russell Donald S. Russell		Director



/s/ John E. Simkins John E. Simkins		Director

CERTIFICATIONS

I, Ware F. Schiefer, certify that:

1. I have reviewed this annual report on Form 10-K of Piedmont Natural Gas Company, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures and internal controls and procedures for financial reporting (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have;

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal controls and procedures for financial reporting, or caused such internal controls and procedures for financial reporting to be designed under their supervision, to provide reasonable assurances that the registrant’s financial statements are fairly presented in conformity with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and internal controls and procedures for financial reporting as of the end of the period covered by this report (“Evaluation Date”);

d) Presented in this report our conclusions about the effectiveness of the disclosure controls and procedures and internal controls and procedures for financial reporting based on our evaluation as of the Evaluation Date;

e) Disclosed to the registrant’s auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function):

(i) All significant deficiencies and material weaknesses in the design or operation of internal controls and procedures for financial reporting which could adversely affect the registrant’s ability to record, process, summarize and report financial information required to be disclosed by the registrant in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.), within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms; and

(ii) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls and procedures for financial reporting; and

f) Indicated in this report any significant changes in the registrant’s internal controls and procedures for financial reporting or in other factors that could significantly affect internal controls and procedures for financial reporting made during the period covered by this report, including any actions taken to correct significant deficiencies and material weaknesses in the registrant’s internal controls and procedures for financial reporting.


Date: January 23, 2003		/s/ Ware F. Schiefer

		Ware F. Schiefer
		Chief Executive Officer

CERTIFICATIONS

I, David J. Dzuricky, certify that:


Date: January 23, 2003		/s/ David J. Dzuricky

		David J. Dzuricky
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)

Schedule II

Piedmont Natural Gas Company, Inc. and Subsidiaries
Valuation and Qualifying Accounts
For the Years Ended October 31, 2002, 2001 and 2000


				Additions
		Balance at		Charged to				Balance
		Beginning		Costs and				at End
Description		of Period		Expenses		Deductions (1)		of Period

		(in thousands)
Allowance for doubtful accounts:
	2002	$	592	$	3,200	$	2,982	$	810
	2001		482		8,172		8,062		592
	2000		864		3,224		3,606		482

(1) Uncollectible accounts written off net of recoveries and adjustments.

Piedmont Natural Gas Company, Inc.
Form 10-K
For the Fiscal Year Ended October 31, 2002

Exhibits


10.23		Employment Agreement between the Company and Franklin H. Yoho, dated March 18, 2002.

10.28		Severance Agreement between the Company and Franklin H. Yoho, dated March 18, 2002.

10.48		Amended and Restated Operating Agreement of Greenbrier Pipeline Company, LLC, dated September 1, 2001.

10.49		Precedent Agreement for Firm Transportation Service (Greenbrier Pipeline Project) between the Company and Greenbrier Pipeline Company, LLC, dated September 1, 2001.

12		Computation of Ratio of Earnings to Fixed Charges.

23		Independent Auditors’ Consent.

99.1		Annual Report on Form 11-K — Piedmont Natural Gas Company, Inc. Salary Investment Plan.

99.2		Annual Report on Form 11-K — Piedmont Natural Gas Company, Inc. Payroll Investment Plan.

EX-10.23 3 g80206exv10w23.txt EMPLOYMENT AGREEMENT/FRANKLIN H. YOHO EXHIBIT 10.23 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT dated as of March 18, 2002, by and between PIEDMONT NATURAL GAS COMPANY, INC., a North Carolina corporation (the "Corporation"), and, FRANKLIN H. YOHO, a resident of Gaston County, North Carolina (the "Officer"). WITNESSETH: WHEREAS, the Board of Directors of the Corporation has determined that the continued retention of the services of the Officer on a long-term basis as described herein is in the best interest of the Corporation in that (a) it promotes the stability of senior management of the Corporation; (b) it enables the Corporation to obtain and retain the services of a well-qualified executive officer with extensive contacts in the natural gas industry; and (c) it secures the continued services of the Officer notwithstanding any change in control of the Corporation; and WHEREAS, the services of the Officer, his experience and knowledge of the Corporation's industry, and his reputation and contacts in the Corporation's industry are valuable to the Corporation; and WHEREAS, the Corporation considers the establishment and maintenance of a sound and vital management to be part of its overall corporate strategy and to be essential to protecting and enhancing the best interests of the Corporation and its stockholders; and WHEREAS, the parties desire to enter into this Agreement in order to clearly set forth the terms and conditions of the Officer's employment relationship with the Corporation; and WHEREAS, contemporaneous with this Agreement, the parties have entered into a Severance Agreement (the "Severance Agreement"), which sets forth certain rights and obligations of the Officer and certain rights and obligations of the Corporation in the event of a "Potential Change of Control" (as defined in the Severance Agreement) or following a "Change in Control" (as defined in the Severance Agreement). Use of the phrases "Potential Change of Control" and "Change in Control" herein shall have the meanings ascribed to those phrases in the Severance Agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereby agree as follows: 1. Employment. The Corporation hereby employs the Officer and the Officer hereby accepts such employment, upon the terms and conditions stated herein, as Senior Vice President of the Corporation. The Officer shall render such administrative and management services to the Corporation as are customarily performed by persons situated in a similar executive capacity. The Officer shall promote the business of the Corporation and perform such other duties as shall from time to time be reasonably prescribed by the Directors. It is understood that the Officer's continued election as an officer of the Corporation is dependent upon action by the Board of Directors of the Corporation from time to time and that, subject to the provisions of Section 7 of this Agreement, the Officer's title and/or duties may change from time to time; provided that following a Change in Control and during the term of the Severance Agreement any action affecting a change in title and/or duties shall be subject to the Severance Agreement. 2. Base Salary. The Corporation shall pay the Officer during the term of this Agreement as compensation for all services rendered by him to the Corporation a base salary in such amounts and at such intervals as shall be commensurate with his duties and responsibilities hereunder. Initially such base salary shall be at the rate of $235,000 per year. The Officer's base salary may be increased from time to time to reflect the duties required of the Officer. In reviewing the Officer's base salary, the Board of Directors of the Corporation shall consider the overall performance of the Officer and the service of the Officer rendered to the Corporation and its subsidiaries and changes in the cost of living. The Board of Directors may also provide for performance or merit increases. Participation by Officer in any incentive, deferred compensation, stock option, stock purchase, bonus, pension, life insurance or other employee benefit plans which may be offered by the Corporation from time to time and participation in any fringe benefits provided by the Corporation shall not cause a reduction of the base salary payable to the Officer. The Officer will be entitled to such customary fringe benefits, vacation and sick leave as are consistent with the normal practices and established policies of the Corporation. 3. Participation in Incentive, Retirement and Employee Benefit Plans; Fringe Benefits. The Officer shall be entitled to participate in any plan relating to incentive compensation, stock options, stock purchase, pension, thrift, profit sharing, group life insurance, medical coverage, disability coverage, education, or other retirement or employee benefits that the Corporation has adopted, or may from time to time adopt, for the benefit of its executive employees and for employees generally, subject to the eligibility rules of such plans. The Officer shall also be entitled to participate in any other fringe benefits which are now or may be or become applicable to the Corporation's executive employees, including the payment of reasonable expenses for attending annual and periodic meetings of trade associations, and any other benefits which are commensurate with the duties and responsibilities to be performed by the Officer under this Agreement. Additionally, the Officer shall be entitled to such vacation and sick leave as shall be established under uniform employee policies promulgated by the Board of Directors. The Corporation shall reimburse the Officer for all out-of-pocket reasonable and necessary business expenses which the Officer may incur in connection with his service on behalf of the Corporation. 4. Term. The initial term of employment under this Agreement shall be for a one-year period commencing April 1, 2002; provided that this Agreement shall automatically be extended to a full one-year period on each successive day during the term of this Agreement. The effect hereof shall be that the Agreement shall at all times remain subject to a term of one year, unless (i) written notice has been given that the Agreement shall not be extended as provided in this Section 4, or (ii) the Agreement is terminated pursuant to Section 7. If written notice from the Corporation or the Officer is delivered to the other party advising the other party that this Agreement is not to be further extended, then upon such notice, the Agreement shall terminate on the anniversary of the date of -2- notice. Provided, further, no extension shall cause this Agreement to extend beyond the date on which the Officer reaches 65 years of age. Upon any extension, the base salary of the extended agreement shall be the base salary in effect on the effective date of such extension. 5. Loyalty; Noncompetition (a) The Officer shall devote his best efforts to the performance of his duties and responsibilities under this Agreement. (b) During the term of this Agreement, or any renewals hereof, the Officer agrees he will not, own, manage, operate, join, control or participate in the management, operation or control of, or be employed by or connected in any manner with any business which competes with the Corporation or any of its subsidiary corporations without the prior written consent of the Corporation. Notwithstanding the foregoing, the Officer shall be free, without such consent, to purchase or hold as an investment or otherwise, up to five percent of the outstanding stock or other securities of any corporation which has its securities publicly traded on any recognized securities exchange or in any established over-the-counter market. The Officer shall hold in confidence all knowledge or information of a confidential nature with respect to the business of the Corporation or any subsidiary of the Corporation received by him during the term of this Agreement and will not disclose or make use of such information without the prior written consent of the Corporation. The Officer acknowledges that it would not be possible to ascertain the amount of monetary damages in the event of a breach by the Officer under the provisions of this Section 5 and agrees that, in the event of a breach of this Section, injunctive relief enforcing the terms of this Section is an appropriate remedy. 6. Standards. The Officer shall perform his duties and responsibilities under this Agreement in accordance with such reasonable standards expected of employees with comparable positions in comparable organizations and as may be established from time to time by the Board of Directors. The Corporation will provide the Officer with the working facilities and staff customary for similar executives and necessary for him to perform his duties. 7. Termination and Termination Pay. (a) Change of Control. Following a Change in Control and during the term of the Severance Agreement, this Agreement shall become null and void except with respect to any rights or obligations accruing prior to the Change in Control and the rights and obligations of the Officer and the Company, including any termination of the Officer, shall be subject to the provisions of the Severance Agreement. (b) By Death. The Officer's employment under this Agreement shall be terminated upon the death of the Officer during the term of this Agreement, in which event the Officer's estate shall be entitled to receive all compensation due the Officer through the last day of -3- the calendar month in which his death shall have occurred. (c) By Total Disability. Except for that period of time following a Change in Control and during the term of the Severance Agreement, the Officer's employment under this Agreement shall be terminated upon the total permanent disability of the Officer during the term of this Agreement, in which event the Officer shall receive all compensation, including bonuses, through the date of determination of such disability and for a period of 90 days thereafter. For purposes of this Section, the Officer shall be deemed to have suffered permanent disability upon the determination of such status by the United States Social Security Administration or a certification to such effect by the Officer's regular physician. (d) By Officer. Except as provided in Section 4 of the Severance Agreement, the Officer's employment under this Agreement may be terminated at any time by the Officer upon 60 days' written notice to the Board of Directors. Upon such termination, the Officer shall be entitled to receive all compensation, including bonuses, through the effective date of such termination. (e) By Corporation. Except for that period of time following a Change of Control and during the term of the Severance Agreement, the Board of Directors may terminate the Officer's employment at any time, but any such termination by the Board of Directors, other than termination for cause, shall not prejudice the Officer's right to continue to receive payment of all compensation and the continuance of benefits for a period of 12 months from the effective date of termination or until such time as the Officer reaches 65 years of age (whichever is less) as provided below. The Officer shall have no right to receive compensation or other benefits (other than vested benefits) for any period after "termination for cause." Termination for cause shall mean termination because of the Officer's personal dishonesty, incompetence, willful material misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful material violation of a law, rule or regulation (other than traffic or traffic-related violations or similar offenses) or final cease-and-desist order, or material breach of any provisions of this Agreement. (f) Costs and Expenses. In the event any dispute shall arise between the Officer and the Corporation as to the terms or interpretation of this Agreement, including this Section 7, whether instituted by formal legal proceedings or otherwise, including any action taken by Officer to enforce the terms of this Section 7 or in defending against any action taken by the Corporation, the Corporation shall reimburse the Officer for all costs and expenses, proceedings or actions in the event the Officer prevails in any such action. 8. Successors and Assigns. (a) This Employment Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Corporation that shall acquire, directly or indirectly, by conversion, merger, consolidation, purchase or otherwise, all or substantially all of the assets of the Corporation. (b) Since the Corporation is contracting for the unique and personal skills of the Officer, the Officer shall be precluded from assigning or delegating his rights or duties hereunder -4- without first obtaining the written consent of the Corporation. 9. Modification; Waiver; Amendments. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing, signed by the Officer and on behalf of the Corporation by such officer as may be specifically designated by the Board of Directors. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. Any modification, waiver or amendment shall be made consistent with the terms and conditions of the Severance Agreement. 10. Applicable Law. This Agreement shall be governed in all respects whether as to validity, construction, capacity, performance or otherwise, by the laws of North Carolina. 11. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first hereinabove written. CORPORATION: ATTEST: Piedmont Natural Gas Company, Inc. /s/ Martin C. Ruegsegger Secretary By: /s/ W. F. Schiefer ---------------------------------- OFFICER: /s/ Franklin H. Yoho (SEAL) ------------------------------------- Employment Agreement reviewed and approved by the Board of Directors this ___ Day of March, 2002. BY: /s/ J. W. Harris ---------------------------------- Chairman of Compensation Committee -5- EX-10.28 4 g80206exv10w28.txt SEVERANCE AGREEMENT/FRANKLIN H. YOHO EXHIBIT 10.28 SEVERANCE AGREEMENT THIS AGREEMENT, dated March 18, 2002, is made by and between PIEDMONT NATURAL GAS COMPANY, INC., a North Carolina corporation (the "Company"), and FRANKLIN H. YOHO (the "Executive"). WHEREAS, the Company considers it essential to the best interests of its shareholders to foster the continued employment of key management personnel; and WHEREAS, the Board of the Company recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; and WHEREAS, contemporaneous with this Agreement, the Company and the Executive have entered into an Employment Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. Term of Agreement. The Term of this Agreement shall commence on the date hereof and shall continue in effect through March 31, 2003; provided, however, that commencing on April 1, 2003 and each April 1 thereafter, the Term shall automatically be extended for one additional year unless, not later than fifteen (15) months prior to the applicable April 1, the Company or the Executive shall have given notice not to extend the Term; and further provided, however, that if a Change in Control shall have occurred during the Term, the Term shall expire at the end of the thirty-sixth (36th) calendar month after the calendar month in which such Change in Control occurred. For example, if a Change in Control were to occur on July 1, 2002, the Term of this Agreement would expire on June 30, 2005, and if a Change in Control were to occur on July 1, 2005, the Term of this Agreement would expire on June 30, 2008 (regardless of whether on or before September 30, 2004 either party had given notice to the other party not to extend the Term as provided above). 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is twelve (12) months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. Should the Executive fail to comply with the provisions of this paragraph 4, the Company's sole remedy shall be to deny the payment of any Severance Payments to the Executive. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation, benefit or incentive plan, program or arrangement maintained by the Company during such period, until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect immediately prior to the Date of Termination or, if higher, the rate in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's executive compensation, benefit and incentive plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's 2 normal post-termination compensation and benefits as such payments become due, including in a lump sum in cash that portion of the Executive's vacation pay vested and accrued but not paid. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's long-term incentive stock plan, pension, supplemental retirement, insurance and other executive compensation, benefit or incentive plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 Subject to Section 6.2 hereof, if the Executive's employment is terminated following a Change in Control and during the Term, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason (including Retirement by the Executive), then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments"), in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, or (iii) the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason and such termination or the circumstance or event which constitutes Good Reason is otherwise in connection with or in anticipation of a Change in Control (whether or not a Change in Control ever occurs). For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the Executive shall be presumed to be correct unless the Company establishes by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to 3.00 times the sum of (i) the Executive's annual base salary as in effect immediately prior to the Date of Termination or, if higher, in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason and (ii) an amount equal to the average of the Executive's annual W-2 Compensation for the three years ending on the last day of the month prior to the Date of Termination. (B) For the 36-month period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, disability, accident and health insurance benefits substantially similar to those provided to the Executive and 3 his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health insurance benefits shall be provided through a third-party insurer. Benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be reduced to the extent benefits of the same type are received by or made available to the Executive during the 36-month period following the Executive's termination of employment (and any such benefits received by or made available to the Executive shall be reported to the Company by the Executive); provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. If the Severance Payments shall be decreased pursuant to Section 6.2 hereof, and the Section 6.1(B) benefits which remain payable after the application of Section 6.2 hereof are thereafter reduced pursuant to the immediately preceding sentence, the Company shall, no later than five (5) business days following such reduction, pay to the Executive the least of (a) the amount of the decrease made in the Severance Payments pursuant to Section 6.2 hereof, (b) the amount of the subsequent reduction in these Section 6.1(B) benefits, or (c) the maximum amount which can be paid to the Executive without being, or causing any other payment to be, nondeductible by reason of section 280G of the Code. 6.2 (A) Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") would not be deductible (in whole or part), by the Company, an affiliate or Person making such payment or providing such benefit as a result of section 280G of the Code, then, to the extent necessary to make such portion of the Total Payments deductible (and after taking into account any reduction in the Total Payments provided by reason of section 280G of the Code in such other plan, arrangement or agreement), the cash Severance Payments shall first be reduced (if necessary, to zero), and all other Severance Payments shall thereafter be reduced (if necessary, to zero); provided, however, that the Executive may elect to have the noncash Severance Payments reduced (or eliminated) prior to any reduction of the cash Severance Payments. (B) For purposes of this limitation, (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have waived at such time and in such manner as not to constitute a "payment" within the meaning of section 280G(b) of the Code shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the 4 "Auditor"), does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the Code, (iii) the Severance Payments shall be reduced only to the extent necessary so that the Total Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of section 280G(b)(4)(B) of the Code or are otherwise not subject to disallowance as deductions by reason of section 280G of the Code, in the opinion of Tax Counsel, and (iv) the value of any noncash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. (C) If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding that, notwithstanding the good faith of the Executive and the Company in applying the terms of this Section 6.2, the Total Payments paid to or for the Executive's benefit are in an amount that would result in any portion of such Total Payments being subject to the Excise Tax, then, if such repayment would result in (i) no portion of the remaining Total Payments being subject to the Excise Tax and (ii) a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, the Executive shall have an obligation to pay the Company upon demand an amount equal to the sum of (i) the excess of the Total Payments paid to or for the Executive's benefit over the Total Payments that could have been paid to or for the Executive's benefit without any portion of such Total Payments being subject to the Excise Tax; and (ii) interest on the amount set forth in clause (i) of this sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date of the Executive's receipt of such excess until the date of such payment. 6.3 The payments provided in subsection (A) of Section 6.1 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments, and the limitation on such payments set forth in Section 6.2 hereof, cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Company of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 5 7. Termination Procedures and Compensation During Dispute. 7.1 Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board that was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination" with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with 6 Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either 7 party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Piedmont Natural Gas Company, Inc. P.O. Box 33068 Charlotte, North Carolina 28233 Attention: Corporate Secretary 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control (i) by the Company other than for Cause or (ii) by the Executive for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of North Carolina. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. 14.1 All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim 8 for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within sixty (60) days after notification by the Board that the Executive's claim has been denied. 14.2 Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Charlotte, North Carolina in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the evidentiary standards set forth in this Agreement shall apply. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (E) "Board" shall mean the Board of Directors of the Company. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) which failure shall continue unabated for thirty (30) days after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the 9 Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes by clear and convincing evidence that Cause exists. (G) A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (III) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 50% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially owned by such Person any securities acquired directly from the Company or its Affiliates other than in connection with the acquisition by the Company or its Affiliates of a business) representing 20% or more of the combined voting power of the Company's then outstanding securities; or (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by 10 the Company of all or substantially all of the Company's assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean Piedmont Natural Gas Company, Inc. and, except in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law, or otherwise. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six (6) consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Executive" shall mean the individual named in the first paragraph of this Agreement. (N) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in Control under the circumstances described in clauses (ii) and (iii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VII) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties inconsistent with the Executive's status as a senior executive officer of the Company, a change in the Executive's reporting responsibilities, titles or offices, or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control other 11 than any such alteration primarily attributable to the fact that the Company may no longer be a public company; (II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions (not to exceed 10%) similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company including the Chief Executive Officer; (III) the relocation of the principal executive offices to a location more than 35 miles from the Company's principal executive offices immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than the location of the Company's executive offices except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation or benefits except pursuant to an across-the-board compensation or benefit deferral (not to exceed 10%) similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company including the Chief Executive Officer, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (V) the failure by the Company to continue in effect any compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, including but not limited to the Company's long-term incentive plans or any substitute plans adopted prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control; (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, supplement retirement, savings, life insurance, supplemental life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control (except for across-the-board changes similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company, including the Chief Executive Officer, not to exceed 10%), the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled either by prior written agreements or on the basis of years of service with the Company in 12 accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes by clear and convincing evidence that Good Reason does not exist. (O) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (P) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. (Q) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial owner, directly or indirectly, of securities of the Company representing 15% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or 13 (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (R) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated voluntarily by the Executive in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (S) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (T) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. (U) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (V) "Total Payments" shall mean those payments so described in Section 6.2 hereof. (W) "W-2 Compensation" shall mean all amounts received for services actually rendered in the course of employment with the Company to the extent that such amounts are includible in gross income as wages for federal income tax purposes plus all amounts that are contributed by the Company pursuant to a salary reduction agreement and which are not includible in the gross income of the Executive under Code Sections 125 or 401(k) and minus all amounts includible in the gross income of the Executive for annual base salary, expense reimbursements or allowances, moving expenses, club initiation fees or special assessments, deferred compensation and welfare benefits, or gross-ups for taxes. PIEDMONT NATURAL GAS COMPANY By: /s/ W. F. Schiefer ------------------------------ Name: Ware F. Schiefer Title: Chief Executive Officer FRANKLIN H. YOHO /s/ Franklin H. Yoho ---------------------------------- Address: 1633 Lakefield Circle --------------------- Gastonia, NC 28056 ----- 14 EX-10.48 5 g80206exv10w48.txt AMENDED AND RESTATED OPERATING AGREEMENT Exhibit 10.48 AMENDED AND RESTATED OPERATING AGREEMENT OF GREENBRIER PIPELINE COMPANY, LLC Dated as of September 1, 2001 THE MEMBERSHIP INTERESTS REPRESENTED BY THIS AGREEMENT HAVE BEEN ACQUIRED FOR INVESTMENT AND WERE ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. MEMBERSHIP INTERESTS MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED AT ANY TIME EXCEPT (I) IN ACCORDANCE WITH THE RESTRICTIONS CONTAINED IN THIS AGREEMENT, AS AMENDED FROM TIME TO TIME AND (II) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS UNLESS AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH THE TRANSFER. AMENDED AND RESTATED OPERATING AGREEMENT OF GREENBRIER PIPELINE COMPANY, LLC TABLE OF CONTENTS 1 DEFINITIONS AND CONSTRUCTION........................................................................................1 1.1 Definitions...............................................................................................1 1.2 Construction.............................................................................................12 2 FORMATION AND PURPOSE OF THE COMPANY...............................................................................12 2.1 Formation................................................................................................12 2.2 Name.....................................................................................................12 2.3 Registered Office, Registered Agent......................................................................12 2.4 Offices..................................................................................................12 2.5 Purposes.................................................................................................13 2.6 Foreign Qualification....................................................................................13 2.7 Term.....................................................................................................13 2.8 No State Law Partnership.................................................................................13 3 MEMBERSHIP; DISPOSITION OF INTERESTS...............................................................................13 3.1 Members. Before the date hereof, Dominion Greenbrier was the sole Member of the Company, having contributed assets to the Company with an initial Gross Asset Value of $1,000. Effective as of the date hereof, Piedmont Greenbrier became a Member of the Company, and in consideration of the Capital Commitments detailed on Appendix B hereto, the Company issued 33% of its Membership Interests to Piedmont Greenbrier, which effectively diluted Dominion Greenbrier's Sharing Ratio to 67%...........................................13 3.2 Restrictions on the Disposition of an Interest...........................................................14 3.3 Additional Members.......................................................................................18 3.4 Limit on Encumbrances....................................................................................18 3.5 Sale of VPSC's Fractional Interest. The Company is undertaking development of the Facilities with VPSC, a wholly-owned subsidiary of Dominion Greenbrier that owns a fractional interest in the Facilities and the development rights thereto. At any time, such fractional interest (the "Fractional Interest") shall be equal to a fraction, the numerator of which is the capital of VPSC at such time and the denominator of which is the sum of the total Capital Commitments of the Members at such time plus the capital of VPSC at such time.....................................................................................19 4 COVENANTS, REPRESENTATIONS AND WARRANTIES; INFORMATION.............................................................19 4.1 Commitment to Construct the Initial Facilities...........................................................19 4.2 Development of a Modification............................................................................21 4.3 Commitment to Construct a Modification...................................................................21 4.4 General Representations and Warranties...................................................................22 4.5 Regulatory Status........................................................................................24 4.6 [INTENTIONALLY OMITTED]..................................................................................24 4.7 Governmental Applications................................................................................24 4.8 Information..............................................................................................24 4.9 Liability to Third Parties...............................................................................25 4.10 Withdrawal...............................................................................................25 4.11 Lack of Authority........................................................................................25

i 4.12 Reasonable and Necessary Efforts.........................................................................25 4.13 No Personal Gain to Members..............................................................................25 5. CAPITAL CONTRIBUTIONS..............................................................................................26 5.1 Pre-Execution Date Expenditures..........................................................................26 5.2 Required Capital Contributions...........................................................................26 5.3 Failure of a Member to Make Required Capital Contributions...............................................28 5.4 Loans....................................................................................................30 5.5 Voluntary Contributions..................................................................................31 5.6 Return of Contributions..................................................................................31 5.7 Capital Accounts.........................................................................................31 6 ALLOCATIONS AND DISTRIBUTIONS......................................................................................31 6.1 Allocations of Profits and Losses........................................................................31 6.2 Tax Allocations..........................................................................................34 6.3 Withholding..............................................................................................35 6.4 Distributions............................................................................................35 7. MANAGEMENT.........................................................................................................36 7.1 Voting by Members and Management Committee...............................................................36 7.2 Removal, Resignation and Replacement of Managers.........................................................40 7.3 Meetings by the Management Committee.....................................................................40 7.4 Action by Written Consent or Telephone Conference........................................................40 7.5 Compensation.............................................................................................41 7.6 Operating Budgets........................................................................................41 7.7 Financing Committee......................................................................................41 7.8 Conflicts of Interest....................................................................................42 7.9 Management of VPSC.......................................................................................42 8 [INTENTIONALLY OMITTED]............................................................................................43 9 OPERATION OF THE FACILITIES........................................................................................43 9.1 Operator.................................................................................................43 10. INDEMNIFICATION....................................................................................................43 10.1 Right to Indemnification.................................................................................43 10.2 Advance Payment..........................................................................................44 10.3 Indemnification of Agents................................................................................44 10.4 Indemnification by the Members...........................................................................44 10.5 Appearance as a Witness..................................................................................44 10.6 Nonexclusivity of Rights.................................................................................45 10.7 Insurance................................................................................................45 10.8 Member Notification......................................................................................45 10.9 Savings Clause...........................................................................................45 11. TAXES..............................................................................................................45 11.1 Tax Returns..............................................................................................45 11.2 Tax Status...............................................................................................46 11.3 Tax Matters..............................................................................................46 11.4 Tax Elections............................................................................................46 12. BOOKS, RECORDS, REPORTS, AND BANK ACCOUNTS.........................................................................47 12.1 Maintenance of Books and Records.........................................................................47 12.2 Accounting Basis.........................................................................................47

ii 12.3 Financial Reports........................................................................................47 12.4 Fiscal Year..............................................................................................48 12.5 Accounts.................................................................................................48 12.6 Other Notices............................................................................................48 12.7 Governmental Reports.....................................................................................49 12.8 Cost of Preparing and Distributing Reports...............................................................49 12.9 Accounts.................................................................................................49 13. INSPECTION.........................................................................................................49 13.1 Inspection of Facilities and Records.....................................................................49 14. BANKRUPTCY OF A MEMBER.............................................................................................50 14.1 Bankruptcy Members.......................................................................................50 15 DISSOLUTION, LIQUIDATION, AND TERMINATION..........................................................................50 15.1 Dissolution..............................................................................................50 15.2 Liquidation and Termination..............................................................................50 15.3 Deficit Capital Accounts.................................................................................51 15.4 Certificate of Cancellation..............................................................................51 16. GENERAL PROVISIONS.................................................................................................52 16.1 Offset...................................................................................................52 16.2 Notices..................................................................................................52 16.3 Entire Agreement.........................................................................................52 16.4 Effect of Waiver or Consent..............................................................................52 16.5 Amendment or Modification................................................................................53 16.6 Binding Effect...........................................................................................53 16.7 Specific Performance and Injunctive Relief...............................................................53 16.8 Governing Law; Severability..............................................................................53 16.9 No Third Party Beneficiaries.............................................................................53 16.10 Creditors................................................................................................54 16.11 Further Assurances.......................................................................................54 16.12 Notice to Members of Provisions of this Agreement........................................................54 16.13 Press Releases...........................................................................................54 16.14 Counterparts.............................................................................................54 16.15 Supercedes...............................................................................................55 APPENDIX D.................................................................................................................1 PHASE I CAPITAL BUDGET...................................................................................................1 Pipelines...........................................................................................................1 Total....................................................................................................................1

Appendix A - Certificate of Formation Appendix B - Sharing Ratios Appendix C - Description of Initial Facilities Appendix D - Pre-Execution Date Expenditures Appendix E - Phase I Capital Budget Appendix F - CO&M Agreement iii This Amended and Restated Operating Agreement (this "Agreement") of Greenbrier Pipeline Company, LLC, a Delaware limited liability company (the "Company"), is executed and agreed to by the Members (as defined below) as of September 1, 2001. RECITALS A. The Company was formed as a limited liability company pursuant to a Certificate of Formation filed with the Secretary of State of the State of Delaware on July 12, 2001 with Dominion Greenbrier, Inc. as its sole Member. B. The Company and Dominion Greenbrier desire to admit Piedmont Greenbrier Pipeline Company, L.L.C. as a Member of the Company and Piedmont Greenbrier desires to be admitted as a Member of the Company, and the parties desire to restate the Company's Operating Agreement as set forth herein. 1. DEFINITIONS AND CONSTRUCTION. The terms defined in this Section 1 shall, for all purposes of this Agreement, have the meaning set forth below: 1.1 DEFINITIONS 1.1.1. "ACT" means the Delaware Limited Liability Company Act, as amended, or any successor or replacement statute. 1.1.2. "ADDITIONAL MEMBER" means any Person who becomes a Member upon the issuance of a Membership Interest directly from the Company after the date hereof. 1.1.3. "ADDITIONAL NECESSARY REGULATORY APPROVALS" means all Authorizations (but excluding Authorizations of a nature not customarily obtained prior to commencement of construction of facilities similar to the Modification in question) as may be required in connection with (a) the ownership, construction and operation of a Modification and (b) the transportation of the natural gas in connection with such Modification. 1.1.4. "ADJUSTED CAPITAL ACCOUNT DEFICIT" means, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments: (a) such Capital Account shall be deemed to be increased by any amounts that such Member is obligated to restore to the Company (pursuant to this Agreement or otherwise) or is deemed to be obligated to restore pursuant to (i) the penultimate sentence of Treasury Regulations Section 1.704-2(g)(l), or (ii) the penultimate sentence of Treasury Regulations Section 1.704-2(i)(5); and (b) such Capital Account shall be deemed to be decreased by the items described in Treasury Regulations Sections 1.704-l(b)(2)(ii)(d)(4), (5) and (6). 1.1.5. "AFFILIATE" means with respect to a Member, any Person which is (a) a Parent of such Member; or (b) a corporation as to which the majority of the voting securities are (directly or through any number of wholly- owned subsidiaries) owned by such Member or a Parent of such Member. 1.1.6. "AFUDC" means allowance for funds used during construction. 1.1.7. "AGREEMENT" has the meaning set forth in the Preamble. 1.1.8. "AUTHORIZATIONS" means all licenses, certificates, permits, orders, approvals, determinations and authorizations from Governmental Authorities having jurisdiction. 1.1.9. "AVAILABLE INTEREST" has the meaning set forth in Section 3.2.3. 1.1.10. "BANKRUPT MEMBER" means a Member who shall take or be subject to any of the actions described in Section 18-304 of the Act. 1.1.11. "BASE RATE" means an interest rate per annum equal to the lesser of (a) the prime rate of Chase Manhattan Bank, N.A. (or its successor) as then in effect, or (b) the maximum interest rate allowed pursuant to Delaware law. 1.1.12. "BUSINESS DAY" means a day, other than Saturday or Sunday, on which commercial banks are open for the transaction of business in New York, New York. 1.1.13. "CAPITAL ACCOUNT" means a book account to be established and maintained by the Company for each Member as computed from time to time in accordance with the capital account maintenance rules set forth in Treasury Regulations Section 1.704-l(b)(2)(iv) and the following provisions: (a) to each Member's Capital Account there shall be credited (i) such Member's Capital Contributions, (ii) such Member's distributive share of Profits and any items in the nature of income or gain which are allocated to such Member pursuant to Section 6.1 hereof, and (iii) the amount of any Company liabilities assumed by such Member or which are secured by any asset of the Company distributed to such Member; (b) to each Member's Capital Account there shall be debited (i) the amount of money and the Gross Asset Value of any asset of the 2 Company distributed to such Member, (ii) such Member's distributive share of Losses and any items in the nature of expenses or losses which are allocated to such Member pursuant to Section 6.1 hereof, and (iii) the amount of any liabilities of such Member assumed by the Company or which are secured by any asset contributed by such Member to the Company; (c) in the event that any Membership Interest is Disposed of or transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the Membership Interest involved; and (d) in determining the amount of any liability for purposes of subparagraphs (a) and (b) above, there shall be taken into account Section 752(c) of the Code and any other applicable provisions of the Code and Treasury Regulations. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Treasury Regulations Section 1.704-l(b), and shall be interpreted and applied in a manner consistent with such Treasury Regulations. In the event the Management Committee shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed in order to comply with such Treasury Regulations, the Management Committee may make such modification, provided that it is not likely to have a material effect on the amounts distributed to any Person pursuant to Section 15 hereof upon the dissolution of the Company. 1.1.14 "CAPITAL COMMITMENT" means, in the case of a Member executing this Agreement as of the date of this Agreement or a person acquiring that Membership Interest, the amount calculated pursuant to the formula specified on Appendix B for that Member as its Capital Commitment to the Company, and in the case of a Membership Interest issued directly by the Company, the Capital Commitment established pursuant thereto, in each case, subject to adjustments on account of Dispositions of Membership Interests permitted by this Agreement. 1.1.15. "CAPITAL CONTRIBUTION" means, with respect to any Member, the amount of money and the initial Gross Asset Value of any property (other than money) contributed to the Company with respect to the Membership Interest held by such Member pursuant to the terms of this Agreement. 1.1.16. "CAPITAL DEFAULTING MEMBER" has the meaning set forth in Section 5.3. 3 1.1.17. "CAPITAL NON-DEFAULTING MEMBER" has the meaning set forth in Section 5.3. 1.1.18. "CERTIFICATE" means the Certificate(s) of public convenience and necessity issued by the FERC pursuant to the FERC Application. 1.1.19. "CERTIFICATE OF CANCELLATION" has the meaning set forth in Section 15.4. 1.1.20. "CERTIFICATE OF FORMATION" means the Certificate of Formation filed with the Delaware Secretary of State pursuant to the Act on July 12, 2001, and attached to this Agreement as Appendix A. 1.1.21. "CERTIFIED PUBLIC ACCOUNTANTS" means the firm(s) of nationally recognized independent certified public accountants selected from time to time by the Operator on behalf of the Company. 1.1.22. "CODE" means the Internal Revenue Code of 1986, as amended, or any successor or replacement statute. 1.1.23. "COMPANY" means Greenbrier Pipeline Company, LLC, a Delaware limited liability company. 1.1.24. "COMPANY MINIMUM GAIN" has the meaning ascribed to the term "partnership minimum gain" in Section 1.704-2(b)(2) and (d) of the Treasury Regulations. 1.1.25. "CO&M AGREEMENT" means the Construction, Operating and Maintenance Agreement between the Company and the Operator. 1.1.26. "CONFIDENTIAL INFORMATION" means unique and specific information about the Facilities, this Agreement, a Member, the Company, rate strategies or marketing strategies that is not generally available to the public and, in the case of a Member or the Company, that such Member or the Company has designated as confidential. Upon the filing of the FERC Application, the terms and conditions of this Agreement and any information about the Facilities disclosed in the FERC Application (except for any terms and conditions or information for which confidential treatment may have been requested and not refused by the FERC) shall be deemed to be generally available to the public and shall not be considered Confidential Information. 1.1.27. "CONTROL NOTICE" has the meaning set forth in Section 3.2.5. 1.1.28. "COST OF INITIAL FACILITIES" means all costs and expenses, including without limitation AFUDC and Pre-Execution Date Expenditures, borne by the Operator or the Company for (a) the acquisition, planning, design, engineering, financing, administration, construction and start-up of the 4 Initial Facilities, and (b) securing all Authorizations required for the foregoing. 1.1.29. "COST OF MODIFICATION" means, with respect to any Modification, all costs and expenses, including without limitation AFUDC, borne by the Operator or the Company for the (a) acquisition, planning, design, engineering, financing, administration, construction and start-up of such Modification, and (b) securing all Authorizations required for the foregoing. 1.1.30. "CUSTOMER" means a Person who has entered into a Service Agreement with the Company (or, where applicable, a precedent agreement relating thereto) for the receipt, transportation, and delivery of natural gas by means of the Facilities. 1.1.31. "DEFAULT RATE" means an interest rate equal to the lesser of (a) two percent (2%) per annum over the prime rate of Chase Manhattan Bank, N.A. (or its successor) as in effect from time to time while such default is outstanding; or (b) the maximum interest rate allowed for this purpose pursuant to the law of Delaware. 1.1.32. "DEPRECIATION" means, for each Fiscal Year or part thereof, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable for federal income tax purposes with respect to an asset for such Fiscal Year or part thereof, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Fiscal Year, the depreciation, amortization, or other cost recovery deduction for such Fiscal Year or part thereof shall be an amount which bears the same ratio to such Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such Fiscal Year or part thereof bears to such adjusted tax basis. 1.1.33. "DISPOSE, DISPOSING OR DISPOSITION" means a sale, assignment, transfer, exchange or other disposition (including, without limitation, by operation of law), or the acts thereof. 1.1.34. "DOMINION GREENBRIER" means Dominion Greenbrier, Inc., a Delaware corporation. 1.1.35. "ESTIMATED COST OF INITIAL FACILITIES" means the estimated total Cost of Initial Facilities as determined by the Operator from time to time. 1.1.36. "ESTIMATED COST OF MODIFICATION" means, with respect to any Modification, the estimated total Cost of Modification as determined by the Operator from time to time. 1.1.37. "EXECUTION DATE" means September 1, 2001. 5 1.1.38. "FACILITIES" means the Initial Facilities together with any and all Modifications. 1.1.39. "FERC" means the Federal Energy Regulatory Commission or any commission, agency or other governmental body succeeding to the powers of such commission. 1.1.40. "FERC APPLICATION" means the documents pursuant to which application for a certificate(s) of public convenience and necessity is made to FERC by the Company for authority to construct, own, lease and operate the Initial Facilities and to receive, transport and deliver natural gas by means of the Initial Facilities. 1.1.41. "FERC REHEARING DATE" means the date upon which the order issuing the Certificate is no longer subject to rehearing before FERC. 1.1.42. "FINANCING COMMITMENT" means the agreements between one or more financial institutions or other Persons and the Company or the Financing Corporation pursuant to which such financial institutions or other Persons agree, subject to the conditions set forth therein, to lend money to, or purchase securities of, the Company or the Financing Corporation, the proceeds of which shall be used to finance all or a portion of the Facilities. 1.1.43. "FINANCING COMMITTEE" means the Committee of Member representatives established pursuant to Section 7.7. 1.1.44. "FINANCING CORPORATION" means a corporation or trust wholly owned by the Company that may be organized for the purpose of issuing securities, the proceeds from which are to be advanced directly or indirectly to the Company to finance all or a portion of the Facilities. 1.1.45. "FISCAL YEAR" means the fiscal year adopted by the Company from time to time. 1.1.46. "FRACTIONAL INTEREST" has the meaning set forth in Section 3.5. 1.1.47. "GAAP" means generally accepted accounting principles as applied in the United States. 1.1.48. "GOVERNMENTAL AUTHORITY" means any court, agency, authority, board, bureau, commission, department, office or instrumentality of any nature whatsoever of any governmental or quasi-governmental unit, whether federal, state, parish, county, district, municipality, city, political subdivision or otherwise, domestic or foreign whether now or hereafter in existence. 6 1.1.49. "GROSS ASSET VALUE" means, with respect to any asset of the Company, the adjusted tax basis of such asset as of the relevant date for federal income tax purposes, except as follows: (a) the initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset as determined by the Management Committee; (b) the Gross Asset Values of all Company assets (including intangible assets such as goodwill) shall be adjusted to equal their respective gross fair market values (taking into account Section 770l(g) of the Code) as determined by the Management Committee as of the following times: (i) the acquisition after the date hereof of an additional Membership Interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (ii) the distribution by the Company to a Member of more than a de minimis amount of money or Company property as consideration for a Membership Interest in the Company; and (iii) the liquidation of the Company within the meaning of Treasury Regulations Section 1.704-l(b)(2)(ii)(g); provided that an adjustment pursuant to clauses (i) and (ii) above shall be made only if the Management Committee reasonably determines that such adjustment is necessary to reflect the relative economic interests of the Members in the Company; (c) the Gross Asset Value of any item of Company assets distributed to any Member shall be adjusted to equal the gross fair market value (taking into account Section 770l(g) of the Code) of such asset on the date of distribution as determined by the Management Committee; (d) the Gross Asset Values of all Company assets (including intangible assets such as goodwill) shall be adjusted to reflect any adjustments to the adjusted basis of such assets pursuant to Sections 734(b) or 743(b) of the Code, but only to the extent that such adjustments are required to be taken into account in determining Capital Accounts pursuant to Treasury Regulations Section 1.704-l(b)(2)(iv)(m) and subparagraph (d) of the definition of "Profits" and "Losses" provided that Gross Asset Values shall not be adjusted pursuant to this subparagraph (d) to the extent that 7 the Management Committee determines that an adjustment pursuant to subparagraph (b) is required in connection with a transaction that would otherwise result in an adjustment pursuant to this subparagraph (d); and (e) if the Gross Asset Value of an asset has been determined or adjusted pursuant to subparagraphs (b) or (d) above, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses and other items allocated pursuant to Section 6.1 of this Agreement. 1.1.50. "INITIAL FACILITIES" means the real, personal, mixed and contractual property (whether tangible or intangible) to be owned and operated by the Company for the receipt, transportation and delivery of natural gas, all as more fully described in Appendix C (not including any Modification but including any changes in size, design capacity and location as may be approved prior to the date of filing of the FERC Application). 1.1.51. "IN-SERVICE DATE" means the date on which the Initial Facilities have been constructed and placed in service. 1.1.52. "LOAN" means any loan made by a Member to the Company. 1.1.53. "MANAGER" has the meaning set forth in Section 7.1.2. 1.1.54. "MANAGEMENT COMMITTEE" has the meaning set forth in Section 7.1.2. 1.1.55. "MEMBER" means any Person executing this Agreement as of the date of this Agreement or who is hereafter admitted to the Company as a Member as provided in this Agreement, but does not include any Person who has ceased to be a Member of the Company. 1.1.56. "MEMBERSHIP INTEREST" means all of a Member's rights in the Company, including, without limitation, the Member's share of profits and losses of the Company, the right to receive distributions of the Company's assets, any right to vote, and any right to participate in the management of the Company. 1.1.57. "MEMBER NONRECOURSE DEBT" has the meaning ascribed to the term "partner nonrecourse debt" in Treasury Regulations Section 1.704-2(b)(4). 1.1.58 "MEMBER NONRECOURSE DEBT MINIMUM GAIN" has the meaning ascribed to the term "partner nonrecourse debt minimum gain" in Section 1.704-2(i)(2) and (3) of the Treasury Regulations. 8 1.1.59. "MEMBER NONRECOURSE DEDUCTIONS" has the meaning ascribed to the term "partner nonrecourse deductions" in Sections 1.704-2(i)(l) and 1.704-2(i)(2) of the Treasury Regulations. 1.1.60. "MEMBER TRANSFEREE" has the meaning set forth in Section 3.2.4. 1.1.61. "MODIFICATION" means any additions or modifications to the Facilities approved after the filing of the FERC Application installed (a) to modify, improve, expand, extend or increase the design capacity or scope of the Facilities or any portion thereof (except in connection with customary maintenance) or (b) to provide a new point of delivery or receipt of natural gas for the Facilities. 1.1.62. "NECESSARY REGULATORY APPROVALS" means all Authorizations (but excluding Authorizations of a nature not customarily obtained prior to commencement of construction of pipeline facilities similar to the Initial Facilities) as may be required in connection with (a) the construction and operation of the Initial Facilities, (b) the formation of the Company, and (c) the receipt, transportation and delivery of natural gas under the Service Agreements. 1.1.63. "NON-OFFERING MEMBER" has the meaning set forth in Section 3.2.3. 1.1.64. "NONRECOURSE LIABILITY" has the meaning set forth in Treasury Regulations Section 1.704-2(b)(3). 1.1.65. "OFFERING MEMBER" has the meaning set forth in Section 3.2.3. 1.1.66. "OFFER NOTICE" has the meaning set forth in Section 3.2.3. 1.1.67. "OFFER PERIOD ONE" has the meaning set forth in Section 3.2.3. 1.1.68. "OFFER PERIOD TWO" has the meaning set forth in Section 3.2.3. 1.1.69. "OPERATING BUDGET" has the meaning set forth in Section 7.6. 1.1.70. "OPERATOR" means Dominion Transmission, Inc., a Delaware corporation, and any of its successors or assigns, pursuant to the CO&M Agreement. 1.1.71. "PARENT" means any Person who directly or indirectly owns more than fifty percent (50%) of the outstanding voting stock of a Member. 1.1.72. "PERSON" means an individual, a trust, an estate, a domestic corporation, a foreign corporation, a professional corporation, a partnership, a limited partnership, a limited liability company, a foreign limited liability company, an unincorporated association, or another entity. 9 1.1.73. "PHASE I CAPITAL BUDGET" means the capital budget for the period from the Execution Date until the filing of the FERC Application, as set forth in Appendix E. 1.1.74. "PHASE II CAPITAL BUDGET" means the capital budget for the period from the filing of the FERC Application to the issuance of the Certificate. 1.1.75. "PHASE III CAPITAL BUDGET" means the capital budget for the period from the issuance of the Certificate to the In-Service Date. 1.1.76. "PIEDMONT GREENBRIER" means Piedmont Greenbrier Pipeline Company, LLC, a North Carolina limited liability company. 1.1.77. "PRE-EXECUTION DATE EXPENDITURES" means expenditures and costs made by any Member or any of its Affiliates prior to the Execution Date, if approved by the Members pursuant to Section 5 if required to be so approved, including, but not limited to, expenditures made in the course of activities reasonably related to preparing this Agreement, the CO&M Agreement, the precedent agreements, and other agreements related to the formation of the Company, marketing, planning and designing the Facilities, acquiring rights of way, preparing the FERC Application and obtaining the Necessary Regulatory Approvals. Pre-Execution Date Expenditures include only internal and external expenditures and costs made on behalf of the Company and do not include any internal and external expenditures or costs made by a Member or any of its Affiliates for the purpose of (i) evaluating the Member's investment in the Company or its use of any services to be provided by the Company, (ii) obtaining the permission of any Governmental Authority or other Person to participate as a Member or as a subscriber to any such services, (iii) or any other expenditures or costs made by a Member or its Affiliates for the benefit of a Member and not for the direct benefit of the Company, except that legal fees incurred by each Member in connection with the preparation of this Agreement, the CO&M Agreement and other agreements related to the formation of the Company and the organization of its activities shall be Pre-Execution Date Expenditures. 1.1.78. "PROCEEDING" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative. 1.1.79. "PROFITS" and "LOSSES" mean, for each Fiscal Year or part thereof, the taxable income or loss of the Company for such Fiscal Year determined in accordance with Section 703(a) of the Code (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a)(l) of the Code shall be included in taxable income or loss), with the following adjustments (without duplication): 10 (a) any income of the Company that is exempt from federal income tax shall be added to such taxable income or loss; (b) any expenditures of the Company described in Section 705(a)(2)(B) of the Code or treated as such pursuant to Treasury Regulations Section 1.704-l(b)(2)(iv)(i) shall be subtracted from such taxable income or loss; (c) in the event the Gross Asset Value of any Company asset is adjusted pursuant to subparagraphs (b) or (c) of the definition of Gross Asset Value, the amount of such adjustment shall be taken into account as gain (if the adjustment increases the Gross Asset Value of the asset) or loss (if the adjustment decreases the Gross Asset Value of the asset) from the disposition of such asset for purposes of computing Profits and Losses; (d) gain or loss resulting from any disposition of Company property with respect to which gain or loss is recognized for federal income tax purposes shall be computed with reference to the Gross Asset Value of the property disposed of, rather than the adjusted tax basis of such property; (e) in lieu of the depreciation, amortization or other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year or part thereof, computed in accordance with the definition of Depreciation; and (f) to the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Sections 734(b) or 743(b) of the Code is required to be taken into account in determining Capital Accounts pursuant Treasury Regulations Section 1.704- l(b)(2)(iv)(m)(4) as a result of a distribution other than in liquidation of a Member's Interest, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) from the disposition of the asset and shall be taken into account for purposes of computing Profits or Losses. 1.1.80. "PURCHASE NOTICE" has the meaning set forth in Section 5.3.5. 1.1.81. "REGULATORY ALLOCATIONS" has the meaning set forth in Section 6.1.2(h). 1.1.82. "SERVICE AGREEMENTS" means the service agreement(s) by and between the Company and the Customers for the receipt, transportation and delivery of natural gas by means of the Facilities. 11 1.1.83. "SHARING RATIO" means with respect to any Member, the fraction (expressed as a percentage), the numerator of which is that Member's Capital Commitment and the denominator of which is the sum of all Capital Commitments of all Members, as such fraction may be adjusted pursuant to any other Section of this Agreement (including, without limitation, Sections 4.1, 4.3, 5.3 and 7.7). 1.1.84. "SUPERMAJORITY VOTE" means the affirmative vote of those Members representing not less than seventy-five percent (75%) of the Sharing Ratios of all Members. 1.1.85. "TAX DISTRIBUTION" has the meaning set forth in Section 6.4.1. 1.1.86. "TAX MATTERS PARTNER" has the meaning set forth in Section 11.1. 1.1.87. "TREASURY REGULATIONS" means the Treasury Regulations issued and in effect under the Code. 1.1.88. "VPSC" means Dominion Pipeline-Greenbrier, Inc., a Virginia public service company. 1.2 CONSTRUCTION. Whenever the context requires, the gender of all words used in this Agreement includes the masculine, feminine and neuter. All references to Sections refer to sections of this Agreement (unless the context clearly indicates otherwise), and all references to Appendices are to Appendices attached to this Agreement, each of which is made a part hereof for all purposes. 2. FORMATION AND PURPOSE OF THE COMPANY. 2.1 FORMATION. The Company has been organized as a Delaware limited liability company by the filing of the Certificate of Formation pursuant to the Act with the Delaware Secretary of State. 2.2 NAME. The name of the Company is "Greenbrier Pipeline Company, LLC." 2.3 REGISTERED OFFICE, REGISTERED AGENT. The registered agent and office shall be as set forth in the Certificate of Formation or as subsequently designated by the Company, subject to the requirements of the Act. 2.4 OFFICES. 12 The principal offices of the Company shall be at such place as the Members may from time to time determine. Notice of any change in such offices shall be given to each Member by the Managers. The Company may have such other offices as the Members may designate from time to time. 2.5 PURPOSES. The purposes of the Company shall be to plan, design, develop, construct, own, lease and provide for the operation and maintenance of the Facilities and conduct such business activities that are necessary or incidental in connection therewith. 2.6 FOREIGN QUALIFICATION. To the extent required by law, the Members shall cause the Company to qualify to transact business in North Carolina, Virginia and West Virginia and any other jurisdictions in which such qualification may be required. At the request of the Management Committee, each Member shall execute, acknowledge, swear to, and deliver all certificates and other instruments conforming with this Agreement that are necessary or appropriate to qualify, continue, and terminate the Company as a foreign limited liability company in all such jurisdictions. 27 TERM. The Company commenced on July 12, 2001 and shall continue in existence until the latest date on which the Company is to dissolve as may be provided in the Certificate of Formation or until such earlier date as the Company may be dissolved as provided in this Agreement. 2.8 NO STATE LAW PARTNERSHIP. The Members intend that (a) the Company shall not be a partnership (including, without limitation, a limited partnership) or joint venture other than for federal or state income tax purposes, (b) no Member or Manager shall be a partner or joint venturer of any other Member or Manager as a result of this Agreement for any purposes other than federal and state tax purposes, and (c) this Agreement shall not be construed to suggest otherwise. 3. MEMBERSHIP; DISPOSITION OF INTERESTS. 3.1 MEMBERS. Before the date hereof, Dominion Greenbrier was the sole Member of the Company, having contributed assets to the Company with an initial Gross Asset Value of $1,000. Effective as of the date hereof, Piedmont Greenbrier became a Member of the Company, and in consideration of the Capital Commitments detailed on Appendix B hereto, the Company issued 33% of its Membership Interests to Piedmont Greenbrier, which effectively diluted Dominion Greenbrier's Sharing Ratio to 67%. 13 As of the date hereof, the Members of the Company are Dominion Greenbrier and Piedmont Greenbrier. 3.2 RESTRICTIONS ON THE DISPOSITION OF AN INTEREST. 3.2.1. SUPER MAJORITY VOTE. Except as specifically provided below in this Section 3.2, a Disposition of a Membership Interest shall not occur without a Supermajority Vote of the Members. Any attempted Disposition of a Membership Interest, or a part thereof, other than in accordance with Section 3.2 of this Agreement shall be null and void ab initio. 3.2.2. TRANSFER TO AFFILIATE. Notwithstanding any other provisions of Section 3.2, a Member may Dispose of a Membership Interest without the consent of the other Members if the Disposition is to an Affiliate of such Member. 3.2.3. TRANSFERS GENERALLY. (a) Subject to Section 3.2.4, if a Member wishes to Dispose of all or any portion of its Membership Interest (the "Available Interest") to a Person other than an Affiliate of such Member, the following procedures shall apply. After receiving a bona fide purchase offer from such Person for the Available Interest, the Member holding the Available Interest (the "Offering Member") shall give a written notice to each of the other Members (the "Non-Offering Members") stating the terms of the offer and the Offering Member's intent to accept the offer unless the Available Interest is purchased as provided below (the "Offer Notice"). (b) Each Non-Offering Member shall have the right, exercisable by giving joint written notice to all Members within thirty (30) calendar days after receipt of the Offer Notice ("Offer Period One"), to purchase a pro rata portion of the entire Available Interest, based on the respective Sharing Ratios of all Non-Offering Members. (c) If at least one, but less than all, of the Non-Offering Members exercises its respective purchase right during Offer Period One each of the Non-Offering Members who exercised such right shall have the further right, exercisable by giving joint written notice to all Members within thirty (30) calendar days after the end of Offer Period One ("Offer Period Two"), to purchase a pro rata portion of the entire remaining Available Interest, based on the respective Sharing Ratios of those Non-Offering Members who actually exercise such purchase right. 14 (d) If a Member elects to purchase an Available Interest or portion thereof pursuant to Section 3.2.3(b) or (c), but does not receive Authorization to purchase all of the Available Interest or portion thereof, then such Member shall be allowed to purchase the maximum amount of the Available Interest which it is permitted to purchase hereunder and under such Authorization, in which case the portion of such Available Interest which such Member is unable to purchase shall be, within 30 days after such Authorization is denied, offered to the other Non-Offering Members in accordance with Section 3.2.3(c). (e) Any purchase under the preceding paragraphs shall occur on the terms and conditions set forth in the bona fide offer, except as set forth below. At closing, each purchasing Member shall make a cash payment for its proportionate amount of the total purchase price for the Available Interest, which total price shall be the lesser of the price set forth in the bona fide offer or the balance in the Offering Member's Capital Account on the date of the closing. Closing on all purchases shall occur on a date and at the location mutually agreed by the purchasing Members, but shall be no later than thirty (30) calendar days after the expiration of the final offer period. (f) If no purchase rights are exercised at all during Offer Period One or if Offer Period Two occurs and no purchase rights are exercised during Offer Period Two or the offers received during Offer Period Two do not cover all of the Available Interest, then the Offering Member shall be free to complete the Disposition of the entire Available Interest to the Person making the bona fide offer on the terms and conditions thereof. If the Disposition to the Person making the bona fide offer is not consummated within ninety (90) calendar days after the expiration of the Offer Period, such Disposition by the Offering Member shall not be made without again complying with the procedures of this Section 3.2.3. 3.2.4. TRANSFERS BY MEMBER TRANSFEREES. (a) Notwithstanding the terms of Section 3.2.3, if a Member who has received its Membership Interest through a Disposition from another Member (the "Member Transferee") wishes to Dispose of an Available Interest to a Person other than its Affiliate, the following procedures shall apply. After receiving a bona fide purchase offer from such Person, the Member Transferee shall give an Offer Notice to the Member from whom it received its Membership Interest (the "Original Transferring Member"). The terms of this Section 3.2.4 shall not apply if the Original Transferring Member is no longer a Member of the Company. 15 (b) Upon receipt of the Offer Notice, the Original Transferring Member shall have the first right, exercisable by giving written notice to all Members within thirty (30) calendar days after receipt of the Offer Notice, to purchase the entire Available Interest. Any decision by the Original Transferring Member not to exercise this right shall not limit its rights under the following provisions. (c) If the Original Transferring Member does not give written notice to exercise its purchase right as provided in Section 3.2.4(b), each Member (including the Original Transferring Member) shall have the right, exercisable by giving joint written notice to all Members within thirty (30) calendar days after the end of the Original Transferring Member's first right of offer period, to purchase a pro rata portion of the entire Available Interest, based on the respective Sharing Ratios of all the Members. (d) If at least one, but less than all, of the Members exercises its purchase right according to Section 3.2.4(c) above, such Member(s) shall have the further right, exercisable by giving joint written notice to all Members within thirty (30) calendar days after the end of the offer period provided in Section 3.2.4(c) above, to purchase a pro rata portion of the entire remaining Available Interest, based on the respective Sharing Ratios of those Members who actually exercise such purchase right. (e) If a Member elects to purchase the Available Interest or portion thereof pursuant to Sections 3.2.4(b), (c) or (d), but does not receive Authorization to purchase the entire Available Interest, then such Member shall be allowed to purchase the maximum amount of the Available Interest which it is permitted to purchase hereunder and under such Authorization, in which case the portion of such Available Interest which such Member is unable to purchase shall be, within 30 days after such Authorization is denied, offered to the other Members in accordance with Section 3.2.4(d). (f) Any purchase under the preceding paragraphs shall occur on the terms and conditions set forth in the bona fide offer, except as set forth below. At closing, each purchasing Member shall make a cash payment for its proportionate amount of the total purchase price for the Available Interest, which total price shall be the lesser of the price set forth in the bona fide offer or the balance in the Member Transferee's Capital Account on the date of the closing. Closing on all purchases shall occur on a date and at the location mutually agreed by the purchasing Members, but shall be no later than thirty (30) calendar days after the expiration of the final offer period. 16 (g) If no purchase rights are exercised at all under Section 3.2.4(b)-(d), or the offers do not cover all of the Available Interest, then the Member Transferee shall be free to complete the Disposition of the entire Available Interest to the Person making the bona fide offer on the terms and conditions thereof. If the Disposition to the Person making the bona fide offer is not consummated within ninety (90) calendar days after the expiration of the final offer period, such Disposition by the Member Transferee shall not be made without again complying with the procedures of this Section 3.2.4. (h) The provisions of this Section 3.2.4 shall only apply to a transfer by a Member Transferee. Any subsequent transfer by the transferee of a Member Transferee shall be governed by Section 3.2.3. 3.2.5. CHANGE IN CONTROL. If a Member shall cease to be controlled directly or indirectly by the same Persons who control it as of the date of that Member's admission to the Company, the Member shall provide written notice thereof to each of the other Members (the "Control Notice"). On or before the expiration of the thirty (30) day period after the Control Notice is received by the other Members, such other Members shall have the option to buy the Membership Interest of the Member affected by the change of control at a purchase price equal to the balance in that Member's Capital Account on the date the option is exercised, according to the procedures set forth in Section 3.2.3 above. If more than one of such other Members wishes to exercise such option, they shall exercise such option on the same date and share in such purchase on a pro rata basis based on their respective Sharing Ratios. This paragraph shall not apply to a change in control that results from the merger or consolidation of a Parent of a Member with another corporation or the sale of all or substantially all of the assets of such Parent if, in each such case, (a) such Parent shall not have been formed for the principal purpose of directly or indirectly controlling the Member, (b) the Membership Interest does not represent substantially all of the assets of such Parent, and (c) either (i) such Parent shall be the continuing corporation and shall continue to directly or indirectly control the Member, or (ii) the successor corporation (if other than such Parent) shall be a corporation organized and existing under the laws of the United States of America or a state thereof or the District of Columbia and such successor corporation shall continue to be in substantially the same business as such Parent. 3.2.6. GENERAL ADMISSION REQUIREMENTS. No Person (who is not already a Member) shall be admitted to the Company as a Member, whether through issuance of a Membership Interest by the Company or Disposition of a Membership Interest by a Member, unless all of the following occur: (a) such Person executes this Agreement, makes any 17 required Capital Contributions in full, and provides all information reasonably requested by the Company in connection with its identity and the terms of any Disposition of a Membership Interest to such Person; (b) if required by law, such issuance or Disposition of a Membership Interest is registered under the Securities Act of 1933, as amended, and any applicable state securities laws; and (c) the Company receives an opinion of its legal counsel, satisfactory to the Company in form and substance, confirming that such issuance or Disposition is exempt from registration under those laws and would not result in the termination of the Company for tax or other purposes. The Company may waive the requirements of an opinion from legal counsel, or may limit the scope and subject matter of such opinion, based upon the determination of the Management Committee. 3.2.7. REIMBURSEMENT UPON ADMISSION. The Member effecting a Disposition and any Person admitted to the Company in connection therewith shall pay, or reimburse the Company for, all costs incurred by the Company in connection with the Disposition or admission (including, without limitation, the legal fees incurred in connection with the legal opinions referred to in Section 3.2.6) on or before the 30th day after the receipt by such Member or transferee of the Company's invoice for the amount due. If payment is not made by the date due, the Person owing that amount shall pay interest on the unpaid amount from the date due at the Default Rate. 3.3 ADDITIONAL MEMBERS. Any Person who receives a Membership Interest pursuant to Sections 3.2.2, 3.2.3 or 3.2.4 shall be admitted to the Company as a Member upon consummation of such transfer. Except as set forth in the previous sentence, no Person shall be admitted to the Company as a Member or Additional Member, and Membership Interests shall not be created or issued for such purpose, unless such admission is approved by the Supermajority Vote of all then existing Members and is followed by compliance with Section 3.2.6 above. Any admission shall become effective only after the new Member has executed and delivered to the other Members a document including the new Member's notice address, its agreement to be bound by this Agreement and its representation and warranty that the representations and warranties in Section 4.4 are true and correct with respect to the new Member. 3.4 LIMIT ON ENCUMBRANCES. Except as provided in this Section 3 and except as may be required by the lenders in connection with the Financing Commitment, each Member shall be prohibited from pledging, granting a security interest in, or otherwise encumbering its Membership Interest or granting any option or contingent right of purchase with respect thereto, whether in whole or in part, without the prior written approval of the Members by Supermajority Vote. 18 3.5 SALE OF VPSC'S FRACTIONAL INTEREST. The Company is undertaking development of the Facilities with VPSC, a wholly-owned subsidiary of Dominion Greenbrier that owns a fractional interest in the Facilities and the development rights thereto. At any time, such fractional interest (the "Fractional Interest") shall be equal to a fraction, the numerator of which is the capital of VPSC at such time and the denominator of which is the sum of the total Capital Commitments of the Members at such time plus the capital of VPSC at such time. Dominion Greenbrier shall cause VPSC to sell the Fractional Interest to the Company, and the Members shall cause the Company to purchase the Fractional Interest from VPSC, as soon after the issuance of the Certificate as approval can be obtained from the Virginia State Corporation Commission (if such approval is necessary) unless some other time is mutually agreed upon by the Members. The purchase price for the Fractional Interest shall be equal to the amount necessary to fully reimburse VPSC for all reasonable expenditures VPSC made or is reasonably obligated to make as of the date of the sale in connection with activities related to the Company or the development of the Facilities. Upon payment of such purchase price by the Company, the Members shall make such additional Capital Commitments and related Capital Contributions in accordance with their Sharing Ratios as are necessary to enable the Company to pay the purchase price for the Fractional Interest. If the Fractional Interest is not sold to the Company for any reason (including, without limitation, lack of Virginia State Corporation Commission approval of such sale or any alternate structure that may be agreed upon by the Members), then, promptly after written request by VPSC, the Company shall reimburse VPSC for all reasonable expenditures made by VPSC in connection with activities related to the Company or the development of the Facilities, and the Company shall assume any unpaid obligations of VPSC incurred in connection with VPSC's activities with respect to the Company or the development of the Facilities. Upon such reimbursement by the Company, the Members shall make such additional Capital Commitments and related Capital Contributions in accordance with their Sharing Ratios as are necessary to enable the Company to reimburse VPSC for all expenditures made by VPSC in connection with activities related to the Company or the development of the Facilities and to assume any unpaid obligations of VPSC incurred in connection with VPSC's activities with respect to the Company or the development of the Facilities. 4 COVENANTS, REPRESENTATIONS AND WARRANTIES; INFORMATION. 4.1 COMMITMENT TO CONSTRUCT THE INITIAL FACILITIES. 4.1.1. Not less than thirty (30) days prior to the filing of the FERC Application, the Management Committee or any Member shall submit to the Members a Phase II Capital Budget and a Phase III Capital Budget. Within thirty (30) days after delivery of the Phase II and Phase III Capital Budgets, the Members shall vote on whether to accept and fund 19 the Phase II Capital Budget (which acceptance shall also be deemed authorization to file the FERC Application) and on whether to accept the Phase III Capital Budget. If the Members do not agree by a Supermajority Vote to accept and fund the Phase II Capital Budget and to accept the Phase III Capital Budget, the Member(s) that voted for acceptance may purchase, in proportion to their respective Sharing Ratios, the entire Membership Interest(s) of the Member(s) who voted against acceptance. The Members desiring to exercise such purchase right shall so notify all of the other Members within ten (10) calendar days after such vote. The aggregate price for the Membership Interests to be purchased shall be paid in cash at closing and, unless the selling and purchasing Members otherwise agree, shall be the sum of the Capital Account balances, on the date of such vote, of the Member(s) who voted against acceptance, and such price shall be allocated to the purchasing Member(s) in proportion to their respective Sharing Ratios. Closing on such purchase shall occur on the date and at the location mutually agreed by the purchasing Member(s), but in no event more than twenty-one (21) calendar days after such vote. The Sharing Ratios of the Members shall be adjusted accordingly, and a revised Appendix B shall be sent to the Members. If the Members who voted for acceptance do not purchase the entire Membership Interest(s) of the Member(s) who voted against acceptance, the Company shall be dissolved as soon as reasonably practicable in accordance with Section 15, subject to any necessary approvals from any Governmental Authority. 4.1.2. Within the time requirements specified in the FERC's regulations for acceptance of the Certificate, the Members shall vote on whether the Company shall (a) accept the Certificate and commit to construct the Initial Facilities, (b) reject the Certificate and/or (c) seek rehearing of the order issuing the Certificate. Within thirty (30) calendar days after the FERC Rehearing Date, if applicable, the Members shall vote on whether the Company shall either accept the Certificate and commit to construct the Initial Facilities, reject the Certificate, appeal the order issuing the Certificate or to take other legal action. A Member may vote to reject the Certificate only if a condition of the Certificate is unacceptable in the Member's reasonable opinion. A vote to accept the Certificate shall also be a vote to fund the Phase III Capital Budget. In the event the Certificate is not ultimately accepted by a Supermajority Vote of the Members, the Member(s) that voted to accept the Certificate may accept the Certificate and commit to construct the Initial Facilities and purchase, in proportion to their respective Sharing Ratios, the entire Membership Interest(s) of the Member(s) who voted against acceptance of the Certificate. The Members desiring to exercise such purchase right shall so notify all of the other Members within ten (10) calendar days after such vote. The aggregate price for the Membership Interests to be purchased shall be paid in cash at closing and, unless the selling and purchasing Members otherwise agree, shall be the sum of the Capital 20 Account balances, on the date of such vote, of the Member(s) who voted against acceptance of the Certificate, and such price shall be allocated to the purchasing Member(s) in proportion to their respective Sharing Ratios. Closing on such purchase shall occur on the date and at the location mutually agreed by the purchasing Member(s), but in no event more than twenty-one (21) calendar days after such vote. The Sharing Ratios of the Members shall be adjusted accordingly, and a revised Appendix B shall be sent to the Members. If the Members who voted to accept the Certificate do not purchase the entire Membership Interest(s) of the Member(s) who voted against acceptance as provided above, the Company shall be dissolved as soon as reasonably practicable in accordance with Section 15, subject to any necessary approvals from any Governmental Authority. 4.2 DEVELOPMENT OF A MODIFICATION. 4.2.1. Any Member who desires the Company to construct a Modification shall notify the other Members and the Operator of the nature of the proposed Modification, including such details as are then available, and shall provide a detailed explanation of the reasons why such Modification is being requested. Promptly, but in no event later than one hundred fifty (150) calendar days from the date requested to do so by such Member, the Operator shall prepare and provide to each Member a detailed description of the proposed Modification and an estimate of the cost thereof, appropriate rate information and the proposed financing therefor. 4.2.2. Within sixty (60) calendar days after the information described in Section 4.2.1 has been received by each Member, the Members shall vote on whether to proceed with the development of such proposed Modification. Upon the Supermajority Vote to proceed with the development of such proposed Modification, the Company shall proceed with such development, including, but not limited to, the acquisition of Additional Necessary Regulatory Approvals and the Financing Commitment. A vote to proceed with the development of a Modification shall be without prejudice to the vote on whether the Company shall be committed to construct such Modification under section 4.3.2. 4.3 COMMITMENT TO CONSTRUCT A MODIFICATION. 4.3.1. Except upon approval by a Supermajority Vote, the Company shall not incur material costs or obligations with respect to a Modification or be obligated under any Financing Commitment relating to a Modification until (a) the Additional Necessary Regulatory Approvals have been obtained and accepted, (b) such Financing Commitment, if any, as may be required in the opinion of the Members for such Modification has been negotiated and is ready for acceptance by the Company (with the Management Committee to decide whether such Financing Commitment 21 utilizes a Financing Corporation), (c) if applicable, the Service Agreements for the use of substantially all of the capacity created by the Modification have been executed by the Company and by one or more Customers pursuant to the Company's FERC gas tariff, (d) the Estimated Cost of Modification has been determined and (e) the Management Committee has approved a commitment to construct such Modification as provided in Section 4.3.2. 4.3.2. Immediately following the last to occur of the events referred to in Section 4.3.1 (a), (b) and (d) (provided that the condition that the event referred to in Section 4.3.1 (a) shall have occurred may be waived by the Supermajority Vote of the Members), and if the Modification will create additional capacity, the satisfaction or waiver by the applicable Customers of all conditions set forth in the precedent agreements for execution of the Service Agreements by substantially all of the Customers that will utilize the capacity to be created by the Modification (other than the vote of the Members to commit to construct the Modification), or at such later time as agreed by the Members, the Members shall vote on whether the Company shall be committed to construct the Modification (which commitment to construct shall constitute an acceptance of the Financing Commitment, if any). 4.3.3. If the proposal to construct the Modification receives Supermajority approval by the Members, the costs of such Modification and related Capital Contribution requirements shall be divided among all Members in proportion to their respective Sharing Ratios. 4.3.4. After the Members vote to commit the Company to construct a Modification, except with the approval by a Supermajority Vote, the Company shall not incur any material costs or obligations with respect to such Modification until all conditions precedent to the obtaining by the Company of funds pursuant to a Financing Commitment (if any) relating to such Modification have been satisfied or waived. 4.4 GENERAL REPRESENTATIONS AND WARRANTIES. Each Member hereby represents and warrants to the Company and to each other Member that as of the date of its admission as a Member: (a) if such Member is an organization, it is duly organized, validly existing, and in good standing under the law of its state of incorporation or organization and that it has full organizational power to execute and agree to this Agreement and to perform its obligations under this Agreement; 22 (b) such Member is acquiring its Membership Interest for such Member's own account as an investment and without an intent to distribute the interest, (c) such Member acknowledges that such Membership Interests have not been registered under the Securities Act of 1933 or any state securities laws and may not be resold or transferred by the Member without appropriate registration or the availability of an exemption from such requirements; (d) such Member, by itself or together with its advisors, is experienced in making investments comparable to its investment in the Company and is capable of judging for itself the risks inherent in such investment; (e) such Member has the financial capacity to hold its investment in the Company for an indefinite period of time and to meet its obligations to make Capital Contributions under this Agreement, and acknowledges that the disposition of such investment is restricted both pursuant to federal and state securities laws and pursuant to the terms of this Agreement; (f) such Member acknowledges that it has received access to all information that it deems necessary in order to make its decision to invest in the Company; (g) this Agreement has been duly executed and delivered by it and constitutes its valid and binding obligation, enforceable in accordance with its terms; (h) neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby nor compliance by it with any provisions hereof (1) conflicts with, or results in a breach or contravention of, or in a default or the creation of any lien under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, agreement, or other instrument or obligation to which it is a party or by which it or its properties are bound, or (2) violates any law, order, writ, injunction or decree applicable to it or any of its properties; (i) except for the Necessary Regulatory Approvals, no consent, approval or other action by any court, governmental authority or third party is required in connection with its execution, delivery and performance of this Agreement; (j) as to Piedmont Greenbrier, there are no lawsuits or contested administrative proceedings against Piedmont Greenbrier that 23 would have a material adverse affect on Piedmont Greenbrier' s ability to perform its obligations as a member under this Agreement; (k) as to Dominion Greenbrier, there are no lawsuits or contested administrative proceedings against Dominion Greenbrier that would have a material adverse affect on Dominion Greenbrier's ability to perform its obligations as a member under this Agreement. 4.5 REGULATORY STATUS. Each Member acknowledges that the Company will be a "natural gas company" under the Natural Gas Act and that the Company will be subject to all applicable laws, rules, regulations and orders of any regulatory authority having jurisdiction. 4.6 [INTENTIONALLY OMITTED] 4.7 GOVERNMENTAL APPLICATIONS. Each Member agrees to support the Company in securing the Necessary Regulatory Approvals, including, without limitation, preparing, filing and prosecuting the FERC Application. 4.8 INFORMATION. 4.8.1. In addition to the other rights specifically set forth in this Agreement, each Member is entitled to all information to which that Member is entitled to have access pursuant to Section 18-305 of the Act under the circumstances and subject to the conditions therein stated. The Members agree, however, that the Management Committee from time to time may determine, due to contractual obligations, business concerns, or other considerations, that certain information regarding the business, affairs, properties, and financial condition of the Company should be kept confidential and disclosed to a Member only with the understanding that such information constitutes Confidential Information under Section 4.8.2. 4.8.2. Each Member acknowledges that, from time to time, it may receive Confidential Information for or regarding the Company or a Member the release of which may be damaging to the Company, Persons with whom the Company does business or to the Member. Each Member will hold in strict confidence any Confidential Information it receives and may not disclose such Confidential Information to any Person other than another Member, except for disclosures (a) compelled by law (but the Member must notify the other Members promptly of any request for that information, before disclosing it, if practicable), (b) to advisers or Managers of the Member or Persons to which that Member's 24 Membership Interest may be Disposed as permitted by this Agreement, but only if the recipients have agreed to be bound by the provisions of this Section 4.8.2, or (c) of information that Member also has received from a source independent of the Company or a Member that the Member reasonably believes obtained that information without breach of any obligation of confidentiality. Each Member acknowledges that breach of the provisions of this Section 4.8.2 may cause irreparable injury to the Company for which monetary damages are inadequate, difficult to compute, or both. Accordingly, each Member agrees that provisions of this Section 4.8.2 may be enforced by specific performance. 4.8.3. A Member that subsequently ceases to be a Member shall promptly destroy (and provide a certificate of destruction to the Company with respect to), or return to the Company, all Confidential Information in its possession. 4.9 LIABILITY TO THIRD PARTIES. No Member or Manager shall be liable for the debts, obligations or liabilities of the Company by reason of being a Member or Manager or both, and does not become so liable by participating, in whatever capacity, in the management or control of the business of the Company. 4.10 WITHDRAWAL. A Member does not have the right or power to unilaterally withdraw from the Company. 4.11 LACK OF AUTHORITY. Except as otherwise specifically provided herein, no Member or Manager has the authority or power to act for or on behalf of the Company, to do any act that would be binding on the Company, or to incur any expenditures on behalf of the Company. 4.12 REASONABLE AND NECESSARY EFFORTS. Each Member shall devote such efforts as shall be reasonable and necessary to develop and promote the business of the Company, taking into account its respective Sharing Ratio, resources and expertise. 4.13 No PERSONAL GAIN TO MEMBERS. The credit and the assets of the Company shall be used solely for the benefit of the Company and shall not be used to further the personal gain of any Member. No asset of the Company shall be transferred or encumbered for, or in payment of, any individual obligation of a Member. 25 5 CAPITAL CONTRIBUTIONS. 5.1 PRE-EXECUTION DATE EXPENDITURES. 5.1.1. Set forth on Appendix D are the amounts of Pre-Execution Date Expenditures that have been incurred with respect to each Member, all of which are hereby approved. 5.1.2. If any Member, or Affiliate thereof, has made Pre-Execution Date Expenditures during the period preceding the Execution Date that are not set forth in Appendix D. such Member shall have the right to request approval thereof by Supermajority Vote as soon as practicable after the Execution Date (but not later than ninety (90) calendar days after the Execution Date). 5.1.3. After all Pre-Execution Date Expenditures to be considered under Section 5.1.2 have been approved or disapproved by the Members, the applicable Members shall, within fifteen (15) days after such approval or disapproval, make cash Capital Contributions to the Company pro rata in proportion to their Sharing Ratios, in an amount equal to the Pre-Execution Date Expenditures approved under Sections 5.1.1 or 5.1.2, provided that to the extent one or more Member's Pre-Execution Date Expenditures are treated as Capital Contributions, no such Member shall be required to make any such cash Capital Contributions to the Company until such time as all other Members have made cash Capital Contributions (or Pre-Execution Date Expenditures that are treated as Capital Contributions) to the Company that are initially pro rata to their Sharing Ratios. 5.1.4. The assets, if any, acquired by means of the Pre-Execution Date Expenditures of the Members shall be and are hereby contributed to the Company. All applicable Members agree to execute and deliver any and all assignments and conveyances as may be necessary or appropriate to evidence such contribution. 5.2 REQUIRED CAPITAL CONTRIBUTIONS. 5.2.1. (a) The Members hereby agree and obligate themselves to the Phase I Capital Budget set forth on Appendix E. On the first day of each month during each Fiscal Year covered by the Phase I Capital Budget, each Member shall make a Capital Contribution equal to the sum of (x) its Sharing Ratio of the amount due under the Phase I Capital Budget on such date, plus (y) amounts as are incurred by the Company or the Operator in implementing the actions identified in the Phase I Capital Budget provided the sum of all such additional amounts do not exceed by more than ten percent (10%) the sum of the amounts budgeted through such date in the Capital Budget. All amounts received by the 26 Company pursuant to this Section 5.2.1 (a), whether received prior to, on or after the first day of each quarter, shall be credited to the respective Member's Capital Account as of the first day of each quarter. (b) If the Members approve the Phase II Capital Budget pursuant to Section 4.1.1, then, on the first day of each month during each Fiscal Year covered by the Phase II Capital Budget, each Member shall make a Capital Contribution equal to the sum of (x) its Sharing Ratio of the amount due under the Phase II Capital Budget on such date plus (y) amounts as are incurred by the Company or the Operator in implementing the actions identified in the Phase II Capital Budget provided the sum of all such additional amounts do not exceed by more than ten percent (10%) the sum of the amounts budgeted through such date in the Phase II Capital Budget. All amounts received by the Company pursuant to this Section 5.2. l(b), whether received prior to, on or after the first day of each quarter, shall be credited to the respective Member's Capital Account as of the first day of each quarter. (c) If the Members approve the Phase III Capital Budget pursuant to Section 4.1.1, then, on the first day of each month during each Fiscal Year covered by the Phase III Capital Budget, each Member shall make a Capital Contribution equal to the sum of (x) its Sharing Ratio of the amount due under the Phase III Capital Budget on such date plus (y) amounts as are incurred by the Company or the Operator in implementing the actions identified in the Phase III Capital Budget provided the sum of all such additional amounts do not exceed by more than ten percent (10%) the sum of the amounts budgeted through such date in the Phase III Capital Budget. All amounts received by the Company pursuant to this Section 5.2. l(c), whether received prior to, on or after the first day of each quarter, shall be credited to the respective Member's Capital Account as of the first day of each quarter. (d) With respect to any Capital Contributions not provided for in Sections 5.2.1(a), (b) or (c), the Members by Supermajority Vote shall issue or cause to be issued a written request to each Member for the making of Capital Contributions at such times and in such amounts as the Members shall so approve. All amounts received by the Company pursuant to this Section 5.2, whether received prior to, on or after the date specified in Section 5.2.2(d), shall be credited to the respective Member's Capital Account as of such specified date (and the Pre-Execution Date Expenditures approved pursuant to Sections 5.1.1 and 5.1.2 shall be so credited as of the date specified in Section 5.2.2(d)). All amounts received from a Member after the date specified in Section 5.2.2(d) by the Company pursuant to this Section 5.2 shall be accompanied by interest on such overdue amounts (and the default shall not be cured unless such interest is also received by the Company), which interest shall be payable to the Company and shall accrue from 27 and after such specified date at the Default Rate. Any such interest paid with respect to a Capital Contribution shall be credited to the respective Capital Accounts of the Members, on a pro rata basis in proportion to their respective Sharing Ratios as of the date such payment is made to the Company after giving effect to the payment of that Capital Contribution with respect to which such interest accrued. 5.2.2. Each written request issued pursuant to Section 5.2.l(d) shall include the following information: (a) The total amount of Capital Contributions requested from all Members; (b) The amount of Capital Contribution requested from the Member to whom the request is addressed, such amount to be in accordance with the Sharing Ratio of such Member; (c) The purpose for which the funds are to be applied in such reasonable detail as the Management Committee shall direct; (d) The date on which payments of the Capital Contribution shall be made (which date shall not be less than thirty (30) calendar days following the date the request is given, unless an earlier date is approved by the Members) and the method of payment, provided that such date and method shall be the same for each of the Members; and (e) Evidence that the Members have approved the request in accordance with Section 5.2.1(d). 5.3 FAILURE OF A MEMBER TO MAKE REQUIRED CAPITAL CONTRIBUTIONS. If there are any Members (collectively, the "Capital Defaulting Members") who fail to make any required Capital Contribution to the Company when due (including without limitation any Loan in lieu of a Capital Contribution as determined by the Management Committee), the Company, the Operator or any Member who has made all of its respective Capital Contributions when due (a "Capital Non-Defaulting Member") shall be entitled to give written notice of default to the Capital Defaulting Members, with a copy to all Capital Non-Defaulting Members. If there are any Capital Defaulting Members who do not pay all amounts due within ten (10) calendar days after such notice is given, the Operator (who shall be deemed to have authority from the Management Committee), if the Operator's Affiliate is not the Capital Defaulting Member, or any Capital Non-Defaulting Member, if the Operator's Affiliate is the Capital Defaulting Member, shall be entitled to take any of the following actions (separately or in combination, to the extent that combination of actions is not inconsistent): 28 5.3.1. Cause the Company to apply any distributions otherwise payable to the Capital Defaulting Members hereunder to the payment of unpaid Capital Contributions, plus interest thereon at the Default Rate; 5.3.2. Transfer any and all voting and approval rights of the Capital Defaulting Members to the Capital Non-Defaulting Members in proportion to the respective Sharing Ratios of the Capital Non-Defaulting Members. 5.3.3. With the approval of Members representing a majority of the Sharing Ratios of the Capital Non-Defaulting Members, cause the Capital Non-Defaulting Members to make aggregate Loans to the Company in the amount of such required and unpaid Capital Contributions in proportion to the respective Sharing Ratios of the Capital Non-Defaulting Members. In such event, (a) such Loans shall accrue interest at the Default Rate from the date of the Loans; (b) repayment of the Loans to the Capital Non-Defaulting Members shall have priority over any other distributions to be made hereunder; and (c) the amount of interest paid by the Company for any such Loans shall be deducted from any distribution otherwise owed to the Capital Defaulting Members. Upon the making of any such Loans to the Company, the Company shall be deemed to have simultaneously made loans in the same aggregate amount and at the same interest rate to the Capital Defaulting Members, and such loans by the Company shall be due and payable upon demand by the Operator; 5.3.4. With the approval of Members representing a majority of the Sharing Ratios of the Capital Non-Defaulting Members, cause the Capital Non-Defaulting Members to Contribute to the Company the required and unpaid portion of the Capital Contributions due from the Capital Defaulting Members. In such case the Sharing Ratios of the Capital Defaulting Members shall be reduced, as to each Capital Defaulting Member, by the percentage equivalent of a fraction, the numerator of which is twice the amount of the required and unpaid Capital Contribution due from such Capital Defaulting Member, and the denominator of which is the sum of all previous Capital Contributions made by such Capital Defaulting Member. The Sharing Ratios of the Capital Non-Defaulting Members shall be proportionately increased, provided such reduction and increase do not violate any law or regulatory requirement. The Members shall be sent a revised Appendix B reflecting the adjusted Sharing Ratios; 5.3.5. With the approval of a majority of the Capital Non-Defaulting Members, upon written notice (a "Purchase Notice") to any Capital Defaulting Member, which notice may be given at any time before the default is fully cured by such Capital Defaulting Member or any Loans are made in accordance with Section 5.3.3, purchase the entire Membership Interest of such Capital Defaulting Member in proportion to the respective Sharing Ratios of the Capital Non-Defaulting Members. The purchase 29 price shall be equal to seventy five percent (75%) of the Capital Account of such Capital Defaulting Member as of the date of such default. If such purchase right is exercised, the closing shall take place on the date specified by the Capital Non-Defaulting Members, which date shall be not sooner than fifteen (15) calendar days and not later than thirty (30) calendar days after the date the Purchase Notice is given. At such closing, the purchase price shall be payable in cash. The Members shall be sent a revised Appendix B reflecting the adjusted Sharing Ratios; or 5.3.6. Sue to enforce the obligations of the Capital Defaulting Members to pay the required and unpaid portion of their Capital Contributions, together with interest thereon at the Default Rate. 5.4 LOANS. 5.4.1. At any time after the Capital Contributions referred to in Section 5.1.3 have been made that the Members determine that the Company needs funds, rather than calling for Capital Contributions, the Members may issue or cause to be issued a written request to each Member for the making of Loans or advances to the Company at such times and in such amounts as the Members shall approve by a Supermajority Vote, provided that the Members shall not call for Loans or advances rather than Capital Contributions if doing so would breach any Financing Commitment or other agreement of the Company. All amounts received from a Member after the date specified in Section 5.4.2(d) by the Company pursuant to this Section 5.4 shall be accompanied by interest on such overdue amounts (and the default shall not be cured unless such interest is also received by the Company), which interest shall be payable to the Company and shall accrue from and after such specified date at the Default Rate. Any such interest paid shall be credited to the respective Capital Accounts of all the Members, on a pro rata basis in proportion to their respective Sharing Ratios as of the date such payment is made to the Company, but shall not be considered part of the principal of the loan. 5.4.2. Each written request issued pursuant to Section 5.4.1 shall include the following information: (a) The total amount of Loans or advances requested from all Members; (b) The amount of the Loans or advances requested from the Member to whom the request is addressed, such amount to be in accordance with the Sharing Ratio of such Member; (c) The purpose for which the funds are to be applied in such reasonable detail as the Members shall direct; 30 (d) The date on which the Loans or advances to the Company shall be made (which date shall not be less than thirty (30) calendar days following the date the request is given, unless a sooner date is approved by the Members) and the method of payment, provided that such date and method shall be the same for each of the Members; (e) All terms relating to such Loans, including the terms of repayment, provided that such terms shall be the same for each of the Members; and (f) Evidence that the Members have approved the request in accordance with Section 5.4.1. 5.5 VOLUNTARY CONTRIBUTIONS. No Member shall be required or permitted to make any Capital Contributions or Loans to the Company except pursuant to this Section 5. 5.6 RETURN OF CONTRIBUTIONS. A Member is not entitled to the return of any part of its Capital Contributions or to be paid interest in respect of either its Capital Account or its Capital Contributions. An unreturned Capital Contribution is not a liability of the Company or of any Member. A Member is not required to contribute or to lend any cash or property to the Company to enable the Company to return a Member's Capital Contributions. 5.7 CAPITAL ACCOUNTS. A Capital Account shall be established and maintained for each Member in accordance with the Code and the Treasury Regulations. A Member that has more than one Membership Interest shall have a single Capital Account that reflects all of its Membership Interests, regardless of any class of Membership Interests owned by that Member and regardless of the time or manner in which those Membership Interests were acquired. 6 ALLOCATIONS AND DISTRIBUTIONS. 6.1 ALLOCATIONS OF PROFITS AND LOSSES. 6.1.1. IN GENERAL. Profits and Losses shall be allocated among the Members ratably in proportion to their respective Sharing Ratios. 6.1.2. SPECIAL RULES. Notwithstanding the general allocation rules set forth in Sections 6.1.1, the following special allocation rules shall apply under the circumstances described: 31 (a) LIMITATION ON LOSS ALLOCATIONS. The Losses allocated to any Member pursuant to Section 6.1.1 with respect to any Fiscal Year shall not exceed the maximum amount of Losses that can be so allocated without causing such Member to have an Adjusted Capital Account Deficit at the end of such Fiscal Year. All Losses in excess of the limitation set forth immediately above shall be allocated (i) first, to those Members who will not be subject to this limitation, in the ratio that their Sharing Ratio bear to each other, and (ii) second, any remaining amount to the Members in the manner required by the Code and Treasury Regulations. (b) QUALIFIED INCOME OFFSET If in any Fiscal Year a Member unexpectedly receives an adjustment, allocation or distribution described in Treasury Regulations Section 1.704-l(b)(2)(ii)(d)(4), (5), or (6), and such adjustment, allocation or distribution causes or increases an Adjusted Capital Account Deficit for such Member, then, before any other allocations are made under this Agreement or otherwise, such Member shall be allocated items of income and gain (consisting of a pro rata portion of each item of Company income, including gross income and gain) in an amount and manner sufficient to eliminate such Adjusted Capital Account Deficit as quickly as possible, provided that an allocation pursuant to this Section 6.1.2(b) shall be made if and only to the extent that the Member has an Adjusted Capital Account Deficit after all other allocations provided in this Section 6.1 have been tentatively made as if this Section 6.1.2(b) were not in this Agreement. (c) COMPANY MINIMUM GAIN CHARGEBACK. If there is a net decrease in Company Minimum Gain during any Fiscal Year, then, except as provided in Treasury Regulations Section 1.704-2(f), each Member shall be allocated items of income and gain for such Fiscal Year (and, if necessary, for subsequent Fiscal Years) in proportion to, and to the extent of, such Member's share of the net decrease in Company Minimum Gain during such Fiscal Year as determined in accordance with Section 1.704-2(g). This Section 6.1.2(c) is intended to comply with the minimum gain chargeback requirement in Treasury Regulations Section 1.704-2(f) and shall be applied and interpreted in accordance with such Treasury Regulations. (d) MEMBER NONRECOURSE DEBT MINIMUM GAIN CHARGEBACK. If there is a net decrease in Member Nonrecourse Debt Minimum Gain during any Fiscal Year, then, except as provided in Treasury Regulations Section 1.704-2(i)(4), each Member shall be allocated items of income and gain for such Fiscal Year (and, if necessary, for subsequent Fiscal Years) in proportion to, and to the extent of, such Member's share of the net decrease in Member Nonrecourse 32 Debt Minimum Gain during such Fiscal Year. This Section 6.1.2(d) is intended to comply with the minimum gain chargeback requirement in Treasury Regulations Section 1.704-2(i)(4) and shall be applied and interpreted in accordance with such Treasury Regulations. (e) MEMBER NONRECOURSE DEDUCTIONS. Member Nonrecourse Deductions shall be allocated among the Members in accordance with the ratios in which the Members share the economic risk of loss for the Member Nonrecourse Debt that gave rise to those deductions. This allocation is intended to comply with the requirements of Treasury Regulations Section 1.704-2(i) and shall be interpreted and applied consistent therewith. (f) COMPANY NONRECOURSE DEDUCTIONS. Nonrecourse deductions that are not related to Member Nonrecourse Debt shall be allocated to the Members in proportion to their Sharing Ratios. (g) CURATIVE ALLOCATIONS. Any allocations of items of income, gain, or loss pursuant to Sections 6.1.2(a)-(f) hereof shall be taken into account in computing subsequent allocations pursuant to this Section 6, so that the net amount of any items so allocated and the income, losses, and other items allocated to each Member pursuant to this Section 6 shall, to the extent possible, be equal to the net amount that would have been allocated to each Member had no allocations ever been made pursuant to Sections 6.1.2(a)-(f). (h) CHANGE IN TREASURY REGULATIONS. If the Treasury Regulations incorporating the allocations set forth in Sections 6.1.2(a)-(g) (the "Regulatory Allocations") are hereafter changed or if new Treasury Regulations are hereafter adopted, and such changed or new Treasury Regulations, in the opinion of tax counsel for the Company, make it necessary to revise the Regulatory Allocations or provide further special allocation rules in order to avoid a significant risk that a material portion of any allocation set forth in this Section 6 would not be respected for federal income tax purposes, the Members shall make such reasonable amendments to this Agreement as, in the opinion of such counsel, are necessary or desirable, taking into account the interests of the Members as a whole and all other relevant factors, to avoid or reduce significantly such risk to the extent possible without materially changing the amounts allocable and distributable to any Member pursuant to this Agreement. (i) CHANGE IN MEMBERS' INTERESTS. In the event of a Disposition of a Membership Interest or a change in a Member's Sharing Ratio during any Fiscal Year, allocations among the Members shall be 33 made in accordance with their Sharing Ratios from time to time during such Fiscal Year in accordance with Code Section 706, provided that in the event of a sale or other Disposition of a Member's entire Membership Interest, allocations of income, gain, loss, deductions and credits with respect to such Member shall be computed precisely by an interim closing of the Company's books as of the date of such sale or other Disposition in accordance with Treasury Regulations Section 1.706-l(c)(2)(ii). (j) EXCESS NONRECOURSE LIABILITIES. For purposes of calculating Members' shares of "excess nonrecourse liabilities" of the Company (within the meaning of Treasury Regulations Section 1.752-3), the Members intend that they be considered as sharing profits of the Company in proportion to their respective Sharing Ratios. 6.2 TAX ALLOCATIONS. 6.2.1. IN GENERAL. Except as set forth in Section 6.2.2, allocations for tax purposes of items of income, gain, loss, deduction, and credits, shall be made in the same manner as the applicable allocation of Profit or Loss set forth in Section 6.1. Allocations pursuant to this Section 6.2 are solely for purposes of federal, state and local income taxes and shall not affect, or in any way be taken into account in computing, any Member's Capital Account or share of Profits, Losses, other items or other distributions pursuant to any provision of this Agreement. 6.2.2 SPECIAL RULES (a) ELIMINATION OF BOOK/TAX DISPARITIES. In determining a Member's allocable share of Company taxable income or tax loss, the Member's allocable share of each item of income, gain, loss and deduction shall be properly adjusted to reflect the difference between such Member's share of the adjusted tax basis and the Gross Asset Value of each of the Company assets used in determining such item. With respect to depreciation, for example, in determining the taxable income or tax loss allocable to a Member, Profits and Losses allocable to that Member shall be adjusted by eliminating Depreciation allocable to that Member and substituting therefor tax depreciation, amortization or other cost recovery deduction allocable to that Member determined by reference to that Member's share of the tax basis of Company assets. This provision is intended to comply with the requirements of Code Section 704(c) and Treasury Regulations Section 1.704-l(b)(2)(iv)(f)(4) and shall be interpreted in conformity therewith. Any elections or other decisions relating to such tax allocations shall be made by the Management Committee. 34 (b) TAX CREDITS. Any tax credits shall be allocated among the Members in accordance with Treasury Regulations Section 1.704-l(b)(4)(ii), unless the applicable Code provision shall otherwise require. 6.2.3. CONFORMITY OF REPORTING. The Members are aware of the income tax consequences of the allocations made by this Section 6.2 and hereby agree to be bound by the provisions of this Section 6.2 in reporting their shares of Company profits, gains, income, losses, deductions, credits and other items for income tax purposes. 6.3 WITHHOLDING. The Company is authorized to withhold from distributions to a Member, or with respect to allocations to a Member, and to pay over to a federal, state or local government, any amounts required to be withheld pursuant to the Code, or any provisions of any other federal, state or local law. Any amounts so withheld shall be treated as having been distributed to such Member pursuant to this Section 6 for all purposes of this Agreement, and shall be offset against the current or next amounts otherwise distributable to such Member. 6.4 DISTRIBUTIONS. From time to time (but at least once each calendar quarter) the Managers shall determine in their reasonable judgment to what extent (if any) the Company's cash on hand exceeds its current and anticipated needs, including, without limitation, for operating expenses, debt service, acquisitions, and a reasonable contingency reserve. If such an excess exists, the Managers, by majority vote, shall cause the Company to distribute to the Members, in accordance with their Sharing Ratios, an amount in cash equal to that excess, excluding, however, any cash from revenues derived from the Company's collection, through its rates and charges, of federal and state income taxes, which shall be distributed (subject to the terms of this Section 6.4) to all Members in accordance with their Sharing Ratios. 6.4.1. The Company shall also distribute, to the extent funds are available, to each Member, with respect to each Fiscal Year within seventy-five (75) days after the end of such Fiscal Year, an amount of cash or cash equivalents equal to (i) the amount of the Company's federal taxable income allocated to such Member for such Fiscal Year, multiplied by (ii) 35% (the "Tax Distribution"); provided; however, that the Tax Distribution for any Fiscal Year may be reduced or eliminated on a pro rata basis among the Members if and to the extent determined by all of the Members. 6.4.2. From time to time the Members also may cause property of the Company other than cash to be distributed to the Members, which distribution must 35 be made in accordance with their Sharing Ratios and may be made subject to existing liabilities and obligations. 7. MANAGEMENT. 7.1 VOTING BY MEMBERS AND MANAGEMENT COMMITTEE. 7.1.1. Except as otherwise provided in this Agreement, the vote of the Members necessary for a matter to be approved by Members shall be a majority of the total Sharing Ratios of the Members. If the requisite majority of Sharing Ratios is not voted in favor of a matter being voted on, then the matter shall be deemed to be denied. Furthermore, unless otherwise provided herein, if the matter being voted on provides for more than two alternatives and no alternative receives the requisite majority approval then no alternative shall be selected. 7.1.2. The Members shall manage the Company's business through a management committee (the "Management Committee") in accordance with this Agreement. The acts of the Management Committee in accordance with its authority shall be binding upon all of the Members and the Company. The Management Committee shall consist of one individual manager appointed by each Member (collectively, the "Managers"). Each Member shall also designate an alternate for its Manager. Each alternate shall have all of the powers of the regular Manager in the regular Manager's absence, declination or inability to serve from time to time. On all matters decided by the Management Committee, each Manager or its alternate shall have voting power equal to the Sharing Ratio of the Member represented by such Manager. Whenever in this Agreement action by the Members as a group is contemplated, action by the Management Committee shall constitute the action of the Members as a group. 7.1.3. Subject to the other terms of this Agreement, the Management Committee, by majority vote of the Managers, may make all decisions and take all actions for the Company not otherwise provided for in this Agreement or in the CO&M Agreement, including, without limitation, the following: (a) Delegating management authority to the Operator under the CO&M Agreement; provided, however, that the Management Committee may not delegate to the Operator the right to take any action that would require a Supermajority Vote under Section 7.1.4 unless such action has been approved by a Supermajority Vote or is provided for in the CO&M Agreement; (b) Entering into, making and performing contracts, agreements, and other undertakings binding the Company that may be necessary, 36 appropriate, or advisable in furtherance of the purposes of the Company and making all decisions and waivers thereunder; (c) Opening and maintaining bank and investment accounts and arrangements, drawing checks and other orders for the payment of money, and designating individuals with authority to sign or give instructions with respect to those accounts and arrangements; (d) Maintaining the assets of the Company in good order; (e) Collecting sums due the Company; (f) To the extent that funds of the Company are available therefor, paying debts and obligations of the Company; (g) Subject to the provisions of Section 7.1.4(t), acquiring, utilizing for Company purposes, and disposing of any asset of the Company; (h) Selecting, removing and changing the authority and responsibility of accountants, contractors and other advisers and consultants; (i) Obtaining insurance for the Company; (j) Determining distributions of Company cash and other property as provided in Section 6.4; (k) Establishing a seal for the Company; (1) Appointing and removing any officers of the Company and establishing the authority and duties thereof; (m) Investing funds of the Company; (n) Determining the accounting methods and conventions to be used in preparation of the Company's financial statements (consistent with GAAP) and tax returns and making any and all elections under any applicable tax laws (consistent with the requirements of this Agreement); (o) Obtaining all necessary permits and governmental approvals regarding the business or operations of the Company; and (p) Engaging in any other activity and performing and carrying out contracts of any kind which may be necessary or appropriate to conduct the Company's business and accomplish its purposes, as may be lawfully carried on or performed by a limited liability company under the laws of the State of Delaware and the laws of 37 the states and municipalities in which the Company conducts business. 7.1.4. Notwithstanding anything in Section 7.1.3 above, the Management Committee may not cause the Company to do any of the following without the Supermajority Vote of the Members: (a) Filing the FERC Application or filing an application with FERC in connection with any Modification; (b) Approving a sale or abandonment of the Facilities; (c) Amending, modifying, changing or otherwise altering this Agreement or taking any action in contravention of this Agreement; (d) Electing to dissolve the Company; (e) Borrowing money or otherwise committing the credit of the Company for Company activities and voluntary prepayments or extensions of debt; (f) Approving any matter pursuant to Section 3.3; (g) Approving any matter pursuant to Sections 4.1; (h) Approving any matter pursuant to Section 5.1.2; (i) Selecting, removing and changing lawyers under Section 7.1.3.(h); (j) Entering into, amending, modifying, or terminating any contract or commitment to acquire or transfer any asset not provided for in an approved Phase I or Phase II or Phase III Capital Budgets, the cost of which exceeds by more than ten percent (10%) the amount budgeted therefor; (k) Requesting that Loans (rather than Capital Contributions) be made to the Company pursuant to Section 5.4.1; (1) Delegating any authority to any committee, Manager or agent of the Company to take any action that requires more than a majority vote of Members under this Section 7.1.4; (m) Approving any Financing Commitment or causing any financing (whether or not pursuant to a Financing Commitment) to be issued on which there is recourse to a Person other than the Company; 38 (n) Approving the Phase II or Phase III Capital Budgets or making any capital expenditures in excess of $200,000 in the aggregate in any calendar year that are not included in an approved Capital Budget; (o) Indemnifying any officer, employee, agent or any other Person except as specifically provided herein or in the CO&M Agreement; (p) Executing or otherwise entering into, or amending, modifying, or terminating, any employment agreement with an officer of the Company or similarly compensated person, the election or removal of any officer or the hiring or firing of other similarly compensated person with or without cause; (q) Setting or amending the compensation level of any officer of the Company or other similarly compensated person employed by the Company; (r) Revaluing any property or asset outside of the normal course of business; (s) Executing or otherwise entering into, or amending, modifying, or terminating (other than in accordance with, or pursuant to, the terms of such agreement), any agreement with a Member, an officer or employee of the Company, an Affiliate of a Member, or a person related by blood or marriage to an Officer or employee of the Company, involving aggregate consideration (including assumed actual and contingent liabilities) or fair market value or actual or contingent liability in excess of $100,000; (t) Transferring all or substantially all of the assets of the Company; (u) The filing of a petition as debtor in a United States Bankruptcy Court or taking any material affirmative act that would result in the Company's Bankruptcy; (v) Merging or consolidating the Company with or into any other Person; (w) Changing the name of the Company; (x) Changing the designation or the terms of Membership Interests which the Company has authorized or is authorized to issue; (y) Increasing the size of the Management Committee and changing the provisions of Section 7.1.2 regarding the composition of the Management Committee; 39 (z) Authorizing any non-cash distribution, dividend or transfer of Company assets; (aa) Any agreement by the Tax Matters Partner to an extension of the statute of limitations for making assessments on behalf of the Company or changing any tax election provided for in Section 11.4; (bb) Voting at a meeting of the Management Committee on a matter not on the agenda for the meeting referred to in Section 7.3 or shortening the ten (10) day notice requirement of Section 7.3; (cc) Amending, modifying, changing or otherwise altering the CO&M Agreement; or (dd) Taking any other action as to which a Supermajority Vote is required under this Agreement. 7.2 REMOVAL, RESIGNATION AND REPLACEMENT OF MANAGERS. Each Member, in its sole discretion, may remove or replace any Manager (including an alternate) appointed by it at any time and for any reason. Each Manager shall hold office for the term for which he is appointed and thereafter until his successor shall have been appointed and qualified, or until his earlier death, resignation or removal. A Manager may resign at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, or if no time be specified, at the time of its receipt by the remaining Manager. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. Upon the resignation of a Manager, the Member appointing that Manager shall have the right to appoint and designate another Manager. Managers need not be residents of Delaware. 7.3 MEETINGS BY THE MANAGEMENT COMMITTEE. The Management Committee shall meet at least quarterly. Special meetings of the Management Committee may be called from time to time by any Manager or Member acting through its Manager, and the Manager who does so shall be responsible for the agenda and minutes of such meeting. Except as otherwise provided in this Agreement, or as waived in writing by the Managers, each Manager shall be given at least ten (10) calendar days prior written notice of any meeting of the Management Committee. Such notice shall contain the time and place of such meeting, along with an agenda of items to be discussed and/or voted on at such meeting. A quorum shall consist of Managers or their alternates representing at least two (2) Members and a majority of the Sharing Ratios of the Members. 7.4 ACTION BY WRITTEN CONSENT OR TELEPHONE CONFERENCE. 40 Any action permitted or required by the Act, the Certificate of Formation or this Agreement to be taken at a meeting of the Members or the Management Committee may be taken without a meeting if a consent in writing, setting forth the action to be taken is signed by all the Members or the Managers, as the case may be. Such consent shall have the same force and effect as a unanimous consent at a meeting and may be stated as such in any document or instrument filed with the Secretary of State of Delaware, and the execution of such consent shall constitute attendance or presence in person at a meeting of the Members or Management Committee, as the case may be. Subject to the requirements of the Act, the Certificate of Formation or this Agreement for notice of meetings, unless otherwise restricted by the Certificate of Formation, Members or the Management Committee, may participate in and hold a meeting of the Members or Management Committee, as the case may be, by means of a conference telephone or similar communications equipment by means of which all Persons participating in the meeting can hear each other, and participation in such meeting shall constitute attendance and presence at such meeting, except where a Person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 7.5 COMPENSATION. A Manager shall receive no compensation for services rendered to the Company in that capacity. Officers and agents of the Company shall receive such compensation as approved by the Management Committee. 7.6 OPERATING BUDGETS. The Management Committee shall cause the Operator, under the CO&M Agreement, to direct the preparation of an annual operating budget and related operating plan, which shall include, for each Fiscal Year, one and three year projections showing (a) projected capital expenditures of the Company, (b) projected working capital and reserves that will be maintained or funded, (c) projected revenues, (d) projected operating expenses broken down in reasonable detail satisfactory to the Management Committee and the Members, (e) projected general and administrative expenses of the Company, and (f) projected capitalization and indebtedness of the Company and the debt service payable thereon (the "Operating Budget"). In the event that a subsequent Operating Budget is not approved in its entirety, any approved expense line items of such Operating Budget shall go in effect, all other expense line items shall be deemed to be increased by the lesser of the percentage that is agreed upon by the Management Committee or three percent (3%) from the level specified in the prior Operating Budget with the exception of Capital Contributions which shall not automatically increase and such prior Operating Budget, as so adjusted pursuant to the terms of this sentence, shall be effective until the end of the Fiscal Year to which it applies. 7.7 FINANCING COMMITTEE. 41 Within 30 days after the execution of this Agreement, each Member shall designate a representative to serve on the Financing Committee. The Financing Committee shall arrange for the Financing Commitment and present it to the Management Committee for consideration. Within 30 days after the presentation of the proposed Financing Commitment, the Management Committee shall vote on whether to accept or reject it. In the event the Members do not agree by a Supermajority Vote to accept the Financing Commitment, the Member(s) that voted for acceptance may purchase, in proportion to their respective Sharing Ratios, the entire Membership Interest(s) of the Member(s) who voted against acceptance. The Members desiring to exercise such purchase right shall so notify all of the other Members within ten (10) calendar days after such vote. The aggregate price for the Membership Interests to be purchased shall be paid in cash at closing and, unless the selling and purchasing Members otherwise agree, shall be the sum of the Capital Account balances, on the date of such vote, of the Member(s) who voted against acceptance, and such price shall be allocated to the purchasing Member(s) in proportion to their respective Sharing Ratios. Closing on such purchase shall occur on the date and at the location mutually agreed by the purchasing Member(s), but in no event more than twenty-one (21) calendar days after such vote. The Sharing Ratios of the Members shall be adjusted accordingly, and a revised Appendix B shall be sent to the Members. If the Member(s) who voted for acceptance do not purchase the entire Membership Interest(s) of the Member(s) who voted against acceptance, the Company shall be dissolved as soon as reasonably practicable in accordance with Section 15, subject to any necessary approvals from any Governmental Authority. 7.8 CONFLICTS OF INTEREST. Except as otherwise provided in this Agreement, each Member at any time and from time to time may engage in and possess interests in other business ventures of any and every type and description, independently or with others, including business ventures in competition with the Company, with no obligation to offer to the Company or any other Member the right to participate therein. The Company may transact business with any Member or Affiliate thereof, provided the terms of those transactions are no less favorable than those the Company could obtain from unrelated third parties. 7.9 MANAGEMENT OF VPSC. Notwithstanding that Dominion Greenbrier is the sole shareholder of VPSC, Dominion Greenbrier agrees that it shall not cause or permit VPSC to take any actions except with the approval of the Management Committee, and that the percentage approval of the Management Committee required with respect to any such actions shall be the percentage approval that would be required under Section 7.1 hereof if the Company was taking the action in question. 42 8. [INTENTIONALLY OMITTED] 9. OPERATION OF THE FACILITIES. 9.1 OPERATOR. The Company intends to enter into a CO&M Agreement with the Operator in the form attached hereto as Appendix F. The Members may, at any time, upon a Supermajority Vote, agree to an amendment to the CO&M Agreement, provided that the Operator concurs therewith. In the event that such CO&M Agreement is terminated pursuant to the terms thereof or the Operator ceases to serve as Operator in accordance with the terms of the CO&M Agreement, Piedmont Greenbrier, if it is still a Member, may designate its Affiliate the successor Operator. If neither Dominion Greenbrier or its Affiliate, nor Piedmont Greenbrier or its Affiliate is still a Member, the Members may, upon a Supermajority Vote, appoint a successor Operator. Any successor Operator selected pursuant to this Agreement shall execute and be bound by an agreement substantially in the form of the CO&M Agreement existing immediately prior to such execution. 10. INDEMNIFICATION. 10.1 RIGHT TO INDEMNIFICATION. Subject to the limitations and conditions as provided in Section 10 of this Agreement, each person who was or is made a party or is threatened to be made a party to or is involved in any Proceeding, or any appeal in such a Proceeding or any inquiry or investigation that could lead to such a Proceeding, by reason of the fact that he or she, or a Person of whom he or she is legal Manager, is or was a Manager of the Company or while Manager of the Company is or was serving at the request of the Company as a Manager, director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic limited liability company, corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise shall be indemnified by the Company to the fullest extent permitted by the Act, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law permitted the Company to provide prior to such amendment) against judgments, penalties (including excise and similar taxes and punitive damages), fines, settlements and reasonable expenses (including, without limitation, attorneys' fees) actually incurred by such Person in connection with such Proceeding, and indemnification under Section 10 of this Agreement shall continue as to a Person who has ceased to serve to the capacity which initially entitled such Person to indemnity hereunder. The rights granted pursuant to Section 10 of this Agreement shall be deemed contract rights and no amendment, modification or repeal of Section 10 of this Agreement shall have the effect of limiting or denying any such rights with respect to actions taken 43 or Proceedings arising prior to any such amendment, modification or repeal. It is expressly acknowledged that the indemnification provided in Section 10 of this Agreement could involve indemnification for negligence or under theories of strict liability. 10.2 ADVANCE PAYMENT. The right to indemnification conferred in Section 10 of this Agreement shall include the right to be paid or reimbursed by the Company the reasonable expenses incurred by a Person of the type entitled to be indemnified under Section 10.1 who was, is or is threatened to be made a named defendant or respondent in a Proceeding in advance of the final disposition of the Proceeding and without any determination as to the Person's ultimate entitlement to indemnification, provided that the payment of such expenses incurred by any such Person in advance of the final disposition of a Proceeding, shall be made only upon delivery to the Company of a written affirmation by such Manager of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification under Section 10 of this agreement and a written undertaking, by or on behalf of such Person, to repay all amounts so advanced if it shall ultimately be determined that such indemnified Person is not entitled to be indemnified under Section 10 of this Agreement or otherwise. 10.3 INDEMNIFICATION OF AGENTS. The Company, by adoption of a resolution of the Management Committee, may indemnify and advance expenses to an agent of the Company to the same extent and subject to the same conditions under which it may indemnify and advance expenses to Managers under Section 10 of this Agreement; and, the Company may indemnify and advance expenses to Persons who are not or were not Managers or agents of the Company but who are or were serving at the request of the Company as a Manager, director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic limited liability company, corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise against any liability asserted against him or her and incurred by him or her in such a capacity or arising out of his status as such a Person to the same extent that it may indemnify and advance expenses to Managers under Section 10 of this Agreement. 10.4 INDEMNIFICATION BY THE MEMBERS. To the fullest extent permitted by law, each Member shall indemnify the Company, each Manager and each other Member and hold them harmless from and against all losses, costs, liabilities, damages, and expenses (including, without limitation, costs of suit and attorney's fees) they may incur on account of any breach by that Member of this Agreement. 10.5 APPEARANCE AS A WITNESS. 44 Notwithstanding any other provisions of Section 10 of this Agreement, upon approval by the Members, the Company shall pay or reimburse expenses incurred by a Member in connection with that Member or Member's Manager or other employee's appearance as a witness or other participation in a Proceeding at a time when that Member or Member's Manager is not a named defendant or respondent in the Proceeding. 10.6 NONEXCLUSIVITY OF RIGHTS. The right to indemnification and the advancement and payment of expenses conferred in Section 10 of this Agreement shall not be exclusive of any other right which a Manager or other Person indemnified pursuant to Section 10.3 may have or hereafter acquired under any law (common or statutory), provision of the Certificate of Formation or this agreement, agreements, vote of Members or otherwise. 10.7 INSURANCE. Unless the Members otherwise determine by Supermajority Vote, each Member shall maintain its own insurance for the benefit of any Member or any Manager acting in their capacity as a Member or Manager, and the Company shall not be required to obtain any such insurance for the benefit of any Member or any Manager acting in their capacity as a Member or Manager. 10.8 MEMBER NOTIFICATION. To the extent required by law, any indemnification of or advance of expenses to a Manager in accordance with Section 10 of this Agreement shall be reported in writing to the Members with or before the notice or waiver of notice of the next Members' meeting or with or before the next submission to Members of a consent to action without a meeting and, in any case, within the 12 month period immediately following the date of the indemnification or advance. 10.9 SAVINGS CLAUSE. If Section 10 of this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify and hold harmless each Manager or any other Person indemnified pursuant to Section 10 of this Agreement as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceedings, whether civil, criminal, administrative or investigative to the full extent permitted by any applicable portion of Section 10 of this Agreement that shall not have been invalidated and to the full extent permitted by applicable law. 11. TAXES. 1l.l TAX RETURNS. 45 Dominion Greenbrier is hereby designated as the Company's "Tax Matters Partner" under Section 6231(a)(7) of the Code, and such Member shall supervise the preparation and filing of all tax and information returns which the Company may be required to file and shall, on behalf of the Company, make such tax elections and determinations as are reasonably necessary, appropriate or desirable and consistent with Section 11.4. Each Member shall furnish to the Company all pertinent information that is in the possession of such Member and is necessary to enable such returns to be prepared and filed. Copies of the tax returns, together with any schedules or other information that each Member may require in connection with preparation of such Member's own tax affairs, shall be furnished to the Members within ninety (90) calendar days after the end of each Fiscal Year. The Company shall bear the costs of preparing, filing and distributing any tax returns. 11.2 TAX STATUS. Without a Supermajority Vote of the Members, neither the Company nor anyone acting on its behalf shall be permitted to make any filing or election that would terminate the Company's classification as a partnership for federal income tax purposes. 11.3 TAX MATTERS. The Tax Matters Partner shall provide each Member with prompt notice of the initiation of all tax examinations or proceedings, shall thereafter promptly provide copies of all written information issued by or delivered to governmental authorities in connection with any such examinations or proceedings, and shall further provide each Member with prompt, reasonable, and continuous opportunity to review and provide comment with respect to the subject matter of each such examination or proceedings. Each Member agrees to cooperate fully with the Tax Matters Partner and to do or refrain from doing any and all things reasonably required by the Tax Matters Partner to conduct such proceedings. Subject to the terms hereof, the Tax Matters Partner shall not have the right to settle any audit or examination without first consulting with and receiving approval of a majority of the Members. 11.4 TAX ELECTIONS. The Company shall make the following elections on the appropriate tax returns: (a) to adopt the calendar year as the Company's tax year for federal and state income tax purposes; (b) to adopt the accrual method of accounting and to keep the Company's books and records on the income-tax method; and (c) and any other elections not inconsistent with the above that the Management Committee may deem appropriate. 46 12. BOOKS, RECORDS, REPORTS, AND BANK ACCOUNTS. 12.1 MAINTENANCE OF BOOKS AND RECORDS. The Company shall maintain the following accurate and complete records at the Principal Office or at such other locations as may be provided by the Members: (a) a current list of the full name and last known business address of each Member; (b) a copy of the Certificate of Formation and all amendments thereto; (c) copies of each of the Company's Federal, state and local tax returns and reports, as filed, for the last seven taxable periods; (d) copies of this Agreement, including all amendments thereto; (e) Company audited financial statements for the last seven Fiscal Years; (f) books and records of the Company; and (g) minutes of meetings of the Management Committee. 12.2 ACCOUNTING BASIS. Books and records of the Company shall be maintained on an accrual accounting basis, and the Company's net profit or net loss shall be determined on the basis of the Fiscal Year and in accordance with GAAP as consistently applied. 12.3 FINANCIAL REPORTS. The Management Committee shall cause the following financial statements to be prepared, in each case in accordance with GAAP as consistently applied on a consolidated and consolidating (i.e., by line of business) basis, but unaudited except in the case of the reports called for in Section 12.3(d), and shall cause to be delivered to each Person who was a Member during the applicable period described below: (a) a balance sheet and statement of income, statement of cash flow and Member's capital account as of the end of or for, as the case may be, each month, each within thirty (30) days after the end of each month; (b) (i) a balance sheet as of the end of each fiscal quarter of the Company; (ii) an income statement for such quarters and year-to-date; (iii) a statement of each Member's Capital Account as of the end of such quarters; and (iv) a statement of cash flows for such 47 quarter and year-to-date (including sufficient information to permit the Members to calculate their tax accruals), each within forty-five (45) days after the end of such quarters (or more frequently if agreed by the Management Committee); (c) (i) a balance sheet as of the end of each Fiscal Year of the Company; (ii) an income statement for such fiscal years; (iii) a statement of each Member's Capital Account as of the end of such fiscal years; and (iv) a statement of cash flows for such fiscal years, each within ninety (90) days after the end of such fiscal years; and (d) audited annual financial statements prepared by a national CPA firm selected by the Management Committee within ten (10) days after such statements are issued to the Company but in no event later than ninety (90) days after the end of each Fiscal Year of the Company. These financial statements shall be accompanied by a report of the Certified Public Accountants certifying the statements and stating that (a) their examination was made in accordance with generally accepted auditing standards and, in their opinion, the financial statements present fairly the financial position, financial results of operations, and changes in Members' capital in accordance with GAAP and (b) in making the examination and reporting on the financial statements described above, nothing came to their attention that caused them to believe that (i) the income and revenues were not paid or credited in accordance with the financial and accounting provisions of their Agreement, (ii) the costs and expenses were not charged in accordance with the financial and accounting provisions of this Agreement, or (iii) the Members or any Member failed to comply in any material respect with the financial and accounting provisions of this Agreement, or if they do conclude that a Member so failed, specifying the nature and period of existence of the failure. 12.4 FISCAL YEAR. The fiscal year of the Company (the "Fiscal Year") shall end on December 31 unless otherwise required by the Code or approved by a Supermajority Vote of the Members. 12.5 ACCOUNTS. The Company shall maintain a record of each Member's Capital Account in accordance with Section 5.7. 12.6 OTHER NOTICES. 48 The Company shall notify each Member in writing of any of the following immediately upon learning of the occurrence thereof, describing the same and, if applicable, the steps being taken by the Company with respect thereto: (a) the occurrence of the default by the Company under any material note, indenture, loan agreement, mortgage, lease, deed or other material similar agreement to which the Company is a party or by which it is bound; (b) the institution of any litigation, arbitration proceeding or governmental proceeding affecting the Company, whether or not considered to be covered by insurance, if the damages being sought in such litigation exceed $100,000 or, if not specified in such litigation, could reasonably be expected to exceed $100,000; and (c) the entry of any judgment or decree against the Company, if the amount of such judgment exceeds $10,000. 12.7 GOVERNMENTAL REPORTS. The Operator shall prepare and file, or cause to be prepared and filed, all reports prescribed or required by the FERC or any other Governmental Authority having jurisdiction over the Company. 12.8 COST OF PREPARING AND DISTRIBUTING REPORTS. The Company shall bear the costs of (1) preparing and distributing the tax returns described in Section 11.1 and any reports required or permitted in Sections 12.3 and 12.7, and (2) legal, accounting, and other fees and expenses reasonably incurred by Dominion Greenbrier in the capacity as Tax Matters Partner. 12.9 ACCOUNTS. The Members shall cause to be established and maintained one or more separate bank and investment accounts and arrangement for Company funds in the Company' name with financial institutions and firms that the Members determine. The Company's funds may not be commingled with the funds of any Member. 13. INSPECTION. 13.1 INSPECTION OF FACILITIES AND RECORDS. Subject to the provisions of Section 4.8, each Member shall have the right at all reasonable times during usual business hours upon providing reasonable notice to the Operator to inspect the Facilities and other properties of the Company and to audit, examine and make copies of the books of account and other records of the company. Such right may be exercised through any agent or employee of such 49 Member designated in writing by it or by an independent public accountant, engineer, attorney or other consultant so designated. The Member making the request shall bear all reasonable costs and expenses incurred by such Member, the Company or the Operator in connection with any inspection, examination or audit made on such Member's behalf. 14. BANKRUPTCY OF A MEMBER. 14.1 BANKRUPTCY MEMBERS. If any Member becomes a Bankrupt Member, that Person ceases to be a Member of the Company. The successor in interest to that Person holds that Person's Membership Interest in the capacity of a non-Member with none of the rights and powers of a Member, except the right to such Person's Profits, Losses and Distributions. 15. DISSOLUTION, LIQUIDATION, AND TERMINATION. 15.1 DISSOLUTION. The Company shall dissolve and its affairs shall be wound up on the first to occur of the following: (a) the unanimous written consent of the Members; (b) the time, if any, specified in the Certificate of Formation; (c) under the circumstances specified in Section 4.1.1 and 4.1.2; (d) pursuant to Section 7.1.4(d); and (e) entry of a decree of judicial dissolution of the Company under Section 18-802 of the Act. 15.2 LIQUIDATION AND TERMINATION. On dissolution of the Company, the Members shall act as liquidator or may appoint one or more Members as liquidator. The liquidator shall proceed diligently to wind up the affairs of the Company and make final distributions as provided herein and in the Act. The costs of liquidation shall be borne as a Company expense. Until final distribution, the liquidator shall continue to operate the Company properties with all of the power and authority of the Members. The steps to be accomplished by the liquidator are as follows: (a) as promptly as possible after dissolution and again after final liquidation, the liquidator shall cause a proper accounting to be made by the Certified Public Accountants of the Company's assets, liabilities, and operations 50 through the last day of the calendar month in which the dissolution occurs or the final liquidation is completed, as applicable; (b) Profit or Loss from the sale or distribution of Company property incurred upon or during liquidation and termination of the Company shall be allocated among the Members as provided in Section 6 of this Agreement; and (c) the liquidator shall distribute the Company's assets in the following manner, subject to the Act: (i) First, to satisfy debts and obligations of the Company, including those owed to Members or their Affiliates; (ii) Second, to fund any reserves deemed appropriate by the Management Committee; and (iii) Third, to the Members in accordance with the positive balance in their Capital Accounts, after giving effect to all contributions, distributions and allocations for all periods. The distribution of cash and/or property to a Member in accordance with the provisions of this Section 15.2 constitutes a complete return to the Member of its Capital Contributions and a complete distribution to the Member of its Membership Interest and all the Company's property and constitutes a compromise to which all Members have consented. To the extent that a Member returns funds to the Company, it has no claim against any other Member for those funds. 15.3 DEFICIT CAPITAL ACCOUNTS. Notwithstanding anything to the contrary contained in this Agreement, and notwithstanding any custom or rule of law to the contrary, to the extent that the deficit, if any, in the Capital Account of any Member results from or is attributable to deductions and Losses of the Company (including non-cash items such as depreciation), or distributions of money pursuant to this Agreement to all Members in proportion to their respective Sharing Ratios, upon dissolution of the Company such deficit shall not be an asset of the Company and such Members shall not be obligated to contribute such amount to the Company to bring the balance of such Member's Capital Account to zero. 15.4 CERTIFICATE OF CANCELLATION. On completion of the distribution of Company assets as provided herein, the Company is terminated, and the Members (or such other Person or Persons as the Act may require or permit) shall cause to be filed a Certificate of Cancellation with the Delaware Secretary of State as required by Section 18-203 of the Act, 51 cancel any other filing made pursuant to Sections 2.3 or 2.6, and take such other actions as may be necessary to terminate the Company. 16. GENERAL PROVISIONS. 16.1 OFFSET. Whenever the Company is to pay any sum to any Member, any amounts that Member owes the Company may be deducted from that sum before payment. 16.2 NOTICES. Except as expressly set forth to the contrary in this Agreement, all notices, requests, or consents provided for or permitted to be given under this Agreement must be in writing. Notices and other communications will be deemed to have been given (a) on the date when delivered by hand or by means of electronic transmission (and followed by electronic confirmation of receipt), (b) on the date after the day when deposited for delivery with a nationally recognized air courier, or (c) on the third Business Day after being deposited in the United States mail, postage prepaid return receipt requested. All notices, requests, and consents to be sent to a Member must be sent to or made at the addresses given for that Member on the signature pages of this Agreement, or such other address as that Member may specify by notice to the other Members. Any notice, request, or consent to the Company must be given to the Management Committee at the address designated by the Company pursuant to Section 2.4. Whenever any notice is required to be given by law, the Certificate of Formation or this Agreement, a written waiver thereof, signed by the Person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. 16.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the Members and their Affiliates relating to the Company and supersedes all prior contracts or agreements with respect to the Company, whether oral or written. 16.4 EFFECT OF WAIVER OR CONSENT. A waiver or consent, express or implied, to or of any breach or default by any Person in the performance by that Person of its obligations with respect to the Company is not a consent or waiver to or of any other breach or default in the performance by that Person of the same or any other obligations of that Person with respect to the Company. Failure on the part of a Person to complain of any act of any Person or to declare any Person in default with respect to the Company, irrespective of how long that failure continues, does not constitute a waiver by that Person of its rights with respect to that default until the applicable statute-of-limitations period has run. 52 16.5 AMENDMENT OR MODIFICATION. This Agreement may be amended or modified from time to time only by a written instrument adopted by at least a Supermajority Vote of the Members, provided that no amendment or modification having a material affect on the rights or obligations of a Member shall be adopted without the written consent of such Member. No amendment or modification of this Agreement shall be deemed to exist as the result of any oral statement, action, waiver or delay by a Member or group of Members on any occasion(s). 16.6 BINDING EFFECT. Subject to the restrictions on Dispositions set forth in this Agreement, this Agreement is binding on and inures to the benefit of the Members and their respective heirs, legal Managers, successors and assigns. 16.7 SPECIFIC PERFORMANCE AND INJUNCTIVE RELIEF. The parties acknowledge and agree that any breach or violation of this Agreement has the potential to cause irreparable and continuing harm that cannot be adequately cured or remedied by monetary damages alone. In recognition of the foregoing, the parties hereby agree that the remedies for breach or violation of this Agreement shall include, without limitation, the remedies of specific performance and injunctive relief. In any action, suit or other proceeding involving the enforcement of this Agreement, each party hereby waives all rights to claim or assert that monetary damages alone constitute a sufficient remedy, or that specific performance or injunctive relief should be denied. Each party agrees that the preceding waiver is irrevocable and unconditional, and shall have the broadest possible scope and application. 16.8 GOVERNING LAW; SEVERABILITY. THIS AGREEMENT IS GOVERNED BY AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF DELAWARE, EXCLUDING ANY CONFLICT-OF-LAWS RULE OR PRINCIPLE THAT MIGHT REFER THE GOVERNANCE OR THE CONSTRUCTION OF THIS AGREEMENT TO THE LAW OF ANOTHER JURISDICTION. In the event of a direct conflict between the provisions of this Agreement and (a) any provision of the Certificate of Formation, or (b) any mandatory provision of the Act, the application provision of the Certificate of Formation or the Act shall control. If any provision of this Agreement or the application thereof to any Person or circumstance is held invalid or unenforceable to any extent, the remainder of this Agreement and the application of that provision to other Persons or circumstances is not affected thereby and that provision shall be enforced to the greatest extent permitted by law. 16.9 NO THIRD PARTY BENEFICIARIES. 53 Nothing in this Agreement shall provide any benefit to any third party or entitle any third party to any claim, cause of action, remedy or right of any kind, it being the intent of the Members that this Agreement shall not be construed as a third party beneficiary contract. 16.10 CREDITORS. None of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Company. 16.11 FURTHER ASSURANCES. In connection with this Agreement and the transactions contemplated hereby, each Member shall execute and deliver any additional documents and instruments and perform any additional acts that may be necessary or appropriate to effectuate and perform the provisions of this Agreement and those transactions. 16.12 NOTICE TO MEMBERS OF PROVISIONS OF THIS AGREEMENT. By executing this Agreement, each Member acknowledges that it has actual notice of (a) all of the provisions of this Agreement, including, without limitation, the restrictions on the transfer or Disposition of Membership Interests set forth in Section 3 and (b) all of the provisions of the Certificate of Formation. Each Member hereby agrees that this Agreement constitutes adequate notice of all such provisions, and each Member hereby waives any requirement that any further notice thereunder be given. 16.13 PRESS RELEASES. Prior to the filing of the FERC Application, without first obtaining the agreement of the other Members by Supermajority Vote, no Member shall make any press release or public statement about the Company, the business of the Company, or the transactions or operations contemplated hereby, unless legal counsel for such Member determines that such statement is required by applicable law. At any time subsequent to the filing of the FERC Application, no Member may make a press release or public statement disclosing Confidential Information without first obtaining the agreement of the Company unless legal counsel for such Member determines that such statement is required by applicable law, in which event, such Member may issue a statement to the extent legally required, provided, however, prior to the In-Service Date, the disclosing Member shall give the other Members the opportunity to review a copy of such statement and consult with such Member prior to the release thereof. 16.14 COUNTERPARTS. This Agreement may be executed in any number of counterparts with the same effect as if all signing parties had signed the same document. All counterparts shall be construed together and constitute the same instrument. 54 16.15 SUPERCEDES. This Agreement amends and supercedes in all respects that certain Operating Agreement for Greenbrier Pipeline Company, LLC dated as of July 12, 2001 between Greenbrier Pipeline Company, LLC and Dominion Greenbrier, Inc., which shall have no further force or effect. IN WITNESS WHEREOF, the Members have executed this Agreement as of the date first set forth above. MEMBERS: DOMINION GREENBRIER INC. By: /s/ Thomas Farrell ------------------------------------ Name: Thomas F. Farrell, II Title: Chief Executive Officer PIEDMONT GREENBRIER PIPELINE COMPANY, LLC By: /s/ Ware F. Schiefer ------------------------------------ Name: Ware F. Schiefer Title: President 55 APPENDIX A (CERTIFICATE OF FORMATION) A-l STATE OF DELAWARE OFFICE OF THE SECRETARY OF STATE I, HARRIET SMITH WINDSOR, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF FORMATION OF "GREENBRIER PIPELINE COMPANY, LLC", FILED IN THIS OFFICE ON THE TWELFTH DAY OF JULY, A.D. 2001, AT 3 O'CLOCK P.M. [SEAL] /s/ Harriet Smith Windsor ---------------------------------------------- HARRIET SMITH WINDSOR, SECRETARY OF STATE AUTHENTICATION: 1243122 DATE: 07-16-01 CERTIFICATE OF FORMATION OF GREENBRIER PIPELINE COMPANY, LLC This Certificate of Formation of Greenbrier Pipeline Company, LLC (the "LLC") dated as of July 12, 2001, is being duly executed and filed by E. J. Marks, III, as an authorized person, to form a limited liability company under the Delaware Limited Liability Company Act. FIRST. The name of the limited liability company formed hereby is Greenbrier Pipeline Company, LLC. SECOND. The address of the registered office of the LLC in the State of Delaware is c/o The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, County of New Castle, Wilmington, Delaware 19801. THIRD. The name and address of the registered agent for service of process on the LLC in the State of Delaware is The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, County of New Castle, Wilmington, Delaware 19801. IN WITNESS WHEREOF, the undersigned has executed this Certificate of Formation as of the date first written above. /s/ E. J. Marks, III ---------------------------------------- E. J. Marks, III Authorized Person APPENDIX B (SHARING RATIOS)
Member Capital Commitment Sharing Ratio ------ ------------------ ------------- ~~Dominion Greenbrier $ * 67% Piedmont Greenbrier $ * 33%~~
* Each Member's Capital Commitment shall equal such Member's Sharing Ratio, multiplied by the Estimated Cost of the Initial Facilities set forth on Appendix C hereto, as such estimate may be adjusted with respect to the Initial Facilities and the inclusion of any Modification (i) in the Phase I Capital Budget, the Phase II Capital Budget and the Phase III Capital Budgets approved pursuant to this Agreement; and (ii) under Sections 5.2.1(a)(y), 5.2.1(b)(y) and 5.2.1(c)(y). B-l APPENDIX C DESCRIPTION OF INITIAL FACILITIES The Initial Facilities will consist of approximately 200 miles of 30-inch diameter natural gas pipeline extending from proposed points of interconnection with the Operator's facilities and the facilities of Tennessee Gas Pipeline in Kanawha County, West Virginia to a point in Rockingham County, North Carolina. A 24-inch diameter pipeline will extend 44 miles from Rockingham County to a point in Person County, North Carolina, and a 20-inch diameter pipeline will extend approximately 18 miles from Person County to a point in Granville County, North Carolina. Approximately 37,500 horsepower of compression will be required at appurtenant facilities along the route. The estimated cost of the Initial Facilities is $480,000,000 plus AFUDC. The pipeline will have the capacity to transport 600,000 dekatherms per day. It will have a maximum allowable operating pressure of 1250 pounds per square inch (psi) and a minimum operating pressure of 650 psi. APPENDIX D PRE-EXECUTION DATE EXPENDITURES THROUGH JULY 31, 2001 DOMINION GREENBRIER, INC. CATEGORY COSTS -------- ------------- Labor/Benefits/etc. $ 358,596.16 Materials/supplies 58,089.70 Other Costs 57,636.02 Outside Services 1,873,207.38 ------------- Total $2,347,529.26 PIEDMONT GREENBRIER PIPELINE COMPANY, LLC Outside Services $ 26,674.60 ------------- D-l APPENDIX E PHASE I CAPITAL BUDGET (excluding AFUDC)
COMPRESSOR PIPELINES STATIONS TOTAL ---------- ---------- ---------- September 2001 $1,558,000 $ 40,000 $1,598,000 October 2001 2,425,000 40,000 2,465,000 November 2001 551,000 40,000 591,000 December 2001 505,000 35,000 540,000 January 2002 471,000 10,000 481,000 ---------- Total $5,510,000 $165,000 $5,675,000
E-l APPENDIX F CONSTRUCTION, OPERATION AND MAINTENANCE AGREEMENT BY AND BETWEEN DOMINION TRANSMISSION, INC. AND GREENBRIER PIPELINE COMPANY, LLC DATED SEPTEMBER 1, 2001 TABLE OF CONTENTS
Page ---- 1. Definitions and Construction 1 1.1 Definitions 1 1.2 Construction 5 2. Relationship of the Parties 5 2.1 Appointment as Operator 5 2.2 Operator's Authority to Execute Contracts 6 3. Operation of the Facilities 6 3.1 Operator's Responsibilities 6 3.2 Reasonable Efforts 9 3.3 Claims 9 4. Employees, Consultants and Subcontractors 9 4.1 Operator's Employees, Consultants and Subcontractors 9 4.2 Use of Affiliates or Independent Contractors 10 4.3 Standards for Operator and its Employees 10 4.4 Non-Discrimination and Drugs 10 5. Financial and Accounting 11 5.1 Accounting and Compensation 11 5.2 Budgets and Reports 11 5.3 Disputed Charges 12 5.4 Rate and Tariff Reviews 12 5.5 Audit and Examination 12 6. Intellectual Property; License to Operator 12 7. Indemnification 13 8. Insurance 14 9. Term 15 10. Survival of Obligations 15 11. Law of the Contract and Arbitration 16 11.1 Law of the Contract 16 11.2 Arbitration 16 12. Special and Consequential Damages 18 13. General 18 13.1 Effect of Agreement; Amendments 18
ii 13.2 Notices 18 13.3 Counterparts 19 13.4 Waiver 19 13.5 Assignability; Successors 19 13.6 Third Persons 19 13.7 Laws and Regulatory Bodies 20 13.8 Section Numbers; Headings 20 13.9 Severabilitv 20 13.10 Further Assurances 20 Exhibit A - Accounting Procedure

iii CONSTRUCTION, OPERATION AND MAINTENANCE AGREEMENT This agreement ("CO&M Agreement"), made and entered into as of the first day of September, 2001, is by and between Dominion Transmission, Inc., a Delaware corporation ("Operator"), and Greenbrier Pipeline Company, LLC, a Delaware limited liability company ("Company"). 1. DEFINITIONS AND CONSTRUCTION. 1.1. DEFINITIONS. The definitions used in the Amended and Restated Operating Agreement of the Company, dated September 1, 2001 ("Operating Agreement"), shall, except as otherwise specifically provided below, have the same meanings in this CO&M Agreement. 1.1.1. "ACCOUNTING PROCEDURE" means the accounting procedure set forth in Exhibit A. 1.1.2. "AFFILIATE" means with respect to a Member, any Person which is (a) a Parent of such Member; or (b) a corporation as to which the majority of the voting securities are (directly or through any number of wholly-owned subsidiaries) owned by such Member or a Parent of such Member. 1.1.3. "AUTHORIZATIONS" means all licenses, certificates, permits, orders, approvals, determinations and authorizations from Governmental Authorities having jurisdiction. 1.1.4. "BUSINESS DAY" means a day, other than Saturday or Sunday, on which commercial banks are open for the transaction of business in New York, New York. 1.1.5. "CERTIFICATE" means the Certificate(s) of public convenience and necessity issued by the FERC pursuant to the FERC Application. 1.1.6. "CERTIFICATE OF FORMATION" means the Certificate of Formation filed with the Delaware Secretary of State pursuant to the Delaware Limited Liability Act on July 12, 2001 and attached to the Operating Agreement as Appendix A. 1.1.7. "COMPANY" means Greenbrier Pipeline Company, LLC, a Delaware limited liability company. 1.1.8. "CO&M AGREEMENT" means this Construction, Operating and Maintenance Agreement between the Company and the Operator. 1 1.1.9. "CONFIDENTIAL INFORMATION" means unique and specific information about the Facilities, the Operating Agreement, this CO&M Agreement, a Member, the Company, rate strategies or marketing strategies that is not generally available to the public, and in the case of a Member or the Company, that such Member or the Company has designated as confidential, Upon the filing of the FERC Application, the terms and conditions of this CO&M Agreement and any information about the Facilities disclosed in the FERC Application (except for any terms and conditions or information for which confidential treatment may have been requested and not refused by the FERC) shall be deemed to be generally available to the public and shall not be considered Confidential Information. 1.1.10. "CUSTOMER" means a Person who has entered into a Service Agreement with the Company (or, where applicable, a precedent agreement relating thereto) for the receipt, transportation, and delivery of natural gas by means of the Facilities. 1.1.11. "DECISION NOTICE" has the meaning set forth in Section 11.2. 1.1.12. "DEFAULT RATE" means an interest rate equal to the lesser of (a) two percent (2%) per annum over the prime rate of Chase Manhattan Bank, N.A. (or its successor) as in effect from time to time while such default is outstanding; or (b) the maximum interest rate allowed for this purpose pursuant to the law of Delaware. 1.1.13. "DOMINION GREENBRIER" means Dominion Greenbrier, Inc., a Delaware corporation. 1.1.14. "EXECUTION DATE" means September 1, 2001. 1.1.15. "FACILITIES" means the Initial Facilities together with any and all Modifications. 1.1.16. "FERC" means the Federal Energy Regulatory Commission or any commission, agency or other governmental body succeeding to the powers of such commission. 1.1.17. "FERC APPLICATION" means the documents pursuant to which application for a certificate(s) of public convenience and necessity is made to FERC by the Company for authority to construct, own, lease and operate the Initial 2 Facilities and to receive, transport and deliver natural gas by means of the Initial Facilities. 1.1.18. "FINANCING COMMITMENT" means the agreements between one or more financial institutions or other Persons and the Company or the Financing Corporation pursuant to which such financial institutions or other Persons agree, subject to the conditions set forth therein, to lend money to, or purchase securities of, the Company or the Financing Corporation, the proceeds of which shall be used to finance all or a portion of the Facilities. 1.1.19. "FISCAL YEAR" means the fiscal year adopted by the Company from time to time. 1.1.20. "GOVERNMENTAL AUTHORITY" means any court, agency, authority, board, bureau, commission, department, office or instrumentality of any nature whatsoever of any governmental or quasi-governmental unit, whether federal, state, parish, county, district, municipality, city, political subdivision or otherwise, domestic or foreign whether now or hereafter in existence. 1.1.21. "INITIAL FACILITIES" means the real, personal, mixed and contractual property (whether tangible or intangible) to be owned and operated by the Company for the receipt, transportation and delivery of natural gas, all as more fully described in Appendix C to the Operating Agreement (not including any Modification but including any changes in size, design capacity and location as may be approved prior to the date of filing of the FERC Application). 1.1.22. "LIABILITIES" means actions, claims, settlements, judgments, demands, costs, expenses (including, without limitation, expenses attributable to the defense of any actions or claims), attorneys' fees and liabilities related to the Operation of the Facilities. 1.1.23. "MANAGER" has the meaning set forth in Section 7.1.2 of the Operating Agreement. 1.1.24. "MANAGEMENT COMMITTEE" has the meaning set forth in Section 7.1.2 of the Operating Agreement. 1.1.25. "MEETING" has the meaning set forth in Section 11.2. 1.1.26. "MEMBER" means any Person executing the Operating Agreement as of the date of the Operating Agreement or who is hereafter admitted to the Company as a Member as provided in the Operating Agreement, but does not include 3 any Person who has ceased to be a Member of the Company. 1.1.27. "MODIFICATION" means any additions or modifications to the Facilities approved after the filing of the FERC Application installed (a) to modify, improve, expand, extend or increase the design capacity or scope of the Facilities or any portion thereof (except in connection with customary maintenance) or (b) to provide a new point of delivery or receipt of natural gas for the Facilities. 1.1.28. "MONTH" means a period of time beginning on the first day of a calendar month and ending at the same time on the first day of the next succeeding calendar month. 1.1.29. "OPERATE THE FACILITIES" means to plan, design, construct, test, maintain, repair, replace, improve, expand and/or operate the Facilities, including, without limitation, the duties identified in Section 3.1 of this CO&M Agreement. Where used in noun form, such term shall be "OPERATION OF THE FACILITIES." 1.1.30. "OPERATOR" means Dominion Transmission, Inc., a Delaware corporation, and any of its successors or assigns, pursuant to this CO&M Agreement. 1.1.31. "PARTY" means the Company or the Operator. 1.1.32. "PERSON" means an individual, a trust, an estate, a domestic corporation, a foreign corporation, a professional corporation, a partnership, a limited partnership, a limited liability company, a foreign limited liability company, an unincorporated association, or another entity. 1.1.33. "PHASE II CAPITAL BUDGET" means the capital budget for the period from the filing of the FERC Application to the issuance of the Certificate. 1.1.34. "PHASE III CAPITAL BUDGET" means the capital budget for the period from the issuance of the Certificate to the In-Service Date. 1.1.35. "PIEDMONT GREENBRIER" means Piedmont Greenbrier Pipeline Company, LLC, a North Carolina limited liability company. 1.1.36. "PRE-COMPLETION PERIOD" means the period between the Execution Date and the date that the Facilities are placed into service, which latter date shall be certified in writing by the Operator. 4 1.1.37. "PROCEEDING" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative. 1.1.38. "PROHIBITED CONDUCT" means any action by the Operator that constitutes bad faith, gross negligence or willful misconduct. 1.1.39. "REQUIRED ACCOUNTING PRACTICE" means the accounting rules and regulations, if any, at the time prescribed by the regulatory bodies under the jurisdiction of which the Company is at the time operating and, to the extent of matters not covered by such rules and regulations, generally accepted accounting principles applied on a consistent basis as practiced in the United States at the time prevailing for companies engaged in a business similar to that of the Company. 1.1.40. "SERVICE AGREEMENTS" means the service agreement(s) by and between the Company and the Customers for the receipt, transportation and delivery of natural gas by means of the Facilities. 1.1.41. "YEAR" means each twelve (12) Month period beginning on the first day of a calendar year and ending at the beginning of the first day of the next calendar year, provided that the first year hereunder shall begin on the date hereof, and shall end at the beginning of the first day of the following calendar year, and further provided that the last contract year shall end at the expiration of the term of this CO&M Agreement pursuant to Section 9 hereof. 1.2. CONSTRUCTION. Whenever the context requires, the gender of all words used in this CO&M Agreement includes the masculine, feminine and neuter. All references to Sections refer to sections of this CO&M Agreement (unless the context clearly indicates otherwise), and all references to Exhibits are to Exhibits attached to this CO&M Agreement, each of which is made a part hereof for all purposes. 2. RELATIONSHIP OF THE PARTIES. 2.1. APPOINTMENT AS OPERATOR. Subject to the terms and conditions of this CO&M Agreement, the Company hereby appoints the Operator to act hereunder, and the Operator hereby accepts such appointment and agrees to act pursuant to the provisions of this CO&M Agreement and the applicable provisions of the Operating Agreement. In performing services pursuant to this CO&M Agreement, the Operator shall be an agent of the Company. 5 2.2. OPERATOR'S AUTHORITY TO EXECUTE CONTRACTS. Subject to the terms of this CO&M Agreement, contracts in connection with Operation of the Facilities may be negotiated and executed or amended by the Operator as agent for the Company. Copies of all contracts entered into by the Operator on behalf of the Company shall be provided to the Company. All contracts and permits, if any, relating to Company business and executed by the Operator prior to the Execution Date shall be assigned by the Operator to the Company as soon as practicable after the Execution Date. 3. OPERATION OF THE FACILITIES. 3.1. OPERATOR'S RESPONSIBILITIES. The Operator shall be responsible for the Operation of the Facilities, and, subject to the provisions of the Operating Agreement, the Operator is authorized to undertake all activities reasonably necessary to fulfill such responsibilities, including, but not limited to: 3.1.1. Prepare, file, execute and prosecute applications for the Authorizations required by the Company and make periodic filings required of the Company by Governmental Authorities having jurisdiction, including, without limitation, the preparation, filing, execution and prosecution of the FERC Application (and any amendments thereto) and the Company's FERC tariff (and any amendments thereto). 3.1.2. Provide or cause to be provided the day-to-day operating and maintenance services, administrative liaison and related services to the Members, Managers, Management Committee and the Company, including, but not limited to, Customer support, regulatory matters (including rate, tariff and Certificate filings), legal, accounting, electronic bulletin board design and maintenance, capacity and informational postings, engineering, construction, repair, replacement, inspection, operational planning, budgeting, tax and technical services, and insurance and regulatory administration and compliance. 3.1.3. Prepare and/or cause to be prepared the engineering design and specifications for the Facilities. 3.1.4. Negotiate and execute contracts for the purchase of materials, equipment and supplies necessary for the Operation of the Facilities. 3.1.5. Prepare, negotiate and execute in the name of the Company rights-of-way, land in fee, permits and contracts, and initiate and prosecute eminent domain Proceedings, 6 necessary for the Operation of the Facilities, and resist the perfection of any involuntary liens against Company property. 3.1.6. Construct and/or install, or cause to be constructed and/or installed, the Facilities. 3.1.7. Maintain accurate and itemized accounting records for the Operation of the Facilities, together with any information reasonably required by the Company relating to such records, consistent with the applicable provisions of Section 12 of the Operating Agreement. 3.1.8. Prepare the financial and other reports set forth in Section 12 of the Operating Agreement. 3.1.9. Cause the Operation of the Facilities to be in accordance with the requirements of all Governmental Authorities having jurisdiction, including, but not limited to, the requirements of the United States Department of Transportation set forth in 49 CFR Parts 190, 191, 192 and 199 and in accordance with sound and prudent natural gas pipeline industry practices, and provide or cause to be provided such appropriate supervisory, audit, administrative, technical and other services as may be required for the Operation of the Facilities. 3.1.10. Prepare, or cause to be prepared, and file all necessary federal and state income tax returns and all other tax returns and filings for the Company (including making the elections set forth in Section 11.4 of the Operating Agreement). Each Member shall furnish to the Operator all pertinent information in its possession relating to Company operations that is necessary to enable such returns to be prepared and filed. The Operator shall pay on behalf of the Company such taxes as are required to be paid by the Company. 3.1.11. On behalf of the Company, maintain and administer bank and investment accounts and arrangements for receipt of Company funds, draw checks and other orders for the payment of money, and designate individuals with authority to sign or give instructions with respect to those accounts and arrangements. The Company's funds shall not be commingled with funds belonging to the Operator. 3.1.12. On behalf of the Company, market the Company's services, including, but not limited to, conducting open seasons for new services, receiving and responding to requests for new services or changes in existing services, the negotiation, 7 execution and administration of Precedent Agreements and Service Agreements in accordance with FERC's policies, rules and Orders and the Company's FERC Gas Tariff, and the preparation and collection of all bills to the Customers for services rendered thereunder. 3.1.13. On behalf of the Company, negotiate, execute and administer contracts with other pipelines and service providers, including, but not limited to, Operational Balancing Agreements, Capacity Leases, Storage and Transportation Agreements and Balancing Agreements and to undertake such emergency measures with third parties necessary to protect the reliability and safety of the Company's services. 3.1.14. Receive nominations for service, schedule service, issue confirmations, and administer Customer contracts, including capacity release, in accordance with the Company's FERC tariff and FERC policies, rules and orders. 3.1.15. Establish such procedures as may be reasonable and appropriate to comply with or to obtain an exemption from the marketing affiliate rules set forth in the FERC Order No. 497 as the same may be amended or superseded. 3.1.16. Dispatch and allocate daily scheduled nominations for natural gas quantities to be received, transported and redelivered by means of the Facilities. 3.1.17. Utilize electronic flow measurement equipment for volume determinations and natural gas chromatographs, as deemed appropriate by the Operator, for heating value determinations as described in the Company's FERC tariff. 3.1.18. Except as otherwise provided by applicable laws or governmental regulations or as otherwise directed by the Company, retain all records, books of account, Company tax returns, plans, designs, studies, reports and other documents related to the Operation of the Facilities for three (3) years from the date of completion of the activity to which such records relate (or such longer period as may be required by law or the Operating Agreement). 3.1.19. Report to the Company as soon as practicable all non-routine occurrences that the Operator determines may have a significant adverse impact upon the Operation of the Facilities, make any necessary repairs as a result of such occurrences as the Operator reasonably deems necessary, and make a follow-up report at an appropriate time on the 8 Operator's response to each non-routine occurrence; provided, however, that the Operator shall obtain the prior approval of the Company prior to performing repairs with an estimated cost of over $250,000 unless the non-routine occurrence is of a nature that immediate repair is required, in which event the Operator may make such repair without such prior approval but shall provide a complete and accurate report to the Company of such repair as soon as practicable thereafter. 3.1.20. Perform any required major equipment overhaul and replacement; provided, however, that unless already previously approved by the Company in a budget submitted by the Operator, the Operator shall obtain the prior approval of the Company prior to performing such overhaul or replacement with an estimated cost of over $250,000 unless such overhaul or replacement is of a nature that immediate action must be taken, in which event the Operator may perform such overhaul or replacement without such prior approval but shall provide a complete and accurate report to the Company of all such actions as soon as practicable thereafter. 3.1.21. Perform such other duties as are reasonably necessary or appropriate and enter into such other arrangements as reasonably requested by the Company to discharge the Operator's responsibilities under this CO&M Agreement and the Operating Agreement. 3.2. REASONABLE EFFORTS. Operator agrees to design the Facilities and to use reasonable efforts to operate the Facilities in such a manner to provide services as required in the Shipper's Service Agreements, the Company's FERC Gas Tariff, and FERC's policies, rules and orders. 3.3. CLAIMS. Any and all claims against the Company instituted by anyone other than the Operator arising out of the Operation of the Facilities that are not covered by insurance in accordance with Section 8 of this CO&M Agreement shall be settled or litigated and defended by the Operator in accordance with its best judgment and discretion except when (a) the amount involved is stated to be (or estimated to be, as the case may be) greater than $100,000, or (b) criminal sanction is sought. The settlement or defense of any claim described in (a) or (b) above shall be decided by the Members pursuant to the Operating Agreement. 4. EMPLOYEES, CONSULTANTS AND SUBCONTRACTORS. 4.1. OPERATOR'S EMPLOYEES, CONSULTANTS AND SUBCONTRACTORS. The Operator shall employ or retain and have supervision over the 9 Persons (including consultants and professional service or other organizations) required or deemed advisable by the Operator to perform its duties and responsibilities hereunder in an efficient and economically prudent manner. The Operator shall pay all reasonable expenses in connection therewith, including compensation, salaries, wages, overhead and administrative expenses incurred by the Operator, and if applicable, social security taxes, workers' compensation insurance, retirement and insurance benefits and other such expenses. The compensation for the Operator's employees shall be determined by the Operator, provided that the amount and terms of such compensation shall be comparable to those prevailing in the natural gas industry where Operator's employees are located for similar work. Subject to the other provisions of this CO&M Agreement, all authorized expenses pursuant to this Section 4.1 shall be reimbursed to the Operator by the Company as provided in the Accounting Procedure. 4.2. USE OF AFFILIATES OR INDEPENDENT CONTRACTORS. The Operator may utilize, as it reasonably deems necessary or appropriate, the services of any independent contractors or of its or any Member's Affiliates; provided, however, that such services of the Operator's or any Member's Affiliates must be utilized on terms no less favorable to the Company than those prevailing at the time for comparable services of nonaffiliated independent parties. 4.3. STANDARDS FOR OPERATOR AND ITS EMPLOYEES. The Operator shall perform its services and carry out its responsibilities hereunder, and shall require all of its employees and contractors, subcontractors and materialmen furnishing labor, material or services for the Operation of the Facilities to carry out their respective responsibilities in accordance with sound, workmanlike and prudent practices of the natural gas pipeline industry and in compliance with the Company's FERC Gas Tariff, FERC's policies, rules and orders and with all relevant laws, statutes, ordinances, safety codes, regulations, rules and Authorizations of Governmental Authorities having jurisdiction applicable to the Facilities. 4.4. NON-DISCRIMINATION AND DRUGS. In performing under this CO&M Agreement, the Operator shall not discriminate against any employee or applicant for employment because of race, creed, color, religion, sex, national origin, age or disability, and will comply with all provisions of Executive Order 11246 of September 24, 1965 and any successor order thereto, to the extent that such provisions are applicable to the Operator or the Company. The Company and the Operator do not condone in any way the use of illegal drugs or controlled substances. Any Person known by the Operator to be in possession of any illegal drug or controlled substance will be removed by the Operator and not permitted to 10 work on or with respect to the Facilities. In addition, the Operator shall meet all the applicable requirements imposed by the Department of Transportation as specified in 49 C.F.R., Parts 40 and 199. Furthermore, upon request and to the extent permitted by law, the Operator will furnish the Company copies of the records of employee drug test results required to be kept under the provisions of 49 C.F.R. Part 199. The provisions of this Section 4.4 shall be applicable to any contractors, consultants and subcontractors retained in connection herewith, and the Operator shall cause the agreements with any contractor, consultant or subcontractor to contain similar language. 5. FINANCIAL AND ACCOUNTING. 5.1. ACCOUNTING AND COMPENSATION. 5.1.1. The Operator shall maintain accounts for the Company in accordance with the FERC Uniform System of Accounts and other Required Accounting Practices and shall keep a full and complete account of all costs, expenses and expenditures incurred by it in connection with its obligations hereunder in the manner set forth in the Accounting Procedure. 5.1.2. The Operator shall be reimbursed by the Company at the rate and in the manner set forth in the Accounting Procedure for all costs and expenses of the Operator subject only to Operator's demonstration that such costs and expenses were incurred in connection with the Operation of the Facilities or otherwise to fulfill the Operator's duties under this CO&M Agreement and the Operating Agreement; provided, however, that the Company shall not be required to reimburse the Operator for costs and expenses arising out of Prohibited Conduct or claims for non-payment of any and all contributions, withholding deductions or taxes measured by the wages, salaries or compensation paid to Persons employed by the Operator or any of its Affiliates in connection herewith. The fact that such costs and expenses exceed any budget approved by the Company shall not be sole grounds to deny reimbursement otherwise required under this CO&M Agreement, provided the Operator can demonstrate such costs are reasonably necessary. 5.2. BUDGETS AND REPORTS. The Operator shall, on a timely basis, prepare and deliver to the Company for approval the following budgets and reports: (a) The Phase II Capital Budget and Phase III Capital Budget pursuant to Section 4.1.1 of the Operating Agreement; and (b) an annual Operating Budget pursuant to Section 7.6 of the Operating Agreement. Such budgets shall be 11 prepared in sufficient detail to satisfy the requirements of any lending institution providing financing for the Facilities. 5.3. DISPUTED CHARGES. The Company may, within the audit period referred to in Section 5.5 hereof, take written exception to any bill or statement rendered by the Operator for any expenditure or any part thereof on the ground that the same was not appropriate for reimbursement under the terms of Section 5.1.2 above. The Company shall nevertheless pay in full when due the amount of all statements submitted by the Operator. Such payment shall not be deemed a waiver of the right of the Company to recoup any contested portion of any bill or statement; provided, however, that if the amount as to which such written exception is taken or any part thereof is ultimately determined in accordance with Section 11.2 of this CO&M Agreement not to be appropriate for reimbursement under the terms of Section 5.1.2 of this CO&M Agreement, such amount or portion thereof (as the case may be) shall be refunded by the Operator to the Company, together with interest thereon at the Default Rate. 5.4. RATE AND TARIFF REVIEWS. The Operator shall review from time to time the rates and fees charged for natural gas transportation services, and the terms and conditions for such services and any new services deemed appropriate by the Operator and, subject to the receipt of any required Regulatory Approvals and the terms of any Service Agreement, revise such rates, fees, terms and conditions as the Operator may deem appropriate for the Company. 5.5. AUDIT AND EXAMINATION. The Company or any Member, after thirty (30) days' notice in writing to the Operator, shall have the right during normal business hours to audit or examine, at the expense of the Company or the requesting Member, as the case may be, all books and records maintained by the Operator, as well as the relevant books of account of the Operator's contractors, relating to the Operation of the Facilities; provided, however, that the total number of full audits commenced in any Year pursuant to this Section 5.5 shall not exceed two. Such right shall include the right to meet with the Operator's internal and independent auditors to discuss matters relevant to the audit or examination. The Company shall have two Years after the close of a Year in which to make an audit of the Operator's records for such Year; provided, however, that any audits relating to construction costs may be made up to twenty four (24) Months after the in-service date of the Facilities (not including any Modifications) or after the date that construction of the Modification in question was completed, as certified in writing by the Operator, in the case of a Modification. 6. INTELLECTUAL PROPERTY; LICENSE TO OPERATOR. Each Member hereby grants to the operator an irrevocable, royalty-free, non-exclusive and non-assignable license to use, during the term of this 12 CO&M Agreement, any Confidential Information provided to the Company or the Operator by said Member and designated as such by said Member. For purposes of this section 6, Confidential Information shall include, but shall not be limited to, inventions (whether patented or not) and copyrighted or copyrightable material. As a condition precedent to the effectiveness of such license to use, the Operator hereby expressly agrees that it will utilize such Confidential Information solely in connection with the performance of its duties hereunder and further expressly agrees that it will be subject to and bound by the provisions set forth in Section 4.8.2 of the Operating Agreement as if it were a Member. Upon termination of this CO&M Agreement or its removal as Operator, such license shall terminate and, upon the request of the Company, the Operator shall either return all Confidential Information that has been provided to it, together with all reproductions thereof in the Operator's possession, pursuant to such license to use, to the Member from whom it obtained such Confidential Information or certify to such Member that it has been destroyed. 7. INDEMNIFICATION. The Company agrees to indemnify, hold harmless and defend the Operator and its Affiliates and their respective officers, directors, employees and agents (but not including any Member of the Company, in its capacity as such) from and against, and the indemnified parties shall have no liability to the Company for, any and all Liabilities incurred arising out of or relating to this CO&M Agreement or the Operation of the Facilities, regardless of cause; provided, however, that the Company shall not be required to indemnify or hold harmless the indemnified parties from or against any Liabilities attributable to the actions or omissions of Operator in maintaining and administering accounts and arrangements as set forth in Section 3.1.11 of this CO&M Agreement; provided, further, that the Company shall not be required to indemnify or hold harmless the indemnified parties from or against any Liabilities attributable to Prohibited Conduct or claims for non-payment of any and all contributions, withholding deductions or taxes measured by the wages, salaries or compensation paid to Persons employed by the Operator or any of its Affiliates in connection herewith. In the event applicable law limits in any way the extent to which indemnification may be provided to an indemnitee, this Section 7 shall be automatically amended, in keeping with the express intent of the parties hereto, as necessary to render all the remainder of this CO&M Agreement valid and enforceable and to provide that the indemnifications provided herein shall extend and be effective only to the maximum extent permitted by such law. Upon notice therefor, the Company shall advance to the indemnified party the costs of any Liabilities for which indemnification is to be sought hereunder upon the execution by the indemnified party of a written undertaking to repay any costs for which indemnification pursuant to this Section 7 is determined to be improper by mutual agreement or pursuant to the procedures set forth in Section 11.2 of this CO&M Agreement, together with interest thereon at the Default Rate. With respect to any claim against any indemnified party for which indemnification may be 13 sought hereunder, the Company shall not, without the indemnified party's prior written consent, settle or compromise such claim or consent to entry of any judgment in respect thereof which imposes any future obligation on the indemnified party or which does not include, as an unconditional term thereof, the giving by the claimant or the plaintiff to the indemnified party a release from all liability in respect of such claim. The Company (a) shall have the right to defend, at its cost and expense, such claim in all appropriate Proceedings, and (b) shall have full control (including choice of counsel) of such defense and Proceedings, including any compromise or settlement thereof (subject to the foregoing provisions of this Section 7), and the indemnified parties shall cooperate in such defense in all reasonable ways. The Company shall not be required to provide indemnification pursuant to this Section 7 to the extent, if any, that the Liabilities in question are not borne or incurred by the indemnified parties because of the availability of insurance proceeds from the insurance required in Section 8.2 of this CO&M Agreement to the indemnified parties. 8. INSURANCE. 8.1. During the construction of the Facilities, the Operator shall cause to be carried and maintained, either directly or through the contractor(s) building the Facilities, the equivalent of all-risk builders risk insurance, including the perils of Flood and Earthquake, if available and deemed affordable, and including mutually acceptable sublimits of Offsite Storage and Transit for the full replacement value of the work with all coinsurance waived and "permission to occupy" granted. The insurance shall name the Operator and the Company as insureds, as their respective interests may appear. 8.2. At all times during the Operation of the Facilities, the Operator shall provide (a) workers' compensation insurance granting full compensation under the worker's compensation law of any state in which operations are conducted, and (b) employer's liability insurance with limits of not less than $2,000,000 per occurrence for all of the Operator's employees engaged in work on the Facilities, and (c) automobile liability insurance for all vehicles owned or used by the Operator, covering injuries to or death of Persons and damage to property, with a combined single limit of not less than $2,000,000 per occurrence. 8.3. If permitted by applicable law, the Operator may self-insure the workers' compensation, employer's liability insurance, and automobile liability insurance required above and, up to $1,000,000 per occurrence or such other amounts as the Company authorizes by Supermajority Vote, the general liability insurance required in section 8.4 below. 14 8.4. To be effective as of the Execution Date, Operator shall procure and maintain for the benefit of Company and Operator general liability and/or excess liability insurance with limits of not less than $10,000,000 per occurrence for bodily injury and property damage combined. The Company and the Operator will be the named insureds under such insurance policy(ies). The Operator's parent and Affiliates and the Members will be named as additional insureds under such insurance policy(ies). Such insurance policy(ies) will be worded to provide primary insurance to the named insureds and the above additional insureds with respect to the Operation of the Facilities, and to waive any rights of subrogation against the above additional insureds. Within 15 days after execution of this CO&M Agreement, and annually thereafter, Operator will have a certificate of insurance issued evidencing this insurance upon the specific request of the Company or any of its Members. 8.5. The Operator will procure and maintain for the benefit of and on behalf of the Company and the Operator all-risk property insurance covering the Facilities with no co-insurance, including coverage for boiler and machinery, business interruption (at the Company's option) and natural gas in the possession of the Company. This insurance will be placed into effect simultaneously with the termination of the builder's risk insurance the Operator is required to maintain under Section 8.1 of this CO&M Agreement. The Company and the Operator will be the named insureds and loss payees under such insurance policy. This insurance policy will provide a waiver of any rights of subrogation against the Operator's Parent and Affiliates and the Members. Any insurance proceeds for any losses under this policy will be applied against the cost to repair or replace the Facilities. 8.6. All policies of insurance shall be written with carriers holding a current Best's rating of at least A (or if not so rated, has a creditworthiness comparable to such an A rated carrier), and shall afford at least 60-days written notice in the event of cancellation, non-renewal or material reduction in the coverage required hereunder. The costs for premiums, deductibles and self-insured retentions for the insurance maintained by the Operator pursuant to this CO&M Agreement shall be reimbursable costs pursuant to Section 5 of this CO&M Agreement. In addition, in the event the Operator self-insures the general liability insurance required above as herein permitted, the Operator shall be reimbursed as provided in Section 2.9 of the Accounting Procedures. 9. TERM. This CO&M Agreement shall be effective as of the date hereof and shall continue for the term of the Company as provided in the Company's Certificate of Formation; provided, however, that this CO&M Agreement shall be terminated earlier upon the first to occur of the following: (a) the Operator's Affiliates (or any successor Affiliate of the 15 Operator) that is a Member ceases to be a Member; or (b) the Operator commits a material default under this CO&M Agreement and such material default continues for a period of 120 days after notice thereof by the Company to the Operator (provided, however, that no termination shall occur if the Operator has initiated action to cure such material default but, despite its good faith efforts, it has been unable to complete such cure within such 120 day period). 10. SURVIVAL OF OBLIGATIONS. The termination of this CO&M Agreement shall not discharge any Party from any obligation that it owes to any other Party by reason of any transaction, commitment or agreement entered into, or any Liabilities that shall occur or arise (or the circumstances, events or basis of which shall occur or arise) prior to such termination. It is the intent of the Parties that any obligation owed by a Party to the other Party (whether the same shall be known or unknown at the time of termination hereof, or whether the circumstances, events or basis of the same shall be known or unknown at the termination hereof) shall survive the time of termination of this CO&M Agreement. 11. LAW OF THE CONTRACT AND ARBITRATION. 11.1. LAW OF THE CONTRACT. THIS CO&M AGREEMENT IS GOVERNED BY AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, EXCLUDING ANY CONFLICT-OF-LAWS RULE OR PRINCIPLE THAT MIGHT REFER THE GOVERNANCE OR THE CONSTRUCTION OF THIS CO&M AGREEMENT TO THE LAW OF ANOTHER JURISDICTION. 11.2. ARBITRATION. 11.2.1. In the event that the Parties are unable to agree on any matter relating to this CO&M Agreement, the Company or the Operator may upon notice given to the other call for submission of such matter to arbitration. The Party requesting arbitration shall set forth in such notice in adequate detail the issues to be arbitrated, and within ten (10) days from the receipt of such notice, the other Party may set forth in adequate detail additional related issues to be arbitrated. Within ten (10) days after the giving of such latter notice, each Party shall furnish to the other Party a notice ("Decision Notice") setting forth the decision (on a word-for-word basis) that such Party wishes the arbitrator(s) to make with respect to the issues to be arbitrated. Within ten (10) days after the giving of the latter of the two Decision Notices, the Parties shall attend a meeting ("Meeting") at a mutually acceptable time and place to discuss fully the content of such Decision Notices 16 and based thereon determine whether either or both wish to modify their Decision Notices in any way. Any such modifications shall be discussed with each other, so that when each Party finalizes its Decision Notice, it shall do so with full knowledge of the content of the other Party's final Decision Notice. The finalization of such Decision Notices and the delivery of same by each Party to the other shall occur at the Meeting unless by mutual agreement they agree to have one or more additional Meetings for such purposes. If arbitration is invoked by either Party, the decision of the arbitrators shall be final and binding upon all Parties, and neither Party shall seek to have the applicable issues litigated rather than arbitrated (except as may be otherwise required by law). 11.2.2. It is the intent of the Parties that, to the extent practicable, such binding arbitration shall be conducted by a Person knowledgeable and experienced in the type of matter that is the subject of the dispute. In the event the Parties are unable to agree upon such Person within ten days after the last Meeting held pursuant to Section 11.2.1 above, then each Party shall select a Person that it believes has the qualifications set forth above as its designated arbitrator (which selection shall be accomplished by notifying the other Party of the identity of such Person), and such arbitrators so designated shall mutually agree upon a similarly qualified third Person to complete the arbitration panel; provided, however, that if one of the Parties fails to select its designated arbitrator as specified herein within ten (10) days of receiving notice from the other Party that such other Party has selected its designated arbitrator then the arbitration provided for herein shall be conducted by the one arbitrator so designated. In the event that the Persons selected by the Parties are unable to agree on a third member of the panel within ten (10) days after the selection of the latter of the two arbitrators, such Person shall be designated by the American Arbitration Association. Upon final selection of the entire panel, such panel shall, as expeditiously as possible (and if possible, within ninety (90) days after the selection of the last arbitrator), render a decision on the matter submitted for arbitration. Such panel shall be required to adopt either the decision set forth in the Operator's final Decision Notice or the decision set forth in the Company's final Decision Notice and shall have no power whatsoever to reach any other result. Such panel shall adopt the decision that in its judgement is the more fair, equitable and in conformity with this CO&M Agreement. The arbitration shall be conducted in Charlotte, North Carolina in accordance with the 17 commercial arbitration rules of the American Arbitration Association. 11.2.3. Upon the determination of any such dispute, the arbitrators shall bill the costs attributable to such binding arbitration to the losing Party; provided, however, that the arbitrators shall be empowered to apportion such costs between the Parties if they deem it appropriate. 11.2.4. It is the intent of the Parties that, once arbitration is invoked by either Party pursuant to the provisions of this Section 11, the matters set for arbitration shall be decided as set forth herein, and they shall not seek to have this Section 11 rendered unenforceable or to have such matter decided in any other way; provided, however, that nothing herein shall prevent the Parties from negotiating a settlement of any issue at any time. 11.2.5. Without limiting any of the foregoing, for purposes of this CO&M Agreement an independent determination of whether an action or failure to act constitutes Prohibited Conduct shall be made by arbitration pursuant to this Section 11, without regard to the findings of any court or administrative body or the settlement or compromise of any claim (other than a settlement of the type referred to in Section 11.2.4 above). 12. SPECIAL AND CONSEQUENTIAL DAMAGES. The indemnification provided in Section 7 of this CO&M Agreement shall include without limitation claims made by any Person for special, indirect, consequential or punitive damages; otherwise, neither Party shall have any liability hereunder to the other Party for any special, indirect, consequential or punitive damages. 13. GENERAL. 13.1. EFFECT OF AGREEMENT; AMENDMENTS. This CO&M Agreement, together with the Operating Agreement, constitutes the entire agreement among the Parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral and written, among the Parties with respect to the subject matter hereof. This CO&M Agreement can be amended, restated or supplemented only by the written agreement of the Operator and the Company. 13.2. NOTICES. Except as expressly set forth to the contrary in this CO&M Agreement, all notices, requests, or consents provided for or permitted to be given under this CO&M Agreement must be in writing. Notices and other communications will be deemed to have been given (a) on the date when delivered by hand or by 18 means of electronic transmission (and followed by electronic confirmation of receipt), (b) on the date after the day when deposited for delivery with a nationally recognized air courier, or (c) on the third Business Day after being deposited in the United States mail, postage prepaid return receipt requested. All notices, requests, and consents to be sent to the Operator must be given to the Operator at the following addresses: Dominion Transmission, Inc., 445 West Main Street, Clarksburg WV 26301 Attn: Gary L. Sypolt, if by mail or Dominion Transmission, Inc. Fax number (304) 627-3323 Attn: Gary L. Sypolt if by facsimile transmission and if regarding billing and invoicing matters to Dominion Transmission, Inc., 445 West Main Street, Clarksburg WV 26301 Attn: Diane Logue if by mail or Dominion Transmission, Inc. Fax number (304) 627-3253 Attn: Diane Logue if by facsimile transmission. All notices, requests, and consents to be sent to the Company must be given to the Management Committee at the following addresses: Greenbrier Pipeline Company, LLC, 120 Tredegar Street, Richmond, VA 23219 Attn: Joseph J. Kienle, if by mail or Greenbrier Pipeline Company, LLC, Fax number (804) 819-2705 Attn: Joseph J. Kienle if by facsimile. Whenever any notice is required to be given by law or this CO&M Agreement, a written waiver thereof, signed by the Person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. 13.3. COUNTERPARTS. This CO&M Agreement may be executed in any number of counterparts with the same effect as if all Parties had signed the same document. Each counterpart shall be deemed an original, but all of which together shall constitute one and the same instrument. 13.4. WAIVER. A waiver or consent, expressed or implied, to or of any breach or default by any Person in the performance by the Person of its obligations with respect to the Company or the Operator is not a consent or waiver to or of any other breach or default in the performance by that Person of the same or any other obligations of that Person with respect to the Company or the Operator. Failure on the part of a Person to complain of any act of any Person or to declare any Person in default with respect to the Company or the Operator, irrespective of how long that failure continues, does not constitute a waiver by the Person of its rights with respect to that default until the applicable statute-of-limitations period has run. 13.5. ASSIGNABILITY; SUCCESSORS. This CO&M Agreement may not be assigned by either Party without the written consent of the other Party; provided, however, that such consent shall not be withheld unreasonably; provided, further, that this CO&M Agreement may be pledged by the Company without the consent of the Operator in connection with any Financing Commitment. This CO&M Agreement and all of the obligations and rights herein established 19 shall extend to and be binding upon and shall inure to the benefit of the respective successors and permitted assigns of the respective Parties hereto. Unless otherwise agreed, any assignment of this CO&M Agreement shall not relieve the assigning Party of any of its obligations hereunder. 13.6. THIRD PERSONS. Except as expressly provided in this CO&M Agreement, nothing in this CO&M Agreement shall provide any benefit to any third party or entitle any third party to any claim, cause of action, remedy or right of any kind, it being the intent of the Parties that this CO&M Agreement shall not be construed as a third party beneficiary contract. Nothing in this subsection 13.6 is intended to limit in any way the right of a Member to bring a derivative action in the right of the Company under Subchapter X of the Act. Further, in the specific event that Operator's affiliates own more than fifty (50) percent of the Membership Interests in the Company, then any other Member of the Company that holds more than twenty (20) percent of the Membership Interests in the Company may independently pursue a cause of action against the Operator regarding any breach of this CO&M Agreement by Operator if such Member first makes written demand on the Company to bring an action with respect to the breach of this CO&M Agreement by Operator specified in such demand letter and within thirty (30) days after such demand, the Company fails to commence action to cause Operator to cure such breach of this CO&M Agreement or to enforce the Company's rights against Operator for such breach of this CO&M Agreement. 13.7. LAWS AND REGULATORY BODIES. This CO&M Agreement and the obligations of the Parties hereunder are subject to all applicable laws, rules, orders and regulations of Governmental Authorities having jurisdiction, and to the extent of conflict, such laws, rules, orders and regulations of governmental authorities having jurisdiction shall control. 13.8. SECTION NUMBERS; HEADINGS. Unless otherwise indicated, references to Section numbers are to Sections of this CO&M Agreement. Headings and captions are for reference purposes only and shall not affect the meaning or interpretation of this CO&M Agreement. 13.9. SEVERABILITY. If any provision of this CO&M Agreement or the application thereof to any Person or circumstance is held invalid or unenforceable to any extent, the remainder of this CO&M Agreement and the application of that provision to other Persons or circumstances is not affected thereby and that provision shall be enforced to the greatest extent permitted by law. 13.10. FURTHER ASSURANCES. In connection with this CO&M Agreement and the transactions contemplated hereby, each Party shall execute 20 and deliver any additional instruments and documents and perform any acts and things as may be necessary or appropriate to effectuate and perform the terms and provisions of this CO&M Agreement and those transactions. 21 IN WITNESS WHEREOF, the Parties have caused this CO&M Agreement to be executed by their duly authorized representatives as of the date first above written. OPERATOR: COMPANY: Dominion Transmission, Inc. Greenbrier Pipeline Company, LLC By each of its Members: By: DOMINION GREENBRIER, INC. ----------------------------- Gary L. Sypolt Senior Vice President - Transmission By: ----------------------------------- Georgia B. Carter Vice President - Tariff Services PIEDMONT GREENBRIER PIPELINE COMPANY, LLC By: ----------------------------------- Ware F. Schiefer President 22 1. 2. 3. 4. 5. 6. 7. 8. INSURANCE. 8.1. During the construction of the Facilities, the Operator shall cause to be carried and maintained, either directly or through the contractor(s) building the Facilities, the equivalent of all-risk builders risk insurance, including the perils of Flood and Earthquake, if available and deemed affordable, and including mutually acceptable sublimits of Transit, Offsite Storage and Transit for the full replacement value of the work with all coinsurance waived and "permission to occupy" granted. The insurance shall name the Operator and the Company as insureds, as their respective interests may appear. 8.2. At all times during the Operation of the Facilities, the Operator shall provide (a) workers' compensation insurance granting full compensation under the worker's compensation law of any state in which operations are conducted, and (b) employer's liability insurance with limits of not less than $2,000,000 per occurrence for all of the Operator's employees engaged in work on the Facilities, and (c) automobile liability insurance for all vehicles owned or used by the Operator, covering injuries to or death of Persons and damage to property, with a combined single limit of not less than $2,000,000 per occurrence. 8.3. If permitted by applicable law, the Operator may self-insure the workers' compensation, employer's liability insurance, and automobile liability insurance required above and, up to $1,000,000 per occurrence or such other amounts as the Company authorizes by Supermajority Vote, the general liability insurance required in section 8.4 below. 8.4. To be effective as of the Execution Date, Operator shall procure and maintain for the benefit of Company and Operator general liability and/or excess liability insurance with limits of not less than $10,000,000 per occurrence for bodily injury and property damage combined. The Company and the Operator will be the named insureds under such insurance policy(ies). The Operator's parent and Affiliates and the Members will be named as additional insureds under such insurance policy(ies). Such insurance policy(ies) will be worded to provide primary insurance to the named insureds and the above additional insureds with respect to the Operation of the Facilities, and to waive any rights of subrogation against the above additional insureds. Within 15 days after execution of this CO&M Agreement and annually thereafter, Operator will have a certificate of insurance issued evidencing this insurance upon the specific request of the Company or any of its Members. 8.5. The Operator will procure and maintain for the benefit of and on behalf of the Company and the Operator all-risk property insurance covering the Facilities with no co-insurance, including coverage for boiler and machinery, business interruption (at the Company's option) and natural gas in the possession of the Company. This insurance will be placed into effect simultaneously with the termination of the builder's risk insurance the Operator is required to maintain under Section 8.1 of this CO&M Agreement. The Company and the Operator will be the named insureds and loss payees under such insurance policy. This insurance policy will provide a waiver of any rights of subrogation against the Operator's Parent and Affiliates and the Members. Any insurance proceeds for any losses under this policy will be applied against the cost to repair or replace the Facilities. 8.6. All policies of insurance shall be written with carriers holding a current Best's rating of at least A (or if not so rated, has a creditworthiness comparable to such an A rated carrier), and shall afford at least 60-days written notice in the event of cancellation, non-renewal or material reduction in the coverage required hereunder. The costs for premiums, deductibles and self-insured retentions for the insurance maintained by the Operator pursuant to this CO&M Agreement shall be reimbursable costs pursuant to Section 5 of this CO&M Agreement. In addition, in the event the Operator self-insures the general liability insurance required above as HEREIN PERMITTED, the Operator shall be reimbursed as provided in Section 2.9 of the Accounting Procedures. EXHIBIT A TO CONSTRUCTION, OPERATING AND MAINTENANCE AGREEMENT ACCOUNTING PROCEDURE 1. GENERAL PROVISIONS 1.1. STATEMENTS AND BILLINGS. Commencing on the first Business Day after the Execution Date, the Operator shall bill the Company on the first Business Day of each Month or as soon as practicable thereafter for the estimated costs and expenses for the Month, including any adjustment that may be necessary to correct prior estimated billings to actual costs. If requested by the Company, the Operator will promptly provide reasonably sufficient support for the estimated costs and expenses to be incurred for the Month. Actual bills will be summarized by appropriate classifications indicative of the nature thereof and will be accompanied by such detail and supporting documentation as the Company may reasonably request. 1.2. PAYMENT BY COMPANY. The Company shall pay all bills presented by the Operator as provided in the CO&M Agreement and the Operating Agreement on or before the fifteenth (15th) Day after the bill is received. If payment is not made within such time, the unpaid balance shall bear interest until paid at the Default Rate. 1.3. FINANCIAL RECORDS. The Operator shall maintain accurate books and records in accordance with Required Accounting Practice covering all of the Company's activities and the Operator's actions under this CO&M Agreement. 1.4. PURCHASE OF MATERIALS. It is contemplated that most material, equipment and supplies will be owned by the Company and purchased or furnished for its account. So far as is reasonably practical and consistent with efficient, safe and economical operation as determined by the Operator, only such material shall be obtained for the Facilities as may be required for immediate use, and the accumulation of surplus stock shall be avoided. To the extent reasonably possible, the Operator shall take advantage of discounts available by early payments and pass such benefits on to the Company. 1.5. INTEREST-BEARING ACCOUNT. To the extent practicable, the funds of the Company will be held in one or more interest-bearing accounts. A-l 2. COSTS AND EXPENSES Subject to the limitations hereafter prescribed and the provisions of the CO&M Agreement, the Operator shall charge the Company for all costs and expenses provided for in Section 5.1.2 of the CO&M Agreement, including, but not limited to, the following items 2.1. Rentals. All rentals paid by the Operator. 2.2. Labor Costs. All applicable personnel generating the following labor costs shall keep time sheets so that the portion of their salaries and wages chargeable under the CO&M Agreement may be supported and calculated, and only such proportionate part of such labor costs shall be charged pursuant to this Section 2.2: 2.2.1. Salaries and wages of employees of the Operator and its Affiliates, engaged in connection with the Operation of the Facilities and, in addition, amounts paid as salaries and wages of others temporarily employed in connection therewith. Such salaries and wages shall be loaded to include the Operator's actual costs of bonuses, holiday, vacation, sickness and jury service benefits and other customary allowances for time not worked paid to Persons whose salaries and wages are chargeable under this Section 2.2.1. Direct labor charges shall be billed so far as costs can be identified and related to the performance of the Operator's duties under this CO&M Agreement. As used in this CO&M Agreement, "Direct Labor" shall include labor costs in Sections 2.2.1, 2.2.2, and 2.2.3 of this CO&M Agreement. 2.2.2. Expenditures or contributions made pursuant to assessments imposed by Governmental Authority that are applicable to salaries, wages and costs chargeable under Section 2.2.1 above, including, but not limited to, FICA taxes and federal and state unemployment taxes. 2.2.3. The costs of plans incurred by or on behalf of the Operator for workers' compensation, employers' group life insurance, hospitalization, disability, pension, retirement, savings and other benefit plans, that are applicable to salaries and wages chargeable under Section 2.2.1 above. Such costs shall be charged on the basis of a percentage assessment on the amount of salaries and wages chargeable under Section 2.2.1 above. A-2 2.2.4 All other administrative and general expenditures, including salaries and wages, bonuses, related benefits and expenses of personnel of the Operator and/or the Operator's Affiliates (excluding the personnel who have direct billed in Section 2.2.1) who render services for the benefit of the Operator (in the performance of its obligations hereunder) or the Company, shall be charged from the Execution Date at five percent (5%) of Direct Labor costs charged under this CO&M Agreement 2.3. REIMBURSABLE EXPENSES OF EMPLOYEES. Reasonable personal expenses of Operator's and Operator's Affiliate's employees reasonably incurred in connection with the performance of the Operator's duties under this CO&M Agreement. As used herein, the term "personal expenses" shall mean out-of-pocket expenditures incurred by Operator's or Operator's Affiliate's employees in the performance of their duties and for which such employees are reimbursed. The Operator shall maintain documentation for such expenses in accordance with the standards of the Internal Revenue Service. 2.4. MATERIAL, EQUIPMENT AND SUPPLIES. Material, equipment and supplies purchased or furnished from the warehouse or other properties of the Operator or Operator's Affiliates, priced at cost plus the Operator's or Affiliate's appropriate purchasing and stores overhead ordinarily in use by the Operator or Affiliate. 2.5. TRANSPORTATION. Transportation of employees, equipment and material and supplies necessary for the Operation of the Facilities. 2.6. SERVICES. The cost of contract services and utilities procured from outside sources. 2.7. LEGAL EXPENSES AND CLAIMS. All costs and expenses of handling, investigating and settling litigation or claims arising by reason of the Operation of the Facilities or necessary to protect or recover any Facilities or property, including, but not limited to, attorney's fees, court costs, costs of investigation or procuring evidence and any judgments paid or amounts paid in settlement or satisfaction of any such litigation or claims. All judgments received or amounts received in settlement of litigation with respect to any claim asserted on behalf of the Company shall be for the benefit of and shall be remitted to the Company. 2.8. TAXES. All taxes (except those measured by income) of every kind and nature assessed or levied upon or incurred in connection with the Operation of the Facilities or on the Facilities or other property of the Company and which taxes have been paid by the Operator for the benefit of the Company, including charges for late payment arising from A-3 extensions of the time for filing that are caused by the Company, or that result from the Operator's good faith efforts to contest the amount or application of any tax. 2.9. INSURANCE. Net of any returns, refunds or dividends, all premiums, deductibles and self-insured retentions paid and expenses incurred for insurance required to be carried under this CO&M Agreement, provided, however, the insurance required to be carried under Section 8.2 of this CO&M Agreement shall be reimbursed through the five percent A&G charge in Section 2.2.4 of this Exhibit A. 2.10. PERMITS, LICENSES AND BOND. Cost of permits, licenses and bond premiums necessary in the performance of the Operator's duties. A-4 EX-10.49 6 g80206exv10w49.txt PRECEDENT AGREEMENT/FIRM TRANSPORTATION SERVICE Exhibit 10.49 PRECEDENT AGREEMENT FOR FIRM TRANSPORTATION SERVICE (GREENBRIER PIPELINE PROJECT) THIS PRECEDENT AGREEMENT dated as of this 1st day of September 2001, by and between GREENBRIER PIPELINE COMPANY, LLC ("Pipeline") and PIEDMONT NATURAL GAS COMPANY, INC. ("Customer"), sometimes jointly called "the Parties." WHEREAS, Pipeline is proposing to construct a large-diameter, high pressure natural gas pipeline that would stretch from a proposed interconnection with Dominion Transmission, Inc. in central West Virginia to markets in north central North Carolina (the "Greenbrier Pipeline Project"). WHEREAS, an "open season" was conducted in the fall of last year seeking customer interest in the Greenbrier Pipeline Project and Customer has indicated an interest in entering into an arrangement for the firm transportation of natural gas pursuant to the terms and conditions as fully described in this Precedent Agreement. WHEREAS, subject to the terms and conditions of this Precedent Agreement, Pipeline is willing to provide such firm transportation service for Customer as part of the Greenbrier Pipeline Project commencing as soon as all necessary rights and regulatory approvals are received and accepted by Pipeline and as the necessary facilities are constructed and ready for service. NOW, THEREFORE, in consideration of the mutual promises contained in this Agreement, and intending to be legally bound, Pipeline and Customer agree as follows: 1. REGULATORY AUTHORIZATIONS Pipeline shall proceed with due diligence to obtain the governmental and regulatory authorizations required for the construction and operation of project facilities, leasing of capacity rights on other pipelines, if necessary, and the provision of the services contemplated herein. Pipeline, however, reserves the right to file and prosecute applications for such authorizations, any supplements or amendments thereto, and, if necessary, any court review, in such manner as it deems to be in its best interest. Customer agrees to support all applications for such governmental and regulatory authorizations to the extent such governmental and regulatory authorizations are consistent with the terms of this Precedent Agreement. 2. PREPARATIONS FOR CONSTRUCTION Upon the Parties' execution of this Precedent Agreement, Pipeline shall, with due diligence and in timely fashion, proceed to seek such contract rights, property rights, financial arrangements and regulatory approvals and make other necessary preparations in order to enable Pipeline to provide to Customer the firm transportation service contemplated by this Precedent Agreement. Notwithstanding anything to the contrary set forth in this Precedent Agreement, Pipeline may make contractual arrangements to order or acquire equipment, materials, and properties, design, construct, and/or lease facilities, and incur other costs to provide such firm transportation service, but shall not be under any obligation to do so until Pipeline receives all necessary certificates and other authorizations required by the FERC and any other governmental authority. 2 3. TRANSPORTATION SERVICE AGREEMENT Within thirty (30) days after fulfillment of the conditions precedent in Paragraph 4, Pipeline and Customer shall enter into a firm transportation agreement ("Transportation Service Agreement"), provided that this Precedent Agreement shall not have been previously terminated pursuant to Paragraph 7, below. The Transportation Service Agreement shall substantially conform to the form of service agreement that the FERC will approve as part of its action in granting the necessary authorizations to Pipeline, as referenced in Paragraph 1, above. The Transportation Service Agreement shall provide for: a. The maximum quantities of natural gas that Pipeline shall transport for Customer including the quantities that Pipeline will receive from Customer at the primary receipt point(s) and the quantities that Pipeline shall be obligated to redeliver to Customer at the primary delivery point(s) as set forth in Exhibit A, attached hereto. b. Customer to pay the agreed-to negotiated, levelized rate, plus fuel retention and applicable surcharges (e.g., ACA) all as described on Exhibit A, attached hereto, and any other applicable charges, surcharges and penalties set forth in the approved FERC Gas Tariff. c. The term of service shall commence on the November 1 or December 1 first following the date that Pipeline notifies Customer that it is prepared to transport gas for Customer under the Transportation Service Agreement ("Commencement Date"). Service shall not commence earlier than November 1, 2005, nor later than December 1, 2006. Service pursuant to the Transportation Service Agreement shall continue for the primary term as set forth in Exhibit A, and from year to year thereafter; provided 3 however, that either Party may terminate the Transportation Service Agreement after the primary term, by giving written notice to the other at least twenty-four (24) months prior to the start of a contract year. 4. CONDITIONS PRECEDENT Pipeline's and Customer's rights and obligations under this Precedent Agreement and the Transportation Service Agreement are expressly made subject to satisfaction or waiver of the following conditions precedent: A. Only Pipeline shall have the right to determine, in its reasonable opinion, that the conditions set forth below in this Paragraph 4.A. are satisfactory to it and/or whether to waive any such condition: (i) the receipt by Pipeline on or before September 1, 2003, of all necessary certificates and other authorizations from the FERC, and any other governmental authorities having jurisdiction, to (i) own, construct, operate and maintain the Greenbrier Pipeline Project facilities and any necessary related facilities and (ii) to render the firm transportation service to Customer pursuant to the rates, terms and conditions reflected in the proposed tariff, including the tariff provisions necessary to authorize the negotiated rates reflected in this Precedent Agreement, which authorizations are in form and substance satisfactory to Pipeline; (ii) the receipt by Pipeline, within thirty days of Pipeline's acceptance of a Certificate of Public Convenience and Necessity from the FERC, of the approval of its Management Committee, to make the expenditures necessary to enable Pipeline to construct, own, operate and maintain the necessary facilities to render the firm transportation service as contemplated in this Precedent Agreement; and, (iii) execution by Pipeline of sufficient precedent agreements and service agreements with customers to economically justify, in Pipeline's sole opinion, construction of the Greenbrier Pipeline Project. 4 B. Only Customer shall have the right to determine, in its reasonable opinion, that the conditions set forth below in this Paragraph 4.B. are satisfactory to it and/or whether to waive any such condition: (i) the receipt by Customer, on or before January 1, 2002, of any necessary approvals of its Board of Directors, the Board of Directors of its parent, or the applicable equivalent management body to enter into the Transportation Service Agreement upon the satisfaction or waiver of the other conditions precedent contained in this Precedent Agreement; (ii) the receipt by Customer of such approvals, if any, requested by it from any state regulatory commissions having jurisdiction over it or this Precedent Agreement and the ability to recover its costs under the Transportation Service Agreement in its rates, any such approvals to be received not later than July 1, 2002, in a form consistent with the terms of this Precedent Agreement and satisfactory to Customer in its reasonable opinion; and, (iii) the approval by the FERC prior to September 1, 2003, as part of the order granting Pipeline a Certificate of Public Convenience and Necessity, of Pipeline's proposal to render firm transportation service to Customer pursuant to the rates, terms and conditions reflected in the proposed tariff, including the tariff provisions necessary to authorize the negotiated rates reflected in this Precedent Agreement, which authorizations are in form and substance satisfactory to Customer. If any of the conditions precedent set forth in this Paragraph 4 have not been satisfied or waived by the applicable date set forth herein, either party shall have the right to provide written notice to the other party of its intention to terminate this Precedent Agreement. Such notice shall designate all conditions precedent that have not been satisfied. Unless all such conditions are satisfied within 30 days after the receipt of such notice, this Precedent Agreement shall terminate effective upon the expiration of said 30-day period and shall thereafter be of no further force and effect; provided, however, that in no event shall a party have the right to terminate this Precedent Agreement if the failure to satisfy a condition precedent is caused by the failure of such party to act in a timely manner and/or to use reasonable efforts to satisfy the condition precedent. If this Precedent Agreement is terminated pursuant to this Paragraph 4, such termination shall be 5 without liability for damages, costs or expenses of either party to the other party, or to any of its shareholders, directors, officers, employees, agents, consultants, representatives, and neither Pipeline nor Customer shall have any further rights or obligations whatsoever pursuant to this Precedent Agreement. 5. COMMENCEMENT OF TRANSPORTATION SERVICE After execution of the Transportation Service Agreement by Customer and Pipeline pursuant to Paragraph 3 above, and Pipeline's receipt and acceptance of all other necessary contract rights, property rights, financing arrangements and regulatory approvals, in a form and substance satisfactory to Pipeline in its sole opinion, Pipeline shall proceed with the construction of the facilities so as to begin firm transportation service on November 1, 2005. If Pipeline is unable to complete such construction and place such facilities into operation by such proposed in service date despite its exercise of due diligence, Pipeline shall continue to proceed with due diligence to complete such construction, place such facilities in operation and commence service for Customer at the earliest practicable date thereafter (but no later than December 1, 2006). Pipeline shall not be liable in any manner to Customer if despite Pipeline's exercise of due diligence, Pipeline is unable to complete the construction of such facilities and commence firm transportation service contemplated herein by December 1, 2006. Pipeline agrees to provide advance written notice of the projected in-service date and inform the Customer of its best estimate of any revisions to the in-service date for the Greenbrier Pipeline Project. Notwithstanding the foregoing, if the Management Committee shall not have accepted the FERC Certificate of Public Convenience and Necessity on or before November 1, 2004, Customer shall have no obligation to take or to pay for any service prior to November 1, 2006. 6 6. CUSTOMER REIMBURSEMENT OBLIGATION Should Customer terminate this Precedent Agreement or refuse to sign the Transportation Service Agreement as provided by Paragraph 3, above, in either case for any reason other than the failure of the conditions precedent described in Section 4.B., above, then Customer shall, at the option of Pipeline, reimburse Pipeline for 17.19% of the actual and verifiable costs incurred prior to such termination by Pipeline in its efforts to provide the services proposed as part of the Greenbrier Pipeline Project and not previously reimbursed. Costs to be incurred by Pipeline shall include, but shall not be limited to, costs associated with engineering, environmental, regulatory, legal activities, and internal overhead and administration, and incurred costs related to pipeline, compression, measurement and regulation material and equipment, and construction supplies and labor. Pipeline shall use all reasonable efforts to mitigate any costs incurred, including but not limited to, reselling any capacity created to which Customer has subscribed in this Precedent Agreement and employing any assets or work products generated as a part of the Greenbrier Pipeline Project for other business purposes. The Parties understand and agree that this provision is intended to reimburse Pipeline for actual and verifiable costs incurred by Pipeline to meet its obligation hereunder and is not intended to penalize Customer or otherwise provide Pipeline with additional revenue or profit above such actual costs incurred for the Greenbrier Pipeline Project. If this Precedent Agreement is terminated because of Pipeline's failure to satisfy a condition precedent as described in Paragraph 4.A., then Customer shall not be obligated to reimburse Pipeline for any costs incurred to provide the services proposed as part of the Greenbrier Pipeline Project. Customer's reimbursement obligation to Pipeline pursuant to this Paragraph 6 shall not exceed the cumulative amount shown on Exhibit B (attached hereto and made a part hereof for 7 all purposes) for the calendar quarter corresponding to the date on which Customer terminates the Agreement. 7. CREDITWORTHINESS Pipeline may terminate this Precedent Agreement if, at any time, it has a reasonable basis to determine that Customer is no longer creditworthy and may not be able to carry out its obligations under this Precedent Agreement or the Transportation Service Agreement. At Pipeline's request, Customer shall provide Pipeline with financial information relevant to the Pipeline's determination of creditworthiness. 8. NOTICE Any notice that either party may desire to give to the other, shall be in writing and sent to the attention of the appropriate person to the applicable post office address or telephone fax number set forth below: Pipeline: Greenbrier Pipeline Company, LLC 120 Tredegar Street Richmond, Virginia 23219 Attention: Joseph Kienle Phone: (804) 819-2114 Fax: (804) 819-2705 CUSTOMER: Piedmont Natural Gas Company, Inc. 1915 Rexford Road Charlotte, North Carolina 28211 Attention: Director-Federal Regulatory & Supply Planning Phone:(704) 364-3120 Fax: (704) 364-8320 or any such other address as either party shall designate by formal written notice. 9. AUTOMATIC TERMINATION 8 This Precedent Agreement shall terminate by its express terms on the date of commencement under the Transportation Service Agreement, and thereafter Pipeline's and Customer's respective rights and obligations related to the transactions contemplated herein shall be determined pursuant to the terms and conditions of the Transportation Service Agreement and Pipeline's FERC Gas Tariff as amended from time to time. 10. ASSIGNMENTS Any individual or entity that shall succeed by purchase, merger or consolidation of the properties of Pipeline or Customer shall be entitled to the rights and shall be subject to the obligations of its predecessor in interest under this Precedent Agreement. Either Party may, without prior consent of the other Party, pledge, mortgage or assign its rights hereunder as security for its indebtedness. With respect to the foregoing sentence, Customer and Pipeline hereby agree to execute and deliver to any pledgee or mortgagee of the other Party a consent to assignment to the extent such consent does not materially alter any of the terms and conditions of this Precedent Agreement. Customer may assign this Precedent Agreement or any of the rights and obligations hereunder provided that (i) the assignee meets Pipeline's creditworthiness standards and any other applicable requirements set forth in Pipeline's FERC Gas Tariff as approved by the FERC, or (ii) Customer remains liable for any and all financial obligations arising under this Agreement. Any assignment hereof shall be subject to the receipt and acceptance by Pipeline of any necessary regulatory or governmental authorizations. This Precedent Agreement shall be binding upon and shall inure to the benefit of the respective authorized successors and assigns. 11. JOINTLY PREPARED AGREEMENT 9 Every provision of this Precedent Agreement shall be considered as prepared through the joint efforts of the Parties and shall not be construed against either Party as a result of the preparation or drafting thereof. It is expressly agreed that no consideration shall be given or presumption made on the basis of who drafted this Precedent Agreement or any particular provision hereof. 12. NO THIRD-PARTY BENEFICIARY Except as expressly provided in this Precedent Agreement, nothing herein expressed or implied is intended or shall be construed to confer upon or to give any person not a Party hereto any rights, remedies or obligations under or by reason of this Precedent Agreement. 13. RELATED DOCUMENTS Each Party agrees to execute and deliver all such other and additional instruments and documents and to do such other acts as may be reasonably necessary to effectuate the terms and provisions of this Precedent Agreement. 14. GOVERNING LAW The interpretation and performance of this Precedent Agreement shall be in accordance with the laws of the State of Delaware. 15. PRECEDENT AGREEMENT IS NOT AN OFFER The delivery of this Precedent Agreement to Customer for execution does not constitute an offer. This Precedent Agreement requires execution by both parties to create a binding contractual commitment. This Precedent Agreement can be modified only by a written agreement of the parties. 10 16. AGREEMENT SUBJECT TO APPLICABLE LAWS This Precedent Agreement and the obligations of the parties hereunder are subject to all applicable laws, rules, orders and regulations of governmental authorities having jurisdiction and, in the event of a conflict between the provisions of this Precedent Agreement and such laws, rules, orders and regulations, such laws, rules, orders and regulations shall control. 17. WAIVER No waiver of either party of any default by the other party in the performance of any provision, condition or requirement herein shall be deemed to be a waiver of, or in any manner release the other party from, future performance of any other provision, condition or requirement herein, nor shall such waiver be deemed to be a waiver of, or in any manner release the other party from, future performance of the same provision, condition or requirement. Any delay or omission of either party to exercise any right hereunder shall not impair the exercise of any such right, or any like right, accruing to it thereafter. 18. REFLECTS THE WHOLE AGREEMENT OF THE PARTIES This Precedent Agreement reflects the whole and entire agreement of the parties hereto and supersedes all prior agreements related to the subject matter hereof. 11 IN WITNESS WHEREOF, the parties hereto have caused this Precedent Agreement to be duly executed by their proper officers thereunto duly authorized as of the day and year first above written. ATTEST GREENBRIER PIPELINE COMPANY, LLC /s/ Todd B. Rhoads By: /s/ Georgia B. Carter - ----------------------------- ------------------------------------- Georgia B. Carter Title: Vice President-Tariff Services ------------------------------------- PIEDMONT NATURAL GAS COMPANY, INC. /s/ K. T. Valentine By: /s/ Thomas E. Skains - ----------------------------- ------------------------------------- Thomas E. Skains Title: Senior Vice President ------------------------------------- 12 EXHIBIT A To The Firm Transportation Precedent Agreement Dated September 1, 2001 Between Greenbrier Pipeline Company, LLC And Piedmont Natural Gas Company, Inc. A. Quantities The maximum quantities of gas that Pipeline shall transport for Customer shall be a Maximum Daily Transportation Quantity ("MDTQ") of 150,000 Dekatherms ("Dt") per day for the period from November 1 to March 31 of each year. B. Point(s) of Receipt The Primary Point(s) of Receipt and the maximum quantities for such point shall be as set forth below. Each of the parties will use due care and diligence to ensure that pressures will be maintained within normal operating tolerances at the Point(s) of Receipt as reasonably may be required to render service hereunder. In addition to the quantities specified below, Customer may increase the quantities furnished to Pipeline at the Point(s) of Receipt, so long as such quantities, when reduced by the fuel retention percentage specified in Pipeline's then-effective FERC Gas Tariff, do not exceed the quantity limitation specified below for the Primary Point(s) of Receipt. 1. Up to 150,000 Dt per day at Pipeline's Cornwell Receipt Point, which shall include points of interconnection between the facilities of Pipeline and Dominion Transmission, Inc. ("DTI") and between Pipeline and Tennessee Gas Pipeline Company ("Tennessee"), both in Kanawha County, West Virginia. 13 C. Point(s) of Delivery Each of the parties will use due care and diligence to ensure that pressures will be maintained within normal operating tolerances at the Point(s) of Delivery as reasonably may be required to render service hereunder, but Pipeline shall not be required to deliver gas (or to cause gas to be delivered) at greater than 850 pounds per square inch gauge. The Primary Point(s) of Delivery shall be as follows: Up to 150,000 Dt per day, at a pressure sufficient to enable deliveries at an existing connection between the facilities of Pipeline and Transcontinental Gas Pipe Line Corporation in Rockingham County, North Carolina, known as the Rockingham Connection. D. Term The primary term shall be for fifteen (15) years starting on the Commencement Date. E. Rates 1. Customer shall pay Pipeline the rates, charges, surcharges, penalties, and fuel retention percentages pursuant to its approved FERC Gas Tariff, except that, for service within Customer's MDTQ, Customer shall be entitled to a negotiated rate consisting of: a. A reservation charge payable in five monthly installments of $16.61 per Dt payable over each of the five winter months (November through March) over the contract term (equivalent to 55 cents per Dt on a 100% load factor basis). b. The commodity charge for ACA and other FERC-mandated surcharges, now $0.0022 per Dt of throughput. c. Fuel retention: 1.1% of quantities received by Pipeline. 14 2. The rates in Items a. and c., above, and the overall negotiated rate structure shall not be subject to change by either Pipeline or Customer during the primary term of the Transportation Service Agreement, except as follows: a. Pipeline agrees to reduce Customer's firm winter-period reservation charge of $16.61 per Dt if the FERC approves a year-round firm transportation service recourse reservation charge for Pipeline that is lower than $9.2572 per Dt. In such event, Customer's $16.61 per Dt firm winter-period reservation charge shall be reduced by the same proportion as the FERC-approved reduction in the year-round firm transportation service recourse reservation charge from $9.2572 per Dt. Nothing in this paragraph shall be construed to require Pipeline to accept a certificate that includes a FERC-mandated reduction in its filed recourse rate(s). b. Pipeline agrees to reduce Customer's firm winter-period reservation charge of $16.61 per Dt if, in any year during the primary term of the Transportation Service Agreement, a new shipper, sponsored by Customer, agrees to purchase summer- period firm capacity from Pipeline for a reservation charge greater than $4.0049 per Dt. In such event, Customer's firm winter-period reservation charge for that year, for an MDTQ equal to that subscribed to by the sponsored summer-period shipper, shall be reduced to a firm winter-period reservation charge that would allow Pipeline to collect annual revenues from such combined winter-period and summer-period MDTQs equivalent to annual revenues based on a year-round reservation charge of $9.2572 per Dt. To determine whether the summer-period firm transportation shipper is "sponsored by Customer," Pipeline must receive, prior to the start of any contract year, a written affidavit, executed by such shipper, attesting that absent the consideration provided by Customer, shipper would not have paid the reservation charge that it agreed to for summer-period firm transportation service. c. Customer shall have a one-time right to convert all or a portion of its service from a 151-day firm transportation service to a year-round firm transportation service. The conversion right may be exercised by Customer at any time prior to the date that the Parties execute the Transportation Service Agreement in accordance with Paragraph 3 of this Precedent Agreement, but the right is contingent upon Pipeline having the year-round capacity available for sale. The reservation rate payable for such service shall be $9.2572 per Dt or 30.43 cents per Dt stated on a 100 percent load factor basis. d. Pipeline agrees to reduce Customer's negotiated rates to match the rates payable by any similarly situated local distribution company customer if such customer and Pipeline have agreed to lower rates than reflected in Paragraph E of this Exhibit A. 15 EXHIBIT B TO THE FIRM TRANSPORTATION PRECEDENT AGREEMENT DATED SEPTEMBER 1,2001 BETWEEN GREENBRIER PIPELINE COMPANY, LLC AND PIEDMONT NATURAL GAS COMPANY, INC. SCHEDULE OF CUSTOMER'S MAXIMUM REIMBURSEMENT OBLIGATION INCLUSIVE OF AFUDC
If Customer terminates on or Total Cumulative Greenbrier Piedmont's Maximum before the end of the: Pipeline Estimated Capital Reimbursement Obligation Costs (17.19% of total costs) - ---------------------------- --------------------------- ------------------------ Third Quarter 2001 $ 4,513,391 $ 775,852 Fourth Quarter 2001 $ 8,400,853 $ 1,444,107 First Quarter 2002 $ 11,103,482 $ 1,908,689 Second Quarter 2002 $ 12,858,029 $ 2,210,295 Third Quarter 2002 $ 14,113,130 $ 2,426,047 Fourth Quarter 2002 $ 16,284,963 $ 2,799,385 First Quarter 2003 $ 17,441,688 $ 2,998,226 Second Quarter 2003 $ 19,642,709 $ 3,376,582 Third Quarter 2003 $ 25,105,263 $ 4,315,595 Fourth Quarter 2003 $ 28,187,342 $ 4,845,404 First Quarter 2004 $ 35,563,358 $ 6,113,341 Second Quarter 2004 $ 68,652,188 $11,801,311 Third Quarter 2004 $118,310,297 $20,337,540 Fourth Quarter 2004 $134,192,028 $23,067,610 First Quarter 2005 $140,547,531 $24,160,121 Second Quarter 2005 $272,812,043 $46,896,390 Third Quarter 2005 $422,060,959 $72,552,278 Fourth Quarter 2005 $494,803,846 $85,056,781 And Following Quarters $497,100,000 $85,451,490
EX-12 7 g80206exv12.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 PIEDMONT NATURAL GAS COMPANY, INC. AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges For Fiscal Years Ended October 31, 1998 through 2002 (in thousands except ratio amounts)
2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- Earnings: Pre-tax income from continuing operations $ 82,091 $ 90,683 $ 99,199 $103,077 $100,938 Distributed income of equity investees 22,143 9,885 4,255 -- -- Fixed charges 44,251 47,793 44,368 37,978 38,415 -------- -------- -------- -------- -------- Total Adjusted Earnings $148,485 $148,361 $147,822 $141,055 $139,353 ======== ======== ======== ======== ======== Fixed Charges: Interest $ 42,250 $ 45,286 $ 42,010 $ 35,911 $ 36,453 Amortization of debt expense 366 420 465 323 304 One-third of rental expense 1,635 2,087 1,893 1,744 1,658 -------- -------- -------- -------- -------- Total Fixed Charges $ 44,251 $ 47,793 $ 44,368 $ 37,978 $ 38,415 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges $ 3.36 3.10 3.33 3.71 3.63 ======== ======== ======== ======== ========
EX-23 8 g80206exv23.txt INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT Piedmont Natural Gas Company, Inc.: We consent to the incorporation by reference in Registration Statement No. 33-61093 on Form S-8, in Registration Statement No. 333-34433 on Form S-8, in Registration Statement No. 333-34435 on Form S-8, in Registration Statement No. 333-86263 on Form S-3, in Registration Statement No. 333-62222 on Form S-3, in Registration Statement No. 333-76138 on Form S-8, and in Registration Statement No. 333-76140 on Form S-8 of our report dated December 12, 2002, appearing in the Annual Report on Form 10-K of Piedmont Natural Gas Company, Inc. for the year ended October 31, 2002. /s/ DELOITTE & TOUCHE LLP Charlotte, North Carolina January 22, 2003 EX-99.1 9 g80206exv99w1.txt ANNUAL REPORT ON FORM 11-K - SALARY INV. PLAN EXHIBIT 99.1 PIEDMONT NATURAL GAS COMPANY, INC. SALARY INVESTMENT PLAN Financial Statements as of September 30, 2002 and 2001 and for the Year Ended September 30, 2002, Supplemental Schedule as of September 30, 2002, and Independent Auditors' Report PIEDMONT NATURAL GAS COMPANY, INC. SALARY INVESTMENT PLAN TABLE OF CONTENTS
PAGE INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS: Statements of Net Assets Available for Benefits as of September 30, 2002 and 2001 2 Statement of Changes in Net Assets Available for Benefits for the Year Ended September 30, 2002 3 Notes to Financial Statements 4-6 SUPPLEMENTAL SCHEDULE - Form 5500, Schedule H, Part IV, Line 4i - Schedule of Assets (Held at End of Year) as of September 30, 2002 7
NOTE: The accompanying financial statements have been prepared for the purpose of filing with the Department of Labor's Form 5500. Supplemental schedules required by 29 CFR 2520 of the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974, other than the schedule listed above, are omitted because of the absence of the conditions under which they are required. INDEPENDENT AUDITORS' REPORT To the Retirement Committee and Participants of Piedmont Natural Gas Company, Inc. Salary Investment Plan: We have audited the accompanying statements of net assets available for benefits of Piedmont Natural Gas Company, Inc. Salary Investment Plan (the "Plan") as of September 30, 2002 and 2001, and the related statement of changes in net assets available for benefits for the year ended September 30, 2002. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the net assets available for benefits of the Plan as of September 30, 2002 and 2001, and the changes in net assets available for benefits for the year ended September 30, 2002 in conformity with accounting principles generally accepted in the United States of America. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule listed in the Table of Contents is presented for the purpose of additional analysis and is not a required part of the basic financial statements, but is supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. This schedule is the responsibility of the Plan's management. Such schedule has been subjected to the auditing procedures applied in our audit of the basic 2002 financial statements and, in our opinion, is fairly stated, in all material respects, when considered in relation to the basic financial statements taken as a whole. /s/ Deloitte & Touche LLP November 5, 2002 -1- PIEDMONT NATURAL GAS COMPANY, INC. SALARY INVESTMENT PLAN STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS SEPTEMBER 30, 2002 AND 2001
2002 2001 ASSETS: Investments (Notes 1, 2, 3 and 6) $55,315,680 $54,846,614 Receivables: Employer's contribution 53,330 48,636 Participants' contributions 113,584 105,465 Due from broker for securities sold 111,493 9,149 ----------- ----------- Total receivables 278,407 163,250 Cash 5,033 20,042 ----------- ----------- Total assets 55,599,120 55,029,906 LIABILITY - Due to broker for securities purchased 116,526 29,191 ----------- ----------- NET ASSETS AVAILABLE FOR BENEFITS $55,482,594 $55,000,715 =========== ===========
-2- See notes to financial statements. PIEDMONT NATURAL GAS COMPANY, INC. SALARY INVESTMENT PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS YEAR ENDED SEPTEMBER 30, 2002 ADDITIONS: Investment income - interest income (Note 2) $ 68,479 ----------- Contributions: Employer's 1,424,968 Participants' 3,154,208 ----------- Total contributions 4,579,176 Transfer from other plan (Note 1) 5,206,148 ----------- Total additions 9,853,803 ----------- DEDUCTIONS: Investment loss - net depreciation in fair value of investments (Notes 2 and 3) 4,674,998 Benefits paid to participants 4,534,273 Expenses (Notes 2 and 6) 162,653 ----------- Total deductions 9,371,924 ----------- NET INCREASE 481,879 NET ASSETS AVAILABLE FOR BENEFITS: Beginning of year 55,000,715 ----------- End of year $55,482,594 ===========

See notes to financial statements. -3- PIEDMONT NATURAL GAS COMPANY, INC. SALARY INVESTMENT PLAN NOTES TO FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 AND 2001 AND FOR THE YEAR ENDED SEPTEMBER 30, 2002 1. DESCRIPTION OF THE PLAN The following description of Piedmont Natural Gas Company, Inc. (the "Company") Salary Investment Plan (the "Plan") is provided for general information purposes only. Participants should refer to the plan document for more complete information. GENERAL - The Plan is a defined contribution plan providing benefits to participating salaried employees or their beneficiaries upon retirement, death or termination of employment (following a break in service, as defined in the Plan). All full-time salaried employees become eligible to participate in the Plan on the first day of the plan quarter after they have completed six months of continuous service with the Company. The Retirement Committee of the Board of Directors of the Company controls and manages the operation and administration of the Plan. Wachovia Bank, N.A. (formerly First Union National Bank) ("Wachovia") serves as the trustee of the Plan. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). Effective October 1, 2001, the Piedmont Natural Gas Company Employee Stock Ownership Plan (the "ESOP Plan") was merged into the Piedmont Natural Gas Company, Inc. Payroll Investment Plan (the "Payroll Plan") and the Plan (collectively, the "401(k) Plans"). Net assets of $730,897 from the bargaining unit component of the ESOP Plan were transferred to the Payroll Plan and net assets of $5,206,148 from the non-bargaining unit component of the ESOP Plan were transferred to the Plan in October 2001. As a result of the merger, on and after October 1, 2001, the Plan consists of two portions, the ESOP and savings portions, as defined. Participants can remain invested in the Company's common stock or sell the common stock at any time and reinvest the proceeds in any of the investment options available in the 401(k) Plans. CONTRIBUTIONS - Effective April 1, 2002, participants may contribute up to 50% (formerly 15%) of their pretax annual compensation, as defined in the Plan. The Company contributes 50% of the first 10% of base compensation that a participant contributes to the Plan. Additional amounts may be contributed at the discretion of the Company's Board of Directors. There were no discretionary contributions during 2002 and 2001. Contributions are subject to certain Internal Revenue Code limitations. Participants may also contribute amounts representing distributions from other qualified defined benefit or defined contribution plans. PARTICIPANT ACCOUNTS - Individual accounts are maintained for each plan participant. Each participant's account is credited with the participant's contribution, the Company's matching contribution, and allocations of Company discretionary contributions, if applicable, and plan earnings, and charged with any benefit payments and allocations of plan losses and expenses. Allocations are based on participant earnings or account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant's vested account. INVESTMENTS - Participants direct the investment of their contributions into various investment options offered by the Plan. Currently, the Plan offers eight mutual funds, three common trust funds and one common stock fund as investment options for participants. VESTING - All participants and employer contributions and earnings thereon are fully vested and nonforfeitable upon allocation to the participants' accounts. -4- PARTICIPANT LOANS - Participants may borrow from their fund accounts up to a maximum of $50,000 or 50% of their account balances, whichever is less. The loans are secured by the balance in the participant's account and bear interest at the average yield of five-year U.S. Treasury notes. PAYMENTS OF BENEFITS - The vested balance of a participant's account will be paid to the participant or, in the case of death, to the spouse or beneficiary, if any, in a single, lump sum of cash. However, a participant who retires with an account balance of more than $15,000 may elect payment over a specified number of years under an annuity contract purchased from a life insurance company selected by the participant. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING - The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of net assets available for benefits and changes therein. Actual results could differ from those estimates. The Plan utilizes various investment instruments. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the financial statements. INVESTMENT VALUATION AND INCOME RECOGNITION - Investments in mutual funds are valued at quoted market prices, which represent the net asset values of shares held by the Plan at year-end. Investments in common trust funds ("funds") are stated at estimated fair values, which have been determined based on the unit values of the funds. Unit values are determined by the organization sponsoring such funds by dividing the funds' net assets at fair value by the units outstanding at each valuation date. Investment in the common stock fund is valued at its quoted market price. Participant loans receivable are valued at cost plus accrued interest, which approximates fair value. Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. PAYMENT OF BENEFITS - Benefits payments to participants are recorded upon distribution. EXPENSES - As provided by the plan document, administrative expenses (excluding certain trustee and fund management expenses) of the Plan are paid by the Company. -5- 3. INVESTMENTS The Plan's investments that represent 5% or more of the Plan's net assets available for benefits as of September 30, 2002 and 2001, are as follows:
2002 2001 Evergreen Stock Selector Fund (formerly the Evergreen Select Value Fund), 1,101,124 and 1,192,609 shares, respectively $10,724,946 $14,645,234 Evergreen Select Balanced Fund, 445,965 and 507,559 shares, respectively 4,031,521 5,080,668 INVESCO Dynamics Fund, 434,587 and 431,985 shares, respectively 4,228,529 5,274,535 Alleghany/Montag & Caldwell Growth Fund, 198,465 and 185,211 shares, respectively 3,548,562 4,059,815 First Union Stable Investment Fund, 548,800 and 545,700 units, respectively 15,762,321 15,108,883 Piedmont Natural Gas Stock Fund, 484,338 units 5,765,702 -- During 2002, the Plan's investments (including gains and losses on investments bought and sold, as well as held during the year) (depreciated) appreciated in value as follows: Mutual funds $(3,880,145) Common trust funds (941,800) Common stock fund 146,947 ----------- $(4,674,998) ===========
4. FEDERAL INCOME TAX STATUS The Internal Revenue Service has determined and informed the Company by a letter dated March 27, 1996, that the Plan and related trust are designed in accordance with applicable sections of the Internal Revenue Code. The Plan has been amended since receiving the determination letter; however, the Company and plan administrator believe that the Plan is currently designed and operated in compliance with the applicable requirements of the Internal Revenue Code and the Plan and related trust continue to be tax-exempt. Therefore, no provision for income taxes has been included in the Plan's financial statements. 5. PLAN TERMINATION Although it has not expressed any intention to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. 6. RELATED-PARTY TRANSACTIONS Certain plan investments are shares of mutual funds and units of participation in common trust funds managed by Wachovia. Wachovia is the trustee as defined by the Plan and, therefore, these transactions qualify as party-in-interest transactions. Fees paid by the Plan to Wachovia for the investment management services amounted to $162,653 for the year ended September 30, 2002. -6- PIEDMONT NATURAL GAS COMPANY, INC. SALARY INVESTMENT PLAN FORM 5500, SCHEDULE H, PART IV, LINE 4i - SCHEDULE OF ASSETS (HELD AT END OF YEAR) SEPTEMBER 30, 2002
DESCRIPTION OF INVESTMENT, INCLUDING MATURITY DATE, IDENTITY OF ISSUE, BORROWER, RATE OF INTEREST, COLLATERAL, CURRENT LESSOR OR SIMILAR PARTY PAR OR MATURITY VALUE COST VALUE * Evergreen Stock Selector Fund Mutual fund ** $10,724,946 * Evergreen Select Balanced Fund Mutual fund ** 4,031,521 Federated Stock Trust Mutual fund ** 1,404,302 Federated Bond Fund Mutual fund ** 1,162,816 INVESCO Dynamics Fund Mutual fund ** 4,228,529 INVESCO Combination Stock & Bond Fund Mutual fund ** 756,629 Putnam International Growth Class A Fund Mutual fund ** 2,425,915 Alleghany/Montag & Caldwell Growth Fund Mutual fund ** 3,548,562 * Evergreen Short Intermediate Bond Fund Mutual fund ** 2,654,842 * First Union Stable Investment Fund Common trust fund ** 15,762,321 * First Union Enhanced Stock Market Fund Common trust fund ** 1,848,805 * Piedmont Natural Gas Stock Fund Common stock fund ** 5,765,702 * Participant loans receivable Participant loans (maturing 2001 through 2015 at 6.77% to 8.53%) ** 1,000,790 ----------- Total investments $55,315,680 ===========
* Permitted party-in-interest. ** Cost information is not required for participant-directed investments and, therefore, is not included. -7- EX-99.2 10 g80206exv99w2.txt ANNUAL REPORT ON FORM 11-K - PAYROLL INV. PLAN EXHIBIT 99.2 PIEDMONT NATURAL GAS COMPANY, INC. PAYROLL INVESTMENT PLAN Financial Statements as of September 30, 2002 and 2001 and for the Year Ended September 30, 2002, Supplemental Schedule as of September 30, 2002, and Independent Auditors' Report PIEDMONT NATURAL GAS COMPANY, INC. PAYROLL INVESTMENT PLAN TABLE OF CONTENTS
PAGE INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS: Statements of Net Assets Available for Benefits as of September 30, 2002 and 2001 2 Statement of Changes in Net Assets Available for Benefits for the Year Ended September 30, 2002 3 Notes to Financial Statements 4-6 SUPPLEMENTAL SCHEDULE - Form 5500, Schedule H, Part IV, Line 4i - Schedule of Assets (Held at End of Year) as of September 30, 2002 7 NOTE: The accompanying financial statements have been prepared for the purpose of filing with the Department of Labor's Form 5500. Supplemental schedules required by 29 CFR 2520 of the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974, other than the schedule listed above, are omitted because of the absence of the conditions under which they are required.
INDEPENDENT AUDITORS' REPORT To the Retirement Committee and Participants of Piedmont Natural Gas Company, Inc. Payroll Investment Plan: We have audited the accompanying statements of net assets available for benefits of Piedmont Natural Gas Company, Inc. Payroll Investment Plan (the "Plan") as of September 30, 2002 and 2001, and the related statement of changes in net assets available for benefits for the year ended September 30, 2002. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the net assets available for benefits of the Plan as of September 30, 2002 and 2001, and the changes in net assets available for benefits for the year ended September 30, 2002 in conformity with accounting principles generally accepted in the United States of America. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule listed in the Table of Contents is presented for the purpose of additional analysis and is not a required part of the basic financial statements, but is supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. This schedule is the responsibility of the Plan's management. Such schedule has been subjected to the auditing procedures applied in our audit of the basic 2002 financial statements and, in our opinion, is fairly stated, in all material respects, when considered in relation to the basic financial statements taken as a whole. /s/ Deloitte & Touche, LLP November 5, 2002 -1- PIEDMONT NATURAL GAS COMPANY, INC. PAYROLL INVESTMENT PLAN STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS SEPTEMBER 30, 2002 AND 2001
2002 2001 ASSETS: Investments (Notes 1, 2, 3 and 6) $25,317,145 $25,511,866 ----------- ----------- Receivables: Employer's contribution 31,449 32,968 Participants' contributions 67,081 70,547 Due from broker for securities sold 140,830 3,258 ----------- ----------- Total receivables 239,360 106,773 Cash 1,736 4,901 ----------- ----------- Total assets 25,558,241 25,623,540 LIABILITY - Due to broker for securities purchased 142,566 8,165 ----------- ----------- NET ASSETS AVAILABLE FOR BENEFITS $25,415,675 $25,615,375 =========== ===========
See notes to financial statements. -2- PIEDMONT NATURAL GAS COMPANY, INC. PAYROLL INVESTMENT PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS YEAR ENDED SEPTEMBER 30, 2002 ADDITIONS: Investment income - interest income (Note 2) $ 51,781 ------------ Contributions: Employer's 815,515 Participants' 1,826,040 ------------ Total contributions 2,641,555 Transfer from other plan (Note 1) 730,897 ------------ Total additions 3,424,233 ------------ DEDUCTIONS: Investment loss - net depreciation in fair value of investments (Notes 2 and 3) 2,152,925 Benefits paid to participants 1,393,596 Expenses (Notes 2 and 6) 77,412 ------------ Total deductions 3,623,933 ------------ NET DECREASE (199,700) NET ASSETS AVAILABLE FOR BENEFITS: Beginning of year 25,615,375 ------------ End of year $ 25,415,675 ============

See notes to financial statements. -3- PIEDMONT NATURAL GAS COMPANY, INC. PAYROLL INVESTMENT PLAN NOTES TO FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 AND 2001 AND FOR THE YEAR ENDED SEPTEMBER 30, 2002 1. DESCRIPTION OF THE PLAN The following description of Piedmont Natural Gas Company, Inc. (the "Company") Payroll Investment Plan (the "Plan") is provided for general information purposes only. Participants should refer to the plan document for more complete information. GENERAL - The Plan is a defined contribution plan, providing benefits to participating hourly employees or their beneficiaries upon retirement, death or termination of employment (following a break in service, as defined in the Plan). All full-time hourly employees become eligible to participate in the Plan on the first day of the plan quarter after they have completed six months of continuous service with the Company. The Retirement Committee of the Board of Directors of the Company controls and manages the operation and administration of the Plan. Wachovia Bank, N.A. (formerly First Union National Bank) ("Wachovia") serves as the trustee of the Plan. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). Effective October 1, 2001, the Piedmont Natural Gas Company Employee Stock Ownership Plan (the "ESOP Plan") was merged into the Piedmont Natural Gas Company, Inc. Salary Investment Plan (the "Salary Plan") and the Plan (collectively, the "401(k) Plans"). Net assets of $730,897 from the bargaining unit component of the ESOP Plan were transferred to the Plan and net assets of $5,206,148 from the non-bargaining unit component of the ESOP Plan were transferred to the Salary Plan in October 2001. As a result of the merger, on and after October 1, 2001, the Plan consists of two portions, the ESOP and savings portions, as defined. Participants can remain invested in the Company's common stock or sell the common stock at any time and reinvest the proceeds in any of the investment options available in the 401(k) Plans. CONTRIBUTIONS - Effective April 1, 2002, participants may contribute up to 50% (formerly 15%) of their pretax annual compensation, as defined in the Plan. The Company contributes 50% of the first 10% of base compensation that a participant contributes to the Plan. Additional amounts may be contributed at the discretion of the Company's Board of Directors. There were no discretionary contributions during 2002 and 2001. Contributions are subject to certain Internal Revenue Code limitations. Participants may also contribute amounts representing distributions from other qualified defined benefit or defined contribution plans. PARTICIPANT ACCOUNTS - Individual accounts are maintained for each plan participant. Each participant's account is credited with the participant's contribution, the Company's matching contribution, and allocations of Company discretionary contributions, if applicable, and plan earnings, and charged with any benefit payments and allocations of plan losses and expenses. Allocations are based on participant earnings or account balances, as defined. The benefit to which a participant is entitled is the benefit that can be provided from the participant's vested account. -4- INVESTMENTS - Participants direct the investment of their contributions into various investment options offered by the Plan. Currently, the Plan offers eight mutual funds, three common trust funds and one common stock fund as investment options for participants. VESTING - All participant and employer contributions and earnings thereon are fully vested and nonforfeitable upon allocation to the participants' accounts. PARTICIPANT LOANS - Participants may borrow from their fund accounts up to a maximum of $50,000 or 50% of their account balances, whichever is less. The loans are secured by the balance in the participant's account and bear interest at rates at the average yield of five-year U.S. Treasury notes. PAYMENTS OF BENEFITS - The vested balance of a participant's account will be paid to the participant or, in the case of death, to the spouse or beneficiary, if any, in a single, lump sum of cash. However, a participant who retires with an account balance of more than $15,000 may elect payment over a specified number of years under an annuity contract purchased from a life insurance company selected by the participant. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING - The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of net assets available for benefits and changes therein. Actual results could differ from those estimates. The Plan utilizes various investment instruments. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the financial statements. INVESTMENT VALUATION AND INCOME RECOGNITION - Investments in mutual funds are valued at quoted market prices, which represent the net asset values of shares held by the Plan at year-end. Investments in common trust funds ("funds") are stated at estimated fair values, which have been determined based on the unit values of the funds. Unit values are determined by the organization sponsoring such funds by dividing the funds' net assets at fair value by the units outstanding at each valuation date. Investment in the common stock fund is valued at its quoted market price. Participant loans receivable are valued at cost plus accrued interest, which approximates fair value. Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. PAYMENT OF BENEFITS - Benefits payments to participants are recorded upon distribution. EXPENSES - As provided by the plan document, administrative expenses (excluding certain trustee and fund management expenses) of the Plan are paid by the Company. -5- 3. INVESTMENTS The Plan's investments that represented 5% or more of the Plan's net assets available for benefits as of September 30, 2002 and 2001, are as follows:
2002 2001 Evergreen Stock Selector Fund (formerly the Evergreen Select Value Fund), 599,400 and 653,510 shares, respectively $ 5,838,154 $ 8,025,102 Evergreen Select Balanced Fund, 153,798 and 169,473 shares, respectively 1,390,331 1,696,421 INVESCO Dynamics Fund, 161,045 and 156,610 shares, respectively 1,566,965 1,912,207 Alleghany/Montag & Caldwell Growth Fund, 65,578 shares * 1,437,478 Evergreen Short Intermediate Bond Fund, 145,216 shares 1,759,955 -- First Union Stable Investment Fund, 333,894 and 304,799 units, respectively 9,590,278 8,442,096
* Represented less than 5% of the Plan's net assets available for benefits as of this date During 2002, the Plan's investments (including gains and losses on investments bought and sold, as well as held during the year) (depreciated) appreciated in value as follows: Mutual funds $(2,507,210) Common trust funds 290,749 Common stock fund 63,536 ----------- $(2,152,925) ===========

4. FEDERAL INCOME TAX STATUS The Internal Revenue Service has determined and informed the Company by a letter dated May 16, 1996, that the Plan and related trust are designed in accordance with applicable sections of the Internal Revenue Code. The Plan has been amended since receiving the determination letter; however, the Company and plan administrator believe that the Plan is currently designed and operated in compliance with the applicable requirements of the Internal Revenue Code and the Plan and related trust are tax-exempt. Therefore, no provision for income taxes has been included in the Plan's financial statements. 5. PLAN TERMINATION Although it has not expressed any intention to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. 6. RELATED-PARTY TRANSACTIONS Certain plan investments are shares of mutual funds and units of participation in common trust funds managed by Wachovia. Wachovia is the trustee as defined by the Plan and, therefore, these transactions qualify as party-in-interest transactions. Fees paid by the Plan to Wachovia for the investment management services amounted to $77,412 for the year ended September 30, 2002. -6- PIEDMONT NATURAL GAS COMPANY, INC. PAYROLL INVESTMENT PLAN FORM 5500, SCHEDULE H, PART IV, LINE 4i - SCHEDULE OF ASSETS (HELD AT END OF YEAR) SEPTEMBER 30, 2002
DESCRIPTION OF INVESTMENT, INCLUDING MATURITY DATE, IDENTITY OF ISSUE, BORROWER, RATE OF INTEREST, COLLATERAL, CURRENT LESSOR OR SIMILAR PARTY PAR OR MATURITY VALUE COST VALUE * Evergreen Stock Selector Fund Mutual fund ** $ 5,838,154 * Evergreen Select Balanced Fund Mutual fund ** 1,390,331 Federated Stock Trust Mutual fund ** 478,537 Federated Bond Fund Mutual fund ** 479,876 INVESCO Dynamics Fund Mutual fund ** 1,566,965 INVESCO Combination Stock and Bond Fund Mutual fund ** 233,461 Putnam International Growth Class A Fund Mutual fund ** 668,769 Alleghany/Montag & Caldwell Growth Fund Mutual fund ** 1,175,466 * Evergreen Short Intermediate Bond Fund Mutual fund ** 1,759,955 * First Union Stable Investment Fund Common trust fund ** 9,590,278 * First Union Enhanced Stock Market Fund Common trust fund ** 271,384 * Piedmont Natural Gas Stock Fund Common trust fund ** 1,033,074 * Participant loans receivable Participant loans (maturing 2001 through 2015 at 5.82% to 8.53%) ** 830,895 ----------- Total investments $25,317,145 ===========
* Permitted party-in-interest. ** Cost information is not required for participant-directed investments and, therefore, is not included. -7- ~~-----END PRIVACY-ENHANCED MESSAGE-----~~

			regulated by the Federal Energy Regulatory Commission (FERC) and the North Carolina Utilities Commission (NCUC), respectively.

	•		Residential, commercial and industrial growth in our service territories. The ability to grow our customer base and the pace of that growth are impacted by general business and economic conditions such as interest rates, inflation, fluctuations in the capital markets and the overall strength of the economy in our local markets and the country.

	•		Deregulation, unanticipated impacts of restructuring and competition in the energy industry. We face competition from electric companies and energy marketing and trading companies. As a result of deregulation, we expect this highly competitive environment to continue.

	•		The potential loss of large-volume industrial customers to alternate fuels or to bypass or the shift by such customers to special competitive contracts at lower per-unit margins.

	•		The ability to meet internal performance goals. Regulatory issues, customer growth, deregulation, economic and capital market conditions, the cost and availability of natural gas and weather conditions can impact our performance goals.

	•		The capital-intensive nature of our business, including governmental approvals, development project delays or changes in project costs. Weather, general economic conditions and the cost of funds to finance our capital projects can materially alter the cost of a project.

	•		Changes in the availability and cost of natural gas. To meet customer requirements, we must acquire sufficient gas supplies and pipeline capacity to ensure delivery to our distribution system while also ensuring that our supply and capacity contracts will allow us to remain competitive. Natural gas is an unregulated commodity subject to market supply and demand and price volatility. We have a diversified portfolio of local peaking facilities, transportation and storage contracts with interstate pipelines and supply contracts with major producers and marketers to satisfy the supply and delivery requirements of our customers. Because these producers, marketers and pipelines are subject to operating and financial risks associated with exploring, drilling, producing, gathering, marketing and transporting natural gas, their risks also increase our exposure to supply and price fluctuations. We engage in hedging activity to minimize price volatility for our customers.

	•		Changes in weather conditions. Weather conditions and other natural phenomena can have a large impact on our earnings. Severe weather conditions can impact our suppliers and the pipelines that deliver gas to our distribution system. Extended mild or severe weather, either during the winter period or the summer period, can

			have a significant impact on the demand for and the cost of natural gas.

	•		Changes in environmental requirements and cost of compliance.

	•		Earnings from our equity investments. We have investments in unregulated retail energy marketing services, interstate liquefied natural gas (LNG) storage operations, intrastate and interstate pipeline operations and unregulated retail propane operations. These companies have risks that are inherent to their industries and, as an equity investor, we assume such risks.

	•		Decrease in margin due to warmer weather resulting in fewer volumes of gas delivered to customers (system throughput).

	•		Increase in depreciation expense.

	•		Increase in interest expense.

	•		Rates charged to customers increased due to general rate increases in Tennessee effective July 1, 2000, and in North Carolina effective November 1, 2000.

	•		Even though total system throughput decreased, volumes delivered to residential and commercial customers from whom we earn a higher margin increased.

	•		Increase in the allowance for funds used during construction (AFUDC).

	•		Increase in interest income.

	•		Increase in earnings from unregulated retail energy marketing services.

	•		Increase in earnings from non-utility LNG operations.

	•		Increase in earnings from secondary market transactions.

	•		Addition of Gaffney customers in January 2001.

	•		Increase in operations and maintenance expenses.

	•		Increase in depreciation expense.

	•		Increase in general taxes.

	•		Increase in interest charges.

	•		Decrease in earnings from propane operations.

	•		The commodity cost of gas decreased significantly during the winter of 2001-2002 resulting in a corresponding decrease in rates charged to customers.

	•		Decreased system throughput to all customer classes except industrial due to warmer weather.


			the winter of 2000-2001 resulting in a corresponding increase in rates charged to customers.

	•		Increased customer growth and 23% colder weather.

	•		System throughput to higher-margin residential and commercial customers increased nine million dekatherms.

	•		Rates increased due to general rate increases as noted above.

	•		Increased secondary market activity.

	•		Addition of Gaffney customers in January 2001.

	•		Increase in payroll expense due to positions being filled by employees rather than by outside labor.

	•		Increase in other corporate expense due to increases in fees for committed lines of credit and net service fees to banks and increases in training expenses.

	•		Increase in employee benefits expense due to pension expense recorded in 2002 with pension income recorded in 2001 and increased health insurance premiums.

	•		Decrease in outside labor as explained above.

	•		Decrease in the provision for uncollectibles due to warmer weather and lower gas prices.

	•		Increase in transportation expense due to higher fuel costs and increases in license fees and taxes.

	•		Increase in utilities expense due to the installation of new communications units in service trucks and the higher volume of telephone calls to our customer information centers.

	•		Increase in bank charges for activity fees and for fees associated with higher committed bank lines.

	•		Increase in the provision for uncollectibles due to higher charge-offs for customers who could not pay their bills due to higher gas prices and colder-than-normal weather.

	•		Amortization of North Carolina environmental expense as recovered from customers beginning in November 2000.

	•		Decrease in employee benefits expense due primarily to a decrease in pension expense and the shift of the payment of administrative fees from benefit plan assets rather than by the sponsor.

	•		Decrease in outside consultants expense due to a reduction in the need for information systems upgrades.

	•		Increase in interest on long-term debt due to higher balances outstanding.

	•		Decrease in the portion of AFUDC attributable to borrowed funds.

	•		Decrease in interest on short-term debt due to lower balances outstanding at lower interest rates.

	•		Decrease in interest charged on refunds due customers due to lower balances outstanding.

	•		Increase in interest on long-term debt due to higher balances outstanding.

	•		Increase in interest charged on refunds due customers due to higher balances outstanding.

	•		Decrease in interest on short-term debt due to lower balances outstanding at lower interest rates.

	•		Increase in the portion of AFUDC attributable to borrowed funds.

	1.		I have reviewed this annual report on Form 10-K of Piedmont Natural Gas Company, Inc.;

	2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures and internal controls and procedures for financial reporting (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Designed such internal controls and procedures for financial reporting, or caused such internal controls and procedures for financial reporting to be designed under their supervision, to provide reasonable assurances that the registrant’s financial statements are fairly presented in conformity with generally accepted accounting principles;

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and internal controls and procedures for financial reporting as of the end of the period covered by this report (“Evaluation Date”);

	d)		Presented in this report our conclusions about the effectiveness of the disclosure controls and procedures and internal controls and procedures for financial reporting based on our evaluation as of the Evaluation Date;

	e)		Disclosed to the registrant’s auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function):

	(i)		All significant deficiencies and material weaknesses in the design or operation of internal controls and procedures for financial reporting which could adversely affect the registrant’s ability to record, process, summarize and report financial information required to be disclosed by the registrant in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.), within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms; and

	(ii)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls and procedures for financial reporting; and