<PAGE> 1
FORM 8-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (date of earliest event Reported) January 19, 1994
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THE COLUMBIA GAS SYSTEM, INC.
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(Exact name of registrant as specified in its charter)
Delaware 1-1098 13--1594808
- ---------------------------- ------------ -------------------
(State of other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
20 Montchanin Road, Wilmington, Delaware 19807
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(Address of principal executive offices)
Registrant's telephone number, including area code (302) 429-5000
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Item 5. Other Events
Information contained in a News Release dated January 19,
1994, together with an executive summary of the Plan of Reorganization
for Columbia Gas Transmission Corporation filed with the United States
Bankruptcy Court for the District of Delaware on January 18, 1994, are
incorporated herein by reference.
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
<TABLE>
<S> <C> <C>
The Columbia Gas System, Inc
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(Registrant)
By /s/ R. E. Lowe
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R. E. Lowe
Vice President &
Controller
Date: January 19, 1994
</TABLE>
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Contacts: Media - W. R. McLaughlin (302) 429-5443
H. W. Chaddock (302) 429-5261
D. R. Dodrill (302) 429-5444
Analysts - T. L. Hughes (302) 429-5363
K. P. Murphy (302) 429-5471
FOR USE AFTER 8:15 A.M., JANUARY 19, 1994
COLUMBIA GAS TRANSMISSION FILES CHAPTER 11 REORGANIZATION PLAN;
COLUMBIA GAS SYSTEM'S PLAN TO BE FILED LATER
WILMINGTON, DEL. -- Columbia Gas Transmission Corp., the principal pipeline
subsidiary of The Columbia Gas System, Inc. (NYSE:CG), filed its Chapter 11
reorganization plan and disclosure statement with the U.S. Bankruptcy Court for
the District of Delaware late Tuesday.
The plan has a total value of $3.3 billion. It proposes paying 100 percent for
all priority, administrative and secured claims and offers various classes of
general unsecured creditors, including producers whose gas supply contracts
were rejected by Columbia Transmission, between 80 and 100 percent of its
projection of their allowable claims.
Columbia Transmission Chairman James P. Holland said the plan offers a
"balanced and practical business solution to the complex litigations that have
slowed the progress of the proceedings."
Although Columbia Transmission's plan utilizes June 30, 1994, as an assumed
date of emergence, the actual date will be determined by the time required to
complete the bankruptcy process and obtain necessary creditor, judicial and
regulatory approvals. Holland said Columbia Transmission has requested that
the Bankruptcy Court defer required proceedings on the plan in order to permit
discussions of the plan and its proposed settlements with its creditors and
their official representatives.
Both Columbia Transmission and its parent company have been operating as
debtors-in-possession under Chapter 11 of the Federal Bankruptcy Code since
July 31, 1991.
Under the plan, Columbia Transmission will remain a wholly-owned subsidiary of
The Columbia Gas System, Inc., will continue to offer an array of competitive
transportation and storage services, and will retain ownership of its 18,900
mile pipeline network and related facilities.
(more)
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2
Columbia Gas System Chairman John H. Croom said the plan filed by Columbia
Transmission will be financially supported by the parent company and has the
endorsement of the parent company's Board of Directors, its Equity Committee
and its Official Committee of Unsecured Creditors.
Croom said it is anticipated that both companies will emerge from Chapter 11
simultaneously even though the parent company's plan will be filed at a later
date.
The $3.3 billion distribution proposed in Columbia Transmission's plan is based
on an estimated value for the company of $3.1 billion and includes significant
parent company financial contributions, which may include up to $100 million in
market value of Columbia common stock, as well as other parent company
non-monetary contributions. Under the plan, the litigation pending in the
Bankruptcy Court challenging the status of the parent company's debt
investments in Columbia Transmission and certain intercompany transfers would
be terminated.
Holland said the parent company, in order to make more cash available to
satisfy other creditors' claims, has agreed to accept debt securities of
reorganized Columbia Transmission and all its equity in payment of its $1.75
billion of secured claims. In addition, the parent company has also consented
to reorganized Columbia Transmission assuming responsibility for public
environmental enforcement agency claims.
While the plan proposes paying the parent company's secured debt in full, its
unsecured debt would be paid at the same level as other similar unsecured
claims.
Columbia Transmission's proposed business solution will offer to producers,
whose gas supply contracts were rejected or who have pre-petition claims under
those contracts, individual, specific settlements that are based upon uniform
assumptions and principles and which, in Columbia Transmission's view, are fair
and reasonable settlement values. These specific settlement proposals are
being developed and will be filed as an adjunct to the plan. TCO estimates
that aggregate distributions to producers under the plan should come to
approximately $900 million.
The plan also provides that distribution company customers of Columbia
Transmission will receive virtually all of their refund claims.
Holland said that, under bankruptcy procedures, when Columbia Transmission's
disclosure statement has been approved by the Bankruptcy Court, it and the
reorganization plan will be sent to the company's creditors for voting. He
noted that, although the plan as filed does not have the endorsement of
Columbia Transmission's Official Committee of Unsecured Creditors, "the company
is now in discussions with major creditors and the Official Committees and,
while I am hopeful that these discussions will produce positive results, they
are still in a preliminary stage."
# # #
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<S> <C> <C>
I. SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
B. Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. The Debtor and its Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. The Problems that Led to TCO's Chapter 11 Petition . . . . . . . . . . . . . . . . . . . . . . . 3
3. TCO'S Business Operations and Financial Performance and Prospects . . . . . . . . . . . . . . . 4
4. Obstacles to Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5. The Cornerstones of the TCO Plan: The Columbia Omnibus Settlement
and the Proposed Settlements of all Major Controversies . . . . . . . . . . . . . . . . . . . . 6
6. Major Bankruptcy Court Controversies in TCO's Chapter 11 Proceedings
and their Proposed Resolutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
a. Challenges on behalf of the TCO Estate to Columbia's Claims and to Certain
Transfers of TCO Assets to or for the Benefit of Columbia . . . . . . . . . . . . . . . . 7
b. Objections to Producer Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
c. Proposed Settlements of the Intercompany Claims and the Producer Claims . . . . . . . . . 11
d. Challenges to Customer Refunds by the TCO Creditors' Committee . . . . . . . . . . . . . . 13
e. Pre-petition Disputes Between TCO and Appalachian Producers--"Enterprise
Energy" Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
f. IRS Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
g. Environmental Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7. NGA/FERC Controversies and their Proposed Resolutions . . . . . . . . . . . . . . . . . . . . . 17
a. The Baltimore Gas and Electric Appeal . . . . . . . . . . . . . . . . . . . . . . . . . . 17
b. TCO's 1990 Rate Case Settlement
(NGA Section 4(e)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
c. TCO's Entitlements to Recoveries from its Customers . . . . . . . . . . . . . . . . . . . 19
8. Valuation of the TCO Estate and Considerations for Settlement of the Intercompany Claims . . . . 19
C. Distributions Under the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
D. Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
E. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
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I. SUMMARY
A. INTRODUCTION
On July 31, 1991, Columbia Gas Transmission Corporation ("TCO")1 and its
parent company, The Columbia Gas System, Inc. ("Columbia"), each filed
voluntary petitions for reorganization under Chapter 11 of title 11 of the
United States Code, 11 U.S.C. Section Section 101, et seq. (the "Bankruptcy
Code"). On January 18, 1994, TCO filed its plan of reorganization (the
"Plan").
This Disclosure Statement is submitted by TCO in connection with its
solicitation of acceptances of the Plan.
B. EXECUTIVE SUMMARY
1. THE DEBTOR AND ITS BUSINESS
TCO owns and operates an 18,900 mile natural gas ("gas") transmission
pipeline network and related extensive underground gas storage fields that
serve parts of sixteen states in the Northeastern, Mid-Atlantic, Midwestern and
Southeastern regions and the District of Columbia. TCO's Customers are various
affiliated and unaffiliated gas distribution companies, gas marketers and end
users of gas. Its rates, charges, services and facilities are subject to
regulation by the Federal Energy Regulatory Commission ("FERC"), primarily
pursuant to the Natural Gas Act, 15 U.S.C. Section Section 717, et seq.
("NGA").
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1 Terms not otherwise defined in this Section I shall have
the meaning ascribed to them in the Plan or in subsequent
Sections of this Disclosure Statement.
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TCO is a wholly owned subsidiary of Columbia, which is a registered
public utility holding company under the Public Utility Holding Company Act of
1935, as amended, 15 U.S.C. Section Section 79, et seq. ("HCA"). Columbia's
sixteen other operating subsidiaries are engaged in the exploration,
production, marketing, transmission and distribution of natural gas and other
energy operations such as cogeneration. Pursuant to the HCA, Columbia's
external and intercompany financing activities, including certain transactions
contemplated by the Plan, and certain of its intercompany contractual
relationships and various other matters are regulated by the Securities and
Exchange Commission ("SEC").
Prior to the mid-1980s, TCO operated principally as a "merchant" of gas,
purchasing gas from Producers and other pipeline companies and reselling it to
distribution companies. Thereafter and until November 1, 1993, consistent with
a series of significant changes occurring in Federal regulatory policy, TCO's
"merchant" activities declined and a steadily increasing portion of its
business was as a transporter of gas and provider of gas storage services for
its Customers. Since November 1, 1993, following a fundamental change in the
gas industry brought about by FERC under its Order No. 636, TCO no longer
conducts significant gas merchant activities and is presently almost entirely
engaged in the business of transporting and storing gas for its Customers.
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2. THE PROBLEMS THAT LED TO TCO'S CHAPTER 11 PETITION
TCO's Chapter 11 filing was precipitated by a combination of events that
adversely affected its physical operations and financial viability. Most
notable were (i) its continuing contractual obligations to purchase gas at
prices above those at which it was able to market gas and (ii) federal
legislative and regulatory actions, instituted years after TCO's gas purchase
contracts were signed, that significantly impacted TCO's ability to sell the
gas it had contracted to buy and to recover its costs from its Customers.
These problems were exacerbated by record-setting warm weather, which caused
spot market prices for gas to plunge and created excess transportation
capacity, thus making an unexpected and persistent oversupply of bargain-priced
gas available to TCO's Customers. As a result, TCO's ability to market its gas
was severely undercut, substantially reducing both sales volumes and revenues.
After completing studies in early June 1991 that revealed the magnitude
of TCO's gas supply problems, Columbia announced on June 19, 1991 that the
present value of losses associated with TCO's above-market-priced gas purchase
contracts could exceed $1 billion and that a substantial portion of that amount
could be charged to income in the second quarter and that the dividend on
Columbia's common stock was being suspended.
Columbia immediately initiated negotiations with banks in an effort to
reestablish lines of credit that were interrupted
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by the June 19 announcement, and TCO promptly proposed a comprehensive producer
settlement plan (the "PSP") that offered to buy out producers' contracts and
settle other contractual disputes for a pro rata share of $600 million of TCO
debt obligations. Progress was made in both areas of negotiation. However,
agreements could not be concluded before TCO's and Columbia's available cash
resources were exhausted, forcing both to seek Chapter 11 protection at the end
of July.
3. TCO'S BUSINESS OPERATIONS AND FINANCIAL PERFORMANCE AND PROSPECTS
Subsequent to the filing of its Chapter 11 petition, TCO rejected, as
permitted by the Bankruptcy Code, more than 4,000 gas purchase contracts. The
Producer counterparties to these contracts filed Claims for rejection damages
in excess of $13 billion (an amount which in TCO's view greatly inflates the
aggregate allowable amounts for such Claims). Producers also filed other
Claims based on pre-filing contractual disputes relating to pricing and
take-or-pay obligations in amounts significantly in excess of TCO's estimates
of its liabilities with respect to such disputes.
Rejection of the above-market-price contracts enabled TCO to purchase
market-priced gas which reduced its sales rate to competitive levels.
Accordingly, TCO has recorded substantial operating profits and accumulated a
cash balance of approximately $1 billion (net of customer refunds) as of
December 31, 1993 confirming that, aside from the problem contracts, there was
not and is not anything basically wrong
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with TCO's operations or business position. TCO expects to continue to
generate substantial operating profits in the future under Order No. 636 by
providing an array of competitively-priced FERC-approved transportation and
storage services to its customers.
Under Order No. 636, pipelines such as TCO have the right to recover from
their Customers various costs resulting from the mandated transition from
merchants to transporters. However, FERC has determined that, with minor
exceptions, TCO is not eligible to recover costs arising from its rejection of
Producers' gas supply contracts. The ultimate level of TCO's other recoupable
transition costs has not been determined.
Since the inception of its Reorganization Case, TCO has been burdened by
substantial reorganization expenses which are expected to total approximately
$66 million by mid-1994. Moreover, the largest Claims against the TCO estate
for money borrowed are held by Columbia and are secured by substantially all of
TCO's assets. This indebtedness bears interest at rates substantially higher
than those earned by TCO on its excess cash because of limitations on TCO's
temporary investments. As a result, the growth in TCO's secured interest
obligations (the status of which has been challenged by the Intercompany Claims
described below) has exceeded its interest earnings on its cash available for
debt service by an amount exceeding $300 million when projected to June 30,
1994.
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4. OBSTACLES TO REORGANIZATION
In contrast to the situation of many other Chapter 11 debtors,
reorganization of TCO has not been hampered by unprofitable or marginal
business operations. Rather, in TCO's case the achievement of the Chapter 11
objective of reorganization has been impacted by the enormity and complexity of
the disputed and contingent Claims filed against it by unaffiliated Creditors
and by the attempts on behalf of those Creditors to obtain recoveries on such
Claims from the assets of the Columbia estate. In addition, TCO's status as a
regulated gas transmission company under the NGA and its resulting obligations
has brought into the bankruptcy forum creditors' rights issues which are
greatly complicated by public law issues arising under the NGA.
Thus, there are now pending before the Bankruptcy Court, or in some
instances before other tribunals, several disputes of material significance to
TCO's reorganization and their final adjudications would both involve heavy
expense and result in lengthy delays in realizations by Creditors on their
Claims against TCO.
5. THE CORNERSTONES OF THE TCO PLAN: THE COLUMBIA OMNIBUS
SETTLEMENT AND THE PROPOSED SETTLEMENTS OF ALL MAJOR
CONTROVERSIES
The Plan is predicated on an offer by Columbia pursuant to which (i)
Columbia will retain ownership of TCO, (ii) TCO will be able to distribute to
its Creditors $3.3 billion in money or money's worth, (iii) Creditors other
than Columbia would share
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in distributions of over $1.2 billion in cash (or up to $100 million in market
value Columbia common stock) and (iv) the recoveries of such other Creditors
would not (with minor exceptions) be diminished by the environmental
liabilities of the TCO Estate.
The TCO Plan is also predicated on TCO's and Columbia's belief that it is
in the best interest of all concerned that TCO be reorganized without awaiting
final adjudication of the numerous significant controversies affecting the TCO
estate--controversies involving large notional dollar sums and various levels
of merit or lack thereof. Thus, as made possible by the benefits of the
Columbia offer, the TCO Plan proposes settlements of these controversies.
6. MAJOR BANKRUPTCY COURT CONTROVERSIES IN TCO'S CHAPTER 11
PROCEEDINGS AND THEIR PROPOSED RESOLUTIONS
A. CHALLENGES ON BEHALF OF THE TCO ESTATE TO COLUMBIA'S
CLAIMS AND TO CERTAIN TRANSFERS OF TCO ASSETS TO OR FOR
THE BENEFIT OF COLUMBIA
To avoid possible conflicts of interest and with the approval of Columbia
and of the Bankruptcy Court, TCO granted to its Creditors' Committee the
prerogative of asserting challenges to Columbia's Claims against TCO and of
bringing possible avoidance actions under the Bankruptcy Code against Columbia
and other subsidiaries of Columbia. The Creditors' Committee brought an action
(later joined in by the TCO Customers' Committee) against Columbia and one of
its other subsidiaries, Columbia Natural Resources Corporation ("CNR"), seeking
to
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recharacterize as equity, or to subordinate, debt claims against TCO held by
Columbia, to reclaim various payments made by TCO to Columbia in respect of its
investments in TCO and to set aside the transfer by TCO to CNR of various oil,
gas and coal properties allegedly made for inadequate consideration and at a
time when TCO allegedly was insolvent (the "Intercompany Claims").
Columbia moved for dismissal or judgment in its favor on the pleadings,
without trial, on Intercompany Claims other than those that related to alleged
fraudulent transfers. Virtually simultaneously, the Creditors' Committee
sought to remove to the United States District Court the complaint it had filed
in the Bankruptcy Court. This attempted removal was rejected by the District
Court and, after appeal by the Creditors' Committee, by the United States Court
of Appeals for the Third Circuit.
These removal efforts suspended consideration by the Bankruptcy Court of
Columbia's motion for fifteen months. In the interim, however, extensive
documentary and testimonial discovery was conducted by the Creditors' Committee
and the Customers' Committee. Based on this discovery record, in May and June
1993, Columbia and the Creditors' Committee filed substantial supplementary
papers, in effect converting the original Columbia motion into a motion for
partial summary judgment. No disposition of that motion has yet occurred.
Columbia's requests for pre-trial discovery from certain of TCO's
Producer Creditors has been opposed by those Creditors but
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is expected to proceed shortly. Subject to the Bankruptcy Court's calendar, it
has been agreed that the parties will be ready to proceed to a trial on the
committees' complaint by June 1994.
Columbia initiated settlement discussions with respect to the
Intercompany Claims with the Creditors' Committee in December 1992. Those
discussions proved fruitless.
The TCO Plan incorporates an offer by Columbia in settlement of the
Intercompany Claims directly to TCO's unaffiliated Creditors, the potential
beneficiaries of those Claims.
B. OBJECTIONS TO PRODUCER CLAIMS
In March 1992, TCO presented to the Bankruptcy Court a proposal to
expedite and simplify resolution of Disputed Producer Claims. Following
negotiations among TCO, its Creditors' Committee and other interested parties,
the Bankruptcy Court entered a procedural order that provided for (i) the
appointment of a Claims Mediator, (ii) initial resolution of issues generic to
all or large categories of gas supply Contract Rejection Claims, and (iii)
subsequent resolution of issues specific to particular rejected gas supply
contracts. This procedural order also provides for estimation of other
Producer Claims against TCO. By agreement, Charles Normandin, Esq. was
appointed Claims Mediator and John Norris, Esq. was appointed to advise Mr.
Normandin with respect to the natural gas law aspects of the proceedings.
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Extensive evidentiary hearings before the Claims Mediator with respect to
Producer positions on generic issues relating to Contract Rejection Claims have
now been concluded and the parties are awaiting his recommended decisions on
implementation of such Producer positions. Possible hearings on TCO's position
on the proper method for estimation of these Claims has been deferred until
after rulings on the Producers' proposals.
Based on the existing record, in TCO's judgment, the positions taken by
all Producers before the Claims Mediator and the evidence presented demonstrate
that the total level of allowable Contract Rejection Claims generically
determined does not exceed 1/10th of the $13 plus billion asserted in the
Claims as filed and is likely to be between $600 million and $950 million.
Acceptance of certain positions advanced by TCO on the evidence of record, as
well as TCO's as yet unheard defenses, could decrease substantially this range
of possible aggregate outcomes. Resolution of the contract-specific issues not
yet presented could increase or decrease individual Claims materially but
should not significantly alter the range of possible aggregate outcomes. In
TCO's judgment, the maximum aggregate level of Contract Rejection Claims as
finally allowed should not exceed $1.3 billion in the worst plausible case.
The Plan contemplates Producer-specific settlements of all or mostly all
Contract Rejection Claims and other Producer Claims and assumes aggregate
levels for the ultimate allowances
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(by virtue of settlement or adjudication) of all Producer Claims.
C. PROPOSED SETTLEMENTS OF THE INTERCOMPANY CLAIMS AND THE
PRODUCER CLAIMS
TCO and Columbia believe that the past two and one-half years of
proceedings have sufficiently informed all concerned to permit them to exercise
sound business judgments in favor of settlements liquidating Producer Claims
and resolving the Intercompany Claims in order to permit prompt receipt of
payments by all Creditors without the further expense and other financial
detriments of continued litigation and delay.
The remedies sought in the Intercompany Claims taken at face value would
enlarge the asset values of the Estate available for distribution to its
unaffiliated Creditors by an amount far in excess of the aggregate amount that
TCO believes will be the allowable total of all such Claims. Thus, the maximum
practical benefit to TCO's unaffiliated Creditors of any final adjudication of
the Intercompany Claims in favor of the Estate is primarily a function of the
allowable level of Claims, especially of the Producers' Claims. Final
adjudication of the Intercompany Claims would likely consume at least another
year and, even with the facilitating Estimation Procedures described below,
final quantification of the Producer Claims would likely require an additional
two years.
The Plan provides for the settlement of the Intercompany Claims by the
acceptance of the offer, described below, being made by Columbia to the TCO
Estate. By virtue of its
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incorporation in the Plan, the settlement offer is made directly to TCO's
unaffiliated Creditors as the potential beneficiaries of the Intercompany
Claims.
The fairness of the proposed settlement will be subject to approval by
the Bankruptcy Court, both in TCO's Chapter 11 proceedings and in Columbia's
Chapter 11 proceedings.
In addition, the Plan contemplates specific, individual settlement values
for all or most unliquidated Producer Claims. These proposed consensual
quantifications of Claims for allowance reflect the application of various
assumptions and principles on a consistent basis for all such Claims of a
particular type with considerations of significant Claim-specific issues where
appropriate. Based on these proposed Claims levels, the TCO Plan provides a
high percentage payout on all Allowed Unsecured Claims.
The Plan offers prospective payouts to Producers that provide a
substantial increase over the PSP offered by TCO to Producers in mid-1991 for
the resolutions of outstanding disputes and the buyout of burdensome long-term
gas supply contracts. In light of the information available concerning
industry experience with buyouts and renegotiations of long-term gas supply
contracts (e.g., FERC filings which show a total of $8.2 billion of settlements
and payments in respect of above-market-price commitments of some $44 billion
in the 1985-89 period), TCO believes that the amounts offered to Producers
under the Plan for Contract Rejection Claims exceed what
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Producers could reasonably have expected to have obtained absent bankruptcy
through the negotiation of contract terminations.
Thus, the Plan proposes to make the Producers with Contract Rejection
Claims essentially whole relative to the position they would have been in if
TCO had never filed its Chapter 11 petition. The Plan also provides
substantial compensation for other Producer Claims that compares very favorably
with industry experience of settlements of such Claims in the absence of
bankruptcy.
D. CHALLENGES TO CUSTOMER REFUNDS BY THE TCO CREDITORS' COMMITTEE
Shortly after the commencement of the Reorganization Case, TCO moved the
Bankruptcy Court for permission to honor its obligations under the NGA to flow
through refunds to its Customers received by TCO from upstream pipeline
suppliers. TCO estimates the amounts of such refunds arising prior to the
Petition Date subject to flow through to be approximately $180 million
including interest earned as of June 30, 1994. Of that amount, approximately
$35 million was received pre-petition and approximately $145 million has been
or will be received post-petition.
The Creditors' Committee opposed TCO's motion and asserted that all
Refund Obligations should be treated as Unsecured Claims. The legal issues
raised have now been litigated through the United States Court of Appeals for
the Third Circuit, which affirmed the Bankruptcy Court's conclusions that (i)
flow through Refund Obligations to Customers arising from TCO's
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post-petition refund collections from upstream pipelines must be passed on to
Customers in accordance with the NGA and (ii) flow through Refund Obligations
arising from its pre-petition refund collections must be passed on but only to
the extent of TCO's "lowest intermediate cash balance" (deemed to be a "trust
fund" and calculated at about $3.3 million) in the interval between the
collections and the filing of the Chapter 11 petition. As a result, the
remainder of such obligations with respect to pre-petition collections have the
status of Unsecured Claims. Review of the Third Circuit's determinations is
now being sought from the United States Supreme Court.
The Plan is consistent with the decision of the Third Circuit. The
possibility of Supreme Court review and the consequences of any reversal by
that Court of the decisions of the Third Circuit do not, in TCO's judgment,
justify postponement of consideration of the Plan. The Plan provides for a
distribution of at least 90% on Customers flow through Refund Claims which have
been denied priority by the Third Circuit, as well as for certain other Refund
Claims, provided Customers waive possible recoveries under the Baltimore Gas &
Electric Appeal (described below in Section I.B.7.a, "NGA/FERC Controversies
and their Proposed Resolutions; The Baltimore Gas and Electric Appeal") and
agree not to challenge TCO's recovery from Customers of certain amounts paid to
claimants under the Plan as well as its recoveries of payments made to upstream
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pipelines pursuant to negotiated exit fee arrangements under Order No. 636.
E. PRE-PETITION DISPUTES BETWEEN TCO AND APPALACHIAN
PRODUCERS--"ENTERPRISE ENERGY" LITIGATION
Prior to the filing of its Chapter 11 petition, TCO entered into a
Federal court-approved settlement with members of a class of Appalachian gas
Producers on whose behalf TCO had been sued for alleged improper application of
a pricing provision common to several of its standard forms of Appalachian gas
purchase agreements. This settlement covered alleged liabilities and claims
calculated by TCO to amount to about $115 million for the period 1985 through
1990 and provided for certain changes in these agreements. The first $15
million of the cash consideration for the settlement was paid prior to the
Petition Date, but the final $15 million installment of the agreed-upon
settlement payment remained due and owing on that date. Many of these
Producers have filed Claims on the assumption that the settlement is void
because of nonpayment of this final installment.
In addition, a number of Producers had "opted out" of the class action
prior to settlement and have Filed Claims in the Chapter 11 proceedings based
upon an assumed ruling favorable to them as to the contract interpretation
dispute involved in the class action.
The Plan proposes payment of the remaining installment due on the class
action settlement and settlements with the "opt
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out" Producers in the amounts payable on their claims had they remained members
of the class.
F. IRS CLAIM
The Internal Revenue Service has filed against TCO and Columbia a
priority income tax liability Claim for more than half a billion dollars. An
agreement in principle has been reached to settle this Claim and all other open
issues for tax years 1983-90 (and the net effect of this agreement in principle
was booked in 1993). TCO's portion of this settlement is approximately $137.4
million. The Plan assumes that this settlement will be implemented. A portion
of this amount should operate to reduce future tax liabilities producing a net
cost to TCO of approximately $94.1 million including interest through June 30,
1994.
G. ENVIRONMENTAL LIABILITIES
TCO, like most other pipeline companies, is subject to environmental
liabilities arising from its past operations (as well as the need to incur
further costs to bring all of its operations into compliance with newer
stricter environmental protection standards).
As a Chapter 11 debtor, TCO may require that all of its pre-petition
environmental liabilities and their rankings as Claims against the TCO Estate
be determined in the Bankruptcy Court. Similarly, the costs of TCO's
post-petition compliance with environmental obligations are an expense of the
administration of its Estate and it may require that such costs
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be determined and dealt with as part of its reorganization. However, exercise
of these rights would require lengthy and costly Bankruptcy Court proceedings
and would result in a significant diminution of the recoveries by all Unsecured
Creditors of TCO. Under the Columbia offer on which the TCO Plan is based
these consequences to Creditors are avoided.
7. NGA/FERC CONTROVERSIES AND THEIR PROPOSED RESOLUTIONS
Settlements, as opposed to litigation through final adjudication, of
pipeline/customer disputes arising in FERC proceedings is a common practice in
the gas industry. TCO believes that its status as a Chapter 11 debtor does not
conflict with this industry practice but, instead, makes it even more
appropriate.
A. THE BALTIMORE GAS AND ELECTRIC APPEAL
There is now pending before the United States Court of Appeals for the
District of Columbia an appeal by Customers of a FERC determination that TCO is
entitled to recover from its Customers charges paid by TCO to its upstream
pipeline suppliers amounting to $122 million plus interest. This appeal has
long been pending and, in TCO's judgment, is without merit. As part of a
comprehensive settlement of Customer Claims, the Plan proposes settlement of
all nonpriority flow through Refund Claims and waiver by the Customers of all
Claims which might arise should prosecution of the appeal result in a Court of
Appeals decision requiring further FERC action
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adverse to TCO. See Section I.B.6.d, "Challenges to Customer Refunds by the
TCO Creditors' Committee."
B. TCO'S 1990 RATE CASE SETTLEMENT
(NGA SECTION 4(E))
In 1990, TCO filed with FERC proposed higher rate levels and, as provided
by the NGA, on November 1, 1990 began to collect such higher rates from its
Customers subject to an obligation to refund to them any portion of such higher
collections determined to be in excess of "just and reasonable" rates. The
pre-petition and post-petition collections subject to refund total
approximately $135 million, of which approximately two-thirds relate to
pre-petition periods. A settlement of this rate case has been negotiated and
approved by FERC. If implemented, it would establish TCO's refund obligations
at approximately $58.5 million for the pre- and post-petition periods plus
FERC-prescribed interest to the date of payment. However, this settlement is
conditioned on Bankruptcy Court approval of the payment by TCO of the full
refund, including interest. The Bankruptcy Court is now considering this
proposed settlement and the Plan assumes that it will be approved.
In December 1991, TCO placed into effect proposed rates at a higher level
than provided for in its 1990 filing. This rate filing, which covered entirely
post-petition periods, was subsequently settled. The settlement, and the
payment of the refunds thereunder, has been approved by FERC and the Bankruptcy
Court.
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C. TCO'S ENTITLEMENTS TO RECOVERIES FROM ITS CUSTOMERS
The TCO Plan is conditioned on assurance of specified levels of
recoveries by TCO from its Customers of previously unrecouped gas and non-gas
costs and of costs incurred to terminate its obligations to upstream pipelines.
It is neither predicated nor conditioned on any recovery by TCO from its
Customers of amounts paid to Producers in respect of their Contract Rejection
Claims.
8. VALUATION OF THE TCO ESTATE AND CONSIDERATIONS FOR SETTLEMENT
OF THE INTERCOMPANY CLAIMS
The TCO Plan is based on the mid-point of an estimated range of value, as
of June 30, 1994, for the Estate (exclusive of any settlement value to it of
the Intercompany Claims) of between $3.0 billion and $3.2 billion. This
estimated range of value is predicated on, among other things, the current
business plans and related projections of TCO's management (which assume no
acceleration of TCO's liabilities to public environmental protection agencies).
The TCO Plan is based on an omnibus proposal by Columbia to settle the
Intercompany Claims and to facilitate reorganization consisting of:
(a) satisfaction of the value of its Secured Claims against TCO in
debt and equity securities of TCO;
(b) the cash monetization for the benefit of TCO's other Creditors
of TCO's value in excess of the amount of Columbia's Secured Claims;
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(c) the cash, or, to the extent of $100 million, market value of
Columbia common stock necessary to bring the aggregate distribution to
$3.3 billion; and
(d) avoidance of the delay in and diminution of Creditors'
recoveries from the Estate consequent to (i) a waiver of TCO's right to
impose a Bar Date on most pre-petition Claims against the Estate by
public environmental enforcement agencies, and (ii) the assumption of
such Claims by Reorganized TCO as a wholly owned subsidiary of Columbia.
The sum of these considerations cannot be expressed as a precise dollar amount
but Columbia believes they constitute, in the aggregate, a fair valuation of
the Estate plus a fair settlement of the Intercompany Claims.
C. DISTRIBUTIONS UNDER THE PLAN
Pursuant to the Plan, TCO will propose allowance levels, which may be
proposed settlement levels, for all presently unliquidated or Disputed Claims.
The Plan provides for:
(a) immediate payments in cash in full of all Priority Claims, all
Secured Claims held other than by Columbia, trust fund Claims and
administrative expenses;
(b) satisfaction of Columbia's Secured Claims with restructured debt
securities of Reorganized TCO and retention of its equity;
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(c) immediate cash payment in full of Unsecured Claims of (or
voluntarily reduced to) $50,000 or less;
(d) immediate cash distributions on Unsecured Claims in amounts between
$50,000 and $250,000 (or voluntarily reduced to $250,000) of 95% plus possible
subsequent distributions if required to bring total distributions to parity
with the distributions on larger Unsecured Claims should they exceed 95%;
(e) immediate cash distributions on Claims that give rise to cost
recovery rights by TCO from Customers of 90% plus possible subsequent
distributions if required to bring total distributions to parity with
distributions on other Unsecured Claims should they exceed 90%;
(f) immediate cash distributions (i) on Enterprise Energy Claims, of
the remainder of the amounts due them pursuant to the class action settlement
and (ii) on Claims of those Producers that opted out of the class, of amounts
comparable to what they would have received under such settlement;
(g) immediate cash distributions to Customers (i) of the amounts to
which they are entitled on a priority basis pursuant to the Third Circuit's
decision on the Omnibus FERC Motion and, to the extent not theretofore
distributed, the 1990 Rate Case Settlement and (ii) with respect to the balance
of their Refund Claims, of 90% of the amounts thereof plus possible subsequent
distributions if required to bring total distributions on such nonpriority
Claims to parity with distributions on other Unsecured Claims should they
exceed 90%; and
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(h) cash (or cash and Columbia common stock) distributions on other
Unsecured Claims (including Producer Contract Rejection Claims) upon their
allowance by settlement or adjudication, of amounts estimated by TCO to be
approximately 80% of the contemplated Allowed amounts thereof.
In respect of some of the above Classes of Creditors, the treatments
described above depend on the acceptance of the Plan by the relevant Class.
D. CONDITIONS
Confirmation of the TCO Plan is subject to numerous conditions (all of
which TCO believes can be satisfied or, if appropriate, amended or waived),
including the non-waivable condition that distributions on Claims that are
Allowed as of the Effective Date of the Plan be at least equal to 50% of the
Allowed amounts thereof (which, at Columbia's option, may be achieved by
deferral of distributions on Columbia's and CNR's liquidated Unsecured Claims
against TCO).
E. CONCLUSION
TCO's Plan offers a business solution to the legal quicksand in which the
bankruptcy proceedings have been mired for almost two and one-half years. It
is hoped that the Plan will be acceptable to a requisite majority of Creditors
as a prompt, cost efficient, balanced, and most practical financial solution
for all concerned.
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