<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
/ X / OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 1994
------------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ------ to ------
Commission file number 1-1098
------
THE COLUMBIA GAS SYSTEM, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-1594808
-----------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
20 Montchanin Road, Wilmington, Delaware 19807
--------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (302) 429-5000
--------------
SINCE JULY 31, 1991, THE COLUMBIA GAS SYSTEM, INC. AND ITS
WHOLLY-OWNED SUBSIDIARY, COLUMBIA GAS TRANSMISSION CORPORATION, HAVE BEEN
OPERATING UNDER BANKRUPTCY COURT PROTECTION PURSUANT TO CHAPTER 11 OF THE
FEDERAL BANKRUPTCY CODE.
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
filing requirements for the past 90 days. Yes X No
-------- ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common Stock, $10
Par Value: 50,563,335 shares outstanding at September 30, 1994.
<PAGE> 2
THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 1994
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
- ------ ---------------------
Item 1 Financial Statements
Statements of Consolidated Income 1
Condensed Consolidated Balance Sheets 2
Consolidated Statements of Cash Flows 3
Consolidated Statements of Common Stock Equity 4
Notes 5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
PART II OTHER INFORMATION
- ------- -----------------
Item 1 Legal Proceedings 42
Item 2 Changes in Securities 46
Item 3 Defaults Upon Senior Securities 46
Item 4 Submission of Matters to a Vote of Security Holders 46
Item 5 Other Information 46
Item 6 Exhibits and Reports on Form 8-K 46
Signature 47
</TABLE>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
The Columbia Gas System, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME (unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1994 1993 1994 1993
------ ------ ------ ------
(millions)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Gas sales $ 204.0 $ 426.3 $ 1,469.6 $ 1,917.5
Transportation 131.3 87.0 431.2 297.9
Other 51.2 52.2 163.6 165.6
---------- ---------- --------- ---------
Total Operating Revenues 386.5 565.5 2,064.4 2,381.0
---------- ---------- --------- ---------
OPERATING EXPENSES
Products purchased 32.7 235.7 692.2 1,102.1
Operation 204.2 193.7 655.7 569.1
Maintenance 39.5 47.5 95.3 100.0
Depreciation and depletion 56.6 50.2 191.2 174.3
Other taxes 35.7 35.9 154.4 150.9
Writedown of investment in Columbia LNG Corporation - - - 57.5
---------- ---------- --------- ---------
Total Operating Expenses 368.7 563.0 1,788.8 2,153.9
---------- ---------- --------- ---------
OPERATING INCOME 17.8 2.5 275.6 227.1
---------- ---------- --------- ---------
OTHER INCOME (DEDUCTIONS)
Interest income and other, net 7.3 4.6 33.4 15.4
Interest expense and related charges* (18.7) (74.7) (8.5) (89.6)
Reorganization items, net (32.4) 2.5 (20.1) 5.1
---------- ---------- --------- ---------
Total Other Income (Deductions) (43.8) (67.6) 4.8 (69.1)
---------- ---------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (26.0) (65.1) 280.4 158.0
Income Taxes (11.0) (10.7) 107.4 75.2
---------- ---------- ---------- ---------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (15.0) (54.4) 173.0 82.8
Cumulative effect of change in
accounting for postemployment benefits - - (5.6) -
---------- ---------- ---------- ---------
NET INCOME (LOSS) $ (15.0) $ (54.4) $ 167.4 $ 82.8
========== ========== ========== =========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK
(based on average shares outstanding)
Before accounting change $ (0.30) $ (1.07) $ 3.42 $ 1.64
Change in accounting for postemployment benefits - - (0.11) -
---------- ---------- ---------- ---------
EARNINGS (LOSS) ON COMMON STOCK $ (0.30) $ (1.07) $ 3.31 $ 1.64
========== ========== ========== =========
AVERAGE COMMON SHARES OUTSTANDING (thousands) 50,560 50,559 50,560 50,559
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
* Due to the bankruptcy filings, estimated interest expense of approximately
$58 million and $52 million has not been recorded for the three months
ended September 30, 1994 and 1993, respectively, and approximately $171
million and $165 million has not been recorded for the nine months ended
September 30, 1994 and 1993, respectively (see Note 2 of Notes to
Consolidated Financial Statements).
Reference is made to the accompanying Notes and Management's Discussion and
Analysis for information related to the Chapter 11 bankruptcy filings made by
The Columbia Gas System, Inc., and Columbia Gas Transmission Corporation (a
wholly-owned subsidiary) on July 31, 1991.
1
<PAGE> 4
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of
------------------------------------------
September 30, 1994 December 31, 1993
------------------- -----------------
(unaudited)
ASSETS (millions)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Gas utility and other plant, at original cost $ 6,505.5 $ 6,329.8
Accumulated depreciation and depletion (3,145.0) (3,048.4)
---------- ----------
Net Gas Utility and Other Plant 3,360.5 3,281.4
---------- ----------
Oil and gas producing properties, full cost method 1,252.3 1,208.7
Accumulated depletion (640.2) (600.0)
---------- ----------
Net Oil and Gas Producing Properties 612.1 608.7
---------- ----------
Net Property, Plant and Equipment 3,972.6 3,890.1
---------- ----------
INVESTMENTS AND OTHER ASSETS 312.6 325.2
---------- ----------
CURRENT ASSETS
Cash and temporary cash investments 1,557.0 1,340.4
Accounts receivable, net 385.6 721.4
Inventories 328.1 237.9
Prepayments 79.6 124.6
Other 48.3 63.0
---------- ----------
Total Current Assets 2,398.6 2,487.3
---------- ----------
DEFERRED CHARGES 280.5 255.3
---------- ----------
TOTAL ASSETS $ 6,964.3 $ 6,957.9
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock equity $ 1,394.8 $ 1,227.3
Long-term debt 4.3 4.8
---------- ----------
Total Capitalization 1,399.1 1,232.1
---------- ----------
CURRENT LIABILITIES
Accounts and drafts payable 126.8 184.4
Accrued taxes 69.0 129.5
Estimated rate refunds 156.4 277.8
Estimated supplier obligations 115.9 146.3
Transportation and exchange gas payable 36.9 66.8
Other* 288.9 289.0
---------- ----------
Total Current Liabilities 793.9 1,093.8
---------- ----------
LIABILITIES SUBJECT TO CHAPTER 11 PROCEEDINGS 3,963.1 3,927.8
---------- ----------
OTHER LIABILITIES AND DEFERRED CREDITS
Income taxes, noncurrent 345.1 253.8
Postretirement benefits other than pensions 234.8 230.0
Other 228.3 220.4
---------- ----------
Total Other Liabilities and Deferred Credits 808.2 704.2
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES $ 6,964.3 $ 6,957.9
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
* Due to the bankruptcy filings, estimated accrued interest of approximately
$694 million and $523 million has not been recorded as of September 30,
1994, and December 31, 1993, respectively (see Note 2 of Notes to
Consolidated Financial Statements).
Reference is made to the accompanying Notes and Management's Discussion and
Analysis for information related to the Chapter 11 bankruptcy filings made by
The Columbia Gas System, Inc. and Columbia Gas Transmission Corporation (a
wholly-owned subsidiary) on July 31, 1991.
2
<PAGE> 5
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30
---------------------------
1994 1993
--------- ---------
(millions)
<S> <C> <C>
OPERATIONS
Cash received from customers $ 2,265.1 $ 2,562.4
Other operating cash receipts 153.5 168.4
Cash paid to suppliers (865.9) (1,071.5)
Interest paid (0.3) (0.5)
Income taxes paid (24.9) (86.6)
Other tax payments (171.9) (164.1)
Cash paid to employees and for other employee benefits (407.2) (395.5)
Other operating cash payments (431.5) (308.0)
Reorganization items, net 8.6 2.7
----------- -----------
Net Cash From Operations 525.5 707.3
----------- ----------
INVESTMENT ACTIVITIES
Capital expenditures* (282.3) (226.7)
Other investments - net (4.2) 4.0
----------- ----------
Net Investment Activities (286.5) (222.7)
----------- ----------
FINANCING ACTIVITIES
Retirement of long-term debt (0.9) (0.7)
Increase (decrease) in other financing activities (21.5) 15.1
----------- ----------
Net Financing Activities (22.4) 14.4
----------- ----------
INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS 216.6 499.0
Cash and Temporary Cash Investments at Beginning of Year 1,340.4 820.6
----------- ----------
CASH AND TEMPORARY CASH INVESTMENTS AT SEPTEMBER 30** $ 1,557.0 $ 1,319.6
=========== ==========
NET INCOME RECONCILIATION
Net Income $ 167.4 $ 82.8
Items Not Requiring (Providing) Cash from Operations
Depreciation and depletion 191.2 174.3
Deferred income taxes 79.8 3.2
Amortization of prepayments for producer contract modifications - 19.3
Change in accounting for postemployment benefits 5.6 -
Other - net (30.1) 144.8
Net Change in Working Capital
Accounts receivable, net 335.2 232.3
Inventories (90.2) (36.7)
Accounts and drafts payable (36.1) (70.3)
Estimated rate refunds (106.6) 48.3
Other working capital items 9.3 109.3
---------- ----------
NET CASH FROM OPERATIONS $ 525.5 $ 707.3
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
* Includes amounts transferred from interest paid, cash paid to employees
and for other employee benefits and other operating cash payments.
** The Corporation considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
Reference is made to the accompanying Notes and Management's Discussion and
Analysis for information related to the Chapter 11 bankruptcy filings made by
The Columbia Gas System, Inc. and Columbia Gas Transmission Corporation (a
wholly-owned subsidiary) on July 31, 1991.
3
<PAGE> 6
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMMON STOCK EQUITY
<TABLE>
<CAPTION>
As of
-------------------------------------------
September 30, December 31,
1994 1993
--------------------- ------------------
(unaudited)
(millions)
<S> <C> <C>
COMMON STOCK EQUITY
Common stock, $10 par value, authorized
100,000,000 shares, outstanding 50,563,335
shares and 50,559,225 shares, respectively $ 505.6 $ 505.6
Additional paid in capital 601.9 601.8
Retained earnings 357.3 189.9
Unearned employee compensation (70.0) (70.0)
---------- ----------
TOTAL COMMON STOCK EQUITY $ 1,394.8 $ 1,227.3
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
Reference is made to the accompanying Notes and Management's Discussion and
Analysis for information related to the Chapter 11 bankruptcy filings made by
The Columbia Gas System, Inc. and Columbia Gas Transmission Corporation (a
wholly-owned subsidiary) on July 31, 1991.
4
<PAGE> 7
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
NOTES
1. Basis of Accounting Presentation
On July 31, 1991, The Columbia Gas System, Inc. (Corporation) and its
wholly-owned subsidiary, Columbia Gas Transmission Corporation (Columbia
Transmission), filed separate petitions for protection under Chapter 11 of
the Federal Bankruptcy Code. As a result, the two companies are operating
their businesses as debtors-in-possession (DIP) under the jurisdiction of
the United States Bankruptcy Court for the District of Delaware
(Bankruptcy Court) and cannot engage in transactions outside the ordinary
course of business without Bankruptcy Court approval.
The accompanying consolidated financial statements reflect all adjustments
necessary, in the opinion of management, to present fairly the results of
operations in accordance with generally accepted accounting principles
applicable to a going concern. Such presentation contemplates the
realization of assets and payment of liabilities in the ordinary course of
business. As a result of reorganization proceedings under Chapter 11, the
debtor companies may take, or be required to take, actions which may cause
assets to be realized, or liabilities to be liquidated, for amounts other
than those reflected in the financial statements. The appropriateness of
continuing to present consolidated financial statements on a going concern
basis is dependent upon, among other things, the terms of the ultimate
plan of reorganization and the ability to generate sufficient cash from
operations and financing sources to meet obligations. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts, or the
amounts and classification of liabilities that might be necessary as a
result of the outcome of the uncertainties discussed herein.
The accompanying financial statements should be read in conjunction with
the financial statements and notes thereto included in the Corporation's
1993 Annual Report on Form 10-K and the 1994 First and Second Quarter Form
10-Qs. Income for interim periods may not be indicative of results for
the calendar year due to weather variations and other factors. Certain
reclassifications have been made to the 1993 financial statements to
conform to the 1994 presentation.
2. Bankruptcy Matters
Reorganization Proceedings
Under the Federal Bankruptcy Code, actions by creditors to collect
prepetition indebtedness are stayed and other contractual obligations may
not be enforced against either the Corporation or Columbia Transmission.
As debtors-in-possession, both the Corporation and Columbia Transmission
have the right, subject to Bankruptcy Court approval and certain other
limitations, to assume or reject executory contracts and unexpired leases.
In this context, "rejection" means that the debtor companies are relieved
from their obligations to perform further under the contract or lease but
are
5
<PAGE> 8
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
subject to a claim for damages for the breach thereof. Any damages
resulting from rejection are treated as general unsecured claims in the
reorganization. The parties affected by these rejections have filed or
may file claims with the Bankruptcy Court in accordance with bankruptcy
procedures.
Prepetition claims which were contingent or unliquidated at the
commencement of the Chapter 11 proceedings are generally allowable against
the debtor-in-possession in amounts fixed by the Bankruptcy Court.
Substantially all of a debtor's liabilities as of the petition date are
subject to resolution under a plan of reorganization to be approved by the
Bankruptcy Court after submission to any required vote by affected
parties. Certain parts of Columbia Transmission's filed reorganization
plan and any reorganization plan for the Corporation also will require
approval by the Securities and Exchange Commission (SEC) under the Public
Utility Holding Company Act of 1935.
Intercompany Complaint
On March 19, 1992, the Official Committee of Unsecured Creditors of
Columbia Transmission (Columbia Transmission Creditors' Committee) filed a
complaint (Intercompany Complaint) with the Bankruptcy Court alleging that
the $1.7 billion of Columbia Transmission's secured and unsecured debt
securities held by the Corporation should be recharacterized as capital
contributions (rather than loans) and equitably subordinated to the claims
of Columbia Transmission's other creditors. The Intercompany Complaint
also challenges interest and dividend payments made by Columbia
Transmission to the Corporation of approximately $500 million for the
period from 1988 to the petition date and the 1990 property transfer from
Columbia Transmission to Columbia Natural Resources, Inc. (CNR) as an
alleged "fraudulent transfer". Based on the SEC standardized measurement
procedures, CNR's properties had a reserve value of approximately $387
million as of December 31, 1993, a significant portion of which is
attributable to the transfer from Columbia Transmission. At the request
of the Bankruptcy Court, the trial proceedings for the Intercompany
Complaint were transferred to the U. S. District Court for the District of
Delaware (the District Court). On September 12, 1994, the trial for the
Intercompany Complaint began in the District Court and concluded on
October 25, 1994. Post trial briefs are scheduled to be filed in December
1994, and the judge is expected to render a decision in the first quarter
of 1995.
Management believes that the Intercompany Complaint is without merit;
however, the ultimate outcome of these issues is uncertain at this stage
of the proceedings. As noted under "Columbia Transmission's Proposed Plan
of Reorganization," discussions with the Columbia Transmission Creditors'
Committee with respect to the value of the estate and the matters raised
in the Intercompany Complaint have not been successful. Since the
standing and value of the Corporation's debt investment in Columbia
Transmission are crucial to the determination of the value of the
Corporation's estate, the Corporation's reorganization could be affected
by the ultimate outcome of the Intercompany Complaint.
6
<PAGE> 9
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
Columbia Transmission's Proposed Plan of Reorganization
As discussed in the 1993 Annual Report on Form 10-K, the Corporation's and
Columbia Transmission's discussions with the Columbia Transmission
Creditors' Committee to negotiate a reorganization plan for Columbia
Transmission and expedite emergence from Chapter 11 proceedings had been
largely unsuccessful. Therefore, on January 18, 1994, Columbia
Transmission filed, with the Corporation as cosponsor, a reorganization
plan (plan) and a disclosure statement, for consideration by its creditors
and other interested parties.
The plan provides that Columbia Transmission will remain a wholly-owned
subsidiary of the Corporation, will continue to offer an array of
competitive transportation and storage services, and will retain ownership
of its 18,800-mile pipeline network and related facilities.
Subsequent to the filing of the plan, Columbia Transmission has had
discussions directly with gas producers who have substantial claims
against it. Despite months of negotiations and numerous offers of
settlement, Columbia Transmission has been unable to reach agreement on a
consensual reorganization plan with the Columbia Transmission Creditors'
Committee. Columbia Transmission continues to consider various amendments
to the plan as filed and intends to promulgate amended plan provisions
when it is appropriate to do so.
The Corporation intends to file a plan for its reorganization which will
be consistent with the financial aspects and structure of Columbia
Transmission's proposed plan of reorganization. Both plans will be
subject to obtaining adequate financing and to review and approval
requirements (including authorizations from the SEC) which may require
several months to complete.
Implementation of reorganization plans for Columbia Transmission and the
Corporation, and the levels and timing of distributions to their
creditors, are subject to a number of risk factors which could materially
impact their outcome. Both companies anticipate emerging from bankruptcy
at the same time. The provisions of the reorganization plans of either
Columbia Transmission or the Corporation that are ultimately implemented
could be materially different from the initial plan filed by Columbia
Transmission.
7
<PAGE> 10
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
Prepetition Obligations of Debtor Companies
The accompanying consolidated balance sheet as of September 30, 1994,
includes approximately $4.0 billion of liabilities subject to the Chapter
11 proceedings of the Corporation and Columbia Transmission as follows:
<TABLE>
<CAPTION>
($ in millions)
- ---------------------------------------------------------------------
<S> <C>
Corporation
Total payable (primarily debt obligations) 2,382.2
Less: payable to affiliates 4.9
--------
Payable to nonaffiliates 2,377.3
--------
Columbia Transmission
Total payable 3,789.4
Less: payable to affiliates 2,203.6
--------
Payable to nonaffiliates 1,585.8
- ---------------------------------------------------------------------
Liabilities Subject to Chapter 11 Proceedings 3,963.1
- ---------------------------------------------------------------------
</TABLE>
Columbia Transmission's prepetition obligations include secured and
unsecured debt payable to the Corporation, estimated supplier obligations,
estimated rate refunds, accrued taxes and other trade payables and
liabilities. Prepetition obligations of the Corporation primarily
represent debentures, bank loans and commercial paper outstanding on the
filing date together with accrued interest to that date. A substantial
amount of Columbia Transmission's liabilities subject to Chapter 11
proceedings relate to amounts owed to the Corporation. Columbia
Transmission's borrowings have been funded by the Corporation on a secured
basis since June 1985 and are secured by mortgages and a cash collateral
order approved by the Bankruptcy Court. On the petition date, the
principal amount of the First Mortgage Bonds outstanding was $930.4
million. A secured inventory financing agreement of $410 million was
also outstanding on the petition date. Prepetition and postpetition
interest on secured debt owed by Columbia Transmission to the Corporation
was $450.7 million at September 30, 1994. In addition to these secured
claims, the Corporation has an unsecured claim against Columbia
Transmission of $351 million in installment notes issued prior to 1985 and
accrued interest to the petition date.
Producer Claims Estimation Process
As a result of Columbia Transmission's bankruptcy petition filing in July
1991 and its rejection of more than 4,800 above- market gas purchase
contracts with producers, Columbia Transmission had recorded liabilities
of approximately one billion dollars for estimated contract rejection
costs. In addition, approximately $200 million of take-or-pay and other
miscellaneous producer claims had also been recorded.
In 1992 the Bankruptcy Court approved the appointment of a claims mediator
to implement a claims estimation procedure related to the rejected
above-market producer
8
<PAGE> 11
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
contracts and other producer claims. On October 13, 1994, the claims
mediator issued his Initial Report and Recommendation of the Claims
Mediator on Generic Issues for Natural Gas Contract Claims (Report).
The Report, which is subject to Bankruptcy Court review and approval,
establishes the parameters within which producers must initially
recalculate their contract rejection and take-or-pay claims. The
recalculated claims will then be subject to challenge and audit and
adjustment based upon claim specific issues. The Report generally
validates the assumptions Columbia Transmission used earlier to estimate
the total value of contract rejection claims filed by producers in the
bankruptcy proceedings and clearly rules out most of the methods the
producers utilized to derive grossly and legally improper amounts in
their original claims which amounted to $13 billion.
In management's opinion the $1.3 billion estimate previously reported
still represents the worst plausible case for allowed contract rejection
claims, although it is anticipated that initial recalculations by
producers may well exceed that total. Further, Columbia Transmission does
not believe the Report produces any basis which would cause it to change
the amount it previously recorded for contract rejection (approximately
one billion dollars) given the information currently available to it.
However, following the review of the Report by Columbia Transmission and
its counsel, Columbia Transmission has increased the $200 million reserve
for take-or-pay and other miscellaneous producer claims by approximately
$55 million in the third quarter of 1994. The $55 million reserve
addition is composed of approximately $40 million for disallowance of
recovery of recoupable take-or-pay proposed by the Report and
approximately $15 million of additional prepetition interest on certain
claims.
While the Report uses a lower discount rate than that used by Columbia
Transmission and recognizes certain proved undeveloped reserves, it
directs that calculations of damages be based only on the amount by which
a contract price exceeds a mitigation price and be discounted to a present
value as of the petition date. Not addressed in this report are numerous
contract specific issues that ultimately will be used in the estimation
procedure to determine the allowable level of producer claims. Columbia
Transmission is not able to calculate individual contract rejection claims
at this time because it does not have adequate data for the producers on
the proved undeveloped reserves or on planned gas development projects.
This data will only become available, and subject to challenge and audit,
when the individual producers make their recalculations.
Interest Expense
Interest expense of the Corporation is not being accrued during
bankruptcy, but an estimate is included in a footnote on the Statements of
Consolidated Income and Consolidated Balance Sheets which was calculated
based on an interpretation of the language governing the debt instruments
or other guidelines, such as state laws, exclusive of any redemption
premiums. The Official Committee of Unsecured Creditors of the
Corporation has asserted claims for interest which exceeded calculated
amounts by approximately $40 million at December 31, 1993. There are
several factors to be considered in making these calculations that are
subject to uncertainty as to their ultimate outcome in the bankruptcy
proceeding, including the interest rates and method
9
<PAGE> 12
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
of calculation to be applied to overdue payments of principal and
interest. In addition, the committee has asserted that approximately $110
million of redemption premiums should be paid on the high cost debt
instruments to compensate investors for anticipated lower interest rates
if the debt is refinanced. Amounts disclosed as committee assertions
reflect, in part, interest rate markets in late 1993. Resolution of these
issues will be dependent upon, among other items, interest rates and
market conditions at the time of emergence from bankruptcy.
Accounting for Claims
The resolution of bankruptcy related issues, including producer claims and
the recent decision of the U. S. Court of Appeals for the District of
Columbia Circuit regarding potential customer refunds (see page 11 for
more information), could significantly influence future reported financial
results. Accounting standards require that as claim amounts are allowed
by the Bankruptcy Court, the full amount of the allowed claim must be
recorded. This could result in liabilities being recorded which bear
little relationship to the amounts ultimately required to be paid in
settlement of those claims and could conceivably exceed the Corporation's
total investment in Columbia Transmission. Any such distortion would not
be corrected until final plans of reorganization are approved for the
Corporation and Columbia Transmission.
Security Holder Litigation
After the announcement on June 19, 1991, regarding the Corporation's
probable charge to second quarter earnings and the suspension of its
dividend, 17 complaints including purported class actions were filed
against the Corporation and its directors and certain officers of the
debtor companies in the District Court. The class actions, which
generally allege violations of certain anti-fraud provisions of the
Securities Act of 1933 and the Securities Exchange Act of 1934, have been
consolidated.
On October 31, 1994, the class action plaintiffs filed an amended and
consolidated complaint against the non-debtor defendants in the District
Court essentially alleging the same causes of action as the previously
filed complaints. In addition, these plaintiffs filed a motion for class
certification in both the Bankruptcy Court and the District Court. The
plaintiffs also filed a motion seeking to withdraw the litigation against
the Corporation from the Bankruptcy Court to the District Court. The
suits against the Corporation continue to be stayed by the Bankruptcy
Court filing. On November 1, 1994, the Corporation filed a motion that
seeks to require the individual class action plaintiffs to file
supplementary information with respect to their previously-filed proofs of
claims. Any person not responding would be barred from asserting their
claims pursuant to such procedures.
Also in 1991, three derivative actions were filed in the Court of Chancery
in and for New Castle County (Delaware) alleging that the Corporation's
directors breached their fiduciary duties at that time. These suits have
been stayed by either the Bankruptcy Court filing or by stipulation of the
parties. While the Corporation and its officers and directors believe
that they have meritorious defenses to these actions, the outcome is
uncertain at this time.
10
<PAGE> 13
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
Customer Refunds
Total customer claims in Columbia Transmission's bankruptcy proceedings
relating to, or arising from, Columbia Transmission's contracts with its
customers for sales, transportation, gas storage and similar services and
other miscellaneous claims represent about 450 claims for a total of
approximately $540 million as filed, plus a potentially substantial sum
filed in undetermined amounts. The claims filed in undetermined amounts,
which potentially could be significant, still remain to be resolved.
Columbia Transmission believes it has resolved a portion of these customer
claims due to the payment of certain refunds pursuant to a U.S. Court of
Appeals for the Third Circuit (Third Circuit) decision. On April 21,
1994, Columbia Transmission issued refunds of approximately $139 million
to its customers. The majority of these refunds were for overpayments
Columbia Transmission and its customers previously made to upstream
suppliers under the Federal Energy Regulatory Commission (FERC) Order Nos.
500 and 528 (Order 500/528). Other refund issues underlying customer
claims include prepetition revenues collected subject to refund in general
rate filings, purchased gas adjustment filings, and other upstream
pipeline flowthrough filings.
A significant portion of the customer claims is attributable to the
Baltimore Gas & Electric Co. v. FERC litigation, in which various Columbia
Transmission customers and others have challenged Columbia Transmission's
right to recover Order 500/528 direct charges that were billed to Columbia
Transmission by former upstream pipeline suppliers. On June 24, 1994, the
U. S. Court of Appeals for the District of Columbia Circuit issued its
decision in this case, reversing and remanding earlier FERC rulings that
permitted Columbia Transmission to pass through to its customers all Order
500/528 charges incurred from Columbia Transmission's former pipeline
suppliers which Columbia Transmission estimates to be approximately $125
million (principal). Interest on the $125 million would be approximately
$40 million through the date that Columbia Transmission filed for
bankruptcy protection under Chapter 11. The court ruled that Columbia
Transmission's 1985 Purchased Gas Adjustment Settlement bars the recovery
of some portion of such costs and ordered FERC to investigate the
pipeline charges in question and to disallow the recovery of amounts
attributable to Columbia Transmission's gas purchasing practices prior to
April 1, 1987. In September 1994, Columbia Transmission filed a motion
with FERC asking that it set procedures and hold a hearing to address
issues raised by the court's decision. Certain customers have opposed
this motion and have urged FERC to rule summarily that Columbia
Transmission must refund all amounts previously collected, or in the
alternative, order expedited procedures for determining what refunds
Columbia Transmission owes its customers. Management has commenced
settlement discussions with customers on this issue as well as other
significant rate issues primarily related to FERC Order 636 (Order 636)
transition costs. The accompanying financial statements do not reflect
any reserves for this matter as it is not possible at this time to
determine with any reliability the amount of Columbia Transmission's
refund obligation. Management believes that any amounts ultimately
determined to be due the customers upon conclusion of the required FERC
proceedings are prepetition unsecured claims in the bankruptcy proceedings
and, therefore, are not entitled to payment of postpetition interest.
11
<PAGE> 14
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
Customer Recoupment Rights
During the third and fourth quarters of 1993, various customers of
Columbia Transmission filed motions with the Bankruptcy Court, seeking
authority to exercise alleged recoupment and setoff rights that are
disputed by Columbia Transmission, whereby they would be permitted to
reduce amounts owed to Columbia Transmission for current services against
refunds owed to the customers by Columbia Transmission. These would
include amounts which were not otherwise payable in full under a July 1993
Third Circuit decision, all customer refunds under the 1990 rate case
settlement, and miscellaneous refunds not otherwise payable in full to
them. Columbia Transmission estimates these refund claims to be
approximately $216 million; however, the amount is subject to change as
customers quantify their filed claims. The claims associated with the
Baltimore Gas & Electric v. FERC litigation is also a matter included in
the recoupment and set off motions filed by the customers.
On October 20, 1993, the Bankruptcy Court approved an interim settlement
under which customers continued to pay Columbia Transmission for services
authorized by the FERC at approved rates, and Columbia Transmission has
agreed to grant these customers a priority claim to the extent the
Bankruptcy Court finds them entitled to recoupment rights. In January
1994, the Bankruptcy Court issued a procedural order whereby other
customers were permitted to file recoupment and setoff motions by February
18, 1994. Customers, Columbia Transmission and other interested parties
have filed summary judgment motions and responses on these issues, and
these matters are currently pending before the Bankruptcy Court.
Internal Revenue Service Claim
As reported in the 1993 Annual Report on Form 10-K, a settlement was
negotiated with Internal Revenue Service (IRS) representatives on all of
the issues included in the duplicate claims of $553 million which the IRS
had filed against both debtor companies and the consolidated Columbia Gas
System for tax deficiencies, interest and penalties for the years
1983-1990. The settlement was approved by the Joint Committee on Taxation
of the U. S. Congress on June 30, 1994, and the Bankruptcy Court on
October 12, 1994. The settlement reduced the original claim to
approximately $112 million. The final cost of the settlement is expected
to be about $46 million after taking into consideration certain tax
deductions that become available in subsequent years. The after-tax
impact of the settlement had been previously recorded.
12
<PAGE> 15
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
Financial Information for the Debtor Companies
Below is condensed financial information for the Corporation and Columbia
Transmission as of, and for the nine month period ended September 30,
1994. The prior periods are consistent with the presentation of 1994
information in the consolidated financial statements contained herewith:
<TABLE>
<CAPTION>
Corporation Columbia Transmission
--------------------- ---------------------
As of As of
-------------------------------- ------------------------------
September 30, December 31, September 30, December 31,
($ in millions) 1994 1993 1994 1993
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current assets
Cash and temporary
cash investments 279.6 128.7 1,267.6 1,209.2
Other 162.2 168.7 340.5 461.8
Total current assets 441.8 297.4 1,608.1 1,671.0
Current liabilities (19.6) (19.2) (392.6) (629.6)
----------------------------------------------------------------------------------------------------
Working capital 422.2 278.2 1,215.5 1,041.4
Noncurrent assets 3,563.4 3,476.4 2,263.7 2,269.4
Estimated liabilities subject
to Chapter 11 proceedings (2,382.2) (2,382.2) (3,789.4) (3,649.4)
Noncurrent liabilities (208.6) (145.1) (179.8) (178.6)
----------------------------------------------------------------------------------------------------
NET EQUITY 1,394.8 1,227.3 (490.0) (517.2)
====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended September 30, Ended September 30,
----------------------------------- ------------------------------
($ in millions) 1994 1993 1994 1993
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues - - 536.0 1,189.7
Operating expenses 6.2 5.7 384.3 1,037.4
----------------------------------------------------------------------------------------------------
Operating income (loss) (6.2) (5.7) 151.7 152.3
Other income (deductions) 238.2 144.6 (108.0) (163.3)
Income taxes 64.6 56.1 13.4 5.7
Change in accounting - - (3.1) -
----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 167.4 82.8 27.2 (16.7)
====================================================================================================
NET CASH FROM OPERATIONS 61.2 61.1 138.4 382.9
====================================================================================================
</TABLE>
3. Environmental Matters
As discussed in the 1993 Form 10-K, the Corporation's subsidiaries are
subject to extensive federal, state and local laws and regulations
relating to environmental matters. These laws and regulations require
expenditures for corrective action at various operating facilities,
waste disposal sites and former gas manufacturing sites for conditions
resulting from past practices that subsequently were determined to be
13
<PAGE> 16
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
environmentally unsound. Comprehensive reviews of compliance with
existing environmental standards, including review of operating
activities through site reviews, identification of potential site
problems and formulation of remediation programs are being conducted.
As these self-assessment programs continue, it is likely that
additional compliance costs will be identified and become subject to
reasonable quantification.
As previously reported, in 1992 Columbia Transmission received a
Subpoena and Information Request (Request) from the United States
Environmental Protection Agency (EPA) Region III regarding Columbia
Transmission's past and current environmental practices. In September
1994, Columbia Transmission and the EPA signed agreements that will
give the agency oversight responsibility for an ongoing environmental
remediation program started in 1990 and that impose penalties of $4.9
million on Columbia Transmission for alleged violations regarding the
use and disposal of polychlorinated biphenyls (PCBs). Columbia
Transmission believes that it has meritorious defenses to the alleged
violations, but chose not to pursue lengthy and expensive litigation
of the issues that gave rise to the penalty. Columbia Transmission
also entered into related agreements with the environmental agencies
of Pennsylvania and Kentucky. On October 24, 1994, Columbia
Transmission filed motions with the Bankruptcy Court seeking approval
of the EPA, Pennsylvania and Kentucky agreements.
Columbia Gulf has continued its site characterization studies at
various locations during 1994, and in September 1994 recorded
additional accruals of $10.1 million for environmental matters of
which a portion was recovered in current period revenues. The
additional accruals are for newly discovered PCB and hydrocarbon
contamination at certain compressor station sites and screening for
possible exposure at other locations and for cleanup of various
station sites, pipeline drip sites, and measurement sites. Where the
screenings identify additional exposure, the costs of remediation will
be quantified, and additional accruals may become necessary.
4. Cove Point LNG Facility
As previously reported, a partnership between Columbia LNG Corporation
(Columbia LNG) and a wholly-owned subsidiary of Potomac Electric Power
Company was formed in October 1993. The partnership is pursuing a
business plan to offer a peaking service and to reactivate the Cove
Point Terminal. On November 3, 1993, the partnership filed an
application with FERC to acquire all of the existing plant and
pipeline facilities owned by Columbia LNG, for authorization to
recommission the plant and construct liquefaction facilities and to
charge customers based upon negotiated market rates for the services.
By orders issued July 27, 1994, and September 28, 1994, the FERC
determined that the proposed peaking operation is in the public
interest; however, the proposal to charge customers market based rates
was denied. The September 28, 1994, order, which directed the
partnership to use cost of service based rates, also contained certain
rate base determinations which allowed only a portion of Columbia
LNG's current rate base to be used in the calculation of the cost
based rates. If the project
14
<PAGE> 17
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
proceeds, this action would result in significantly lower projected
revenues for the partnership.
On October 12, 1994, a request for reconsideration of the rate base
issues was filed with FERC.
The recovery of the Corporation's remaining investment in Columbia LNG
of $11.6 million will be dependent upon successful implementation of
the partnership and related business plan.
5. Accounting Change for Postemployment Benefits
Effective January 1, 1994, the Corporation adopted the Financial
Accounting Standards Board's statement SFAS No. 112, "Employers'
Accounting for Postemployment Benefits". This statement requires
employers to recognize obligations which exist to provide benefits to
former or inactive employees after employment, but before retirement.
Such benefits include, but are not limited to, salary continuation,
supplemental unemployment, severance, disability, job training,
counseling, and continuation of benefits such as health care and life
insurance coverage.
The adoption of this statement resulted in an accrual of $14.4 million
of which $5.6 million was deferred by certain of the distribution
subsidiaries as a regulatory asset pending rate recovery authorization
from their respective state commissions. The after-tax effect of the
remainder reduced net income by $5.6 million.
6. Leveraged Employee Stock Ownership Plan (LESOP)
On March 2, 1993, the Trustee for the Indenture, under which
debentures were issued by the Employees Thrift Plan of Columbia Gas
System (Thrift Plan), filed a complaint against the Corporation in the
Bankruptcy Court. The Trustee alleges that matching payments made by
the Corporation to the Thrift Plan should have been allocated to pay
debt service on the outstanding debentures instead of credited to the
employees' accounts.
On March 24, 1994, the Bankruptcy Court denied the Corporation's
motion for summary judgment and on April 22, 1994, the Corporation
filed a motion for leave to appeal the ruling of the Bankruptcy Court
which was granted May 18, 1994. Oral argument in the Corporation's
appeal was held before the U.S. District Court for the District of
Delaware on October 27, 1994. If the Corporation's appeal is denied,
the matter will proceed to trial. The Corporation believes that it
has meritorious defenses to the Indenture Trustee's claims and that
the nonpayment of LESOP debt will not affect the participants'
benefits under the plan.
7. Oil and Gas Producing Properties
Under the full cost method of accounting for oil and gas properties,
all productive and unproductive costs directly identified with
acquisition, exploration, and
15
<PAGE> 18
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
development activities are capitalized in a countrywide cost center.
At September 30, 1994, the capitalized costs exceeded the sum of the
estimated present value of future oil and gas revenues. However,
since that date, oil and gas prices recovered such that the present
value of future revenues exceeded the capitalized costs and,
therefore, no charge to earnings is required.
16
<PAGE> 19
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STATUS OF BANKRUPTCY PROCEEDINGS
A summary of events relating to the bankruptcy proceedings that have occurred
subsequent to the information reported in the 1994 Second Quarter Form 10-Q is
as follows:
Intercompany Complaint
On September 12, 1994, the U.S. District Court for the District of Delaware
(District Court) began trial proceedings for the Intercompany Complaint filed
by Columbia Transmission Creditors' Committee which were concluded on October
25, 1994. (See Note 2, page 6 for a discussion of the Intercompany Complaint.)
Interest on Restricted Investment Accounts
On February 18, 1994, Columbia Transmission filed a petition with FERC seeking
a declaration that Columbia Transmission's interest expense obligations with
respect to restricted investment account (RIA) funds be limited to the interest
income actually earned rather than the higher interest rate prescribed by FERC.
Following a review of protests made by numerous customers, FERC determined that
Columbia Transmission must disburse the RIA funds with interest actually earned
on the RIA funds while in the RIA account which was established in March 1993,
and with interest at the FERC prescribed rate for the period of time before the
RIA was created on any RIA funds Columbia Transmission had in its possession
before being deposited into the RIA. In the second quarter of 1994, Columbia
Transmission recorded additional interest expense of $0.9 million for this
issue. On October 5, 1994, the FERC denied the customers' request for
rehearing of this order.
West Virginia Property Tax Appeal
In February 1992 Columbia Transmission filed a motion in the Bankruptcy Court
for an order authorizing payment of approximately $6.7 million of personal
property taxes assessed by the State of West Virginia as postpetition priority
administrative expenses under the Federal Bankruptcy Code. The Bankruptcy
Court denied the motion finding that the obligation of Columbia Transmission to
pay the taxes arose when it owned and operated the property in 1990, prior to
its July 1991 bankruptcy petition filing. This decision was appealed to the
District Court which affirmed the order of the Bankruptcy Court. The District
Court's decision was appealed by the State of West Virginia Department of Tax
and Revenue and Columbia Transmission to the United States Court of Appeals for
the Third Circuit (Third Circuit) which on October 5, 1994, affirmed the
District Court's ruling that the West Virginia property taxes are not entitled
to administrative expense treatment under the Federal Bankruptcy Code.
Investment Guidelines
In September 1994, the Third Circuit affirmed in part the decision of the
District Court reversing a previous Bankruptcy Court decision on investment
guidelines that would have
17
<PAGE> 20
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
STATUS OF BANKRUPTCY PROCEEDINGS (CONTINUED)
allowed the Corporation and Columbia Transmission to invest their excess cash
in high grade corporate securities as well as government securities. The Third
Circuit held that provisions of the Federal Bankruptcy Code restrict such
investments to securities issued or backed by the U.S. government. Columbia
Transmission and the Corporation have since realigned investments made with
cash accumulated since the bankruptcy petition to comply with the Third Circuit
decision. Since this ruling limits investment opportunities, the amount of
interest which could be earned may be reduced.
Claims Mediator
On October 13, 1994, the Claims Mediator issued his initial report regarding a
uniform methodology for calculating claims for gas purchase contracts Columbia
Transmission rejected after filing for Chapter 11 protection on July 31, 1991.
Columbia Transmission views the initial report as a positive step that will
advance the reorganization process for both Columbia Transmission and the
Corporation. The uniform methodology for calculating producers' claims,
however, is only one step in the claims estimation process. The mediator's
recommendations ultimately must be considered by the Bankruptcy Court and all
producers must recalculate and resubmit their claims based upon the mediator's
methodology. There will also be an opportunity for Columbia Transmission and
others to respond and object to those recalculated claims. (See Note 2, page
8, for a discussion of this issue.)
Internal Revenue Service Claim
On October 12, 1994, the Bankruptcy Court approved a settlement with the
Internal Revenue Service (IRS) that resolves all of the issues included in the
$553 million claim filed by the IRS. (See Note 2, page 12, for a discussion of
this issue.)
Exclusivity Periods
The Corporation and Columbia Transmission filed motions with the Bankruptcy
Court requesting approval to extend the period in which they have exclusive
rights to file and/or amend their Chapter 11 reorganization plans to the
earlier of April 18, 1995, or 90 days following the issuance of the District
Court's decision in the trial proceedings for the Intercompany Complaint (see
Note 2, page 6, for a discussion of this issue). The Columbia Transmission
Creditors' Committee filed a motion with the Bankruptcy Court requesting
termination of Columbia Transmission's exclusivity period. It is expected that
the Bankruptcy Court will hear both motions for the requested extension at its
next scheduled hearing on November 16, 1994.
18
<PAGE> 21
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GAS SALES AND TRANSPORTATION REVENUES
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- --------------------
1994 1993 1994 1993
------ ------- ----- ------
(millions)
<S> <C> <C> <C> <C>
Residential $ 102.2 $ 101.6 $ 861.1 $ 842.0
Commercial 33.8 33.9 333.2 325.6
Industrial 39.5 38.8 146.5 100.7
Wholesale 21.5 246.6 110.2 613.0
Other 7.0 5.4 18.6 36.2
Transportation 131.3 87.0 431.2 297.9
--------- --------- --------- ---------
TOTAL $ 335.3 $ 513.3 $1,900.8 $2,215.4
========= ========= ========= =========
</TABLE>
OPERATING INCOME (LOSS) BY SEGMENT
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- --------------------
1994 1993 1994 1993
------ ------- ----- -----
(millions)
<S> <C> <C> <C> <C>
Oil and Gas $ 4.2 $ 7.0 $ 27.4 $ 38.2
Transmission 42.1 26.1 169.3 107.7*
Distribution (26.9) (20.8) 72.0 90.2
Other Energy 0.7 (7.9) 13.1 (3.3)
Corporate (2.3) (1.9) (6.2) (5.7)
---------- ---------- ----------- ------------
TOTAL $ 17.8 $ 2.5 $ 275.6 $ 227.1
========== ========== =========== ============
</TABLE>
*Includes a $57.5 million writedown in the investment in Columbia LNG
Corporation's Cove Point LNG facility.
19
<PAGE> 22
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
COMPARATIVE GAS OPERATIONS DATA
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- ------------------------
1994 1993 1994 1993
----- ----- ----- ------
<S> <C> <C> <C> <C>
THROUGHPUT (BCF)
- ----------------
SALES
Residential 11.1 11.6 137.4 131.3
Commercial 5.2 5.4 59.6 57.3
Industrial 18.2 16.0 56.7 33.2
Wholesale 19.7 81.5 58.5 223.5
Other 8.5 9.2 25.7 27.8
Intersegment eliminations (8.0) (44.0) (25.7) (85.5)
-------- -------- -------- --------
Total Sales Volumes 54.7 79.7 312.2 387.6
-------- -------- -------- --------
TRANSPORTATION
Market Area
Transmission 150.5 167.7 750.2 596.1
Distribution 52.5 48.5 168.0 160.4
Columbia Gulf
Main-line 136.4 136.8 475.7 425.8
Short-haul 118.6 152.3 438.4 450.2
Intersegment eliminations (241.6) (287.4) (1,032.3) (937.0)
-------- -------- --------- --------
Total Transportation Volumes 216.4 217.9 800.0 695.5
-------- -------- --------- --------
Total Throughput 271.1 297.6 1,112.2 1,083.1
======== ======== ======== ========
SOURCES OF GAS SOLD (BCF)
- -------------------------
Purchased 103.3 179.2 350.4 467.7
Produced 16.4 17.4 49.8 54.6
Exchange 0.2 (3.8) (3.5) (13.4)
Storage withdrawals (injections) (49.7) (58.9) (34.2) (14.3)
Other, net (7.5) (10.2) (24.6) (21.5)
Intersegment eliminations (8.0) (44.0) (25.7) (85.5)
-------- -------- -------- --------
Total 54.7 79.7 312.2 387.6
======== ======== ======== ========
DEGREE DAYS (DISTRIBUTION SERVICE TERRITORY)
- --------------------------------------------
Actual 98 119 3,859 3,597
Normal 41 41 3,568 3,566
% Colder (warmer) than normal 139 190 8 1
% Colder (warmer) than prior period (18) (6) 7 3
</TABLE>
20
<PAGE> 23
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS
THREE MONTHS RESULTS
Net Income (Loss)
For the third quarter of 1994 the Corporation had a net loss of $15 million, or
$0.30 per share, compared to a net loss of $54.4 million, or $1.07 per share in
the same period last year. Both periods contained unusual and bankruptcy
related items as listed below. Absent these items the Corporation had net
income of $9.4 million in the current quarter, an increase of $8.7 million over
last year primarily due to improved results from the transmission segment.
Bankruptcy Related and Unusual Items
After-tax Effect on Net Income
(millions)
<TABLE>
<CAPTION>
Three Months
Ended September 30,
-------------------------
1994 1993
------- -------
<S> <C> <C>
Bankruptcy Related Items:
Estimated interest costs not recorded on prepetition debt $ 37.7 $ 33.8
Professional fees and related expenses (8.4) (7.0)
Producer claim adjustments (35.4) -
Unusual Items:
Impact of transmission rate items (13.7) -
IRS settlement - (40.4)
Environmental reserve addition (2.6) (13.0)
Increased income tax rate to 35% - (9.8)
Employee severance expense (2.0) (8.8)
Miscellaneous other items - (9.9)
------- -------
Total adjustments $(24.4) $(55.1)
======= =======
</TABLE>
Not included in the above adjustments is the after-tax effect of interest
earned on accumulated cash while in Chapter 11 of $11.6 million and $7.1
million, for 1994 and 1993, respectively. Adjusting for interest earned,
combined with the adjustment for estimated interest costs on prepetition debt,
would in the aggregate overstate the effect of interest expense to the extent
the accumulated cash would have been used, in the absence of the Corporation's
bankruptcy, to reduce the amount of debt outstanding.
Operating Income (Loss)
Oil and Gas
The oil and gas segment had operating income of $4.2 million for the three
months ended September 30, 1994, down $2.8 million from the same period last
year. The decline primarily reflects higher depletion expense partially offset
by a third quarter 1993 reserve of $5.4 million for a royalty dispute. Also
contributing to the current period decrease was lower gas production and
prices, both down by 6 percent when compared to last year.
21
<PAGE> 24
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS (CONTINUED)
Transmission
The transmission segment had operating income of $42.1 million, an increase of
$16 million over the third quarter of 1993. This increase primarily results
from decreased environmental reserves of $17.1 million, the effect of prior
period expense associated with contract reformation costs, and an adjustment
this year to a reserve concerning a pricing dispute. These improvements were
tempered by the net impact of several unusual regulatory issues in the current
period. These included a decrease that resulted from a timing change for the
recovery of certain storage service transportation costs and a lower
cost-of-service level currently being collected due to the sale of storage.
Partially offsetting the decrease was the collection this year of certain prior
period gas costs due to Columbia Transmission's 1993 cost of gas meeting
certain competitive tests.
Distribution
The distribution segment had an operating loss of $26.9 million for the three
months ended September 30, 1994, compared to a loss of $20.8 million last year.
The results reflected higher current period operating expenses. The prior
period improvement for the recovery of certain costs associated with the
implementation of Statement of Financial Accounting Standard No. 109
(Accounting for Income Taxes) was offset in income tax expense and, therefore,
had no effect on after-tax income. The increase in operating expenses was
largely due to higher property taxes and depreciation expense and increased
costs associated with programs designed to improve customer services.
Operating results for the distribution segment are expected to improve as new
rates resulting from recent regulatory settlements are put into effect.
Other Energy
Operating income for other energy operations of $0.7 million, increased $8.6
million over last year due largely to the recording of $6.3 million in 1993 for
costs associated with the Columbia Gas System Service Corporation's
re-engineering program, as well as improved results from propane operations and
gas marketing activities.
Other Income (Deductions)
For the quarter ended September 30, 1994, income decreased $43.8 million for
Other Income (Deductions), whereas income was reduced $67.6 million for the
same period last year. The current period includes prepetition interest
expense of $14.9 million for estimated producer claims against Columbia
Transmission based on an initial interpretation of the claims mediator's report
(see Note 2, page 8, for a discussion of this issue). In the prior period
recording the expected terms of the IRS settlement increased expense $63.5
million. Income was also decreased in 1993 for a reserve established for
pipeline partnerships and the writedown of a cogeneration project.
Reorganization Items, Net reduced income $32.4 million due to the recording of
a reserve of approximately $40 million for the principal portion of the
estimated producer claims mentioned above, together with increased
22
<PAGE> 25
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS (CONTINUED)
professional fees and related expenses of $1.8 million. These decreases were
partially offset by higher interest earned of $6.9 million on accumulated cash.
Benefitting both 1994 and 1993 was the impact of not accruing interest expense
on prepetition debt obligations estimated to be $58 million and $52 million,
respectively.
NINE MONTHS RESULTS
Net Income
Net income for the first nine months of 1994 was $167.4 million, or $3.31 per
share, an increase of $84.6 million, or $1.67 per share over the same period in
1993. After adjusting both periods for bankruptcy related and unusual items
net income was $111.7 million and $112.5 million in 1994 and 1993,
respectively. Listed below are the bankruptcy related and unusual items for
both nine month periods.
Bankruptcy Related and Unusual Items
After-tax Effect on Net Income
(millions)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-----------------------
1994 1993
------- -------
<S> <C> <C>
Bankruptcy Related Items:
Estimated interest costs not recorded on prepetition debt $111.2 $107.3
Professional fees and related expenses (21.1) (20.0)
Producer claim adjustments (35.4) -
Unusual Items:
IRS settlement adjustments 10.3 (40.4)
Reserve adjustments for royalty dispute 3.2 (3.5)
Impact of transmission rate items 1.1 5.8
Change in accounting for postemployment benefits (5.6) -
Employee relocation and severance costs (4.1) (9.2)
Environmental reserve additions (3.9) (15.6)
Cove Point LNG facility writedown - (37.9)
Increased income tax rate to 35% - (9.8)
Miscellaneous other unusual items - (6.4)
-------- --------
Total adjustments $ 55.7 $(29.7)
======== ========
</TABLE>
Operating Income (Loss)
Oil and Gas
The oil and gas segment reported operating income of $27.4 million for the
first nine months of 1994, down $10.8 million from last year due primarily to
higher depletion expense resulting from depressed energy prices, partially
offset by the reversal in the current period of a reserve established last year
for a royalty dispute due to a settlement with the Minerals Management Service.
Also depressing 1994 results was lower gas production of 4.8 Bcf, or 9 percent,
and a decline of $1.92 per barrel, or 11 percent for oil and liquids prices in
1994.
23
<PAGE> 26
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS (CONTINUED)
Transmission
Operating income for the transmission segment increased by $61.6 million, to
$169.3 million due largely to the recording of a $57.5 million writedown in the
prior period for the Cove Point LNG facility and the effect of lower reserve
additions for environmental costs as well as an improvement for the full period
effect of increased demand for firm transportation services. These increases
were partially offset by the impact of several unusual regulatory issues
discussed previously.
Distribution
Distribution segment operating income of $72 million reflects a decrease of
$18.2 million from last year primarily due to higher operating expenses
reflecting the costs associated with implementing new customer services under
Order 636, higher gross receipts taxes, increased property taxes and an
increase in depreciation expense. Favorable regulatory settlements reached in
most of Distribution's service territories during 1994 are expected to lead to
improved operating results for this segment.
Other Energy Operations
Other energy operations had operating income of $13.1 million, an increase of
$16.4 million over the prior period due to the 1993 recording of reengineering
costs for the Columbia Gas System Service Corporation and the subsequent
recovery of a portion of these costs in the current period. Also contributing
to the increase was improved margins and sales volumes for propane operations
as well as increased gas marketing activities.
Other Income (Deductions)
Other Income (Deductions) increased income for the first nine months of 1994 by
$4.8 million compared to a decrease to income of $69.1 million last year. In
addition to the effect of the 1993 and 1994 third quarter items mentioned
previously, current period income improved $21 million for the reversal of a
previously recorded reserve for carrying charges related to prior period
exchange activity and a $15.8 million reserve reduction to reflect lower
interest rates for the IRS settlement. Reorganization Items, Net reduced
income $25.2 million from last year reflecting the $40 million reserve for
producer claims mentioned previously and $1.2 million higher professional fees
and related expenses. These decreases were partially offset by $16 million
higher interest on accumulated cash.
Income was improved approximately $171 million in 1994 and $165 million last
year from not accruing interest expense on prepetition debt obligations.
(Since the July 31, 1991 bankruptcy filing, the estimated effect of not
accruing interest expense on prepetition debt obligations totals approximately
$694 million. However, the actual interest that will ultimately be paid
pursuant to the final plans of reorganization could differ significantly and
cannot be determined at this time.)
24
<PAGE> 27
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS (CONTINUED)
Liquidity and Capital Resources
Net cash flow from operations for the first nine months of 1994 decreased
$181.8 million to $525.5 million, due largely to nonaffiliated customer refunds
made under Order 500/528 in April of this year together with the effect of a
prior period improvement for refunds received from certain pipelines. The
effect of eliminating Columbia Transmission's merchant function when it
implemented Order 636, in November 1993, resulted in decreased cash received
from customers for gas sales and also reduced cash needed for supplier
purchases. To meet their gas requirements customers are making increased use
of transportation services which partially offset the impact from the absence
of Columbia Transmission's merchant function. In addition, increased cash
received from customers for the distribution segment due to colder first
quarter weather was more than offset by an increase in payments to suppliers
for the nine months reflecting higher average gas costs. Cash flow was
improved $61.7 million for reduced income tax payments due primarily to lower
projected taxable income in 1994.
On September 15, 1994 the Corporation converted its $100 million
debtor-in-possession borrowing facility to a $25 million letter of credit
facility (DIP Facility) with Chemical Bank (Chemical). The DIP Facility will
expire on December 31, 1995, unless extended by mutual agreement between the
Corporation and Chemical. As of October 31, 1994, $13.7 million of letters of
credit were outstanding under the DIP Facility. It is expected that the
Corporation's liquidity needs can be satisfied by internally generated funds.
As of October 31, 1994, the Corporation and its subsidiaries, excluding
Columbia Transmission, had $232.5 million invested in money market instruments.
The liquidity needs of Columbia Transmission are being satisfied by internally
generated funds. Columbia Transmission also maintains a DIP facility with
Chemical solely for the issuance of letters of credit for up to $25 million.
As of October 31, 1994, the balance of outstanding letters of credit under
Columbia Transmission's DIP facility was $1.8 million. The expiration date of
Columbia Transmission's DIP Facility is December 31, 1995, unless extended by
mutual agreement between Columbia Transmission and Chemical. As of October 31,
1994, Columbia Transmission had $1,219.8 million invested in money market
instruments through a wholly- owned subsidiary, Columbia Transmission
Investment Corporation.
25
<PAGE> 28
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OIL AND GAS OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1994 1993 1994 1993
------ ------ ------ ------
(millions)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Gas $ 35.2 $ 37.9 $ 114.6 $ 121.7
Oil and liquids 14.7 14.2 41.7 44.8
-------- -------- -------- --------
Total Operating Revenues 49.9 52.1 156.3 166.5
-------- -------- -------- --------
OPERATING EXPENSES
Operation and maintenance 21.1 25.0 57.3 65.3
Depreciation and depletion 21.8 18.2 62.6 54.5
Other taxes 2.8 1.9 9.0 8.5
-------- -------- -------- --------
Total Operating Expenses 45.7 45.1 128.9 128.3
-------- -------- -------- --------
OPERATING INCOME $ 4.2 $ 7.0 $ 27.4 $ 38.2
======== ======== ======== ========
GAS PRODUCTION STATISTICS
Production (Bcf) 16.4 17.4 49.8 54.6
Average Price ($/Mcf) 2.04 2.17 2.22 2.23
OIL AND LIQUIDS PRODUCTION STATISTICS
Production (000Bbls) 920 903 2,788 2,658
Average Price ($/Bbl) 15.93 15.68 14.92 16.84
</TABLE>
26
<PAGE> 29
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OPERATIONS (CONTINUED)
OIL AND GAS OPERATIONS (CONTINUED)
Drilling Activities
During the third quarter of 1994, Columbia Gas Development Corporation
(Columbia Development) began drilling operations on 12 wells. Four of these
wells were productive, four were plugged and abandoned, and the remaining four
were still underway at the end of the quarter. During 1994, Columbia
Development has drilled 48 wells (27.7 net). Of these wells, 36 were successful
and two others appear to be productive. In Columbia Development's Austin Chalk
drilling program in central Texas all 30 wells drilled during this year have
been successful.
Columbia Natural Resources participated in the drilling of 40 Appalachian area
development wells during the third quarter of 1994, with a success rate of 83
percent. For the first nine months of 1994, 72 development wells have been
drilled, with an 86 percent success rate. During the current quarter and
year-to-date 1994, Columbia Natural Resources successfully completed 19 and
33.3 net wells, respectively.
Volumes
Gas production decreased by 1 Bcf and 4.8 Bcf in the third quarter and first
nine months of 1994, respectively, reflecting production declines in both the
Appalachian and Southwest areas. The Appalachian gas production decline was due
to reduced deliverability resulting from the replacement and repair of
pipelines and compressor facilities serving various wells. The decline in
Southwest gas production was due to a production problem on an offshore well
during the third quarter and normal production declines in older wells.
Columbia Development's horizontal drilling program continues to increase oil
production which was higher in the third quarter and the first nine months of
1994 over last year by 17,000 barrels and 130,000 barrels, respectively.
Revenues
Reduced gas revenues of $2.7 million and $7.1 million in the current three and
nine month periods was primarily due to the gas production declines. A decline
in average gas prices of 6 percent to $2.04 per Mcf in the third quarter of
1994 also contributed to the decrease in gas revenues in the current period.
The average gas price for the first nine months of 1994 was essentially
unchanged from the prior year.
For the three months ended September 30, 1994, revenues from oil and liquids
increased by $0.5 million from the same period last year to $14.7 million due
to the increase in production while average oil prices were relatively
unchanged. However, oil revenues for the first nine months of 1994 were down
as the impact on revenues of production increases was more than offset by
significantly lower average prices for oil and liquids in 1994.
27
<PAGE> 30
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OPERATIONS (CONTINUED)
OIL AND GAS OPERATIONS (CONTINUED)
Operating Income
For the third quarter of 1994, operating income of $4.2 million was down $2.8
million from last year. The decline reflects an increase in depletion due to
depressed energy prices and lower operating revenues. The impact of these
decreases was partially offset by lower operation and maintenance expense due
primarily to the recording of a $5.4 million reserve associated with a royalty
dispute in the third quarter of 1993.
For the nine-month period ending September 30, 1994, operating income
decreased $10.8 million, to $27.4 million due to higher depletion expense and
lower operating revenues. These changes were partially offset by the combined
effect of the recording of a reserve for the royalty dispute in 1993 and the
subsequent reversal of this reserve in the second quarter of 1994.
28
<PAGE> 31
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- ----------------------
1994 1993 1994 1993
----- ----- ----- -----
(millions)
<S> <C> <C> <C> <C>
NET REVENUES
Sales revenues $ (3.1) $ 372.5 $ 6.3 $ 884.4
Transportation revenues 162.8 89.6 542.8 300.8
Storage revenues 37.1 29.7 108.0 87.9
--------- --------- --------- ---------
Total revenues 196.8 491.8 657.1 1,273.1
Less: Associated cost of gas (8.6) 310.3 (13.5) 688.7
--------- --------- --------- ---------
Net Revenues 205.4 181.5 670.6 584.4
--------- --------- --------- ---------
OPERATING EXPENSES
Operation and maintenance 124.6 115.7 382.0 298.6
Depreciation 26.5 24.5 78.1 73.1
Other taxes 12.2 15.2 41.2 47.5
Writedown of investment in Columbia LNG Corporation - - - 57.5
--------- --------- --------- ---------
Total Operating Expenses 163.3 155.4 501.3 476.7
--------- --------- --------- ---------
OPERATING INCOME $ 42.1 $ 26.1 $ 169.3 $ 107.7
========= ========= ========= =========
THROUGHPUT (BCF)
Transportation
Columbia Transmission
Market area 150.5 167.7 750.2 596.1
Columbia Gulf
Main-line 136.4 136.8 475.7 425.8
Short-haul 118.6 152.3 438.4 450.2
Intrasegment eliminations (177.4) (214.4) (682.6) (673.5)
--------- --------- --------- ---------
Total Transportation 228.1 242.4 981.7 798.6
--------- --------- --------- ---------
Sales 0.2 63.0 0.9 166.3
--------- --------- --------- ---------
Total Throughput 228.3 305.4 982.6 964.9
========= ========= ========= =========
</TABLE>
29
<PAGE> 32
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION OPERATIONS (CONTINUED)
Marketing Initiatives
Columbia Transmission is currently exploring a possible expansion of its
pipeline capacity to serve potential increased firm customer requirements in
its market area, most likely in the 1997-1999 time frame. Other pipelines have
also indicated a desire to expand their systems to serve the same or similar
markets. Discussions to determine the level of interest in an expansion
project by Columbia Transmission are being held with potential customers, as
well as with various pipelines which may be involved in providing related
upstream transportation services. Columbia Transmission expects the magnitude
and timing of the project to be determined over the next few months. Assuming
the market response is positive, Columbia Transmission would anticipate holding
an open season for formal customer subscription to the project sometime in
early 1995.
Columbia Transmission has reached an agreement to provide a Maryland
co-generation facility 23,310 Mcf/day of firm transportation to begin in June
1996 and continue for 25 years. The agreement requires $11 million of new
construction, which will be jointly funded by Columbia Transmission and the
owner of the co-generation facility. Construction is anticipated to begin in
mid-1995.
Regulatory Matters
Order 94
On January 12, 1994, FERC granted requests for rehearing of prior orders
approving settlements between Columbia Transmission and four of its upstream
pipeline suppliers relating to those suppliers' direct billings to Columbia
Transmission of FERC's Order 94 (Order 94) costs in the mid-1980s. On
rehearing the settlements were rejected because they are expressly contingent
upon Columbia Transmission's recovery of the Order 94 settlement payments from
its customers. FERC also reversed its prior rulings and found that Columbia
Transmission's 1985 Purchase Gas Adjustment Settlement essentially bars such
recovery and held that these pipelines are not entitled to bill any Order 94
charges to Columbia Transmission. FERC ordered these upstream pipelines to
refund the principal amounts of all Order 94 collections from Columbia
Transmission, but waived any requirement that these pipelines pay interest on
the refunds. Since Columbia Transmission had been accruing the interest income
on these refunds since 1990, these orders led to a $19.5 million reduction to
interest income in 1993. On October 18, 1994, the FERC essentially denied all
requests for rehearing and ordered the upstream pipeline suppliers to pay
Columbia Transmission interest from the date a stay was issued in February
1994. As a result, in September 1994 Columbia Transmission recorded
approximately $1 million of interest income. This order is subject to appeal
to a Circuit Court of Appeals.
Upstream Pipeline Exit Fee Settlements
Also reported in the 1994 Second Quarter Form 10-Q, FERC approved a settlement
with Tennessee Gas Pipeline Company (Tennessee) in June 1994 that provides for
an exit fee
30
<PAGE> 33
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION OPERATIONS (CONTINUED)
in consideration for Tennessee's substantial reduction of its major
transportation contracts with Columbia Transmission and the termination of
certain other contracts that are no longer necessary for Columbia
Transmission's operations. The payment by Columbia Transmission of $3.9
million in liquidated unpaid prepetition invoice claims and an exit fee of
approximately $37 million was made in October 1994. On September 28, 1994, the
FERC denied requests made by certain customers for rehearing of its order
approving the settlement.
As previously reported, Columbia Transmission entered into settlements with
four additional pipelines which provide for the payment of exit fees which are
now estimated to be approximately $52 million in exchange for contract
terminations. The Bankruptcy Court has approved these settlements, which were
subsequently filed with the FERC for its approval. During the third quarter of
1994, Columbia Transmission continued settlement discussions with two
additional pipelines and reached an agreement with one which provides for an
exit fee of approximately $13 million. These settlements are conditioned upon
Columbia Transmission's recovery of the exit fees through rates.
1990 Rate Case Settlement
Columbia Transmission and Columbia Gulf Transmission Company received approval
from FERC in 1992 for a 1990 rate case settlement despite objections to the
settlement by the Columbia Transmission Creditors' Committee. On August 9,
1994, the Bankruptcy Court denied Columbia Transmission's request for approval
of this settlement. The Bankruptcy Court ruled that the prepetition refund
portion of this settlement is a prepetition unsecured claim and provision for
payment of such claims are to be addressed in a Plan of Reorganization.
Various state agencies have appealed the Bankruptcy Court's order, and these
agencies have also petitioned FERC to require Columbia Transmission to make
refunds in accordance with the settlement.
Environmental Matters
As previously reported, in 1992 Columbia Transmission received a Subpoena and
Information Request (Request) from the EPA Region III regarding three major
environmental statutes: the Toxic Substance Control Act (TSCA), the Resource
Conservation and Recovery Act (RCRA) and the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA). The Request relates to
Columbia Transmission's past and current environmental practices. In September
1994, Columbia Transmission and the EPA signed agreements that will give the
agency oversight responsibility for an ongoing environmental self-assessment
and remediation program Columbia Transmission started in 1990. The agreements
call for the cleanup to be done under CERCLA guidelines and imposes penalties
of $4.9 million for alleged violations regarding the use and disposal of
polychlorinated biphenyls (PCBs). These agreements were submitted to the
Bankruptcy Court for approval. Columbia Transmission believes it has
meritorious defenses to the alleged violations, but chose not to pursue lengthy
and expensive litigation of the issues that gave rise to the penalty. The
environmental reserves reflected
31
<PAGE> 34
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION OPERATIONS (CONTINUED)
in Columbia Transmission's financial statements are adequate to provide for the
cost of the penalty.
Columbia Gulf has continued its site characterization studies at various
locations during 1994, and in September 1994 recorded additional accruals of
$10.1 million for environmental matters of which a portion was recovered in
current period revenues. The additional accruals are for newly discovered PCB
and hydrocarbon contamination at certain compressor station sites and screening
for possible exposure at other locations and for cleanup of various station
sites, pipeline drip sites, and measurement sites. Where the screenings
identify additional exposure, the costs of remediation will be quantified and
additional accruals may become necessary.
Cove Point LNG Facility
As previously reported, a partnership between Columbia LNG Corporation
(Columbia LNG) and a wholly-owned subsidiary of Potomac Electric Power Company
was formed in October 1993. The partnership is pursuing a business plan to
offer a peaking service and to reactivate the Cove Point Terminal. On November
3, 1993, the partnership filed an application with FERC to acquire all of the
existing plant and pipeline facilities owned by Columbia LNG, for authorization
to recommission the plant and construct liquefaction facilities and to charge
customers based upon negotiated market rates for the services.
By orders issued July 27, 1994, and September 28, 1994, the FERC determined
that the proposed peaking operation is in the public interest; however, the
proposal to charge customers market based rates was denied. The September 28,
1994, order, which directed the partnership to use cost of service based rates,
also contained certain rate base determinations which allowed only a portion of
Columbia LNG's current rate base to be used in the calculation of the cost
based rates. If the project proceeds, this action would result in
significantly lower projected revenues for the partnership.
On October 12, 1994, a request for reconsideration of the rate base issues was
filed with FERC.
The recovery of the Corporation's remaining investment in Columbia LNG of $11.6
million will be dependent upon successful implementation of the partnership and
related business plan.
Reengineering Activities
As previously reported, the Corporation initiated a reengineering program in
which the subsidiaries' operations were to be evaluated and the organizational
structures streamlined to improve efficiencies. As part of this process, in
1993 Columbia Transmission and Columbia Gulf established reserves of
approximately $4 million and $1 million, respectively, for the projected cost
of the Reengineering Retention and Release program which was established for
employees whose positions were being eliminated as a result of
32
<PAGE> 35
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION OPERATIONS (CONTINUED)
reengineering. In the third quarter of 1994, the accrual for Columbia
Transmission was increased $3.1 million. The total reserve balance for the
transmission segment for the Reengineering Release and Retention program as of
September 30, 1994, was approximately $4.8 million.
Volumes
Throughput for the three months ended September 30, 1994, decreased 77.1 Bcf
and increased 17.7 Bcf for the first nine months of this year, compared to the
same periods last year. These changes are primarily attributable to a change
in timing for the recognition of market area transportation associated with
storage activity as a result of the implementation by the transmission
companies of Order 636 on November 1, 1993. Customers use transportation
services to place gas purchased from third parties in storage for delivery
during the heating season. The sales volume decrease from the prior periods is
offset by increased transportation services as virtually all former sales
customers of Columbia Transmission have converted their pre-Order 636 sales
service requirements to firm transportation services. Absent the timing
difference discussed above, Columbia Transmission's market area throughput
increased by 3 Bcf for the current quarter and 11 Bcf for the first nine months
of this year.
Net Revenues
Third quarter 1994 net revenues of $205.4 million increased $23.9 million over
the same period last year. Due to the elimination of the merchant function,
certain costs previously included as a cost of gas sold and transportation
expense are now included in operating expense and are no longer reflected in
net revenues. This change had the effect of increasing both net revenues and
operating expense by $40.4 million with no effect on operating income. After
adjusting for the effect of this reclassification, net revenues decreased $16.5
million. The primary reasons for this decrease were a reduction in net
revenues of $16.2 million associated with timing of the recovery of certain
storage service transportation costs which were previously collected more
evenly throughout the year and are now collected on a seasonal basis and a
reduced cost of service recovery of $7.8 million resulting from the
restructuring of Columbia Transmission's services under Order 636. A portion
of the $7.8 million decrease was offset by lower expenses due to the
elimination of Columbia Transmission's merchant function. Compared to the
prior period, these net revenue decreases were partially offset by expenses
associated with contract reformation costs last year of $5.6 million and the
recovery by Columbia Transmission in 1994 of certain previously unrecovered gas
costs under the terms of a 1985 customer settlement.
Net revenues for the nine months ended September 30, 1994, of $670.6 million
reflect an increase of $86.2 million. This increase was primarily due to the
above-mentioned inclusion of certain gas costs and gas transportation expenses
in operating expense which were previously reflected as a purchased gas cost
and transportation expense of $92.6 million. Net revenues decreased $6.4
million if the effects of this reclassification are excluded. Primary reasons
for this decrease include a reduced cost of service recovery level of $23.4
33
<PAGE> 36
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION OPERATIONS (CONTINUED)
million resulting from the restructuring of Columbia Transmission's services
under Order 636, an increase in the prior period for the recording of a reserve
reversal to reflect the terms of a customer settlement of $21.6 million, and
the above-mentioned net revenues associated with the timing of the recovery of
certain storage service transportation costs. These decreases were partially
offset by an increase due to recovery of a portion of the above noted prior
period gas costs and the prior period loss on the sale of storage. Also
improving net revenues by comparison was the favorable full period effect of
increased demand for firm transportation services.
Operating Income
Operating income for the three months ending September 30, 1994, was $42.1
million compared to $26.1 million in the same period last year. The principal
reason for the $16 million improvement was a decrease in environmental reserves
of $17.1 million and an adjustment in the current period to a reserve
concerning a pricing dispute. This effect was partially offset by lower net
revenues (after adjusting for net revenue items mentioned above which do not
impact operating income) of $16.5 million.
Operating income for the nine months ended September 30, 1994, was $169.3
million, compared to $107.7 million in the same period last year. Principal
reasons for the $61.6 million increase included the recording of a $57.5
million writedown in the prior period for the Cove Point LNG facility and the
effect of the 1993 environmental reserve addition mentioned above. These
increases were partially offset by lower net revenues of $6.4 million (after
excluding net revenue items which do not impact operating income).
34
<PAGE> 37
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1994 1993 1994 1993
----- ----- ----- -----
(millions)
<S> <C> <C> <C> <C>
NET REVENUES
Sales revenues $ 143.9 $ 148.7 $1,235.7 $1,219.3
Less: Cost of gas sold 66.3 65.5 780.9 758.0
-------- -------- --------- ---------
Net Sales Revenues 77.6 83.2 454.8 461.3
-------- -------- --------- ---------
Transportation revenues 17.1 14.9 63.7 55.9
Less: Associated gas costs 1.6 1.3 5.4 4.4
-------- -------- --------- ---------
Net Transportation Revenues 15.5 13.6 58.3 51.5
-------- -------- --------- ---------
Net Revenues 93.1 96.8 513.1 512.8
-------- -------- --------- ---------
OPERATING EXPENSES
Operation and maintenance 94.2 94.0 296.0 289.4
Depreciation 6.5 6.0 45.2 42.3
Other taxes 19.3 17.6 99.9 90.9
-------- -------- --------- ---------
Total Operating Expenses 120.0 117.6 441.1 422.6
-------- -------- --------- ---------
OPERATING INCOME (LOSS) $ (26.9) $ (20.8) $ 72.0 $ 90.2
======== ======== ========= =========
THROUGHPUT (BCF)
Sales
Residential 11.1 11.6 137.3 131.3
Commercial 5.2 5.4 59.7 57.2
Industrial and other 1.2 1.3 7.7 10.2
-------- -------- -------- --------
Total Sales 17.5 18.3 204.7 198.7
Transportation 52.5 48.5 168.0 160.4
-------- -------- -------- --------
Total Throughput 70.0 66.8 372.7 359.1
======== ======== ======== ========
SOURCES OF GAS FOR THROUGHPUT (BCF)
Sources of Gas Sold
Spot market* 54.6 26.1 197.1 98.5
Producers 12.0 11.2 48.5 40.2
Pipelines 0.2 38.4 (1.3) 81.1
Storage withdrawals (injections) (49.8) (49.4) (34.3) (9.3)
Other 0.5 (8.0) (5.3) (11.8)
-------- -------- -------- --------
Total Sources of Gas Sold 17.5 18.3 204.7 198.7
Transportation received for delivery to customers 52.5 48.5 168.0 160.4
-------- -------- -------- --------
Total Sources 70.0 66.8 372.7 359.1
======== ======== ======== ========
</TABLE>
* Purchase contracts less than one year.
35
<PAGE> 38
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS (CONTINUED)
Market Conditions
The distribution subsidiaries (Distribution) continues to add about 30,000 net
residential and commercial customers each year. Additions for 1994 are
averaging about 8 percent ahead of the 1993 pace primarily due to new
construction in the central Ohio and Virginia areas. However, the throughput
impact of these new customer additions is offset by a continuing downward trend
in customer usage due to conservation measures and more efficient appliances.
Distribution continues to encounter significant competition, particularly
electric competition, in the residential and commercial markets. In Ohio,
Distribution introduced a water heating program during the current quarter to
counter increased electric competition in this traditionally strong natural gas
market. Distribution provides financing for the initial purchase of water
heating equipment and provides for a maintenance contract. This program will
be expanded to Distribution's other jurisdictions to complement its ongoing
efforts to market a broad array of services to customers.
To augment its core market activities, Distribution continues to target several
developmental markets that hold significant growth potential, primarily gas
cooling, power generation, and natural gas vehicles (NGV).
With the advent of a new generation of cooling equipment, Distribution is
targeting commercial markets that currently are served almost exclusively by
electricity. Gas cooling is environmentally friendly and reduces costly
summertime peak electric consumption with gas demand during times of ample
capacity in the gas industry. Distribution has successfully marketed gas-fired
air conditioning systems to nine large customers in 1994. This marketing
effort is expanding to the residential sector with the recent introduction of a
gas-fired heat pump that is the first commercially available residential
natural gas year-round climate control system in the United States.
In response to the Clean Air Act (CAA) of 1990, many power companies must
either install expensive exhaust scrubbers, or switch to low-sulfur coal or
natural gas. The natural gas fueled processes are more efficient and
environmentally preferable to conventional fossil fuel power plants. In 1994,
Distribution began providing gas service to a power generation facility in
Virginia that will result in approximately one Bcf of additional throughput.
Distribution continues to pursue these attractive off-peak market
opportunities. Although Distribution has several power generation prospects
that may be on line over the next several years, more significant growth is
expected in the latter part of the decade as the new standards included in
Phase II of the CAA amendments go into effect.
Distribution is also aggressively pursuing its NGV marketing activities and is
earmarking approximately $6 million annually in related capital expenditures.
Recent efforts have focused on establishing the fueling infrastructure
throughout Distribution's service areas. It is anticipated that approximately
20 new stations will be operational by the end of the year. Over the next four
years, Distribution anticipates being involved in approximately 140-
36
<PAGE> 39
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS (CONTINUED)
160 new commercial NGV fueling locations with related capital expenditures of
approximately $24 million.
Regulatory Activity
The distribution subsidiaries in Ohio, Kentucky, Maryland, and Pennsylvania
have now successfully completed regulatory settlements in each of their
jurisdictions. All have been approved by the appropriate state commissions.
These settlements will allow Distribution to place new rates in effect which
are designed to generate an additional $71 million in annual revenues.
In late September, the Public Utilities Commission of Ohio approved Columbia
Gas of Ohio, Inc.'s (Columbia of Ohio) settlement that includes the resolution
of a number of service and rate incentive issues and provides for an annual
revenue increase of $47.5 million as well as an experimental weather
normalization adjustment provision discussed in the 1994 Second Quarter Form
10-Q. Columbia of Ohio is also pursuing gas supply management and customer
service incentives through collaborative efforts with its various regulatory
interests.
In Kentucky, the Public Service Commission approved on November 1, 1994,
Columbia Gas of Kentucky, Inc.'s (Columbia of Kentucky) comprehensive
settlement that provides for an increase in annualized revenues of $6 million
effective in November 1994, $2.25 million in October 1995 and $1.5 million in
October 1996. The settlement also includes a provision that precludes Columbia
of Kentucky from filing a new rate case for a three-year period, and provides
for a weather normalization adjustment over this period.
A settlement was also recently approved by the Maryland Public Service
Commission in Columbia Gas of Maryland, Inc.'s expedited rate case. The new
rate levels that were effective November 1, 1994, are designed to generate
$800,000 of additional revenue annually.
As previously reported, the Pennsylvania Public Utilities Commission approved a
$16.6 million rate settlement. In addition, the commission approved, with
modifications, a settlement of Columbia Gas of Pennsylvania, Inc.'s, (Columbia
of Pennsylvania) annual gas cost recovery filing. In the commission's final
order, an incentive program for gas cost procurement was adopted, but it is
anticipated that the Pennsylvania Office of Consumer Advocate will challenge
the legality of the commission's adoption of a gas supply management incentive
mechanism.
Other Postretirement Employee Benefits (OPEB)
Columbia of Kentucky's regulatory settlement discussed above provides for full
recovery of the OPEB obligation existing at January 1, 1993, as well as the
incremental OPEB costs accrued in 1994. However, as a part of the
comprehensive consensual arrangement, Columbia of Kentucky agreed to absorb the
1993 incremental costs which had been
37
<PAGE> 40
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS (CONTINUED)
previously deferred. Columbia of Kentucky will record a pre-tax charge for
OPEB of approximately $875,000 in the fourth quarter of 1994.
With commission approval of the Columbia of Kentucky settlement, Distribution
has obtained commission approved recovery of OPEB costs in all five
jurisdictions. However, as discussed in the 1994 Second Quarter Form 10-Q,
Columbia of Pennsylvania's recovery of incremental OPEB costs might be subject
to question as a result of ongoing litigation involving two other Pennsylvania
utilities.
Gas Supply
In terms of availability and pricing, recent gas supply conditions for the
Distribution companies have been favorable. In addition, for the first time in
many years, Distribution is not working with a host of new FERC rules and
regulations requiring radical changes in its gas supply mix and contracting
policies and procedures. During the first year under FERC's Order 636,
Distribution successfully implemented new gas purchasing strategies and
procedures and, now on the verge of its second winter under Order 636,
Distribution is basically fine-tuning its gas supply management approaches.
Distribution's storage inventories are at target levels as it enters the winter
heating season. Because of its substantial underground storage position,
Distribution, with certain restrictions for flexibility, can either withdraw
gas from storage or purchase flowing gas supplies if transportation capacity is
available. Distribution has obtained firm commitments from multiple sources
for additional gas supplies to be delivered on a firm basis under peak day
design conditions and has secured supplemental peaking services which is a
lower cost alternative than contracting firm capacity on an annual basis to
meet a design peak day. Distribution will also have sufficient firm gas supply
under contract to serve core market demand during a winter that could be over
10 percent colder than normal. If the winter is warmer than normal,
Distribution has the flexibility to control flowing gas supplies to meet
reduced heating markets.
Volumes
Higher industrial demand for transportation services in Ohio and Virginia for
the quarter ended September 30, 1994, led to an increase in throughput of 3.2
Bcf over the same period last year. For the first nine months of 1994, seven
percent colder weather over the same period in 1993, increased industrial
demand and continued customer growth resulted in a 13.6 Bcf increase in
throughput to 372.7 Bcf. Transportation and sales volumes were up 7.6 Bcf and
6 Bcf, respectively. The increase in throughput was mitigated by reduced
residential customer usage due to equipment improvements and conversions along
with reduced deliveries to the power generation market reflecting alternative
fuel price sensitivity and reduced electric demand due to moderate summer
temperatures.
38
<PAGE> 41
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS (CONTINUED)
Net Revenues
Net revenues for the three months ended September 30, 1994 were $93.1 million,
a decrease of $3.7 million from the third quarter of 1993. The net revenue
reduction primarily reflects prior period revenue for the implementation of
Statement of Financial Accounting Standard No. 109 (Accounting for Taxes) that
was offset by income tax expense and, therefore, did not affect after-tax
income. Improved transportation deliveries and favorable rate settlements in
Pennsylvania and Maryland partially offset the overall net revenue reduction.
For the nine months ended September 30, 1994, net revenues of $513.1 million
were essentially unchanged from 1993. The temporary suspension of Columbia Gas
of Ohio's payment plan for low-income customers and various other revenue
adjustments decreased current period net revenues by $9.4 million. Absent
these adjustments, which have no net income impact, net revenues were up $9.7
million primarily reflecting increased throughput and the favorable rate
settlements in Virginia, Maryland and Pennsylvania. Weather normalization rate
adjustments in Ohio and Maryland triggered by colder weather conditions
lessened the impact of increased throughput on current period revenues by $6.6
million.
Operating Income (Loss)
Distribution had an operating loss of $26.9 million for the current quarter
compared to a loss of $20.8 million last year due to lower net revenues and
higher operating expenses of $2.4 million in the current period. The increase
in operating expenses primarily reflects higher property taxes, while operation
and maintenance expense was essentially unchanged as the impact of a prior
period charge associated with plans to streamline the organization was offset
by current period increases in labor costs and customer service improvement
studies.
For the nine months ended September 30, 1994, operating income of $72 million
reflects an $18.2 million decrease from the same period last year due largely
to $18.5 million of higher operating expenses. After adjusting for the effect
of the suspension of the customer low-income payment plan, operating expenses
increased $29.6 million. Increased expenses were primarily due to higher gross
receipts taxes, increased property taxes and added costs associated with
implementing enhancements to compete more effectively in the new operating
environment resulting from Order 636. Depreciation expense increased primarily
due to plant additions. The effect of lower operating income was partially
offset by a $3 million revenue adjustment offset in income tax expense as
previously discussed. Additionally, a unique regulatory arrangement that
permits the capitalization of certain Columbia Gas of Ohio interest charges had
a favorable impact on net income but not operating income. For the nine months
ended September 30, 1994, pre-tax income improved $9.4 million for this issue,
an increase of $3.1 million over the same period last year. It is anticipated
that the recent regulatory settlements and the realization of operating
efficiencies will improve future operating results.
39
<PAGE> 42
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OTHER ENERGY OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- ----------------------
1994 1993 1994 1993
----- ----- ----- -----
(millions)
<S> <C> <C> <C> <C>
NET REVENUES
Gas marketing revenues $ 53.8 $ 51.0 $179.5 $118.3
Less: Products purchased 52.7 50.5 174.7 116.6
------- ------- ------- -------
Net Gas Marketing Revenues 1.1 0.5 4.8 1.7
------- ------- ------- -------
Propane revenues 9.5 8.3 44.7 38.8
Less: Products purchased 5.4 4.6 23.1 20.9
------- ------- ------- -------
Net Propane Revenues 4.1 3.7 21.6 17.9
------- ------- ------- -------
Other Revenues 17.3 24.3 54.0 62.0
------- ------- ------- -------
Net Revenues 22.5 28.5 80.4 81.6
------- ------- ------- -------
OPERATING EXPENSES
Operation and maintenance 18.9 34.0 58.0 76.8
Depreciation and depletion 1.7 1.4 5.2 4.4
Other taxes 1.2 1.0 4.1 3.7
------- ------- ------- -------
Total Operating Expenses 21.8 36.4 67.3 84.9
------- ------- ------- -------
OPERATING INCOME (LOSS) $ 0.7 $ (7.9) $ 13.1 $ (3.3)
======= ======= ======= =======
PROPANE SALES (MILLIONS OF GALLONS)
Retail 9.4 7.1 37.0 31.6
Wholesale and other 0.9 1.5 11.4 8.4
------- ------- ------- -------
Total Propane Sales 10.3 8.6 48.4 40.0
======= ======= ======= =======
</TABLE>
40
<PAGE> 43
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OTHER ENERGY OPERATIONS (CONTINUED)
Market Center
In October 1994, the Corporation opened a natural gas market center in
Pittsburgh. Managed by Columbia Energy Services Corporation (CES), the market
center offers a variety of natural gas supply services for third parties as
well as the Corporation's distribution and pipeline subsidiaries. These
services respond to the changing needs of local utilities, industrial consumers
and others managing gas supply in the new environment generated by Order 636.
In order to offer an additional energy service to its customers, CES intends to
seek the necessary regulatory approvals in 1995 to market electric power. CES
would purchase electric power from electric utilities and cogeneration
facilities and, in turn, sell it to other electric utilities as well as to its
current customers.
Net Revenues
Net revenues for gas marketing activities increased for the three and nine
months ended September 30, 1994 by $0.6 million and $3.1 million, respectively,
resulting from an increase in demand for services. This function also benefits
the Corporation by providing a more comprehensive marketing activity for the
Corporation's gas production and transportation services.
Third quarter net revenues from propane operations increased $0.4 million due
to increased spot sales transactions and a slight increase in margin due to
lower supply costs. A $3.7 million increase in net revenues for the first nine
months of 1994 was primarily due to the colder weather in the first quarter of
this year which resulted in higher sales volumes and margins.
A decline in revenues from professional services provided to affiliated
companies was reflected in the decrease in other revenues for both the current
third quarter and nine month periods of $7 million and $8 million,
respectively, as a result of the reengineering program.
Operating Income (Loss)
Operating income for the third quarter of 1994 was $0.7 million compared to an
operating loss of $7.9 million for the same quarter last year. The decrease in
net revenues of $6 million was more than offset by a $14.6 million reduction in
operating expenses reflecting a $6.3 million reserve recorded in the prior
period related to reengineering costs and the related efficiencies obtained in
the current period.
For the nine months ended September 30, 1994, operating income was $13.1
million compared to an operating loss of $3.3 million for the same period last
year. This increase reflects a $17.6 million decrease in operating expenses
again due to recording reengineering costs and improved efficiencies.
41
<PAGE> 44
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
No new matters have arisen and there have been no material developments in any
legal proceedings reported in Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993, since the filing of the Quarterly Report on Form
10-Q for the quarter ended June 30, 1994, dated August 11, 1994, and the Form
8-K dated September 28, 1994, except as follows:
I. Shareholder Class Actions and Derivative Suits (Unless otherwise noted,
all matters are stayed against the Corporation pursuant to Section 362 of
the Bankruptcy Code)
After the June 19, 1991 announcement of the Corporation's proposed charge
to second quarter earnings and suspension of its dividend, seventeen
complaints including suits purporting to be class actions, or alleging
claims common to the purported class actions, were filed in the U.S.
District Court for the District of Delaware. These actions have been
consolidated under the style In re Columbia Gas Securities Litigation,
Consol. C.A. No. 91-357. The complaints named as defendants, the
Corporation, members of the Corporation's Board of Directors as of June
1991, certain officers, the Corporation's independent public accountants,
and the Corporation's underwriters for its 1990 common stock offering
(the Defendants).
The complaints alleged violations of Sections 11, 12(2) and 15 of the
Securities Act of 1933, Sections 10(b), 20(a) and Rule 10b-5 of the
Securities Exchange Act of 1934, negligent misrepresentations, and common
law fraud and deceit. They generally asserted that the Defendants
publicly made material misleading statements during the relevant class
periods (from February 28, 1990 to June 19, 1991) concerning the
Corporation's financial condition, and failed to disclose material facts
which rendered other statements misleading, thereby artificially
inflating the market price of the Corporation's common stock and publicly
traded debt securities, causing the various plaintiffs and other class
members to purchase such publicly-traded securities at artificially
inflated prices.
On October 31, 1994, the class action plaintiffs filed an amended and
consolidated complaint against the non-debtor defendants in the District
Court essentially alleging the same causes of action as the previously
filed complaints. On October 31, 1994, plaintiffs filed motions with
both the District Court and the Bankruptcy Court for certification of
classes and for withdrawal of reference to the United States District
Court of the actions against individual defendants.
On November 1, 1994, the Corporation filed a Motion in the U.S.
Bankruptcy Court for the District of Delaware seeking to require
individual class action plaintiffs to file information to supplement the
class proofs of claim filed in this litigation. If this procedure is
approved by the Bankruptcy Court, those plaintiffs failing to respond
will be barred from asserting their claims.
Also in 1991, three derivative actions were filed in the Court of
Chancery in and for New Castle County (Delaware) alleging that the
Corporation's directors breached their fiduciary duties at that time.
These suits have been stayed by either the Bankruptcy Court filing or by
stipulation of the parties. While the Corporation and its officers and
directors believe that they have meritorious defenses to these actions,
the outcome is uncertain at this time.
42
<PAGE> 45
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
II. Bankruptcy Matters
A. Matters in the United States Bankruptcy Court for the District of
Delaware
1. The Columbia Gas System, Inc. v. First National Bank of Boston,
C.A. No. 94-230. On March 2, 1993, the Trustee for the Indenture
under which debentures were issued by the Employees Thrift Plan of
Columbia Gas System (Plan) filed a complaint against the
Corporation alleging tortious interference with contract and breach
of duty. The Indenture Trustee alleges that the Corporation is not
acting in accordance with the Plan when it directs the Plan Trustee
to use sums paid by participating employers to match employee
contributions and not to pay debt service on the outstanding
debentures. On May 14, 1993, the Corporation filed a motion for
Summary Judgment challenging the Bank's standing to bring the
action. The appeal of the Bankruptcy Court's denial of the
Corporation's Motion for Summary Judgment is pending before the
U.S. District Court for the District of Delaware. First National
Bank of Boston filed its answering brief on June 15, 1994. The
Corporation's reply brief was filed on June 24, 1994. Oral
argument before the District Court was held on October 27, 1994.
B. Other Bankruptcy Matters in the United States District Court for the
District of Delaware
1. Columbia Gas Transmission Corporation v. The Columbia Gas System,
Inc. and Columbia Natural Resources, Inc., C.A. No. 92-453. In
this action by the Official Committee of Unsecured Creditors of
Columbia Transmission seeking equitable subordination of secured
debt held by the Corporation and challenging certain pre-petition
transfers, trial began September 12, 1994 and concluded on October
25, 1994. Parties are to submit proposed conclusions of fact by
November 18 and proposed conclusions of law by December 5, 1994. A
decision is expected in the first quarter of 1995.
C. Appeal to the United States Court of Appeals for the Third Circuit
1. The Columbia Gas System, Inc. and Columbia Gas Transmission v. U.S.
Trustee, No. 93-7609. On August 29, 1994, the U.S. Court of
Appeals for the Third Circuit affirmed in part, and remanded for
further proceedings, the District Court's order adopting the
Magistrate's Report and Recommendation to vacate the U.S.
Bankruptcy Court's July 31, 1993 order approving certain investment
guidelines for both the Corporation and Columbia Transmission. The
Third Circuit's decision limits investments of cash by the debtors
to securities issued or backed by the U.S. Government in strict
compliance with Section 345(b) of the U.S. Bankruptcy Code.
III. Southwest Producer Litigation
A. Columbia Gas Transmission Corporation v. New Ulm Gas, Ltd., C.A. No.
01-92-01133-CV (U.S. Court of Appeals, 1st District of Texas). On
July 28, 1994, the Court of Appeals reversed and remanded the trial
Court's judgment which had ordered Columbia Transmission to pay
$5,690,755 for actual damages, prejudgment
43
<PAGE> 46
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
interest and attorneys' fees. On August 12, 1994, Columbia
Transmission and New Ulm sought rehearing of the judgment of the
Court of Appeals. Both motions were denied in October.
IV. Regulatory Matters
A. Take-or-Pay and Contract Reformation Costs Billed by Pipeline
Suppliers
1. Columbia Gas Transmission Corp., FERC Dkt. No. RP91-41. On June
24, 1994 the Court of Appeals reversed the FERC's finding that the
1985 PGA Settlement did not bar Columbia Transmission's recovery of
any of the upstream pipeline Order Nos. 500/528 costs and remanded
the case to the FERC for a determination of which of such charges
relate to Columbia Transmission's purchasing decisions prior to
April 1, 1987. On September 16, 1994, Columbia Transmission filed
with the FERC a motion for an order governing proceedings on
remand.
On October 11, 1994, the Joint Intervenors filed a response to the
September 16, 1994 motion and moved for entry of an order requiring
immediate refund of all the disputed amounts and for summary
disposition of the issues remanded by the Court of Appeals. On
October 26, 1994, Columbia Transmission filed its response to the
Joint Intervenors.
B. Pipeline Exit Fees
1. Columbia Gas Transmission Corporation, et al., Docket No. RP94-113.
In this docket, a joint petition was filed by Columbia Transmission
and Tennessee to resolve outstanding bankruptcy issues and
contractual matters, including the payment by Columbia Transmission
of a $42 million exit fee to Tennessee. On July 29, 1994 various
customers of Columbia Transmission and Tennessee and other parties
filed requests for rehearing of the June 30, 1994 order approving
the settlement. On September 28, 1994, the FERC issued an order
denying requests for rehearing of the June 30, 1994 order in all
material respects. The rehearing request of Cabot Oil and Gas
Corporation and Independent Oil and Gas Association was granted to
condition abandonment of the Project Penny Exchange Agreement upon
replacement service agreements being executed between the producers
and Tennessee. On October 28, 1994, a report was filed with the
FERC advising that an agreement in principal had been reached
regarding replacement of the Project Penny Agreement. A request
for rehearing of the September 28, 1994 order was filed by UGI
Corp. on October 28, 1994.
2. Columbia Gas Transmission Corporation, Dockets No. RP94-315, 316,
317 and 318. In these dockets, Columbia Transmission filed
petitions to approve settlements terminating contracts with certain
pipelines that are no longer needed by Columbia Transmission and to
resolve outstanding bankruptcy issues by, inter alia, the payment
by Columbia Transmission of exit fees to Wyoming Interstate Company
(WIC), Trailblazer Pipeline, Natural Gas Pipeline Company and
Transcontinental Gas Pipeline. All four settlements have been
approved by the Bankruptcy Court. On August 2, 1994, various
customers of Columbia Transmission commented in
44
<PAGE> 47
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
protest to the settlements, and Columbia Transmission filed reply
comments on August 12, 1994. The settlements are presently pending
before the FERC.
V. Other
A. Minerals Management Service (MMS). Both MMS matters have been settled
for $288,000 in principal and approximately $230,000 in interest. MMS
will issue letters indicating Columbia Development is in substantial
compliance with both audits and audit closure letters.
VI. Environmental
A. Commonwealth Gas Services/Virginia Department of Environmental
Quality. Commonwealth is negotiating a Memorandum of Agreement for
the voluntary remediation of the Petersburg Manufactured Gas Plant
site with the Virginia Department of Environmental Quality.
B. In Re: Marcor Environmental, Inc. v. Columbia Gas Transmission
Corporation. On September 30, 1994, the U.S. EPA Region III issued a
complaint and notice of opportunity for hearing against Marcor
Environmental and Columbia Transmission for violations of the Clean
Air Act arising from the removal of asbestos at Lanham Compressor
Station at Lanham, West Virginia in 1993. The complaint which seeks a
penalty of $162,500 alleges a failure of Marcor to adequately wet the
asbestos material and to ensure it remained wet pending disposal.
Columbia Transmission filed its answer to the complaint and a motion
to dismiss on November 4, 1994.
45
<PAGE> 48
PART II - OTHER INFORMATION
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
As of September 30, 1994, there were $1,349.8 million of the
Corporation's senior securities in default as a result of the
Chapter 11 filing. In addition, at the end of the 1994 third
quarter $488.9 million of short-term indebtedness was also in
default for nonpayment.
Item 4. Submission of Matters to Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
(11) Statement re Computation of Per Share Earnings, a copy
of which is attached hereto as PART II, EXHIBIT 11, pursuant
to Regulation 229.601(b)(11).
(12) Statements of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends, a copy of which is attached
hereto as PART II, EXHIBIT 12, pursuant to Regulation
229.601(b)(12).
(27) Financial Data Schedule, a copy of which is attached
hereto as PART II, EXHIBIT 27, pursuant to Regulation
229.601(b)(27).
b. Reports on Form 8-K
The following reports on Form 8-K were not previously
reported.
<TABLE>
<CAPTION>
Financial
Item Statements
Reported Included Date Filed
-------- ---------- ----------
<S> <C> <C>
5 No June 21, 1994
5 No August 30, 1994
5 No September 28, 1994
5 No October 5, 1994
5 No October 13, 1994
5 No November 4, 1994
</TABLE>
46
<PAGE> 49
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
The Columbia Gas System, Inc.
-----------------------------------
(Registrant)
Date: November 10, 1994 By: /s/ R. E. Lowe
-------------------------------
R. E. Lowe
Vice President, Controller and
Chief Accounting Officer
47
<PAGE> 1
Exhibit 11
THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES
Statements Re Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------- ----------------
1994 1993 1994 1993
------ ------ ------ ------
Computation for Statements of Consolidated
- ------------------------------------------
Income ($ in millions)
- ----------------------
<S> <C> <C> <C> <C>
Income (loss) before cumulative effect of accounting change . . . . (15.0) (54.4) 173.0 82.8
Cumulative effect of change
in accounting for postemployment benefits . . . . . . . . . . . - - (5.6) -
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . (15.0) (54.4) 167.4 82.8
- ------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share of common stock
(based on average shares outstanding) ($)
Before cumulative effect of accounting change . . . . . . . . . . (0.30) (1.07) 3.42 1.64
Cumulative effect of accounting change . . . . . . . . . . . . . . - - (0.11) -
- ------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) on common stock . . . . . . . . . . . . . . . . . . (0.30) (1.07) 3.31 1.64
=============================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------
Additional computation of average common
shares outstanding (thousands) (NOTE)
- -----------------------------------------------------------------------------------------------------------------------------
Average shares of common stock outstanding . . . . . . . . . . . . 50,560 50,559 50,560 50,559
Incremental common shares applicable to
common stock based on the common stock
daily average market price:
Applicable to contingent stock awards . . . . . . . . . . . . . . - 4 - 4
- -----------------------------------------------------------------------------------------------------------------------------
Average common shares as adjusted . . . . . . . . . . . . . . . . . 50,560 50,563 50,560 50,563
=============================================================================================================================
Average shares of common stock outstanding . . . . . . . . . . . . 50,560 50,559 50,560 50,559
Incremental common shares applicable to
common stock based on the more dilutive
of the common stock ending or daily average
market price during the year:
Applicable to contingent stock awards . . . . . . . . . . . . . . - 4 - 4
- -----------------------------------------------------------------------------------------------------------------------------
Average common shares assuming full dilution . . . . . . . . . . . 50,560 50,563 50,560 50,563
=============================================================================================================================
Earnings (loss) per share of common stock
as adjusted:
Before cumulative effect of accounting change . . . . . . . . . . (0.30) (1.07) 3.42 1.64
Cumulative effect of accounting change . . . . . . . . . . . . . . - - (0.11) -
- -----------------------------------------------------------------------------------------------------------------------------
Average common shares as adjusted ($) . . . . . . . . . . . . . . . (0.30) (1.07) 3.31 1.64
=============================================================================================================================
Earnings (loss) per common shares assuming full
dilution:
Before cumulative effect of accounting change . . . . . . . . . . (0.30) (1.07) 3.42 1.64
Cumulative effect of accounting change . . . . . . . . . . . . . . - - (0.11) -
- -----------------------------------------------------------------------------------------------------------------------------
Average common shares assuming full dilution ($) . . . . . . . . . (0.30) (1.07) 3.31 1.64
=============================================================================================================================
</TABLE>
NOTE These calculations are submitted in accordance with the Securities
Exchange Act of 1934 Release No. 9083 although not required by
footnote 2 to paragraph 14 of Accounting Principles Opinion No. 15
because they result in dilution of less than 3%.
48
<PAGE> 1
Exhibit 12
THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Statements of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
------------------------------------------------------------------------------
($ in millions)
Twelve Months Twelve Months
Ended September 30, Ended December 31,
----------------------------- -------------------------------
1994 1993 1993 1992
---- ---- ---- ----
<S> <C> <C> <C> <C>
Consolidated Income (Loss) from Continuing Operations
before Income Taxes and Extraordinary Charges . . . . . . . . 410.5 314.3 288.1 161.4
Adjustments:
Interest during construction . . . . . . . . . . . . . . . - - - -
Distributed (Undistributed) equity income . . . . . . . . . (1.4) - (0.1) (0.1)
Fixed charges . . . . . . . . . . . . . . . . . . . . . . 20.5 85.9 101.5 13.7
--------- --------- -------- ---------
Earnings Available . . . . . . . . . . . . . . . . . . . 429.6 400.2 389.5 175.0
--------- --------- -------- ---------
Fixed Charges:
Interest on long-term and short-term debt . . . . . . . . . 0.7 4.0 3.1 4.9
Other interest . . . . . . . . . . . . . . . . . . . . . . 19.8 81.9 98.4 8.8
--------- --------- -------- ---------
Total Fixed Charges before Adjustments*,** . . . . . . . 20.5 85.9 101.5 13.7
--------- --------- -------- ---------
Adjustments:
Gain/(Loss) on reacquired debt . . . . . . . . . . . . . . - - - -
--------- --------- -------- --------
Total Fixed Charges . . . . . . . . . . . . . . . . . . . 20.5 85.9 101.5 13.7
--------- --------- -------- --------
Ratio of Earnings Before Taxes to Fixed Charges . . . . . . . 20.96 4.66 3.84 12.77
========= ========= ======== ========
<CAPTION>
Twelve Months
Ended December 31,
-----------------------------------------------
1991 1990 1989
---- ---- ----
<S> <C> <C> <C>
Consolidated Income (Loss) from Continuing Operations
before Income Taxes and Extraordinary Charges . . . . . . . . (1,205.8) 162.6 215.1
Adjustments:
Interest during construction . . . . . . . . . . . . . . . (3.4) (10.0) (4.0)
Distributed (Undistributed) equity income . . . . . . . . . (2.4) 2.9 (3.2)
Fixed charges . . . . . . . . . . . . . . . . . . . . . . 139.9 182.5 208.8
--------- --------- ---------
Earnings Available . . . . . . . . . . . . . . . . . . . (1,071.7) 338.0 416.7
--------- --------- ---------
Fixed Charges:
Interest on long-term and short-term debt . . . . . . . . . 112.4 170.6 159.7
Other interest . . . . . . . . . . . . . . . . . . . . . . 27.6 10.5 48.0
--------- --------- ---------
Total Fixed Charges before Adjustments*,** . . . . . . . 140.0 181.1 207.7
--------- --------- ---------
Adjustments:
Gain/(Loss) on reacquired debt . . . . . . . . . . . . . . (0.1) 1.4 1.1
--------- --------- --------
Total Fixed Charges . . . . . . . . . . . . . . . . . . . 139.9 182.5 208.8
--------- --------- ---------
Ratio of Earnings Before Taxes to Fixed Charges . . . . . . . N/A(a) 1.85 2.00
========= ========= =========
</TABLE>
(a) To achieve a one-to-one coverage, the Corporation would need an
additional $1,211.6 million of earnings.
* This amount excludes approximately $218 million of estimated interest
expense not recorded in the twelve months ended September 30, 1994,
$222 million of estimated interest expense not recorded in the twelve
months ended September 30, 1993, $212 million, $225 million and $86
million of estimated interest expense not recorded for 1993, 1992 and
1991. Reference is made to the Statements of Consolidated Income for
the quarterly period ended September 30, 1994, as reported in Form
10-Q and to Note 2 of Notes to Consolidated Financial Statements of
the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993.
** This amount excludes $8.6 million and $8.6 million of interest
expense not recorded with respect to the registrant's guarantee of
LESOP Trust's debentures for the twelve months ended September 30,
1994 and September 30, 1993, respectively. Also excluded are $8.6
million, $8.6 million, $8.8 million and $6.7 million of interest
expense not recorded with respect to the registrant's guarantee of
LESOP Trust's debentures for the twelve months ended December 31,
1993, 1992, 1991 and 1990, respectively. See Note 9 of the Notes to
Consolidated Financial Statements of the Corporation's Annual Report
to Shareholders.
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