<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 June 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
--------------
ON JULY 31, 1991, THE COLUMBIA GAS SYSTEM, INC. AND ITS
WHOLLY-OWNED SUBSIDIARY, COLUMBIA GAS TRANSMISSION CORPORATION, FILED SEPARATE
PETITIONS SEEKING PROTECTION UNDER 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: 50,559,225 shares outstanding at June 30, 1994.
<PAGE> 2
THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 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 16
PART II OTHER INFORMATION
- - ------- -----------------
Item 1 Legal Proceedings 44
Item 2 Changes in Securities 47
Item 3 Defaults Upon Senior Securities 47
Item 4 Submission of Matters to a Vote of Security Holders 47
Item 5 Other Information 47
Item 6 Exhibits and Reports on Form 8-K 47
Signature 48
</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 Six Months
Ended June 30, Ended June 30,
------------------- -------------------
1994 1993 1994 1993
------ ------ ------ ------
(millions)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Gas sales $ 359.0 $ 440.6 $ 1,265.6 $ 1,491.2
Transportation 114.3 100.9 299.9 210.9
Other 47.2 51.4 112.4 113.4
---------- ---------- --------- ---------
Total Operating Revenues 520.5 592.9 1,677.9 1,815.5
---------- ---------- --------- ---------
OPERATING EXPENSES
Products purchased 137.7 223.9 659.5 866.4
Operation 209.2 181.7 451.5 375.4
Maintenance 30.5 27.5 55.8 52.5
Depreciation and depletion 59.8 53.8 134.6 124.1
Other taxes 46.2 47.0 118.7 115.0
Writedown of investment in Columbia LNG Corporation - 57.5 - 57.5
---------- ---------- --------- ---------
Total Operating Expenses 483.4 591.4 1,420.1 1,590.9
---------- ---------- --------- ---------
OPERATING INCOME 37.1 1.5 257.8 224.6
---------- ---------- --------- ---------
OTHER INCOME (DEDUCTIONS)
Interest income and other, net 38.0 7.9 26.1 10.8
Interest expense and related charges* (6.6) (9.9) 10.2 (14.9)
Reorganization items, net 8.3 1.7 12.3 2.6
---------- ---------- --------- ---------
Total Other Income (Deductions) 39.7 (0.3) 48.6 (1.5)
---------- ---------- --------- ---------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 76.8 1.2 306.4 223.1
Income Taxes 29.0 3.8 118.4 85.9
---------- ---------- ---------- ---------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 47.8 (2.6) 188.0 137.2
Cumulative effect of change in
accounting for postemployment benefits - - (5.6) -
---------- ---------- ---------- ---------
NET INCOME (LOSS) $ 47.8 $ (2.6) $ 182.4 $ 137.2
========== ========== ========== =========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK
(based on average shares outstanding)
Before accounting change $ 0.95 $ (0.06) $ 3.72 $ 2.71
Change in accounting for postemployment benefits - - (0.11) -
---------- ---------- ---------- ---------
EARNINGS (LOSS) ON COMMON STOCK $ 0.95 $ (0.06) $ 3.61 $ 2.71
========== ========== ========== =========
AVERAGE COMMON SHARES OUTSTANDING (thousands) 50,559 50,559 50,559 50,559
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
*Due to the bankruptcy filings, interest expense of approximately $58 million
and $55 million has not been recorded for the three months ended June 30, 1994
and 1993, respectively, and approximately $113 million has not been recorded
for both six-month periods ended June 30, 1994, and 1993.
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
------------------------------------------
June 30, 1994 December 31, 1993
------------------- -----------------
(unaudited)
ASSETS (millions)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Gas utility and other plant, at original cost $ 6,425.1 $ 6,329.8
Accumulated depreciation and depletion (3,123.5) (3,048.4)
---------- ----------
Net Gas Utility and Other Plant 3,301.6 3,281.4
---------- ----------
Oil and gas producing properties, full cost method 1,229.8 1,208.7
Accumulated depletion (625.7) (600.0)
---------- ----------
Net Oil and Gas Producing Properties 604.1 608.7
---------- ----------
Net Property, Plant and Equipment 3,905.7 3,890.1
---------- ----------
INVESTMENTS AND OTHER ASSETS 331.4 325.2
---------- ----------
CURRENT ASSETS
Cash and temporary cash investments 1,693.7 1,340.4
Accounts receivable, net 513.6 721.4
Inventories 201.4 237.9
Prepayments 93.9 124.6
Other 17.3 63.0
---------- ----------
Total Current Assets 2,519.9 2,487.3
---------- ----------
DEFERRED CHARGES 281.6 255.3
---------- ----------
TOTAL ASSETS $ 7,038.6 $ 6,957.9
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock equity $ 1,409.7 $ 1,227.3
Long-term debt 4.5 4.8
---------- ----------
Total Capitalization 1,414.2 1,232.1
---------- ----------
CURRENT LIABILITIES
Accounts and drafts payable 161.1 184.4
Accrued taxes 120.5 129.5
Estimated rate refunds 161.7 277.8
Estimated supplier obligations 129.2 146.3
Transportation and exchange gas payable 55.2 66.8
Other* 301.0 289.0
---------- ----------
Total Current Liabilities 928.7 1,093.8
---------- ----------
LIABILITIES SUBJECT TO CHAPTER 11 PROCEEDINGS 3,913.3 3,927.8
---------- ----------
OTHER LIABILITIES AND DEFERRED CREDITS
Income taxes, noncurrent 314.9 253.8
Postretirement benefits other than pensions 234.6 230.0
Other 232.9 220.4
---------- ----------
Total Other Liabilities and Deferred Credits 782.4 704.2
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES $ 7,038.6 $ 6,957.9
========== ==========
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
*Due to the bankruptcy filings, accrued interest of approximately $636 million
and $523 million has not been recorded as of June 30, 1994 and December 31,
1993, respectively.
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>
Six Months
Ended June 30
--------------------------
1994 1993
--------- ---------
(millions)
<S> <C> <C>
OPERATIONS
Cash received from customers $ 1,769.7 $ 1,924.8
Other operating cash receipts 103.3 123.6
Cash paid to suppliers (613.2) (728.7)
Interest paid (0.2) (0.4)
Income taxes paid (23.5) (76.7)
Other tax payments (130.3) (122.3)
Cash paid to employees and for other employee benefits (277.1) (271.5)
Other operating cash payments (304.7) (205.6)
Reorganization items, net 6.2 3.2
---------- -----------
Net Cash From Operations 530.2 646.4
---------- ----------
INVESTMENT ACTIVITIES
Capital expenditures* (165.6) (132.6)
Other investments - net (0.1) 2.1
---------- ----------
Net Investment Activities (165.7) (130.5)
---------- ----------
FINANCING ACTIVITIES
Retirement of long-term debt (0.5) (0.5)
Increase (decrease) in other financing activities (10.7) 5.9
----------- ----------
Net Financing Activities (11.2) 5.4
----------- ----------
INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS 353.3 521.3
Cash and Temporary Cash Investments at Beginning of Year 1,340.4 820.6
---------- ----------
CASH AND TEMPORARY CASH INVESTMENTS AT JUNE 30** $ 1,693.7 $ 1,341.9
========== ==========
NET INCOME RECONCILIATION
Net Income $ 182.4 $ 137.2
Items Not Requiring (Providing) Cash from Operations
Depreciation and depletion 134.6 124.1
Deferred income taxes 67.3 7.1
Amortization of prepayments for producer contract modifications - 11.4
Change in accounting for postemployment benefits 5.6 -
Other - net (32.4) 62.9
Net Change in Working Capital
Accounts receivable, net 181.0 181.0
Inventories 36.5 119.7
Accounts and drafts payable (12.6) (70.8)
Estimated rate refunds (121.7) 23.5
Other working capital items 89.5 50.3
---------- ----------
NET CASH FROM OPERATIONS $ 530.2 $ 646.4
========== ==========
</TABLE>
The accompanying Notes to the 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 as 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
-------------------------------------
June 30, December 31,
1994 1993
----------------- ----------------
(unaudited)
(millions)
<S> <C> <C>
COMMON STOCK EQUITY
Common stock, $10 par value, authorized
100,000,000 shares, outstanding 50,559,225
shares $ 505.6 $ 505.6
Additional paid in capital 601.8 601.8
Retained earnings 372.3 189.9
Unearned employee compensation (70.0) (70.0)
---------- ----------
TOTAL COMMON STOCK EQUITY $ 1,409.7 $ 1,227.3
========== ==========
</TABLE>
The accompanying Notes to the 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, future profitable operations, the
ability to comply with DIP and other financing agreements 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
Quarter Form 10-Q. 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 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
5
<PAGE> 8
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
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 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.
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 Official Committee of
Unsecured Creditors of Columbia Transmission (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 and has continued to have discussions with the Columbia
Transmission Creditors' Committee. These discussions have not
resulted in agreement on a plan of reorganization and there can be no
assurance that they will continue or, if they continue, that agreement
will be reached. Columbia Transmission is considering various
amendments to the plan as filed and intends to promulgate amended plan
provisions when it is appropriate to do so.
6
<PAGE> 9
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
Under bankruptcy procedures, after Columbia Transmission's disclosure
statement has been approved by the Bankruptcy Court, the disclosure
statement and the reorganization plan will be sent to the company's
creditors for voting.
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.
Prepetition Obligations of Debtor Companies
The accompanying consolidated balance sheet as of June 30, 1994,
includes approximately $3.9 billion of liabilities subject to the
Chapter 11 proceedings of the Corporation and Columbia Transmission as
follows:
<TABLE>
<CAPTION>
($ 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 3,702.8
Less: payable to affiliates 2,166.8
--------
Payable to nonaffiliates 1,536.0
- - ---------------------------------------------------------------------
Liabilities Subject to Chapter 11 Proceedings 3,913.3
- - ---------------------------------------------------------------------
</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
7
<PAGE> 10
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
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 $414.5 million at June 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.
Intercompany Complaint
On March 19, 1992, the 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 have been transferred to the U. S. District Court for the
District of Delaware (the District Court). The District Court has
scheduled a trial on the Intercompany Complaint to begin in September
1994. Pretrial discovery, including deposition of expert witnesses, has
been substantially completed. 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 previously 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.
8
<PAGE> 11
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
Producer Claims Estimation Process
Columbia Transmission has recorded liabilities of approximately $1.2
billion to reflect the estimated effects of its above- market producer
contracts and estimated supplier obligations associated with pricing
disputes and take-or-pay obligations for historical periods. With
Bankruptcy Court approval, Columbia Transmission rejected more than 4,800
above-market gas purchase contracts with producers. 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 contracts and other producer claims. The claims
mediator has indicated that he will be in a position to issue recommended
determinations regarding certain common or generic producer claim issues
in September 1994. Those recommended determinations are expected to
provide the basis for a recalculation of producer contract rejection
claims. In Columbia Transmission's judgment, the position taken by all
producers before the claims mediator and the evidence presented
demonstrate that the total level of allowable contract rejection claims,
generically determined, will not exceed 1/10th of the $13 billion asserted
in the claims as filed and is likely to be between $600 million and $950
million. In July 1994, the claims mediator concluded the estimation
hearing for purposes of taking evidence in regard to Columbia
Transmission's generic defenses. The acceptance of certain positions
advanced by Columbia Transmission in these proceedings, including Columbia
Transmission's defenses, could decrease this range of possible aggregate
outcomes. Resolution of the contract-specific issues not yet presented
could increase or decrease individual claims materially but should not
significantly alter the range of possible aggregate outcomes.
Interest Expense
Interest expense of the Corporation is not being accrued during
bankruptcy, but an estimate of interest is included in a footnote on the
Statements of Consolidated Income and Consolidated Balance Sheets. Such
interest has been calculated based on management's interpretation of the
contractual arrangements which govern the various debt instruments the
Corporation has outstanding exclusive of any redemption premiums. The
Official Committee of Unsecured Creditors of the Corporation has asserted
claims for interest which exceed disclosed 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 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. Negotiations are continuing
and, therefore, these amounts are subject to change.
9
<PAGE> 12
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
Accounting for Claims
The resolution of bankruptcy related issues, including 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),
can 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 settlements 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 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.
In addition, three derivative actions were filed in the Court of Chancery
in and for New Castle County (Delaware) alleging that the Corporation's
directors at that time breached their fiduciary duties. 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.
Customer Recoupment Rights
As detailed in the 1993 Annual Report on Form 10-K, the U.S. Court of
Appeals for the Third Circuit (Third Circuit) issued a decision in July
1993, overturning most of a U.S. District Court ruling and affirming an
earlier Bankruptcy Court decision. The Third Circuit ruled that refunds
Columbia Transmission received from upstream pipelines, as well as the Gas
Research Institute (GRI) surcharge payments it collected from customers
postpetition, are held in trust, by Columbia Transmission, for those
customers and the GRI and are not part of Columbia Transmission's estate.
The U.S. Supreme Court subsequently denied petitions for review of the
Third Circuit decision.
10
<PAGE> 13
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
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, whereby they
would be permitted to reduce amounts owed to Columbia Transmission for
current services against refunds owed to the customers by Columbia
Transmission, including amounts which were not otherwise payable in full
under the July 1993 Third Circuit decision, all customer refunds under the
1990 rate case settlement, and miscellaneous refunds not otherwise payable
in full to them. Customers are alleging that they have recoupment and
setoff rights which are disputed by Columbia Transmission. Columbia
Transmission estimates these claims to be approximately $216 million;
however, the amount is subject to change as customers quantify their filed
claims.
On October 20, 1993, the Bankruptcy Court approved an interim settlement
under which customers continued to pay Columbia Transmission for services
authorized by the Federal Energy Regulatory Commission (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. Currently this
matter is in the supplemental briefing process with respect to addressing
the impact, if any, of the recent Baltimore Gas and Electric Co. vs. FERC
decision (described below) on these recoupment issues.
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 the Third Circuit
decision. On April 21, 1994, Columbia Transmission issued refunds of
approximately $139 million to its customers. The majority of these
refunds are for overpayments Columbia Transmission and its customers
previously made to upstream suppliers under 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 matters subject to court appeals.
A significant portion of the customer claims is attributable to the
Baltimore Gas and Electric Co. vs. 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.
Customers have filed claims of approximately $229 million regarding this
issue. A portion of these claims relate to overcharges by Columbia
Transmission's
11
<PAGE> 14
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
suppliers which were refunded to its customers in April 1994. The amount
of these filed claims is subject to change as claims filed in undetermined
amounts are quantified. 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). 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. Management believes that
the portion of the pipeline supplier charges which may be disallowed can
only be determined by the extensive inquiry that the court ordered FERC to
conduct. Management has commenced settlement discussions with customers on
this issue as well as other significant rate issues primarily related to
Order 636 transition costs. Interest on the $125 million would be
approximately $40 million through the date that Columbia Transmission
filed for bankruptcy protection under Chapter 11. 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. However, any amounts so determined would have to
be recorded and current period income would be reduced accordingly.
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 $553.7 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. The settlement reduced the
original claim to $112 million. The final cost of the settlement is
expected to be about $46 million after taking into consideration certain
tax deductions that become available in subsequent years. The after-tax
impact of the settlement has been previously recorded. The settlement now
requires Bankruptcy Court approval.
12
<PAGE> 15
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
Financial Information for the Debtor Companies
Below is condensed financial information for the Corporation and Columbia
Transmission as of, and for the six month period ended June 30, 1994. The
prior periods are consistent with the presentation of 1993 information in
the consolidated financial statements contained herewith:
<TABLE>
<CAPTION>
Corporation Columbia Transmission
--------------------- ---------------------
As of As of
------------------------------------- -----------------------------------
June 30, December 31, June 30, December 31,
($ in millions) 1994 1993 1994 1993
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current assets
Cash and temporary
cash investments 301.3 128.7 1,269.7 1,209.2
Other 127.6 168.7 362.7 461.8
Total current assets 428.9 297.4 1,632.4 1,671.0
Current liabilities (20.6) (19.2) (472.8) (629.6)
-------------------------------------------------------------------------------------------------------
Working capital 408.3 278.2 1,159.6 1,041.4
Noncurrent assets 3,572.3 3,476.4 2,261.1 2,269.4
Estimated liabilities
subject to Chapter
11 proceedings (2,382.2) (2,382.2) (3,702.8) (3,649.4)
Noncurrent liabilities (188.7) (145.1) (179.5) (178.6)
-------------------------------------------------------------------------------------------------------
NET EQUITY 1,409.7 1,227.3 (461.6) (517.2)
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Six Months Six Months
Ended June 30, Ended June 30,
------------------------------ -------------------------
<S> <C> <C> <C> <C>
($ in millions) 1994 1993 1994 1993
-------------------------------------------------------------------------------------------------------
Operating revenues - - 369.0 723.4
Operating expenses 3.9 3.9 255.4 593.9
-------------------------------------------------------------------------------------------------------
Operating income (loss) (3.9) (3.9) 113.6 129.5
Other income (deductions) 230.0 172.7 (23.5) (70.3)
Income taxes 43.7 31.6 31.4 26.7
Change in accounting - - (3.1) -
-------------------------------------------------------------------------------------------------------
NET INCOME 182.4 137.2 55.6 32.5
=======================================================================================================
NET CASH FROM OPERATIONS 29.1 31.5 101.3 206.9
=======================================================================================================
</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
13
<PAGE> 16
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
various operating facilities, waste disposal sites and former gas
manufacturing sites for conditions resulting from past practices that
subsequently were determined to be 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.
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.
On July 27, 1994, FERC issued a preliminary determination concerning
the above application. FERC determined that the proposed peaking
operation is in the public interest; however, the proposal to charge
negotiated market rates for the service was not approved as submitted.
FERC has allowed the partnership to file additional information on
market rates or alternative proposals.
The order is being analyzed and the partnership expects to develop and
file additional information or other proposals.
The recovery of the Corporation's remaining investment in Columbia LNG
of $11.7 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.
14
<PAGE> 17
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
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 instead 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. On May 4, 1994, the Trustee for the
Indenture filed a motion for a preliminary injunction which was denied
by the U.S. District Court for the District of Delaware on May 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.
15
<PAGE> 18
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 First Quarter Form 10-Q is
as follows.
Court Ruling Regarding Claims Made by Certain Customers and others
A significant portion of the $540 million of filed customer claims is
attributable to the Baltimore Gas and Electric Co. vs. FERC litigation, in
which various Columbia Transmission customers and others have challenged
Columbia Transmission's right to recover the Federal Energy Regulatory
Commission (the FERC) Order Nos. 500/528 (Order 500/528) direct charges that
were billed to Columbia Transmission by former upstream pipeline suppliers.
Customers have filed claims of approximately $229 million regarding this issue.
A portion of these claims relate to overcharges by Columbia Transmission's
suppliers which were refunded to its customers in April 1994. The amount of
these filed claims is subject to change as claims filed in undetermined amounts
are quantified. 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 from Columbia Transmission's former
pipeline suppliers which Columbia Transmission estimates to be approximately
$125 million (principal). The court ruled that a 1985 settlement of Columbia
Transmission 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. Management believes that the portion of the pipeline
supplier charges which may be disallowed can only be determined by the
extensive inquiry that the court ordered FERC to conduct. Management has
commenced settlement discussions with customers on this issue as well as other
significant rate issues primarily related to Order 636 transition costs.
Interest on the $125 million would be approximately $40 million through the
date that Columbia Transmission filed for bankruptcy protection under Chapter
11. Management believes that any amounts ultimately determined to be due to
the customers upon conclusion of the required FERC proceedings are prepetition
unsecured claims in the bankruptcy proceedings and, therefore, the customers
would not be entitled to payment of postpetition interest.
Intercompany Complaint
On May 25, 1994, the U. S. District Court for the District of Delaware accepted
the transfer of proceedings relating to the Intercompany Complaint from the
Bankruptcy Court that have been filed by Columbia Transmission Creditors'
Committee. (See Note 2, page 8 for a discussion of the Intercompany
Complaint.) The U. S. District Court has scheduled the trial to begin on
September 12, 1994.
16
<PAGE> 19
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 obligation 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 customer groups FERC determined
that Columbia Transmission must disburse the RIA funds (1) with interest
actually earned on the RIA funds while in the RIA account which was established
in March 1993, and (2) with interest at 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. In July 1994 Columbia Transmission's customers filed a request
for rehearing of this order with FERC.
Data Room for Columbia Transmission Information
As previously reported, the Bankruptcy Court approved procedures on March 15,
1994, for the establishment of a data room to make business information
available to third parties that may have an interest in acquiring Columbia
Transmission. The procedures provided that the data room be established in
Charleston, West Virginia, by April 8, 1994, and be available through June 20,
1994. Following a review by Columbia Transmission's financial advisors of the
six applications received, only four companies were determined to have complied
fully with and were accepted under the Bankruptcy Court approved review
procedure. All four companies have completed their review of the data room and
inspection of certain Columbia Transmission's facilities.
Internal Revenue Service Issues
The settlement with the IRS that resolves all of the issues included in the
$553.7 million IRS claim for the years 1983-1990 has been approved by the U.S.
Joint Congressional Committee on Taxation (see Note 2, Page 12 for additional
information).
In April of this year, the Corporation requested the IRS to initiate an
expedited audit of its 1991-1992 federal tax returns in order to bring those
years under the administration of the Bankruptcy Court. There have been no
Notices of Proposed Adjustments to the returns received to date. Management
believes that its positions on all tax issues are appropriate and supportable.
17
<PAGE> 20
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 Six Months
Ended June 30, Ended June 30,
----------------------- -------------------
1994 1993 1994 1993
------ ------- ----- -----
(millions)
<S> <C> <C> <C> <C>
Residential $ 182.6 $ 181.4 $ 758.9 $ 740.4
Commercial 65.3 69.9 299.4 291.7
Industrial 43.3 25.1 107.0 61.9
Wholesale 62.3 150.5 88.7 367.0
Other 5.5 13.7 11.6 30.2
Transportation 114.3 100.9 299.9 210.9
--------- --------- --------- ---------
TOTAL $ 473.3 $ 541.5 $1,565.5 $1,702.1
========= ========= ========= =========
</TABLE>
OPERATING INCOME (LOSS) BY SEGMENT
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- --------------------
1994 1993 1994 1993
------ ------- ----- -----
(millions)
<S> <C> <C> <C> <C>
Oil and Gas $ 11.1 $ 11.4 $ 23.2 $ 31.2
Transmission 40.9 (6.9)* 127.2 81.6*
Distribution (13.5) (0.3) 98.9 111.0
Other Energy 0.5 (0.8) 12.4 4.6
Corporate (1.9) (1.9) (3.9) (3.8)
---------- ------------ ----------- -----------
TOTAL $ 37.1 $ 1.5 $ 257.8 $ 224.6
========== ============ =========== ===========
</TABLE>
*Includes a $57.5 million writedown in the investment in Columbia LNG
Corporation's Cove Point LNG facility.
18
<PAGE> 21
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 Six Months
Ended June 30, Ended June 30,
------------------ -------------------
1994 1993 1994 1993
-------- ------ ------ -------
<S> <C> <C> <C> <C>
THROUGHPUT (BCF)
- - ----------------
SALES
Residential 28.1 27.2 126.3 119.7
Commercial 11.7 12.2 54.4 51.9
Industrial 17.7 7.2 38.5 17.1
Wholesale 19.3 50.0 38.8 142.7
Other 9.0 9.0 17.2 18.5
Intersegment eliminations (8.7) (18.4) (17.7) (41.5)
-------- -------- -------- --------
Total Sales Volumes 77.1 87.2 257.5 308.4
-------- -------- -------- --------
TRANSPORTATION
Market Area
Transmission 182.2 197.4 599.7 428.4
Distribution 52.8 47.8 115.5 111.9
Columbia Gulf
Main-line 165.9 152.5 339.3 289.0
Short-haul 125.7 148.9 319.8 297.9
Intersegment eliminations (312.1) (326.1) (790.7) (649.6)
-------- -------- -------- --------
Total Transportation Volumes 214.5 220.5 583.6 477.6
-------- -------- -------- --------
Total Throughput 291.6 307.7 841.1 786.0
======== ======== ======== ========
SOURCES OF GAS SOLD (BCF)
- - -------------------------
Purchased 132.3 156.2 247.1 288.5
Produced 16.8 17.6 33.4 37.2
Exchange (5.2) (1.0) (3.7) (9.6)
Storage withdrawals (injections) (57.4) (65.7) 15.5 44.6
Other, net (0.7) (1.5) (17.1) (10.8)
Intersegment eliminations (8.7) (18.4) (17.7) (41.5)
-------- -------- -------- --------
Total 77.1 87.2 257.5 308.4
======== ======== ======== ========
DEGREE DAYS (DISTRIBUTION SERVICE TERRITORY)
- - --------------------------------------------
Actual 614 613 3,761 3,478
Normal 580 580 3,527 3,525
% Colder (warmer) than normal 6 6 7 (1)
% Colder (warmer) than prior period - (12) 8 3
</TABLE>
19
<PAGE> 22
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)
The Corporation's net income for the 1994 second quarter was $47.8 million, or
$0.95 per share, versus a net loss of $2.6 million, or $0.06 per share in the
same period last year. After adjusting both periods for unusual items and
bankruptcy related issues as detailed below, after-tax income decreased from
$13.8 million last year to $12.4 million in the second quarter of 1994.
Unusual and Bankruptcy Related Items
After-tax Effect on Net Income
(millions)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
------------------
1994 1993
------ ------
<S><C> <C> <C>
o Estimated interest costs not recorded on prepetition debt $37.7 $36.0
o Professional fees and related expenses (5.7) (7.1)
o Impact of transmission rate items 6.6 (7.4)
o Distribution weather normalization adjustment (4.3) -
o Employee relocation costs (2.1) -
o Reserve reversal for royalty dispute 3.2 -
o Write-down in the Corporation's investment in Cove Point LNG facility - (37.9)
------- -------
Total adjustments 35.4 (16.4)
======= =======
</TABLE>
Not included in the above adjustments is interest earned on accumulated cash
while in Chapter 11 of $15.2 million and $10.3 million, for 1994 and 1993,
respectively. Adjusting for interest earned, combined with the adjustment for
estimated interest costs on prepetition obligations, 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
Second quarter operating income for the oil and gas segment was essentially
unchanged at $11.1 million compared to the same three months last year. A
beneficial effect for a reserve adjustment of $4.9 million related to the
resolution of a royalty dispute was recorded in the current period. This
improvement combined with increased oil and liquids production of 988,000
barrels, up 82,000 barrels, resulting from new wells recently brought on line
was offset by a higher depletion rate in effect, lower gas production and
reduced oil and gas prices. Gas production of 16.8 Bcf decreased 5 percent,
reflecting normal production declines in older wells and well shut-ins due to
workovers. Lower average oil and gas prices of $15.16 per barrel and $2.15 per
Mcf were down 13 percent and 3 percent, respectively.
20
<PAGE> 23
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Transmission
The transmission segment reported operating income of $40.9 million for the
three months ended June 30, 1994, whereas in the same period in 1993 it had an
operating loss of $6.9 million. The prior period loss was due to writedowns of
$57.5 million in the Corporation's investment in the Cove Point LNG facility
and $11.8 million for the loss on the sale of storage as a result of
implementing Order 636. In the current period several unusual regulatory
issues affected operating income for the transmission segment. These included
a decrease for a change in timing of the recovery of certain storage service
transportation costs which offsets the corresponding improvement in the first
quarter. Also, a lower cost of service level is now being collected due to
the sale of storage. In addition, expenses associated with employee relocation
costs, for realigning field and marketing activities, reduced operating income
$3.2 million. Partially offsetting these decreases were collections of certain
prior period gas costs since Columbia Transmission's average cost of gas in
1993 met certain competitive tests. Throughput decreased 35.5 Bcf from last
year primarily reflecting timing changes in recording market area
transportation services for customers moving gas for storage under Order 636.
Distribution
The distribution segment had an operating loss of $13.5 million for the three
months ended June 30, 1994, compared to a loss of $0.3 million last year. This
decrease resulted from higher operating expenses combined with a $6.5 million
revenue reduction for a weather normalization adjustment resulting from the
provisions of a regulatory settlement for Columbia Gas of Ohio. Higher
operating expenses were largely due to additional costs associated with the
implementation of Order 636 and increased costs to improve customer service.
Other Income (Deductions)
For the three months ended June 30, 1994, income improved $39.7 million for
Other Income (Deductions), whereas income was decreased $0.3 million in 1993.
Improving Interest Income and Other, Net in the current period was the
recording of a $29.8 million reserve adjustment for carrying charges associated
with prior period gas exchange activity as a result of a favorable FERC
decision. Reorganization Items, Net improved income $6.6 million over last
year due to higher interest earned of $5 million on accumulated cash together
with the beneficial effect of lower professional fees and related expenses of
$1.6 million. Both periods benefited from not accruing interest expense on
prepetition debt obligations by $58 million and $55 million, respectively.
21
<PAGE> 24
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS
Six Months Results
Net Income
For the first six months of 1994 the Corporation had net income of $182.4
million, or $3.61 per share, an increase of $45.2 million, or $0.90 per share
over last year. After adjusting for unusual items and bankruptcy related
matters, net income for the current period of $101.1 million, decreased $7
million or $0.14 per share from the same period in 1993. In addition to the
second quarter unusual items mentioned previously, the first quarter of 1994
included a reserve adjustment for an IRS settlement that resulted in an
increase in net income of $10.3 million. This was offset by a decrease for a
change in accounting for postemployment benefits of $5.6 million. The first
quarters of both years also included unusual rate items for the transmission
segment as well as bankruptcy related issues.
Operating Income
Oil and Gas
A higher depletion rate, together with a decrease in gas production and lower
oil and liquids prices resulted in operating income of $23.2 million for the
oil and gas segment declining $8 million from the first half of 1993. Gas
production was down 3.8 Bcf, or 10 percent and oil and liquids prices decreased
$3.00 per barrel, or 17 percent. Partially offsetting these decreases was the
second quarter reserve adjustment for a royalty dispute, slightly higher gas
prices and a 6 percent increase in oil production.
Transmission
Operating income for the transmission segment of $127.2 million, increased
$45.6 million largely due to the pre-tax effect of the unusual items, discussed
previously. The beneficial effect in 1993 for recovery of contract reformation
costs together with higher current period operating expenses depressed the
favorable effect of a new rate design.
Distribution
Lower distribution segment operating income of $98.9 million, a decrease of
$12.1 million from last year, resulted from higher operating expenses, due
largely to increased costs stemming from implementing Order 636 and
reengineering efforts to improve efficiencies and customer service.
22
<PAGE> 25
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS
Other Energy Operations
Other energy operations had operating income of $12.4 million, an increase of
$7.8 million over 1993 reflecting improved margins and sales volumes for
propane operations as well as increased gas marketing activities.
Other Income (Deductions)
Other Income (Deductions) improved income in the first half of 1994 by $48.6
million versus an income decrease of $1.5 million for the first six months of
1993. Interest Income and Other, Net increased $15.3 million due to
recording the favorable effect of the reserve adjustment for carrying charges
mentioned previously, partially offset by lower interest income for a FERC
ruling on Order 94 costs which also decreases interest expense. A reserve
adjustment for a IRS settlement recorded in the first quarter together with
lower interest expense for the Order 94 issue mentioned above, led to reduced
Interest Expense and Related Charges of $25.1 million. Reorganization Items,
Net improved income $9.7 million over last year due to increased interest
income on accumulated cash of $9.2 million while expense for professional fees
and related services decreased $0.5 million.
Income for both 1994 and 1993 was improved by approximately $113 million 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 $636 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.)
Liquidity and Capital Resources
The effect of a customer refund under Order 500/528 was the principal reason
for the decrease of $116.2 million in net cash flow from operations for the
first half of 1994. Columbia Transmission virtually eliminated its merchant
function when it implemented Order 636 in November 1993, which resulted in
decreased cash received from customers for gas sales as well as reduced cash
needed for purchases from suppliers. Partially offsetting the impact from the
absence of Columbia Transmission's merchant function was increased receipts due
to customers using transportation services to meet their gas requirements
together with higher sales for the distribution segment due to the colder first
quarter weather. The higher cash receipts caused by the weather-related
increased retail sales was more than offset by an increase in payments made to
suppliers due to higher average gas costs. In April 1994, Columbia
Transmission issued refunds totalling $84.6 million for Order
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)
500/528 to its nonaffiliate customers for overpayments Columbia Transmission
and its customers previously made to upstream suppliers.
The Corporation currently maintains a debtor-in-possession facility (DIP
Facility) for up to $100 million, including the availability of letters of
credit of up to $50 million. The DIP Facility is used in conjunction with
internally generated funds for general corporate purposes and to provide
financing for subsidiaries not involved in the bankruptcy proceedings. As of
July 31, 1994, no borrowings were outstanding and $13.7 million of letters of
credit were outstanding under the DIP Facility. The DIP Facility will expire
on December 31, 1994. Currently, the Corporation has filed with the Securities
and Exchange Commission to convert the DIP Facility to a $25 million letter of
credit facility through December 31, 1995. It is expected that the
Corporation's liquidity needs can be satisfied by internally generated funds.
As of July 31, 1994, the Corporation and its subsidiaries, excluding Columbia
Transmission, had $345.1 million invested in money market instruments. Based
upon current projections, the Corporation expects to be in a cash surplus
position during the remainder of 1994.
The liquidity needs of Columbia Transmission are being satisfied by internally
generated funds. Columbia Transmission also maintains a DIP facility solely
for the issuance of letters of credit for up to $25 million. As of July, 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. As of July, 31, 1994,
Columbia Transmission had $1,263 million invested in money market instruments
through a wholly-owned subsidiary, Columbia Transmission Investment
Corporation.
24
<PAGE> 27
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 Six Months
Ended June 30, Ended June 30,
----------------- ------------------
1994 1993 1994 1993
------ ------ ------ ------
(millions)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Gas $ 37.5 $ 38.4 $ 79.4 $ 83.8
Oil and liquids 15.0 15.8 27.0 30.6
-------- -------- -------- --------
Total Operating Revenues 52.5 54.2 106.4 114.4
-------- -------- -------- --------
OPERATING EXPENSES
Operation and maintenance 16.4 20.3 36.2 40.3
Depreciation and depletion 21.8 18.8 40.8 36.3
Other taxes 3.2 3.7 6.2 6.6
-------- -------- -------- --------
Total Operating Expenses 41.4 42.8 83.2 83.2
-------- -------- -------- --------
OPERATING INCOME $ 11.1 $ 11.4 $ 23.2 $ 31.2
======== ======== ======== ========
GAS PRODUCTION STATISTICS
Production (Bcf) 16.8 17.6 33.4 37.2
Average Price ($/Mcf) 2.15 2.22 2.30 2.26
OIL AND LIQUIDS PRODUCTION STATISTICS
Production (000Bbls) 988 906 1,868 1,755
Average Price ($/Bbl) 15.16 17.44 14.43 17.43
</TABLE>
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 (CONTINUED)
Drilling Activities
Columbia Gas Development Corporation (Columbia Development) began drilling
operations on 20 wells during the second quarter of 1994. Of these, ten were
productive, one was dry, and the remaining nine were still being drilled or
tested at the end of the quarter. Columbia Development has completed 31 wells
(18.7 net) since the beginning of 1994. Of these wells, 25 were successful and
two more appear to be productive. Notable success continues in the Austin
Chalk formation in central Texas as all 21 wells drilled thus far in 1994 have
been successful.
During the second quarter, Columbia Natural Resources drilled 19 development
wells in the Appalachian area, with a success rate of 84 percent. For the first
six months of 1994, 32 development wells have been drilled, with a 91 percent
success rate. During the second quarter and first six months of 1994 Columbia
Natural Resources successfully completed net wells of 6.8 and 14.3,
respectively.
Volumes
Gas production for the current quarter and for the first half of 1994 decreased
by 0.8 Bcf and 3.8 Bcf, respectively, reflecting lower production in both the
Appalachian and Southwest areas. The decline in Appalachian gas production
primarily reflects reduced deliverability due to maintenance work on pipelines
serving certain wells which began in May 1994. The decrease in the Southwest
was primarily attributable to normal production declines in older wells. Oil
and natural gas liquids production reflected an increase in the second quarter
of 1994 and the first six months of 1994 of 82,000 barrels and 113,000 barrels,
respectively, over last year as a result of Columbia Development's successful
horizontal drilling program.
Revenues
The decline in gas production in the current three and six-month periods was
the principal reason for the reduction in gas revenues of $0.9 million and $4.4
million in these respective periods. Average gas prices in the second quarter
decreased by 3 percent to $2.15 per Mcf from the same period last year. Higher
average gas prices in the first quarter of 1994 led to a $0.04 per mcf increase
in gas prices, to $2.30 per mcf, for the six months ended June 30, 1994.
Revenues from oil and liquids production were down for both the three and
six-month periods ended June 30, 1994, as the impact on revenues of production
increases in both periods was more than offset by sharply lower average prices
for oil and liquids in 1994. For the three months ended June 30, 1994,
revenues from oil and liquids production decreased by $0.8 million from the
same period last year to $15 million as average prices decreased
26
<PAGE> 29
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS (CONTINUED)
OIL AND GAS OPERATIONS (CONTINUED)
$2.28 per barrel to $15.16 per barrel. For the first half of 1994, oil and
liquids revenues declined by $3.6 million to $27 million as the average price
declined $3 per barrel to $14.43 per barrel.
Operating Income
Operating income for the second quarter of 1994 of $11.1 million was
essentially unchanged from the previous year. The $1.7 million decline in
operating revenues was largely offset by a $1.4 million decrease in operating
expenses, primarily due to recording a reduction in a previously established
reserve for the resolution of a royalty dispute offset by a higher depletion
rate in effect.
For the six-month period, operating income declined by $8 million as operating
revenues decreased by $8 million and operating expenses were unchanged, again
mainly due to recording an adjustment in the current period of a reserve for a
royalty dispute offsetting a higher depletion rate in 1994.
27
<PAGE> 30
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 Six Months
Ended June 30, Ended June 30,
------------------ --------------------
1994 1993 1994 1993
----- ----- ----- -----
(millions)
<S> <C> <C> <C> <C>
NET REVENUES
Sales revenues $ 9.4 $ 211.3 $ 9.4 $ 511.9
Transportation revenues 143.5 103.0 380.0 211.2
Storage revenues 35.1 29.0 70.9 58.2
--------- --------- --------- ---------
Total revenues 188.0 343.3 460.3 781.3
Less: Associated cost of gas (8.1) 160.5 (4.9) 378.4
--------- --------- --------- ---------
Net Revenues 196.1 182.8 465.2 402.9
--------- --------- --------- ---------
OPERATING EXPENSES
Operation and maintenance 115.8 92.6 257.4 182.9
Depreciation 25.8 24.3 51.6 48.6
Other taxes 13.6 15.3 29.0 32.3
Writedown of investment in Columbia LNG Corporation - 57.5 - 57.5
--------- --------- --------- ---------
Total Operating Expenses 155.2 189.7 338.0 321.3
--------- --------- --------- ---------
OPERATING INCOME (LOSS) $ 40.9 $ (6.9) $ 127.2 $ 81.6
========= ========= ========= =========
THROUGHPUT (BCF)
Transportation
Columbia Transmission
Market area 182.2 197.4 599.7 428.4
Columbia Gulf
Main-line 165.9 152.5 339.3 289.0
Short-haul 125.7 148.9 319.8 297.9
Intrasegment eliminations (222.2) (240.5) (505.2) (459.1)
--------- --------- --------- ---------
Total Transportation 251.6 258.3 753.6 556.2
--------- --------- --------- ---------
Sales 0.6 29.4 0.7 103.3
--------- --------- --------- ---------
Total Throughput 252.2 287.7 754.3 659.5
========= ========= ========= =========
</TABLE>
28
<PAGE> 31
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION OPERATIONS (CONTINUED)
Regulatory Matters
1991 Rate Case Settlement
As reported in the 1993 Form 10-K, Columbia Transmission and Columbia Gulf
Transmission Company (Columbia Gulf) received approvals from both FERC and the
Bankruptcy Court for a 1991 rate case settlement despite objections made by two
parties. Subsequently, Columbia Transmission and Columbia Gulf reached a
settlement with the two parties resolving all pending issues with respect to
the 1991 rate case which was approved by FERC on June 22, 1994.
FERC Order on Recovery of Carrying Charges
In June 1994, FERC granted rehearing of a prior order and determined that
Columbia Transmission could recover approximately $20 million in carrying
charges related to prior period exchange activity. In July 1994, Columbia
Transmission's customers filed a request for rehearing of the latest order.
Columbia Gulf Rate Case
On May 27, 1994, FERC conditionally accepted a rate filing by Columbia Gulf
which will permit revised rates to be put into effect on November 1, 1994.
These rates, which could produce additional annual revenue of approximately $23
million over Columbia Gulf's currently approved rates, will be collected
subject to refund while the remaining issues relating to the proceeding are
resolved at FERC. A hearing on these issues is currently scheduled in June
1995.
On July 18, 1994, FERC approved Columbia Gulf's request to terminate its cost
of service transportation tariff with Columbia Transmission effective November
1, 1994.
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 and FERC reversed its prior rulings and found that Columbia
Transmission's 1985 Purchase Gas Adjustment Settlement essentially bars such
recovery. FERC also 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
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)
any requirement that these pipelines pay interest on the refunds. Since
Columbia Transmission has been accruing the interest income on these refunds
since 1990, these orders led to a $19.5 million reduction to interest income in
1993. Columbia Transmission and its pipeline suppliers sought rehearing of
these orders. On May 19, 1994, FERC ordered further briefing as to the
appropriate remedy for its prior orders authorizing direct billing of Order 94
costs. Columbia Transmission and certain customers of Panhandle Eastern Pipe
Line Company and Trunkline Gas Company filed briefs supporting full refunds
plus interest as the appropriate remedy while the pipeline suppliers filed
arguments for no refunds. The ultimate outcome of this issue is uncertain at
this time and could impact future operating results depending upon the results
of these additional regulatory and court reviews.
Order 636
On March 31, 1994, FERC approved orders, subject to refund and certain
conditions, that allow Columbia Transmission to recover from its customers
certain costs related to the transition to restructured operations under Order
636. These orders permit Columbia Transmission to recover approximately $87.8
million, subject to refund, for costs associated with transportation contracts
with upstream pipelines no longer needed by Columbia Transmission and $58.7
million for unrecovered gas purchase costs outstanding at December 31, 1993.
The unrecovered gas purchase costs as of June 30, 1994 is $28.8 million. In
addition, approximately $140 million of prepetition unrecovered gas purchase
costs have not been paid due to the bankruptcy filing and will be eligible for
recovery only when paid. With regard to the recovery of upstream pipeline
costs, FERC established procedures to review the nature and legitimacy of the
costs for which recovery is sought. Certain parties have challenged Columbia
Transmission's ability to recover a portion of these costs. While FERC has not
yet issued a final order resolving this issue, Management believes that
Columbia Transmission will ultimately be permitted to recover all costs
incurred from upstream pipelines. With regard to the recovery of the $58.7
million of unrecovered gas costs, under Columbia Transmission's tariff as
approved during its restructuring proceedings, Columbia Transmission would be
precluded from including any prior period adjustments after July 31, 1994,
except for costs associated with gas purchase contracts in litigation including
bankruptcy proceedings. On June 1, 1994, Columbia Transmission filed a request
to extend this deadline in order to afford it additional time to resolve
certain outstanding disputes. To date, FERC has not acted upon this waiver
request, and accordingly on July 29, 1994, Columbia Transmission filed an
updated balance of unrecovered gas costs to include adjustments through that
date.
Upstream Pipeline Exit Fee Settlements
In November 1993, the Bankruptcy Court approved a settlement between Columbia
Transmission and Tennessee Gas Pipeline Company (Tennessee) that provides for
Columbia Transmission's assumption of certain contracts, the termination of
certain other
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)
contracts that are no longer necessary for Columbia Transmission's operations,
and payment to Tennessee of an exit fee in consideration for Tennessee's
substantial reduction of its major transportation contracts with Columbia
Transmission. On June 30, 1994, FERC approved the settlement which provides
for the payment by Columbia Transmission of approximately $3.9 million in
liquidated unpaid prepetition invoice claims, and an exit fee of approximately
$40 million. Columbia Transmission is continuing to pay Tennessee's current
demand charges until the settlement becomes final. Such payments serve to
reduce the ultimate level of the amount to be paid as an exit fee and,
therefore, the exact amount of the exit fee to be paid is contingent upon the
date the settlement is implemented. FERC approved Columbia Transmission's
recovery of the exit fee paid to Tennessee as a stranded cost pursuant to Order
636.
Columbia Transmission has recently entered into settlements with four
additional pipelines which provide for the payment of exit fees of
approximately $58 million by Columbia Transmission in exchange for contract
terminations. On July 20, 1994, the Bankruptcy Court approved these
settlements. FERC approval must also be obtained before Columbia Transmission
can implement the terms of these settlements. As in the Tennessee settlement,
these settlements are conditioned upon the recovery by Columbia Transmission of
these exit fees.
Columbia Transmission's strategy has been to assume all upstream pipeline
contracts that can be directly assigned to its customers or need to be retained
by Columbia Transmission for operational reasons and negotiate exit fees for
other upstream contracts. FERC ruling in the Order 636 proceedings permits
recovery of these exit fees through rates, provided that Columbia Transmission
can show that they are prudently incurred. Columbia Transmission retains the
option of rejecting such contracts in its bankruptcy proceedings if appropriate
exit fees cannot be negotiated. The financial statements reflect a $119
million liability and offsetting receivable for the exit fee issue; however,
the ultimate cost could vary depending on the outcome of ongoing discussions
with the affected pipelines.
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 the 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.
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)
On July 27, 1994, FERC issued a preliminary determination concerning the above
application. FERC determined that a proposed peaking operation is in the
public interest; however, the proposal to charge negotiated market rates for
the service was not approved as submitted. FERC has allowed the partnership to
file additional information on market rates or alternative proposals. The
order is being analyzed and the partnership expects to develop and file
additional information or other proposals.
The recovery of the Corporation's remaining investment in Columbia LNG of $11.7
million will be dependent upon successful implementation of the partnership and
related business plan.
Reengineering Program
As previously reported, the Corporation has initiated a multi-year
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, as the projected cost of the Reengineering Retention and Release
Program which was established for employees whose positions were being
eliminated as a result of reengineering.
Additional expenses are expected to be incurred as a result of the
restructuring and realignment of field and marketing regions and offices. As a
result, in June 1994, Columbia Transmission recorded a $3.2 million accrual for
estimated relocation costs for field operating and marketing employees.
Additional adjustments to this accrual may be necessary in the future as
additional information becomes known.
As of June 30, 1994, the total reserve balance for the transmission segment's
reengineering program was approximately $7.1 million.
Volumes
Throughput for the second quarter of 1994 decreased 35.5 Bcf while increasing
94.8 Bcf for the first half of this year, compared to the same periods last
year. These changes are primarily attributable to a change in the timing of
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. 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 service requirements
to firm transportation services.
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)
Net Revenues
Second quarter 1994 net revenues of $196.1 million increased $13.3 million over
the same period last year. As a result of the elimination of the merchant
function, certain costs previously included as a cost of gas sold are now
included in operating expense and no longer reflected in net revenues. This
change effectively increased net revenues and operating expense by $17.7
million, respectively, and has no effect on operating income. In addition, net
revenues increased $4.4 million as a result of Columbia Transmission's recovery
of certain previously unrecovered gas costs under the terms of a 1985 customer
settlement. Partially offsetting these increases were (1) a reduced cost of
service recovery of $7.8 million resulting from the restructuring of its
services under Order 636, and (2) 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.
Net revenues for the first half of 1994 of $465.2 million reflect an increase
of $62.3 million. This increase was primarily due to the above-mentioned
inclusion of certain fuel costs in operating expense which were previously
reflected as a purchased gas cost of $52.7 million and the favorable effect of
the new rate design. Net revenues were also enhanced $17.3 million by the
recovery of the above noted prior period gas costs. Partially offsetting these
improvements was a reduced cost of service recovery level of $15.6 million
under Order 636. Also offsetting these improvements was an increase in the
prior period for the recording of a reserve reversal of $21.6 million to
reflect the terms of a customer settlement and 1993 revenues associated with
the recovery of contract reformation costs. The above-mentioned impact on
second quarter net revenues associated with the timing of the recovery of
certain storage service transportation costs offset the first quarter impact of
this issue and had no effect on the six-month results.
Operating Income (Loss)
Operating income for the three months ending June 30, 1994 was $40.9 million
compared to an operating loss of $6.9 million in the same period last year.
The prior period loss reflected the $57.5 million writedown of the
Corporation's investment in the Cove Point LNG facility. After adjusting for
last year's writedown and other unusual items in both periods, this year's
operating income represents an increase of $1.3 million from last year as the
increase in net revenues was for the most part offset by an increase of $5.3
million in operating expenses due largely to the additional expense for
reengineering activities discussed previously.
For the first half of 1994, operating income amounted to $127.2 million as
compared to $81.6 million for the first half of 1993. After adjusting for the
1993 writedown of the LNG facility and other unusual items in both periods,
this year's operating income reflected a small decline of $0.6 million from
last year as higher net revenues were more than offset by increased operating
expenses of $21.5 million.
33
<PAGE> 36
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 Six Months
Ended June 30, Ended June 30,
----------------- ------------------
1994 1993 1994 1993
----- ----- ----- -----
(millions)
<S> <C> <C> <C> <C>
NET REVENUES
Sales revenues $ 257.0 $ 265.9 $1,091.8 $1,070.6
Less: Cost of gas sold 151.9 154.4 714.6 692.5
-------- -------- --------- ---------
Net Sales Revenues 105.1 111.5 377.2 378.1
-------- -------- --------- ---------
Transportation revenues 20.0 16.9 46.6 41.0
Less: Associated gas costs 1.9 1.2 3.8 3.1
-------- -------- --------- ---------
Net Transportation Revenues 18.1 15.7 42.8 37.9
-------- -------- --------- ---------
Net Revenues 123.2 127.2 420.0 416.0
-------- -------- --------- ---------
OPERATING EXPENSES
Operation and maintenance 98.2 91.6 201.8 195.4
Depreciation 10.4 9.2 38.7 36.3
Other taxes 28.1 26.7 80.6 73.3
-------- -------- --------- ---------
Total Operating Expenses 136.7 127.5 321.1 305.0
-------- -------- --------- ---------
OPERATING INCOME (LOSS) $ (13.5) $ (0.3) $ 98.9 $ 111.0
======== ======== ========= =========
THROUGHPUT (BCF)
Sales
Residential 28.1 27.2 126.2 119.7
Commercial 11.8 12.1 54.5 51.8
Industrial and other 1.6 3.2 6.5 8.9
-------- -------- -------- --------
Total Sales 41.5 42.5 187.2 180.4
Transportation 52.8 47.8 115.5 111.9
-------- -------- -------- --------
Total Throughput 94.3 90.3 302.7 292.3
======== ======== ======== ========
SOURCES OF GAS FOR THROUGHPUT (BCF)
Sources of Gas Sold
Spot market* 80.4 37.6 142.5 72.4
Producers 15.9 11.7 36.5 29.0
Pipelines (0.3) 18.7 (1.5) 42.7
Storage withdrawals (injections) (57.5) (24.1) 15.5 40.1
Other 3.0 (1.4) (5.8) (3.8)
-------- -------- -------- --------
Total Sources of Gas Sold 41.5 42.5 187.2 180.4
Transportation received for delivery to customers 52.8 47.8 115.5 111.9
-------- -------- -------- --------
Total Sources 94.3 90.3 302.7 292.3
======== ======== ======== ========
</TABLE>
* Purchase contracts less than one year.
34
<PAGE> 37
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS (CONTINUED)
Marketing Initiatives
The distribution subsidiaries (Distribution) are continuing to take aggressive
measures to counter increased marketing activities by electric utilities aimed
at core residential gas markets. Through targeted advertising, educational and
promotional initiatives, Distribution is demonstrating the resource efficiency
of natural gas over electric, the environmental benefits of natural gas and the
comfort and economy natural gas provides. These efforts are directed not only
at maintaining Distribution's market position, but at increasing its share of
existing and new residential and commercial customers.
Distribution also continues to experience instances of gas-on-gas competition
in Kentucky, Ohio and Pennsylvania. Competition of this sort can occur between
local distribution companies (LDCs) for new and existing customers; attempts by
small intrastate pipelines to connect existing customers to major interstate
pipelines and marketer and customer initiated bypass of Distribution directly
to pipeline suppliers. Distribution has an ongoing program to mitigate such
competitive threats with measures that include flexible pricing and services.
During the second quarter of 1994, gas deliveries by Commonwealth Gas Services,
Inc. (Commonwealth) began to the Gordonsville Energy Limited Partnership's
power generating facility in Virginia. Commonwealth has a long-term agreement
to provide transportation service of approximately three billion cubic feet of
gas annually to the power plant.
The second quarter of 1994 proved to be significant for the natural gas vehicle
market. In June, the U.S. Environmental Protection Agency issued long-awaited
rules that establish the tailpipe emission standards for vehicles powered by
natural gas that are built after 1996. Under the new rules, manufacturers will
be able to obtain corporate average fuel economy credits for producing vehicles
that meet these new standards. Importantly, the standards restrict only
certain emissions that are a source of ozone, or smog, instead of all
hydrocarbon emissions. Natural gas is not an active ingredient in generating
smog. Distribution, together with others in the gas industry, participated
aggressively in discussions leading to these regulations.
Rate Activity
Columbia Gas of Ohio, Inc. (Columbia Gas of Ohio) has reached a settlement with
its key regulatory interests, including the Office of Consumers Counsel, which
resolves a number of service and rate incentive issues and provides for an
annual revenue increase of $47.5 million, effective November 1994. The
settlement, which is pending final approval by the Public Utility Commission of
Ohio, includes an experimental weather normalization adjustment provision to
alleviate the impact of unusual winter weather on customers' bills and Columbia
Gas of Ohio's revenues. As a result of this provision, a $6.5 million reserve
was recorded in the second quarter of 1994 for a refund to Columbia Gas of
Ohio's
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)
customers of revenues generated by the unusually cold weather experienced in
early 1994. Additionally, the agreement provides for recovery of operating
costs based on a partially projected period through October 1994 and a review
of Columbia Gas of Ohio's revenue requirements in early 1996 with a possible
revenue adjustment effective in May 1996. Under the agreement, Columbia Gas of
Ohio would not be permitted to file a general rate case for an increase in
rates to be effective prior to January 1998 at the earliest. The agreement
also provides for recovery mechanisms for transition cost billings stemming
from Order 636. This comprehensive settlement is the result of a collaborative
effort that has continued since 1991.
A settlement has also been reached with interested parties in a Columbia Gas of
Pennsylvania, Inc. (Columbia Gas of Pennsylvania) rate case which would
increase annual revenues by $16.6 million, effective August 1, 1994. To
mitigate the effects of regulatory lag, operating costs were projected through
September 1994, and rates will go into effect three months earlier than if the
case had been fully litigated. Under the agreement that was approved by the
Pennsylvania commission in July 1994, the regulatory reform initiatives, such
as weather normalization, proposed by Columbia Gas of Pennsylvania will be
withdrawn, but the parties have agreed to continue discussions concerning
alternative ratemaking procedures.
Columbia Gas of Kentucky, Inc. (Columbia Gas of Kentucky) filed a rate case in
June 1994, requesting a $12.4 million annual revenue increase, effective
January 1, 1995. This is the first filing in which Columbia Gas of Kentucky is
utilizing a fully projected test year as permitted by recently enacted
legislation. Also reflected in this filing are regulatory reform initiatives
including a weather normalization clause to mitigate the effects of extreme
weather fluctuations on customer bills and Columbia Gas of Kentucky's revenues.
In Virginia, Commonwealth has received final approval from the State
Corporation Commission of the 1993 regulatory settlement which provides for an
annual revenue increase of $3.5 million. As it currently stands, Commonwealth
does not anticipate any additional base rate activity until 1995.
In Maryland, Columbia Gas of Maryland, Inc. (Columbia Gas of Maryland) filed a
rate case on August 5, 1994, requesting a $1 million increase to be effective
in November 1994. Also, Columbia Gas of Maryland's efforts to resolve Order
636 transition costs on a non- litigated basis have not yet been productive.
The key regulatory interests have established procedural dates to begin
litigation of this matter.
Order 636
Order 636 provides for the transfer of gas supply management risks and
responsibilities from interstate pipelines to distribution companies. As a
result, Distribution recently replaced the remaining portion of its annual gas
supply portfolio, previously provided by pipeline
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)
merchants, with direct purchases from various producers and marketers. During
1994, Distribution will directly purchase over 300 million dekatherms of gas to
serve customers.
State regulatory agencies are continuing to review the implications of Order
636 guidelines to ensure that principal retail markets are protected while
still encouraging a more open access, competitive environment. Throughout
Distribution's retail market, marketers and brokers continue to selectively
target customers to expand the use of transportation arrangements while
Distribution must generally be prepared to offer firm merchant services.
Distribution's portfolio strategy integrates the risk of losing core customers
to third-party suppliers; however, since pipeline capacity contracts are
typically long-term, Distribution is also at risk if merchants or their
customers do not assume the transportation contracts designated for serving
these customers. Distribution continues to aggressively work with state
commissions and other regulatory interests to establish appropriate definitions
of the utility's gas supply obligations and cost responsibilities among various
customers. In order for LDCs to more effectively compete with open access into
its core market, some state regulatory agencies are permitting the LDC to
establish rate schedules to more fairly compete with third-party suppliers. In
Pennsylvania, Distribution has recently been granted authorization by the
commission to develop a negotiated sales service which will give larger
commercial or industrial customers options for a more competitively priced gas
supply.
Other Postretirement Employee Benefits (OPEB)
The recent settlement in Ohio, currently pending approval by the regulatory
commission, provides for full recovery of the regulatory asset related to OPEB
costs of approximately $88.4 million at June 30, 1994, as well as recovery of
the ongoing costs.
Under the terms of Columbia Gas of Pennsylvania's settlement, full recovery of
the deferred regulatory asset related to OPEB costs ($34.1 million at June 30,
1994), as well as recovery of the ongoing cost on an accrual basis was
approved. However, recent intermediate appellate court rulings that involve
two other Pennsylvania utilities could impact Columbia Gas of Pennsylvania's
recoverability of OPEB costs. In the first order, the commission granted an
electric utility permission to defer OPEB costs until such time as the utility
filed to recover the costs in a rate case. Subsequently, the Pennsylvania
Office of Consumer Advocate (OCA) was successful in getting the decision
reversed by the Commonwealth Court based on the fact that this treatment
constituted retroactive ratemaking. In the second order, a water utility was
granted recovery of OPEB costs (including the transition obligation) on an
accrual basis. The OCA was unsuccessful in its appeal to overturn this order.
The difference between the two cases was that the electric company did not file
for a change in rates to recover OPEB costs while the water company sought
immediate rate relief. These cases may be appealed to the Pennsylvania Supreme
Court. Depending upon the final disposition of the cases, Columbia Gas of
Pennsylvania's recovery of incremental OPEB costs could be at risk. However,
it is management's opinion at this time that
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)
Columbia Gas of Pennsylvania will be allowed recovery of OPEB costs on an
accrual basis including the transition obligation.
In Kentucky, Columbia Gas of Kentucky has included a request for full recovery
of OPEB costs in a recently filed rate case. As of June 30, 1994, Columbia Gas
of Kentucky had a regulatory asset of $10.2 million for this issue. Management
believes it will be successful in receiving recovery authorization since the
commission has stated, in the rate settlement of another utility, that recovery
of these costs on an accrual basis better reflects the true cost of providing
service to current customers.
Reengineering Efforts
In 1993, Distribution initiated comprehensive efforts to evaluate various
support processes and operating practices to determine how they should be
structured to better meet the significant changes occurring in the energy
market place. These reengineering efforts have been focusing on improving
operating efficiencies and significantly enhancing customer service.
As part of these broad efforts, Distribution has established reserves of
approximately $2.5 million as of June 30, 1994. As the reengineering
initiatives continue, it is anticipated that additional reserves may be
required if additional improvement measures are identified and implemented.
Volumes
Throughput in the second quarter of 1994 improved by 4 Bcf. Residential and
commercial sales were up 0.6 Bcf due largely to customer additions. An
increase in industrial transportation more than offset a 1.6 Bcf decrease in
industrial sales, reflecting increased deliveries to existing and new
cogeneration facilities and increased industrial activity in Distribution's
service area. The weather effect between the two periods was minimal. For the
first six months of 1994, eight percent colder weather than the same period in
1993 and continued customer growth resulted in the 10.4 Bcf increase in
throughput to 302.7 Bcf. Sales and transportation volumes were up 6.8 Bcf and
3.6 Bcf, respectively. Increased sales to the weather sensitive markets and
higher transportation were partially offset by a decrease in deliveries to
lower-margin industrial customers due to fuel switching, particularly a shift
to lower-priced coal by power generating facilities.
Net Revenues
Net revenues for the three months ended June 30, 1994 were $123.2 million, a
decrease of $4 million from 1993 due largely to a $6.5 million adjustment to
reverse the effect of colder weather related sales in the first quarter under
the provisions of the recent customer
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)
settlement in Ohio discussed previously. Also reducing revenues was the
temporary suspension of Columbia Gas of Ohio's payment plan for low-income
customers pending certain modifications to the plan guidelines. The suspension
also reduced operating expenses by the same amount and, therefore, had no
effect on operating income. These decreases were partially offset by revenue
improvements of $1.4 million reflecting improved throughput and over $1 million
for favorable regulatory settlements in Virginia and Maryland.
Increased throughput as a result of the colder weather was primarily
responsible for the $4 million increase in net revenues to $420 million, for
the first half of 1994. The increased throughput generated $13.6 million of
this improvement while the favorable Virginia and Maryland regulatory
settlements provided about $4.6 million. The effect of these increases was
mitigated by a $10.1 million decrease in net revenues due to the temporary
suspension of customer low-income payment plan which also reduced operating
expenses by a like amount and the first quarter weather related adjustment,
both mentioned above.
Operating Income (Loss)
Distribution had an operating loss of $13.5 million for the current quarter
compared to an operating loss of $0.3 million for the same period last year
reflecting higher operating expenses of $9.2 million together with lower net
revenues of $4 million. The increase in operating expenses was largely due to
additional costs associated with the implementation of Order 636 and initial
reengineering efforts aimed at improving customer service. Higher depreciation
expense reflected plant additions while increased gross receipts taxes is the
principal reason for the increase in other taxes.
The lower operating income has been somewhat tempered for Columbia Gas of Ohio
by a unique regulatory arrangement that permits the capitalization of certain
interest charges that favorably impact net income but not operating income.
For the three months ended June 30, 1994, pre-tax income improved $3.1 million
for this issue, an increase of approximately $1 million over the same period
last year. (The beneficial effect of this issue is eliminated on the
consolidated financial statements because the Corporation, while in Chapter 11,
is not recording interest expense.) While it is anticipated that recent
regulatory settlements in Ohio and Pennsylvania will result in improved
operating results, Distribution is continuing to aggressively manage its
operating cost activities which include the realization of enhanced operating
effectiveness identified in ongoing reengineering activities. Also,
Distribution must continually pursue regulatory initiatives designed to more
appropriately synchronize rate recovery with the company's ongoing cost levels,
as well as provide incentives for superior operating and customer service
levels.
39
<PAGE> 42
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS (CONTINUED)
Operating income for the first six months of 1994 decreased $12.1 million from
the same period last year as the $4 million increase in net revenues was more
than offset by a $16.1 million increase in operating expenses. After adjusting
for the effect of the suspension of the customer low-income payment plan,
operating expenses increased $26.2 million. The higher expenses primarily
reflect normal increases and added costs associated with the new operating
environment resulting from Order 636 discussed previously. Also contributing
to the increase in operating expense was an increase in depreciation expense
due to plant additions that was offset by a favorable impact to net income for
Columbia Gas of Ohio's unique regulatory arrangement mentioned above. These
additions along with higher taxable revenues also resulted in increased
property and gross receipts taxes.
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
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- -----------------
1994 1993 1994 1993
----- ----- ----- -----
(millions)
<S> <C> <C> <C> <C>
NET REVENUES
Gas marketing revenues $ 57.8 $ 38.5 $125.7 $ 67.3
Less: Products purchased 55.9 38.1 122.0 66.1
------- ------- ------- -------
Net Gas Marketing Revenues 1.9 0.4 3.7 1.2
------- ------- ------- -------
Propane revenues 8.2 9.7 35.2 30.5
Less: Products purchased 4.5 5.7 17.7 16.3
------- ------- ------- -------
Net Propane Renvenues 3.7 4.0 17.5 14.2
------- ------- ------- -------
Other Revenues 16.2 18.9 36.7 37.7
------- ------- ------- -------
Net Revenues 21.8 23.3 57.9 53.1
------- ------- ------- -------
OPERATING EXPENSES
Operation and maintenance 18.3 21.3 39.1 42.8
Depreciation and depletion 1.7 1.5 3.5 3.0
Other taxes 1.3 1.3 2.9 2.7
------- ------- ------- -------
Total Operating Expenses 21.3 24.1 45.5 48.5
------- ------- ------- -------
OPERATING INCOME (LOSS) $ 0.5 $ (0.8) $ 12.4 $ 4.6
======= ======= ======= =======
PROPANE SALES (MILLIONS OF GALLONS)
Retail 6.1 6.8 27.6 24.5
Wholesale and other 2.1 1.7 10.5 6.9
------- ------- ------- -------
Total Propane Sales 8.2 8.5 38.1 31.4
======= ======= ======= =======
</TABLE>
41
<PAGE> 44
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
On July 18, 1994, the Corporation announced plans to create a natural gas
market center. The Columbia Gas Market Center will be operated by Columbia
Energy Services Corporation, the Corporation's gas marketing company, from its
offices in Pittsburgh. The Market Center will offer a variety of natural gas
supply services designed to meet the requirements of local utilities, marketers
and large end users with the initial focus on markets currently served by the
Corporation's distribution and pipeline subsidiaries. Initially, the Market
Center will facilitate pipeline capacity releases, arrange for gas redeliveries
and short-term natural gas storage, and offer an electronic gas market
information system. The opening of the center is targeted for October 1, 1994.
Cogeneration
Independent power production remains a growth area for natural gas. The
Corporation is involved in several cogeneration projects through TriStar
Ventures Corporation (TriStar), a wholly-owned subsidiary. With the opening of
a 47-megawatt cogeneration facility on June 1, 1994 in Vineland, New Jersey,
TriStar now holds various interests in four operating facilities which total
nearly 300 megawatts.
Net Revenues
Increased gas marketing activities resulted in both higher revenues and gas
purchased expense which increased net revenues by $1.5 million and $2.5 million
for the three months and six months ended June 30, 1994, respectively. The
benefits to the Corporation of this function also come from providing a more
comprehensive marketing activity for the Corporation's gas production and
transportation services.
Second quarter net revenues from propane operations decreased $0.3 million due
to a drop in retail sales volumes which was partially offset by an increase in
margin as depressed propane market prices reduced supply costs. Colder weather
in the first quarter of this year resulted in higher sales volumes and margins
and led to the $3.3 million improvement in net revenues for the first half of
1994.
Other revenues for both the current second quarter and six-month periods
reflected a decrease of $2.7 million and $1 million, respectively, for services
provided to affiliates by Columbia Gas System Service Corporation.
42
<PAGE> 45
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OTHER ENERGY OPERATIONS (CONTINUED)
Operating Income
Operating income for the second quarter of 1994 was $0.5 million compared to an
operating loss of $0.8 million for the same quarter last year. The decrease in
net revenues of $1.5 million was more than offset by a $2.8 million reduction
in operating expenses reflecting increased efficiencies and the beneficial
effect of reengineering.
Operating income for the six months ended June 30, 1994 was $12.4 million, an
increase of $7.8 million, reflecting the $4.8 million increase in net revenues
and a $3 million reduction in operating expenses.
43
<PAGE> 46
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 March 31, 1994, dated May 13, 1994, except as
follows:
I. Bankruptcy Matters
A. Appeal to the United States District Court for the District of
Delaware of Bankruptcy Matters
1. Columbia Gas System v. First National Bank of Boston, C.A. No.
94-230. In this adversary proceeding charging the Corporation
with tortious interference with contract for nonpayment of
LESOP debt, First National Bank of Boston's motion for
preliminary injuction was denied on May 27, 1994. The
Corporation filed its opening brief in support of its appeal
of the Bankruptcy Court's order denying the Corporation's
motion for summary judgment on June 1, 1994. First National
Bank of Boston filed its answering brief on June 15, 1994 and
the Corporation's reply brief was filed on June 24, 1994.
2. Columbia Gas Transmission Corporation v. The Columbia Gas
System, Inc. and Columbia Natural Resources, Inc., C.A. No.
92-453. In this Intercompany Complaint, order granting the
motion to withdraw jurisdictional reference was granted on May
25, 1994 and the matter placed before the District Court.
II. 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 the
lower court's judgment against Columbia Transmission and
remanded the matter to the trial court for proceedings not
inconsistent with the Court of Appeals' opinion.
III. Regulatory Matters
A. Take-or-Pay and Contract Reformation Costs Billed by Pipeline
Suppliers
1. Columbia Gas Transmission Corp., FERC Dkt. No.
RP91-41, appeals pending sub nom., Baltimore Gas &
Electric Co. v. FERC, C.A. No. 88-1779 U.S. Ct. of
App., D.C. Cir.). 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. The case will be remanded to the FERC
for a determination of which of such charges relate
to Columbia Transmission's purchasing decisions prior
to April 1, 1987. Columbia Transmission is presently
assessing financial impact of this decision.
44
<PAGE> 47
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS (CONTINUED)
B. Direct Billing of Past Period Production and Production-
Related Costs
1. Columbia Gas Transmission Corp. v. FERC, C.A. No.
88-1701 (U.S. Ct of App., D.C. Circuit). On May 19,
1994, FERC asked the affected parties to brief the
appropriate remedies for the filed rate doctrine and
retroactive ratemaking violations. Columbia
Transmission and other customers argued for full
refunds with interest, whereas the pipelines argued
for no refunds.
C. Pipeline Exit Fees
Columbia Gas Transmission Corporation, et al., Dkt
No. RP94-113-000, et al. On June 30, 1994, FERC
approved an agreement between Columbia Transmission
and Tennessee Gas Pipeline Company (Tennessee) which
provided for a reduction and early termination of
contracts in consideration for Columbia
Transmission's payment of an exit fee of
approximately $40 million. FERC rejected objections
of several customers and permitted Columbia
Transmission full recovery of the exit fee from its
customers. The Bankruptcy Court had approved this
settlement on November 15, 1993.
In June and July, 1994 Columbia Transmission filed
with FERC and the Bankruptcy Court similar fee
settlement agreements with four other pipelines
providing for exit fees and cure costs totalling
$68.1 million. The Bankruptcy Court approved the
agreements on July 20, 1994.
IV. Other
A. Minerals Management Service (MMS). Columbia Gas Development
has reached a settlement with the MMS providing audit closure
relative to the MMS demands for additional royalties for the
audit periods of October 1, 1983 to December 31, 1985 and
January 1, 1986 to December 31, 1990. Under the terms of the
settlement Columbia Development will remit to the MMS
approximately $500,000 in additional royalties and interest
and withdraw its administrative appeal and judicial appeals in
case no. 3:92-CV2199-T.
V. Environmental
A. Columbia Gas Transmission Corp. v. Aetna Casualty & Surety
Co., et al., C.A. No. 94-C-454. Several insurers received an
extension of the time to respond to May 31, 1994.
45
<PAGE> 48
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS (CONTINUED)
B. Commonwealth Gas Services/Virginia Department of Environmental
Quality. Commonwealth is negotiating a Memorandum of
Agreement for the voluntary remediation of a former Petersburg
manufactured gas production site with the Virginia Department
of Environmental Quality.
C. Portsmouth Redevelopment and Housing Authority and
Commonwealth Gas Services, Inc. (Commonwealth) v. BMI
Apartment Associates, C.A. No. 2:93CV242, (U.S. Dist. Ct. E.D.
Va., filed March 25, 1993). On July 22, 1994, this matter was
settled. Commonwealth is negotiating a Memorandum of
Agreement with the Virginia Department of Environmental
Quality to begin addressing the environmental concerns at the
site.
46
<PAGE> 49
PART II - OTHER INFORMATION
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
As of June 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 second
quarter $488.9 million of short-term indebtedness was also in
default for nonpayment.
Item 4. Submission of Matters to Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
(11) Statement re Computation of Per Share Earnings, a copy
of which is attached hereto as PART II, EXHIBIT 11, pursuant
to Regulation 229.601(b)(11).
(12) Statements of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends, a copy of which is attached hereto
as PART II, EXHIBIT 12, pursuant to Regulation
229.601(b)(12).
b. Reports on Form 8-K
The following reports on Form 8-K were not previously reported.
<TABLE>
<CAPTION>
Financial
Item Statements
Reported Included Date Filed
-------- ---------- --------------
<S> <C> <C>
5 No May 18, 1994
5 No May 31, 1994
5 No June 6, 1994
5 No June 30, 1994
5 No July 19, 1994
5 No July 21, 1994
</TABLE>
47
<PAGE> 50
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
The Columbia Gas System, Inc.
-----------------------------------
(Registrant)
Date: August 11, 1994 By: /s/ Richard E. Lowe
--------------------------------------------
R. E. Lowe
Vice President, Controller and
Chief Accounting Officer
48
<PAGE> 51
EXHIBIT INDEX
Exhibit No. Description
- - ----------- -----------
11 Statement re Computation of Per Share Earnings
12 Statements of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends
<PAGE> 1
Exhibit 11
THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES
Statements Re Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
------------------- -----------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Computation for Statements of Consolidated
- - ------------------------------------------
Income ($ in millions)
- - ----------------------
Income (loss) before cumulative effect of accounting change . . . . 47.8 (2.6) 188.0 137.2
Cumulative effect of change
in accounting for postemployment benefits . . . . . . . . . . . . - - (5.6) -
- - ------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . 47.8 (2.6) 182.4 137.2
- - ------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share of common stock
(based on average shares outstanding ($)
Before cumulative effect of accounting change . . . . . . . . . . . 0.95 (0.06) 3.72 2.71
Cumulative effect of accounting change . . . . . . . . . . . . . . - - (0.11) -
- - ------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) on common stock . . . . . . . . . . . . . . . . . . 0.95 (0.06) 3.61 2.71
==============================================================================================================================
- - ------------------------------------------------------------------------------------------------------------------------------
Additional computation of average common
shares outstanding (thousands) (NOTE)
- - ------------------------------------------------------------------------------------------------------------------------------
Average shares of common stock outstanding . . . . . . . . . . . . 50,559 50,559 50,559 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 4 4
- - ------------------------------------------------------------------------------------------------------------------------------
Average common shares as adjusted . . . . . . . . . . . . . . . . . 50,563 50,563 50,563 50,563
==============================================================================================================================
Average shares of common stock outstanding . . . . . . . . . . . . 50,559 50,559 50,599 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 4 4
- - ------------------------------------------------------------------------------------------------------------------------------
Average common shares assuming full dilution . . . . . . . . . . . 50,563 50,563 50,563 50,563
==============================================================================================================================
Earnings (loss) per share of common stock
as adjusted:
Before cumulative effect of accounting change . . . . . . . . . . . 0.95 (0.06) 3.72 2.71
Cumulative effect of accounting change . . . . . . . . . . . . . . - - (0.11) -
- - ------------------------------------------------------------------------------------------------------------------------------
Average common shares as adjusted ($) . . . . . . . . . . . . . . . 0.95 (0.06) 3.61 2.71
==============================================================================================================================
Earnings (loss) per common shares assuming full
dilution:
Average common shares assuming full dilution ($) . . . . . . . . . 0.95 (0.06) 3.61 2.71
==============================================================================================================================
Earnings (loss) per common shares assuming full
dilution:
Before cumulative effect of accounting change . . . . . . . . . . . 0.95 (0.06) 3.72 2.71
Cumulative effect of accounting change . . . . . . . . . . . . . . - - (0.11) -
- - ------------------------------------------------------------------------------------------------------------------------------
Average common shares assuming full dilution ($) . . . . . . . . . 0.95 (0.06) 3.61 2.71
==============================================================================================================================
</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%.
<PAGE> 1
Exhibit 12
THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES
Statements of Ratio of Earnings to Fixed Charges
($ in millions)
<TABLE>
<CAPTION>
Twelve Months Twelve Months
Ended June 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
and Cumulative Effect of Accounting Change . . . . . . . . . 371.4 315.4 288.1 161.4
Adjustments:
Interest during construction . . . . . . . . . . . . . . . - - - -
Distributed (Undistributed) equity income . . . . . . . . . (0.8) (1.2) (0.1) (0.1)
Fixed charges . . . . . . . . . . . . . . . . . . . . . . 76.5 17.7 101.5 13.7
--------- --------- -------- ---------
Earnings Available . . . . . . . . . . . . . . . . . . . 447.1 331.9 389.5 175.0
--------- --------- -------- ---------
Fixed Charges:
Interest on long-term and short-term debt . . . . . . . . . 1.3 4.3 3.1 4.9
Other interest . . . . . . . . . . . . . . . . . . . . . . 75.2 13.4 98.4 8.8
--------- --------- -------- ---------
Total Fixed Charges before Adjustments*,** . . . . . . . 76.5 17.7 101.5 13.7
--------- --------- -------- ---------
Adjustments:
Gain/(Loss) on reacquired debt . . . . . . . . . . . . . . - - - -
--------- --------- -------- --------
Total Fixed Charges . . . . . . . . . . . . . . . . . . . 76.5 17.7 101.5 13.7
--------- --------- -------- --------
Ratio of Earnings Before Taxes to Fixed Charges . . . . . . . 5.84 18.75 3.84 12.77
========= ========= ======== ========
</TABLE>
<TABLE>
<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
and Cumulative Effect of Accounting Change . . . . . . . . . (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 $212 million interest expense not
recorded in the twelve months ended June 30, 1994, $227 million
interest expense not recorded in the twelve months ended June 30,
1993, $212 million, $225 million and $86 million of interest expenses
not recorded for 1993, 1992 and 1991. Reference is made to the
Statements of Consolidated Income for the quarterly period ended
March 31, 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 June 30, 1994
and June 30, 1993, respectively. Also included 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.
