<PAGE> 1
File No. 70-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form U-1
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
THE COLUMBIA GAS SYSTEM, INC.
20 Montchanin Road
Wilmington, DE 19807
- --------------------------------------------------------------------------------
(Name of Company or Companies Filing This Statement
and Addresses of the Principal Executive Offices)
THE COLUMBIA GAS SYSTEM, INC.
- --------------------------------------------------------------------------------
(Name of Top Registered Holding Company Parent of
Each Applicant or Declarant)
L. J. BAINTER, TREASURER
The Columbia Gas System, Inc.
20 Montchanin Road
Wilmington, DE 19807
- --------------------------------------------------------------------------------
(Name and Address of Principal Agent for Service)
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Item 1. Description of Proposed Transaction.
(a) Furnish a reasonably detailed and precise description of the
proposed transaction, including a statement of the reasons why it is desired to
consummate the transaction and the anticipated effect thereof. If the
transaction is part of a general program, describe the program and its relation
to the proposed transaction.
The Columbia Gas System, Inc. ("Columbia"), a Delaware corporation and
a public utility holding company registered under the Public Utility Holding
Company Act of 1935 (the "Act"), hereby files this Application-Declaration
seeking Securities and Exchange Commission ("Commission") approval to enter
into interest rate hedge transactions to limit its exposure to a potential rise
in long-term interest rates from now until the interest rates on its long-term
debt are fixed upon its emergence from bankruptcy. Columbia's interest rate
exposure is due to a projected fixed rate debt issuance of approximately $2.1
billion to fund Columbia's plan of reorganization (the "Columbia Plan") as more
fully described in Exhibit D-2 to this Application-Declaration.
Columbia and Columbia Gas Transmission Corporation, a Delaware
corporation and wholly owned subsidiary of Columbia, are debtors-in-possession
under Chapter 11 of the United States Bankruptcy Code.
I. FINANCING CONTEMPLATED UNDER THE COLUMBIA PLAN
Under the Columbia Plan, Columbia may issue up to $3.65 billion in new
securities(1). The Columbia Plan contemplates the issuance of up to $2.1
billion in debentures (the "New Indenture Securities") to be issued under a
new form of indenture, the entering into of bank facilities (the "Bank
Facilities") totaling up to $1.15 billion (for a maximum of $3.25 billion in
debt) and the issuance of
- ----------------------------------
(1) In the event that certain post-emergence contingencies addressed
in the Columbia Plan occur, Columbia may issue new securities in excess of $3.65
billion.
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up to $400 million of equity through the issuance of preferred stock and of
Dividend Enhanced Convertible Stock(TM)(2). Columbia seeks the flexibility to
mitigate the interest rate risk inherent in the future issuance of the New
Indenture Securities through the implementation of certain hedging strategies
as described below.
The New Indenture Securities are to be issued in seven series (each,
a "Series") with the respective maturities as follows:
<TABLE>
<CAPTION>
Approximate
Series Maturity
------ --------
<S> <C>
Series A 5 years
Series B 7 years
Series C 10 years
Series D 12 years
Series E 15 years
Series F 20 years
Series G 30 years
</TABLE>
The principal amount of each Series will be substantially the same as
that of each other Series; provided, however, that no Series other than Series
A will have an initial principal amount that is more than 150% of that of any
other Series. Each New Indenture Security will bear interest from the
- ----------------------------------
(2) If at emergence, cash available through the Bank Facilities or from
operations is reduced, the principal amount of New Indenture Securities to be
issued would be increased proportionately. Under no circumstances would the
aggregate of New Indenture Securities and Bank Facilities under the Columbia
Plan exceed $3.25 billion.
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effective date (the "Effective Date", currently anticipated to be December 31,
1995) of the Columbia Plan, payable semi-annually, on dates to be determined,
to the registered holder at the close of business on the applicable record
date. The rate of interest to be borne by the New Indenture Securities of each
Series will be determined prior to the Effective Date based on market rates for
securities of similar maturities and debt rating and in accordance with the
pricing methodology set forth in the Columbia Plan.
II. HEDGING COLUMBIA'S INTEREST RATE RISK EXPOSURE
Columbia has interest rate risk exposure associated with the future
issuance of New Indenture Securities (the "New Issuance"). For example, a 100
basis point increase in interest rates between now and the Effective Date would
cost Columbia approximately $21 million annually.
The cost of borrowing for the New Indenture Securities will be equal
to the yield on benchmark U.S. Treasury securities plus a spread based on the
average spread, over relevant U.S. Treasury yields, of comparable corporate
debt securities. The financial market provides an avenue to hedge the U.S.
Treasury security component embedded in the ultimate cost of borrowing to
Columbia, but not the spread.
Recent declines in long-term interest rates permit Columbia to lock in
historically attractive interest rates on its New Indenture Securities.
Current U.S. Treasury yields are trading close to twenty-five year lows.
Columbia could have one of the lowest long-term debt cost structures in its
industry if it was afforded the opportunity to lock in current rates.
To provide Columbia protection against higher long-term interest
rates, Columbia requests authorization to enter into an interest rate hedging
program prior to the New Issuance (the "Hedge Program"). The Hedge Program
would be utilized to fix and/or limit the interest rate risk exposure
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on the U.S. Treasury security component of the New Issuance through (i) a
forward sale of exchange-traded U.S. Treasury futures contracts, U.S. Treasury
securities and/or a forward swap (each a "Forward Sale"), (ii) the purchase of
put options on U.S. Treasury securities (a "Put Options Purchase"), (iii) a Put
Options Purchase in combination with the sale of call options on U.S. Treasury
securities (a "Zero Cost Collar"), or (iv) some combination of a Forward Sale,
Put Options Purchase and/or Zero Cost Collar. The Hedge Program may be
executed on-exchange ("On-Exchange Trades") with brokers through the opening of
futures and/or options positions traded on the Chicago Board of Trade ("CBOT"),
the opening of over-the-counter positions with one or more counterparties
("Off-Exchange Trades") or a combination of On-Exchange Trades and Off-Exchange
Trades. While it is debatable whether Columbia's proposed Hedge Program
involves the jurisdictional acquisition of a "security" or an extension of
credit under the Act, noting that at least a couple strategies do not,(3)
Columbia nevertheless seeks Commission approval of the entire Hedge Program to
ensure the maximal flexibility in structuring effective interest rate hedging
strategies.
Due to the size of the Hedge Program (interest cost on up to $2.1
billion principal amount of New Issuance), Off-Exchange Trades may be used to
avoid execution costs associated with On-Exchange Hedge Trades. Also,
Off-Exchange Trades possibly may match more effectively the duration of the
Hedge Program with the timing of the New Issuance.
Off-Exchange Trades provide similar interest rate protection as
On-Exchange Trades and are entered with a financial counterparty, e.g., an
investment banking firm, commercial bank or some
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(3) See HCAR No. 35-26312, 60 F.R. 33640, 33641, n.12 (June 28, 1995)
(noting the Commission's exercise of jurisdiction under Sections 6(a) and 7 of
the Act over interest rate caps, floors and collars).
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other form of financial intermediary. Unlike On-Exchange Trades, Off-Exchange
Trades do not have the credit support of the CBOT. Columbia must bear the
credit risk of counterparties to the Off-Exchange Trades and, therefore, may
diversify its Off-Exchange Trades with multiple counterparties should it embark
on such transactions. The duration of the Hedge Program will be short-term,
lasting from the date of execution until the Effective Date. The short length
of the Hedge Program minimizes this counterparty risk and, therefore, Columbia
may choose not to diversify for ease of execution. However, Columbia will
enter into Off-Exchange Trades only with counterparties whose deposit or
long-term debt have no lower than an "BBB3" rating from Moody's Investors
Service, Inc., or an "BBB-" rating from Standard & Poor's Corporation, or an
equivalent rating from Fitch Investors Service or Duff & Phelps.
All transactions entered into under Columbia's Hedging Program will be
bona fide hedges of interest rate risk and will meet the criteria established
by the Financial Accounting Standards Board in "Statement of Financial
Accounting Standards No. 80-Accounting for Futures Contracts ("SFAS")." SFAS
80 establishes the criteria which must be satisfied in order to qualify for
hedge accounting treatment,(4) and the financial disclosure requirements
associated with hedging transactions.
Columbia will determine the optimal structure of the Hedge Program at
the time of execution. Columbia may decide to lock in interest rates and/or
limit its exposure to interest rate increases. All
- ----------------------------------
(4) SFAS 80 requires that (i) the item to be hedged exposes the
enterprise to price or interest rate risk, (ii) the hedging instrument reduces
that exposure and is designated as a hedge, (iii) the significant
characteristics and expected terms of the anticipated financial transaction are
identified, and (iv) it is probable the expected transaction will occur. As
such, hedging transactions should not result in an increased risk to Columbia.
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open positions under the Hedge Program will be closed on or prior to the date
of the New Issuance and Columbia will not, at any time, take possession of the
underlying U.S. Treasury securities.
III. HEDGE STRATEGIES
A. Forward Sale
A Forward Sale would lock-in the U.S. Treasury security component of
the New Issuance by Columbia agreeing to sell U.S. Treasury securities in a
known amount and on a known future date utilizing the U.S. Treasury futures
market, forward U.S. Treasury security contracts and/or the forward swap
market.
Using a Forward Sale strategy of U.S. Treasury securities, Columbia
would lock-in the U.S. Treasury security component of the New Issuance at the
then current Treasury forward yield by selling ("shorting") the U.S. Treasury
futures market and/or by selling spot U.S. Treasury securities forward.
Columbia would reverse its short positions on or around the Effective Date by
purchasing the U.S. Treasury futures contracts and/or U.S. Treasury securities
previously sold.
In a Forward Sale utilizing a forward swap, Columbia would lock-in the
swap rate (U.S. Treasury component + swap spread) by entering into a forward
swap (with a counterparty) as the fixed rate payor. The swap spread is due, in
part, to the relative investors/borrowers appetite for receiving/paying fixed
versus floating rates.
In a forward swap, Columbia would agree to enter into a
fixed-to-floating rate swap, as of a future settlement date. The future
settlement date will be on or around the Effective Date. In the swap
agreement, Columbia would contract to pay a fixed rate and receive
floating-rate payments (i.e.,
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LIBOR). On or about the Effective Date, Columbia would unwind the swap by
entering a floating-to-fixed rate swap.
Each of the Forward Sale alternatives would provide Columbia with
similar lock-in protection with respect to future movements in U.S. Treasury
rates. The alternative(s) ultimately chosen will depend on market conditions
(e.g., pricing) at the time of entering the hedge position.
The hypothetical Forward Sale example below utilizing a U.S. Treasury
Forward Sale is based upon quoted market rates and indices for 10 year
securities at June 22, 1995.
<TABLE>
<CAPTION>
U.S. Treasury
Forward Sale
------------
<S> <C>
10 Year U.S. Treasury
Yield (%) 6.12
Forward Spread (%) 0.15
----
Lock-In Rate (%) 6.27
</TABLE>
Under a Forward Sale of a notional amount of $1.0 million, if interest
rates rise 100 basis points, prices of the shorted hedge contracts would fall
resulting in a gain to Columbia of approximately $69,400, because Columbia
would close the short contracts at a lower price. The gains from the hedge
positions would be offset ratably over the life of the financing (10 years)
from the higher financing cost of Columbia's New Issuances. If interest rates
decline 100 basis points, the losses by the hedge positions (approximately
$76,200) would be offset ratably over the life of the financing (10 years) by
the lower financing cost of the New Issuance. There is no up-front cost
associated with a Forward Sale strategy. The accounting entries for this
Forward Sale example are as follows:
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ACCOUNTING ENTRIES FOR A FORWARD SALE
<TABLE>
<S> <C> <C>
1. Interest Rates Rise By 100 Basis Points
(a) Cash $69,400
Deferred Gain $69,400
To record the settlement of the forward contract.
(b) Deferred Gain $6,940
Interest Expense $6,940
To record one year's amortization of the deferred gain.
2. Interest Rates Decline By 100 Basis Points
(a) Deferred Loss $76,200
Cash $76,200
To record the settlement of the forward contract.
(b) Interest Expense $7,620
Deferred Loss $7,620
To record one year's amortization of the deferred loss.
</TABLE>
B. Put Options/Zero Cost Collar
Using a Put Options Purchase strategy, Columbia would buy the right,
but not the obligation, to sell U.S. Treasury securities forward at a
predetermined price or yield. A Put Options Purchase would protect Columbia
from a rise in U.S. Treasury rates and would permit Columbia to benefit from a
decline in U.S. Treasury rates. To purchase this right, Columbia would be
required to pay an up-front option premium.
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The hypothetical Put Options Purchase example below is based upon
quoted market rates and indices for 10 year securities at June 22, 1995.
<TABLE>
<CAPTION>
Put Options
Purchase
------------
<S> <C>
10 Year U.S. Treasury Yield (%) 6.12
Annualized NPV Cost of Put Options (%) 0.38*
Forward Spread (%) 0.15
----
Upper Limit of U.S. Treasury Rate (%) 6.65
</TABLE>
* The up-front premium would be 2.60% of the notional
amount hedged. Amortized over a 10 year life, the annual cost would be
approximately .38%. A notional amount of $1.0 million would require an
up-front premium of $26,000. Because the premium is paid up-front, it
would have an effective annualized implied cost of 38 basis points
(equivalent to $3,800) during the 10 year life of a new financing.
Under a Put Option Purchase of a notional amount of $1.0 million, if
interest rates rise 100 basis points, a net gain of approximately $42,400
($69,400 gain less $26,000 option premium) from the put option hedge positions
would be offset ratably over the life of the financing (10 years) by the higher
financing cost of Columbia's New Issuance. If interest rates decline 100 basis
points, Columbia would benefit from the lower financing cost of the New
Issuance. However, the cost of the option, which would expire worthless, would
lower the benefit. The accounting entries for this Put Options Purchase
example are as follows:
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ACCOUNTING ENTRIES FOR A PUT OPTION PURCHASE
<TABLE>
<S> <C> <C>
1. Interest Rates Rise By 100 Basis Points.
(a) Option Premium $26,000
Cash $26,000
To record the purchase of the put option.
(b) Cash $69,400
Deferred Gain $69,400
To record the effect of exercising the option.
(c) Interest Expense $2,600
Option Premium $2,600
To record one year's amortization of the premium.
(d) Deferred Gain $6,940
Interest Expense $6,940
To record one year's amortization of the deferred
gain.
2. Interest Rates Decline By 100 Basis Points.
(a) Option Premium $26,000
Cash $26,000
To record the purchase of the put option.
(b) Interest Expense $2,600
Option Premium $2,600
To record one year's amortization of the premium.
</TABLE>
Using a Zero Cost Collar strategy, Columbia would buy the right to sell
U.S. Treasury securities forward at a predetermined price and yield (through a
put option purchase) and Columbia, would sell the right to buy the same U.S.
Treasury securities forward at a higher predetermined price and lower
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yield (a sale of a call option). The premiums paid for the put options are
financed with the premiums received on the call options that are sold,
hence "zero cost".
The hypothetical Zero Cost Collar example below is based upon quoted
market rates and indices for 10 years securities at June 22, 1995.
<TABLE>
<CAPTION>
Zero Cost
Collar
--------------
<S> <C>
10 Year U.S. Treasury Yield (%) 6.12
Forward Spread (%) 0.15
----
Forward Yield (%) 6.27
</TABLE>
<TABLE>
<CAPTION>
Locked-In Yield
-------------------------------
Minimum Maximum
------- -------
<S> <C> <C>
Zero Cost Collar Capped at 30
Basis Points Out-Of-The Money (%)* 6.10 6.57
</TABLE>
* The Zero Cost Collar provides a floor interest rate of 6.10%, 17
basis points out-of-the-money. The difference between the 30 basis
points maximum out-of-the money put rate and the 17 basis points
out-of-the-money call rate is a probable outcome as the collar would
not be symmetrical around the forward yield (6.27%) due to pricing of
the bid/ask spreads for both the put and call transactions.
In a Zero Cost Collar, Columbia would participate in market rate
movements between the put options and call options strike and yield levels. If
the comparable U.S. Treasury security yield rises 100 basis points (70 basis
points above the put option strike level), Columbia would exercise the put
options and lock in the puts' strike yield for a gain of approximately $48,600.
If the U.S. Treasury yield rallies below the call options strike level, a
counterparty would exercise the call
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options resulting in a loss of approximately $63,200 and Columbia would have
locked in an interest rate floor at the calls' strike yield. The accounting
entries for this Zero Cut Collar example are as follows:
ACCOUNTING ENTRIES FOR A ZERO COST COLLAR
<TABLE>
<S> <C> <C>
1. Interest Rates Rise By 100 Basis Points
(a) Cash $48,600
Deferred Gain $48,600
To record the effect of exercising the option.
(b) Deferred Gain $4,860
Interest Expense $4,860
To record one year's amortization of the deferred
gain.
2. Interest Rates Decline By 100 Basis Points
(a) Deferred Loss $63,200
Cash $63,200
To record the effect of the counterparty exercising
the option.
(b) Interest Expense $6,320
Deferred Loss $6,320
To record one year's amortization of the deferred
loss.
</TABLE>
On-Exchange Trades of options are executed on the CBOT.
CBOT put option contracts are standardized contracts for the option to sell
U.S. Treasury futures and CBOT call option contracts are standardized contracts
for the option to buy U.S. Treasury futures.
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Reporting Requirements
Within forty-five days following the close of each calendar quarter,
commencing September 30, 1995, Columbia will submit a report to the Commission
disclosing the following information with respect to the Hedge Program:
- the trade date, the type of hedge instruments opened,
- the notional principal amount,
- a description of the material terms of the transaction including the
maturity or termination date of each instrument, the interest rate
fixed in the case of a Forward Sale, the strike rate in the case of a
Put Options Purchase and the floor and ceiling interest rate in the
case of a Zero Cost Collar,
- the name of the counterparty in the case of an Off-Exchange Trade,
- the market value of all open positions, and
- any gains and losses realized from liquidation during such quarter of
any position.
Summary of Authorization Sought
Columbia seeks Commission authorization to enter into the Hedge Program
in order to protect up to $2.1 billion of New Issuance from a potential rise in
interest rates.
(b) Describe briefly, and where practicable state the approximate amount
of, any material interest in the proposed transaction, direct or indirect, of
any associate or affiliate of the applicant or declarant company or any
affiliate of any such associate company.
Not applicable.
(c) If the proposed transaction involves the acquisition of securities
not issued by a registered holding company or subsidiary thereof, describe
briefly the business and property, present or proposed, of the issuer of such
securities.
Not applicable.
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PAGE 15
(d) If the proposed transaction involves the acquisition or disposition
of assets, describe briefly such assets, setting forth original cost, vendor's
book cost (including the basis of determination) and applicable valuation and
qualifying reserves.
Item 2. Fees, Commissions and Expenses.
(a) State (1) the fees, commissions and expenses paid or incurred, or to
be paid or incurred, directly or indirectly, in connection with the proposed
transaction by the applicant or declarant or any associate company thereof, and
(2) if the proposed transaction involves the sale of securities at competitive
bidding, the fees and expenses to be paid to counsel selected by applicant or
declarant to act for the successful bidder.
<TABLE>
<S> <C>
Securities and Exchange Commission Filing Fee . . . . . . . . . . . . . . . . $ 2,000
Services of Columbia Gas System Service
Corporation in connection with the preparation
of the Application-Declaration . . . . . . . . . . . . . . . . . . . . . . 10,000
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,000
</TABLE>
(b) If any person to whom fees or commissions have been or are to be
paid in connection with the proposed transaction in an associate company or an
affiliate of the applicant or declarant, or is an affiliate of an associate
company, set forth the facts with respect thereto.
Service will perform certain services at cost as set forth in Item
2(a) above.
Item 3. Applicable Statutory Provisions.
(a) State the section of the Act and the rules thereunder believed to
be applicable to the proposed transaction. If any section or rule would be
applicable in the absence of a specific exemption, state the basis of
exemption.
As noted, to the extent that Columbia's Hedge Program involves the
jurisdictional acquisition of a "security" or an "extension of credit,"
Sections 6(a), 7, 9(a), 10 and 12(b) of the Act and Rules 23, 24 and 45
promulgated thereunder are applicable to the proposed transactions. To the
extent any other section of the Act may be applicable to the proposed
transactions, Columbia hereby requests appropriate orders thereunder.
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(b) If any person to whom fees or commissions have been or are to be
paid in connection with the proposed transaction is an associate company or an
affiliate of any applicant or declarant, or is an affiliate of an associate
company, set forth the facts with respect thereto.
Not applicable.
Item 4. Regulatory Approval.
(a) State the nature and extent of the jurisdiction of any State
commission or any Federal commission (other than the Securities and Exchange
Commission) over the proposed transaction.
In the opinion of counsel, the approval of the U.S. Bankruptcy Court
for the District of Delaware is necessary for the consummation of the proposed
transaction.
(b) Describe the action taken or proposed to be taken before any
commission named in answer to paragraph (a) of this item in connection with the
proposed transaction.
Filings for approval of the proposed transaction will be made with the
U.S. Bankruptcy Court for the District of Delaware.
Item 5. Procedure.
(a) State the date when Commission action is requested. If the date
is less than 40 days from the date of the original filing, set for the reasons
for acceleration.
It is requested that the Commission issue its notice by July 28, 1995
and its order as soon as practicable after the file is completed. Time is of
the essence as interest rates may move against Columbia.
(b) State (i) whether there should be a recommended decision by a
hearing officer, (ii) whether there should be a recommended decision by any
other responsible officer of the Commission, (iii) whether the Division of
Investment Management may assist in the preparation of the Commission's
decision, and (iv) whether there should be a 30-day waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
Applicants hereby (i) waive a recommended decision by a hearing
officer, (ii) waive a recommended decision by any other responsible officer or
the Commission, (iii) consent that the
<PAGE> 17
PAGE 17
Division of Investment Management may assist in the preparation of the
Commission's decision, and (iv) waive a 30-day waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
Item 6. Exhibits and Financial Statements
(a) Exhibits
D-1 Bankruptcy Court Motion and Order (to be filed by
amendment)
D-2 The Columbia Gas System, Inc. Plan of Reorganization and
Disclosure Statement (filed herewith by incorporation by
reference to the Plan of Reorganization and Disclosure
Statement filed in File No. 1-1098 on June 16, 1995)
F Opinion of Counsel (to be filed by amendment)
G Financial Data Schedule
H Proposed Notice
(b) Financial Statements
The Columbia Gas System, Inc. and Subsidiaries
(a) Balance Sheet as of May 31, 1995 (actual)
(b) Statement of Capitalization as of May 31, 1995
(actual)
(c) Statement of Income for the twelve months ended
May 31, 1995 (actual)
(d) Statement of Common Stock Equity as of May 31, 1995
(actual)
There have been no material changes, not in the ordinary course of
business, since the date of the financial statements filed herewith.
Item 7. Information as to Environmental Effects.
(a) Describe briefly the environmental effects of the proposed
transaction in terms of the standards set forth in Section 102 (2) (C) of the
National Environmental Policy Act
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PAGE 18
(42 U.S.C. 4232 (2) (C)). If the response to this term is a negative statement
as to the applicability of Section 102 (2) (C) in connection with the proposed
transaction, also briefly state the reasons for that response.
As more fully described in Item 1, the proposed transaction relates
only to executing a Hedge Program and has no environmental impact in itself.
(b) State whether any other federal agency has prepared or is
preparing an environmental impact statement ("EIS") with respect to the
proposed transaction. If any other federal agency has prepared or is preparing
an EIS, state which agency or agencies and indicate the status of that EIS
preparation.
No federal agency has prepared or, to Columbia's knowledge, is,
preparing and EIS with respect to the proposed transaction.
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PAGE 19
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned company has duly caused this Application-Declaration
to be signed on its behalf by the undersigned thereunto duly authorized.
THE COLUMBIA GAS SYSTEM, INC.
Date: July 17, 1995 By: /s/ L. J. BAINTER
--------------------------
L. J. Bainter
Treasurer
<PAGE> 20
THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES UNAUDITED
6(b)(a)
(1 of 2)
CONSOLIDATED BALANCE SHEET
ACTUAL and PRO FORMA
As of May 31, 1995
($000)
<TABLE>
<CAPTION>
CGS
Actual
-----------
<S> <C>
ASSETS
Property, Plant and Equipment
Gas utility and other plant, at original cost .... 6,714,245
Accumulated depreciation and depletion ........... (3,257,567)
-----------
Net Gas Utility and Other Plant .................. 3,456,678
-----------
Oil and gas producing properties, full cost method 1,255,631
Accumulated depletion ............................ (646,236)
-----------
Net Oil and Gas Producing Properties ............. 609,395
-----------
Net Property, Plant, and Equipment ................. 4,066,073
-----------
Investments and Other Assets
Gas supply prepayments ........................... 387
Accounts receivable - noncurrent ................. 202,841
Unconsolidated affiliates ........................ 74,892
Other ............................................ 8,045
-----------
Total Investments and Other Assets ................. 286,165
-----------
Current Assets
Cash and temporary cash investments .............. 1,973,175
Accounts receivable, net ......................... 430,260
Gas inventories .................................. 145,396
Other inventories at average cost ................ 50,699
Prepayments ...................................... 106,256
Other ............................................ 71,484
-----------
Total Current Assets ............................... 2,777,270
-----------
Deferred Charges ................................... 289,861
-----------
Total Assets ....................................... 7,419,369
===========
</TABLE>
<PAGE> 21
THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES (2 of 2)
CONSOLIDATED BALANCE SHEET
ACTUAL and PRO FORMA
As of May 31, 1995
($000)
<TABLE>
<CAPTION>
CGS
Actual
-----------
<S> <C>
CAPITALIZATION AND LIABILITIES
Capitalization
Stockholder's equity ............................. 1,621,773
Long-term debt ................................... 4,031
-----------
Total Capitalization ............................... 1,625,804
-----------
Current Liabilities
Debt obligations ................................. 1,167
Debtor in possession financing ................... -
Accounts and drafts payable ...................... 128,794
Accrued taxes .................................... 206,285
Accrued interest ................................. (3,137)
Estimated rate refunds ........................... 51,600
Estimated supplier obligations ................... 64,040
Deferred income taxes - current .................. -
Other ............................................ 474,991
-----------
Total Current Liabilities .......................... 923,740
-----------
Liabilities Subject to Chapter 11 Proceedings ..... 3,991,131
-----------
Other Liabilities and Deferred Credits
Deferred income taxes, noncurrent ................ 385,930
Deferred investment tax credits .................. 37,970
Postretirement benefits other than pensions ...... 226,953
Other ............................................ 227,841
-----------
Total Other Liabilities and Deferred Credits ....... 878,694
-----------
Total Capitalization and Liabilities ............... 7,419,369
===========
</TABLE>
<PAGE> 22
THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES UNAUDITED
6(b)(b)
CONSOLIDATED STATEMENT OF CAPITALIZATION
ACTUAL and PRO FORMA
As of May 31, 1995
($000)
<TABLE>
<CAPTION>
CGS
Actual
-----------
<S> <C>
Stockholder's Equity
Common Stock, The Columbia Gas System, Inc.,
$10 par value, authorized 100,000,000 shares,
outstanding 50,573,335 shares ................... 505,733
Additional paid in capital ....................... 602,026
Retained earnings ................................ 583,980
Unearned employee compensation ................... (69,966)
-----------
Total Stockholder's Equity ......................... 1,621,773
-----------
Long-Term Debt
Miscellaneous debt of subsidiaries ............... 2,388
Capitalized lease obligations .................... 1,643
-----------
Total Long-Term Debt ............................... 4,031
-----------
Total Capitalization ............................... 1,625,804
===========
</TABLE>
<PAGE> 23
THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES UNAUDITED
6(b)(c)
STATEMENT OF CONSOLIDATED INCOME
ACTUAL and PRO FORMA
Twelve Months Ended May 31, 1995
($000)
<TABLE>
<CAPTION>
CGS
Actual
-----------
<S> <C>
Operating Revenues
Gas sales......................................... 1,886,243
Transportation ................................... 582,408
Storage .......................................... 26,254
Other ............................................ 198,489
-----------
Total Operating Revenues ........................... 2,693,394
-----------
Operating Expenses
Products purchased .............................. 859,818
Operation ........................................ 884,420
Maintenance ...................................... 131,161
Depreciation and depletion ....................... 271,762
Other taxes ...................................... 210,938
-----------
Total Operating Expenses ........................... 2,358,099
-----------
Operating Income ................................... 335,295
-----------
Other Income (Deductions)
Interest income and other, net ................... 61,314
Interest expense and related charges.............. (36,751)
Reorganization items, net ........................ 4,721
-----------
Total Other Income (Deductions) .................... 29,284
-----------
Income before Income Taxes and Cumulative Effect
of Accounting Change ............................. 364,579
Income taxes ....................................... 132,095
-----------
Income before Cumulative Effect of Accounting
Change ........................................... 232,484
Cumulative Effect of Change in Accounting for
Postemployment Benefits .......................... 91
-----------
Net Income ......................................... 232,575
===========
</TABLE>
<PAGE> 24
THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES UNAUDITED
6(b)(d)
CONSOLIDATED STATEMENTS OF COMMON STOCK EQUITY
ACTUAL and PRO FORMA
Twelve Months Ended May 31, 1995
($000)
<TABLE>
<CAPTION>
CGS
Actual
-----------
<S> <C>
COMMON STOCK
Balance at June 1, 1994 ............................ 505,592
Common stock issued -
Leveraged employee stock ownership plan (LESOP) .. -
Dividend reinvestment plan ....................... -
Long-term incentive plan ......................... 41
Public offering .................................. -
-----------
Balance at May 31, 1995 ............................ 505,633
-----------
ADDITIONAL PAID IN CAPITAL
Balance at June 1, 1994 ............................ 601,759
Common stock issued -
Leveraged employee stock ownership plan (LESOP) .. -
Dividend reinvestment plan ....................... -
Long-term incentive plan ......................... 267
Public offering .................................. -
Preferred stock issued ............................. -
-----------
Balance at May 31, 1995 ............................ 602,026
-----------
RETAINED EARNINGS
Balance at June 1, 1994 ............................ 351,405
Net income ......................................... 232,575
Common stock dividends ............................. -
Other .............................................. -
-----------
Balance at May 31, 1995 ............................ 583,980
-----------
UNEARNED EMPLOYEE COMPENSATION
Balance at June 1, 1994 ............................ (69,966)
Adjustment ......................................... -
-----------
Balance at May 31, 1995 ............................ (69,966)
-----------
TOTAL COMMON STOCK EQUITY .......................... 1,621,673
===========
</TABLE>
<PAGE> 25
PAGE 1
EXHIBIT INDEX
(a) Exhibits
D-1 Bankruptcy Court Motion and Order (to be filed by
amendment)
D-2 The Columbia Gas System, Inc. Plan of Reorganization
and Disclosure Statement (filed herewith by
incorporation by reference to the Plan of
Reorganization and Disclosure Statement filed in File
No. 1-1098 on June 16, 1995)
F Opinion of Counsel (to be filed by amendment)
G Financial Data Schedule
H Proposed Notice
<TABLE> <S> <C>
<ARTICLE> OPUR1
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JUN-1-1994
<PERIOD-END> MAY-31-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,456,678
<OTHER-PROPERTY-AND-INVEST> 895,560
<TOTAL-CURRENT-ASSETS> 2,777,270
<TOTAL-DEFERRED-CHARGES> 289,861
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 7,419,369
<COMMON> 505,733
<CAPITAL-SURPLUS-PAID-IN> 602,026
<RETAINED-EARNINGS> 563,980
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,621,773
0
0
<LONG-TERM-DEBT-NET> 4,031
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 1,643
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 5,793,565
<TOT-CAPITALIZATION-AND-LIAB> 7,419,369
<GROSS-OPERATING-REVENUE> 2,693,394
<INCOME-TAX-EXPENSE> 132,095
<OTHER-OPERATING-EXPENSES> 2,358,099
<TOTAL-OPERATING-EXPENSES> 2,358,099
<OPERATING-INCOME-LOSS> 335,295
<OTHER-INCOME-NET> 66,035
<INCOME-BEFORE-INTEREST-EXPEN> 401,330
<TOTAL-INTEREST-EXPENSE> 36,751
<NET-INCOME> 232,575
0
<EARNINGS-AVAILABLE-FOR-COMM> 232,575
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 0
<EPS-PRIMARY> 4.60
<EPS-DILUTED> 4.60
</TABLE>
<PAGE> 1
PAGE 1
EXHIBIT H
SECURITIES AND EXCHANGE COMMISSION
(Release No. )
The Columbia Gas System, Inc. Notice of Proposed Interest Rate Hedge Program
(the "Hedge Program").
The Columbia Gas System, Inc. ("Columbia"), a registered holding
company located at 20 Montchanin Road, Wilmington, Delaware 19807, has filed an
application-declaration with this Commission pursuant to Sections 6(a), 7, 9(a)
and 12(b) under the Public Utility Holding Company Act of 1935 (the "Act") and
Rules 23, 24 and 45 to the extent that Columbia's Hedge Program involves the
jurisdictional acquisition of a security or an "extension of credit". Columbia
and its wholly-owned transmission subsidiary, Columbia Gas Transmission
Corporation presently are debtors-in-possession under Chapter 11 of the U.S.
Bankruptcy Code in U.S. Bankruptcy Court for the District of Delaware. To the
extent any other section of the Act may be applicable to the proposed
transactions, Columbia hereby requests appropriate orders thereunder.
Columbia is requesting Commission approval to enter into interest rate
hedge transactions to limit its exposure to a potential rise in long-term
interest rates prior to the interest rates on its long-term debt being fixed
upon its emergence from bankruptcy. Columbia's interest rate exposure is
associated with a projected fixed rate debt issuance of approximately $2.1
billion in debentures (the "New Indenture Securities"). For example, a 100
basis point increase in interest rates prior to the emergence date (the
"Effective Date", currently anticipated to be December 31, 1995) would cost
Columbia approximately $21 million annually due to the future issuance of New
Indenture Securities (the "New Issuance").
To provide Columbia protection against higher long-term interest
rates, Columbia proposes to enter into an interest rate Hedge Program prior to
the New Issuance. Recent declines in long-term interest rates permit Columbia
to lock in historically attractive interest rates on its New Indenture
Securities. Current U.S. Treasury yields are trading close to twenty-five year
lows. Columbia could have one of the lowest long-term debt cost structures in
its industry if it was afforded the opportunity to lock in current rates.
The Hedge Program would be utilized to fix and/or limit the interest
rate risk exposure on the U.S. Treasury security component of the New Issuance
through (i) a forward sale of exchange-traded U.S. Treasury futures contracts,
U.S. Treasury securities and/or a forward swap (each a "Forward Sale"), (ii)
the purchase of put options on U.S. Treasury securities (a "Put Options
Purchase"), (iii) a Put Options Purchase in combination with the sale of call
options on U.S. Treasury securities (a "Zero Cost Collar"), or (iv) some
combination of a Forward Sale, Put Options Purchase and/or Zero Cost Collar.
The Hedge Program may be executed on-exchange ("On-Exchange Trades") with
brokers through the opening of futures and/or options positions traded on the
Chicago Board of Trade
<PAGE> 2
PAGE 2
("CBOT"), the opening of over-the-counter positions with one or more
counterparties ("Off-Exchange Trades") or a combination of On-Exchange Trades
and Off-Exchange Trades. While it is debatable whether Columbia's proposed
Hedge Program involves the jurisdictional acquisition of a "security" or an
extension of credit under the Act, noting that at least a couple strategies do
not,(1) Columbia nevertheless seeks Commission approval of the entire Hedge
Program to ensure the maximal flexibility in structuring effective interest rate
hedging strategies.
Due to the size of the Hedge Program (interest cost on up to $2.1
billion principal amount of New Issuance), Off-Exchange Trades may be used to
avoid execution costs associated with On-Exchange Hedge Trades. Also,
Off-Exchange Trades possibly may match more effectively the duration of the
Hedge Program with the timing of the New Issuance.
Off-Exchange Trades provide similar interest rate protection as
On-Exchange Trades and are entered with a financial counterparty, e.g., an
investment banking firm, commercial bank or some other form of financial
intermediary. Unlike On-Exchange Trades, Off-Exchange Trades do not have the
credit support of the CBOT. Columbia must bear the credit risk of
counterparties to the Off-Exchange Trades and, therefore, may diversify its
Off-Exchange Trades with multiple counterparties should it embark on such
transactions. The duration of the Hedge Program will be short-term, lasting
from the date of execution until the Effective Date. The short length of the
Hedge Program minimizes this counterparty risk and, therefore, Columbia may
choose not to diversify for ease of execution. However, Columbia will enter
into Off-Exchange Trades only with counterparties whose deposit or long-term
debt have no lower than an "BBB3" rating from Moody's Investors Service, Inc.,
or an "BBB-" rating from Standard & Poor's Corporation, or an equivalent rating
from Fitch Investors Service or Duff & Phelps.
All transactions entered into under Columbia's Hedging Program will be
bona fide hedges of interest rate risk and will meet the criteria established
by the Financial Accounting Standards Board in "Statement of Financial
Accounting Standards No. 80-Accounting for Futures Contracts ("SFAS")." SFAS
80 establishes the criteria which must be satisfied in order to qualify for
hedge accounting treatment,(2) and the financial disclosure requirements
associated with hedging transactions.
- ----------------------------------
(1) See HCAR No. 35-26312, 60 F.R. 33640, 33641, n.12 (June 28,
1995) (noting the Commission's exercise of jurisdiction under Sections 6(a) and
7 of the Act over interest rate caps, floors and collars).
(2) SFAS 80 requires that (i) the item to be hedged exposes the
enterprise to price or interest rate risk, (ii) the hedging instruments
reduces that exposure and is designated as a hedge, (iii) the significant
characteristics and expected terms of the anticipated financial transaction
are identified, and (iv) it is probable the expected transaction will occur.
As such, hedging transactions should not result in an increased risk to
Columbia.
<PAGE> 3
PAGE 3
Columbia will determine the optimal structure of the Hedge Program at
the time of execution. Columbia may decide to lock in interest rates and/or
limit its exposure to interest rate increases. All open positions under the
Hedge Program will be closed on or prior to the date of the New Issuance and
Columbia will not, at any time, take possession of the underlying U.S. Treasury
securities.
The application-declaration and any amendments thereto are available
for public inspection through the commission's Office of Public Reference.
Interested persons wishing to comment or request a hearing should submit their
views in writing by ________________, 1995, to the Secretary, Securities and
Exchange Commission, Washington, D.C. 20549, and serve a copy on the
applicants-declarants at the address specified above. Proof of service (by
affidavit or, in the case of an attorney-at-law, by certificate) should be
filed with the request. Any request for a hearing shall identify specifically
the issues of fact or law that are disputed. A person who so requests will be
notified of any hearing, if ordered, and will receive a copy of any notice or
order issued in this matter. After said date, the joint
application-declaration, as filed or as it may be amended, may be permitted to
become effective.
For the Commission, by the Division of Investment Management, pursuant
to delegated authority.
Jonathan G. Katz
Secretary
