<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended SEPTEMBER 30, 1997
[ ] 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 (IRS Employer
incorporation or organization) Identification No.)
12355 Sunrise Valley Drive, Suite 300, Reston, VA 20191-3420
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 295-0300
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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: 55,441,917 shares outstanding at September 30, 1997.
<PAGE> 2
THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Statements of Consolidated Income 3
Condensed Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Consolidated Statements of Common Stock Equity 7
Notes 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II OTHER INFORMATION
Item 1 Legal Proceedings 27
Item 2 Changes in Securities 27
Item 3 Defaults Upon Senior Securities 28
Item 4 Submission of Matters to a Vote of Security Holders 28
Item 5 Other Information 28
Item 6 Exhibits and Reports on Form 8-K 28
Signature 29
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
The Columbia Gas System, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME (LOSS) (unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(millions, except per
share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Gas sales $ 842.5 $ 315.3 $ 2,776.2 $ 1,749.6
Transportation 107.4 99.6 382.4 355.5
Other 45.1 35.9 174.8 131.1
---------- ---------- ---------- ----------
Total Operating Revenues 995.0 450.8 3,333.4 2,236.2
---------- ---------- ---------- ----------
OPERATING EXPENSES
Products purchased 663.7 144.0 1,966.9 901.7
Operation 202.0 182.2 601.5 603.6
Maintenance 21.7 27.8 73.1 79.1
Depreciation and depletion 42.8 38.8 163.2 157.8
Other taxes 35.1 37.1 158.1 158.9
---------- ---------- ---------- ----------
Total Operating Expenses 965.3 429.9 2,962.8 1,901.1
---------- ---------- ---------- ----------
OPERATING INCOME 29.7 20.9 370.6 335.1
---------- ---------- ---------- ----------
OTHER INCOME (DEDUCTIONS)
Interest income and other, net 7.5 22.2 27.9 39.0
Interest expense and related charges (37.0) (51.8) (115.3) (134.7)
---------- ---------- ---------- ----------
Total Other Income (Deductions) (29.5) (29.6) (87.4) (95.7)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 0.2 (8.7) 283.2 239.4
Income Taxes 0.1 (2.6) 85.5 86.0
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 0.1 $ (6.1) $ 197.7 $ 153.4
========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK $ -- $ (0.11) $ 3.57 $ 2.88
DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 0.25 $ 0.15 $ 0.65 $ 0.45
AVERAGE COMMON SHARES OUTSTANDING (thousands) 55,420 55,165 55,372 53,340
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
3
<PAGE> 4
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of
--------------------------------
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
ASSETS (millions)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Gas utility and other plant, at original cost $7,224.8 $6,994.4
Accumulated depreciation and depletion (3,437.9) (3,344.5)
-------- --------
Net Gas Utility and Other Plant 3,786.9 3,649.9
-------- --------
Gas and oil producing properties, full cost method 643.5 502.8
Accumulated depletion (188.6) (146.4)
-------- --------
Net Gas and Oil Producing Properties 454.9 356.4
-------- --------
Net Property, Plant and Equipment 4,241.8 4,006.3
-------- --------
INVESTMENTS AND OTHER ASSETS 95.2 103.3
-------- --------
CURRENT ASSETS
Cash and temporary cash investments 21.3 49.8
Accounts receivable, net 444.6 597.6
Gas inventory 304.0 237.8
Other inventories - at average cost 39.9 45.1
Prepayments 100.5 73.8
Regulatory assets 65.4 63.4
Underrecovered gas costs 41.7 104.7
Prepaid property tax 25.3 81.1
Exchange gas receivable 112.6 114.6
Deferred taxes 86.7 52.8
Other 7.0 15.2
-------- --------
Total Current Assets 1,249.0 1,435.9
-------- --------
REGULATORY ASSETS 391.2 410.1
DEFERRED CHARGES 70.8 49.0
-------- --------
TOTAL ASSETS $6,048.0 $6,004.6
======== ========
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
4
<PAGE> 5
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of
------------------------------
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
CAPITALIZATION AND LIABILITIES (millions)
<S> <C> <C>
CAPITALIZATION
Common stock equity $1,723.0 $1,553.6
Long-term debt 2,003.6 2,003.8
-------- --------
Total Capitalization 3,726.6 3,557.4
-------- --------
CURRENT LIABILITIES
Short-term debt 80.0 250.0
Accounts and drafts payable 399.2 348.6
Accrued taxes 125.7 142.6
Accrued interest 50.5 14.8
Estimated rate refunds 86.3 114.0
Estimated supplier obligations 76.9 115.1
Transportation and exchange gas payable 84.3 95.4
Overrecovered gas costs 84.9 --
Retirement income plan 58.1 57.4
Other 268.1 313.7
-------- --------
Total Current Liabilities 1,314.0 1,451.6
-------- --------
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes, noncurrent 607.5 557.7
Investment tax credits 36.0 37.1
Postretirement benefits other than pensions 153.7 172.3
Regulatory liabilities 42.3 44.5
Other 167.9 184.0
-------- --------
Total Other Liabilities and Deferred Credits 1,007.4 995.6
-------- --------
TOTAL CAPITALIZATION AND LIABILITIES $6,048.0 $6,004.6
======== ========
</TABLE>
5
<PAGE> 6
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
1997 1996
------ ------
(millions)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $197.7 $153.4
Adjustments for items not requiring (providing) cash:
Depreciation and depletion 163.2 157.8
Deferred income taxes (15.7) 31.7
Income from equity investment, net of distributions (0.4) 8.9
Other - net (20.6) 43.2
Change in components of working capital:
Accounts receivable 155.1 270.3
Income tax refunds -- 271.5
Gas inventory (66.2) (144.2)
Prepayments (26.7) (3.2)
Accounts payable 79.5 (12.8)
Accrued taxes (16.9) (125.5)
Accrued interest 39.4 (39.7)
Estimated rate refunds (27.7) 8.3
Estimated supplier obligations (38.2) (57.1)
Under/Overrecovered gas costs 147.9 (128.9)
Exchange gas payable (12.6) (7.8)
Other working capital 24.3 64.1
------ ------
Net Cash from Operations 582.1 490.0
------ ------
INVESTMENT ACTIVITIES
Capital expenditures (295.3) (202.6)
Proceeds received on the sale of Columbia Development -- 190.9
Purchase of Alamco, Inc. (99.4) --
Other investments - net (4.5) (0.9)
------ ------
Net Investment Activities (399.2) (12.6)
------ ------
FINANCING ACTIVITIES
Retirement of preferred stock -- (400.0)
Retirement of long-term debt (0.6) (0.8)
Dividends paid (36.1) (23.9)
Issuance of common stock 7.9 248.4
Net decrease in short-term debt (170.0) (228.9)
Other financing activities (12.6) (61.1)
------ ------
Net Financing Activities (211.4) (466.3)
------ ------
Increase (decrease) in Cash and Temporary Cash Investments (28.5) 11.1
Cash and temporary cash investments at beginning of year 49.8 8.0
------ ------
Cash and temporary cash investments at September 30 * $ 21.3 $ 19.1
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest 72.9 79.7
Cash paid for income taxes (net of refunds) 52.5 (158.6)
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
* The Corporation considers all highly liquid debt instruments to be cash
equivalents.
6
<PAGE> 7
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMMON STOCK EQUITY
<TABLE>
<CAPTION>
As of
-------------------------------
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
(millions)
<S> <C> <C>
COMMON STOCK EQUITY
Common stock, $10 par value, authorized
100,000,000 shares, outstanding 55,441,917
and 55,263,659 shares, respectively $ 554.4 $ 552.6
Additional paid in capital 748.8 743.2
Retained earnings 420.9 259.3
Unearned employee compensation (1.1) (1.5)
-------- --------
TOTAL COMMON STOCK EQUITY $1,723.0 $1,553.6
======== ========
</TABLE>
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
7
<PAGE> 8
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
NOTES
1. Basis of Accounting Presentation
The accompanying unaudited condensed consolidated financial statements for
The Columbia Gas System, Inc. (Columbia) reflect all normal recurring
adjustments which are necessary, in the opinion of management, to present
fairly the results of operations in accordance with generally accepted
accounting principles.
The accompanying financial statements should be read in conjunction with
the financial statements and notes thereto included in Columbia's 1996
Annual Report on Form 10-K and First and Second Quarter 1997 Quarterly
Reports on 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 1996 financial statements
to conform to the 1997 presentation.
2. Statement of Financial Accounting Standards No. 128, "Earnings per Share"
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS No. 128). This statement supersedes APB Opinion No. 15, "Earnings
per Share" and simplifies the computation of earnings per share (EPS).
Primary EPS is replaced with a presentation of basic EPS. Basic EPS
includes no dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. In addition, fully diluted EPS is replaced
with diluted EPS. Diluted EPS reflects the potential dilution if certain
securities are converted into common stock. This statement requires dual
presentation of basic and diluted EPS by entities with complex capital
structures and also requires restatement of all prior-period EPS data
presented. SFAS No. 128 will be effective for financial statements for
both interim and annual periods ending after December 15, 1997, and
Columbia plans to adopt the statement for year-end 1997. Columbia does not
expect the effect of adopting SFAS No. 128 to have a material impact on
its EPS calculation. If adopted currently, SFAS No. 128 would not have a
material impact on Columbia's reported EPS.
3. Accounting for Commodity Hedging Activities
In accordance with Statement of Financial Accounting Standards No. 80,
"Accounting for Futures Contracts" a futures contract qualifies as a hedge
if the commodity to be hedged is exposed to price risk and the futures
contract reduces that exposure and is designated as a hedge. Subsidiaries
in Columbia's production, marketing and propane operations engage in
commodity hedging activities to minimize the risk of market fluctuations
associated with the price of natural gas production, propane inventories
and commitments for natural gas purchases and sales. The hedging
objectives include assurance of stable and known minimum cash flows,
fixing favorable prices and margins when they become available and
participation in any long-term increases in value. Under internal
guidelines, speculative positions are prohibited.
Columbia's exploration and production company utilizes futures, options
and swaps on futures as well as commodity price swaps and basis swaps.
Futures help manage commodity price risk by fixing prices for future
production volumes. The options provide a price floor for future
production volumes and the opportunity to benefit from any increases in
prices. Swaps are negotiated and executed over-the-counter and are
structured to provide the same risk protection as futures and options.
Basis swaps are used to manage risk by fixing the basis or differential
that exists between a delivery location index and the commodity futures
prices.
8
<PAGE> 9
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
Columbia's marketing and propane operations utilize futures contracts and
basis swaps to assure adequate margins on the purchase and resale of
natural gas as well as protecting the value and margins of its propane
inventories.
Premiums paid for option and swap agreements are included as current
assets in the consolidated balance sheet until they are exercised or
expire. Margin requirements for natural gas and propane futures are also
recorded as current assets. Unrealized gains and losses on all futures
contracts are deferred on the consolidated balance sheet as either current
assets or other deferred credits. Realized gains and losses from the
settlement of natural gas futures, options and swaps are included in
revenues or products purchased as appropriate concurrent with the
associated physical transaction. Realized gains and losses from the
settlement of propane futures contracts are included in products
purchased. The cash flows from commodity hedging are included in operating
activities in the consolidated statement of cash flows.
Columbia and its subsidiaries are exposed to credit losses in the event of
nonperformance by the counterparties to its various hedging contracts.
Management has evaluated such risk and believes that overall business risk
is minimized as a result of these hedging contracts which are primarily
with major investment grade financial institutions or their affiliates.
4. Bankruptcy Matters
On November 28, 1995, Columbia and its wholly-owned subsidiary, Columbia
Gas Transmission Corporation (Columbia Transmission), emerged from Chapter
11 protection of the Federal Bankruptcy Code under the jurisdiction of the
United States Bankruptcy Court for the District of Delaware (Bankruptcy
Court). Both Columbia and Columbia Transmission had operated under Chapter
11 protection since July 31, 1991. Certain residual unresolved
bankruptcy-related matters are still within the jurisdiction of the
Bankruptcy Court.
Unsettled Producer Claims
Columbia Transmission's approved plan of reorganization (Plan) provides
that producers who rejected settlement offers contained in Columbia
Transmission's Plan may continue to litigate their claims under the
Bankruptcy Court-approved claims estimation procedures and receive the
same percentage payout on their allowed claims, when and if ultimately
allowed, as received by the settling producers. Columbia Transmission's
Plan further provides that since the actual distribution percentage for
all producer claims, which would not be less than 68.875% or greater than
72.5%, can not be determined until the total amount of contested producer
claims is established, 5% of the maximum amount (based on a 72.5% payout)
to be distributed to producer claimants for allowed claims and to Columbia
for unsecured debt will be withheld until the total has been determined.
Additional distributions, if any, will be made when the total amount of
allowed producer claims has been determined.
Based on the information received and evaluated to date, Columbia believes
adequate reserves have been established for resolution of the remaining
producer claims and the payment of any amounts ultimately due to producers
with respect to the 5% holdback.
9
<PAGE> 10
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING INCOME (LOSS) BY SEGMENT
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
------ ------ ------ ------
(millions)
<S> <C> <C> <C> <C>
Transmission and Storage $ 39.6 $ 36.7 $198.5 $161.2
Distribution (11.4) (19.3) 150.5 145.7
Exploration and Production 5.6 5.4 22.7 22.6
Marketing, Propane and Power Generation (3.1) (2.2) 5.0 11.3
Corporate (1.0) 0.3 (6.1) (5.7)
------ ------ ------ ------
TOTAL $ 29.7 $ 20.9 $370.6 $335.1
====== ====== ====== ======
</TABLE>
DEGREE DAYS (DISTRIBUTION SERVICE TERRITORY)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- -----------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Actual 108 103 3,638 3,910
Normal 41 41 3,568 3,600
% Colder (warmer) than normal 163 151 2 9
% Colder (warmer) than prior period 5 1 (7) 12
</TABLE>
10
<PAGE> 11
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS (CONTINUED)
Forward Looking Statements
The Management's Discussion and Analysis contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Investors and prospective investors
should understand that several factors govern whether any forward-looking
statement contained herein will be or can be achieved. Any one of those factors
could cause actual results to differ materially from those projected herein.
These forward-looking statements include statements concerning Columbia's plans,
objectives and expected performance, expenditures and recovery of expenditures
through rates, including any and all underlying assumptions and other statements
that are other than statements of historical fact. From time to time, Columbia
may publish or otherwise make available forward-looking statements of this
nature. All such subsequent forward-looking statements, whether written or oral
and whether made by or on behalf of Columbia, are also expressly qualified by
these cautionary statements. All forward-looking statements are based on
assumptions that management believes to be reasonable; however, there can be no
assurance that actual results will not differ materially. Realization of
Columbia's objectives and expected performance is subject to a wide range of
risks and can be adversely affected by, among other things, competition,
weather, regulatory and legislative changes as well as changes in general
economic and capital market conditions, many of which are beyond the control of
Columbia. In addition, the relative contributions to profitability by segment
may change over time due to changes in the market place.
With respect to any references made to ratings assigned to Columbia's debt
securities, there can be no assurance that Columbia will be successful at
maintaining its credit quality or that such credit ratings will continue for any
given period of time or that they will not be revised downward or withdrawn
entirely by these rating agencies. Credit ratings reflect only the views of the
rating agencies, whose methodology and the significance of their ratings may be
obtained from them.
THREE MONTH RESULTS
Net Income
Columbia reported third quarter net income of $100,000, an improvement of $6.2
million, or $0.11 per share, over the same period last year. Typically, Columbia
reports a small loss in the third quarter due to the low level of sales during
the summer months by the distribution operation, which derives most of its
income in the first and fourth quarters. After adjusting for unusual items as
discussed below, results for the third quarter of 1997 increased over the same
period in 1996 primarily reflecting the after-tax benefit of efficiencies gained
through the implementation of restructuring initiatives.
Third quarter net income was reduced $6.1 million by recording relocation costs
and restructuring costs for Columbia Transmission and the establishment of a
$6.6 million after-tax valuation reserve for the anticipated sale of certain of
Columbia Transmission's pipeline facilities. Columbia Transmission's relocation
and restructuring costs primarily reflected expense associated with relocating
certain employees to northern Virginia and relocating employees in certain field
operations. Columbia Transmission has signed a letter of intent with a third
party for the sale of certain facilities located in New York and Pennsylvania;
however, the sale is contingent upon the definitive documentation and Federal
Energy Regulatory Commission (FERC) approval. Improving current quarter results
was an after-tax increase of $3.5 million for a settlement of a FERC Order
(Order 94) that was related to the allocation methodology for certain
production-related costs that were being billed to pipelines in the 1980's.
Recording the terms of the settlement in 1997 and a reserve established in 1996
for this issue resulted in a period-to-period pre-tax improvement of $5.4
million. In the third quarter of 1996 a $4.3 million pre-tax reserve was
established; however, the settlement in the third quarter of 1997 was $1.1
million less than the reserve amount.
Revenues
11
<PAGE> 12
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS (CONTINUED)
For the third quarter of 1997, operating revenues of $995 million increased
$544.2 million reflecting a significant increase in gas marketing sales volumes.
This was due in part to the recent acquisition of PennUnion Energy Services
L.L.C. (PennUnion), a former energy-marketing affiliate of the Pennzoil Company.
Sales volumes for the gas marketing operations of 323 Bcf were approximately 400
percent higher than last year's third quarter level.
Expenses
Operating expense for the three months ended September 30, 1997, of $965.3
million was $535.4 million higher than the same period last year, primarily
reflecting a $519.7 million increase in products purchased that resulted from
the higher natural gas sales for gas marketing activities. Also increasing
operating expense, as mentioned previously, were additional relocation and
restructuring costs and the recording of a $10.1 million valuation reserve for
the anticipated sale of certain pipeline facilities. In addition, higher costs
related to the PennUnion acquisition and business expansion activities for the
gas marketing operations also contributed to an increase in operating expense.
Reducing expense was the beneficial effect of efficiencies gained from
implementing restructuring initiatives during 1997. In addition, operating
expense decreased compared to last year for the $5.4 million period-to-period
improvement for the Order 94 issue, also mentioned previously.
Other Income (Deductions)
Other Income (Deductions) reduced income $29.5 million in the third quarter of
1997 and was essentially unchanged from the same period last year. Both periods
included $35.1 million of interest expense on long-term debt as well as interest
income on temporary investments and miscellaneous other items. The third quarter
of 1996 included approximately $13.5 million in interest income and other, net,
for Order 94 refunds that was offset in interest expense and related charges,
with no effect on income.
NINE MONTH RESULTS
Net Income
Columbia=s net income for the first nine months of 1997 of $197.7 million, or
$3.57 per share, increased $44.3 million, or $0.69 per share, over the same
period last year despite 7 percent warmer weather.
This increase included the net effect of lower operating costs and increased
revenues from off-system sales, transportation and storage services, as well as
higher rates in effect for the regulated subsidiaries and several unusual items.
The unusual items included the reserve for the anticipated sale of certain
pipeline facilities and the period-to-period effect of recording the Order 94
adjustments, both mentioned previously, a $12.4 million benefit from the sale of
9 Bcf of Columbia Transmission's base gas as provided for under its rate
settlement, a $12.8 million reduction to tax expense resulting from benefits
gained through the filing of a consolidated state tax return, a $5.5 million
gain on the temporary deactivation of a storage field that is discussed below in
Other Income (Deductions) as well as reduced interest expense on short-term
debt. In addition, 1996's net income was reduced $21.9 million for restructuring
activities, whereas in the current period net income was reduced by $14.4
million. Last year's results benefited from the effect of a $5.6 million
increase for a favorable adjustment from the sale of Columbia's southwest gas
and oil subsidiary.
Revenues
Operating revenues for the first nine months of 1997 were $3,333.4 million, an
increase of $1,097.2 million over the same period in 1996. The increase was
principally due to increased sales for the gas marketing operations and higher
rates in effect for the distribution subsidiaries that provided for the recovery
of increased gas costs. Also improving revenues were increased off-system sales
and transportation and storage services, the beneficial effect of Columbia
Transmission's rate settlement and $4.1 million received by Columbia Natural
Resources, Inc. (Columbia Resources) for a gas purchase contract buyout by the
Binghamton Cogeneration Partnership
12
<PAGE> 13
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS (CONTINUED)
(Binghamton Partnership) project that ceased operations in early 1997. The
facility had a contract to purchase natural gas for its operations from Columbia
Resources. This cogeneration project was a partnership between a Columbia
affiliate, TriStar Ventures Corporation (TriStar), and third parties. In
addition, TriStar recorded $2.6 million of revenues from the Binghamton
Partnership for accepting the assignment of a transportation agreement.
Tempering these improvements were the effect of warmer weather compared to last
year that resulted in lower sales volumes for the distribution subsidiaries and
lower wellhead prices for gas production.
Expenses
Total operating expenses through September 30, 1997 of $2,962.8 million, were
$1,061.7 million higher than the same period in 1996. This increase included
$1,065.2 million higher product purchased expense attributable to gas purchased
by the marketing operations to meet sales requirements and the higher cost of
gas purchased by the distribution subsidiaries. After adjusting for the effect
of recording the reserve for the anticipated sale of certain pipeline
facilities, the period-to-period effect of Order 94 adjustments and
restructuring charges recorded in both years, operating expense decreased
reflecting the beneficial effect of implementing restructuring initiatives.
Other Income (Deductions)
Other Income (Deductions) reduced income $87.4 million through the first nine
months of 1997 and $95.7 million in the same period last year. The improvement
was due in large part to reduced interest expense on short-term borrowings. In
the first quarter of 1997, an $8.5 million pre-tax gain was recorded for the
payment received from the deactivation of a storage field that would allow the
owner of coal reserves in the area to mine the property, as well as increased
interest income on temporary cash investments. Offsetting the effect of this
increase was an $8.6 million pre-tax favorable adjustment recorded in 1996 for
the sale of Columbia's southwest gas and oil subsidiary. Interest income and
other, net in 1996 included approximately $13.5 million for Order 94 refunds
that was offset in interest expense and related charges with no effect on
income.
Liquidity and Capital Resources
A significant portion of Columbia's operations is subject to seasonal
fluctuations in cash flow. During the heating season, which is primarily from
November through March, cash receipts from sales and transportation services
typically exceed cash requirements. Conversely, during the remainder of the
year, cash on hand, together with external short-term and long-term financing as
needed, is used to purchase gas to place in storage for heating season
deliveries, perform necessary maintenance of facilities, make capital
improvements in plant and expand service into new areas.
For the first nine months of 1997, net cash from operations was $582.1 million.
This reflects an increase of $92.1 million over the same period last year
primarily due to a higher recovery level of gas costs by the distribution
subsidiaries in the current period. The improvement also reflected the full
period effect of higher base rates for Columbia Transmission and Columbia Gas of
Kentucky, Inc. Tempering these increases were lower sales attributable to warmer
weather for the first nine months of 1997 compared to the same period last year.
In 1996, cash from operations improved approximately $213 million due to the net
effect of income tax refunds.
The rise in gas prices in 1996 resulted in an increase in the commodity portion
of the distribution subsidiaries' rates as provided for under the current
regulatory process, resulting in a higher recovery level of gas costs in the
current period. Previously, the distribution subsidiaries were in an
underrecovered position because the rapid increase in the cost of gas exceeded
the recovery levels that were allowed.
Columbia satisfies its liquidity requirements through internally generated funds
and the use of its $1 billion
13
<PAGE> 14
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS (CONTINUED)
unsecured bank revolving credit facility (Credit Facility). Columbia also
utilizes additional short-term financing available to it through the use of bid
notes and the recent establishment of a commercial paper program.
Columbia's $1 billion Credit Facility provides for scheduled quarterly
reductions of $25 million of the aggregate committed amount starting December
31, 1997, that will reduce the Credit Facility commitments to $700 million by
September 30, 2000. The Credit Facility also provides for the issuance of up to
$150 million of letters of credit. As of September 30, 1997, Columbia had
approximately $138 million of letters of credit outstanding under the Credit
Facility. In addition, Columbia had $80 million of bid notes outstanding at the
end of the third quarter of 1997. On November 3, 1997, Columbia issued $165
million of commercial paper, which was primarily used to repay its outstanding
short-term borrowings under the Credit Facility and bid notes (including
additional borrowings incurred after September 30, 1997) .
Interest rates on borrowings are based upon the London Interbank Offered Rate,
Certificate of Deposit rates or other short-term interest rates. The facility
fee on the commitment amount is based on Columbia's public debt rating. In 1997,
Fitch Investors Service (Fitch), Moody's Investors Service, Inc. (Moody's) and
Standard & Poor's Ratings Group (S&P) upgraded Columbia's long-term debt rating
to BBB+, Baa1 and BBB+, respectively. These higher ratings will result in lower
interest rates on any syndicated borrowings that Columbia makes under the Credit
Facility. Columbia's commercial paper credit ratings are F-2 by Fitch, P-2 by
Moody's and A-2 by S&P.
Columbia has an effective shelf registration statement on file with the U. S.
Securities and Exchange Commission for the issuance of up to $1 billion in
aggregate of debentures, common stock or preferred stock in one or more series.
In March 1996, Columbia issued 5,750,000 shares of common stock under the shelf
registration and used the proceeds to reduce borrowings incurred under the
Credit Facility. No further issuances of the remaining $750 million available
under the shelf registration are scheduled at this time.
14
<PAGE> 15
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION AND STORAGE OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
------ ------ ------ ------
(millions)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Transportation revenues $131.8 $130.5 $448.8 $451.1
Storage revenues 45.2 40.2 137.0 119.4
Other revenues 6.5 4.8 41.2 14.9
------ ------ ------ ------
Total Operating Revenues 183.5 175.5 627.0 585.4
------ ------ ------ ------
OPERATING EXPENSES
Operation and maintenance 105.1 103.6 308.8 303.9
Depreciation 25.8 20.9 78.7 76.1
Other taxes 13.0 14.3 41.0 44.2
------ ------ ------ ------
Total Operating Expenses 143.9 138.8 428.5 424.2
------ ------ ------ ------
OPERATING INCOME $ 39.6 $ 36.7 $198.5 $161.2
====== ====== ====== ======
THROUGHPUT (BCF)
Transportation
Columbia Transmission
Market area 145.4 161.1 719.6 788.2
Columbia Gulf
Main-line 145.4 145.9 458.3 475.2
Short-haul 66.1 69.3 185.1 202.7
Intrasegment eliminations (142.6) (145.1) (448.0) (469.8)
------ ------ ------ ------
Total Throughput 214.3 231.2 915.0 996.3
====== ====== ====== ======
</TABLE>
15
<PAGE> 16
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)
Marketing Initiatives
Proposed Millennium Pipeline Project
As previously reported, the proposed Millennium Pipeline Project, in which
Columbia Transmission is participating and will serve as developer and operator,
will transport western gas supplies to Northeast and Mid-Atlantic markets. The
380-mile pipeline will connect with TransCanada Pipelines Limited at a new Lake
Erie import point and transport up to approximately 650,000 Mcf per day to
eastern markets. Negotiation of precedent agreements was completed in September
1997, and resulted in a total requested capacity well in excess of design
levels. Discussions are now underway to allocate the pipeline capacity among the
shippers who have signed agreements. Assuming satisfaction of various conditions
contained in the precedent agreements, a filing with the FERC requesting
approval of the Millennium project is expected to be made by year end 1997. The
anticipated in-service date is November 1999.
The current sponsors of the proposed Millennium project are Columbia
Transmission, Westcoast Energy, Inc., TransCanada Pipelines Limited and MCN
Energy Group, Inc.
Proposed Vector Pipeline Project
Columbia Transmission intends to become a sponsor of IPL Energy Inc.'s proposed
Vector Pipeline project to transport western gas supplies from Chicago to the
Ontario area. The 344-mile pipeline will link with Northern Border Pipeline
System, the proposed Alliance Pipeline and the proposed Viking Voyageur Pipeline
and transport approximately one Bcf per day, for delivery to eastern Canadian
and U. S. markets. The proposed Vector Pipeline will provide an upstream link
for Columbia Transmission's proposed Millennium Pipeline. An "open season" that
provided potential customers an opportunity to express interest in capacity was
concluded on September 30, 1997, and resulted in precedent agreements in excess
of the anticipated capacity. An application for approval with the FERC for the
U. S. facilities and a companion filing with the National Energy Board for the
Canadian facilities is expected to occur in December 1997. The anticipated
in-service date for the proposed Vector project is November 1999.
Columbia Gulf Main-line Capacity Proceeding
The FERC issued an order on August 8, 1997, approving a Stipulation and Consent
Agreement that requires Columbia Gulf to conduct a 30-day open season on
additional firm mainline capacity up to its certificated design capacity within
60 days of the final order. Columbia Gulf intends to begin the open season on
November 14, 1997. Requests for rehearing have been filed by various
parties. Any ultimate change to pipeline capacity would be made prospectively.
Sale of Gathering Facilities
Effective September 1, 1997, Columbia Transmission sold approximately 3,800
miles of gathering lines to Columbia Resources. Effective October 31, 1997,
approximately 1,800 miles of gathering lines and facilities in Ohio were sold to
Gatherco, Inc. As previously reported in the Quarterly Report on Form 10-Q for
the second quarter of 1997, the majority of the remaining gathering lines are
expected to be sold to other parties over the next several months.
Additional Base Gas Sales
As provided in Columbia Transmission's recent rate settlement, Columbia
Transmission is allowed to retain approximately 95% of the first $60 million
pre-tax gain from any base gas sales and to share equally with customers any
gain after that level has been reached. Columbia Transmission has an agreement
to sell approximately 5 Bcf of base gas volumes in the first quarter of 1998
pursuant to the settlement agreement.
16
<PAGE> 17
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)
Environmental Matters
Columbia's transmission subsidiaries have implemented programs to continually
review compliance with existing environmental standards. Columbia Transmission
is currently conducting assessment, characterization and remediation activities
at specific sites under a 1995 EPA Administrative Order by Consent.
Expenditures of approximately $3.9 million in the third quarter of 1997 have
been charged against the liability previously established resulting in a
remaining overall liability of $118 million. Consistent with Statement of
Financial Accounting Standards No. 71, a regulatory asset has been recorded to
the extent environmental expenditures are expected to be recovered through
rates. Columbia Transmission's recent rate settlement excluded the issue of
environmental cost recovery which will be addressed in a hearing currently
scheduled for the third quarter of 1998. Columbia Transmission is also currently
involved in pursuing recovery of environmental expenditures from its insurance
carriers; however at this time, management is unable to determine the extent, if
any, of recovery. Management does not believe that Columbia Transmission's
environmental expenditures will have a material adverse effect on its
operations, liquidity or financial position, based on known facts and existing
laws and regulations and the long period over which expenditures will be made.
Volumes
Columbia Transmission's throughput consists of transportation and storage
service withdrawals for delivery to local distribution companies and other
customers within its market area. Throughput for Columbia Gulf reflects mainline
transportation services from Rayne, Louisiana to West Virginia and short-haul
transportation services from the Gulf of Mexico to Rayne, Louisiana.
For the third quarter of 1997 the transmission and storage segment reported
throughput of 214.3 Bcf, a decrease of 16.9 Bcf from the same period last year
largely due to lower electric generation requirements during the summer of 1997.
For the first nine months of 1997, throughput decreased 81.3 Bcf to 915 Bcf,
primarily due to warmer weather in the first half of 1997.
Under Order 636, a significant portion of the transmission and storage segment's
fixed costs are being recovered through a monthly demand charge. As a result,
variations in throughput do not have a significant impact on income.
Operating Revenues
Total operating revenues for the three months ended September 30, 1997, of
$183.5 million increased $8 million over the same quarter last year primarily
reflecting increased transportation and storage revenues. For the first nine
months of 1997, total operating revenues of $627 million increased $41.6 million
over last year. This increase includes the sale of certain base gas volumes that
were part of Columbia Transmission's overall rate case settlement, and higher
effective rates for transportation and storage services.
Operating Income
Third quarter and nine-month 1997 operating income were $39.6 million and $198.5
million, respectively. The current year results reflect an increase over the
same period last year of $2.9 million and $37.3 million for the third quarter
and year-to-date periods, respectively. This improvement is attributable to
higher operating revenues and, after adjusting for unusual items, lower
operation and maintenance expense which reflects operating efficiencies achieved
through the implementation of restructuring initiatives. These unusual items
include restructuring costs recorded during the first half of 1997, $9.4 million
of third quarter expense reflecting relocation costs and a $10.1 million
valuation reserve for the anticipated sale of certain pipeline facilities.
17
<PAGE> 18
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS
-----------------------
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
------ ------ -------- --------
(millions)
<S> <C> <C> <C> <C>
NET REVENUES
Sales revenues $166.5 $171.5 $1,534.5 $1,328.1
Less: Cost of gas sold 77.6 84.0 1,004.2 771.5
------ ------ -------- --------
Net Sales Revenues 88.9 87.5 530.3 556.6
------ ------ -------- --------
Transportation revenues 22.4 21.6 97.8 88.0
Less: Associated gas costs 1.7 3.2 7.9 10.6
------ ------ -------- --------
Net Transportation Revenues 20.7 18.4 89.9 77.4
------ ------ -------- --------
Net Revenues 109.6 105.9 620.2 634.0
------ ------ -------- --------
OPERATING EXPENSES
Operation and maintenance 94.8 97.5 307.6 332.6
Depreciation 7.8 7.9 55.8 51.7
Other taxes 18.4 19.8 106.3 104.0
------ ------ -------- --------
Total Operating Expenses 121.0 125.2 496.7 488.3
------ ------ -------- --------
OPERATING INCOME (LOSS) $(11.4) $(19.3) $ 150.5 $ 145.7
====== ====== ======== ========
THROUGHPUT (Bcf)
Sales
Residential 11.1 11.5 129.2 144.1
Commercial 4.7 5.1 49.4 59.2
Industrial and other 0.8 0.9 1.8 6.0
------ ------ -------- --------
Total Sales 16.6 17.5 180.4 209.3
Transportation 54.0 52.1 187.0 183.8
------ ------ -------- --------
Total Throughput 70.6 69.6 367.4 393.1
Off-System Sales 3.1 3.1 45.3 8.4
------ ------ -------- --------
Total Sold or Transported 73.7 72.7 412.7 401.5
====== ====== ======== ========
SOURCES OF GAS FOR
THROUGHPUT (Bcf)
Sources of Gas Sold
Spot Market* 72.1 69.5 210.5 236.7
Producers 8.8 9.0 28.4 34.6
Storage withdrawals
(injections) (56.1) (54.9) (24.1) (47.0)
Other (5.1) (3.0) 10.9 (6.6)
------ ------ -------- --------
Total Sources of Gas Sold 19.7 20.6 225.7 217.7
Transportation received
for delivery to customers 54.0 52.1 187.0 183.8
------ ------ -------- --------
Total Sources 73.7 72.7 412.7 401.5
====== ====== ======== ========
</TABLE>
* Purchase contracts of less than one year.
18
<PAGE> 19
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS (CONTINUED)
Market Conditions
Weather in Columbia's distribution subsidiaries (Distribution) market area
through the first nine months of 1997 was 7% warmer than 1996 and as a result,
Distribution's weather-sensitive deliveries during the period were down over 17
Bcf from last year. Although warmer than last year, this year's weather has been
2% colder than normal.
Regulatory Matters
Commonwealth Gas Services, Inc. (Commonwealth Services) filed a rate case with
the Virginia State Corporation Commission (VSCC) in May 1997 requesting a $10.1
million increase in annual revenue. Approximately $8.5 million of the requested
increase is to recover normal increases in the cost-of-service. Higher rates to
recover these increased costs went into effect on October 18, 1997, subject to
refund. The remaining $1.6 million of the requested increase is based upon
recently passed legislation in Virginia providing for performance-based
ratemaking (PBR). The PBR rules would allow Commonwealth Services to more timely
recover the costs associated with its capital expenditure program if certain
service quality benchmarks are attained. Commonwealth Services is the first
Virginia gas utility to file a rate case seeking approval to utilize the PBR
methodology.
On September 30, 1997, the VSCC approved Commonwealth Services' proposed
two-year pilot transportation program for residential and small commercial
customers called "Commonwealth Choice Program". The pilot program will be open
to approximately 27,000 customers in the Gainesville market area. Commonwealth
Services could expand the program and eventually make it available to all of its
165,000 customers depending on the results of the pilot program. Commonwealth
Services is the first company in Virginia to file tariffs to support such a
program. Additionally, as provided for by the new legislation, and consistent
with Columbia's strategy to limit the frequency of rate cases, the filing
included a request for future annual revenue increases of $1.9 million effective
October 18, 1998, and $900,000 effective October 18, 1999. These increases are
needed to recover plant additions to replace facilities due to age and
condition. The revenue increases, including the $1.6 million mentioned above,
will be contingent upon Commonwealth Services achieving performance benchmarks
in the area of pipeline operations.
Commonwealth Services' previous rate case settlement provided for a separate
proceeding to consider capacity release and off-system sales proposals. A
hearing on these issues was held in September 1996 and the Hearing Examiner
issued a report in March 1997 recommending approval of Commonwealth Services'
capacity release and off-system sales pilot incentive programs. In October 1997,
the VSCC issued an order which permits Commonwealth Services to retain a portion
of capacity release proceeds once a benchmark has been reached, but disallowed
any retention from off-system sales proceeds. Commonwealth Services filed a
petition for rehearing and reconsideration. On November 4, 1997, the VSCC
granted partial reconsideration of its order by extending the capacity release
incentive pilot through the end of 1997 rather than ending it in October 1997 as
provided for by the original order. All other aspects of the petition for
rehearing were denied.
Columbia Gas of Ohio, Inc.'s (Columbia of Ohio) "Customer Choice" pilot
transportation program continues to expand. Currently there are 39,000 customers
participating of which nearly 35,000 are residential customers. Out of a total
of 19 marketers approved for participation in the program, 13 are currently
active.
In June 1997, Columbia Gas of Pennsylvania, Inc. (Columbia of Pennsylvania)
received approval from the Pennsylvania Public Utility Commission (PPUC) to
extend its pilot customer choice program into Allegheny County, including the
city of Pittsburgh, beginning on November 1, 1997. There are nearly 37,000
customers and 9 marketers signed up to participate in this program for the
coming winter. Columbia of Pennsylvania has
19
<PAGE> 20
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS (CONTINUED)
over 100,000 customers in Allegheny County who are eligible for the program. As
approved by the PPUC, the new program will give marketers the option of using
their own pipeline capacity, rather than taking assignment of capacity held by
Columbia of Pennsylvania. Columbia of Pennsylvania's two-year pilot program
began on November 1, 1996 in Washington County with about 5,300 customers and
four marketers participating.
Columbia Gas of Maryland, Inc. (Columbia of Maryland) is opposing a petition
filed by the Maryland People's Counsel seeking a $1.6 million annual revenue
reduction. As previously reported in the Quarterly Report on Form 10-Q for the
second quarter of 1997, the petition claims, among the issues cited, that
Columbia of Maryland's 12-month earnings through March 31, 1997, as adjusted by
People's Counsel, exceeded its authorized return on equity. Hearings are
scheduled through the first quarter of 1998 and a decision is expected in the
second quarter of 1998. Any modification to rates would be prospective. On
November 17, 1997, Columbia of Maryland intends to file a request for a rate
increase.
Voluntary Severance Program
In September 1997, Columbia of Pennsylvania and Columbia of Maryland announced a
voluntary severance program available to their 990 employees. The program is the
result of a review of the two companies' operations which identified some
efficiencies that should be implemented to better position the companies in
their evolving business climate. Employees electing to participate in the
program will leave the companies by the end of November 1997. It is estimated
that as many as 8% of the employees will elect to participate in the program and
would result in a charge to operating expense in the fourth quarter of 1997.
Volumes
For the quarter ended September 30, 1997, throughput of 70.6 Bcf was 1 Bcf
higher than the same period last year as increases in transportation were
partially offset by decreases in tariff sales. Increased throughput attributable
to higher demand for natural gas by power generation facilities, favorable
economic conditions, competitive natural gas prices and customer growth was
largely offset by the labor strike at Wheeling-Pittsburgh Steel Corporation,
which reduced throughput by approximately 2.4 Bcf. The ten-month strike was
settled in August but the plants are not expected to resume full production
until the fourth quarter of 1997.
For the first nine months of 1997, throughput of 367.4 Bcf decreased 25.7 Bcf
from the same period last year reflecting reduced tariff sales as a result of
the mild weather in the first quarter of 1997 and a decrease in industrial
throughput of approximately 8.4 Bcf due to the ten-month strike at
Wheeling-Pittsburgh Steel. The increase in transportation volumes of 3.2 Bcf
reflected higher demand for power generation, favorable economic conditions and
competitive natural gas prices.
Net Revenues
Net revenues for the quarter ended September 30, 1997 were $109.6 million, up
$3.7 million from the third quarter of 1996 reflecting Columbia of Ohio's $1.4
million retention of certain off-system sales revenues in the current period and
higher transportation revenues.
For the first nine months of 1997, net revenues were $620.2 million, a decrease
of $13.8 million from 1996. Weather that was 7 % warmer than last year reduced
net revenues by approximately $25 million. This decrease was partially offset by
Columbia of Ohio's retention in the current period of $12.4 million of
off-system sales revenues.
20
<PAGE> 21
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS (CONTINUED)
Operating Income (Loss)
Distribution experienced a seasonal operating loss of $11.4 million for the
third quarter of 1997, a $7.9 million improvement over the same period in 1996,
reflecting higher net revenues and a $4.2 million decline in operating expenses.
The reduction in operating expenses reflects decreases of $2.7 million in
operation and maintenance expense and $1.4 million in other taxes. Lower
operation and maintenance expense resulted from recently implemented
restructuring initiatives and cost containment measures. Other taxes declined
primarily due to lower gross receipts and payroll taxes.
Operating income for the first nine months of 1997 of $150.5 million was up $4.8
million from 1996. The decline in net revenues was more than offset by a
decrease of $18.6 million in operating expenses reflecting lower restructuring
charges as well as the favorable impact of cost containment measures. Increased
plant additions contributed to the $4.1 million increase in depreciation expense
while higher property taxes were responsible for the $2.3 million rise in other
taxes.
21
<PAGE> 22
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
EXPLORATION AND PRODUCTION OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
(millions)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Gas $ 23.9 $ 21.6 $ 77.6 $ 72.8
Oil and liquids 0.8 1.2 2.8 4.0
------- ------- ------- -------
Total Operating Revenues 24.7 22.8 80.4 76.8
------- ------- ------- -------
OPERATING EXPENSES
Operation and maintenance 10.8 8.4 30.9 26.4
Depreciation and depletion 6.0 7.0 20.6 21.3
Other taxes 2.3 2.0 6.2 6.5
------- ------- ------- -------
Total Operating Expenses 19.1 17.4 57.7 54.2
------- ------- ------- -------
OPERATING INCOME $ 5.6 $ 5.4 $ 22.7 $ 22.6
======= ======= ======= =======
GAS PRODUCTION STATISTICS
Production (Bcf) 8.6 8.0 25.3 24.6
Average Price (per Mcf) $ 2.36 $ 2.45 $ 2.59 $ 2.81
OIL AND LIQUIDS PRODUCTION STATISTICS
Production (000Bbls) 57 64 157 217
Average Price (per Bbl) $ 15.20 $ 19.35 $ 17.90 $ 18.40
</TABLE>
22
<PAGE> 23
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
EXPLORATION AND PRODUCTION OPERATIONS (CONTINUED)
Gathering Facilities
As previously reported in the Quarterly Report on Form 10-Q for the second
quarter of 1997, Columbia Transmission filed a request with FERC in April 1996
for abandonment and transfer of certain gathering facilities to Columbia
Resources. Final FERC approval for the abandonment and transfer of these assets
was received in May 1997 with closing occurring on September 1, 1997.
Planned Sale of Coal Assets
Columbia Resources is negotiating a sale of its coal assets located in southern
West Virginia. Settlement is anticipated in the fourth quarter of 1997. It is
not expected that this sale will have a material impact on the consolidated
financial statements.
Drilling Activity
During the first nine months of 1997, Columbia Resources participated in 63
gross wells, of which 54 were successful, adding approximately 20 Bcfe (billion
cubic feet equivalent) to net reserves. In addition, Columbia Resources'
exploration and drilling program in upstate New York made significant natural
gas discoveries in Steuben County. A series of exploratory wells in this area,
including the completion of five wells, resulted in estimated recoverable
reserves of 16 Bcfe. As previously reported in the Quarterly Report on From 10-Q
for the second quarter of 1997, Alamco, Inc. (Alamco) was acquired. Reserves
developed through Alamco's drilling program contributed another 6 Bcfe. In
total, reserve additions were 42 Bcfe during 1997 with total net revenue
reserves as of September 30, 1997, increasing to an estimated 806 Bcfe, up
nearly 24% over year end 1996. For 1998, Columbia Resources expects natural gas
production to reach approximately 51 Bcf, an increase of 45% from the current
estimate for 1997.
Volumes
Gas production for the current quarter of 8.6 Bcf increased almost 8% over the
third quarter of 1996. For the nine months ended September 30, 1997, gas
production was up 3% over the prior period to 25.3 Bcf. The production increase
in both periods was due to the acquisition of Alamco plus production shut-ins
last year resulting from facility problems at Columbia Transmission's Kanawha
Extraction Plant.
Oil and liquids production for the three and nine months ended September 30,
1997, was down 11% and 28%, respectively, primarily due to Columbia Resources'
sale of Granny's Creek production field in December 1996.
Revenues
Third quarter 1997 revenues increased $1.9 million from the same period last
year to $24.7 million primarily due to a reclassification in the recording of
gathering costs. In order to appropriately report the results of Columbia
Resources' gathering activity, beginning with the second quarter of 1997, gas
revenues were recorded before deducting any gathering costs. Gathering costs are
also included as an operating expense; therefore, the change in reporting has no
impact on operating income. Previously, gas revenues were based on gas prices
that had been reduced for gathering costs. After adjusting for the gathering
costs in the current third quarter, total operating revenues remained unchanged
from last year as an increase in gas volumes was offset by a 4% decrease in gas
prices and lower oil revenues. For the quarter ended September 30, 1997, gas
prices at the well-head averaged $2.36 per Mcf compared to $2.45 per Mcf in the
third quarter of 1996. To lessen the impact of market price volatility, Columbia
Resources has secured for approximately 55% of its natural gas production
through October 1998, an average price of $2.81 per Mcf, through a gas marketing
affiliate. The gas marketing affiliate in turn, during the normal course of
business, hedged these positions in the marketplace. Additional hedge
transactions for 1998 production may be executed in the future to reduce
Columbia Resources' remaining exposure to market price fluctuations.
23
<PAGE> 24
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
EXPLORATION AND PRODUCTION OPERATIONS (CONTINUED)
Revenues for the first nine months of 1997 increased $3.6 million from the same
period last year to $80.4 million. After adjusting for the gathering costs
mentioned above, revenues decreased $600,000 due to lower gas prices and reduced
oil and liquids production. The weaker natural gas prices reflected the impact
of warmer weather and ample storage inventory. Columbia Resources' average gas
sales price for the first nine months was $2.59 per Mcf, down almost 8% from the
same period last year. The effect of lower prices was partially offset by a $4.1
million first quarter 1997 improvement to revenues related to cash received from
a contract buyout by the owner of a cogeneration facility.
Operating Income
Operating income for the third quarter of $5.6 million and $22.7 million for the
first nine months of 1997 was essentially unchanged from the same periods last
year. Higher operating revenues were offset by higher operation and maintenance
expense due to additional costs associated with the acquisition of Alamco and
accruals for incentive awards. The increase in expense also reflects the
recording of gathering expense. As discussed above, this expense offsets a like
increase in gas revenues and has no effect on operating income.
24
<PAGE> 25
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARKETING, PROPANE AND POWER GENERATION OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
(millions)
<S> <C> <C> <C> <C>
NET REVENUES
Gas marketing revenues $ 680.2 $ 151.9 $1,282.3 $ 462.3
Less: Products purchased 673.4 149.7 1,265.5 449.1
-------- -------- -------- --------
Net Gas Marketing Revenues 6.8 2.2 16.8 13.2
-------- -------- -------- --------
Propane revenues 11.1 10.8 52.3 54.0
Less: Products purchased 6.4 6.9 29.6 31.1
-------- -------- -------- --------
Net Propane Revenues 4.7 3.9 22.7 22.9
-------- -------- -------- --------
Other Revenues 1.1 0.9 9.5 6.2
-------- -------- -------- --------
Net Revenues 12.6 7.0 49.0 42.3
-------- -------- -------- --------
OPERATING EXPENSES
Operation and maintenance 13.5 8.3 38.4 27.1
Depreciation 1.6 0.8 3.5 2.3
Other taxes 0.6 0.1 2.1 1.6
-------- -------- -------- --------
Total Operating Expenses 15.7 9.2 44.0 31.0
-------- -------- -------- --------
OPERATING INCOME (LOSS) $ (3.1) $ (2.2) $ 5.0 $ 11.3
======== ======== ======== ========
PROPANE SALES (MILLIONS OF GALLONS)
Retail 8.6 8.9 38.5 42.0
Wholesale and Other 2.3 2.0 9.3 10.9
-------- -------- -------- --------
Total Propane Sales 10.9 10.9 47.8 52.9
======== ======== ======== ========
MARKETING SALES (BCF) 323.0 64.8 551.4 171.2
</TABLE>
25
<PAGE> 26
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARKETING, PROPANE AND POWER GENERATION OPERATIONS (CONTINUED)
Net Revenues
Net revenues for the third quarter of 1997 increased $5.6 million over last year
to $12.6 million primarily due to higher sales volumes partially offset by lower
gross margins for Columbia Energy Services, Inc (Columbia Service). Reflecting
the effect of the 1997 second quarter acquisition of PennUnion and the agreement
to purchase and market Kerr-McGee Corporation's (Kerr-Mcgee) offshore production
volumes, gas marketing volumes increased to 323 Bcf in the third quarter of 1997
from 64.8 Bcf in the same period last year. These higher sales volumes led to
third quarter 1997 gas marketing revenues increasing $528.3 million over the
same period last year. Net revenues for the propane operations increased
$800,000 due to an approximate 26% increase in margins.
For the nine months ended September 30, 1997, net revenues of $49 million
increased $6.7 million over last year's results. This increase was due in part
to $2.6 million of revenues recorded by TriStar for assuming Binghamton
Partnership's gas transportation contract with Columbia Transmission and higher
sales volumes net of reduced gross margins for gas marketing activities.
Columbia Energy's gas marketing volumes of 551.4 Bcf in 1997, increased 380.2
Bcf over the first nine months of 1996, primarily due to the PennUnion
acquisition and Kerr-Mcgee agreement. The colder than normal weather experienced
in the first quarter of 1996 provided gas marketing operations the opportunity
to earn significantly higher margins.
Operating Income (Loss)
An operating loss of $3.1 million for the third quarter of 1997 was $900,000
greater than the $2.2 million loss reported for last year's third quarter.
Increased net revenues were more than offset by higher operating expense
reflecting costs associated with the PennUnion acquisition, increased staffing
for wholesale marketing, mass market advertising and additional start-up costs
by Columbia Network Services Corporation (Columbia Network).
Operating income for the first nine months of 1997 was $5 million, a decrease of
$6.3 million from last year primarily due to higher operating expense reflecting
the PennUnion acquisition and business expansion for Columbia Energy. Operation
and maintenance expense for the propane operations also increased over the same
period last year reflecting increased staffing levels resulting from the
purchase of the assets of Supertane Gas Corporation by Commonwealth Propane,
Inc. in the first quarter of 1997. In addition, Columbia Network incurred
additional start-up costs. The decrease in operating income was mitigated by
revenues received from the termination of the Binghamton Partnership. In the
second quarter of 1996, approximately $1.4 million of expense was recorded for
restructuring charges.
26
<PAGE> 27
PART II - OTHER INFORMATION (CONTINUED)
Item l. Legal Proceedings
No new reportable matters have arisen and there have been no material
developments in any legal proceedings reported in Columbia's Annual
Report on Form 10-K for the year ended December 31, 1996, or Quarterly
Reports on Form 10-Q for the first and second quarters of 1997 except
as follows:
I. Purchase and Production Matters
A. New Ulm v. Columbia Gas Transmission Corp., C.A. No.
88-V-655 (155th Judicial Dist. Ct. of Austin County,
TX). The Court entered judgment on the verdict and
stipulated contract damages in the amount of
approximately $15,800 for a total judgment amount of
nearly $3.1 million plus interest. On September 26,
1997, Columbia Transmission filed a motion for new
trial, and on October 7, 1997, filed a motion for
remittitur to reduce the punitive damages in the
judgment. On October 10, 1997, Columbia Transmission
perfected an appeal. On October 29, 1997, the court
denied Columbia Transmission's motion for remittitur.
Any final order will be subject to the terms of Columbia
Transmission's plan of reorganization.
II. Regulatory Matters
A. Columbia Gas Transmission Corp. V. FERC, C.A. No.
94-1727 (U.S. Ct. of App., D.C. Circuit). Columbia
Transmission and Transcontinental Gas Pipeline
Corporation (Transco) reached an agreement to settle a
FERC Order No. 94 matter for a total payment to Transco
of $5.4 million. On September 9, 1997, the Bankruptcy
Court entered an Order approving the settlement
agreement. Columbia Transmission has made the $5.4
million refund to Transco as required by the settlement.
Columbia Transmission and some Virginia customers have
agreed to a plan whereby Columbia Transmission and the
customers will share in the refund payment to Transco.
The agreement results in billings to these customers of
approximately $1.9 million.
III Other Matters
A. Canada Southern Petroleum Ltd. v. Columbia Gas
Development of Canada Ltd. (C.A. No. 9001-03466, Court
of Queen's Bench, Alberta, Canada, filed March 7, 1990).
A trial commenced in the third quarter of 1996 in the
Court of Queen's Bench, and was adjourned while the
plaintiff sought to have Amoco's (a co-defendant)
counsel removed based upon a conflict of interest. The
trial resumed in September 1997. As a result of the 1997
upgrading of Columbia's long-term debt, an escrow
account now funded by a letter of credit was reduced to
approximately $35,835,000 (Cdn) on October 3, 1997
Item 2. Changes in Securities
None.
27
<PAGE> 28
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit
Number
11 Statement re Computation of Per Share Earnings
12 Statements of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends
27 Financial Data Schedule
The following reports on Form 8-K were filed during the third
quarter of 1997.
Financial
Item Statements
Reported Included Date of Event Date Filed
-------- ---------- ----------------- ----------------
5 Yes *October 10, 1997 October 14, 1997
* Summary of Financial and Operational data for three and nine
months ended September 30, 1997
28
<PAGE> 29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Columbia Gas System, Inc.
------------------------------------------
(Registrant)
Date: November 12, 1997 By: /s/ Jeffrey W. Grossman
---------------------------------------
Jeffrey W. Grossman
Vice President and Controller
(Principal Accounting Officer
and Duly Authorized Officer)
29
<PAGE> 1
EXHIBIT 11
THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES
Statements Re Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Computation for Statements of Consolidated
- ------------------------------------------
Income ($ in millions)
- ----------------------
Net income 0.1 (6.1) 197.7 153.4
- ----------------------------------------------------------------------------------------------------------------------------
Earnings per share of common stock
(based on average shares outstanding) ($)
Earnings on common stock - (0.11) 3.57 2.88
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Additional computation of average common
shares outstanding (thousands)(NOTE)
- ----------------------------------------------------------------------------------------------------------------------------
Average shares of common stock outstanding 55,420 55,165 55,372 53,340
Incremental common shares applicable to
common stock based on the common stock
daily average market price:
Applicable to contingent stock awards 5 - 5 10
Applicable to contingent stock options 186 - 144 76
- ----------------------------------------------------------------------------------------------------------------------------
Average common shares as adjusted 55,611 55,165 55,521 53,426
- ----------------------------------------------------------------------------------------------------------------------------
Average shares of common stock outstanding 55,420 55,165 55,372 53,340
Incremental common shares applicable to
common stock based on the more dilutive
of the common stock ending or daily average
market price during the period:
Applicable to contingent stock awards 5 - 5 10
Applicable to contingent stock options 219 - 219 114
- ----------------------------------------------------------------------------------------------------------------------------
Average common shares assuming full dilution 55,644 55,165 55,596 53,464
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Earnings on common stock as adjusted ($) - (0.11) 3.56 2.87
- ----------------------------------------------------------------------------------------------------------------------------
Earnings on common stock assuming full dilution ($) - (0.11) 3.56 2.87
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE
- ----
These calculations are submitted in accordance with the Securities and Exchange
Act of 1934 Release No. 9083 although not required by footnote 2 to paragraph 14
of Accounting Principles Opinion No. 15 because they result in dilution of less
than 3%.
<PAGE> 1
EXHIBIT 12
THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES
Statements of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends
($ in millions)
<TABLE>
<CAPTION>
Twelve Months Twelve Months
Ended September 30, Ended December 31,
-------------------- ----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Income (Loss) from Continuing Operations
before Income Taxes 381.4 (692.3) 337.5 (643.0) 392.2 288.1 161.4
Adjustments:
Interest during construction 2.3 (21.2) (1.1) (20.2) - - -
Distributed (Undistributed) equity income 1.6 3.6 1.5 (7.9) (0.9) (0.1) (0.1)
Fixed charges* 166.5 1,181.3 184.6 1,061.3 33.7 120.0 33.0
--------- -------- -------- -------- -------- -------- -------
Earnings Available 551.8 471.4 522.5 390.2 425.0 408.0 194.3
--------- -------- -------- -------- -------- -------- -------
Fixed Charges:
Interest on long-term and short-term debt 145.0 1,100.1 150.8 987.2 0.7 3.1 4.9
Other interest 0.9 60.7 13.5 53.6 14.1 98.4 8.8
Portion of rentals representing interest 20.6 20.5 20.3 20.5 18.9 18.5 19.3
--------- -------- -------- -------- -------- -------- -------
Total Fixed Charges **, *** 166.5 1,181.3 184.6 1,061.3 33.7 120.0 33.0
--------- -------- -------- -------- -------- -------- -------
Ratio of Earnings Before Taxes to Fixed Charges 3.31 N/A(a) 2.83 N/A(a) 12.61 3.40 5.89
========= ======== ======== ======== ======== ======== =======
</TABLE>
(a) To achieve a one-to-one coverage, the Corporation would need an additional
$709.9 and $671.1 million of earnings, for the twelve months ended September 30,
1996 and the twelve months ended December 31, 1995, respectively.
* Amounts for the twelve months ended September 30, 1996 and December 31, 1992
through December 31, 1996 have been restated to conform to 1997 presentation.
** This amount excludes approximately $230 million, $210 million and $204
million of interest expense not recorded for the twelve months ended December
31, 1994, 1993 and 1992, respectively. This amount includes interest expense of
$982.9 million including the write-off of unamortized discounts on debentures
recorded in 1995. Reference is made to the Statements of Consolidated Income
for the quarterly period ended September 30, 1996, as reported in Form 10-Q.
*** This amount excludes $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 December 31, 1994, 1993 and 1992.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> OPUR1
<CIK> 0000022099
<NAME> THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<BOOK-VALUE> PER-BOOK PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,786,900 3,786,900
<OTHER-PROPERTY-AND-INVEST> 550,100 550,100
<TOTAL-CURRENT-ASSETS> 1,249,000 1,249,000
<TOTAL-DEFERRED-CHARGES> 70,800 70,800
<OTHER-ASSETS> 391,200 391,200
<TOTAL-ASSETS> 6,048,000 6,048,000
<COMMON> 554,400 554,400
<CAPITAL-SURPLUS-PAID-IN> 748,800 748,800
<RETAINED-EARNINGS> 420,900 420,900
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,723,000 1,723,000
0 0
0 0
<LONG-TERM-DEBT-NET> 2,003,500 2,003,500
<SHORT-TERM-NOTES> 0 0
<LONG-TERM-NOTES-PAYABLE> 0 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0 0
<LONG-TERM-DEBT-CURRENT-PORT> 0 0
0 0
<CAPITAL-LEASE-OBLIGATIONS> 2,800 2,800
<LEASES-CURRENT> 0 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,321,500 2,321,500
<TOT-CAPITALIZATION-AND-LIAB> 6,048,000 6,048,000
<GROSS-OPERATING-REVENUE> 995,000 3,333,400
<INCOME-TAX-EXPENSE> 100 85,500
<OTHER-OPERATING-EXPENSES> 965,300 2,962,800
<TOTAL-OPERATING-EXPENSES> 965,300 2,962,800
<OPERATING-INCOME-LOSS> 29,700 370,600
<OTHER-INCOME-NET> 7,500 27,900
<INCOME-BEFORE-INTEREST-EXPEN> 37,200 398,500
<TOTAL-INTEREST-EXPENSE> 37,000 115,300
<NET-INCOME> 100 197,700
0 0
<EARNINGS-AVAILABLE-FOR-COMM> 100 197,700
<COMMON-STOCK-DIVIDENDS> 0.23 0.65
<TOTAL-INTEREST-ON-BONDS> 35,100 105,300
<CASH-FLOW-OPERATIONS> 16,600 582,100
<EPS-PRIMARY> 0 3.57
<EPS-DILUTED> 0 3.56
</TABLE>
