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FILED AND ACCEPTED
(date) ___________
File No. _________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form U-1
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
COLUMBIA ENERGY GROUP
13880 Dulles Corner Lane
Herndon, Virginia 20171-4600
and its subsidiary company:
COLUMBIA INSURANCE CORPORATION, LTD.
13880 Dulles Corner Lane
Herndon, Virginia 20171-4600
- --------------------------------------------------------------------------------
(Names of company or companies filing this statement
and addresses of principal executive offices)
J. W. Trost, Vice President
Columbia Energy Group Service Corporation
13880 Dulles Corner Lane
Herndon, Virginia 20171-4600
- --------------------------------------------------------------------------------
(Name and address of agent for service)
Sharon B. Heaton, Vice President
Columbia Insurance Corporation, Ltd.
13880 Dulles Corner Lane
Herndon, Virginia 20171-4600
- --------------------------------------------------------------------------------
(Name and address of subsidiary company 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.
Columbia Energy Group(1) ("Columbia"), a Delaware Corporation, and a
holding company registered under the Public Utility Holding Company Act of 1935
(the "Act"), and its wholly-owned subsidiary captive insurance company, Columbia
Insurance Corporation, Ltd. ("CICL"), are seeking authority to expand the lines
of coverage that CICL may provide to Columbia subsidiary companies. By order
dated October 25, 1996, the Commission authorized the formation and
capitalization of CICL to engage in the reinsurance of predictable losses under
the automobile and general liability and "all-risk" coverages. The Columbia Gas
System, Inc., Holding Co. Act Release No. 26596 (Oct. 25, 1996) (the "Order").
The Order noted that, in the future, CICL might seek to underwrite coverage
including, but not limited to, director and officer liability, employee attorney
liability, legal malpractice for employee attorneys, performance bonds, and
various warranty programs offered to consumers. Although the Order is silent in
this regard, Columbia represented that these programs would only be undertaken
pursuant to further Commission approval under the Act.
As will be discussed, Columbia estimates that it can significantly
reduce its cost of purchasing commercial insurance, beyond savings already
achieved, by expanding the scope of risk management activities that may be
directed through CICL. Accordingly, Columbia seeks to provide additional support
in the form of equity, guarantees, letters of credit, or other forms of credit
support in an aggregate amount of up to $50 million at any
- --------
(1) Formerly The Columbia Gas System, Inc.
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one time outstanding. Columbia further requests authority to establish
additional, direct or indirect, subsidiaries to engage in the proposed
activities.
CURRENT CAPTIVE INSURANCE PROGRAM
Established as a direct subsidiary of Columbia on November 1, 1996,
CICL operates as a Bermuda-incorporated insurance company and reinsures certain
commercial insurance bought by Columbia, its subsidiaries and affiliates from
commercial insurance companies such as Aegis, Ltd. CICL does not contract
directly with other Columbia subsidiary companies. Rather, CICL markets
reinsurance to admitted commercial insurers which, in turn, market primary
insurance to companies in the Columbia system. Currently, CICL's coverage
includes automobile and general liability and "all-risk" property. Initial
funding for CICL was $3,000,000, with the first $1,000,000 in capital
contributions in exchange for CICL common stock ($25 par value) and an
additional $2,000,000 in letters of credit under Columbia's bank facility
previously approved by the Commission (See File No. 70-8627).
CICL assumes the risk of the more predictable loss layer from the
commercial insurers. For general liability, CICL's exposure is limited to
$800,000 per occurrence excess of a self insured retention of $200,000 per
occurrence and subject to an aggregate limit of exposure of $3,000,000; and to a
further $1,000,000 per occurrence excess of $800,000 per occurrence excess of a
self insured retention of $200,000 per occurrence and subject to a separate
aggregate limit of exposure of $1,000,000. For "all-risk" property, CICL's
exposure is limited, depending on the type of loss, to between $500,000
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and $650,000 per occurrence excess of applicable deductibles and is also subject
to an aggregate limit of exposure of $3,000,000.
PROPOSED EXPANSION OF CAPTIVE INSURANCE PROGRAM
Columbia proposes to provide additional support to CICL in the form of
equity, guarantees, letters of credit or other credit support in an aggregate
amount of up to $50 million at any one time outstanding, to expand CICL's scope
of coverage to include all predictable risks related to the business of Columbia
and its affiliates. The expansion in coverage could, by way of example, include
Workers' Compensation to the extent Columbia subsidiaries opted to participate
through CICL. Using an in-house vehicle to provide such coverage would be
economically beneficial as administrative fees and overhead would be reduced
significantly vis-a-vis state-regulated insurance funds. Warranty programs such
as homeowners' gas line warranties also typify the kinds of coverage CICL could
offer to expand its current service. See Columbia Energy Group, Holding Co. Act
Release No. 26868 (May 6, 1998) (authorizing Columbia to engage directly or
indirectly in "providing service line repair and extended warranties with
respect to all of the utility- or energy-related service lines internal and
external to a customer's premises"). Columbia also seeks authority to establish
one or more, direct or indirect, subsidiaries to engage in the proposed
activities.
No changes would be made to CICL's current framework relating to
administrative functions, fund management, assignment of officers and directors,
letters of credit arrangements, "stop-loss" protection, and method of premium
allocations. To
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the extent any new subsidiaries differ operationally or administratively from
CICL, such differences will be described in future Rule 24 letters to the
Commission.
BENEFITS OF EXPANDING THE CAPTIVE'S SCOPE
1) Significant reduction in the 30% to 40% overhead charge for commercial
insurers underwriting "predictable" risk.
Commercial insurers charge insurance premiums based on actuarially
projected "predictable" losses plus a 30% to 40% overhead charge. Therefore, for
every $1.00 in projected loss, a commercial insurer charges an additional $0.40
for administrative charges/overhead. In contrast, CICL only adds the actual cost
of administration, resulting in substantial premiums savings. A comparison of
the estimated cost of purchasing guaranteed cost coverage for the layers of
insurance reinsured to CICL for 1996/97 and 1997/98 to the actual costs of CICL
for the period from its incorporation to June 30, 1998 reveals that Columbia
realized pre-tax savings of over two and a half million dollars by reinsuring
certain of the risks to CICL during that period.
2) Direct access to global reinsurers to ensure the most competitive and
cost-effective pricing for Columbia's "unpredictable" commercial insurance
exposures.
Reinsurers are generally only accessible by commercial insurers and brokers
who charge a fee. CICL provides Columbia direct access to reinsurance markets,
avoiding the fee, and permits access to the same group of reinsurers which many
Fortune 500 companies already access. These reinsurers, Munich RE, Zurich RE and
Swiss RE, are not only among the world's largest and most innovative insurers,
they are also among the most competitively priced.
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3) Flexibility for subsidiaries to select deductibles for their business needs
and objectives.
Higher deductibles foster an increased awareness for loss prevention
programs at the subsidiary level with the likely prospect of reduced losses in
the future, as well as lower future premiums. The better the loss experience,
the lower the premium.
4) Greater control and input over the claim management process.
Under current arrangements related to coverage types beyond CICL's
authorized scope, commercial insurers determine if and when to settle claims.
Expanding the scope of the captive would place even greater control with
Columbia companies.
5) Decreased reliance on the commercial insurance market for insuring
"predictable" risk resulting in less volatility of future premiums.
Commercial insurers base premiums not only on a company's loss history,
but also on the results in the industry, subjecting companies to dramatic
changes in insurance rates from year to year. To the extent that CICL reduces
reliance on commercial insurers, the vulnerability to such changes is lessened.
The portion of insurance premiums paid to CICL would continue to be based solely
on a company's underwiting factors and loss experience, and would not be subject
to industry-driven volatility.
Approximately sixty percent of the Fortune 500 companies presently
utilize a captive insurance company to more effectively control and manage their
insurance costs. Columbia believes that an expansion in CICL's permissible scope
will further "level the playing field" and provide increased access to the most
competitive global insurance markets, thereby resulting in reduced cost for
insurance and related services.
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SAFEGUARDS
To the extent that premiums and interest earned exceed current claims
and expenses, a reserve accumulates to respond to years when claims and expenses
exceed premiums. In the unlikely event that losses exceed aggregate limits,
commercial insurance (i.e., "stop-loss" protection) will respond to any claim(s)
in excess of the aggregate retention, thereby ensuring that coverage will be
available to Columbia subsidiaries. The financial strength and integrity of CICL
is further bolstered by its compliance with strict Bermuda capital to premium
requirements of $1 of capital for every $5 of net premium.
AUTHORIZATION REQUESTED
Columbia seeks to provide additional support in the form of equity,
guarantees, letters of credit, or other forms of credit support in an aggregate
amount of up to $50 million at any one time outstanding, to expand its captive
insurance company's scope of coverage to include all predictable risks related
to the business of Columbia and its affiliates. Columbia further requests
authority to establish additional, direct or indirect, subsidiaries to engage in
the proposed activities.
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.
Legal fees in connection with the preparation of the Application-
Declaration . . . . . . . . . . . . . . . . . . . . . . $7,500.00
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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.
The Columbia Energy Group Service Corporation will render certain legal
services at cost.
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 absence of a specific exemption, state the basis of exemption.
Sections 6, 7, 9(a)(1) and 10 are deemed applicable to the proposed
expansion of CICL's business. The proposed increase in funding is subject to
Rules 45 and 52.
Columbia does not own, nor operate nor is it an equity participant in
any Exempt Wholesale Generator or any Foreign Utility Company and will not be a
company that owns, operates or has an equity participation in an Exempt
Wholesale Generator or Foreign Utility Company as a result of the approvals
requested herein. Columbia does not have any rights or obligations under a
service, sales or construction contract with an Exempt Wholesale Generator or
Foreign Utility Company as a result of the proposed transactions.
To the extent that the proposed transactions are considered by the
Commission to require authorization, approval or exemption under any section of
the Act or any provision of the rules and regulations other than those
specifically referred to herein, a request for such authorization, approval or
exemption is hereby made.
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(b) If any applicant is not a registered holding company or a
subsidiary thereof, state the name of each public utility company of which it is
an affiliate, or of which it will become an affiliate as a result of the
proposed transaction, and the reasons why it is or will become such an
affiliate.
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.
No State public utility commission or other Federal commission
has jurisdiction over the reinsurance program described herein.
(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.
Not applicable.
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 forth the
reasons for acceleration.
It is respectively requested that the Commission issue its notice
by November 1, 1998 and its order on or before December 31, 1998.
(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.
The Applicants hereby (i) waive a recommended decision by a hearing
officer, (ii) waive a recommended decision by any other responsible officer of
the Commission, (iii) specify that the Division of Investment Management may
assist in the
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preparation of the Commission's decision, and (iv) specify that there should not
be 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
F Opinion of Counsel (to be filed by amendment).
G Draft Notice.
(b) Financial Statements
CICL
(1) Balance Sheet as of June 30, 1998.
(2) Statement of Capitalization as of June 30, 1998.
(3) Statement of Income for the Twelve Months ended June 30, 1998.
(4) Statement of Common Stock Equity as of June 30, 1998.
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 (42 U.S.C. 4232(2)(C)). If the response to
this item 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.
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As more fully described in Item 1, the proposed transactions
relate only to the expanded operational scope of a subsidiary company and have
no environmental impact in and of themselves.
(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 is preparing an EIS with respect
to the proposed transaction.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, each of the undersigned companies has duly caused this Declaration to
be signed on its behalf by the undersigned thereunto duly authorized.
COLUMBIA ENERGY GROUP
Date: October 9, 1998 By: //s//M.W. O'Donnell
-------------------------------------
M.W. O'Donnell, Senior Vice President
& Chief Financial Officer
COLUMBIA INSURANCE CORPORATION, LTD.
Date: October 9, 1998 By: //s//S.B. Heaton
-------------------------------------
S.B. Heaton, Vice President
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EXHIBIT G
SECURITIES AND EXCHANGE COMMISSION
(Release No. )
Columbia Energy Group ("Columbia"), a holding company
registered under the Public Utility Holding Company Act of 1935 (the "Act"),
located at 13880 Dulles Corner Lane, Herndon, Virginia 20171-4600, has filed an
application-declaration under Sections 6, 7, 9(a) and 10 of the Act.
Columbia requests authorization to expand the scope of risk
management currently performed by its captive insurance subsidiary, Columbia
Insurance Corporation, Ltd. ("CICL"). Currently, CICL is authorized to engage in
the reinsurance of predictable losses under the automobile and general liability
and "all-risk" coverages. Columbia seeks to provide additional support in the
form of equity, guarantees, letters of credit, or other forms of credit support
in an aggregate amount of up to $50 million at any one time outstanding, to
expand its captive insurance company's scope of coverage to include all
predictable risks related to the business of Columbia and its affiliates.
Columbia further requests authority to establish additional, direct or indirect,
subsidiaries to engage in the proposed activities.
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 ___________, 1998, to the Secretary, Securities
and Exchange Commission, Washington, DC 20549, and serve a copy on the
applicant-declarant 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 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 manner. After said date, the 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
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COLUMBIA INSURANCE CORPORATION, LTD. UNAUDITED
(b)(1)
(1 of 2)
BALANCE SHEET
ACTUAL
As of June 30, 1998
($000)
<TABLE>
<CAPTION>
CIC
Actual
------
<S> <C>
ASSETS
Property, Plant and Equipment
Gas utility and other plant .......... --
Accumulated depreciation and depletion --
------
Net Gas Utility and Other PP&E ....... --
------
Investments and Other Assets
Accounts receivable - noncurrent ..... --
Unconsolidated affiliates ............ --
Other ................................ 7,701
------
Total Investments and Other Assets ..... 7,701
------
Current Assets
Cash and temporary cash investments .. 1,825
Accounts receivable, net
Customers .......................... --
Affiliated ......................... 453
Other .............................. 27
Prepayments .......................... 33
Other ................................ --
------
Total Current Assets ................... 2,338
------
Deferred Charges ....................... 664
------
Total Assets ........................... 10,703
======
</TABLE>
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COLUMBIA INSURANCE CORPORATION, LTD. UNAUDITED
(b)(2)
(2 of 2)
BALANCE SHEET
ACTUAL
As of June 30, 1998
($000)
<TABLE>
<CAPTION>
CIC
Actual
------
<S> <C>
CAPITALIZATION AND LIABILITIES
Capitalization
Stockholder's equity ...................... 1,431
Long-term debt ............................ --
------
Total Capitalization ........................ 1,431
------
Current Liabilities
Short-term debt ........................... --
Accounts and drafts payable ............... 34
Affiliated accounts payable ............... 201
Accrued taxes ............................. --
Accrued interest .......................... --
Deferred income taxes - current ........... --
Other ..................................... --
------
Total Current Liabilities ................... 235
------
Other Liabilities and Deferred Credits
Deferred income taxes, noncurrent ......... --
Postretirement benefits other than pensions --
Other ..................................... 9,037
------
Total Other Liabilities and Deferred Credits 9,037
------
Total Capitalization and Liabilities ........ 10,703
======
</TABLE>
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COLUMBIA INSURANCE CORPORATION, LTD. UNAUDITED
(b)(2)
STATEMENT OF CAPITALIZATION
ACTUAL
As of June 30, 1998
($000)
<TABLE>
<CAPTION>
CIC
Actual
-----
<S> <C>
Stockholder's Equity
Common Stock, $25 par value, authorized
4,800 shares, outstanding 4,800 shares 120
Additional paid in capital ............. 880
Retained earnings ...................... 431
-----
Total Stockholder's Equity ............... 1,431
-----
Long-Term Debt
Long term debt ......................... --
-----
Total Long-Term Debt ..................... --
-----
Total Capitalization ..................... 1,431
=====
</TABLE>
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COLUMBIA INSURANCE CORPORATION, LTD. UNAUDITED
(b)(3)
STATEMENT OF INCOME
ACTUAL
Twelve Months Ended June 30, 1998
($000)
<TABLE>
<CAPTION>
CIC
Actual
------
<S> <C>
Operating Revenues
Gas Sales .......................... --
Transportation ..................... --
Storage ............................ --
Other .............................. 4,920
------
Total Operating Revenues ............. 4,920
------
Operating Expenses
Products purchased ................. --
Operation .......................... 4,994
Maintenance ........................ --
Depreciation and depletion ......... --
Other taxes ........................ 1
------
Total Operating Expenses ............. 4,995
------
Operating Income (Loss) .............. (75)
------
Other Income (Deductions)
Interest income and other, net ..... 547
Interest expense and related charges --
------
Total Other Income (Deductions) ...... 547
------
Income (Loss) before Income Taxes .... 472
Income Taxes ......................... 165
------
Net Income ........................... 307
======
</TABLE>
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COLUMBIA INSURANCE CORPORATION, LTD. UNAUDITED
(b)(4)
STATEMENTS OF COMMON STOCK EQUITY
ACTUAL
As of June 30, 1998
($000)
<TABLE>
<CAPTION>
CIC
Actual
------
COMMON STOCK
<S> <C>
Balance at beginning of year ............................. 120
Common stock issued -
Subsidiaries ............................................ --
Leverage employee stock ownership plan (LESOP) .......... --
Dividend reinvestment plan .............................. --
Long-term incentive plan ................................ --
Public offering ......................................... --
------
Balance at June 30, 1998 ................................. 120
======
ADDITIONAL PAID IN CAPITAL
Balance at beginning of year ............................. 880
Common stock issued -
Subsidiaries ............................................ --
Leverage employee stock ownership plan (LESOP) .......... --
Dividend reinvestment plan .............................. --
Long-term incentive plan ................................ --
Public offering ......................................... --
------
Balance at June 30, 1998 ................................. 880
======
RETAINED EARNINGS
Balance at beginning of year ............................. 506
Net income (loss) ........................................ (25)
Common stock dividends -
CG ......................................................
Subsidiaries (to CG) .................................... (50)
Other .................................................... --
------
Balance at June 30, 1998 ................................. 431
======
ACCUMULATED FOREIGN CURRENCY TRANSLATION
Balance at beginning of year ............................. --
Adjustment ............................................... --
------
Balance at June 30, 1998 ................................. --
======
UNEARNED EMPLOYEE COMPENSATION
Balance at beginning of year ............................. --
Adjustment ............................................... --
------
Balance at June 30, 1998 ................................. --
------
TOTAL COMMON STOCK EQUITY ................................ 1,431
======
</TABLE>
