<PAGE> 1
As filed with the United States Securities and Exchange
Commission on March 2, 2000.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended DECEMBER 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
C O L U M B I A E N E R G Y G R O U P
(Exact name of registrant as specified in its charter)
Delaware 13-1594808
(State or other Jurisdiction of incorporation (I.R.S. Employer
or organization) (Identification No.)
13880 Dulles Corner Lane, Herndon, VA 20171
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (703) 561-6000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, $0.01 Par Value . . . . . . . . . . . New York Stock Exchange
Debentures
6.39% Series A due November 28, 2000
6.61% Series B due November 28, 2002
6.80% Series C due November 28, 2005
7.05% Series D due November 28, 2007
7.32% Series E due November 28, 2010
7.42% Series F due November 28, 2015
7.62% Series G due November 28, 2025
Securities registered pursuant to Section 12(g) of the Act: None
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 proceeding 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 ] or No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the outstanding common shares of the Registrant
held by nonaffiliates as of January 31, 2000, was $5,231,062,000. For purposes
of the foregoing calculation, all directors and/or officers have been deemed to
be affiliates, but the registrant disclaims that any of such directors and/or
officers is an affiliate.
The number of shares outstanding of each class of common stock as of January 31,
2000, was: Common Stock $0.01 Par Value: 81,304,961 shares outstanding.
Documents Incorporated by Reference
Part III of this report incorporates by reference specific portions of the
Registrant's Proxy Statement relating to the 2000 Annual Meeting of
Stockholders.
<PAGE> 2
CONTENTS
<TABLE>
<CAPTION>
Page
Part I No.
<S> <C>
Item 1. Business................................................................... 3
Item 2. Properties................................................................. 7
Item 3. Legal Proceedings.......................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders........................ 11
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.. 11
Item 6. Selected Financial Data.................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 14
Item 8. Financial Statements and Supplementary Data................................ 39
Item 9. Change In and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................... 72
Part III
Item 10. Directors and Executive Officers of the Registrant......................... 72
Item 11. Executive Compensation..................................................... 72
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 72
Item 13. Certain Relationships and Related Transactions............................. 72
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 73
Undertaking made in Connection with 1933 Act Compliance on Form S-8................. 73
Signatures.......................................................................... 74
Exhibits............................................................................ 75
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
General
Columbia Energy Group (Columbia), formerly The Columbia Gas System, Inc., and
its subsidiaries comprise one of the nation's largest integrated natural gas
systems engaged in natural gas transmission, natural gas distribution, and
exploration for and production of natural gas and oil. Columbia is also engaged
in related energy businesses including the distribution of propane and petroleum
products, marketing of natural gas and electricity and the generation of
electricity, primarily fueled by natural gas. Columbia, organized under the laws
of the State of Delaware on September 30, 1926, is a registered holding company
under the Public Utility Holding Company Act of 1935, as amended, (1935 Act) and
derives substantially all its revenues and earnings from the operating results
of its 19 direct subsidiaries. Columbia owns all of the securities of these
direct subsidiaries except for approximately 8% of the stock in Columbia LNG
Corporation. Columbia and its subsidiaries are sometimes collectively referred
to herein as the Columbia Group.
On February 28, 2000, Columbia announced that it had entered into an Agreement
and Plan of Merger, dated as of February 27, 2000 (Merger Agreement), between
Columbia and NiSource, Inc., an Indiana corporation (NiSource). The Board of
Directors of Columbia determined to enter into the Merger Agreement after a
comprehensive evaluation of strategic alternatives that might generate value
greater than that which Columbia's business plan could create.
The terms of the Merger Agreement provide that NiSource will organize a new
company which shall serve as the holding company for both Columbia and NiSource
after the completion of the transaction. Pursuant to the terms of the Merger
Agreement, each of Columbia and NiSource will be merged into newly formed
special purpose subsidiaries of the new holding company, and each will become a
wholly owned subsidiary of the new holding company.
Subject to the terms and conditions of the Merger Agreement, upon completion of
the transaction, Columbia's shareholders will receive, for each share of
Columbia common stock, $70 in cash and a $2.60 face value SAILS(sm) (a unit
consisting of a zero coupon debt security with a forward equity contract).
Columbia's shareholders also have the option to elect to receive (in lieu of
cash and SAILS(sm)) shares in the new holding company in a tax-free exchange,
for up to 30% of the outstanding shares of Columbia common stock. Pursuant to
the stock election option, each Columbia share will be exchanged for up to $74
in new holding company stock, subject to a collar such that, if the average
closing price of NiSource shares during the 30 days prior to the closing of the
transaction is greater than $16.50, Columbia shareholders will receive shares of
the new holding company valued at $74 for each share of Columbia stock, and if
the average closing price of NiSource shares during the 30 days prior to closing
of the transaction is $16.50 or below, Columbia shareholders will receive 4.4848
shares of new holding company stock for each Columbia share. Upon completion of
the transaction, NiSource shareholders will receive one share of holding company
stock for each share of NiSource common stock that they own.
The Merger is conditioned upon, among other things, the approvals of the
shareholders of both companies and various regulatory commissions. However, if
the NiSource shareholder approval is not obtained, the transaction will
automatically be restructured so that, instead of each of NiSource and Columbia
becoming wholly-owned subsidiaries of the new holding company, Columbia will
become a wholly owned subsidiary of NiSource, and Columbia shareholders will
receive $70 in cash and a $3.02 face value SAILS(sm) unit of NiSource with no
option for Columbia shareholders to elect new holding company stock.
Presentation of Segment Information
Columbia revised its presentation of primary business segment information
beginning with the reporting of third quarter 1999 results. The results for
Columbia Propane have been moved from the propane, power generation and
liquefied natural gas (LNG) operations to energy marketing operations that also
includes Columbia Energy Services Corporation's (Columbia Energy Services)
retail operations. Prior periods have been restated to reflect this change.
Transmission and Storage Operations
Columbia's two interstate pipeline subsidiaries, Columbia Gas Transmission
Corporation (Columbia Transmission) and Columbia Gulf Transmission Company
(Columbia Gulf), own a pipeline network of approximately 16,250 miles extending
from offshore in the Gulf of Mexico to Lake Erie, New York and the eastern
seaboard. In addition, Columbia Transmission operates one of the nation's
largest underground natural gas storage systems. Together, Columbia Transmission
and Columbia Gulf serve customers in 15 northeastern, mid-Atlantic, midwestern,
and southern states and the District of Columbia. Columbia Gulf's pipeline
system extends from offshore Louisiana to West Virginia and transports a major
portion of the gas delivered by Columbia Transmission. It also transports gas
for third parties within the production areas of the Gulf Coast. Columbia
Pipeline Corporation and its wholly-owned subsidiary, Columbia Deep Water
Services Company, were formed to operate pipeline and gathering facilities that
are not regulated by the Federal Energy Regulatory Commission (FERC).
3
<PAGE> 4
ITEM 1. BUSINESS (continued)
Columbia Transmission and Columbia Gulf provide an array of competitively priced
natural gas transportation and storage services for local distribution companies
and industrial and commercial customers who contract directly with producers or
marketers for their gas supplies.
In 1999, Columbia Transmission completed construction of the largest ever
expansion of its storage and transportation system. The expansion adds
approximately 500,000 Mcf (thousand cubic feet) per day of firm storage to 23
customers. Columbia Transmission is also participating in the proposed 442-mile
Millennium Pipeline Project that has been submitted to the FERC for approval. As
proposed, the project will transport approximately 700,000 Mcf of natural gas
per day from the Lake Erie region to eastern markets. For additional information
regarding the transmission and storage operation's expansion projects see Item
7, page 21.
Distribution Operations
Columbia's five distribution subsidiaries provide natural gas service to nearly
2.1 million residential, commercial and industrial customers in Ohio,
Pennsylvania, Virginia, Kentucky and Maryland. Approximately 32,400 miles of
distribution pipelines serve these major markets. The distribution subsidiaries
have initiated transportation programs that allow residential and small
commercial customers the opportunity to choose their natural gas suppliers and
to use the distribution subsidiaries for transportation service. This ability to
choose a supplier was previously limited to larger commercial and industrial
customers. See Item 7, page 26 and "Competition" on page 5 for additional
information.
Exploration and Production Operations
Columbia's exploration and production subsidiary, Columbia Energy Resources,
Inc. (Columbia Resources), explores for, develops, gathers and produces natural
gas and oil in Appalachia and Canada. As of December 31, 1999, Columbia
Resources held interests in approximately 3.9 million net acres of gas and oil
leases and had proved reserves of 965.8 billion cubic feet of natural gas
equivalent. Columbia Resources owns and operates 8,188 wells and 6,069 miles of
gathering facilities and has expanded its reserve base and production through an
aggressive drilling and acquisition program. During 1999, Columbia Resources
purchased 800 wells, gathering assets and approximately 800,000 undeveloped
acres in the U.S. and Canada. In August 1997, Columbia Resources acquired
Alamco, Inc. (Alamco), an Appalachian gas and oil exploration and development
company. Through Columbia Resources' operations in north-central West Virginia,
southern Kentucky, northern Tennessee and New York, it is one of the
largest-volume independent natural gas and oil producers in the Appalachian
Basin. For additional information, see Item 7, page 31.
Energy Marketing Operations
The energy marketing segment includes Columbia Energy Services that consists of
a retail mass marketing business, an internet based service and a wholly-owned
subsidiary that provides energy related services and products. Also included in
the energy marketing segment are the operations of Columbia Propane Corporation
(Columbia Propane).
As a result of an ongoing strategic assessment in 1999, Columbia Energy Services
decided to focus its efforts on the Mass Markets business, which provides energy
products to smaller volume retail customers, and to exit the Wholesale and
Trading and Major Accounts businesses. The Wholesale and Trading business was
sold at the end of 1999 and the Major Accounts business is being offered for
sale. These businesses are recorded as discontinued operations, in accordance
with generally accepted accounting principles.
Columbia Propane sells propane at wholesale and retail and has been aggressively
expanding its operations through acquisitions and internal growth. See Item 7,
page 33 for additional information regarding recent acquisitions. At the end of
1999, Columbia Propane served more than 350,600 customers in 31 states and the
District of Columbia, which is more than triple the number of customers served
at the end of 1998. Columbia Petroleum Corporation, a subsidiary of Columbia
Propane, owns and operates petroleum assets and had sales of 202.4 million
gallons in 1999 with approximately 42,600 customers in five states.
Power Generation, LNG and Other Operations
Columbia Electric Corporation (Columbia Electric) is an unregulated electric
generation company whose primary focus is the development, ownership and
operation of clean, natural gas fueled power projects. Columbia currently has
three operating facilities totaling 248 megawatts, one 550-megawatt (equivalent)
plant under construction in Gregory, Texas and approximately 3,000 megawatts of
gas-fired generation under development. Publicly announced projects in Columbia
Electric's development portfolio include the Kelson Ridge Project in Charles
County, Maryland, the Liberty Electric Project in Eddystone, Pennsylvania, the
Grassy Point Energy Project in Haverstraw, New York, the Ceredo Electric
Generating Station in Ceredo, West Virginia and the Henderson Generating Station
in Henderson, Kentucky.
4
<PAGE> 5
ITEM 1. BUSINESS (continued)
The Gregory Project, a partnership between subsidiaries of Columbia Electric and
LG&E Power, Inc., is anticipated to start operations in the summer of 2000.
Construction of the Liberty Electric Project is anticipated to commence in
spring 2000. Ownership of the Liberty Electric Project was jointly held by
Columbia Electric and subsidiaries of Westcoast Energy, Inc. (Westcoast). In
December 1999, the ownership agreement between Columbia and Westcoast was
terminated due to allocation of capital to other projects by Westcoast in
geographic areas more closely aligned with other Westcoast operating assets and
the desire of Westcoast to focus its resources in ventures that will generate
near-term operating income. Columbia Electric announced on February 16, 2000,
that it purchased Westcoast's 50% interest and now owns 100% of the Liberty
Electric Project.
In December 1999, a limited partnership company established between Columbia
Electric and Atlantic Generation, Inc. completed a transaction terminating a
long-term power purchase contract. Columbia Electric's portion was approximately
$71 million pre-tax under the terms of the buyout. The partners will continue to
operate the facility as a merchant power plant.
Columbia LNG Corporation and an affiliate company own an LNG facility, located
in Cove Point, Maryland, which is one of the largest natural gas peaking and
storage facilities in the United States. The facility has the capacity to
liquify natural gas at a rate of 15,000 Mcf of natural gas per day. The facility
enables LNG to be stored until needed for the winter peak-day requirements of
utilities and other large gas users.
Columbia Network Services Corporation (Columbia Network), a wholly-owned
subsidiary of Columbia, and its subsidiaries provide telecommunications and
information services and assist personal communications service providers and
other microwave radio service licensees in locating and constructing antenna
facilities.
In 1999, Columbia Transmission Communications Corporation (Transcom), a
wholly-owned subsidiary of Columbia, began the construction of its
telecommunications network along the Washington, D.C. to New York City corridor.
Transcom will build and maintain a fiber optics network for voice and data
communications on rights-of-way of Columbia's pipeline companies. Transcom
expects to complete the D.C. to New York fiber optics link in the first half of
2000. The route covers 260 miles and provides access to 16 million people in the
busiest telecommunications corridor in the United States. The company is
developing plans to extend the fiber optics network beyond the initial route.
For additional discussion of Columbia's business segments, including financial
information for the last three fiscal years, see Item 7, pages 21 through 37 and
Note 17 on pages 65 and 66 of Item 8.
Competition
Open access to natural gas supplies over interstate pipelines and the
deregulation of the commodity price of gas has led to tremendous change in the
energy markets, which continue to evolve. During the past couple of years, local
distribution company (LDC) customers and marketers began to purchase gas
directly from producers and marketers and an open competitive market for gas
supplies has emerged. This separation or "unbundling" of the transportation and
other services offered by pipelines and LDCs allows customers to select the
service they want independent from the purchase of the commodity. Columbia's
distribution subsidiaries are involved in programs that provide residential
customers the opportunity to purchase their natural gas requirements from third
parties and use the distribution subsidiaries for transportation services. It is
likely that, over time, distribution companies will have a very limited merchant
function. At the same time that the natural gas markets are evolving, the
markets for competing energy sources are also changing. In 1997, open access to
interstate transmission of electricity was approved by the FERC and was
subsequently approved by several state regulatory commissions, which approvals
provide for increased competition in the electricity market. Columbia's other
operations also experience competition for energy sales and related services
from third party providers. Columbia meets these challenges through innovative
programs aimed at providing energy products and services at competitive prices
while also providing new services that are responsive to the evolving energy
market and customer requirements. For additional information regarding
competition, see Item 7.
Credit Ratings and Credit Facilities
Columbia has an investment grade credit rating which, when coupled with its
$1.35 billion revolving credit facilities, adds to Columbia's financial
flexibility to take advantage of business opportunities as they arise. The
credit facilities consist of a $450 million 364-day revolving credit facility,
with a one-year term loan option, that expires in March 2000 and a $900 million
five-year revolving credit facility that expires in March 2003 and provides for
the issuance of up to $300 million of letters of credit. Columbia is currently
negotiating the replacement of the 364-day facility
5
<PAGE> 6
ITEM 1. BUSINESS (continued)
with a bank facility substantially similar in terms. There were no borrowings
under the credit facilities as of December 31, 1999. Columbia's long-term debt
is rated A3, A and BBB+ by Moody's Investors Service, Inc. (Moody's), Fitch
Investors Service (Fitch) and Standard & Poor's Rating Group (S&P),
respectively. Columbia's long-term debt ratings are currently under review for a
possible change by Moody's and S&P. Columbia's commercial paper is rated F-1 by
Fitch, P-2 by Moody's and A-2 by S&P.
The foregoing discussion and Item 3 contain "forward-looking statements," within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Investors and
prospective investors should understand that many 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. These forward-looking statements include, but are not limited to,
statements concerning Columbia's plans, proposed acquisitions and dispositions,
objectives, expected performance, expenditures and recovery of expenditures
through rates, stated on either a consolidated or segment basis, and 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, increased competition in deregulated energy markets,
weather, fluctuations in supply and demand for energy commodities, successful
consummation of proposed acquisitions and dispositions, growth opportunities for
Columbia's regulated and nonregulated businesses, dealings with third parties
over whom Columbia has no control, actual operating experience of acquired
assets, Columbia's ability to integrate acquired operations into its operations,
the regulatory process, regulatory and legislative changes as well as changes in
general economic, capital and commodity market conditions, counter-party credit
risk, many of which are beyond the control of Columbia. In addition, the
relative contributions to profitability by each segment, and the assumptions
underlying the forward-looking statements relating thereto, may change over
time.
With respect to any references made to ratings assigned to Columbia's debt
securities, there can be no assurance that Columbia will be successful in
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 the 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.
Other Relevant Business Information
Columbia Group's customer base is broadly diversified, with no single customer
accounting for a significant portion of revenues.
As of January 31, 2000, the Columbia Group had 9,683 full-time employees of
which 1,797 are subject to collective bargaining agreements.
Columbia's subsidiaries are subject to extensive federal, state and local laws
and regulations relating to environmental matters. These laws and regulations,
which are constantly changing, require expenditures for corrective action at
various operating facilities, waste disposal sites and former gas manufacturing
sites for conditions resulting from past practices that have subsequently become
subject to environmental regulation. Information relating to environmental
matters is detailed in Item 7, pages 23, 28 and 34, and in Item 8, Note 14 on
page 63.
On February 22, the board of directors of Columbia amended Columbia's bylaws to
provide that the annual meeting of Columbia will be held on the third Wednesday
in May of each year, at nine o'clock in the morning. If that day is a legal
holiday, the annual meeting will be held on the following day. The board of
directors may change such date and time in its discretion. The board of
directors further amended the bylaws to require stockholders to provide
Columbia with advance notice of stockholder proposals and stockholder
nominations to the board of directors. As amended, the bylaws provide that
stockholders must notify Columbia not less than 60 days and not more than 90
days before the date of the meeting of any stockholder proposal or stockholder
nomination to the board of directors. If, however, the date of the meeting is
first publicly announced or disclosed less than 70 days prior to the meeting,
then stockholders must provide Columbia with such notice within 10 days after
announcement or disclosure. With respect to stockholder proposals, the notice
must include the text of the proposal, a brief written statement of the reasons
why the stockholder favors the proposal, and other information as set forth in
the bylaws. In the case of nominations to the board of directors, the bylaws
provide that the notice must contain the name of the nominated person and other
information as set forth in the bylaws.
For a listing of the direct subsidiaries of Columbia refer to Exhibit 21.
6
<PAGE> 7
ITEM 2. PROPERTIES
Information relating to properties of subsidiary companies is detailed below and
on page 8 and page 47 of Item 8 under Note 1F. Assets under lien and other
guarantees are described on page 62 in Note 14D of Item 8.
Neither Columbia nor any subsidiary knows of material defects in the title to
any real properties of the subsidiaries of Columbia or any material adverse
claim of any right, title, or interest therein, pending or contemplated.
Substantially all of Columbia Transmission's property has been pledged to
Columbia as security for First Mortgage Bonds issued by Columbia Transmission to
Columbia.
EXPLORATION AND DEVELOPMENT DATA
Acreage - at December 31, 1999
<TABLE>
<CAPTION>
Developed Acreage Undeveloped Acreage
---------------------------------- ---------------------------------------
Gross Net Gross Net
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
United States........ 2,177,356 2,050,862 1,362,091 1,061,595
Canada............... 3,524 1,625 1,435,344 774,962
---------- --------- --------- ---------
Total................ 2,180,880 2,052,487 2,797,435 1,836,557
========= ========= ========= =========
</TABLE>
Net Wells Completed - 12 Months Ended December 31,
<TABLE>
<CAPTION>
Exploratory Development Total
------------------------- ------------------------- ------------------------
Productive Dry Productive Dry Productive Dry
---------- --- ---------- --- ---------- ---
<S> <C> <C> <C> <C> <C> <C>
United States........
1999............ 3 1 193 37 196 38
1998............ 5 1 136 32 141 33
1997............ - - 84 18 84 18
Canada...............
1999............ - 1 1 2 1 3
1998............ - 1 - 1 - 2
</TABLE>
Productive and Drilling Wells - At December 31, 1999
<TABLE>
<CAPTION>
Production Wells
----------------------------------------
Gross Net Wells Drilling
--------------- ------------- ---------------------------
Gas Oil Gas Oil Gross Net
------ ------ ---- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C>
United States........ 8,019(a) 142 7,493 85 40 33
Canada............... 12 15 6 8 6 4
----- ----- ----- ------ ------ -----
Total................ 8,031 157 7,499 93 46 37
===== ===== ===== ====== ====== =====
</TABLE>
(a) Includes 616 multiple completion gas wells, all of which are included as
single wells in the table. Also includes 1 gross productive horizontal
well.
7
<PAGE> 8
ITEM 2. PROPERTIES (continued)
GAS PROPERTIES OF SUBSIDIARIES - AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
Underground Storage Miles of Pipeline
----------------------------------- -------------------------------------------------
Gathering
Subsidiaries State Acreage Wells and Storage Transmission Distribution
- --------------------------------------- --------- ---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Columbia Gas of Kentucky, Inc. KY - - - - 2,433
Columbia Gas of Maryland, Inc. MD - - - - 601
Columbia Gas of Ohio, Inc. OH - - - - 18,387
Columbia Gas of Pennsylvania, Inc. PA 3,300 8 4 - 6,961
Columbia Gas of Virginia, Inc. VA - - - - 4,021
Columbia Gas Transmission Corporation DE - - - 3 -
KY - - - 711 -
MD 945 - - 229 -
NJ - - - 69 -
NY 26,228 143 30 338 -
NC - - - 1 -
OH 486,884 2,476 815 4,136 -
PA 63,587 230 76 1,845 -
VA - - - 1,149 -
WV 304,867 811 281 2,405 -
Columbia Gulf Transmission Company KY - - - 716 -
LA - - - 2,035 -
MS - - - 659 -
TN - - - 556 -
TX - - - 183 -
WY - - - 10 -
Columbia Energy Resources, Inc. KY - - 2,289 - -
MI - - 6 - -
NY - - 130 - -
OH - - 123 - -
PA - - 37 - -
TN - - 45 - -
VA - - 429 - -
WV - - 3,010 - -
Columbia Pipeline Company LA - - 3 - -
Columbia LNG Corporation MD - - - 48 -
VA - - - 39 -
---------- ---------- ---------- ---------- ----------
Total 885,811 3,668 7,278 15,132 32,403
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Compressor Stations
------------------------------
Installed
Subsidiaries Number Capacity (hp)
- --------------------------------------- ---------- -------------
<S> <C> <C>
Columbia Gas of Kentucky, Inc. - -
Columbia Gas of Maryland, Inc. - -
Columbia Gas of Ohio, Inc. - -
Columbia Gas of Pennsylvania, Inc. 1 800
Columbia Gas of Virginia, Inc. - -
Columbia Gas Transmission Corporation - -
6 18,270
1 12,000
- -
3 3,880
1 1,200
25 103,187
23 66,194
10 79,330
39 313,564
Columbia Gulf Transmission Company 2 70,000
6 195,500
3 131,500
2 85,600
- -
- -
Columbia Energy Resources, Inc. 20 6,332
- -
- -
1 10
- -
2 100
- -
15 1,189
Columbia Pipeline Company - -
Columbia LNG Corporation - -
- -
---------- ----------
Total 160 1,088,656
========== ==========
</TABLE>
NOTE: This table excludes minor gas properties and all construction work in
progress. The titles to the real properties of the subsidiaries of
Columbia have not been examined for the purpose of this document.
Neither Columbia nor any subsidiary know of material defects in the
title to any of the real properties of the subsidiaries of Columbia or
of any material adverse claim of any right, title, or interest therein,
pending or contemplated. Substantially all of Columbia Transmission's
property has been pledged to Columbia as security for First Mortgage
Bonds issued by Columbia Transmission to Columbia.
8
<PAGE> 9
ITEM 3. LEGAL PROCEEDINGS
I. Purchase and Production Matters
A. New Bremen Corp. v. Columbia Gas Transmission Corp. and Columbia Gulf
Transmission Co., No. 88V-631 (Dist. Ct. Austin County, TX); In re The
Columbia Gas System, Inc. and Columbia Gas Transmission Corporation,
No. 91-803 and No. 91-804 (U.S. Bankr. Ct. Dist. of Del.). As reported
in the Quarterly Report on Form 10-Q for the quarter ended March 31,
1999, the Bankruptcy Court approved the settlement of this matter on
April 12, 1999. Payment was made on April 26, 1999. This matter is now
concluded. For further information regarding bankruptcy matters see
Item 7, page 38.
II. Environmental
A. Columbia Gas Transmission Corp. v. Aetna Casualty & Surety Co., et al.,
C.A. No. 94-C-454 (Kanawha (W.Va.) Cir. Ct. March 14, 1994). Columbia
Transmission filed a complaint in West Virginia state court seeking
coverage from various insurers under various insurance policies for
environmental cleanup costs. These costs are discussed more fully in
the Management's Discussion and Analysis of Financial Condition and
Results of Operations section of this Report. All insurers have
responded to the complaint denying such claims. The case is currently
stayed under the evergreen provision of the agreed scheduling order
entered by the state court on November 29, 1995, in order to allow
informal discussions among the parties to the litigation. The parties
have also entered into an agreed order concerning a special discovery
master, which was entered by the court. Columbia Transmission continues
to pursue recovery of environmental expenditures from its insurance
carriers, however, at this time, management is unable to determine the
total amount or final disposition of any recovery.
B. Columbia Gulf Transmission Co. v. Aetna Casualty & Surety Co., et al.,
C.A. No. 95-C-177 (Kanawha (W.Va.) Cir. Ct. January 19, 1995). Columbia
Gulf filed a complaint in West Virginia state court seeking coverage
from various insurers under various insurance policies for
environmental cleanup costs. These costs are discussed more fully in
the Management's Discussion and Analysis of Financial Condition and
Results of Operations section of this Report. All insurers have
responded to the complaint denying such claims. The case is currently
stayed under the evergreen provision of the agreed scheduling order
entered by the state court on December 1, 1995, in order to allow
informal discussions among the parties to the litigation. The parties
have also entered into an agreed order concerning a special discovery
master, which was entered by the court. Columbia Gulf continues to
pursue recovery of environmental expenditures from its insurance
carriers, however, at this time, management is unable to determine the
total amount or final disposition of any recovery.
C. "Emergency Planning and Community Right to Know Act". In January 2000,
the management of Columbia Petroleum discovered that an erroneous
determination of the applicability of certain regulatory requirements
to certain of its petroleum distribution facilities had resulted in a
failure to submit toxic chemical release information required under
Section 313 of the Emergency Planning and Community Right-To-Know Act
of 1986. Management promptly self-reported the circumstance to state
and federal regulatory officials and submitted the required
information. Columbia Petroleum has entered into discussions with
regulatory officials concerning the circumstances, which gave rise to
the failure to report. Because these discussions are in as very
preliminary state, management is unable to estimate the amount of
sanctions, if any, associated with the final resolution of this matter.
III. Other
A. MarkWest Hydrocarbon, Inc., Arbitration Proceeding, AAA Case No. 77 181
0035 98 (filed February 13, 1998); Columbia Gas Transmission Corp. v.
MarkWest Hydrocarbon, Inc., U.S. D.C., S.D. W.Va., Case No. 2:98-03622
(filed April 28, 1998). As reported in the Quarterly Report on Form
10-Q for the quarter ended September 30, 1999, Columbia Transmission
and MarkWest executed, on October 16, 1999, the necessary documents to
implement a full and complete settlement of all issues. As part of the
settlement, MarkWest will expand certain facilities to process
additional gas production in the Appalachian region. This matter is now
concluded.
B. 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). The plaintiffs assert, among other things, that
the defendant working interest owners, including Columbia Gas
Development of Canada Ltd. (Columbia Canada) and various Amoco
affiliates, breached an alleged fiduciary duty to ensure the earliest
feasible marketing of gas from the Kotaneelee field (Yukon Territory,
Canada). The plaintiffs seek, among other remedies, the return of the
defendants' interests in the Kotaneelee field to the plaintiffs, a
declaration that such interests are held in trust for the plaintiffs
and an order requiring the defendants to promptly market Kotaneelee gas
or assessing damages.
In November 1993, the plaintiffs amended their Amended Statement of
Claim to include allegations that the balance in the Carried Interest
Account (an account for operating costs, which are recoverable, by
working
9
<PAGE> 10
ITEM 3. LEGAL PROCEEDINGS (continued)
interest owners) which is in excess of the balance as of November 1988
should be reduced to zero. Columbia, on behalf of Columbia Canada,
consented to the amendment in consideration of the plaintiffs'
acknowledgment that some $63 million was properly charged to the
account. However, Columbia and Columbia Canada continue to dispute the
claim to the extent that the claim challenges expenditures incurred
since November 1988, including expenditures made after Columbia Canada
was sold to Anderson Exploration Ltd. (Anderson) effective December 31,
1991.
A trial commenced in the third quarter of 1996 in the Court of Queen's
Bench. Following multiple lengthy adjournments, plaintiffs concluded
their case-in-chief in the fourth quarter of 1998. Defendants are
currently presenting their witnesses and evidence. The trial is
expected to conclude by the end of 2000. Management continues to
believe that its defenses are meritorious, and that the risk of any
material liability to Columbia is de minimis.
Pursuant to an Indemnification Agreement regarding the Kotaneelee
Litigation entered into when Columbia Canada was sold to Anderson,
Columbia agreed to indemnify and hold Anderson harmless for losses due
to this litigation arising out of actions occurring prior to December
31, 1991. As a result of the 1997 upgrading of Columbia's long-term
debt, an escrow account that provides security for the indemnification
obligation and is now funded by a letter of credit was reduced to
approximately $35,835,000 (Cdn).
C. Cathodic Protection. In September 1995, the management of Commonwealth
Gas Services, Inc. (now Columbia Gas of Virginia, Inc.) (Columbia of
Virginia) advised the Staff of the Virginia State Corporation
Commission (VSCC) that there had been deficiencies in Columbia of
Virginia's cathodically protected pipeline distribution system in its
Northern Operating Area in Virginia. Following several months of
informal investigation, on March 1, 1996, the Commission subpoenaed
Columbia of Virginia to produce documents related to its cathodic
protection program in the Northern Operating Area. Columbia of Virginia
complied with the subpoena. On November 18, 1998, Columbia of Virginia
reported to the VSCC that, with one small exception, it had completed
all remedial work related to the cathodic protection deficiencies. On
April 29, 1999, the Staff of the VSCC issued a Notice of Probable
Violation, indicating it had discovered numerous "probable violations"
of the VSCC's pipeline safety regulations. On May 26, 1999, Columbia of
Virginia submitted a response to the Notice acknowledging that cathodic
protection deficiencies had occurred, identifying the actions taken by
Columbia of Virginia to address such deficiencies, and requesting an
informal conference. Numerous informal conferences have been held with
the Staff. As a result of these conferences, Columbia of Virginia has
agreed to engage an independent consultant to review its cathodic
protection program as part of an overall settlement of the matter.
Discussions between Columbia of Virginia and the Staff concerning the
complete resolution of this matter are continuing. At this time
Columbia is unable to determine the likelihood or magnitude of any
penalties that might be assessed.
D. Columbia Gas Transmission Corp. v. Consolidation Coal Co., et al.,
U.S.D.C. W.D. Pa., C.A. No. 99-2071. On December 21, 1999 Columbia
Transmission filed, but did not serve, a complaint against
Consolidation Coal Co. and McElroy Coal Co. (collectively, Consol),
seeking declaratory and permanent injunctive relief enjoining Consol
from pursuing its current plan to conduct longwall mining through
Columbia Transmission's Victory Storage Field in northern West
Virginia. Consol's current plans to longwall mine through the Victory
Storage Field would destroy certain infrastructure of Victory Storage
Field, including all of Columbia Transmission's storage wells in the
path of the mining. The parties have held discussions concerning
resolution of this matter and, contingent upon the parties reaching an
agreement to hold the litigation in abeyance, further discussions may
occur.
E. NiSource Related Litigation. NiSource has commenced three lawsuits
against Columbia and its directors, two in Delaware Chancery Court and
one in the United States District Court for the District of Delaware.
Several groups of shareholders have instituted similar or identical
actions against Columbia. These shareholder actions have been
consolidated with each other and coordinated with NiSource's actions.
NiSource's federal court complaint was filed on June 24, 1999, and was
amended on July 8, 1999. The federal court complaint, among other
things (i) alleges that certain statements that Columbia has made in
connection with NiSource's offer to purchase Columbia have been false
and misleading in violation of the Securities Exchange Act of 1934, as
amended; (ii) seeks an injunction requiring Columbia to take all
actions necessary to exempt the NiSource tender offer from the
requirements of Section 203 of the Delaware General Corporation Law,
and (iii) seeks injunctive relief prohibiting Columbia from taking any
defensive actions in response to the Offer. Columbia has moved to
dismiss the federal court complaints and the motions are pending.
10
<PAGE> 11
ITEM 3. LEGAL PROCEEDINGS (continued)
The first Chancery Court complaint was filed on June 24, 1999, and
alleged that Columbia's certificate of incorporation requires 13
persons to be on the Board of Directors and that, therefore, Columbia's
current 12-person Board of Directors violates the certificate. On
September 22, 1999, the Chancery Court granted Columbia's motion to
dismiss the complaint and declined to grant an order for a special
meeting of the shareholders to elect a thirteenth director.
The second Chancery Court complaint was filed on July 29, 1999, and
alleges that the Board's actions in response to the Offer, including
the announced increase in Columbia's share repurchase program,
represent a breach of the fiduciary duties owed to Columbia
stockholders. The parties began discovery in both the federal and
Chancery Court actions, but on October 25, 1999, the parties agreed to
stay the federal action and second Chancery Court action pending the
outcome of meetings between the two companies.
Following the execution of the Merger Agreement, NiSource and Columbia
have agreed to dismiss the remaining litigation brought by NiSource.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of Columbia is traded on the New York Stock Exchange under the
ticker symbol CG and abbreviated as either ColumEngy or ColumEgy in trading
reports. At December 31, 1999, the number of shareholders of record was
approximately 31,625 and the stock closed at $63 1/4, as reflected in the New
York Stock Exchange Composite Transactions as reported by The Wall Street
Journal. On February 22, 2000, Columbia declared a quarterly dividend of $0.225
per share for the first quarter of 2000, which will be payable on March 15,
2000, to holders of record as of March 3, 2000.
See Item 7 on page 20 for additional information regarding Columbia's common
stock prices and dividends.
11
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
Columbia Energy Group and Subsidiaries
<TABLE>
<CAPTION>
($ in millions, except per share amounts) 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA ($)
Total net revenues 1,994.8 1,861.9 1,896.9 1,856.6
Earnings (Loss) before discontinued operations,
extraordinary item and accounting changes 355.0 300.3 280.3 218.2
Earnings (Loss) before extraordinary item
and accounting changes 249.2 269.2 273.3 221.6
Earnings (Loss) on common stock 249.2 269.2 273.3 221.6
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA**
Earnings (Loss) per share of common stock ($):
Continuing operations 4.31 3.60 3.37 2.71
Discontinued operations (1.28) (0.37) (0.08) 0.04
Before extraordinary item and accounting changes 3.03 3.23 3.29 2.75
Earnings (Loss) per share of common stock 3.03 3.23 3.29 2.75
Average common shares outstanding (000) 82,210 83,382 83,100 80,681
Diluted earnings (loss) per share of common stock ($):
Continuing operations 4.29 3.58 3.35 2.70
Discontinued operations (1.28) (0.37) (0.08) 0.04
Before extraordinary item and accounting changes 3.01 3.21 3.27 2.74
Diluted earnings (loss) per share of common stock 3.01 3.21 3.27 2.74
Diluted average common shares (000) 82,709 83,748 83,594 80,919
Dividends:
Per share ($) 0.875 0.77 0.60 0.40
Payout ratio (%) 28.9 23.8 18.2 14.5
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA ($)
Capitalization including debt subject to Chapter 11:
Common stock equity 2,064.0 2,005.3 1,790.7 1,553.6
Preferred stock -- -- -- --
Long-term debt 1,639.7 2,003.1 2,003.5 2,003.8
Short-term debt 465.5 N/A N/A N/A
Current maturities of long-term debt 311.3 0.4 0.5 0.8
Debt subject to Chapter 11 -- -- -- --
Total 4,480.5 4,008.8 3,794.7 3,558.2
Total assets 7,095.9 6,531.4 6,259.4 5,905.8
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA
Capitalization ratio (%) (including current maturities ***):
Common stock equity 46.1 50.0 47.2 43.7
Preferred stock -- -- -- --
Debt 53.9 50.0 52.8 56.3
Capital expenditures ($) 867.3 479.2 563.2 314.0
Net cash from operations ($) 831.6 698.3 504.1 461.0
Book value per share of common stock ($) ** 25.39 24.01 21.51 18.74
Return on average common equity before discontinued
operations, extraordinary item and accounting changes (%) 17.5 15.8 16.8 16.4
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
($ in millions, except per share amounts) 1995* 1994*
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCOME STATEMENT DATA ($)
Total net revenues 1,807.4 1,756.2
Earnings (Loss) before discontinued operations,
extraordinary item and accounting changes (433.4) 244.7
Earnings (Loss) before extraordinary item
and accounting changes (432.3) 246.2
Earnings (Loss) on common stock (360.7) 240.6
- ----------------------------------------------------------------------------------------------------
PER SHARE DATA**
Earnings (Loss) per share of common stock ($):
Continuing operations (5.72) 3.23
Discontinued operations 0.01 0.02
Before extraordinary item and accounting changes (5.71) 3.25
Earnings (Loss) per share of common stock (4.76) 3.17
Average common shares outstanding (000) 75,708 75,838
Diluted earnings (loss) per share of common stock ($):
Continuing operations (5.72) 3.23
Discontinued operations 0.01 0.02
Before extraordinary item and accounting changes (5.71) 3.25
Diluted earnings (loss) per share of common stock (4.76) 3.17
Diluted average common shares (000) 75,708 75,838
Dividends:
Per share ($) -- --
Payout ratio (%) N/A N/A
- ----------------------------------------------------------------------------------------------------
BALANCE SHEET DATA ($)
Capitalization including debt subject to Chapter 11:
Common stock equity 1,114.0 1,468.0
Preferred stock 399.9 --
Long-term debt 2,004.5 4.3
Short-term debt N/A --
Current maturities of long-term debt 0.5 1.2
Debt subject to Chapter 11 -- 2,317.1
Total 3,518.9 3,790.6
Total assets 6,033.4 7,152.2
- ----------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA
Capitalization ratio (%) (including current maturities ***):
Common stock equity 31.7 38.7
Preferred stock 11.4 --
Debt 56.9 61.3
Capital expenditures ($) 420.8 447.1
Net cash from operations ($) (798.0) 574.9
Book value per share of common stock ($) ** 15.09 19.36
Return on average common equity before discontinued
operations, extraordinary item and accounting changes (%) (33.6) 18.2
- ----------------------------------------------------------------------------------------------------
</TABLE>
N/A - Not applicable
Dilutive potential common shares were not included in the 1995 computation of
diluted EPS as the effect would be antidilutive.
* Reference is made to Note 14(A) of Notes to Consolidated Financial
Statements. Due to the bankruptcy filings, interest expense of
approximately $230 million, $210 million, $204 million and $86 million
was not recorded in 1994, 1993, 1992 and 1991, respectively. Interest
expense of $982.9 million, including write-off of unamortized discounts
on debentures, was recorded in the fourth quarter of 1995.
** All per share amounts, average common shares outstanding and diluted
average common shares have been restated to reflect a three-for-two
common stock split, in the form of a stock dividend, effective June 15,
1998.
*** Prior to 1991, Columbia made extensive use of variable rate debt since
the associated cost was normally less than senior long-term debt.
Short-term borrowings were used in 1999 to finance acquisitions and to
fund Columbia's stock repurchase program. Inclusion of the short-term
debt in years prior to 1991 and in 1999 makes those historical ratios
more meaningful.
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA (continued)
SELECTED FINANCIAL DATA
Columbia Energy Group and Subsidiaries
<TABLE>
<CAPTION>
($ in millions, except per share amounts) 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA ($)
Total net revenues 1,734.0 1,622.3 1,407.2 1,499.9 1,520.3
Earnings (Loss) before discontinued operations,
extraordinary item and accounting changes 152.1 90.9 (794.8) 104.7 145.8
Earnings (Loss) before extraordinary item
and accounting changes 152.2 90.9 (794.8) 104.7 145.8
Earnings (Loss) on common stock 152.2 51.2 (694.4) 104.7 145.8
- -----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA**
Earnings (Loss) per share of common stock ($):
Continuing operations 2.01 1.20 (10.49) 1.48 2.14
Discontinued operations -- -- -- -- --
Before extraordinary item and accounting changes 2.01 1.20 (10.49) 1.48 2.14
Earnings (Loss) per share of common stock 2.01 0.68 (9.16) 1.48 2.14
Average common shares outstanding (000) 75,838 75,838 75,798 70,983 68,260
Diluted earnings (loss) per share of common stock ($):
Continuing operations 2.01 1.20 (10.49) 1.47 2.13
Discontinued operations -- -- -- -- --
Before extraordinary item and accounting changes 2.01 1.20 (10.49) 1.47 2.13
Diluted earnings (loss) per share of common stock 2.01 0.68 (9.16) 1.47 2.13
Diluted average common shares (000) 75,838 75,838 75,798 71,133 68,537
Dividends:
Per share ($) -- -- 0.77 1.47 1.33
Payout ratio (%) N/A N/A N/A 99.3 62.1
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA ($)
Capitalization including debt subject to Chapter 11:
Common stock equity 1,227.3 1,075.1 1,006.9 1,757.8 1,620.3
Preferred stock -- -- -- -- --
Long-term debt 4.8 5.4 6.1 1,428.7 1,196.0
Short-term debt -- -- N/A 735.5 634.2
Current maturities of long-term debt 1.3 1.4 2.9 35.2 47.2
Debt subject to Chapter 11 2,317.1 2,317.1 2,317.1 -- --
Total 3,550.5 3,399.0 3,333.0 3,957.2 3,497.7
Total assets 6,934.7 6,505.9 6,332.2 6,196.3 5,878.4
- -----------------------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA
Capitalization ratio (%) (including current maturities ***):
Common stock equity 34.6 31.6 30.2 44.4 46.3
Preferred stock -- -- -- -- --
Debt 65.4 68.4 69.8 55.6 53.7
Capital expenditures ($) 361.1 299.7 381.9 629.6 473.5
Net cash from operations ($) 839.4 765.4 531.6 420.1 400.5
Book value per share of common stock ($) ** 16.18 14.18 13.28 23.22 23.67
Return on average common equity before discontinued
operations, extraordinary item and accounting changes (%) 13.2 8.7 (57.5) 6.2 9.2
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
N/A - Not applicable
Dilutive potential common shares were not included in the 1995 computation of
diluted EPS as the effect would be antidilutive.
* Reference is made to Note 14(A) of Notes to Consolidated Financial
Statements. Due to the bankruptcy filings, interest expense of
approximately $230 million, $210 million, $204 million and $86 million
was not recorded in 1994, 1993, 1992 and 1991, respectively. Interest
expense of $982.9 million, including write-off of unamortized discounts
on debentures, was recorded in the fourth quarter of 1995.
** All per share amounts, average common shares outstanding and diluted
average common shares have been restated to reflect a three-for-two
common stock split, in the form of a stock dividend, effective June 15,
1998.
*** Prior to 1991, Columbia made extensive use of variable rate debt since
the associated cost was normally less than senior long-term debt.
Short-term borrowings were used in 1999 to finance acquisitions and to
fund Columbia's stock repurchase program. Inclusion of the short-term
debt in years prior to 1991 and in 1999 makes those historical ratios
more meaningful.
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Index Page
- ----- ----
<S> <C>
Consolidated Review............................................................................. 14
Liquidity and Capital Resources................................................................. 17
Transmission and Storage Operations............................................................. 21
Distribution Operations......................................................................... 26
Exploration and Production Operations........................................................... 31
Energy Marketing Operations..................................................................... 33
Power Generation, LNG and Other Operations...................................................... 36
Bankruptcy Matters.............................................................................. 38
</TABLE>
The Management's Discussion and Analysis, including statements regarding market
risk sensitive instruments, contains "forward-looking statements," within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Investors and
prospective investors should understand that many 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. These forward-looking statements include, but are not limited to,
statements concerning Columbia's plans, proposed acquisitions and dispositions,
objectives, expected performance, expenditures and recovery of expenditures
through rates, stated on either a consolidated or segment basis, and 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, increased competition in deregulated energy markets,
weather, fluctuations in supply and demand for energy commodities, successful
consummation of proposed acquisitions and dispositions, growth opportunities for
Columbia's regulated and nonregulated businesses, dealings with third parties
over whom Columbia has no control, actual operating experience of acquired
assets, Columbia's ability to integrate acquired operations into its operations,
the regulatory process, regulatory and legislative changes as well as changes in
general economic, capital and commodity market conditions, counter-party credit
risk, many of which are beyond the control of Columbia. In addition, the
relative contributions to profitability by each segment, and the assumptions
underlying the forward-looking statements relating thereto, may change over
time.
With respect to any references made to ratings assigned to Columbia's debt
securities, there can be no assurance that Columbia will be successful in
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 the 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.
CONSOLIDATED REVIEW
Columbia's income from continuing operations for 1999 was $355 million, or $4.29
per share, an increase of $54.7 million, or $0.71 per share, over 1998. All per
share amounts are reported on a diluted basis. Increasing after-tax income
relative to last year was a $49 million after-tax gain recorded in connection
with the termination of a cogeneration power purchase contract, a $20.6 million
after-tax gain related to the final producer contract claim stemming from
Columbia's bankruptcy proceedings concluded in 1995, an after-tax gain of $7.8
million on the sale of Columbia's interests in the Trailblazer pipeline system
and a reduction in tax expense for the realization of state net carryforwards
that increased net income by $6.9 million. Weather was 12% colder than in 1998;
however, weather in 1999 was still 8% warmer than normal. Also improving results
was increased natural gas production for the exploration and production
operations along with lower gross receipts and property taxes for the
distribution segment. Partially offsetting these improvements were higher costs
for energy marketing operations, higher interest expense, and professional fees
primarily related to Columbia's response to an unsolicited tender offer. In
1998, several key items improved results including a $16.5 million improvement
recorded for a settlement gain related to postretirement benefit costs, which
reflected the purchase of insurance for a portion of those liabilities, the
implementation of state tax planning initiatives and the settlement of certain
tax issues.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Discontinued operations, which include the Wholesale and Trading and Major
Accounts businesses of Columbia Energy Services, Inc. (Columbia Energy
Services), reflected an after-tax loss of $105.8 million or $1.28 per share in
1999, compared to an after-tax loss of $31.1 million, or $0.37 per share in
1998. Taking into account income from continuing operations and the loss from
discontinued operations, Columbia reported net income of $249.2 million, or
$3.01 per share in 1999, versus $269.2 million or $3.21 per share for the prior
year.
Income from continuing operations for 1998 of $300.3 million, or $3.58 per
share, increased $20 million, or $0.23 per share, from 1997, due largely to
lower operation and maintenance costs for Columbia's rate-regulated
subsidiaries, higher revenue from transportation services and gas management
activities and increased gas production and prices from Columbia's exploration
and production segment. These changes were largely offset by the impact of
record warm weather in 1998 and higher costs for Columbia Energy Services
related to its larger infrastructure. Several other items also affected both
years' results. In 1998, the benefit from the reduction in certain
postretirement benefit costs, reflecting the purchase of insurance for a portion
of those liabilities, and a $10 million benefit from state tax planning
initiatives enhanced net income. Also improving 1998 results was a gain of $6.5
million from the settlement of 1991-1994 tax issues. In 1997, net income was
improved $12.8 million as a result of reduced state income taxes, $12.4 million
from a regulatory settlement for Columbia Gas Transmission Corporation (Columbia
Transmission) that included the sale of base gas storage volumes, $6 million
from the sale of coal assets, $5.5 million from a gain on the deactivation of a
storage field and $4.4 million for payments received from a cogeneration
partnership. Reducing net income in 1997 were $20.2 million of restructuring and
relocation costs and a $6.6 million reserve for the sale of certain pipeline
facilities.
The after-tax loss on discontinued operations increased from $7 million, or
$0.08 per share, in 1997 to $31.1 million, or $0.37 per share, in 1998. Income
from continuing operations together with the loss from discontinued operations
resulted in reported net income in 1998 decreasing $4.1 million, or $0.06 per
share, from the $273.3 million, or $3.27 per share, reported for 1997.
Net Revenues
Total net revenues (revenues less associated product purchased costs) of
$1,994.8 million for 1999 reflected an increase of $132.9 million over 1998
primarily due to a gain recorded for the settlement of a cogeneration power
purchase contract, the impact of 1999's colder weather, increased transportation
services and higher production for the exploration and production operations.
Also providing higher net revenues was the effect of recent acquisitions for the
propane and petroleum operations. Reduced prices for natural gas production and
a reduction to revenues resulting from a Columbia of Ohio regulatory settlement
partially offset these improvements.
For 1998, total net revenues of $1,861.9 million reflected a decrease of $35
million from 1997, due primarily to the adverse effect of warmer weather in 1998
on gas sales for the distribution segment. The impact of warmer weather was
partially offset by higher revenues from transportation services and gas
management activities in the transmission and distribution segments. Also
improving revenues in 1998 was a $13.4 million increase resulting from the gain
on the sale of storage base gas volumes and higher revenues from increased gas
production and prices.
Expenses
Total operating expenses for 1999 were $1,346.4 million, an increase of $65.8
million over 1998. Operation and maintenance expense increased $108.3 million,
due to higher expenses for the energy marketing and exploration and production
segments, due in part to recent acquisitions for Columbia Energy Resources
Corporation (Columbia Resources) and Columbia Propane Corporation (Columbia
Propane) and increased costs for Columbia Energy Services, and a $25.4 million
favorable adjustment in 1998 for a settlement gain related to postretirement
benefit costs. Also increasing 1999 operation and maintenance expense were costs
related to Columbia's response to an unsolicited tender offer. Depreciation and
depletion expense declined $2.9 million primarily due to Columbia Gas of Ohio's
1999 regulatory settlement that was partially offset by lower revenues, which
was also related to the settlement, as mentioned above. The settlement of gas
supply litigation in 1999 reduced operating expenses by $31.7 million reflecting
the bankruptcy-related producer settlement mentioned above. In addition, lower
gross receipts and property taxes for the distribution operations also improved
income.
Total operating expenses of $1,280.6 million for 1998 decreased $94.8 million
compared to 1997, reflecting a reduction of $104.8 million in operation and
maintenance expense largely due to cost conservation measures and efficiencies
gained through recently implemented restructuring activities for the
rate-regulated segments. The lower operation and maintenance expense also
reflects a $25.4 million reduction in the cost of certain postretirement
benefits, reflecting the purchase of insurance for a portion of Columbia's
liabilities. The 1997 operating expenses were higher due in part to $24.8
million of restructuring costs. Depreciation and depletion expense increased $12
million in 1998 due primarily to an increase in depletion expense for the
exploration and production segment
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
resulting from a higher depletion rate, together with the effect of increased
production from both the acquisition of Alamco, Inc., (Alamco) an Appalachian
exploration and production company in 1997, and the success of Columbia Energy
Resources Inc.'s (Columbia Resources) drilling program.
Other Income (Deductions)
<TABLE>
<CAPTION>
Twelve Months Ended December 31, (in millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income and other, net $ 29.2 $ 12.3 $ 39.4
Interest expense and related charges (164.4) (144.5) (157.4)
- --------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (DEDUCTIONS) $(135.2) $(132.2) $(118.0)
- --------------------------------------------------------------------------------------------
</TABLE>
Other income (deductions) reduced income by $135.2 million in 1999 compared to a
reduction of $132.2 million in 1998. Interest income and other, net, of $29.2
million was $16.9 million greater than in the year earlier, due largely to gains
in 1999 of $12.1 million for the sale of Columbia's interests in a pipeline
partnership and $2.9 million from the sale of coal properties. Interest expense
and related charges of $164.4 million increased $19.9 million due largely to
higher short-term borrowings to finance recent acquisitions and to fund
Columbia's stock repurchase program, as discussed below.
For 1998, other income (deductions) reduced income by $132.2 million compared to
a reduction of $118 million in 1997. Interest income and other, net of $12.3
million decreased $27.1 million when compared to 1997, due largely to two
transactions recorded in 1997 namely, an $8.5 million gain for a payment
received from the deactivation of a storage field that allowed the owner of the
coal reserves to mine the property and a $9.5 million improvement for the sale
of Columbia's coal assets. In addition, temporary cash investments in 1998 were
lower than the prior year, which led to reduced interest income. Interest
expense and related charges of $144.5 million in 1998 decreased $12.9 million
from 1997, primarily reflecting a reduction in interest expense for a 1998 tax
settlement, involving tax issues from 1991-1994, partially offset by additional
interest expense on prepayments received from third parties for gas to be
delivered in future periods.
Income Taxes
Income tax expense in 1999 totaled $158.2 million, an increase of $9.4 million
over 1998, primarily due to higher pre-tax income in 1999. Income benefited as a
result of utilizing certain tax benefits and state tax planning initiatives
during 1999 and 1998.
Income tax expense of $148.8 million for 1998 increased $25.6 million from the
year earlier, primarily reflecting higher pre-tax income. There were reductions
to income tax expense of approximately $10 million in 1998 and $12.8 million in
1997 due to the implementation of state tax planning initiatives.
Discontinued Operations
Discontinued operations reflected an after-tax loss of $105.8 million, or $1.28
per share, in 1999 compared to an after-tax loss of $31.1 million, or $0.37 per
share, in 1998. The increased loss on discontinued operations reflected higher
operation and maintenance costs that included the write down of certain assets,
establishing reserves for certain issues and lower margins for gas and power
trading.
In August 1999, Columbia Energy Services announced that it had decided to sell
its Wholesale and Trading operations based in Houston, Texas. The decision was
made as part of an ongoing strategic review of Columbia Energy Services' overall
energy marketing businesses initiated in February 1999. In December 1999, its
Wholesale and Trading operations were sold to Enron North America Corp., a
wholly-owned subsidiary of Enron Corp.
Columbia Energy Services subsequently determined that it would exit the Major
Accounts business that provided energy services and products to industrial and
large commercial customers. In accordance with generally accepted accounting
principles, the Wholesale and Trading and Major Accounts businesses are reported
as discontinued operations on Columbia's consolidated financial statements.
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
A significant portion of Columbia's operations, most notably in the distribution
segment, 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, 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.
Net cash from continuing operations in 1999 of $825.8 million reflected a
decrease of $19.9 million from 1998 due primarily to normal working capital
changes.
Net cash from continuing operations for 1998 was $860.5 million, an increase of
$286 million over 1997. The increase primarily reflected higher prepayments
received for natural gas to be delivered over several years partially offset by
a decrease in the overrecovery of gas costs by the distribution segment as well
as the effect of warm weather in 1998. The decrease in the overrecovery position
reflects higher gas prices in 1998 compared to the same period in 1997. The
recovery of gas costs in the distribution segment's rates is provided for under
the current regulatory process.
Columbia satisfies its liquidity requirements primarily through internally
generated funds and from the sale of commercial paper, which is supported by two
unsecured bank revolving credit facilities that total $1.35 billion (Credit
Facilities). The Credit Facilities consist of a $450 million 364-day revolving
credit facility, with a one-year term loan option, that expires in March 2000
and a $900 million five-year revolving credit facility that expires in March
2003 and provides for the issuance of up to $300 million of letters of credit.
Columbia is currently negotiating the replacement of the 364-day bank facility
with a bank facility substantially similar in terms. Columbia also utilizes
other borrowing arrangements from time-to-time. As of year-end 1999, Columbia
had no borrowings under the Credit Facilities. See Note 12 in the Notes to
Consolidated Financial Statements for additional information.
Interest rates on borrowings under the Credit Facilities are based upon the
London Interbank Offered Rate, Certificate of Deposit rates or other short-term
interest rates. In addition, the 364-day facility has a utilization fee if
borrowings exceed a certain level. The interest rate margins and facility fee on
the commitment amounts are based on Columbia's public debt ratings. In 1998,
Moody's Investors Service, Inc. (Moody's) and Fitch Investors Service (Fitch)
upgraded their rating of Columbia's long-term debt to A3 and A, respectively.
Columbia's long-term debt rating is BBB+ by Standard & Poor's Ratings Group
(S&P). Columbia's long-term debt ratings are currently under review for a
possible change by Moody's and S&P. Higher debt ratings result in lower facility
fees and interest rate margins on borrowings. Columbia's commercial paper
ratings are F-1 by Fitch, P-2 by Moody's and A-2 by S&P.
As of year-end 1999, Columbia had approximately $133.7 million of letters of
credit outstanding, of which approximately $54.7 million was issued under the
Credit Facilities. At the end of 1999, Columbia had $340.5 million of commercial
paper outstanding under its $850 million commercial paper program and $125
million of notes payable.
During 1998, Columbia entered into fixed-to-floating interest rate swap
agreements to modify the interest characteristics of $300 million of its
outstanding long-term debt. As a result of these transactions, that portion of
Columbia's long-term debt is now subject to fluctuations in interest rates. This
allows Columbia to benefit from a lower interest rate environment. In order to
maintain a balance between fixed and floating interest rates, Columbia is
targeting average floating rate debt exposure of 10-20% of its outstanding
long-term debt.
Columbia has an effective shelf registration statement on file with the
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.
Currently, Columbia has $750 million available under the shelf registration.
Management believes that its sources of funding are sufficient to meet
short-term and long-term liquidity needs of Columbia.
Common Stock Repurchase Program
At its February 1999 meeting, Columbia's Board of Directors (Board) authorized
the purchase of up to $100 million of Columbia's common stock through February
29, 2000, in the open market or otherwise. In July 1999, Columbia's Board
authorized the purchase of an additional $400 million of common stock through
July 14, 2000. In October 1999, the program was suspended pending consideration
of strategic alternatives. The source of funds for
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
repurchases consisted of available funds and/or borrowings. Through this
program, 2,478,500 common shares were repurchased at a cost of approximately
$135 million, before the program was suspended. There can be no assurance as to
when the share repurchase program will recommence or if it will resume. If the
program were to resume, the timing and terms of additional purchases, and the
number of shares actually purchased, will be determined by management based on
several factors including market conditions. Purchased shares are held in
treasury to be made available for general corporate purposes, or resale at a
future date or they may be retired.
Capital Expenditures
The table below reflects actual capital expenditures by segment for 1999 and
1998 and an estimate for year 2000:
<TABLE>
<CAPTION>
(in millions) 2000 1999 1998
- -------------------------------------------------------------------
<S> <C> <C> <C>
Transmission and Storage $148.4 $183.4 $210.0
Distribution 135.6 145.5 151.9
Exploration and Production 165.7 166.5 75.7
Energy Marketing 43.3 315.5 27.9
Power Generation, LNG and Other 376.5 51.0 2.7
Corporate 5.2 5.4 11.0
- -------------------------------------------------------------------
TOTAL $874.7 $867.3 $479.2
- -------------------------------------------------------------------
</TABLE>
For 1999, capital expenditures were $867.3 million, an increase of $388.1
million from 1998. The 1999 program included approximately $347 million for
acquisitions, of which approximately $301 million was for propane acquisitions
that added nearly 235,000 new customers. The 1999 program also included $86
million for new business initiatives for the transmission and storage segment.
The largest portion of the transmission and storage segment's investments are
made to ensure the safety and reliability of the pipelines and for market
expansion activities. The distribution subsidiaries' program includes
investments to extend service to new areas and develop future markets, as well
as expenditures required to ensure safe, reliable and improved service. The
exploration and production segment's 1999 program included amounts for its
expanded drilling program and acquisitions.
For 2000, Columbia's estimated capital expenditure program of $874.7 million is
$7.4 million higher than the 1999 program. Included in the 2000 program for the
Power Generation, LNG and Other Operations is about $196 million for the
development of Columbia Transmission Communication Corporation's fiber optics
network and approximately $131 million for cogeneration activities. The
transmission and storage segment includes approximately $44 million for new
business activities and another $54 million is planned for new business and
development activities for the distribution segment. The exploration and
production segment's capital program provides for the drilling of approximately
330 new wells.
All discretionary capital expenditures are subject to review under Columbia's
value added approach (CVA) that determines whether the anticipated return on a
business activity or project exceeds its risk adjusted capital cost.
Market Risk Exposure
Subsidiaries in Columbia's exploration and production and energy marketing
segments are exposed to market risk due primarily to fluctuations in commodity
prices. In order to help minimize this risk, Columbia has adopted a policy that
provides for commodity hedging activities to help ensure stable cash flow,
favorable prices and margins. Financial instruments authorized for use by
Columbia for hedging include futures, swaps and options. Due to the sale of
Columbia's Wholesale and Trading business, Columbia's use of derivatives has
been significantly reduced. However, Columbia Energy Services does utilize
financial instruments to help assure adequate margins for its Mass Markets
business on the purchase and resale of energy products. Columbia Resources
utilizes financial instruments to fix prices for a portion of its future
production volumes, which are hedged in the marketplace through a third party.
Columbia Propane utilizes financial instruments to help protect the value of its
propane and petroleum inventories and commitments.
Any positions using derivative instruments continue to be controlled within
predetermined limits as provided by Columbia's senior management. Columbia's
policy prohibits any Columbia subsidiary from entering into derivative
transactions that are not effectively connected with its business. Market risks
are monitored by an independent risk control group operating separately from the
area that creates or actively manages these risk exposures in order to monitor
compliance with Columbia's stated risk management policies.
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Columbia measures the market risk in its energy marketing portfolios and employs
multiple risk control mechanisms to mitigate market risk including value-at-risk
measures using a variance/covariance methodology and volumetric limits.
Value-at-risk simulates forward price curves in the energy markets to estimate
the size and probability of future potential losses. Based on a 95% confidence
interval and a one-day time horizon, the value-at-risk for Columbia's energy
marketing operations was insignificant.
Columbia also utilizes fixed-to-floating interest rate swap agreements to modify
the interest characteristics of a portion of its outstanding long-term debt. As
a result of these transactions, $300 million of Columbia's long-term debt is now
subject to fluctuations in interest rates.
Merger Agreement
On February 28, 2000, Columbia announced that it had entered into an Agreement
and Plan of Merger, dated as of February 27, 2000 (Merger Agreement), between
Columbia and NiSource, Inc., an Indiana corporation (NiSource). The Board of
Directors of Columbia determined to enter into the Merger Agreement after a
comprehensive evaluation of strategic alternatives that might generate value
greater than that which Columbia's business plan could create.
The terms of the Merger Agreement provide that NiSource will organize a new
company which shall serve as the holding company for both Columbia and NiSource
after the completion of the transaction. Pursuant to the terms of the Merger
Agreement, each of Columbia and NiSource will be merged into newly formed
special purpose subsidiaries of the new holding company, and each will become a
wholly owned subsidiary of the new holding company.
Subject to the terms and conditions of the Merger Agreement, upon completion of
the transaction, Columbia's shareholders will receive, for each share of
Columbia common stock, $70 in cash and a $2.60 face value SAILS(sm) (a unit
consisting of a zero coupon debt security with a forward equity contract).
Columbia's shareholders also have the option to elect to receive (in lieu of
cash and SAILS(sm)) shares in the new holding company in a tax-free exchange,
for up to 30% of the outstanding shares of Columbia common stock. Pursuant to
the stock election option, each Columbia share will be exchanged for up to $74
in new holding company stock, subject to a collar such that, if the average
closing price of NiSource shares during the 30 days prior to the closing of the
transaction is greater than $16.50, Columbia shareholders will receive shares of
the new holding company valued at $74 for each share of Columbia stock, and if
the average closing price of NiSource shares during the 30 days prior to closing
of the transaction is $16.50 or below, Columbia shareholders will receive 4.4848
shares of new holding company stock for each Columbia share. Upon completion of
the transaction, NiSource shareholders will receive one share of holding company
stock for each share of NiSource common stock that they own.
The Merger is conditioned upon, among other things, the approvals of the
shareholders of both companies and various regulatory commissions. However, if
the NiSource shareholder approval is not obtained, the transaction will
automatically be restructured so that, instead of each of NiSource and Columbia
becoming wholly-owned subsidiaries of the new holding company, Columbia will
become a wholly owned subsidiary of NiSource, and Columbia shareholders will
receive $70 in cash and a $3.02 face value SAILS(sm) unit of NiSource with no
option for Columbia shareholders to elect new holding company stock.
Presentation of Segment Information
Columbia revised its presentation of primary business segment information
beginning with the reporting of third quarter 1999 results. The results for
Columbia Propane have been moved from the propane, power generation and
liquefied natural gas (LNG) operations to energy marketing operations that also
includes Columbia Energy Services' retail operations. Prior periods have been
restated to reflect this change.
Impact of Year 2000 on Computer and Other Systems
The Year 2000 issue was a worldwide concern because certain existing software,
hardware and embedded systems were initially designed without addressing the
impact of the change to the Year 2000. If not corrected, these systems could
have failed or created erroneous results. In October 1999, Columbia announced
that it had met its Year 2000 readiness objectives designed to provide
uninterrupted, safe and reliable delivery of natural gas through the Year 2000.
Columbia's comprehensive Year 2000 program included a thorough evaluation of its
information technology and non-information technology to determine if they were
Year 2000 compliant and,
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
ensure that the appropriate corrective action was completed, if appropriate. The
total cost of assessing, testing and remediating Columbia's systems for Year
2000 compliance was approximately $19 million. Since the date change, Columbia
has not experienced any interruption in service.
As part of its normal operations, Columbia continuously operates in a
safety-conscious, high-reliability environment and has numerous back-up systems
in place. As a result of the extensive planning that was incorporated into
Columbia's contingency plans and the Year 2000 project, management believed that
the most reasonably likely worst case Year 2000 scenario would have involved
minor failures that were not detected and corrected during the project. However,
such failures were not experienced.
Common Stock Prices and Dividends*
<TABLE>
<CAPTION>
Market Price
----------------------------------------------------------
Quarterly
Quarter Ended High Low Close Dividends Paid
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ $ $ $
1999
December 31 66 1/4 55 1/16 63 1/4 .225
September 30 64 11/16 54 1/4 55 3/8 .225
June 30 64 1/4 43 7/8 62 11/16 .225
March 31 58 44 5/8 52 1/4 .200
- -----------------------------------------------------------------------------------------------------------------------------------
1998
December 31 60 3/4 54 1/4 57 3/4 .200
September 30 60 3/8 47 1/2 58 5/8 .200
June 30 57 11/12 50 1/3 55 5/8 .200
March 31 52 17/24 47 1/3 51 5/6 .166
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Amounts have been restated to reflect a three-for-two common stock
split, in the form of a stock dividend, effective June 15, 1998.
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
TRANSMISSION AND STORAGE OPERATIONS
Columbia's transmission and storage segment consists of the operations of
Columbia Transmission, Columbia Gulf Transmission Company (Columbia Gulf) and
Columbia Pipeline Corporation. Together they own a pipeline network of
approximately 16,250 miles extending from offshore in the Gulf of Mexico to Lake
Erie, New York and the eastern seaboard serving 15 northeastern, mid-Atlantic,
midwestern and southern states, as well as the District of Columbia. In
addition, Columbia Transmission operates one of the nation's largest underground
natural gas storage systems.
Proposed Millennium Pipeline Project
The proposed Millennium Pipeline Project (Millennium 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
442-mile pipeline will connect to TransCanada Pipe Lines Ltd. at a new Lake Erie
export point and transport approximately 700,000 Mcf per day to eastern markets.
Nine shippers have signed agreements for the available capacity. A filing with
the Federal Energy Regulatory Commission (FERC), requesting approval of the
Millennium Project, was made on December 22, 1997. This filing began the
extensive review process, including opportunities for public review,
communication and comment. The Millennium Project sponsors proposed an
in-service date of November 1, 2000. However, the final in-service date for the
entire project is now expected to be delayed as a result of the timing of
certificate approval by the FERC.
The sponsors of the proposed Millennium Project are Columbia Transmission,
Westcoast Energy, Inc., TransCanada Pipe Lines Ltd. and MCN Energy Group, Inc.
Market Expansion Project
Columbia Transmission initiated services under the final phase of the market
expansion project in November 1999. The expansion project, which was phased in
over a three-year period, added approximately 500,000 Mcf per day of firm
service to 23 customers.
Columbia Transmission's Phase II Rate Proceeding
Columbia Transmission's rate case settlement, approved by the FERC in April
1997, provided for a hearing in the fall of 1998 to address environmental cost
recovery that was excluded from the settlement. However, at the request of
Columbia Transmission and other active parties, the schedule was suspended in
May 1998 in order to afford the parties an opportunity to pursue settlement
discussions. As a result of these discussions, the active parties reached an
agreement on the overall components of an environmental settlement. The
comprehensive agreement included such major components as Columbia
Transmission's total allowed recovery of environmental remediation program costs
and the disposition of any proceeds received by Columbia Transmission from
insurance carriers and others. Columbia Transmission filed the stipulation and
agreement with the FERC on April 5, 1999, and on September 15, 1999, the FERC
approved the settlement. No requests for rehearing were filed. The approval of
the settlement did not have a material impact on Columbia's consolidated
financial results.
Proposed East Lateral Expansion and SunStar Pipeline Projects
Columbia Gulf announced plans in September 1998 to consider an expansion of its
onshore East Lateral system at Grand Isle, Louisiana. The expansion of the East
Lateral would provide additional capacity to shippers from Grand Isle. The
expansion, which would add approximately 600,000 Mcf per day of incremental firm
transportation capacity, would be accomplished by adding new facilities and
expanding existing facilities.
The proposed SunStar Pipeline Project, in which Columbia Gulf is participating
and will serve as the developer and operator, will transport gas from the deep
water areas of the Gulf of Mexico to Columbia Gulf's onshore lateral at Grand
Isle. This offshore pipeline project of approximately 56 miles would have
capacity of 660,000 Mcf per day and is complementary to the expansion of the
East Lateral system facilities, mentioned above.
Columbia Gulf conducted open seasons in the fall of 1998 to obtain binding
commitments from interested parties for the additional capacity from the East
Lateral expansion and the SunStar Pipeline Project. Based on the open season
interest, Columbia Gulf is reevaluating the design parameters of the proposed
pipelines and continuing its negotiations with potential shippers who are
drilling prospects in the proposed service area of the Gulf of Mexico.
Volunteer Pipeline
On April 14, 1999, Columbia Gulf, MCN Energy Group, Inc. and AGL Resources, Inc.
announced the start of an open season offering approximately 250,000 Mcf per day
of capacity in a proposed 24-inch natural gas pipeline extending approximately
160 miles from an interconnection near
21
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Portland, Tennessee to an interconnection near Chattanooga, Tennessee. The
pipeline, to be called the Volunteer Pipeline (Volunteer), anticipates
additional interconnections with several pipeline companies including Columbia
Gulf.
Volunteer recently concluded the open season where nearly a dozen companies
requested more than 440,000 Mcf per day of capacity. Potentially expandable to
approximately 500,000 Mcf per day, Volunteer expects to provide firm natural gas
transportation from the mid-continent into the Atlanta, Georgia, and other
southeastern markets.
Subsequent to the open season, AGL Resources, Inc. withdrew its participation in
the project. Volunteer expects to file an application with the FERC in 2000 and
to be in service by November 2001. Columbia Gulf will serve as operator of the
new pipeline facilities.
Trailblazer
Effective November 30, 1999, Columbia Gulf sold its 100% interest in CGT
Trailblazer, L.L.C., which was formed for the sole purpose of holding Columbia
Gulf's one-third-partnership interest in the Trailblazer Pipeline Company. The
sale price was approximately $38 million in cash.
Competition and the Effect of LDC Unbundling Services
Columbia's transmission and storage subsidiaries compete with other interstate
pipelines for the transportation and storage of natural gas. Since the issuance
of FERC Order No. 636, various states throughout Columbia Transmission's service
area have initiated proceedings dealing with open access and unbundling of local
distribution companies' (LDC) services. Among other things, unbundling involves
providing all LDC customers with the choice of what entity will serve as
transporter as well as merchant supplier. While the scope and timing of these
various unbundling initiatives varies from state to state, retail choice
programs are being extended to increasing numbers of LDC customers throughout
Columbia Transmission's market area.
Among the issues being addressed in the state unbundling proceedings is the
treatment of the pipeline transmission and storage agreements that have
underpinned the traditional LDC merchant function. In the case of Columbia
Transmission and Columbia Gulf, contracts covering the majority of their firm
transportation and storage quantities with LDCs have primary terms that extend
to October 31, 2004. Management fully expects that the LDCs, or those entities
to which pipeline capacity may be assigned as a result of the LDC unbundling
process, will continue to fulfill their obligations under these contracts.
However, in view of the changing market and regulatory environment, Columbia's
transmission companies have commenced the process of discussing long-term
transportation and storage service needs with their firm customers. Those
discussions could result in the restructuring of some of these contracts on
mutually agreeable terms prior to 2004.
Regulatory Matters
Mainline '99
Columbia Gulf filed an application with the FERC on June 5, 1998, for authority
to increase the maximum certificated capacity of its mainline facilities. The
expansion project, referred to as Mainline '99, will increase Columbia Gulf's
certificated capacity to nearly 2.2 billion cubic feet per day (Bcf/day), by
replacing certain compressor units and increasing the horsepower capacity of
other compressor stations. It is expected that the total cost of the project
would be approximately $37.6 million. Various shippers contracted for the
additional service through an open bidding process held in late 1997 and early
1998. On February 10, 1999, the FERC issued an order approving Columbia Gulf's
June 1998 filing and construction commenced on March 3, 1999. On March 12, 1999,
requests for rehearing of the FERC order were filed by three parties. On January
31, 2000, the FERC issued an order denying the requests for rehearing and
validating the open season held in conjunction with Mainline '99. The FERC chose
to address the requirement of holding an additional open season in the Columbia
Gulf mainline capacity proceeding (see Columbia Gulf Mainline Capacity
Proceeding below). On December 1, 1999, approximately 270,000 Dth/day of
additional capacity was made available on Columbia Gulf's mainline. Additional
capacity of approximately 45,000 Dth/day is expected to be made available on
November 1, 2000.
Discussions with FERC
The transmission and storage subsidiaries are in confidential and informal
discussions with the staff of the FERC (Staff) concerning the scope of
authorization for certain past transactions under the relevant filed tariffs.
The transmission and storage subsidiaries initiated these discussions with the
FERC. These subsidiaries provided information concerning these transactions to
the Staff pursuant to an informal non-public inquiry being conducted by the
Staff. Because management does not yet know the position Staff will take,
management is unable to reasonably estimate the amount that will have to be paid
pursuant to reimbursement or other remedies.
22
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Columbia Gulf Mainline Capacity Proceeding
In 1993, the FERC directed Columbia Gulf to show cause as to why it had not
sought FERC abandonment authorization to reduce capacity on its mainline
facility. In an August 8, 1997 order, the FERC approved a settlement between
Columbia Gulf and FERC's enforcement staff requiring Columbia Gulf to conduct a
30-day open season on additional firm mainline capacity up to its certificated
design. Although certain of Columbia Gulf's customers challenged the terms of
the settlement, Columbia Gulf concluded the open season on December 15, 1997
which resulted in requests for capacity that exceeded the capacity specified in
Columbia Gulf's FERC certificate. In orders issued in December 1998 and 1999,
the FERC has rejected challenges to the settlement and denied rehearing. In its
order issued December 22, 1999, the FERC affirmed the validity of the 1997 open
season but indicated that an additional open season in compliance with the
settlement will be necessary. In early February 2000, several appeals of the
FERC's orders in this proceeding were filed with the federal circuit court of
appeals.
Columbia Transmission's Voluntary Incentive Retirement Program
Columbia Transmission announced the introduction of a voluntary incentive
retirement plan on September 30, 1999. Approximately 600 Columbia Transmission
employees were eligible for the program, which provides a retirement incentive
for active employees who are age fifty and above with at least five years of
service as of March 1, 2000. During the acceptance period that began on January
1, 2000 and closed on January 31, 2000, 486 employees elected early retirement.
The majority of the retirements are scheduled to occur in the first quarter of
2000, at which time the cost of the program will be recorded. Retirement costs
for these employees are funded through the pension plan and will not have a
significant impact on Columbia's consolidated net income.
Sale of Facilities
During 1999, Columbia Transmission sold approximately 1,150 miles of gathering
pipelines and related properties. In addition, the Kanawha Separation Plant and
its appurtenances were sold to an affiliate. Agreements are in place for an
additional 970 miles of gathering and transmission pipelines to be sold to third
parties. Excluding these sales, there are approximately 150 miles of gathering
lines remaining to be sold or refunctionalized. The sale of these assets will
not have a material impact on Columbia's consolidated financial results.
Storage Base Gas Sales
Columbia Transmission has agreements to sell 4.8 billion cubic feet (Bcf) of
base gas volumes in the first quarter of 2000. Base gas represents storage
volumes that are maintained to ensure that adequate pressure exists to deliver
current inventory. However, as a result of ongoing improvements made in Columbia
Transmission's storage operations, from time-to-time certain of these storage
volumes are determined to be unnecessary to maintain deliverability of current
inventory. 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. As a result of such sales in the first
quarter of 2000, Columbia Transmission will reach the $60 million pre-tax gain
level. Gains from any future base gas sales will be shared equally with Columbia
Transmission's customers.
Capital Expenditure Program
The transmission and storage segment's net capital expenditure program was
$183.4 million in 1999 and is projected to be $148.4 million in 2000. New
business initiatives totaled approximately $86 million in 1999 and are expected
to be $44 million in 2000. The remaining expenditures are for modernizing and
upgrading facilities.
Environmental Matters
Columbia's transmission subsidiaries have implemented programs to continually
review compliance with existing environmental standards. In addition,
transmission subsidiaries continue to review past operational activities and to
formulate remediation programs where necessary.
Columbia Transmission is currently conducting assessment, characterization and
remediation activities at specific sites under a 1995 Environmental Protection
Agency (EPA) Administrative Order by Consent (AOC). The program pursuant to the
AOC covers approximately 240 facilities, approximately 13,000 liquid removal
points, approximately 2,200 mercury measurement stations and about 3,700 storage
well locations. As of December 31, 1999, field characterization has been
performed at most of these sites, and site characterization reports and
remediation plans which must be submitted to the EPA for approval, are in
various stages of development and completion. Characterization of the
approximately 40 remaining facilities and all of the storage well locations is
yet to be completed. Significant remediation has taken place only at mercury
measurement stations and at a limited number of the 240 facilities. Only those
site investigation, characterization and remediation costs currently known and
determinable can be considered "probable and reasonably estimable" under
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies" (SFAS No. 5). As costs become probable and reasonably estimable,
the associated reserves will be adjusted as appropriate. Columbia Transmission
is unable, at this time, to
23
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
accurately estimate the time frame and potential costs of the entire program.
Management expects that as characterization is completed and additional
remediation work is performed and more facts become available, it will be able
to develop a probable and reasonable estimate for the entire program or a major
portion thereof consistent with U.S. Securities and Exchange Commission's Staff
Accounting Bulletin No. 92, SFAS No. 5, and American Institute of Certified
Public Accountants Statement of Position 96-1.
As a result of 1999 activities, actual expenditures of approximately $16.8
million were charged against the liability resulting in a remaining liability of
$121.4 million. Columbia Transmission's environmental cash expenditures are
expected to be approximately $17 million in 2000 and to remain at this level in
the foreseeable future. These expenditures will be charged against the
previously recorded liability. 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.
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, its
cost recovery settlement with customers and the long time period over which
expenditures will be made.
In addition, predecessor companies of Columbia Transmission may have been
involved in the operation of manufactured gas plants. When such plants were
abandoned, material used and created in the process was sometimes buried at the
site. As of the date of this report, Columbia Transmission is unable to
determine if it will become liable for any characterization or remediation costs
at such sites.
Throughput
Columbia Transmission's throughput consists of transportation and storage
services for LDCs and other customers within its market area. Throughput for
Columbia Gulf reflects mainline transportation services from Rayne, Louisiana to
Leach, Kentucky and short-haul transportation services from the Gulf of Mexico
to Rayne, Louisiana.
In 1999, throughput for the transmission and storage segment increased 53.3 Bcf
from 1998 to 1,250.8 Bcf, due to the colder weather in 1999 and increased
transportation services from Columbia Transmission's market expansion project.
Market area transportation by Columbia Transmission increased 57.9 Bcf to
1,005.7 Bcf. Mainline transportation for Columbia Gulf increased 30.9 Bcf to
594.2 Bcf in 1999, reflecting the impact of colder weather in Columbia
Transmission's operating territory. Short-haul transportation of 220.2 Bcf in
1999 was down 11 Bcf from 1998, due to a decline in market demand in the area
south of Rayne, Louisiana.
Throughput for 1998 of 1,197.5 Bcf decreased 104 Bcf when compared to the year
earlier primarily due to warmer than normal weather in Columbia Transmission's
operating territory that reduced demand for natural gas. The warmer weather was
the principal reason that Columbia Transmission's market area transportation of
947.8 Bcf in 1998, decreased 84.8 Bcf. In addition, warmer weather in 1998 also
reduced transportation for Columbia Gulf's mainline transportation of 563.3 Bcf
by 44.2 Bcf from 1997 and Columbia Gulf's short-haul transportation of 231.2 Bcf
by 21.2 Bcf.
Operating Revenues
Operating revenues of $836.4 million in 1999 were down $2.3 million from 1998.
After adjusting for revenue items that are offset in operating expenses,
operating revenues increased by $6.1 million, primarily due to an increase in
Columbia Transmission's market expansion contracts.
Operating revenues in 1998 of $838.7 million were essentially unchanged from
1997. After adjusting for revenue items that are offset in operating expenses,
operating revenues in 1998 decreased $2.6 million. The effect of the sale of
gathering facilities and a lower cost-of-service level underlying Columbia
Transmission's rates in 1998 was only partially offset by increased revenues
from transportation and storage services. The sale of storage base gas volumes
that were part of Columbia Transmission's overall 1997 rate case settlement
improved revenues in both 1998 and 1997.
Operating Income
In 1999, operating income for the transmission and storage segment of $350.1
million increased $24 million over 1998. This increase primarily reflected the
pre-tax effect of a producer settlement and additional revenues primarily
resulting from Columbia Transmission's market expansion project. The 1998
results benefited from reduced postretirement benefit costs and Columbia Gulf's
regulatory settlement. Both periods included base gas sales, $14.7 million in
1999 and $13.9 million in 1998.
Operating income of $326.1 million for 1998 increased $67.8 million over 1997
due to a decline in operating expenses. Operation and maintenance expenses for
1998 declined $64.3 million compared with 1997, primarily reflecting
24
<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
restructuring costs recorded in 1997 and the beneficial effect of implementing
those restructuring initiatives in 1998. Also making 1997 operation and
maintenance expense higher when compared to 1998 was a $10.1 million reserve
recorded in 1997 for the anticipated loss related to the sale of certain
pipeline facilities.
STATEMENTS OF OPERATING INCOME FROM TRANSMISSION AND
STORAGE OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES
Transportation revenues $ 615.0 $ 620.4 $ 622.0
Storage revenues 182.4 186.0 179.8
Other revenues 39.0 32.3 36.8
- ----------------------------------------------------------------------------------------------------------
Total Operating Revenues 836.4 838.7 838.6
- ----------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 358.9 358.9 423.2
Settlement of gas supply charges (31.7) - -
Depreciation 106.2 101.8 104.3
Other taxes 52.9 51.9 52.8
- ----------------------------------------------------------------------------------------------------------
Total Operating Expenses 486.3 512.6 580.3
- ----------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 350.1 $ 326.1 $ 258.3
- ----------------------------------------------------------------------------------------------------------
</TABLE>
TRANSMISSION AND STORAGE OPERATING HIGHLIGHTS
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES ($ in millions) 183.4 210.0 251.4 142.7 169.1
- --------------------------------------------------------------------------------------------------------------------------------
THROUGHPUT (Bcf)
Transportation
Columbia Transmission
Market area 1,005.7 947.8 1,032.6 1,102.4 1,106.1
Columbia Gulf
Mainline 594.2 563.3 607.5 633.7 605.0
Short-haul 220.2 231.2 252.4 266.5 221.4
Intrasegment eliminations (569.3) (544.8) (591.0) (624.5) (596.3)
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL THROUGHPUT 1,250.8 1,197.5 1,301.5 1,378.1 1,336.2
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
DISTRIBUTION OPERATIONS
Columbia's five distribution subsidiaries (Distribution) provide natural gas
service to nearly 2.1 million residential, commercial and industrial customers
in Ohio, Pennsylvania, Virginia, Kentucky and Maryland.
Market Conditions
Weather in Distribution's market area during 1999 was 12% colder than the record
warm weather of 1998, but still 8% warmer than normal. As a result,
Distribution's weather-sensitive deliveries were up 25 Bcf from 1998.
Competition
Distribution competes with investor-owned, municipal, and cooperative electric
utilities throughout its five-state service area, and to a lesser extent with
propane and fuel oil suppliers. Electric competition is generally strongest in
the residential and commercial markets of Kentucky, southern Ohio, southwestern
Pennsylvania and western Virginia where rates are primarily driven by low-cost
coal-fired generation. The northern Ohio and Pittsburgh areas have less
competitive electric rates due to the use of higher-cost nuclear-generated
power. It is too soon to determine what impact, if any, deregulation of the
electric industry will have on the competitive situation. Distribution continues
to be a strong competitor in the energy market for new homes as a result of
strong customer preference for natural gas.
Approximately 38% of Distribution's industrial and commercial throughput, or 137
Bcf, is susceptible to bypass because these customers are located close to
multiple natural gas pipelines and local gas distribution companies. As a result
of Distribution's competitive strategies, substantial inroads by other natural
gas competitors have been avoided to date.
Regulatory Matters
In May 1998, Columbia Gas of Virginia, Inc. (Columbia of Virginia) filed a rate
case with the Virginia State Corporation Commission (VSCC) requesting an annual
revenue increase of $5.3 million over the revenues then being collected, subject
to refund, under a 1997 rate case filing. In April 1999, Columbia of Virginia
amended its May 1998 rate increase application to revise its rate design for
residential and small general service customers, effective January 1, 2000,
requesting recovery of most non-gas costs through monthly fixed charges rather
than the traditional combination fixed/volumetric charge. On December 23, 1999,
the VSCC issued an order approving a proposed settlement that provides for
additional annual revenue of approximately $4.4 million and rejecting Columbia
of Virginia's rate design proposal. The VSCC order did approve a 20% increase in
the fixed monthly customer charges for residential and small general service
customers which shifts about $4.9 million of annual revenues from the
weather-sensitive volumetric rate to the fixed monthly customer charge.
Distribution continues to pursue initiatives that give retail customers the
opportunity to purchase natural gas directly from marketers and to use
Distribution's facilities for transportation services. These opportunities are
being pursued through regulatory initiatives in all of its jurisdictions, which
resulted in transportation programs being initiated in all five of its service
areas. Once fully implemented, these programs would reduce Distribution's
merchant function and provide all customer classes with the opportunity to
obtain gas supplies from alternative merchants. As these programs expand to all
customers, regulations will have to be implemented to provide for the recovery
of transition capacity costs and other transition costs incurred by a utility
serving as the supplier of last resort if the marketing company cannot supply
the gas. Transition capacity costs are created as customers enroll in these
programs and purchase their gas from other suppliers, leaving Distribution with
pipeline capacity it has contracted for but no longer needs. The state
commissions in Distribution's five jurisdictions are at various stages in
addressing these issues and other transition considerations. Distribution is
currently recovering, or has the opportunity to recover, the costs resulting
from the unbundling of its services and believes that most of such future costs
and costs resulting from being the supplier of last resort will be mitigated or
recovered.
On October 25, 1999, Columbia Gas of Ohio, Inc. (Columbia of Ohio) and a group
comprising diverse interested parties, also known as the Collaborative, filed
with the Public Utilities Commission of Ohio (PUCO) a third amendment to its
1994 rate case. The filing, which was approved by the PUCO on December 2, 1999,
extends Columbia of Ohio's Customer CHOICE(SM) program through October 31, 2004,
freezes base rates through October 31, 2004 and resolves the issue of transition
capacity costs. Under the agreement, Columbia of Ohio would assume total
financial risk for mitigation of transition capacity costs at no additional cost
to customers. Among other items, Columbia of Ohio would have the opportunity to
utilize non-traditional revenue sources as a means of offsetting the costs. The
agreement also requires Columbia of Ohio to submit a proposal addressing issues
related to the merchant function, obligation to serve, and provider of last
resort by April 1, 2000. Columbia of Ohio extended its Customer CHOICE(SM)
program to all of its nearly 1.3 million customers in mid-1998 and there are now
over 519,000 customers
26
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
participating, including approximately 445,000 residential customers. Of 41
marketers approved for participation, 32 are currently active.
In addition, the PUCO authorized Columbia of Ohio to revise its depreciation
accrual rates for the period January 1, 1999 through December 31, 2004. The
revised depreciation rates are lower than those that would have been utilized if
Columbia of Ohio were not subject to regulation. The amount of depreciation that
would have been recorded for 1999 had Columbia of Ohio not been subject to rate
regulation is $31.8 million, $18.8 million more than the $13 million recorded.
Over the six-year period, the amount of depreciation that would have been
recorded if Columbia of Ohio were not regulated is estimated to be approximately
$150 million higher than the regulatory depreciation to be recorded. A
regulatory asset will be established for this amount. Pursuant to the terms of
the agreement, rates were not reduced to reflect this reduction in depreciation
expense with most of the excess revenues generated being used to recover
Columbia of Ohio's transition capacity costs.
In Pennsylvania, legislation was signed by the governor in June 1999 that allows
consumers statewide to choose their natural gas supplier. Under the legislation,
all Pennsylvania natural gas utilities, upon approval of the Pennsylvania Public
Utility Commission (PPUC), must offer all of their customers the opportunity to
choose a supplier by July 1, 2000. Before offering choice programs to customers,
each company was required to submit a restructuring plan to the PPUC. The
legislation makes Pennsylvania one of the first states to offer customers both
gas and electric choice on a statewide level. Another major component of the
legislation is the repeal of the gross receipts tax on natural gas use,
effective January 1, 2000. On August 2, 1999, Columbia Gas of Pennsylvania, Inc.
(Columbia of Pennsylvania) filed an expanded statewide restructuring plan with
the PPUC. On August 12, 1999, the PPUC issued a preliminary order providing a
litigation schedule and directing Columbia of Pennsylvania to develop and
implement an interim program for the 1999-2000 heating season while the
permanent plan was being litigated. In October 1999, the PPUC approved the
interim plan, thereby allowing all of the company's residential and small
commercial customers the right to choose a new natural gas supplier, effective
November 1, 1999. Prior to this date, more than 70% of Columbia of
Pennsylvania's customers in seven counties could choose their supplier under a
program approved by the PPUC in 1998. Columbia of Pennsylvania subsequently
negotiated a settlement of the full restructuring plan with 26 parties. On
December 16, 1999, the PPUC unanimously approved the settlement making Columbia
of Pennsylvania the first company to receive PPUC approval of a permanent
statewide program under the guidelines of the June 1999 legislation. As part of
the settlement, Columbia of Pennsylvania will continue to deliver natural gas to
all 390,000 of its customers regardless of their supplier.
In Virginia, legislation was enacted in 1999 permitting Columbia of Virginia,
upon approval by the VSCC, to offer all of its 175,000 residential and
commercial customers the opportunity to choose their natural gas suppliers. This
legislation allows a natural gas distribution company to file for an unbundling
of its rates with the VSCC effective July 1, 2000. Moreover, the legislation
expires on June 30, 2000, unless reenacted by the Virginia General Assembly. In
January 2000, new legislation was introduced in the General Assembly that would
reenact last year's legislation. Columbia of Virginia has been providing a pilot
transportation program in the Gainesville market area of Northern Virginia since
late 1997. There are now over 7,500 customers and 11 marketers participating in
the program. Columbia of Virginia plans to file in 2000 for permission to expand
the Customer CHOICE(SM) program statewide.
In August 1998, the Maryland Public Service Commission approved a two-year
continuation of Columbia Gas of Maryland, Inc.'s (Columbia of Maryland) Customer
CHOICE(SM) program which allows all of its nearly 32,000 customers to select a
natural gas supplier other than Columbia of Maryland. There are approximately
2,900 customers and 5 marketers participating in the program.
In April 1999, Columbia Gas of Kentucky, Inc. (Columbia of Kentucky) filed an
application with the Kentucky Public Service Commission (KPSC) seeking approval
to initiate a residential and small commercial transportation program. Under the
terms of the filing, all of Columbia of Kentucky's 142,000 residential and small
commercial customers would be eligible to choose a new supplier for gas
deliveries commencing in November 1999. In late May 1999, the KPSC issued an
order stating that more time was needed to determine the reasonableness of the
proposal and suspending the filing until March 31, 2000. However, the KPSC said
it could issue a final decision prior to the end of the suspension period. In
late January 2000, the KPSC issued an order approving the transportation program
on a pilot basis effective February 1, 2000 through January 31, 2005. Under the
order, Columbia of Kentucky would become the first utility in Kentucky, gas or
electric, to offer a choice of supplier to all of its customers. Under the terms
of the order, Columbia of Kentucky would have to assume the financial risk for
mitigating transition capacity costs through the utilization of non-traditional
revenue sources. Also, the order did not renew Columbia of
27
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Kentucky's gas cost incentive program, which had been temporarily continued by
the KPSC until the conclusion of the customer transportation case. On February
18, 2000, Columbia of Kentucky filed for rehearing of the order.
Capital Expenditure Program
Distribution's 1999 capital expenditures were approximately $145.5 million, a
decrease of $6.4 million from 1998. In addition to maintaining and upgrading
facilities to assure safe, reliable and efficient operation, 1999 expenditures
included $63.7 million for extending service to new areas and $61.5 million for
replacement and betterment projects. The estimated 2000 capital expenditure
program amounts to approximately $135.6 million, including $54 million for new
business and development, $59 million for replacement and betterment projects
with the remainder primarily for support services.
Environmental Matters
Distribution's primary environmental issues relate to 18 former manufactured gas
plant sites. Investigations or remedial activities are currently underway at six
sites and remedial construction has been completed at two sites. Additional site
investigations may be required at some of the remaining sites. To the extent
Distribution's site investigations have been conducted, remediation plans
developed and the responsibility for remediation established, the appropriate
estimated liabilities have been recorded. Regulatory assets have also been
recorded for a majority of these costs as rate recovery has been authorized or
is probable.
In June 1999, Columbia of Pennsylvania was notified by the Environmental
Protection Agency (EPA) Region 5 that it was a Potentially Responsible Party
(PRP) in a removal action pursuant to Section 106 of the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA), also known as
Superfund, concerning a site in Wooster, Ohio, known as 7-7 Merger, Inc. Coal
tar materials sent by Columbia of Pennsylvania from the former manufactured gas
plant at York, Pennsylvania to 7-7 Merger, Inc. for recycling in 1997 are
potentially among the materials abandoned by 7-7 Merger, Inc. at the Wooster
site. There are approximately 28 parties that received a similar notice from
EPA. There is no reasonable way to estimate liability at this time. However, the
EPA preliminary estimate of the total costs of response is $702,000. Based upon
the EPA estimate and preliminary cost sharing discussions among a PRP group, a
reasonable lower bound estimate of Columbia of Pennsylvania's cost for the
removal action would be approximately $25,000. The PRP group has entered into an
administrative order with EPA Region 5 with work scheduled to begin in March
2000.
Voluntary Workforce Reduction Programs
As a result of Columbia's ongoing review of its various business units, the
utilization of improved technologies and process improvement initiatives,
management has identified a number of ways of working more efficiently. As
discussed below. Columbia is implementing a Voluntary Incentive Retirement
Program (VIRP) for the distribution subsidiaries and certain business units of
Columbia Energy Group Service Corporation, similar to the program discussed in
the Transmission and Storage Operations on page 23 for Columbia Transmission. In
early 1999 Columbia of Pennsylvania announced a Voluntary Severance Program
(VSP) for its employees.
In February 2000, the five distribution subsidiaries and Columbia Energy Group
Service Corporation announced the introduction of a VIRP. Approximately 880
employees are eligible for the program, which provides a retirement incentive
for certain active employees who are age fifty and above with at least five
years of service as of June 1, 2000. The acceptance period will end on April 30,
2000. The majority of the retirements are scheduled to occur on June 1, 2000, at
which time the cost of the program will be recorded. Retirement costs for these
employees are funded through the pension plan and will not have a significant
impact on Columbia's consolidated net income.
In January 1999, Columbia of Pennsylvania announced a VSP that was available to
all of its nearly 700 employees in its operations department. In total, 37
professional, manual and administrative/technical employees in the operations
department elected to participate in the program. By combining the VSP with
other workforce reduction measures, Columbia of Pennsylvania has reduced
staffing by about 45 full-time employees. These initiatives resulted in a first
quarter 1999 charge to operating expense of $1.5 million, representing severance
and benefit costs for the participating employees, most of whom left the company
by March 17, 1999.
Throughput
In 1999, total volumes sold and transported of 696.8 Bcf increased 138.6 Bcf
from 1998. The improved throughput reflects the colder weather in 1999 compared
to 1998, along with a 108 Bcf increase in off-system sales as Distribution took
advantage of higher spot prices in March 1999 to sell supplies available due to
warmer than normal weather.
Distribution's 1998 total volumes sold and transported of 558.2 Bcf decreased
13.9 Bcf from 1997 due to the record warm weather in 1998. Increased off-system
sales, the return to full production of a major customer idled by a 10-month
strike in 1997, increased industrial transportation volumes and customer growth
partially offset the adverse impact on sales of the record warm weather in 1998.
Net Revenues
Net revenues for 1999 of $852.6 million were up $5.6 million from 1998 as the
impact of the colder weather in 1999 and Columbia of Virginia's regulatory
settlement were largely offset by Columbia of Ohio's contribution of $23.8
million to the transition capacity cost pool pursuant to the 1999 rate
settlement. The revenue impact on operating income of this contribution is more
than offset by a related reduction in depreciation expense provided by the
28
<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
settlement. Revenues in 1998 benefited from Columbia of Ohio's 1996 regulatory
settlement, which expired in December 1998.
In 1998, net revenues of $847 million were down $51.1 million from 1997. This
decline was primarily due to the record warm weather in 1998, which reduced net
revenues approximately $76 million from 1997. The beneficial impact of Columbia
of Ohio's 1997 regulatory settlement on net revenues in 1998 partially offset
the adverse impact of the warm weather.
Operating Income
Operating income for 1999 of $254.6 million increased $28.8 million over 1998,
primarily due to the increase in net revenues, reduced operating expenses
attributable to lower gross receipts and property taxes and, as noted above, the
terms of the 1999 Columbia of Ohio regulatory settlement resulted in reduced
depreciation expense. In 1998, operating expenses were reduced due to a $16.5
million settlement gain related to postretirement benefits costs that reflected
the purchase of insurance for a portion of those liabilities.
Operating income in 1998 of $225.8 million increased by $1.6 million from 1997,
as the decline in net revenues was more than offset by a $52.7 million decrease
in operating expenses primarily reflecting the reduction in postretirement
benefits costs and the beneficial impact of the restructuring initiatives
implemented in 1997.
STATEMENTS OF OPERATING INCOME FROM DISTRIBUTION OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES
Sales revenues $ 1,705.5 $ 1,686.3 $ 2,153.1
Less: Cost of gas sold 1,137.6 1,005.4 1,385.6
- ----------------------------------------------------------------------------------------------------------------------------------
Net Sales Revenues 567.9 680.9 767.5
- ----------------------------------------------------------------------------------------------------------------------------------
Transportation revenues 317.3 183.2 143.2
Less: Associated gas costs 32.6 17.1 12.6
- ----------------------------------------------------------------------------------------------------------------------------------
Net Transportation Revenues 284.7 166.1 130.6
- ----------------------------------------------------------------------------------------------------------------------------------
Net Revenues 852.6 847.0 898.1
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 406.9 386.7 441.0
Depreciation 54.5 82.2 78.2
Other taxes 136.6 152.3 154.7
- ----------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 598.0 621.2 673.9
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 254.6 $ 225.8 $ 224.2
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
DISTRIBUTION OPERATING HIGHLIGHTS
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES ($ in millions) 145.5 151.9 159.5 148.4 151.8
- --------------------------------------------------------------------------------------------------------------------------------
THROUGHPUT (Bcf)
Sales
Residential 132.5 149.1 190.9 209.4 196.6
Commercial 43.7 54.1 72.7 85.7 79.5
Industrial and Other 3.5 4.4 4.2 10.3 7.1
- --------------------------------------------------------------------------------------------------------------------------------
Total Sales 179.7 207.6 267.8 305.4 283.2
Transportation 346.2 287.7 258.9 248.8 255.9
- --------------------------------------------------------------------------------------------------------------------------------
Total Throughput 525.9 495.3 526.7 554.2 539.1
Off-System Sales 170.9 62.9 45.4 10.8 7.5
- --------------------------------------------------------------------------------------------------------------------------------
Total Sold and Transported 696.8 558.2 572.1 565.0 546.6
- --------------------------------------------------------------------------------------------------------------------------------
SOURCES OF GAS FOR THROUGHPUT (Bcf)
Sources of Gas Sold
Spot market* 302.2 229.8 314.0 323.2 210.4
Producers 12.6 20.8 38.9 50.2 70.9
Storage withdrawals (injections) 15.5 12.4 4.0 (20.8) 23.6
Company use and other 20.3 7.5 (43.7) (36.4) (14.2)
- --------------------------------------------------------------------------------------------------------------------------------
Total Sources of Gas Sold 350.6 270.5 313.2 316.2 290.7
Gas received for delivery to customers 346.2 287.7 258.9 248.8 255.9
- --------------------------------------------------------------------------------------------------------------------------------
Total Sources 696.8 558.2 572.1 565.0 546.6
- --------------------------------------------------------------------------------------------------------------------------------
CUSTOMERS
Sales
Residential 1,366,869 1,612,124 1,769,647 1,815,269 1,794,800
Commercial 123,673 148,529 168,413 173,689 172,114
Industrial and Other 2,264 2,295 2,340 2,285 2,265
- --------------------------------------------------------------------------------------------------------------------------------
Total Sales Customers 1,492,806 1,762,948 1,940,400 1,991,243 1,969,179
Transportation 603,901 298,107 93,923 12,804 6,789
- --------------------------------------------------------------------------------------------------------------------------------
Total Customers 2,096,707 2,061,055 2,034,323 2,004,047 1,975,968
- --------------------------------------------------------------------------------------------------------------------------------
DEGREE DAYS 5,171 4,635 5,736 5,975 5,692
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects volumes under purchase contracts of less than one year.
30
<PAGE> 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
EXPLORATION AND PRODUCTION OPERATIONS
Columbia's exploration and production subsidiary, Columbia Resources, is one of
the largest independent natural gas and oil producers in the Appalachian Basin
and also has production operations in Canada. Columbia Resources produced
approximately 47 Bcf equivalents (Bcfe) of natural gas and oil in 1999 and owns
and operates 8,188 wells, and has net proven reserve holdings of 965.8 Bcfe at
December 31, 1999. Columbia Resources also owns and operates approximately 6,069
miles of gathering pipelines.
Columbia Resources seeks to achieve asset and profitable growth through
acquisitions, expanded drilling activities and divestiture of under-performing
assets. During 1999, Columbia Resources completed the largest and most
successful exploration and development program in its history. Columbia
Resources exceeded its originally projected 230 well program by drilling 233
wells and participated in another 20 wells with joint venture partners. Also,
Columbia Resources had a well completion success rate of 82% in 1999 consistent
with its success rate over the last five years. Columbia Resources participated
in the drilling and completion of 263 wells during 1999. The success of these
wells added 70.5 net Bcfe to Columbia Resources' reserve base. An additional 68
Bcfe of oil and gas reserves were acquired from Wiser Oil and Meridian
Exploration, bringing Columbia Resources' reserve base to a record level of
965.8 Bcfe.
During 1999, Columbia Resources' acquisition strategy involved six transactions
totaling approximately $61 million and expansion of the gathering infrastructure
by more than 450 miles of pipeline. Also notable in 1999 was the discovery by
Columbia Resources of reserves in West Virginia in the Trenton-Black River
formation at depths exceeding 10,000 feet. Columbia Resources recently completed
construction of an eight-inch gathering pipeline and has connected the discovery
well at a flowing rate in excess of 7.4 million cubic feet per day. A
confirmation well, which has indicated strong production characteristics, was
tied into the same pipeline network at the end of December. Drilling on the
third prospect was completed in the first quarter of 2000.
Capital Expenditure Program
Columbia Resources' 1999 capital expenditures of $166.5 million primarily
reflect investments in drilling and acquisitions. The 2000 capital expenditure
program is estimated at $165.7 million and provides for the drilling of 330 new
wells in the Appalachian Basin and Canada. This investment will include the
expansion of Columbia Resources' gathering infrastructure in the Appalachian
Basin and the continued expansion of its acreage position.
Forward Sale of Natural Gas
On December 1, 1999, Columbia Resources entered into an agreement with a third
party whereby Columbia Resources received cash as a prepayment, and will sell
approximately 45,000 Mcf/d during the period February 2000 through October 2004.
This transaction, net of expenses, provided $148.5 million in cash proceeds for
funding future operating costs and acquisitions and provided a forward sale at
an average commodity price of $2.82 per Mcf exclusive of the basis differential.
Purchase of a Natural Gas Processing Plant
On November 1, 1999, Columbia Resources purchased certain carbon dioxide rights,
a separation plant, and certain natural gas pipelines and facilities located in
Kanawha County, West Virginia from Columbia Transmission. This facility, known
as the Kanawha Separation Plant, was acquired at a price of $3.5 million.
Production
Gas production of 45.8 Bcf in 1999 increased 6.7 Bcf over 1998, primarily due to
the acquisitions of Wiser Oil and Meridian Exploration, new drilling and
improvements to Columbia Resources' gathering facilities. From 1997 to 1998, gas
production increased by 13% reflecting the Alamco acquisition in mid-1997 and
new production brought online in 1998.
In 1999, oil and liquids production decreased 14% from 1998 to 185,207 barrels
due to normal production declines in Ohio wells. Oil and liquids production in
1998 increased 2% from 1997 to 214,000 barrels primarily reflecting new well
completions coming online.
Operating Revenues
Operating revenues for 1999 of $144.8 million increased $17.3 million over 1998
reflecting increased gas production that was partially offset by lower average
1999 gas prices. Columbia Resources manages the uncertainty of natural gas
prices by hedging a portion of its production using derivative instruments.
Columbia Resources hedged approximately 50% of its first quarter 2000 production
at an average price of $3.75 per Mcf. Also contributing to the
31
<PAGE> 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
increase in operating revenues in 1999 was $6 million of revenues from the
termination of long-term sales contracts with two cogeneration facilities.
Operating revenues for 1998 were $127.5 million, an increase of $14.2 million
over 1997, primarily reflecting higher average prices and increased gas
production.
Operating Income
Operating income of $44.2 million for 1999 increased $7 million over 1998 as the
increase in operating revenues discussed above was partially offset by $10.3
million higher operating expenses associated with an expanded operation due in
part to recent acquisitions, additional gathering facilities and drilling
activity.
In 1998, operating income improved by $6.3 million to $37.2 million, also
primarily due to higher operating revenues, partially offset by higher operating
expense due largely to acquisitions and increased drilling activity.
STATEMENTS OF OPERATING INCOME FROM EXPLORATION AND PRODUCTION OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1999 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES
Gas revenues $123.1 $113.9 $109.5
Other revenues 21.7 13.6 3.8
- ------------------------------------------------------------------------------------
Total Operating Revenues 144.8 127.5 113.3
- ------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 53.9 44.6 45.7
Depreciation and depletion 36.9 36.5 27.6
Other taxes 9.8 9.2 9.1
- ------------------------------------------------------------------------------------
Total Operating Expenses 100.6 90.3 82.4
- ------------------------------------------------------------------------------------
OPERATING INCOME $ 44.2 $ 37.2 $ 30.9
- ------------------------------------------------------------------------------------
</TABLE>
EXPLORATION AND PRODUCTION OPERATING HIGHLIGHTS
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995*
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES ($ in millions) 166.5 75.7 135.6 12.1 86.8
- -----------------------------------------------------------------------------------------------------------------------
PROVED RESERVES
Gas (Bcf) 951.6 790.5 800.5 644.5 599.5
Oil and Liquids (000 Bbls) 2,375 1,835 1,700 774 1,651
- -----------------------------------------------------------------------------------------------------------------------
PRODUCTION
Gas (Bcf) 45.8 39.1 34.7 33.6 65.4
Oil and Liquids (000 Bbls) 185 214 210 281 2,849
- -----------------------------------------------------------------------------------------------------------------------
AVERAGE PRICES
Gas ($ per Mcf)** 2.66 2.91 2.63 2.84 1.96
Oil and Liquids ($ per barrel) 14.96 12.76 17.99 19.07 16.17
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Include operating results from Columbia Gas Development Corporation,
which was sold effective December 31, 1995
** Includes the effect of hedging activities as discussed in Note 6 of
Notes to Consolidated Financial Statements.
32
<PAGE> 33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
ENERGY MARKETING OPERATIONS
Energy marketing operations include the operations of Columbia Propane as well
as Columbia Energy Services' retail operations. The results of Columbia Energy
Services also include the operations of Columbia Service Partners, Inc., which
provides a range of warranty products to homeowners, and Energy.com Corporation,
an internet-based business that offers a variety of services to energy marketers
and consumers. Together, these businesses serve 750,000 residential and 70,000
commercial and industrial customers in 34 states.
Columbia Energy Services
The president and CEO of Columbia Energy Services has been conducting a
strategic assessment of all facets of Columbia Energy Services' businesses,
which began in the first quarter of 1999, including ongoing action taken with
company personnel and outside consultants to identify and address infrastructure
weaknesses.
After completing the initial phase of the strategic assessment, it was
determined that Columbia Energy Services would concentrate its efforts primarily
on the retail businesses, taking advantage of Columbia's existing geographic
presence in an area where deregulation of gas and electric power markets is
proceeding rapidly. In December 1999, the Wholesale and Trading operations,
based in Houston, Texas, were sold to Enron North America Corp., a wholly-owned
subsidiary of Enron Corp. for $38.3 million, subject to post-closing
adjustments. The Wholesale and Trading operations are reported as discontinued
operations in Columbia's consolidated financial statements.
Also, as a result of the strategic assessment, it was determined that Columbia
Energy Services should also exit the Major Accounts business that provides
energy services and products to industrial and large commercial customers. In
accordance with generally accepted accounting principles, the Major Accounts
business is also being reported as discontinued operations in Columbia's
consolidated financial statements.
In conjunction with management's ongoing assessment of the opportunities and
challenges facing Columbia's marketing operations, a letter of intent with
Metromedia Energy for a joint venture to market retail energy and related
services has expired and will not be renewed.
Columbia Propane Acquisitions
During 1999, Columbia Propane made several acquisitions to expand its
operations.
In May 1999, Columbia Propane, through its subsidiary, Columbia Petroleum
Corporation (Columbia Petroleum), completed a transaction to acquire certain
propane and petroleum product assets and associated properties from Carlos R.
Leffler, Inc. (Leffler) and other Leffler entities. Columbia Propane acquired
the propane assets, consisting of bulk storage facilities with a capacity of
over 1.5 million gallons, a pipeline terminal with over 1.2 million gallons of
storage, a propane distribution fleet and wholesale and retail operations
serving central and eastern Pennsylvania. This acquisition provided Columbia
Propane approximately 12,500 propane customers and 36,000 petroleum customers.
In June 1999, Columbia Propane completed its acquisition of Trentane Gas, Inc.
(Trentane Gas). The acquisition of Trentane Gas, a retail propane company
located in north-central Virginia, added approximately 4,300 customers to
Columbia Propane's customer base.
In July 1999, Columbia Propane, through its subsidiary, Columbia Propane, L.P.,
completed the acquisition of National Propane Partners, LP (National Propane),
which added approximately 210,000 customers in 24 states, 155 full service
centers, 101 satellite locations and bulk storage facilities with more than 33
million gallons of propane.
Also in July 1999, Columbia Propane completed its purchase of the propane assets
of ENC Propane and a related appliance sales and services business, both located
in eastern North Carolina. On September 21, 1999, Columbia Propane completed the
purchase of the propane and fuel oil assets of Baker & Russell, Inc. located in
Shippensburg, Pennsylvania. On September 23, 1999, Columbia Petroleum acquired
the assets of Dampman Sturges Oil, in Douglassville, Pennsylvania. In three
other transactions later in 1999, Columbia Propane, L.P. acquired the assets of
Pacer-Acmer Propane in Tekonsha, Michigan, Mid-State Energy in Tomahawk,
Wisconsin and Lewiston Propane in Lewiston, Maine. These acquisitions, together
with the acquisitions of National Propane, Leffler and Trentane Gas, raise the
total number of customers served by Columbia Propane to more than 350,600 in 31
states and the District of Columbia at December 31, 1999, which is more than
triple the number of propane customers served at the end of 1998. On January 7,
2000, Columbia Propane acquired all of the propane related assets of Zoe's
Bottled Gas in Colchester, Connecticut, adding 2,900 additional customers.
33
<PAGE> 34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Columbia Petroleum owns and operates the petroleum assets acquired from Leffler
and Dampman Sturges. Columbia Petroleum currently serves 42,000 customers in
five states.
Environmental Activity
Columbia Propane's primary environmental issues relate to former manufactured
gas plant sites acquired in the acquisition of National Propane for which
accruals were made by National Propane. Investigations are currently underway at
one site. One other known former manufactured gas plant site is inactive. It is
possible that former manufactured gas plant sites exist at two other National
Propane properties. Management does not believe that Columbia Propane's
environmental expenditures will have a material adverse effect on Columbia's
consolidated financial results.
Commodity Hedging Activity
Columbia Propane purchases propane and petroleum and places it in storage for
future sale and hedges its inventory against the risk of decreasing prices.
Columbia Energy Services hedges anticipated fixed-price sales of its Mass
Markets business.
Capital Expenditures
A large portion of the $315.5 million capital expenditure program in 1999 was
allocated to propane acquisitions. The 2000 capital expenditure program is
estimated at $43.3 million, including $20 million for propane acquisitions.
Net Revenues
In 1999, net revenues were $90.1 million, up $47.9 million from 1998, primarily
due to Columbia Propane's acquisitions and colder weather in 1999. The
improvement in propane revenues due to additional volumes being sold was
partially offset by lower margins. Petroleum revenues reflect the results of the
acquisition of Leffler and Dampman Sturges in 1999, as discussed previously.
Columbia Energy Services' Mass Markets business reported revenues of $88.9
million, an increase of $67.3 million over 1998, due to a significant increase
in the number of customers being served. Other revenues of $27.2 million,
increased $15.7 million reflecting sales revenues from appliance, warranty and
lubricant products and other miscellaneous revenues, primarily as a result of
the National Propane and Leffler acquisitions.
In 1998, net revenues of $42.2 million improved $5.4 million over 1997 due
largely to net revenues generated by the Mass Markets business, which began in
1998.
Operating Income/Loss
In 1999, an operating loss of $54.5 million was recorded compared to an
operating loss of $13.6 million in 1998. The improvement in net revenues was
more than offset by higher operating costs for Columbia Energy Services' retail
operations that included additional investment in its infrastructure. The
operating loss for Columbia Energy Services for 1999 was $50.6 million compared
to $17.7 million in 1998. Included in the higher costs for Columbia Energy
Services was $14.3 million recorded in 1999 to reflect the write-down of certain
computer software no longer necessary for its operations and an adjustment for
uncollectible accounts. In addition, higher costs were incurred by Columbia
Propane due to its expanded operations and the ongoing process of integrating
recent propane and petroleum acquisitions.
An operating loss of $13.6 million was recorded in 1998 compared to operating
income of $6 million in 1997. The higher net revenues was more than offset by
additional costs to build Columbia Energy Services' infrastructure, customer
acquisition costs related to adding new Mass Markets customers, and increased
costs associated with expanded propane operations resulting from acquisitions.
34
<PAGE> 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
STATEMENTS OF OPERATING INCOME FROM ENERGY MARKETING OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES
Propane $ 152.9 $ 63.1 $ 70.4
Gas 88.9 21.6 --
Petroleum 127.7 -- --
- ----------------------------------------------------------------------------------
Total 369.5 84.7 70.4
Less: Products purchased 306.6 54.0 43.4
- ----------------------------------------------------------------------------------
Gross Margin 62.9 30.7 27.0
Other revenues 27.2 11.5 9.8
- ----------------------------------------------------------------------------------
NET REVENUES 90.1 42.2 36.8
- ----------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 109.5 47.0 25.4
Depreciation 26.6 5.8 3.6
Other taxes 8.5 3.0 1.8
- ----------------------------------------------------------------------------------
Total Operating Expenses 144.6 55.8 30.8
- ----------------------------------------------------------------------------------
OPERATING INCOME (LOSS) $ (54.5) $ (13.6) $ 6.0
- ----------------------------------------------------------------------------------
</TABLE>
ENERGY MARKETING OPERATING HIGHLIGHTS
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES ($ in millions) 315.5 27.9 10.4 5.2 5.7
- --------------------------------------------------------------------------------------------------------
SALES
Propane (millions of gallons) 178.3 66.5 70.9 75.9 68.9
Gas (billion cubic feet) 28.4 6.1 -- -- --
Petroleum (millions of gallons) 202.4 -- -- -- --
- --------------------------------------------------------------------------------------------------------
PROPANE CUSTOMERS 350,652 113,748 96,954 79,650 74,308
- --------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
POWER GENERATION, LNG AND OTHER OPERATIONS
Telecommunications Network
In the second quarter of 1999, Columbia Transmission Communication Corporation
(Transcom), a wholly-owned subsidiary of Columbia, began the construction of its
telecommunications network along the Washington, D.C. to New York City corridor.
Transcom will build and maintain a fiber optics network on rights-of-way of
Columbia's pipeline companies. Transcom expects to complete the D.C. to New York
fiber optics link in the first half of 2000. The route covers 260 miles and
provides access to 16 million people in the busiest telecommunications corridor
in the United States. The company is developing plans to extend the fiber optics
network beyond the initial route.
Power Generation Activities
Columbia Electric Corporation (Columbia Electric) is an unregulated electric
generation company whose primary focus is the development, ownership and
operation of clean, natural gas fueled power projects. Columbia currently has
three operating facilities totaling 248 megawatts, one 550-megawatt (equivalent)
plant under construction in Gregory, Texas and approximately 3,000 megawatts of
gas-fired generation under development. Publicly announced projects in Columbia
Electric's development portfolio include the Kelson Ridge Project in Charles
County, Maryland, the Liberty Electric Project in Eddystone, Pennsylvania, the
Grassy Point Energy Project in Haverstraw, New York, the Ceredo Electric
Generating Station in Ceredo, West Virginia and the Henderson Generating Station
in Henderson, Kentucky.
The Gregory Project, a partnership between subsidiaries of Columbia Electric and
LG&E Power, Inc., is anticipated to start operations in the summer of 2000.
Construction of the Liberty Electric Project is anticipated to commence in
spring 2000. Ownership of the Liberty Electric Project was jointly held by
Columbia Electric and subsidiaries of Westcoast Energy, Inc. (Westcoast). In
December 1999, the ownership agreement between Columbia and Westcoast was
terminated due to allocation of capital to other projects by Westcoast in
geographic areas more closely aligned with other Westcoast operating assets and
the desire of Westcoast to focus its resources in ventures that will generate
near-term operating income. Columbia Electric announced on February 16, 2000,
that it purchased Westcoast's 50% interest and now owns 100% of the Liberty
Electric Project.
In December 1999, a limited partnership established between Columbia Electric
and Atlantic Generation, Inc. completed a transaction terminating a long-term
power purchase contract. Columbia Electric's portion was approximately $71
million pre-tax under the terms of the buyout. The partners will continue to
operate the facility as a merchant power plant.
Liquified Natural Gas Operations
In January 2000, Columbia Atlantic Trading Corporation acquired Potomac Electric
Power Company's (Pepco) 50% interest in the Cove Point LNG Limited Partnership
for $40.7 million. This acquisition gives Columbia LNG Corporation (Columbia
LNG) and Columbia Atlantic Trading Corporation 100% ownership of the Cove Point
liquefied natural gas (LNG) terminal in Cove Point, Maryland and certain other
pipeline facilities, which had been owned equally by Columbia LNG and Pepco
since 1994.
The current operations include operating one of the largest natural gas peaking
and storage facilities in the United States. With approximately 5 Bcf of vapor
equivalent storage capacity, the facility enables LNG to be stored until needed
for the winter peak-day requirements of utilities and other large gas users. The
acquisition will facilitate Columbia's plans to reactivate the LNG receiving
facilities and expand the business to include LNG tanker unloading services at
the terminal. Cove Point LNG is holding an open season where potential customers
can bid for capacity. Based on the results of the open season, Cove Point LNG
expects to file a certificate application with the FERC to reactivate the
terminal's marine facilities. Pending approval by the FERC, Cove Point LNG plans
to begin LNG tanker discharging by late 2001.
Capital Expenditures
The capital expenditure program for 1999 was $51 million and included amounts
for the development of Transcom's fiber optics network. The 2000 program is
projected to be $376.5 million, which is primarily for fiber optics, Columbia
Electric's cogeneration projects and the acquisition of Pepco's interest in the
Cove Point LNG Limited Partnership.
36
<PAGE> 37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Operating Revenues
In 1999, operating revenues increased $69.6 million from 1998 to $88.7 million
largely due to the $71 million gain from the termination of the cogeneration
power purchase contract, mentioned above.
In 1998, operating revenues of $19.1 million decreased $3.1 million from 1997.
The decrease largely reflected the net effect of Columbia Electric's $3.2
million revenue improvement recorded in the first quarter of 1997 from the
assumption of a cogeneration partnership fuel transportation contract.
Operating Income
Operating income for 1999 of $71.5 million increased $64.9 million over 1998
primarily reflecting the increase in operating revenues, which was partially
offset by a $4.5 million increase in operation and maintenance expense due to
increased staffing levels and development activity for the cogeneration
business.
In 1998, operating income of $6.6 million declined $2.6 million from 1997 as the
decrease in operating revenues was only partially offset by a $500,000 decrease
in operating expenses.
STATEMENTS OF POWER GENERATION, LNG AND OTHER OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES
Power generation $78.5 $ 8.3 $10.6
LNG 9.3 10.3 11.2
Other 0.9 0.5 0.4
- --------------------------------------------------------------------------------
Operating Revenues 88.7 19.1 22.2
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 16.7 12.2 12.6
Depreciation 0.1 0.1 0.1
Other taxes 0.4 0.2 0.3
- --------------------------------------------------------------------------------
Total Operating Expenses 17.2 12.5 13.0
- --------------------------------------------------------------------------------
OPERATING INCOME $71.5 $ 6.6 $ 9.2
- --------------------------------------------------------------------------------
</TABLE>
POWER GENERATION, LNG AND OTHER OPERATING HIGHLIGHTS
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES ($ in millions) 51.0 2.7 1.0 0.3 3.3
- ---------------------------------------------------------------------------------
</TABLE>
37
<PAGE> 38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Bankruptcy MatterS
On November 28, 1995, Columbia and its wholly-owned subsidiary, Columbia
Transmission emerged from Chapter 11 protection of the United States 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.
In July 1998, the Bankruptcy Court, granting a motion by Columbia Transmission,
entered an order allowing the claim of the New Bremen Corporation in accordance
with the Claims Mediator's Report and Recommendations and the decision of the
U.S. 5th Circuit Court of Appeals. In August 1998, New Bremen filed a notice of
appeal of this order to the U.S. District Court for the District of Delaware.
This litigation was the last remaining producer claim in Columbia Transmission's
bankruptcy proceeding. During the first quarter of 1999, Columbia Transmission
reached a settlement with New Bremen. The improvement to Columbia's first
quarter 1999 consolidated net income was $20.6 million. The settlement was
approved by the Bankruptcy Court on April 12, 1999, and on April 26, 1999,
Columbia Transmission distributed the producer holdback amounts in accordance
with its Plan of Reorganization and the New Bremen settlement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is in Item 7 beginning on page 18.
38
<PAGE> 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index Page
- ----------------------------------------------------------------------------------
<S> <C>
Report of Independent Public Accountants ................................ 40
Statements of Consolidated Income ...................................... 41
Consolidated Balance Sheets ............................................. 42
Statements of Consolidated Cash Flows ................................... 44
Statements of Consolidated Common Stock Equity .......................... 45
Notes of Consolidated Financial Statements .............................. 46
Schedule V - Valuation and Qualifying Accounts .......................... 71
- ----------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Columbia Energy Group.:
We have audited the accompanying consolidated balance sheets of Columbia Energy
Group (a Delaware corporation, the "Corporation") and subsidiaries as of
December 31, 1999 and 1998, and the related statements of consolidated income,
cash flows and common stock equity for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
Index to Item 8, Financial Statements and Supplementary Data, is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
January 25, 2000
40
<PAGE> 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
STATEMENTS OF CONSOLIDATED INCOME
Columbia Energy Group and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31, (in millions,
except per share amounts) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES
Energy sales $ 2,085.5 $ 1,725.5 $ 2,215.7
Less: Products purchased 1,194.4 766.1 1,117.2
- ------------------------------------------------------------------------------------------------------------------------
Gross Margin 891.1 959.4 1,098.5
Transportation 706.3 577.2 532.4
Production gas sales 120.2 111.8 98.4
Other 277.2 213.5 167.6
- ------------------------------------------------------------------------------------------------------------------------
Total Net Revenues 1,994.8 1,861.9 1,896.9
- ------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 937.5 829.2 934.0
Settlement of gas supply charges (31.7) -- --
Depreciation and depletion 229.0 231.9 219.9
Other taxes 211.6 219.5 221.5
- ------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 1,346.4 1,280.6 1,375.4
- ------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 648.4 581.3 521.5
- ------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Interest income and other, net (Note 15) 29.2 12.3 39.4
Interest expense and related charges (Note 16) (164.4) (144.5) (157.4)
- ------------------------------------------------------------------------------------------------------------------------
Total Other Income (Deductions) (135.2) (132.2) (118.0)
- ------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 513.2 449.1 403.5
Income Taxes (Note 8) 158.2 148.8 123.2
- ------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 355.0 300.3 280.3
- ------------------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS - NET OF TAXES
(Loss) from operations (80.0) (31.1) (7.0)
Estimated (loss) on disposal (25.8) -- --
- ------------------------------------------------------------------------------------------------------------------------
(Loss) from Discontinued Operations - net of taxes (105.8) (31.1) (7.0)
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 249.2 $ 269.2 $ 273.3
- ------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Continuing operations $ 4.31 $ 3.60 $ 3.37
(Loss) from discontinued operations (0.97) (0.37) (0.08)
Estimated (loss) on disposal (0.31) -- --
- ------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ 3.03 $ 3.23 $ 3.29
- ------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Continuing operations $ 4.29 $ 3.58 $ 3.35
(Loss) from discontinued operations (0.97) (0.37) (0.08)
Estimated (loss) on disposal (0.31) -- --
- ------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ 3.01 $ 3.21 $ 3.27
- ------------------------------------------------------------------------------------------------------------------------
DIVIDENDS PAID PER SHARE* $ 0.875 $ 0.77 $ 0.60
- ------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING (thousands)* 82,210 83,382 83,100
DILUTED AVERAGE COMMON SHARES (thousands)* 82,709 83,748 83,594
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
* All per share amounts, average common shares outstanding and diluted average
common shares have been restated to reflect a three-for-two common stock
split, in the form of a stock dividend, effective June 15, 1998. See Note 3A
of Notes to Consolidated Financial Statements.
41
<PAGE> 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
CONSOLIDATED BALANCE SHEETS
Columbia Energy Group and Subsidiaries
<TABLE>
<CAPTION>
ASSETS as of December 31, (in millions) 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT
Gas utility and other plant, at original cost $ 8,150.6 $ 7,673.9
Accumulated depreciation (3,708.8) (3,588.7)
- ----------------------------------------------------------------------------------------------
Net Gas Utility and Other Plant 4,441.8 4,085.2
- ----------------------------------------------------------------------------------------------
Gas and oil producing properties, full cost method
United States cost center 823.5 714.1
Canadian cost center 12.6 5.0
Accumulated depletion (251.6) (225.4)
- ----------------------------------------------------------------------------------------------
Net Gas and Oil Producing Properties 584.5 493.7
- ----------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 5,026.3 4,578.9
- ----------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Unconsolidated affiliates 67.6 81.6
Net assets of discontinued operations (9.7) 235.8
Other 61.6 40.5
- ----------------------------------------------------------------------------------------------
Total Investments and Other Assets 119.5 357.9
- ----------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments 62.6 22.9
Accounts receivable
Customer (less allowance for doubtful accounts
of $15.8 and $13.9, respectively) 465.4 344.5
Other 87.0 55.2
Gas inventory 144.9 186.0
Other inventories - at average cost 71.1 26.8
Prepayments 74.3 65.6
Regulatory assets 52.7 59.5
Underrecovered gas costs 40.5 24.5
Deferred property taxes 79.8 80.0
Exchange gas receivable 275.4 197.5
Other 39.5 62.8
- ----------------------------------------------------------------------------------------------
Total Current Assets 1,393.2 1,125.3
- ----------------------------------------------------------------------------------------------
REGULATORY ASSETS 358.1 391.4
DEFERRED CHARGES 198.8 77.9
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 7,095.9 $ 6,531.4
- ----------------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
42
<PAGE> 43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
<TABLE>
<CAPTION>
CAPITALIZATION AND LIABILITIES as of
December 31, (in millions) 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK EQUITY
Common stock, par value $.01 per share - issued
83,786,942 and 83,511,878 shares, respectively $ 0.8 $ 835.1
Additional paid in capital 1,611.6 761.8
Retained earnings 586.9 409.5
Unearned employee compensation (0.6) (0.9)
Accumulated Other Comprehensive Income:
Foreign currency translation adjustment 0.3 (0.2)
Treasury stock (135.0) --
- --------------------------------------------------------------------------------------------
Total Common Stock Equity 2,064.0 2,005.3
LONG-TERM DEBT (Note 11) 1,639.7 2,003.1
- --------------------------------------------------------------------------------------------
Total Capitalization 3,703.7 4,008.4
- --------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Short-term debt (Note 12) 465.5 144.8
Current maturities of long-term debt 311.3 0.4
Accounts and drafts payable 267.5 180.9
Accrued taxes 199.0 238.3
Accrued interest 32.5 17.3
Estimated rate refunds 21.4 59.2
Supplier obligations -- 72.4
Overrecovered gas costs 14.6 34.3
Transportation and exchange gas payable 297.5 139.2
Other 406.7 367.8
- --------------------------------------------------------------------------------------------
Total Current Liabilities 2,016.0 1,254.6
- --------------------------------------------------------------------------------------------
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes - noncurrent 674.1 655.0
Investment tax credits 32.6 34.1
Postretirement benefits other than pensions 96.4 103.7
Regulatory liabilities 36.4 44.0
Deferred revenue 177.4 191.4
Other 359.3 240.2
- --------------------------------------------------------------------------------------------
Total Other Liabilities and Deferred Credits 1,376.2 1,268.4
- --------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 14) -- --
- --------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $7,095.9 $6,531.4
- --------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE> 44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
STATEMENTS OF CONSOLIDATED CASH FLOWS
Columbia Energy Group and Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31, (in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 249.2 $ 269.2 $ 273.3
Adjustments to reconcile net income to net
cash from continuing operations:
Loss from discontinued operations 80.0 31.1 7.0
Loss on disposal 25.8 -- --
Depreciation and depletion 229.0 231.9 219.9
Deferred income taxes 45.1 38.6 28.9
Earnings from equity investment, net of distributions 23.0 (8.5) 2.4
Other - net 53.5 135.0 26.8
- -----------------------------------------------------------------------------------------------------------
705.6 697.3 558.3
Changes in components of working capital:
Accounts receivable, net of sale (191.7) 43.8 69.7
Sale of accounts receivable 81.1 -- --
Gas inventory 41.1 40.8 11.0
Prepayments (8.7) (6.0) (4.5)
Accounts payable 98.2 7.4 (8.6)
Accrued taxes 72.0 50.9 (25.2)
Accrued interest 15.2 (12.1) (1.2)
Estimated rate refunds (37.8) (9.2) (45.6)
Estimated supplier obligations (40.6) (1.5) (41.2)
Under/Overrecovered gas costs (35.7) (33.4) 147.9
Exchange gas receivable/payable 80.4 60.1 (85.3)
Other working capital 46.7 7.6 (0.8)
- -----------------------------------------------------------------------------------------------------------
Net Cash From Continuing Operations 825.8 845.7 574.5
Net Cash From Discontinued Operations 5.8 (138.1) (70.4)
- -----------------------------------------------------------------------------------------------------------
Net Cash From Operating Activities 831.6 707.6 504.1
- -----------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Capital expenditures (462.3) (455.2) (415.7)
Acquisitions and other investments - net (368.2) (12.5) (108.5)
- -----------------------------------------------------------------------------------------------------------
Net Investment Activities (830.5) (467.7) (524.2)
- -----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Retirement of long-term debt (52.5) (0.9) (0.6)
Dividends paid (71.8) (63.9) (49.9)
Issuance of common stock 15.5 10.5 11.7
Issuance (repayment) of short-term debt 320.7 (182.4) 77.1
Purchase of treasury stock (135.0) -- --
Other financing activities (38.3) (8.8) (39.3)
- -----------------------------------------------------------------------------------------------------------
Net Financing Activities 38.6 (245.5) (1.0)
- -----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and temporary cash investments 39.7 (5.6) (21.1)
Cash and temporary cash investments at beginning of year 22.9 28.5 49.6
- -----------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF YEAR $ 62.6 $ 22.9 $ 28.5
- -----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 149.3 $ 147.0 $ 145.4
Cash paid for income taxes (net of refunds) $ 61.7 $ 38.3 $ 90.7
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
44
<PAGE> 45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY
Columbia Energy Group and Subsidiaries
<TABLE>
<CAPTION>
Common Stock*
---------------------------------------------
Shares Additional
Outstanding ** Par Treasury Paid In Retained
(in millions, except for share amounts) (Thousands) Value Stock Capital Earnings
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 55,264 $ 552.6 $ -- $ 743.2 $ 259.3
Net income 273.3
Cash dividends:
Common stock (49.9)
Common stock issued:
Long-term incentive plan 232 2.3 11.0
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 55,496 554.9 -- 754.2 482.7
Comprehensive income:
Net income 269.2
Foreign currency translation adjustment
Comprehensive income
Cash dividends:
Common stock (63.9)
Common stock issued:
Long-term incentive plan 231 2.3 7.6
Three-for-two stock split 27,785 277.9 (278.5)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 83,512 835.1 761.8 409.5
Comprehensive income:
Net income 249.2
Foreign currency translation adjustment
Comprehensive income
Cash dividends:
Common stock (71.8)
Reduction in par from $10 to $.01 per share (834.3) 834.3
Common stock issued:
Long-term incentive plan 275 15.5
Purchase of treasury stock (2,479) (135.0)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 81,308 $ 0.8 $ (135.0) $1,611.6 $ 586.9
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Unearned Other
Employee Comprehensive
(in millions, except for share amounts) Compensation Income Total
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ (1.5) $ -- $ 1,553.6
Net income 273.3
Cash dividends:
Common stock (49.9)
Common stock issued:
Long-term incentive plan 0.4 13.7
- ---------------------------------------------------------------------------------------------
Balance at December 31, 1997 (1.1) -- 1,790.7
Comprehensive income:
Net income
Foreign currency translation adjustment (0.2)
Comprehensive income 269.0
Cash dividends:
Common stock (63.9)
Common stock issued:
Long-term incentive plan 0.2 10.1
Three-for-two stock split (0.6)
- ---------------------------------------------------------------------------------------------
Balance at December 31, 1998 (0.9) (0.2) 2,005.3
Comprehensive income:
Net income
Foreign currency translation adjustment 0.5
Comprehensive income 249.7
Cash dividends:
Common stock (71.8)
Reduction in par from $10 to $.01 per share --
Common stock issued: --
Long-term incentive plan 0.3 15.8
Purchase of treasury stock (135.0)
- ---------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ (0.6) $ 0.3 $ 2,064.0
- ---------------------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
* Effective May 19, 1999, the authorized number of shares of common stock
increased from 100 million to 200 million and the par value of common stock
decreased from $10 to $.01 per share.
** The common shares outstanding at December 31, 1997 and 1996 do not reflect
the three-for-two common stock split, in the form of a stock dividend,
effective June 15, 1998.
45
<PAGE> 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Columbia Energy Group (Columbia) and all subsidiaries. All
intercompany accounts and transactions have been eliminated. Certain
reclassifications have been made to the 1998 and 1997 financial statements to
conform to the 1999 presentation.
B. CASH AND CASH EQUIVALENTS. Columbia considers all highly liquid short-term
investments to be cash equivalents.
C. DILUTED AVERAGE COMMON SHARES COMPUTATION. Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 128), requires dual presentation of basic and diluted earnings per
share (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. Diluted EPS reflects the potential dilutive effect
of stock options.
The numerator in calculating both basic and diluted earnings per share for each
year is reported net income. The computation of diluted average common shares
follows:
<TABLE>
<CAPTION>
Diluted Average Common Shares Computation 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Denominator (thousands)
Basic average common shares outstanding 82,210 83,382 83,100
Dilutive potential common shares - options 499 366 494
- ---------------------------------------------------------------------------------------------------------------------
DILUTED AVERAGE COMMON SHARES 82,709 83,748 83,594
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
D. BASIS OF ACCOUNTING FOR RATE-REGULATED SUBSIDIARIES. Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS No. 71), provides that rate-regulated public utilities account
for and report assets and liabilities consistent with the economic effect of the
way in which regulators establish rates, if the rates established are designed
to recover the costs of providing the regulated service and if the competitive
environment makes it probable that such rates can be charged and collected.
Columbia's transmission and gas distribution subsidiaries follow the accounting
and reporting requirements of SFAS No. 71. Certain expenses and credits subject
to utility regulation or rate determination normally reflected in income are
deferred on the balance sheet and are recognized in income as the related
amounts are included in service rates and recovered from or refunded to
customers.
In Columbia Gas of Ohio, Inc.'s (Columbia of Ohio) 1999 rate agreement (See Note
2), the Public Utilities Commission of Ohio (PUCO) authorized Columbia of Ohio
to revise its depreciation accrual rates for the period January 1, 1999 through
December 31, 2004. The revised depreciation rates are lower than those which
would have been utilized if Columbia of Ohio were not subject to regulation. The
amount of depreciation that would have been recorded for 1999 had Columbia of
Ohio not been subject to rate regulation is $31.8 million, an $18.8 million
increase over the $13 million reflected in rates. Accordingly, a regulatory
asset has been established in the amount of $18.8 million at December 31, 1999.
46
<PAGE> 47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Information for assets and liabilities subject to utility regulation and rate
determination are as follows:
<TABLE>
<CAPTION>
TRANSMISSION DISTRIBUTION
SUBSIDIARIES SUBSIDIARIES
----------------------------------------------------------
At December 31, ($ in millions) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
- ----------------------------------------------------------------------------------------------------------------------
Environmental costs 95.5 136.7 5.0 6.2
Postemployment and postretirement benefits costs 56.2 60.3 105.5 113.6
Percent of income plan receivables -- -- 8.0 15.3
Retirement income plan costs 12.7 15.2 14.9 16.6
Regulatory effects of accounting for income taxes -- -- 64.4 55.8
Post in-service carrying charges -- -- 16.0 16.9
Underrecovered gas costs -- -- 40.5 24.5
Depreciation -- -- 18.8 --
Other 7.9 8.1 5.9 6.2
- ----------------------------------------------------------------------------------------------------------------------
TOTAL REGULATORY ASSETS 172.3 220.3 279.0 255.1
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES
Rate refunds and reserves 5.3 49.1 16.1 10.1
Overrecovered gas costs -- -- 14.6 34.3
Regulatory effects of accounting for income taxes 15.2 17.3 21.0 21.9
Other 23.1 22.7 2.0 6.6
- ----------------------------------------------------------------------------------------------------------------------
TOTAL REGULATORY LIABILITIES 43.6 89.1 53.7 72.9
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Regulatory assets of approximately $359.7 million are not presently included in
the rate base and consequently are not earning a return on investment. These
regulatory assets are being recovered through cost of service. The remaining
recovery periods generally range from one to fifteen years. Regulatory assets of
approximately $35.1 million require specific rate action. All regulatory assets
are probable of recovery.
E. GAS UTILITY AND OTHER PLANT AND RELATED DEPRECIATION. Property, plant and
equipment (principally utility plant) are stated at original cost. The cost of
gas utility and other plant of the rate-regulated subsidiaries includes an
allowance for funds used during construction (AFUDC). Property, plant and
equipment of other subsidiaries includes interest during construction (IDC). The
1999 before-tax rates for AFUDC and IDC were 5.91% and 6.94%, respectively. The
1998 and 1997 before-tax rates for AFUDC were 7.43% and 7.09%, respectively, and
for IDC were 6.96% and 7.05%, respectively.
Improvements and replacements of retirement units are capitalized at cost. When
units of property are retired, the accumulated provision for depreciation is
charged with the cost of the units and the cost of removal, net of salvage.
Maintenance, repairs and minor replacements of property are charged to expense.
Columbia's subsidiaries provide for annual depreciation on a composite
straight-line basis. The average annual depreciation rate for the transmission
subsidiaries' property was 2.4% in 1999 and 2.4% in 1998 and 2.5% in 1997. The
average annual depreciation rate for the distribution subsidiaries' property was
2.8% in 1999 and 3.1% in 1998 and 3.2% in 1997.
F. GAS AND OIL PRODUCING PROPERTIES. Columbia's subsidiaries engaged in
exploring for and developing gas and oil reserves follow the full cost method of
accounting. Under this method of accounting, all productive and nonproductive
costs directly identified with acquisition, exploration and development
activities including certain payroll and other internal costs are capitalized.
Depletion is based upon the ratio of current year revenues to expected total
revenues, utilizing current prices, over the life of production. If costs exceed
the sum of the estimated present value of the net future gas and oil revenues
and the lower of cost or estimated value of unproved properties, an amount
equivalent to the excess is charged to current depletion expense. Gains or
losses on the sale or other disposition of gas and oil properties are normally
recorded as adjustments to capitalized costs, except in the case of a sale of a
significant amount of properties, which would be reflected in the income
statement.
G. INTANGIBLE ASSETS. Intangible assets are recorded at original cost and are
amortized on a straight line basis. Goodwill represents the excess of the
purchase price over assets acquired and is being amortized over 40 years.
47
<PAGE> 48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Customer lists are being amortized over periods of 10 to 20 years. Intangible
assets are immaterial to the consolidated financial statements.
H. ACCOUNTING FOR RISK MANAGEMENT ACTIVITIES. Subsidiaries in Columbia's
exploration and production, marketing and propane operations are exposed to
market risk due primarily to fluctuations in commodity prices. In order to help
minimize this risk, Columbia has adopted a policy that provides for the use of
commodity derivative instruments to help ensure stable cash flow, favorable
prices and margins. 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. The
hedging objectives include assurance of stable and known cash flows, fixing
favorable prices and margins when they become available.
Columbia's exploration and production company and propane operations utilize
futures and options as well as commodity price swaps and basis swaps. Futures
help manage commodity price risk by fixing prices for future production volumes
as well as protecting the value and margins of propane and petroleum products
inventories. 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.
Premiums paid for option agreements are included as current assets in the
consolidated balance sheets until they are exercised or expire. Margin
requirements for natural gas and propane and petroleum products futures are also
recorded as current assets. Unrealized gains and losses on all futures contracts
are deferred on the consolidated balance sheets 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 and petroleum products futures
contracts are included in products purchased. The cash flows from commodity
hedging are included in operating activities in the consolidated statements of
cash flows.
Columbia and its subsidiaries are exposed to credit losses in the event of
nonperformance by the counterparties to its various financial contracts.
Management has evaluated such risk and believes that overall business risk is
significantly reduced as these financial contracts are primarily with major
investment grade financial institutions or their affiliates.
Columbia utilizes fixed-to-floating interest rate swap agreements to modify the
interest characteristics of a portion of its outstanding long-term debt. The
differentials between amounts received and paid under the agreements are
recorded as adjustments to interest expense.
I. GAS INVENTORY. The distribution subsidiaries' gas inventory is carried at
cost on a last-in, first-out (LIFO) basis. The excess of replacement cost of gas
inventory at December 31, 1999, over the carrying value is approximately $37.9
million. Liquidation of LIFO layers related to gas delivered by the distribution
subsidiaries does not affect income since the effect is passed through to
customers as part of purchased gas adjustment tariffs.
J. INCOME TAXES AND INVESTMENT TAX CREDITS. Columbia and its subsidiaries record
income taxes to recognize full interperiod tax allocations. Under the liability
method of income tax accounting, deferred income taxes are recognized for the
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.
Previously recorded investment tax credits of the regulated subsidiaries were
deferred and are being amortized over the life of the related properties to
conform with regulatory policy.
K. ESTIMATED RATE REFUNDS. Certain rate-regulated subsidiaries collect revenues
subject to refund pending final determination in rate proceedings. In connection
with such revenues, estimated rate refund liabilities are recorded which reflect
management's current judgment of the ultimate outcome of the proceedings. No
provisions are made when, in the opinion of management, the facts and
circumstances preclude a reasonable estimate of the outcome.
48
<PAGE> 49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
L. DEFERRED GAS PURCHASE COSTS. Columbia's gas distribution subsidiaries defer
differences between gas purchase costs and the recovery of such costs in
revenues, and adjust future billings for such deferrals on a basis consistent
with applicable tariff provisions.
M. REVENUE RECOGNITION. Columbia's gas distribution subsidiaries bill customers
on a monthly cycle billing basis. Revenues are recorded on the accrual basis and
include an estimate for gas delivered but unbilled at the end of each accounting
period.
N. ENVIRONMENTAL EXPENDITURES. Columbia accrues for costs associated with
environmental remediation obligations when such costs are probable and can be
reasonably estimated, regardless of when expenditures are made. The undiscounted
estimated future expenditures are based on currently enacted laws and
regulations, existing technology and, when possible, site-specific costs. The
reserve is adjusted as further information is developed or circumstances change.
Rate-regulated subsidiaries applying SFAS No. 71 establish a regulatory asset on
the balance sheet to the extent that future recovery of environmental
remediation costs is probable through the regulatory process.
O. ACCOUNTS RECEIVABLE SALES PROGRAM. Columbia enters into agreements with third
parties to sell certain accounts receivable without recourse. These sales are
reflected as reductions of accounts receivable in the accompanying consolidated
balance sheets and as operating cash flows in the accompanying consolidated
statements of cash flows. The costs of this program, which are based upon the
purchasers' level of investment and borrowing costs, will be charged to interest
expense and related charges in the accompanying consolidated statements of
income.
P. USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Q. STOCK OPTIONS AND AWARDS. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS No. 123), encourages, but
does not require, entities to adopt the fair value method of accounting for
stock-based compensation plans. This statement requires the value of the option
at the date of grant be amortized over the vesting period of the option.
Columbia continues to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No. 25).
For stock appreciation rights, compensation expense is recognized on the
aggregate difference between the market price of Columbia's stock and the option
price. Restricted stock awards are recorded as deferred compensation in the
consolidated balance sheets at the date of grant. Compensation expense related
to restricted stock awards is recognized ratably over the vesting period.
Compensation expense related to contingent stock awards is recognized over the
vesting period. Columbia sets the grant price of the options at the market price
of the stock on the grant date. In accordance with APB Opinion No. 25, expense
related to stock options is measured by the difference between the grant price
and Columbia's stock price on the measurement date (grant date). Since the
difference between the grant price and Columbia's stock price on the measurement
date is de minimis, no compensation expense is recognized. When stock options
are exercised, common stock is credited for the par value of shares issued and
additional paid in capital is credited with the consideration in excess of par.
2. REGULATORY MATTERS
In 1993, the FERC directed Columbia Gulf to show cause as to why it had not
sought FERC abandonment authorization to reduce capacity on its mainline
facility. In an August 8, 1997 order, the FERC approved a settlement between
Columbia Gulf and FERC's enforcement staff requiring Columbia Gulf to conduct a
30-day open season on additional firm mainline capacity up to its certificated
design. Although certain of Columbia Gulf's customers challenged the terms of
the settlement, Columbia Gulf concluded the open season on December 15, 1997
which resulted in requests for capacity that exceeded the capacity specified in
Columbia Gulf's FERC certificate. In orders issued in December 1998 and 1999,
the FERC has rejected challenges to the settlement and denied rehearing. In its
order issued December 22, 1999, the FERC affirmed the validity of the 1997 open
season but indicated that an additional open season in compliance with the
settlement will be necessary. In early February 2000, several appeals of the
FERC's orders in this proceeding were filed.
Columbia Gulf filed an application with the FERC on June 5, 1998, for authority
to increase the maximum certificated capacity of its mainline facilities. The
expansion project, referred to as Mainline '99, will increase Columbia Gulf's
certificated capacity to nearly 2.2 Bcf/day, by replacing certain compressor
units and increasing the horsepower capacity of other compressor stations.
Various shippers contracted for the additional service through an
49
<PAGE> 50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
open bidding process held in late 1997 and early 1998. On February 10, 1999, the
FERC issued an order approving Columbia Gulf's June 1998 filing and construction
commenced on March 3, 1999. On March 12, 1999, requests for rehearing of the
FERC order were filed by three parties. On January 31, 2000, the FERC issued an
order denying the requests for rehearing and validating the open season held in
conjunction with Mainline '99. The FERC said it had previously addressed the
validity of the open season in the show cause proceeding discussed above.
Columbia Transmission's rate case settlement, approved by the FERC in April
1997, provided for a hearing in the fall of 1998 to address environmental cost
recovery that was excluded from the settlement. As a result of settlement
discussions, the active parties reached an agreement on the overall components
of an environmental settlement. The comprehensive agreement includes such major
components as Columbia Transmission's total allowed recovery of environmental
remediation program costs and the disposition of any proceeds received by
Columbia Transmission from insurance carriers and others. Columbia Transmission
filed the stipulation and agreement with the FERC on April 5, 1999 and on
September 15, 1999, the FERC approved the settlement. No requests for rehearing
were filed. The approval of the settlement did not have a material impact on
Columbia's consolidated financial results.
The transmission and storage subsidiaries are in confidential and informal
discussions with the staff of the FERC (Staff) concerning the scope of
authorization for certain past transactions under the relevant filed tariffs.
The transmission and storage subsidiaries have initiated these discussions with
the FERC. These subsidiaries provided information concerning these transactions
to the Staff pursuant to an informal non-public inquiry being conducted by the
Staff. Because management does not yet know the position Staff will take,
management is unable to reasonably estimate the amount that will have to be paid
pursuant to reimbursement or the other remedies.
The distribution subsidiaries (Distribution) continue to pursue initiatives that
give retail customers the opportunity to purchase natural gas directly from
marketers and to use Distribution's facilities for transportation services.
These opportunities are being pursued through regulatory initiatives in all of
its jurisdictions, which resulted in transportation programs being initiated in
all five of its service areas. Once fully implemented, these programs would
reduce Distribution's merchant function and provide all customer classes with
the opportunity to obtain gas supplies from alternative merchants. As these
programs expand to all customers, regulations will have to be implemented to
provide for the recovery of transition capacity costs and other transition costs
incurred by a utility serving as the supplier of last resort if the marketing
company cannot supply the gas. Transition capacity costs are created as
customers enroll in these programs and purchase their gas from other suppliers,
leaving Distribution with pipeline capacity it has contracted for but no longer
needs. The state commissions in Distribution's five jurisdictions are at various
stages in addressing these issues and other transition considerations.
Distribution is currently recovering, or has the opportunity to recover, the
costs resulting from the unbundling of its services and believes that most of
such future costs and costs resulting from being the supplier of last resort
will be mitigated or recovered.
On October 25, 1999, Columbia of Ohio and a group comprising diverse interested
parties, also known as the Collaborative, filed with the Public Utilities
Commission of Ohio (PUCO) a third amendment to its 1994 rate case. The filing,
which was approved by the PUCO on December 2, 1999, extends Columbia of Ohio's
CHOICE(SM) program through October 31, 2004, freezes base rates through October
31, 2004 and resolves the issue of transition capacity costs. Under the
agreement, Columbia of Ohio would assume total financial risk for mitigation of
transition capacity costs at no additional cost to customers. Among other items,
Columbia of Ohio would have the opportunity to utilize non-traditional revenue
sources as a means of offsetting the costs. The agreement also requires Columbia
of Ohio to submit a proposal addressing issues related to the merchant function,
obligation to serve, and provider of last resort by April 1, 2000.
3. COMMON STOCK EQUITY
A. STOCK SPLIT EFFECTED IN THE FORM OF A STOCK DIVIDEND. On May 20, 1998,
Columbia's Board of Directors (Board of Directors or Columbia's Board) approved
a three-for-two common stock split, effected in the form of a 50% stock dividend
(stock split), on June 15, 1998, payable to shareholders of record as of June 1,
1998. In connection with the stock split, 27.8 million shares were issued on
June 15, 1998, and $277.9 million was transferred to common stock from retained
earnings. The value of fractional shares resulting from the stock split was
determined at the closing price on June 1, 1998, and $0.6 million was paid in
cash to the shareholders for fractional-share interests. All references in the
financial statements and notes to the number of common shares outstanding and
per-share amounts, except where otherwise noted, reflect the retroactive effect
of the stock split.
B. TREASURY STOCK. In February 1999, Columbia's Board authorized the purchase of
up to $100 million of its common stock, through February 29, 2000, in the open
market or otherwise. In July 1999, Columbia's Board authorized the purchase of
an additional $400 million of common stock through July 14, 2000. In October
1999, this
50
<PAGE> 51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
program was suspended pending consideration of strategic alternatives (see Note
5). There can be no assurance as to when the share repurchase program will
recommence or if it will resume. If the program were to resume, the timing and
terms of additional purchases, and the number of shares actually purchased, will
be determined by management based on several factors including market
conditions. Purchased shares are held in treasury at cost and are available for
general corporate purposes or resale at a future date, or may be retired. As of
December 31, 1999, Columbia had purchased 2,478,500 common shares at a cost of
$135 million.
C. COMMON STOCK - AMENDMENTS. At Columbia's Annual Meeting of Shareholders held
on May 19, 1999, the shareholders voted to approve an amendment of Columbia's
Restated Certificate of Incorporation to increase the authorized number of
shares of common stock from 100 million to 200 million and decrease the par
value of common stock from $10 to $.01 per share. This change resulted in a
transfer during the second quarter of 1999 of $834.3 million from Common Stock
to Additional Paid In Capital.
4. DISCONTINUED OPERATIONS
As a result of a strategic assessment commenced in early 1999, on August 30,
1999, Columbia Energy Services announced that it decided to sell its Wholesale
and Trading operations. On December 30, 1999, Columbia Energy Services completed
the sale of these operations to a wholly-owned subsidiary of Enron Corp.
(Enron). The proceeds from the sale were $38.3 million, which is subject to post
closing adjustments in the first quarter of 2000.
In November 1999, after analysis from such ongoing strategic assessment, it was
determined that Columbia Energy Services should focus on its Mass Markets
business and exit the Major Accounts business that provides energy services and
products to industrial and large commercial customers.
In accordance with generally accepted accounting principles, the Columbia Energy
Services Wholesale and Trading operations and Major Accounts business are
reported as discontinued operations, and therefore the financial statements for
prior periods have been reclassified accordingly. The revenues from discontinued
operations were $5,371.6 million, $4,684.9 million and $2,217.6 million for the
years ended 1999, 1998 and 1997, respectively. The loss from discontinued
operations - net of taxes were $105.8 million, $31.1 million and $7 million for
the years ended 1999, 1998 and 1997, respectively. The estimated loss on
disposal of discontinued operations is $25.8 million, net of income tax benefits
of $13.7 million. The net assets of the discontinued operations are as follows:
<TABLE>
<CAPTION>
At December 31, ($ in millions) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS OF DISCONTINUED OPERATIONS
Accounts receivable, net 317.7 645.3
Other assets 18.3 158.8
Accounts payable (317.0) (566.7)
Other liabilities (28.7) (1.6)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS OF DISCONTINUED OPERATIONS (9.7) 235.8
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
5. MERGER AGREEMENT
On February 28, 2000, Columbia announced that it had entered into an Agreement
and Plan of Merger, dated as of February 27, 2000 (Merger Agreement), between
Columbia and NiSource, Inc., an Indiana corporation (NiSource). The Board of
Directors of Columbia determined to enter into the Merger Agreement after a
comprehensive evaluation of strategic alternatives that might generate value
greater than that which Columbia's business plan could create.
The terms of the Merger Agreement provide that NiSource will organize a new
company which shall serve as the holding company for both Columbia and NiSource
after the completion of the transaction. Pursuant to the terms of the Merger
Agreement, each of Columbia and NiSource will be merged into newly formed
special purpose subsidiaries of the new holding company, and each will become a
wholly owned subsidiary of the new holding company.
Subject to the terms and conditions of the Merger Agreement, upon completion of
the transaction, Columbia's shareholders will receive, for each share of
Columbia common stock, $70 in cash and a $2.60 face value SAILS(SM) (a unit
consisting of a zero coupon debt security with a forward equity contract).
Columbia's shareholders also have the option to elect to receive (in lieu of
cash and SAILS(SM)) shares in the new holding company in a tax-free exchange,
for up to 30% of the outstanding shares of Columbia common stock. Pursuant to
the stock election option, each Columbia share will be exchanged for up to $74
in new holding company stock, subject to a collar such that, if the average
closing price of NiSource shares during the 30 days prior to the closing of the
transaction is greater than $16.50, Columbia shareholders will receive shares of
the new holding company valued at $74 for each share of Columbia stock, and if
the average closing price of NiSource shares during the 30 days prior to closing
of the transaction is $16.50 or below, Columbia shareholders will receive 4.4848
shares of new holding company stock for each Columbia share. Upon completion of
the transaction, NiSource shareholders will receive one share of holding company
stock for each share of NiSource common stock that they own.
The Merger is conditioned upon, among other things, the approvals of the
shareholders of both companies and various regulatory commissions. However, if
the NiSource shareholder approval is not obtained, the transaction will
automatically be restructured so that, instead of each of NiSource and Columbia
becoming wholly-owned subsidiaries of the new holding company, Columbia will
become a wholly owned subsidiary of NiSource, and Columbia shareholders will
receive $70 in cash and a $3.02 face value SAILS(SM) unit of NiSource with no
option for Columbia shareholders to elect new holding company stock.
51
<PAGE> 52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
6. RISK MANAGEMENT ACTIVITIES
Subsidiaries in Columbia's exploration and production and energy marketing
segments are exposed to market risk due primarily to fluctuations in commodity
prices. In order to help minimize this risk, Columbia has adopted a policy that
provides for commodity hedging activities to help ensure stable cash flow,
favorable prices and margins. Financial instruments authorized for use by
Columbia for hedging include futures, swaps and options.
Columbia's energy marketing subsidiary utilized financial instruments to help
assure adequate margins for its Mass Markets business on the purchase and resale
of natural gas and electric power. At December 31, 1999, there were 25 open
contracts to purchase natural gas maturing from January 2000 to December 2008,
representing a notional quantity amounting to 128 Bcf. Also at December 31,
1999, there were five future equivalent contracts to purchase electric power
maturing from January 2000 to May 2000 representing a notional quantity
amounting to 85 Gigawatts hours. Unrealized gains or losses deferred on the
consolidated balance sheets, at December 31, 1999, with respect to these open
contracts were immaterial. During the year ended December 31, 1999, the gains or
losses realized on contracts settled were immaterial. Based on a 95% confidence
interval and a one-day time horizon, the value-at-risk for Columbia's energy
marketing operations was insignificant for both 1999 and 1998. At December 31,
1998, there were 27 open contracts to purchase natural gas maturing from January
1999 to December 2008 representing a notional quantity amounting to 115 Bcf.
Unrealized gains or losses deferred on the consolidated balance sheets, at
December 31, 1998, with respect to these contracts were immaterial. During the
year ended December 31, 1998, the gains or losses realized on contracts settled
were immaterial.
Columbia's exploration and production subsidiary hedged a portion of its gas
production that was subject to price volatility. At December 31, 1999, there
were 4,214 open contracts representing a notional quantity amounting to 6.6 Bcf
of commodity contracts and 30.4 Bcf of basis contracts for natural gas
production through February and October 2000, respectively at a combined average
price of $3.61 per Mcf. A total of $6.1 million of unrealized gains have been
deferred on the consolidated balance sheets, at December 31, 1999, with respect
to these open contracts. During the year ended December 31, 1999, $0.5 million
of losses were realized on contracts settled. At December 31, 1998, there were
6,896 open contracts representing a notional quantity amounting to 16.4 Bcf of
commodity contracts and 44.1 Bcf of basis contracts for natural gas production
through October 1999 at a combined average price of $2.79 per Mcf. A total of
$9.1 million of unrealized gains were deferred on the consolidated balance
sheets with respect to these open contracts. During the year ended December 31,
1998, $11 million of gains were realized on contracts settled.
Columbia's propane subsidiary hedges a portion of its inventory at the time of
purchase against the risk of decreasing prices. At December 31, 1999, there were
930 open contracts through March 2000 representing a notional quantity amounting
to 22.9 million gallons of petroleum products and 16.2 million gallons of
propane at an average price of $0.68 and $0.43 per gallon, respectively. The
unrealized gain deferred on the consolidated balance sheets, with respect to
these open contracts, is immaterial at December 31, 1999. During the year ended
December 31, 1999, $6.1 million of losses were realized on contracts settled. At
December 31, 1998, there were 620 open contracts through March 1999 representing
a notional quantity amounting to 26 million gallons of propane at an average
price of $0.24 per gallon. A total of $0.4 million of unrealized losses were
deferred on the consolidated balance sheets with respect to these open
contracts. During the year ended December 31, 1998, $1 million of losses were
realized on contracts settled.
52
<PAGE> 53
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
7. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). This statement, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 requires an entity to
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign-currency-denominated forecasted transaction. The
accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and resulting designation. A company may implement SFAS
No. 133 as of the beginning of any fiscal quarter, however the statement cannot
be applied retroactively. Columbia plans on adopting the statement on January 1,
2001. Columbia does not anticipate that the adoption of this statement will have
a significant impact on the consolidated financial statements.
8. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, ($ in millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME TAXES
Current
Federal 109.9 108.4 86.8
State 3.2 1.8 7.5
- ------------------------------------------------------------------------------------------------------------------------------
Total Current 113.1 110.2 94.3
- ------------------------------------------------------------------------------------------------------------------------------
Deferred
Federal 68.4 53.3 50.0
State (21.8) (13.2) (19.6)
- ------------------------------------------------------------------------------------------------------------------------------
Total Deferred 46.6 40.1 30.4
- ------------------------------------------------------------------------------------------------------------------------------
Deferred Investment Credits (1.5) (1.5) (1.5)
- ------------------------------------------------------------------------------------------------------------------------------
Income Taxes Included in Continuing Operations 158.2 148.8 123.2
- ------------------------------------------------------------------------------------------------------------------------------
Income Taxes Related to Discontinued Operations (57.0) (17.0) (4.3)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME TAXES 101.2 131.8 118.9
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Total income taxes from continuing operations are different from the amount that
would be computed by applying the statutory Federal income tax rate to book
income before income tax. The major reasons for this difference are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, ($ in millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Book income before income taxes 513.2 449.1 403.5
Tax expense at statutory Federal income tax rate 179.6 35.0% 157.2 35.0% 141.2 35.0%
Increases (reductions) in taxes resulting from:
State income taxes, net of Federal income tax benefit (12.1) (2.4) (7.4) (1.6) (7.9) (2.0)
Estimated non-deductible expenses 1.3 0.3 1.6 0.4 0.7 0.2
Effect of change in deferred taxes previously provided (3.5) (0.7) 1.5 0.3 (1.9) (0.5)
Other (7.1) (1.4) (4.1) (1.0) (8.9) (2.2)
- ------------------------------------------------------------------------------------------------------------------------------
INCOME TAXES FROM CONTINUING OPERATIONS 158.2 30.8% 148.8 33.1% 123.2 30.5%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE> 54
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Deferred income taxes result from temporary differences between the financial
statement carrying amounts and the tax basis of existing assets and liabilities.
The principal components of Columbia's net deferred tax liability are as
follows:
<TABLE>
<CAPTION>
At December 31, ($ in millions) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities
Property basis differences 733.0 688.1
Gas purchase costs 67.7 55.0
Investment in Partnerships 5.4 27.8
Other 28.1 33.1
- ---------------------------------------------------------------------------------------------------------------------
Gross Deferred Tax Liabilities 834.2 804.0
- ---------------------------------------------------------------------------------------------------------------------
Deferred tax assets
Estimated supplier obligations (2.7) (28.2)
Estimated rate refunds (12.7) (21.8)
Inventory (16.7) (22.1)
Unbilled utility revenue (20.1) (20.9)
Benefit plan accruals (15.7) (16.2)
Environmental liabilities (14.2) (10.5)
Tax loss carryforwards (43.7) (43.9)
Deferred revenue (20.8) (18.4)
Other (46.7) (43.3)
- ---------------------------------------------------------------------------------------------------------------------
Gross Deferred Tax Assets (193.3) (225.3)
- ---------------------------------------------------------------------------------------------------------------------
Deferred Tax Asset Valuation Allowance 11.4 31.3
- ---------------------------------------------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY* 652.3 610.0
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes net current deferred tax assets of $21.8 million and $45.3 million
reflected in Current Assets for 1999 and 1998, respectively.
As reflected by the valuation allowance in the table above, Columbia had
potential tax benefits of $11.4 million and $31.3 million at December 31, 1999
and 1998, respectively, which were not recognized in the statements of
consolidated income when generated. These benefits result primarily from state
income tax operating loss carryforwards which are available to reduce future tax
liabilities. The net decrease of $19.9 million in the valuation allowance
reflects management's belief that it is now likely that the majority of the
state net operating loss carryforwards will be utilized before they expire. The
expiration of the tax loss carryforward benefits, net of federal taxes, in 2000
is $1.4 million, in 2001 is $0.5 million, in 2002 is $0.2 million, in 2003 is
$0.3 million, in 2004 is $0.3 million and beyond is $41.0 million.
9. PENSION AND OTHER POSTRETIREMENT BENEFITS
Columbia has a noncontributory, qualified defined benefit pension plan covering
essentially all employees. Benefits are based primarily on years of credited
service and employees' highest three-year average annual compensation in the
final five years of service. Effective January 1, 2000, Columbia adopted a cash
balance feature to the pension plan that provides benefits based on a
percentage, which may vary with age and years of service, of current eligible
compensation and current interest credits. Columbia's funding policy complies
with Federal law and tax regulations. In addition, Columbia has a nonqualified
pension plan that provides benefits to some employees in excess of the qualified
plan's Federal tax limits. Columbia also provides medical coverage and life
insurance to retirees. Essentially all active employees are eligible for these
benefits upon retirement after completing ten consecutive years of service after
age 45. Normally, spouses and dependents of retirees are also eligible for
medical benefits. Columbia is reflecting the information presented below as of
September 30, rather than December 31. The effect of utilizing September 30,
rather than December 31, is not significant.
On September 30, 1999, Columbia Transmission announced the introduction of a
voluntary incentive retirement plan. Approximately 600 Columbia Transmission
employees were eligible for the program, which provides a retirement incentive
for active employees who are age fifty and above with at least five years of
service as of March 1, 2000. During the acceptance period that began on January
1, 2000 and closed on January 31, 2000, 486 employees elected early retirement.
The majority of the retirements are scheduled to occur in the first quarter of
2000, at which time the cost of the program will be recorded. In February 2000,
the five distribution subsidiaries and Columbia Energy Group Service Corporation
announced the introduction of a VIRP. Approximately 880 employees are eligible
for the program, which provides a retirement incentive for certain active
employees who are age fifty and above with at least five years of service as of
June 1, 2000. The acceptance period will end on April 30, 2000. The majority of
the retirements are scheduled to occur on June 1, 2000, at which time the cost
of the program will be recorded. Retirement costs for these employees are funded
through the pension plan and will not have a significant impact on Columbia's
consolidated net income.
54
<PAGE> 55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
The following tables provide a reconciliation of the plans' funded status and
amounts reflected in Columbia's consolidated balance sheets at December 31:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------ ------------------------
($ in millions) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year 946.8 888.9 198.9 309.8
Service cost 30.6 31.3 12.6 13.0
Interest cost 62.9 64.7 14.0 23.4
Plan participants' contributions -- -- 2.4 2.8
Plan amendments 3.9 -- 4.5 (2.2)
Actuarial (gain) loss (59.8) 56.0 (12.2) 6.1
Settlements -- -- (24.5) (130.3)
Actual expense paid (4.7) (5.2) -- --
Benefits paid (95.9) (88.9) (13.5) (23.7)
- ---------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 883.8 946.8 182.2 198.9
- ---------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 1,091.5 1,164.6 117.0 242.9
Actual return on plan assets 210.0 20.8 26.0 11.2
Columbia contributions -- -- 15.5 32.4
Plan participants' contributions -- -- 2.4 2.8
Settlements -- -- (31.6) (146.9)
Actual expense paid (4.7) (5.2) -- (1.7)
Benefits paid (95.7) (88.7) (13.5) (23.7)
- ---------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 1,201.1 1,091.5 115.8 117.0
- ---------------------------------------------------------------------------------------------------------------------------
Funded status of plan at end of year 317.3 144.7 (66.4) (81.9)
Unrecognized actuarial net gain (403.4) (237.8) (54.1) (41.5)
Unrecognized prior service cost 45.2 45.1 2.6 (2.2)
Unrecognized transition obligation 3.5 4.6 -- --
Fourth quarter contributions -- -- 3.3 4.5
- ---------------------------------------------------------------------------------------------------------------------------
ACCRUED BENEFIT COST (37.4) (43.4) (114.6) (121.1)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------- ------------------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
SEPTEMBER 30,
Discount rate assumption 7.75% 6.75% 7.75% 6.75%
Compensation growth rate assumption 4.50% 4.40% 4.50% 4.40%
Medical cost trend assumption -- -- 5.50% 5.50%
Assets earnings rate assumption 9.00% 9.00% 9.00%* 9.00%*
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* One of the several established medical trusts is subject to taxation which
results in an after-tax asset earnings rate that is less than 9.00%
55
<PAGE> 56
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
The following table provides the components of the plans expense for each of the
three years:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------------------- ----------------------------------
($ in millions) 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET PERIODIC COST
Service cost 30.6 31.3 28.7 12.6 13.0 11.2
Interest cost 62.9 64.7 67.6 14.0 23.5 23.1
Expected return on assets (94.1) (99.7) (88.2) (9.4) (18.3) (13.1)
Amortization of transition obligation 1.2 1.2 1.2 -- -- --
Recognized gain (10.2) (17.5) (11.3) (2.1) (10.3) (9.6)
Prior service cost amortization 3.7 3.7 3.7 (0.4) -- --
Settlement gain -- -- -- (6.1) (46.6) --
- ---------------------------------------------------------------------------------------------------------------------------------
NET PERIODIC BENEFITS COST (BENEFIT) (5.9) (16.3) 1.7 8.6 (38.7) 11.6
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1% point 1% point
increase decrease
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on service and interest components of net periodic cost $ 2.6 $ (2.4)
Effect on accumulated postretirement benefit obligation $ 15.0 $ (13.8)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1999 and 1998, trusts established by Columbia purchased insurance
policies that provide both medical and life insurance with respect to
liabilities to a selected class of current retirees. As a result, pre-tax gains
in the amount of $6.1 million and $46.6 million were recorded in 1999 and 1998,
respectively. The 1999 gain is reflected in the consolidated financial
statements as a $4 million reduction to benefits expense, and a $2.1 million
liability of certain rate-regulated companies. The 1998 gain is reflected in the
consolidated financial statements as a $25.4 million reduction to benefits
expense, and a $21.2 million liability of certain rate-regulated companies.
10. LONG-TERM INCENTIVE PLAN
Columbia has two Long-Term Incentive Plans. Columbia's 1996 Long-Term Incentive
Plan (1996 LTIP) which is effective for ten years, beginning February 21, 1996,
provides for the granting of nonqualified stock options and incentive stock
options, contingent stock awards, stock appreciation rights and restricted stock
awards to officers and key employees. The 1996 LTIP also provides for the
granting of nonqualified stock options to outside directors. A total of
8,585,000 shares of Columbia's authorized common stock is available under the
1996 LTIP's provisions.
Columbia also provides an incentive compensation plan for outside directors
under which they may receive benefits in lieu of a retirement plan and defer
current compensation in the form of phantom stock units, which equates the
amounts granted to the directors with the performance of Columbia's stock.
Columbia's 1985 Long-Term Incentive Plan (1985 LTIP), in effect from 1985
through 1995, provided for the granting of nonqualified stock options, stock
appreciation rights and contingent stock awards as determined by the
Compensation Committee of the Board of Directors. That committee also had the
right to modify any outstanding award. A total of 1,500,000 shares of Columbia's
authorized common stock was available under the 1985 LTIP's provisions.
Stock appreciation rights, which were granted in connection with certain
nonqualified stock options, entitle the holders to receive stock, cash or a
combination thereof equal to the excess market value over the grant price. Stock
options and related stock appreciation rights granted under the 1985 LTIP
generally have a maximum term of ten years and vest over two to four years.
56
<PAGE> 57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Transactions for the three years ended December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Options
-----------------------------------
Without Stock With Stock Weighted Average
Appreciation Appreciation Exercise Price
Rights Rights Per Share
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1996 405,675 75,930 $42.88
Granted 1,133,350 -- $63.40
Exercised (183,138) (48,790) $44.31
Forfeited (43,462) (3,240) $62.01
- -------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 1,312,425 23,900 $59.37
Granted 853,300 -- $76.22
Exercised (92,821) -- $53.47
Forfeited (9,000) -- $65.48
Adjustment for three-for-two stock split 1,032,700 11,950 $44.32*
Granted 20,800 -- $54.14
Exercised (114,579) (26,190) $36.76
Forfeited (22,950) -- $50.77
- -------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1998 2,979,875 9,660 $44.79
Granted 1,585,200 -- $49.76
Exercised (268,280) (4,860) $41.81
Forfeited (121,795) -- $48.52
- -------------------------------------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1999 4,175,000 4,800 $46.76
- -------------------------------------------------------------------------------------------------------------
EXERCISABLE AT DECEMBER 31, 1999 1,884,734 4,800 $42.71
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* Reflects repricing of outstanding stock options for the effect of the
three-for-two common stock split.
Regarding the stock options granted in 1999, 1998 and 1997, such options vest
ratably over three years.
The following table summaries information on stock options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Remaining Average
Range of Exercise Number Exercise Price Contractual Life Number Exercise Price
Prices Per Share Outstanding Per Share in Years Exercisable Per Share
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$19.33-$20.70 36,000 $19.62 5.43 36,000 $19.62
$31.12-$42.4583 1,430,275 $40.89 6.94 1,430,275 $40.89
$47.3958-$59.938 2,713,525 $50.21 8.74 423,259 $50.84
- ------------------------------------------------------------------------------------------------------------------------
$19.33-$59.938 4,179,800 $46.76 8.09 1,889,534 $42.71
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
There were no contingent stock awards granted in 1999, 1998 or 1997. Restricted
stock awards totaling 44,677 shares were granted to one key executive in 1996 of
which 8,395 shares vested during 1999, 1998 and 1997, respectively.
During 1999, 1998, and 1997, $4.5 million, $2.4 million, and $3.2 million were
expensed for the long-term incentive plans, respectively.
57
<PAGE> 58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Had compensation cost been determined consistent with the provisions of the SFAS
No. 123 fair value method (See Note 1), Columbia's net income and earnings per
share would have been the pro forma amounts below:
<TABLE>
<CAPTION>
Year Ended December 31 ($ in millions, except per share data) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income
As reported 249.2 269.2 273.3
Pro forma 232.4 258.4 266.8
Earnings per share
Basic - as reported 3.03 3.23 3.29
- pro forma 2.83 3.10 3.21
Diluted - as reported 3.01 3.21 3.27
- pro forma 2.81 3.09 3.19
Weighted-average fair value of options granted during the year 17.53 17.79 24.85
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with a dividend yield of zero percentage and
the following assumptions used for grants in 1999, 1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected Life 7 YRS. 7 yrs. 7 yrs.
Interest Rate 5.19%-6.27% 4.90%-5.77% 5.86%-6.89%
Volatility 18.18%-21.67% 14.97%-17.40% 18.41%-19.29%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
11. LONG-TERM DEBT
The long-term debt (exclusive of current maturities) of Columbia and its
subsidiaries is as follows:
<TABLE>
<CAPTION>
At December 31, ($ in millions) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Columbia Energy Group Debentures
6.39% Series A due November 28, 2000 -- 311.0
6.61% Series B due November 28, 2002 281.5 281.5
6.80% Series C due November 28, 2005 281.5 281.5
7.05% Series D due November 28, 2007 281.5 281.5
7.32% Series E due November 28, 2010 281.5 281.5
7.42% Series F due November 28, 2015 281.5 281.5
7.62% Series G due November 28, 2025 229.2 281.5
- -----------------------------------------------------------------------------------------------------------------------
Total Debentures 1,636.7 2,000.0
Subsidiary Debt:
Capitalized lease obligations 2.8 3.1
Other 0.2 --
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 1,639.7 2,003.1
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1999, Columbia repurchased $52.45 million of its 7.62% Series G
Debentures due November 28, 2025 at a price of approximately 99% of par value.
The net impact of the early extinguishment of such debt was immaterial.
During 1998, Columbia entered into interest rate swap agreements to modify the
interest characteristics of its outstanding long-term debt. At December 31,
1999, Columbia has outstanding four interest rate swap agreements effective
through November 28, 2002, on $200 million notional amounts of its 6.61% Series
B Debentures due November 28, 2002. In addition, Columbia has outstanding an
interest rate swap agreement effective through November 28, 2005, on a $100
million notional amount of its 6.80% Series C Debentures due November 28, 2005.
Under the terms of the agreements, Columbia pays interest based on a floating
rate index and receives interest based on a fixed rate. The effect of these
agreements is to modify the interest rate characterization of a portion of
Columbia's long-term debt from fixed to variable. The effect of these interest
rate swaps on interest expense in 1999 and 1998 was immaterial.
58
<PAGE> 59
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
The aggregate maturities of long-term debt and capitalized lease obligations
during the next five years are as follows:
<TABLE>
<CAPTION>
($ in millions)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
2000 311.3
2001 0.4
2002 281.7
2003 0.2
2004 0.3
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
12. SHORT-TERM DEBT AND CREDIT FACILITIES
Columbia has two unsecured bank revolving credit facilities available that total
$1.35 billion (Credit Facilities). The Credit Facilities consist of a $900
million five-year revolving credit facility and a $450 million 364-day revolving
credit facility with a one-year term loan option. The five-year facility
provides for the issuance of up to $300 million of letters of credit. Interest
rates on borrowings under the Credit Facilities are based upon the London
Interbank Offered Rate, Certificate of Deposit rate or Citibank's publicly
announced "base rate." Facility fees and borrowing margins are based on
Columbia's public debt ratings. At Columbia's current rating, the facility fee
charged on the $900 million credit facility is 0.09% and on the $450 million
credit facility is 0.06%. The Credit Facilities contain certain covenants that
must be met to borrow funds, including restrictions on the incurrence of liens
and a maximum leverage ratio. Compensating balances are not required.
At December 31, 1999, Columbia had no borrowings outstanding under the Credit
Facilities. The maximum indebtedness outstanding during the year occurred on May
11, 1999, in the amount of $32.6 million at an average interest rate of 5.69%.
At December 31, 1998, Columbia had no borrowings outstanding under the Credit
Facilities.
On October 28, 1999, Columbia issued a note payable outside of the Credit
Facilities in the amount of $125 million at an interest rate of 6.70%. The note
matured on January 28, 2000.
As of December 31, 1999, Columbia had $54.7 million of letters of credit
outstanding under the Credit Facilities. Fees for letters of credit issued are
calculated at rates that are based on Columbia's public debt rating plus a
commission of 0.125% to the issuing bank. In addition, Columbia had
approximately $4 million of letters of credit outstanding to guarantee certain
transactions of an affiliate. Fees for the letter of credit issued were at a
rate of 0.625%. At December 31, 1998, Columbia had $44.4 million of letters of
credit outstanding under the Credit Facilities.
Columbia has an $850 million commercial paper program authorized and rated by
the rating agencies. The commercial paper program is supported by the Credit
Facilities. At December 31, 1999, Columbia had commercial paper outstanding of
$340.5 million (net of discount) at a weighted-average interest rate of 6.34%.
The maximum commercial paper indebtedness outstanding during the year occurred
on October 25, 1999, in the amount $642.2 million at an average interest rate of
5.72%. At December 31, 1998, Columbia had commercial paper outstanding of $144.8
million (net of discount) at a weighted-average interest rate of 6.12%.
Columbia was the guarantor on certain contracts of its marketing affiliate that
were sold to Enron effective December 30, 1999. These contracts had not been
legally assigned to Enron as of the balance sheet date, therefore the guarantees
are still outstanding. Enron has provided Columbia guarantees and
indemnification should Columbia be required to perform under the guarantees. At
December 31, 1999, Columbia had a $75 million letter of credit outstanding and
has issued other guarantees and indemnities in the amount of $646.6 million. As
of February 18, 2000, this amount has been reduced to $585.3 million.
At December 31, 1999, approximately $12.5 million of investments were pledged as
collateral on outstanding letters of credit related to Columbia's wholly-owned
insurance company.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires all entities to disclose the fair
value of financial instruments, both assets and liabilities, recognized and not
recognized in the consolidated balance sheets, for which it is practicable to
estimate a fair value. For purposes of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced or
liquidation sale. Fair value may be based on
59
<PAGE> 60
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
quoted market prices for the same or similar financial instruments or on
valuation techniques, such as the present value of estimated future cash flows
using a discount rate commensurate with the risks involved.
As cash and temporary cash investments, current receivables, current payables,
and certain other short-term financial instruments are all short-term in nature,
their carrying amount approximates fair value. Columbia utilizes standby letters
of credit (See Note 12) and does not believe it is practicable to estimate their
fair value.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
LONG-TERM INVESTMENTS
Long-term investments include loans receivable ($7.7 million for 1999 and $3.3
million for 1998) whose estimated fair values are based on the present value of
estimated future cash flows using an estimated rate for similar loans. Long-term
investments also include pledged assets ($14.4 million for 1999 and $11.8
million for 1998), whose estimated fair value is based on the trading value
provided by a financial institution. The financial instruments included in
long-term investments are primarily reflected in Investments and Other Assets on
the consolidated balance sheets. Long-term investments for which it is
practicable to estimate fair value had carrying amounts of $22.1 million and
$15.1 million, and estimated fair values of $21.7 million and $14.7 million at
December 31, 1999 and 1998, respectively. There are no long-term investments for
which it is not practicable to estimate fair value at December 31, 1999 and
1998.
LONG-TERM DEBT
The estimated fair value of Columbia's debentures, including current maturities
and accrued interest, is based on estimates provided by brokers. Long-term debt
of $1,960.1 million and $2,012.9 million at December 31, 1999 and 1998, have
estimated fair values of $1,858.4 million and $2,088.1 million, respectively.
The fair value of Columbia's interest rate swaps agreements are based on the
amounts estimated to terminate or settle the agreements. At December 31, 1999
and December 31, 1998, Columbia had interest rate swaps agreements with notional
amounts of $300 million. Columbia would have paid $18 million to terminate the
agreements at December 31, 1999. The amount that Columbia would have paid to
terminate the agreements at December 31, 1998 was immaterial.
ACCOUNTS RECEIVABLE SALES PROGRAM
In October 1999, Columbia of Ohio entered into an agreement to sell, without
recourse, substantially all of its trade accounts receivable to Columbia
Accounts Receivable Corporation (CARC), a wholly-owned subsidiary of Columbia.
At the same time, CARC entered into an agreement, with a third party, Canadian
Imperial Bank of Commerce (CIBC), to sell a percentage ownership interest in a
defined pool of accounts receivable (Sales Program). Under this Sales Program,
CARC can transfer an undivided interest in a designated pool of its accounts
receivable on an ongoing basis up to a maximum of $125 million until April 30,
2000, at which time the maximum decreases to $100 million. The amount available
at any measurement date varies based upon the level of eligible receivables.
Under this agreement, approximately $81 million of receivables were sold as of
December 31, 1999.
Under a separate agreement, in conjunction with the Sales Program, Columbia of
Ohio acts as agent for CIBC, the ultimate purchaser of the receivables, by
performing record keeping and cash collection functions for the accounts
receivable sold by CARC. Columbia of Ohio receives a fee, which provides
adequate compensation, for such services.
14. OTHER COMMITMENTS AND CONTINGENCIES
A. BANKRUPTCY MATTERS. On November 28, 1995, Columbia and its wholly-owned
subsidiary, Columbia Transmission emerged from Chapter 11 protection of the
United States 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 from July 31,
1991, until emergence. Certain residual unresolved bankruptcy-related matters
are still within the jurisdiction of the Bankruptcy Court.
During the first quarter of 1999, Columbia Transmission resolved its last
remaining producer claim in its bankruptcy proceeding. The improvement to
Columbia's first quarter 1999 consolidated net income was $20.6 million. The
settlement was approved by the Bankruptcy Court on April 12, 1999 and on April
26, 1999, Columbia Transmission distributed the producer holdback amounts in
accordance with its Plan of Reorganization and a producer settlement.
60
<PAGE> 61
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
There remain four non-producer claims to be resolved, all of which are being
litigated outside of the Bankruptcy Court. Columbia believes adequate reserves
have been established for resolution of the remaining non-producer claims.
B. CAPITAL EXPENDITURES. Capital expenditures for 2000 are currently estimated
at $874.7 million. Of this amount, $148.4 million is for transmission and
storage operations, $135.6 million for distribution operations, $165.7 million
for exploration and production operations, $43.3 million for energy marketing
operations, $376.5 million for power generation, LNG and other operations and
$5.2 million for corporate purposes.
C. OTHER LEGAL PROCEEDINGS. In the normal course of its business, Columbia and
its subsidiaries have been named as defendants in various legal proceedings. In
the opinion of management, the ultimate disposition of these currently asserted
claims will not have a material adverse impact on Columbia's consolidated
financial position or results of operations.
D. ASSETS UNDER LIEN. Substantially all of Columbia Transmission's properties
have been pledged to Columbia as security for debt owed by Columbia Transmission
to Columbia.
Columbia Electric holds indirectly through various subsidiaries, both general
and limited partnership interests in the following electric power generation
projects:
Vineland Cogeneration Limited Partnership (the "Partnership") owns and operates
a project-financed non-utility power generation facility in New Jersey. The
assets of the Partnership, including plant facilities and contract rights, have
been pledged as collateral to an indenture trustee for the benefit of certain
bondholders.
Gregory Power Partners owns a 550-megawatt equivalent electric power generation
plant that is currently under construction in Gregory, Texas. The assets and
contract rights have been pledged as collateral for the construction loan.
Columbia Electric's investment in these partnerships, as of December 31, 1999,
amounted to $13.2 million.
E. GUARANTEES AND INDEMNITIES. In connection with the purchase of National
Propane Partners, L.P. (National Propane) interests, Columbia has provided an
indemnity to reimburse the former Managing General Partner for income taxes that
would be due if certain actions by Columbia result in the recognition of certain
types of income or gain by the former Managing General Partner.
To secure certain partnership transactions, Columbia Electric has provided
financial support through letters of credit, indemnification agreements, and
guarantees. As of December 31, 1999, agreements for approximately $57 million
have been executed.
F. INTERNAL REVENUE SERVICE (IRS) AUDIT. The field audit of Columbia's 1995
federal income tax return has been finalized and discussions on all unagreed
issues have begun. The audit of tax years 1996 and 1997 began in February 1999.
Management believes adequate reserves have been established for issues related
to these returns.
G. OPERATING LEASES. Payments made in connection with operating leases are
primarily charged to operation and maintenance expense as incurred. Such amounts
were $61.5 million in 1999, $63.8 million in 1998 and $62.9 million in 1997.
Future minimum rental payments required under operating leases that have initial
or remaining noncancellable lease terms in excess of one year are:
<TABLE>
<CAPTION>
($ in millions)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
2000 34.7
2001 29.4
2002 27.2
2003 26.4
2004 24.1
After 162.7
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE> 62
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
H. PURCHASE COMMITMENTS. Columbia has service agreements that provide for
pipeline capacity, transportation and storage services. These agreements which
have expiration dates ranging from 2000 to 2017, provide for Columbia to pay
fixed monthly charges. The estimated aggregate amounts of such payments at
December 31, 1999, were:
<TABLE>
<CAPTION>
($ in millions)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
2000 58.0
2001 52.9
2002 47.8
2003 36.0
2004 32.7
After 185.2
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Costs incurred under these contracts are recovered under Columbia's regulatory
cost recovery mechanisms.
I. ENVIRONMENTAL MATTERS. Columbia's subsidiaries are subject to extensive
federal, state and local laws and regulations relating to environmental matters.
These laws and regulations, which are constantly changing, require expenditures
for corrective action at various operating facilities, waste disposal sites and
former gas manufacturing sites for conditions resulting from past practices that
have subsequently become subject to environmental regulation.
Columbia's transmission subsidiaries have implemented programs to continually
review compliance with existing environmental standards. In addition, the
transmission subsidiaries have reviewed past operational activities and
conducted remediation programs where necessary.
Columbia Transmission is currently conducting assessment, characterization and
remediation activities at specific sites under a 1995 Environmental Protection
Agency (EPA) Administrative Order by Consent (AOC). The program pursuant to the
AOC covers approximately 240 facilities, approximately 13,000 liquid removal
points, approximately 2,200 mercury measurement stations, and about 3,700
storage wells. As of December 31, 1999, field characterization has been
performed at many of these sites, and site characterization reports and
remediation plans which must be submitted to EPA for approval are in various
stages of development and completion. Significant remediation has taken place
only at mercury measurement stations and at a limited number of the 240
facilities.
Only those site investigation, characterization and remediation costs currently
known and determinable can be considered "probable and reasonably estimable"
under Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies" (SFAS No. 5). As costs become probable and reasonably estimable,
the associated reserves will be adjusted as appropriate. Columbia Transmission
is unable, at this time, to accurately estimate the time frame and potential
costs of the entire program. Management expects that as additional work is
performed and more facts become available, it will be able to develop a probable
and reasonable estimate for the entire program or a major portion thereof
consistent with U.S. Securities and Exchange Commission's Staff Accounting
Bulletin No. 92, SFAS No. 5, and American Institute of Certified Public
Accountants Statement of Position 96-1.
During 1999, actual expenditures of $16.8 million were charged to the liability
resulted in a remaining liability of $121.4 million. Columbia Transmission's
environmental cash expenditures are expected to be approximately $17 million in
2000 and to remain at this level for the foreseeable future. These expenditures
will be charged against the previously recorded liability. Consistent with
Statement of Financial Accounting Standards No. 71, a regulatory asset has been
recorded to the extent environmental expenditures are probable of recovery
through rates. 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 time period over which expenditures will be
made.
In addition, predecessor companies of Columbia Transmission may have been
involved in the operation of manufactured gas plants. When such plants were
abandoned, material used and created in the process was sometimes buried at the
site. As of the date of this report, Columbia Transmission is unable to
determine if it will become liable for any characterization or remediation costs
at such sites.
Distribution's primary environmental issues relate to 18 former manufactured gas
plant sites. Investigations or remedial activities are currently underway at six
sites and remedial construction has been completed at two sites. Additional site
investigations may be required at some of the remaining sites. To the extent
Distribution's site investigations have been conducted, remediation plans
developed and any responsibility for remediation established,
62
<PAGE> 63
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
the appropriate estimated liabilities have been recorded. Regulatory assets have
also been recorded for a majority of these costs as rate recovery has been
authorized or is anticipated.
Columbia Propane's primary environmental issues relate to former manufactured
gas plant sites acquired in the acquisition of National Propane for which
accruals have been made. Investigations are currently underway at one site. One
other known former manufactured gas plant site is inactive. It is possible that
former manufactured gas plant sites exist at two other National Propane
properties. Management does not believe that Columbia Propane's environmental
expenditures will have a material adverse effect on Columbia's consolidated
financial results.
The eventual total cost of full future environmental compliance for Columbia is
difficult to estimate due to, among other things: (1) the possibility of as yet
unknown contamination, (2) the possible effect of future legislation and new
environmental agency rules, (3) the possibility of future litigation, (4) the
possibility of future designations as a potential responsible party by the EPA
and the difficulty of determining liability, if any, in proportion to other
responsible parties, (5) possible insurance and rate recoveries, and (6) the
effect of possible technological changes relating to future remediation.
However, reserves have been established based on information currently
available, which resulted in a total recorded net liability of approximately
$124.7 million for Columbia at December 31, 1999. As new issues are identified,
additional liabilities will be recorded.
It is management's continued intent to address environmental issues in
cooperation with regulatory authorities in such a manner as to achieve mutually
acceptable compliance plans. However, there can be no assurance that fines and
penalties will not be incurred. Management expects most environmental assessment
and remediation costs to be recoverable through rates.
15. INTEREST INCOME AND OTHER, NET
<TABLE>
<CAPTION>
Year Ended December 3l, ($ in millions) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income 13.5 12.5 19.9
Miscellaneous 15.7 (0.2) 19.5
- -----------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME AND OTHER, NET 29.2 12.3 39.4
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
16. INTEREST EXPENSE AND RELATED CHARGES
<TABLE>
<CAPTION>
Year Ended December 31, ($ in millions) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest on debentures 138.0 140.4 140.4
Interest on short-term debt 18.4 10.8 8.0
Discount on prepayment transactions 2.3 - -
Interest on rate refunds 3.1 2.3 3.4
Interest on prior years' taxes 6.2 (6.3) 9.1
Allowance for borrowed funds used
and interest during construction (3.6) (2.7) (3.5)
- -----------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE AND RELATED CHARGES 164.4 144.5 157.4
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
17. BUSINESS SEGMENT INFORMATION
Columbia is a registered holding company under the Public Utility Holding
Company Act of 1935, as amended, and derives substantially all of its revenues
and earnings from the operating results of its 19 direct subsidiaries. During
1999, in accordance with generally accepted accounting principles, Columbia
revised the presentation of its business segments and accordingly, all prior
periods have been restated. Columbia's operations are divided into five primary
business segments. The transmission and storage segment offers transportation
and storage services for local distribution companies, marketers and industrial
and commercial customers located in northeastern, mid-Atlantic, midwestern and
southern states and the District of Columbia. The distribution segment provides
natural gas service and transportation for residential, commercial and
industrial customers in Ohio, Pennsylvania, Virginia, Kentucky and Maryland. The
exploration and production segment explores for, develops, produces and markets
gas and oil in the United States and in Canada. The energy marketing segment
provides gas and electric power to smaller volume retail customers and sells
propane and petroleum to wholesale and retail customers in 35 states and the
District of Columbia. The power generation, LNG and other segment participates
in natural gas fueled electric cogeneration projects, peaking and storage
services as well as a telecommunications business.
The following tables provide information concerning Columbia's major business
segments. Revenues include intersegment sales to affiliated subsidiaries, which
are eliminated when consolidated. Affiliated sales are recognized
63
<PAGE> 64
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
on the basis of prevailing market or regulated prices. Operating income is
derived from revenues and expenses directly associated with each segment.
<TABLE>
<CAPTION>
($ in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Transmission and Storage
Unaffiliated 571.3 546.1 519.9
Intersegment 265.1 292.6 318.7
- ---------------------------------------------------------------------------------------------------------------------
TOTAL 836.4 838.7 838.6
- ---------------------------------------------------------------------------------------------------------------------
Distribution
Unaffiliated 2,022.1 1,858.8 2,293.9
Intersegment 0.7 10.7 2.4
- ---------------------------------------------------------------------------------------------------------------------
TOTAL 2,022.8 1,869.5 2,296.3
- ---------------------------------------------------------------------------------------------------------------------
Exploration and Production
Unaffiliated 143.4 125.4 112.3
Intersegment 1.4 2.1 1.0
- ---------------------------------------------------------------------------------------------------------------------
TOTAL 144.8 127.5 113.3
- ---------------------------------------------------------------------------------------------------------------------
Energy Marketing
Unaffiliated 396.0 95.6 78.7
Intersegment 0.7 0.6 1.5
- ---------------------------------------------------------------------------------------------------------------------
TOTAL 396.7 96.2 80.2
- ---------------------------------------------------------------------------------------------------------------------
Power Generation, LNG and Other
Unaffiliated 89.0 19.2 22.0
Intersegment (0.3) (0.1) 0.2
- ---------------------------------------------------------------------------------------------------------------------
TOTAL 88.7 19.1 22.2
- ---------------------------------------------------------------------------------------------------------------------
Adjustments and eliminations
Intersegment (267.6) (305.9) (323.8)
- ---------------------------------------------------------------------------------------------------------------------
CONSOLIDATED 3,221.8 2,645.1 3,026.8
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE> 65
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued
<TABLE>
<CAPTION>
($ in millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING INCOME (LOSS)
Transmission and Storage 350.1 326.1 258.3
Distribution 254.6 225.8 224.2
Exploration and Production 44.2 37.2 30.9
Energy Marketing (54.5) (13.6) 6.0
Power Generation, LNG
and Other 71.5 6.6 9.2
Corporate (17.5) (0.8) (7.1)
- ---------------------------------------------------------------------------------------------------------------------
CONSOLIDATED 648.4 581.3 521.5
- ---------------------------------------------------------------------------------------------------------------------
DEPRECIATION & DEPLETION
Transmission and Storage 106.2 101.8 104.3
Distribution 54.5 82.2 78.2
Exploration and Production 36.9 36.5 27.6
Energy Marketing 26.6 5.8 3.6
Power Generation, LNG
and Other 0.1 0.1 0.1
Corporate 4.2 5.0 5.5
Adjustments and eliminations 0.5 0.5 0.6
- ---------------------------------------------------------------------------------------------------------------------
CONSOLIDATED 229.0 231.9 219.9
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Transmission and Storage 2,814.1 2,837.6 2,775.4
Distribution 2,831.3 2,665.1 2,753.2
Exploration and Production 774.3 590.9 564.6
Energy Marketing 576.0 354.0 175.9
Power Generation, LNG
and Other 240.9 103.3 85.6
Corporate 4,848.8 4,298.0 4,221.4
Adjustments and eliminations (4,989.5) (4,317.5) (4,316.7)
- ---------------------------------------------------------------------------------------------------------------------
CONSOLIDATED 7,095.9 6,531.4 6,259.4
- ---------------------------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES
Transmission and Storage 183.4 210.0 251.4
Distribution 145.5 151.9 159.5
Exploration and Production 166.5 75.7 135.6
Energy Marketing 315.5 27.9 10.4
Power Generation, LNG
and Other 51.0 2.7 1.0
Corporate 5.4 11.0 5.3
- ---------------------------------------------------------------------------------------------------------------------
CONSOLIDATED 867.3 479.2 563.2
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
65
<PAGE> 66
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data does not always reveal the trend of Columbia's business
operations due to nonrecurring items and seasonal weather patterns which affect
earnings and related components of net revenues and operating income.
<TABLE>
<CAPTION>
First Second Third Fourth
($ in millions, except per share data) Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Net Revenues 650.3 384.2 351.0 609.3
Operating Income 283.7 71.0 39.9 253.8
Income from Continuing Operations 160.4 32.6 6.7 155.3
(Loss) from Discontinued Operations - net (10.0) (6.5) (29.4) (59.9)
of taxes
Net Income (Loss) 150.4(a) 26.1(b) (22.7) 95.4(c)
Basic Earnings (Loss) Per Share
Continuing Operations 1.93 0.40 0.08 1.91
Discontinued Operations (0.12) (0.08) (0.36) (0.74)
--------- ------- ------- -------
Basic Earnings (Loss) per Share 1.81 0.32 (0.28) 1.17
========= ======= ======= =======
Diluted Earnings (Loss) Per Share
Continuing Operations 1.92 0.40 0.08 1.89
Discontinued Operations (0.12) (0.08) (0.36) (0.73)
--------- ------- ------- -------
Diluted Earnings (Loss) Per Share 1.80 0.32 (0.28) 1.16
========= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
1998
Net Revenues 613.2 375.6 337.7 535.4
Operating Income 257.3 77.2 56.1 190.7
Income from Continuing Operations 150.4 27.8 13.8 108.3
(Loss) from Discontinued Operations - net (2.9) (5.0) (2.6) (20.6)
of taxes
Net Income 147.5(d) 22.8 11.2 87.7
Basic Earnings (Loss) Per Share
Continuing Operations 1.80 0.33 0.16 1.30
Discontinued Operations (0.03) (0.06) (0.03) (0.25)
--------- ------- ------- -------
Basic Earnings Per Share 1.77 0.27 0.13 1.05
========= ======= ======= =======
Diluted Earnings (Loss) Per Share
Continuing Operations 1.80 0.33 0.16 1.29
Discontinued Operations (0.03) (0.06) (0.03) (0.24)
--------- ------- ------- -------
Diluted Earnings Per Share 1.77 0.27 0.13 1.05
========= ======= ======= =======
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes $20.6 million gain from the producer contract settlement stemming
from Columbia's bankruptcy proceedings concluded in 1995.
(b) Includes $6.9 million benefit from the reduction in tax expense for state
net operating loss carryforwards.
(c) Includes $49 million gain recorded in connection with the termination of a
cogeneration power purchase contract and $7.8 million gain on the sale of
Columbia's interest in the Trailblazer pipeline system.
(d) Includes $15 million gain on settlement of postretirement benefit costs and
a $10 million benefit from state tax planning initiatives.
19. EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED)
During 1999, Columbia Resources' acquisition strategy involved six transactions
totaling approximately $61 million, added reserves of 65 Bcfe and expanded the
gathering infrastructure by more than 450 miles of pipeline. Also in 1999,
Columbia Resources discovered reserves in West Virginia in the Trenton-Black
river formation at depths exceeding 10,000 feet.
On August 7, 1997, Columbia Resources acquired Alamco, Inc. (Alamco), a gas and
oil production company operating in the Appalachian Basin. The information
contained in the following tables includes amounts attributable to the
operations and reserves of Alamco from August 7, 1997.
Reserve information contained in the following tables for the U.S. and Canadian
properties is management's estimate, which was reviewed by the independent
consulting firms of Ryder Scott Company Petroleum Engineers for the U.S.
reserves and Sproule Associates Limited for the Canadian reserves. Reserves are
reported as net working interest. Gross revenues are reported after deduction of
royalty interest payments.
66
<PAGE> 67
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued
<TABLE>
<CAPTION>
RESERVE QUANTITY INFORMATION United States Canada
- ---------------------------------------------------------------------------------------------------------------------
Oil & Other Oil & Other
Gas Liquids Gas Liquids
Proved Reserves (Bcf) (000 Bbls) (Bcf) (000 Bbls)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reserves as of December 31, 1996 644.5 774 - -
Revisions of previous estimate 69.5 (139) - -
Extensions, discoveries
and other additions 33.2 59 - -
Production (34.7) (210) - -
Purchase of reserves-in-place(a) 88.0 1,216 - -
- ---------------------------------------------------------------------------------------------------------------------
Reserves as of December 31, 1997 800.5 1,700 - -
Revisions of previous estimate (23.1) 178 - -
Extensions, discoveries
and other additions 60.7 94 - -
Production (39.0) (201) (0.1) (13)
Purchase of reserves-in-place - - 1.1 77
Sale of reserves-in-place (9.6) - - -
- ---------------------------------------------------------------------------------------------------------------------
Reserves as of December 31, 1998 789.5 1,771 1.0 64
Revisions of previous estimate 34.4 99 - 9
Extensions, discoveries
and other additions 116.8 38 0.3 40
Production (45.6) (175) (0.2) (10)
Purchase of reserves-in-place 58.2 539 - -
Sale of reserves-in-place (2.8) - - -
- ---------------------------------------------------------------------------------------------------------------------
RESERVES AS OF DECEMBER 31, 1999 950.5 2,272 1.1 103
- ---------------------------------------------------------------------------------------------------------------------
Proved developed reserves as of
December 31,
1997 653.2 1,330 - -
1998 586.2 1,436 1.0 64
1999 697.2 1,953 1.1 103
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes the purchase of Alamco.
<TABLE>
<CAPTION>
CAPITALIZED COSTS United States Canada Total
- ---------------------------------------------------------------------------------------------------------------------
($ in millions) 1999 1998 1997 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CAPITALIZED COSTS AT YEAR END
Proved properties 762.5 673.2 628.4 1.7 1.4 - 764.2 674.6 628.4
Unproved properties (a) 61.0 40.8 31.8 10.9 3.7 - 71.9 44.5 31.8
- ---------------------------------------------------------------------------------------------------------------------
Total capitalized costs 823.5 714.0 660.2 12.6 5.1 - 836.1 719.1 660.2
Accumulated depletion (251.3) (225.2) (196.0) (0.3) (0.2) - (251.6) (225.4) (196.0)
- ---------------------------------------------------------------------------------------------------------------------
NET CAPITALIZED COSTS 572.2 488.8 464.2 12.3 4.9 - 584.5 493.7 464.2
- ---------------------------------------------------------------------------------------------------------------------
COSTS CAPITALIZED DURING YEAR (b)
Acquisition properties
Proved 1.2 - - - 0.7 - 1.2 0.7 -
Unproved 8.6 0.6 0.1 2.9 3.0 - 11.5 3.6 0.1
Exploration 6.7 2.3 1.0 1.3 - - 8.0 2.3 1.0
Development 99.4 62.1 132.4 2.9 1.4 - 102.3 63.5 132.4
- ---------------------------------------------------------------------------------------------------------------------
COSTS CAPITALIZED 115.9 65.0 133.5 7.1 5.1 - 123.0 70.1 133.5
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents expenditures associated with properties on which evaluations have
not been completed.
(b) Includes internal costs capitalized pursuant to the accounting policy
described in Note 1(F) of Notes to Consolidated Financial Statements of $3.5
million in 1999, $3.3 million in 1998 and $1.4 million in 1997.
67
<PAGE> 68
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
<TABLE>
<CAPTION>
OTHER EXPLORATION AND PRODUCTION DATA United States Canada
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average sales price per Mcf of gas ($)(a) 2.66 2.91 2.63 2.25 2.61 -
Average sales price per barrel
of oil and other liquids ($) 14.69 12.53 17.99 19.43 16.42 -
Production (lifting) cost per
dollar of gross revenue ($) 0.19 0.21 0.24 0.18 0.32 -
Depletion rate per dollar
of gross revenue ($) 0.26 0.29 0.28 0.24 0.27 -
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes the effect of hedging activities.
<TABLE>
<CAPTION>
HISTORICAL RESULTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------
United States Canada Total
($ in millions) 1999 1998 1997 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross revenues
Unaffiliated 122.4 53.7 27.4 0.5 0.6 - 122.9 54.3 27.4
Affiliated 1.4 62.3 69.0 - - - 1.4 62.3 69.0
Production costs 23.7 24.2 23.3 0.1 0.2 - 23.8 24.4 23.3
Depletion 32.8 33.5 26.6 0.1 0.2 - 32.9 33.7 26.6
Income tax expense 25.0 20.7 14.3 0.1 0.1 - 25.1 20.8 14.3
- ---------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS 42.3 37.6 32.2 0.2 0.1 - 42.5 37.7 32.2
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Results of operations for exploration and production activities exclude
administrative and general costs, corporate overhead and interest expense.
Income tax expense is expressed at statutory rates less Section 29 credits.
<TABLE>
<CAPTION>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------
United States Canada Total
($ in millions) 1999 1998 1997 1999 1998 1997 1999 1998 1997
- ----------------------------- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Future cash inflows 2,805.4 2,094.4 2,503.0 5.5 3.4 - 2,810.9 2,097.8 2,503.0
Future production costs (739.8) (585.5) (719.9) (2.1) (1.5) - (741.9) (587.0) (719.9)
Future development costs (258.3) (200.4) (182.7) (0.1) (0.1) - (258.4) (200.5) (182.7)
Future income tax expense (697.5) (487.8) (557.5) (0.9) (0.7) - (698.4) (488.5) (557.5)
- ----------------------------- ---------------------------------------------------------------------------------------
Future net cash flows 1,109.8 820.7 1,042.9 2.4 1.1 - 1,112.2 821.8 1,042.9
Less: 10% discount 600.6 440.1 582.2 0.9 0.3 - 601.5 440.4 582.2
- ----------------------------- ---------------------------------------------------------------------------------------
STANDARDIZED MEASURE OF
DISCOUNTED FUTURE
NET CASH FLOW 509.2 380.6 460.7 1.5 0.8 - 510.7 381.4 460.7
- ----------------------------- ---------------------------------------------------------------------------------------
</TABLE>
Future cash inflows are computed by applying year-end prices to estimated future
production of proved gas and oil reserves. Future expenditures (based on
year-end costs) represent those costs to be incurred in developing and producing
the reserves. Discounted future net cash flows are derived by applying a 10%
discount rate, as required by the Financial Accounting Standards Board, to the
future net cash flows. This data is not intended to reflect the actual economic
value of Columbia's gas and oil producing properties or the true present value
of estimated future cash flows since many arbitrary assumptions are used. The
data does provide a means of comparison among companies through the use of
standardized measurement techniques.
68
<PAGE> 69
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
A reconciliation of the components resulting in changes in the standardized
measure of discounted cash flows attributable to proved gas and oil reserves for
the three years ending December 31, follows:
<TABLE>
<CAPTION>
United States Canada Total
- --------------------------------------------------------------------------------------------------------------------------------
($ in millions) 1999 1998 1997 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of year 380.6 460.7 433.7 0.8 - - 381.4 460.7 433.7
Gas and oil sales,
net of production costs (100.1) (91.9) (73.1) (0.4) (0.4) - (100.5) (92.3) (73.1)
Net changes in prices
and production costs 74.7 (108.5) (107.8) 0.6 - - 75.3 (108.5) (107.8)
Change in future
development costs (35.8) (10.0) (16.9) - - - (35.8) (10.0) (16.9)
Extensions, discoveries
and other additions,
net of related costs 107.5 77.5 51.9 0.6 - - 108.1 77.5 51.9
Revisions of previous
estimates, net of
related costs 33.7 (18.0) 64.0 0.1 - - 33.8 (18.0) 64.0
Sales of reserves-in-place (2.9) (12.0) (4.1) - - - (2.9) (12.0) (4.1)
Purchases of reserves-in-
place 54.6 - 67.0 - 1.7 - 54.6 1.7 67.0
Accretion of discount 60.0 70.1 64.3 0.1 - - 60.1 70.1 64.3
Net change in income taxes (91.3) 21.1 (30.5) (0.2) (0.5) - (91.5) 20.6 (30.5)
Timing of production
and other changes 28.2 (8.4) 12.2 (0.1) - - 28.1 (8.4) 12.2
- ---------------------------------------------------------------------------------------------------------------------------------
END OF YEAR 509.2 380.6 460.7 1.5 0.8 - 510.7 381.4 460.7
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
69
<PAGE> 70
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
Schedule V
VALUATION AND QUALIFYING ACCOUNTS
Columbia Energy Group and Subsidiaries
Year Ended December 31,
($ in millions)
<TABLE>
<CAPTION>
Additions - Charged to
---------------------------------
Beginning Other Ending
Description Balance Income Accounts (a) Deductions (b) Balance
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Reserves deducted in the balance sheet
from the assets to which they apply:
Allowance for doubtful accounts
1999 13.9 24.8 31.8 54.7 15.8
1998 16.6 19.2 26.8 48.7 13.9
1997 15.6 27.9 30.5 57.4 16.6
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Primarily reflects reclassifications to a regulatory asset of the
uncollectible accounts related to the Percent of Income Plan (PIP) of Columbia
Gas of Ohio, Inc.
(b) Principally reflects amounts charged off as uncollectible less amounts
recovered.
70
<PAGE> 71
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There has not been a change of accountants nor any disagreements concerning
accounting and financial disclosure within the past two years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information required by this item is contained in Columbia's Proxy
Statement related to the 2000 Annual Meeting of Stockholders, to be filed
pursuant to Section 14 of the Securities Exchange Act of 1934 and is
incorporated herein by reference.
Information regarding Columbia's current executive officers, is as follows:
OLIVER G. RICHARD III, 47, Chairman, President and Chief Executive Officer of
Columbia (since April 28, 1995). Chairman of New Jersey Resources Corporation
from 1992 to 1995; President and Chief Executive Officer from 1991 to 1995.
President and Chief Executive Officer of Northern Natural Gas Company from 1989
to 1991. Senior Vice President and subsequently Executive Vice President of
Enron Gas Pipeline Group from 1987 to 1989. Vice President and General Counsel
of Tenngasco, a subsidiary of Tenneco Corporation, from 1985 to 1987. Federal
Energy Regulatory Commission Commissioner from 1982 to 1985.
PETER M. SCHWOLSKY, 53, Senior Vice President and Chief Legal Officer of
Columbia and Columbia Energy Group Service Corporation since August 1995. Senior
Vice President from June 1995 to August 1995. Executive Vice President, Law and
Corporate Development, for New Jersey Resources Corporation from 1991 to 1995.
Of counsel and then Partner with Steptoe & Johnson from 1986 to 1991.
MICHAEL W. O'DONNELL, 55, Senior Vice President and Chief Financial Officer of
Columbia and Columbia Energy Group Service Corporation since October 1993.
Senior Vice President and Assistant Chief Financial Officer of Columbia and
Columbia Energy Group Service Corporation from 1989 to 1993.
CATHERINE GOOD ABBOTT, 49, Chief Executive Officer and President of Columbia Gas
Transmission Corporation and Chief Executive Officer of Columbia Gulf
Transmission Company since January 1996. Principal with Gem Energy Consulting,
Inc. from 1995 to January 1996. Vice President for various business units of
Enron Corporation from 1985 to 1995.
PATRICIA A. HAMMICK, 53, Senior Vice President for Strategy and Communications
for Columbia since May 1998. Vice President, Strategy Implementation from 1997
through May 1998. Vice President of the Natural Gas Supply Association from 1983
through 1996. Manager, Energy Liaison for the Gulf Oil Exploration and
Production Company from 1979 to 1983.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is contained in Columbia's Proxy Statement
related to the 2000 Annual Meeting of Stockholders, to be filed pursuant to
Section 14 of the Securities Exchange Act of 1934 and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is contained in Columbia's Proxy Statement
related to the 2000 Annual Meeting of Stockholders, to be filed pursuant to
Section 14 of the Securities Exchange Act of 1934 and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is contained in Columbia's Proxy Statement
related to the 2000 Annual Meeting of Stockholders, to be filed pursuant to
Section 14 of the Securities Exchange Act of 1934 and is incorporated herein by
reference.
71
<PAGE> 72
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Exhibits
Reference is made to pages 75 through 77 for the list of exhibits filed as part
of this Annual Report on Form 10-K.
Pursuant to Item 601(b), paragraph (4)(iii)(A) of Regulation S-K, certain
instruments representing long-term debt of Columbia or its subsidiaries have not
been included as Exhibits because such debt does not exceed 10% of the total
assets of Columbia and its subsidiaries on a consolidated basis. Columbia agrees
to furnish a copy of any such instrument to the U.S. Securities and Exchange
Commission upon request.
Financial Statement Schedules
All of the financial statements and financial statement schedules filed as a
part of the Annual Report on Form 10-K are included in Item 8.
Reports on Form 8-K
<TABLE>
<CAPTION>
Financial
Item Statements
Reported Included Date of Event Date Filed
<S> <C> <C> <C> <C>
5 Yes* October 21, 1999 October 21, 1999
5 No October 24, 1999 October 26, 1999
</TABLE>
* Summary of Financial and Operational data for three and nine months ended
September 30, 1999.
Undertaking made in Connection with 1933 Act Compliance on Form S-8
For purposes of complying with the amendments to the rules governing Form S-8
under the Securities Act of 1933, as amended (the Act), Columbia undertakes the
following, which is incorporated by reference into the registration statements
on Form S-8, Nos. 333-80797 (filed June 6, 1999), 333-03869 (filed May 16, 1996)
and 33-42776 (filed September 13, 1991).
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the U.S. Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the questions whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
72
<PAGE> 73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
COLUMBIA ENERGY GROUP
-----------------------
(Registrant)
Dated: March 2, 2000
By:/s/Oliver G. Richard III
-----------------------
(Oliver G. Richard III)
Director (Principal
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
March 2, 2000 /s/ Oliver G. Richard III
-------------------------
Oliver G. Richard III
Director (Principal
Executive Officer)
March 2, 2000 /s/ Richard F. Albosta
-------------------------
Richard F. Albosta
Director
March 2, 2000 /s/ Robert H. Beeby
-------------------------
Robert H. Beeby
Director
March 2, 2000 /s/ Wilson K. Cadman
-------------------------
Wilson K. Cadman
Director
March 2, 2000 /s/ Jeffrey W. Grossman
-------------------------
Jeffrey W. Grossman
Vice President & Controller
(Principal Accounting Officer)
March 2, 2000 /s/ James P. Heffernan
-------------------------
James P. Heffernan
Director
March 2, 2000 /s/ Karen L. Hendricks
-------------------------
Karen L. Hendricks
Director
March 2, 2000 /s/ Malcolm T. Hopkins
-------------------------
Malcolm T. Hopkins
Director
March 2, 2000 /s/ J. Bennett Johnston
-------------------------
J. Bennett Johnston
Director
March 2, 2000 /s/ Malcolm Jozoff
-------------------------
Malcolm Jozoff
Director
March 2, 2000 /s/ William E. Lavery
-------------------------
William E. Lavery
Director
March 2, 2000 /s/ Gerald E. Mayo
-------------------------
Gerald E. Mayo
Director
March 2, 2000 /s/ Michael W. O'Donnell
-------------------------
Michael W. O'Donnell
Senior Vice President
(Chief Financial Officer)
March 2, 2000 /s/ Douglas E. Olesen
-------------------------
Douglas E. Olesen
Director
73
<PAGE> 74
EXHIBIT INDEX
Reference is made in the two right-hand columns below to those
exhibits which have heretofore been filed with the U.S. Securities and
Exchange Commission. Exhibits so referred to are incorporated herein by
reference.
<TABLE>
<CAPTION>
Reference
File No. Exhibit
<S> <C> <C>
2-A* - Agreement and Plan of Merger dated February 27, 2000 between
Columbia Energy Group and NiSource Inc.
3-A - Restated Certificate of Incorporation of The Columbia 1-1098 3-A
Gas System, Inc., as amended dated as of November 28, 1995.
3-B - By-Laws of The Columbia Gas System, Inc., as amended dated 1-1098 3-B
November 18, 1987.
3-C - Certificate of Ownership and Merger, Merging Columbia 1-1098 3-C
Energy Group, Inc. into The Columbia Gas System, Inc.
3-D* - Amended and Restated By-Laws of Columbia Energy Group as of
February 22, 2000.
4-A - Indenture between The Columbia Gas System, Inc. 33-64555 4-S
and Marine Midland Bank, N.A. Trustee, dated as of
November 28, 1995.
4-B - First Supplemental Indenture, between The Columbia Gas 33-64555 4-T
System, Inc. and Marine Midland Bank, N.A. Trustee,
dated as of November 28, 1995.
4-C - Second Supplemental Indenture, between The Columbia Gas 33-64555 4-U
System, Inc., and Marine Midland Bank, N.A. Trustee,
dated as of November 28, 1995.
4-D - Third Supplemental Indenture, between The Columbia Gas 33-64555 4-V
System, Inc. and Marine Midland Bank, N.A. Trustee,
dated as of November 28, 1995.
4-E - Fourth Supplemental Indenture, between The Columbia Gas 33-64555 4-W
System, Inc. and Marine Midland Bank, N.A. Trustee,
dated as of November 28, 1995.
4-F - Fifth Supplemental Indenture, between The Columbia Gas 33-64555 4-X
System, Inc. and Marine Midland Bank, N.A. Trustee,
dated as of November 28, 1995.
4-G - Sixth Supplemental Indenture, between The Columbia Gas 33-64555 4-Y
System, Inc. and Marine Midland Bank, N.A. Trustee, dated
as of November 28, 1995.
4-H - Seventh Supplemental Indenture, between The Columbia 33-64555 4-Z
Gas System, Inc. and Marine Midland Bank, N.A., Trustee,
dated as of November 28, 1995.
4-I - Instrument of Resignation, Appointment and Acceptance dated as 1-1098 4-I
of March 1, 1999, between Columbia Energy Group and Marine
Midland Bank, as Resigning Trustee and The First National Bank
of Chicago, as Successor Trustee
10-P(a) - Pension Restoration Plan of The Columbia Gas 1-1098 10-P
System, Inc., amended October 9, 1991.
10-Q(a) - Thrift Restoration Plan of The Columbia Gas 1-1098 10-Q
System, Inc. dated January 1, 1989.
10-T - Agreement and Bridge Agreement dated 1-1098 10-T
December 1, 1993, between Columbia Gas
Transmission Corporation and Consol
Pennsylvania Coal Company.
10-AE - U.S. Environmental Protection Agency Administrative 1-1098 10-AE
Order by Consent for Removal Actions for Columbia Gas
Transmission Corporation dated September 22,1994.
10-AF - Amended and Restated Indenture of Mortgage and 1-1098 10-AF
Deed of Trust by Columbia Gas Transmission
Corporation to Wilmington Trust Company,
dated as of November 28, 1995
</TABLE>
(a) Executive Compensation arrangements filed pursuant to Item 14 of Form 10-K.
* Filed herewith.
74
<PAGE> 75
EXHIBIT INDEX (continued)
<TABLE>
<CAPTION>
Reference
File No. Exhibit
<S> <C> <C>
10-BB(a) - Annual Incentive Compensation Plan of The Columbia Gas 1-1098 10-BB
System, Inc., as amended, dated as of November 16, 1988.
10-BC(a) - Employment Agreement between Oliver G. Richard III 1-1098 10-BC
and The Columbia Gas System, Inc., dated March 15, 1995.
10-BE(a) - Employment Agreement between Peter M. Schwolsky 1-1098 10-BE
and The Columbia Gas System, Inc., dated May 30, 1995.
10-BF(a) - Employment Agreement between Catherine Good Abbott and The 1-1098 10-BF
Columbia Gas System, Inc., dated January 17, 1996.
10-BU - Share Sale and Purchase Agreement between The 1-1098 10-BU
Columbia Gas System, Inc. and Anderson Exploration
Ltd. dated November 25, 1991.
10-BV - Security Agreement dated as of January 15, 1992, 1-1098 10-BV
between The Columbia Gas System, Inc. and
Anderson Exploration Ltd. and Montreal Trust
Company of Canada.
10-BW - Kotaneelee Litigation Indemnity Agreement dated 1-1098 10-BW
as of December 31, 1991, among The Columbia
Gas System, Inc. and Columbia Gas Development
of Canada Ltd. and Anderson Exploration Ltd.
10-BX - Specified Litigation Indemnity Agreement made 1-1098 10-BX
as of December 31, 1991, among The Columbia
Gas System, Inc. and Columbia Gas Development
of Canada Ltd. and Anderson Exploration Ltd.
10-BY(a) - Columbia Gas Restoration Security Trust 1-1098 10-BY
Agreement dated June 1, 1991, with Dauphin
Deposit Bank and Trust Company.
10-CA(a) - The Columbia Gas System, Inc. Retirement Plan 1-1098 10-CA
for Outside Directors, as amended, August 21, 1991.
10-CB - Credit Agreement, dated as of November 28, 1995, 1-1098 10-CB
among The Columbia Gas System, Inc., certain banks party
thereto and Citibank, N.A.
10-CC - First Amendment and Supplement to Credit 1-1098 10-CC
Agreement, dated December 6, 1995
10-CD - Credit Agreement for $450,000,000, dated March 11, 1998, 1-1098 10-CD
among Columbia Energy Group and certain banks party thereto
and Citibank, N.A. as Administrative and Syndication Agent.
10-CE - Credit Agreement for $900,000,000, dated March 11, 1998, 1-1098 10-CE
among Columbia Energy Group and certain banks party thereto
and Citibank, N.A. as Administrative and Syndication Agent.
10-CF - Memorandum of Understanding among the Millennium Pipeline 1-1098 10-CF
Project partners (Columbia Transmission, West Coast Energy, MCN
Investment Corp. and TransCanada Pipelines Limited) dated
December 1, 1997.
10-CG - Agreement of Limited Partnership of Millennium Pipeline 1-1098 10-CG
Company, L.P. dated May 31, 1998.
10-CH - Contribution Agreement Between Columbia Gas Transmission 1-1098 1-1098 10-CH
10-CH Corporation and Millennium Pipeline Company, L.P. dated
July 31, 1998
10-CI - Regulations of Millennium Pipeline Management Company, L.L.C. 1-1098 10-CI
dated May 31, 1998
10-CJ - Amended and Restated Agreement of Cove Point 1-1098 10-CJ
LNG Limited Partnership between Columbia LNG and
PEPCO Energy Company, Inc. dated January 27, 1994.
</TABLE>
(a) Executive Compensation arrangements filed pursuant to Item 14 of Form 10-K.
75
<PAGE> 76
EXHIBIT INDEX (continued)
<TABLE>
<CAPTION>
Reference
File No. Exhibit
<S> <C> <C>
10-CK - Amended and Restated 364-Day Credit Agreement among Columbia 1-1098 10-CK
Energy Group and certain banks party thereto and Citibank, N.
A. as Administrative and Syndication Agent dated as of
March 10, 1999.
10-CM - Plan of Reorganization for Columbia Gas Transmission 1-1098 10-CM
Corporation 1-1098 10-CM as filed with the United States
Bankruptcy Court for the District of Delaware on January 18,
1994.
10-CO* - Amendment No. 1 to the $450,000,000 Amended and Restated
364-Day Credit Agreement, dated as of March 10,1999, among
Columbia Energy Group and certain banks party thereto and
Citibank N.A. as administrative and syndication agent.
10-CP* - Amendment No. 1 to the $900,000,000 Credit Agreement, dated
as of March 11,1999, among Columbia Energy Group and certain
banks party thereto and Citibank N.A. as administrative and
syndication agent.
12 * - Statements of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends.
21 * - Subsidiaries of Columbia Energy Group
23-A * - Written consent, dated January 24, 2000, to the filing and use
of information contained in such letter report, in Reports and
Registration Statements filed during 1999, of Ryder Scott
Company Petroleum Engineers, independent petroleum and natural
gas consultants.
23-B * - Written consent of Arthur Andersen LLP, independent public
accountants, to the incorporation by reference of their report
included in the 1999 Annual Report on Form 10-K of Columbia
Energy Group and their report included in Columbia Energy
Group's 1999 Annual Report to Shareholders in the registration
Statements on Form S-3 (File No. 33-64555 and Form S-8 (File
Nos. 333-80797, 333-03869 and 33-42776).
23-C* Written consent, dated January 20, 2000, to the filing and
use of information contained in such letter report, in Reports
and Registration Statements filed during 1999, of Sproule
Associates Limited, independent petroleum and natural gas
consultants.
27 * - Financial Data Schedule for the period ended December 31, 1999.
</TABLE>
* Filed herewith.
76
<PAGE> 1
Exhibit 2-A
AGREEMENT AND PLAN OF MERGER
Between
COLUMBIA ENERGY GROUP
and
NISOURCE INC.
Dated as of February 27, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
FORMATION OF HOLDING COMPANY AND SUBSIDIARIES 2
1.1 Organization of Holdco 2
1.2 Directors and Officers of Holdco 3
1.3 Organization of Merger Subsidiaries 3
1.4 Actions of Directors and Officers 4
1.5 Actions of Parent and the Company 4
ARTICLE II
THE MERGERS; CLOSING; EFFECTIVE TIME
2.1 The Mergers 4
(a) Parent Merger 4
(b) Company Merger 5
2.2 Closing 6
2.3 Effective Time 6
2.4 Alternative Structure 7
ARTICLE III
EFFECT OF THE MERGERS ON THE CAPITAL STOCK OF PARENT,
THE COMPANY AND THE MERGER SUBS; EXCHANGE OF CERTIFICATES
3.1 Merger Sub Shares 8
3.2 Holdco Shares 8
3.3 Conversion of Parent Shares 8
3.4 Conversion of Company Shares 9
3.5 Stock Elections 11
3.6 Proration 13
3.7 Exchange of Company Certificates 13
3.8 Dividends, Etc 15
ARTICLE IV
ADJUSTMENT TO PREVENT DILUTION 17
4.1 Adjustments of the Exchange Ratio 17
ARTICLE V
REPRESENTATIONS AND WARRANTIES 17
5.1 Representations and Warranties of the Company 17
(a) Organization, Good Standing and Qualification 18
(b) Capital Structure 19
(c) Corporate Authority; Approval and Fairness 20
(d) Governmental Filings; No Violations 21
(e) Company Reports; Financial Statements 22
(f) Absence of Certain Changes 23
(g) Litigation 24
(h) Employee Benefits 24
(i) Compliance with Laws 26
(j) Takeover Statutes 27
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
(k) Environmental Matters 27
(l) Taxes 28
(m) Labor Matters 29
(n) Intellectual Property 29
(o) Brokers and Finders 30
(p) Regulation as a Utility 30
(q) Trading Position Risk Management 30
(r) Registration Statement and Proxy Statement 30
(s) Tax Matters 31
(t) Employment Agreements 31
(u) No Other Representations or Warranties 31
5.2 Representations and Warranties of Parent 31
(a) [RESERVED] 31
(b) Organization, Good Standing and Qualification 31
(c) Capital Structure 32
(d) Corporate Authority and Approval 33
(e) Governmental Filings; No Violations 34
(f) Parent Reports; Financial Statements 35
(g) Absence of Certain Changes 36
(h) Litigation 37
(i) Employee Benefits 37
(j) Compliance with Laws 39
(k) Takeover Statutes 40
(l) Environmental Matters 40
(m) Tax Matters 40
(n) Taxes 40
(o) Labor Matters 41
(p) Intellectual Property 41
(q) Brokers and Finders 42
(r) Available Funds 42
(s) Regulation as a Utility 42
(t) Registration Statement and Proxy Statement 43
(u) No Other Representations or Warranties 43
ARTICLE VI
COVENANTS
6.1 Interim Operations of the Company 43
6.2 Acquisition Proposals 47
6.3 Shareholders Meeting 49
(c) Meeting Date 50
6.3A Joint Proxy Statement and Registration Statement 50
(a) Preparation and Filing 50
(b) Letter of the Company's Accountants 51
(c) Letter of Parent's Accountants 51
6.4 Filings; Other Actions; Notification 51
6.5 Access 53
6.6 Stock Exchange De-listing 54
</TABLE>
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<TABLE>
<CAPTION>
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6.7 Publicity 54
6.8 Benefits 55
(a) Stock Options 55
(b) Employee Benefits 55
(c) Employees 56
(d) Community Involvement 56
(e) Integration Committee 57
(f) Phantom Shares 57
6.9 Expenses 58
6.10 Indemnification; Directors' and Officers' Insurance 58
6.11 Takeover Statute 60
6.12 Parent Vote 61
6.13 1935 Act 61
6.14 Necessary Action 61
6.15 Certain Mergers 61
6.16 Rule 145 Affiliates 62
6.17 Executive Consent Rights 62
6.18 Listing of Units 62
ARTICLE VII
CONDITIONS
7.1 Conditions to Each Party's Obligation to Effect
the Mergers 62
(a) Shareholder Approval 63
(b) Registration Statement 63
(c) Listing of Shares 63
(d) HSR 63
(e) Other Regulatory Consents 63
(f) Litigation 64
7.2 Conditions to Obligations of Parent 64
(a) Representations and Warranties 64
(b) Performance of Obligations of the Company 65
(c) Consents Under Agreements 65
(d) Material Adverse Effect 65
7.3 Conditions to Obligation of the Company 65
(a) Representations and Warranties 65
(b) Performance of Obligations of Parent 66
(c) Tax Opinion 66
ARTICLE VIII
TERMINATION
8.1 Termination by Mutual Consent 66
8.2 Termination by Either Parent or the Company 66
8.3 Termination by the Company 67
8.4 Termination by Parent 68
8.5 Effect of Termination and Abandonment 68
ARTICLE IX
MISCELLANEOUS AND GENERAL
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9.1 Survival 70
9.2 Modification or Amendment 70
9.3 Waiver of Conditions 71
9.4 Counterparts 71
9.5 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL 71
9.6 Notices 72
9.7 Entire Agreement; NO OTHER REPRESENTATIONS 72
9.8 No Third Party Beneficiaries 73
9.9 Obligations of Parent and of the Company 73
9.10 Severability 73
9.11 Interpretation 74
9.12 Assignment 74
</TABLE>
<PAGE> 6
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (hereinafter called this "Agreement"),
dated as of February 27, 2000, between Columbia Energy Group, a Delaware
corporation (the "Company") and NiSource Inc., an Indiana corporation
("Parent").
WHEREAS, the boards of directors of each of Parent and the Company
have approved and declared it advisable and in the best interests of their
respective companies and stockholders to consummate the mergers provided for
herein, pursuant to which a newly formed holding company, Parent Holdco, Inc.
("Holdco"), will acquire all of the common stock of each of Parent and the
Company through mergers of subsidiaries of Holdco with and into each of Parent
and the Company or, if the Parent Requisite Vote (as hereinafter defined) is not
obtained, pursuant to which a wholly owned subsidiary of Parent will merge with
and into the Company;
WHEREAS, for federal income tax purposes, it is intended that (i) the
Parent Merger (as hereinafter defined) qualify as a reorganization under the
provisions of Section 368(a) of the United States Internal Revenue Code of 1986,
as amended (the "Code"); and/or as an exchange under the provisions of Section
351 of the Code and (ii) that, if the Parent Requisite Vote is obtained, the
Company Merger (as hereinafter defined) qualify as an exchange under the
provisions of Section 351 of the Code; and
WHEREAS, the Company and Parent desire to make certain
representations, warranties, covenants and agreements in connection with this
Agreement.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
FORMATION OF HOLDING COMPANY AND SUBSIDIARIES
1.1 Organization of Holdco. As promptly as
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practicable and in any event no later than five days following the execution of
this Agreement, Parent shall cause Holdco to be organized under the laws of the
State of Indiana. The Articles of Incorporation and By-Laws of Holdco shall be
in such forms as shall be determined by Parent; provided that, if the Parent
Requisite Vote has been received, prior to the Closing Date (as hereinafter
defined), the Articles of Incorporation of Holdco shall be amended to be
substantially in the form of the Articles of Incorporation of Parent in effect
as of the date hereof. The authorized capital stock of Holdco shall initially
consist of 100 common shares, without par value (the "Holdco Shares"), all of
which shares shall be issued to Parent. Parent shall provide the Company with
copies of the Articles of Incorporation and By-Laws of Holdco promptly upon the
Company's request.
1.2 Directors and Officers of Holdco. The directors and officers of
Holdco shall be designated by Parent. Each such officer and director shall
remain in office until his or her successor is elected.
1.3 Organization of Merger Subsidiaries. As promptly as practicable,
and in any event no later than five days following the execution of this
Agreement, Holdco shall cause to be organized for the sole purpose of
effectuating the mergers contemplated herein:
(a) Parent Acquisition Corp., a corporation to be organized
under the laws of the State of Indiana ("PAC"). The Articles of Incorporation
and By-Laws of PAC shall be in such forms as shall be determined by Parent. The
authorized capital stock of PAC shall initially consist of 100 common shares,
without par value ("PAC Shares"), all of which shares shall be issued to Holdco
at a price of $1.00 per share.
(b) Company Acquisition Corp., a corporation to be organized
under the laws of the State of Delaware ("CAC" and, together with PAC, the
"Merger Subs"). The Certificate of Incorporation and By-Laws of CAC shall be in
such forms as shall be determined by Parent. The authorized capital stock of CAC
shall initially consist of 100 shares of common stock, par value $0.01 per share
("CAC Shares"), all of which shares shall be issued to Holdco at a price of
$1.00 per share.
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Parent shall provide the Company with copies of the Articles
of Incorporation or Certificate of Incorporation, as the case may be, and
By-Laws of PAC and CAC promptly upon the Company's request.
1.4 Actions of Directors and Officers. As promptly as practicable and
in any event no later than five days following the execution of this Agreement,
Parent shall take all requisite action to designate the directors and officers
of Holdco and each of the Merger Subs and to take such steps as may be necessary
or appropriate to complete the organization of Holdco and the Merger Subs.
Parent shall cause the directors of Holdco and the directors of the Merger Subs
to declare advisable, ratify and approve this Agreement.
1.5 Actions of Parent and the Company. As promptly as practicable and
in any event no later than five days following the execution of this Agreement,
Parent, as the holder of all the outstanding Holdco Shares, shall cause Holdco,
as the sole stockholder of each of the Merger Subs, to adopt and declare
advisable this Agreement. Parent shall cause Holdco, and Holdco shall cause
Parent and the Merger Subs, to perform their respective obligations under this
Agreement. As promptly as practicable and in any event no later than five days
after the date hereof the parties shall cause this Agreement to be amended to
add Holdco and the Merger Subs as parties hereto, and each Merger Sub shall
become a constituent corporation in its respective Merger.
ARTICLE II
THE MERGERS; CLOSING; EFFECTIVE TIME
2.1 The Mergers. Upon the terms and subject to the conditions set forth
in this Agreement at the Effective Time (as hereinafter defined), the following
transactions shall be consummated:
(a) Parent Merger. In accordance with the Indiana Business
Corporation Law (the "IBCL") and this Agreement, at the Effective Time, PAC
shall be merged with and into Parent, and the separate corporate existence of
PAC shall thereupon cease (the "Parent Merger"). Parent shall be the surviving
corporation in the Parent Merger and shall
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continue its corporate existence under the laws of the State of Indiana, and the
separate corporate existence of Parent with all its rights, privileges,
immunities and franchises shall continue unaffected by the Parent Merger. As a
result of the Parent Merger, Parent shall become a wholly owned subsidiary of
Holdco. The Parent Merger shall have the effects set forth in the IBCL. Pursuant
to the Parent Merger:
(i) The Articles of Incorporation of Parent, as in
effect immediately prior to the Effective Time, shall be the articles of
incorporation of the surviving corporation in the Parent Merger.
(ii) The By-Laws of PAC, as in effect immediately prior
to the Effective Time, shall be the by-laws of the surviving corporation in the
Parent Merger.
(iii) The directors of PAC immediately prior to the
Effective Time, shall, from and after the Effective Time, be the directors of
the surviving corporation in the Parent Merger until their successors are duly
appointed or elected in accordance with applicable law.
(iv) The officers of Parent immediately prior to the
Effective Time, shall, from and after the Effective Time, be the officers of the
surviving corporation in the Parent Merger until their successors are duly
appointed or elected in accordance with applicable law.
(v) The shares of PAC and Parent shall be converted as
provided in Article III.
(b) Company Merger. In accordance with the Delaware General
Corporation Law (the "DGCL") and this Agreement, at the Effective Time, CAC
shall be merged with and into the Company, and the separate corporate existence
of CAC shall thereupon cease (the "Company Merger" and, together with the Parent
Merger, the "Mergers"). The Company shall be the surviving corporation in the
Company Merger and shall continue its corporate existence under the laws of the
State of Delaware, and the separate corporate existence of the Company with all
its rights, privileges, immunities and franchises shall continue unaffected by
the Company Merger. As a result of the Company Merger, the Company shall become
a wholly owned subsidiary of Holdco. The Company Merger shall have the effects
set forth in the
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DGCL. Pursuant to the Company Merger:
(i) The Certificate of Incorporation of the Company, as
in effect immediately prior to the Effective Time, shall be the certificate of
incorporation of the surviving corporation in the Company Merger.
(ii) The By-Laws of CAC, as in effect immediately prior
to the Effective Time, shall be the by-laws of the surviving corporation in the
Company Merger.
(iii) The directors of CAC immediately prior to the
Effective Time, shall, from and after the Effective Time, be the directors of
the surviving corporation in the Company Merger.
(iv) The officers of the Company immediately prior to
the Effective Time, shall, from and after the Effective Time, be the officers of
the surviving corporation in the Company Merger.
(v) The shares of CAC and the Company shall be converted
as provided in Article III.
2.2 Closing. The closing of the Mergers (the "Closing") shall take
place (i) at the offices of Sullivan & Cromwell, 125 Broad Street, New York, New
York at 10:00 A.M. on the third Business Day after the last of the conditions
set forth in Article VII (other than those conditions that by their nature are
to be satisfied at the Closing, but subject to the satisfaction or waiver of
those conditions) shall be satisfied or waived (by the party entitled to the
benefit of such condition) in accordance with this Agreement or (ii) at such
other place and time and/or on such other date as the Company and Parent may
agree in writing (the "Closing Date"). For purposes of this Agreement, the term
"Business Day" means a day on which banks are not required or authorized by law
to close in New York City.
2.3 Effective Time. On the Closing Date, or, if not reasonably
practicable, as soon as practicable following the Closing Date, the Company and
Parent will cause Articles of Merger relating to the Parent Merger to be
executed, acknowledged and filed with the Secretary of State of the State of
Indiana and a Certificate of Merger relating to the Company Merger to be
executed, acknowledged and filed with the Secretary of State of the State of
Delaware. The term
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"Effective Time" shall mean the time and date which is the later of (i) the date
and time of the filing of the Articles of Merger relating to the Parent Merger
with the Secretary of State of the State of Indiana and (ii) the date and time
of the filing of the Certificate of Merger relating to the Company Merger with
the Secretary of State of the State of Delaware.
2.4 Alternative Structure. In the event Parent fails to obtain the
Parent Requisite Vote (as defined in Section 5.2(d)) at the Parent Shareholders
Meeting (as defined in Section 6.3(b)), the Company, Parent and Holdco hereby
agree that the Company Merger will be consummated upon the following terms:
(a) the Parent Merger will not be consummated and Holdco will
not repurchase Holdco Shares and consequently Holdco shall remain a wholly owned
subsidiary of Parent;
(b) the term "Effective Time" as used throughout this
Agreement shall mean the date and time of the filing of the Certificate of
Merger relating to the Company Merger;
(c) Parent shall cause Holdco to, and Holdco shall, consummate
the Company Merger; and
(d) at the Effective Time, each Company Share issued and
outstanding immediately prior to the Effective Time, other than Excluded Shares
(as defined herein), shall, in lieu of being converted as provided in Section
3.4(a)(i) and (ii), be converted into the right to receive (x) $70 in cash,
without interest, and (y) $3.02 in face value of Parent SAILS security units
consisting of a zero coupon debt security and a forward equity contract and
having the terms set forth in Annex A hereof (the "Parent Units") and (z) the
Additional Amount, if any (the sum of (x), (y) and (z) being referred to herein
as the "Alternative Structure Merger Consideration").
ARTICLE III
EFFECT OF THE MERGERS ON THE CAPITAL STOCK OF PARENT,
THE COMPANY AND THE MERGER SUBS; EXCHANGE OF CERTIFICATES
3.1 Merger Sub Shares.
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(a) At the Effective Time, each PAC Share issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Parent Merger and without further action by the holder thereof, be converted
into and shall become one common share, without par value, of Parent, as the
surviving corporation in the Parent Merger. Each certificate which immediately
prior to the Effective Time represented outstanding PAC Shares shall, on and
after the Effective Time, be deemed for all purposes to represent the number of
shares of the common stock of the surviving corporation into which the PAC
Shares represented by such certificate shall have been converted pursuant to the
Parent Merger.
(b) At the Effective Time, each CAC Share issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Company Merger and without further action by the holder thereof, be converted
into and shall become one share of common stock, par value $.01 per share, of
the Company, as the surviving corporation in the Company Merger. Each
certificate which immediately prior to the Effective Time represented
outstanding CAC Shares shall, on and after the Effective Time, be deemed for all
purposes to represent the number of shares of the common stock of the surviving
corporation into which the CAC Shares represented by such certificate shall have
been converted pursuant to the Company Merger.
3.2 Holdco Shares. At the Effective Time, Holdco shall repurchase each
Holdco Share issued and outstanding immediately prior to the Effective Time for
an amount of cash representing the fair market value thereof, as agreed upon by
Parent and Holdco.
3.3 Conversion of Parent Shares.
(a) At the Effective Time, each common share, without par
value, of Parent (a "Parent Share"), issued and outstanding immediately prior to
the Effective Time (other than Parent Shares held in the treasury of Parent)
shall be converted into one Holdco Share. Upon such conversion, all such Parent
Shares shall be canceled and cease to exist, and each certificate theretofore
representing Parent Shares shall, without any action on the part of the holder
thereof, be deemed to represent an equivalent number of Holdco Shares. The
Holdco Shares into which Parent Shares are
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<PAGE> 13
converted pursuant to the Parent Merger shall be deemed to have been issued at
the Effective Time.
(b) At the Effective Time, each Parent Share which is then
held in the treasury of Parent shall, by virtue of the Parent Merger, cease to
be outstanding and shall be canceled and retired without payment of any
consideration therefor.
(c) At the Effective Time, each outstanding option or right to
purchase Parent Shares (a "Parent Option") shall be assumed by Holdco in such
manner that it is converted into an option to purchase Holdco Shares, with each
such Parent Option otherwise to be exercisable upon the same terms and
conditions as then are applicable to such Parent Option, including the number of
shares and exercise price provided thereby. At the Effective Time, Holdco shall
assume all rights and obligations of Parent under Parent's stock option plans as
in effect at the Effective Time and shall continue such plans in accordance with
their terms.
3.4 Conversion of Company Shares.
(a) At the Effective Time, each share of common stock, par
value $.01 per share, of the Company (a "Company Share") issued and outstanding
immediately prior to the Effective Time (other than (x) Company Shares the
holders of which shall have validly demanded appraisal of such shares pursuant
to Section 262 of the DGCL ("Section 262") and shall not have voted such shares
in favor of the Company Merger ("Dissenting Shares"), (y) Company Shares owned
by Parent or any Subsidiary of Parent and (z) Company Shares held in the
treasury of the Company or owned by any Subsidiary of the Company (collectively,
"Excluded Shares")) shall be converted into either of the following (the "Merger
Consideration"):
(i) the right to receive (x) $70 in cash, without
interest, and (y) $2.60 in face value of Holdco SAILS security units consisting
of a zero coupon debt security and a forward equity contract and having the
terms set forth in Annex A hereto (the "Holdco Units")(the Holdco Units or the
Parent Units, as the case may be, being referred to herein as the "Units
Consideration"), and (z) the Additional Amount, if any (the sum of (x), (y) and
(z) being referred to herein as the "Cash and Units Consideration"), or
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(ii) subject to Section 3.4(b), if the holder thereof
shall have validly made and not revoked a Stock Election (as defined in Section
3.5(c)) with respect to such Company Share, a number of fully paid and
non-assessable Holdco Shares determined by dividing $74 by the Average Parent
Share Price (the "Exchange Ratio"), plus the Additional Amount, if any, provided
that in no event shall the Exchange Ratio be more than 4.4848 (the "Stock
Consideration").
The "" means an amount in cash equal to 7% interest on $72.29
for the period beginning on the first anniversary date of this Agreement, and
ending on the day prior to the Closing Date (calculated on a per annum basis of
a 365-day year), less all cash dividends per Company Share, if any, paid on the
Company Shares with respect to a record date occurring after the first
anniversary date of this Agreement; provided, however, that the Additional
Amount shall not be a negative number.
"Average Parent Share Price" means the average (rounded to the
nearest 1/10,000) of the closing trading prices of the Parent Shares on the New
York Stock Exchange Composite Tape on each of the thirty consecutive trading
days immediately preceding the second trading day prior to the Closing Date.
Upon such conversion, all Company Shares (other than Excluded
Shares) shall be canceled and cease to exist, and each holder of Company Shares
shall thereafter cease to have any rights with respect to such shares, except
the right to receive, without interest, the Merger Consideration or the
Alternative Structure Merger Consideration, as the case may be, and cash for
fractional Holdco Shares in accordance with Section 3.7(d) upon the surrender of
a certificate representing such Company Shares (a "Company Certificate").
(b) Notwithstanding the foregoing, (i) if the aggregate number
of Company Shares for which Stock Elections are validly made and not revoked
exceeds 30% of the Company Shares outstanding as of the Effective Time (the
"Maximum Stock Shares"), the number of Company Shares to be converted into the
Stock Consideration shall be prorated as described in Section 3.6, and all other
Company Shares (other than
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Excluded Shares) shall be converted into the Cash and Units Consideration, and
(ii) if the aggregate number of Company Shares for which valid Stock Elections
are made is less than 10% of the Company Shares outstanding as of the Effective
Time, all Company Shares shall be converted into the Cash and Units
Consideration and Section 2.4 (other than subparagraph (d) thereof) shall apply
and in lieu of the Holdco Units, Parent Units shall be delivered as part of the
Merger Consideration.
(c) At the Effective Time, each Company Share which is then
held in the treasury of the Company or owned by Parent, any Subsidiary of Parent
or any Subsidiary of Company shall, by virtue of the Company Merger, cease to be
outstanding and shall be canceled and retired without payment of any
consideration therefor.
(d) Notwithstanding anything in this Section 3.4 to the
contrary, Dissenting Shares shall not be converted into or be exchangeable for
the right to receive the Merger Consideration or the Alternative Structure
Merger Consideration, unless and until the holder of Dissenting
Shares shall have failed to perfect or shall have effectively withdrawn or lost
such holder's right to appraisal and payment, as the case may be. If such holder
shall have so failed to perfect or shall have effectively withdrawn or lost such
right, such holder's shares shall thereupon be deemed to have been converted
into and to have become exchangeable for, at the Effective Time, the right to
receive the Cash and Units Consideration, without any interest thereon. The
Company shall give Parent prompt notice of any Dissenting Shares (and shall also
give Parent prompt notice of any withdrawals of such demands for appraisal
rights), and Parent shall have the right to direct all negotiations and
proceedings with respect to any such demands. Neither the Company nor the
surviving corporation of the Company Merger shall, except with the prior written
consent of Parent, voluntarily make any payment with respect to, or settle or
offer to settle, any such demand for appraisal rights.
3.5 Stock Elections.
(a) Parent shall authorize one or more transfer agent(s)
reasonably acceptable to the Company to receive Stock Elections and to act as
Exchange Agent hereunder (the "Exchange Agent") with respect to the Company
Merger.
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(b) Each person who, at the Effective Time, is a record holder
of Company Shares (other than Excluded Shares) shall have the right to submit a
Form of Election (as defined in Section 3.5(c)) specifying the number of Company
Shares that such person desires to have converted into the Stock Consideration.
(c) Parent and the Company shall prepare a form (the "Form of
Election") pursuant to which any holder of Company Shares may elect to receive
the Stock Consideration for any or all of his Company Shares (a "Stock
Election"). The Form of Election shall be mailed to the holders of Company
Shares as of a date on which Parent and the Company mutually agree, which date
is expected to be approximately 45 days prior to the expected Closing Date.
Parent and the Company shall use reasonable efforts to make the Form of Election
available to all persons who become holders of record of Company Shares between
the date on which the Form of Election is mailed to holders of Company Shares
and the Election Deadline (as defined in Section 3.5(d)).
(d) A Stock Election shall have been validly made only if the
Exchange Agent shall have received, by 5:00 p.m. New York, New York time on the
second Business Day prior to the Effective Time (the "Election Deadline"), a
Form of Election properly completed and signed and accompanied by the Company
Certificate or Certificates representing the shares to which such Form of
Election relates (or by an appropriate guarantee of delivery of such Company
Certificates from a member of any registered national securities exchange or of
the National Association of Securities Dealers, Inc. or a commercial bank or
trust company in the United States as set forth in such Form of Election,
provided such Company Certificate or Certificates are in fact delivered by the
time set forth in such guarantee of delivery). Any holder of Company Shares who
has made a Stock Election by submitting a Form of Election to the Exchange Agent
may at any time prior to the Election Deadline change such holder's election by
submitting a revised Form of Election, properly completed and signed, that is
received by the Exchange Agent prior to the Election Deadline. Any holder of
Company Shares may at any time prior to the Election Deadline revoke such
holder's election and withdraw such holder's Company Certificates deposited with
the Exchange Agent by written notice to the Exchange
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<PAGE> 17
Agent received by the Election Deadline. As soon as practicable after the
Election Deadline, the Exchange Agent shall determine the aggregate amounts of
Cash and Units Consideration and Stock Consideration and shall notify Holdco of
its determination.
(e) Parent, with the Company's consent, shall have the right
to make rules, not inconsistent with the terms of this Agreement, governing the
validity of the Forms of Election, the manner and extent to which Stock
Elections are to be taken into account in making the determinations prescribed
by Section 3.6, the issuance and delivery of certificates representing Holdco
Shares ("Holdco Certificates") into which Company Shares are converted in the
Company Merger, and the payment of cash for Company Shares converted into the
right to receive the Cash and Units Consideration in the Company Merger.
3.6 Proration. If valid Stock Elections are made for more than the
Maximum Stock Shares, then the number of Company Shares covered by each Form of
Election to be converted into the Stock Consideration shall be determined by
multiplying (i) the number of Company Shares as to which such Form of Election
relates by (ii) a fraction, the numerator of which is the Maximum Stock Shares
and the denominator of which is the total number of Company Shares for which a
valid stock election has been validly made and not withdrawn as of the Effective
Time, rounded down to the nearest whole number, and the balance of the Company
Shares covered by such Form of Election shall be converted into the Cash and
Units Consideration.
3.7 Exchange of Company Certificates.
(a) At or prior to the Effective Time, (i) Parent or Holdco
shall deposit (or cause to be deposited) with the Exchange Agent, for the
benefit of the holders of Company Shares, for exchange in accordance with this
Article III, cash in the amount sufficient to pay the aggregate cash portion of
the Merger Consideration or the Alternative Structure Merger Consideration, as
the case may be, and (ii) Parent or Holdco shall deposit (or cause to be
deposited) with the Exchange Agent, for the benefit of the holders of Company
Shares, Holdco Certificates and certificates for Holdco Units or Parent Units,
as the case may be, for exchange in accordance with this Article III (the cash
and shares deposited pursuant to clauses (i) and
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(ii) being hereinafter referred to as the "Exchange Fund"). The Holdco Shares
and Holdco Units or Parent Units, as the case may be, into which Company Shares
are converted pursuant to the Company Merger shall be deemed to have been issued
at the Effective Time. Any cash (including the cash portion of the Cash and Unit
Consideration) deposited with the Exchange Agent shall be invested by the
Exchange Agent as Parent reasonably directs, provided that such investments
shall be in obligations of or guaranteed by the United States of America and
backed by the full faith and credit of the United States of America or in
commercial paper obligations rated P-1 and A-1 or better by Moody's Investors
Service, Inc. and Standard & Poor's Corporation, respectively, and any net
profit resulting from, or interest or income produced by, such investments will
be payable to the Company or Parent, as Parent directs. Parent shall pay all
charges and expenses, including those of the Exchange Agent, in connection with
the exchange of Company Shares for the Merger Consideration or the Alternative
Structure Merger Consideration.
(b) As soon as reasonably practicable after the Effective Time
and in any case no later than 5 days thereafter, the Exchange Agent shall mail
to each holder of record of Company Shares immediately prior to the Effective
Time (other than Company Shares covered by valid Stock Elections and Excluded
Shares) (i) a letter of transmittal (the "Company Letter of Transmittal") (which
shall specify that delivery shall be effected, and risk of loss and title to the
Company Certificates shall pass, only upon delivery of such Company Certificates
to the Exchange Agent and shall be in such form and have such other provisions
as Parent and the Company shall agree prior to the Effective Time), and (ii)
instructions for use in effecting the surrender of the Company Certificates in
exchange for the Cash and Unit Consideration with respect to the Company Shares
formerly represented thereby. As of the Election Deadline all holders of Company
Shares immediately prior to the Effective Time that have not submitted to the
Exchange Agent or have properly revoked an effective, properly completed Form of
Election shall be deemed not to have made a valid Stock Election.
(c) Upon surrender of a Company Certificate for cancellation
to the Exchange Agent, together with the Company Letter of Transmittal, duly
executed, and such other
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documents as Parent or the Exchange Agent shall reasonably request, the holder
of such Company Certificate shall be entitled to receive in exchange therefor
(i) a certified or bank cashier's check in the amount equal to the cash, if any,
which such holder has the right to receive pursuant to the provisions of this
Article III (including any cash in lieu of fractional Holdco Shares pursuant to
Section 3.7(d)), (ii) a certificate representing that number of Holdco Units or
Parent Units, if any, and (iii) a Holdco Certificate representing that number of
Holdco Shares, if any, which such holder has the right to receive pursuant to
this Article III (in each case less the amount of any required withholding
taxes), and the Company Certificate so surrendered shall forthwith be canceled.
Until surrendered as contemplated by this Section 3.7, each Company Certificate
shall be deemed at any time after the Effective Time to represent only the right
to receive the Merger Consideration or the Alternative Structure Merger
Consideration, as the case may be, with respect to the Company Shares formerly
represented thereby.
(d) No fractional Holdco Shares shall be issued pursuant to
the Company Merger. In lieu of the issuance of any fractional Holdco Shares,
cash adjustments will be paid to holders in respect of any fractional Holdco
Share that would otherwise be issuable, and the amount of such cash adjustment
shall be equal to the product of such fractional amount and the Average Parent
Share Price.
3.8 Dividends, Etc.
(a) Notwithstanding any other provisions of this Agreement, no
dividends or other distributions declared after the Effective Time shall be paid
on Holdco Shares issuable with respect to any Company Shares represented by a
Company Certificate, until such Company Certificate is surrendered in exchange
for Stock Consideration as provided herein. Subject to the effect of applicable
laws, following surrender of any such Company Certificate, there shall be paid
to the holder of the Holdco Certificates issued in exchange therefor, without
interest, (i) at the time of such surrender, the amount of dividends or other
distributions with a record date after the Effective Time theretofore payable
with respect to such whole Holdco Shares and not paid, less the amount of any
withholding taxes which may be required thereon, and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record
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date after the Effective Time but prior to surrender and a payment date
subsequent to surrender payable with respect to such whole Holdco Shares, less
the amount of any withholding taxes which may be required thereon.
(b) At or after the Effective Time, there shall be no
transfers on the stock transfer books of Parent of the Parent Shares (in the
event the Parent Merger is consummated) or the Company of the Company Shares
that were outstanding immediately prior to the Effective Time. If, after the
Effective Time, certificates representing any such shares are presented to the
surviving corporations of the Parent Merger or the Company Merger, they shall be
canceled and exchanged for certificates for the consideration, if any,
deliverable in respect thereof pursuant to this Agreement in accordance with the
procedures set forth in this Article III. Company Certificates surrendered by
any person constituting an "affiliate" of the Company for purposes of Rule
145(c) under the Securities Act of 1933, as amended (the "Securities Act"),
shall not be exchanged until Parent has received a written agreement from such
person as provided in Section 6.16.
(c) Any portion of the Exchange Fund (including the proceeds
of any investments thereof, any Holdco Shares and any Holdco Units or Parent
Units) that remains unclaimed by the former stockholders of the Company six
months after the Effective Time shall be delivered to Holdco. Any former
stockholder of the Company who has not theretofore complied with this Article
III shall thereafter look only to the applicable surviving corporation for
payment of the Merger Consideration or the Alternative Structure Merger
Consideration, as the case may be, and any cash in lieu of fractional shares and
unpaid dividends and distributions on the Holdco Shares deliverable in respect
of each Company Share such stockholder holds as determined pursuant to this
Agreement, in each case without any interest thereon.
(d) None of Parent, the Company, Holdco, the surviving
corporations of the Mergers, the Exchange Agent or any other person shall be
liable to any former holder of Parent Shares or Company Shares for any amount
properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(e) In the event that any Company Certificate shall have been
lost, stolen or destroyed, upon the making
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of an affidavit of that fact by the person claiming such Company Certificate to
be lost, stolen or destroyed and, if required by Holdco or Parent, as
applicable, the posting by such person of a bond in such reasonable amount as
Holdco or Parent, as applicable, may direct as indemnity against any claim that
may be made against it with respect to such Company Certificate, the Exchange
Agent will issue in exchange for such lost, stolen or destroyed Company
Certificate the applicable Merger Consideration or Alternative Structure Merger
Consideration and any cash in lieu of fractional shares, and unpaid dividends
and distributions on Holdco Shares as provided in Section 3.7, deliverable in
respect thereof pursuant to this Agreement.
ARTICLE IV
ADJUSTMENT TO PREVENT DILUTION
4.1 Adjustments of the Exchange Ratio. If, after the date hereof and
prior to the Effective Time, the outstanding shares of Parent or the Company
shall be changed into a different number of shares by reason of any
reclassification, recapitalization, split-up, combination or exchange of shares,
or any dividend payable in stock or other securities is declared thereon with a
record date within such period, the Exchange Ratio shall be adjusted accordingly
to provide to the holders of Company Shares the same economic effect as
contemplated by this Agreement prior to such reclassification, recapitalization,
split-up, combination, exchange or stock dividend or similar event.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1 Representations and Warranties of the Company. Except as set forth
in the disclosure letter delivered to Parent by the Company on or prior to
entering into this Agreement (the "Company Disclosure Letter") or the Company
Reports (as defined in Section 5.1(e), the Company hereby represents and
warrants to Parent that:
(a) Organization, Good Standing and Qualification. Each of
the Company and its Subsidiaries is a corporation duly organized, validly
existing and in good
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standing under the laws of its respective jurisdiction of organization and has
all requisite corporate or similar power and authority to own and operate its
material properties and assets and to carry on its business as presently
conducted in all material respects and is qualified to do business and is in
good standing as a foreign corporation in each jurisdiction where the ownership
or operation of its properties or conduct of its business requires such
qualification, except where the failure to be so qualified as a foreign
corporation or be in good standing would not be reasonably likely to have,
either individually or in the aggregate, a Company Material Adverse Effect. The
Company has made available to Parent complete and correct copies of the
Company's and its Subsidiaries' certificate of incorporation and by-laws (or
comparable governing instruments), as amended to date. The Company's and its
Subsidiaries' certificate of incorporation and by-laws (or comparable governing
instruments) so delivered are in full force and effect. Section 5.1(a) of the
Company Disclosure Letter sets forth a list, as of the date hereof, of all of
the Subsidiaries of the Company, the jurisdictions under which such Subsidiaries
were incorporated, the percent of the equity interest therein owned by the
Company and each Subsidiary of the Company, as applicable and specifies each
Subsidiary that is (i) a "public utility company", a "holding company", a
"subsidiary company", an "affiliate" of any public-utility company, an "exempt
wholesale generator" or a "foreign utility company" within the meaning of
Section 2(a)(5), 2(a)(7), 2(a)(8), 2(a)(11), 32(a)(1) or 33(a)(3) of the Public
Utility Holding Company Act of 1935, as amended (the "1935 Act"), respectively,
(ii) a "public utility" within the meaning of Section 201(e) of the Federal
Power Act (the "Power Act") or (iii) a "qualifying facility" within the meaning
of the Public Utility Regulatory Policies Act of 1978, as amended ("PURPA"), or
that owns such a qualifying facility.
As used in this Agreement, the term "Subsidiary" means, with
respect to the Company or Parent, as the case may be, any entity, whether
incorporated or unincorporated, of which at least a majority of the securities
or ownership interests having by their terms ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
is directly or indirectly owned or controlled by such party or by one or more of
its respective Subsidiaries or by such party and any one or more
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of its respective Subsidiaries but excludes any such entities that are inactive.
As used in this Agreement, the term "Company Material Adverse
Effect" means a material adverse effect on the financial condition, business,
assets, liabilities or results of operations of the Company and its Subsidiaries
taken as a whole; provided, however, that any such effect resulting from or
arising out of (i) any change in U.S. generally accepted accounting principles
("GAAP") or interpretations thereof, (ii) economic or business conditions in
the United States generally or (iii) conditions generally affecting the electric
or gas utility industries, shall not be considered when determining if a Company
Material Adverse Effect has occurred. As used in this Agreement, the term
"knowledge" or any similar formulation of knowledge shall mean the actual
knowledge of, with respect to the Company, those persons set forth in Section
1.1 of the Company Disclosure Letter and, with respect to Parent, those persons
set forth in Section 1.1 of the Parent Disclosure Letter (as defined in Section
5.2).
(b) Capital Structure. The authorized capital stock of the
Company consists of 200,000,000 Shares, of which 81,308,000 Shares were
outstanding as of the close of business on December 31, 1999 and 40,000,000
shares of Preferred Stock, par value $0.01 per share (the "Preferred Shares"),
of the Company, of which no shares were outstanding as of the date hereof. All
of the issued and outstanding Shares have been duly authorized and are validly
issued, fully paid and nonassessable. The Company has no Shares reserved for
issuance, except that, as of February 25, 2000 there were 10,085,000 Shares
reserved in the aggregate for issuance pursuant to the Company's 1985 Long Term
Incentive Plan, 1996 Amended and Restated Long Term Incentive Plan and the
Columbia Savings Plan (collectively, the "Stock Plans"). Section 5.1(b) of the
Company Disclosure Letter sets forth, as of February 25, 2000 the aggregate
number of outstanding options to acquire Shares granted by the Company. Each of
the outstanding shares of capital stock or other securities of each of the
Company's Subsidiaries is duly authorized, validly issued, fully paid and
nonassessable and owned by the Company or a direct or indirect wholly owned
Subsidiary of the Company, free and clear of any lien, pledge, security
interest, claim or other encumbrance. Except as set forth above, there are no
preemptive or other outstanding rights, options, warrants,
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conversion rights, stock appreciation rights, redemption rights, repurchase
rights, agreements, arrangements or commitments to issue or to sell any shares
of capital stock or other securities of the Company or any of its Subsidiaries
or any securities or obligations convertible or exchangeable into or exercisable
for, or giving any Person a right to subscribe for or acquire, any securities of
the Company or any of its Subsidiaries, and no securities or obligations
evidencing such rights are authorized, issued or outstanding. The Company does
not have outstanding any bonds, debentures, notes or other obligations the
holders of which have the right to vote (or convertible into or exercisable for
securities having the right to vote) with the shareholders of the Company on any
matter ("Voting Debt").
(c) Corporate Authority; Approval and Fairness.
(i) The Company has all requisite corporate power and
authority and has taken all corporate action necessary in order to execute,
deliver and perform its obligations under this Agreement and to consummate,
subject only to approval of this Agreement by the holders of a majority of the
outstanding Shares (the "Company Requisite Vote"), the Company Merger. This
Agreement has been duly executed and delivered by the Company, and, assuming due
authorization, execution and delivery of this Agreement by Parent, is a valid
and legally binding agreement of the Company enforceable against the Company in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles (the
"Bankruptcy and Equity Exception").
(ii) As of the date hereof the Board of Directors of the
Company (A) has approved and declared advisable this Agreement and adopted the
plan of merger relating to the Company set forth herein and has resolved to
recommend that the shareholders of the Company approve this Agreement and (B)
has received the opinion of its financial advisors, Morgan Stanley Dean Witter &
Co., Inc. ("Morgan Stanley") and Salomon Smith Barney Inc., to the effect that
the consideration to be received by the holders of the Shares in the Company
Merger pursuant to this Agreement is fair from a financial point of view to such
holders.
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(d) Governmental Filings; No Violations.
(i) Other than any reports, filings, registrations,
approvals and/or notices (A) required to be made pursuant to Section 2.3, (B)
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), the Securities Act of 1933, as amended (the "Securities Act"), and
the Securities Exchange Act of 1934 (the "Exchange Act"), (C) with, to or of the
Federal Energy Regulatory Commission (the "FERC"), (D) with, to or of the
Kentucky Public Service Commission, the Maryland Public Service Commission, the
Public Utilities Commission of Ohio, the Pennsylvania Public Utility Commission,
the Virginia State Corporation Commission and the West Virginia Public Service
Commission; (E) with, to or of the Securities and Exchange Commission (the
"SEC") under the 1935 Act; (F) to comply with applicable Environmental Laws (as
defined in Section 5.1(k)); (G) with, to or of The Bermuda Registrar of
Companies; (H) with, to or of the Vermont Commissioner of Banking, Insurance,
Securities and Health Care Administration; and (I) to comply with the rules and
regulations of the New York Stock Exchange, Inc. (the "NYSE"), no notices,
reports, registrations or other filings are required to be made by the Company
with, nor are any consents, registrations, approvals, permits or authorizations
required to be obtained by the Company from, any governmental or regulatory
authority, agency, commission, body or other governmental entity (each a
"Governmental Entity"), in connection with the execution and delivery of this
Agreement by the Company and the consummation by the Company of the Company
Merger and the other transactions contemplated hereby, except for those that the
failure to make or obtain are not, individually or in the aggregate, reasonably
likely to have a Company Material Adverse Effect or prevent, materially delay or
materially impair the ability of the Company to consummate the transactions
contemplated by this Agreement.
(ii) The execution, delivery and performance of this
Agreement by the Company do not, and the consummation by the Company of the
Company Merger and the other transactions contemplated hereby will not,
constitute or result in (A) a breach or violation of, or a default under, either
the Restated Certificate of Incorporation of the Company or by-laws of the
Company or the comparable governing instruments of any of its Subsidiaries, (B)
a breach or violation of, or a default under, or the
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acceleration of any obligations, the loss of any right or benefit, or the
creation of a lien, pledge, security interest or other encumbrance on the assets
of the Company or any of its Subsidiaries (with or without notice, lapse of time
or both) pursuant to, any agreement, lease, contract, note, mortgage, indenture,
arrangement or other obligation not otherwise terminable by the other party
thereto on 90 days' or less notice ("Contracts") binding upon the Company or any
of its Subsidiaries or any Law (as defined in Section 5.1(i)) or governmental or
non-govern mental permit or license to which the Company or any of its
Subsidiaries is subject or (C) any change in the rights or obligations of any
party under any of the Contracts, except, in the case of clause (B) or (C)
above, for any breach, violation, default, acceleration, creation or change that
would not, individually or in the aggregate, be reasonably likely to have a
Company Material Adverse Effect or prevent, materially delay or materially
impair the ability of the Company to consummate the transactions contemplated by
this Agreement.
(e) Company Reports; Financial Statements. The Company has
made available to Parent each registration statement, report, proxy statement or
information statement filed by it with the SEC (collectively, including any
amendments of any such reports, the "Company Reports") pursuant to the
Securities Act or the Exchange Act since January 1, 1998 and prior to the date
hereof, including (i) the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 and (ii) the Company's Quarterly Reports on Form
10-Q for the quarterly periods ended March 31, 1999, June 30, 1999 and September
30, 1999, each in the form filed with the SEC (including exhibits, annexes and
any amendments thereto). None of the Company Reports (in the case of Company
Reports filed pursuant to the Securities Act), as of their effective dates,
contains any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading and none of the Company Reports (in the case of Company Reports filed
pursuant to the Exchange Act) as of the respective dates first mailed to
shareholders contains any statement which, at the time and in the light of the
circumstances under which it was made, was false or misleading with respect to
any material fact, or omits to state any material
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fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements of the Company and its Subsidiaries included in such
Company Reports comply as to form in all material respects with the applicable
rules and regulations of the SEC with respect thereto. Each of the consolidated
balance sheets included in or incorporated by reference into the Company Reports
(including the related notes and schedules) presents fairly, in all material
respects, the financial position of the Company and its Subsidiaries as of its
date and each of the consolidated statements of income and consolidated
statements of cash flow included in or incorporated by reference into the
Company Reports (including any related notes and schedules) fairly presents in
all material respects the results of operations, retained earnings and changes
in financial position, as the case may be, of the Company and its Subsidiaries
for the periods set forth therein (subject, in the case of unaudited statements,
to the absence of notes and normal year-end audit adjustments), in each case in
accordance with GAAP consistently applied during the periods involved, except as
may be noted therein. Since December 31, 1999 (the "Audit Date") and through the
date hereof, neither the Company nor any of its Subsidiaries has incurred any
liabilities or obligations (whether absolute, accrued, fixed, contingent or
otherwise and whether due or to become due) of any nature, except liabilities or
obligations which (i) were reflected on the audited balance sheet of the Company
and its Subsidiaries as of December 31, 1999 (including the notes thereto), (ii)
were incurred in the ordinary course of business, consistent with past practices
after December 31, 1999, (iii) are disclosed in the Company Reports filed after
December 31, 1999, (iv) would not be reasonably likely to, either individually
or in the aggregate, have a Company Material Adverse Effect, (v) were incurred
in connection with the transactions contemplated by this Agreement or (vi) have
been satisfied prior to the date hereof.
(f) Absence of Certain Changes. Since the Audit Date, the
Company and its Subsidiaries taken as a whole have conducted their business only
in the ordinary and usual course of such business and there has not been (i) any
change in the financial condition, business, assets, liabilities, or results of
operations of the Company and its Subsidiaries that has had or would be
reasonably likely to have a Company Material Adverse Effect; (ii) any material
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damage, destruction or other casualty loss with respect to any material asset or
material property owned, leased or otherwise used by the Company or any of its
Subsidiaries, not covered by insurance; (iii) any declaration, setting aside or
payment of any dividend or other distribution in respect of the capital stock of
the Company or any repurchase, redemption or other acquisition by the Company or
any Subsidiary of any securities of the Company other than (A) regular quarterly
dividends on Shares in the ordinary course (including any periodic increase
thereon consistent with past practice) not to exceed $.225 per Share and (B) as
expressly contemplated by this Agreement; or (iv) any change by the Company in
accounting principles, practices or methods which is not required by a change in
GAAP. Since the Audit Date and through the date hereof, except as provided for
herein or as disclosed in the Company Reports, there has not been any material
increase in the compensation payable or that could become payable by the Company
or any of its Subsidiaries to officers or key employees or any material
amendment of any of the Compensation and Benefit Plans (as defined in Section
5.1(h)(i)) other than increases or amendments in the ordinary course of business
consistent with past practice.
(g) Litigation. There are no civil, criminal or administrative
actions, suits, claims, hearings, investigations, reviews or proceedings pending
or, to the knowledge of the Company, threatened against the Company or any of
its Subsidiaries, except for those that would not be reasonably likely to have,
either individually or in the aggregate, a Company Material Adverse Effect or
prevent or materially delay or materially impair the ability of the Company to
consummate the transactions contemplated by this Agreement.
(h) Employee Benefits.
(i) A copy of each bonus, deferred compensation,
pension, retirement, profit-sharing, thrift, savings, employee stock ownership,
stock bonus, stock purchase, change in control, retention, restricted stock,
stock option, employment, termination, severance, compensation, medical, health
or other plan, agreement, policy, practice or arrangement that covers employees
or former employees of the Company and its Subsidiaries ("Employees"), or
directors or former directors of the
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Company (the "Compensation and Benefit Plans") and any trust agreement or
insurance contract forming a part of such Compensation and Benefit Plans has
been made available to Parent prior to the date hereof. All material
Compensation and Benefit Plans are listed in Section 5.1(h) of the Company
Disclosure Letter and any Compensation and Benefit Plans containing "change of
control" or similar provisions therein are specifically identified in Section
5.1(h) of the Company Disclosure Letter.
(ii) All Compensation and Benefit Plans, to the extent
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), are in substantial compliance with the applicable provisions of
ERISA. Each Compensation and Benefit Plan that is an "employee pension benefit
plan" within the meaning of Section 3(2) of ERISA (a "Pension Plan") and that is
intended to be qualified under Section 401(a) of the Code has received a
favorable determination letter from the Internal Revenue Service (the "IRS"). As
of the date hereof, there is no material pending or to the knowledge of the
Company threatened litigation relating to the Compensation and Benefit Plans.
Neither the Company nor any of its Subsidiaries has engaged in a transaction
with respect to any Plan that, assuming the taxable period of such transaction
expired as of the date hereof, would subject the Company or any of its
Subsidiaries to a material tax or penalty imposed by either Section 4975 of the
Code or Section 502(i) of ERISA.
(iii) No liability under Subtitle C or D of Title IV of
ERISA has been or is expected to be incurred by the Company or any of its
Subsidiaries with respect to any ongoing, frozen or terminated "single-employer
plan", within the meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by any of them, or the single-employer plan of any entity which is
considered one employer with the Company under Section 4001 of ERISA or Section
414 of the Code (an "ERISA Affiliate"). The Company and its Subsidiaries have
not incurred and do not expect to incur any withdrawal liability with respect to
a multiemployer plan under Subtitle E of Title IV of ERISA (regardless of
whether based on contributions of an ERISA Affiliate). No notice of a
"reportable event", within the meaning of Section 4043 of ERISA, for which the
30-day reporting requirement has not been waived or extended, other than
pursuant to PBGC Reg. Section 4043.66, has been
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required to be filed for any Pension Plan or by any ERISA Affiliate within the
12-month period ending on the date hereof.
(iv) All contributions required to be made under the
terms of any Compensation and Benefit Plan as of the date hereof have been
timely made or have been reflected on the most recent consolidated balance sheet
filed or incorporated by reference in the Company Reports. Neither any Pension
Plan nor any single-employer plan of an ERISA Affiliate has an "accumulated
funding deficiency" (whether or not waived) within the meaning of Section 412 of
the Code or Section 302 of ERISA and no ERISA Affiliate has an outstanding
funding waiver. Neither the Company nor any of its Subsidiaries has provided, or
is required to provide, security to any Pension Plan or to any single-employer
plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the Code.
(v) Neither the Company nor its Subsidiaries have any
obligations for, or liabilities with respect to, retiree health and life
benefits under any Compensation and Benefit Plan, except for benefits required
to be provided under Section 4980(B) of the Code.
(i) Compliance with Laws. As of the date hereof, the business
of the Company and its Subsidiaries taken as a whole is not being conducted in
violation of any federal, state, local or foreign law, statute, ordinance, rule,
regulation, judgment, order, injunction, decree, arbitration award, agency
requirement, license or permit of any Governmental Entity (collectively,
"Laws"), except for violations that would not be reasonably likely to have,
either individually or in the aggregate, a Company Material Adverse Effect or
prevent or materially delay or materially impair the ability of the Company to
consummate the transactions contemplated by this Agreement. As of the date
hereof, no investigation or review by any Governmental Entity with respect to
the Company or any of its Subsidiaries is pending or, to the knowledge of the
Company, threatened, nor has any Governmental Entity indicated an intention to
conduct the same, except for those the outcome of which would not be reasonably
likely to have, either individually or in the aggregate, a Company Material
Adverse Effect or prevent or materially delay or materially impair the ability
of the Company to consummate the transactions
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contemplated by this Agreement. The Company and its Subsidiaries each has all
permits, licenses, franchises, variances, exemptions, orders and other
governmental authorizations, consents and approvals from Governmental Entities
necessary to conduct its business as presently conducted, except for those the
absence of which would not be reasonably likely to have, either individually or
in the aggregate, a Company Material Adverse Effect or prevent or materially
delay or materially impair the ability of the Company to consummate the Merger
and the other transactions contemplated by this Agreement.
(j) Takeover Statutes. No "fair price," "moratorium," "control
share acquisition" or other similar anti-takeover statute or regulation (each a
"Takeover Statute") or any anti-takeover provision in the Company's Restated
Certificate of Incorporation and by-laws is applicable to the Company Merger or
the other transactions contemplated by this Agreement.
(k) Environmental Matters. To the knowledge of the Company,
except for such matters that would not be reasonably likely to cause a Company
Material Adverse Effect: (i) the operations of the Company and its Subsidiaries
are in compliance with all applicable Environ mental Laws; (ii) the Company and
its Subsidiaries possess all environmental permits, licenses, authorizations and
approvals required under applicable Environmental Laws with respect to the
business of the Company and its Subsidiaries as presently conducted and no
deficiencies have been asserted by any Governmental Entities with respect to
such authorizations; (iii) the Company and its Subsidiaries have not received
any written environmental claim, notice or request for information during the
past three years concerning any violation or alleged violation of any applicable
Environmental Law; and (iv) there are no material writs, injunctions, decrees,
orders or judgments outstanding, or any actions, suits or proceedings pending or
threatened in writing relating to compliance by the Company or any of its
Subsidiaries with any environmental permit or liability of the Company or any of
its Subsidiaries under any applicable Environmental Law.
The representations and warranties in this Section 5.1(k)
constitute the sole representations and warranties of the Company with respect
to any Environmental Law or Hazardous Substance.
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As used herein, the term "Environmental Law" means any
applicable law, regulation, code, license, permit, order, judgment, decree or
injunction promulgated by any Governmental Entity (A) for the protection of the
environment (including air, water, soil and natural resources) or (B) regulating
the use, storage, handling, transportation, release or disposal of Hazardous
Substances.
As used herein, the term "Hazardous Substance" means any
substance listed, defined, regulated, designated or classified as hazardous,
toxic or radioactive pursuant to any applicable Environmental Law including
petroleum and any derivative or by-product thereof.
(l) Taxes. The Company and each of its Subsidiaries (i) have
duly and timely filed (taking into account any extension of time within which to
file) all Tax Returns (as defined below) required to be filed by any of them as
of the date hereof and all such filed Tax Returns are complete and accurate in
all material respects; (ii) (A) have timely paid all Taxes that are shown as due
on such filed Tax Returns, including amounts required to be paid with respect to
Taxes as a result of any Tax sharing agreement or similar arrangements ("Tax
Sharing Agreement Amounts") or that the Company or any of its Subsidiaries are
obligated to withhold from amounts owing to any employee, creditor or third
party, except with respect to matters contested in good faith and (B) no
penalties or charges are due with respect to the late filing of any Tax Return
required to be filed by or with respect to any of them on or before the
Effective Time; and (iii) with respect to all Tax Returns filed by or with
respect to any of them have not waived any statute of limitations with respect
to Taxes or agreed to any extension of time with respect to a Tax assessment or
deficiency, except, in each case, for those failures to file or pay or those
waivers that would not have a Company Material Adverse Effect. As of the date
hereof, there are not pending or proposed or threatened in writing, any
deficiency, or any such audits, examinations, investigations or other
proceedings in respect of Taxes or Tax matters. Neither the Company nor any of
its Subsidiaries has been or is a party to any Tax sharing agreement or similar
arrangement.
As used in this Agreement, (i) the term "Tax" (including, with
correlative meaning, the terms "Taxes", and
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"Taxable") includes all federal, state, local and foreign income, profits,
franchise, gross receipts, environmental, customs duty, capital stock,
severances, stamp, payroll, sales, employment, unemployment, disability, use,
property, withholding, excise, production, value added, occupancy and other
taxes, duties or assessments of any nature whatsoever, together with all
interest, penalties and additions imposed with respect to such amounts and any
interest in respect of such penalties and additions, and (ii) the term "Tax
Return" includes all returns and reports (including elections, declarations,
disclosures, schedules, estimates and information returns) required to be
supplied to a Tax authority relating to Taxes.
(m) Labor Matters. As of the date hereof, neither the Company
nor any of its Subsidiaries is the subject of any material proceeding asserting
that the Company or any of its Subsidiaries has committed an unfair labor
practice nor is there pending or threatened, nor since January 1, 1998 has there
been any labor strike, dispute, walk-out, work stoppage, slow-down or lockout
involving the Company or any of its Subsidiaries, except for those that, either
individually or in the aggregate, are not reasonably likely to have a Company
Material Adverse Effect or prevent or materially delay or materially impair the
ability of the Company to consummate the transactions contemplated by this
Agreement.
(n) Intellectual Property.
(i) The Company or its Subsidiaries own (free and clear
of any and all liens, pledges, security interests, claims or other
encumbrances), or are licensed or otherwise possess sufficient legally
enforceable rights to use, all patents, trademarks, trade names, service marks,
copyrights, technology, know-how, computer software programs or applications,
databases and tangible or intangible proprietary information or materials that
are currently used in its and its Subsidiaries' businesses (collectively,
"Intellectual Property Rights"), except for any such failures to own, be
licensed or possess that, individually or in the aggregate, are not reasonably
likely to have a Company Material Adverse Effect.
(ii) Except as disclosed in the Company Reports filed
prior to the date hereof, and except for such matters that, individually or in
the aggregate, are not
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reasonably likely to have a Company Material Adverse Effect, (i) to the
knowledge of the Company, the use of the Intellectual Property Rights by the
Company or its Subsidiaries does not conflict with, infringe upon, violate or
interfere with or constitute an appropriation of any right, title, interest or
1goodwill, including, without limitation, any intellectual property right,
patent, trademark, trade name, service mark, copyright of any other Person and
(ii) there have been no claims made and neither the Company nor any of its
Subsidiaries has received written notice of any claim or otherwise knows that
any Intellectual Property Right is invalid, or conflicts with the asserted right
of any other Person.
(o) Brokers and Finders. Except for Morgan Stanley and Salomon
Smith Barney Inc., neither the Company nor any of its officers, directors or
employees has employed any broker or finder or incurred any liability for any
brokerage fees, commissions or finders' fees in connection with the Company
Merger or the other transactions contemplated by this Agreement.
(p) Regulation as a Utility. Neither the Company nor any
subsidiary company or affiliate of the Company is subject to regulation as a
public utility or public service company (or similar designation) by any state
in the United States, by the United States or any agency or instrumentality of
the United States or by any foreign country. As used in this Section 5.1(p), the
terms "subsidiary company" and "affiliate" shall have the respective meanings
ascribed to them in the 1935 Act.
(q) Trading Position Risk Management. The Company has
established a risk management committee which, from time to time, establishes
risk parameters to restrict the level of risk that the Company and its
Subsidiaries are authorized to take with respect to the net position resulting
from physical commodity transactions, exchange traded futures and options and
over-the-counter derivative instruments.
(r) Registration Statement and Proxy Statement. None of the
information supplied or to be supplied by or on behalf of the Company for
inclusion or incorporation by reference in (i) the registration statement on
Form S-4 to be filed with the SEC by Holdco in connection with the issuance of
shares of Holdco Common Stock and Holdco Units
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(or by Parent in connection with the issuance of Parent Units) in the Mergers
(the "Registration Statement") will, at the time the Registration Statement
becomes effective under the Securities Act, and as the same may be amended, at
the effective time of such amendment, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the joint
proxy in definitive form, relating to the meetings of the stockholders of the
Company and Parent to be held in connection with the Mergers and the prospectus
relating to the Holdco Shares and Holdco Units or the Parent Units, as the case
may be, to be issued in the Mergers (the "Joint Proxy Statement/Prospectus")
will at the date such Joint Proxy Statement/Prospectus is mailed to such
stockholders and, as the same may be amended or supplemented, at the times of
such meetings, contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(s) Tax Matters. As of the date hereof, neither the Company
nor any of its Affiliates has taken or agreed to take any action that would
prevent the Company Merger contemplated by this Agreement from qualifying as an
exchange under the provisions of Section 351 of the Code.
(t) Employment Agreements. Other than those persons listed on
Section 5.1(t) of the Company Disclosure Letter, no officer, director or
employee of the Company or any of its Subsidiaries is a party to, or a
beneficiary of, an employment agreement of the type set forth in Section 5.1(t)
of the Company Disclosure Letter.
(u) No Other Representations or Warranties. Except for the
representations and warranties contained in this Section 5.1, neither the
Company nor any other Person makes any other express or implied representation
or warranty on behalf of the Company or any of its Affiliates.
5.2 Representations and Warranties of Parent. Except as set forth in
the disclosure letter delivered to the Company by Parent on or prior to entering
into this Agreement (the "Parent Disclosure Letter") or the Parent Reports (as
defined in Section 5.2(f)), Parent represents
and warrants to the Company that:
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(a) [RESERVED]
(b) Organization, Good Standing and Qualification. Each of
Parent and its Subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of its respective jurisdiction of
organization and has all requisite corporate or similar power and authority to
own and operate its material properties and assets and to carry on its business
as presently conducted in all material respects and is qualified to do business
and is in good standing as a foreign corporation in each jurisdiction where the
ownership or operation of its properties or conduct of its business requires
such qualification, except where the failure to be qualified as a foreign
corporation or be in good standing would not be reasonably likely to have,
either individually or in the aggregate, a Parent Material Adverse Effect.
Parent has made available to the Company a complete and correct copy of Parent's
and its Subsidiaries' certificates of incorporation and by-laws (or comparable
governing instruments), as amended to date. Parent's and its Subsidiaries'
certificates of incorporation and by-laws (or comparable governing instruments)
so delivered are in full force and effect.
As used in this Agreement, the term "Parent Material Adverse
Effect" means a material adverse effect on the financial condition, business,
assets, liabilities or results of operations of Parent and its Subsidiaries
taken as a whole; provided, however, that any such effect resulting from or
arising out of (i) any change in GAAP or interpretations thereof, (ii) economic
or business conditions in the United States generally or (iii) conditions
generally affecting the electric or gas utility industries, shall not be
considered when determining if a Parent Material Adverse Effect has occurred.
(c) Capital Structure. The authorized capital stock of Parent
consists of 400,000,000 Parent Shares, of which 124,098,357 shares were issued
and outstanding on January 31, 2000 and 20,000,000 preferred shares, without par
value, of which no shares were outstanding as of the date hereof and 4,000,000
shares designated as Series A Junior Participating Preferred Shares and reserved
for issuance pursuant to Parent's Share Purchase Rights Plan. All of the issued
and outstanding shares of Parent Shares
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have been duly authorized and are validly issued, fully paid and nonassessable.
Parent has no Parent Shares reserved for or subject to issuance, except that, as
of December 31, 1999, there were 5,874,956 shares of Parent Shares reserved in
the aggregate for issuance pursuant to Parent's 1988 Amended and Restated
Long-Term Incentive Plan, 1994 Amended and Restated Long-Term Incentive Plan and
Nonemployee Director Stock Incentive Plan (the "Parent Stock Plans"). Each of
the outstanding shares of capital stock or other securities of each of Parent's
Subsidiaries is duly authorized, validly issued, fully paid and nonassessable
and owned by Parent or a direct or indirect wholly owned Subsidiary of Parent,
free and clear of any lien, pledge, security interest, claim or other
encumbrance. Except as set forth above, there are no preemptive or other
outstanding rights, options, warrants, conversion rights, stock appreciation
rights, redemption rights, repurchase rights, agreements, arrangements or
commitments to issue or to sell any shares of capital stock or other securities
of Parent or any of its Subsidiaries or any securities or obligations
convertible or exchangeable into or exercisable for, or giving any Person a
right to subscribe for or acquire, any securities of Parent or any of its
Subsidiaries, and no securities or obligations evidencing such rights are
authorized, issued or outstanding. Parent does not have outstanding any bonds,
debentures, notes or other obligations the holders of which have the right to
vote (or convertible into or exercisable for securities having the right to
vote) with the shareholders of Parent on any matter ("Parent Voting Debt").
(d) Corporate Authority and Approval.
(i) Parent has all requisite corporate power and
authority and has taken all corporate action necessary in order to execute,
deliver and perform its obligations under this Agreement, and, subject only to
approval of this Agreement by the holders of a majority of the outstanding
Parent Shares (the "Parent Requisite Vote"), to consummate the Mergers and the
transactions contemplated hereby. If the Parent Requisite Vote is not obtained,
this Agreement as modified by Section 2.4 hereof will remain effective and no
vote of holders of capital stock of Parent will be necessary to approve this
Agreement and the transactions contemplated by Section 2.4 hereof or for Parent,
Holdco or CAC to perform their respective obligations hereunder. This Agreement
has been duly
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executed and delivered by Parent and, assuming due authorization, execution and
delivery of this Agreement by the Company, is a valid and legally binding
agreement of Parent, enforceable against Parent in accordance with its terms,
subject to the Bankruptcy and Equity Exception.
(ii) Prior to the Effective Time, Parent will have taken
all necessary action to permit Holdco to issue the number of Holdco Shares and
Holdco Units or to permit Parent to issue the number of Parent Units, as the
case may be, required to be issued pursuant to Articles II and III. The Holdco
Shares and Holdco Units or the Parent Units, as the case may be, when issued,
will be validly issued, fully paid and nonassessable, and no shareholder of
Parent will have any preemptive right of subscription or purchase in respect
thereof. The Holdco Shares and Holdco Units or the Parent Units, as the case may
be, when issued, will be registered under the Securities Act and Exchange Act
and registered or exempt from registration under any applicable state securities
or "blue sky" laws.
(iii) As of the date hereof the Board of Directors of
Parent (A) has approved and declared advisable this Agreement and adopted the
plan of merger relating to Parent set forth herein and has resolved to recommend
that the shareholders of Parent approve this Agreement and (B) has received the
opinion of its financial advisor Credit Suisse First Boston to the effect that
the Merger Consideration or the Alternate Structure Merger Consideration, as the
case may be, is fair to Parent from a financial point of view.
(e) Governmental Filings; No Violations.
(i) Other than any reports, filings, registrations,
approvals and/or notices (A) required to be made pursuant to Section 2.3, (B)
required to be made under the HSR Act, the Securities Act and the Exchange Act,
(C) with, to or of the SEC under the 1935 Act, (D) with, to or of the FERC, (E)
required to be made with the NYSE and (F) with, to or of the Kentucky Public
Service Commission, the Maryland Public Service Commission, the Public Utilities
Commission of Ohio, the Pennsylvania Public Utility Commission, the Virginia
State Corporation Commission, the West Virginia Public Service Commission and
the Maine Public Utilities Commission, no notices, reports, registrations or
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other filings are required to be made by Parent with, nor are any consents,
registrations, approvals, permits or authorizations required to be obtained by
Parent from, any Governmental Entity, in connection with the execution and
delivery of this Agreement by Parent and the consummation by Parent of the
Mergers and the other transactions contemplated hereby, except for those that
the failure to make or obtain would not be reasonably likely to have, either
individually or in the aggregate, a Parent Material Adverse Effect or prevent,
materially delay or materially impair the ability of Parent to consummate the
transactions contemplated by this Agreement.
(ii) The execution, delivery and performance of this
Agreement by Parent do not, and the consummation by Parent of the Merger and the
other transactions contemplated hereby will not, constitute or result in (A) a
breach or violation of, or a default under, either the certificate of
incorporation or by-laws of Parent or the comparable governing instruments of
any of Parent's Subsidiaries, (B) a breach or violation of, or a default under,
or the acceleration of any obligations, the loss of any right or benefit or the
creation of a lien, pledge, security interest or other encumbrance on the assets
of Parent or any of its Subsidiaries (with or without notice, lapse of time or
both) pursuant to any Contracts binding upon Parent or any of its Subsidiaries
or any Law or governmental or non-governmental permit or license to which Parent
or any of its Subsidiaries is subject or (C) any change in the rights or
obligations of any party under any of the Contracts, except, in the case of
clause (B) or (C) above, for any breach, violation, default, acceleration,
creation or change that would not be reasonably likely to have, either
individually or in the aggregate, a Parent Material Adverse Effect or prevent,
materially delay or materially impair the ability of Parent to consummate the
transactions contemplated by this Agreement.
(f) Parent Reports; Financial Statements. Parent has made
available to the Company each registration statement, report, proxy statement or
information statement filed by it with the SEC (collectively, including any
amendments of any such reports, the "Parent Reports") pursuant to the Securities
Act or the Exchange Act since January 1, 1998 and prior to the date hereof,
including (i) Parent's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and (ii) Parent's Quarterly Reports
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on Form 10-Q for the quarterly periods ended March 31, 1999, June 30, 1999 and
September 30, 1999, each in the form filed with the SEC (including exhibits,
annexes and any amendments thereto). None of the Parent Reports (in the case of
Parent Reports filed pursuant to the Securities Act), as of their effective
dates, contains any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances under which they were made, not
misleading and none of the Parent Reports (in the case of Parent Reports filed
pursuant to the Exchange Act) as of the respective dates first mailed to
shareholders contains any statement which, at the time and in the light of the
circumstances under which it was made, was false or misleading with respect to
any material fact, or omits to state any material fact necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The consolidated financial statements of Parent and its
Subsidiaries included in such Parent Reports comply as to form in all material
respects with the applicable rules and regulations of the SEC with respect
thereto. Each of the consolidated balance sheets included in or incorporated by
reference into the Parent Reports (including the related notes and schedules)
fairly presents, in all material respects, the financial position of Parent and
its Subsidiaries as of its date and each of the consolidated statements of
income and consolidated statements of cash flow included in or incorporated by
reference into the Parent Reports (including any related notes and schedules)
fairly presents, in all material respects, the results of operations, retained
earnings and changes in financial position, as the case may be, of Parent and
its Subsidiaries for the periods set forth therein, in each case in accordance
with GAAP consistently applied during the periods involved, except as may be
noted therein. Since September 30, 1999 (the "Parent Audit Date") and through
the date hereof, neither Parent nor any of its Subsidiaries has incurred any
liabilities or obligations (whether absolute, accrued, fixed, contingent or
otherwise and whether due or to become due) of any nature, except liabilities or
obligations which (i) were reflected on the audited balance sheet of Parent and
its Subsidiaries as of September 30, 1999 (including the notes thereto), (ii)
were incurred in the ordinary course of business, consistent with past practices
after September 30, 1999, (iii) are disclosed in the Parent Reports filed after
September 30, 1999,
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(iv) would not be reasonably likely to, either individually or in the aggregate,
have a Parent Material Adverse Effect, (v) were incurred in connection with the
transactions contemplated by this Agreement or (vi) have been satisfied prior to
the date hereof.
(g) Absence of Certain Changes. Since the Parent Audit Date,
Parent and its Subsidiaries taken as a whole have conducted their business only
in the ordinary and usual course of such business and there has not been (i) any
change in the financial condition, business, assets, liabilities or results of
operations of Parent and its Subsidiaries that has had or would be reasonably
likely to have a Parent Material Adverse Effect; (ii) any material damage,
destruction or other casualty loss with respect to any material asset or
material property owned, leased or otherwise used by Parent or any of its
Subsidiaries, not covered by insurance; (iii) any declaration, setting aside or
payment of any dividend or other distribution in respect of the capital stock of
Parent or any repurchase, redemption or other acquisition by Parent or any
Subsidiary of any securities of Parent other than (A) quarterly dividends in the
ordinary course not to exceed $.30 per share of Parent Shares and (B) as
expressly contemplated by this Agreement; or (iv) any change by Parent in
accounting principles, practices or methods which is not required or permitted
by GAAP. Since the Parent Audit Date and through the date hereof, except as
provided for herein or as disclosed in the Parent Reports, there has not been
any material increase in the compensation payable or that could become payable
by Parent or any of its Subsidiaries to officers or key employees or any
material amendment of any of the Parent Compensation and Benefit Plans (as
defined in Section 5.2(i)) other than increases or amendments in the ordinary
course of business consistent with past practice.
(h) Litigation. There are no civil, criminal or administrative
actions, suits, claims, hearings, investigations, reviews or proceedings pending
or threatened against Parent or any of its Subsidiaries, except for those that
would not be reasonably likely to have, either individually or in the aggregate,
a Parent Material Adverse Effect or prevent or materially delay or materially
impair the ability of Parent to consummate the transactions contemplated by this
Agreement.
(i) Employee Benefits.
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(i) A copy of each bonus, deferred compensation,
pension, retirement, profit-sharing, thrift, savings, employee stock ownership,
stock bonus, stock purchase, change in control, retention, restricted stock,
stock option, employment, termination, severance, compensation, medical, health
or other plan, agreement, policy, practice or arrangement that covers employees
or former employees of the Parent and its Subsidiaries ("Parent Employees"), or
directors or former directors of the Parent (the "Parent Compensation and
Benefit Plans") and any trust agreement or insurance contract forming a part of
such Parent Compensation and Benefit Plans has been made available to the
Company prior to the date hereof. All material Parent Compensation and Benefit
Plans are listed in Section 5.2(i) of the Parent Disclosure Letter and any
Parent Compensation and Benefit Plans containing "change of control" or similar
provisions therein are specifically identified in Section 5.2(i) of the Parent
Disclosure Letter.
(ii) All Parent Compensation and Benefit Plans, to the
extent subject to ERISA are in substantial compliance with the applicable
provisions of ERISA. Each Parent Compensation and Benefit Plan that is a Pension
Plan and that is intended to be qualified under Section 401(a) of the Code has
received a favorable determination letter from the IRS. As of the date hereof,
there is no material pending or, to the knowledge of Parent or Merger Sub,
threatened litigation relating to the Parent Compensation and Benefit Plans.
Neither Parent nor any of its Subsidiaries has engaged in a transaction with
respect to any Parent Employee Plan that, assuming the taxable period of such
transaction expired as of the date hereof, would subject Parent or any of its
Subsidiaries to a material tax or penalty imposed by either Section 4975 of the
Code or Section 502(i) of ERISA.
(iii) No liability under Subtitle C or D of Title IV of
ERISA has been or is expected to be incurred by Parent or any of its
Subsidiaries with respect to any ongoing, frozen or terminated "single-employer
plan", within the meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by any of them, or the single-employer plan of any entity which is
considered an ERISA Affiliate. Parent and its Subsidiaries have not incurred and
do not
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expect to incur any withdrawal liability with respect to a multiemployer plan
under Subtitle E of Title IV of ERISA (regardless of whether based on
contributions of an ERISA Affiliate). No notice of a "reportable event", within
the meaning of Section 4043 of ERISA for which the 30-day reporting requirement
has not been waived or extended, other than pursuant to PBGC Reg. Section
4043.66, has been required to be filed for any Pension Plan or by any ERISA
Affiliate within the 12-month period ending on the date hereof.
(iv) All contributions required to be made under the
terms of any Parent Compensation and Benefit Plan as of the date hereof have
been timely made or have been reflected on the most recent consolidated balance
sheet filed or incorporated by reference in the Parent Reports. Neither any
Pension Plan nor any single-employer plan of an ERISA Affiliate has an
"accumulated funding deficiency" (whether or not waived) within the meaning of
Section 412 of the Code or Section 302 of ERISA and no ERISA Affiliate has an
outstanding funding waiver. Neither Parent nor any of its Subsidiaries has
provided, or is required to provide, security to any Pension Plan or to any
single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the
Code.
(v) Neither Parent nor any of its Subsidiaries have any
obligations for, or liabilities with respect to, retiree health and life
benefits under any Parent Compensation and Benefit Plan, except for benefits
required to be provided under Section 4980(B) of the Code.
(j) Compliance with Laws. As of the date hereof, the business
of Parent and its Subsidiaries taken as a whole is not being conducted in
violation of any Laws, except for violations that would not be reasonably likely
to have, either individually or in the aggregate, a Parent Material Adverse
Effect or prevent or materially delay or materially impair the ability of Parent
to consummate the transactions contemplated by this Agreement. As of the date
hereof, no investigation or review by any Governmental Entity with respect to
Parent or any of its Subsidiaries is pending or to the knowledge of Parent
threatened, nor has any Governmental Entity indicated an intention to conduct
the same, except for those the outcome of which would not be reasonably likely
to have, either individually or in the aggregate, a Parent Material Adverse
Effect or prevent or
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materially delay or materially impair the ability of Parent or Merger Sub to
consummate the transactions contemplated by this Agreement. Parent and its
Subsidiaries each has all permits, licenses, franchises, variances, exemptions,
orders and other governmental authorizations, consents and approvals from
Governmental Entities necessary to conduct its business as presently conducted,
except for those the absence of which would not be reasonably likely to have,
either individually or in the aggregate, a Parent Material Adverse Effect or
prevent or materially delay or materially impair the ability of Parent to
consummate the Merger and the other transactions contemplated by this Agreement.
(k) Takeover Statutes. As of the date hereof, no Takeover
Statute or any applicable anti-takeover provision in the certificate of
incorporation of Parent or by-laws of Parent is applicable to the Mergers or any
of the other transactions contemplated by this Agreement.
(l) Environmental Matters. To the knowledge of Parent, except
for such matters that would not be reasonably likely to cause a Parent Material
Adverse Effect: (i) operations of Parent and its Subsidiaries are in compliance
with all applicable Environmental Laws; (ii) Parent and its Subsidiaries possess
all environmental permits, licenses, authorizations and approvals required under
applicable Environmental Laws with respect to the business of Parent and its
Subsidiaries as presently conducted and no deficiencies have been asserted by
any Governmental Entities with respect to such authorizations; (iii) Parent and
its Subsidiaries have not received any written environmental claim, notice or
request for information during the past three years concerning any violation or
alleged violation of any applicable Environmental Law; and (iv) there are no
material writs, injunctions, decrees, orders or judgments outstanding, or any
actions, suits or proceedings pending or threatened in writing relating to
compliance by Parent or any of its Subsidiaries with any environmental permit or
liability of Parent or any of its Subsidiaries under any applicable
Environmental Law.
The representations and warranties in this Section 5.2(l)
constitute the sole representations and warranties of Parent with respect to any
Environmental Law or Hazardous Substance.
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(m) Tax Matters. As of the date hereof, neither Parent nor any
of its Affiliates has taken or agreed to take any action that would prevent the
Parent Merger from qualifying as a "reorganization" within the meaning of
Section 368(a) of the Code.
(n) Taxes. Parent and each of its Subsidiaries (i) have duly
and timely filed (taking into account any extension of time within which to
file) all Tax Returns required to be filed by any of them as of the date hereof
and all such filed Tax Returns are complete and accurate in all material
respects; (ii) (A) have timely paid all Taxes that are shown as due on such
filed Tax Returns, including all Tax Sharing Agreement Amounts, and all amounts
that Parent or any of its Subsidiaries are obligated to withhold from amounts
owing to any employee, creditor or third party, except with respect to matters
contested in good faith and (B) no penalties or charges are due with respect to
the late filing of any Tax Return required to be filed by or with respect to any
of them on or before the Effective Time; and (iii) with respect to all Tax
Returns filed by or with respect to any of them have not waived any statute of
limitations with respect to Taxes or agreed to any extension of time with
respect to a Tax assessment or deficiency, except, in each case, for those
failures to file or pay or those waivers that would not have a Parent Material
Adverse Effect. As of the date hereof, there are not pending or proposed or
threatened in writing, any deficiency, or any such audits, examinations,
investigations or other proceedings in respect of Taxes or Tax matters. Neither
Parent nor any of its Subsidiaries has been or is a party to any Tax sharing
agreement or similar arrangement.
(o) Labor Matters. As of the date hereof, neither Parent nor
any of its Subsidiaries is the subject of any material proceeding asserting that
Parent or any of its Subsidiaries has committed an unfair labor practice nor is
there pending or threatened, nor since January 1, 1998 has there been any labor
strike, dispute, walk-out, work stoppage, slow-down or lockout involving Parent
or any of its Subsidiaries, except for those that, either individually or in the
aggregate, are not likely to have a Parent Material Adverse Effect or prevent or
materially delay or materially impair the ability of Parent to consummate the
transactions contemplated by this Agreement.
(p) Intellectual Property.
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(i) Parent or its Subsidiaries own (free and clear of
any and all liens, pledges, security interests, claims or other encumbrances),
or are licensed or otherwise possess sufficient legally enforceable rights to
use, all patents, trademarks, trade names, service marks, copyrights,
technology, know-how, computer software programs or applications, databases and
tangible or intangible proprietary information or materials that are currently
used in its and its Subsidiaries' businesses (collectively, "Parent Intellectual
Property Rights"), except for any such failures to own, be licensed or possess
that, individually or in the aggregate, are not reasonably likely to have a
Parent Material Adverse Effect.
(ii) Except as disclosed in the Parent Reports filed
prior to the date hereof, and except for such matters that, individually or in
the aggregate, are not reasonably likely to have a Parent Material Adverse
Effect, (i) to the knowledge of Parent, the use of the Parent Intellectual
Property Rights by Parent or its Subsidiaries does not conflict with, infringe
upon, violate or interfere with or constitute an appropriation of any right,
title, interest or goodwill, including, without limitation, any intellectual
property right, patent, trademark, trade name, service mark of any other Person
and (ii) there have been no claims made and neither Parent nor any of its
Subsidiaries has received written notice of any claim or otherwise knows that
any Parent Intellectual Property Right is invalid, or conflicts with the
asserted right of any other Person.
(q) Brokers and Finders. Except for Credit Suisse First Boston
and Wasserstein Perella & Co., Inc., neither Parent nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in connection
with the Mergers or the other transactions contemplated by this Agreement.
(r) Available Funds. Parent has received a commitment letter
from Credit Suisse First Boston and Barclays Bank PLC representing committed
funds sufficient to pay the cash portion of the Cash and Unit Consideration and
to satisfy all of its obligations hereunder and in connection with the Company
Merger and the other transactions contemplated by this Agreement (a copy of
which has been provided to the Company) and on the Closing Date
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will have available all funds necessary to pay the cash portion of the Cash and
Unit Consideration and to satisfy all of obligations hereunder and in connection
with the Company Merger and the other transactions contemplated by this
Agreement. The obligations of Parent hereunder are not subject to any conditions
regarding the ability of Parent to obtain financing for the consummation of the
transactions contemplated herein.
(s) Regulation as a Utility. Neither Parent nor any subsidiary
company or affiliate of Parent is subject to regulation as a public utility or
public service company (or similar designation) by any state in the United
States, by the United States or any agency or instrumentality of the United
States or by any foreign country. As used in this Section 5.2(s), the terms
"subsidiary company" and "affiliate" shall have the respective meanings ascribed
to them in the 1935 Act.
(t) Registration Statement and Proxy Statement. None of the
information supplied or to be supplied by or on behalf of Holdco, PAC, CAC, or
Parent for inclusion or incorporation by reference in (i) the Registration
Statement will, at the time the Registration Statement becomes effective under
the Securities Act, and as the same may be amended, at the effective time of
such amendment, contain any untrue statement or a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading and (ii) the Joint Proxy Statement/Prospectus
will, at the date such Joint Proxy Statement/Prospectus is mailed to the
stockholders of the Company and Parent and, as the same may be amended or
supplemented, at the times of the meetings of such stockholders to be held in
connection with the Mergers, contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Registration Statement and the Joint Proxy Statement/Prospectus
will comply as to form in all material respects with the provisions of the
Securities Act and the Exchange Act and the rules and regulations thereunder.
(u) No Other Representations or Warranties. Except for the
representations and warranties contained in this Section 5.2, neither Parent nor
any other Person makes any other express or implied representation or warranty
on
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behalf of Parent or any of its Affiliates.
ARTICLE VI
COVENANTS
6.1 Interim Operations of the Company. Except as otherwise set forth in
Section 6.1 of the Company Disclosure Letter, including but not limited to the
list of capital expenditures of the Company for the years 2000 and 2001 set
forth therein, the Company covenants and agrees as to itself and its
Subsidiaries that, from the date hereof and prior to the Effective Time (unless
Parent shall otherwise approve in writing, which approval shall not be
unreasonably withheld or delayed, and except as otherwise expressly contemplated
by this Agreement or required by Law):
(i) the business of the Company and its Subsidiaries
shall be conducted only in the ordinary and usual course and, to the extent
consistent therewith, it and its Subsidiaries shall use their respective
reasonable best efforts to (a) subject to prudent management of workforce needs
and ongoing programs currently in force, preserve its business organization
intact and maintain its existing relations and goodwill with customers,
suppliers, distributors, creditors, lessors, employees and business associates,
(b) maintain and keep material properties and assets in good repair and
condition, subject to ordinary wear and tear and (c) maintain in effect all
existing governmental permits pursuant to which the Company or any of its
Subsidiaries operates;
(ii) the Company shall not (w) amend its certificate of
incorporation or by-laws or the comparable governing instruments of any of its
Subsidiaries except, in the case of its Subsidiaries, for such amendments that
would not prevent or materially delay the consummation of the transactions
contemplated by this Agreement; (x) split, combine or reclassify its outstanding
shares of capital stock; (y) declare, set aside or pay any dividend payable in
cash, stock or property in respect of any capital stock (other than (A)
dividends from its direct or indirect wholly owned Subsidiaries to it or a
wholly owned Subsidiary and (B) regular quarterly dividends on Shares with usual
record and payment dates not to exceed $.225 per Share); or
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(z) repurchase, redeem or otherwise acquire any shares of its capital stock or
any securities convertible into or exchangeable or exercisable for any shares of
its capital stock or permit any of its Subsidiaries to purchase or otherwise
acquire, any shares of its capital stock or any securities convertible into or
exchangeable or exercisable for any shares of its capital stock (other than for
the purpose of funding or providing benefits under the existing terms of the
Compensation and Benefit Plans and any other existing terms of the employee
benefit plans, stock option and other incentive compensation plans, directors
plans and stock purchase and dividend reinvestment plans);
(iii) neither the Company nor any of its Subsidiaries
shall issue, sell, pledge, dispose of or encumber any shares of, or securities
convertible into or exchangeable or exercisable for, or options, warrants,
calls, commitments or rights of any kind to acquire, any shares of its capital
stock of any class or any Voting Debt or any other property or assets (other
than (A) Shares issuable pursuant to options (whether or not vested) outstanding
on the date hereof under the Stock Plans and (B) issuances of additional options
or rights to acquire not more than 1,000,000 Company Shares in any calendar year
(it being understood that approximately 845,000 options have already been issued
by the Company in the year 2000 and that those persons identified on Section
6.1(iii) of the Company Disclosure Letter have already been issued approximately
115,000 options in 2000) nor more than 2,000,000 Company Shares in the aggregate
granted pursuant to the terms of the Stock Plans as in effect on the date hereof
in the ordinary and usual course of the operation of such Stock Plans consistent
with past practice and performance guidelines; provided that option issuances
for each of the calendar years 2001 and 2002 for the persons identified on
Section 6.1(iii) of the Company Disclosure Letter shall not exceed the option
issuances to such persons in the year 2000 and shall not be included for
purposes of the 1,000,000 and 2,000,000 option grant limitations set forth
above, and issuances of Shares pursuant to options granted after the date hereof
pursuant to such Stock Plans;
(iv) neither the Company nor any of its Subsidiaries
shall, other than in the ordinary and usual course of business, and other than
transactions not in excess of $125,000,000 in the aggregate in any calendar
year, transfer, lease, license, guarantee, sell, mortgage,
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pledge, dispose of or encumber any property or assets (including capital stock
of any of its Subsidiaries) or incur or modify any indebtedness for borrowed
money or guarantee any such indebtedness;
(v) neither the Company nor any of its Subsidiaries
shall, by any means, make any acquisition of, or investment in, assets or stock
(whether by way of merger, consolidation, tender offer, share exchange or other
activity) in any transaction or any series of transactions (whether or not
related), except for acquisitions not involving a merger, consolidation, tender
offer or share exchange for an aggregate purchase price or prices, including the
assumption of any debt, not in excess of $125,000,000 in any calendar year;
(vi) neither the Company nor any of its Subsidiaries
shall, other than in the ordinary and usual course of business, (i) modify,
amend, or terminate any material contract, (ii) waive, release, relinquish or
assign any material contract (or any of the material rights of the Company or
any of its Subsidiaries thereunder), right or claim, or (iii) cancel or forgive
any material indebtedness owed to the Company or any of its Subsidiaries;
(vii) neither the Company nor any of its Subsidiaries
will (i) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, recapitalization or other similar reorganization of the Company
or any Subsidiary of the Company, (ii) accelerate or delay collection of notes
or accounts receivable in advance of or beyond their regular due dates, other
than in the usual and ordinary course of business, or (iii) change any
accounting principle, practice or method in a manner that is inconsistent with
past practice, except to the extent required by U.S. GAAP as advised by the
Company's regular independent accountants;
(viii) neither the Company nor any of its Subsidiaries
shall terminate, establish, adopt, enter into, make any new grants or awards
under, amend or otherwise modify, any Compensation and Benefit Plans (other than
issuances of additional Shares or options or rights to acquire Shares granted
pursuant to the terms of the Stock Plans as in effect on the date hereof in the
ordinary and usual course of the operation of such Stock Plans, subject
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to the limitations set forth in clause (iii) of this Section 6.1) or enter into
any material consulting agreements or arrangements, or increase the salary,
wage, bonus or other compensation of any employees except for (A) grants or
awards or increases to employees who are not persons set forth in Section
6.1(iii) of the Company Disclosure Letter under existing Compensation and
Benefit Plans as in effect as of the date hereof occurring in the ordinary and
usual course of business consistent with past practice (which shall include
normal periodic performance reviews and related compensation and benefit
increases), (B) annual reestablishment of Compensation and Benefit Plans and the
provision of individual compensation or benefit plans and agreements for newly
hired or appointed officers and employees of the Company and its Subsidiaries
who are not executive officers or (C) actions necessary to satisfy existing
contractual obligations under Compensation and Benefit Plans or agreements
existing as of the date hereof;
(ix) other than in the ordinary and usual course of
business, neither the Company nor any of its Subsidiaries shall settle or
compromise any material claims or litigation or regulatory proceeding;
(x) neither the Company nor any of its Subsidiaries
shall make any material Tax election or, except as required by applicable Law,
permit any insurance policy naming it as a beneficiary or loss-payable payee to
be canceled or terminated except in the ordinary and usual course of business or
as may be required by applicable Law;
(xi) except for (x) capital expenditures set forth in
Section 6.1(xi) of the Company Disclosure Letter and (y) acquisitions permitted
under clause (v) above, neither the Company nor any of its Subsidiaries shall
make, or (to the extent the Company has not previously committed to making such
expenditures) commit to make, any capital expenditures; and
(xii) neither the Company nor any of its Subsidiaries
will authorize or enter into an agreement to do anything prohibited by the
foregoing.
6.2 Acquisition Proposals. The Company agrees that neither it nor any
of its Subsidiaries nor any of its or its Subsidiaries' officers and directors
shall, and that it shall direct and use its best efforts to cause its and its
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Subsidiaries' employees, agents and other representatives (including any
investment banker, attorney or accountant retained by it or any of its
Subsidiaries) not to, directly or indirectly, initiate, solicit, encourage or
otherwise facilitate any inquiries or the making of any proposal or offer with
respect to (i) a merger, recapitalization, reorganization, share exchange,
consolidation or similar transaction involving it or its Subsidiaries, (ii) any
sale, lease, exchange, mortgage, pledge or transfer of 25% or more of the equity
securities of the Company or a business that constitutes 25% or more of the net
revenues, net income or the assets of the Company and its Subsidiaries, taken as
a whole, in a single transaction or series of related transactions or (iii) any
tender offer or exchange offer for 15% or more of the outstanding Shares (any
such proposal or offer being hereinafter referred to as an "Acquisition
Proposal"). The Company further agrees that neither it nor any of its
Subsidiaries nor any of its or its Subsidiaries' officers and directors shall,
and that it shall direct and use its reasonable best efforts to cause its and
its Subsidiaries' employees, agents and representatives not to, directly or
indirectly, engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any Person relating to an
Acquisition Proposal, or otherwise facilitate any effort or attempt to make or
implement an Acquisition Proposal; provided, however, that prior to the adoption
of this Agreement by the Company's Shareholders, nothing contained in this
Agreement shall prevent either the Company or any of its representatives or the
Board of Directors of the Company from (A) complying with Rule 14e-2 promulgated
under the Exchange Act with regard to an Acquisition Proposal or otherwise
complying with the Exchange Act; provided that the Company or its Board of
Directors shall not be permitted to recommend any such Acquisition Proposal
unless it would be permitted to do so in accordance with clause (D) below; (B)
providing information in response to a request therefor by a Person who has made
a bona fide unsolicited written Acquisition Proposal; (C) engaging in any
negotiations or discussions with any Person who has made a bona fide unsolicited
written Acquisition Proposal; or (D) recommending such an Acquisition Proposal
to the shareholders of the Company or adopting an agreement relating to an
Acquisition Proposal, if, and only to the extent that (x) in each such case
referred to in clause (B), (C) or (D) above, the Board of Directors of the
Company
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determines in good faith, after consultation with and based upon the advice of
outside legal counsel that failure to take such action would result in a breach
of the directors' fiduciary duties under applicable law and after consultation
with its independent financial advisors of national reputation, that such
Acquisition Proposal is reasonably likely to lead to a transaction on terms more
favorable from a financial point of view to the Company's shareholders than the
transactions contemplated by this Agreement (any such more favorable Acquisition
Proposal being referred to as a "Superior Proposal") and (y) in the case of
clause (D) above the Board of Directors of the Company determines in good faith
that such Acquisition Proposal is reasonably capable of being consummated,
taking into account legal, financial, regulatory and other aspects of the
proposal and the Person making the proposal, and prior to taking any such action
set forth in clauses (B), (C) or (D) above (other than with respect to actions
related to entering into a confidentiality agreement), the Company provides
reasonable notice to Parent to the effect that it is taking such action and
receives from the Person making the Acquisition Proposal an executed
confidentiality agreement in reasonably customary form and, in any event,
containing terms no more onerous to the Company than those contained in the
Confidentiality Agreement (as defined in Section 9.7). Promptly after receiving
any Acquisition Proposal or any written inquiry that would be reasonably likely
to lead to an Acquisition Proposal and prior to providing any information to or
entering into any discussions or negotiations with any Person in connection with
an Acquisition Proposal by such Person, the Company shall notify Parent of such
Acquisition Proposal (including, without limitation, the material terms and
conditions thereof and the identity of the person making it), and shall provide
Parent with a copy of any written Acquisition Proposal or amendment or
supplements thereto and shall thereafter inform Parent on a prompt basis of any
material changes to the terms and conditions of such Acquisition Proposal. The
Company agrees that it will immediately cease and cause to be terminated any
existing discussions or negotiations with any parties conducted heretofore with
respect to any Acquisition Proposal; it being understood that any Acquisition
Proposal made prior to the date hereof may, if made at any time after the date
hereof, be deemed a Superior Proposal, if it would otherwise fulfill the
requirements for being deemed a Superior Proposal hereunder. The Company agrees
that it will take the necessary steps to
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promptly inform the individuals or entities referred to in the first sentence
hereof of the obligations undertaken in this Section 6.2.
6.3 Shareholders Meetings. (a) Subject to fiduciary obligations under
applicable law, the Company will take, in accordance with applicable law and its
Restated Certificate of Incorporation and by-laws, all action necessary to call,
give notice of, convene and hold a meeting of holders of Shares, including any
adjournment thereof (the "Company Shareholders Meeting") as promptly as
practicable after the execution of this Agreement by Parent to consider and vote
upon the approval of this Agreement and such other matters as may be
appropriate. The Board of Directors of the Company shall recommend such approval
and shall take all lawful action reasonably necessary to solicit such approval;
provided, however, that the recommendation of the Board of Directors of the
Company may be withdrawn or adversely modified if required under applicable law
relating to fiduciary duties.
Without limiting the generality of the foregoing but subject
to the Company's rights pursuant to Sections 6.2 and 8.3, the Company agrees
that its obligations pursuant to the first sentence of this Section 6.3(a) shall
not be affected by the commencement, public proposal, public disclosure or
communication to the Company of any Acquisition Proposal.
(b) Subject to fiduciary obligations under applicable law,
Parent will take, in accordance with applicable law and its Restated Articles of
Incorporation and by-laws, all action necessary to call, give notice of, convene
and hold a meeting of its holders of Parent Shares, including any adjournment
thereof (the "Parent Shareholders Meeting") as promptly as practicable after the
execution of this Agreement to consider and vote upon the approval of this
Agreement and such other matters as may be appropriate. The Board of Directors
of Parent shall recommend such approval and shall take all lawful action
reasonably necessary to solicit such approval, provided, however, that the
recommendation of the Board of Directors of the Company may be withdrawn or
adversely modified if required under applicable law relating to fiduciary
duties.
(c) Meeting Date. The Parent Shareholders Meeting shall be
held on the day prior to the Company Shareholders
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Meeting unless otherwise agreed by the Company and Parent.
6.3A Joint Proxy Statement and Registration Statement.
(a) Preparation and Filing. As promptly as reasonably
practicable after the date hereof, Parent, Holdco and the Company, shall prepare
and file with the SEC the Registration Statement and the Joint Proxy Statement/
Prospectus (together the "Joint Proxy/Registration Statement"). Holdco or
Parent, as the case may be, shall take such actions as may be reasonably
required to cause the Registration Statement to be declared effective under the
Securities Act as promptly as practicable after such filing. Each of the parties
shall furnish all information concerning itself that is required or customary
for inclusion in the Joint Proxy/Registration Statement. No representation,
covenant or agreement contained in this Agreement is made by any party hereto
with respect to information supplied by any other party hereto for inclusion in
the Joint Proxy/Registration Statement. The parties shall take such actions as
may be reasonably required to cause the Joint Proxy/Registration Statement to
comply as to form in all material respects with the Securities Act, the Exchange
Act and the 1935 Act and the rules and regulations thereunder. Holdco or Parent,
as the case may be, shall take such action as may be reasonably required to
cause the Holdco Shares and Holdco Units or Parent Units to be issued in the
Mergers to be approved for listing on the NYSE and any other stock exchanges
agreed to by the parties, each upon official notice of issuance.
(b) Letter of the Company's Accountants. The Company shall use
its reasonable best efforts to cause to be delivered to the Company, Parent and
Holdco letters of Arthur Andersen LLP, one dated a date within two (2) business
days before the effective date of the Joint Proxy/Registration Statement and one
dated the Closing Date, and addressed to the Company and Parent, in form and
substance reasonably satisfactory to the Company and Parent and customary in
scope and substance for "cold comfort" letters delivered by independent public
accountants in connection with registration statements and proxy statements
similar to the Joint Proxy/Registration Statement.
(c) Letter of Parent's Accountants. Parent shall use its
reasonable best efforts to cause to be delivered to
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Parent, Holdco and the Company letters of Arthur Andersen LLP, one dated a date
within two (2) business days before the effective date of the Joint
Proxy/Registration Statement and one dated the Closing Date, and addressed to
Parent and the Company, in form and substance satisfactory to Parent and the
Company and customary in scope and substance for "cold comfort" letters
delivered by independent public accountants in connection with registration
statements and proxy statements similar to the Joint Proxy/Registration
Statement.
6.4 Filings; Other Actions; Notification.
(a) The Company and Parent shall cooperate with each other and
use (and shall cause their respective Subsidiaries to use) their respective
reasonable best efforts to take or cause to be taken all actions, and do or
cause to be done all things, necessary, proper or advisable on its part under
this Agreement and applicable Laws to consummate and make effective the Merger
and the other transactions contemplated by this Agreement as soon as
practicable, including preparing and filing as soon as practicable all
documentation to effect all necessary notices, reports and other filings and to
obtain as soon as practicable all consents (including, but not limited to, the
parties cooperating and using their reasonable best efforts to obtain the
consents listed in Section 5.1(d) of the Company Disclosure Letter),
registrations, approvals, permits and authorizations necessary or advisable to
be obtained from any third party and/or any Governmental Entity in order to
consummate the Merger or any of the other trans actions contemplated by this
Agreement. Subject to applicable Laws relating to the exchange of information
and the preservation of any applicable attorney-client privilege, work-product
doctrine, self-audit privilege or other similar privilege, Parent and the
Company shall have the right to review and comment on in advance, and to the
extent practicable each will consult the other on, all the information relating
to Parent or the Company, as the case may be, and any of their respective
Subsidiaries, that appear in any filing made with, or written materials
submitted to, any third party and/or any Governmental Entity in connection with
the Merger and the other transactions contemplated by this Agreement. In
exercising the foregoing right, each of the Company and Parent shall act
reasonably and as promptly as practicable.
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(b) Subject to applicable Laws and the preservation of any
applicable attorney-client privilege, the Company and Parent each shall, upon
request by the other, furnish the other with all information concerning itself,
its Subsidiaries, directors, officers and shareholders and such other matters as
may be reasonably necessary or advisable in connection with any statement,
filing, notice or application made by or on behalf of Parent, the Company or any
of their respective Subsidiaries to any third party and/or any Governmental
Entity in connection with the Merger and the transactions contemplated by this
Agreement.
(c) Subject to any confidentiality obligations and the
preservation of any attorney-client privilege, the Company and Parent each shall
keep the other apprised of the status of matters relating to completion of the
transactions contemplated hereby, including promptly furnishing the other with
copies of notices or other communications received by Parent or the Company, as
the case may be, or any of its Subsidiaries, from any third party and/or any
Governmental Entity with respect to the Merger and the other transactions
contemplated by this Agreement.
(d) Without limiting the generality of the undertakings
pursuant to this Section 6.4, each of the Company and Parent agrees to take or
cause to be taken the following actions: (i) provide promptly to any and all
federal, state, local or foreign courts or Governmental Entity with jurisdiction
over enforcement of any applicable antitrust laws ("Government Antitrust
Entity") information and documents requested by any Government Antitrust Entity
or necessary, proper or advisable to permit consummation of the Company Merger
and the transactions contemplated by this Agreement and (ii) contest and resist
any action seeking to have imposed any order, decree, judgment, injunction,
ruling or other order (whether temporary, preliminary or permanent) (an "Order")
that would materially delay, restrain, enjoin or otherwise prohibit consummation
of the Company Merger and, in the event that any such temporary or preliminary
Order is entered in any proceeding that would make consummation of the Company
Merger in accordance with the terms of this Agreement unlawful or that would
prevent or materially delay consummation of the Company Merger or the other
transactions contemplated by this Agreement, Parent agrees to use its best
efforts to take promptly any and all
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steps (including the appeal thereof, the posting of a bond or the taking of the
steps contemplated by clause (e) of this paragraph) necessary to vacate, modify
or suspend such Order so as to permit such consummation.
(e) Without limiting the generality of the covenants contained
in this Section 6.4, Parent agrees to, if necessary to prevent any Governmental
Authority from issuing any order, injunction, decree, judgment or ruling or the
taking of any other action restraining, enjoining or otherwise prohibiting the
Company Merger, offer to accept an order to divest (or enter into a consent
decree or other agreement giving effect thereto) such of Parent's or the
Company's assets as are required to forestall such order, injunction, decree,
judgment, ruling or action and to hold separate such assets pending such
divestiture.
6.5 Access. Upon reasonable notice, and except as may otherwise be
required by applicable Law, the Company shall (and shall cause its Subsidiaries
to) afford Parent's officers, employees, counsel, accountants and other
authorized representatives ("Representatives") reasonable access, during normal
business hours throughout the period prior to the Effective Time, to its
executive officers, to its properties, books, contracts and records and, during
such period, the Company shall (and shall cause its Subsidiaries to) furnish
promptly to Parent all information concerning its business, properties and
personnel as may reasonably be requested; provided that no investigation
pursuant to this Section shall affect or be deemed to modify any representation
or warranty made by the Company, and; provided, further, that the foregoing
shall not require the Company to permit any inspection, or to disclose any
information, that in the reasonable judgment of the Company, would result in the
disclosure of any trade secrets of third parties, the loss of any applicable
attorney-client privilege or violate any of its obligations with respect to
confidentiality if the Company shall have used reasonable efforts to obtain the
consent of such third party to such inspection or disclosure. All requests for
information made pursuant to this Section shall be directed to an executive
officer of the Company or such Person as may be designated by such executive
officer. All such information shall be governed by the terms of the
Confidentiality Agreement. From the date hereof until the Effective Time, Parent
shall (i) comply with the reasonable requests of the Company to make its
officers and employees available to respond to the
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reasonable inquiries of the Company in connection with the operations of Parent
and its Subsidiaries and (ii) furnish to the Company such information concerning
its financial condition as may be reasonably requested.
6.6 Stock Exchange De-listing. Holdco or Parent, as the case may be,
shall use its best efforts to cause the Company Shares to be removed from
quotation on the NYSE and de-registered under the Exchange Act as soon as
practicable following the Effective Time.
6.7 Publicity. The initial press release shall be a joint press release
and thereafter the Company and Parent each shall consult with the other prior to
issuing any press releases or otherwise making public announcements with respect
to the Merger and the other transactions contemplated by this Agreement and
prior to making any filings with any third party and/or any Governmental Entity
with respect thereto, except as may be required by Law or by obligations
pursuant to any listing agreement with or rules of any national securities
exchange or national market system.
6.8 Benefits.
(a) Stock Options. At the Effective Time, each stock option
outstanding under the Stock Plans (each, a "Company Option"), whether or not
then exercisable, shall be cancelled and only entitle the holder thereof to
receive with respect to such Company Option an amount in cash equal to (i) for
each share with respect to such Company Option, the excess, if any, of (A) the
value of the Merger Consideration or the Alternative Structure Merger
Consideration, as the case may be, over (B) the per Share exercise price under
such Company Option and (ii) the balance in such holder's Dividend Credit
Account pursuant to the stock option agreement with respect to such Company
Option. For purposes of this Section 6.8(a), the value of the Merger
Consideration or the Alternative Structure Merger Consideration, as the case may
be, shall be $72.29 plus an amount in cash equal to 7% interest on $72.29 for
the period beginning on the first anniversary date of this Agreement and ending
on the day prior to the Closing Date (calculated on a per annum basis of a
365-day year). Parent, or Merger Sub, as applicable, shall be entitled to deduct
or withhold from amounts otherwise payable to a holder of a Company
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Option any amounts required to be withheld under applicable tax laws. The
Company shall use its reasonable efforts to obtain, but only if and to the
extent required, the consent of each holder of outstanding Company Options to
the foregoing treatment of such Company Options and to take any other action
reasonably necessary to effectuate the foregoing provisions.
(b) Employee Benefits. Parent agrees that, during the period
commencing at the Effective Time and ending on the third anniversary thereof,
the employees of the Company and its Subsidiaries will continue to be provided
with benefits under employee benefit plans that are no less favorable than the
greater of (i) those currently provided by the Company and its Subsidiaries to
such employees and (ii) those provided by Parent and its Subsidiaries from time
to time during such three-year period. Following the Effective Time, Parent
shall cause service by employees of the Company and its Subsidiaries (and any
predecessor entities) to be taken into account for all purposes (including,
without limitation, eligibility to participate, eligibility to commence
benefits, vesting, benefit accrual and severance) under the Compensation and
Benefit Plans or any other benefit plans of Parent or its Subsidiaries in which
such employees participate; provided, however, that with respect to any defined
benefit pension plan, such crediting of service shall not result in the
duplication of benefits in respect of any period.
From and after the Effective Time, Parent shall (i) cause to
be waived any pre-existing condition limitations under benefit plans, policies
or practices of Parent or its Subsidiaries in which employees of the Company or
its Subsidiaries participate (other than those pre-existing condition
limitations in effect at the Effective Time under any plans, policies or
practices of the Company or its Subsidiaries) and (ii) cause to be credited any
deductibles and out-of-pocket expenses incurred by such employees and their
beneficiaries and dependents during the portion of the calendar year prior to
participation in the benefit plans provided by Parent and its Subsidiaries.
Parent and Holdco shall, and Parent and Holdco shall cause the
Company to, honor all employee benefit obligations to current and former
employees under the Compensation and Benefit Plans.
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Parent agrees that the transactions contemplated by this
Agreement meet the definition of, and shall constitute, a "change in control"
under each Compensation and Benefit Plan listed on Schedule 6.8(b) of the
Company Disclosure Letter.
(c) Employees. Any workforce reductions carried out following
the Effective Time by Parent, Holdco or the Company and their respective
Subsidiaries shall be done in accordance with all applicable collective
bargaining agreements, and all Laws and regulations governing the employment
relationship and termination thereof including, without limitation, the Worker
Adjustment and Retraining Notification Act and regulations promulgated
thereunder, and any comparable state or local law.
(d) Community Involvement. Parent acknowledges that after the
Effective Time, it intends to provide charitable contributions and community
support within the service areas of the Company and its Subsidiaries at levels
consistent with past practice.
(e) Integration Committee. Parent recognizes that the Company
has a talented group of officers and employees that will be important to the
future growth of Holdco or Parent, as the case may be, after the Effective Time.
In recognition of the foregoing, within seven business days of the date hereof,
Parent and the Company will establish an Integration Committee composed in its
entirety of two senior executive officers of the Company and two senior
executive officers of Parent, as selected by the Company and Parent,
respectively (the "Integration Committee"). The Integration Committee shall meet
not less than once per month and shall have direct access to the Chief Executive
Officer of each of Parent and the Company and will be responsible for proposing
alternatives and recommendations regarding the matters and issues arising in
connection with the integration of the Company and Parent and their respective
businesses, assets and organizations (including without limitation, issues
arising in connection with matters contemplated by this Article VI).
(f) Phantom Shares. At the Effective Time, each Phantom Share
under the Company's Phantom Stock Plan for Outside Directors shall be canceled
and only entitle the holder thereof to receive with respect to such Phantom
Share
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an amount in cash equal to the value of the Merger Consideration or the
Alternative Structure Merger Consideration, as the case may be. For purposes of
this Section 6.8(f), the value of the Merger Consideration or the Alternative
Structure Merger Consideration, as the case may be, shall be $72.29 plus an
amount in cash equal to 7% interest on $72.29 for the period beginning on the
first anniversary date of this Agreement and ending on the date prior to the
Closing Date (calculated on a per annum basis of a 365-day year). Parent, or
Holdco, as applicable, shall be entitled to deduct or withhold from amounts
otherwise payable to a holder of a Phantom Share any amounts required to be
withheld under applicable tax laws. The Company shall use its reasonable efforts
to obtain, but only if and to the extent required, the consent of each holder of
a Phantom Share to the foregoing treatment of such Phantom Shares and to take
any other action reasonably necessary to effectuate the foregoing provisions.
6.9 Expenses. Parent shall pay all charges and expenses, including
those of the Exchange Agent, in connection with the transactions contemplated in
Article II. Except as otherwise provided in this Section 6.9 and Section 8.5(b),
whether or not the Mergers are consummated, all costs and expenses incurred in
connection with this Agreement and the Mergers and the other transactions
contemplated by this Agreement shall be paid by the party incurring such
expense, except that each of the Company and Parent shall bear and pay one-half
of the costs and expenses incurred in connection with the preparation, printing
and mailing of the Joint Proxy/Registration Statement.
6.10 Indemnification; Directors' and Officers' Insurance.
(a) From and after the Effective Time, Holdco and Parent shall
indemnify and hold harmless, to the fullest extent permitted under applicable
law (and Parent shall also advance expenses as incurred to the fullest extent
permitted under applicable law, provided the Person to whom expenses are
advanced provides an undertaking to repay such advances if it is ultimately
determined that such Person is not entitled to indemnification), each present
and former director and officer of the Company and its Subsidiaries
(collectively, the "Indemnified Parties") against any costs or expenses
(including reasonable attorneys' fees and expenses), judgments, fines, losses,
claims, damages or
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liabilities (collectively, "Costs") incurred in connection with any claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of or pertaining to matters
existing or occurring at or prior to the Effective Time, including the
transactions contemplated by this Agreement; provided, however, that Parent
shall not be required to indemnify any Indemnified Party pursuant hereto if it
shall be determined that the Indemnified Party acted in bad faith and not in a
manner such Party believed to be in or not opposed to the best interests of the
Company. In addition, Holdco and Parent shall indemnify each present and former
director, officer and employee of the Company and its Subsidiaries for any Costs
arising out of or pertaining to matters existing or occurring at or prior to the
Effective Time to the extent that the Company would have been obligated to
indemnify such persons pursuant to its Restated Certificate of Incorporation as
in effect as of the date hereof. In the event any claim or claims are asserted
or made within six years after the Effective Time, all rights to indemnifica-
tion in respect of any such claim or claims shall continue until final
disposition of any and all such claims.
(b) Any Indemnified Party wishing to claim indemnification
under paragraph (a) of this Section 6.10, upon receiving written notification of
any such claim, action, suit, proceeding or investigation, shall promptly notify
the Company thereof, but the failure to so notify shall not relieve the Company
of any liability it may have to such Indemnified Party if such failure does not
materially and irreversibly prejudice Parent. In the event of any such claim,
action, suit, proceeding or investigation (whether arising before or after the
Effective Time), (i) subject to receipt of the undertaking to repay advances
referred to in paragraph (a) of this Section 6.10, Parent shall pay the
reasonable fees and expenses of counsel selected by the Indemnified Party, which
counsel shall be reasonably satisfactory to Parent, promptly after statements
therefor are received, and otherwise advance to such Indemnified Party upon
request reimbursement of documented expenses reasonably incurred, (ii) Parent
will cooperate in the defense of any such matter, and (iii) any determination
required to be made with respect to whether an Indemnified Party's conduct
complies with the standards set forth under applicable Law shall be made by
independent counsel mutually acceptable to Parent and the Indemnified Party;
provided,
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however, that (A) Parent shall be obligated pursuant to this paragraph (b) to
pay for only one firm of counsel for all Indemnified Parties in any
jurisdiction, except to the extent there is, in the opinion of counsel to an
Indemnified Party, under applicable standards of professional conduct, a
conflict on any significant issue between the positions of such Indemnified
Party and any other Indemnified Party or Indemnified Parties, in which case each
Indemnified Party with a conflicting position on a significant issue shall be
entitled to retain separate counsel mutually satisfactory to Parent and such
Indemnified Party, (B) the Indemnified Parties shall cooperate in the defense of
any such matter and (C) Parent shall not be liable for any settlement effected
without its prior written consent (which consent may not be unreasonably
withheld or delayed).
(c) Parent or Holdco shall cause the Company to maintain the
Company's existing officers' and directors' liability insurance ("D&O
Insurance") for a period of six years after the Effective Time so long as the
annual premium therefor is not in excess of 200% of the last annual premium paid
prior to the date hereof (the "Current Premium"); provided, however, (i) that
policies with at least the same coverage, containing terms and conditions which
are at least as protective of the insureds thereunder, may be substituted
therefor; (ii) if the existing D&O Insurance is terminated or cancelled during
such six-year period, the Surviving Corporation shall use its best efforts to
obtain as much D&O Insurance as can be obtained for the remainder of such period
for a premium not in excess (on an annualized basis) of 200% of the Current
Premium and, to the extent permitted by law, shall agree to indemnify the
directors and officers for any Costs not covered by such D&O Insurance; and
(iii) if the annual premiums for the existing D&O Insurance exceed 200% of the
Current Premium, the Surviving Corporation shall obtain as much D&O Insurance as
can be obtained for the remainder of such period for a premium not in excess (on
an annualized basis) of 200% of the Current Premium.
(d) If Parent, Holdco or the Company or any of its successors
or assigns (i) shall consolidate with or merge into any other corporation or
entity and shall not be the continuing or surviving corporation or entity of
such consolidation or merger or (ii) shall transfer all or substantially all of
its properties and assets to any individual, corporation or other entity, then,
and in each such case, proper provisions shall be made so that the
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successors and assigns of Parent, Holdco or the Company shall assume all of the
obligations set forth in this Section 6.10.
(e) The provisions of this Section are intended to be for the
benefit of, and shall be enforceable by, each of the Indemnified Parties, their
heirs and their representatives.
6.11 Takeover Statute. If any Takeover Statute is or may become
applicable to the Mergers or the other transactions contemplated by this
Agreement, each of Parent, Holdco and the Company and their respective Boards of
Directors shall grant such approvals and take such actions as are necessary so
that such transactions may be consummated as promptly as practicable on the
terms contemplated by this Agreement or by the Merger and otherwise act to
eliminate or minimize the effects of such statute or regulation on such
transactions.
6.12 Parent Vote. Parent shall vote (or consent with respect to) or
cause to be voted (or a consent to be given with respect to) any Shares and any
shares of common stock of a Merger Sub beneficially owned by it or any of its
Affiliates or with respect to which it or any of its Affiliates has the power
(by agreement, proxy or otherwise) to cause to be voted (or to provide a
consent), in favor of the approval of this Agreement at the Company Shareholders
Meeting or any other meeting of shareholders of the Company or either Merger
Sub, respectively, at which this Agreement shall be submitted for approval and
at all adjournments or postponements thereof (or, if applicable, by any action
of shareholders of either the Company or either Merger Sub by consent in lieu of
a meeting).
6.13 1935 Act. None of the parties hereto shall, nor shall any such
party permit any of its Subsidiaries to, except as required or contemplated by
this Agreement, engage in any activities that would cause a change in its
status, or that of its Subsidiaries, under the 1935 Act if such change would
prevent or materially delay the consummation of the transactions contemplated by
this Agreement.
6.14 Necessary Action. Neither the Company nor Parent, nor any of their
respective Subsidiaries, shall take or fail to take any action that is
reasonably likely to result in
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any failure of the conditions to the Mergers set forth in Article VII, or is
reasonably likely to make any representation or warranty of the Company or
Parent contained herein inaccurate in any material respect at, or as of any time
prior to, the Effective Time, or that is reasonably likely to, individually or
in the aggregate, have a Company Material Adverse Effect or a Parent Material
Adverse Effect, as the case may be.
6.15 Certain Mergers. Each of the Company and Parent agrees that it
shall not, and shall not permit any of its Subsidiaries to (i) acquire or agree
to acquire any assets or (ii) acquire or agree to acquire, whether by merger,
consolidation, by purchasing a substantial portion of the assets of or equity
in, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, if the entering
into of a definitive agreement relating thereto or the consummation of such
acquisition, merger or consolidation could reasonably be expected to (A) impose
any material delay in the expiration of any applicable waiting period or impose
any material delay in the obtaining of, or significantly increase the risk of
not obtaining, any authorizations, consents, orders, declarations or approvals
of any Governmental Entity necessary to consummate the Merger, (B) significantly
increase the risk of any Governmental Entity entering an Order (as defined in
Section 7.1(e)) prohibiting the consummation of the Merger, (C) significantly
increase the risk of not being able to remove any such Order on appeal or
otherwise or (D) materially delay or materially impede the consummation of the
Merger.
6.16 Rule 145 Affiliates. Prior to the Closing Date, the Company shall
identify in a letter to Parent all persons who are, at the Closing Date,
"affiliates" of the Company, as such term is used in Rule 145 under the
Securities Act. The Company shall use its reasonable best efforts to cause its
affiliates to deliver to Parent on or prior to the Closing Date written
agreements substantially in the form attached as Annex B.
6.17 Executive Consent Rights. In the event an officer covered by an
employment agreement set forth in Section 5.1(t) of the Company Disclosure
Letter terminates his employment with the Company prior to the Effective Time,
the person replacing such officer shall not be hired by the Company without the
prior written consent of Parent (which
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consent shall not be unreasonably withheld or delayed).
6.18 Listing of Units. Parent agrees to file, within 60 days after the
date hereof, a listing application with NYSE covering the listing of the Units
and to use its best efforts to pursue the listing of such Units so that the
listing is effective prior to the Effective Time. In the event such Units are
not accepted for listing despite such best efforts, Parent shall use its best
efforts to list such Units on another national securities exchange or the Nasdaq
Stock Market so that such listings are effective prior to the Effective Time.
ARTICLE VII
CONDITIONS
7.1 Conditions to Each Party's Obligation to Effect the Mergers. The
respective obligation of each party to effect the Mergers is subject to the
satisfaction or waiver at or prior to the Effective Time of each of the
following conditions:
(a) Shareholder Approval. This Agreement shall have been duly
approved by holders of Company Shares constituting the Company Requisite Vote in
accordance with applicable Law and the Restated Certificate of Incorporation and
by-laws of the Company.
(b) Registration Statement. The Registration Statement shall
have become effective in accordance with the provisions of the Securities Act,
and no stop order suspending such effectiveness shall have been issued and
remain in effect.
(c) Listing of Shares. In the event that the Parent Requisite
Vote is obtained, the Holdco Shares issuable in the Mergers pursuant to Article
II shall have been approved for listing on the NYSE, subject to official
notice of issuance.
(d) HSR. The waiting period applicable to the consummation of
the Mergers under the HSR Act shall have expired or been earlier terminated.
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(e) Other Regulatory Consents. Other than the filing provided
for in Section 1.3, the parties shall have made or filed those notices, reports
or other filings required to be made or filed with, and obtained those
registrations, approvals, permits or authorizations required to be obtained from
or filed with any Governmental Entity prior to the consummation of the Mergers
and in each case set forth in Sections 5.1(d) and 5.2(e) ("Governmental
Consents") and such Governmental Consents shall have become Final Orders, except
for those that the failure to make or to obtain, either individually or in the
aggregate are not reasonably likely to have a material adverse effect on the
combined entity resulting from the transactions contemplated hereby.
The Final Orders shall not impose terms or conditions that (a)
have or would reasonably be expected to have a material adverse effect on the
combined entity resulting from the transactions contemplated hereby, or (b)
materially impair the ability of the parties to complete the Mergers or the
transactions contemplated hereby. A "Final Order" means action by the relevant
regulatory authority that has not been reversed, stayed, enjoined, set aside,
annulled or suspended, with respect to which any waiting period prescribed by
law before the transactions contemplated hereby may be consummated has expired,
and as to which all conditions to the consummation of such transactions
prescribed by law, regulation or order have been satisfied.
(f) Litigation. No court or Governmental Entity of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, law, ordinance, rule, regulation, judgment, decree, injunction or
other order that is in effect and permanently enjoins or otherwise prohibits
consummation of the Merger (collectively, an "Order"), nor shall any proceeding
brought by a Governmental Entity seeking an Order be pending, provided, however,
that the provisions of this Section 7.1(f) shall not be available to any party
whose failure to fulfill its obligations hereunder shall have been the cause of,
or shall have resulted in, such Order.
7.2 Conditions to Obligations of Parent. The obligations of Parent and
Merger Sub to effect the Merger are also subject to the satisfaction or waiver
by Parent at or prior to the Effective Time of the following conditions:
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(a) Representations and Warranties. The representations and
warranties of the Company set forth in this Agreement which are not modified by
the words "Material Adverse Effect" shall be true and correct in all material
respects as of the Closing Date as though made on and as of the Closing Date
(except to the extent any such representation or warranty expressly speaks as of
an earlier date, which representations and warranties shall be true and correct
in all material respects as of such date in the same manner as specified above),
and the representations and warranties of the Company set forth in this
Agreement which are modified by the words "Material Adverse Effect" shall be
true and correct as of the Closing Date as though made on and as of the Closing
Date (except to the extent any such representation or warranty expressly speaks
as of an earlier date, which representations and warranties shall be true and
correct as of such date in the same manner as specified above), and Parent shall
have received a certificate signed on behalf of the Company by an executive
officer of the Company to such effect.
(b) Performance of Obligations of the Company. The Company
shall have performed in all material respects all material obligations required
to be performed by it under this Agreement at or prior to the Closing Date, and
Parent shall have received a certificate signed on behalf of the Company by an
executive officer of the Company to such effect.
(c) Consents Under Agreements. The Company shall have obtained
the consent or approval of each Person whose consent or approval shall be
required under any material Contract to which the Company or any of its
Subsidiaries is a party except for such consents or approvals the failure of
which to obtain would not be reasonably likely to result in a material adverse
effect on Parent and the Company (together with all Subsidiaries of Parent and
the Company) taken as a whole.
(d) Material Adverse Effect. There shall not have occurred any
Company Material Adverse Effect or change or condition which would reasonably be
expected to have a Company Material Adverse Effect.
7.3 Conditions to Obligation of the Company. The
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obligation of the Company to effect the Mergers is also subject to the
satisfaction or waiver by the Company at or prior to the Effective Time of the
following conditions:
(a) Representations and Warranties. The representations and
warranties of Parent set forth in this Agreement which are not modified by the
words "Material Adverse Effect" shall be true and correct in all material
respects as of the Closing Date as though made on and as of the Closing Date
(except to the extent any such representation or warranty expressly speaks as of
an earlier date, which representations and warranties shall be true and correct
in all material respects as of such date in the same manner as specified above)
and the representations and warranties of Parent set forth in this Agreement
which are modified by the words "Material Adverse Effect" shall be true and
correct as of the Closing Date as though made on and as of the Closing Date
(except to the extent any such representation or warranty expressly speaks as of
an earlier date, which representations and warranties shall be true and correct
as of such date in the same manner as specified above), and the Company shall
have received a certificate signed on behalf of Parent by executive officers of
Parent to such effect.
(b) Performance of Obligations of Parent. Parent shall have
performed and caused Holdco, CAC and PAC to have performed, in all material
respects all material obligations required to be performed by each such entity
under this Agreement at or prior to the Closing Date, and the Company shall have
received a certificate signed on behalf of Parent by an executive officer of
Parent to such effect.
(c) Tax Opinion. In the event of the Company Merger, the
Company shall have received the opinion of Sullivan & Cromwell, counsel to the
Company, dated the Closing Date, to the effect that, based on the facts and
assumptions stated therein, the Company Merger will qualify as an exchange
pursuant to Section 351 of the Code.
In rendering its opinion, Sullivan & Cromwell may rely on the
representations made in certificates addressed to such counsel by both Parent
and the Company.
ARTICLE VIII
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TERMINATION
8.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, whether
before or after the approval by shareholders of the Company referred to in
Section 7.1(a), by mutual written consent of the Company and Parent by action of
their respective Boards of Directors.
8.2 Termination by Either Parent or the Company. This Agreement may be
terminated and the Mergers may be abandoned at any time prior to the Effective
Time by action of the Board of Directors of either Parent or the Company if (a)
the Mergers shall not have been consummated by June 30, 2001, whether such date
is before or after the date of receipt of the Company Requisite Vote (the
"Termination Date"), provided that the Termination Date shall be automatically
extended to March 31, 2002 if, on June 30, 2001: (x) any of the Governmental
Consents described in Section 7.1(e) have not been obtained or waived, (y) each
of the other conditions to the consummation of the Mergers set forth in Article
VII has been satisfied or waived or remains capable of satisfaction, and (z) any
Governmental Consent that has not yet been obtained is being pursued diligently
and in good faith, (b) the approval of the Company's shareholders required by
Section 7.1(a) shall not have been obtained at a meeting duly convened therefor
or at any adjournment or postponement thereof or (c) any Order permanently
restraining, enjoining or otherwise prohibiting consummation of the Mergers
shall become final and non-appealable after the parties have used their
respective best efforts to have such Order removed, repealed or overturned
(whether before or after the approval by the shareholders of the Company)
pursuant to Section 6.4, provided that the right to terminate this Agreement
pursuant to clause (a) above shall not be available to any party whose failure
to fulfill any obligation under this Agreement or under any existing law, order,
rule or regulation has caused or resulted in the failure of the Mergers to be
consummated.
8.3 Termination by the Company. This Agreement may be terminated and
the Mergers may be abandoned by action of the Board of Directors of the Company
after three days' prior written notice to Parent at any time prior to (a) the
approval of this Agreement by shareholders of the Company
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referred to in Section 7.1(a), if the Board of Directors of the Company shall
approve a Superior Proposal; provided, however, that (i) the Company is not then
in breach of Section 6.2, (ii) the Board of Directors of the Company shall have
concluded in good faith, after giving effect to any concessions which are
offered by Parent during such three-day period, on the basis of the advice of
its independent financial advisor of national reputation, that such proposal is
a Superior Proposal and (iii) the termination pursuant to this Section 8.3(a)
shall not be effective unless the Company shall at or prior to the time of such
termination make the payment required by Section 8.5; or (b) the Effective Time,
whether before or after the approval by shareholders of the Company referred to
in Section 7.1(a) if (x) there has been a breach by Parent of any representation
or warranty modified by the words "Material Adverse Effect" or a breach of any
other representation or warranty that, individually or in the aggregate, has had
a Parent Material Adverse Effect, or there has been a material breach by Parent
of any material covenant or agreement contained in this Agreement that is not
curable or, if curable, is not cured within 20 days after written notice of such
breach is given by the Company to the party committing such breach or (y) if all
Governmental Consents have not been obtained and become Final Orders meeting the
requirements of Section 7.1(e) by March 31, 2002.
8.4 Termination by Parent. This Agreement may be terminated and the
Mergers may be abandoned at any time prior to the Effective Time by action of
the Board of Directors of Parent if (a) the Board of Directors of the Company
withdraws or adversely modifies its adoption of this Agreement or its
recommendation that the shareholders of the Company approve this Agreement, (b)
the Board of Directors of the Company shall approve or recommend a Superior
Proposal, (c) the Board of Directors of the Company shall resolve or publicly
propose to take any of the actions specified in clauses (a) or (b) above, or (d)
there has been a breach by the Company of any representation or warranty
modified by the words "Material Adverse Effect" or a breach of any other
representation or warranty that, individually or in the aggregate, has had a
Company Material Adverse Effect, or there has been a material breach by the
Company of any material covenant or agreement contained in this Agreement that
is not curable or, if curable, is not cured within 20 days after written notice
of such breach is given
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by Parent to the party committing such breach.
8.5 Effect of Termination and Abandonment.
(a) In the event of termination of this Agreement and the
abandonment of the Merger pursuant to this Article VIII, this Agreement (other
than as set forth in Section 9.1) shall become void and of no effect with no
liability on the part of any party hereto (or of any of its directors, officers,
employees, agents, legal and financial advisors or other representatives);
provided, however, that no such termination shall relieve any party hereto of
any liability or damages resulting from any breach of this Agreement prior to
termination.
(b) In the event that this Agreement is terminated by the
Company pursuant to Section 8.3(a) or by Parent pursuant to Section 8.4(a), (b)
or (c), then the Company shall promptly, but in no event later than two days
after the date of such termination (except in the case of a termination pursuant
to Section 8.3(a), in which case the payment referred to below shall be made at
or prior to the time of such termination), pay Parent a termination fee (as
liquidated damages) of $200,000,000 (the "Termination Fee") by wire transfer of
same day funds to an account previously designated in writing by Parent to the
Company. In the event that (i) an Acquisition Proposal shall have been made to
the Company after the date hereof or any Person (other than Parent or any of its
Affiliates) shall have publicly announced after the date hereof an intention
(whether or not conditional) to make an Acquisition Proposal with respect to the
Company and thereafter this Agreement is terminated by either Parent or the
Company pursuant to Section 8.2(b) and (ii) (x) the Person making the
Acquisition Proposal which was outstanding at the time of the Shareholders
Meeting (the "Acquiring Party") acquires, by purchase, merger, consolidation,
sale, assignment, lease, transfer or otherwise, in one transaction or any
related series of transactions within twelve months after a termination of this
Agreement, a majority of the voting power of the outstanding securities of the
Company or all or substantially all of the assets of the Company and its
Subsidiaries taken as a whole or (y) there is consummated a merger,
consolidation or similar business combination between the Company or one of its
Subsidiaries and the Acquiring Party or one of its Subsidiaries within twelve
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months after the relevant termination of this Agreement, or (z) within twelve
months after termination of this Agreement, the Company or one of its
Subsidiaries enters into a binding agreement with the Acquiring Party for such
an acquisition, merger, consolidation or similar business combination then the
Company shall promptly, but in no event later than two days after the earlier of
consummation of the transaction or transactions with the Acquiring Party or one
of its Subsidiaries or the execution of a binding agreement between the Company
and the Acquiring Party, pay Parent the Termination Fee in same day funds to an
account previously designated by Parent to the Company in writing.
In the event that this Agreement is terminated by the Company
pursuant to Section 8.3(b)(y) or by Parent or the Company pursuant to 8.2(a) as
a result of the failure to meet the condition set forth in Section 7.1(e) or
8.2(c) hereof, then Parent shall, or shall cause Holdco to, promptly, but in no
event later than two days after the date of such termination, pay to the Company
a termination fee (as liquidated damages) of $50,000,000 (the "Regulatory
Termination Fee").
The Company and Parent acknowledge that the agreements
contained in this Section 8.5(b) are an integral part of the transactions
contemplated by this Agreement, and that, without these agreements neither
Parent nor the Company would have entered into this Agreement; accordingly, if
the Company or Parent fails to promptly pay any amounts due pursuant to this
Section 8.5(b), and in order to obtain such payment Parent or the Company as the
case may be commences a suit which results in a judgment against the Company for
payment of all or a portion of the Termination Fee, or against Parent for
payment of all or a portion of the Regulatory Termination Fee, the Company shall
pay to Parent or Parent shall pay the Company, as the case may be, its costs and
expenses (including its reasonable attorneys' fees) incurred in connection with
such suit, together with interest from the date of termination of this Agreement
on the amounts owed at the prime rate of The Chase Manhattan Bank in effect from
time to time during such period. The Company's payment of the Termination Fee
shall be the sole and exclusive remedy of Parent against the Company and any of
its Subsidiaries and their respective directors, officers, employees, agents,
advisors or other representatives in the event this Agreement is terminated and
the Termination Fee is payable whether or not there has
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been a breach of this Agreement.
ARTICLE IX
MISCELLANEOUS AND GENERAL
9.1 Survival. This Article IX and the agreements of the Company, Parent
and Holdco, as the case may be contained in Article IV, Sections 6.6 (Stock
Exchange De-listing), 6.8 (Benefits), 6.9 (Expenses), 6.10 (Indemnification;
Directors' and Officers' Insurance) and 6.18 (Listing of Units) shall survive
the consummation of the Merger. This Article IX, the agreements of the Company,
Parent and Holdco, as the case may be, contained in Section 6.9 (Expenses),
Section 8.5 (Effect of Termination and Abandonment) and the Confidentiality
Agreement shall survive the termination of this Agreement. All other
representations, warranties, covenants and agreements in this Agreement shall
not survive the consummation of the Mergers or the termination of this
Agreement.
9.2 Modification or Amendment. Subject to the provisions of applicable
Law, at any time prior to the Effective Time, the parties hereto may modify or
amend this Agreement, by written agreement executed and delivered by duly
authorized officers of the respective parties.
9.3 Waiver of Conditions. The conditions to each of the parties'
obligations to consummate the Mergers are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law.
9.4 Counterparts. This Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original instrument,
and all such counterparts shall together constitute the same agreement.
9.5 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL. THIS AGREEMENT SHALL
BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL BE INTERPRETED, CONSTRUED AND
GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK APPLICABLE
TO CONTRACTS TO BE WHOLLY PERFORMED IN SUCH STATE. The parties hereby
irrevocably submit to the jurisdiction of the courts of the State of New York
and the
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Federal courts of the United States of America located in the State of New York
in each case in the borough of Manhattan solely in respect of the interpretation
and enforcement of the provisions of this Agreement and of the documents
referred to in this Agreement, and in respect of the transactions contemplated
hereby, and hereby waive, and agree not to assert, as a defense in any action,
suit or proceeding for the interpretation or enforcement hereof or of any such
document, that it is not subject thereto or that such action, suit or proceeding
may not be brought or is not maintainable in said courts or that the venue
thereof may not be appropriate or that this Agreement or any such document may
not be enforced in or by such courts, and the parties hereto irrevocably agree
that all claims with respect to such action or proceeding shall be heard and
determined in such a State of New York or Federal court. The parties hereby
consent to and grant any such court jurisdiction over the person of such parties
and over the subject matter of such dispute and agree that mailing of process or
other papers in connection with any such action or proceeding in the manner
provided in Section 9.6 or in such other manner as may be permitted by law shall
be valid and sufficient service thereof. Each party hereto hereby acknowledges
and agrees to waive any right it may have to a trial by jury in respect of any
action, suit or proceeding arising out of or relating to this Agreement.
9.6 Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid, or by
facsimile:
if to Parent
NiSource Inc.
801 East 86th Avenue,
Merrillville, Indiana 46410.
Attention: Stephen P. Adik
fax: (219) 647-6060
(with a copy to
Peter V. Fazio, Jr.,
Schiff Hardin & Waite,
6600 Sears Tower
233 South Wacker Drive
Chicago, IL 60606-6473
fax: (312) 258-5600).
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<PAGE> 77
if to the Company
Columbia Energy Group,
13880 Dulles Corner Lane
Herndon, Virginia 20171-4600
Attention: Michael W. O'Donnell
fax: (703) 561-7326
(with a copy to
Neil T. Anderson
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
fax: (212) 558-3588).
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
9.7 Entire Agreement; NO OTHER REPRESENTATIONS. This Agreement
(including any exhibits hereto), the Company Disclosure Letter, the Parent
Disclosure Letter and the Confidentiality Agreement, dated November 18, 1999
between Parent and the Company (the "Confidentiality Agreement") constitute the
entire agreement, and supersede all other prior agreements, understandings,
representations and warranties both written and oral, among the parties, with
respect to the subject matter hereof. EACH PARTY HERETO AGREES THAT, EXCEPT FOR
THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT, NEITHER PARENT
NOR THE COMPANY MAKES ANY OTHER REPRESENTATIONS OR WARRANTIES, AND EACH HEREBY
DISCLAIMS ANY OTHER REPRESENTATIONS OR WARRANTIES MADE BY ITSELF OR ANY OF ITS
OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, FINANCIAL AND LEGAL ADVISORS OR OTHER
REPRESENTATIVES, WITH RESPECT TO THE EXECUTION AND DELIVERY OF THIS AGREEMENT
OR THE TRANSACTIONS CONTEMPLATED HEREBY, NOT WITHSTANDING THE DELIVERY OR
DISCLOSURE TO THE OTHER OR THE OTHER'S REPRESENTATIVES OF ANY DOCUMENTATION OR
OTHER INFORMATION WITH RESPECT TO ANY ONE OR MORE OF THE FORE GOING.
9.8 No Third Party Beneficiaries. Other than with respect to the
matters set forth in Section 6.10 (Indemnification; Directors' and Officers'
Insurance), this Agreement is not intended to confer upon any Person other
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<PAGE> 78
than the parties hereto any rights or remedies hereunder.
9.9 Obligations of Parent and of the Company. Whenever this Agreement
requires Holdco or a Subsidiary of Parent to take any action, such requirement
shall be deemed to include an undertaking on the part of Parent to cause Holdco
or such Subsidiary, as the case may be, to take such action. Whenever this
Agreement requires Parent to take any action, such requirement shall be deemed
to include an undertaking to cause Holdco to take such action. Whenever this
Agreement requires a Subsidiary of the Company to take any action, such
requirement shall be deemed to include an undertaking on the part of the Company
to cause such Subsidiary to take such action and, after the Effective Time, on
the part of the Company to cause such Subsidiary to take such action.
9.10 Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof. If any
provision of this Agreement, or the application thereof to any Person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other Persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
9.11 Interpretation. The table of contents and headings herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
Where a reference in this Agreement is made to a Section or Exhibit, such
reference shall be to a Section of or Exhibit to this Agreement unless otherwise
indicated. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
9.12 Assignment. This Agreement shall not be assignable by operation of
law or otherwise; provided,
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<PAGE> 79
however, that Parent may designate, by written notice to the Company, another
wholly owned direct or indirect subsidiary to be a constituent corporation in
lieu of either Merger Sub, so long as such designation would not reasonably be
expected to (i) impose any material delay in the obtaining of, or significantly
increase the risk of not obtaining any authorizations, consents, orders,
declarations or approvals of any Governmental Entity necessary to consummate the
Mergers or the expiration or termination of any applicable waiting period, (ii)
significantly increase the risk of any Governmental Entity entering an order
prohibiting the consummation of the Mergers, (iii) significantly increase the
risk of not being able to remove any such order on appeal or otherwise or (iv)
materially delay the consummation of the Mergers. If the requirements of the
previous sentence are met and Parent wishes to designate another wholly owned
direct or indirect subsidiary to be a constituent corporation in lieu of either
Merger Sub, then, all references herein to that Merger Sub shall be deemed
references to such other subsidiary, except that all representations and
warranties made herein with respect to that Merger Sub as of the date of this
Agreement shall be deemed representations and warranties made with respect to
such other subsidiary as of the date of such designation.
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<PAGE> 80
IN WITNESS WHEREOF, this Agreement has been duly executed, acknowledged
and delivered by the duly authorized officers of the parties hereto as of the
date first written above.
COLUMBIA ENERGY GROUP
By: /s/ Oliver G. Richard III
-------------------------
Name: Oliver G. Richard III
Title: Chairman, President
and Chief Executive
Officer
NISOURCE INC.
By: /s/ Gary L. Neale
-----------------
Name: Gary L. Neale
Title: Chairman, President
and Chief Executive
Officer
<PAGE> 81
ANNEX A
SUMMARY OF TERMS FOR HOLDCO/PARENT SAILS(SM)
Each SAILS is a unit consisting of a share purchase contract plus a senior debt
security. The share purchase contract and the senior debt security will have the
following terms and other terms customary for securities of this type.
o Share purchase contract
o Obligates holder to buy $2.60 or $3.02, as applicable, of
Holdco/Parent common shares on settlement date
o Settlement date: 4 years after closing
o "Contract adjustment payments" pending settlement: none
o Stock issuable upon settlement (per $2.60 or $3.02, as
applicable, purchase contract):
o If average closing price of Holdco/Parent common
shares for the 30-day period before settlement date
(the "measurement period") is $16.50 or less, then
the holder will receive .1576 of a Holdco/Parent
common share;
o If average closing price of Holdco/Parent common
shares for the measurement period is more than $16.50
but less than $23.10, then the holder will receive a
number shares of Holdco/Parent common stock equal to
$2.60 or $3.02, as applicable, divided by the average
closing price of Holdco/Parent common shares (carried
to four decimal places);
o If the average closing price of Holdco/Parent common
shares for the measurement period is more than
$23.10, then the holder will receive .1126 of a
Holdco/Parent common share; and
o Customary anti-dilution provisions, including upon a
change in control of Holdco/Parent after the
Effective Time
o Acceleration of settlement date upon change of control of
Holdco/Parent after Effective Time
<PAGE> 82
o No early settlement option
o Voting rights: none, except with respect to modification of
terms of share purchase contract or senior debt securities
o Obligation is secured by pledge of companion senior debt
security (provided holder may substitute basket of treasuries)
o Purchase price will be paid on settlement date using solely
proceeds from remarketing of pledged debt security (or
proceeds of basket of treasuries), without holder having to
provide additional funds. However, at holder's election,
holder may deliver $2.60 or $3.02, as applicable, cash to pay
purchase price on settlement date, in which case pledged debt
security will be released to holder in lieu of being
remarketed
o NYSE listing
o Senior debt security
o Maturity: 6 years after closing
o Not interest bearing prior to settlement date; after
settlement date, bears interest at market rate (determined in
remarketing procedure as rate necessary to trade at par) plus
50 basis points
o Not redeemable prior to maturity
o No sinking fund
o Unsecured
o No voting rights, except customary rights with respect to
modification of indenture
o Remarketed on settlement date to determine market interest
rate for a par security
o Covenants
o Customary affirmative covenants to pay principal and
interest, maintain office for payment and transfer,
pay taxes, maintain corporate existence, etc.
o Customary limitation on liens
<PAGE> 83
o Customary limitation on mergers, consolidations,
sales of assets and similar transactions
o No limitation on incurrence of additional
indebtedness
o No limitation on restricted payments
o Events of default
o Failure to pay interest for 30 days after due
(relevant only after remarketing)
o Nonpayment of principal when due
o Nonpayment of more than $5 million of indebtedness
for borrowed money beyond grace period
o Bankruptcy
o Failure to perform covenants for 90 days
<PAGE> 1
Exhibit 3-D
COLUMBIA ENERGY GROUP
----------
AMENDED AND RESTATED
BY-LAWS
AMENDED AND RESTATED AS OF
FEBRUARY 22, 2000
<PAGE> 2
BY-LAWS
Of
COLUMBIA ENERGY GROUP
---------
ARTICLE I.
SEAL.
The corporate seal of the Corporation shall consist of a metallic stamp
circular in form, bearing in its center the figures "1926" and the words
"Incorporated" and "Delaware" and on the outer edge the name of the Corporation.
ARTICLE II.
OFFICES.
The location of the Corporation's principal office shall be in the
County of New Castle, State of Delaware.
The Corporation may, in addition to its principal office in the State
of Delaware, establish and maintain an office or offices in such other states
and places as the Board of Directors may from time to time find necessary or
desirable.
The books, documents, and papers of the Corporation, except as may be
otherwise required by the laws of the State of Delaware, may be kept outside of
the said State at such places as the Board of Directors may from time to time
designate.
<PAGE> 3
ARTICLE III.
CAPITAL STOCK.
Every stockholder shall be entitled to have a certificate, signed by,
or in the name of the Corporation by, the Chairman of the Board, the President
or a Vice President and the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary of the Corporation, certifying the number of shares
owned by him in the Corporation; provided, however, that any such signature on
the certificate may be a facsimile. In case any officer or officers, Transfer
Agent or Registrar who shall have signed, or whose facsimile signature or
signatures shall have been used on any such certificate or certificates shall
cease to be such officer or officers of the Corporation, Transfer Agent or
Registrar, whether because of death, resignation or otherwise, before such
certificate or certificates shall have been delivered by the Corporation, such
certificate or certificates may nevertheless be issued and delivered as though
the person or persons who signed such certificate or certificates or whose
facsimile signature or signatures shall have been used thereon had not ceased to
be such officer or officers of the Corporation, Transfer Agent or Registrar.
Such certificates shall be transferable on the stock books of the Corporation in
person or by attorney, but, except as hereinafter provided in the case of loss,
destruction or mutilation of certificates, no transfer of stock shall be entered
until the previous certificate, if any, given for the same shall have been
surrendered and cancelled.
The person in whose name shares of stock stand on the books of the
Corporation shall be deemed the owner thereof for all purposes as regards the
Corporation.
The Board of Directors may make such rules and regulations as it may
deem expedient, not inconsistent with these By-Laws, concerning the issue,
transfer and registration of certificates for shares of the capital stock of the
Corporation. It may
2
<PAGE> 4
appoint one or more Transfer Agents or one or more Registrars or both, and may
require all certificates of stock to bear the signature of either or both.
In order that the Corporation may determine the stockholders entitled
to notice of, or to vote at, a meeting of stockholders or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
other change, conversion or exchange of stock or for the purpose of any other
lawful action, the Board of Directors may fix in advance a record date, which
shall not be more than sixty nor less than ten days before the date of such
meeting, nor more than sixty days prior to any other action. If in any case
involving the determination of stockholders for any purpose other than notice of
or voting at a meeting of stockholders the Board shall not fix such a record
date, the record date for determining stockholders for such purpose shall be the
close of business on the day on which the Board shall adopt the resolution
relating thereto. A determination of stockholders entitled to notice of, or to
vote at, a meeting of stockholders, shall apply to any adjournment of the
meeting; provided, however, that the Board may fix a new record date for the
adjourned meeting.
In case of loss, destruction or mutilation of any certificate of stock,
another may be issued in its place upon proof of such loss, destruction or
mutilation and upon the giving to the Corporation of a bond sufficient to
indemnify the Corporation, its Transfer Agents and Registrars, against any claim
that may be made against it or them on account of the alleged loss or
destruction of any such certificate or the issuance of such new certificate;
provided, however, that a new certificate may be issued without requiring any
bond when, in the judgment of the Board of Directors, it is proper so to do.
3
<PAGE> 5
ARTICLE IV.
STOCKHOLDERS' MEETINGS.
(a) All meetings of the stockholders shall be held either at the
principal office of the Corporation in the State of Delaware, or at such other
place, either within or without the State of Delaware as the Board of Directors
shall determine. The place at which any given meeting shall be held shall be
distinctly specified in the notice of such meeting.
(b) The annual meeting of the stockholders of the Corporation, for the
election of Directors and for the transaction of such other business as may come
before the meeting, shall be held on the third Wednesday in May of each year, at
nine o'clock in the morning, unless such day shall fall on a legal holiday, in
which event the annual meeting shall be held on the day following.
Such date and time of meeting may be changed by action of the Board of
Directors.
(c) Special meetings of stockholders of the Corporation may be called
only by the Board of Directors pursuant to a resolution adopted by a majority of
the total number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time any such resolution
is presented to the Board for adoption).
(d) If the annual meeting of the stockholders be not held as herein
prescribed, the election of Directors may be held at any meeting thereafter
called pursuant to these By-Laws.
(e) Notice of the annual and of all special meetings of the
stockholders shall be given each holder of stock of the Corporation
4
<PAGE> 6
having power to vote at such meeting by depositing in the United States mail a
written or printed notice of the same not less than ten nor more than sixty days
prior to the meeting, with postage prepaid, to each such stockholder of record
of the Corporation and addressed to him at his address as registered upon the
books of the Corporation. Except in special cases where other provision is made
by statute, no publication of any notice of a meeting of stockholders shall be
required. Every notice of a meeting of stockholders shall state the place, date
and hour of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called. Notice of any meeting of stockholders
shall not be required to be given to any stockholder who shall attend such
meeting in person or by proxy except a stockholder who shall attend such meeting
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting was not lawfully called or
convened. Except where otherwise required by statute for an adjournment
exceeding thirty days or if a new record date is fixed for the adjourned
meeting, notice of any adjourned meeting of the stockholders of the Corporation
shall not be required to be given if the time and place thereof are announced at
the meeting which is adjourned.
It shall be the duty of the officer who shall have charge of the stock
ledger of the Corporation to prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
said meeting, arranged in alphabetical order, showing their addresses of record
and the number of shares held by each. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city, town or village where the meeting is to be
held and which place shall be specified in the notice of the meeting, or, if not
so specified, at the place where said meeting is to be held, and the list shall
be produced and kept at the time and place of the meeting during the
5
<PAGE> 7
whole time thereof, and subject to the inspection of any stockholder who may be
present.
(f) The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person, or represented by proxy, shall be
requisite and shall constitute a quorum at all meetings of the stockholders for
the transaction of any business except as otherwise provided by law, by the
Certificate of Incorporation or by these By-Laws. If, however, such majority
shall not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat present in person or by proxy shall have
power to adjourn the meeting from time to time. At any such adjourned meeting at
which the requisite amount of voting stock shall be represented any business may
be transacted which might have been transacted at the meeting as originally
called.
(g) Any action required or permitted to be taken by the stockholders of
the Corporation must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders.
(h) At any annual or special meeting of stockholders, proposals by
stockholders and persons nominated for election as directors by stockholders
shall be considered only if advance notice thereof has been timely given as
provided herein and such proposals or nominations are otherwise proper for
consideration under applicable law and the Certificate of Incorporation and
By-Laws of the Corporation. Notice of any proposal to be presented by any
stockholder or of the name of any person to be nominated by any stockholder for
election as a director of the Corporation at any meeting of stockholders shall
be delivered to the Secretary of the Corporation at its principal executive
office not less than 60 nor more than 90 days prior to the date of the meeting;
provided,
6
<PAGE> 8
however, that if the date of the meeting is first publicly announced or
disclosed (in a public filing or otherwise) less than 70 days prior to the date
of the meeting, such advance notice shall be given not more than ten days after
such date is first so announced or disclosed. Public notice shall be deemed to
have been given more than 70 days in advance of the annual meeting if the
Corporation shall have previously disclosed, in these By-Laws or otherwise, that
the annual meeting in each year is to be held on a determinable date, unless and
until the Board determines to hold the meeting on a different date. Any
stockholder who gives notice of any such proposal shall deliver therewith the
text of the proposal to be presented and a brief written statement of the
reasons why such stockholder favors the proposal and setting forth such
stockholder's name and address, the number and class of all shares of each class
of stock of the Corporation beneficially owned by such stockholder and any
material interest of such stockholder in the proposal (other than as a
stockholder). Any stockholder desiring to nominate any person for election as a
director of the Corporation shall deliver with such notice a statement in
writing setting forth the name of the person to be nominated, the number and
class of all shares of each class of stock of the Corporation beneficially owned
by such person, the information regarding such person required by paragraphs
(a), (e) and (f) of Item 401 of Regulation S-K adopted by the U.S. Securities
and Exchange Commission (or the corresponding provisions of any regulation
subsequently adopted by the U.S. Securities and Exchange Commission applicable
to the Corporation), such person's signed consent to serve as a director of the
Corporation if elected, such stockholder's name and address and the number and
class of all shares of each class of stock of the Corporation beneficially owned
by such stockholder. As used herein, shares "beneficially owned" shall mean all
shares as to which such person, together with such person's affiliates and
associates (as defined in Rule 12b-2 under the Securities Exchange Act of 1934),
may be deemed to beneficially own pursuant to Rules 13d-3 and 13d-5 under the
Securities Exchange Act of 1934,
7
<PAGE> 9
as well as all shares as to which such person, together with such person's
affiliates and associates, has the right to become the beneficial owner pursuant
to any agreement or understanding, or upon the exercise of warrants, options or
rights to convert or exchange (whether such rights are exercisable immediately
or only after the passage of time or the occurrence of conditions). The person
presiding at the meeting, in addition to making any other determinations that
may be appropriate to the conduct of the meeting, shall determine whether such
notice has been duly given and shall direct that proposals and nominees not be
considered if such notice has not been given.
ARTICLE V.
BOARD OF DIRECTORS.
(a) The management of business and affairs of the Corporation shall be
under the direction of a Board of Directors consisting of not less than thirteen
(13) or more than eighteen (18) persons, the exact number to be fixed from time
to time exclusively by the Board of Directors pursuant to a resolution adopted
by a majority of the total number of authorized directors (whether or not there
exist any vacancies in previously authorized directorships at the time of any
such resolution is presented to the Board for adoption). At the 1986 annual
meeting of stockholders, the directors shall be divided into three classes, as
nearly equal in number as possible, with the term of office of the first class
to expire at the 1987 annual meeting of stockholders, the term of office of the
second class to expire at the 1988 annual meeting of stockholders and the term
of office of the third class to expire at the 1989 annual meeting of the
stockholders. Except as otherwise provided in the Corporation's Certificate of
Incorporation, at each annual meeting of the stockholders following such initial
classification and election, directors elected to succeed those
8
<PAGE> 10
directors whose terms expire shall be elected for a term of office to expire at
the third succeeding annual meeting of the stockholders after their election.
(b) Any director of the Corporation may resign at any time by giving
written notice thereof to the Corporation. Such resignation shall take effect at
the time specified therefor, and unless otherwise specified with respect thereto
the acceptance of such resignation shall not be necessary to make it effective.
Subject to the rights of the holders of the Preferred Stock to elect directors
under specified circumstances, any director, or the entire Board of Directors,
may be removed from office at any time, but only for cause and only by the
affirmative vote of the holders of at least 80 percent of the combined voting
power of all of the then outstanding shares of stock of all classes and series
of the Corporation entitled to vote generally (the "Voting Stock"), voting
together as a single class (it being understood that, for all purposes of these
By-Laws, each share of the Preferred Stock shall have the number of votes
granted to it pursuant to the Corporation's Certificate of Incorporation or any
designation of terms of any class or series of Preferred Stock made pursuant to
the Certificate of Incorporation). The Corporation must notify the director of
the grounds of his impending removal and the director shall have an opportunity,
at the expense of the Corporation, to present his defense to the stockholders by
a statement which accompanies or precedes the Corporation's solicitation of
proxies to remove him. The term 'entire Board' as used in these By-Laws means
the total number of directors which the Corporation would have if there were no
vacancies.
(c) Newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the directors
then in office, even though
9
<PAGE> 11
less than a quorum of the Board of Directors, acting at a regular or special
meeting. If any applicable provision of the Delaware General Corporation Law
expressly confers power on stockholders to fill such a directorship at a special
meeting of stockholders, such a directorship may be filled at such a meeting
only by the affirmative vote of at least 80 percent of the Voting Stock of the
Corporation; provided, however, that when (a) pursuant to the provision of
Article Fourth of the Certificate of Incorporation the holders of Preferred
Stock have the right, and have exercised such right, to elect directors and (b)
The Delaware General Corporation Law expressly confers on stockholders voting
rights as aforesaid, if the directorship to be filled had been occupied by a
director elected by holders of Common Stock, then such directorship shall be
filled by an 80 percent vote as aforesaid, but if such directorship to be filled
had been elected by holders of Preferred Stock, then such directorship shall be
filled by the majority vote of the holders of Preferred Stock. Any director
elected in accordance with the two preceding sentences shall hold office for the
remainder of the full term of the directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been elected and qualified. No decrease in the authorized number of directors
constituting the entire Board of Directors shall shorten the term of any
incumbent director.
(d) Without prejudice to the general powers conferred by subdivision
(a) of this Article, the Board of Directors shall have and exercise each and
every power granted to them in Article Ninth of the Certificate of Incorporation
of the Corporation.
(e) Regular meetings of the Board of Directors shall be held at such
office or offices, whether within or without the State of Delaware, and at such
times as the Board shall from time to time determine.
Special meetings of the Board of Directors may be called at any time by
the Chief Executive Officer or, if he is incapacitated or
10
<PAGE> 12
unable to call such meetings, by any member of the Board of Directors. Such
meetings may take place in the office of the Corporation in the State of
Delaware or in such office or offices as the Directors may establish.
(f) Except as aforesaid, notice of all special meetings of the Board of
Directors shall be given to each Director by five days' service of the same by
telegram, or telephone or letter or personally. Notice of any special meeting of
the Board of Directors shall state the place and hour of the meeting, but need
not state the purposes thereof. Notice of any meeting of the Board or of any
Committee need not be given to any Director if waived by him in writing, or by
telegraph or cable, whether before or after such meeting be held, or if he shall
be present at the meeting; and any meeting of the Board of Directors or of any
Committee shall be a legal meeting without any notice thereof having been given,
if all the members shall be present thereat. Notice of regular meetings of the
Board need not be given. In the absence of written instructions from a Director
designating some other address, notice shall be sufficiently given if addressed
to him at his usual business address.
(g) Except as provided in clause (c) of this Article, one-third of the
total number of Directors shall constitute a quorum for the transaction of
business at all meetings of the Board of Directors; but less than a quorum may
adjourn the meeting.
(h) Each Director of the Corporation shall be entitled to receive such
fixed sum per meeting of the Board of Directors attended, or such annual sum, or
both, as the Board shall from time to time determine, together with his expenses
of attendance at such meeting.
11
<PAGE> 13
ARTICLE VI.
STANDING COMMITTEES.
(a) The Board of Directors shall, by resolution adopted by a majority
of the whole Board, designate annually three or more of their number, one of
whom shall be the Chief Executive Officer, to constitute an Executive Committee
which shall have power to authorize the seal of the Corporation to be affixed to
all papers which may require it, and shall have and may exercise in the
intervals between the meetings of the Board of Directors the powers of the Board
in the management of the business and affairs of the Corporation (including the
power and authority to declare a dividend and to authorize the issuance of
stock) except the power in reference to amending the Certificate of
Incorporation, adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
By-Laws of the Corporation. The Executive Committee shall study and report to
the Board of Directors on such matters as shall be referred to it by the Board
or by the Chairman of the Board or Chief Executive Officer. The Board of
Directors may also designate one or more other Directors as alternate members of
the Executive Committee, who may replace any absent or disqualified member at
any meeting of the Committee. In the absence or disqualification of a member of
the Committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another Director to act at the meeting in the place of any
such absent or disqualified member. Each member of the Executive Committee shall
continue to be a member thereof only during the pleasure of a majority of the
whole Board.
12
<PAGE> 14
(b) The Board of Directors shall designate the Chairman of the
Executive Committee, who may be any member thereof. In the absence from any
meeting of the Executive Committee of its Chairman, the Committee may appoint a
Chairman of the meeting. At any meeting at which the Executive Committee may
exercise its power to act in intervals between the meetings of the Board in the
management of the business and affairs of the Corporation, the Secretary of the
Corporation shall act as Secretary thereof. In the absence from any such meeting
of the Secretary, and at any other meeting of the Committee, the Committee may
appoint a Secretary of the meeting.
(c) Meetings of the Executive Committee may be called at the request of
any member of the Committee. Two days' notice of each meeting of the Executive
Committee shall be given by mail, telegraph or telephone or be delivered
personally, to each member of the Committee. Notice of any meeting need not be
given to any member of the Executive Committee if waived by him in writing or by
telegraph or cable, whether before or after such meeting be held, or if he shall
be present at the meeting; and any meeting of the Committee shall be a legal
meeting without any notice thereof having been given, if all the members of the
Committee shall be present thereat. In the absence of written instructions from
a member of the Executive Committee designating some other address, notice shall
be sufficiently given if addressed to him at his usual business address. Subject
to the provisions of this Article VI, the Executive Committee, by resolution of
a majority of all of its members, shall fix its own rules of procedure and shall
keep a record of its proceedings and report them to the Board of Directors at
the next regular meeting thereof after such proceedings shall have been taken.
All such proceedings shall be subject to revision or alteration by the Board of
Directors; provided, however, that third parties shall not be prejudiced by such
revision or alteration.
13
<PAGE> 15
(d) A quorum of the Executive Committee for the transaction of business
shall consist of not less than one-third of the total number of members thereof
nor less than two members thereof, and the act of a majority of those present at
a meeting at which a quorum is present shall be the act of the Executive
Committee. Less than a quorum may adjourn a meeting. The members of the
Executive Committee shall act only as a committee, and the individual members
shall have no power as such.
(e) Any member of the Executive Committee may resign at any time by
giving written notice to the Chief Executive Officer or to the Secretary of the
Corporation. Such resignation shall take effect at the time specified in such
notice and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
(f) Any vacancy in the Executive Committee shall be filled by the vote
of a majority of the whole Board of Directors.
(g) The members of the Executive Committee shall be entitled to receive
such fees and compensation as the Board of Directors may determine.
(h) The Board of Directors may, by resolution adopted by a majority of
the whole Board, also appoint such other standing or temporary committees from
time to time as they may see fit, investing them with all or any part of their
own powers. All committees shall adopt their own rules of procedure and shall
keep regular minutes of their transactions in books kept in the office of the
Corporation, and shall report the same to the Board of Directors or to the
Executive Committee at the various meetings thereof.
14
<PAGE> 16
ARTICLE VII.
OFFICERS.
(a) The officers of the Corporation shall be the President, one or more
Vice Presidents, the Secretary and the Treasurer, who shall be elected by the
Board of Directors, and such additional Assistant Secretaries, Assistant
Treasurers, and special subordinate officers as may from time to time be elected
or appointed by the Board of Directors or appointed by the Chief Executive
Officer. A Chairman of the Board and a Vice Chairman of the Board may be elected
by the Board of Directors. The Board shall designate an officer as the Chief
Executive Officer.
Any two of the above offices, not counting the title of Chief Executive
Officer, may be held by the same person.
The Chief Executive Officer shall, if present, preside at all meetings
of the stockholders and at all meetings of the Board of Directors, provided,
however, that if there is a Chairman of the Board who is not the Chief Executive
Officer, the Chairman of the Board, if present, shall preside at all meetings of
the stockholders and the Board of Directors. The Chief Executive Officer or an
officer designated by him shall make a report on the state of the business of
the Corporation at each annual meeting of stockholders. From time to time, the
Chief Executive Officer or officers designated by him shall report to the
stockholders and to the Board of Directors and to the Executive Committee all
matters within the knowledge of the Chief Executive Officer which in his
judgment the interests of the Corporation may require to be brought to their
notice.
All of the officers of the Corporation shall hold office for one year
and until others are elected or appointed and qualified in their stead, unless
in the election or appointment of the officer it shall be specified that he
holds his office for a shorter period or
15
<PAGE> 17
subject to the pleasure of the Board of Directors or the Chief Executive
Officer.
All vacancies in such offices by resignation, death or otherwise may be
filled by the Board of Directors. In the case of absence or inability to act of
any officer of the Corporation, and of any person herein authorized to act in
his place, the Board of Directors may from time to time delegate the powers or
duties of such officer to any other officer or any Director or other person whom
they may select.
(b) The Chief Executive Officer shall have general and active
supervision and direction over the business and affairs of the Corporation and
over its several officers; subject, however, to the control of the Board of
Directors and of the Executive Committee. He shall see that all orders and
resolutions of the Board of Directors and of the Executive Committee are carried
into effect. He may be ex officio a member of all standing committees of the
Board of Directors, and he shall perform such other duties as may be assigned to
him from time to time by the Board of Directors or by the Executive Committee.
(c) The Chairman or Vice Chairman of the Board, if elected, shall
perform such duties as from time to time may be assigned by the Board of
Directors or by the Executive Committee.
(d) The President and the Vice Presidents shall perform such duties as
the Board of Directors shall, from time to time, require.
(e) The Treasurer shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation, shall deposit all moneys
and other valuables in the name and to the credit of the Corporation, in such
depositaries as may be directed by the Board of Directors, shall disburse the
funds of the Corporation as may be ordered by the Board or the Chief Executive
16
<PAGE> 18
Officer taking proper vouchers therefor, and shall render to the Chief Executive
Officer and the Directors whenever they may require it an account of all his
transactions as Treasurer and of the financial condition of the Corporation.
He shall also perform such other duties as the Board of Directors may
from time to time require.
If required by the Board of Directors he shall give the Corporation a
bond in a form and in a sum with surety satisfactory to the Board of Directors
for the faithful performance of the duties of his office and the restoration to
the Corporation in the case of his death, resignation or removal from office, of
all books, papers, vouchers, money and other property of whatever kind in his
possession belonging to the Corporation.
At the request of the Treasurer, or in his absence or inability to act,
the Assistant Treasurer or, if there be more than one, the Assistant Treasurer
designated by the Treasurer, shall perform the duties of the Treasurer and when
so acting shall have the powers of and be subject to all the restrictions of the
Treasurer. The Assistant Treasurers shall perform such other duties as may from
time to time be assigned to them by the Chief Executive Officer, the Treasurer
or the Board of Directors.
(f) The Secretary shall attend all meetings of the Board of Directors
and of the stockholders and act as Clerk thereof and record all votes and the
minutes of all proceedings in a book to be kept for that purpose, and shall
perform like duties for the standing committees when required.
He shall keep in safe custody the seal of the Corporation and, whenever
authorized by the Board or the Executive Committee, affix the seal to any
instrument requiring the same.
He shall see that proper notice is given of all meetings of the
stockholders of the Corporation and of the Board of Directors and shall perform
such other duties as may be prescribed from time to time by the Board of
Directors or the Chief Executive Officer.
17
<PAGE> 19
At the request of the Secretary, or in his absence or inability to act,
the Assistant Secretary or, if there be more than one, the Assistant Secretary
designated by the Secretary, shall perform the duties of the Secretary and when
so acting shall have all the powers of and be subject to all the restrictions of
the Secretary. The Assistant Secretaries shall perform such other duties as may
from time to time be assigned to them by the Chief Executive Officer, the
Secretary or the Board of Directors.
(g) Any officer of the Corporation may be removed, either with or
without cause, at any time, by resolution adopted by the Board of Directors at a
regular meeting or at a special meeting of the Board called for that purpose, by
any Committee upon whom such power of removal may be conferred by the Board of
Directors or by a superior officer upon whom such power of removal may be
conferred by the Board of Directors.
ARTICLE VIII.
CONTRACTS, CHECKS, NOTES, ETC.
(a) All contracts and agreements authorized by the Board of Directors
or the Executive Committee, and all checks, drafts, notes, bonds, bills of
exchange and orders for the payment of money (including orders for repetitive or
non-repetitive electronic funds transfers) shall, unless otherwise directed by
the Board of Directors, or unless otherwise required by law, be signed by any
two of the following officers: the Chairman of the Board, the President, any
Vice President, the Treasurer, the Secretary, any Assistant Treasurer or any
Assistant Secretary; provided that in every case at least one such officer shall
be the Chairman of the Board, the President, a Vice President, the Treasurer or
the Secretary. The Board of Directors may, however, notwithstanding the
foregoing provision, by resolution adopted at any meeting,
18
<PAGE> 20
authorize any of said officers to sign checks, drafts and such orders for the
payment of money singly and without necessity of countersignature, and may
designate officers of the Corporation other than those named above, or different
combinations of such officers, who may, in the name of the Corporation, execute
checks, drafts, and such orders for the payment of money in its behalf. Further,
the Treasurer is authorized to designate to the Corporation's banks, in writing,
individuals employed in the Columbia Energy Group Service Corporation Cash
Management Department, who need not be officers or employees of the Corporation,
to give in the name of the Corporation telephonic, telegraphic, or electronic
transfer instructions for the payment of money, which may, with respect to
routine items, include instructions as to the amount to be transferred, to any
bank, pursuant to previously issued written orders, signed by officers of the
Corporation in any manner provided above, which designate the recipients of such
amounts and which identify what shall be treated as routine items.
(b) Anything in subdivision (a) of this Article VIII to the contrary
notwithstanding, the officers of this Corporation may open in the name of the
Corporation special accounts appropriately designated in which shall be
deposited funds of the Corporation transferred from the Corporation's other
accounts by its checks signed in accordance with the requirements of subdivision
(a) of this Article VIII, but from which special accounts funds may be disbursed
by check, draft, or other instrument of the Corporation designated as drawn
against such special account and signed by the single signature of any one of
the executive officers of the Corporation authorized by subdivision (a) of this
Article VIII to sign checks, drafts and other instruments of the Corporation or
signed by the single signature of any other person expressly authorized by the
Board to sign checks, drafts and other instruments disbursing funds from such
special accounts.
19
<PAGE> 21
(c) Anything in subdivision (a) of this Article VIII to the contrary
notwithstanding, (i) bonds, notes, debentures and other evidence of indebtedness
of the Corporation issued under an indenture may be executed in the name of the
Corporation by the facsimile signature, printed, engraved or otherwise used
thereon, of the Chairman of the Board, the President or any Vice President of
the Corporation, and the corporate seal affixed thereto or impressed, printed,
engraved or otherwise reproduced thereon may be attested by the facsimile
signature of the Secretary or an Assistant Secretary of the Corporation,
provided that the indenture require the same to be authenticated by the trustee
under such indenture, and (ii) interest coupons attached to any such bond, note,
debenture or other evidence of indebtedness may be executed on behalf of the
Corporation by the facsimile signature of the Treasurer of the Corporation.
ARTICLE IX.
FISCAL YEAR.
The fiscal year of the Corporation shall begin on the first day of
January in each year.
ARTICLE X.
AMENDMENT OF BY LAWS.
These By-Laws may be amended, added to, rescinded or repealed at any
meeting of the Board of Directors or of the stockholders, provided notice of the
proposed change was given in the notice of the meeting or, in the case of a
meeting of the Board of Directors, in a notice given not less than two days
prior to the meeting; provided, however, that, notwithstanding any other
20
<PAGE> 22
provisions of these By-Laws or any provision of law which might otherwise permit
a lesser vote or no vote, but in addition to any affirmative vote of the holders
of any particular class or series of the Voting Stock required by law, the
Certificate of Incorporation, any class or series of Preferred Stock or these
By-Laws, the affirmative vote of at least 80 percent of the total number of
authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any such alteration, amendment or repeal is
presented to the Board for adoption), shall be required to alter, amend or
repeal Article IV (c), IV (g), V (a), V (b), V (c), and V (g) of these By-Laws
or this proviso to this Article X of these By-Laws.
ARTICLE XI.
NATIONAL EMERGENCY.
(a) Definition and Application. For the purposes of this Article XI the
term "national emergency" is defined as an emergency situation resulting from an
attack upon the United States, a nuclear disaster within the United States, a
catastrophe, or other emergency condition, as a result of which attack,
disaster, catastrophe or emergency condition a quorum of the Board of Directors
cannot readily be convened for action. Persons not directors of the Corporation
may conclusively rely upon a determination by the Board of Directors of the
Corporation, at a meeting held or purporting to be held pursuant to this Article
XI that a national emergency as hereinabove defined exists regardless of the
correctness of such determination made or purporting to be made as hereinafter
provided. During the existence of a national emergency the provisions of this
Article XI shall become operative, but, to the extent not inconsistent with such
provisions, the other provisions of these By-Laws shall remain in effect during
any
21
<PAGE> 23
national emergency and upon its termination the provisions of this Article XI
shall cease to be operative.
(b) Meetings, etc. When it is determined in good faith by any director
that a national emergency exists, special meetings of the Board of Directors may
be called by such director. The director calling any such special meeting shall
make a reasonable effort to notify all other directors of the time and place of
such special meeting, and such effort shall be deemed to constitute the giving
of notice of such special meeting, and every director shall be deemed to have
waived any requirement, of law or otherwise, that any other notice of such
special meeting be given. At any such special meeting two directors shall
constitute a quorum for the transaction of business including, without limiting
the generality hereof, the filling of vacancies among directors and officers of
the Corporation and the election of additional Vice Presidents, Assistant
Secretaries and Assistant Treasurers. The act of a majority of the directors
present thereat shall be the act of the Board of Directors. If at any such
special meeting of the Board of Directors there shall be only one director
present, such director present may adjourn the meeting from time to time until a
quorum is obtained, and no further notice thereof need be given of any such
adjournment.
The directors present at any such special meeting shall make reasonable
effort to report any action taken thereat to all absent directors, but failure
to give such report shall not affect the validity of the action taken at any
such meeting. All directors, officers, employees and agents of, and all persons
dealing with, the Corporation, if acting in good faith, may conclusively rely
upon any action taken at any such special meeting.
(c) Amendment. The Board of Directors shall have the power to alter,
amend, or repeal any of these By-Laws by the affirmative vote of at least
two-thirds (2/3) of the directors present at any special meeting attended by two
(2) or more directors and held in the manner prescribed in (b) of this Article,
if it is
22
<PAGE> 24
determined in good faith by said two-thirds (2/3) that such alteration,
amendment or repeal would be conducive to the proper direction of the
Corporation's affairs.
(d) Chief Executive Officer. If, during the existence of a national
emergency, the Chief Executive Officer of the Corporation becomes incapacitated,
cannot by reasonable effort be located, or otherwise is unable or unavailable to
perform the duties of his office, an Executive Vice President of the
Corporation, if there be one, is hereby designated as Chief Executive Officer.
The Executive Vice President senior in office, if there be more than one, shall
so serve. If an Executive Vice President is unable or unavailable to perform the
duties of the Chief Executive Officer of the Corporation, the senior available
Vice President shall be designated as Chief Executive Officer, such seniority to
be determined by the date on which such Vice President was first elected or
appointed to such office. If none of the foregoing officers is able or available
to perform the duties of the Chief Executive Officer, the next senior available
officer of the Corporation is hereby designated as Chief Executive Officer, such
seniority to be determined by the date on which he was first elected or
appointed to serve.
(e) Substitute Directors. To the extent required to constitute a quorum
at any meeting of the Board of Directors during a national emergency, the
officers of the Corporation who are present shall be deemed, in order of rank of
office and within the same rank in order of election or appointment to such
office, directors for such meeting.
I, Carolyn McKinney Afshar, Secretary of COLUMBIA ENERGY GROUP, hereby
certify that the foregoing constitutes a true and correct copy of the By-Laws of
said Corporation, amended and restated as of February 22, 2000.
23
<PAGE> 25
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of said
Corporation, this 22nd day of February 2000.
/s/ Carolyn Afshas
------------------
Secretary
24
<PAGE> 1
Exhibit 10-CO
AMENDMENT NO. 1
TO THE
U.S. $450,000,000
AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT
DATED AS OF MARCH 10, 1999
THIS AMENDMENT NO. 1, dated as of February 15, 2000 (this
"Amendment No. 1") to the Amended and Restated 364-Day Credit Agreement, dated
as of March 10, 1999 (the "Agreement") among Columbia Energy Group, a Delaware
corporation (the "Borrower"), the banks, financial institutions and other
institutional lenders parties to the Agreement (collectively, the "Lenders"),
Salomon Smith Barney Inc., as arranger and book manager, and Citibank N.A., as
administrative and syndication agent for the Lenders, evidences the agreement of
the parties as follows:
WHEREAS, the Borrower and the Required Lenders desire to amend
the Agreement in accordance with Section 8.01 thereof.
NOW, THEREFORE, in consideration of the foregoing and the
respective covenants, agreements and conditions hereinafter set forth, and
intending to be legally bound hereby, the parties hereto agree as follows:
SECTION 1. Amendment to Agreement.
Section 6.01(h) of the Agreement is amended to delete the
following text therefrom:
"(iii) any Person or two or more Persons acting in concert
shall have acquired by contract or otherwise (excluding
employment contracts with officers of the Borrower) or shall
have entered into a contract or arrangement (excluding
employment contracts with officers of the Borrower), that,
upon consummation, will result in its or their acquisition of
the power to exercise, directly or indirectly, a controlling
influence over the management or policies of the Borrower; or"
SECTION 2. Capitalized Terms. Capitalized terms used but not
otherwise defined in this Amendment No. 1 shall have the respective meanings
ascribed to such terms in the Agreement.
<PAGE> 2
SECTION 3. Execution in Counterparts. This Amendment No. 1 may
be executed in any number of counterparts and by different parties hereto on
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute but one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Amendment No. 1 by telecopier shall be effective as delivery of a manually
executed counterpart of this Amendment No. 1.
SECTION 4. Governing Law. This Amendment No. 1 shall be
governed by, and construed in accordance with the laws of the State of New York.
SECTION 5. Jurisdiction, Etc. (a) Each of the parties hereto
hereby irrevocably and unconditionally submits, for itself and its property, to
the nonexclusive jurisdiction of any New York State court or federal court of
the United States of America sitting in New York City, and any appellate court
for any thereof, in any action or proceeding arising out of or relating to this
Agreement or the Notes, or for recognition or enforcement of any judgment, and
each of the parties hereto hereby irrevocably and unconditionally agrees that
all claims in respect of any such action or proceeding may be heard and
determined in any such New York State court or, to the extent permitted by law,
in such federal court. Each of the parties hereto agrees that a final judgment
in any such action or proceeding shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment or in any other manner provided by
law. Nothing in this Agreement shall affect any right that any party may
otherwise have to bring any action or proceeding relating to this Agreement or
the Notes in the courts of any jurisdiction.
(b) Each of the parties hereto irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Agreement or the Notes
in any New York State or federal court. Each of the parties hereto hereby
irrevocably waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any such
court.
SECTION 6. Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 1 to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
COLUMBIA ENERGY GROUP
By: /s/ Michael W. O'Donnell
______________________________
Name: Michael W. O'Donnell
Title: Senior Vice President and
Chief Financial Officer
SALOMON SMITH BARNEY INC.,
as Arranger and Book Manager
By: /s/ J. Christopher Lyons
______________________________
Name: J. Christopher Lyons
Title: Attorney-in-Fact
CITIBANK, N.A.,
as Administrative and Syndication Agent
By: /s/ J. Christopher Lyons
______________________________
Name: J. Christopher Lyons
Title: Attorney-in-Fact
Lenders
CITIBANK, N.A.
By: /s/ J. Christopher Lyons
______________________________
Name: J. Christopher Lyons
Title: Attorney-in-Fact
THE CHASE MANHATTAN BANK
By: /s/ Steven Wood
______________________________
Name: Steven Wood
Title: Vice President
<PAGE> 4
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Thomas A. Majeski
______________________________
Name: Thomas A. Majeski
Title: Vice President
BANK OF MONTREAL
By: /s/ Ian M. Plester
______________________________
Name: Ian M. Plester
Title: Director
CANADIAN IMPERIAL BANK OF COMMERCE
By: /s/ M. Beth Miller
______________________________
Name: M. Beth Miller
Title: Authorized Signatory
FIRST UNION NATIONAL BANK
By: /s/ Michael J. Kolosowski
______________________________
Name: Michael J. Kolosowski
Title: Vice President
BANKERS TRUST COMPANY
By:
______________________________
Name:
Title:
BANK ONE
By: /s/ George R. Schanz
______________________________
Name: George R. Schanz
Title: First Vice President
<PAGE> 5
ALLFIRST BANK
By: /s/ Shaun E. Murphy
______________________________
Name: Shaun E. Murphy
Title: Senior Vice President
NATIONAL CITY BANK
By: /s/ Gregory D. Miller
______________________________
Name: Gregory D. Miller
Title: Vice President
COMMERZBANK AG,
NEW YORK BRANCH
By: /s/ Andrew Kjoller
______________________________
/s/ Timothy Chin
______________________________
Name: Andrew Kjoller
Timothy Chin
Title: Assistant Vice President
Assistant Vice President
NATIONSBANK, N.A.
By: /s/ Paula Z. Kramp
______________________________
Name: Paula Z. Kramp
Title: Principal
ARAB BANK, PLC
By: ______________________________
Name:
Title:
THE BANK OF NOVA SCOTIA
By: /s/ F.C.H. Ashby
______________________________
Name: F.C.H. Ashby
Title: Senior Manager
Loan Operations
<PAGE> 6
BANK OF TOKYO-MITSUBISHI
TRUST COMPANY
By: /s/ Nicholas R. Battista
______________________________
Name: Nicholas R. Battista
Title: Vice President
CRESTAR BANK
By: /s/ Nancy R. Petrash
______________________________
Name: Nancy R. Petrash
Title: Senior Vice President
BANCA MONTE DEI PASCHI DI SIENA, S.p.A.
By: ______________________________
Name:
Title:
SOCIETE GENERALE
By: /s/ Gordon R. Eadon
______________________________
Name: Gordon R. Eadon
Title: Director
UNION BANK OF CALIFORNIA
By: /s/ David Musicant
______________________________
Name: David Musicant
Title: Vice President
<PAGE> 1
Exhibit 10-CP
AMENDMENT NO. 1
TO THE
U.S. $900,000,000
CREDIT AGREEMENT
DATED AS OF MARCH 11, 1998
THIS AMENDMENT NO. 1, dated as of February 15, 2000 (this
"Amendment No. 1") to the Credit Agreement, dated as of March 11, 1998 (the
"Agreement") among Columbia Energy Group, a Delaware corporation (the
"Borrower"), the banks, financial institutions and other institutional lenders
listed on the signature page of the Agreement (collectively, the "Lenders") and
Citibank N.A., as administrative and syndication agent for the Lenders,
evidences the agreement of the parties as follows:
WHEREAS, the Borrower and the Required Lenders desire to amend
the Agreement in accordance with Section 8.01 thereof.
NOW, THEREFORE, in consideration of the foregoing and the
respective covenants, agreements and conditions hereinafter set forth, and
intending to be legally bound hereby, the parties hereto agree as follows:
SECTION 1. Amendment to Agreement.
Section 6.01(h) of the Agreement is amended to delete the
following text therefrom:
"(iii) any Person or two or more Persons acting in concert
shall have acquired by contract or otherwise (excluding
employment contracts with officers of the Borrower) or shall
have entered into a contract or arrangement (excluding
employment contracts with officers of the Borrower), that,
upon consummation, will result in its or their acquisition of
the power to exercise, directly or indirectly, a controlling
influence over the management or policies of the Borrower; or"
SECTION 2. Capitalized Terms. Capitalized terms used but not
otherwise defined in this Amendment No. 1 shall have the respective meanings
ascribed to such terms in the Agreement.
<PAGE> 2
SECTION 3. Execution in Counterparts. This Amendment No. 1 may
be executed in any number of counterparts and by different parties hereto on
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute but one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Amendment No. 1 by telecopier shall be effective as delivery of a manually
executed counterpart of this Amendment No. 1.
SECTION 4. Governing Law. This Amendment No. 1 shall be
governed by, and construed in accordance with the laws of the State of New York.
SECTION 5. Jurisdiction, Etc. (a) Each of the parties hereto
hereby irrevocably and unconditionally submits, for itself and its property, to
the nonexclusive jurisdiction of any New York State court or federal court of
the United States of America sitting in New York City, and any appellate court
for any thereof, in any action or proceeding arising out of or relating to this
Agreement or the Notes, or for recognition or enforcement of any judgment, and
each of the parties hereto hereby irrevocably and unconditionally agrees that
all claims in respect of any such action or proceeding may be heard and
determined in any such New York State court or, to the extent permitted by law,
in such federal court. Each of the parties hereto agrees that a final judgment
in any such action or proceeding shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment or in any other manner provided by
law. Nothing in this Agreement shall affect any right that any party may
otherwise have to bring any action or proceeding relating to this Agreement or
the Notes in the courts of any jurisdiction.
(b) Each of the parties hereto irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection that it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Agreement or the Notes
in any New York State or federal court. Each of the parties hereto hereby
irrevocably waives, to the fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or proceeding in any such
court.
SECTION 6. Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 1 to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
COLUMBIA ENERGY GROUP
By: /s/ Michael W. O'Donnell
______________________________
Name: Michael W. O'Donnell
Title: Senior Vice President
Chief Financial Officer
SALOMON SMITH BARNEY INC.
as Arranger and Book Manager
By: /s/ J. Christopher Lyons
______________________________
Name: J. Christopher Lyons
Title: Attorney-in-Fact
CITIBANK, N.A.
as Administrative and Syndication Agent
By: /s/ J. Christopher Lyons
______________________________
Name: J. Christopher Lyons
Title: Attorney-in-Fact
Lenders
CITIBANK, N.A.
By: /s/ J. Christopher Lyons
______________________________
Name: J. Christopher Lyons
Title: Attorney-in-Fact
THE CHASE MANHATTAN BANK
By: /s/ Steven Wood
______________________________
Name: Steven Wood
Title: Vice President
<PAGE> 4
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Thomas A. Majeski
______________________________
Name: Thomas A. Majeski
Title: Vice President
BANK OF MONTREAL
By: /s/ Ian M. Plester
______________________________
Name: Ian M. Plester
Title: Director
CANADIAN IMPERIAL BANK OF COMMERCE
By: /s/ M. Beth Miller
______________________________
Name: M. Beth Miller
Title: Authorized Signatory
FIRST UNION NATIONAL BANK
By: /s/ Michael J. Kolosowsky
______________________________
Name: Michael J. Kolosowsky
Title: Vice President
BANKERS TRUST COMPANY
By:
______________________________
Name:
Title:
BANK ONE
By: /s/ George R. Schanz
______________________________
Name: George R. Schanz
Title: First Vice President
<PAGE> 5
MORGAN GUARANTY
TRUST COMPANY OF NEW YORK
By: /s/ Robert Bottamedi
______________________________
Name: Robert Bottamedi
Title: Vice President
ALLFIRST BANK
By: /s/ Shaun E. Murphy
______________________________
Name: Shaun E. Murphy
Title: Senior Vice President
NATIONAL CITY BANK
By: /s/ Gregory D. Miller
______________________________
Name: Gregory D. Miller
Title: Vice President
COMMERZBANK AG,
NEW YORK BRANCH
By: /s/ Andrew Kjoller
Timothy Chin
______________________________
Name: Andrew Kjoller
Timothy Chin
Title: Assistant Vice President
NATIONSBANK, N.A.
By: /s/ Paula Z. Kramp
______________________________
Name: Paula Z. Kramp
Title: Principal
ARAB BANK, PLC
By:
______________________________
Name:
Title:
<PAGE> 6
THE BANK OF NOVA SCOTIA
By: /s/ F.C.H. Ashby
______________________________
Name: F.C.H. Ashby
Title: Senior Manager Loan Operations
BANK OF TOKYO-MITSUBISHI
TRUST COMPANY
By: /s/ Nicholas R. Battista
______________________________
Name: Nicholas R. Battista
Title: Vice President
CREDIT AGRICOLE
By:
______________________________
Name:
Title:
CRESTAR BANK
By: /s/ Nancy R. Petrash
______________________________
Name: Nancy R. Petrash
Title: Senior Vice President
BANCA MONTE DEI PASCHI DI SIENA, S.p.A.
By:
______________________________
Name:
Title:
SOCIETE GENERALE
By: /s/ Gordon R. Eadon
______________________________
Name: Gordon R. Eadon
Title: Director
<PAGE> 7
UNION BANK OF CALIFORNIA
By: /s/ David Musicant
______________________________
Name: David Musicant
Title: Vice President
<PAGE> 1
Exhibit 12
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
Statements of Ratio of Earnings to Fixed Charges
($ in millions)
<TABLE>
<CAPTION>
Twelve Months
Ended December 31,
------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Income (Loss) from Continuing Operations
before Income Taxes 513.2 449.1 403.5 331.8 (645.6)
Adjustments:
Interest during construction (2.8) (2.1) (3.0) (1.1) (20.2)
Distributed (Undistributed) equity income (5.8) (0.4) 3.6 1.5 (7.9)
Fixed charges * 185.9 164.9 181.3 184.4 1,061.3
----- ----- ----- ----- -------
Earnings Available 690.5 611.5 585.4 516.6 387.6
----- ----- ----- ----- -------
Fixed Charges:
Interest on long-term and short-term debt 152.9 145.4 145.6 150.8 987.2
Other interest 15.0 1.8 15.2 13.5 53.6
Portion of rentals representing interest 18.0 17.7 20.5 20.1 20.5
----- ----- ----- ----- -------
Total Fixed Charges ** 185.9 164.9 181.3 184.4 1,061.3
----- ----- ----- ----- -------
Ratio of Earnings to Fixed Charges 3.71 3.71 3.23 2.80 N/A (a)
===== ===== ===== ===== =======
</TABLE>
(a) To achieve a one-to-one coverage, the Corporation would need an
additional $673.7 million of earnings in 1995.
* Amounts for the twelve months ended December 31, 1995 through
December 31, 1998 have been restated to conform to 1999
presentation.
** 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 twelve months ended December 31, 1995, as reported on Form 10-K
and Note 2 of Notes to Consolidated Financial Statements of the
Corporation's Annual Report on Form 10-K for the year ended December
31, 1995.
<PAGE> 1
Exhibit 21
Subsidiaries of the Columbia Energy Group
as of December 31, 1999
<TABLE>
<CAPTION>
State of
Segment / Subsidiary Incorporation
-------------------- -------------
<S> <C>
Transmission and Storage Operations
Columbia Gas Transmission Corporation Delaware
Columbia Gulf Transmission Company Delaware
Columbia Pipeline Corporation Delaware
Distribution Operations
Columbia Gas of Kentucky, Inc. Kentucky
Columbia Gas of Maryland, Inc. Delaware
Columbia Gas of Ohio, Inc. Ohio
Columbia Gas of Pennsylvania, Inc. Pennsylvania
Columbia Gas of Virginia, Inc. Virginia
Exploration and Production Operations
Columbia Energy Resources, Inc. Texas
Energy Marketing Operations
Columbia Energy Services Corporation Kentucky
Columbia Propane Corporation Delaware
Power Generation, LNG and Other Operations
Columbia LNG Corporation Delaware
Columbia Atlantic Trading Corporation Delaware
Columbia Electric Corporation Delaware
Columbia Energy Group Capital Corporation Delaware
Columbia Network Services Corporation Delaware
Corporate
Columbia Energy Group Service Corporation Delaware
Columbia Insurance Corporation, Ltd Bermuda
Columbia Finance Corporation Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23-A
CONSENT
As independent petroleum and natural gas consultants, we
hereby consent to the filing of this Letter Report dated January 24, 2000 in its
entirety as an Exhibit to the 1999 Annual Report of Columbia Energy Group, to
the Securities and Exchange Commission on Form 10-K, and any Registration
Statement of Columbia Energy Group, relating to the issue of securities to the
public during 2000; to the quotation or summarization of portions of this Letter
Report, subject to our approval of the related page(s) of the document(s), in
the 10-K, the Prospectus included in said Registration Statement(s) or the 1999
annual Report to Stockholders; and, subject to approval of the related page(s)
of the document(s), to the use of our name and the reliance upon our authority
as experts in said Annual Report to Stockholders, Form 10-K and Prospectus(es).
We have no interest of a substantial or material nature in Columbia Energy
Group, or in any affiliate, nor are we to receive any such interest as payment
for the preparation of this Letter Report; we have not been employed for such
preparation on a contingent fee basis; and we are not connected with Columbia
Energy Group, or any affiliate as a promoter, underwriter, voting trustee,
director, officer, employee, or affiliate.
RYDER SCOTT COMPANY, L.P.
Houston, Texas
January 24, 2000
<PAGE> 1
Exhibit 23-B
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated January 25, 2000, included in Columbia Energy Group's 1999
Annual Report on Form 10-K, into the following previously filed registration
statements:
1. Form S-8 of Columbia Energy Group (File No. 333-03869)
2. Form S-8 of Columbia Energy Group (File No. 33-42776)
3. Form S-8 of Columbia Energy Group (File No. 333-80797)
4. Form S-3 of Columbia Energy Group (File No. 33-64555)
ARTHUR ANDERSEN LLP
New York, New York
February 25, 2000
<PAGE> 1
Exhibit 23-C
January 20, 2000
RE: EVALUATION OF THE P&NG RESERVES OF COLUMBIA NATURAL RESOURCES (AS OF
DECEMBER 31, 1999) CONSTANT PRICE AND COST VERSION FOR U.S. SECURITIES
REPORTING REQUIREMENTS
As independent petroleum and natural gas consultants, we hereby consent to the
filing of this Letter Report in its entirety as an Exhibit to the 1999 Annual
Report of Columbia Energy Group to the Securities and Exchange Commission on
Form 10-K, and any Registration Statement of Columbia Energy Group, relating to
the issue of securities to the public during 2000; to the quotation or
summarization of portions of this Letter Report, subject to our approval of the
related page(s) of the document(s), in the 10-K, the Prospectus included in said
Registration Statement(s) or the 1999 Annual Report to Stockholders; and,
subject to approval of the related page(s) of the document(s), to the use of our
name and the reliance upon our authority as experts in said Annual Report to
Stockholders, Form 10-K and Prospectus(es) and in Part II of said Registration
Statement(s). We have no interest of a substantial or material nature in
Columbia Energy Group, or in any affiliate, nor are we to receive any such
interest as payment for the preparation of this Letter Report; we have not been
employed for such preparation on a contingent fee basis; and we are not
connected with Columbia Energy Group or any affiliate as a promoter,
underwriter, voting trustee, director, officer, employee, or affiliate.
/s/ Peter C. Sidey
----------------------------------------
Peter C. Sidey, P.Eng.
Senior Reservoir Engineer
/s/ H.J. Helwerda
----------------------------------------
H. J. Helwerda, P.Eng.
Vice-President, Engineering
RNJ:HJH:CR:paob
<TABLE> <S> <C>
<ARTICLE> OPUR1
<CIK> 0000022099
<NAME> COLUMBIA ENERGY GROUP AND SUBSIDIARIES
<SUBSIDIARY>
<NUMBER> 1
<NAME> CEG
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,441,800
<OTHER-PROPERTY-AND-INVEST> 704,000
<TOTAL-CURRENT-ASSETS> 1,393,200
<TOTAL-DEFERRED-CHARGES> 198,800
<OTHER-ASSETS> 358,100
<TOTAL-ASSETS> 7,095,900
<COMMON> 800
<CAPITAL-SURPLUS-PAID-IN> 1,611,600
<RETAINED-EARNINGS> 586,900
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,064,000
0
0
<LONG-TERM-DEBT-NET> 1,639,700
<SHORT-TERM-NOTES> 125,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 340,500
<LONG-TERM-DEBT-CURRENT-PORT> 311,300
0
<CAPITAL-LEASE-OBLIGATIONS> 2,800
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,615,400
<TOT-CAPITALIZATION-AND-LIAB> 7,095,900
<GROSS-OPERATING-REVENUE> 3,189,200
<INCOME-TAX-EXPENSE> 158,200
<OTHER-OPERATING-EXPENSES> 1,346,400
<TOTAL-OPERATING-EXPENSES> 2,540,800
<OPERATING-INCOME-LOSS> 648,400
<OTHER-INCOME-NET> 29,200
<INCOME-BEFORE-INTEREST-EXPEN> 677,600
<TOTAL-INTEREST-EXPENSE> 164,400
<NET-INCOME> 249,200
0
<EARNINGS-AVAILABLE-FOR-COMM> 249,200
<COMMON-STOCK-DIVIDENDS> 71,800
<TOTAL-INTEREST-ON-BONDS> 138,000
<CASH-FLOW-OPERATIONS> 831,600
<EPS-BASIC> 3.03
<EPS-DILUTED> 3.01
</TABLE>
