-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, J1BjCMr3F+oSWHMUbHOgJzQwS6/hRaRjcXNieFmCPZzBsAlSoDCbdbA7lToqLSmF orZV5TuMDn4NtXxKMXaJTw== 0000893220-95-000459.txt : 199507180000893220-95-000459.hdr.sgml : 19950718 ACCESSION NUMBER: 0000893220-95-000459 CONFORMED SUBMISSION TYPE: U-1 PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19950717 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLUMBIA GAS SYSTEM INC CENTRAL INDEX KEY: 0000022099 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 131594808 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: U-1 SEC ACT: 1935 Act SEC FILE NUMBER: 070-08659 FILM NUMBER: 95554287 BUSINESS ADDRESS: STREET 1: 20 MONTCHANIN RD CITY: WILMINGTON STATE: DE ZIP: 19807 BUSINESS PHONE: 3024295000 U-1 1 COLUMBIA GAS FORM U-1 DATED JULY 17, 1995 1 File No. 70- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form U-1 APPLICATION-DECLARATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 THE COLUMBIA GAS SYSTEM, INC. 20 Montchanin Road Wilmington, DE 19807 - -------------------------------------------------------------------------------- (Name of Company or Companies Filing This Statement and Addresses of the Principal Executive Offices) THE COLUMBIA GAS SYSTEM, INC. - -------------------------------------------------------------------------------- (Name of Top Registered Holding Company Parent of Each Applicant or Declarant) L. J. BAINTER, TREASURER The Columbia Gas System, Inc. 20 Montchanin Road Wilmington, DE 19807 - -------------------------------------------------------------------------------- (Name and Address of Principal Agent for Service) 2 PAGE 2 Item 1. Description of Proposed Transaction. (a) Furnish a reasonably detailed and precise description of the proposed transaction, including a statement of the reasons why it is desired to consummate the transaction and the anticipated effect thereof. If the transaction is part of a general program, describe the program and its relation to the proposed transaction. The Columbia Gas System, Inc. ("Columbia"), a Delaware corporation and a public utility holding company registered under the Public Utility Holding Company Act of 1935 (the "Act"), hereby files this Application-Declaration seeking Securities and Exchange Commission ("Commission") approval to enter into interest rate hedge transactions to limit its exposure to a potential rise in long-term interest rates from now until the interest rates on its long-term debt are fixed upon its emergence from bankruptcy. Columbia's interest rate exposure is due to a projected fixed rate debt issuance of approximately $2.1 billion to fund Columbia's plan of reorganization (the "Columbia Plan") as more fully described in Exhibit D-2 to this Application-Declaration. Columbia and Columbia Gas Transmission Corporation, a Delaware corporation and wholly owned subsidiary of Columbia, are debtors-in-possession under Chapter 11 of the United States Bankruptcy Code. I. FINANCING CONTEMPLATED UNDER THE COLUMBIA PLAN Under the Columbia Plan, Columbia may issue up to $3.65 billion in new securities(1). The Columbia Plan contemplates the issuance of up to $2.1 billion in debentures (the "New Indenture Securities") to be issued under a new form of indenture, the entering into of bank facilities (the "Bank Facilities") totaling up to $1.15 billion (for a maximum of $3.25 billion in debt) and the issuance of - ---------------------------------- (1) In the event that certain post-emergence contingencies addressed in the Columbia Plan occur, Columbia may issue new securities in excess of $3.65 billion. 3 PAGE 3 up to $400 million of equity through the issuance of preferred stock and of Dividend Enhanced Convertible Stock(TM)(2). Columbia seeks the flexibility to mitigate the interest rate risk inherent in the future issuance of the New Indenture Securities through the implementation of certain hedging strategies as described below. The New Indenture Securities are to be issued in seven series (each, a "Series") with the respective maturities as follows:
Approximate Series Maturity ------ -------- Series A 5 years Series B 7 years Series C 10 years Series D 12 years Series E 15 years Series F 20 years Series G 30 years
The principal amount of each Series will be substantially the same as that of each other Series; provided, however, that no Series other than Series A will have an initial principal amount that is more than 150% of that of any other Series. Each New Indenture Security will bear interest from the - ---------------------------------- (2) If at emergence, cash available through the Bank Facilities or from operations is reduced, the principal amount of New Indenture Securities to be issued would be increased proportionately. Under no circumstances would the aggregate of New Indenture Securities and Bank Facilities under the Columbia Plan exceed $3.25 billion. 4 PAGE 4 effective date (the "Effective Date", currently anticipated to be December 31, 1995) of the Columbia Plan, payable semi-annually, on dates to be determined, to the registered holder at the close of business on the applicable record date. The rate of interest to be borne by the New Indenture Securities of each Series will be determined prior to the Effective Date based on market rates for securities of similar maturities and debt rating and in accordance with the pricing methodology set forth in the Columbia Plan. II. HEDGING COLUMBIA'S INTEREST RATE RISK EXPOSURE Columbia has interest rate risk exposure associated with the future issuance of New Indenture Securities (the "New Issuance"). For example, a 100 basis point increase in interest rates between now and the Effective Date would cost Columbia approximately $21 million annually. The cost of borrowing for the New Indenture Securities will be equal to the yield on benchmark U.S. Treasury securities plus a spread based on the average spread, over relevant U.S. Treasury yields, of comparable corporate debt securities. The financial market provides an avenue to hedge the U.S. Treasury security component embedded in the ultimate cost of borrowing to Columbia, but not the spread. Recent declines in long-term interest rates permit Columbia to lock in historically attractive interest rates on its New Indenture Securities. Current U.S. Treasury yields are trading close to twenty-five year lows. Columbia could have one of the lowest long-term debt cost structures in its industry if it was afforded the opportunity to lock in current rates. To provide Columbia protection against higher long-term interest rates, Columbia requests authorization to enter into an interest rate hedging program prior to the New Issuance (the "Hedge Program"). The Hedge Program would be utilized to fix and/or limit the interest rate risk exposure 5 PAGE 5 on the U.S. Treasury security component of the New Issuance through (i) a forward sale of exchange-traded U.S. Treasury futures contracts, U.S. Treasury securities and/or a forward swap (each a "Forward Sale"), (ii) the purchase of put options on U.S. Treasury securities (a "Put Options Purchase"), (iii) a Put Options Purchase in combination with the sale of call options on U.S. Treasury securities (a "Zero Cost Collar"), or (iv) some combination of a Forward Sale, Put Options Purchase and/or Zero Cost Collar. The Hedge Program may be executed on-exchange ("On-Exchange Trades") with brokers through the opening of futures and/or options positions traded on the Chicago Board of Trade ("CBOT"), the opening of over-the-counter positions with one or more counterparties ("Off-Exchange Trades") or a combination of On-Exchange Trades and Off-Exchange Trades. While it is debatable whether Columbia's proposed Hedge Program involves the jurisdictional acquisition of a "security" or an extension of credit under the Act, noting that at least a couple strategies do not,(3) Columbia nevertheless seeks Commission approval of the entire Hedge Program to ensure the maximal flexibility in structuring effective interest rate hedging strategies. Due to the size of the Hedge Program (interest cost on up to $2.1 billion principal amount of New Issuance), Off-Exchange Trades may be used to avoid execution costs associated with On-Exchange Hedge Trades. Also, Off-Exchange Trades possibly may match more effectively the duration of the Hedge Program with the timing of the New Issuance. Off-Exchange Trades provide similar interest rate protection as On-Exchange Trades and are entered with a financial counterparty, e.g., an investment banking firm, commercial bank or some - ---------------------------------- (3) See HCAR No. 35-26312, 60 F.R. 33640, 33641, n.12 (June 28, 1995) (noting the Commission's exercise of jurisdiction under Sections 6(a) and 7 of the Act over interest rate caps, floors and collars). 6 PAGE 6 other form of financial intermediary. Unlike On-Exchange Trades, Off-Exchange Trades do not have the credit support of the CBOT. Columbia must bear the credit risk of counterparties to the Off-Exchange Trades and, therefore, may diversify its Off-Exchange Trades with multiple counterparties should it embark on such transactions. The duration of the Hedge Program will be short-term, lasting from the date of execution until the Effective Date. The short length of the Hedge Program minimizes this counterparty risk and, therefore, Columbia may choose not to diversify for ease of execution. However, Columbia will enter into Off-Exchange Trades only with counterparties whose deposit or long-term debt have no lower than an "BBB3" rating from Moody's Investors Service, Inc., or an "BBB-" rating from Standard & Poor's Corporation, or an equivalent rating from Fitch Investors Service or Duff & Phelps. All transactions entered into under Columbia's Hedging Program will be bona fide hedges of interest rate risk and will meet the criteria established by the Financial Accounting Standards Board in "Statement of Financial Accounting Standards No. 80-Accounting for Futures Contracts ("SFAS")." SFAS 80 establishes the criteria which must be satisfied in order to qualify for hedge accounting treatment,(4) and the financial disclosure requirements associated with hedging transactions. Columbia will determine the optimal structure of the Hedge Program at the time of execution. Columbia may decide to lock in interest rates and/or limit its exposure to interest rate increases. All - ---------------------------------- (4) SFAS 80 requires that (i) the item to be hedged exposes the enterprise to price or interest rate risk, (ii) the hedging instrument reduces that exposure and is designated as a hedge, (iii) the significant characteristics and expected terms of the anticipated financial transaction are identified, and (iv) it is probable the expected transaction will occur. As such, hedging transactions should not result in an increased risk to Columbia. 7 PAGE 7 open positions under the Hedge Program will be closed on or prior to the date of the New Issuance and Columbia will not, at any time, take possession of the underlying U.S. Treasury securities. III. HEDGE STRATEGIES A. Forward Sale A Forward Sale would lock-in the U.S. Treasury security component of the New Issuance by Columbia agreeing to sell U.S. Treasury securities in a known amount and on a known future date utilizing the U.S. Treasury futures market, forward U.S. Treasury security contracts and/or the forward swap market. Using a Forward Sale strategy of U.S. Treasury securities, Columbia would lock-in the U.S. Treasury security component of the New Issuance at the then current Treasury forward yield by selling ("shorting") the U.S. Treasury futures market and/or by selling spot U.S. Treasury securities forward. Columbia would reverse its short positions on or around the Effective Date by purchasing the U.S. Treasury futures contracts and/or U.S. Treasury securities previously sold. In a Forward Sale utilizing a forward swap, Columbia would lock-in the swap rate (U.S. Treasury component + swap spread) by entering into a forward swap (with a counterparty) as the fixed rate payor. The swap spread is due, in part, to the relative investors/borrowers appetite for receiving/paying fixed versus floating rates. In a forward swap, Columbia would agree to enter into a fixed-to-floating rate swap, as of a future settlement date. The future settlement date will be on or around the Effective Date. In the swap agreement, Columbia would contract to pay a fixed rate and receive floating-rate payments (i.e., 8 PAGE 8 LIBOR). On or about the Effective Date, Columbia would unwind the swap by entering a floating-to-fixed rate swap. Each of the Forward Sale alternatives would provide Columbia with similar lock-in protection with respect to future movements in U.S. Treasury rates. The alternative(s) ultimately chosen will depend on market conditions (e.g., pricing) at the time of entering the hedge position. The hypothetical Forward Sale example below utilizing a U.S. Treasury Forward Sale is based upon quoted market rates and indices for 10 year securities at June 22, 1995.
U.S. Treasury Forward Sale ------------ 10 Year U.S. Treasury Yield (%) 6.12 Forward Spread (%) 0.15 ---- Lock-In Rate (%) 6.27
Under a Forward Sale of a notional amount of $1.0 million, if interest rates rise 100 basis points, prices of the shorted hedge contracts would fall resulting in a gain to Columbia of approximately $69,400, because Columbia would close the short contracts at a lower price. The gains from the hedge positions would be offset ratably over the life of the financing (10 years) from the higher financing cost of Columbia's New Issuances. If interest rates decline 100 basis points, the losses by the hedge positions (approximately $76,200) would be offset ratably over the life of the financing (10 years) by the lower financing cost of the New Issuance. There is no up-front cost associated with a Forward Sale strategy. The accounting entries for this Forward Sale example are as follows: 9 PAGE 9 ACCOUNTING ENTRIES FOR A FORWARD SALE 1. Interest Rates Rise By 100 Basis Points (a) Cash $69,400 Deferred Gain $69,400 To record the settlement of the forward contract. (b) Deferred Gain $6,940 Interest Expense $6,940 To record one year's amortization of the deferred gain. 2. Interest Rates Decline By 100 Basis Points (a) Deferred Loss $76,200 Cash $76,200 To record the settlement of the forward contract. (b) Interest Expense $7,620 Deferred Loss $7,620 To record one year's amortization of the deferred loss.
B. Put Options/Zero Cost Collar Using a Put Options Purchase strategy, Columbia would buy the right, but not the obligation, to sell U.S. Treasury securities forward at a predetermined price or yield. A Put Options Purchase would protect Columbia from a rise in U.S. Treasury rates and would permit Columbia to benefit from a decline in U.S. Treasury rates. To purchase this right, Columbia would be required to pay an up-front option premium. 10 PAGE 10 The hypothetical Put Options Purchase example below is based upon quoted market rates and indices for 10 year securities at June 22, 1995.
Put Options Purchase ------------ 10 Year U.S. Treasury Yield (%) 6.12 Annualized NPV Cost of Put Options (%) 0.38* Forward Spread (%) 0.15 ---- Upper Limit of U.S. Treasury Rate (%) 6.65
* The up-front premium would be 2.60% of the notional amount hedged. Amortized over a 10 year life, the annual cost would be approximately .38%. A notional amount of $1.0 million would require an up-front premium of $26,000. Because the premium is paid up-front, it would have an effective annualized implied cost of 38 basis points (equivalent to $3,800) during the 10 year life of a new financing. Under a Put Option Purchase of a notional amount of $1.0 million, if interest rates rise 100 basis points, a net gain of approximately $42,400 ($69,400 gain less $26,000 option premium) from the put option hedge positions would be offset ratably over the life of the financing (10 years) by the higher financing cost of Columbia's New Issuance. If interest rates decline 100 basis points, Columbia would benefit from the lower financing cost of the New Issuance. However, the cost of the option, which would expire worthless, would lower the benefit. The accounting entries for this Put Options Purchase example are as follows: 11 PAGE 11 ACCOUNTING ENTRIES FOR A PUT OPTION PURCHASE 1. Interest Rates Rise By 100 Basis Points. (a) Option Premium $26,000 Cash $26,000 To record the purchase of the put option. (b) Cash $69,400 Deferred Gain $69,400 To record the effect of exercising the option. (c) Interest Expense $2,600 Option Premium $2,600 To record one year's amortization of the premium. (d) Deferred Gain $6,940 Interest Expense $6,940 To record one year's amortization of the deferred gain. 2. Interest Rates Decline By 100 Basis Points. (a) Option Premium $26,000 Cash $26,000 To record the purchase of the put option. (b) Interest Expense $2,600 Option Premium $2,600 To record one year's amortization of the premium.
Using a Zero Cost Collar strategy, Columbia would buy the right to sell U.S. Treasury securities forward at a predetermined price and yield (through a put option purchase) and Columbia, would sell the right to buy the same U.S. Treasury securities forward at a higher predetermined price and lower 12 PAGE 12 yield (a sale of a call option). The premiums paid for the put options are financed with the premiums received on the call options that are sold, hence "zero cost". The hypothetical Zero Cost Collar example below is based upon quoted market rates and indices for 10 years securities at June 22, 1995.
Zero Cost Collar -------------- 10 Year U.S. Treasury Yield (%) 6.12 Forward Spread (%) 0.15 ---- Forward Yield (%) 6.27
Locked-In Yield ------------------------------- Minimum Maximum ------- ------- Zero Cost Collar Capped at 30 Basis Points Out-Of-The Money (%)* 6.10 6.57
* The Zero Cost Collar provides a floor interest rate of 6.10%, 17 basis points out-of-the-money. The difference between the 30 basis points maximum out-of-the money put rate and the 17 basis points out-of-the-money call rate is a probable outcome as the collar would not be symmetrical around the forward yield (6.27%) due to pricing of the bid/ask spreads for both the put and call transactions. In a Zero Cost Collar, Columbia would participate in market rate movements between the put options and call options strike and yield levels. If the comparable U.S. Treasury security yield rises 100 basis points (70 basis points above the put option strike level), Columbia would exercise the put options and lock in the puts' strike yield for a gain of approximately $48,600. If the U.S. Treasury yield rallies below the call options strike level, a counterparty would exercise the call 13 PAGE 13 options resulting in a loss of approximately $63,200 and Columbia would have locked in an interest rate floor at the calls' strike yield. The accounting entries for this Zero Cut Collar example are as follows: ACCOUNTING ENTRIES FOR A ZERO COST COLLAR 1. Interest Rates Rise By 100 Basis Points (a) Cash $48,600 Deferred Gain $48,600 To record the effect of exercising the option. (b) Deferred Gain $4,860 Interest Expense $4,860 To record one year's amortization of the deferred gain. 2. Interest Rates Decline By 100 Basis Points (a) Deferred Loss $63,200 Cash $63,200 To record the effect of the counterparty exercising the option. (b) Interest Expense $6,320 Deferred Loss $6,320 To record one year's amortization of the deferred loss.
On-Exchange Trades of options are executed on the CBOT. CBOT put option contracts are standardized contracts for the option to sell U.S. Treasury futures and CBOT call option contracts are standardized contracts for the option to buy U.S. Treasury futures. 14 PAGE 14 Reporting Requirements Within forty-five days following the close of each calendar quarter, commencing September 30, 1995, Columbia will submit a report to the Commission disclosing the following information with respect to the Hedge Program: - the trade date, the type of hedge instruments opened, - the notional principal amount, - a description of the material terms of the transaction including the maturity or termination date of each instrument, the interest rate fixed in the case of a Forward Sale, the strike rate in the case of a Put Options Purchase and the floor and ceiling interest rate in the case of a Zero Cost Collar, - the name of the counterparty in the case of an Off-Exchange Trade, - the market value of all open positions, and - any gains and losses realized from liquidation during such quarter of any position. Summary of Authorization Sought Columbia seeks Commission authorization to enter into the Hedge Program in order to protect up to $2.1 billion of New Issuance from a potential rise in interest rates. (b) Describe briefly, and where practicable state the approximate amount of, any material interest in the proposed transaction, direct or indirect, of any associate or affiliate of the applicant or declarant company or any affiliate of any such associate company. Not applicable. (c) If the proposed transaction involves the acquisition of securities not issued by a registered holding company or subsidiary thereof, describe briefly the business and property, present or proposed, of the issuer of such securities. Not applicable. 15 PAGE 15 (d) If the proposed transaction involves the acquisition or disposition of assets, describe briefly such assets, setting forth original cost, vendor's book cost (including the basis of determination) and applicable valuation and qualifying reserves. Item 2. Fees, Commissions and Expenses. (a) State (1) the fees, commissions and expenses paid or incurred, or to be paid or incurred, directly or indirectly, in connection with the proposed transaction by the applicant or declarant or any associate company thereof, and (2) if the proposed transaction involves the sale of securities at competitive bidding, the fees and expenses to be paid to counsel selected by applicant or declarant to act for the successful bidder. Securities and Exchange Commission Filing Fee . . . . . . . . . . . . . . . . $ 2,000 Services of Columbia Gas System Service Corporation in connection with the preparation of the Application-Declaration . . . . . . . . . . . . . . . . . . . . . . 10,000 -------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,000
(b) If any person to whom fees or commissions have been or are to be paid in connection with the proposed transaction in an associate company or an affiliate of the applicant or declarant, or is an affiliate of an associate company, set forth the facts with respect thereto. Service will perform certain services at cost as set forth in Item 2(a) above. Item 3. Applicable Statutory Provisions. (a) State the section of the Act and the rules thereunder believed to be applicable to the proposed transaction. If any section or rule would be applicable in the absence of a specific exemption, state the basis of exemption. As noted, to the extent that Columbia's Hedge Program involves the jurisdictional acquisition of a "security" or an "extension of credit," Sections 6(a), 7, 9(a), 10 and 12(b) of the Act and Rules 23, 24 and 45 promulgated thereunder are applicable to the proposed transactions. To the extent any other section of the Act may be applicable to the proposed transactions, Columbia hereby requests appropriate orders thereunder. 16 PAGE 16 (b) If any person to whom fees or commissions have been or are to be paid in connection with the proposed transaction is an associate company or an affiliate of any applicant or declarant, or is an affiliate of an associate company, set forth the facts with respect thereto. Not applicable. Item 4. Regulatory Approval. (a) State the nature and extent of the jurisdiction of any State commission or any Federal commission (other than the Securities and Exchange Commission) over the proposed transaction. In the opinion of counsel, the approval of the U.S. Bankruptcy Court for the District of Delaware is necessary for the consummation of the proposed transaction. (b) Describe the action taken or proposed to be taken before any commission named in answer to paragraph (a) of this item in connection with the proposed transaction. Filings for approval of the proposed transaction will be made with the U.S. Bankruptcy Court for the District of Delaware. Item 5. Procedure. (a) State the date when Commission action is requested. If the date is less than 40 days from the date of the original filing, set for the reasons for acceleration. It is requested that the Commission issue its notice by July 28, 1995 and its order as soon as practicable after the file is completed. Time is of the essence as interest rates may move against Columbia. (b) State (i) whether there should be a recommended decision by a hearing officer, (ii) whether there should be a recommended decision by any other responsible officer of the Commission, (iii) whether the Division of Investment Management may assist in the preparation of the Commission's decision, and (iv) whether there should be a 30-day waiting period between the issuance of the Commission's order and the date on which it is to become effective. Applicants hereby (i) waive a recommended decision by a hearing officer, (ii) waive a recommended decision by any other responsible officer or the Commission, (iii) consent that the 17 PAGE 17 Division of Investment Management may assist in the preparation of the Commission's decision, and (iv) waive a 30-day waiting period between the issuance of the Commission's order and the date on which it is to become effective. Item 6. Exhibits and Financial Statements (a) Exhibits D-1 Bankruptcy Court Motion and Order (to be filed by amendment) D-2 The Columbia Gas System, Inc. Plan of Reorganization and Disclosure Statement (filed herewith by incorporation by reference to the Plan of Reorganization and Disclosure Statement filed in File No. 1-1098 on June 16, 1995) F Opinion of Counsel (to be filed by amendment) G Financial Data Schedule H Proposed Notice (b) Financial Statements The Columbia Gas System, Inc. and Subsidiaries (a) Balance Sheet as of May 31, 1995 (actual) (b) Statement of Capitalization as of May 31, 1995 (actual) (c) Statement of Income for the twelve months ended May 31, 1995 (actual) (d) Statement of Common Stock Equity as of May 31, 1995 (actual) There have been no material changes, not in the ordinary course of business, since the date of the financial statements filed herewith. Item 7. Information as to Environmental Effects. (a) Describe briefly the environmental effects of the proposed transaction in terms of the standards set forth in Section 102 (2) (C) of the National Environmental Policy Act 18 PAGE 18 (42 U.S.C. 4232 (2) (C)). If the response to this term is a negative statement as to the applicability of Section 102 (2) (C) in connection with the proposed transaction, also briefly state the reasons for that response. As more fully described in Item 1, the proposed transaction relates only to executing a Hedge Program and has no environmental impact in itself. (b) State whether any other federal agency has prepared or is preparing an environmental impact statement ("EIS") with respect to the proposed transaction. If any other federal agency has prepared or is preparing an EIS, state which agency or agencies and indicate the status of that EIS preparation. No federal agency has prepared or, to Columbia's knowledge, is, preparing and EIS with respect to the proposed transaction. 19 PAGE 19 SIGNATURE Pursuant to the requirements of the Public Utility Holding Company Act of 1935, the undersigned company has duly caused this Application-Declaration to be signed on its behalf by the undersigned thereunto duly authorized. THE COLUMBIA GAS SYSTEM, INC. Date: July 17, 1995 By: /s/ L. J. BAINTER -------------------------- L. J. Bainter Treasurer 20 THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES UNAUDITED 6(b)(a) (1 of 2) CONSOLIDATED BALANCE SHEET ACTUAL and PRO FORMA As of May 31, 1995 ($000)
CGS Actual ----------- ASSETS Property, Plant and Equipment Gas utility and other plant, at original cost .... 6,714,245 Accumulated depreciation and depletion ........... (3,257,567) ----------- Net Gas Utility and Other Plant .................. 3,456,678 ----------- Oil and gas producing properties, full cost method 1,255,631 Accumulated depletion ............................ (646,236) ----------- Net Oil and Gas Producing Properties ............. 609,395 ----------- Net Property, Plant, and Equipment ................. 4,066,073 ----------- Investments and Other Assets Gas supply prepayments ........................... 387 Accounts receivable - noncurrent ................. 202,841 Unconsolidated affiliates ........................ 74,892 Other ............................................ 8,045 ----------- Total Investments and Other Assets ................. 286,165 ----------- Current Assets Cash and temporary cash investments .............. 1,973,175 Accounts receivable, net ......................... 430,260 Gas inventories .................................. 145,396 Other inventories at average cost ................ 50,699 Prepayments ...................................... 106,256 Other ............................................ 71,484 ----------- Total Current Assets ............................... 2,777,270 ----------- Deferred Charges ................................... 289,861 ----------- Total Assets ....................................... 7,419,369 ===========
21 THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES (2 of 2) CONSOLIDATED BALANCE SHEET ACTUAL and PRO FORMA As of May 31, 1995 ($000)
CGS Actual ----------- CAPITALIZATION AND LIABILITIES Capitalization Stockholder's equity ............................. 1,621,773 Long-term debt ................................... 4,031 ----------- Total Capitalization ............................... 1,625,804 ----------- Current Liabilities Debt obligations ................................. 1,167 Debtor in possession financing ................... - Accounts and drafts payable ...................... 128,794 Accrued taxes .................................... 206,285 Accrued interest ................................. (3,137) Estimated rate refunds ........................... 51,600 Estimated supplier obligations ................... 64,040 Deferred income taxes - current .................. - Other ............................................ 474,991 ----------- Total Current Liabilities .......................... 923,740 ----------- Liabilities Subject to Chapter 11 Proceedings ..... 3,991,131 ----------- Other Liabilities and Deferred Credits Deferred income taxes, noncurrent ................ 385,930 Deferred investment tax credits .................. 37,970 Postretirement benefits other than pensions ...... 226,953 Other ............................................ 227,841 ----------- Total Other Liabilities and Deferred Credits ....... 878,694 ----------- Total Capitalization and Liabilities ............... 7,419,369 ===========
22 THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES UNAUDITED 6(b)(b) CONSOLIDATED STATEMENT OF CAPITALIZATION ACTUAL and PRO FORMA As of May 31, 1995 ($000)
CGS Actual ----------- Stockholder's Equity Common Stock, The Columbia Gas System, Inc., $10 par value, authorized 100,000,000 shares, outstanding 50,573,335 shares ................... 505,733 Additional paid in capital ....................... 602,026 Retained earnings ................................ 583,980 Unearned employee compensation ................... (69,966) ----------- Total Stockholder's Equity ......................... 1,621,773 ----------- Long-Term Debt Miscellaneous debt of subsidiaries ............... 2,388 Capitalized lease obligations .................... 1,643 ----------- Total Long-Term Debt ............................... 4,031 ----------- Total Capitalization ............................... 1,625,804 ===========
23 THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES UNAUDITED 6(b)(c) STATEMENT OF CONSOLIDATED INCOME ACTUAL and PRO FORMA Twelve Months Ended May 31, 1995 ($000)
CGS Actual ----------- Operating Revenues Gas sales......................................... 1,886,243 Transportation ................................... 582,408 Storage .......................................... 26,254 Other ............................................ 198,489 ----------- Total Operating Revenues ........................... 2,693,394 ----------- Operating Expenses Products purchased .............................. 859,818 Operation ........................................ 884,420 Maintenance ...................................... 131,161 Depreciation and depletion ....................... 271,762 Other taxes ...................................... 210,938 ----------- Total Operating Expenses ........................... 2,358,099 ----------- Operating Income ................................... 335,295 ----------- Other Income (Deductions) Interest income and other, net ................... 61,314 Interest expense and related charges.............. (36,751) Reorganization items, net ........................ 4,721 ----------- Total Other Income (Deductions) .................... 29,284 ----------- Income before Income Taxes and Cumulative Effect of Accounting Change ............................. 364,579 Income taxes ....................................... 132,095 ----------- Income before Cumulative Effect of Accounting Change ........................................... 232,484 Cumulative Effect of Change in Accounting for Postemployment Benefits .......................... 91 ----------- Net Income ......................................... 232,575 ===========
24 THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES UNAUDITED 6(b)(d) CONSOLIDATED STATEMENTS OF COMMON STOCK EQUITY ACTUAL and PRO FORMA Twelve Months Ended May 31, 1995 ($000)
CGS Actual ----------- COMMON STOCK Balance at June 1, 1994 ............................ 505,592 Common stock issued - Leveraged employee stock ownership plan (LESOP) .. - Dividend reinvestment plan ....................... - Long-term incentive plan ......................... 41 Public offering .................................. - ----------- Balance at May 31, 1995 ............................ 505,633 ----------- ADDITIONAL PAID IN CAPITAL Balance at June 1, 1994 ............................ 601,759 Common stock issued - Leveraged employee stock ownership plan (LESOP) .. - Dividend reinvestment plan ....................... - Long-term incentive plan ......................... 267 Public offering .................................. - Preferred stock issued ............................. - ----------- Balance at May 31, 1995 ............................ 602,026 ----------- RETAINED EARNINGS Balance at June 1, 1994 ............................ 351,405 Net income ......................................... 232,575 Common stock dividends ............................. - Other .............................................. - ----------- Balance at May 31, 1995 ............................ 583,980 ----------- UNEARNED EMPLOYEE COMPENSATION Balance at June 1, 1994 ............................ (69,966) Adjustment ......................................... - ----------- Balance at May 31, 1995 ............................ (69,966) ----------- TOTAL COMMON STOCK EQUITY .......................... 1,621,673 ===========
25 PAGE 1 EXHIBIT INDEX (a) Exhibits D-1 Bankruptcy Court Motion and Order (to be filed by amendment) D-2 The Columbia Gas System, Inc. Plan of Reorganization and Disclosure Statement (filed herewith by incorporation by reference to the Plan of Reorganization and Disclosure Statement filed in File No. 1-1098 on June 16, 1995) F Opinion of Counsel (to be filed by amendment) G Financial Data Schedule H Proposed Notice EX-27 2 COLUMBIA GAS FINANCIAL DATA SCHEDULE
OPUR1 1,000 12-MOS DEC-31-1994 JUN-1-1994 MAY-31-1995 PER-BOOK 3,456,678 895,560 2,777,270 289,861 0 7,419,369 505,733 602,026 563,980 1,621,773 0 0 4,031 0 0 0 0 0 1,643 0 5,793,565 7,419,369 2,693,394 132,095 2,358,099 2,358,099 335,295 66,035 401,330 36,751 232,575 0 232,575 0 0 0 4.60 4.60
EX-99.H 3 EXHIBIT H-PROPOSED NOTICE 1 PAGE 1 EXHIBIT H SECURITIES AND EXCHANGE COMMISSION (Release No. ) The Columbia Gas System, Inc. Notice of Proposed Interest Rate Hedge Program (the "Hedge Program"). The Columbia Gas System, Inc. ("Columbia"), a registered holding company located at 20 Montchanin Road, Wilmington, Delaware 19807, has filed an application-declaration with this Commission pursuant to Sections 6(a), 7, 9(a) and 12(b) under the Public Utility Holding Company Act of 1935 (the "Act") and Rules 23, 24 and 45 to the extent that Columbia's Hedge Program involves the jurisdictional acquisition of a security or an "extension of credit". Columbia and its wholly-owned transmission subsidiary, Columbia Gas Transmission Corporation presently are debtors-in-possession under Chapter 11 of the U.S. Bankruptcy Code in U.S. Bankruptcy Court for the District of Delaware. To the extent any other section of the Act may be applicable to the proposed transactions, Columbia hereby requests appropriate orders thereunder. Columbia is requesting Commission approval to enter into interest rate hedge transactions to limit its exposure to a potential rise in long-term interest rates prior to the interest rates on its long-term debt being fixed upon its emergence from bankruptcy. Columbia's interest rate exposure is associated with a projected fixed rate debt issuance of approximately $2.1 billion in debentures (the "New Indenture Securities"). For example, a 100 basis point increase in interest rates prior to the emergence date (the "Effective Date", currently anticipated to be December 31, 1995) would cost Columbia approximately $21 million annually due to the future issuance of New Indenture Securities (the "New Issuance"). To provide Columbia protection against higher long-term interest rates, Columbia proposes to enter into an interest rate Hedge Program prior to the New Issuance. Recent declines in long-term interest rates permit Columbia to lock in historically attractive interest rates on its New Indenture Securities. Current U.S. Treasury yields are trading close to twenty-five year lows. Columbia could have one of the lowest long-term debt cost structures in its industry if it was afforded the opportunity to lock in current rates. The Hedge Program would be utilized to fix and/or limit the interest rate risk exposure on the U.S. Treasury security component of the New Issuance through (i) a forward sale of exchange-traded U.S. Treasury futures contracts, U.S. Treasury securities and/or a forward swap (each a "Forward Sale"), (ii) the purchase of put options on U.S. Treasury securities (a "Put Options Purchase"), (iii) a Put Options Purchase in combination with the sale of call options on U.S. Treasury securities (a "Zero Cost Collar"), or (iv) some combination of a Forward Sale, Put Options Purchase and/or Zero Cost Collar. The Hedge Program may be executed on-exchange ("On-Exchange Trades") with brokers through the opening of futures and/or options positions traded on the Chicago Board of Trade 2 PAGE 2 ("CBOT"), the opening of over-the-counter positions with one or more counterparties ("Off-Exchange Trades") or a combination of On-Exchange Trades and Off-Exchange Trades. While it is debatable whether Columbia's proposed Hedge Program involves the jurisdictional acquisition of a "security" or an extension of credit under the Act, noting that at least a couple strategies do not,(1) Columbia nevertheless seeks Commission approval of the entire Hedge Program to ensure the maximal flexibility in structuring effective interest rate hedging strategies. Due to the size of the Hedge Program (interest cost on up to $2.1 billion principal amount of New Issuance), Off-Exchange Trades may be used to avoid execution costs associated with On-Exchange Hedge Trades. Also, Off-Exchange Trades possibly may match more effectively the duration of the Hedge Program with the timing of the New Issuance. Off-Exchange Trades provide similar interest rate protection as On-Exchange Trades and are entered with a financial counterparty, e.g., an investment banking firm, commercial bank or some other form of financial intermediary. Unlike On-Exchange Trades, Off-Exchange Trades do not have the credit support of the CBOT. Columbia must bear the credit risk of counterparties to the Off-Exchange Trades and, therefore, may diversify its Off-Exchange Trades with multiple counterparties should it embark on such transactions. The duration of the Hedge Program will be short-term, lasting from the date of execution until the Effective Date. The short length of the Hedge Program minimizes this counterparty risk and, therefore, Columbia may choose not to diversify for ease of execution. However, Columbia will enter into Off-Exchange Trades only with counterparties whose deposit or long-term debt have no lower than an "BBB3" rating from Moody's Investors Service, Inc., or an "BBB-" rating from Standard & Poor's Corporation, or an equivalent rating from Fitch Investors Service or Duff & Phelps. All transactions entered into under Columbia's Hedging Program will be bona fide hedges of interest rate risk and will meet the criteria established by the Financial Accounting Standards Board in "Statement of Financial Accounting Standards No. 80-Accounting for Futures Contracts ("SFAS")." SFAS 80 establishes the criteria which must be satisfied in order to qualify for hedge accounting treatment,(2) and the financial disclosure requirements associated with hedging transactions. - ---------------------------------- (1) See HCAR No. 35-26312, 60 F.R. 33640, 33641, n.12 (June 28, 1995) (noting the Commission's exercise of jurisdiction under Sections 6(a) and 7 of the Act over interest rate caps, floors and collars). (2) SFAS 80 requires that (i) the item to be hedged exposes the enterprise to price or interest rate risk, (ii) the hedging instruments reduces that exposure and is designated as a hedge, (iii) the significant characteristics and expected terms of the anticipated financial transaction are identified, and (iv) it is probable the expected transaction will occur. As such, hedging transactions should not result in an increased risk to Columbia. 3 PAGE 3 Columbia will determine the optimal structure of the Hedge Program at the time of execution. Columbia may decide to lock in interest rates and/or limit its exposure to interest rate increases. All open positions under the Hedge Program will be closed on or prior to the date of the New Issuance and Columbia will not, at any time, take possession of the underlying U.S. Treasury securities. The application-declaration and any amendments thereto are available for public inspection through the commission's Office of Public Reference. Interested persons wishing to comment or request a hearing should submit their views in writing by ________________, 1995, to the Secretary, Securities and Exchange Commission, Washington, D.C. 20549, and serve a copy on the applicants-declarants at the address specified above. Proof of service (by affidavit or, in the case of an attorney-at-law, by certificate) should be filed with the request. Any request for a hearing shall identify specifically the issues of fact or law that are disputed. A person who so requests will be notified of any hearing, if ordered, and will receive a copy of any notice or order issued in this matter. After said date, the joint application-declaration, as filed or as it may be amended, may be permitted to become effective. For the Commission, by the Division of Investment Management, pursuant to delegated authority. Jonathan G. Katz Secretary -----END PRIVACY-ENHANCED MESSAGE-----