-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VsdCz9uNinfUiPCd8RSI5mUYjRJpQ3VLU8SBdLep0mkilVdG9Gk9JguiJPSugBQM Lqmxc5/kCu/Ps3iz4uIIXA== 0000893220-96-001267.txt : 19960802 0000893220-96-001267.hdr.sgml : 19960802 ACCESSION NUMBER: 0000893220-96-001267 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960801 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-01098 FILM NUMBER: 96602331 BUSINESS ADDRESS: STREET 1: 20 MONTCHANIN RD CITY: WILMINGTON STATE: DE ZIP: 19807 BUSINESS PHONE: 3024295000 10-Q 1 FORM 10-Q COLUMBIA GAS SYSTEM, INC. 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) /X/ OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended June 30, 1996 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) / / OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from ______ to ______ Commission file number 1-1098 THE COLUMBIA GAS SYSTEM, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) Delaware 13-1594808 ----------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
20 Montchanin Road, Wilmington, Delaware 19807 -------------------------------------------------------------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (302) 429-5000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $10 Par Value: 55,065,869 shares outstanding at June 30, 1996. 2 THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED JUNE 30, 1996 TABLE OF CONTENTS
Page ---- PART I FINANCIAL INFORMATION - ------ --------------------- Item 1 Financial Statements Statements of Consolidated Income 1 Condensed Consolidated Balance Sheets 2 Consolidated Statements of Cash Flows 3 Consolidated Statements of Common Stock Equity 4 Notes 5 Item 2 Management's Discussion and Analysis of 7 Financial Condition and Results of Operations PART II OTHER INFORMATION - ------- ----------------- Item 1 Legal Proceedings 28 Item 2 Changes in Securities 30 Item 3 Defaults Upon Senior Securities 30 Item 4 Submission of Matters to a Vote of Security Holders 30 Item 5 Other Information 30 Item 6 Exhibits and Reports on Form 8-K 30 Signature 31
3 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS The Columbia Gas System, Inc. and Subsidiaries STATEMENTS OF CONSOLIDATED INCOME (unaudited)
Three Months Six Months Ended June 30, Ended June 30, ----------------- ---------------- 1996 1995 1996 1995 ---- ---- ---- ---- (millions) OPERATING REVENUES Gas sales $ 432.0 $ 301.9 $1,434.3 $1,140.1 Transportation 113.3 108.8 255.9 235.5 Other 37.1 43.9 95.2 109.7 ------- ------- -------- -------- Total Operating Revenues 582.4 454.6 1,785.4 1,485.3 ------- ------- -------- -------- OPERATING EXPENSES Products purchased 205.9 88.8 757.7 529.9 Operation 214.6 201.9 421.4 410.0 Maintenance 27.4 30.8 51.3 53.4 Depreciation and depletion 50.9 59.9 119.0 143.6 Other taxes 47.6 46.3 121.8 121.6 ------- ------- -------- -------- Total Operating Expenses 546.4 427.7 1,471.2 1,258.5 ------- ------- -------- -------- OPERATING INCOME 36.0 26.9 314.2 226.8 ------- ------- -------- -------- OTHER INCOME (DEDUCTIONS) Interest income and other, net 13.7 2.8 16.8 8.8 Interest expense and related charges* (39.2) (6.7) (82.9) (12.2) Reorganization items, net - 21.8 - 32.5 ------- ------- -------- -------- Total Other Income (Deductions) (25.5) 17.9 (66.1) 29.1 ------- ------- -------- -------- INCOME BEFORE INCOME TAXES 10.5 44.8 248.1 255.9 Income Taxes 2.3 13.9 88.6 96.2 ------- ------- -------- -------- NET INCOME $ 8.2 $ 30.9 $ 159.5 $ 159.7 ======= ======= ======== ======== EARNINGS PER SHARE OF COMMON STOCK $ 0.15 $ 0.61 $ 3.04 $ 3.16 ======= ======= ======== ======== DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 0.15 - $ 0.30 - AVERAGE COMMON SHARES OUTSTANDING (thousands) 55,044 50,568 52,544 50,566
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. *Due to the bankruptcy filings, interest expense of approximately $67 million was not recorded for the three months ended June 30, 1995, and approximately $132 million was not recorded for the six months ended June 30, 1995. Reference is made to the accompanying Notes and Management's Discussion and Analysis for information related to the 1991 to 1995 Chapter 11 bankruptcy proceedings involving The Columbia Gas System, Inc. and Columbia Gas Transmission Corporation (a wholly-owned subsidiary). 1 4 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS (CONTINUED) The Columbia Gas System, Inc. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS
As of ------------------------------------- June 30, 1996 December 31, 1995 ------------- ----------------- (unaudited) (million) ASSETS PROPERTY, PLANT AND EQUIPMENT Gas utility and other plant, at original cost $6,834.2 $6,903.2 Accumulated depreciation and depletion (3,292.5) (3,322.0) -------- -------- Net Gas Utility and Other Plant 3,541.7 3,581.2 -------- -------- Oil and gas producing properties, full cost method 517.2 516.3 Accumulated depletion (151.8) (141.1) -------- -------- Net Oil and Gas Producing Properties 365.4 375.2 -------- -------- Net Property, Plant and Equipment 3,907.1 3,956.4 -------- -------- INVESTMENTS AND OTHER ASSETS 160.9 354.6 -------- -------- CURRENT ASSETS Cash and temporary cash investments 75.4 8.0 Accounts receivable, net 358.4 511.0 Income tax refund - 271.5 Gas inventory 149.1 172.3 Other inventories - at average cost 45.9 41.5 Prepayments 61.4 56.9 Regulatory assets 66.7 76.5 Other 251.4 138.2 -------- -------- Total Current Assets 1,008.3 1,275.9 -------- -------- REGULATORY ASSETS 422.3 422.0 DEFERRED CHARGES 51.4 48.1 -------- -------- TOTAL ASSETS $5,550.0 $6,057.0 ======== ======== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common stock equity $1,499.7 $1,114.0 Preferred stock - 399.9 Long-term debt 2,004.1 2,004.5 -------- -------- Total Capitalization 3,503.8 3,518.4 -------- -------- CURRENT LIABILITIES Short-term debt - 338.9 Accounts and drafts payable 184.8 215.7 Accrued taxes 267.7 271.3 Accrued interest 23.6 94.3 Estimated rate refunds 94.9 96.1 Estimated supplier obligations 129.2 178.3 Transportation and exchange gas payable 43.0 46.7 Other 321.1 337.3 -------- -------- Total Current Liabilities 1,064.3 1,578.6 -------- -------- OTHER LIABILITIES AND DEFERRED CREDITS Income taxes, noncurrent 530.1 468.6 Postretirement benefits other than pensions 180.5 208.2 Regulatory liabilities 44.6 44.9 Other 226.7 238.3 -------- -------- Total Other Liabilities and Deferred Credits 981.9 960.0 -------- -------- CAPITAL CAPITALIZATION AND LIABILITIES $5,550.0 $6,057.0 ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 2 5 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS (CONTINUED) The Columbia Gas System, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30, ---------------------- 1996 1995 ---- ---- (millions) OPERATIONS ACTIVITIES Net Income $ 159.5 $ 159.7 Adjustments for items not requiring (providing) cash: Depreciation and depletion 119.0 143.6 Deferred income taxes 33.1 31.4 Other - net* (19.5) (5.5) Change in components of working capital Accounts receivable 172.9 171.5 Income tax refunds 271.5 - Gas inventory 23.2 49.7 Prepayments (4.5) 42.6 Accounts payable 16.1 2.0 Accrued taxes (26.4) (30.0) Accrued interest (71.1) (0.4) Estimated rate refunds (1.3) (42.9) Estimated supplier obligations (49.1) (2.2) Under/Overrecovered gas costs (83.9) 91.6 Exchange gas payable (5.5) (6.7) Other working capital 20.2 (11.7) -------- -------- Net Cash From Operations 554.2 592.7 -------- -------- INVESTMENT ACTIVITIES Capital expenditures (112.9) (155.2) Proceeds received on the sale of Columbia Development 188.9 - Other investments - net 14.7 12.6 -------- -------- Net Investment Activities 90.7 (142.6) FINANCING ACTIVITIES Retirement of preferred stock (400.0) - Retirement of long-term debt (0.5) (0.4) Dividends paid (15.6) - Issuance of common stock 242.5 - Net decrease in revolving credit facility (338.9) - Other financing activities (65.0) (24.8) -------- -------- Net Financing Activities (577.5) (25.2) -------- -------- Increase in Cash and Temporary Cash Investments 67.4 424.9 Cash and temporary cash investments at beginning of year 8.0 1,481.8 -------- -------- Cash and temporary cash investments at June 30** $ 75.4 $1,906.7 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest 79.1 0.5 Cash paid for income taxes (net of refunds) (175.7) 39.5
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. * 1995 includes changes in Liabilities Subject to Chapter 11 Proceedings of $2.8 million. **The Corporation considers all highly liquid debt instruments to be cash equivalents. Reference is made to the accompanying Notes and Management's Discussion and Analysis for information related to the 1991 to 1995 Chapter 11 bankruptcy proceedings involving The Columbia Gas System, Inc. and Columbia Gas Transmission Corporation (a wholly-owned subsidiary). 3 6 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS (CONTINUED) The Columbia Gas System, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF COMMON STOCK EQUITY
As of ------------------------------- June 30, December 31, 1996 1995 -------------- ------------ (unaudited) (millions) COMMON STOCK EQUITY Common stock, $10 par value, authorized 100,000,000 shares, outstanding 55,065,869 shares and 49,204,025 shares respectively $ 550.7 $ 506.2 Additional paid in capital 736.8 595.8 Retained earnings 213.7 69.8 Unearned employee compensation (1.5) - Cost of treasury stock (1,416,155 shares outstanding as of December 31, 1995) - (57.8) -------- -------- TOTAL COMMON STOCK EQUITY $1,499.7 $1,114.0 ======== =======
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 7 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS (CONTINUED) The Columbia Gas System, Inc. and Subsidiaries NOTES 1. Basis of Accounting Presentation The accompanying unaudited condensed consolidated financial statements for The Columbia Gas System, Inc. (Columbia) reflect all normal recurring adjustments which are necessary, in the opinion of management, to present fairly the results of operations in accordance with generally accepted accounting principles. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included in Columbia's 1995 Annual Report on Form 10-K and 1996 First Quarter Form 10-Q. Income for interim periods may not be indicative of results for the calendar year due to weather variations and other factors. Certain reclassifications have been made to the 1995 financial statements to conform to the 1996 presentation. 2. Bankruptcy Matters On November 28, 1995, Columbia and its wholly-owned subsidiary, Columbia Gas Transmission Corporation (Columbia Transmission), emerged from Chapter 11 protection of the Federal Bankruptcy Code under the jurisdiction of the United States Bankruptcy Court for the District of Delaware (Bankruptcy Court). Both Columbia and Columbia Transmission had operated under Chapter 11 protection since July 31, 1991. Certain residual unresolved bankruptcy-related matters are still within the jurisdiction of the Bankruptcy Court. Unsettled Producer Claims Columbia Transmission's approved plan of reorganization (Plan) provided that producers who rejected settlement offers contained in Columbia Transmission's Plan may continue to litigate their claims under the Bankruptcy Court-approved claims estimation procedures, described below, and receive the same percentage payout on their allowed claims, when and if ultimately allowed, as received by the settling producers. Columbia Transmission's Plan further provided that the actual distribution percentage for all producer claims, which would not be less than 68.875% or greater than 72.5%, could not be determined until the total amount of contested producer claims is established, and that until such time, 5% of the maximum amount (based on a 72.5% payout) to be distributed to producer claimants for allowed claims and to Columbia for unsecured debt will be withheld. Additional distributions, if any, will be made when the total amount of allowed producer claims has been determined. Producer Claims Estimation Process In 1992, the Bankruptcy Court approved the appointment of a claims mediator and the implementation of a claims estimation procedure for the quantification of claims arising from the rejection of above-market gas purchase contracts and other claims by producers related to gas purchase contracts with Columbia Transmission. In late 1994 and early 1995, the Claims Mediator issued an Initial Report and Recommendations of the Claims Mediator on Generic Issues for Natural Gas Contract Claims and a Supplement to Initial Report and Recommendations of the Claims Mediator (Report) and directed producer claimants to submit 5 8 PART 1 - Financial Information Item 1 - Financial Statements (continued) recalculated claims prepared pursuant to the instructions contained in the Report. The recommendations and instructions set out in the Report have not been considered by the Bankruptcy Court. In mid-1995, most producers with which Columbia Transmission had not yet negotiated settlements liquidating their claims submitted recalculated claims to the claims mediator. As submitted, those recalculated claims initially amounted to over $2 billion. Since mid-1995, numerous additional producers have settled their claims and those settlements became final with the confirmation of Columbia Transmission's Plan. In addition, several recalculated claims have been amended by producer claimants. The claims estimation procedures remain in place for use in the post-confirmation liquidation of producer claims. The claims estimation process is now proceeding with various discovery, motions for dismissal or summary judgement and evidentiary hearings before the claims mediator with respect to individual producer claims, including claim-specific issues not addressed by the Report. Motions are being filed by Columbia Transmission with the Bankruptcy Court based on the recommendations of the claims mediator to determine the amounts at which particular claims will be allowed. All parties have rights of appellate review with respect to the resulting orders of the Bankruptcy Court. When claims are allowed by the Bankruptcy Court and the allowances become final, Columbia Transmission will make distributions with respect to those claims pursuant to the Plan. The timing of this litigation process is impossible to predict. The 5% holdback from settling producers and a matching contribution by reorganized Columbia Transmission will be used, to the extent necessary, to fund any distributions on producer claims ultimately liquidated in an aggregate amount in excess of those proposed by Columbia Transmission's Plan. If the holdback and matching contributions are exhausted, any further distribution would be funded entirely by Columbia Transmission. Columbia has guaranteed the payment of the remaining distributions to producers, either in cash or in Columbia's common stock. Based on the information received and evaluated to date, Columbia Transmission believes adequate reserves have been established for resolution of the remaining producer claims and the payment of any amounts ultimately due to producers with respect to the 5% holdback. 3. Sale of Southwest Oil and Gas Subsidiary On April 30, 1996, Columbia sold Columbia Gas Development Corporation (Columbia Development), effective December 31, 1995, to a privately- held exploration and production concern for approximately $200 million. Columbia Development had approximately 196 billion cubic feet equivalent of proved oil and natural gas reserves located in the Gulf of Mexico and on-shore continental United States. An estimated loss of $54.8 million after-tax was recorded in the fourth quarter of 1995 to reflect the sale of this subsidiary. In the second quarter of 1996, an adjustment was recorded that reduced the loss to $49.2 million. 6 9 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATING INCOME (LOSS) BY SEGMENT
Three Months Six Months Ended June 30, Ended June 30, ------------------- ------------------ 1996 1995 1996 1995 ---- ---- ---- ---- (millions) Transmission $ 38.8 $ 35.9 $ 124.4 $ 112.5 Distribution (3.0) (7.9) 165.0 108.3 Oil and Gas 6.4 (0.2) 17.2 (0.3) Other Energy (3.1) 1.7 13.6 9.6 Corporate (3.1) (2.6) (6.0) (3.3) ------ ------ ------- ------- TOTAL $ 36.0 $ 26.9 $ 314.2 $ 226.8 ====== ====== ======= =======
DEGREE DAYS (DISTRIBUTION SERVICE TERRITORY)
Three Months Six Months Ended June 30, Ended June 30, ---------------- ------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Actual 705 624 3,807 3,382 Normal 580 580 3,559 3,527 % Colder (warmer) than normal 22 8 7 (4) % Colder (warmer) than prior period 13 2 13 (10)
7 10 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CONSOLIDATED RESULTS Three Month Results Net Income Columbia's net income for the three months ended June 30, 1996, was $8.2 million, or $0.15 per share. In the same period last year, while Columbia was in Chapter 11, net income of $30.9 million, or $0.61 per share was reported. After adjusting the current period for unusual items and the prior period for bankruptcy-related issues including interest costs not recorded, adjusted second quarter 1996 net income was $21.2 million, an increase of $25.5 million over adjusted net income for the same period last year. This increase was attributed to improved results for all segments of the business that resulted from higher rates in effect for the regulated subsidiaries, colder weather and higher wellhead prices received for natural gas production. Unusual items for the current quarter included a decrease to net income of $18.6 million, after-tax, to reflect severance and benefit costs associated with ongoing reengineering activities to improve operating efficiencies and customer services and a $5.6 million after-tax improvement for an adjustment to the loss on the sale of Columbia Development that was finalized in April 1996. The table below reflects the unusual items and last year's bankruptcy-related issues for both the three and six month periods. Bankruptcy Related and Unusual Items After-tax effect on Net Income (millions)
Three Months Six Months Ended June 30, Ended June 30, --------------- --------------- 1996 1995 1996 1995 ---- ---- ---- ---- Reported net income $ 8.2 $ 30.9 $159.5 $159.7 Less (plus): Estimated interest costs not recorded - 43.0 - 83.4 Bankruptcy-related professional fees and related expenses - (7.8) - (14.6) Reengineering costs (18.6) - (18.6) - Adjustment to the sale of Columbia Development 5.6 - 5.6 - ----- ------ ------ ------ Total adjustments (13.0) 35.2 (13.0) 68.8 ----- ------ ------ ------ Net income after adjusting for unusual and bankruptcy items $21.2 $(4.3) $172.5 $ 90.9 ===== ====== ====== ======
Revenues Operating revenues for the second quarter of 1996 were $582.4 million, a $127.8 million improvement over the same period last year, due mainly to higher gas prices, increased gas marketing activity and increased sales for the distribution subsidiaries, resulting in part from 13% colder weather. Also, increasing revenues was the beneficial effect of new rates in place for Columbia Transmission and four of the five distribution subsidiaries. Partially offsetting these improvements was a decrease in oil and gas production revenues resulting from the sale of Columbia Development effective year end 1995. 8 11 PART 1-FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (CONTINUED) CONSOLIDATED RESULTS (CONTINUED) Expenses For the three months ended June 30, 1996, operating expenses of $546.4 million were $118.7 million higher than the prior period, reflecting increased natural gas purchases necessary to meet higher sales requirements and the impact of higher prices for gas purchased. Also increasing current period expense was $28.6 million of current and future expenditures representing severance and benefit costs associated with Columbia's ongoing reengineering program mentioned above. Included in expense last year were costs related to Columbia Development's operations. Depreciation and depletion expense decreased $9 million. This reflects $13.6 million lower depletion expense attributable to reduced depletable plant as a result of the sale of Columbia Development and a lower depletion rate reflecting higher gas prices, tempered by a $4.6 million increase in depreciation expense primarily due to higher depreciation rates in effect for Columbia Transmission and additional plant in service for Columbia Transmission and the other regulated subsidiaries. Other Income (Deductions) Other Income (Deductions) reduced income $25.5 million in the current quarter primarily reflecting $35.1 million of interest expense on long- term debt obligations partially offset by an $8.6 million pre-tax favorable adjustment for the sale of Columbia Development. In the same period last year, while Columbia was in Chapter 11, interest expense was not recorded. The 1995 income improvement of $17.9 million for Other Income (Deductions) was due principally to bankruptcy-related issues, which included the effect of $31.2 million of interest earned on cash accumulated while in Chapter 11 partially offset by expense of $9.4 million for professional fees and related costs. Six Month Results Net Income Net income for the first six months of 1996 of $159.5 million was essentially unchanged from the $159.7 million reported for the same period last year. Included in the current period's results are the previously mentioned unusual items recorded in the second quarter. Net income for the first half of 1995 benefitted from not recording $83.4 million in after-tax interest expense on prepetition debt obligations due to the Chapter 11 proceedings. After adjusting for unusual items and 1995 bankruptcy-related issues, adjusted net income in 1996 was $172.5 million, an increase of $81.6 million over last year's adjusted net income. Revenues For the first half of 1996, operating revenues were $1,785.4 million, an increase of $300.1 million over the previous year. The increase was principally due to the favorable effect of colder weather that increased sales and transportation services, higher gas prices and higher rates in effect for the regulated subsidiaries. Tempering the increase were lower revenues associated with oil and gas production due to the sale of Columbia Development. Expenses Total operating expenses of $1,471.2 million for the first six months of 1996 were up $212.7 million. This was primarily the result of $227.8 million in higher product purchase expense 9 12 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CONSOLIDATED RESULTS (CONTINUED) reflecting additional sales requirements and increased prices charged by suppliers. The $24.6 million decrease in depreciation and depletion expense was attributable to reduced depletable plant due to the sale of Columbia Development and a lower depletion rate resulting from higher gas prices, partially offset by higher depreciation rates and additional plant in service. Operation and maintenance expense increased $9.3 million over last year. After adjusting for the effect of the reengineering expense recorded in the second quarter of 1996 and the elimination of Columbia Development's 1995 operating expense, operation and maintenance expense was essentially unchanged from last year. Other Income (Deductions) Other Income (Deductions) reduced income $66.1 million in the first six months of 1996, whereas income was increased $29.1 million in the same period last year. The effect in 1996 of $70.3 million of interest expense on long-term debt obligations was mitigated by an $8.6 million favorable adjustment for the sale of Columbia Development. In the same period last year, no interest expense was recorded. In 1995, income increased for bankruptcy-related issues reflecting $50.1 million of interest earned on cash accumulated while in Chapter 11, partially offset by $17.6 million of expense for professional fees and related costs. Liquidity and Capital Resources Cash from operations for the first half of 1996 was $554.2 million, a decrease of $38.5 million from last year that was due largely to a lag in the recovery by the distribution subsidiaries of gas costs in the current period together with increased payments for estimated supplier obligations, increased prepayments and payment of accrued interest. The recovery lag resulted from the sharp rise in gas prices during 1996 that exceeded the distribution subsidiaries' current recovery levels. These higher costs will be recovered through future adjustments to the commodity portion of rates as provided for under the regulatory process. Conversely, in the prior period when gas prices were decreasing, the rates in place for the distribution subsidiaries led to an overrecovered position. Cash from operations was improved by approximately $213 million for the net effect of Internal Revenue Service (IRS) refunds. Columbia's 1995 Federal Income Tax return included a net operating loss carryback claim to recover income taxes and was the principal reason for a $271.5 million improvement in working capital for income tax refunds. This claim, net of other adjustments and liabilities to the IRS, resulted in a cash refund in April 1996 of approximately $213 million. Cash also improved for the favorable effect of colder weather that increased sales for the distribution subsidiaries, as well as higher base rates in effect for the regulated subsidiaries. Columbia maintains an unsecured bank revolving credit facility (Credit Facility) which permits borrowings of up to $1 billion. Scheduled quarterly reductions of $25 million of the committed amount begin December 31, 1997, and will reduce the Credit Facility to $700 million by September 30, 2000. The Credit Facility provides for the issuance of up to $100 million of letters of credit. Borrowings under the Credit Facility were used in February 1996, to redeem the 5.22% Series B-Preferred Stock and 7.89% Series A-Preferred Stock issued pursuant to Columbia's approved Plan of Reorganization. As of June 30, 1996, Columbia had $73.2 million of letters of credit outstanding under the Credit Facility and no borrowings. 10 13 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CONSOLIDATED RESULTS (CONTINUED) Columbia has an effective shelf registration statement on file with the U.S. Securities and Exchange Commission (SEC) for the issuance of up to $1 billion in aggregate amount of debentures, common stock or preferred stock in one or more series. In March 1996, Columbia issued 5,750,000 shares of common stock consisting of 4,333,845 newly issued shares and 1,416,155 shares previously held as treasury stock. Proceeds of $239.2 million from the issuance were used to reduce borrowings incurred under the Credit Facility. On April 30, 1996, Columbia sold Columbia Development for approximately $200 million. The funds generated from this sale were used to reduce borrowings under the Credit Facility. Columbia believes that future cash requirements for normal ongoing operations and capital expenditures will be met with internally generated funds and amounts available under the Credit Facility. No further issuances under the shelf registration are contemplated at this time. Restructuring Activities In the second quarter of this year, $28.6 million (pre-tax) of expense was recorded to reflect current and future severance and benefit expenditures associated with Phase I of a study, called Project Phoenix, that began in 1995 to streamline operations and make them more efficient and cost-competitive. Staffing throughout Columbia has been reduced nearly five percent as a result of implementing this initial phase. Phase II of Project Phoenix is scheduled to be completed and substantially implemented by year end. The second phase of the project will result in additional expense being recorded later in 1996 that is anticipated to be approximately half of the amount recorded for Phase I. 11 14 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) TRANSMISSION OPERATIONS
Three Months Six Months Ended June 30, Ended June 30, ----------------- ---------------- 1996 1995 1996 1995 ----- ---- ---- ---- (millions) OPERATING REVENUES Transportation revenues $ 137.6 $ 135.3 $ 320.6 $ 294.6 Storage revenues 40.5 34.5 79.2 64.0 Other revenues 3.6 1.1 7.8 15.5 ------- ------- ------- ------- Total Operating Revenues 181.7 170.9 407.6 374.1 ------- ------- ------- ------- OPERATING EXPENSES Operation and maintenance 100.3 95.6 198.1 182.5 Depreciation 28.2 26.0 55.2 51.7 Other taxes 14.4 13.4 29.9 27.4 ------- ------- ------- ------- Total Operating Expenses 142.9 135.0 283.2 261.6 ------- ------- ------- ------- OPERATING INCOME $ 38.8 $ 35.9 $ 124.4 $ 112.5 ======= ======= ======= ======= Throughput (Bcf) Transportation Columbia Transmission Market area 197.6 194.7 627.1 595.9 Columbia Gulf Main-line 159.1 151.8 329.3 306.7 Short-haul 64.1 53.7 133.4 104.4 Intrasegment eliminations (158.2) (150.7) (324.7) (302.0) ------- ------- -------- -------- Total Throughput 262.6 249.5 765.1 705.0 ======= ======= ======== =======
12 15 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) TRANSMISSION OPERATIONS (CONTINUED) Marketing Initiatives In February 1996, Columbia Transmission filed with the Federal Energy Regulatory Commission (FERC) for authorization to expand its pipeline and storage systems to serve the increasing needs of customers. As previously reported, Columbia Transmission has signed 15-year agreements with 23 customers for approximately 500,000 Mcf per day (Mcf/d) of additional firm service to be phased in over a three-year period commencing November 1, 1997. In the filing, Columbia Transmission sought to roll the cost of the project into existing rates rather than charge an incremental rate to the market expansion customers. Several protests were subsequently filed with respect to the rolled-in rate treatment. On April 12, 1996, Columbia Transmission filed a response to the protests that reasserted points made in its initial FERC application that the market expansion project meets the FERC's requirements for the rolled-in pricing treatment and provides system operational benefits to its customers, including those not receiving increased levels of service. The cost is projected to increase overall rates by less than five percent which, under FERC policy guidelines, qualifies for rolled-in rate treatment. On June 7, 1996, Columbia Transmission filed an amendment to its market expansion proposal that will reduce capital expenditures necessary for the project by about $80 million, to approximately $270 million, while still maintaining the same level of service to customers. The amendment reflects an agreement between Columbia Transmission and Texas Eastern Transmission Corporation (Texas Eastern) under which Texas Eastern will increase capacity on its Pennsylvania pipeline system and lease the new capacity to Columbia Transmission. In June 1996, Texas Eastern also filed with the FERC its certificate application seeking approval of the arrangement. Interventions and protests filed in response to the amendment generally question the propriety of rolled-in rate treatment, the recovery mechanism for the lease costs and whether a lease is appropriate as opposed to contracting for throughput service. Responses to these protests have been filed by Columbia Transmission and Texas Eastern. The responses noted, among other things, that Columbia Transmission's leasing of the Texas Eastern capacity is fully consistent with recently announced FERC policy that encourages creative arrangements among pipelines to economically develop pipeline capacity to meet the needs of growing markets. Regulatory Matters Columbia Transmission's Rate Filing In August 1995, Columbia Transmission filed with the FERC its first general rate case since 1991, requesting an increase in annual revenues of approximately $147 million. Columbia Transmission also proposed to recover its net investment in gathering and certain gas processing facilities over a period of five years. The FERC authorized new rates to be implemented on February 1, 1996, subject to refund. Columbia Transmission agreed to collect only 75% of the requested rate increase for at least three months in an effort to reach a timely resolution of the issues. Since settlement discussions with active parties are on-going, Columbia Transmission has agreed to continue the reduction in its collection rates past May 1, 1996. 13 16 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) TRANSMISSION OPERATIONS (CONTINUED) On June 20, 1996, an Administrative Law Judge order extended the hearing date for the rate proceedings until February 25, 1997. A hearing date for issues related to environmental matters was set for May 5, 1997. Gathering Facilities Under the FERC's Order No. 636, natural gas pipelines were required to unbundle their gathering costs and services from all other transportation services. Columbia Transmission has determined that gathering services are not essential to its ongoing transportation activities and, as a result, intends to dispose of the related assets. On April 29, 1996, Columbia Transmission filed an application with FERC to abandon, by sale to Columbia Natural Resources, Inc. (CNR), certain gathering and transmission facilities at their net book value of approximately $28 million. Pending FERC approval, the transfer is expected to be completed around year end. In response to Columbia Transmission's April 1996 filing, certain parties filed protests and motions for a technical conference, a hearing, and consolidation with Columbia Transmission's ongoing rate case. Columbia Transmission filed a response on June 4, 1996 in opposition to the motions. Columbia Transmission is actively pursuing discussions with various parties concerning the sale of its remaining gathering assets. Recovery of Columbia Gulf's Pre-November 1994 Transportation Costs On March 1, 1995, Columbia Transmission filed with the FERC to recover $69 million of annual transportation costs. Included in this amount were $39 million of unrecovered transportation costs that were billed to Columbia Transmission by Columbia Gulf Transmission Company (Columbia Gulf). Several parties filed protests with the FERC regarding the Columbia Gulf charges. In an April 2, 1996 order, the FERC ruled that Columbia Gulf was entitled to bill its prudently incurred costs, under its cost-of-service tariff, to Columbia Transmission, and that Columbia Transmission was entitled to flow such amounts through to its customers. The FERC ruled that approximately $19 million of the Columbia Gulf charges, which were attributable to operation and maintenance costs, were recoverable, subject to a general FERC audit which is presently under way. With respect to the remaining $20 million of costs, that are associated with environmental issues, the FERC has established hearing procedures to determine if some portion of these costs are not recoverable because they were not prudently incurred by Columbia Gulf. This hearing is scheduled for March 1997. FERC has denied requests for rehearing of the April 1996 order and affirmed the limited scope of the hearing. Environmental A U.S. EPA Administrative Order by Consent establishes requirements for the replacement of, maintenance to, or sale of, covered Columbia Transmission facilities. In light of additional information about remediation activities associated with certain facilities and presently known normal replacement and maintenance activities, a reserve addition of $2.5 million was recorded in the second quarter of 1996. 14 17 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) TRANSMISSION OPERATIONS (CONTINUED) Restructuring Activities The transmission segment has a reengineering project underway to assess the way the companies do business. These efforts are expected to streamline the business functions, improve the organizational structure and reduce overall employee headcount. The project is focusing on all processes within the companies. Implementation has begun and will continue into late 1996. In the second quarter of 1996, Columbia Transmission recorded expense of $6.1 million in anticipated severance costs associated with reengineering and restructuring efforts currently underway. Additional expense will likely be recorded later in 1996 as further reengineering and restructuring activities are identified. Appeals of Order No. 636 On July 16, 1996, the U.S. Court of Appeals for the D.C. Circuit issued its long-awaited decision regarding the appeals of FERC Order No. 636 (Order 636). The court generally upheld the FERC's actions; however, it remanded to the FERC certain aspects of Order 636. While analysis of the impact of the decision is ongoing, Columbia Transmission does not believe that the order will have a significant impact on its operations. A settlement approved by the FERC in 1995 provides that any relief granted as a result of the decision will be implemented prospectively on Columbia Transmission's system, and that Columbia Transmission will have no refund obligation or other financial liability as a result of the decision. Volumes Throughput for the second quarter of 1996 increased 13.1 Bcf, to 262.6 Bcf, primarily reflecting additional short-haul deliveries by Columbia Gulf in the Gulf of Mexico that were due to increased offshore production. Higher main-line and market-area transportation services were largely due to customers injecting gas into storage and increased deliveries early in the second quarter due to colder weather. For the first six months of 1996, throughput was 765.1 Bcf, an increase of 60.1 Bcf over the same period last year, due in large part to 13% colder weather that increased customer demand for transportation services. Short-haul deliveries were 29 Bcf higher than last year reflecting increased offshore supply at Vermillion and Eugene Island and increased marketing activity by Columbia Gulf. Operating Revenues Operating revenues for the second quarter and first half of 1996 of $181.7 million and $407.6 million were up $10.8 million and $33.5 million, respectively. These increases were principally due to the implementation of higher rates for Columbia Transmission that were effective in February 1996, subject to refund, and increased throughput for Columbia Gulf resulting from colder weather. In the first quarter of 1995, Columbia Gulf recorded one-time revenue of $5.4 million for its portion of exit fees that were paid to the Ozark partnership. Columbia Gulf sold its interests in this partnership in 1995. Operating Income Second quarter operating income of $38.8 million, $2.9 million above last year, reflected higher operating revenues partially offset by $7.9 million of higher operating expenses. Included in the 15 18 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) TRANSMISSION OPERATIONS (CONTINUED) current period was $6.1 million of reengineering-related severance and benefits expense to improve operating efficiencies and customer service. Also increasing operating expenses were higher depreciation rates and property taxes. These higher expenses were tempered by cost-conservation measures recently implemented. Operating income for the six months ended June 30, 1996, of $124.4 million was $11.9 million above the same period in 1995. The beneficial effect of $33.5 million higher operating revenues was mitigated by an increase of $21.6 million in operating expenses primarily attributable to the reengineering costs recorded in the second quarter and increases in depreciation rates, property taxes and operation and maintenance expenses. 16 19 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) DISTRIBUTION OPERATIONS
Three Months Six Months Ended June 30, Ended June 30, ------------------ ------------------- 1996 1995 1996 1995 ------ ------ ------ ------ (millions) NET REVENUES Sales revenues $ 299.9 $ 234.4 $ 1,156.6 $ 1,001.5 Less: Cost of gas sold 168.8 117.4 687.5 592.8 -------- -------- --------- ---------- Net Sales Revenues 131.1 117.0 469.1 408.7 -------- -------- --------- ---------- Transportation revenues 30.5 23.8 66.4 57.4 Less: Associated gas costs 4.2 2.1 7.4 5.2 -------- -------- --------- ---------- Net Transportation Revenues 26.3 21.7 59.0 52.2 -------- -------- --------- ---------- Net Revenues 157.4 138.7 528.1 460.9 -------- -------- --------- ---------- OPERATING EXPENSES Operation and maintenance 118.6 107.1 235.1 225.4 Depreciation 12.2 10.6 43.8 41.5 Other taxes 29.6 28.9 84.2 85.7 -------- -------- --------- ---------- Total Operating Expenses 160.4 146.6 363.1 352.6 -------- -------- --------- ---------- OPERATING INCOME (LOSS) $ (3.0) $ (7.9) $ 165.0 $ 108.3 ======== ======== ========= ========== THROUGHPUT (BCF) Sales Residential 30.0 25.5 132.7 115.9 Commercial 11.7 10.1 54.0 46.7 Industrial and other 1.6 1.1 5.1 4.1 -------- -------- --------- ---------- Total Sales 43.3 36.7 191.8 166.7 Transportation 60.0 58.7 131.7 135.5 -------- -------- --------- ---------- Total Throughput 103.3 95.4 323.5 302.2 -------- -------- --------- ---------- Off-System Sales 0.9 0.8 5.3 3.9 -------- -------- --------- ---------- Total Sold or Transported 104.2 96.2 328.8 306.1 ======== ======== ========= ========== SOURCES OF GAS FOR THROUGHPUT (BCF) Sources of Gas Sold Spot market* 88.2 66.0 167.2 112.6 Producers 9.4 12.8 25.6 32.6 Storage withdrawals (injections) (60.6) (42.6) 7.9 26.4 Other 7.2 1.3 (3.6) (1.0) -------- -------- --------- --------- Total Sources of Gas Sold 44.2 37.5 197.1 170.6 Transportation received for delivery to customers 60.0 58.7 131.7 135.5 -------- -------- --------- --------- Total Sources 104.2 96.2 328.8 306.1 ======== ======== ========= =========
* Purchase contracts of less than one year. 17 20 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) DISTRIBUTION OPERATIONS (CONTINUED) Market Conditions Weather in the distribution subsidiaries' (Distribution) operating territories through the first half of 1996 was 13 percent colder than 1995 and 7 percent colder than normal. The second quarter weather was also 13 percent colder than last year. The extended cold weather reduced industry-wide storage inventories to levels lower than any in recent history thereby causing gas wellhead prices to rise. The higher wellhead prices may continue through summer, as gas utilities replenish depleted storage volumes, and will continue to affect customer bills throughout the 1996-1997 winter as storage gas is withdrawn to meet heating requirements. Regulatory Matters Columbia Gas of Ohio, Inc.'s (Columbia of Ohio) 1994 rate case settlement provided for a review of the company's revenue requirements by a collaborative group composed of diverse interested parties (Collaborative). The review process has been completed and discussions are continuing with the Collaborative to determine how the identified revenue requirement can be accommodated. The Collaborative is also developing a "Customer Choice" transportation program and will be addressing alternative regulatory rules in the near future. Legislation has been enacted in Ohio that revises state laws governing natural gas to allow for more competition among suppliers and more choices for customers. The Public Utilities Commission of Ohio is required to have new guidelines established by the first quarter of 1997. Distribution continues to develop pilot transportation programs that, if approved, would provide small customers, including residential, the opportunity to arrange their own gas supplies from marketers while continuing to use Distribution's facilities for transportation. Both Columbia Gas of Pennsylvania, Inc. (Columbia of Pennsylvania) and Columbia Gas of Maryland, Inc. (Columbia of Maryland) filed for regulatory authority to implement pilot programs, discussed below, in the second quarter. Under these programs, both companies will assign a portion of their upstream pipeline capacity to the transportation customers' third party suppliers thereby avoiding stranded upstream pipeline capacity costs and the shifting of such costs to sales customers. In June, Columbia of Pennsylvania filed with the Pennsylvania Public Utility Commission two distinct, but interrelated, changes in its tariff provisions. The first would provide a permanent, statewide residential transportation rate schedule. The second proposes a two-year transportation pilot program for more than 20,000 residential and human needs customers in Washington County beginning in November, making it one of the largest pilot programs initiated anywhere in the United States. A new Columbia of Maryland program for smaller commercial and industrial customers went into effect in June on a pilot basis. Additionally, Columbia of Maryland has received approval from the Maryland Public Service Commission for a residential transportation service pilot program involving 10,000 customers. The pilot is for two years and is planned to begin in November. 18 21 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) DISTRIBUTION OPERATIONS (CONTINUED) In other Columbia of Maryland rate matters, recent studies determined that a new rate filing is not needed. Consequently, the company canceled its previously announced plans to file for an increase in base rates in November 1996. The Virginia State Corporation Commission has approved Commonwealth Gas Services, Inc.'s (Commonwealth Services) rate case settlement that was reached in early 1996. In addition to new rates, the settlement provided for a separate proceeding to consider gas supply and other incentive proposals. A hearing on these issues is set for September 1996. Sales Incentives Storage represents approximately 50% of Distribution's winter season firm supply and two-thirds of its winter peak day supply. Distribution's supply portfolio, particularly the storage component, enables it to accommodate the day-to-day variations in customer demand caused by weather and other factors. Off-system sales are sales outside of Distribution's traditional market areas. In the first half of 1996, Distribution had off-system sales and exchange volumes of approximately 3.3 Bcf resulting in pre-tax income of $2.2 million, an increase of 2.3 Bcf and $2 million, respectively, from the same period in 1995. Columbia of Ohio has deferred approximately $22.9 million of pre-tax income from off-system sales and exchange transactions pending a final incentive-based sharing agreement with its customers. Proceeds from releasing unused capacity totaled $7.8 million in the first half of 1996, down $1.2 million from the prior year's first half total. This year's colder weather increased the need for capacity to meet customer requirements and reduced opportunities to release any unused capacity. Except for a small amount retained by Columbia of Maryland, Distribution recorded these proceeds as a reduction to gas costs. Columbia of Pennsylvania has an approved incentive program that allows a portion of the proceeds to be retained once a benchmark has been reached. Distribution continues to pursue gas supply incentives in states that do not have approved programs in place. Columbia Gas of Kentucky, Inc. (Columbia of Kentucky) filed a tariff application in March 1996, in a renewed attempt to obtain gas cost incentives. A hearing was held in June and a decision from the Kentucky Public Service Commission is expected in the third quarter. Restructuring Activities As previously reported, Distribution has initiated a restructuring of its headquarter's operations as part of its ongoing efforts to provide enhanced customer service and to achieve greater operating efficiencies. The restructuring will result in a reduction of 285 management, professional and administrative/technical employees by the end of 1996. As a result of this restructuring and related personnel reductions, Distribution recorded current and future expenditures of $15.1 million representing severance and related benefit costs. The separation of employees and related severance payments are expected to begin in the third quarter of 1996. 19 22 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) DISTRIBUTION OPERATIONS (CONTINUED) "Project Customer" initiatives discussed in the 1995 Form 10-K are continuing. A charge of $1.9 million was recorded in the second quarter primarily associated with the liability for salary and related benefit costs for 84 Columbia of Pennsylvania and Columbia of Maryland employees whose positions will be eliminated. Additional studies are underway in all of Distribution's service territories that may affect the field organizations in functions other than customer service and may result in additional positions being eliminated. Volumes Throughput for the quarter ended June 30, 1996, was 104.2 Bcf, an increase of 8 Bcf over last year. The increase in tariff sales was primarily due to colder weather and customer growth while transportation service reflected a small increase of 1.3 Bcf. For the first half of 1996, throughput of 328.8 Bcf increased 22.7 Bcf over the same period last year. Sales increased 25.1 Bcf due largely to higher residential and commercial tariff sales attributable to colder weather and customer growth. Transportation volumes were down 3.8 Bcf reflecting reduced transportation service for power generation due to higher prices and transportation capacity constraints. This reduction was partially offset by increased usage within the manufacturing sector. Net Revenues For the three months ended June 30, 1996, net revenues were $157.4 million, an increase of $18.7 million over 1995. This increase primarily reflects $7 million from additional throughput and $4.3 million from higher rates in effect in four of the five states that Distribution serves. The remaining increase was essentially due to higher revenue surcharges that are offset in expense and have no effect on income. For the first half of 1996, net revenues were $528.1 million, an increase of $67.2 million over 1995. Additional throughput contributed $40.7 million of the increase while higher rates produced another $15.2 million. Higher revenue surcharges that are offset in expense accounted for most of the remaining increase. Operating Income (Loss) Distribution experienced an operating loss for the second quarter of $3 million, a $4.9 million improvement over the same period last year. The higher net revenues were mostly offset by $13.8 million of higher operating expenses. The $11.5 million increase in operation and maintenance expense reflects $15.1 million for costs associated with reengineering activities and $1.9 million for Project Customer initiatives partially offset by decreased costs due to efficiencies and modernization efforts recently implemented. Depreciation was up $1.6 million primarily reflecting increased plant additions. Higher gross receipts taxes due to higher taxable revenues mainly contributed to a $0.7 million increase in other taxes. 20 23 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) DISTRIBUTION OPERATIONS (CONTINUED) Operating income for the first six months of 1996 was up $56.7 million from 1995. Higher net revenues were partially offset by a $10.5 million increase in operating expenses. Included in the $9.7 million higher operation and maintenance expenses were the restructuring costs recorded in the second quarter. Increases in plant additions contributed to the $2.3 million rise in depreciation. Lower gross receipts and sales taxes caused the $1.5 million decline in taxes other than income. 21 24 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OIL AND GAS OPERATIONS
Three Months Six Months Ended June 30, Ended June 30, ---------------- ---------------- 1996 1995 1996 1995 ---- ---- ---- ---- (millions) OPERATING REVENUES Gas $ 23.5 $ 31.1 $ 51.2 $ 67.8 Oil and liquids 1.6 11.9 2.8 23.8 ------ ------ ------ ------ Total Operating Revenues 25.1 43.0 54.0 91.6 ------ ------ ------ ------ OPERATING EXPENSES Operation and maintenance 9.1 19.4 18.0 40.4 Depreciation and depletion 7.4 21.1 14.3 46.0 Other taxes 2.2 2.7 4.5 5.5 ------ ------ ------ ------ Total Operating Expenses 18.7 43.2 36.8 91.9 ------ ------ ------ ------ OPERATING INCOME (LOSS) $ 6.4 $ (0.2) $ 17.2 $ (0.3) ====== ====== ====== ====== GAS PRODUCTION STATISTICS Production (Bcf) Appalachian 8.1 8.1 16.6 17.2 Southwest - 8.1 - 16.7 ====== ====== ====== ====== Total 8.1 16.2 16.6 33.9 Average Price ($/Mcf) Appalachian 2.81 2.11 2.98 2.20 Southwest - 1.62 - 1.69 System 2.81 1.86 2.98 1.95 OIL AND LIQUIDS PRODUCTION STATISTICS Production (000Bbls) Appalachian 83 80 153 158 Southwest - 616 - 1,280 ------ ------ ------ ------ Total 83 696 153 1,438 ====== ====== ====== ====== Average Price ($/Bbl) Appalachian 19.10 16.87 18.00 16.43 Southwest - 16.99 - 16.53 System 19.10 16.98 18.00 16.52
22 25 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OIL AND GAS OPERATIONS (CONTINUED) Gathering Facilities On April 29, 1996, Columbia Transmission filed a request with the FERC for abandonment and transfer of selected gathering facilities to CNR. CNR requested an order from the FERC disclaiming jurisdiction over the selected facilities. Interventions and protests were subsequently filed by producers and other energy groups. CNR is negotiating with producers, shippers and distribution companies regarding future gathering and supply arrangements. Sale of Columbia Development On April 30, 1996, (effective December 31, 1995) Columbia sold Columbia Development to a privately-held exploration and production concern for approximately $200 million. Columbia Development had approximately 196 billion cubic feet equivalent of proved oil and natural gas reserves located in the Gulf of Mexico and on-shore continental United States. An estimated loss of $54.8 million after-tax was recorded in the fourth quarter of 1995 to reflect the sale of this subsidiary. In the second quarter of 1996, an adjustment was recorded that reduced the loss to $49.2 million. Drilling Activity Drilling activity lagged behind the pace established in the first half of 1995 due to inclement weather and CNR's reengineering activities. For the first half of 1996, CNR participated in 18 wells in Ohio, Virginia, and West Virginia of which 14 were successful, adding net reserves of 3.6 Bcf. Volumes For the three months and six months ended June 30, 1996, gas production was 8.1 Bcf and 16.6 Bcf. This represents decreases of 8.1 Bcf and 17.3 Bcf, respectively, from last year. After adjusting for the sale of Columbia Development, gas volumes were essentially unchanged. CNR's oil and liquids production during the three and six months ended June 30, 1996 was essentially unchanged from last year. Revenues Gas revenues for the second quarter and first half of 1996 of $23.5 million and $51.2 million, decreased $7.6 million and $16.6 million, respectively, primarily due to the sale of Columbia Development. After adjusting for the sale of Columbia Development, gas revenues increased $5.5 million and $11.7 million for the three and six month periods, reflecting higher prices. Revenues from oil and liquids production for the three and six months ended June 30, 1996, were $1.6 million and $2.8 million, down $10.3 million and $21 million, respectively. After adjusting for the sale of Columbia Development, oil and liquids production revenues were relatively unchanged in both the second quarter and year-to-date periods. 23 26 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OIL AND GAS OPERATIONS (CONTINUED) Operating Income (Loss) For the current quarter, operating income was $6.4 million compared to an operating loss of $0.2 million in the same quarter last year. The 1995 loss included results from Columbia Development. Lower depletion expense of $13.7 million was due to reduced depletable plant resulting from the sale of Columbia Development and a lower depletion rate in effect, reflecting higher gas prices. The decreased operation and maintenance expense also reflected reduced labor costs attributable to CNR's workforce reduction. For the six months ended June 30, 1996, operating income was $17.2 million, compared to an operating loss of $0.3 million last year. The improvement reflected lower depletion expense of $31.7 million due to reduced depletable revenues and a higher average gas price for CNR, along with CNR's lower operating costs attributable to reduced staffing levels and improved efficiency. 24 27 Part 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OTHER ENERGY OPERATIONS
Three Months Six Months Ended June 30, Ended June 30, -------------------- ------------------ 1996 1995 1996 1995 ------- ------- ------ ------- (millions) NET REVENUES Gas marketing revenues $ 152.3 $ 55.4 $ 310.4 $ 114.1 Less: Products purchased 149.5 54.0 299.4 110.9 ------- ------- ------- ------- Net Gas Marketing Revenues 2.8 1.4 11.0 3.2 ------- ------- ------- ------- Propane revenues 10.9 8.7 43.2 34.2 Less: Products purchased 6.3 4.8 24.2 18.9 ------- ------- ------- ------- Net Propane Revenues 4.6 3.9 19.0 15.3 ------- ------- ------- ------- Other Revenues 24.7 21.7 45.2 41.5 ------- ------- ------- ------- Net Revenues 32.1 27.0 75.2 60.0 ------- ------- ------- ------- OPERATING EXPENSES Operation and maintenance 31.5 22.0 53.9 43.4 Depreciation and depletion 2.2 2.0 4.5 4.1 Other taxes 1.5 1.3 3.2 2.9 ------- ------- ------- ------- Total Operating Expenses 35.2 25.3 61.6 50.4 ------- ------- ------- ------- OPERATING INCOME (LOSS) $ (3.1) $ 1.7 $ 13.6 $ 9.6 ======= ======= ======= ======= PROPANE SALES (MILLIONS OF GALLONS) Retail 8.3 6.8 33.1 27.1 Wholesale and Other 2.5 1.3 8.9 10.3 ------- ------- ------- ------- Total Propane Sales 10.8 8.1 42.0 37.4 ======= ======= ======= =======
25 28 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OTHER ENERGY OPERATIONS (CONTINUED) Restructuring Activities During the third quarter of 1996, Columbia Gas System Service Corporation, Columbia LNG Corporation and TriStar Ventures Corporation are moving their corporate headquarters from Wilmington, Delaware, to a temporary location in Reston, Virginia. A new headquarters, that will be constructed in northern Virginia, is expected to be completed by late-1997. As a result of the move to Reston, Virginia, approximately $7.4 million of expense was recorded in the second quarter to reflect current and future severance and benefit expenditures for those employees who will not be transferring. Energy Related Services Columbia Energy Services Corporation has formed a wholly-owned subsidiary, Columbia Service Partners, Inc. (CSP), to provide a variety of new non-regulated services to both homeowners and businesses. The new company's initial focus is on the nongas needs of Distribution's customers. In the second quarter of 1996, CSP introduced a new appliance repair service called Appliance Partner to Distribution's residential customers throughout southeastern Ohio. In early July 1996, the service was extended to Distribution's customers in northern Ohio. For a small monthly premium, Appliance Partner customers are eligible for prompt appliance repair from qualified independent contractors. CSP has also initiated a billing insurance program, "Payment Partner," for Distribution customers in Ohio and Kentucky. Later CSP expects to complement these services with warranty and energy management services to commercial and industrial customers. These new programs are part of Columbia's ongoing effort to become a full service provider of energy and energy-related services. In July 1996, Columbia Energy Services Corporation began providing energy management services to 14 libraries in the Columbus, Ohio, area. This new service agreement will provide more flexible and cost-effective pricing arrangements for the 12.5 million cubic feet of natural gas that the libraries use annually. Net Revenues Net revenues for the three months ended June 30, 1996, of $32.1 million increased by $5.1 million from the same period last year. The increase is primarily due to an increase of $3 million in revenues for services provided to affiliated companies by Columbia Gas System Service Corporation and an increase of $1.4 million in net revenues for increased gas marketing activities and $0.7 million for higher propane sales and margins. For the six months ended June 30, 1996, net revenues improved by $15.2 million to $75.2 million due to the impact of colder weather this year. Net revenues for the gas marketing subsidiary increased $7.8 million as a result of increased margins and volumes sold. Net revenues from propane operations increased $3.7 million, reflecting increased weather-generated sales. Higher other revenues for services provided to affiliates caused the remaining increase. 26 29 PART 1 - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OTHER ENERGY OPERATIONS (CONTINUED) Operating Income (Loss) An operating loss for the second quarter of 1996 of $3.1 million was primarily the result of $7.4 million in reengineering-related costs. Absent these costs, operating income improved due to higher propane margins and the increased gas marketing activity. Operating income for the first six months of 1996 was $13.6 million, up $4 million from the same period last year, as the favorable impact of colder weather was only partially offset by the reengineering expenses recorded in the second quarter. 27 30 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS No new reportable matters have arisen and there have been no material developments in any legal proceedings reported in Columbia's Annual Report on Form 10-K for the year ended December 31, 1995, or reported on Form 10-Q for the First Quarter 1996, except as follows: I. Regulatory Matters Columbia Gas Transmission Corp., FERC Docket No. RP95-196 (March 1, 1995) On March 1, 1995, Columbia Transmission filed its semi-annual Transportation Cost Recovery Adjustment to recover Account No. 858 (upstream pipeline) costs, including $39 million of costs paid to Columbia Gulf. On April 2, 1996, the FERC ruled generally that Columbia Gulf could bill the costs to Columbia Transmission and that Columbia Transmission could recover the costs from its customers. FERC did, however, (a) make recovery of operation and maintenance costs (approximately $19 million) subject to the outcome of the FERC's next audit of Columbia Gulf, and (b) establish hearing procedures concerning whether some portion of Columbia Gulf's environmental costs billed to Columbia Transmission (approximately $20 million) were imprudently incurred. A hearing date has been set for March 26, 1997. On June 14, 1996, FERC denied the requests for rehearing of the April 2, 1996 order and upheld the Administrative Law Judge's rulings regarding the limited scope of the prudence issues to be examined at hearing. Tennessee Gas Pipeline Co., FERC Docket No. RP96-61 ( November 30, 1995) On November 30, 1995, Tennessee made a filing to direct bill Columbia Transmission for $115,303 of new take-or-pay costs which, if accepted, could have resulted in estimated total costs being billed to Columbia Transmission of $5 million. Columbia Transmission opposed Tennessee's filing. On July 22, 1996, the FERC issued an order which holds that Tennessee may not bill new take-or-pay costs to Columbia Transmission. Columbia Gas Transmission Corp., FERC Docket No. RP96-149 (February 26, 1996) On February 26, 1996, Columbia Transmission sought approval from the FERC to sell, at market prices, certain base storage gas in connection with the deactivation of the Majorsville-Heard Storage Complex, and proposed to retain the profits. The FERC approved the sale, but reserved ruling on the issue of whether Columbia Transmission is entitled to keep the profit from the sale. Numerous parties protested arguing primarily that Columbia Transmission should not be permitted to retain the profits. The base gas was sold at a profit of approximately $19 million. 28 31 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS II. Bankruptcy Matters Daniel Garshman v. Columbia Gas Transmission Corporation, No. ATL-L-000172-99, (Sup. Ct. of N.J., 1993) The parties have proposed a resolution of the dispute, subject to Bankruptcy Court approval, as set forth under the terms of the claims estimation proceedings. The resolution of this issue will not have a material effect on the financial results of Columbia. New Bremen Corp. v. Columbia Gas Transmission Corp. and Columbia Gulf Transmission Co. (November 16, 1988) This action, filed in Texas State court, was removed to the U.S. District Court for the Southern District of Texas, Houston District, on January 10, 1989 (Civ. Action No. H-89-0072). The action concerns the interpretation of a producer contract subject to the estimation proceedings in the Bankruptcy Court. On March 12, 1996, the District Court entered final judgment on an order granting Columbia Transmission's motion for partial summary judgment. New Bremen Corp. appealed the District Court's ruling and on July 8, 1996 filed its brief. Columbia Transmission's brief is due 30 days from the filing of New Bremen's brief. Any claim of New Bremen will be subject to the claims estimation proceedings. III. Other In re Marcor Environmental, Inc. v. Columbia Gas Transmission Corp. (U.S. EPA Reg. III, No. CAA-III-055) (September 30, 1994) On September 30, 1994, EPA Region III issued a complaint and notice of opportunity for hearing against Marcor Environmental, Inc. (Marcor) and Columbia Transmission for alleged violations of the Clean Air Act Amendments of 1990 arising from Marcor's removal of asbestos at Lanham Compressor Station at Lanham, West Virginia in 1993. The complaint which seeks a penalty of $162,500 alleges failure by Marcor and Columbia Transmission, as owner of the facility, to adequately wet the asbestos material and to ensure it remained wet pending disposal. Settlement was reached between EPA Region III and the parties for a civil penalty of $40,000. The settlement was filed with the Chief Administrative Law Judge on May 21, 1996. Marcor has agreed to indemnify Columbia Transmission for all liabilities arising from the complaint and to pay the penalty in full. 29 32 PART II - OTHER INFORMATION Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to Vote of Security Holders None. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a. Exhibits
Exhibit Number ------ 11 Statement re Computation of Per Share Earnings, a copy of which is attached hereto as PART II, EXHIBIT 11, pursuant to Regulation 229.601(b)(11). 12 Statements of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends, a copy of which is attached hereto as PART II, EXHIBIT 12, pursuant to Regulation 229.601(b)(12). 27 Financial Data Schedule.
b. Reports on Form 8-K The following reports on Form 8-K were not previously reported.
Financial Item Statements Reported Included Date Filed -------- ---------- ------------- 5 No June 10, 1996 5 No July 12, 1996
30 33 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Columbia Gas System, Inc. ----------------------------- (Registrant) Date: August 1, 1996 By: /s/ J. W. Grossman --------------------------------- J. W. Grossman Vice President and Controller (Chief Accounting Officer and duly authorized officer) 31 EX-11 2 STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS 1 Exhibit 11 THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES Statements Re Computation of Per Share Earnings
Three Months Six Months Ended Ended June 30, June 30, ------------------- ------------------ 1996 1995 1996 1995 ---- ---- ---- ---- Computation for Statements of Consolidated - ------------------------------------------ Income ($ in millions) - ---------------------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 30.9 159.5 159.7 - ----------------------------------------------------------------------------------------------------------------------------- Earnings per share of common stock (based on average shares outstanding) ($) Earnings on common stock . . . . . . . . . . . . . . . . . . . . . . . 0.15 0.61 3.04 3.16 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- Additional computation of average common shares outstanding (thousands) (NOTE) - ----------------------------------------------------------------------------------------------------------------------------- Average shares of common stock outstanding . . . . . . . . . . . . . . 55,044 50,568 52,544 50,566 Incremental common shares applicable to common stock based on the common stock daily average market price: Applicable to contingent stock awards . . . . . . . . . . . . . . . . 10 10 10 5 Applicable to contingent stock options . . . . . . . . . . . . . . . 66 - 58 - - ----------------------------------------------------------------------------------------------------------------------------- Average common shares as adjusted . . . . . . . . . . . . . . . . . . . 55,120 50,578 52,612 50,571 - ----------------------------------------------------------------------------------------------------------------------------- Average shares of common stock outstanding . . . . . . . . . . . . . . 55,044 50,568 52,544 50,566 Incremental common shares applicable to common stock based on the more dilutive of the common stock ending or daily average market price during the year: Applicable to contingent stock awards . . . . . . . . . . . . . . . . 10 10 10 5 Applicable to contingent stock options . . . . . . . . . . . . . . . 114 - 114 - - ----------------------------------------------------------------------------------------------------------------------------- Average common shares assuming full dilution . . . . . . . . . . . . . 55,168 50,578 52,668 50,571 - ----------------------------------------------------------------------------------------------------------------------------- Earnings on common stock as adjusted ($) . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.15 0.61 3.03 3.16 - ----------------------------------------------------------------------------------------------------------------------------- Earnings on common stock assuming full dilution ($) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.15 0.61 3.03 3.16 - -----------------------------------------------------------------------------------------------------------------------------
NOTE These calculations are submitted in accordance with the Securities Exchange Act of 1934 Release No. 9083 although not required by footnote 2 to paragraph 14 of Accounting Principles Opinion No. 15 because they result in dilution of less than 3%. 32 EX-12 3 STATEMENTS OF RATIO OF EARNINGS TO FIXED INCOME 1 Exhibit 12 THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES Statements of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends ($ in millions)
Twelve Months Twelve Months Ended June 30, Ended December 31, ----------------- ------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- Consolidated Income (Loss) from Continuing Operations before Income Taxes, Extraordinary Item and Cumulative Effect of Accounting Change . . . . . . . (650.7) 341.6 (643.0) 392.2 288.1 161.4 (1,205.8) Adjustments: Interest during construction . . . . . . (20.8) - (20.2) - - - (3.4) Distributed (Undistributed) equity income (3.1) (3.1) (7.9) (0.9) (0.1) (0.1) (2.4) Fixed charges . . . . . . . . . . . . . 1,112.6 37.2 1,040.8 14.8 101.5 13.7 139.9 ------- ----- ------- ----- ----- ----- ------- Earnings Available . . . . . . . . . . 438.0 375.7 369.7 406.1 389.5 175.0 (1,071.7) Fixed Charges: Interest on long-term and short-term debt 1,064.7 0.2 987.2 0.7 3.1 4.9 112.4 Other interest . . . . . . . . . . . . . 47.9 37.0 53.6 14.1 98.4 8.8 27.6 ------- ----- ------- ----- ----- ----- ------- Total Fixed Charges before Adjustments*,** 1,112.6 37.2 1,040.8 14.8 101.5 13.7 140.0 ------- ----- ------- ----- ----- ----- ------- Adjustments: Gain/(Loss) on reacquired debt . . . . . - - - - - - (0.1) ------- ----- ------- ----- ----- ----- ------- Total Fixed Charges . . . . . . . . . 1,112.6 37.2 1,040.8 14.8 101.5 13.7 139.9 ------- ----- ------- ----- ----- ----- ------- Ratio of Earnings Before Taxes to Fixed Charges N/A(a) 10.10 N/A(a) 27.44 3.84 12.77 N/A(a) ======= ===== ======= ===== ===== ===== =======
(a) To achieve a one-to-one coverage, the Corporation would need an additional $674.6, $671.1 and $1,211.6 million of earnings, for the twelve months ended June 30, 1996, and the twelve months ended December 31, 1995 and 1991, respectively. * This amount excludes approximately $253 million interest expense not recorded in the twelve months ended June 30, 1995, $230 million, $210 million, $204 million and $86 million of interest expense not recorded for 1994, 1993, 1992 and 1991. Includes interest expense of $982.9 million including write-off of unamortized discounts on debentures recorded in 1995. Reference is made to the Statements of Consolidated Income for the quarterly period ended June 30, 1996, as reported in Form 10-Q. ** This amount excludes $8.6 million of interest expense not recorded with respect to the registrant's guarantee of LESOP Trust's debentures for the twelve months ended June 30, 1995. Also excluded are $8.6 million, $8.6 million, $8.6 million and $15.5 million of interest expense not recorded with respect to the registrant's guarantee of LESOP Trust's debentures for the twelve months ended December 31, 1994, 1993, 1992 and 1991, respectively. EX-27 4 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT 0000022099 THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES 1,000 1,000 3-MOS 9-MOS DEC-31-1995 DEC-31-1995 APR-01-1996 JAN-01-1996 JUN-30-1996 JUN-30-1996 PER-BOOK PER-BOOK 3,541,700 3,541,700 526,300 526,300 1,008,300 1,008,300 51,400 51,400 422,300 422,300 5,550,000 5,550,000 550,700 550,700 736,800 736,800 213,700 213,700 1,499,700 1,499,700 0 0 0 0 2,004,100 2,004,100 0 0 0 0 0 0 500 500 0 0 2,700 2,700 0 0 2,046,200 2,046,200 5,550,000 5,550,000 582,400 1,785,400 2,300 88,600 546,400 1,471,200 546,400 1,471,200 36,000 314,200 13,700 16,800 49,700 331,000 39,200 82,900 8,200 159,500 0 0 8,200 159,500 15 30 35,104 70,208 254,000 554,200 0.15 3.04 0.15 3.03
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