1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended JUNE 30, 2000
[ ] 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
COLUMBIA ENERGY GROUP
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-1594808
------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13880 Dulles Corner Lane, Herndon, VA 20171-4600
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 561-6000
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 by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. 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, $0.01
Par Value: 79,528,122 shares outstanding at July 31, 2000.
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COLUMBIA ENERGY GROUP AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Statements of Consolidated Income 3
Consolidated Balance Sheets 4
Statements of Consolidated Cash Flows 6
Statements of Consolidated Common Stock Equity 7
Statements of Consolidated Comprehensive Income 7
Notes 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk 29
PART II OTHER INFORMATION
Item 1 Legal Proceedings 29
Item 2 Changes in Securities and Use of Proceeds 30
Item 3 Defaults Upon Senior Securities 30
Item 4 Submission of Matters to a Vote of Security Holders 30
Item 5 Other Information 31
Item 6 Exhibits and Reports on Form 8-K 31
Signature 32
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3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Columbia Energy Group and Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME (unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(millions, except per share amounts)
NET REVENUES
Energy sales $ 223.1 $ 244.0 $ 861.4 $ 1,151.7
Less: Products purchased 76.2 99.5 443.0 687.7
--------- --------- --------- ---------
Gross Margin 146.9 144.5 418.4 464.0
Transportation 163.9 151.0 415.8 368.6
Production gas sales 35.4 27.0 81.8 52.4
Other 40.4 48.2 90.0 113.1
--------- --------- --------- ---------
Total Net Revenues 386.6 370.7 1,006.0 998.1
--------- --------- --------- ---------
OPERATING EXPENSES
Operation and maintenance 220.6 201.1 434.0 419.6
Settlement of gas supply charges -- -- -- (29.8)
Depreciation and depletion 47.1 54.0 109.5 127.4
Other taxes 39.4 40.9 109.3 122.8
--------- --------- --------- ---------
Total Operating Expenses 307.1 296.0 652.8 640.0
--------- --------- --------- ---------
OPERATING INCOME 79.5 74.7 353.2 358.1
--------- --------- --------- ---------
OTHER INCOME (DEDUCTIONS)
Interest income and other, net 93.8 7.4 98.1 12.1
Interest expense and related charges (45.2) (37.2) (90.9) (74.6)
--------- --------- --------- ---------
Total Other Income (Deductions) 48.6 (29.8) 7.2 (62.5)
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 128.1 44.9 360.4 295.6
Income Taxes 45.2 9.6 134.1 99.4
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 82.9 35.3 226.3 196.2
--------- --------- --------- ---------
DISCONTINUED OPERATIONS - NET OF TAXES
(Loss) from operations (7.8) (9.2) (1.5) (19.7)
Estimated (loss) on disposal (27.4) -- (27.4) --
--------- --------- --------- ---------
(Loss) from Discontinued Operations - net of taxes (35.2) (9.2) (28.9) (19.7)
--------- --------- --------- ---------
NET INCOME $ 47.7 $ 26.1 $ 197.4 $ 176.5
========= ========= ========= =========
BASIC EARNINGS PER SHARE
Continuing operations $ 1.04 $ 0.43 $ 2.81 $ 2.37
(Loss) from discontinued operations (0.10) (0.11) (0.02) (0.24)
Estimated (loss) on disposal (0.34) -- (0.34) --
--------- --------- --------- ---------
BASIC EARNINGS PER SHARE $ 0.60 $ 0.32 $ 2.45 $ 2.13
========= ========= ========= =========
DILUTED EARNINGS PER SHARE
Continuing operations $ 1.03 $ 0.43 $ 2.79 $ 2.36
(Loss) from discontinued operations (0.10) (0.11) (0.02) (0.24)
Estimated (loss) on disposal (0.34) -- (0.34) --
--------- --------- --------- ---------
DILUTED EARNINGS PER SHARE $ 0.59 $ 0.32 $ 2.43 $ 2.12
========= ========= ========= =========
DIVIDENDS PAID PER SHARE $ 0.225 $ 0.225 $ 0.45 $ 0.425
BASIC AVERAGE COMMON SHARES OUTSTANDING (thousands) 79,780 82,345 80,434 82,809
DILUTED AVERAGE COMMON SHARES (thousands) 80,524 82,755 81,126 83,153
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
Columbia Energy Group and Subsidiaries
CONSOLIDATED BALANCE SHEETS
As of
-------------------------
June 30, December 31,
2000 1999
---------- -----------
(unaudited)
ASSETS (millions)
PROPERTY, PLANT AND EQUIPMENT
Gas utility and other plant, at original cost $ 7,975.6 $ 7,886.2
Accumulated depreciation (3,715.2) (3,659.4)
---------- ----------
Net Gas Utility and Other Plant 4,260.4 4,226.8
---------- ----------
Gas and oil producing properties, full cost method
United States cost center 858.3 823.5
Canadian cost center 15.2 12.6
Accumulated depletion (266.6) (251.6)
---------- ----------
Net Gas and Oil Producing Properties 606.9 584.5
---------- ----------
Net Property, Plant and Equipment 4,867.3 4,811.3
---------- ----------
INVESTMENTS AND OTHER ASSETS
Unconsolidated affiliates 24.2 65.6
Net assets of discontinued operations 360.7 410.0
Assets held for sale 34.6 --
Other 101.1 61.4
---------- ----------
Total Investments and Other Assets 520.6 537.0
---------- ----------
CURRENT ASSETS
Cash and temporary cash investments 7.7 58.1
Accounts receivable, net 283.7 498.5
Gas inventory 96.2 144.9
Other inventories - at average cost 15.5 16.1
Prepayments 72.8 70.7
Regulatory assets 57.7 52.7
Underrecovered gas costs 45.5 40.5
Deferred property taxes 39.9 79.9
Exchange gas receivable 369.2 275.4
Other 53.7 31.0
---------- ----------
Total Current Assets 1,041.9 1,267.8
---------- ----------
REGULATORY ASSETS 350.6 358.1
DEFERRED CHARGES 11.4 63.1
---------- ----------
TOTAL ASSETS $ 6,791.8 $ 7,037.3
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
Columbia Energy Group and Subsidiaries
CONSOLIDATED BALANCE SHEETS
As of
-------------------------
June 30, December 31,
2000 1999
----------- -----------
(unaudited)
CAPITALIZATION AND LIABILITIES (millions)
CAPITALIZATION
Common stock equity $ 2,115.6 $ 2,064.0
Long-term debt 1,639.2 1,639.3
---------- ----------
Total Capitalization 3,754.8 3,703.3
---------- ----------
CURRENT LIABILITIES
Short-term debt 328.9 465.5
Current maturities of long-term debt 311.1 311.1
Accounts and drafts payable 251.0 240.8
Accrued taxes 206.9 216.1
Accrued interest 34.4 32.4
Estimated rate refunds 19.3 21.4
Overrecovered gas costs 16.5 14.6
Transportation and exchange gas payable 264.5 297.5
Other 295.8 406.8
---------- ----------
Total Current Liabilities 1,728.4 2,006.2
---------- ----------
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes, noncurrent 705.1 661.9
Investment tax credits 31.9 32.6
Postretirement benefits other than pensions 119.5 91.0
Regulatory liabilities 34.9 36.4
Deferred revenue 275.8 300.8
Other 141.4 205.1
---------- ----------
Total Other Liabilities and Deferred Credits 1,308.6 1,327.8
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES $ 6,791.8 $ 7,037.3
========== ==========
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
Columbia Energy Group and Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited)
Six Months
Ended June 30,
--------------------
2000 1999
-------- --------
(millions)
OPERATING ACTIVITIES
Net income $ 197.4 $ 176.5
Adjustments to reconcile net income to net
cash from continuing operations:
Loss from discontinued operations 1.5 19.7
Loss from disposal of discontinued operations 27.4 --
Depreciation and depletion 109.5 127.4
Deferred income taxes 22.7 30.0
Gain on sale of partnership (90.6) --
Earnings from equity investment, net of distributions (6.4) (7.2)
Other - net (68.5) (35.4)
-------- --------
193.0 311.0
Change in components of working capital:
Accounts receivable, net of sale 201.6 68.2
Sale of accounts receivable 13.5 --
Gas inventory 48.7 61.6
Other inventories - at average cost 0.6 3.1
Prepayments (2.1) 2.8
Accounts payable 14.9 (4.0)
Accrued taxes (9.2) (44.3)
Accrued interest 2.0 11.7
Estimated rate refunds (2.1) (0.5)
Estimated supplier obligations -- (40.7)
Under/Overrecovered gas costs (3.1) 24.9
Exchange gas receivable/payable (126.8) 234.3
Other working capital (31.4) 0.8
-------- --------
Net Cash From Continuing Operations 299.6 628.9
Net Cash From Discontinued Operations 20.4 (101.2)
-------- --------
Net Cash From Operating Activities 320.0 527.7
-------- --------
INVESTMENT ACTIVITIES
Capital expenditures (190.9) (187.6)
Purchase and sale of investments 108.8 (26.7)
Other (2.1) (9.0)
-------- --------
Net Investment Activities (84.2) (223.3)
-------- --------
FINANCING ACTIVITIES
Dividends paid (36.2) (35.1)
Issuance of common stock 4.5 3.7
Issuance (repayment) of short-term debt (136.6) 29.8
Retirement of long-term debt -- (52.5)
Purchase of treasury stock (114.1) (79.9)
Other financing activities (3.8) (20.9)
-------- --------
Net Financing Activities (286.2) (154.9)
-------- --------
Increase (decrease) in cash and temporary cash investments (50.4) 149.5
Cash and temporary cash investments at beginning of year 58.1 20.8
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT JUNE 30 * $ 7.7 $ 170.3
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 82.4 $ 71.5
Cash paid for income taxes (net of refunds) $ 66.7 $ 67.9
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
* The Corporation considers all highly liquid short-term investments to be cash
equivalents.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
Columbia Energy Group and Subsidiaries
STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY
As of
--------------------------
June 30, December 31,
2000 1999
----------- -----------
(unaudited)
(millions)
Common stock, $.01 par value, authorized
200,000,000 shares, issued 83,880,779
and 83,786,942 shares, respectively $ 0.8 $ 0.8
Additional paid in capital 1,616.1 1,611.6
Retained earnings 748.1 586.9
Unearned employee compensation (0.3) (0.6)
Accumulated other comprehensive income -- 0.3
Treasury stock, at cost (4,368,300 and 2,478,500 shares) (249.1) (135.0)
---------- ----------
TOTAL COMMON STOCK EQUITY $ 2,115.6 $ 2,064.0
========== ==========
Columbia Energy Group and Subsidiaries
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
For the year to date
period ended
--------------------------
June 30, December 31,
2000 1999
----------- -----------
(unaudited)
(millions)
COMPREHENSIVE INCOME
Net income $ 197.4 $ 249.2
Other Comprehensive Income (Loss):
Foreign currency translation adjustment (0.3) 0.5
---------- ----------
COMPREHENSIVE INCOME $ 197.1 $ 249.7
========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
Columbia Energy Group and Subsidiaries
NOTES
1. Basis of Accounting Presentation
The accompanying unaudited consolidated financial statements for
Columbia Energy Group (Columbia) reflect all normal recurring
adjustments that 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 consolidated financial statements and notes thereto included
in Columbia's 1999 Annual Report on Form 10-K (Form 10-K) and 2000
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 1999
financial statements to conform to the 2000 presentation. As discussed
in Note 5, the 1999 financial statements have been reclassified to
report Columbia Propane Corporation (Columbia Propane), Columbia
Petroleum Corporation (Columbia Petroleum) and Columbia Energy Services
Corporation (Columbia Energy Services) Wholesale and Trading
operations, Major Accounts and Retail Mass Markets businesses as
discontinued operations.
2. Diluted Average Common Shares Computation
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS No. 128), requires dual
presentation of basic and diluted earnings per share (EPS). Basic EPS
includes no dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilutive
effect of stock options.
The numerator in calculating both basic and diluted earnings per share
for each year is reported net income. The computation of diluted
average common shares follows:
Three Months Six Months
Ended June 30, Ended June 30,
--------------- ---------------
Diluted Average Common Shares Computation 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------
Denominator (thousands)
Basic average common shares outstanding 79,780 82,345 80,434 82,809
Dilutive potential common shares - options 744 410 692 344
------------------------------------------------------------------------------------------------------
DILUTED AVERAGE COMMON SHARES 80,524 82,755 81,126 83,153
------------------------------------------------------------------------------------------------------
3. Treasury Stock
In March 2000, Columbia announced that it had restarted its open market
share repurchase program, that was authorized by Columbia's Board of
Directors (Columbia's Board). The program had been suspended since
October 1999, when Columbia's Board authorized Columbia's management to
explore strategic alternatives to enhance shareholder value. Under the
recommenced program, Columbia was allowed to repurchase up to $300
million of its common shares through July 14, 2000. The repurchase
program authorized Columbia to make purchases in the open market or
otherwise. The timing and terms of purchases, and the number of shares
actually purchased, were determined by management based on several
factors including market conditions. Purchased shares are held in
treasury at cost and are available for general corporate purposes or
resale at a future date or may be retired. During the first six months
of 2000,
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
Columbia purchased 1,889,800 common shares at a cost of $114.1 million
under the recommenced program. As of June 30, 2000, Columbia had
purchased 4,368,300 common shares at a cost of $249.1 million. There
were no additional common stock repurchases after June 30, 2000.
4. Business Segment Information
Columbia manages its operations in four primary business segments:
transmission and storage; distribution; exploration and production; and
power generation and other operations. The following table provides
information concerning these major business segments. Revenues include
intersegment sales to affiliated subsidiaries, which are eliminated
when consolidated. Affiliated sales are recognized on the basis of
prevailing market or regulated prices. Operating income is derived from
revenues and expenses directly associated with each segment.
Three Months Six Months
Ended June 30, Ended June 30,
($ in millions) 2000 1999 2000 1999
-----------------------------------------------------------------------------------
REVENUES
Transmission and Storage
Unaffiliated 134.7 124.1 310.4 295.8
Intersegment 53.8 58.7 123.2 140.3
-----------------------------------------------------------------------------------
TOTAL 188.5 182.8 433.6 436.1
-----------------------------------------------------------------------------------
Distribution
Unaffiliated 278.7 318.5 1,036.6 1,336.6
Intersegment 0.2 0.9 0.8 0.9
-----------------------------------------------------------------------------------
TOTAL 278.9 319.4 1,037.4 1,337.5
-----------------------------------------------------------------------------------
Exploration and Production
Unaffiliated 40.1 31.0 91.9 61.0
Intersegment 0.2 0.5 0.9 1.0
-----------------------------------------------------------------------------------
TOTAL 40.3 31.5 92.8 62.0
-----------------------------------------------------------------------------------
Power Generation and Other
Unaffiliated 15.0 5.7 28.5 11.4
Intersegment - (0.6) - (0.5)
-----------------------------------------------------------------------------------
TOTAL 15.0 5.1 28.5 10.9
-----------------------------------------------------------------------------------
Adjustments and eliminations
Unaffiliated - - - -
Intersegment (54.2) (59.5) (124.9) (141.7)
-----------------------------------------------------------------------------------
TOTAL (54.2) (59.5) (124.9) (141.7)
-----------------------------------------------------------------------------------
CONSOLIDATED 468.5 479.3 1,467.4 1,704.8
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Transmission and Storage 66.9 55.9 190.8 200.1
Distribution 6.4 16.6 137.6 146.8
Exploration and Production 15.0 6.9 35.8 12.5
Power Generation and Other 1.1 (0.6) 1.3 (2.2)
Corporate (9.9) (4.1) (12.3) 0.9
-----------------------------------------------------------------------------------
CONSOLIDATED 79.5 74.7 353.2 358.1
-----------------------------------------------------------------------------------
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
5. Discontinued Operations
On May 22, 2000, as a result of its ongoing strategic assessment,
Columbia announced that it decided to sell Columbia Propane, a propane
marketer. Columbia also announced its decision to sell Columbia
Petroleum, a diversified petroleum distribution company. The sales of
Columbia Propane and Columbia Petroleum are expected to occur during
the third or fourth quarter of 2000. Columbia Propane and Columbia
Petroleum are reported as discontinued operations and therefore the
financial statements for 1999 have been reclassified accordingly.
In June 2000, Columbia announced that it entered into a definitive
agreement to sell its Retail Mass Marketing business to The New Power
Company. The transaction is expected to be completed before the end of
the third quarter of 2000. Columbia Energy Services Corporation is
expected to cease operations of its Major Accounts business during the
third quarter of 2000. Columbia Energy Services' Wholesale and Trading
operations, Major Accounts and Retail Mass Markets businesses are
reported as discontinued operations.
The revenues from discontinued operations were $158.2 million
(Gas-$45.6 million, Propane-$47.7 million, Petroleum-$58.7 million and
Other $6.2 million) and $504.8 million (Gas-$177.3 million,
Propane-$163.8 million, Petroleum-$143.8 million and Other-$19.9
million) for the three months and six months ended June 30, 2000. The
revenues from discontinued operations were $1,005.1 million (Gas-$966.8
million, Propane-$14.7 million, and Petroleum-$21.4 million and
Other-$2.2 million) and $2,353.5 million (Gas-$2,278.8 million,
Propane-$47.4 million, Petroleum-$21.4 million and Other $5.9 million)
for the three months and six months ended June 30, 1999. The loss from
discontinued operations - net of taxes were $7.8 million and $1.5
million for the three months and six months ended June 30, 2000,
respectively. The loss from discontinued operations - net of taxes were
$9.2 million and $19.7 million for the three months and six months
ended June 30, 1999, respectively. The estimated loss on disposal of
discontinued operations was $27.4 million, net of income tax benefits
of $10.7 million, for the six months ended June 30, 2000. The net
assets of the discontinued operations are as follows:
($ in millions) JUNE 30, 2000 December 31, 1999
---------------------------------------------------------------------------------
NET ASSETS OF DISCONTINUED OPERATIONS
Accounts receivable, net 94.9 416.7
Property, Plant and Equipment, net 218.1 212.0
Other assets 220.9 239.6
Accounts payable (84.7) (388.4)
Other liabilities (88.5) (69.9)
---------------------------------------------------------------------------------
NET ASSETS OF DISCONTINUED OPERATIONS 360.7 410.0
---------------------------------------------------------------------------------
6. Voluntary Incentive Retirement Programs
On September 30, 1999, Columbia Gas Transmission Corporation (Columbia
Transmission) announced the introduction of their voluntary incentive
retirement program (VIRP). Approximately 600 Columbia Transmission
employees were eligible for the program, which provides a retirement
incentive for active employees who were age fifty and above with at
least five years of service as of March 1, 2000. During the acceptance
period that began on January 1, 2000, and closed on January 31, 2000,
486 employees elected early retirement. The majority of the retirements
occurred in the first quarter of 2000. As a result of settlement gains,
Columbia Transmission recorded a net gain of $11.6 million in the first
six months of 2000 related to its VIRP.
In February 2000, the five distribution subsidiaries and Columbia
Energy Group Service
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
Corporation (Service Corp.) announced the introduction of their VIRP.
Approximately 880 employees were eligible for the program, which
provides a retirement incentive for certain active employees who were
age fifty and above with at least five years of service as of June 1,
2000. During the acceptance period that began on April 1, 2000, and
closed on April 30, 2000, 679 employees elected early retirement. The
majority of the retirements occurred in the second quarter. The
distribution subsidiaries and Service Corp. recorded a net charge of
$10.6 million in the first six months of 2000 related to their VIRP.
The VIRPs did not result in a curtailment of the pension plan as
defined in Statement of Financial Accounting Standards No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits".
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PART I - 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,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(millions)
Transmission and Storage $ 66.9 $ 55.9 $ 190.8 $ 200.1
Distribution 6.4 16.6 137.6 146.8
Exploration and Production 15.0 6.9 35.8 12.5
Power Generation and Other 1.1 (0.6) 1.3 (2.2)
Corporate (9.9) (4.1) (12.3) 0.9
-------- -------- -------- --------
CONSOLIDATED $ 79.5 $ 74.7 $ 353.2 $ 358.1
======== ======== ======== ========
DEGREE DAYS (DISTRIBUTION SERVICE TERRITORY)
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
Actual 579 483 3,145 3,261
Normal 580 580 3,559 3,527
% Colder (warmer) than normal - (17) (12) (8)
% Colder (warmer) than prior period 20 (7) (4) 15
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PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS
Forward-Looking Statements
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations, including statements regarding market risk sensitive
instruments, contains "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Investors and prospective investors should
understand that many factors govern whether any forward-looking statement
contained herein will be or can be achieved. Any one of those factors could
cause actual results to differ materially from those projected. These
forward-looking statements include, but are not limited to, statements
concerning Columbia's plans, proposed acquisitions and dispositions, objectives,
expected performance, expenditures and recovery of expenditures through rates,
stated on either a consolidated or segment basis, underlying assumptions and
statements that are other than historical fact. From time to time, Columbia may
publish or otherwise make available forward-looking statements of this nature.
All such subsequent forward-looking statements, whether written or oral and
whether made by or on behalf of Columbia, are also expressly qualified by these
cautionary statements. All forward-looking statements are based on assumptions
that management believes to be reasonable; however, there can be no assurance
that actual results will not differ materially. Realization of Columbia's
objective and expected performance is subject to a wide range of risks and can
be adversely affected by, among other things, increased competition in
deregulated energy markets, weather conditions, fluctuations in energy-related
commodity prices, service territories, successful consummation of proposed
acquisitions and dispositions, growth opportunities for Columbia's regulated and
nonregulated businesses, dealings with third parties over whom Columbia has no
control, actual operating experience of acquired assets, the ability to
integrate acquired operations into its operations, the regulatory process,
regulatory and legislative changes, changes in general economic, capital and
commodity market conditions and counter-party credit risk, many of which are
beyond the control of Columbia. In addition, the relative contributions to
profitability by each segment, and the assumptions underlying the
forward-looking statements relating thereto, may change over time.
With respect to any references made to ratings assigned to Columbia's debt
securities, there can be no assurance that Columbia will be successful in
maintaining its quality of credit, or that such credit ratings will continue for
any given period of time, or that they will not be revised downward or that they
will not be withdrawn entirely by the rating agencies. Credit ratings reflect
only the views of the rating agencies, whose methodology and the significance of
their ratings may be obtained from them.
Second Quarter Results
Income from Continuing Operations
Columbia reported consolidated income from continuing operations for the second
quarter 2000 of $82.9 million, or $1.03 per share, an increase of $47.6 million
or $0.60 per share over the same period last year. All per share amounts are on
a diluted basis. The increase was primarily attributable to a $59 million
after-tax gain on the sale of Cove Point LNG.
Also contributing to the increase was increased natural gas production and lower
labor and benefits costs related to Columbia Gas Transmission Corporation's
(Columbia Transmission) voluntary incentive retirement program (VIRP)
implemented in March of this year. Tempering these improvements was an increase
in professional fees incurred as a result of the planned merger with NiSource,
Inc., as discussed on page 17, cost related to implementing a VIRP at the
distribution subsidiaries and Columbia Energy Group Service Corporation (Service
Corp.) and higher interest expense. After adjusting for unusual items, second
quarter 2000 income from continuing operations was $37.2 million, an increase of
$6.4 million over the same period last year.
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PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS(CONTINUED)
Revenues
Total second quarter 2000 consolidated net revenues (operating revenues less
associated products purchased costs) were $386.6 million, a $15.9 million
increase over the same period last year. The increase was primarily attributable
to increased sales as a result of a rise in natural gas production and an
increase in transportation services. Also improving revenues by $4.1 million was
a settlement of a contract for the sale of electricity by the cogeneration
operations.
Expenses
Operating expenses for the second quarter of 2000 were $307.1 million, an
increase of $11.1 million over the same period last year. The increased expense
was largely due to generally higher operation and maintenance costs for the
distribution operations. Costs related to implementing a VIRP at the
distribution subsidiaries and Service Corp. in the second quarter of this year
were largely offset by reduced labor and benefits costs as a result of a similar
program implemented in the first quarter of 2000 by Columbia Transmission. The
VIRP implemented at the distribution subsidiaries and Service Corp. is also
expected to result in lower future labor and benefits costs. Lower depreciation
expense was related to the terms of Columbia of Gas of Ohio, Inc.'s (Columbia of
Ohio) 1999 regulatory settlement.
Other Income (Deductions)
Other Income (Deductions), which includes interest income and other, net and
interest expense and related charges, improved operating income by $48.6 million
for the second quarter of 2000 versus a decrease of $29.8 million in the same
period last year. Interest income and other, net for the second quarter 2000 of
$93.8 million, was up $86.4 million, due to a $90.6 million pre-tax gain on the
sale of Cove Point LNG in the second quarter of 2000, which was partially offset
by reduced interest income on short-term investments. Interest expense and
related charges of $45.2 million in the second quarter of 2000, increased $8
million compared to the same period last year primarily due to additional
short-term borrowings attributable to the stock repurchase program and higher
interest rates.
Income Taxes
Income tax expense of $45.2 million in the second quarter of 2000 was up $35.6
million from the same period last year primarily due to higher pre-tax income
and certain tax benefits utilized in 1999.
Six Month Results
Income from Continuing Operations
Columbia's income from continuing operations for the first half of 2000 was
$226.3 million, or $2.79 per share, up $30.1 million, or $0.43 per share over
the corresponding 1999 period. Excluding the second quarter 2000 gain on the
sale of Cove Point LNG, costs for merger-related professional fees, and a $20.6
million after-tax gain recorded in 1999 related to a producer settlement, income
from continuing operations of $180.5 million was up $11.3 million over the first
half of 1999 despite 4 percent warmer weather. This improvement was largely due
to increased natural gas production and prices and lower labor and benefits
costs for Columbia Transmission resulting from its VIRP. The improvement for the
Columbia Transmission VIRP was due in part to settlement gains recorded in the
first quarter of 2000. Tempering these improvements was higher interest expense
in the first half of 2000.
Revenues
For the six months ended June 30, 2000, net revenues of $1,006 million increased
$7.9 million over the same period in 1999. The improvement was primarily related
to higher gas prices and an increase in gas production. Partially offsetting
this increase were lower revenues from the sale of base gas volumes for the
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15
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS(CONTINUED)
transmission and storage operations and reduced gas sales by the distribution
segment due to warmer weather in 2000.
Expenses
Operating expenses for the first half of 2000 were $652.8 million, an increase
of $12.8 million over the same period last year, due to a reduction in the first
quarter of 1999 operating expenses for the producer settlement. This was
partially offset by lower gross receipts and property taxes and the beneficial
effect of the Columbia Transmission VIRP. Also decreasing operating expense
during the first six months of 2000 was a reduction in depreciation expense, as
provided for under the terms of Columbia of Ohio's 1999 regulatory settlement.
Other Income (Deductions)
Other Income (Deductions), increased operating income by $7.2 million for the
first half of 2000 compared to a reduction to income of $62.5 million in the
same period last year. Interest income and other, net of $98.1 million for the
first six months of 2000, was up $86 million, due to the sale of Cove Point LNG,
mentioned previously, partially offset by reduced interest income on short-term
investments. In 1999, a $2.9 million gain was recorded as a result of the sale
of Columbia Energy Resources Inc.'s (Columbia Resources) surface coal property.
Interest expense and related charges increased $16.3 million in the first half
of 2000, due to additional short-term borrowings for the stock repurchase
program together with higher interest rates.
Income Taxes
Income tax expense of $134.1 million in the first half of 2000, increased $34.7
million over the same period in 1999 due to higher pre-tax income and certain
tax benefits realized last year.
Discontinued Operations
Columbia has been evaluating the appropriateness of remaining in some of its
businesses given the rapidly changing energy industry and its pending merger
with NiSource, Inc. (NiSource). During the course of this ongoing assessment, it
was determined to essentially exit operations previously comprising the energy
marketing operations, which includes the propane, petroleum and Columbia Energy
Services Corporation's (Columbia Energy Services) mass marketing businesses, as
discussed below. In accordance with generally accepted accounting principles,
the results from the following businesses are now reported as discontinued
operations.
In the fourth quarter of 1999, Columbia Energy Services, a wholly-owned
subsidiary of Columbia, sold its wholesale and trading operations to Enron North
America Corporation. In late 1999, Columbia Energy Services also decided to exit
its major accounts business.
In May 2000, Columbia Energy Services sold its internet-based energy marketing
operation, Energy.com. Also in May 2000, Columbia announced that it was in the
process of preparing its propane and petroleum businesses for sale. Columbia's
propane business is the fifth largest propane marketer in the United States,
with operations in more than 30 states and nearly 350,000 customers. The
petroleum business is a diversified petroleum distribution operation that
engages in retail and wholesale petroleum product sales, transportation, and
branded gasoline distribution.
In June 2000, Columbia announced that it entered into a definitive agreement to
sell its retail energy mass marketing business to The New Power Company, a
national residential and small business energy provider serving markets where
natural gas and electricity are deregulated. The transaction is expected to be
completed by the end of the third quarter of 2000.
15
16
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS(CONTINUED)
For the second quarter of 2000, discontinued operations reflected an after-tax
loss of $35.2 million compared to a $9.2 million after-tax loss in the same
period last year. Included in the amount recorded for discontinued operations
for the 2000 second quarter are the estimated losses through the anticipated
sale date. For the first half of 2000, discontinued operations represented an
after-tax loss of $28.9 million, $9.2 million higher then the first six months
of 1999.
Liquidity and Capital Resources
A significant portion of Columbia's operations is subject to seasonal
fluctuations in cash flow. During the heating season, which is primarily from
November through March, cash receipts from sales and transportation services
typically exceed cash requirements. Conversely, during the remainder of the
year, cash on hand together with external short-term and long-term financing, as
needed, is used to purchase gas to place in storage for heating season
deliveries, perform necessary maintenance of facilities, make capital
improvements in plant and expand service.
Net cash from continuing operations for the first half of 2000 was $299.6
million, a $329.3 million decrease from the same period in 1999. The decrease
was primarily due to timing differences associated with exchange gas activity
and other working capital items including the impact of warmer weather.
Columbia satisfies its liquidity requirements primarily through internally
generated funds and from the sale of commercial paper, which is supported by two
unsecured bank revolving credit facilities that total $1.35 billion (Credit
Facilities). The Credit Facilities consist of a $450 million 364-day revolving
credit facility, with a one-year term loan option, that expires in March 2001
and a $900 million five-year revolving credit facility that expires in March
2003 and provides for the issuance of up to $300 million of letters of credit.
Interest rates on borrowings under the Credit Facilities are based upon the
London Interbank Offered Rate, Certificate of Deposit rates or other short-term
interest rates. In addition, the 364-day facility has a utilization fee if
borrowings exceed a certain level. The interest rate margins and facility fee on
the commitment amounts are based on Columbia's public debt ratings. Moody's
Investors Service, Inc. (Moody's), Fitch Investors Service (Fitch) and Standard
& Poor's Ratings Group (S&P) rating of Columbia's long-term debt is A3, A and
BBB+, respectively. Columbia's long-term debt ratings are currently under review
for a possible change by Moody's, Fitch and S&P. Under the Credit Facilities,
higher debt ratings result in lower facility fees and interest rate margins on
borrowings. Columbia's commercial paper ratings are P-2 by Moody's, F-1 by Fitch
and A-2 by S&P.
As of June 30, 2000, Columbia had approximately $127.8 million of letters of
credit issued, of which approximately $98.4 million were issued under the Credit
Facilities, and $325.4 million of commercial paper was outstanding.
In 1998, Columbia entered into several fixed-to-floating interest rate swap
agreements to modify the interest characteristics of $300 million of its
outstanding long-term debt. As a result of these transactions, that portion of
Columbia's long-term debt is now subject to fluctuations in interest rates. This
allows Columbia to benefit from a lower interest rate environment. In order to
maintain a balance between fixed and floating interest rates, Columbia is
targeting average annual floating rate debt exposure for 10 to 20% of its
outstanding long-term debt.
Columbia has an effective shelf registration statement on file with the
Securities and Exchange Commission for the issuance of up to $1 billion in
aggregate of debentures, common stock or preferred
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17
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS(CONTINUED)
stock in one or more series. Currently, Columbia has $750 million available
under the shelf registration.
Management believes that its sources of funding are sufficient to meet the
short-term and long-term liquidity needs of Columbia.
Common Stock Repurchase Program
During 1999, Columbia's Board of Directors (Columbia's Board) authorized the
repurchase of up to $500 million of Columbia's common stock through July 14,
2000, in the open market or otherwise. During the second quarter of 2000,
1,243,500 common shares were repurchased at a cost of $75.9 million. There were
no additional stock repurchases after June 30, 2000.
From February 23, 1999 through June 30, 2000, a total of 4,368,300 common shares
have been repurchased under this program at a cost of $249.1 million. Purchased
shares are held in treasury to be made available for general corporate purposes,
resold at a future date or retired.
Merger Agreement
On February 28, 2000, Columbia announced that it had entered into an Agreement
and Plan of Merger, dated as of February 27, 2000, and subsequently amended and
restated on March 31, 2000 (Merger Agreement), between Columbia and NiSource.
Columbia's Board determined to enter into the Merger Agreement after a
comprehensive evaluation of strategic alternatives that might generate value
greater than that which Columbia's business plan could create.
In early June 2000, the shareholders of both companies approved the merger
between NiSource and Columbia Energy Group. As provided for in the merger
agreement, NiSource has organized a new company that will serve as the holding
company for Columbia and its subsidiaries after the completion of the
transaction. Pursuant to the terms of the Merger Agreement, each of Columbia and
NiSource will be merged with newly formed special purpose subsidiaries of the
new holding company, and each will become a wholly-owned subsidiary of the new
holding company. Immediately following these mergers, NiSource will be merged
into the new holding company, which will then change its name to NiSource. It is
expected that the merger will be completed by the end of 2000.
Subject to the terms and conditions of the Merger Agreement, upon completion of
the transaction, Columbia's shareholders will receive, for each share of
Columbia common stock, $70 in cash plus $2.60 face value SAILS(SM) (a unit
consisting of a zero coupon debt security with a forward equity contract).
Columbia's shareholders also have the option to elect to receive (in lieu of
cash and SAILS(SM) shares in the new holding company in a tax-free exchange, for
up to 30% of the outstanding shares of Columbia common stock. Pursuant to the
stock election option, each Columbia share will be exchanged for up to $74 in
new holding company stock, subject to a collar such that, if the average closing
price of NiSource shares during the 30 days prior to the closing of the
transaction is greater than $16.50, Columbia shareholders will receive shares of
the new holding company valued at $74 for each share of Columbia stock, and if
the average closing price of NiSource shares during the 30 days prior to closing
of the transaction is $16.50 or below, Columbia shareholders will receive 4.4848
shares of new holding company stock for each Columbia share. Upon completion of
the transaction, NiSource shareholders will receive one share of holding company
stock for each share of NiSource common stock that they own.
The Merger Agreement is conditioned upon, among other things, the approval of
various state and federal regulatory commissions. As of the filing date of this
Form 10-Q, regulatory actions on the merger have been completed in all nine of
the necessary states. On the federal level, the appropriate filings have been
17
18
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS(CONTINUED)
made and the company anticipates receiving the necessary approvals to complete
the merger by the end of 2000.
Voluntary Incentive Retirement Programs
In September 1999, Columbia Transmission announced a VIRP that provided a
retirement incentive for active employees who were age fifty and above with at
least five years of service as of March 1, 2000. Approximately 486 of its 600
eligible employees elected early retirement under this program with the majority
of the retirements occurring in the first quarter of 2000.
In February 2000, the five distribution subsidiaries and Service Corp. also
announced a VIRP. Of the 879 employees eligible for the program, 679 employees
elected early retirement. Most of the retirements from this second VIRP occurred
on June 1, 2000, with the remainder occurring on December 1, 2000, due to
business needs.
Retirement costs for these employees are funded through the pension plan. Costs
related to implementing these programs will not have a significant effect on
Columbia's consolidated annual income and they are expected to reduce future
labor and benefits costs due to a reduced employee complement.
Presentation of Segment Information
Columbia revised its presentation of its primary business segment information
beginning with the reporting of second quarter 2000 results. As a result of the
discontinuation of most of the businesses within the Energy Marketing
Operations, this segment has been deleted. (See Note 5 of Part 1, Item 1 -
Financial Statements for additional information.) In addition, due to the recent
sale of Cove Point LNG, the Power Generation, LNG and Other Operations have been
renamed Power Generation and Other Operations. The results for Columbia Service
Partners Inc., which were previously in Energy Marketing Operations, have been
reclassified to Power Generation and Other Operations.
Market Risk Exposure
Some of Columbia's non-rate regulated subsidiaries are exposed to market risk
due primarily to fluctuations in commodity prices. In order to help minimize
this risk, Columbia has adopted a policy that provides for commodity hedging
activities to help ensure stable cash flow and favorable prices and margins.
Financial instruments authorized for use by Columbia for hedging include
futures, swaps and options. Due to the sale of Columbia's Wholesale and Trading
business in late 1999, Columbia's use of derivatives has been significantly
reduced. However, Columbia Energy Services does utilize financial instruments to
help assure adequate margins for its mass marketing business on the purchase and
resale of energy products. In June 2000, Columbia entered into a definitive
agreement to sell this business, as discussed on page 15. Columbia Resources
also utilizes financial instruments to fix prices for a portion of its future
production volumes, which are hedged in the marketplace through a third party.
Columbia Propane Corporation, which is currently being prepared for sale,
utilizes financial instruments to help protect the value of its propane and
petroleum inventories and commitments.
Derivative instruments continue to be controlled within predetermined limits as
provided by Columbia's senior management. Columbia's policy prohibits any
Columbia subsidiary from entering into derivative transactions that are not
effectively connected with its business. Market risks are monitored by an
independent risk control group operating separately from the area that creates
or actively manages these risk exposures in order to monitor compliance with
Columbia's stated risk management policies. Columbia measures the market risk in
its businesses and employs multiple risk control mechanisms to mitigate market
risk including value-at-risk measures using a variance/covariance methodology
and volumetric
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19
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS(CONTINUED)
limits. Value-at-risk simulates forward price curves in the energy markets to
estimate the size and probability of future potential losses. At June 30, 2000,
based on a 95% confidence interval and a one-day time horizon, the value-at-risk
for Columbia's derivative positions was insignificant.
Columbia also utilizes fixed-to-floating interest rate swap agreements to modify
the interest characteristics of a portion of its outstanding long-term debt. As
a result of these transactions, $300 million of Columbia's long-term debt is now
subject to fluctuations in interest rates.
19
20
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION AND STORAGE OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(millions)
OPERATING REVENUES
Transportation revenues $ 140.2 $ 134.5 $ 325.8 $ 316.9
Storage revenues 44.1 43.7 88.7 94.0
Other revenues 4.2 4.6 19.1 25.2
-------- -------- -------- --------
Total Operating Revenues 188.5 182.8 433.6 436.1
-------- -------- -------- --------
OPERATING EXPENSES
Operation and maintenance 81.1 86.6 159.7 183.5
Settlement of gas supply charges -- -- -- (29.8)
Depreciation 27.3 26.9 54.6 53.6
Other taxes 13.2 13.4 28.5 28.7
-------- -------- -------- --------
Total Operating Expenses 121.6 126.9 242.8 236.0
-------- -------- -------- --------
OPERATING INCOME $ 66.9 $ 55.9 $ 190.8 $ 200.1
======== ======== ======== ========
THROUGHPUT (BCF)
Transportation
Columbia Transmission
Market area 186.3 164.4 564.4 558.4
Columbia Gulf
Mainline 162.0 149.5 307.7 296.9
Short-haul 40.5 58.0 98.0 108.6
Intrasegment eliminations (156.8) (145.6) (297.2) (284.3)
-------- -------- -------- --------
Total Throughput 232.0 226.3 672.9 679.6
======== ======== ======== ========
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21
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)
Proposed Millennium Pipeline Project
The proposed Millennium Pipeline Project (Millennium Project), in which Columbia
Transmission is participating and will serve as developer and operator, will
transport western gas supplies to northeast and mid-Atlantic markets. The
442-mile pipeline will connect to TransCanada Pipe Lines Ltd. at a new Lake Erie
export point and transport approximately 700,000 Mcf (thousand cubic feet) per
day to eastern markets. There are currently seven shippers who have signed
agreements for a significant portion, in aggregate, of the available capacity.
Based on unanticipated delays attributed to the regulatory approval process at
the FERC, the Millennium Project sponsors have advised the FERC of a revised
in-service date of November 1, 2001.
The sponsors of the proposed Millennium Project are Columbia Transmission,
Westcoast Energy, Inc., TransCanada Pipe Lines Ltd. and MCN Energy Group, Inc.
Mainline '99
Columbia Gulf Transmission Company's (Columbia Gulf's) largest expansion of its
mainline facilities, referred to as Mainline '99, will increase Columbia Gulf's
certificated capacity to nearly 2.2 billion cubic feet (Bcf) per day by
replacing certain compressor units and increasing the horsepower capacity of
other compressor stations. On December 1, 1999, approximately 270,000 Dth/day of
additional capacity was made available on Columbia Gulf's mainline. The project
is currently in the final phase and is expected to add additional capacity of
approximately 45,000 Dth/day by November 1, 2000.
Discussions with FERC
The transmission and storage subsidiaries are in confidential and informal
discussions with the staff of the FERC (Staff) concerning the scope of
authorization for certain past transactions under the relevant filed tariffs.
The transmission and storage subsidiaries initiated these discussions with the
FERC. These subsidiaries provided information concerning these transactions to
the Staff pursuant to an informal non-public inquiry being conducted by the
Staff. Management does not expect that the ultimate resolution of this issue
will have a material impact on Columbia's consolidated results.
Throughput
Columbia Transmission's throughput consists of transportation and storage
services for local distribution companies and other customers within its market
area, which covers fifteen northeastern, mid-Atlantic, mid-western, and southern
states and the District of Columbia. Throughput for Columbia Gulf reflects
mainline transportation services from Rayne, Louisiana to Leach, Kentucky and
short-haul transportation services from the Gulf of Mexico to Rayne, Louisiana.
Throughput for the transmission and storage segment totaled 232 Bcf and 672.9
Bcf for the second quarter and first six months of 2000, respectively. For the
second quarter, this represents an increase of 5.7 Bcf from the same period in
1999, primarily due to an increase in customer demand due in part to colder
weather. For the first six months of 2000, an increase in customer demand was
more than offset by the effect of warmer weather and lower off-shore
transportation which resulted in a 6.7 Bcf decrease in throughput from the first
six months of 1999.
Operating Revenues
Total operating revenues were $188.5 million for the second quarter of 2000, an
increase of $5.7 million over the same period last year. The increase in
revenues was primarily due to additional transportation. This increase was
tempered by a decrease in offshore throughput.
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PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)
For the first six months of 2000, operating revenues were $433.6 million, a
decrease of $2.5 million from the same period last year primarily due to lower
revenues from the sale of Columbia Transmission's storage base gas.
Operating Income
Second quarter 2000 operating income of $66.9 million increased $11 million from
the same period last year due in large part to the implementation of Columbia
Transmission's VIRP, an improvement in operation and maintenance expense and
increased operating revenues.
For the first six months of 2000, operating income was $190.8 million, a
decrease of $9.3 million from the same period in 1999. This decrease is
primarily due to a gain on a Columbia Transmission producer settlement recorded
in 1999, partially offset by improvements from the implementation of the VIRP in
the first quarter of 2000.
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23
PART I - 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,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(millions)
NET REVENUES
Sales revenues $ 213.8 $ 252.7 $ 841.6 $1,163.8
Less: Cost of gas sold 120.7 155.4 545.9 822.0
-------- -------- -------- --------
Net Sales Revenues 93.1 97.3 295.7 341.8
-------- -------- -------- --------
Transportation revenues 65.1 66.7 195.8 173.7
Less: Associated gas costs 5.6 9.0 18.3 18.9
-------- -------- -------- --------
Net Transportation Revenues 59.5 57.7 177.5 154.8
-------- -------- -------- --------
Net Revenues 152.6 155.0 473.2 496.6
-------- -------- -------- --------
OPERATING EXPENSES
Operation and maintenance 112.6 97.2 230.1 209.6
Depreciation 11.5 17.1 33.1 53.1
Other taxes 22.1 24.1 72.4 87.1
-------- -------- -------- --------
Total Operating Expenses 146.2 138.4 335.6 349.8
-------- -------- -------- --------
OPERATING INCOME $ 6.4 $ 16.6 $ 137.6 $ 146.8
======== ======== ======== ========
THROUGHPUT (BCF)
Sales
Residential 16.1 15.5 73.6 84.6
Commercial 5.5 5.1 25.9 28.0
Industrial and other 0.6 0.6 2.0 1.6
-------- -------- -------- --------
Total Sales 22.2 21.2 101.5 114.2
Transportation 76.5 76.9 199.8 184.8
-------- -------- -------- --------
Total Throughput 98.7 98.1 301.3 299.0
Off-System sales 2.4 9.2 9.5 165.5
-------- -------- -------- --------
Total Sold and Transported 101.1 107.3 310.8 464.5
======== ======== ======== ========
SOURCES OF GAS FOR THROUGHPUT (BCF)
Sources of Gas Sold
Spot market* 87.3 86.2 139.9 142.9
Producers 2.9 2.3 6.2 4.7
Storage withdrawals (injections) (32.7) (36.3) 12.5 25.6
Other (32.9) (21.8) (47.6) 106.5
-------- -------- -------- --------
Total Sources of Gas Sold 24.6 30.4 111.0 279.7
Gas received for delivery to customers 76.5 76.9 199.8 184.8
-------- -------- -------- --------
Total Sources 101.1 107.3 310.8 464.5
======== ======== ======== ========
* Reflects volumes under purchase contracts of less than one year.
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PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS (CONTINUED)
Market Conditions
Weather in Columbia's market area for its distribution subsidiaries
(Distribution) for the first half of 2000 was 12% warmer than normal and 4%
warmer than the same period in 1999. As a result, Distribution's
weather-sensitive deliveries for the first six months of 2000 were down 20 Bcf
from the same period last year.
Regulatory Matters
In April 1999, Columbia Gas of Kentucky, Inc. (Columbia of Kentucky) filed an
application with the Kentucky Public Service Commission (KPSC), seeking approval
to initiate a residential and small commercial transportation program. In late
January 2000, the KPSC approved Columbia of Kentucky's application, but did not
renew Columbia of Kentucky's gas cost incentive program. Columbia of Kentucky
filed for rehearing of the order during the first quarter. On May 19, 2000, the
KPSC issued an order affirming its original decision to deny continuation of the
gas cost incentive program originally approved in 1996. However, an alternate
incentive sharing mechanism was approved that allows Columbia of Kentucky to
retain 25% of off system sales margins over the term of the pilot program.
Additionally, Columbia of Kentucky will remain responsible for mitigating
transition capacity costs through the utilization of non-traditional revenues.
Columbia of Kentucky will begin customer enrollment in the pilot program in
September 2000, and the program is scheduled to run through October 2004.
Throughput
During the second quarter of 2000, total volumes sold and transported of 101.1
Bcf decreased 6.2 Bcf from the same period last year. The decline primarily
reflects a decrease in off-system sales due to reduced opportunities for these
sales in the current quarter, partially offset by increased sales and
transportation services to steel production facilities together with residential
and commercial growth.
For the first six months of 2000, total throughput sold and transported of 310.8
Bcf decreased 153.7 Bcf from the first half of 1999. The decline largely
reflected a decrease in off-system sales, which are typically low-margin
opportunities to sell natural gas supplies outside of Distribution's traditional
market, and warmer weather. Off-system sales volumes for the first six months of
2000 were 9.5 Bcf compared to 165.5 Bcf in 1999. The higher off-system sales in
1999 were due to additional opportunities available, particularly during the
first quarter.
Net Revenues
Net revenues for the three months ended June 30, 2000, of $152.6 million were
essentially unchanged from the same period in 1999.
For the first half of 2000, net revenues were $473.2 million, down $23.4 million
over the same period last year due to warmer weather in 2000 and the effect of
Columbia of Ohio's 1999 regulatory settlement.
Operating Income
Operating income for the three months ended June 30, 2000 of $6.4 million
decreased $10.2 from the same period in 1999, primarily due to an increase of
$15.4 million in operation and maintenance expense, largely attributable to
implementing the VIRP.
For the six months ended June 30, 2000, operating income of $137.6 million
decreased $9.2 million from the same period last year. The decrease in net
revenues was tempered by a $14.2 million decrease in operating expenses.
Depreciation expense declined by $20 million as a result of recording the terms
of the 1999 Columbia of Ohio regulatory settlement and other taxes decreased
$14.7 million primarily due to a decrease in gross receipts and property taxes.
Operation and maintenance expense in 2000 increased $20.5 million over the first
half of 1999, reflecting expenses related to implementing the VIRP and higher
insurance and outside service costs.
24
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PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
EXPLORATION AND PRODUCTION OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
(millions)
OPERATING REVENUES
Gas revenues $ 36.3 $ 27.9 $ 83.8 $ 53.8
Other revenues 4.0 3.6 9.0 8.2
------- ------- ------- -------
Total Operating Revenues 40.3 31.5 92.8 62.0
------- ------- ------- -------
OPERATING EXPENSES
Operation and maintenance 15.2 13.4 31.3 26.3
Depreciation and depletion 7.0 8.7 19.4 18.2
Other taxes 3.1 2.5 6.3 5.0
------- ------- ------- -------
Total Operating Expenses 25.3 24.6 57.0 49.5
------- ------- ------- -------
OPERATING INCOME $ 15.0 $ 6.9 $ 35.8 $ 12.5
======= ======= ======= =======
GAS PRODUCTION STATISTICS
Production (Bcf)
U.S 12.9 10.2 27.0 20.8
Canada 0.1 0.1 0.1 0.1
------- ------- ------- -------
Total 13.0 10.3 27.1 20.9
======= ======= ======= =======
Average Price ($ per Mcf)
U.S 2.75 2.69 3.06 2.56
Canada 2.73 2.24 2.80 2.41
OIL AND LIQUIDS PRODUCTION STATISTICS
Production (000 Bbls)
U.S 50 50 93 86
Canada 2 2 5 5
------- ------- ------- -------
Total 52 52 98 91
======= ======= ======= =======
Average Price ($ per Bbl)
U.S 28.76 12.67 26.38 11.45
Canada 30.40 19.01 29.28 15.06
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PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
EXPLORATION AND PRODUCTION OPERATIONS (CONTINUED)
Drilling Activity
Columbia Resources participated in 62 gross (56.8 net) wells during the second
quarter of 2000 with a success rate of 85%, adding 12.5 net Bcfe of reserves.
During the same period in 1999, Columbia Resources completed 39 gross (32.7 net)
wells with a 79% success rate, adding reserves of 7.5 net Bcfe.
Columbia Resources' drilling activity in the first half of 2000 resulted in the
discovery of 15.6 net Bcfe of gas and oil reserves compared to 14.7 Bcfe in the
same period in 1999. Through June 2000, Columbia Resources has participated in
85 gross (75 net) wells compared to 71 gross (60 net) wells in the first half of
1999.
Volumes
Gas production of 13 Bcf in the second quarter of 2000 increased 2.7 Bcf, or
26%, and for the six months ended June 30, 2000, gas production increased 6.2
Bcf from the same period last year to 27.1 Bcf principally due to new wells
coming on line.
Operating Revenues
Operating revenues for the second quarter of 2000 of $40.3 million increased
$8.8 million or 28% over the same quarter in 1999 primarily due to the increase
in gas production. Gas prices increased $0.06 per Mcf to $2.75 per Mcf compared
to the second quarter of 1999. Approximately 90% of Columbia Resources' second
quarter 2000 natural gas production was hedged or committed through fixed price
contracts at an average price of $3.09 per Mcf.
Operating revenues for the first half of 2000 were $92.8 million, compared to
$62 million for the same period in 1999. A $0.50 per Mcf increase in Columbia
Resources' natural gas sales price along with the increase in gas production
contributed to the improvement in operating revenues.
Operating Income
For the three months ended June 30, 2000, operating income of $15 million
increased $8.1 million over last year's second quarter, primarily due to higher
operating revenues, as discussed above.
For the first half of 2000, operating income increased $23.3 million to $35.8
million, as the increased operating revenues were partially offset by an
increase in operation and maintenance expense due to the acquisition of the
Wiser Oil Company's production assets in the second quarter of 1999 and
increased depletion expenses and other taxes as a direct result of higher
revenues.
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PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
POWER GENERATION AND OTHER OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
(millions)
OPERATING REVENUES
Gas sales $ 8.0 $ 1.5 $ 17.8 $ 2.9
Power generation 4.3 1.5 4.8 3.5
LNG 1.8 1.9 3.8 4.2
Other 0.9 0.2 2.1 0.3
------- ------- ------- -------
Total Operating Revenues 15.0 5.1 28.5 10.9
------- ------- ------- -------
OPERATING EXPENSES
Products purchased 5.9 0.3 13.6 0.3
Operation and maintenance 7.8 5.3 13.2 12.4
Depreciation 0.1 0.1 0.2 0.2
Other taxes 0.1 -- 0.2 0.2
------- ------- ------- -------
Total Operating Expenses 13.9 5.7 27.2 13.1
------- ------- ------- -------
OPERATING INCOME (LOSS) $ 1.1 $ (0.6) $ 1.3 $ (2.2)
======= ======= ======= =======
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PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
POWER GENERATION AND OTHER OPERATIONS (CONTINUED)
Sale of Liquefied Natural Gas Operations
On June 15, 2000, Columbia's subsidiaries completed the sale of the Cove Point
LNG Limited Partnership to subsidiaries of Williams Gas Pipeline for $150
million. The facilities include a liquefied natural gas storage and a marine
terminal, and an 87-mile natural gas pipeline connecting the terminal with gas
pipelines in Northern Virginia.
Telecommunications Network
In 1999, Columbia Transmission Communications Corporation (Transcom), a
wholly-owned subsidiary of Columbia, began the construction of its
telecommunications network along the Washington, D.C. to New York City corridor.
As reported in Columbia's 1999 Form 10-K, Transcom anticipated the completion of
the 260-mile D.C. to New York fiber optics link in the first half of 2000.
However, as a result of certain matters as discussed in Part II Legal
Proceedings, Item 1-I.C and other unrelated matters, the project has been
delayed.
Sale of Cogeneration Facilities
Columbia Electric Corporation's interests in four qualifying generation
facilities will be divested prior to the consummation of the NiSource merger in
order to maintain the facilities' qualified facility status under the Public
Utility Regulatory Policies Act, and a sale of the remainder of Columbia
Electric's business may be pursued.
Operating Revenues
Operating revenues for the second quarter of 2000 of $15 million increased $9.9
million over the same period last year primarily reflecting gas sales for
long-term sales contracts that were formerly associated with Columbia Energy
Services' wholesale operations together with a $4.1 million improvement
resulting from a contract restructuring for a cogeneration facility in the
second quarter of 2000. The increase in revenues attributable to gas sales is
largely offset by gas purchases that are reflected in products purchased.
Operating revenues for the first half of 2000 increased $17.6 million to $28.5
million primarily due to the above-mentioned gas sales and the cogeneration
contract restructuring in the second quarter of 2000.
Operating Income (Loss)
Power Generation and Other Operations reported operating income of $1.1 million
in the second quarter of 2000 compared to an operating loss of $600,000 in the
same period last year. The increase in operating revenues was largely offset by
$5.6 million higher products purchased expense and increased operation and
maintenance expense of $2.5 million, due in part to higher start-up costs for
Columbia's telecommunications business.
For the six months ended June 30, 2000, this segment reported operating income
of $1.3 million compared to an operating loss of $2.2 million in the first half
of last year. This improvement was largely due to the increase in operating
revenues tempered by higher gas purchase expense.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is reported on page 18 of
the Management's Discussion and Analysis under "Market Risk
Exposure."
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, 1999 or the
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000,
except as follows:
I. Other
A. Canada Southern Petroleum Ltd. v. Columbia Gas Development of Canada
Ltd. (C.A. No. 9001-03466, Court of Queen's Bench, Alberta, Canada,
filed March 7, 1990). The plaintiffs assert, among other things,
that the defendant working interest owners, including Columbia Gas
Development of Canada Ltd. (Columbia Canada) and various Amoco
affiliates, breached an alleged fiduciary duty to ensure the
earliest feasible marketing of gas from the Kotaneelee field (Yukon
Territory, Canada). The plaintiffs seek, among other remedies, the
return of the defendants' interests in the Kotaneelee field to the
plaintiffs, a declaration that such interests are held in trust for
the plaintiffs and an order requiring the defendants to promptly
market Kotaneelee gas or assessing damages.
In November 1993, the plaintiffs amended their Amended Statement of
Claim to include allegations that the balance in the Carried
Interest Account (an account for operating costs, which are
recoverable, by working interest owners) which is in excess of the
balance as of November 1988 should be reduced to zero. Columbia, on
behalf of Columbia Canada, consented to the amendment in
consideration of the plaintiffs' acknowledgment that approximately
$63 million was properly charged to the account. However, Columbia
and Columbia Canada continue to dispute the claim to the extent that
the claim challenges expenditures incurred since November 1988,
including expenditures made after Columbia Canada was sold to
Anderson Exploration Ltd. (Anderson) effective December 31, 1991.
A trial commenced in the third quarter of 1996 in the Court of
Queen's Bench. Following multiple lengthy adjournments, the parties
have concluded presenting their witnesses and evidence. The
plaintiffs have submitted their written argument and defendant's
written argument is due in August. The trial is expected to conclude
by the end of 2000. Management continues to believe that its
defenses are meritorious, and that the risk of any material
liability to Columbia is de minimis.
Pursuant to an Indemnification Agreement regarding the Kotaneelee
Litigation entered into when Columbia Canada was sold to Anderson,
Columbia agreed to indemnify and hold Anderson harmless for losses
due to this litigation arising out of actions occurring prior to
December 31, 1991. As a result of the 1997 upgrading of Columbia's
long-term debt, an escrow account that provides security for the
indemnification obligation and is now funded by a letter of credit
was reduced to approximately $35,835,000 (Cdn).
B. Columbia Gas Transmission Corp. v. Consolidation Coal Co., et al.,
U.S.D.C. W.D. Pa., C.A. No. 99-2071. On December 21, 1999 Columbia
Transmission filed a complaint against Consolidation Coal Co. and
McElroy Coal Co. (collectively, Consol), seeking declaratory and
permanent injunctive relief enjoining Consol from pursuing its
current plan to conduct longwall mining through Columbia
Transmission's Victory Storage Field in northern West Virginia. The
complaint was served on April 10, 2000.
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30
Consol's current plans to longwall mine through the Victory Storage
Field would destroy certain infrastructure of Victory Storage Field,
including all of Columbia Transmission's storage wells in the path
of the mining. The parties have held discussions concerning
resolution of this matter and further discussions are contemplated.
On April 28, 2000, Consol filed a Motion to Dismiss, which is
currently pending before the court. In addition, discovery by
Columbia Transmission has been initiated.
C. Transcom. On March 17, April 11 and April 21, 2000, one of
Columbia's subsidiaries, Columbia Transmission Communications
Corporation (Transcom) received directives from the U.S. Army Corps
of Engineers and an administrative order from The Pennsylvania
Department of Environmental Protection addressing alleged violations
of federal and state laws resulting from construction activities
associated with Transcom's laying fiber optic cable along portions
of a route between Washington, D.C. and New York City. Columbia and
Transcom are in discussions with these agencies and the Maryland
Department of the Environment. The order and directives require
Transcom to largely cease construction activities at the present
time. The agencies have not to date assessed any penalties. Transcom
cannot predict when or if the orders precluding construction
activities will be lifted, the effect of these events on the
completion schedule for the project, nor the nature or amount of any
remedies that may be sought in connection with the foregoing
construction activities.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On May 17, 2000, Columbia held its Annual Meeting of Stockholders. On
the March 20, 2000 record date, Columbia had 81,308,761 shares of
common stock outstanding, each of which was entitled to one vote at the
meeting. Voted upon and approved by the requisite number of shares
present in person or by proxy at the meeting was: A) the election of
five directors each to serve a term of three years, and B) the election
of Arthur Andersen LLP as independent public accountants.
A. Election of Directors
Name of Director Votes For Votes Withheld
---------------- --------- --------------
Wilson K. Cadman 64,029,760 999,841
James P. Heffernan 64,050,985 978,616
Karen L. Hendricks 64,039,218 990,383
J. Bennett Johnston 64,030,619 998,983
Peter M. Schwolsky 63,991,924 1,037,677
B. Election of Arthur Andersen LLP as independent public accountants:
Votes For Votes Against Abstain
--------- ------------- -------
64,177,173 570,790 281,638
On June 2, 2000, a special meeting of Columbia's stockholders was held
to vote on the company's proposed merger with NiSource Inc., an
Indiana-based energy company. Columbia and NiSource
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announced on February 28, 2000, that they had entered into a definitive
merger agreement, pending shareholder and regulatory approval. On the
April 27, 2000 record date, Columbia had 80,101,250 shares of common
stock outstanding, each of which was entitled to one vote at the
meeting. The proposed merger was voted upon and approved by the
requisite number of shares present in person or by proxy at the
meeting. Below are the results of this meeting for the approval of
Columbia's proposed merger with NiSource, Inc:
Votes For Votes Against Abstain
--------- ------------- -------
53,298,809 354,684 867,093
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Reference is made below to those exhibits that have previously been
filed with the Commission. Exhibits so referred to are incorporated by
reference.
Exhibit
Number
------
10-BG Third amendment to employment agreement by and between
the Columbia Energy Group and Oliver G. Richard III,
effective July 21, 2000.
10-BH Second amendment to employment agreement by and between
the Columbia Energy Group and Peter M. Schwolsky,
effective July 21, 2000.
10-BI Second amendment to employment agreement by and between
the Columbia Energy Group and Catherine Good Abbott,
effective July 21, 2000.
12* Statements of Ratio of Earnings to Fixed Charges
27* Financial Data Schedule
* Filed herewith
The following reports on Form 8-K were filed during the second quarter
of 2000.
Financial
Item Statements
Reported Included Date of Event Date Filed
-------- ---------- --------------- --------------
5 Yes ** April 13, 2000 April 13, 2000
5 No May 3, 2000 May 3, 2000
5 No April 24, 2000 May 12, 2000
5 No May 22, 2000 May 22, 2000
5 No June 2, 2000 June 2, 2000
5 No June 15, 2000 June 15, 2000
** Summary of Financial and Operational data for the three months ended
March 31, 2000.
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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.
Columbia Energy Group
------------------------------------
(Registrant)
Date: August 4, 2000 By: /s/ Jeffrey W. Grossman
------------------------------------
Jeffrey W. Grossman
Vice President and Controller
(Principal Accounting Officer
and Duly Authorized Officer)
32