UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] For the Quarterly period ended SEPTEMBER 30, 2001
------------------
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.)
801 East 86th Avenue, Merrillville, IN 46410
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (877) 647-5990
--------------
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 [ ].
As of November 1, 2000, all shares of the registrant's Common Shares, $.01 par
value, were issued and outstanding, all held beneficially and of record by
NiSource Inc.
The registrant meets the conditions set forth in General Instructions H(1)(a)
and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
FORM 10-Q/A QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
REASON FOR AMENDMENT
On November 1, 2000 NiSource acquired all the outstanding common stock of
Columbia Energy Group. Such acquisition was accounted for pursuant to purchase
accounting. Prior to the acquisition of Columbia, NiSource initiated a study to
identify and quantify potential contingent liabilities of Columbia that were
acquired, but for which additional information was required in order to estimate
such liabilities. In late October 2001, after the release of the Company's
earnings for the third quarter of 2001, but prior to the filing of its third
quarter 2001 Form 10-Q, this study was essentially completed and approved by
management. It identified probable liabilities that existed at the time of the
acquisition related primarily to environmental, regulatory and litigation
issues. Columbia initially intended to record the effects of the study during
the fourth quarter of 2001 in connection with its October 2001 monthly close.
However, upon further review of the information and the time of its
availability, it was concluded that it was more appropriate to record these
liabilities in the company's financial statements for the third quarter of 2001.
Consequently, Columbia's September 30, 2001 Form 10-Q has been amended to
reflect this change.
ORIGINAL 10-Q AMENDED 10-Q
Three Months Nine Months Three Months Nine Months
($ in millions) Ended September 30, Ended September 30, Ended September 30, Ended September 30,
- -----------------------------------------------------------------------------------------------------------------------------------
Total net revenues 371.3 1,424.5 356.3 1,409.5
Total operating expenses 307.3 1,005.9 369.1 1,067.7
Operating income 64.0 418.6 (12.8) 341.8
Income from continuing operations 13.8 182.6 (35.4) 133.4
Discontinued operations - net of taxes (30.8) (31.8) (61.1) (62.1)
Net income (loss) (17.0) 154.8 (96.5) 75.3
- -----------------------------------------------------------------------------------------------------------------------------------
2
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
FORM 10-Q/A QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Financial Statements
Statements of Consolidated Income ............................ 4
Consolidated Balance Sheets .................................. 5
Statements of Consolidated Cash Flows ........................ 7
Statements of Consolidated Common Stock Equity ............... 8
Statements of Consolidated Comprehensive Income .............. 8
Notes ........................................................ 9
Item 2. Management's Narrative Analysis of Results of Operations ..... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk ... 19
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings ............................................ 20
Item 2. Changes in Securities and Use of Proceeds .................... 22
Item 3. Defaults Upon Senior Securities .............................. 22
Item 4. Submission of Matters to a Vote of Security Holders .......... 22
Item 5. Other Information ............................................ 22
Item 6. Exhibits and Reports on Form 8-K ............................. 22
Signature ............................................................ 23
3
PART I
ITEM 1. FINANCIAL STATEMENTS
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- --------------------------
(in millions) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
NET REVENUES
Energy sales 390.2 159.2 2,082.1 1,020.6
Less: Products purchased 253.7 25.3 1,461.5 468.3
- ---------------------------------------------------------------------------------------------------------------------------
Gross Margin 136.5 133.9 620.6 552.3
Transportation 151.9 147.5 574.5 563.3
Production gas sales 36.0 33.5 103.4 115.3
Other 31.9 39.1 111.0 129.1
- ---------------------------------------------------------------------------------------------------------------------------
Total Net Revenues 356.3 354.0 1,409.5 1,360.0
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 287.7 204.9 684.6 638.9
Depreciation and depletion 52.3 43.5 165.4 153.0
Loss on impairment of telecommunication assets - - 89.2 -
Other taxes 29.1 32.0 128.5 141.3
- ---------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 369.1 280.4 1,067.7 933.2
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (12.8) 73.6 341.8 426.8
- ---------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Interest Income and other, net 2.7 5.7 6.1 103.8
Interest expense and related charges (40.4) (48.3) (125.9) (139.2)
- ---------------------------------------------------------------------------------------------------------------------------
Total Other Income (Deductions) (37.7) (42.6) (119.8) (35.4)
- ---------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (50.5) 31.0 222.0 391.4
INCOME TAX EXPENSE (BENEFIT) (15.1) 11.5 88.6 145.6
- ---------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS (35.4) 19.5 133.4 245.8
- ---------------------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS - NET OF TAXES
(Loss) from operations - - - (1.5)
Estimated (loss) on disposal (61.1) (83.3) (62.1) (110.7)
- ---------------------------------------------------------------------------------------------------------------------------
(Loss) from Discontinued Operations - net of taxes (61.1) (83.3) (62.1) (112.2)
- ---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE (96.5) (63.8) 71.3 133.6
Cumulative Effect of Accounting Change - net of taxes - - 4.0 -
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (96.5) (63.8) 75.3 133.6
===========================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31,
(in millions) 2001 2000
- -------------------------------------------------------------------------------------------------
ASSETS (unaudited)
PROPERTY, PLANT AND EQUIPMENT
Gas utility and other plant, at original cost $ 8,192.9 $ 8,174.2
Accumulated depreciation (3,852.8) (3,778.3)
- -------------------------------------------------------------------------------------------------
Net Gas Utility and Other Plant 4,340.1 4,395.9
- -------------------------------------------------------------------------------------------------
Gas and oil producing properties, full cost method
United States cost center 975.2 913.6
Canadian cost center 22.0 20.2
Accumulated depletion (311.1) (272.7)
- -------------------------------------------------------------------------------------------------
Net Gas and Oil Producing Properties 686.1 661.1
- -------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 5,026.2 5,057.0
- -------------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Unconsolidated affiliates 75.8 28.1
Net assets of discontinued operations 24.1 236.3
Affiliated notes receivable 26.2 -
Other 17.3 27.4
- -------------------------------------------------------------------------------------------------
Total Investments and Other Assets 143.4 291.8
- -------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and temporary cash investments 42.3 73.5
Accounts receivable, net 356.5 683.3
Affiliated receivable 60.0 2.7
Gas inventory 293.8 147.4
Other inventories - at average cost 13.9 14.5
Prepayments 90.5 73.8
Regulatory assets 72.6 57.4
Underrecovered gas costs 10.3 169.0
Deferred property taxes 15.0 45.2
Exchange gas receivable 275.5 615.9
Price risk management asset 122.4 -
Other 63.8 (2.3)
- -------------------------------------------------------------------------------------------------
Total Current Assets 1,416.6 1,880.4
- -------------------------------------------------------------------------------------------------
REGULATORY ASSETS 348.2 351.8
DEFERRED CHARGES 60.5 45.2
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,994.9 $ 7,626.2
=================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31,
(in millions) 2001 2000
- -----------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES (unaudited)
CAPITALIZATION
Common stock equity $ 2,186.7 $ 2,035.9
Long-term debt 1,648.4 1,639.1
- -----------------------------------------------------------------------------------------
Total Capitalization 3,835.1 3,675.0
- -----------------------------------------------------------------------------------------
CURRENT LIABILITIES
Short term debt - 521.0
Current maturities of long-term debt 0.2 0.2
Accounts and drafts payable 240.5 398.0
Affiliated payable 126.7 7.2
Accrued taxes 122.6 177.1
Accrued interest 51.4 17.7
Estimated rate refunds 8.3 6.8
Overrecovered gas costs 155.8 -
Transportation and exchange gas payable 211.1 358.5
Deferred revenue 91.6 451.5
Other 437.3 366.0
- -----------------------------------------------------------------------------------------
Total Current Liabilities 1,445.5 2,304.0
- -----------------------------------------------------------------------------------------
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes, noncurrent 816.0 766.8
Investment tax credits 30.1 31.2
Postretirement benefits other than pensions 108.1 114.7
Regulatory liabilities 33.2 32.4
Deferred revenue 464.6 498.0
Other 262.3 204.1
- -----------------------------------------------------------------------------------------
Total Other Liabilities and Deferred Credits 1,714.3 1,647.2
- -----------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 6,994.9 $ 7,626.2
=========================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, ( in millions) 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income 75.3 133.6
Adjustments to reconcile net income to net cash from continuing operations:
Loss from discontinued operations - 1.5
Loss from disposal of discontinued operations 62.1 110.7
Cumulative effect of accounting change, net of tax (4.0) -
Depreciation and depletion 165.4 153.0
Deferred income taxes (53.5) 64.6
Gain on sale of partnership - (90.5)
Earnings from equity investment, net of distributions (43.0) (9.7)
Loss on impairment of telecommunication assets 89.2 -
Deferred revenue (33.4) 211.4
Other - net 52.8 21.4
- -----------------------------------------------------------------------------------------------------------------------
310.9 596.0
- -----------------------------------------------------------------------------------------------------------------------
Changes in components of working capital:
Accounts receivable, net 320.9 112.2
Affiliated receivable (83.5) 77.7
Gas inventory (146.4) (91.6)
Other inventories - at average cost 0.6 1.5
Prepayments (16.7) (9.3)
Accounts payable (157.5) (12.3)
Affiliated payable 119.5 -
Accrued taxes (38.1) (71.6)
Accrued interest 33.7 43.2
Estimated rate refunds 1.5 (14.1)
Under/Overrecovered gas costs 158.7 (57.6)
Exchange gas receivable/payable 193.0 (256.8)
Deferred revenue (359.9) 396.0
Other working capital 218.0 41.3
- -----------------------------------------------------------------------------------------------------------------------
Net Cash from Continuing Operations 554.7 754.6
Net Cash from Discontinued Operations 178.9 17.9
- -----------------------------------------------------------------------------------------------------------------------
Net Cash from Operating Activities 733.6 772.5
- -----------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Capital expenditures (257.8) (305.9)
Capital expenditures - assets held for sale - (41.1)
Sale and purchase of investments 8.2 107.5
- -----------------------------------------------------------------------------------------------------------------------
Net Investment Activities (249.6) (239.5)
- -----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends paid - (54.1)
Issuance of common stock - 5.4
Repayment of short-term debt (521.0) (411.4)
Purchase of treasury stock - (114.1)
Other financing activities 5.8 13.4
- -----------------------------------------------------------------------------------------------------------------------
Net Financing Activities (515.2) (560.8)
- -----------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in cash and temporary cash investments (31.2) (27.8)
Cash and temporary cash investments at beginning of year 73.5 58.1
- -----------------------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS AT SEPTEMBER 30* 42.3 30.3
=======================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest 9.8 89.0
Cash paid for income taxes (net of refunds) 8.9 68.2
- -----------------------------------------------------------------------------------------------------------------------
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.
7
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY
SEPTEMBER 30, December 31,
(in millions) 2001 2000
- -------------------------------------------------------------------------------------------------------------------
(unaudited)
Common stock, $.01 par value, authorized
and issued 3,000 shares $ - $ 0.8
Additional paid in capital 1,369.8 1,369.0
Retained earnings 741.5 666.5
Accumulated other comprehensive income 75.4 (0.4)
- -------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK EQUITY $ 2,186.7 $ 2,035.9
===================================================================================================================
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
SEPTEMBER 30, December 31,
For the Year to Date Period Ended, (in millions) 2001 2000
- -------------------------------------------------------------------------------------------------------------------
(unaudited)
COMPREHENSIVE INCOME
Net income $ 75.3 $ 133.7
Other comprehensive income (loss) - net of tax
Foreign currency translation adjustment (1.3) (0.7)
Change on value of marketable securities 3.0 -
Net gain on cash flow hedges 73.7 -
- -------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 150.7 $ 133.0
===================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
8
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
Annual Report on Form 10-K (Form 10-K) for the fiscal year ended December 31,
2000. 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 2000 financial statements to conform to
the 2001 presentation. As discussed in Note 5, the 2000 financial statements
have been reclassified to report several energy marketing operations as
discontinued operations.
2. ACQUISITION
On November 1, 2000, NiSource Inc. completed its acquisition of Columbia for an
aggregate consideration of approximately $6 billion, consisting of $3,888
million in cash, 72.4 million shares of common stock valued at $1,761 million,
and SAILSSM (units consisting of a zero coupon debt security coupled with a
forward equity contract in NiSource shares) valued at $114 million. NiSource
also assumed approximately $2 billion in Columbia debt. NiSource accounted for
the acquisition in accordance with the purchase method of accounting, but did
not "push-down" the purchase accounting adjustments to the financial statements
of Columbia.
3. RESTRUCTURING ACTIVITIES
As discussed in the Form 10-K, Columbia implemented a plan to restructure its
operations as a result of its acquisition by NiSource, discussed above. As a
result of the restructuring plan, it is estimated that approximately 781
management, professional, administrative and technical positions have been or
will be eliminated. The restructuring plan included a severance program, a
transition plan to implement operational efficiency throughout NiSource's
operations and a voluntary early retirement program. As of September 30, 2001,
approximately 625 employees had been terminated as a result of the restructuring
plan. Approximately 90 and 337 terminations occurred for the three months and
nine months ended September 30, 2001, respectively. At September 30, 2001, the
consolidated balance sheet reflected an accrual of $33.8 million related to the
restructuring plan. This is a $5.8 million decrease in the accrual from the
previous quarter ended June 30, 2001 and $27.9 million decrease year-to-date.
4. PRESENTATION OF SEGMENT INFORMATION
Columbia revised its presentation of its primary business segment information
beginning with the reporting of second quarter 2000 results. Columbia manages
its operations in four primary segments: 1) transmission and storage, 2)
distribution, 3) exploration and production, and 4) other products and services.
The following table provides information concerning these major business
segments. Revenues include intersegment sales to affiliated subsidiaries, which
are eliminated when consolidated. Affiliated sales are recognized on the basis
of prevailing market or regulated prices. Operating income is derived from
revenues and expenses directly associated with each segment.
9
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- ------------------------
($ in millions) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------
REVENUES
TRANSMISSION AND STORAGE
Unaffiliated 129.0 133.9 453.9 444.3
Intersegment and affiliates 54.9 53.2 181.4 176.4
- -------------------------------------------------------------------------------------------------------
Total 183.9 187.1 635.3 620.7
- -------------------------------------------------------------------------------------------------------
DISTRIBUTION
Unaffiliated 410.5 196.7 2,237.8 1,233.3
Intersegment and affiliates 3.0 0.1 3.0 0.9
- -------------------------------------------------------------------------------------------------------
Total 413.5 196.8 2,240.8 1,234.2
- -------------------------------------------------------------------------------------------------------
EXPLORATION AND PRODUCTION
Unaffiliated 43.5 39.4 117.7 131.3
Intersegment and affiliates 17.3 0.5 45.8 1.4
- -------------------------------------------------------------------------------------------------------
Total 60.8 39.9 163.5 132.7
- -------------------------------------------------------------------------------------------------------
OTHER PRODUCTS AND SERVICES
Unaffiliated 6.2 10.4 20.0 38.9
Intersegment and affiliates 0.1 (0.2) 0.2 (0.2)
- -------------------------------------------------------------------------------------------------------
Total 6.3 10.2 20.2 38.7
- -------------------------------------------------------------------------------------------------------
Adjustments and eliminations (53.5) (53.3) (178.5) (178.2)
- -------------------------------------------------------------------------------------------------------
CONSOLIDATED 611.0 380.7 2,881.3 1,848.1
- -------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Transmission and Storage 27.6 61.3 240.4 252.1
Distribution (49.4) 12.3 156.7 149.9
Exploration and Production 21.1 15.5 57.1 51.3
Other Products and Services (8.8) (15.8) (107.5) (14.5)
Corporate (3.3) 0.3 (4.9) (12.0)
- -------------------------------------------------------------------------------------------------------
CONSOLIDATED (12.8) 73.6 341.8 426.8
- -------------------------------------------------------------------------------------------------------
5. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
On August 21, 2001, Columbia sold the stock and assets of Columbia Propane
Corporation (Columbia Propane) to AmeriGas Partners L.P. (AmeriGas) for
approximately $196.0 million, consisting of $152.0 million in cash and $44.0
million of AmeriGas partnership common units. The loss on the sale of Columbia
Propane amounted to $49.5 million, including an additional accrual for increased
litigation exposure. Columbia has also sold substantially all the assets of
Columbia Petroleum Corporation, a diversified petroleum distribution company.
Columbia Propane and Columbia Petroleum are reported as discontinued operations
and therefore the financial statements for prior periods have been reclassified
accordingly.
The revenues from discontinued operations are provided in the following table:
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- ----------------------
($ in millions) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------
Propane 20.8 49.9 229.6 213.7
Petroleum - 73.6 48.8 217.4
Gas - 20.8 - 186.9
Other - 8.8 - 39.9
- ----------------------------------------------------------------------------------
Total 20.8 153.1 278.4 657.9
- ----------------------------------------------------------------------------------
10
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
The loss from discontinued operations and the estimated loss on disposal
information are provided in the following table:
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ------------------------
($ in millions) 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------
Loss from discontinued operations - - - (2.0)
Income tax benefit - - - (0.5)
- ------------------------------------------------------------------------------------------------------------
NET LOSS FROM DISCONTINUED OPERATIONS - - - (1.5)
- ------------------------------------------------------------------------------------------------------------
Loss on disposal (94.0) (128.2) (95.5) (166.3)
Income tax benefits (32.9) (44.9) (33.4) (55.6)
- ------------------------------------------------------------------------------------------------------------
NET LOSS ON DISPOSAL (61.1) (83.3) (62.1) (110.7)
- ------------------------------------------------------------------------------------------------------------
The net assets of the discontinued operations were as follows:
SEPTEMBER 30, December 31,
($ in millions) 2001 2000
- --------------------------------------------------------------------------
NET ASSETS OF DISCONTINUED OPERATIONS
Accounts receivable, net - 91.3
Property, plant and equipment, net - 212.2
Other assets 8.7 70.2
Accounts payable (0.6) (68.3)
Other liabilities 16.0 (69.1)
- --------------------------------------------------------------------------
NET ASSETS OF DISCONTINUED OPERATIONS 24.1 236.3
- --------------------------------------------------------------------------
6. TELECOMMUNICATION NETWORK (TRANSCOM)
Management has held discussions with investment banking firms seeking strategic
options for the assets of Columbia Transmission Communications Corporation
(Transcom), a fiber optics telecommunications network. Prior to the second
quarter of 2001, significant uncertainties existed surrounding the estimated
costs to complete the fiber optic network, time to market in a competitive
environment, and delays due to construction deficiencies and environmental
issues. During the second quarter of 2001, the Company received subsequent
information pertaining to the estimated construction costs and delays.
Consequently, management concluded that the carrying value of the
telecommunication assets at June 30, 2001 exceeded the realizable value by
approximately $89.2 million. The Company recorded a charge of $89.2 million to
Operating Income in the second quarter of 2001. During the third quarter of
2001, Transcom commenced operations and the Company developed a business plan to
realize the value of such assets. Management will continue to evaluate market
conditions and the related operations of the Transcom operations.
7. ACCOUNTING CHANGE
Effective January 1, 2001, Columbia adopted the Financial Accounting Standards
Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as subsequently
amended by SFAS No. 137 and SFAS No. 138 (collectively referred to as SFAS No.
133). These statements establish accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 requires an entity to recognize all derivatives as
either assets or liabilities on the balance sheet and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and resulting designation.
11
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
The adoption of this statement on January 1, 2001, resulted in a cumulative
after-tax increase to net income of approximately $4 million and an after-tax
reduction to other comprehensive income (OCI) of $33.6 million. The adoption
also resulted in the recognition of $160.2 million of assets and $193.8 million
of liabilities on the consolidated balance sheet. Additionally, the adoption
resulted in the reduction of the carrying value of certain long-term debt by
$3.8 million. During the third quarter of 2001, $4.4 million of the net gains
included in the cumulative effect of a change in accounting principle component
of OCI were reclassified into earnings. During the nine months ended September
30, 2001, $14.7 million of the net losses included in the cumulative effect of a
change in accounting principle component of OCI were reclassified into earnings.
Further detail of the assets and liabilities recorded on the consolidated
financial statements for the adoption of SFAS No. 133 is as follows:
(in millions) ASSETS LIABILITIES
- -----------------------------------------------------------
Price Risk Management $ 153.6 $ 209.8
Deferred Taxes - (16.0)
Regulatory 6.6 -
Debt - (3.8)
- -----------------------------------------------------------
TOTAL $ 160.2 $ 190.0
- -----------------------------------------------------------
As stated above, the initial recording of the cumulative effect of this
accounting change included unrealized holding losses of $33.6 million. However,
the activity for the third quarter of 2001 and the nine months ended September
30, 2001 resulted in unrealized gains on qualifying derivatives of approximately
$4.3 and $73.7 million, respectively, as reported in the Statements of
Consolidated Shareholder's Equity. The activity for the periods included:
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- -----------------------
( in millions) 2001 2001
- ------------------------------------------------------------------------------------------------------------------------------------
UNREALIZED GAINS ON DERIVATIVES QUALIFYING AS CASH
FLOW HEDGES:
Unrealized holding gain (loss) arising during the period due to cumulative
effect of a change in accounting principle,
recognized at January 1, 2001, net of tax $ - $(33.6)
Unrealized holding gains arising during the period on
derivatives qualifying as cash flow hedges, net of tax 11.4 95.8
Reclassification adjustment for net loss (gain) included in net income,
net of tax (including gains of $4.4 and losses of $14.7 million,
respectively, related to the cumulative
effect of change in accounting principle) (7.1) 11.5
- ------------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying as cash
flow hedges, net of tax $ 4.3 $ 73.7
- ------------------------------------------------------------------------------------------------------------------------------------
12
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
NiSource's senior management takes an active role in the risk management process
and has developed policies and procedures that require specific administrative
and business functions to assist in the identification, assessment and control
of various risks. In recognition of the increasingly varied and complex nature
of the energy business, NiSource's risk management policies and procedures
continue to evolve and are subject to ongoing review and modification.
Following is additional information regarding the impact of SFAS No. 133 by
segment.
Distribution
For regulatory incentive purposes, the Columbia Distribution subsidiaries enter
into contracts that allow counterparties the option to sell gas to Distribution
at specified prices during specified periods of time. Distribution charges the
counterparties a fee for this option. The changes in the fair value of the
options are primarily due to the difference between the cost of gas during the
contracted delivery period and the market price of gas during that same period.
Distribution defers a portion of the change in the fair value of the options as
either a regulatory asset or liability in accordance with SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation." The remaining
change is recognized currently in earnings.
Exploration and Production
In conjunction with certain fixed price gas delivery commitments, Columbia
Energy Resources, Inc. (Columbia Resources) has purchased financial basis swaps
to transfer basis risk from the counterparty back to Columbia Resources. Because
these transactions by definition are derivatives and do not qualify for hedge
accounting, the mark to fair value of these swaps will directly impact earnings.
Additionally, Columbia Resources has engaged in commodity and basis swaps to
hedge the anticipated future sale of natural gas. These contracts are
derivatives and are designated as cash flow hedges of anticipated future sales.
The fair value of these derivatives is recorded in OCI until the related sale
occurs. Any ineffectiveness is charged to earnings. It is anticipated that
during the next 12 months, expiration of forward swap contracts will result in
income recognition for amounts currently classified in OCI of approximately
$28.6 million, net of tax, which will be included in net income. Columbia
Resources has forward derivative contracts designated as cash flow hedges
through December 2002. Columbia Resources reclassified $2.4 million of certain
cash flow hedges into earnings due to the probability that the forecasted
transaction would not occur.
Other
Columbia Energy Services, Inc. (Columbia Energy Services) has fixed price gas
delivery commitments to three municipalities in the U.S. Columbia Energy
Services entered into a forward purchase agreement with a gas supplier, wherein
the supplier will fulfill the delivery obligation requirements at a slight
premium to index. In order to hedge this anticipated future purchase of gas from
the gas supplier, Columbia Energy Services entered into pay fixed/receive
floating swaps priced at those locations designated for physical delivery. These
swaps are designated as cash flow hedges of the anticipated purchases. Any
impacts of changes in the swaps' fair values are included in OCI until the sales
are completed. Columbia Energy Services has no net gain or loss recognized in
earnings due to ineffectiveness. It is anticipated that during the next 12
months, expiration of forward swap contracts will result in income recognition
of amounts currently classified in OCI of approximately $3.1 million, net of
tax, which will be included in net income. Columbia Energy Services has forward
swap contracts designated as cash flow hedges through December 2008. At this
time, Columbia Energy Services expects to continue its cash flow hedges due to
the probability that the forecasted transaction will occur.
Gas Transmission and Storage
The adoption and application of SFAS 133 had no impact on this segment.
13
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
Interest Rate Swaps
Columbia 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. Columbia has no net gain or loss
recognized in earnings due to ineffectiveness in this reporting period. Columbia
would recognize approximately $0.7 million in earnings over the remaining life
of the corresponding long-term debt if the hedging relationship was to be
discontinued.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The key
concepts from the two interrelated Statements include mandatory use of the
purchase method in accounting for business combinations, discontinuance of
goodwill amortization, a revised framework for testing for goodwill impairment
at a "reporting unit" level, and new criteria for the identification and
potential amortization of other intangible assets. Other changes to existing
accounting standards involve the amount of goodwill to be used in determining
the gain or loss on the disposal of assets and a requirement to test goodwill
for impairment at least annually under the revised framework.
The Business Combinations Statement is generally effective for combinations that
are initiated after June 30, 2001. The Statement on Goodwill and Other
Intangible Assets is effective for fiscal years beginning after December 15,
2001, however, for business combinations consummated after June 30, 2001, the
requirements to discontinue goodwill amortization are effective upon issuance of
the Statements. The first part of the annual impairment test is to be performed
within six months of adopting the Statement on Goodwill and Other Intangible
Assets.
Columbia adopted the provisions of the Business Combinations Statement on July
1, 2001, and will adopt the Goodwill and Other Intangible Assets Statement on
January 1, 2002. Although Columbia is currently evaluating the effects of the
Statements, the Company does not expect the adoption of the Statements to have a
material impact on its results of operations.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." The Statement requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its then present value, and the capitalized
cost is depreciated over the useful life of the related asset. Upon settlement
of the liability, an entity either settles the obligation for its recorded
amount or incurs a gain or loss upon settlement. The Statement is effective for
fiscal years beginning after June 15, 2002, with earlier application encouraged.
Columbia is currently evaluating the impact that the Statement will have on its
results of operations.
On October 3, 2001 the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement
replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," although it retains the impairment
testing methodology used in SFAS No. 121. The accounting and reporting
provisions of Accounting Principals Board Opinion (APBO) No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," are superceded by SFAS No. 144, except that the Statement
preserves the requirement of APBO No. 30 to report discontinued operations
separately from continuing operations. The Statement covers a variety of
implementation issues inherent in SFAS No. 121, unifies the framework used in
accounting for assets to be disposed of and discontinued operations, and
broadens the reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest of the entity
and that will be eliminated from the ongoing operations of the entity in a
disposal transaction. The Statement is effective for fiscal years beginning
after December 15, 2001. Columbia will adopt SFAS No. 144 on January 1, 2002.
The Company does not expect the adoption of the Statement to have a material
impact on its results of operations.
14
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
9. LITIGATION MATTERS
The company is subject to various legal proceedings (see page 20 "Legal
Proceedings") and provides a reserve when it is determined that a liability is
probable. During the third quarter of 2001, an additional liability was recorded
in connection with certain ongoing litigation.
10. ENVIRONMENTAL MATTERS
Several subsidiaries are a "potentially responsible parties"
(PRPs) at waste disposal sites under the Comprehensive Environmental Response
Compensation and Liability Act (CERCLA) (commonly known as Superfund); and
similar state laws, including at former manufactured gas plant (MGP) sites which
such subsidiaries, or their corporate predecessors, own or owned and operated.
These subsidiaries are likely to be required to share in the cost of
clean up of such sites.
A program has been instituted to identify and investigate former MGP sites where
Columbia subsidiaries or predecessors are the current or former owner.
As site investigations proceed, waste disposal site liability is
reviewed periodically and adjusted as additional information becomes available.
In October 2001, various site studies were completed regarding probable
liabilities at certain of these former MGP sites. Accordingly, during the
quarter ended September 30, 2001, an additional liability of approximately $49.2
million was recorded. Columbia intends to continue to evaluate its facilities
and properties with respect to environmental laws and regulations and take
appropriate corrective action. It is likely that additional liabilities will be
recorded as more information becomes available.
15
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
Columbia meets the conditions specified in General Instruction H(1)(a) and (b)
to Form 10-Q and is permitted to use the reduced disclosure format for
wholly-owned subsidiaries of companies, such as NiSource, that are reporting
companies under the Securities Exchange Act of 1934. Accordingly, this Columbia
Management's Narrative Analysis of Results of Operations is included in this
report, and Columbia has omitted from this report the information called for by
Part I. Item 2 (Management's Discussion and Analysis of Financial Condition and
Results of Operations).
Forward Looking Statements
The Management's Narrative Analysis, including statements regarding market risk
sensitive instruments, contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Investors and prospective investors
should understand that many factors govern whether any forward-looking statement
contained herein will be or can be achieved. Any one of those factors could
cause actual results to differ materially from those projected. These
forward-looking statements include, but are not limited to, statements
concerning Columbia's plans, proposed dispositions, objectives, expected
performance, expenditures and recovery of expenditures through rates, stated on
either a consolidated or segment basis, and any and all underlying assumptions
and other statements that are other than statements of historical fact. From
time to time, Columbia may publish or otherwise make available forward-looking
statements of this nature. All such subsequent forward-looking statements,
whether written or oral and whether made by or on behalf of Columbia, are also
expressly qualified by these cautionary statements. All forward-looking
statements are based on assumptions that management believes to be reasonable;
however, there can be no assurance that actual results will not differ
materially. Realization of Columbia's objectives and expected performance is
subject to a wide range of risks and can be adversely affected by, among other
things, increased competition in deregulated energy markets, weather,
fluctuations in supply and demand for energy commodities, successful
consummation of proposed acquisitions and dispositions, growth opportunities for
Columbia's regulated and nonregulated businesses, dealings with third parties
over whom Columbia has no control, actual operating experience of acquired
assets, Columbia's ability to integrate acquired operations into its operations,
the regulatory process, regulatory and legislative changes, changes in general
economic, capital and commodity market conditions and counter-party credit risk,
many of which are beyond the control of Columbia.
The following Management's Narrative Analysis should be read in conjunction with
the Columbia Annual Report on Form 10-K for the fiscal year ended December 31,
2000.
THIRD QUARTER 2001 CONSOLIDATED RESULTS
Income from Continuing Operations
Columbia reported a net loss from continuing operations for the third quarter
2001 of $35.4 million, a decrease of $54.9 million from the third quarter of
2000, primarily due to environmental and litigation contingencies. Including
discontinued operations, Columbia reported a net loss of $96.5 million for the
third quarter of 2001 compared to a net loss of $63.8 for the same period in
2000.
Net Revenues
Third quarter 2001 consolidated net revenues (operating revenues less associated
products purchased costs) were $356.3 million, a $2.3 million increase over the
same period last year. Higher revenue in the exploration and production segment
was the primary reason for this increase. Distribution net revenues also
slightly increased. Net revenues decreased in the transmission segment, due to
decreased throughput and a provision for certain cost determined to be
non-recoverable from customers. Decreases in the other segment occurred due to
the elimination of the revenues of Cove Point LNG and Columbia Electric, which
were sold in 2000.
Expenses
Operating expenses for the third quarter of 2001 were $369.1 million, an
increase of $88.7 million over the same period last year. The increase was
largely due to $49.2 million environmental and $12.6 million litigation
contingencies, and a charge of $6.8 million due to a change in the Millennium
Pipeline project scope. Depreciation and depletion expenses increased by $8.8
million, primarily due to increased depletion expense in Columbia Energy
Resources.
16
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
Other Income (Deductions)
Other Income (Deductions) reduced pre-tax income by $37.7 million for the third
quarter of 2001 compared to a reduction of $42.6 million in the same period last
year. This change is primarily due to reduced interest expense on long term
debentures and reduced short-term debt. Interest income and other, net for the
third quarter of 2001 of $2.7 million was down $3.0 million, as a result of
reduced short-term investments.
Income Taxes
Income tax benefit of $15.1 million resulted from a pre-tax loss in the third
quarter of 2001. Income tax expense of $11.5 million was reported in the same
period last year.
Discontinued Operations
Discontinued operations, which reflect Columbia's propane operations that were
sold on August 21, 2001, incurred an after-tax loss on disposal of $61.1 million
for the third quarter of 2001, which includes a litigation contingency. In the
third quarter of 2000, Columbia's discontinued operations, which included
petroleum as well as propane operations, recorded an after-tax loss on disposal
of $83.3 million.
NINE-MONTH CONSOLIDATED RESULTS
Income from Continuing Operations
Columbia's income from continuing operations for the first nine months of 2001
was $133.4 million, a decrease of $112.4 million from the corresponding 2000
period. The decrease was largely due to environmental and litigation of $39.5
million after-tax in the third quarter of 2001 and a one-time charge of $89.2
million ($52.0 million after-tax) for the asset impairment relating to the fiber
optics telecommunications network in the second quarter of 2001. In addition,
the earlier period had been favorably impacted by a $59.0 million after-tax gain
on the sale of Cove Point LNG. Also contributing to this decrease is an increase
in depletion expense and a decrease in interest income. Tempering these
decreases were increased revenues, primarily in transmission and distribution.
Reduced operation and maintenance costs, mainly labor and benefits, as a result
of restructuring initiatives implemented during 2000, also helped offset the
above-mentioned decreases. Including discontinued operations, net income for the
nine months was $75.3 million in 2001 compared to $133.6 million in the same
period of 2000.
Net Revenues
For the nine months ended September 30, 2001, net revenues of $1,409.5 million
increased $49.5 million over the same period in 2000. The improvement was
primarily a result of colder weather in the first half of 2001 (6% colder than
the first six months of 2000), which increased net revenues in distribution and
transmission. Transmission revenues also increased due to contracts signed in
the first quarter when the colder weather increased demand. Exploration and
production net revenues increased due to higher gas prices in the first nine
months of the year when compared to the 2000 period. Offsetting the increase is
a decrease in net revenue due to the sale of Cove Point LNG and Columbia
Electric Corp.
Expenses
Operating expenses for the first nine months of 2001 were $1,067.7 million, an
increase of $134.5 million over the same period last year. The increased expense
was primarily due to $49.2 million of environmental and $12.6 million of
litigation contingencies and the $89.2 million expense provision recorded for
the asset impairment relating to the fiber optics telecommunications network.
Depreciation and depletion expenses increased $12.4 million, due in part to a
ceiling test write-down in Columbia Resources' Canadian region and higher
depletion expense. Tempering these increases was a voluntary incentive
retirement program implemented in 2000, which reduced payroll and benefit costs,
and restructuring initiatives, which improved operating efficiencies and
contributed to expense reductions. Other taxes decreased $12.8 million as a
result of lower property taxes, though partially offset by increased gross
receipts taxes.
17
ITEM 2. MANAGEMENTS'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
Other Income (Deductions)
Other Income (Deductions) reduced income by $119.8 million for the first nine
months of 2001, compared to a reduction to income of $35.4 million in the same
period last year. Interest income and other, net of $6.1 million, decreased
$97.7 million. The earlier period had been favorably impacted by a $90.6 million
pre-tax gain on the sale of Cove Point LNG. Interest expense and related charges
decreased $13.3 million in the first nine months of 2001 when compared to the
2000 period, due to a reduction in short-term borrowings related to the 2000
stock repurchase program.
Income Taxes
Income tax expense of $88.6 million in the first nine months of 2001 decreased
$57.0 million from the same period last year, primarily from tax benefits
resulting from the effect of reduced earnings. Income tax expense was higher in
the prior period due, in part, to the gain on the sale of Cove Point LNG.
Discontinued Operations
Discontinued operations, which reflect Columbia's propane operations that were
sold on August 21, 2001, incurred an after-tax loss on disposal of $62.1 million
for the first nine months of 2001. In the first nine months of 2000, Columbia's
discontinued operations, which included petroleum as well as propane operations,
recorded loss from operations of $1.5 million and an after-tax loss on disposal
of $110.7 million.
Change in Accounting Principle
On January 1, 2001, Columbia adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This change in accounting, net of taxes,
contributed $4.0 million to net income.
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 nine months of 2001 was $554.7
million, a decrease of $199.9 million from the same period in 2000. This
decrease was primarily due to reduced deferred revenue due to forward sale
contracts obtained in 2000. Offsetting the decrease were increases due to timing
differences associated with exchange gas activity and other working capital
items, including underrecovered gas costs.
Columbia satisfies its liquidity requirements primarily through internally
generated funds and through intercompany borrowings from NiSource Finance Corp.
(NFC), NiSource's financing subsidiary. NFC actively borrows funds in the
commercial paper market and maintains a $2.5 billion revolving credit facility
with a syndicate of banks for back-up liquidity purposes. The credit facility is
guaranteed by NiSource.
As of September 30, 2001, Columbia had $148.8 million of intercompany short-term
borrowings with NiSource Finance Corp. outstanding at a weighted average
interest rate of 3.52%. In addition, at September 30, 2001, Columbia had letters
of credit issued and outstanding of $47.7 million.
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.
Management believes that its sources of funding are sufficient to meet the
short-term and long-term liquidity needs of Columbia.
18
ITEM 2. MANAGEMENTS'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
Accounting Change
Effective January 1, 2001, Columbia adopted the Financial Accounting Standards
Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as subsequently
amended by SFAS No. 137 and SFAS No. 138 (collectively referred to as SFAS No.
133). These statements establish accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 requires an entity to recognize all derivatives as
either assets or liabilities on the balance sheet and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and resulting designation.
The adoption of this statement on January 1, 2001, resulted in a cumulative
after-tax increase to net income of approximately $4 million and an after-tax
reduction to other comprehensive income (OCI) of $33.6 million. The adoption
also resulted in the recognition of $160.2 million of assets and $193.8 million
of liabilities on the consolidated balance sheet. Additionally, the adoption
resulted in the reduction of the carrying value of certain long-term debt by
$3.8 million. During the third quarter of 2001, $4.4 million of the net gains
included in the cumulative effect of a change in accounting principle component
of OCI were reclassified into earnings. During the nine months ended September
30, 2001, $14.7 million of the net losses included in the cumulative effect of a
change in accounting principle component of OCI were reclassified into earnings.
NiSource's senior management takes an active role in the risk management process
and has developed policies and procedures that require specific administrative
and business functions to assist in the identification, assessment and control
of various risks. In recognition of the increasingly varied and complex nature
of the energy business, NiSource's risk management policies and procedures
continue to evolve and are subject to ongoing review and modification.
See Note 6., "Accounting Change" on page 11 for additional information.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H(2)(c).
19
PART II
ITEM 1. LEGAL PROCEEDINGS
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
1. CANADA SOUTHERN PETROLEUM LTD. V. COLUMBIA GAS DEVELOPMENT OF CANADA LTD.
This action was originally filed March 7, 1990. The plaintiffs asserted,
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 sought, 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.
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. An escrow
account provides security for the indemnification obligation and is funded
by a letter of credit with a face amount of approximately $35,835,000 (Cdn).
A trial commenced in the third quarter of 1996 in the Court of Queen's Bench
and judgment was issued in September 2001. The court has finalized a
judgment dismissing most of the plaintiffs' claims, including the fiduciary
duty claim, but did order a reduction of the Carried Interest Account in the
amount of $5.3 million (Cdn.) and ordered that the defendants were not
entitled to charge the plaintiffs processing fees. The monetary value of
these two items has not been determined. The plaintiffs have publicly
announced their intention to appeal.
2. TRANSCOM.
On March 17, April 11 and April 21, 2000, one of Columbia's subsidiaries,
Transcom received directives from the Philadelphia District of the U.S. Army
Corps of Engineers (Philadelphia District) and an administrative order from
the Pennsylvania Department of Environmental Protection (PA DEP) 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. The order
and directives required Transcom to largely cease construction activities.
On September 18, 2000, Transcom entered into a voluntary settlement
agreement with the Philadelphia District under which Transcom contributed
$1.2 million to the Pennsylvania chapter of the Nature Conservancy and the
Philadelphia District lifted its directives. As a result of the voluntary
agreement with the Philadelphia District and communications with the PA DEP,
the Maryland Department of the Environment and the Baltimore District of the
U.S. Army Corps of Engineers, work in Pennsylvania and Maryland was allowed
to continue and has been completed. On October 25, 2001, the Company entered
into a Consent Order and Agreement with the PA DEP in settlement of its
enforcement action under which the Company is obligated to pay $80,633 in
penalties and to fund six community environmental projects totaling $223,567
through the Green Valleys Association.
3. UNITED STATES OF AMERICA EX REL. JACK J. GRYNBERG V COLUMBIA GAS
TRANSMISSION CORP. ET. AL.
The plaintiff filed a complaint under the False Claims Act, on behalf of the
United States of America, against approximately seventy pipelines, including
Columbia Gulf. The plaintiff claimed that the defendants had submitted false
royalty reports to the government (or caused others to do so) by
mismeasuring the volume and heating content of natural gas produced on
Federal land and Indian lands. Plaintiff's original complaint was dismissed
without prejudice for misjoinder of parties and for failing to plead fraud
with specificity. In 1997, the
20
ITEM 1. LEGAL PROCEEDINGS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
plaintiff then filed over sixty-five new False Claims Act complaints against
over 330 defendants in numerous Federal courts. One of those complaints was
filed in the Federal District Court for the Eastern District of Louisiana
against Columbia and thirteen affiliated entities. Plaintiff's second
complaint repeats the mismeasurement claims previously made and adds
valuation claims alleging that the defendants have undervalued natural gas
for royalty purposes in various ways, including by making sales to
affiliated entities at artificially low prices. Most of the Grynberg cases
were transferred to Federal court in Wyoming in 1999. In December 1999, the
Columbia defendants filed a motion to dismiss plaintiff's second complaint
primarily based on a failure to plead fraud with specificity. In May 2001,
the Court denied the Columbia defendants' motion to dismiss. The Columbia
defendants joined together with numerous other defendants and have filed a
motion requesting the district court to amend its order to include a
certification so that the defendants could request permission from the
United States Court of Appeals for the Tenth Circuit to appeal a controlling
question of law. That motion was denied on July 2, 2001.
4. QUINQUE OPERATING CO. ET AL V. GAS PIPELINES ET AL.
Plaintiff filed an amended complaint in Stevens County; Kansas state court
on September 23, 1999, against over 200 natural gas measurers, mostly
natural gas pipelines, including Columbia and fourteen affiliated entities.
The allegations in Quinque are similar to those made in Grynberg; however,
Quinque broadens the claims to cover all oil and gas leases (other than the
Federal and Indian leases that are the subject of Grynberg). Quinque asserts
a breach of contract claim, negligent or intentional misrepresentation,
civil conspiracy, common carrier liability, conversion, violation of a
variety of Kansas statutes and other common law causes of action. Quinque
purports to be a nationwide class action filed on behalf of all similarly
situated gas producers, royalty owners, overriding royalty owners, working
interest owners and certain state taxing authorities. The defendants had
previously removed the case to Federal court. On January 12, 2001, the
Federal court remanded the case to state court. In June 2001, the plaintiff
voluntarily dismissed ten of the fourteen Columbia entities. Discovery
relating to personal jurisdiction has begun.
5. VIVIAN K. KERSHAW ET AL. V. COLUMBIA NATURAL RESOURCES, INC., ET AL.
In February 2000, plaintiff filed a complaint in New York state court
against Columbia Resources and Columbia Transmission. The complaint alleges
that Kershaw owns an interest in an oil and gas lease in New York and that
the defendants have underpaid royalties on those leases by, among other
things, failing to base royalties on the price at which natural gas is sold
to the end user and by improperly deducting post-production costs. The
complaint also seeks class action status on behalf of all royalty owners in
oil and gas leases operated by Columbia Resources. Plaintiff seeks the
alleged royalty underpayments and punitive damages. Columbia Resources and
Columbia Transmission removed the case to Federal court in March 2000. The
Federal court has now remanded Kershaw back to New York state court. The
Columbia defendants' motion to dismiss was partially granted and partially
denied by the New York state court judge on September 24, 2001.
6. ANTHONY GONZALEZ, ET AL. V. NATIONAL PROPANE CORPORATION, ET AL.
On December 11, 1997, plaintiffs Anthony Gonzalez, Helen Pieczynski, as
Special Administrator of the Estate of Edmund Pieczynski, deceased, Michael
Brown and Stephen Pieczynski filed a multiple-count complaint for personal
injuries in the Circuit Court of Cook County, Illinois against National
Propane Corporation and the Estate of Edmund Pieczynski sounding in strict
tort liability and negligence. Plaintiff's complaint arises from an
explosion and fire, which occurred in a Wisconsin vacation cottage in 1997.
National Propane, L.P. filed a third-party complaint for contribution
against Natural Gas Odorizing and Phillips Petroleum Company. Written
discovery has been completed and the parties are conducting oral discovery
of the fact witnesses. The case has a scheduled trial date of October 17,
2002.
7. COLUMBIA GAS TRANSMISSION CORP. V. CONSOLIDATION COAL CO., ET AL.
On December 21, 1999, Columbia Transmission filed a complaint in Federal
court in Pittsburgh, Pennsylvania 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
(Victory) in northern West Virginia. The complaint was served on April 10,
2000. In October 2001, the parties reached an agreement in principle to
settle this matter and the related case described below.
21
ITEM 1. LEGAL PROCEEDINGS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
8. MCELROY COAL COMPANY V. COLUMBIA GAS TRANSMISSION CORPORATION
On February 12, 2001, McElroy Coal Company (McElroy), an affiliate of
Consolidation Coal Co., filed a complaint against Columbia Transmission in
Federal court in Wheeling, West Virginia. The West Virginia complaint seeks
declaratory and injunctive relief as to McElroy's alleged right to mine coal
within Victory, and Columbia Transmission's obligation to take all necessary
measures to permit McElroy to longwall mine. The complaint also seeks
compensation for the inverse condemnation of any coal that cannot be mined
due to Columbia Transmission's Victory operations. Except for the claim of
inverse condemnation, McElroy's West Virginia complaint appears to be
virtually identical to Consol's original counterclaim to Columbia
Transmission's Federal court action in Pennsylvania. On April 10, 2001, the
West Virginia case was dismissed without prejudice. In October 2001, the
parties reached an agreement in principle to settle this matter and the
related case described above.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Omitted pursuant to General Instruction H.(2)(b)
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Omitted pursuant to General Instruction H.(2)(b)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction H.(2)(b)
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS TO FORM 10-Q
Exhibit
Number
------
10-P Pension Restoration Plan of the Columbia Gas System, Inc.,
amended and restated March 1, 1997, hereby incorporated by
reference in NiSource's Quarterly Report on Form 10-Q for the
period ended September 30, 2001, in exhibit 10.27.
10-Q Thrift Restoration Plan of the Columbia Gas System, Inc.,
amended and restated January 1, 2000, hereby incorporated by
reference in NiSource's Quarterly Report on Form 10-Q for the
period ended September 30, 2001, in exhibit 10.28.
12* Statements of Ratio of Earnings to Fixed Charges
*Filed herewith
There were no reports on Form 8-K filed during the third quarter of
2001.
22
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: November __, 2001 By: /s/ Jeffrey W. Grossman
---------------------------------
Jeffrey W. Grossman
Vice President and Controller
(Principal Accounting Officer
and Duly Authorized Officer)
23