UNITED STATES
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, 2002
[ ] 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
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(Exact Name of Registrant as Specified in its Charter)
Delaware 13-1594808
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
801 East 86th Avenue, Merrillville, IN 46410
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(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 QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 2002
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Consolidated Income (Loss)....................... 3
Consolidated Balance Sheets.................................... 4
Statements of Consolidated Cash Flows.......................... 6
Notes.......................................................... 7
Item 2. Management's Narrative Analysis of Results of Operations....... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 13
Item 2. Changes in Securities and Use of Proceeds...................... 15
Item 3. Defaults Upon Senior Securities................................ 15
Item 4. Submission of Matters to a Vote of Security Holders............ 15
Item 5. Other Information.............................................. 15
Item 6. Exhibits and Reports on Form 8-K............................... 15
Signature.............................................................. 17
2
PART I
ITEM 1. FINANCIAL STATEMENTS
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS) (unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
------------------ -----------------------
(in millions) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------
NET REVENUES
Gas distribution $431.8 $688.3 $1,294.2 $2,116.8
Gas transmission and storage 24.9 26.2 51.8 52.6
Exploration and Production 43.3 21.7 109.6 69.9
Other products and services 13.8 4.5 28.0 26.5
- ------------------------------------------------------------------------------------------------------------------
Gross Revenues 513.8 740.7 1,483.6 2,265.8
Cost of Sales 105.7 355.2 451.5 1,212.6
- ------------------------------------------------------------------------------------------------------------------
Total Net Revenues 408.1 385.5 1,032.1 1,053.2
- ------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 198.9 205.5 380.3 406.5
Depreciation, amortization and depletion 50.4 50.0 109.1 108.6
Loss (gain) on sale or impairment of assets 0.8 89.2 (2.7) 89.2
Other taxes 37.8 34.2 100.0 99.4
- ------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 287.9 378.9 586.7 703.7
- ------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 120.2 6.6 445.4 349.5
- ------------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Interest expense, net (28.9) (38.8) (58.6) (85.6)
Other, net 6.2 4.6 11.6 3.4
- ------------------------------------------------------------------------------------------------------------------
Total Other Income (Deductions) (22.7) (34.2) (47.0) (82.2)
- ------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 97.5 (27.6) 398.4 267.3
INCOME TAXES (BENEFIT) 36.3 (9.4) 150.4 101.2
- ------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 61.2 (18.2) 248.0 166.1
- ------------------------------------------------------------------------------------------------------------------
Loss from Discontinued Operations - net of tax -- -- -- (1.0)
Change in Accounting - net of tax -- -- -- 4.0
- ------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 61.2 $(18.2) $ 248.0 $ 169.1
==================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31,
(in millions) 2002 2001
- ---------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility plant $ 8,355.2 $ 8,267.0
Accumulated depreciation and amortization (3,961.3) (3,879.1)
- ---------------------------------------------------------------------------------------------------------
Net utility plant 4,393.9 4,387.9
- ---------------------------------------------------------------------------------------------------------
Gas and oil producing properties, successful efforts method
United States cost center 948.2 934.2
Canadian cost center 9.1 14.2
Accumulated depletion (422.2) (407.4)
- ---------------------------------------------------------------------------------------------------------
Net gas and oil producing properties 535.1 541.0
- ---------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 4,929.0 4,928.9
- ---------------------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Net assets of discontinued operations -- 30.0
Unconsolidated affiliates 57.7 52.9
Assets held for sale 2.0 --
Other investments 16.4 16.8
- ---------------------------------------------------------------------------------------------------------
Total Investments 76.1 99.7
- ---------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 267.3 53.8
Accounts receivable (less reserves of $25.8 and $25.3, respectively) 270.7 496.2
Gas inventory 129.8 195.7
Underrecovered gas and fuel costs 93.4 60.1
Materials and supplies, at average cost 15.0 14.5
Price risk management assets 15.8 65.8
Exchange gas receivable 157.7 186.8
Prepayments and other 273.1 311.5
- ---------------------------------------------------------------------------------------------------------
Total Current Assets 1,222.8 1,384.4
- ---------------------------------------------------------------------------------------------------------
OTHER ASSETS
Price risk management assets 95.5 0.1
Regulatory assets 365.2 364.2
Deferred charges and other 67.9 118.0
- ---------------------------------------------------------------------------------------------------------
Total Other Assets 528.6 482.3
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,756.5 $ 6,895.3
=========================================================================================================
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
JUNE 30, December 31,
(in millions) 2002 2001
- -------------------------------------------------------------------------------------
(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $2,231.3 $2,177.1
Long-term debt, excluding amounts due within one year 1,365.1 1,356.9
- -------------------------------------------------------------------------------------
Total Capitalization 3,596.4 3,534.0
- -------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt 281.7 281.7
Short-term borrowings 0.8 --
Accounts payable 174.9 244.5
Customer deposits 19.0 14.0
Taxes accrued 267.7 232.8
Interest accrued 40.8 28.6
Overrecovered gas and fuel costs 28.9 45.6
Price risk management liabilities 9.5 4.8
Exchange gas payable 306.1 285.1
Current deferred revenue 120.3 89.0
Other accruals 317.6 525.4
- -------------------------------------------------------------------------------------
Total Current Liabilities 1,567.3 1,751.5
- -------------------------------------------------------------------------------------
OTHER LIABILITIES AND DEFERRED CREDITS
Price risk management liabilities -- 0.6
Deferred income taxes 812.9 759.4
Deferred investment tax credits 29.0 29.8
Deferred credits 117.8 114.0
Noncurrent deferred revenue 371.2 435.4
Accrued liability for postretirement benefits 115.8 116.2
Other noncurrent liabilities 146.1 154.4
- -------------------------------------------------------------------------------------
Total Other 1,592.8 1,609.8
- -------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES -- --
- -------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $6,756.5 $6,895.3
=====================================================================================
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
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
Six Months Ended June 30, ( in millions) 2002 2001
- -----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 248.0 $ 169.1
Adjustments to reconcile net income to net cash from continuing operations:
Loss from disposal of discontinued operations -- 1.0
Cummulative effect of accounting change, net of tax -- (4.0)
Depreciation and depletion 109.1 108.6
Deferred income taxes 47.9 (61.4)
Price risk management activity (40.7) --
Loss/Earnings from equity investment, net of distributions (4.8) 89.2
Deferred revenue (32.9) (177.6)
Other - net 45.0 75.6
- -----------------------------------------------------------------------------------------------------------
371.6 200.5
- -----------------------------------------------------------------------------------------------------------
Changes in components of working capital:
Accounts receivable, net 225.5 148.7
Gas inventory 65.9 81.4
Accounts payable (69.6) 47.5
Accrued taxes 34.9 41.0
Accrued interest 12.2 0.3
Under/Overrecovered gas costs (50.0) 271.0
Exchange gas receivable/payable 50.1 (9.6)
Other working capital (107.7) (143.0)
- -----------------------------------------------------------------------------------------------------------
Net Cash from Operating Activities 532.9 637.8
- -----------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Capital expenditures (126.2) (145.1)
Purchases and sales of investments - net -- 7.8
- -----------------------------------------------------------------------------------------------------------
Net Investment Activities (126.2) (137.3)
- -----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuance (repayment) of short-term debt 0.8 (521.0)
Dividend to NiSource (201.8) --
Other financing activities 7.8 (14.7)
- -----------------------------------------------------------------------------------------------------------
Net Financing Activities (193.2) (535.7)
- -----------------------------------------------------------------------------------------------------------
Increase (Decrease) in cash and cash equivalents 213.5 (35.2)
Cash and cash equivalents at beginning of year 53.8 73.5
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 267.3 $ 38.3
===========================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest 27.0 8.3
Cash paid for income taxes (net of refunds) 6.4 7.9
- -----------------------------------------------------------------------------------------------------------
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
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 accounting principles generally accepted in the United States.
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,
2001. Income (loss) 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 2001 financial statements to conform to
the 2002 presentation. During the fourth quarter of 2001, Columbia changed its
method of accounting for exploration and development activities related to oil
and gas reserves from the full cost method to the successful efforts method. The
2001 results have been adjusted to reflect the change to successful efforts
accounting in Columbia's Exploration and Production segment.
2. RESTRUCTURING ACTIVITIES
During 2000, Columbia developed and began the implementation of a plan to
restructure its operations as a result of the acquisition of Columbia by
NiSource Inc. (NiSource). The restructuring plan included a severance program, a
transition plan to implement operational efficiency throughout Columbia's
operations and a voluntary early retirement program. During 2001, the
restructuring initiative was continued with the addition of a plan to
restructure the operations within the Distribution segment.
For all of the plans, a total of approximately 790 management, professional,
administrative and technical positions have been identified for elimination. As
of June 30, 2002, approximately 530 employees had been terminated, of which
approximately 77 employees and 80 employees were terminated during the quarter
and six months ended June 30, 2002, respectively. At June 30, 2002 and December
31, 2001, the consolidated balance sheets reflected liabilities of $27.5 million
and $31.4 million related to the restructuring plans, respectively. During the
quarter and six months ended June 30, 2002, $4.3 million of benefits were paid
as a result of the restructuring plan. Additionally, during the six months ended
June 30, 2002, the restructuring plan liability was decreased by $0.4 million.
A portion of the liability related to the 2000 charge was transferred to
NiSource. This related to the merger of Columbia Energy Group Services, Inc.
with NiSource Corporate Services, Inc. The reported liabilities and employee
counts have been reduced to take into account the effect of the merger.
3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
On August 21, 2001, Columbia sold the stock and assets of 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 an after-tax loss of
$50.6 million. Columbia has also sold substantially all the assets of Columbia
Petroleum Corporation.
The loss from discontinued operations are provided in the following table:
7
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
Three Months Six Months
Ended June 30, Ended June 30,
-----------------------------------------------
(in millions) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------
REVENUES FROM DISCONTINUED OPERATIONS $ -- $ -- $ -- $ --
- ---------------------------------------------------------------------------------------------
Loss from discontinued operations $ -- $ -- $ -- $(1.5)
Income tax benefit -- -- -- (0.5)
- ---------------------------------------------------------------------------------------------
NET LOSS FROM DISCONTINUED OPERATIONS $ -- $ -- $-- $(1.0)
=============================================================================================
Columbia Resources has entered into an agreement to sell a portion of its
Canadian oil and gas properties. This transaction is expected to occur during
the third quarter of 2002. The agreement calls for the sale of the majority of
the Ontario assets for approximately $2.0 million. Because the selling price is
lower than the book value of the assets, Columbia Resources has written down the
value of the held-for-sale assets by $0.3 million. In addition, the remaining
Ontario assets were impaired, resulting in a $0.5 million charge to operating
income.
The net assets of assets held for sale and discontinued operations were as
follows:
JUNE 30, December 31,
(in millions) 2002 2001
- --------------------------------------------------------------------------------------------
NET ASSETS OF ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
Gas and oil producing properties $ 2.0 $ --
Other assets -- 30.0
Accounts payable --
- --------------------------------------------------------------------------------------------
NET ASSETS OF ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS $ 2.0 $30.0
============================================================================================
4. RISK MANAGEMENT ACTIVITIES
Columbia uses commodity-based derivative financial instruments to manage certain
risks inherent in its business. Columbia accounts for its derivatives under
Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting
for Derivative Instruments and Hedging Activities."
SFAS NO. 133. The activity for 2002 with respect to cash flow hedges included
the following:
Three Months Ended Six Months Ended
(in millions, net of tax) June 30, 2002 June 30, 2002
- ------------------------------------------------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying as cash flow hedges
at the beginning of the period $ 36.6 $ 52.4
Unrealized hedging gains arising during the period on derivatives
qualifying as cash flow hedges 24.6 33.8
Reclassification adjustment for net loss (gain) included in net income 2.4 (22.6)
- ------------------------------------------------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying as cash flow hedges,
net of tax $ 63.6 $ 63.6
==================================================================================================================
Unrealized gains and losses on Columbia's cash flow and fair value hedges were
recorded as price risk management assets and liabilities. The accompanying
Consolidated Balance Sheets reflected price risk management assets related to
unrealized gains and losses on hedges of $111.3 million and $65.9 million at
June 30, 2002 and December 31, 2001, respectively, of which $15.8 million and
$65.8 million were included in "Current Assets" and $95.5 million and $0.1
million were included in "Other Assets." Price risk management liabilities
related to unrealized gains and losses on hedges were $9.5 million and $5.4
million at June 30, 2002 and December 31, 2001, respectively, of which $9.5
million and $4.8 million were included in "Current Liabilities" and zero
and $0.6 million were included in "Other Liabilities and Deferred Credits."
8
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
During the second quarter of 2002, no amounts were recognized in earnings due to
the change in value of certain derivative instruments primarily representing
time value, and there were no components of the derivatives' fair values
excluded in the assessment of hedge effectiveness. Also during the second
quarter, Columbia reclassified $0.4 million, net of tax, related to its cash
flow hedges of natural gas production, from other comprehensive income to
earnings due to the probability that certain forecasted transactions would not
occur. It is anticipated that during the next twelve months the expiration and
settlement of cash flow hedge contracts will result in net income recognition of
amounts currently classified in other comprehensive income of approximately
$11.5 million, net of tax.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
NISOURCE INC.
TRANSMISSION AND STORAGE OPERATIONS
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS NOS. 141 AND 142 - BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE
ASSETS. In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations (SFAS No.
141)," and SFAS No. 142, "Goodwill and Other Intangible Assets (SFAS No. 142)."
The key requirements of the two interrelated Statements include mandatory use of
the purchase method of accounting for business combinations, discontinuance of
goodwill amortization, a revised framework for testing 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. SFAS No. 141 is generally effective for combinations
initiated after June 30, 2001. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. Columbia presently has no goodwill recorded,
and therefore, these new statements do not presently affect the company.
6. TELECOMMUNICATIONS NETWORK
Columbia, through its subsidiary Columbia Transmission Communications
Corporation (Transcom), has built a dark-fiber optics telecommunications network
primarily along its pipeline rights-of-way between New York and Washington D.C.
In August 2001, Transcom invited potential buyers to submit bids for the assets.
Based on the results of the bids, management decided to operate the network
while continuing to evaluate the possibility of a sale based on conditions in
the telecommunications market. The anticipated cash flow from Transcom's most
recent business plan indicated that the asset's current carrying value was
ultimately realizable. The realizability of the asset's carrying value is
dependent upon management's ability to execute the business plan or alternative
strategies. However, the unfavorable market conditions remain and continue to
adversely impact Transcom's ability to implement its business plan. Management
is continuing to pursue and evaluate strategic alternatives, including a sale.
7. LONG-TERM NOTES RECEIVABLE
In 1999, Columbia Gas Transmission Corp. (Columbia Transmission) sold certain
gathering facilities to a third-party for approximately $22 million. The two
parties executed a promissory note, which provides for payment of the purchase
price to Columbia Transmission over a five-year period. The balance, including
interest, is approximately $18 million. The counterparty is currently behind
schedule in making payments under the note, which is secured by the facilities
conveyed to the purchaser. In the second quarter, an appropriate reserve was
recorded against the receivable in light of the failure to receive timely
payments from the counterparty. Management is continuing to review the
realizability of the note and the security provided thereon. Once this review is
complete, management will evaluate the need for any adjustment to the reserve.
However, it is not anticipated that this matter will have a significant impact
on Columbia's results of operations.
10
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
11
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
8. PRESENTATION OF SEGMENT INFORMATION
Columbia manages its operations in four primary segments: 1) Distribution, 2)
Transmission and Storage, 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 (loss) is derived from revenues and expenses directly associated with
each segment.
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- --------------------------
(in millions) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------
REVENUES
DISTRIBUTION
Unaffiliated $312.8 $546.5 $1,021.7 $1,822.9
Intersegment and affiliates 3.8 (0.4) 8.4 (0.1)
- ----------------------------------------------------------------------------------------------------
Total 316.6 546.1 1,030.1 1,822.8
- ----------------------------------------------------------------------------------------------------
TRANSMISSION AND STORAGE
Unaffiliated 140.5 141.8 314.5 324.9
Intersegment and affiliates 54.9 54.1 126.1 126.5
- ----------------------------------------------------------------------------------------------------
Total 195.4 195.9 440.6 451.4
- ----------------------------------------------------------------------------------------------------
EXPLORATION AND PRODUCTION
Unaffiliated 38.7 21.0 96.9 74.2
Intersegment and affiliates 9.7 26.7 25.1 28.5
- ----------------------------------------------------------------------------------------------------
Total 48.4 47.7 122.0 102.7
- ----------------------------------------------------------------------------------------------------
OTHER PRODUCTS AND SERVICES
Unaffiliated 6.7 4.6 12.2 13.8
Intersegment and affiliates -- -- 0.1 0.1
- ----------------------------------------------------------------------------------------------------
Total 6.7 4.6 12.3 13.9
- ----------------------------------------------------------------------------------------------------
Adjustments and eliminations (53.3) (53.6) (121.4) (125.0)
- ----------------------------------------------------------------------------------------------------
CONSOLIDATED REVENUES $513.8 $740.7 $1,483.6 $2,265.8
- ----------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Distribution $ 38.4 $ 15.9 $ 190.1 $ 206.1
Transmission and Storage 75.6 72.3 201.4 212.7
Exploration and Production 12.4 13.1 50.8 30.9
Other Products and Services (4.5) (93.9) 5.2 (98.7)
Corporate (1.7) (0.8) (2.1) (1.5)
- ----------------------------------------------------------------------------------------------------
CONSOLIDATED $120.2 $ 6.6 $ 445.4 $ 349.5
- ----------------------------------------------------------------------------------------------------
12
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,
2001.
SECOND QUARTER 2002 CONSOLIDATED RESULTS
Net Income
Columbia reported net income for the second quarter 2002 of $61.2 million, an
increase of $79.4 million from the second quarter of 2001. The increase was
primarily due to lower operating expenses resulting from the $89.2 million
write-down related to Columbia's telecommunications network that occurred in the
2001 period and increased net revenues resulting from weather that was 41%
colder for the second quarter of 2002 when compared to the same period in 2001.
Net Revenues
Second quarter 2002 consolidated net revenues (operating revenues less cost of
sales) were $408.1 million, a $22.6 million increase over the same period last
year. This increase was primarily attributable to 41% colder weather as compared
to the second quarter of 2001.
Expenses
Operating expenses for the second quarter of 2002 were $287.9 million, a
decrease of $91.0 million from the same period last year. The decrease was
primarily due to the $89.2 million write-down related to Columbia's
telecommunications network investment that occurred in the 2001 period.
13
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 $22.7 million for the second
quarter of 2002 compared to a reduction of $34.2 million in the same period last
year. The $11.5 million improvement was due to a reduction in interest expense
of $9.9 million resulting from a reduction in long-term debt and lower
short-term interest rates.
Income Taxes
Income tax expense of $36.3 million for the second quarter of 2002 increased
$45.7 million due to higher pre-tax income.
SIX MONTHS CONSOLIDATED RESULTS
Net Income
Columbia reported net income for the first six months of 2002 of $248.0 million,
an increase of $78.9 million from the same period in 2001. The increase was
primarily due to lower operating expenses resulting from the $89.2 million
write-down related to Columbia's telecommunications network that occurred in the
2001 period, lower interest expense, increased exploration and production net
revenues reflecting the benefits of favorable pricing associated with hedge
positions for production in the first quarter of the 2002 period and insurance
recoveries for environmental expenses.
Net Revenues
The first half of 2002 consolidated net revenues (operating revenues less cost
of sales) were $1,032.1 million, a $21.1 million decrease over the same period
last year. This decrease was primarily attributable to 8% warmer weather
compared to the prior period, reduced off-system sales and a 2001 $11.4 million
gain on the sale of base gas. Partially offsetting the decreases was increased
exploration and production net revenues reflecting the benefits of favorable
pricing associated with hedge positions for production in the 2002 period.
Expenses
Operating expenses for the first six months of 2002 were $586.7 million, a
decrease of $117.0 million from the same period last year. The decrease was
mainly due to the $89.2 million write-down related to Columbia's
telecommunications network investment that occurred in the 2001 period, lower
amounts provided for uncollectible customer receivables and insurance recoveries
for environmental expenses.
Other Income (Deductions)
Other Income (Deductions) reduced pre-tax income by $47.0 million for the first
half of 2002 compared to a reduction of $82.2 million in the same period last
year. This change is primarily due to a reduction in interest expense of $27.0
million resulting from a decrease in long-term debt and lower short-term
interest rates.
Income Taxes
Income tax expense of $150.4 million for the first half of 2002 increased $49.2
million due to higher pre-tax income.
Discontinued Operations
For the first six months in 2002, Columbia had no activity for discontinued
operations. During the first six months of 2001, Columbia recorded an after-tax
loss on disposal of $1.0 million relating to its propane business.
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 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.
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ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
Columbia satisfies its liquidity requirements primarily through internally
generated funds and through intra-system financing arrangements with NiSource
Finance Corp. (NFC), NiSource's financing subsidiary. NFC borrows funds through
its revolving credit facility and through the commercial paper markets. NFC
maintains a $1.75 billion revolving credit facility with a syndicate of banks
for advance purposes and for back-up liquidity purposes for its commercial paper
program. The credit facility is guaranteed by NiSource.
As of June 30, 2002, Columbia did not have any intercompany short-term
borrowings with NFC outstanding. In addition, at June 30, 2002, Columbia had
letters of credit issued and outstanding of $49.5 million.
Columbia has entered into interest rate swap agreements to modify the interest
characteristics of its outstanding long-term debt. Under the terms of all the
swap agreements, Columbia pays interest based on a floating rate index and
receives interest based on a fixed rate. The effect of these agreements is to
modify the interest rate characteristics of a portion of Columbia's long-term
debt from fixed to variable.
Columbia Gas of Ohio is a party to an agreement to sell, without recourse,
substantially all of its trade receivables to Columbia Accounts Receivable
Corporation (CARC), a wholly owned subsidiary of Columbia. CARC, in turn, is
party to an agreement in which it sells a percentage ownership interest in a
defined pool of the accounts receivable to a commercial paper conduit. Under
these agreements, CARC may not sell any new affiliate receivables to the conduit
if Columbia's debt rating falls below BBB or Baa2 at Standard and Poor's and
Moody's, respectively. In addition, if Columbia's debt rating falls below
investment grade, the agreements terminate and CARC may not sell any new
receivables to the conduit. As of June 30, 2002, Columbia Gas of Ohio has sold
$79.1 million to the conduit.
Management believes that its sources of funding are sufficient to meet the
short-term and long-term liquidity needs of Columbia.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H(2)(c).
15
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 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 Exploration Ltd.
(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
for the Province of Alberta and judgment was issued in September 2001. The
court dismissed 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 inability to charge
the plaintiffs processing fees does not affect Columbia. The monetary value
of these two items has not been determined. The plaintiffs have filed an
appeal of the judgment. The Court has not yet set a date when it will hear
the appeal; however, it has established a schedule for the filing of the
arguments and responses of the parties, all of which must be completed by
December 31, 2002.
2. 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. 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 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 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. Pretrial
proceedings continue.
3. PRICE 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 thirteen affiliated entities.
The allegations in Price (formerly known as Quinque) are similar to those
made in Grynberg; however, Price broadens the claims to cover all oil and
gas leases (other than the Federal and Indian leases that are the subject
16
ITEM 1. LEGAL PROCEEDINGS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
of Grynberg). Price 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. Price 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. On
September 12, 2001 the four remaining Columbia defendants along with other
defendants filed a joint motion to dismiss the amended complaint. That
motion is currently pending before the court.
4. 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, Columbia Natural Resources, Inc. 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 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. On December 3, 2001 the defendants filed an answer to
the plaintiffs' complaint. Recovery regarding claim certification is
ongoing.
5. 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. National Propane Corporation was acquired by
Columbia in 1999, and this litigation was retained by Columbia when Columbia
Propane was sold in 2001. 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 expert discovery is to be completed by October 25, 2002. The
case has a scheduled trial date of March 31, 2003.
6. 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.
7. 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.
17
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
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
(a) Exhibits
(12) Statements of Ratio of Earnings to Fixed Charges (filed herewith)
(99.1) Certification of Michael W. O'Donnell, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
(99.2) Certification of Dennis W. McFarland, Principal Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the second quarter of 2002.
18
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 9, 2002 By: /s/ Jeffrey W. Grossman
-----------------------------------
Jeffrey W. Grossman
Vice President and Controller
(Principal Accounting Officer
and Duly Authorized Officer)
19