1
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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ______ to ______
Commission file number 1-1098
THE COLUMBIA GAS SYSTEM, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-1594808
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12355 Sunrise Valley Drive, Suite 300, Reston, VA 20191-3420
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 295-0300
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common Stock, $10
Par Value: 55,382,267 shares outstanding at June 30, 1997.
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THE COLUMBIA GAS SYSTEM, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Statements of Consolidated Income 3
Condensed Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Consolidated Statements of Common Stock Equity 7
Notes 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II OTHER INFORMATION
Item 1 Legal Proceedings 30
Item 2 Changes in Securities 30
Item 3 Defaults Upon Senior Securities 30
Item 4 Submission of Matters to a Vote of Security Holders 31
Item 5 Other Information 31
Item 6 Exhibits and Reports on Form 8-K 31
Signature 33
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3
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
The Columbia Gas System, Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME (unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(millions, except per share amounts)
OPERATING REVENUES
Gas sales $ 625.3 $ 432.0 $ 1,933.7 $ 1,434.3
Transportation 123.6 113.3 275.0 255.9
Other 61.8 37.1 129.7 95.2
---------- ---------- ---------- ----------
Total Operating Revenues 810.7 582.4 2,338.4 1,785.4
---------- ---------- ---------- ----------
OPERATING EXPENSES
Products purchased 403.6 205.9 1,303.2 757.7
Operation 200.6 214.6 399.5 421.4
Maintenance 26.8 27.4 51.4 51.3
Depreciation and depletion 49.2 50.9 120.4 119.0
Other taxes 46.2 47.6 123.0 121.8
---------- ---------- ---------- ----------
Total Operating Expenses 726.4 546.4 1,997.5 1,471.2
---------- ---------- ---------- ----------
OPERATING INCOME 84.3 36.0 340.9 314.2
---------- ---------- ---------- ----------
OTHER INCOME (DEDUCTIONS)
Interest income and other, net 6.1 13.7 20.4 16.8
Interest expense and related charges (38.0) (39.2) (78.3) (82.9)
---------- ---------- ---------- ----------
Total Other Income (Deductions) (31.9) (25.5) (57.9) (66.1)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 52.4 10.5 283.0 248.1
Income Taxes 17.5 2.3 85.4 88.6
---------- ---------- ---------- ----------
NET INCOME $ 34.9 $ 8.2 $ 197.6 $ 159.5
========== ========== ========== ==========
EARNINGS PER SHARE OF COMMON STOCK $ 0.63 $ 0.15 $ 3.57 $ 3.04
DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 0.25 $ 0.15 $ 0.40 $ 0.30
AVERAGE COMMON SHARES OUTSTANDING (thousands) 55,367 55,044 55,346 52,544
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
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4
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
As of
-----------------------
June 30, December 31,
1997 1996
-------- ------------
(unaudited)
ASSETS (millions)
PROPERTY, PLANT AND EQUIPMENT
Gas utility and other plant, at original cost $7,091.8 $6,994.4
Accumulated depreciation and depletion (3,413.7) (3,344.5)
-------- --------
Net Gas Utility and Other Plant 3,678.1 3,649.9
-------- --------
Gas and oil producing properties, full cost method 504.7 502.8
Accumulated depletion (156.9) (146.4)
-------- --------
Net Gas and Oil Producing Properties 347.8 356.4
-------- --------
Net Property, Plant and Equipment 4,025.9 4,006.3
-------- --------
INVESTMENTS AND OTHER ASSETS 101.8 103.3
-------- --------
CURRENT ASSETS
Cash and temporary cash investments 190.2 49.8
Accounts receivable, net 593.8 597.6
Gas inventory 153.2 237.8
Other inventories - at average cost 42.6 45.1
Prepayments 105.5 73.8
Regulatory assets 68.8 63.4
Underrecovered gas costs 15.8 104.7
Prepaid property tax 35.5 81.1
Exchange gas receivable 104.7 114.6
Deferred taxes 75.1 52.8
Other 6.6 15.2
-------- --------
Total Current Assets 1,391.8 1,435.9
-------- --------
REGULATORY ASSETS 396.9 410.1
DEFERRED CHARGES 66.9 49.0
-------- --------
TOTAL ASSETS $5,983.3 $6,004.6
======== ========
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
As of
----------------------
June 30, December 31,
1997 1996
-------- ------------
(unaudited)
CAPITALIZATION AND LIABILITIES (millions)
CAPITALIZATION
Common stock equity $1,734.5 $1,553.6
Long-term debt 2,003.7 2,003.8
-------- --------
Total Capitalization 3,738.2 3,557.4
-------- --------
CURRENT LIABILITIES
Short-term debt -- 250.0
Accounts and drafts payable 387.8 348.6
Accrued taxes 175.9 142.6
Accrued interest 14.8 14.8
Estimated rate refunds 86.9 114.0
Estimated supplier obligations 78.0 115.1
Transportation and exchange gas payable 74.3 95.4
Overrecovered gas costs 118.4 --
Retirement income plan 57.9 57.4
Other 274.0 313.7
-------- --------
Total Current Liabilities 1,268.0 1,451.6
-------- --------
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes, noncurrent 576.1 557.7
Investment tax credits 36.4 37.1
Postretirement benefits other than pensions 157.4 172.3
Regulatory liabilities 43.0 44.5
Other 164.2 184.0
-------- --------
Total Other Liabilities and Deferred Credits 977.1 995.6
-------- --------
TOTAL CAPITALIZATION AND LIABILITIES $5,983.3 $6,004.6
======== ========
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months
Ended June 30,
-----------------
1997 1996
------ ------
(millions)
OPERATING ACTIVITIES
Net income $197.6 $159.5
Adjustments for items not requiring (providing) cash:
Depreciation and depletion 120.4 119.0
Deferred income taxes (6.5) 33.1
Other - net (34.9) (19.5)
Change in components of working capital:
Accounts receivable 2.8 172.9
Income tax refunds -- 271.5
Gas inventory 84.6 23.2
Prepayments (31.4) (4.5)
Accounts payable 54.4 16.1
Accrued taxes 33.3 (26.4)
Accrued interest 2.5 (71.1)
Estimated rate refunds (27.1) (1.3)
Estimated supplier obligations (37.1) (49.1)
Under/Overrecovered gas costs 207.3 (83.9)
Exchange gas payable (20.9) (5.5)
Other working capital 20.8 20.2
------ ------
Net Cash from Operations 565.8 554.2
------ ------
INVESTMENT ACTIVITIES
Capital expenditures (141.4) (112.9)
Proceeds received on the sale of Columbia Development -- 188.9
Other investments - net (2.3) 14.7
------ ------
Net Investment Activities (143.7) 90.7
------ ------
FINANCING ACTIVITIES
Retirement of preferred stock -- (400.0)
Retirement of long-term debt (0.5) (0.5)
Dividends paid (22.1) (15.6)
Issuance of common stock 5.5 242.5
Net decrease in short-term debt (250.0) (338.9)
Other financing activities (14.6) (65.0)
------ ------
Net Financing Activities (281.7) (577.5)
------ ------
Increase in Cash and Temporary Cash Investments 140.4 67.4
Cash and temporary cash investments at beginning of year 49.8 8.0
------ ------
Cash and temporary cash investments at June 30 * $190.2 $ 75.4
====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest 71.6 79.1
Cash paid for income taxes (net of refunds) 34.7 (175.7)
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
* The Corporation considers all highly liquid debt instruments to be cash
equivalents.
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF COMMON STOCK EQUITY
As of
-----------------------------
June 30, December 31,
1997 1996
-------- ------------
(unaudited)
(millions)
COMMON STOCK EQUITY
Common stock, $10 par value, authorized
100,000,000 shares, outstanding 55,382,267
and 55,263,659 shares, respectively $ 553.8 $ 552.6
Additional paid in capital 747.1 743.2
Retained earnings 434.7 259.3
Unearned employee compensation (1.1) (1.5)
-------- --------
TOTAL COMMON STOCK EQUITY $1,734.5 $1,553.6
======== ========
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
The Columbia Gas System, Inc. and Subsidiaries
NOTES
1. Basis of Accounting Presentation
The accompanying unaudited condensed consolidated financial statements for
The Columbia Gas System, Inc. (Columbia) reflect all normal recurring
adjustments which are necessary, in the opinion of management, to present
fairly the results of operations in accordance with generally accepted
accounting principles.
The accompanying financial statements should be read in conjunction with
the financial statements and notes thereto included in Columbia's 1996
Annual Report on Form 10-K and First Quarter 1997 Quarterly Report on Form
10-Q. Income for interim periods may not be indicative of results for the
calendar year due to weather variations and other factors. Certain
reclassifications have been made to the 1996 financial statements to
conform to the 1997 presentation.
2. Bankruptcy Matters
On November 28, 1995, Columbia and its wholly-owned subsidiary, Columbia
Gas Transmission Corporation (Columbia Transmission), emerged from Chapter
11 protection of the Federal Bankruptcy Code under the jurisdiction of the
United States Bankruptcy Court for the District of Delaware (Bankruptcy
Court). Both Columbia and Columbia Transmission had operated under Chapter
11 protection since July 31, 1991. Certain residual unresolved
bankruptcy-related matters are still within the jurisdiction of the
Bankruptcy Court.
Unsettled Producer Claims
Columbia Transmission's approved plan of reorganization (Plan) provided
that producers who rejected settlement offers contained in Columbia
Transmission's Plan may continue to litigate their claims under the
Bankruptcy Court-approved claims estimation procedures, described below,
and receive the same percentage payout on their allowed claims, when and
if ultimately allowed, as received by the settling producers. Columbia
Transmission's Plan further provided that the actual distribution
percentage for all producer claims, which would not be less than 68.875%
or greater than 72.5%, could not be determined until the total amount of
contested producer claims is established, and until such time, 5% of the
maximum amount (based on a 72.5% payout) to be distributed to producer
claimants for allowed claims and to Columbia for unsecured debt will be
withheld. Additional distributions, if any, will be made when the total
amount of allowed producer claims has been determined.
Producer Claims Estimation Process
In 1992, the Bankruptcy Court approved the appointment of a claims
mediator and the implementation of a claims estimation procedure for the
quantification of claims arising from the rejection of above-market gas
purchase contracts and other claims by producers related to gas purchase
contracts with Columbia Transmission. In late 1994 and early 1995, the
claims mediator issued Initial and Supplemental Reports On Generic Issues
for Natural Gas Contract Claims and directed producer claimants to submit
recalculated claims. The recommendations and instructions set out in the
reports have not been considered by the Bankruptcy Court. In mid-1995,
most producers with which Columbia Transmission had not yet negotiated
settlements submitted recalculated claims to the claims mediator. Those
recalculated claims amounted to over $2 billion. Since mid-1995, numerous
additional producers have settled their claims. Some of those settlements
became final with the confirmation of Columbia Transmission's Plan while
others were approved subsequent to confirmation and have become final. In
addition, several recalculated claims have been amended by producer
claimants, and several claims have been resolved by means of litigation
within the claims estimation process.
The claims estimation procedures remain in place for use in the
post-confirmation liquidation of those producer claims that remain
unresolved. The claims mediator continues to schedule and hold evidentiary
hearings with respect to individual producer claims, including
claim-specific issues not addressed by the report.
Recommendations made by the claims mediator are subject to review by the
Bankruptcy Court and all parties have rights of appellate review. When
claims are allowed by the Bankruptcy Court and the
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
allowances become final, Columbia Transmission will make distributions
with respect to those claims pursuant to the Plan. The timing of this
litigation process is impossible to predict.
Based on the information received and evaluated to date, Columbia believes
adequate reserves have been established for resolution of the remaining
producer claims and the payment of any amounts ultimately due to producers
with respect to the 5% holdback.
3. Statement of Financial Accounting Standards No. 128, "Earnings per Share"
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS No. 128). This statement supersedes APB Opinion No. 15, "Earnings
per Share" and simplifies the computation of earnings per share (EPS).
Primary EPS is replaced with a presentation of basic EPS. Basic EPS
includes no dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. In addition, fully diluted EPS is replaced
with diluted EPS. Diluted EPS reflects the potential dilution if certain
securities are converted. This statement requires dual presentation of
basic and diluted EPS by entities with complex capital structures and also
requires restatement of all prior-period EPS data presented. SFAS No. 128
will be effective for financial statements for both interim and annual
periods ending after December 15, 1997, and Columbia plans to adopt the
statement for year-end 1997. Columbia does not expect the effect of
adopting SFAS No. 128 to have a material impact on its EPS calculation. If
adopted currently, SFAS No. 128 would not have a material impact on
Columbia's reported EPS.
4. Accounting for Commodity Hedging Activities
In accordance with Statement of Financial Accounting Standards No. 80,
"Accounting for Futures Contracts" a futures contract qualifies as a hedge
if the commodity to be hedged is exposed to price risk and the futures
contract reduces that exposure and is designated as a hedge. Subsidiaries
in Columbia's production, marketing and propane operations engage in
commodity hedging activities to minimize the risk of market fluctuations
associated with the price of natural gas production, propane inventories
and commitments for natural gas purchases and sales. The hedging
objectives include assurance of stable and known minimum cash flows,
fixing favorable prices and margins when they become available and
participation in any long-term increases in value. Under internal
guidelines, speculative positions are prohibited.
Columbia's exploration and production company utilizes futures, options
and swaps on futures as well as commodity price swaps and basis swaps.
Futures help manage commodity price risk by fixing prices for future
production volumes. The options provide a price floor for future
production volumes and the opportunity to benefit from any increases in
prices. Swaps are negotiated and executed over-the-counter and are
structured to provide the same risk protection as futures and options.
Basis swaps are used to manage risk by fixing the basis or differential
that exists between a delivery location index and the commodity futures
prices.
Columbia's marketing and propane operations utilize futures contracts and
basis swaps to assure adequate margins on the purchase and resale of
natural gas as well as protecting the value and margins of its propane
inventories.
Premiums paid for option and swap agreements are included as current
assets in the consolidated balance sheet until they are exercised or
expire. Margin requirements for natural gas and propane futures are also
recorded as current assets. Unrealized gains and losses on all futures
contracts are deferred on the consolidated balance sheet as either current
assets or other deferred credits. Realized gains and losses from the
settlement of natural gas futures, options and swaps are included in
revenues or products purchased as appropriate concurrent with the
associated physical transaction. Realized gains and losses from the
settlement of propane futures contracts are included in products
purchased. The cash flows from commodity hedging are included in operating
activities in the consolidated statement of cash flows.
Columbia and its subsidiaries are exposed to credit losses in the event of
nonperformance by the counterparties to its various hedging contracts.
Management has evaluated such risk and believes that overall business risk
is minimized as a result of these hedging contracts which are primarily
with major investment grade financial institutions or their affiliates.
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
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11
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING INCOME (LOSS) BY SEGMENT
Three Months Six Months
Ended June 30, Ended June 30,
---------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
(millions)
Transmission and Storage $ 66.0 $ 39.0 $158.9 $124.5
Distribution 21.3 (3.0) 161.9 165.0
Exploration and Production 5.4 6.4 17.1 17.2
Marketing, Propane and Power Generation (1.8) (1.2) 8.1 13.5
Corporate (6.6) (5.2) (5.1) (6.0)
------ ------ ------ ------
TOTAL $ 84.3 $ 36.0 $340.9 $314.2
====== ====== ====== ======
DEGREE DAYS (DISTRIBUTION SERVICE TERRITORY)
Three Months Six Months
Ended June 30, Ended June 30,
----------------- ---------------------
1997 1996 1997 1996
---- ---- ----- -----
Actual 837 705 3,530 3,807
Normal 580 580 3,527 3,559
% Colder (warmer) than normal 44 22 -- 7
% Colder (warmer) than prior period 19 13 (7) 13
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PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS (CONTINUED)
Management's Discussion and Analysis contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Investors and prospective investors
should understand that several 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 herein.
These forward-looking statements include statements concerning Columbia's plans,
objectives and expected performance, expenditures and recovery of expenditures
through rates, including 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, competition,
weather, regulatory and legislative changes as well as changes in general
economic and capital market conditions, many of which are beyond the control of
Columbia. In addition, the relative contributions to profitability by segment
may change over time due to changes in the market place.
With respect to any references made to ratings assigned to Columbia's debt
securities, there can be no assurance that Columbia will be successful at
maintaining its credit quality or that such credit ratings will continue for any
given period of time or that they will not be revised downward or withdrawn
entirely by these rating agencies. Credit ratings reflect only the views of the
rating agencies, whose methodology and the significance of their ratings may be
obtained from them.
THREE MONTH RESULTS
Net Income
Columbia's second quarter 1997 net income of $34.9 million, or $0.63 per share,
was up sharply over the same period last year, increasing $26.7 million, or
$0.48 per share. This increase included a $12.4 million improvement for Columbia
Transmission's sale of base gas from a deactivated storage field, as provided
for by its rate settlement, together with colder weather experienced early in
the current quarter. Also contributing to the increase was a lower level of
restructuring costs in the current period -- $7.7 million in the current quarter
compared to $18.6 million last year. Restructuring initiatives implemented over
the past several months have allowed Columbia to improve operating efficiencies.
In the second quarter of 1996, an improvement of $5.6 million was recorded to
reflect an adjustment from the sale of Columbia Gas Development Corporation
(Columbia Development). The sale was effective year-end 1995.
Revenues
Operating revenues for the second quarter of 1997 were $810.7 million, a $228.3
million improvement over the same period last year, due mainly to increased gas
marketing activity and increased sales for the distribution subsidiaries,
resulting from 19% colder weather. Sales volumes for the gas marketing
operations of 121.7 Bcf, more than doubled last year's level. Also contributing
to the increase in revenues was $18.8 million from the effect of recording
Columbia Transmission's rate settlement as discussed later in the Transmission
and Storage Operations section.
Expenses
For the three months ended June 30, 1997, operating expenses of $726.4 million
were $180 million higher than the prior period, primarily reflecting a $197.7
million increase in products purchased that resulted from higher natural gas
sales requirements primarily for gas marketing activities. In the current
period, $11.9 million of restructuring expense was recorded for severance and
benefit costs, whereas in the second quarter last year $28.6 million of this
type of expense was incurred.
Other Income (Deductions)
Other Income (Deductions) reduced income $31.9 million in the current quarter
compared to a reduction to income of $25.5 million in the same period last year.
This change largely reflected recording an $8.6 million pre-tax favorable
adjustment in 1996 to the sale of Columbia Development. Second quarter income
benefited from not having any short-term debt outstanding, whereas last year
Columbia had $1.5 million of interest expense on short-term borrowings, which
was paid off in the first quarter of 1997.
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13
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS (CONTINUED)
SIX MONTH RESULTS
Net Income
Columbia's net income for the first half of 1997 of $197.6 million, or $3.57 per
share, increased $38.1 million, or $0.53 per share, over the same period last
year despite unseasonably mild temperatures during the first quarter.
More than offsetting the impact of mild first quarter weather were several items
that included recording the terms of Columbia Transmission's rate settlement
mentioned previously, a $12.8 million reduction to tax expense resulting from
benefits gained through the filing of a consolidated state tax return, $5.5
million from a gain on the temporary deactivation of a storage field, the full
period effect of higher rates for Columbia Transmission and Columbia Gas of
Kentucky, Inc. and reduced interest costs because Columbia paid-off its
short-term borrowings. Also, as mentioned previously, last year's net income
included a reduction of $18.6 million for restructuring activities, compared to
$7.7 million this year. Last year's results also included a $5.6 million
increase to 1996's net income as an adjustment for the Columbia Development
sale.
Revenues
For the first half of 1997, operating revenues were $2,338.4 million, an
increase of $553 million over the previous year. The increase was principally
due to increased sales for the gas marketing operations and higher rates in
effect for the distribution subsidiaries that provided for the recovery of
increased gas costs. Also improving revenues were increased transportation
services, the beneficial effect of Columbia Transmission's rate settlement and
$4.1 million received by Columbia Natural Resources, Inc. (Columbia Resources)
for a gas purchase contract buyout by the Binghamton Cogeneration Partnership
project (Binghamton Partnership) that ceased operations in early 1997. The
facility had a contract to purchase natural gas for its operations from Columbia
Resources. This cogeneration project was a partnership between a Columbia
affiliate, TriStar Ventures Corporation (TriStar), and third parties. In
addition, TriStar received $3.2 million from the Binghamton Partnership for
accepting the assignment of a transportation agreement. Tempering these
increases was the effect of the unseasonably warm weather in the first quarter
that resulted in lower sales volumes for the distribution subsidiaries and lower
wellhead prices for gas production.
Expenses
Total operating expenses of $1,997.5 million for the first six months of 1997,
increased $526.3 million over last year. This was primarily the result of $545.5
million higher product purchased expense attributable to the higher cost of gas
purchased by the distribution subsidiaries and additional sales requirements for
the gas marketing operations. After adjusting for the effect of the
restructuring charges recorded in the second quarters of both years, operation
and maintenance expense decreased reflecting the lower costs that resulted from
implementing restructuring initiatives.
Other Income (Deductions)
Other Income (Deductions) reduced income $57.9 million in the first six months
of 1997 and $66.1 million in the first six months of last year. Interest income
and other, net, of $20.4 million, increased income $3.6 million compared to the
prior year due in large part to recording a $8.5 million gain for the payment
received from the deactivation of a storage field that will allow the owner of
coal reserves in the area to mine the property as well as increased interest
income on temporary cash investments. In the second quarter of 1996, an $8.6
million favorable adjustment was recorded for the sale of Columbia Development.
Total interest expense and related charges of $78.3 million, decreased $4.6
million from last year due primarily to lower interest costs on short-term
borrowings.
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 financing as needed, is used to
purchase gas to place in storage for heating season deliveries, make capital
improvements in plant, perform necessary maintenance of the facilities, and
expand service into new areas.
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14
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS (CONTINUED)
Net cash from operations for the first half of 1997 was $565.8 million, an
increase of $11.6 million over the same period last year. This improvement
primarily reflected a higher gas cost recovery level by the distribution
subsidiaries in the current period. Tempering this increase were lower sales
attributable to warmer weather for the first six months of 1997 compared to the
same period last year. In 1996 cash from operations was improved approximately
$213 million due to the net effect of income tax refunds.
The higher level of recovery reflected the rise in prices experienced in 1996
that resulted in an increase in the commodity portion of the distribution
subsidiaries' rates as provided for under the current regulatory process.
Previously, the distribution subsidiaries were in an underrecovered position
because the rapid increase in the cost of gas exceeded the recovery levels that
were allowed at that time. The improvement also reflected the full period effect
of higher base rates for Columbia Transmission and Columbia of Kentucky.
Partially offsetting these improvements was the effect of lower sales volumes
for the distribution subsidiaries due to the warmer weather.
Columbia satisfies its liquidity requirements through internally generated funds
and the use of its $1 billion unsecured bank revolving credit facility (Credit
Facility). Columbia also may pursue obtaining additional short-term financing
through the use of bid notes and the establishment of a commercial paper
program.
Columbia's $1 billion Credit Facility provides for scheduled quarterly
reductions of $25 million of the aggregate committed amount starting December
31, 1997, that will reduce the Credit Facility commitments to $700 million by
September 30, 2000. The Credit Facility also provides for the issuance of up to
$150 million of letters of credit. As of June 30, 1997, Columbia had no
borrowings and approximately $139.1 million of letters of credit outstanding
under the Credit Facility. During the first quarter, Columbia was able to repay
its remaining short-term borrowings which at year-end 1996 was $250 million.
Interest rates on borrowings are based upon the London Interbank Offered Rate,
Certificate of Deposit rates or other short-term interest rates. The facility
fee on the commitment amount is based on Columbia's public debt rating. In 1997,
Fitch Investor Service, Moody's Investors Service and Standard & Poors upgraded
Columbia's long-term debt rating to BBB+, Baa1 and BBB+, respectively. These
higher ratings will result in lower interest rates on any borrowings that
Columbia makes under the facility.
Columbia has an effective shelf registration statement on file with the U. S.
Securities and Exchange Commission for the issuance of up to $1 billion in
aggregate of debentures, common stock or preferred stock in one or more series.
In March 1996, Columbia issued 5,750,000 shares of common stock under the shelf
registration and used the proceeds to reduce borrowings incurred under the
Credit Facility. No further issuances of the remaining $750 million available
under the shelf registration are scheduled at this time.
Recent Acquisitions
Columbia has as a strategic goal to increase its investment in generally
non-rate regulated (nonregulated) businesses to a level that would provide for
its nonregulated operations to contribute approximately 30% of Columbia's
consolidated operating income by 2002. In 1996 this segment contributed
approximately 9% toward Columbia's consolidated operating income. Consistent
with this objective, Columbia Energy Services Corporation (Columbia Energy)
recently purchased PennUnion Energy Services, L.L.C. (PennUnion), an
energy-marketing affiliate of the Pennzoil Company (Pennzoil), for
approximately $14.75 million, subject to certain purchase price adjustments. In
addition, Columbia Resources recently acquired Alamco, Inc. (Alamco), an
Appalachian oil and gas exploration and development company, for approximately
$101 million including the assumption of approximately $24 million of Alamco
debt. For additional information on the Alamco acquisition, see the Exploration
and Production segment, and see the Marketing, Propane and Power Generation
segment for a further discussion of PennUnion. Columbia continually evaluates
acquisition and strategic alliance opportunities made available to it by the
marketplace. However, it is Columbia's general policy not to comment on the
specifics of any such opportunity.
14
15
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION AND STORAGE OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
1997 1996 1997 1996
------ ------ ------ ------
(millions)
OPERATING REVENUES
Transportation revenues $136.8 $137.6 $317.0 $320.6
Storage revenues 48.3 40.5 91.8 79.2
Other revenues 25.0 5.2 34.7 10.1
------ ------ ------ ------
Total Operating Revenues 210.1 183.3 443.5 409.9
------ ------ ------ ------
OPERATING EXPENSES
Operation and maintenance 103.6 101.7 203.7 200.3
Depreciation 26.6 28.2 52.9 55.2
Other taxes 13.9 14.4 28.0 29.9
------ ------ ------ ------
Total Operating Expenses 144.1 144.3 284.6 285.4
------ ------ ------ ------
OPERATING INCOME $ 66.0 $ 39.0 $158.9 $124.5
====== ====== ====== ======
THROUGHPUT (BCF)
Transportation
Columbia Transmission
Market area 196.4 197.6 574.2 627.1
Columbia Gulf
Main-line 161.9 159.1 312.9 329.3
Short-haul 57.0 64.1 119.0 133.4
Intrasegment eliminations (160.6) (158.2) (305.4) (324.7)
------ ------ ------ ------
Total Throughput 254.7 262.6 700.7 765.1
====== ====== ====== ======
15
16
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)
Marketing Initiatives
Proposed Millennium Pipeline Project
As previously reported, the proposed Millennium Pipeline Project, in which
Columbia Transmission is participating, and will serve as operator, will
transport western gas supplies to east coast markets. The 380-mile pipeline will
link with TransCanada Pipelines Limited at a new Lake Erie point and transport
up to approximately 650,000 Mcf per day to eastern markets utilizing existing
Columbia Transmission rights-of-way for the majority of the route. A 45-day
"open season" that provided potential customers an opportunity to express
interest in capacity, ended on June 16, 1997, and resulted in non-binding
nominations for service that significantly exceeded the pipeline's anticipated
operating capacity. Negotiations are proceeding for binding precedent
agreements. A filing with the Federal Energy Regulatory Commission (FERC),
requesting approval for this project is planned for later this year with an
anticipated in-service date of late 1999.
On August 7, 1997, it was announced that TransCanada Pipelines and IPL Energy
Inc. (IPL) would become project sponsors in the Millennium project. Also on
August 7, 1997, Columbia Transmission announced its intention to become a
sponsor of IPL's proposed Vector Pipeline project that will transport gas from
the Chicago area to the Millennium pipeline.
Market Expansion Project
Final FERC approval for Columbia Transmission's market expansion project was
received on May 14, 1997. Construction on the facilities required to provide the
first phase of service commenced in late-May. The expansion will add
approximately 500,000 Mcf per day of firm service to 23 customers. The first
phase of service will begin on November 1, 1997. The New York State Electric &
Gas Corporation (NYSEG) filed an appeal with the U. S. Court of Appeals for the
District of Columbia Circuit. NYSEG has not requested a stay of Columbia
Transmission's certificate order. Accordingly, construction is proceeding.
Regulatory Matters
Columbia Transmission's Rate Filing
Columbia Transmission's rate case settlement that went into effect, subject to
refund, on February 1, 1996, became effective June 1, 1997. In addition to an
increase in revenues to recover higher costs incurred since its last rate case
in 1991, the settlement provides an opportunity for the recovery of Columbia
Transmission's net investment in gathering and certain gas processing
facilities. The settlement also provides customers with rate certainty through
February 1, 2000, and allows Columbia Transmission to retain the gain from the
1996 sale of base gas from one of its storage fields, as well as certain future
base gas sales. The settlement permits Columbia Transmission to retain
approximately 95% of the initial $60 million pre-tax gain from base gas sales.
After that level has been reached, Columbia Transmission would share equally
with customers any gain from additional base gas sales. An after-tax improvement
of $12.4 million was recorded in the second quarter of 1997 to reflect the terms
of the settlement, including the base gas sale.
Excluded from the settlement is the environmental cost recovery issue which will
be addressed in the second phase of the proceeding scheduled for hearings during
the third quarter of 1998. Pursuant to a provision of the settlement, the New
York Public Service Commission has the right to initiate a hearing challenging
the appropriateness of the Straight Fixed Variable (SFV) rate design for
Columbia Transmission, with any change from the current SFV methodology to be
placed into effect no earlier than February 1, 2000.
Recovery of Columbia Gulf's Pre-November 1994 Transportation Costs
In March 1995, Columbia Transmission filed with the FERC to recover $39 million
of transportation costs that were billed to Columbia Transmission by Columbia
Gulf Transmission Company (Columbia Gulf). Several parties filed protests with
the FERC regarding the Columbia Gulf charges. The FERC subsequently ruled that
approximately $19 million of the Columbia Gulf charges were recoverable by
Columbia Transmission, subject to a general FERC audit, which has been completed
with no adjustment to the amounts billed. The remaining $20 million of costs are
associated with environmental issues.
Columbia Transmission and the parties to the case filed an uncontested offer of
settlement in May 1997 that provides for the resolution of issues previously
scheduled for hearing as well as other related issues including environmental.
The proposed settlement provides for a refund of $4 million, inclusive of
interest. Previously
16
17
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)
established reserves are sufficient and the settlement does not have an effect
on operating income. In addition, the settlement establishes a method for
determining whether Columbia Gulf may seek recovery of future environmental
costs incurred at specific sites and provides for the withdrawal of a number of
related court appeals. On June 25, 1997, the FERC approved the settlement.
Columbia Gulf Show Cause Proceeding
As reported in Columbia's 1996 Annual Report on Form 10-K, the FERC directed
Columbia Gulf to show cause as to why it had not filed for FERC abandonment
authorization to reduce capacity on its mainline facilities. On August 8, 1997,
the FERC issued an order approving a Stipulation and Consent Agreement that
requires Columbia Gulf to conduct a 30-day open season during which it will
make capacity available on its mainline pipeline system up to its certificated
capacity. Prospective shippers desiring the capacity will be required to
execute firm transportation agreements and will be responsible for securing
necessary capacity on upstream and downstream pipelines.
Gathering Facilities
Columbia Transmission began the process of selling portions of its gathering
facilities as a result of FERC's Order No. 636, which requires natural gas
pipelines to unbundle their gathering costs and services from other
transportation costs. During 1997, approximately 3,800 miles of gathering lines
in Kentucky, West Virginia and Pennsylvania will be sold to Columbia Resources
at Columbia Transmission's net book value. An agreement in principle has been
reached with a third party for the sale of approximately 1,700 miles of
gathering lines in Ohio, expected to occur in late 1997. Columbia Transmission
has completed an open-bidding process for the remaining 800 miles of gathering
lines. Subsequent negotiations have resulted in letters of intent to sell to
various parties certain of the remaining gathering systems located in Ohio,
Pennsylvania, West Virginia and Maryland. It is anticipated that the majority of
these facilities will be sold before year-end 1997 and will not have a material
effect on consolidated results.
Environmental Matters
Columbia's transmission subsidiaries have implemented programs to continually
review compliance with existing environmental standards. Columbia Transmission
is currently conducting assessment, characterization and remediation activities
at specific sites under a 1995 EPA Administrative Order by Consent.
Expenditures of approximately $2.1 million in the second quarter of 1997 have
been charged against the liability previously established resulting in a
remaining overall liability of $121.9 million. Consistent with Statement of
Financial Accounting Standards No. 71, a regulatory asset has been recorded to
the extent environmental expenditures are expected to be recovered through
rates. Columbia Transmission is also currently involved in pursuing recovery of
environmental expenditures from its insurance carriers; however at this time,
management is unable to determine the extent, if any, of recovery. Management
does not believe that Columbia Transmission's environmental expenditures will
have a material adverse effect on its operations, liquidity or financial
position, based on known facts and existing laws and regulations and the long
period over which expenditures will be made.
Volumes
Columbia Transmission's throughput consists of transportation and storage
services for local distribution companies and other customers within its market
area. Throughput is recorded for market-area storage services as gas is
withdrawn from storage. Throughput for Columbia Gulf reflects mainline
transportation services from Rayne, Louisiana to West Virginia and short-haul
transportation services from the Gulf of Mexico to Rayne, Louisiana.
Total throughput for the transmission and storage segment totaled 254.7 Bcf for
the second quarter of 1997, a decrease of 7.9 Bcf from the same period last year
due largely to a reduction in short-haul deliveries. For the six month period
ended June 1997, total throughput decreased 64.4 Bcf to 700.7 Bcf, primarily due
to warmer weather.
Under Order 636, a significant portion of the transmission and storage segment's
fixed costs are being recovered through a monthly demand charge. As a result,
variations in throughput do not have a significant impact on income.
Operating Revenues
Total operating revenues for the second quarter of 1997 of $210.1 million
increased $26.8 million over the same period last year. This increase is the
result of a variety of factors, primarily the base gas sales that were part of
Columbia Transmission's overall rate case settlement, and increased revenues
from transportation and storage services. For the first six months of 1997,
total operating revenues were $443.5 million, an increase of $33.6 million over
the same period in 1996, primarily due to the full period effect of higher rates
and the rate case settlement as well as revenues from transportation and storage
services as mentioned previously.
Operating Income
Operating income for the second quarter and six months ended June 30, 1997 was
$66 million and $158.9 million, respectively. This reflects an increase of $27
million and $34.4 million for the second quarter and year-to-date periods ended
June 30, 1997, respectively, largely due to higher operating revenues as
discussed above.
17
18
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
(millions)
NET REVENUES
Sales revenues $ 342.8 $ 299.9 $1,368.0 $1,156.6
Less: Cost of gas sold 207.5 168.8 926.6 687.5
-------- -------- -------- --------
Net Sales Revenues 135.3 131.1 441.4 469.1
-------- -------- -------- --------
Transportation revenues 33.3 30.5 75.4 66.4
Less: Associated gas costs 3.3 4.2 6.2 7.4
-------- -------- -------- --------
Net Transportation Revenues 30.0 26.3 69.2 59.0
-------- -------- -------- --------
Net Revenues 165.3 157.4 510.6 528.1
-------- -------- -------- --------
OPERATING EXPENSES
Operation and maintenance 102.6 118.6 212.8 235.1
Depreciation 12.4 12.2 48.0 43.8
Other taxes 29.0 29.6 87.9 84.2
-------- -------- -------- --------
Total Operating Expenses 144.0 160.4 348.7 363.1
-------- -------- -------- --------
OPERATING INCOME (LOSS) $ 21.3 $ (3.0) $ 161.9 $ 165.0
======== ======== ======== ========
THROUGHPUT (BCF)
Sales
Residential 29.7 30.0 118.1 132.7
Commercial 10.6 11.7 44.7 54.0
Industrial and other 0.7 1.6 1.0 5.1
-------- -------- -------- --------
Total Sales 41.0 43.3 163.8 191.8
Transportation 61.0 60.0 133.0 131.7
-------- -------- -------- --------
Total Throughput 102.0 103.3 296.8 323.5
Off-System Sales 10.9 0.9 42.2 5.3
-------- -------- -------- --------
Total Sold or Transported 112.9 104.2 339.0 328.8
======== ======== ======== ========
SOURCES OF GAS FOR THROUGHPUT (BCF)
Sources of Gas Sold
Spot market* 76.8 88.2 138.4 167.2
Producers 8.1 9.4 19.6 25.6
Storage withdrawals (injections) (50.7) (60.6) 32.0 7.9
Other 17.7 7.2 16.0 (3.6)
-------- -------- -------- --------
Total Sources of Gas Sold 51.9 44.2 206.0 197.1
Transportation received for delivery to customers 61.0 60.0 133.0 131.7
-------- -------- -------- --------
Total Sources 112.9 104.2 339.0 328.8
======== ======== ======== ========
* Purchase contracts of less than one year.
18
19
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS (CONTINUED)
Market Conditions
The second quarter weather was 19% colder than 1996 and 44% colder than normal
as April/May 1997 was the second-coldest April/May period since 1950. As a
result, Columbia's distribution subsidiaries' (Distribution) weather-sensitive
deliveries in the second quarter of 1997 increased approximately 5 Bcf from the
same quarter last year. Weather in Distribution's market area through the first
half of 1997 was 7 % warmer than 1996, but returned to essentially normal after
the colder second quarter weather. For the first six months of 1997,
Distribution's weather-sensitive deliveries were down 17 Bcf from last year.
Regulatory Matters
Distribution has been pursuing initiatives that give retail customers the
opportunity to purchase natural gas directly from marketers and using
Distribution's facilities for transportation service. Distribution has been
pursuing these opportunities through regulatory initiatives in all of its
jurisdictions which have resulted in pilot transportation programs being offered
in three of its five service areas as discussed in the 1996 Annual Report on
Form 10-K and Quarterly Report on Form 10-Q for the first quarter of 1997 and
further updated below. Once fully implemented, these programs would reduce
Distribution's merchant function and provide customers with the opportunity for
reduced energy costs. Stranded costs and costs associated with providing gas if
the marketing company cannot supply the gas that customers purchased, sometimes
referred to as the supplier of last resort, are two threshold issues that must
be addressed as these programs expand to all customers. The state commissions in
Distribution's five jurisdictions are at various stages in addressing these
issues. Distribution is currently recovering all stranded costs resulting from
the unbundling of its services and believes that future stranded costs and costs
resulting from being the supplier of last resort, will be fully recovered.
Columbia Gas of Ohio, Inc.'s (Columbia of Ohio) "Customer Choice" pilot
transportation program continues to expand. There are over 36,000 customers
participating, including 31,000 residential customers. There are 11 active
marketers in the program out of a total of 17 approved for participation. The
Public Utilities Commission of Ohio (PUCO) approved the initial program for a
one-year period. If the pilot program is successful, Columbia of Ohio expects to
expand the program to all of its nearly 1.3 million customers.
Columbia Gas of Pennsylvania, Inc.'s (Columbia of Pennsylvania) two-year pilot
program, which began on November 1, 1996 in Washington County, has about 5,300
customers participating. In June 1997, Columbia of Pennsylvania received
approval from the Pennsylvania Public Utility Commission (PPUC) to extend its
pilot customer choice program into Allegheny County, including the city of
Pittsburgh, beginning on November 1, 1997. As approved by the PPUC, the new
program will give marketers the option of obtaining their own pipeline capacity,
rather than taking assignment of capacity held by Columbia of Pennsylvania. The
company has approximately 100,000 customers in Allegheny County who are eligible
for the new program.
In Virginia, Commonwealth Gas Services, Inc. (Commonwealth Services) filed a
rate case with the Virginia State Corporation Commission in May 1997 requesting
a $10.1 million increase in annual revenue. The new rates would be effective on
October 18, 1997, subject to refund. The filing was made under recently passed
legislation providing for performance-based ratemaking. In its filing,
Commonwealth Services also proposed a residential/small commercial
transportation pilot program called "Commonwealth Choice Program." The pilot
program would also commence on October 18, 1997, and would be open to
approximately 26,000 customers in the Gainesville market area. Commonwealth
Services is the first company in Virginia to file tariffs to support such a
program. Additionally, as provided for by the new legislation and consistent
with Columbia's strategy to avoid frequent rate cases, the filing included a
request for future annual revenue increases of $1.9 million effective October
18, 1998 and $900,000 effective October 18, 1999. These increases are needed to
recover plant additions, that would not represent new revenue producing
additions, such as those required to replace facilities due to age and
condition. The revenue increases will be contingent upon Commonwealth Services
achieving performance benchmarks in the area of pipeline operations.
On August 1, 1997, the Maryland People's Counsel filed a petition with the
Public Service Commission (PSC) seeking a $1.6 million reduction in Columbia
Gas of Maryland, Inc.'s (Columbia of Maryland) annual revenues. Among the
issues cited, the petition claimed that Columbia of Maryland's 12-month
earnings through March 31, 1997, exceeded its authorized return on equity.
Columbia of Maryland is currently reviewing this matter.
19
20
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS (CONTINUED)
Gas Supply
Distribution's gas supply portfolio, with its large storage component, has the
reliability and flexibility to accommodate the impact of weather variations on
traditional customer demand as well as provide opportunities to increase
revenues through off-system sales and other incentive programs. Off-system sales
are sales or other transactions conducted outside of Distribution's traditional
market. In the first half of 1997, Distribution had off-system sales of 42.2
Bcf. This was a significant increase of 36.9 Bcf over the first half of 1996 due
indirectly to the mild first quarter weather this year as Distribution
aggressively marketed its storage volumes in March 1997. Columbia of
Pennsylvania, Columbia of Maryland and Columbia of Kentucky have incentive
programs in place that have been approved by their respective regulatory
commissions that provide for the sharing of the proceeds from off-system sales
with customers.
As previously reported, Columbia of Ohio's 1996 rate agreement permitted the
retainage of up to $51 million, from off-system sales, over three years subject
to an earnings limitation. The revenues eligible for retention, $19.7 million in
1997, are primarily from off-system sales transactions completed or agreed to
prior to August 31, 1996.
Proceeds from releasing unused pipeline capacity totaled $9.3 million in the
first half of 1997, up $1.5 million from the prior year's first half total.
Where capacity release incentive benchmarks are established, a portion of the
proceeds generated in excess of the benchmark provides income for Distribution.
The majority of the proceeds are recorded as a reduction to gas costs and the
benefit passed through to customers. In the first half of 1997, both Columbia of
Pennsylvania and Columbia of Maryland were able to retain a small amount of
capacity release proceeds. As residential and small commercial transportation
programs develop into widespread practice and marketers take assignment of the
LDC's pipeline capacity contracts, earnings from these non-traditional services
may decline.
Environmental Matters
As previously reported, Distribution's primary environmental issues relate to 15
former manufactured gas plant sites. In the second quarter, investigation
activity began at one of these sites, bringing to seven the number of sites
currently under remediation or being investigated. At this time, it is not
possible to estimate the costs associated with this site.
To the extent Distribution's site investigations have been conducted,
remediation plans developed and any responsibility for remediation action
established, the appropriate liabilities have been recorded. Regulatory assets
have been recorded for a majority of these costs as rate recovery has been
allowed or is anticipated.
Volumes
Throughput for the second quarter of 1997 was 102 Bcf, a decrease of 1.3 Bcf
from last year as the effect of colder weather was offset by a decline of
approximately 3.8 Bcf due to a labor strike at Wheeling-Pittsburgh Steel Corp.
as well as reduced usage from other customers.
For the first half of 1997, throughput of 296.8 Bcf decreased 26.7 Bcf from the
same period last year reflecting reduced sales as a result of the mild first
quarter of 1997. Partially offsetting the decrease in sales was an increased
demand for transportation services reflecting competitive natural gas spot
prices, favorable economic conditions and decreased interruptions by upstream
suppliers. Industrial throughput was negatively impacted by a decrease of
approximately 6 Bcf due to the strike at Wheeling-Pittsburgh Steel Corp.
Net Revenues
Net revenues for the second quarter of 1997 were $165.3 million, up $7.9 million
from the second quarter of 1996. The 19% colder weather in the current quarter
increased net revenues by $9 million. The effect of higher transportation
revenues and Columbia of Ohio's retention in the current period of certain
off-system sales revenues, resulting from a 1996 rate settlement, was tempered
by decreased customer usage.
For the first six months of 1997, net revenues were $510.6 million, a decrease
of $17.5 million from 1996. Weather that was 7% warmer than last year reduced
net revenues by approximately $25 million. This decrease was tempered by
Columbia of Ohio's retention in the current period of $11 million of off-system
sales revenues.
20
21
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DISTRIBUTION OPERATIONS (CONTINUED)
Operating Income
Operating income for the second quarter of 1997 of $21.3 million reflected a
$24.3 million improvement over the $3 million prior period loss due to the
higher net revenues and a $16.4 million decline in operating expenses. The
reduction in operating expenses primarily reflects a decrease of approximately
$12.6 million for restructuring charges and the beneficial effect of recently
implemented cost containment measures.
For the first six months of 1997, operating income of $161.9 million was down
$3.1 million from 1996 due to the decline in net revenues partially offset by a
decrease of $14.4 million in operating expenses reflecting lower restructuring
charges as well as the favorable impact of cost containment measures. Increased
plant additions contributed to the $4.2 million increase in depreciation expense
while higher property taxes were responsible for the $3.7 million rise in taxes
other than income.
21
22
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
EXPLORATION AND PRODUCTION OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
----------------- ------------------
1997 1996 1997 1996
------- ------- ------- -------
(millions)
OPERATING REVENUES
Gas $ 25.8 $ 23.5 $ 53.7 $ 51.2
Oil and liquids 0.9 1.6 2.0 2.8
------- ------- ------- -------
Total Operating Revenues 26.7 25.1 55.7 54.0
------- ------- ------- -------
OPERATING EXPENSES
Operation and maintenance 11.4 9.1 20.1 18.0
Depreciation and depletion 7.8 7.4 14.6 14.3
Other taxes 2.1 2.2 3.9 4.5
------- ------- ------- -------
Total Operating Expenses 21.3 18.7 38.6 36.8
------- ------- ------- -------
OPERATING INCOME $ 5.4 $ 6.4 $ 17.1 $ 17.2
======= ======= ======= =======
GAS PRODUCTION STATISTICS
Production (Bcf) 8.4 8.0 16.7 16.5
Average Price (per Mcf) $ 2.67 $ 2.81 $ 2.72 $ 2.98
OIL AND LIQUIDS PRODUCTION STATISTICS
Production (000Bbls) 48 83 100 153
Average Price (per Bbl) $ 17.67 $ 19.10 $ 19.45 $ 18.00
22
23
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
EXPLORATION AND PRODUCTION OPERATIONS (CONTINUED)
Acquisition of Alamco
On August 7, 1997, Columbia Resources acquired Alamco, a gas and oil production
company that operates in the Appalachian Basin, for $101 million including the
assumption of $24 million of outstanding debt. Under the agreement, holders of
Alamco received, on a fully diluted basis, $15.75 per share of common stock.
The combined companies will produce approximately 125 million cubic feet (Mmcf)
of natural gas per day, making Columbia Resources one of the largest-volume
natural gas and oil producers in the Appalachian Basin. This acquisition will
provide contiguous assets that give Columbia Resources a major presence in
north-central West Virginia, southern Kentucky and northern Tennessee with
proved reserves of nearly 800 Bcf of gas equivalent.
Gathering Facilities
On April 26, 1996, Columbia Transmission filed a request with FERC for
abandonment and transfer of certain gathering facilities to Columbia Resources.
Final FERC approval for the abandonment and transfer of these assets was
received May 19, 1997. Closing is scheduled to take place September 1, 1997.
Drilling Activity
During the first half of 1997, Columbia Resources participated in 17 gross
wells, of which 14 were successful, and added 1.9 Bcfe to net reserves.
Volumes
Gas production for the current quarter of 8.4 Bcf increased nearly 5% over the
second quarter of 1996. Production in last year's second quarter was reduced due
to production shut-ins resulting from facility problems at Columbia
Transmission's Kanawha Extraction Plant. For the six months ended June 30, 1997,
gas production was relatively unchanged from last year.
Oil and liquids production for the three and six months ended June 30, 1997, was
down 42% and 35%, respectively, primarily due to Columbia Resources' sale of the
Granny's Creek production field in December 1996.
Revenues
Second quarter revenues increased $1.6 million from the same period last year to
$26.7 million due to a reclassification in the recording of gathering costs. In
order to appropriately report the results of Columbia Resources gathering
activity, as discussed above, beginning in the second quarter of 1997 gas
revenues are recorded before deducting any gathering costs. Gathering costs are
included as an operating expense; therefore, the change in reporting has no
impact on operating income. Previously, gas revenues were based on gas prices
that had been reduced for gathering costs. After adjusting for the gathering
costs in the current quarter, total operating revenues decreased $700,000 from
the second quarter of 1996 reflecting reduced oil and liquids production and
prices. In the current quarter, gas prices averaged $2.67 per Mcf, down 5% from
the second quarter of 1996. The effect of lower gas prices was offset by a 0.4
Bcf increase in gas production.
Revenues for the first six months of 1997 increased $1.7 million to $55.7
million over the same period last year as of result of gas revenues being
reflected before deducting gathering costs as mentioned above. After adjusting
for these costs, revenues decreased $600,000 due to reduced oil and liquids
production and lower natural gas prices. The weaker natural gas prices reflected
the impact of warmer weather and ample storage inventory. Columbia Resources'
average gas sales price for the first six months was $2.72 per Mcf, down nearly
9%, from the same period last year. The effect of lower prices was partially
offset by a $4.1 million first quarter 1997 improvement for revenues related to
a contract buyout by a cogeneration facility.
Operating Income
Operating income for the current quarter of $5.4 million decreased $1 million
from the 1996 second quarter primarily due to reduced oil and liquids production
and prices. Total operating expenses increased $2.6 million over the second
quarter of 1996 primarily reflecting gathering expense. As discussed above, this
expense offsets
23
24
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
EXPLORATION AND PRODUCTION OPERATIONS (CONTINUED)
a like increase in gas revenues and has no operating income effect.
Operating income of $17.1 million for the first six months of 1997 was
essentially unchanged from the same period last year. The effect of lower
natural gas prices in the current period was mitigated by revenues received from
the buyout of a purchase contract by a cogeneration project.
24
25
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARKETING, PROPANE AND POWER GENERATION OPERATIONS
Three Months Six Months
Ended June 30, Ended June 30,
----------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
(millions)
NET REVENUES
Gas marketing revenues $296.4 $152.3 $602.1 $310.4
Less: Products purchased 291.7 149.5 592.1 299.4
------ ------ ------ ------
Net Gas Marketing Revenues 4.7 2.8 10.0 11.0
------ ------ ------ ------
Propane revenues 12.7 10.9 41.2 43.2
Less: Products purchased 7.0 6.3 23.2 24.2
------ ------ ------ ------
Net Propane Revenues 5.7 4.6 18.0 19.0
------ ------ ------ ------
Other Revenues 2.5 2.3 8.4 5.3
------ ------ ------ ------
Net Revenues 12.9 9.7 36.4 35.3
------ ------ ------ ------
OPERATING EXPENSES
Operation and maintenance 13.0 9.5 24.9 18.8
Depreciation 1.0 0.7 1.9 1.5
Other taxes 0.7 0.7 1.5 1.5
------ ------ ------ ------
Total Operating Expenses 14.7 10.9 28.3 21.8
------ ------ ------ ------
OPERATING INCOME (LOSS) $ (1.8) $ (1.2) $ 8.1 $ 13.5
====== ====== ====== ======
PROPANE SALES (MILLIONS OF GALLONS)
Retail 8.8 8.3 29.9 33.1
Wholesale and Other 3.3 2.5 7.0 8.9
------ ------ ------ ------
Total Propane Sales 12.1 10.8 36.9 42.0
====== ====== ====== ======
MARKETING SALES (BCF) 121.7 59.9 228.4 106.4
25
26
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARKETING, PROPANE AND POWER GENERATION OPERATIONS (CONTINUED)
Expansion of Energy Marketing Operations
On June 30, 1997, Columbia Energy purchased PennUnion, an energy-marketing
subsidiary of Pennzoil, for approximately $14.75 million, subject to working
capital and certain other adjustments. The PennUnion acquisition will add sales
of 2.1 Bcf per day, increasing Columbia Energy's trading volumes to more than 3
Bcf per day. A significant portion of Columbia Energy's marketing volumes are
represented by a contract committing Columbia Energy to purchase most, at
certain index-priced prices, of Pennzoil's U.S. natural gas production of
approximately 585 Mmcf per day. This contract is for a 4 year period. As a
result of this transaction, Pennzoil will become Columbia Energy's largest
single supplier and places Columbia Energy among the top 15 marketers in the
United States.
Effective May 1, 1997, Columbia Energy began purchasing and marketing the
offshore natural gas production for the Kerr-McGee Corporation (Kerr-McGee) of
approximately 250 Mmcf per day or 90 Bcf a year. The marketing alliance will
continue for three years. Columbia Energy will manage all of Kerr-McGee's United
States natural gas marketing activities including scheduling, nominating and
balancing pipeline transportation as well as providing financial risk management
services.
Columbia Energy is Columbia's nonregulated natural gas marketing company. It
provides gas supply, fuel management and transportation-related services to a
diverse customer base, including cogenerators, local distribution companies,
industrial plants, commercial businesses, joint marketing partners and
residences.
Columbia Network Services Corporation (Columbia Network)
As previously discussed in the 1996 Annual Report on Form 10-K, Columbia
Network, a wholly-owned subsidiary, entered into an agreement with The SABRE
Group, Inc. (SABRE) to jointly develop an electronic energy information system.
In the second quarter of 1997, Columbia Network and SABRE formed a limited
liability company, Energy Net, L. L. C., that will operate under the name of The
SABRE Energy Network. The SABRE Energy Network will serve as a central access
point for the scheduling of natural gas transportation.
Net Revenues
Net revenues for the second quarter of 1997 increased $3.2 million over last
year to $12.9 million primarily due to higher net revenues for both gas
marketing and the propane operations. Gas marketing's net revenues increased
$1.9 million as a result of higher sales volumes that more than doubled to 121.7
Bcf. The improvement attributable to increased sales was partially offset by
lower margins. Propane sales increased 1.3 million gallons reflecting two new
districts being added with the purchase of the assets of Supertane Gas
Corporation in the first quarter of 1997. The higher propane sales coupled with
nearly 30% higher margins led to an increase of $1.1 million in net revenues for
the propane operations.
For the first six months of 1997, net revenues of $36.4 million increased $1.1
million over last year's results of $35.3 million primarily reflecting $3.1
million higher other revenues. This increase was largely due to revenues
received by TriStar for assuming Binghamton Partnership's gas transportation
contract with Columbia Transmission. This increase was offset partially by lower
net revenues for both gas marketing and the propane operations. While gas
marketing sales volumes increased from 106.4 Bcf to 228.4 Bcf, margins were down
in the first six months of 1997 resulting in $1 million lower net revenues. The
colder than normal weather experienced in the first quarter of 1996 provided gas
marketing operations the opportunity to earn significantly higher margins.
Propane net revenues were down $1 million due to lower weather-related sales in
the first quarter of 1997 that were partially offset by 9% higher margins.
Operating Income (Loss)
An operating loss of $1.8 million for the second quarter of 1997 was $600,000
greater than the $1.2 million loss in last year's second quarter. Increased net
revenues were more than offset by higher operating expense associated with
business expansion, an additional loss on the sale of the Binghamton Partnership
assets, and additional start-up costs incurred by Columbia Network. In the
second quarter of 1996, operation and maintenance expense included $1.4 million
of restructuring costs.
26
27
PART 1 - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MARKETING, PROPANE AND POWER GENERATION OPERATIONS (CONTINUED)
Operating income for the six months ended June 30, 1997, was $8.1 million, a
decrease of $5.4 million from last year primarily due to lower margins and
higher operating expense due to business expansion for Columbia Energy, as well
as reduced propane sales in the first quarter of 1997. Additional startup costs
for Columbia Network also negatively impacted operating income. The decrease in
operating income was mitigated by the $2.6 million received from the termination
of the Binghamton Partnership, higher gas marketing volumes and lower operation
and maintenance expense due to the restructuring charges recorded in the second
quarter of 1996.
27
28
PART II - OTHER INFORMATION (CONTINUED)
Item l. Legal Proceedings
No new reportable matters have arisen and there have been no material
developments in any legal proceedings reported in Columbia's Annual
Report on Form 10-K for the year ended December 31, 1996, Quarterly
Report on Form 10-Q for the first quarter of 1997 except as follows:
I. Purchase and Production Matters
A. New Ulm v. Columbia Gas Transmission Corp., C.A. No. 88-V-655
(155th Judicial Dist. Ct. of Austin County, TX). On October 18,
1996, the Texas Supreme Court affirmed, in part, the appellate
Court's judgment by remanding New Ulm's fraud claim to the trial
court for further proceedings. On July 31, 1997, the jury
returned a verdict that awarded plaintiff $512,070 compensatory
damages and $2,560,350 punitive damages. The court has not yet
entered judgement on the verdict. No final order has been
rendered. Furthermore, any final order will be subject to the
terms of Columbia Transmission's plan of reorganization.
II. Regulatory Matters
A. Columbia Gas Transmission Corp., Docket No. RP95-196 and UGI
Utilities, Inc. v. Columbia Gulf Transmission Co. and Columbia
Gas Transmission Corp., Docket No. RP95-392. The Form 10-Q for
the First Quarter reported that Columbia Transmission and the
parties in this case had reached a settlement in principle. The
FERC approved the settlement on June 25, 1997. No requests for
rehearing were filed, thereby concluding this proceeding.
Item 2.Changes in Securities
None.
Item 3.Defaults Upon Senior Securities
None.
28
29
PART II - OTHER INFORMATION (CONTINUED)
Item 4. Submission of Matters to a Vote of Security Holders
On May 21, 1997, the Annual Meeting of Stockholders of The Columbia Gas
System, Inc. was held. On the record date, Columbia had outstanding
55,349,562 shares of common stock, each of which was entitled to one
vote at the meeting. The election of four directors each to serve a
term of three years and the election of Arthur Andersen LLP as
independent public accountants were voted upon and approved by the
requisite number of shares present in person or by proxy at the
meeting.
The following is a summary of the results of that meeting:
A. Election of Directors
Name of Director Votes For Votes Withheld
---------------- ---------- --------------
Wilson K. Cadman 43,827,165 416,325
James P. Heffernan 43,942,789 386,656
J. Bennett Johnston 43,844,644 421,207
James R. Thomas, II 43,886,571 402,524
B. Election of Arthur Andersen LLP as independent public accountants:
Votes For Votes Against Abstain
---------- ------------- -------
43,783,538 391,712 106,720
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit
Number
------
2-A* Unit Purchase Agreement between Pennzoil Exploration and
Production Company, Pennzoil Gas Marketing Company,
Pennzoil Energy Marketing Company and Columbia Energy
Services Corporation dated June 2, 1997.
2-B Agreement and Plan of Merger between Columbia Natural
Resources, Inc. and Alamco, Inc. dated May 27, 1997.
10-BG* Natural Gas Purchase Agreement between Columbia Energy
Services Corporation and Kerr-McGee Corporation dated March
31, 1997.
10-BH* Gas Sales Agreement between Pennzoil Exploration and
Production Company and Columbia Energy Services Corporation
dated June 2, 1997.
11 Statement re Computation of Per Share Earnings
12 Statements of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends
27 Financial Data Schedule
* A request for confidential treatment for certain sections of
these documents has been filed with the Commission.
The following reports on Form 8-K were filed during the second quarter of 1997.
29
30
PART II - OTHER INFORMATION (CONTINUED)
Financial
Item Statements
Reported Included Date of Event Date Filed
-------- ---------- --------------------------- -------------
5 No May, 21, 1997; May 27, 1997 May 28, 1997
5 No June 3, 1997 June 5, 1997
5 Yes ** July 14, 1997 July 16, 1997
** Summary of Financial and Operational data for three and six
months ended June 30, 1997
30
31
PART II - OTHER INFORMATION (CONTINUED)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Columbia Gas System, Inc.
---------------------------------------
(Registrant)
Date: August 14, 1997 By: /s/ Jeffrey W. Grossman
-------------------------------------
Jeffrey W. Grossman
Vice President and Controller
(Principal Accounting Officer
and Duly Authorized Officer)
31