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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, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ______ to ______
Commission file number 1-1098
COLUMBIA ENERGY GROUP
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-1594808
--------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
801 East 86th Avenue
Merrillville, Indiana 46410
--------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (877) 647-5990
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] or No [X]
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 MARCH 31, 2003
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
Statements of Consolidated Comprehensive Income (Loss).................. 7
Notes................................................................... 8
Item 2. Management's Narrative Analysis of Results of Operations................ 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............. 21
Item 4. Controls and Procedures................................................. 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 22
Item 2. Changes in Securities and Use of Proceeds............................... 24
Item 3. Defaults Upon Senior Securities......................................... 24
Item 4. Submission of Matters to a Vote of Security Holders..................... 24
Item 5. Other Information....................................................... 24
Item 6. Exhibits and Reports on Form 8-K........................................ 24
Signature........................................................................ 25
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) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
NET REVENUES
Distribution $ 326.6 $ 251.0 $1,348.1 $ 839.5
Transmission and Storage 204.3 201.8 511.3 495.7
Other 5.8 8.3 6.5 14.6
Affiliated revenues 2.5 5.2 4.3 13.0
- -----------------------------------------------------------------------------------------------------------------------
Gross Revenues 539.2 466.3 1,870.2 1,362.8
Cost of Sales 180.9 105.7 882.1 448.2
Cost of Sales - Affiliated - - 4.8 3.4
- -----------------------------------------------------------------------------------------------------------------------
Total Net Revenues 358.3 360.6 983.3 911.2
- -----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Operation and maintenance 146.1 178.1 334.6 335.8
Depreciation and amortization 41.0 38.7 82.2 87.1
Loss (Gain) on sale of assets 0.2 (0.1) 0.2 (3.9)
Other taxes 37.4 33.4 106.7 91.9
- -----------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 224.7 250.1 523.7 510.9
- -----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 133.6 110.5 459.6 400.3
- -----------------------------------------------------------------------------------------------------------------------
OTHER INCOME (DEDUCTIONS)
Interest expense (20.7) (27.7) (42.4) (55.6)
Interest expense - affiliated (1.1) (0.9) (2.7) (2.7)
Interest income 1.5 1.7 3.5 3.8
Interest income - affiliated 3.8 3.5 6.9 7.2
Other, net - 0.5 0.2 (0.1)
- -----------------------------------------------------------------------------------------------------------------------
Total Other Income (Deductions) (16.5) (22.9) (34.5) (47.4)
- -----------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 117.1 87.6 425.1 352.9
INCOME TAXES 46.0 32.5 161.7 132.6
- -----------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 71.1 55.1 263.4 220.3
- -----------------------------------------------------------------------------------------------------------------------
Income (Loss) from Discontinued Operations - net of taxes (0.7) 6.1 (1.4) 27.7
Loss on Disposition of Discontinued Operations - net of taxes (125.4) - (81.0) -
Change in Accounting - net of taxes - - (16.8) -
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (55.0) $ 61.2 $ 164.2 $ 248.0
=======================================================================================================================
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) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant $ 8,163.4 $ 8,119.2
Accumulated depreciation and amortization (3,931.7) (3,886.1)
- -------------------------------------------------------------------------------------------------------------------
Net utility plant 4,231.7 4,233.1
- -------------------------------------------------------------------------------------------------------------------
Other property, at cost, less accumulated depreciation 1.9 1.8
- -------------------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment 4,233.6 4,234.9
- -------------------------------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Assets of discontinued operations and assets held for sale 811.4 836.3
Unconsolidated affiliates 33.2 35.0
Other investments 40.3 21.2
- -------------------------------------------------------------------------------------------------------------------
Total Investments 884.9 892.5
- -------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 16.8 38.7
Cash invested in the NiSource money pool 274.7 -
Accounts receivable (less reserves of $25.6 and $13.1, respectively) 341.2 307.7
Unbilled revenue (less reserves of $0.1 and $2.2, respectively) 52.1 173.4
Gas inventory 123.1 214.7
Underrecovered gas and fuel costs 52.6 90.1
Materials and supplies, at average cost 15.9 15.3
Price risk management assets 35.4 25.4
Exchange gas receivable 210.0 103.9
Prepayments and other 156.2 156.6
- -------------------------------------------------------------------------------------------------------------------
Total Current Assets 1,278.0 1,125.8
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Price risk management assets 151.3 111.1
Regulatory assets 355.5 359.4
Intangible assets, less accumulated amortization 2.9 2.9
Deferred charges and other 79.4 81.0
- -------------------------------------------------------------------------------------------------------------------
Total Other Assets 589.1 554.4
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,985.6 $ 6,807.6
===================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
4
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, December 31,
(in millions) 2003 2002
- ------------------------------------------------------------------------------------------------------------------
(unaudited)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 2,591.2 $ 2,396.2
Long-term debt, excluding amounts due within one year 1,390.1 1,387.8
- ------------------------------------------------------------------------------------------------------------------
Total Capitalization 3,981.3 3,784.0
- ------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt 0.2 0.2
Short-term borrowings - 0.8
Accounts payable 240.2 204.2
Accounts payable-Affiliated 24.2 122.7
Customer deposits 20.5 21.0
Taxes accrued 265.8 169.4
Interest accrued 31.0 18.8
Overrecovered gas and fuel costs 29.8 13.1
Price risk management liabilities 2.2 3.3
Exchange gas payable 362.6 411.9
Current deferred revenue 16.9 16.9
Accrued liability for postretirement and postemployment benefits 32.8 27.4
Other accruals 307.3 316.1
- ------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 1,333.5 1,325.8
- ------------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES AND DEFERRED CREDITS
Deferred income taxes 723.3 649.5
Deferred investment tax credits 27.6 28.3
Deferred credits 47.3 41.6
Noncurrent deferred revenue 127.2 130.1
Accrued liability for postretirement and postemployment benefits 95.2 103.2
Liabilities of discontinued operations and liabilities held for sale 458.2 539.0
Other noncurrent liabilities 192.0 206.1
- ------------------------------------------------------------------------------------------------------------------
Total Other 1,670.8 1,697.8
- ------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES - -
- ------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 6,985.6 $ 6,807.6
==================================================================================================================
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) 2003 2002
- -------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income $ 164.2 $ 248.0
Adjustments to reconcile net income to net cash from
continuing operations:
Depreciation and amortization 82.2 87.1
Net changes in price risk management activities (19.4) (46.5)
Deferred income taxes and investment tax credits 59.9 43.8
Deferred revenue (2.9) (8.0)
Gain on sale of assets 0.2 (3.9)
Change in accounting 16.8 -
Loss on sale of discontinued assets 81.0 -
Loss (Income) from discontinued operations 1.4 (27.7)
Other assets 7.0 (11.3)
Other liabilities (32.2) (5.5)
Changes in assets and liabilities:
Accounts receivable, net 80.1 470.1
Inventories 91.1 65.5
Accounts payable (62.2) (228.1)
Taxes accrued (14.6) 44.7
Under/Overrecovered gas and fuel costs 54.2 (50.1)
Exchange gas receivable/payable (155.5) 53.3
Other accruals (61.2) (125.3)
Other assets (10.9) 5.2
Other liabilities 11.7 17.1
- -------------------------------------------------------------------------------------------------------------------
Net Cash from Continuing Activities 290.9 528.4
Net Cash from Discontinued Activities (58.8) (41.5)
- -------------------------------------------------------------------------------------------------------------------
Net Cash from Operating Activities 232.1 486.9
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Capital expenditures (74.4) (77.2)
Proceeds from disposition of assets 95.9 -
- -------------------------------------------------------------------------------------------------------------------
Net Investment Activities 21.5 (77.2)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Changes in short-term debt (0.8) -
Dividends paid - common shares - (201.8)
Other financing activity - 7.8
- -------------------------------------------------------------------------------------------------------------------
Net Financing Activities (0.8) (194.0)
- -------------------------------------------------------------------------------------------------------------------
Increase in cash and temporary cash investments 252.8 215.7
Cash and temporary cash investments at beginning of year 38.7 52.4
- -------------------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $ 291.5 $ 268.1
===================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized 32.9 25.6
Interest capitalized 0.7 1.4
Cash paid for income taxes (net of refunds) 101.6 6.4
- -------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
(in millions) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (55.0) $ 61.2 $ 164.2 $ 248.0
Other comprehensive income, net of tax
Foreign currency translation adjustment 0.6 0.1 1.5 1.0
Net unrealized gains on cash flow hedges 20.5 27.0 29.3 11.2
- -------------------------------------------------------------------------------------------------------------------
Total other comprehensive income 21.1 27.1 30.8 12.2
- -------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income (Loss) $ (33.9) $ 88.3 $ 195.0 $ 260.2
- -------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
7
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 of
America.
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,
2002. 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 2002 financial statements to conform to
the 2003 presentation.
2. RESTRUCTURING ACTIVITIES
Since 2000, Columbia has implemented restructuring initiatives to streamline its
operations and realize efficiencies from the acquisition of Columbia by NiSource
Inc. (NiSource).
For all of the plans, a total of approximately 1,000 management, professional,
administrative and technical positions have been identified for elimination. As
of June 30, 2003, approximately 860 employees were terminated, of whom
approximately 65 employees were terminated during the six months ended June 30,
2003. At June 30, 2003 and December 31, 2002, the consolidated balance sheets
reflected liabilities of $26.4 million and $35.4 million related to the
restructuring plans, respectively. During the quarter and six months ended June
30, 2003, $3.4 million and $8.9 million of benefits were paid, respectively, as
a result of the restructuring plans. Additionally, during the quarter and six
months ended June 30, 2003, the restructuring plan liability was increased by
$0.2 million and decreased $0.1 million, respectively, due to adjustments in
estimated costs related to the reorganization initiatives.
3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
On July 3, 2003, Columbia announced that it reached an agreement to sell its
exploration and production subsidiary, Columbia Energy Resources, Inc. (CER).
Under the CER sales agreement, Triana Energy Holdings, an exploration and
production company based in Charleston, WV and an affiliate of Morgan Stanley
Dean Witter Capital Partners IV, L.P. (MSCP), agreed to purchase all of the
stock of CER for $330.0 million in cash, plus the assumption of obligations to
deliver approximately 94.0 billion cubic feet (Bcf) of natural gas pursuant to
existing forward sales contracts. The sale will bring about the transfer of 1.1
trillion cubic feet of natural gas reserves. The transaction is expected to be
completed in the third quarter 2003. The cash proceeds from the sales will be
used to reduce Columbia's debt. Columbia has accounted for CER as discontinued
operations as of June 30, 2003 and has adjusted all periods presented
accordingly. During the second quarter of 2003, Columbia recognized an after-tax
loss of $122.9 million related to the pending sale.
On January 28, 2003, Columbia's subsidiary Columbia Natural Resources, Inc.
(CNR) sold its interest in certain natural gas exploration and production assets
in New York State representing 39.3 billion cubic feet in reserves and
approximately 6.0 Bcf of production for approximately $95.0 million. Columbia
recognized an after-tax gain on the disposition of $44.4 million in the first
quarter 2003. In accordance with the presentation of Columbia's exploration and
production business, CNR's interest in the assets is reported as discontinued
operations. All periods presented have been adjusted to conform to the revised
presentation.
During 2002, Columbia decided to exit the telecommunications business. The
results of operations related to Columbia Transmission Communications
Corporation (Transcom) were displayed as discontinued operations on Columbia's
consolidated income statement and its assets and liabilities were separately
aggregated and reflected as assets and liabilities of discontinued operations on
the consolidated balance sheets for all periods presented. On July 3, 2003,
Columbia executed an agreement for the sale of 100% of its shares in Transcom.
The transaction is expected to be completed in the third quarter of 2003. During
the second quarter of 2003, Columbia recognized an after-tax loss of $2.5
million loss related to the pending sale.
8
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Columbia has decided to sell Columbia Service Partners, Inc. (Columbia Service
Partners), a subsidiary of Columbia. The net assets and net liabilities of
Columbia Service Partners were reported as held for sale at June 30, 2003.
The income (loss) from discontinued operations are provided in the following
table:
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- --------------------
(in millions) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------
REVENUES FROM DISCONTINUED OPERATIONS $ 35.5 48.7 $ 78.0 122.5
- ------------------------------------------------------------------------------------------------------------------
Income from discontinued operations $ 1.7 9.9 $ 5.2 45.5
Income taxes 2.4 3.8 6.6 17.8
- ------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS $ (0.7) $ 6.1 $ (1.4) $ 27.7
- ------------------------------------------------------------------------------------------------------------------
The assets and liabilities of discontinued operations and assests and
liabilities held for sales were as follows:
JUNE 30, December 31,
(in millions) 2003 2002
- ----------------------------------------------------------------------------------------------------------
ASSETS HELD FOR SALE AND ASSETS OF DISCONTINUED OPERATIONS
Accounts receivable, net $ 36.9 $ 44.9
Property, plant and equipment, net 683.3 682.2
Other assets 91.2 109.2
- -------------------------------------------------------------------------------------------------------
Assets Held for Sale and Assets of Discontinued Operations 811.4 836.3
- -------------------------------------------------------------------------------------------------------
LIABILITIES HELD FOR SALE AND LIABILITIES OF DISCONTINUED OPERATIONS
Debt (0.1) (0.1)
Current liabilities (146.1) (191.9)
Other liabilities (312.0) (347.0)
- -------------------------------------------------------------------------------------------------------
Liabilities Held for Sale and Liabilities of Discontinued Operations (458.2) (539.0)
- -------------------------------------------------------------------------------------------------------
NET ASSETS AND NET LIABILITIES HELD FOR SALE AND NET ASSETS
AND NET LIABILITIES OF DISCONTINUED OPERATIONS $ 353.2 $ 297.3
- -------------------------------------------------------------------------------------------------------
4. RISK MANAGEMENT ACTIVITIES
Columbia is exposed to market risk due to fluctuations in commodity prices,
primarily at its exploration and production subsidiary, which is currently
classified as a discontinued operation. Columbia uses commodity-based derivative
financial instruments to manage certain risks in its business and accounts for
its derivatives under Statement of Financial Accounting Standards (SFAS) No.
133, "Accounting for Derivative Instruments and Hedging Activity." Financial
instruments authorized for use by Columbia for hedging include futures, swaps
and options. Columbia is also exposed to interest rate risk and has entered into
interest rate swaps to hedge a portion of the interest rate risk associated with
its long-term debt.
9
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HEDGING ACTIVITIES. The activity for the quarter and six months ended June 30,
2003 and June 30, 2002 affecting other comprehensive income, with respect to
cash flow hedges included the following:
Three Months Six Months
Ended June 30, Ended June 30,
----------------- -----------------
(in millions, net of tax) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying as cash flow
hedges at the beginning of the period $ 73.8 $ 36.6 $ 65.0 $ 52.4
Unrealized hedging gains arising during the period on
derivatives qualifying as cash flow hedges 23.9 24.6 34.7 33.8
Reclassification adjustment for net gain (loss) included
in net income (loss) (3.4) 2.4 (5.4) (22.6)
- -------------------------------------------------------------------------------------------------------------------
Net unrealized gains on derivatives qualifying as cash flow
hedges at the end of the period $ 94.3 $ 63.6 $ 94.3 $ 63.6
- -------------------------------------------------------------------------------------------------------------------
Unrealized gains and losses on Columbia's hedges were recorded as price risk
management assets and liabilities. The accompanying Consolidated Balance Sheets
reflected price risk management assets related to unrealized gains on hedges of
$186.8 million and $136.8 million at June 30, 2003 and December 31, 2002,
respectively, of which $35.4 million and $25.4 million were included in "Current
Assets," $151.3 million and $111.1 million were included in "Other Assets" and
$0.1 million and $0.3 million were included in "Assets of discontinued
operations." Price risk management liabilities related to unrealized losses on
hedges of $12.1 million and $10.0 million at June 30, 2003 and December 31,
2002, respectively, of which $2.2 million and $3.3 million were included in
"Current Liabilities" and $9.9 million and $6.7 million were included in
"Liabilities of discontinued operations."
During the second quarter 2003, a net gain of $0.1 million, net of tax, was
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 no amounts 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
income recognition of amounts currently classified in other comprehensive income
of approximately $18.0 million, net of tax.
10
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In July 2001, the
Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires entities to record
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred. When the liability is initially recorded, the entity
capitalizes the cost, thereby increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted, and the capitalized cost
is depreciated over the useful life of the related asset. The rate-regulated
subsidiaries defer the difference between the amount recognized for depreciation
and accretion and the amount collected in rates as required pursuant to SFAS No.
71, "Accounting for the Effects of Certain Types of Regulation."
Columbia's asset retirement obligations liability was mainly comprised of
obligations for plugging and abandonment costs related to the exploration and
production operations, which is currently classified as a discontinued
operation. Significant liabilities were also calculated for the pipeline
operations related to disposing of offshore platforms, cutting, capping and
filling offshore pipelines and certain storage facilities planned for
abandonment. Minor liabilities were identified for the telecommunications
network, which is currently classified as a discontinued operation. Asset
retirement obligations related to the gas distribution facilities and gas
pipeline networks were identified, however the associated liabilities were not
quantifiable due to the indeterminate lives of the associated assets.
Columbia adopted the provisions of SFAS No. 143 on January 1, 2003, and as a
result Columbia recognized an asset retirement obligations liability of $49.2
million. In addition, Columbia capitalized $19.3 million in additions to plant
assets, net of accumulated amortization. An expense of $1.7 million was
recognized immediately upon adoption related to discontinued operations. The
cumulative after-tax effect of adopting SFAS No. 143 amounted to $16.8 million.
Certain costs of removal, that have been and continue to be included in
depreciation rates and collected in the service rates of the rate-regulated
subsidiaries, did not meet the definition of an asset retirement obligation
pursuant to SFAS No. 143. The amount of the other costs of removal reflected as
a component of Columbia's accumulated depreciation and amortization was
approximately $280.8 million at June 30, 2003.
For the quarter and six months ended June 30, 2003, Columbia recognized
accretion expense of $0.8 million and $1.6 million, respectively. The asset
retirement obligations liability totaled $42.6 million at June 30, 2003, $34.6
million of which was reported in discontinued operations. In addition, the
liability was reduced by $8.2 million in the second quarter of 2003 as a result
of a change in the estimated plugging and abandonment cost related to the
exploration and production business. Had Columbia adopted SFAS No. 143 at the
dates the actual liabilities were incurred, the asset retirement obligations
liability would have been $44.7 million and $40.8 million at December 31, 2001
and 2000, respectively, of which $35.3 million and $31.9 million would have been
reported in discontinued operations.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 149 - AMENDMENT OF STATEMENT 133
ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Effective July 1, 2003,
Columbia adopted Statement of Financial Accounting Standards No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS No.
149). SFAS No. 149 codifies and clarifies financial accounting and reporting for
derivative instruments and hedging activities under Statement of Financial
Accounting Standards No. 133, "Derivative Instruments and Hedging Activities,"
primarily in connection with decisions made by the Derivatives Implementation
Group and for implementation issues raised in the application of SFAS No. 133.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003. The impact on Columbia's existing contracts at June 30, 2003 is not
material. Because the effect of SFAS No. 149 is dependent upon the terms of
contracts the company enters into after June 30, 2003, Columbia cannot determine
the impact of adopting SFAS No. 149 on a prospective basis.
11
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS AND AWARDS
NiSource currently issues long-term incentive grants to key management
employees, including the management of Columbia. SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123), encourages, but does not require,
entities to adopt the fair value method of accounting for stock-based
compensation plans. The fair value method would require the amortization of the
fair value of stock-based compensation at the date of grant over the related
vesting period. Columbia continues to apply the intrinsic value method of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," for awards granted under the stock-based compensation plans. The
following table illustrates the effect on net income as if Columbia had applied
the fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
(in millions) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS)
As reported $ (55.0) $ 61.2 $ 164.2 $ 248.0
Less: Total stock-based employee compensation expense
determined under the fair value method for all
awards, net of tax 1.0 1.1 2.4 1.7
- --------------------------------------------------------------------------------------------------------------------
Pro forma $ (56.0) $ 60.1 $ 161.8 $ 246.3
- --------------------------------------------------------------------------------------------------------------------
7. LEGAL PROCEEDINGS
In the normal course of its business, Columbia and its subsidiaries have been
named as defendants in various legal proceedings. In the opinion of management,
the ultimate disposition of these currently asserted claims would not have a
material adverse impact on Columbia's consolidated financial position or results
of operations.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table displays the components of Accumulated Other Comprehensive
Income, included in "Common Stock Equity," on the consolidated balance sheets.
JUNE 30, December 31,
(in millions, net of tax) 2003 2002
- --------------------------------------------------------------------------------------------------
Foreign currency translation adjustment $ 0.6 $ (0.9)
Gain on available for sale securities 0.8 0.3
Net unrealized gains on cash flow hedges 94.3 65.0
Minimum pension liability adjustment (20.5) (20.1)
- -----------------------------------------------------------------------------------------------
TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME $ 75.2 $ 44.3
- -----------------------------------------------------------------------------------------------
9. GUARANTEES AND INDEMNITIES
As a part of normal business, Columbia and certain subsidiaries enter into
various agreements providing financial or performance assurance to third parties
on behalf of other subsidiaries. These agreements are entered into primarily to
support or enhance the creditworthiness otherwise attributed to a subsidiary on
a stand-alone basis, thereby facilitating the extension of sufficient credit to
accomplish the subsidiaries' intended commercial purposes. The total commercial
commitments in existence at June 30, 2003 and the years in which they expire
were:
(in millions) 2003 2004 2005 2006 2007 After
- ------------------------------------------------------------------------------------------------------------------
Guarantees supporting commodity
transactions of subsidiaries $ - $ - $ 50.0 $ 858.7 $ 43.8 $ 163.6
Other guarantees 130.0 - 51.1 - - 106.7
- ------------------------------------------------------------------------------------------------------------------
Total commercial commitments $ 130.0 $ - $101.1 $ 858.7 $ 43.8 $ 270.3
- ------------------------------------------------------------------------------------------------------------------
12
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Columbia has issued guarantees, which support up to approximately $1.1 billion
of commodity-related payments for its subsidiaries involved in satisfying
requirements under forward gas sales agreements. These guarantees were provided
to counterparties in order to facilitate the transactions. To the extent
liabilities exist under the commodity-related contracts subject to these
guarantees, such liabilities are included in the consolidated balance sheets.
Columbia has purchase and sales agreement guarantees totaling $142.5 million,
which guarantee performance of the seller's covenants, obligations, liabilities,
representations and warranties under the agreements. No amounts related to the
purchase and sales agreement guarantees are reflected in the consolidated
balance sheets.
Management believes that the likelihood Columbia would be required to perform or
otherwise incur any significant losses associated with any of the aforementioned
guarantees is remote.
Within the sales agreement of CER that is expected to be sold in the third
quarter of 2003, Columbia has made certain operational and financial guarantees.
Certain guarantees by Columbia within the CER sales agreement were related to
the CNR forward gas sales agreements with Mahonia II Limited (Mahonia) and the
associated surety bonds will remain in place after the consummation of the
acquisition and will decline over time as volumes (approximately 94.0 Bcf) are
delivered in satisfaction of the contractual obligations, ending in February
2006. Offsetting certain amounts that may be owed by Columbia under the
guarantees, Columbia will be indemnified by Triana and MSCP will fund up to a
maximum of $221.0 million (as of August 31, 2003) of additional equity to Triana
to support Triana's indemnity, for Triana's gas delivery and related obligation
to Mahonia. The MSCP commitment declines over time in concert with the surety
bonds and the guaranteed obligation to deliver gas to Mahonia.
After the close of the transaction, Triana will own approximately 1.1 Tcf of
proved reserves, and will be capitalized with $330.0 million, approximately
$200.0 million of which will be provided a as initial equity by MSCP and the
remainder of which will be provided as part of $500.0 million revolving credit
facility. Columbia believes that the combination of Triana's proved reserves,
sufficient capitalization, and access to the credit facility, combined with the
Triana indemnity and the $221.0 million of further commitments to Triana from
MSCP, will adequately offset any losses that may be incurred by Columbia due to
Triana's non-performance under the Mahonia agreements. Accordingly, Columbia has
not recognized a liability related to the retention of the Mahonia guarantees.
13
ITEM 1. FINANCIAL STATEMENTS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. PRESENTATION OF SEGMENT INFORMATION
Columbia manages its operations in three primary segments: Distribution,
Transmission and Storage, and Other. 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.
During the second quarter 2003, Columbia re-aligned its reportable segments to
reflect the announced sale of its exploration and production operations. As of
the second quarter 2003, Columbia will no longer report an Exploration and
Production segment. All periods have been adjusted to conform with the
realignment.
Three Months Six Months
Ended June 30, Ended June 30,
--------------------- ------------------------
(in millions) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------
REVENUES
DISTRIBUTION
Unaffiliated $ 387.2 $ 312.8 $ 1,548.5 $ 1,021.7
Intersegment and affiliates - 3.8 - 8.4
- -------------------------------------------------------------------------------------------------------------------
Total 387.2 316.6 1,548.5 1,030.1
- -------------------------------------------------------------------------------------------------------------------
TRANSMISSION AND STORAGE
Unaffiliated 140.8 140.4 302.8 314.1
Intersegment and affiliates 50.1 54.9 117.6 126.1
- -------------------------------------------------------------------------------------------------------------------
Total 190.9 195.3 420.4 440.2
- -------------------------------------------------------------------------------------------------------------------
OTHER
Unaffiliated 6.7 6.7 14.1 12.2
Intersegment and affiliates 0.1 - 0.1 0.1
- -------------------------------------------------------------------------------------------------------------------
Total 6.8 6.7 14.2 12.3
- -------------------------------------------------------------------------------------------------------------------
Adjustments and eliminations (45.7) (52.3) (112.9) (119.8)
- -------------------------------------------------------------------------------------------------------------------
CONSOLIDATED REVENUES $ 539.2 $ 466.3 $ 1,870.2 $ 1,362.8
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
Distribution $ 47.8 $ 38.4 $ 253.9 $ 190.1
Transmission and Storage 87.4 75.6 198.3 201.4
Other (0.5) (1.7) (0.7) 10.9
Corporate (1.1) (1.8) 8.1 (2.1)
- -------------------------------------------------------------------------------------------------------------------
CONSOLIDATED $ 133.6 $ 110.5 $ 459.6 $ 400.3
- -------------------------------------------------------------------------------------------------------------------
14
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
Columbia Energy Group (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
Inc. (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 of Results of Operations, including
statements regarding market risk sensitive instruments, contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Investors and prospective investors should understand that many
factors govern whether any forward-looking statement contained herein will be or
can be achieved. Any one of those factors could cause actual results to differ
materially from those projected. These forward-looking statements include, but
are not limited to, statements concerning Columbia's plans, proposed
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 dispositions, growth
opportunities for Columbia's 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,
2002.
SECOND QUARTER 2003 CONSOLIDATED RESULTS
Net Income (Loss)
Columbia reported a net loss of $55.0 million for the three months ended June
30, 2003, compared to net income of $61.2 million for the second quarter in
2002. Operating income was $133.6 million, an increase of $23.1 million from the
same period in 2002.
Net Revenues
Total consolidated net revenues (gross revenues less cost of sales) for the
three months ended June 30, 2003, were $358.3 million, a $2.3 million decrease
over the same period last year. The decrease in net revenues was due to lower
natural gas sales of $5.6 million as a result of unfavorable weather and lower
interruptible service revenues of $1.6 million resulting from higher gas
commodity costs and early storage refills by firm customers, which reduce
available capacity for interruptible customers, partly offset by an adjustment
recorded in the second quarter of 2003 for gas costs associated with certain
customers.
Expenses
Operating expenses for the second quarter 2003 were $224.7 million, a decrease
of $25.4 million from the 2002 period. The decrease was primarily due to a
reduction in employee-related and administrative expenses of $15.7 million and
by a reversal of a litigation reserve of $6.6 million relating to a lawsuit that
was settled in the second quarter of 2003. The 2002 period was unfavorably
impacted by the recognition of a reserve of $6.0 million related to a long-term
note receivable.
15
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
Other Income (Deductions)
Interest expense was $21.8 million for the quarter, a decrease of $6.8 million
compared to the second quarter of 2002. The decrease was primarily due to lower
interest rates on long-term debt.
Income Taxes
Income tax expense for the second quarter 2003 was $46.0 million, an increase of
$13.5 million compared to the 2002 period, due to higher pre-tax income.
Discontinued Operations
Loss from discontinued operations was $126.1 million for the second quarter of
2003 versus income form discontinued operations of $6.1 million in the second
quarter of 2002. In early July, Columbia announced that it reached an agreement
to sell its exploration and production subsidiary, Columbia Energy Resources,
Inc. (CER). An after-tax loss of $122.9 million, related to the sale was
recorded in the second quarter. On July 3, 2003, Columbia executed an agreement
for the sale of 100% of its shares in Columbia Transmission Communications Corp.
(Transcom). The transaction is expected to be completed in the third quarter of
2003. An after-tax loss of $2.5 million, related to the sale was recorded in the
second quarter.
SIX MONTHS CONSOLIDATED RESULTS
Net Income
Columbia reported net income of $164.2 million for the six months ended June 30,
2003, compared to net income of $248.0 million for the same period in 2002, a
decrease of $83.8 million. Operating income was $459.6 million, an increase of
$59.3 million from the same period in 2002.
Net Revenues
Total consolidated net revenues (gross revenues less cost of sales) for the six
months ended June 30, 2003, were $983.3 million, a $72.1 million increase over
the same period last year. The increase in net revenues was a result of
increased natural gas sales and deliveries due to colder weather amounting to
$31.2 million, net of $20.2 million from lower interruptible service revenues
and lower firm service revenues due to measures taken to meet customer demand
during a period of sustained cold weather in the northeast market areas early in
the year, $13.5 million in higher non-weather related gas sales and higher gross
receipts taxes, which were offset in operating expenses.
Expenses
Operating expenses for the first half of 2003 were $523.7 million, an increase
of $12.8 million from the 2002 period. Other taxes increased $14.8 million,
which were partly offset by decreased operation and maintenance expenses of $1.2
million. Other taxes increased due to the effects of higher commodity prices on
gross receipts taxes and are generally offset in revenues. The decrease in
operation and maintenance expenses was primarily due to a reduction in
employee-related and administrative expenses of $18.4 million, a reversal of a
litigation reserve of $6.6 million relating to a lawsuit that was settled in the
second quarter of 2003 and a $4.8 million decrease in weather insurance
premiums. Partly offsetting the decrease in operation and maintenance was
increased uncollectible receivables of $13.5 million from a modification in the
method of calculation and the effects of weather-driven higher gas costs on the
residential customer base and increased pension and postretirement expenses of
$3.4 million. The 2002 period was favorably impacted by $12.5 million in
insurance recoveries and unfavorably impacted by $6.0 million from the
recognition of a reserve related to a long-term note receivable.
Other Income (Deductions)
Interest expense was $45.1 million for the first half 2003, a decrease of $13.2
million compared to the same period in 2002. The decrease was primarily due to
lower interest rates on long-term debt.
16
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
Income Taxes
Income tax expense for the first six months of 2003 was $161.7 million, an
increase of $29.1 million compared to the 2002 period, due to higher pre-tax
income.
Discontinued Operations
Loss from discontinued operations was $82.4 million for the first six months of
2003 versus income from discontinued operations of $27.7 in the prior-year
period. An after-tax loss of $125.4 million, related to the pending sales of CER
and Transcom was recorded in the second quarter, slightly offset by a first
quarter 2003 gain on the sale of CER's interest in natural gas production
properties in New York State. Columbia accounted for CER as discontinued
operation as of June 30, 2003, and adjusted all periods presented accordingly.
Change in Accounting
The change in accounting of $16.8 million, net-of-tax, resulted from the
cumulative effect of adopting the Financial Accounting Standards Board statement
on asset retirement obligations.
LIQUIDITY AND CAPITAL RESOURCES
A significant portion of Columbia's operations is subject to seasonal
fluctuations in cash flows. During the heating season, which is primarily from
November through March, cash receipts from natural gas 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.
Net cash from continuing operations for the quarter ended June 30, 2003 was
$290.9 million. Cash used from working capital was $67.3 million, principally
driven by a decrease in exchange gas payables, accounts payable and other
accruals, partly offset by decreased accounts receivable, inventories and
underrecovered gas and fuel costs.
Columbia satisfies its liquidity requirements primarily through internally
generated funds and through intercompany borrowings from the NiSource Money
Pool. Columbia may borrow, on an intercompany basis, a maximum of $1.0 billion
through the NiSource Money Pool as approved by the Securities and Exchange
Commission under the Public Utility Holding Company Act of 1935. NiSource
Finance Corp. (NFC) provides funding to the NiSource Money Pool from external
borrowing sources and maintains an aggregate $1.25 billion revolving credit
facility with a syndicate of banks. The credit facility is guaranteed by
NiSource. As of June 30, 2003, Columbia had no intercompany short-term
borrowings with NFC outstanding.
On July 3, 2003, Columbia announced that it reached an agreement to sell its
exploration and production subsidiary, CER. Under the CER agreement, Triana
Energy Holdings, an exploration and production company based in Charleston, WV
and an affiliate of Morgan Stanley Dean Witter Capital Partners IV, L.P., agreed
to purchase all of the stock of CER for $330.0 million in cash, plus the
assumption of obligations to deliver approximately 94.0 billion cubic feet (Bcf)
of natural gas pursuant to existing forward sales contracts. The sale will bring
about the transfer of 1.1 trillion cubic feet of natural gas reserves. The
transaction is expected to be completed in the third quarter of 2003. The cash
proceeds from the sales will be used to reduce Columbia's debt.
On January 28, 2003, Columbia's subsidiary Columbia Natural Resources, Inc. sold
its interest in certain natural gas exploration and production assets in New
York State representing 39.3 Bcf in reserves and approximately 6.0 Bcf of
production for approximately $95.0 million. Columbia recognized an after-tax
gain of $44.4 million related to the sale in the first quarter 2003.
Columbia has entered into interest rate swap agreements to modify the interest
characteristics of its outstanding long-term debt. Under the terms of 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 and hedge the fair value of the underlying debt.
On April 11, 2003, Columbia entered into fixed-to-variable interest rate swap
agreements in a notional amount of $100.0 million with two counterparties.
Columbia will receive payments based upon a fixed 7.42% interest rate and
17
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
pay a floating interest amount based on U.S. 6-month LIBOR-BBA plus 2.38 percent
per annum. There was no exchange of premium at the initial date of the swaps.
The swaps contain mirror-image call provisions that allow the counterparties to
cancel the agreements beginning November 28, 2005 through the stated maturity
date. In addition, each party has the right to cancel the swaps on either April
15, 2008 or April 15, 2013 at mid-market. Effectiveness of the swaps was
determined using the short-cut method pursuant to Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activity" as subsequently amended by SFAS No. 137 and SFAS No. 138
(collectively referred to as SFAS No. 133).
On April 4, 2003, Columbia terminated a fixed-to-variable interest rate swap
agreement containing a notional amount of $100.0 million. Columbia received a
settlement payment from the counterparty amounting to $8.2 million, which will
be amortized to interest expense over the remaining term (2.5 years) of the
underlying debt.
Columbia Gas of Ohio, Inc. is a party to an agreement to sell, without recourse,
up to $200.0 million 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. As of
June 30, 2003, CARC had $50.0 million accounts receivable under the conduit.
Management believes that its sources of funding are sufficient to meet the
short- and long-term liquidity needs of Columbia.
Credit Ratings
On July 8, 2003, Moody's Investors Service affirmed the senior unsecured ratings
of NiSource at Baa3, and the existing ratings of all other subsidiaries
including Columbia, concluding a review for possible downgrade that began on May
13, 2003. Moody's ratings outlook for NiSource and all of its subsidiaries is
now "stable". On June 30, 2003, Fitch Ratings affirmed their BBB senior
unsecured rating for NiSource and the BBB+ rating for the Columbia subsidiary.
Fitch's rating outlook for all entities is stable. On June 16, 2003, Standard
and Poor's affirmed its senior unsecured ratings of NiSource at BBB, and the
existing ratings of all other subsidiaries including Columbia. Standard and
Poor's outlook for NiSource and all of its subsidiaries were revised to stable
from negative.
OTHER INFORMATION
Critical Accounting Policies
Columbia applies certain accounting policies based on the accounting
requirements discussed below that have had, and may continue to have,
significant impacts on Columbia's results of operations and consolidated balance
sheets.
SFAS NO. 71 - ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION. SFAS
No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No.
71), provides that rate-regulated subsidiaries account for and report assets and
liabilities consistent with the economic effect of the way in which regulators
establish rates, if the rates established are designed to recover the costs of
providing the regulated service and if the competitive environment makes it
probable that such rates can be charged and collected. Columbia's rate-regulated
subsidiaries follow the accounting and reporting requirements of SFAS No. 71.
Certain expenses and credits subject to utility regulation or rate determination
normally reflected in income are deferred on the balance sheet and are
recognized in income as the related amounts are included in service rates and
recovered from or refunded to customers.
In the event that regulation significantly changes the opportunity for Columbia
to recover its costs in the future, all or a portion of Columbia's regulated
operations may no longer meet the criteria for the application of SFAS No. 71.
In such event, a write-down of all or a portion of Columbia's existing
regulatory assets and liabilities could result. If transition cost recovery is
approved by the appropriate regulatory bodies that would meet the requirements
under generally accepted accounting principles for continued accounting as
regulatory assets and liabilities during such recovery period, the regulatory
assets and liabilities would be reported at the recoverable amounts. If unable
to continue to apply the provisions of SFAS No. 71, Columbia would be required
to apply the provisions of SFAS No. 101, "Regulated Enterprises - Accounting for
the Discontinuation of Application of Financial Accounting Standards Board
Statement No. 71." In management's opinion, Columbia's regulated subsidiaries
will be subject to SFAS No. 71 for the foreseeable future.
18
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
Certain of the regulatory assets reflected on Columbia's Consolidated Balance
Sheets require specific regulatory action in order to be included in future
service rates. Although recovery of these amounts is not guaranteed, Columbia
believes that these costs meet the requirements for deferral as regulatory
assets under SFAS No. 71.
HEDGING ACTIVITIES. Under SFAS No. 133, the accounting for changes in the fair
value of a derivative depends on the intended use of the derivative and
resulting designation. Unrealized and realized gains and losses are recognized
each period as components of other comprehensive income, earnings, or regulatory
assets and liabilities depending on the nature of such derivatives. For
subsidiaries that utilize derivatives for cash flow hedges, the effective
portions of the gains and losses are recorded to other comprehensive income and
are recognized in earnings concurrent with the disposition of the hedged risks.
For fair value hedges, the gains and losses are recorded in earnings each period
along with the change in the fair value of the hedged item. As a result of the
rate-making process, the rate-regulated subsidiaries generally record gains and
losses as regulatory liabilities or assets and recognize such gains or losses in
earnings when recovered in revenues.
In order for a derivative contract to be designated as a hedge, the relationship
between the hedging instrument and the hedged item or transaction must be highly
effective. The effectiveness test is performed at the inception of the hedge and
each reporting period thereafter, throughout the period that the hedge is
designated. Any amounts determined to be ineffective are recorded currently in
earnings.
Although Columbia applies some judgment in the assessment of hedge effectiveness
to designate certain derivatives as hedges, the nature of the contracts used to
hedge the underlying risks is such that the correlation of the changes in fair
values of the derivatives and underlying risks is high. Columbia generally uses
NYMEX exchange-traded natural gas futures and options contracts and
over-the-counter swaps based on published indices to hedge the risks underlying
its natural-gas-related businesses.
PENSIONS AND POSTRETIREMENT BENEFITS. Columbia has defined benefit plans for
both pensions and other postretirement benefits. The plans are accounted for
under SFAS No. 87, "Employers' Accounting for Pensions," and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions." The
calculation of the net obligations and annual expense related to the plans
requires a significant degree of judgment regarding the discount rates to be
used in bringing the liabilities to present value, long-term returns on plan
assets and employee longevity, amongst other assumptions. Due to the size of the
plans and the long-term nature of the associated liabilities, changes in the
assumptions used in the actuarial estimates could have material impacts on the
measurement of the net obligations and annual expense recognition.
Refer to "Recently Issued Accounting Pronouncements" in Note 5 of the Notes of
Consolidated Financial Statements for information regarding recently issued
accounting standards.
Regulatory Matters
Changes in gas industry regulation, which began in the mid-1980s at the federal
level, has broadened to retail customers at the state level. For many years,
large industrial and commercial customers have had the ability to purchase
natural gas directly from marketers and to use Distribution's facilities for
transportation services. Additionally, as of June 30, 2003, approximately 0.8
million of Distribution's residential and commercial customers had selected an
alternate supplier.
Distribution continues to explore customer choice opportunities through
regulatory initiatives in all of its jurisdictions. However, Columbia Gas of
Kentucky has filed to terminate its choice program for residential and
commercial customers and discussions are ongoing. While customer choice programs
are intended to provide all customer classes with the opportunity to obtain gas
supplies from alternative merchants, Distribution expects to play a substantial
role in supplying gas commodity services to its customers in the foreseeable
future. As customers enroll in these programs and purchase their gas from other
suppliers, the Distribution subsidiaries are sometimes left with pipeline
capacity they have contracted for, but no longer need. The state commissions in
jurisdictions served by Distribution are at various stages in addressing these
issues and other transition considerations. Distribution is currently
recovering, or has the opportunity to recover, the costs resulting from the
unbundling of its services and believes that most of such future costs will be
mitigated or recovered. Methodologies for mitigating or recovering transition
costs include incentive sharing mechanisms, temporarily reducing levels of
reserved pipeline capacity and
19
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
mandatory assignment of pipeline capacity to alternative suppliers.
Environmental Matters
Proposals for voluntary initiatives and mandatory controls are being discussed
both in the United States and worldwide to reduce so-called "greenhouse gases"
such as carbon dioxide, a by-product of burning fossil fuels. Certain Columbia
affiliates engage in efforts to voluntarily report and reduce their greenhouse
gas emissions. Columbia will monitor and participate in developments related to
efforts to register and potentially regulate greenhouse gas emissions.
Certain Columbia affiliates use various combustion equipment in the generation,
distribution and transmission of energy, including turbines, boilers and various
reciprocating engines. Within the period December 2002 to January 2003, the U.S.
Environmental Protection Agency proposed maximum achievable control technology
(MACT) standards to meet national emission standards for hazardous air
pollutants for stationary combustion turbines, industrial boilers and
reciprocating internal combustion engines. Columbia will continue to monitor the
proposed MACT standards for potential applicability and cost impact to its
operations. Pending finalization of the proposed standards, Columbia is unable
to predict what, if any, additional compliance costs may result.
In connection with the sale of CER, Columbia will retain responsibility for
remediation of approximately 140 metering stations where mercury was utilized,
and certain other environmental issues. An estimated liability has been
recorded.
The EPA issued final rules revising the National Ambient Air Quality Standards
for ozone and particulate matter in July 1997. These rules were widely
challenged. On March 26, 2002, the United States Court of Appeals for the D.C.
Circuit largely upheld the ambient air standards as challenged. Consequently,
designation of areas not attaining the standards, promulgation of rules
specifying a compliance level, compliance deadline, and controls necessary for
compliance will be completed over the next few years, which will likely change
air emissions compliance requirements. In the interim, existing ozone ambient
air quality standards will remain in place and may require imposition of
additional controls in areas of non-attainment. Resulting rules could require
additional reductions in NOx emissions from reciprocating engines and turbines
at pipeline compressor stations (including compressor stations owned by Columbia
Gas Transmission Corporation and Columbia Gulf Transmission). The EPA and state
regulatory authorities will set final implementation requirements. Certain
states have already begun to propose new NOx emission requirements that may be
applicable to pipeline engines and turbines. Columbia believes that the costs
relating to compliance with any new limits may be significant but are dependent
upon the ultimate control program agreed to by the targeted states and the EPA,
and are currently not reasonably estimable. Columbia will continue to closely
monitor developments in this area.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
Omitted pursuant to General Instruction H(2)(c).
ITEM 4. CONTROLS AND PRODEDURES
Evaluation of Disclosure Controls and Procedures
Columbia's president and chief executive officer and its principal financial
officer, after evaluating the effectiveness of Columbia's disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), have
concluded based on the evaluation required by paragraph (b) of Exchange Act
Rules 13a-15 and 15d-15 that, as of the end of the period covered by this
report, Columbia's disclosure controls and procedures were adequate and
effective to ensure that material information relating to Columbia and its
consolidated subsidiaries would be made known to them by others within those
entities.
Changes in Internal Controls
There were no significant changes in Columbia's internal controls or in other
factors that could significantly affect Columbia's internal controls subsequent
to the date of the most recent evaluation, nor were there any significant
deficiencies or material weaknesses in Columbia's internal controls. As a
result, no corrective actions were required or undertaken.
21
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 set a hearing date of December 1, 2, and 3, 2003; however, an
earlier hearing may be possible.
2. UNITED STATES OF AMERICA EX REL. JACK J. GRYNBERG V. COLUMBIA GAS
TRANSMISSION CORP., ET AL.
Plaintiff originally filed a complaint under the False Claims Act, on
behalf of the United States of America, against approximately seventy
pipelines. 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, 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.
22
ITEM 1. LEGAL PROCEEDINGS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
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 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.
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. On April
10, 2003, the judge denied Plaintiffs motion for class certification.
On July 28, 2003, the court granted plaintiffs' Motion for Leave to
File a Fourth Amended Complaint. This complaint only names one Columbia
entity, Columbia Energy Services Corporation, as a defendant.
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. (CNR) and Columbia
Gas Transmission Corporation (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 the lease 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 CNR.
Plaintiff seeks the alleged royalty underpayments and punitive damages.
CNR 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. Discovery regarding class 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 sold its propane
operations 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. This matter has
been resolved through a settlement.
6. ATLANTIGAS CORPORATION V. NISOURCE, INC., ET AL, U.S. DISTRICT COURT,
DISTRICT OF COLUMBIA AND TRIAD ENERGY RESOURCES, ET AL. V. NISOURCE
INC., ET AL. U.S. DISTRICT COURT, DISTRICT OF COLUMBIA
In June 2002, Atlantigas Corporation filed a complaint alleging that
NiSource, certain of its subsidiaries and other defendants illegally
discounted services to select shippers and sought damages under
anti-trust, RICO, and state law totaling $18 million ($54 million if
trebled). The activities about which the plaintiff is complaining were
the subject of a FERC enforcement staff investigation and subsequent
settlement approved in October 2000. NiSource and its affiliates filed
a motion to dismiss the complaint for lack of personal jurisdiction and
oral argument on that motion was held on April 8. At the hearing,
plaintiff's counsel raised some new issues on personal jurisdiction.
Supplemental briefing was completed on these issues and we are awaiting
the court's ruling.
23
ITEM 1. LEGAL PROCEEDINGS (continued)
COLUMBIA ENERGY GROUP AND SUBSIDIARIES
On March 18, 2003, a related suit was filed by Triad Energy Resources.
This new case purports to be a class action covering customers of
Columbia Gas Transmission who were allegedly damaged by the same
activities complained of in the Atlantigas litigation. The named
defendants include NiSource Inc., certain of its subsidiaries and other
unrelated parties, including shippers who allegedly benefited from the
complained of activities. The plaintiffs claim that all defendants
engaged in vertical restraint of trade by conspiring to provide scarce
transportation/storage capacity to a select group of shippers who in
turn agreed to fix the price of gas. The plaintiffs also claim that the
defendant shippers engaged in horizontal restraint of trade by
conspiring with each other to gain preferential treatment from the
pipeline defendants. There is also a separate count alleging tortious
interference against all defendants. The Company intends to vigorously
defend this matter. However, due to the relationship between this case
and the Atlantigas case, all responses in this matter are deferred
until the court rules on the jurisdictional motions pending in
Atlantigas.
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 ON FORM 8-K
(a) Exhibits
(12) Statements of Ratio of Earnings to Fixed Charges (filed
herewith).
(31.1) Certification of Michael W. O'Donnell, Chief Executive
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith).
(31.2) Certification of David J. Vajda, Principal Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).
(32.1) Certification of Michael W. O'Donnell, Chief Executive
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (furnished herewith).
(32.2) Certification of David J. Vajda, Principal Financial Officer,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith).
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the second quarter 2003.
24
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 11, 2003 By: /s/ Jeffrey W. Grossman
-------------------------------
Jeffrey W. Grossman
Vice President
(Principal Accounting Officer
and Duly Authorized Officer)
25