-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ct4Ds5BhG3JnOOcbh4QGQENyw6/4F2yxGgoe3I5BBtWnn0pVDHTw6oXcix3M6s+X UmEOZv/m4gL/Cz7ig/hYgQ== 0000893220-00-000247.txt : 20000307 0000893220-00-000247.hdr.sgml : 20000307 ACCESSION NUMBER: 0000893220-00-000247 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLUMBIA ENERGY GROUP CENTRAL INDEX KEY: 0000022099 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION & DISTRIBUTION [4923] IRS NUMBER: 131594808 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-01098 FILM NUMBER: 559553 BUSINESS ADDRESS: STREET 1: 13880 DULLES CORNER LANE STREET 2: SUITE 300 CITY: HENDERON STATE: VA ZIP: 20171-4600 BUSINESS PHONE: 7035616000 MAIL ADDRESS: STREET 1: 13880 DULLES CORNER LANE STREET 2: SUITE 300 CITY: HERNDON STATE: VA ZIP: 20171-4600 FORMER COMPANY: FORMER CONFORMED NAME: COLUMBIA GAS SYSTEM INC DATE OF NAME CHANGE: 19920703 10-K 1 COLUMBIA ENERGY GROUP FORM 10-K 1 As filed with the United States Securities and Exchange Commission on March 2, 2000. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended DECEMBER 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _____ to _____ C O L U M B I A E N E R G Y G R O U P (Exact name of registrant as specified in its charter) Delaware 13-1594808 (State or other Jurisdiction of incorporation (I.R.S. Employer or organization) (Identification No.) 13880 Dulles Corner Lane, Herndon, VA 20171 (Address of Principal Executive Office) (Zip Code) Registrant's telephone number, including area code (703) 561-6000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered Common Stock, $0.01 Par Value . . . . . . . . . . . New York Stock Exchange Debentures 6.39% Series A due November 28, 2000 6.61% Series B due November 28, 2002 6.80% Series C due November 28, 2005 7.05% Series D due November 28, 2007 7.32% Series E due November 28, 2010 7.42% Series F due November 28, 2015 7.62% Series G due November 28, 2025 Securities registered pursuant to Section 12(g) of the Act: None 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 proceeding 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 ] or No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the outstanding common shares of the Registrant held by nonaffiliates as of January 31, 2000, was $5,231,062,000. For purposes of the foregoing calculation, all directors and/or officers have been deemed to be affiliates, but the registrant disclaims that any of such directors and/or officers is an affiliate. The number of shares outstanding of each class of common stock as of January 31, 2000, was: Common Stock $0.01 Par Value: 81,304,961 shares outstanding. Documents Incorporated by Reference Part III of this report incorporates by reference specific portions of the Registrant's Proxy Statement relating to the 2000 Annual Meeting of Stockholders. 2 CONTENTS
Page Part I No. Item 1. Business................................................................... 3 Item 2. Properties................................................................. 7 Item 3. Legal Proceedings.......................................................... 9 Item 4. Submission of Matters to a Vote of Security Holders........................ 11 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.. 11 Item 6. Selected Financial Data.................................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................... 14 Item 8. Financial Statements and Supplementary Data................................ 39 Item 9. Change In and Disagreements with Accountants on Accounting and Financial Disclosure....................................................... 72 Part III Item 10. Directors and Executive Officers of the Registrant......................... 72 Item 11. Executive Compensation..................................................... 72 Item 12. Security Ownership of Certain Beneficial Owners and Management............. 72 Item 13. Certain Relationships and Related Transactions............................. 72 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 73 Undertaking made in Connection with 1933 Act Compliance on Form S-8................. 73 Signatures.......................................................................... 74 Exhibits............................................................................ 75
2 3 PART I ITEM 1. BUSINESS General Columbia Energy Group (Columbia), formerly The Columbia Gas System, Inc., and its subsidiaries comprise one of the nation's largest integrated natural gas systems engaged in natural gas transmission, natural gas distribution, and exploration for and production of natural gas and oil. Columbia is also engaged in related energy businesses including the distribution of propane and petroleum products, marketing of natural gas and electricity and the generation of electricity, primarily fueled by natural gas. Columbia, organized under the laws of the State of Delaware on September 30, 1926, is a registered holding company under the Public Utility Holding Company Act of 1935, as amended, (1935 Act) and derives substantially all its revenues and earnings from the operating results of its 19 direct subsidiaries. Columbia owns all of the securities of these direct subsidiaries except for approximately 8% of the stock in Columbia LNG Corporation. Columbia and its subsidiaries are sometimes collectively referred to herein as the Columbia Group. On February 28, 2000, Columbia announced that it had entered into an Agreement and Plan of Merger, dated as of February 27, 2000 (Merger Agreement), between Columbia and NiSource, Inc., an Indiana corporation (NiSource). The Board of Directors of Columbia determined to enter into the Merger Agreement after a comprehensive evaluation of strategic alternatives that might generate value greater than that which Columbia's business plan could create. The terms of the Merger Agreement provide that NiSource will organize a new company which shall serve as the holding company for both Columbia and NiSource after the completion of the transaction. Pursuant to the terms of the Merger Agreement, each of Columbia and NiSource will be merged into newly formed special purpose subsidiaries of the new holding company, and each will become a wholly owned subsidiary of the new holding company. Subject to the terms and conditions of the Merger Agreement, upon completion of the transaction, Columbia's shareholders will receive, for each share of Columbia common stock, $70 in cash and a $2.60 face value SAILS(sm) (a unit consisting of a zero coupon debt security with a forward equity contract). Columbia's shareholders also have the option to elect to receive (in lieu of cash and SAILS(sm)) shares in the new holding company in a tax-free exchange, for up to 30% of the outstanding shares of Columbia common stock. Pursuant to the stock election option, each Columbia share will be exchanged for up to $74 in new holding company stock, subject to a collar such that, if the average closing price of NiSource shares during the 30 days prior to the closing of the transaction is greater than $16.50, Columbia shareholders will receive shares of the new holding company valued at $74 for each share of Columbia stock, and if the average closing price of NiSource shares during the 30 days prior to closing of the transaction is $16.50 or below, Columbia shareholders will receive 4.4848 shares of new holding company stock for each Columbia share. Upon completion of the transaction, NiSource shareholders will receive one share of holding company stock for each share of NiSource common stock that they own. The Merger is conditioned upon, among other things, the approvals of the shareholders of both companies and various regulatory commissions. However, if the NiSource shareholder approval is not obtained, the transaction will automatically be restructured so that, instead of each of NiSource and Columbia becoming wholly-owned subsidiaries of the new holding company, Columbia will become a wholly owned subsidiary of NiSource, and Columbia shareholders will receive $70 in cash and a $3.02 face value SAILS(sm) unit of NiSource with no option for Columbia shareholders to elect new holding company stock. Presentation of Segment Information Columbia revised its presentation of primary business segment information beginning with the reporting of third quarter 1999 results. The results for Columbia Propane have been moved from the propane, power generation and liquefied natural gas (LNG) operations to energy marketing operations that also includes Columbia Energy Services Corporation's (Columbia Energy Services) retail operations. Prior periods have been restated to reflect this change. Transmission and Storage Operations Columbia's two interstate pipeline subsidiaries, Columbia Gas Transmission Corporation (Columbia Transmission) and Columbia Gulf Transmission Company (Columbia Gulf), own a pipeline network of approximately 16,250 miles extending from offshore in the Gulf of Mexico to Lake Erie, New York and the eastern seaboard. In addition, Columbia Transmission operates one of the nation's largest underground natural gas storage systems. Together, Columbia Transmission and Columbia Gulf serve customers in 15 northeastern, mid-Atlantic, midwestern, and southern states and the District of Columbia. Columbia Gulf's pipeline system extends from offshore Louisiana to West Virginia and transports a major portion of the gas delivered by Columbia Transmission. It also transports gas for third parties within the production areas of the Gulf Coast. Columbia Pipeline Corporation and its wholly-owned subsidiary, Columbia Deep Water Services Company, were formed to operate pipeline and gathering facilities that are not regulated by the Federal Energy Regulatory Commission (FERC). 3 4 ITEM 1. BUSINESS (continued) Columbia Transmission and Columbia Gulf provide an array of competitively priced natural gas transportation and storage services for local distribution companies and industrial and commercial customers who contract directly with producers or marketers for their gas supplies. In 1999, Columbia Transmission completed construction of the largest ever expansion of its storage and transportation system. The expansion adds approximately 500,000 Mcf (thousand cubic feet) per day of firm storage to 23 customers. Columbia Transmission is also participating in the proposed 442-mile Millennium Pipeline Project that has been submitted to the FERC for approval. As proposed, the project will transport approximately 700,000 Mcf of natural gas per day from the Lake Erie region to eastern markets. For additional information regarding the transmission and storage operation's expansion projects see Item 7, page 21. Distribution Operations Columbia's five distribution subsidiaries provide natural gas service to nearly 2.1 million residential, commercial and industrial customers in Ohio, Pennsylvania, Virginia, Kentucky and Maryland. Approximately 32,400 miles of distribution pipelines serve these major markets. The distribution subsidiaries have initiated transportation programs that allow residential and small commercial customers the opportunity to choose their natural gas suppliers and to use the distribution subsidiaries for transportation service. This ability to choose a supplier was previously limited to larger commercial and industrial customers. See Item 7, page 26 and "Competition" on page 5 for additional information. Exploration and Production Operations Columbia's exploration and production subsidiary, Columbia Energy Resources, Inc. (Columbia Resources), explores for, develops, gathers and produces natural gas and oil in Appalachia and Canada. As of December 31, 1999, Columbia Resources held interests in approximately 3.9 million net acres of gas and oil leases and had proved reserves of 965.8 billion cubic feet of natural gas equivalent. Columbia Resources owns and operates 8,188 wells and 6,069 miles of gathering facilities and has expanded its reserve base and production through an aggressive drilling and acquisition program. During 1999, Columbia Resources purchased 800 wells, gathering assets and approximately 800,000 undeveloped acres in the U.S. and Canada. In August 1997, Columbia Resources acquired Alamco, Inc. (Alamco), an Appalachian gas and oil exploration and development company. Through Columbia Resources' operations in north-central West Virginia, southern Kentucky, northern Tennessee and New York, it is one of the largest-volume independent natural gas and oil producers in the Appalachian Basin. For additional information, see Item 7, page 31. Energy Marketing Operations The energy marketing segment includes Columbia Energy Services that consists of a retail mass marketing business, an internet based service and a wholly-owned subsidiary that provides energy related services and products. Also included in the energy marketing segment are the operations of Columbia Propane Corporation (Columbia Propane). As a result of an ongoing strategic assessment in 1999, Columbia Energy Services decided to focus its efforts on the Mass Markets business, which provides energy products to smaller volume retail customers, and to exit the Wholesale and Trading and Major Accounts businesses. The Wholesale and Trading business was sold at the end of 1999 and the Major Accounts business is being offered for sale. These businesses are recorded as discontinued operations, in accordance with generally accepted accounting principles. Columbia Propane sells propane at wholesale and retail and has been aggressively expanding its operations through acquisitions and internal growth. See Item 7, page 33 for additional information regarding recent acquisitions. At the end of 1999, Columbia Propane served more than 350,600 customers in 31 states and the District of Columbia, which is more than triple the number of customers served at the end of 1998. Columbia Petroleum Corporation, a subsidiary of Columbia Propane, owns and operates petroleum assets and had sales of 202.4 million gallons in 1999 with approximately 42,600 customers in five states. Power Generation, LNG and Other Operations Columbia Electric Corporation (Columbia Electric) is an unregulated electric generation company whose primary focus is the development, ownership and operation of clean, natural gas fueled power projects. Columbia currently has three operating facilities totaling 248 megawatts, one 550-megawatt (equivalent) plant under construction in Gregory, Texas and approximately 3,000 megawatts of gas-fired generation under development. Publicly announced projects in Columbia Electric's development portfolio include the Kelson Ridge Project in Charles County, Maryland, the Liberty Electric Project in Eddystone, Pennsylvania, the Grassy Point Energy Project in Haverstraw, New York, the Ceredo Electric Generating Station in Ceredo, West Virginia and the Henderson Generating Station in Henderson, Kentucky. 4 5 ITEM 1. BUSINESS (continued) The Gregory Project, a partnership between subsidiaries of Columbia Electric and LG&E Power, Inc., is anticipated to start operations in the summer of 2000. Construction of the Liberty Electric Project is anticipated to commence in spring 2000. Ownership of the Liberty Electric Project was jointly held by Columbia Electric and subsidiaries of Westcoast Energy, Inc. (Westcoast). In December 1999, the ownership agreement between Columbia and Westcoast was terminated due to allocation of capital to other projects by Westcoast in geographic areas more closely aligned with other Westcoast operating assets and the desire of Westcoast to focus its resources in ventures that will generate near-term operating income. Columbia Electric announced on February 16, 2000, that it purchased Westcoast's 50% interest and now owns 100% of the Liberty Electric Project. In December 1999, a limited partnership company established between Columbia Electric and Atlantic Generation, Inc. completed a transaction terminating a long-term power purchase contract. Columbia Electric's portion was approximately $71 million pre-tax under the terms of the buyout. The partners will continue to operate the facility as a merchant power plant. Columbia LNG Corporation and an affiliate company own an LNG facility, located in Cove Point, Maryland, which is one of the largest natural gas peaking and storage facilities in the United States. The facility has the capacity to liquify natural gas at a rate of 15,000 Mcf of natural gas per day. The facility enables LNG to be stored until needed for the winter peak-day requirements of utilities and other large gas users. Columbia Network Services Corporation (Columbia Network), a wholly-owned subsidiary of Columbia, and its subsidiaries provide telecommunications and information services and assist personal communications service providers and other microwave radio service licensees in locating and constructing antenna facilities. In 1999, Columbia Transmission Communications Corporation (Transcom), a wholly-owned subsidiary of Columbia, began the construction of its telecommunications network along the Washington, D.C. to New York City corridor. Transcom will build and maintain a fiber optics network for voice and data communications on rights-of-way of Columbia's pipeline companies. Transcom expects to complete the D.C. to New York fiber optics link in the first half of 2000. The route covers 260 miles and provides access to 16 million people in the busiest telecommunications corridor in the United States. The company is developing plans to extend the fiber optics network beyond the initial route. For additional discussion of Columbia's business segments, including financial information for the last three fiscal years, see Item 7, pages 21 through 37 and Note 17 on pages 65 and 66 of Item 8. Competition Open access to natural gas supplies over interstate pipelines and the deregulation of the commodity price of gas has led to tremendous change in the energy markets, which continue to evolve. During the past couple of years, local distribution company (LDC) customers and marketers began to purchase gas directly from producers and marketers and an open competitive market for gas supplies has emerged. This separation or "unbundling" of the transportation and other services offered by pipelines and LDCs allows customers to select the service they want independent from the purchase of the commodity. Columbia's distribution subsidiaries are involved in programs that provide residential customers the opportunity to purchase their natural gas requirements from third parties and use the distribution subsidiaries for transportation services. It is likely that, over time, distribution companies will have a very limited merchant function. At the same time that the natural gas markets are evolving, the markets for competing energy sources are also changing. In 1997, open access to interstate transmission of electricity was approved by the FERC and was subsequently approved by several state regulatory commissions, which approvals provide for increased competition in the electricity market. Columbia's other operations also experience competition for energy sales and related services from third party providers. Columbia meets these challenges through innovative programs aimed at providing energy products and services at competitive prices while also providing new services that are responsive to the evolving energy market and customer requirements. For additional information regarding competition, see Item 7. Credit Ratings and Credit Facilities Columbia has an investment grade credit rating which, when coupled with its $1.35 billion revolving credit facilities, adds to Columbia's financial flexibility to take advantage of business opportunities as they arise. The credit facilities consist of a $450 million 364-day revolving credit facility, with a one-year term loan option, that expires in March 2000 and a $900 million five-year revolving credit facility that expires in March 2003 and provides for the issuance of up to $300 million of letters of credit. Columbia is currently negotiating the replacement of the 364-day facility 5 6 ITEM 1. BUSINESS (continued) with a bank facility substantially similar in terms. There were no borrowings under the credit facilities as of December 31, 1999. Columbia's long-term debt is rated A3, A and BBB+ by Moody's Investors Service, Inc. (Moody's), Fitch Investors Service (Fitch) and Standard & Poor's Rating Group (S&P), respectively. Columbia's long-term debt ratings are currently under review for a possible change by Moody's and S&P. Columbia's commercial paper is rated F-1 by Fitch, P-2 by Moody's and A-2 by S&P. The foregoing discussion and Item 3 contain "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Investors and prospective investors should understand that many factors govern whether any forward-looking statement contained herein will be or can be achieved. Any one of those factors could cause actual results to differ materially from those projected. These forward-looking statements include, but are not limited to, statements concerning Columbia's plans, proposed acquisitions and dispositions, objectives, expected performance, expenditures and recovery of expenditures through rates, stated on either a consolidated or segment basis, and any and all underlying assumptions and other statements that are other than statements of historical fact. From time to time, Columbia may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of Columbia, are also expressly qualified by these cautionary statements. All forward-looking statements are based on assumptions that management believes to be reasonable; however, there can be no assurance that actual results will not differ materially. Realization of Columbia's objectives and expected performance is subject to a wide range of risks and can be adversely affected by, among other things, increased competition in deregulated energy markets, weather, fluctuations in supply and demand for energy commodities, successful consummation of proposed acquisitions and dispositions, growth opportunities for Columbia's regulated and nonregulated businesses, dealings with third parties over whom Columbia has no control, actual operating experience of acquired assets, Columbia's ability to integrate acquired operations into its operations, the regulatory process, regulatory and legislative changes as well as changes in general economic, capital and commodity market conditions, counter-party credit risk, many of which are beyond the control of Columbia. In addition, the relative contributions to profitability by each segment, and the assumptions underlying the forward-looking statements relating thereto, may change over time. With respect to any references made to ratings assigned to Columbia's debt securities, there can be no assurance that Columbia will be successful in maintaining its 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 the rating agencies. Credit ratings reflect only the views of the rating agencies, whose methodology and the significance of their ratings may be obtained from them. Other Relevant Business Information Columbia Group's customer base is broadly diversified, with no single customer accounting for a significant portion of revenues. As of January 31, 2000, the Columbia Group had 9,683 full-time employees of which 1,797 are subject to collective bargaining agreements. Columbia's subsidiaries are subject to extensive federal, state and local laws and regulations relating to environmental matters. These laws and regulations, which are constantly changing, require expenditures for corrective action at various operating facilities, waste disposal sites and former gas manufacturing sites for conditions resulting from past practices that have subsequently become subject to environmental regulation. Information relating to environmental matters is detailed in Item 7, pages 23, 28 and 34, and in Item 8, Note 14 on page 63. On February 22, the board of directors of Columbia amended Columbia's bylaws to provide that the annual meeting of Columbia will be held on the third Wednesday in May of each year, at nine o'clock in the morning. If that day is a legal holiday, the annual meeting will be held on the following day. The board of directors may change such date and time in its discretion. The board of directors further amended the bylaws to require stockholders to provide Columbia with advance notice of stockholder proposals and stockholder nominations to the board of directors. As amended, the bylaws provide that stockholders must notify Columbia not less than 60 days and not more than 90 days before the date of the meeting of any stockholder proposal or stockholder nomination to the board of directors. If, however, the date of the meeting is first publicly announced or disclosed less than 70 days prior to the meeting, then stockholders must provide Columbia with such notice within 10 days after announcement or disclosure. With respect to stockholder proposals, the notice must include the text of the proposal, a brief written statement of the reasons why the stockholder favors the proposal, and other information as set forth in the bylaws. In the case of nominations to the board of directors, the bylaws provide that the notice must contain the name of the nominated person and other information as set forth in the bylaws. For a listing of the direct subsidiaries of Columbia refer to Exhibit 21. 6 7 ITEM 2. PROPERTIES Information relating to properties of subsidiary companies is detailed below and on page 8 and page 47 of Item 8 under Note 1F. Assets under lien and other guarantees are described on page 62 in Note 14D of Item 8. Neither Columbia nor any subsidiary knows of material defects in the title to any real properties of the subsidiaries of Columbia or any material adverse claim of any right, title, or interest therein, pending or contemplated. Substantially all of Columbia Transmission's property has been pledged to Columbia as security for First Mortgage Bonds issued by Columbia Transmission to Columbia. EXPLORATION AND DEVELOPMENT DATA Acreage - at December 31, 1999
Developed Acreage Undeveloped Acreage ---------------------------------- --------------------------------------- Gross Net Gross Net ---------- --------- --------- --------- United States........ 2,177,356 2,050,862 1,362,091 1,061,595 Canada............... 3,524 1,625 1,435,344 774,962 ---------- --------- --------- --------- Total................ 2,180,880 2,052,487 2,797,435 1,836,557 ========= ========= ========= =========
Net Wells Completed - 12 Months Ended December 31,
Exploratory Development Total ------------------------- ------------------------- ------------------------ Productive Dry Productive Dry Productive Dry ---------- --- ---------- --- ---------- --- United States........ 1999............ 3 1 193 37 196 38 1998............ 5 1 136 32 141 33 1997............ - - 84 18 84 18 Canada............... 1999............ - 1 1 2 1 3 1998............ - 1 - 1 - 2
Productive and Drilling Wells - At December 31, 1999
Production Wells ---------------------------------------- Gross Net Wells Drilling --------------- ------------- --------------------------- Gas Oil Gas Oil Gross Net ------ ------ ---- ---- ------ ----- United States........ 8,019(a) 142 7,493 85 40 33 Canada............... 12 15 6 8 6 4 ----- ----- ----- ------ ------ ----- Total................ 8,031 157 7,499 93 46 37 ===== ===== ===== ====== ====== =====
(a) Includes 616 multiple completion gas wells, all of which are included as single wells in the table. Also includes 1 gross productive horizontal well. 7 8 ITEM 2. PROPERTIES (continued) GAS PROPERTIES OF SUBSIDIARIES - AS OF DECEMBER 31, 1999
Underground Storage Miles of Pipeline ----------------------------------- ------------------------------------------------- Gathering Subsidiaries State Acreage Wells and Storage Transmission Distribution - --------------------------------------- --------- ---------- ---------- ----------- ------------ ------------ Columbia Gas of Kentucky, Inc. KY - - - - 2,433 Columbia Gas of Maryland, Inc. MD - - - - 601 Columbia Gas of Ohio, Inc. OH - - - - 18,387 Columbia Gas of Pennsylvania, Inc. PA 3,300 8 4 - 6,961 Columbia Gas of Virginia, Inc. VA - - - - 4,021 Columbia Gas Transmission Corporation DE - - - 3 - KY - - - 711 - MD 945 - - 229 - NJ - - - 69 - NY 26,228 143 30 338 - NC - - - 1 - OH 486,884 2,476 815 4,136 - PA 63,587 230 76 1,845 - VA - - - 1,149 - WV 304,867 811 281 2,405 - Columbia Gulf Transmission Company KY - - - 716 - LA - - - 2,035 - MS - - - 659 - TN - - - 556 - TX - - - 183 - WY - - - 10 - Columbia Energy Resources, Inc. KY - - 2,289 - - MI - - 6 - - NY - - 130 - - OH - - 123 - - PA - - 37 - - TN - - 45 - - VA - - 429 - - WV - - 3,010 - - Columbia Pipeline Company LA - - 3 - - Columbia LNG Corporation MD - - - 48 - VA - - - 39 - ---------- ---------- ---------- ---------- ---------- Total 885,811 3,668 7,278 15,132 32,403 ========== ========== ========== ========== ==========
Compressor Stations ------------------------------ Installed Subsidiaries Number Capacity (hp) - --------------------------------------- ---------- ------------- Columbia Gas of Kentucky, Inc. - - Columbia Gas of Maryland, Inc. - - Columbia Gas of Ohio, Inc. - - Columbia Gas of Pennsylvania, Inc. 1 800 Columbia Gas of Virginia, Inc. - - Columbia Gas Transmission Corporation - - 6 18,270 1 12,000 - - 3 3,880 1 1,200 25 103,187 23 66,194 10 79,330 39 313,564 Columbia Gulf Transmission Company 2 70,000 6 195,500 3 131,500 2 85,600 - - - - Columbia Energy Resources, Inc. 20 6,332 - - - - 1 10 - - 2 100 - - 15 1,189 Columbia Pipeline Company - - Columbia LNG Corporation - - - - ---------- ---------- Total 160 1,088,656 ========== ==========
NOTE: This table excludes minor gas properties and all construction work in progress. The titles to the real properties of the subsidiaries of Columbia have not been examined for the purpose of this document. Neither Columbia nor any subsidiary know of material defects in the title to any of the real properties of the subsidiaries of Columbia or of any material adverse claim of any right, title, or interest therein, pending or contemplated. Substantially all of Columbia Transmission's property has been pledged to Columbia as security for First Mortgage Bonds issued by Columbia Transmission to Columbia. 8 9 ITEM 3. LEGAL PROCEEDINGS I. Purchase and Production Matters A. New Bremen Corp. v. Columbia Gas Transmission Corp. and Columbia Gulf Transmission Co., No. 88V-631 (Dist. Ct. Austin County, TX); In re The Columbia Gas System, Inc. and Columbia Gas Transmission Corporation, No. 91-803 and No. 91-804 (U.S. Bankr. Ct. Dist. of Del.). As reported in the Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, the Bankruptcy Court approved the settlement of this matter on April 12, 1999. Payment was made on April 26, 1999. This matter is now concluded. For further information regarding bankruptcy matters see Item 7, page 38. II. Environmental A. Columbia Gas Transmission Corp. v. Aetna Casualty & Surety Co., et al., C.A. No. 94-C-454 (Kanawha (W.Va.) Cir. Ct. March 14, 1994). Columbia Transmission filed a complaint in West Virginia state court seeking coverage from various insurers under various insurance policies for environmental cleanup costs. These costs are discussed more fully in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of this Report. All insurers have responded to the complaint denying such claims. The case is currently stayed under the evergreen provision of the agreed scheduling order entered by the state court on November 29, 1995, in order to allow informal discussions among the parties to the litigation. The parties have also entered into an agreed order concerning a special discovery master, which was entered by the court. Columbia Transmission continues to pursue recovery of environmental expenditures from its insurance carriers, however, at this time, management is unable to determine the total amount or final disposition of any recovery. B. Columbia Gulf Transmission Co. v. Aetna Casualty & Surety Co., et al., C.A. No. 95-C-177 (Kanawha (W.Va.) Cir. Ct. January 19, 1995). Columbia Gulf filed a complaint in West Virginia state court seeking coverage from various insurers under various insurance policies for environmental cleanup costs. These costs are discussed more fully in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of this Report. All insurers have responded to the complaint denying such claims. The case is currently stayed under the evergreen provision of the agreed scheduling order entered by the state court on December 1, 1995, in order to allow informal discussions among the parties to the litigation. The parties have also entered into an agreed order concerning a special discovery master, which was entered by the court. Columbia Gulf continues to pursue recovery of environmental expenditures from its insurance carriers, however, at this time, management is unable to determine the total amount or final disposition of any recovery. C. "Emergency Planning and Community Right to Know Act". In January 2000, the management of Columbia Petroleum discovered that an erroneous determination of the applicability of certain regulatory requirements to certain of its petroleum distribution facilities had resulted in a failure to submit toxic chemical release information required under Section 313 of the Emergency Planning and Community Right-To-Know Act of 1986. Management promptly self-reported the circumstance to state and federal regulatory officials and submitted the required information. Columbia Petroleum has entered into discussions with regulatory officials concerning the circumstances, which gave rise to the failure to report. Because these discussions are in as very preliminary state, management is unable to estimate the amount of sanctions, if any, associated with the final resolution of this matter. III. Other A. MarkWest Hydrocarbon, Inc., Arbitration Proceeding, AAA Case No. 77 181 0035 98 (filed February 13, 1998); Columbia Gas Transmission Corp. v. MarkWest Hydrocarbon, Inc., U.S. D.C., S.D. W.Va., Case No. 2:98-03622 (filed April 28, 1998). As reported in the Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, Columbia Transmission and MarkWest executed, on October 16, 1999, the necessary documents to implement a full and complete settlement of all issues. As part of the settlement, MarkWest will expand certain facilities to process additional gas production in the Appalachian region. This matter is now concluded. B. Canada Southern Petroleum Ltd. v. Columbia Gas Development of Canada Ltd. (C.A. No. 9001-03466, Court of Queen's Bench, Alberta, Canada, filed March 7, 1990). The plaintiffs assert, among other things, that the defendant working interest owners, including Columbia Gas Development of Canada Ltd. (Columbia Canada) and various Amoco affiliates, breached an alleged fiduciary duty to ensure the earliest feasible marketing of gas from the Kotaneelee field (Yukon Territory, Canada). The plaintiffs seek, among other remedies, the return of the defendants' interests in the Kotaneelee field to the plaintiffs, a declaration that such interests are held in trust for the plaintiffs and an order requiring the defendants to promptly market Kotaneelee gas or assessing damages. In November 1993, the plaintiffs amended their Amended Statement of Claim to include allegations that the balance in the Carried Interest Account (an account for operating costs, which are recoverable, by working 9 10 ITEM 3. LEGAL PROCEEDINGS (continued) interest owners) which is in excess of the balance as of November 1988 should be reduced to zero. Columbia, on behalf of Columbia Canada, consented to the amendment in consideration of the plaintiffs' acknowledgment that some $63 million was properly charged to the account. However, Columbia and Columbia Canada continue to dispute the claim to the extent that the claim challenges expenditures incurred since November 1988, including expenditures made after Columbia Canada was sold to Anderson Exploration Ltd. (Anderson) effective December 31, 1991. A trial commenced in the third quarter of 1996 in the Court of Queen's Bench. Following multiple lengthy adjournments, plaintiffs concluded their case-in-chief in the fourth quarter of 1998. Defendants are currently presenting their witnesses and evidence. The trial is expected to conclude by the end of 2000. Management continues to believe that its defenses are meritorious, and that the risk of any material liability to Columbia is de minimis. Pursuant to an Indemnification Agreement regarding the Kotaneelee Litigation entered into when Columbia Canada was sold to Anderson, Columbia agreed to indemnify and hold Anderson harmless for losses due to this litigation arising out of actions occurring prior to December 31, 1991. As a result of the 1997 upgrading of Columbia's long-term debt, an escrow account that provides security for the indemnification obligation and is now funded by a letter of credit was reduced to approximately $35,835,000 (Cdn). C. Cathodic Protection. In September 1995, the management of Commonwealth Gas Services, Inc. (now Columbia Gas of Virginia, Inc.) (Columbia of Virginia) advised the Staff of the Virginia State Corporation Commission (VSCC) that there had been deficiencies in Columbia of Virginia's cathodically protected pipeline distribution system in its Northern Operating Area in Virginia. Following several months of informal investigation, on March 1, 1996, the Commission subpoenaed Columbia of Virginia to produce documents related to its cathodic protection program in the Northern Operating Area. Columbia of Virginia complied with the subpoena. On November 18, 1998, Columbia of Virginia reported to the VSCC that, with one small exception, it had completed all remedial work related to the cathodic protection deficiencies. On April 29, 1999, the Staff of the VSCC issued a Notice of Probable Violation, indicating it had discovered numerous "probable violations" of the VSCC's pipeline safety regulations. On May 26, 1999, Columbia of Virginia submitted a response to the Notice acknowledging that cathodic protection deficiencies had occurred, identifying the actions taken by Columbia of Virginia to address such deficiencies, and requesting an informal conference. Numerous informal conferences have been held with the Staff. As a result of these conferences, Columbia of Virginia has agreed to engage an independent consultant to review its cathodic protection program as part of an overall settlement of the matter. Discussions between Columbia of Virginia and the Staff concerning the complete resolution of this matter are continuing. At this time Columbia is unable to determine the likelihood or magnitude of any penalties that might be assessed. D. Columbia Gas Transmission Corp. v. Consolidation Coal Co., et al., U.S.D.C. W.D. Pa., C.A. No. 99-2071. On December 21, 1999 Columbia Transmission filed, but did not serve, a complaint against Consolidation Coal Co. and McElroy Coal Co. (collectively, Consol), seeking declaratory and permanent injunctive relief enjoining Consol from pursuing its current plan to conduct longwall mining through Columbia Transmission's Victory Storage Field in northern West Virginia. Consol's current plans to longwall mine through the Victory Storage Field would destroy certain infrastructure of Victory Storage Field, including all of Columbia Transmission's storage wells in the path of the mining. The parties have held discussions concerning resolution of this matter and, contingent upon the parties reaching an agreement to hold the litigation in abeyance, further discussions may occur. E. NiSource Related Litigation. NiSource has commenced three lawsuits against Columbia and its directors, two in Delaware Chancery Court and one in the United States District Court for the District of Delaware. Several groups of shareholders have instituted similar or identical actions against Columbia. These shareholder actions have been consolidated with each other and coordinated with NiSource's actions. NiSource's federal court complaint was filed on June 24, 1999, and was amended on July 8, 1999. The federal court complaint, among other things (i) alleges that certain statements that Columbia has made in connection with NiSource's offer to purchase Columbia have been false and misleading in violation of the Securities Exchange Act of 1934, as amended; (ii) seeks an injunction requiring Columbia to take all actions necessary to exempt the NiSource tender offer from the requirements of Section 203 of the Delaware General Corporation Law, and (iii) seeks injunctive relief prohibiting Columbia from taking any defensive actions in response to the Offer. Columbia has moved to dismiss the federal court complaints and the motions are pending. 10 11 ITEM 3. LEGAL PROCEEDINGS (continued) The first Chancery Court complaint was filed on June 24, 1999, and alleged that Columbia's certificate of incorporation requires 13 persons to be on the Board of Directors and that, therefore, Columbia's current 12-person Board of Directors violates the certificate. On September 22, 1999, the Chancery Court granted Columbia's motion to dismiss the complaint and declined to grant an order for a special meeting of the shareholders to elect a thirteenth director. The second Chancery Court complaint was filed on July 29, 1999, and alleges that the Board's actions in response to the Offer, including the announced increase in Columbia's share repurchase program, represent a breach of the fiduciary duties owed to Columbia stockholders. The parties began discovery in both the federal and Chancery Court actions, but on October 25, 1999, the parties agreed to stay the federal action and second Chancery Court action pending the outcome of meetings between the two companies. Following the execution of the Merger Agreement, NiSource and Columbia have agreed to dismiss the remaining litigation brought by NiSource. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of Columbia is traded on the New York Stock Exchange under the ticker symbol CG and abbreviated as either ColumEngy or ColumEgy in trading reports. At December 31, 1999, the number of shareholders of record was approximately 31,625 and the stock closed at $63 1/4, as reflected in the New York Stock Exchange Composite Transactions as reported by The Wall Street Journal. On February 22, 2000, Columbia declared a quarterly dividend of $0.225 per share for the first quarter of 2000, which will be payable on March 15, 2000, to holders of record as of March 3, 2000. See Item 7 on page 20 for additional information regarding Columbia's common stock prices and dividends. 11 12 ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA Columbia Energy Group and Subsidiaries
($ in millions, except per share amounts) 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA ($) Total net revenues 1,994.8 1,861.9 1,896.9 1,856.6 Earnings (Loss) before discontinued operations, extraordinary item and accounting changes 355.0 300.3 280.3 218.2 Earnings (Loss) before extraordinary item and accounting changes 249.2 269.2 273.3 221.6 Earnings (Loss) on common stock 249.2 269.2 273.3 221.6 - ----------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA** Earnings (Loss) per share of common stock ($): Continuing operations 4.31 3.60 3.37 2.71 Discontinued operations (1.28) (0.37) (0.08) 0.04 Before extraordinary item and accounting changes 3.03 3.23 3.29 2.75 Earnings (Loss) per share of common stock 3.03 3.23 3.29 2.75 Average common shares outstanding (000) 82,210 83,382 83,100 80,681 Diluted earnings (loss) per share of common stock ($): Continuing operations 4.29 3.58 3.35 2.70 Discontinued operations (1.28) (0.37) (0.08) 0.04 Before extraordinary item and accounting changes 3.01 3.21 3.27 2.74 Diluted earnings (loss) per share of common stock 3.01 3.21 3.27 2.74 Diluted average common shares (000) 82,709 83,748 83,594 80,919 Dividends: Per share ($) 0.875 0.77 0.60 0.40 Payout ratio (%) 28.9 23.8 18.2 14.5 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA ($) Capitalization including debt subject to Chapter 11: Common stock equity 2,064.0 2,005.3 1,790.7 1,553.6 Preferred stock -- -- -- -- Long-term debt 1,639.7 2,003.1 2,003.5 2,003.8 Short-term debt 465.5 N/A N/A N/A Current maturities of long-term debt 311.3 0.4 0.5 0.8 Debt subject to Chapter 11 -- -- -- -- Total 4,480.5 4,008.8 3,794.7 3,558.2 Total assets 7,095.9 6,531.4 6,259.4 5,905.8 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER FINANCIAL DATA Capitalization ratio (%) (including current maturities ***): Common stock equity 46.1 50.0 47.2 43.7 Preferred stock -- -- -- -- Debt 53.9 50.0 52.8 56.3 Capital expenditures ($) 867.3 479.2 563.2 314.0 Net cash from operations ($) 831.6 698.3 504.1 461.0 Book value per share of common stock ($) ** 25.39 24.01 21.51 18.74 Return on average common equity before discontinued operations, extraordinary item and accounting changes (%) 17.5 15.8 16.8 16.4 - -----------------------------------------------------------------------------------------------------------------------------------
($ in millions, except per share amounts) 1995* 1994* - ---------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA ($) Total net revenues 1,807.4 1,756.2 Earnings (Loss) before discontinued operations, extraordinary item and accounting changes (433.4) 244.7 Earnings (Loss) before extraordinary item and accounting changes (432.3) 246.2 Earnings (Loss) on common stock (360.7) 240.6 - ---------------------------------------------------------------------------------------------------- PER SHARE DATA** Earnings (Loss) per share of common stock ($): Continuing operations (5.72) 3.23 Discontinued operations 0.01 0.02 Before extraordinary item and accounting changes (5.71) 3.25 Earnings (Loss) per share of common stock (4.76) 3.17 Average common shares outstanding (000) 75,708 75,838 Diluted earnings (loss) per share of common stock ($): Continuing operations (5.72) 3.23 Discontinued operations 0.01 0.02 Before extraordinary item and accounting changes (5.71) 3.25 Diluted earnings (loss) per share of common stock (4.76) 3.17 Diluted average common shares (000) 75,708 75,838 Dividends: Per share ($) -- -- Payout ratio (%) N/A N/A - ---------------------------------------------------------------------------------------------------- BALANCE SHEET DATA ($) Capitalization including debt subject to Chapter 11: Common stock equity 1,114.0 1,468.0 Preferred stock 399.9 -- Long-term debt 2,004.5 4.3 Short-term debt N/A -- Current maturities of long-term debt 0.5 1.2 Debt subject to Chapter 11 -- 2,317.1 Total 3,518.9 3,790.6 Total assets 6,033.4 7,152.2 - ---------------------------------------------------------------------------------------------------- OTHER FINANCIAL DATA Capitalization ratio (%) (including current maturities ***): Common stock equity 31.7 38.7 Preferred stock 11.4 -- Debt 56.9 61.3 Capital expenditures ($) 420.8 447.1 Net cash from operations ($) (798.0) 574.9 Book value per share of common stock ($) ** 15.09 19.36 Return on average common equity before discontinued operations, extraordinary item and accounting changes (%) (33.6) 18.2 - ----------------------------------------------------------------------------------------------------
N/A - Not applicable Dilutive potential common shares were not included in the 1995 computation of diluted EPS as the effect would be antidilutive. * Reference is made to Note 14(A) of Notes to Consolidated Financial Statements. Due to the bankruptcy filings, interest expense of approximately $230 million, $210 million, $204 million and $86 million was not recorded in 1994, 1993, 1992 and 1991, respectively. Interest expense of $982.9 million, including write-off of unamortized discounts on debentures, was recorded in the fourth quarter of 1995. ** All per share amounts, average common shares outstanding and diluted average common shares have been restated to reflect a three-for-two common stock split, in the form of a stock dividend, effective June 15, 1998. *** Prior to 1991, Columbia made extensive use of variable rate debt since the associated cost was normally less than senior long-term debt. Short-term borrowings were used in 1999 to finance acquisitions and to fund Columbia's stock repurchase program. Inclusion of the short-term debt in years prior to 1991 and in 1999 makes those historical ratios more meaningful. 12 13 ITEM 6. SELECTED FINANCIAL DATA (continued) SELECTED FINANCIAL DATA Columbia Energy Group and Subsidiaries
($ in millions, except per share amounts) 1993 1992 1991 1990 1989 - ----------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA ($) Total net revenues 1,734.0 1,622.3 1,407.2 1,499.9 1,520.3 Earnings (Loss) before discontinued operations, extraordinary item and accounting changes 152.1 90.9 (794.8) 104.7 145.8 Earnings (Loss) before extraordinary item and accounting changes 152.2 90.9 (794.8) 104.7 145.8 Earnings (Loss) on common stock 152.2 51.2 (694.4) 104.7 145.8 - ----------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA** Earnings (Loss) per share of common stock ($): Continuing operations 2.01 1.20 (10.49) 1.48 2.14 Discontinued operations -- -- -- -- -- Before extraordinary item and accounting changes 2.01 1.20 (10.49) 1.48 2.14 Earnings (Loss) per share of common stock 2.01 0.68 (9.16) 1.48 2.14 Average common shares outstanding (000) 75,838 75,838 75,798 70,983 68,260 Diluted earnings (loss) per share of common stock ($): Continuing operations 2.01 1.20 (10.49) 1.47 2.13 Discontinued operations -- -- -- -- -- Before extraordinary item and accounting changes 2.01 1.20 (10.49) 1.47 2.13 Diluted earnings (loss) per share of common stock 2.01 0.68 (9.16) 1.47 2.13 Diluted average common shares (000) 75,838 75,838 75,798 71,133 68,537 Dividends: Per share ($) -- -- 0.77 1.47 1.33 Payout ratio (%) N/A N/A N/A 99.3 62.1 - ----------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA ($) Capitalization including debt subject to Chapter 11: Common stock equity 1,227.3 1,075.1 1,006.9 1,757.8 1,620.3 Preferred stock -- -- -- -- -- Long-term debt 4.8 5.4 6.1 1,428.7 1,196.0 Short-term debt -- -- N/A 735.5 634.2 Current maturities of long-term debt 1.3 1.4 2.9 35.2 47.2 Debt subject to Chapter 11 2,317.1 2,317.1 2,317.1 -- -- Total 3,550.5 3,399.0 3,333.0 3,957.2 3,497.7 Total assets 6,934.7 6,505.9 6,332.2 6,196.3 5,878.4 - ----------------------------------------------------------------------------------------------------------------------------- OTHER FINANCIAL DATA Capitalization ratio (%) (including current maturities ***): Common stock equity 34.6 31.6 30.2 44.4 46.3 Preferred stock -- -- -- -- -- Debt 65.4 68.4 69.8 55.6 53.7 Capital expenditures ($) 361.1 299.7 381.9 629.6 473.5 Net cash from operations ($) 839.4 765.4 531.6 420.1 400.5 Book value per share of common stock ($) ** 16.18 14.18 13.28 23.22 23.67 Return on average common equity before discontinued operations, extraordinary item and accounting changes (%) 13.2 8.7 (57.5) 6.2 9.2 - -----------------------------------------------------------------------------------------------------------------------------
N/A - Not applicable Dilutive potential common shares were not included in the 1995 computation of diluted EPS as the effect would be antidilutive. * Reference is made to Note 14(A) of Notes to Consolidated Financial Statements. Due to the bankruptcy filings, interest expense of approximately $230 million, $210 million, $204 million and $86 million was not recorded in 1994, 1993, 1992 and 1991, respectively. Interest expense of $982.9 million, including write-off of unamortized discounts on debentures, was recorded in the fourth quarter of 1995. ** All per share amounts, average common shares outstanding and diluted average common shares have been restated to reflect a three-for-two common stock split, in the form of a stock dividend, effective June 15, 1998. *** Prior to 1991, Columbia made extensive use of variable rate debt since the associated cost was normally less than senior long-term debt. Short-term borrowings were used in 1999 to finance acquisitions and to fund Columbia's stock repurchase program. Inclusion of the short-term debt in years prior to 1991 and in 1999 makes those historical ratios more meaningful. 13 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Index Page - ----- ---- Consolidated Review............................................................................. 14 Liquidity and Capital Resources................................................................. 17 Transmission and Storage Operations............................................................. 21 Distribution Operations......................................................................... 26 Exploration and Production Operations........................................................... 31 Energy Marketing Operations..................................................................... 33 Power Generation, LNG and Other Operations...................................................... 36 Bankruptcy Matters.............................................................................. 38
The Management's Discussion and Analysis, including statements regarding market risk sensitive instruments, contains "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Investors and prospective investors should understand that many factors govern whether any forward-looking statement contained herein will be or can be achieved. Any one of those factors could cause actual results to differ materially from those projected. These forward-looking statements include, but are not limited to, statements concerning Columbia's plans, proposed acquisitions and dispositions, objectives, expected performance, expenditures and recovery of expenditures through rates, stated on either a consolidated or segment basis, and any and all underlying assumptions and other statements that are other than statements of historical fact. From time to time, Columbia may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of Columbia, are also expressly qualified by these cautionary statements. All forward-looking statements are based on assumptions that management believes to be reasonable; however, there can be no assurance that actual results will not differ materially. Realization of Columbia's objectives and expected performance is subject to a wide range of risks and can be adversely affected by, among other things, increased competition in deregulated energy markets, weather, fluctuations in supply and demand for energy commodities, successful consummation of proposed acquisitions and dispositions, growth opportunities for Columbia's regulated and nonregulated businesses, dealings with third parties over whom Columbia has no control, actual operating experience of acquired assets, Columbia's ability to integrate acquired operations into its operations, the regulatory process, regulatory and legislative changes as well as changes in general economic, capital and commodity market conditions, counter-party credit risk, many of which are beyond the control of Columbia. In addition, the relative contributions to profitability by each segment, and the assumptions underlying the forward-looking statements relating thereto, may change over time. With respect to any references made to ratings assigned to Columbia's debt securities, there can be no assurance that Columbia will be successful in maintaining its 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 the rating agencies. Credit ratings reflect only the views of the rating agencies, whose methodology and the significance of their ratings may be obtained from them. CONSOLIDATED REVIEW Columbia's income from continuing operations for 1999 was $355 million, or $4.29 per share, an increase of $54.7 million, or $0.71 per share, over 1998. All per share amounts are reported on a diluted basis. Increasing after-tax income relative to last year was a $49 million after-tax gain recorded in connection with the termination of a cogeneration power purchase contract, a $20.6 million after-tax gain related to the final producer contract claim stemming from Columbia's bankruptcy proceedings concluded in 1995, an after-tax gain of $7.8 million on the sale of Columbia's interests in the Trailblazer pipeline system and a reduction in tax expense for the realization of state net carryforwards that increased net income by $6.9 million. Weather was 12% colder than in 1998; however, weather in 1999 was still 8% warmer than normal. Also improving results was increased natural gas production for the exploration and production operations along with lower gross receipts and property taxes for the distribution segment. Partially offsetting these improvements were higher costs for energy marketing operations, higher interest expense, and professional fees primarily related to Columbia's response to an unsolicited tender offer. In 1998, several key items improved results including a $16.5 million improvement recorded for a settlement gain related to postretirement benefit costs, which reflected the purchase of insurance for a portion of those liabilities, the implementation of state tax planning initiatives and the settlement of certain tax issues. 14 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Discontinued operations, which include the Wholesale and Trading and Major Accounts businesses of Columbia Energy Services, Inc. (Columbia Energy Services), reflected an after-tax loss of $105.8 million or $1.28 per share in 1999, compared to an after-tax loss of $31.1 million, or $0.37 per share in 1998. Taking into account income from continuing operations and the loss from discontinued operations, Columbia reported net income of $249.2 million, or $3.01 per share in 1999, versus $269.2 million or $3.21 per share for the prior year. Income from continuing operations for 1998 of $300.3 million, or $3.58 per share, increased $20 million, or $0.23 per share, from 1997, due largely to lower operation and maintenance costs for Columbia's rate-regulated subsidiaries, higher revenue from transportation services and gas management activities and increased gas production and prices from Columbia's exploration and production segment. These changes were largely offset by the impact of record warm weather in 1998 and higher costs for Columbia Energy Services related to its larger infrastructure. Several other items also affected both years' results. In 1998, the benefit from the reduction in certain postretirement benefit costs, reflecting the purchase of insurance for a portion of those liabilities, and a $10 million benefit from state tax planning initiatives enhanced net income. Also improving 1998 results was a gain of $6.5 million from the settlement of 1991-1994 tax issues. In 1997, net income was improved $12.8 million as a result of reduced state income taxes, $12.4 million from a regulatory settlement for Columbia Gas Transmission Corporation (Columbia Transmission) that included the sale of base gas storage volumes, $6 million from the sale of coal assets, $5.5 million from a gain on the deactivation of a storage field and $4.4 million for payments received from a cogeneration partnership. Reducing net income in 1997 were $20.2 million of restructuring and relocation costs and a $6.6 million reserve for the sale of certain pipeline facilities. The after-tax loss on discontinued operations increased from $7 million, or $0.08 per share, in 1997 to $31.1 million, or $0.37 per share, in 1998. Income from continuing operations together with the loss from discontinued operations resulted in reported net income in 1998 decreasing $4.1 million, or $0.06 per share, from the $273.3 million, or $3.27 per share, reported for 1997. Net Revenues Total net revenues (revenues less associated product purchased costs) of $1,994.8 million for 1999 reflected an increase of $132.9 million over 1998 primarily due to a gain recorded for the settlement of a cogeneration power purchase contract, the impact of 1999's colder weather, increased transportation services and higher production for the exploration and production operations. Also providing higher net revenues was the effect of recent acquisitions for the propane and petroleum operations. Reduced prices for natural gas production and a reduction to revenues resulting from a Columbia of Ohio regulatory settlement partially offset these improvements. For 1998, total net revenues of $1,861.9 million reflected a decrease of $35 million from 1997, due primarily to the adverse effect of warmer weather in 1998 on gas sales for the distribution segment. The impact of warmer weather was partially offset by higher revenues from transportation services and gas management activities in the transmission and distribution segments. Also improving revenues in 1998 was a $13.4 million increase resulting from the gain on the sale of storage base gas volumes and higher revenues from increased gas production and prices. Expenses Total operating expenses for 1999 were $1,346.4 million, an increase of $65.8 million over 1998. Operation and maintenance expense increased $108.3 million, due to higher expenses for the energy marketing and exploration and production segments, due in part to recent acquisitions for Columbia Energy Resources Corporation (Columbia Resources) and Columbia Propane Corporation (Columbia Propane) and increased costs for Columbia Energy Services, and a $25.4 million favorable adjustment in 1998 for a settlement gain related to postretirement benefit costs. Also increasing 1999 operation and maintenance expense were costs related to Columbia's response to an unsolicited tender offer. Depreciation and depletion expense declined $2.9 million primarily due to Columbia Gas of Ohio's 1999 regulatory settlement that was partially offset by lower revenues, which was also related to the settlement, as mentioned above. The settlement of gas supply litigation in 1999 reduced operating expenses by $31.7 million reflecting the bankruptcy-related producer settlement mentioned above. In addition, lower gross receipts and property taxes for the distribution operations also improved income. Total operating expenses of $1,280.6 million for 1998 decreased $94.8 million compared to 1997, reflecting a reduction of $104.8 million in operation and maintenance expense largely due to cost conservation measures and efficiencies gained through recently implemented restructuring activities for the rate-regulated segments. The lower operation and maintenance expense also reflects a $25.4 million reduction in the cost of certain postretirement benefits, reflecting the purchase of insurance for a portion of Columbia's liabilities. The 1997 operating expenses were higher due in part to $24.8 million of restructuring costs. Depreciation and depletion expense increased $12 million in 1998 due primarily to an increase in depletion expense for the exploration and production segment 15 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) resulting from a higher depletion rate, together with the effect of increased production from both the acquisition of Alamco, Inc., (Alamco) an Appalachian exploration and production company in 1997, and the success of Columbia Energy Resources Inc.'s (Columbia Resources) drilling program. Other Income (Deductions)
Twelve Months Ended December 31, (in millions) 1999 1998 1997 - -------------------------------------------------------------------------------------------- Interest income and other, net $ 29.2 $ 12.3 $ 39.4 Interest expense and related charges (164.4) (144.5) (157.4) - -------------------------------------------------------------------------------------------- TOTAL OTHER INCOME (DEDUCTIONS) $(135.2) $(132.2) $(118.0) - --------------------------------------------------------------------------------------------
Other income (deductions) reduced income by $135.2 million in 1999 compared to a reduction of $132.2 million in 1998. Interest income and other, net, of $29.2 million was $16.9 million greater than in the year earlier, due largely to gains in 1999 of $12.1 million for the sale of Columbia's interests in a pipeline partnership and $2.9 million from the sale of coal properties. Interest expense and related charges of $164.4 million increased $19.9 million due largely to higher short-term borrowings to finance recent acquisitions and to fund Columbia's stock repurchase program, as discussed below. For 1998, other income (deductions) reduced income by $132.2 million compared to a reduction of $118 million in 1997. Interest income and other, net of $12.3 million decreased $27.1 million when compared to 1997, due largely to two transactions recorded in 1997 namely, an $8.5 million gain for a payment received from the deactivation of a storage field that allowed the owner of the coal reserves to mine the property and a $9.5 million improvement for the sale of Columbia's coal assets. In addition, temporary cash investments in 1998 were lower than the prior year, which led to reduced interest income. Interest expense and related charges of $144.5 million in 1998 decreased $12.9 million from 1997, primarily reflecting a reduction in interest expense for a 1998 tax settlement, involving tax issues from 1991-1994, partially offset by additional interest expense on prepayments received from third parties for gas to be delivered in future periods. Income Taxes Income tax expense in 1999 totaled $158.2 million, an increase of $9.4 million over 1998, primarily due to higher pre-tax income in 1999. Income benefited as a result of utilizing certain tax benefits and state tax planning initiatives during 1999 and 1998. Income tax expense of $148.8 million for 1998 increased $25.6 million from the year earlier, primarily reflecting higher pre-tax income. There were reductions to income tax expense of approximately $10 million in 1998 and $12.8 million in 1997 due to the implementation of state tax planning initiatives. Discontinued Operations Discontinued operations reflected an after-tax loss of $105.8 million, or $1.28 per share, in 1999 compared to an after-tax loss of $31.1 million, or $0.37 per share, in 1998. The increased loss on discontinued operations reflected higher operation and maintenance costs that included the write down of certain assets, establishing reserves for certain issues and lower margins for gas and power trading. In August 1999, Columbia Energy Services announced that it had decided to sell its Wholesale and Trading operations based in Houston, Texas. The decision was made as part of an ongoing strategic review of Columbia Energy Services' overall energy marketing businesses initiated in February 1999. In December 1999, its Wholesale and Trading operations were sold to Enron North America Corp., a wholly-owned subsidiary of Enron Corp. Columbia Energy Services subsequently determined that it would exit the Major Accounts business that provided energy services and products to industrial and large commercial customers. In accordance with generally accepted accounting principles, the Wholesale and Trading and Major Accounts businesses are reported as discontinued operations on Columbia's consolidated financial statements. 16 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) LIQUIDITY AND CAPITAL RESOURCES A significant portion of Columbia's operations, most notably in the distribution segment, is subject to seasonal fluctuations in cash flow. During the heating season, which is primarily from November through March, cash receipts from sales and transportation services typically exceed cash requirements. Conversely, during the remainder of the year, cash on hand, together with external short-term and long-term financing, 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 into new areas. Net cash from continuing operations in 1999 of $825.8 million reflected a decrease of $19.9 million from 1998 due primarily to normal working capital changes. Net cash from continuing operations for 1998 was $860.5 million, an increase of $286 million over 1997. The increase primarily reflected higher prepayments received for natural gas to be delivered over several years partially offset by a decrease in the overrecovery of gas costs by the distribution segment as well as the effect of warm weather in 1998. The decrease in the overrecovery position reflects higher gas prices in 1998 compared to the same period in 1997. The recovery of gas costs in the distribution segment's rates is provided for under the current regulatory process. Columbia satisfies its liquidity requirements primarily through internally generated funds and from the sale of commercial paper, which is supported by two unsecured bank revolving credit facilities that total $1.35 billion (Credit Facilities). The Credit Facilities consist of a $450 million 364-day revolving credit facility, with a one-year term loan option, that expires in March 2000 and a $900 million five-year revolving credit facility that expires in March 2003 and provides for the issuance of up to $300 million of letters of credit. Columbia is currently negotiating the replacement of the 364-day bank facility with a bank facility substantially similar in terms. Columbia also utilizes other borrowing arrangements from time-to-time. As of year-end 1999, Columbia had no borrowings under the Credit Facilities. See Note 12 in the Notes to Consolidated Financial Statements for additional information. Interest rates on borrowings under the Credit Facilities are based upon the London Interbank Offered Rate, Certificate of Deposit rates or other short-term interest rates. In addition, the 364-day facility has a utilization fee if borrowings exceed a certain level. The interest rate margins and facility fee on the commitment amounts are based on Columbia's public debt ratings. In 1998, Moody's Investors Service, Inc. (Moody's) and Fitch Investors Service (Fitch) upgraded their rating of Columbia's long-term debt to A3 and A, respectively. Columbia's long-term debt rating is BBB+ by Standard & Poor's Ratings Group (S&P). Columbia's long-term debt ratings are currently under review for a possible change by Moody's and S&P. Higher debt ratings result in lower facility fees and interest rate margins on borrowings. Columbia's commercial paper ratings are F-1 by Fitch, P-2 by Moody's and A-2 by S&P. As of year-end 1999, Columbia had approximately $133.7 million of letters of credit outstanding, of which approximately $54.7 million was issued under the Credit Facilities. At the end of 1999, Columbia had $340.5 million of commercial paper outstanding under its $850 million commercial paper program and $125 million of notes payable. During 1998, Columbia entered into fixed-to-floating interest rate swap agreements to modify the interest characteristics of $300 million of its outstanding long-term debt. As a result of these transactions, that portion of Columbia's long-term debt is now subject to fluctuations in interest rates. This allows Columbia to benefit from a lower interest rate environment. In order to maintain a balance between fixed and floating interest rates, Columbia is targeting average floating rate debt exposure of 10-20% of its outstanding long-term debt. Columbia has an effective shelf registration statement on file with the Securities and Exchange Commission for the issuance of up to $1 billion in aggregate of debentures, common stock or preferred stock in one or more series. Currently, Columbia has $750 million available under the shelf registration. Management believes that its sources of funding are sufficient to meet short-term and long-term liquidity needs of Columbia. Common Stock Repurchase Program At its February 1999 meeting, Columbia's Board of Directors (Board) authorized the purchase of up to $100 million of Columbia's common stock through February 29, 2000, in the open market or otherwise. In July 1999, Columbia's Board authorized the purchase of an additional $400 million of common stock through July 14, 2000. In October 1999, the program was suspended pending consideration of strategic alternatives. The source of funds for 17 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) repurchases consisted of available funds and/or borrowings. Through this program, 2,478,500 common shares were repurchased at a cost of approximately $135 million, before the program was suspended. There can be no assurance as to when the share repurchase program will recommence or if it will resume. If the program were to resume, the timing and terms of additional purchases, and the number of shares actually purchased, will be determined by management based on several factors including market conditions. Purchased shares are held in treasury to be made available for general corporate purposes, or resale at a future date or they may be retired. Capital Expenditures The table below reflects actual capital expenditures by segment for 1999 and 1998 and an estimate for year 2000:
(in millions) 2000 1999 1998 - ------------------------------------------------------------------- Transmission and Storage $148.4 $183.4 $210.0 Distribution 135.6 145.5 151.9 Exploration and Production 165.7 166.5 75.7 Energy Marketing 43.3 315.5 27.9 Power Generation, LNG and Other 376.5 51.0 2.7 Corporate 5.2 5.4 11.0 - ------------------------------------------------------------------- TOTAL $874.7 $867.3 $479.2 - -------------------------------------------------------------------
For 1999, capital expenditures were $867.3 million, an increase of $388.1 million from 1998. The 1999 program included approximately $347 million for acquisitions, of which approximately $301 million was for propane acquisitions that added nearly 235,000 new customers. The 1999 program also included $86 million for new business initiatives for the transmission and storage segment. The largest portion of the transmission and storage segment's investments are made to ensure the safety and reliability of the pipelines and for market expansion activities. The distribution subsidiaries' program includes investments to extend service to new areas and develop future markets, as well as expenditures required to ensure safe, reliable and improved service. The exploration and production segment's 1999 program included amounts for its expanded drilling program and acquisitions. For 2000, Columbia's estimated capital expenditure program of $874.7 million is $7.4 million higher than the 1999 program. Included in the 2000 program for the Power Generation, LNG and Other Operations is about $196 million for the development of Columbia Transmission Communication Corporation's fiber optics network and approximately $131 million for cogeneration activities. The transmission and storage segment includes approximately $44 million for new business activities and another $54 million is planned for new business and development activities for the distribution segment. The exploration and production segment's capital program provides for the drilling of approximately 330 new wells. All discretionary capital expenditures are subject to review under Columbia's value added approach (CVA) that determines whether the anticipated return on a business activity or project exceeds its risk adjusted capital cost. Market Risk Exposure Subsidiaries in Columbia's exploration and production and energy marketing segments are exposed to market risk due primarily to fluctuations in commodity prices. In order to help minimize this risk, Columbia has adopted a policy that provides for commodity hedging activities to help ensure stable cash flow, favorable prices and margins. Financial instruments authorized for use by Columbia for hedging include futures, swaps and options. Due to the sale of Columbia's Wholesale and Trading business, Columbia's use of derivatives has been significantly reduced. However, Columbia Energy Services does utilize financial instruments to help assure adequate margins for its Mass Markets business on the purchase and resale of energy products. Columbia Resources utilizes financial instruments to fix prices for a portion of its future production volumes, which are hedged in the marketplace through a third party. Columbia Propane utilizes financial instruments to help protect the value of its propane and petroleum inventories and commitments. Any positions using derivative instruments continue to be controlled within predetermined limits as provided by Columbia's senior management. Columbia's policy prohibits any Columbia subsidiary from entering into derivative transactions that are not effectively connected with its business. Market risks are monitored by an independent risk control group operating separately from the area that creates or actively manages these risk exposures in order to monitor compliance with Columbia's stated risk management policies. 18 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Columbia measures the market risk in its energy marketing portfolios and employs multiple risk control mechanisms to mitigate market risk including value-at-risk measures using a variance/covariance methodology and volumetric limits. Value-at-risk simulates forward price curves in the energy markets to estimate the size and probability of future potential losses. Based on a 95% confidence interval and a one-day time horizon, the value-at-risk for Columbia's energy marketing operations was insignificant. Columbia also utilizes fixed-to-floating interest rate swap agreements to modify the interest characteristics of a portion of its outstanding long-term debt. As a result of these transactions, $300 million of Columbia's long-term debt is now subject to fluctuations in interest rates. Merger Agreement On February 28, 2000, Columbia announced that it had entered into an Agreement and Plan of Merger, dated as of February 27, 2000 (Merger Agreement), between Columbia and NiSource, Inc., an Indiana corporation (NiSource). The Board of Directors of Columbia determined to enter into the Merger Agreement after a comprehensive evaluation of strategic alternatives that might generate value greater than that which Columbia's business plan could create. The terms of the Merger Agreement provide that NiSource will organize a new company which shall serve as the holding company for both Columbia and NiSource after the completion of the transaction. Pursuant to the terms of the Merger Agreement, each of Columbia and NiSource will be merged into newly formed special purpose subsidiaries of the new holding company, and each will become a wholly owned subsidiary of the new holding company. Subject to the terms and conditions of the Merger Agreement, upon completion of the transaction, Columbia's shareholders will receive, for each share of Columbia common stock, $70 in cash and a $2.60 face value SAILS(sm) (a unit consisting of a zero coupon debt security with a forward equity contract). Columbia's shareholders also have the option to elect to receive (in lieu of cash and SAILS(sm)) shares in the new holding company in a tax-free exchange, for up to 30% of the outstanding shares of Columbia common stock. Pursuant to the stock election option, each Columbia share will be exchanged for up to $74 in new holding company stock, subject to a collar such that, if the average closing price of NiSource shares during the 30 days prior to the closing of the transaction is greater than $16.50, Columbia shareholders will receive shares of the new holding company valued at $74 for each share of Columbia stock, and if the average closing price of NiSource shares during the 30 days prior to closing of the transaction is $16.50 or below, Columbia shareholders will receive 4.4848 shares of new holding company stock for each Columbia share. Upon completion of the transaction, NiSource shareholders will receive one share of holding company stock for each share of NiSource common stock that they own. The Merger is conditioned upon, among other things, the approvals of the shareholders of both companies and various regulatory commissions. However, if the NiSource shareholder approval is not obtained, the transaction will automatically be restructured so that, instead of each of NiSource and Columbia becoming wholly-owned subsidiaries of the new holding company, Columbia will become a wholly owned subsidiary of NiSource, and Columbia shareholders will receive $70 in cash and a $3.02 face value SAILS(sm) unit of NiSource with no option for Columbia shareholders to elect new holding company stock. Presentation of Segment Information Columbia revised its presentation of primary business segment information beginning with the reporting of third quarter 1999 results. The results for Columbia Propane have been moved from the propane, power generation and liquefied natural gas (LNG) operations to energy marketing operations that also includes Columbia Energy Services' retail operations. Prior periods have been restated to reflect this change. Impact of Year 2000 on Computer and Other Systems The Year 2000 issue was a worldwide concern because certain existing software, hardware and embedded systems were initially designed without addressing the impact of the change to the Year 2000. If not corrected, these systems could have failed or created erroneous results. In October 1999, Columbia announced that it had met its Year 2000 readiness objectives designed to provide uninterrupted, safe and reliable delivery of natural gas through the Year 2000. Columbia's comprehensive Year 2000 program included a thorough evaluation of its information technology and non-information technology to determine if they were Year 2000 compliant and, 19 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ensure that the appropriate corrective action was completed, if appropriate. The total cost of assessing, testing and remediating Columbia's systems for Year 2000 compliance was approximately $19 million. Since the date change, Columbia has not experienced any interruption in service. As part of its normal operations, Columbia continuously operates in a safety-conscious, high-reliability environment and has numerous back-up systems in place. As a result of the extensive planning that was incorporated into Columbia's contingency plans and the Year 2000 project, management believed that the most reasonably likely worst case Year 2000 scenario would have involved minor failures that were not detected and corrected during the project. However, such failures were not experienced. Common Stock Prices and Dividends*
Market Price ---------------------------------------------------------- Quarterly Quarter Ended High Low Close Dividends Paid - ----------------------------------------------------------------------------------------------------------------------------------- $ $ $ $ 1999 December 31 66 1/4 55 1/16 63 1/4 .225 September 30 64 11/16 54 1/4 55 3/8 .225 June 30 64 1/4 43 7/8 62 11/16 .225 March 31 58 44 5/8 52 1/4 .200 - ----------------------------------------------------------------------------------------------------------------------------------- 1998 December 31 60 3/4 54 1/4 57 3/4 .200 September 30 60 3/8 47 1/2 58 5/8 .200 June 30 57 11/12 50 1/3 55 5/8 .200 March 31 52 17/24 47 1/3 51 5/6 .166 - -----------------------------------------------------------------------------------------------------------------------------------
* Amounts have been restated to reflect a three-for-two common stock split, in the form of a stock dividend, effective June 15, 1998. 20 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) TRANSMISSION AND STORAGE OPERATIONS Columbia's transmission and storage segment consists of the operations of Columbia Transmission, Columbia Gulf Transmission Company (Columbia Gulf) and Columbia Pipeline Corporation. Together they own a pipeline network of approximately 16,250 miles extending from offshore in the Gulf of Mexico to Lake Erie, New York and the eastern seaboard serving 15 northeastern, mid-Atlantic, midwestern and southern states, as well as the District of Columbia. In addition, Columbia Transmission operates one of the nation's largest underground natural gas storage systems. Proposed Millennium Pipeline Project The proposed Millennium Pipeline Project (Millennium Project), in which Columbia Transmission is participating and will serve as developer and operator, will transport western gas supplies to northeast and mid-Atlantic markets. The 442-mile pipeline will connect to TransCanada Pipe Lines Ltd. at a new Lake Erie export point and transport approximately 700,000 Mcf per day to eastern markets. Nine shippers have signed agreements for the available capacity. A filing with the Federal Energy Regulatory Commission (FERC), requesting approval of the Millennium Project, was made on December 22, 1997. This filing began the extensive review process, including opportunities for public review, communication and comment. The Millennium Project sponsors proposed an in-service date of November 1, 2000. However, the final in-service date for the entire project is now expected to be delayed as a result of the timing of certificate approval by the FERC. The sponsors of the proposed Millennium Project are Columbia Transmission, Westcoast Energy, Inc., TransCanada Pipe Lines Ltd. and MCN Energy Group, Inc. Market Expansion Project Columbia Transmission initiated services under the final phase of the market expansion project in November 1999. The expansion project, which was phased in over a three-year period, added approximately 500,000 Mcf per day of firm service to 23 customers. Columbia Transmission's Phase II Rate Proceeding Columbia Transmission's rate case settlement, approved by the FERC in April 1997, provided for a hearing in the fall of 1998 to address environmental cost recovery that was excluded from the settlement. However, at the request of Columbia Transmission and other active parties, the schedule was suspended in May 1998 in order to afford the parties an opportunity to pursue settlement discussions. As a result of these discussions, the active parties reached an agreement on the overall components of an environmental settlement. The comprehensive agreement included such major components as Columbia Transmission's total allowed recovery of environmental remediation program costs and the disposition of any proceeds received by Columbia Transmission from insurance carriers and others. Columbia Transmission filed the stipulation and agreement with the FERC on April 5, 1999, and on September 15, 1999, the FERC approved the settlement. No requests for rehearing were filed. The approval of the settlement did not have a material impact on Columbia's consolidated financial results. Proposed East Lateral Expansion and SunStar Pipeline Projects Columbia Gulf announced plans in September 1998 to consider an expansion of its onshore East Lateral system at Grand Isle, Louisiana. The expansion of the East Lateral would provide additional capacity to shippers from Grand Isle. The expansion, which would add approximately 600,000 Mcf per day of incremental firm transportation capacity, would be accomplished by adding new facilities and expanding existing facilities. The proposed SunStar Pipeline Project, in which Columbia Gulf is participating and will serve as the developer and operator, will transport gas from the deep water areas of the Gulf of Mexico to Columbia Gulf's onshore lateral at Grand Isle. This offshore pipeline project of approximately 56 miles would have capacity of 660,000 Mcf per day and is complementary to the expansion of the East Lateral system facilities, mentioned above. Columbia Gulf conducted open seasons in the fall of 1998 to obtain binding commitments from interested parties for the additional capacity from the East Lateral expansion and the SunStar Pipeline Project. Based on the open season interest, Columbia Gulf is reevaluating the design parameters of the proposed pipelines and continuing its negotiations with potential shippers who are drilling prospects in the proposed service area of the Gulf of Mexico. Volunteer Pipeline On April 14, 1999, Columbia Gulf, MCN Energy Group, Inc. and AGL Resources, Inc. announced the start of an open season offering approximately 250,000 Mcf per day of capacity in a proposed 24-inch natural gas pipeline extending approximately 160 miles from an interconnection near 21 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Portland, Tennessee to an interconnection near Chattanooga, Tennessee. The pipeline, to be called the Volunteer Pipeline (Volunteer), anticipates additional interconnections with several pipeline companies including Columbia Gulf. Volunteer recently concluded the open season where nearly a dozen companies requested more than 440,000 Mcf per day of capacity. Potentially expandable to approximately 500,000 Mcf per day, Volunteer expects to provide firm natural gas transportation from the mid-continent into the Atlanta, Georgia, and other southeastern markets. Subsequent to the open season, AGL Resources, Inc. withdrew its participation in the project. Volunteer expects to file an application with the FERC in 2000 and to be in service by November 2001. Columbia Gulf will serve as operator of the new pipeline facilities. Trailblazer Effective November 30, 1999, Columbia Gulf sold its 100% interest in CGT Trailblazer, L.L.C., which was formed for the sole purpose of holding Columbia Gulf's one-third-partnership interest in the Trailblazer Pipeline Company. The sale price was approximately $38 million in cash. Competition and the Effect of LDC Unbundling Services Columbia's transmission and storage subsidiaries compete with other interstate pipelines for the transportation and storage of natural gas. Since the issuance of FERC Order No. 636, various states throughout Columbia Transmission's service area have initiated proceedings dealing with open access and unbundling of local distribution companies' (LDC) services. Among other things, unbundling involves providing all LDC customers with the choice of what entity will serve as transporter as well as merchant supplier. While the scope and timing of these various unbundling initiatives varies from state to state, retail choice programs are being extended to increasing numbers of LDC customers throughout Columbia Transmission's market area. Among the issues being addressed in the state unbundling proceedings is the treatment of the pipeline transmission and storage agreements that have underpinned the traditional LDC merchant function. In the case of Columbia Transmission and Columbia Gulf, contracts covering the majority of their firm transportation and storage quantities with LDCs have primary terms that extend to October 31, 2004. Management fully expects that the LDCs, or those entities to which pipeline capacity may be assigned as a result of the LDC unbundling process, will continue to fulfill their obligations under these contracts. However, in view of the changing market and regulatory environment, Columbia's transmission companies have commenced the process of discussing long-term transportation and storage service needs with their firm customers. Those discussions could result in the restructuring of some of these contracts on mutually agreeable terms prior to 2004. Regulatory Matters Mainline '99 Columbia Gulf filed an application with the FERC on June 5, 1998, for authority to increase the maximum certificated capacity of its mainline facilities. The expansion project, referred to as Mainline '99, will increase Columbia Gulf's certificated capacity to nearly 2.2 billion cubic feet per day (Bcf/day), by replacing certain compressor units and increasing the horsepower capacity of other compressor stations. It is expected that the total cost of the project would be approximately $37.6 million. Various shippers contracted for the additional service through an open bidding process held in late 1997 and early 1998. On February 10, 1999, the FERC issued an order approving Columbia Gulf's June 1998 filing and construction commenced on March 3, 1999. On March 12, 1999, requests for rehearing of the FERC order were filed by three parties. On January 31, 2000, the FERC issued an order denying the requests for rehearing and validating the open season held in conjunction with Mainline '99. The FERC chose to address the requirement of holding an additional open season in the Columbia Gulf mainline capacity proceeding (see Columbia Gulf Mainline Capacity Proceeding below). On December 1, 1999, approximately 270,000 Dth/day of additional capacity was made available on Columbia Gulf's mainline. Additional capacity of approximately 45,000 Dth/day is expected to be made available on November 1, 2000. Discussions with FERC The transmission and storage subsidiaries are in confidential and informal discussions with the staff of the FERC (Staff) concerning the scope of authorization for certain past transactions under the relevant filed tariffs. The transmission and storage subsidiaries initiated these discussions with the FERC. These subsidiaries provided information concerning these transactions to the Staff pursuant to an informal non-public inquiry being conducted by the Staff. Because management does not yet know the position Staff will take, management is unable to reasonably estimate the amount that will have to be paid pursuant to reimbursement or other remedies. 22 23 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Columbia Gulf Mainline Capacity Proceeding In 1993, the FERC directed Columbia Gulf to show cause as to why it had not sought FERC abandonment authorization to reduce capacity on its mainline facility. In an August 8, 1997 order, the FERC approved a settlement between Columbia Gulf and FERC's enforcement staff requiring Columbia Gulf to conduct a 30-day open season on additional firm mainline capacity up to its certificated design. Although certain of Columbia Gulf's customers challenged the terms of the settlement, Columbia Gulf concluded the open season on December 15, 1997 which resulted in requests for capacity that exceeded the capacity specified in Columbia Gulf's FERC certificate. In orders issued in December 1998 and 1999, the FERC has rejected challenges to the settlement and denied rehearing. In its order issued December 22, 1999, the FERC affirmed the validity of the 1997 open season but indicated that an additional open season in compliance with the settlement will be necessary. In early February 2000, several appeals of the FERC's orders in this proceeding were filed with the federal circuit court of appeals. Columbia Transmission's Voluntary Incentive Retirement Program Columbia Transmission announced the introduction of a voluntary incentive retirement plan on September 30, 1999. Approximately 600 Columbia Transmission employees were eligible for the program, which provides a retirement incentive for active employees who are age fifty and above with at least five years of service as of March 1, 2000. During the acceptance period that began on January 1, 2000 and closed on January 31, 2000, 486 employees elected early retirement. The majority of the retirements are scheduled to occur in the first quarter of 2000, at which time the cost of the program will be recorded. Retirement costs for these employees are funded through the pension plan and will not have a significant impact on Columbia's consolidated net income. Sale of Facilities During 1999, Columbia Transmission sold approximately 1,150 miles of gathering pipelines and related properties. In addition, the Kanawha Separation Plant and its appurtenances were sold to an affiliate. Agreements are in place for an additional 970 miles of gathering and transmission pipelines to be sold to third parties. Excluding these sales, there are approximately 150 miles of gathering lines remaining to be sold or refunctionalized. The sale of these assets will not have a material impact on Columbia's consolidated financial results. Storage Base Gas Sales Columbia Transmission has agreements to sell 4.8 billion cubic feet (Bcf) of base gas volumes in the first quarter of 2000. Base gas represents storage volumes that are maintained to ensure that adequate pressure exists to deliver current inventory. However, as a result of ongoing improvements made in Columbia Transmission's storage operations, from time-to-time certain of these storage volumes are determined to be unnecessary to maintain deliverability of current inventory. Columbia Transmission is allowed to retain approximately 95% of the first $60 million pre-tax gain from any base gas sales and to share equally with customers any gain after that level. As a result of such sales in the first quarter of 2000, Columbia Transmission will reach the $60 million pre-tax gain level. Gains from any future base gas sales will be shared equally with Columbia Transmission's customers. Capital Expenditure Program The transmission and storage segment's net capital expenditure program was $183.4 million in 1999 and is projected to be $148.4 million in 2000. New business initiatives totaled approximately $86 million in 1999 and are expected to be $44 million in 2000. The remaining expenditures are for modernizing and upgrading facilities. Environmental Matters Columbia's transmission subsidiaries have implemented programs to continually review compliance with existing environmental standards. In addition, transmission subsidiaries continue to review past operational activities and to formulate remediation programs where necessary. Columbia Transmission is currently conducting assessment, characterization and remediation activities at specific sites under a 1995 Environmental Protection Agency (EPA) Administrative Order by Consent (AOC). The program pursuant to the AOC covers approximately 240 facilities, approximately 13,000 liquid removal points, approximately 2,200 mercury measurement stations and about 3,700 storage well locations. As of December 31, 1999, field characterization has been performed at most of these sites, and site characterization reports and remediation plans which must be submitted to the EPA for approval, are in various stages of development and completion. Characterization of the approximately 40 remaining facilities and all of the storage well locations is yet to be completed. Significant remediation has taken place only at mercury measurement stations and at a limited number of the 240 facilities. Only those site investigation, characterization and remediation costs currently known and determinable can be considered "probable and reasonably estimable" under Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" (SFAS No. 5). As costs become probable and reasonably estimable, the associated reserves will be adjusted as appropriate. Columbia Transmission is unable, at this time, to 23 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) accurately estimate the time frame and potential costs of the entire program. Management expects that as characterization is completed and additional remediation work is performed and more facts become available, it will be able to develop a probable and reasonable estimate for the entire program or a major portion thereof consistent with U.S. Securities and Exchange Commission's Staff Accounting Bulletin No. 92, SFAS No. 5, and American Institute of Certified Public Accountants Statement of Position 96-1. As a result of 1999 activities, actual expenditures of approximately $16.8 million were charged against the liability resulting in a remaining liability of $121.4 million. Columbia Transmission's environmental cash expenditures are expected to be approximately $17 million in 2000 and to remain at this level in the foreseeable future. These expenditures will be charged against the previously recorded liability. 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. 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, its cost recovery settlement with customers and the long time period over which expenditures will be made. In addition, predecessor companies of Columbia Transmission may have been involved in the operation of manufactured gas plants. When such plants were abandoned, material used and created in the process was sometimes buried at the site. As of the date of this report, Columbia Transmission is unable to determine if it will become liable for any characterization or remediation costs at such sites. Throughput Columbia Transmission's throughput consists of transportation and storage services for LDCs and other customers within its market area. Throughput for Columbia Gulf reflects mainline transportation services from Rayne, Louisiana to Leach, Kentucky and short-haul transportation services from the Gulf of Mexico to Rayne, Louisiana. In 1999, throughput for the transmission and storage segment increased 53.3 Bcf from 1998 to 1,250.8 Bcf, due to the colder weather in 1999 and increased transportation services from Columbia Transmission's market expansion project. Market area transportation by Columbia Transmission increased 57.9 Bcf to 1,005.7 Bcf. Mainline transportation for Columbia Gulf increased 30.9 Bcf to 594.2 Bcf in 1999, reflecting the impact of colder weather in Columbia Transmission's operating territory. Short-haul transportation of 220.2 Bcf in 1999 was down 11 Bcf from 1998, due to a decline in market demand in the area south of Rayne, Louisiana. Throughput for 1998 of 1,197.5 Bcf decreased 104 Bcf when compared to the year earlier primarily due to warmer than normal weather in Columbia Transmission's operating territory that reduced demand for natural gas. The warmer weather was the principal reason that Columbia Transmission's market area transportation of 947.8 Bcf in 1998, decreased 84.8 Bcf. In addition, warmer weather in 1998 also reduced transportation for Columbia Gulf's mainline transportation of 563.3 Bcf by 44.2 Bcf from 1997 and Columbia Gulf's short-haul transportation of 231.2 Bcf by 21.2 Bcf. Operating Revenues Operating revenues of $836.4 million in 1999 were down $2.3 million from 1998. After adjusting for revenue items that are offset in operating expenses, operating revenues increased by $6.1 million, primarily due to an increase in Columbia Transmission's market expansion contracts. Operating revenues in 1998 of $838.7 million were essentially unchanged from 1997. After adjusting for revenue items that are offset in operating expenses, operating revenues in 1998 decreased $2.6 million. The effect of the sale of gathering facilities and a lower cost-of-service level underlying Columbia Transmission's rates in 1998 was only partially offset by increased revenues from transportation and storage services. The sale of storage base gas volumes that were part of Columbia Transmission's overall 1997 rate case settlement improved revenues in both 1998 and 1997. Operating Income In 1999, operating income for the transmission and storage segment of $350.1 million increased $24 million over 1998. This increase primarily reflected the pre-tax effect of a producer settlement and additional revenues primarily resulting from Columbia Transmission's market expansion project. The 1998 results benefited from reduced postretirement benefit costs and Columbia Gulf's regulatory settlement. Both periods included base gas sales, $14.7 million in 1999 and $13.9 million in 1998. Operating income of $326.1 million for 1998 increased $67.8 million over 1997 due to a decline in operating expenses. Operation and maintenance expenses for 1998 declined $64.3 million compared with 1997, primarily reflecting 24 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) restructuring costs recorded in 1997 and the beneficial effect of implementing those restructuring initiatives in 1998. Also making 1997 operation and maintenance expense higher when compared to 1998 was a $10.1 million reserve recorded in 1997 for the anticipated loss related to the sale of certain pipeline facilities. STATEMENTS OF OPERATING INCOME FROM TRANSMISSION AND STORAGE OPERATIONS (UNAUDITED)
Year Ended December 31, (in millions) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------- OPERATING REVENUES Transportation revenues $ 615.0 $ 620.4 $ 622.0 Storage revenues 182.4 186.0 179.8 Other revenues 39.0 32.3 36.8 - ---------------------------------------------------------------------------------------------------------- Total Operating Revenues 836.4 838.7 838.6 - ---------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Operation and maintenance 358.9 358.9 423.2 Settlement of gas supply charges (31.7) - - Depreciation 106.2 101.8 104.3 Other taxes 52.9 51.9 52.8 - ---------------------------------------------------------------------------------------------------------- Total Operating Expenses 486.3 512.6 580.3 - ---------------------------------------------------------------------------------------------------------- OPERATING INCOME $ 350.1 $ 326.1 $ 258.3 - ----------------------------------------------------------------------------------------------------------
TRANSMISSION AND STORAGE OPERATING HIGHLIGHTS
1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- CAPITAL EXPENDITURES ($ in millions) 183.4 210.0 251.4 142.7 169.1 - -------------------------------------------------------------------------------------------------------------------------------- THROUGHPUT (Bcf) Transportation Columbia Transmission Market area 1,005.7 947.8 1,032.6 1,102.4 1,106.1 Columbia Gulf Mainline 594.2 563.3 607.5 633.7 605.0 Short-haul 220.2 231.2 252.4 266.5 221.4 Intrasegment eliminations (569.3) (544.8) (591.0) (624.5) (596.3) - -------------------------------------------------------------------------------------------------------------------------------- TOTAL THROUGHPUT 1,250.8 1,197.5 1,301.5 1,378.1 1,336.2 - --------------------------------------------------------------------------------------------------------------------------------
25 26 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) DISTRIBUTION OPERATIONS Columbia's five distribution subsidiaries (Distribution) provide natural gas service to nearly 2.1 million residential, commercial and industrial customers in Ohio, Pennsylvania, Virginia, Kentucky and Maryland. Market Conditions Weather in Distribution's market area during 1999 was 12% colder than the record warm weather of 1998, but still 8% warmer than normal. As a result, Distribution's weather-sensitive deliveries were up 25 Bcf from 1998. Competition Distribution competes with investor-owned, municipal, and cooperative electric utilities throughout its five-state service area, and to a lesser extent with propane and fuel oil suppliers. Electric competition is generally strongest in the residential and commercial markets of Kentucky, southern Ohio, southwestern Pennsylvania and western Virginia where rates are primarily driven by low-cost coal-fired generation. The northern Ohio and Pittsburgh areas have less competitive electric rates due to the use of higher-cost nuclear-generated power. It is too soon to determine what impact, if any, deregulation of the electric industry will have on the competitive situation. Distribution continues to be a strong competitor in the energy market for new homes as a result of strong customer preference for natural gas. Approximately 38% of Distribution's industrial and commercial throughput, or 137 Bcf, is susceptible to bypass because these customers are located close to multiple natural gas pipelines and local gas distribution companies. As a result of Distribution's competitive strategies, substantial inroads by other natural gas competitors have been avoided to date. Regulatory Matters In May 1998, Columbia Gas of Virginia, Inc. (Columbia of Virginia) filed a rate case with the Virginia State Corporation Commission (VSCC) requesting an annual revenue increase of $5.3 million over the revenues then being collected, subject to refund, under a 1997 rate case filing. In April 1999, Columbia of Virginia amended its May 1998 rate increase application to revise its rate design for residential and small general service customers, effective January 1, 2000, requesting recovery of most non-gas costs through monthly fixed charges rather than the traditional combination fixed/volumetric charge. On December 23, 1999, the VSCC issued an order approving a proposed settlement that provides for additional annual revenue of approximately $4.4 million and rejecting Columbia of Virginia's rate design proposal. The VSCC order did approve a 20% increase in the fixed monthly customer charges for residential and small general service customers which shifts about $4.9 million of annual revenues from the weather-sensitive volumetric rate to the fixed monthly customer charge. Distribution continues to pursue initiatives that give retail customers the opportunity to purchase natural gas directly from marketers and to use Distribution's facilities for transportation services. These opportunities are being pursued through regulatory initiatives in all of its jurisdictions, which resulted in transportation programs being initiated in all five of its service areas. Once fully implemented, these programs would reduce Distribution's merchant function and provide all customer classes with the opportunity to obtain gas supplies from alternative merchants. As these programs expand to all customers, regulations will have to be implemented to provide for the recovery of transition capacity costs and other transition costs incurred by a utility serving as the supplier of last resort if the marketing company cannot supply the gas. Transition capacity costs are created as customers enroll in these programs and purchase their gas from other suppliers, leaving Distribution with pipeline capacity it has contracted for but no longer needs. The state commissions in Distribution's five jurisdictions 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 and costs resulting from being the supplier of last resort will be mitigated or recovered. On October 25, 1999, Columbia Gas of Ohio, Inc. (Columbia of Ohio) and a group comprising diverse interested parties, also known as the Collaborative, filed with the Public Utilities Commission of Ohio (PUCO) a third amendment to its 1994 rate case. The filing, which was approved by the PUCO on December 2, 1999, extends Columbia of Ohio's Customer CHOICE(SM) program through October 31, 2004, freezes base rates through October 31, 2004 and resolves the issue of transition capacity costs. Under the agreement, Columbia of Ohio would assume total financial risk for mitigation of transition capacity costs at no additional cost to customers. Among other items, Columbia of Ohio would have the opportunity to utilize non-traditional revenue sources as a means of offsetting the costs. The agreement also requires Columbia of Ohio to submit a proposal addressing issues related to the merchant function, obligation to serve, and provider of last resort by April 1, 2000. Columbia of Ohio extended its Customer CHOICE(SM) program to all of its nearly 1.3 million customers in mid-1998 and there are now over 519,000 customers 26 27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) participating, including approximately 445,000 residential customers. Of 41 marketers approved for participation, 32 are currently active. In addition, the PUCO authorized Columbia of Ohio to revise its depreciation accrual rates for the period January 1, 1999 through December 31, 2004. The revised depreciation rates are lower than those that would have been utilized if Columbia of Ohio were not subject to regulation. The amount of depreciation that would have been recorded for 1999 had Columbia of Ohio not been subject to rate regulation is $31.8 million, $18.8 million more than the $13 million recorded. Over the six-year period, the amount of depreciation that would have been recorded if Columbia of Ohio were not regulated is estimated to be approximately $150 million higher than the regulatory depreciation to be recorded. A regulatory asset will be established for this amount. Pursuant to the terms of the agreement, rates were not reduced to reflect this reduction in depreciation expense with most of the excess revenues generated being used to recover Columbia of Ohio's transition capacity costs. In Pennsylvania, legislation was signed by the governor in June 1999 that allows consumers statewide to choose their natural gas supplier. Under the legislation, all Pennsylvania natural gas utilities, upon approval of the Pennsylvania Public Utility Commission (PPUC), must offer all of their customers the opportunity to choose a supplier by July 1, 2000. Before offering choice programs to customers, each company was required to submit a restructuring plan to the PPUC. The legislation makes Pennsylvania one of the first states to offer customers both gas and electric choice on a statewide level. Another major component of the legislation is the repeal of the gross receipts tax on natural gas use, effective January 1, 2000. On August 2, 1999, Columbia Gas of Pennsylvania, Inc. (Columbia of Pennsylvania) filed an expanded statewide restructuring plan with the PPUC. On August 12, 1999, the PPUC issued a preliminary order providing a litigation schedule and directing Columbia of Pennsylvania to develop and implement an interim program for the 1999-2000 heating season while the permanent plan was being litigated. In October 1999, the PPUC approved the interim plan, thereby allowing all of the company's residential and small commercial customers the right to choose a new natural gas supplier, effective November 1, 1999. Prior to this date, more than 70% of Columbia of Pennsylvania's customers in seven counties could choose their supplier under a program approved by the PPUC in 1998. Columbia of Pennsylvania subsequently negotiated a settlement of the full restructuring plan with 26 parties. On December 16, 1999, the PPUC unanimously approved the settlement making Columbia of Pennsylvania the first company to receive PPUC approval of a permanent statewide program under the guidelines of the June 1999 legislation. As part of the settlement, Columbia of Pennsylvania will continue to deliver natural gas to all 390,000 of its customers regardless of their supplier. In Virginia, legislation was enacted in 1999 permitting Columbia of Virginia, upon approval by the VSCC, to offer all of its 175,000 residential and commercial customers the opportunity to choose their natural gas suppliers. This legislation allows a natural gas distribution company to file for an unbundling of its rates with the VSCC effective July 1, 2000. Moreover, the legislation expires on June 30, 2000, unless reenacted by the Virginia General Assembly. In January 2000, new legislation was introduced in the General Assembly that would reenact last year's legislation. Columbia of Virginia has been providing a pilot transportation program in the Gainesville market area of Northern Virginia since late 1997. There are now over 7,500 customers and 11 marketers participating in the program. Columbia of Virginia plans to file in 2000 for permission to expand the Customer CHOICE(SM) program statewide. In August 1998, the Maryland Public Service Commission approved a two-year continuation of Columbia Gas of Maryland, Inc.'s (Columbia of Maryland) Customer CHOICE(SM) program which allows all of its nearly 32,000 customers to select a natural gas supplier other than Columbia of Maryland. There are approximately 2,900 customers and 5 marketers participating in the program. In April 1999, Columbia Gas of Kentucky, Inc. (Columbia of Kentucky) filed an application with the Kentucky Public Service Commission (KPSC) seeking approval to initiate a residential and small commercial transportation program. Under the terms of the filing, all of Columbia of Kentucky's 142,000 residential and small commercial customers would be eligible to choose a new supplier for gas deliveries commencing in November 1999. In late May 1999, the KPSC issued an order stating that more time was needed to determine the reasonableness of the proposal and suspending the filing until March 31, 2000. However, the KPSC said it could issue a final decision prior to the end of the suspension period. In late January 2000, the KPSC issued an order approving the transportation program on a pilot basis effective February 1, 2000 through January 31, 2005. Under the order, Columbia of Kentucky would become the first utility in Kentucky, gas or electric, to offer a choice of supplier to all of its customers. Under the terms of the order, Columbia of Kentucky would have to assume the financial risk for mitigating transition capacity costs through the utilization of non-traditional revenue sources. Also, the order did not renew Columbia of 27 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Kentucky's gas cost incentive program, which had been temporarily continued by the KPSC until the conclusion of the customer transportation case. On February 18, 2000, Columbia of Kentucky filed for rehearing of the order. Capital Expenditure Program Distribution's 1999 capital expenditures were approximately $145.5 million, a decrease of $6.4 million from 1998. In addition to maintaining and upgrading facilities to assure safe, reliable and efficient operation, 1999 expenditures included $63.7 million for extending service to new areas and $61.5 million for replacement and betterment projects. The estimated 2000 capital expenditure program amounts to approximately $135.6 million, including $54 million for new business and development, $59 million for replacement and betterment projects with the remainder primarily for support services. Environmental Matters Distribution's primary environmental issues relate to 18 former manufactured gas plant sites. Investigations or remedial activities are currently underway at six sites and remedial construction has been completed at two sites. Additional site investigations may be required at some of the remaining sites. To the extent Distribution's site investigations have been conducted, remediation plans developed and the responsibility for remediation established, the appropriate estimated liabilities have been recorded. Regulatory assets have also been recorded for a majority of these costs as rate recovery has been authorized or is probable. In June 1999, Columbia of Pennsylvania was notified by the Environmental Protection Agency (EPA) Region 5 that it was a Potentially Responsible Party (PRP) in a removal action pursuant to Section 106 of the Comprehensive Environmental Response Compensation and Liability Act (CERCLA), also known as Superfund, concerning a site in Wooster, Ohio, known as 7-7 Merger, Inc. Coal tar materials sent by Columbia of Pennsylvania from the former manufactured gas plant at York, Pennsylvania to 7-7 Merger, Inc. for recycling in 1997 are potentially among the materials abandoned by 7-7 Merger, Inc. at the Wooster site. There are approximately 28 parties that received a similar notice from EPA. There is no reasonable way to estimate liability at this time. However, the EPA preliminary estimate of the total costs of response is $702,000. Based upon the EPA estimate and preliminary cost sharing discussions among a PRP group, a reasonable lower bound estimate of Columbia of Pennsylvania's cost for the removal action would be approximately $25,000. The PRP group has entered into an administrative order with EPA Region 5 with work scheduled to begin in March 2000. Voluntary Workforce Reduction Programs As a result of Columbia's ongoing review of its various business units, the utilization of improved technologies and process improvement initiatives, management has identified a number of ways of working more efficiently. As discussed below. Columbia is implementing a Voluntary Incentive Retirement Program (VIRP) for the distribution subsidiaries and certain business units of Columbia Energy Group Service Corporation, similar to the program discussed in the Transmission and Storage Operations on page 23 for Columbia Transmission. In early 1999 Columbia of Pennsylvania announced a Voluntary Severance Program (VSP) for its employees. In February 2000, the five distribution subsidiaries and Columbia Energy Group Service Corporation announced the introduction of a VIRP. Approximately 880 employees are eligible for the program, which provides a retirement incentive for certain active employees who are age fifty and above with at least five years of service as of June 1, 2000. The acceptance period will end on April 30, 2000. The majority of the retirements are scheduled to occur on June 1, 2000, at which time the cost of the program will be recorded. Retirement costs for these employees are funded through the pension plan and will not have a significant impact on Columbia's consolidated net income. In January 1999, Columbia of Pennsylvania announced a VSP that was available to all of its nearly 700 employees in its operations department. In total, 37 professional, manual and administrative/technical employees in the operations department elected to participate in the program. By combining the VSP with other workforce reduction measures, Columbia of Pennsylvania has reduced staffing by about 45 full-time employees. These initiatives resulted in a first quarter 1999 charge to operating expense of $1.5 million, representing severance and benefit costs for the participating employees, most of whom left the company by March 17, 1999. Throughput In 1999, total volumes sold and transported of 696.8 Bcf increased 138.6 Bcf from 1998. The improved throughput reflects the colder weather in 1999 compared to 1998, along with a 108 Bcf increase in off-system sales as Distribution took advantage of higher spot prices in March 1999 to sell supplies available due to warmer than normal weather. Distribution's 1998 total volumes sold and transported of 558.2 Bcf decreased 13.9 Bcf from 1997 due to the record warm weather in 1998. Increased off-system sales, the return to full production of a major customer idled by a 10-month strike in 1997, increased industrial transportation volumes and customer growth partially offset the adverse impact on sales of the record warm weather in 1998. Net Revenues Net revenues for 1999 of $852.6 million were up $5.6 million from 1998 as the impact of the colder weather in 1999 and Columbia of Virginia's regulatory settlement were largely offset by Columbia of Ohio's contribution of $23.8 million to the transition capacity cost pool pursuant to the 1999 rate settlement. The revenue impact on operating income of this contribution is more than offset by a related reduction in depreciation expense provided by the 28 29 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) settlement. Revenues in 1998 benefited from Columbia of Ohio's 1996 regulatory settlement, which expired in December 1998. In 1998, net revenues of $847 million were down $51.1 million from 1997. This decline was primarily due to the record warm weather in 1998, which reduced net revenues approximately $76 million from 1997. The beneficial impact of Columbia of Ohio's 1997 regulatory settlement on net revenues in 1998 partially offset the adverse impact of the warm weather. Operating Income Operating income for 1999 of $254.6 million increased $28.8 million over 1998, primarily due to the increase in net revenues, reduced operating expenses attributable to lower gross receipts and property taxes and, as noted above, the terms of the 1999 Columbia of Ohio regulatory settlement resulted in reduced depreciation expense. In 1998, operating expenses were reduced due to a $16.5 million settlement gain related to postretirement benefits costs that reflected the purchase of insurance for a portion of those liabilities. Operating income in 1998 of $225.8 million increased by $1.6 million from 1997, as the decline in net revenues was more than offset by a $52.7 million decrease in operating expenses primarily reflecting the reduction in postretirement benefits costs and the beneficial impact of the restructuring initiatives implemented in 1997. STATEMENTS OF OPERATING INCOME FROM DISTRIBUTION OPERATIONS (UNAUDITED)
Year Ended December 31, (in millions) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- NET REVENUES Sales revenues $ 1,705.5 $ 1,686.3 $ 2,153.1 Less: Cost of gas sold 1,137.6 1,005.4 1,385.6 - ---------------------------------------------------------------------------------------------------------------------------------- Net Sales Revenues 567.9 680.9 767.5 - ---------------------------------------------------------------------------------------------------------------------------------- Transportation revenues 317.3 183.2 143.2 Less: Associated gas costs 32.6 17.1 12.6 - ---------------------------------------------------------------------------------------------------------------------------------- Net Transportation Revenues 284.7 166.1 130.6 - ---------------------------------------------------------------------------------------------------------------------------------- Net Revenues 852.6 847.0 898.1 - ---------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Operation and maintenance 406.9 386.7 441.0 Depreciation 54.5 82.2 78.2 Other taxes 136.6 152.3 154.7 - ---------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 598.0 621.2 673.9 - ---------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME $ 254.6 $ 225.8 $ 224.2 - ----------------------------------------------------------------------------------------------------------------------------------
29 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) DISTRIBUTION OPERATING HIGHLIGHTS
1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- CAPITAL EXPENDITURES ($ in millions) 145.5 151.9 159.5 148.4 151.8 - -------------------------------------------------------------------------------------------------------------------------------- THROUGHPUT (Bcf) Sales Residential 132.5 149.1 190.9 209.4 196.6 Commercial 43.7 54.1 72.7 85.7 79.5 Industrial and Other 3.5 4.4 4.2 10.3 7.1 - -------------------------------------------------------------------------------------------------------------------------------- Total Sales 179.7 207.6 267.8 305.4 283.2 Transportation 346.2 287.7 258.9 248.8 255.9 - -------------------------------------------------------------------------------------------------------------------------------- Total Throughput 525.9 495.3 526.7 554.2 539.1 Off-System Sales 170.9 62.9 45.4 10.8 7.5 - -------------------------------------------------------------------------------------------------------------------------------- Total Sold and Transported 696.8 558.2 572.1 565.0 546.6 - -------------------------------------------------------------------------------------------------------------------------------- SOURCES OF GAS FOR THROUGHPUT (Bcf) Sources of Gas Sold Spot market* 302.2 229.8 314.0 323.2 210.4 Producers 12.6 20.8 38.9 50.2 70.9 Storage withdrawals (injections) 15.5 12.4 4.0 (20.8) 23.6 Company use and other 20.3 7.5 (43.7) (36.4) (14.2) - -------------------------------------------------------------------------------------------------------------------------------- Total Sources of Gas Sold 350.6 270.5 313.2 316.2 290.7 Gas received for delivery to customers 346.2 287.7 258.9 248.8 255.9 - -------------------------------------------------------------------------------------------------------------------------------- Total Sources 696.8 558.2 572.1 565.0 546.6 - -------------------------------------------------------------------------------------------------------------------------------- CUSTOMERS Sales Residential 1,366,869 1,612,124 1,769,647 1,815,269 1,794,800 Commercial 123,673 148,529 168,413 173,689 172,114 Industrial and Other 2,264 2,295 2,340 2,285 2,265 - -------------------------------------------------------------------------------------------------------------------------------- Total Sales Customers 1,492,806 1,762,948 1,940,400 1,991,243 1,969,179 Transportation 603,901 298,107 93,923 12,804 6,789 - -------------------------------------------------------------------------------------------------------------------------------- Total Customers 2,096,707 2,061,055 2,034,323 2,004,047 1,975,968 - -------------------------------------------------------------------------------------------------------------------------------- DEGREE DAYS 5,171 4,635 5,736 5,975 5,692 - --------------------------------------------------------------------------------------------------------------------------------
* Reflects volumes under purchase contracts of less than one year. 30 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) EXPLORATION AND PRODUCTION OPERATIONS Columbia's exploration and production subsidiary, Columbia Resources, is one of the largest independent natural gas and oil producers in the Appalachian Basin and also has production operations in Canada. Columbia Resources produced approximately 47 Bcf equivalents (Bcfe) of natural gas and oil in 1999 and owns and operates 8,188 wells, and has net proven reserve holdings of 965.8 Bcfe at December 31, 1999. Columbia Resources also owns and operates approximately 6,069 miles of gathering pipelines. Columbia Resources seeks to achieve asset and profitable growth through acquisitions, expanded drilling activities and divestiture of under-performing assets. During 1999, Columbia Resources completed the largest and most successful exploration and development program in its history. Columbia Resources exceeded its originally projected 230 well program by drilling 233 wells and participated in another 20 wells with joint venture partners. Also, Columbia Resources had a well completion success rate of 82% in 1999 consistent with its success rate over the last five years. Columbia Resources participated in the drilling and completion of 263 wells during 1999. The success of these wells added 70.5 net Bcfe to Columbia Resources' reserve base. An additional 68 Bcfe of oil and gas reserves were acquired from Wiser Oil and Meridian Exploration, bringing Columbia Resources' reserve base to a record level of 965.8 Bcfe. During 1999, Columbia Resources' acquisition strategy involved six transactions totaling approximately $61 million and expansion of the gathering infrastructure by more than 450 miles of pipeline. Also notable in 1999 was the discovery by Columbia Resources of reserves in West Virginia in the Trenton-Black River formation at depths exceeding 10,000 feet. Columbia Resources recently completed construction of an eight-inch gathering pipeline and has connected the discovery well at a flowing rate in excess of 7.4 million cubic feet per day. A confirmation well, which has indicated strong production characteristics, was tied into the same pipeline network at the end of December. Drilling on the third prospect was completed in the first quarter of 2000. Capital Expenditure Program Columbia Resources' 1999 capital expenditures of $166.5 million primarily reflect investments in drilling and acquisitions. The 2000 capital expenditure program is estimated at $165.7 million and provides for the drilling of 330 new wells in the Appalachian Basin and Canada. This investment will include the expansion of Columbia Resources' gathering infrastructure in the Appalachian Basin and the continued expansion of its acreage position. Forward Sale of Natural Gas On December 1, 1999, Columbia Resources entered into an agreement with a third party whereby Columbia Resources received cash as a prepayment, and will sell approximately 45,000 Mcf/d during the period February 2000 through October 2004. This transaction, net of expenses, provided $148.5 million in cash proceeds for funding future operating costs and acquisitions and provided a forward sale at an average commodity price of $2.82 per Mcf exclusive of the basis differential. Purchase of a Natural Gas Processing Plant On November 1, 1999, Columbia Resources purchased certain carbon dioxide rights, a separation plant, and certain natural gas pipelines and facilities located in Kanawha County, West Virginia from Columbia Transmission. This facility, known as the Kanawha Separation Plant, was acquired at a price of $3.5 million. Production Gas production of 45.8 Bcf in 1999 increased 6.7 Bcf over 1998, primarily due to the acquisitions of Wiser Oil and Meridian Exploration, new drilling and improvements to Columbia Resources' gathering facilities. From 1997 to 1998, gas production increased by 13% reflecting the Alamco acquisition in mid-1997 and new production brought online in 1998. In 1999, oil and liquids production decreased 14% from 1998 to 185,207 barrels due to normal production declines in Ohio wells. Oil and liquids production in 1998 increased 2% from 1997 to 214,000 barrels primarily reflecting new well completions coming online. Operating Revenues Operating revenues for 1999 of $144.8 million increased $17.3 million over 1998 reflecting increased gas production that was partially offset by lower average 1999 gas prices. Columbia Resources manages the uncertainty of natural gas prices by hedging a portion of its production using derivative instruments. Columbia Resources hedged approximately 50% of its first quarter 2000 production at an average price of $3.75 per Mcf. Also contributing to the 31 32 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) increase in operating revenues in 1999 was $6 million of revenues from the termination of long-term sales contracts with two cogeneration facilities. Operating revenues for 1998 were $127.5 million, an increase of $14.2 million over 1997, primarily reflecting higher average prices and increased gas production. Operating Income Operating income of $44.2 million for 1999 increased $7 million over 1998 as the increase in operating revenues discussed above was partially offset by $10.3 million higher operating expenses associated with an expanded operation due in part to recent acquisitions, additional gathering facilities and drilling activity. In 1998, operating income improved by $6.3 million to $37.2 million, also primarily due to higher operating revenues, partially offset by higher operating expense due largely to acquisitions and increased drilling activity. STATEMENTS OF OPERATING INCOME FROM EXPLORATION AND PRODUCTION OPERATIONS (UNAUDITED)
Year Ended December 31, (in millions) 1999 1998 1997 - ------------------------------------------------------------------------------------ OPERATING REVENUES Gas revenues $123.1 $113.9 $109.5 Other revenues 21.7 13.6 3.8 - ------------------------------------------------------------------------------------ Total Operating Revenues 144.8 127.5 113.3 - ------------------------------------------------------------------------------------ OPERATING EXPENSES Operation and maintenance 53.9 44.6 45.7 Depreciation and depletion 36.9 36.5 27.6 Other taxes 9.8 9.2 9.1 - ------------------------------------------------------------------------------------ Total Operating Expenses 100.6 90.3 82.4 - ------------------------------------------------------------------------------------ OPERATING INCOME $ 44.2 $ 37.2 $ 30.9 - ------------------------------------------------------------------------------------
EXPLORATION AND PRODUCTION OPERATING HIGHLIGHTS
1999 1998 1997 1996 1995* - ----------------------------------------------------------------------------------------------------------------------- CAPITAL EXPENDITURES ($ in millions) 166.5 75.7 135.6 12.1 86.8 - ----------------------------------------------------------------------------------------------------------------------- PROVED RESERVES Gas (Bcf) 951.6 790.5 800.5 644.5 599.5 Oil and Liquids (000 Bbls) 2,375 1,835 1,700 774 1,651 - ----------------------------------------------------------------------------------------------------------------------- PRODUCTION Gas (Bcf) 45.8 39.1 34.7 33.6 65.4 Oil and Liquids (000 Bbls) 185 214 210 281 2,849 - ----------------------------------------------------------------------------------------------------------------------- AVERAGE PRICES Gas ($ per Mcf)** 2.66 2.91 2.63 2.84 1.96 Oil and Liquids ($ per barrel) 14.96 12.76 17.99 19.07 16.17 - -----------------------------------------------------------------------------------------------------------------------
* Include operating results from Columbia Gas Development Corporation, which was sold effective December 31, 1995 ** Includes the effect of hedging activities as discussed in Note 6 of Notes to Consolidated Financial Statements. 32 33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) ENERGY MARKETING OPERATIONS Energy marketing operations include the operations of Columbia Propane as well as Columbia Energy Services' retail operations. The results of Columbia Energy Services also include the operations of Columbia Service Partners, Inc., which provides a range of warranty products to homeowners, and Energy.com Corporation, an internet-based business that offers a variety of services to energy marketers and consumers. Together, these businesses serve 750,000 residential and 70,000 commercial and industrial customers in 34 states. Columbia Energy Services The president and CEO of Columbia Energy Services has been conducting a strategic assessment of all facets of Columbia Energy Services' businesses, which began in the first quarter of 1999, including ongoing action taken with company personnel and outside consultants to identify and address infrastructure weaknesses. After completing the initial phase of the strategic assessment, it was determined that Columbia Energy Services would concentrate its efforts primarily on the retail businesses, taking advantage of Columbia's existing geographic presence in an area where deregulation of gas and electric power markets is proceeding rapidly. In December 1999, the Wholesale and Trading operations, based in Houston, Texas, were sold to Enron North America Corp., a wholly-owned subsidiary of Enron Corp. for $38.3 million, subject to post-closing adjustments. The Wholesale and Trading operations are reported as discontinued operations in Columbia's consolidated financial statements. Also, as a result of the strategic assessment, it was determined that Columbia Energy Services should also exit the Major Accounts business that provides energy services and products to industrial and large commercial customers. In accordance with generally accepted accounting principles, the Major Accounts business is also being reported as discontinued operations in Columbia's consolidated financial statements. In conjunction with management's ongoing assessment of the opportunities and challenges facing Columbia's marketing operations, a letter of intent with Metromedia Energy for a joint venture to market retail energy and related services has expired and will not be renewed. Columbia Propane Acquisitions During 1999, Columbia Propane made several acquisitions to expand its operations. In May 1999, Columbia Propane, through its subsidiary, Columbia Petroleum Corporation (Columbia Petroleum), completed a transaction to acquire certain propane and petroleum product assets and associated properties from Carlos R. Leffler, Inc. (Leffler) and other Leffler entities. Columbia Propane acquired the propane assets, consisting of bulk storage facilities with a capacity of over 1.5 million gallons, a pipeline terminal with over 1.2 million gallons of storage, a propane distribution fleet and wholesale and retail operations serving central and eastern Pennsylvania. This acquisition provided Columbia Propane approximately 12,500 propane customers and 36,000 petroleum customers. In June 1999, Columbia Propane completed its acquisition of Trentane Gas, Inc. (Trentane Gas). The acquisition of Trentane Gas, a retail propane company located in north-central Virginia, added approximately 4,300 customers to Columbia Propane's customer base. In July 1999, Columbia Propane, through its subsidiary, Columbia Propane, L.P., completed the acquisition of National Propane Partners, LP (National Propane), which added approximately 210,000 customers in 24 states, 155 full service centers, 101 satellite locations and bulk storage facilities with more than 33 million gallons of propane. Also in July 1999, Columbia Propane completed its purchase of the propane assets of ENC Propane and a related appliance sales and services business, both located in eastern North Carolina. On September 21, 1999, Columbia Propane completed the purchase of the propane and fuel oil assets of Baker & Russell, Inc. located in Shippensburg, Pennsylvania. On September 23, 1999, Columbia Petroleum acquired the assets of Dampman Sturges Oil, in Douglassville, Pennsylvania. In three other transactions later in 1999, Columbia Propane, L.P. acquired the assets of Pacer-Acmer Propane in Tekonsha, Michigan, Mid-State Energy in Tomahawk, Wisconsin and Lewiston Propane in Lewiston, Maine. These acquisitions, together with the acquisitions of National Propane, Leffler and Trentane Gas, raise the total number of customers served by Columbia Propane to more than 350,600 in 31 states and the District of Columbia at December 31, 1999, which is more than triple the number of propane customers served at the end of 1998. On January 7, 2000, Columbia Propane acquired all of the propane related assets of Zoe's Bottled Gas in Colchester, Connecticut, adding 2,900 additional customers. 33 34 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Columbia Petroleum owns and operates the petroleum assets acquired from Leffler and Dampman Sturges. Columbia Petroleum currently serves 42,000 customers in five states. Environmental Activity Columbia Propane's primary environmental issues relate to former manufactured gas plant sites acquired in the acquisition of National Propane for which accruals were made by National Propane. Investigations are currently underway at one site. One other known former manufactured gas plant site is inactive. It is possible that former manufactured gas plant sites exist at two other National Propane properties. Management does not believe that Columbia Propane's environmental expenditures will have a material adverse effect on Columbia's consolidated financial results. Commodity Hedging Activity Columbia Propane purchases propane and petroleum and places it in storage for future sale and hedges its inventory against the risk of decreasing prices. Columbia Energy Services hedges anticipated fixed-price sales of its Mass Markets business. Capital Expenditures A large portion of the $315.5 million capital expenditure program in 1999 was allocated to propane acquisitions. The 2000 capital expenditure program is estimated at $43.3 million, including $20 million for propane acquisitions. Net Revenues In 1999, net revenues were $90.1 million, up $47.9 million from 1998, primarily due to Columbia Propane's acquisitions and colder weather in 1999. The improvement in propane revenues due to additional volumes being sold was partially offset by lower margins. Petroleum revenues reflect the results of the acquisition of Leffler and Dampman Sturges in 1999, as discussed previously. Columbia Energy Services' Mass Markets business reported revenues of $88.9 million, an increase of $67.3 million over 1998, due to a significant increase in the number of customers being served. Other revenues of $27.2 million, increased $15.7 million reflecting sales revenues from appliance, warranty and lubricant products and other miscellaneous revenues, primarily as a result of the National Propane and Leffler acquisitions. In 1998, net revenues of $42.2 million improved $5.4 million over 1997 due largely to net revenues generated by the Mass Markets business, which began in 1998. Operating Income/Loss In 1999, an operating loss of $54.5 million was recorded compared to an operating loss of $13.6 million in 1998. The improvement in net revenues was more than offset by higher operating costs for Columbia Energy Services' retail operations that included additional investment in its infrastructure. The operating loss for Columbia Energy Services for 1999 was $50.6 million compared to $17.7 million in 1998. Included in the higher costs for Columbia Energy Services was $14.3 million recorded in 1999 to reflect the write-down of certain computer software no longer necessary for its operations and an adjustment for uncollectible accounts. In addition, higher costs were incurred by Columbia Propane due to its expanded operations and the ongoing process of integrating recent propane and petroleum acquisitions. An operating loss of $13.6 million was recorded in 1998 compared to operating income of $6 million in 1997. The higher net revenues was more than offset by additional costs to build Columbia Energy Services' infrastructure, customer acquisition costs related to adding new Mass Markets customers, and increased costs associated with expanded propane operations resulting from acquisitions. 34 35 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) STATEMENTS OF OPERATING INCOME FROM ENERGY MARKETING OPERATIONS (UNAUDITED)
Year Ended December 31, (in millions) 1999 1998 1997 - ---------------------------------------------------------------------------------- NET REVENUES Propane $ 152.9 $ 63.1 $ 70.4 Gas 88.9 21.6 -- Petroleum 127.7 -- -- - ---------------------------------------------------------------------------------- Total 369.5 84.7 70.4 Less: Products purchased 306.6 54.0 43.4 - ---------------------------------------------------------------------------------- Gross Margin 62.9 30.7 27.0 Other revenues 27.2 11.5 9.8 - ---------------------------------------------------------------------------------- NET REVENUES 90.1 42.2 36.8 - ---------------------------------------------------------------------------------- OPERATING EXPENSES Operation and maintenance 109.5 47.0 25.4 Depreciation 26.6 5.8 3.6 Other taxes 8.5 3.0 1.8 - ---------------------------------------------------------------------------------- Total Operating Expenses 144.6 55.8 30.8 - ---------------------------------------------------------------------------------- OPERATING INCOME (LOSS) $ (54.5) $ (13.6) $ 6.0 - ----------------------------------------------------------------------------------
ENERGY MARKETING OPERATING HIGHLIGHTS
1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- CAPITAL EXPENDITURES ($ in millions) 315.5 27.9 10.4 5.2 5.7 - -------------------------------------------------------------------------------------------------------- SALES Propane (millions of gallons) 178.3 66.5 70.9 75.9 68.9 Gas (billion cubic feet) 28.4 6.1 -- -- -- Petroleum (millions of gallons) 202.4 -- -- -- -- - -------------------------------------------------------------------------------------------------------- PROPANE CUSTOMERS 350,652 113,748 96,954 79,650 74,308 - --------------------------------------------------------------------------------------------------------
35 36 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) POWER GENERATION, LNG AND OTHER OPERATIONS Telecommunications Network In the second quarter of 1999, Columbia Transmission Communication Corporation (Transcom), a wholly-owned subsidiary of Columbia, began the construction of its telecommunications network along the Washington, D.C. to New York City corridor. Transcom will build and maintain a fiber optics network on rights-of-way of Columbia's pipeline companies. Transcom expects to complete the D.C. to New York fiber optics link in the first half of 2000. The route covers 260 miles and provides access to 16 million people in the busiest telecommunications corridor in the United States. The company is developing plans to extend the fiber optics network beyond the initial route. Power Generation Activities Columbia Electric Corporation (Columbia Electric) is an unregulated electric generation company whose primary focus is the development, ownership and operation of clean, natural gas fueled power projects. Columbia currently has three operating facilities totaling 248 megawatts, one 550-megawatt (equivalent) plant under construction in Gregory, Texas and approximately 3,000 megawatts of gas-fired generation under development. Publicly announced projects in Columbia Electric's development portfolio include the Kelson Ridge Project in Charles County, Maryland, the Liberty Electric Project in Eddystone, Pennsylvania, the Grassy Point Energy Project in Haverstraw, New York, the Ceredo Electric Generating Station in Ceredo, West Virginia and the Henderson Generating Station in Henderson, Kentucky. The Gregory Project, a partnership between subsidiaries of Columbia Electric and LG&E Power, Inc., is anticipated to start operations in the summer of 2000. Construction of the Liberty Electric Project is anticipated to commence in spring 2000. Ownership of the Liberty Electric Project was jointly held by Columbia Electric and subsidiaries of Westcoast Energy, Inc. (Westcoast). In December 1999, the ownership agreement between Columbia and Westcoast was terminated due to allocation of capital to other projects by Westcoast in geographic areas more closely aligned with other Westcoast operating assets and the desire of Westcoast to focus its resources in ventures that will generate near-term operating income. Columbia Electric announced on February 16, 2000, that it purchased Westcoast's 50% interest and now owns 100% of the Liberty Electric Project. In December 1999, a limited partnership established between Columbia Electric and Atlantic Generation, Inc. completed a transaction terminating a long-term power purchase contract. Columbia Electric's portion was approximately $71 million pre-tax under the terms of the buyout. The partners will continue to operate the facility as a merchant power plant. Liquified Natural Gas Operations In January 2000, Columbia Atlantic Trading Corporation acquired Potomac Electric Power Company's (Pepco) 50% interest in the Cove Point LNG Limited Partnership for $40.7 million. This acquisition gives Columbia LNG Corporation (Columbia LNG) and Columbia Atlantic Trading Corporation 100% ownership of the Cove Point liquefied natural gas (LNG) terminal in Cove Point, Maryland and certain other pipeline facilities, which had been owned equally by Columbia LNG and Pepco since 1994. The current operations include operating one of the largest natural gas peaking and storage facilities in the United States. With approximately 5 Bcf of vapor equivalent storage capacity, the facility enables LNG to be stored until needed for the winter peak-day requirements of utilities and other large gas users. The acquisition will facilitate Columbia's plans to reactivate the LNG receiving facilities and expand the business to include LNG tanker unloading services at the terminal. Cove Point LNG is holding an open season where potential customers can bid for capacity. Based on the results of the open season, Cove Point LNG expects to file a certificate application with the FERC to reactivate the terminal's marine facilities. Pending approval by the FERC, Cove Point LNG plans to begin LNG tanker discharging by late 2001. Capital Expenditures The capital expenditure program for 1999 was $51 million and included amounts for the development of Transcom's fiber optics network. The 2000 program is projected to be $376.5 million, which is primarily for fiber optics, Columbia Electric's cogeneration projects and the acquisition of Pepco's interest in the Cove Point LNG Limited Partnership. 36 37 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Operating Revenues In 1999, operating revenues increased $69.6 million from 1998 to $88.7 million largely due to the $71 million gain from the termination of the cogeneration power purchase contract, mentioned above. In 1998, operating revenues of $19.1 million decreased $3.1 million from 1997. The decrease largely reflected the net effect of Columbia Electric's $3.2 million revenue improvement recorded in the first quarter of 1997 from the assumption of a cogeneration partnership fuel transportation contract. Operating Income Operating income for 1999 of $71.5 million increased $64.9 million over 1998 primarily reflecting the increase in operating revenues, which was partially offset by a $4.5 million increase in operation and maintenance expense due to increased staffing levels and development activity for the cogeneration business. In 1998, operating income of $6.6 million declined $2.6 million from 1997 as the decrease in operating revenues was only partially offset by a $500,000 decrease in operating expenses. STATEMENTS OF POWER GENERATION, LNG AND OTHER OPERATIONS (UNAUDITED)
Year Ended December 31, (in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- OPERATING REVENUES Power generation $78.5 $ 8.3 $10.6 LNG 9.3 10.3 11.2 Other 0.9 0.5 0.4 - -------------------------------------------------------------------------------- Operating Revenues 88.7 19.1 22.2 - -------------------------------------------------------------------------------- OPERATING EXPENSES Operation and maintenance 16.7 12.2 12.6 Depreciation 0.1 0.1 0.1 Other taxes 0.4 0.2 0.3 - -------------------------------------------------------------------------------- Total Operating Expenses 17.2 12.5 13.0 - -------------------------------------------------------------------------------- OPERATING INCOME $71.5 $ 6.6 $ 9.2 - --------------------------------------------------------------------------------
POWER GENERATION, LNG AND OTHER OPERATING HIGHLIGHTS
1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------- CAPITAL EXPENDITURES ($ in millions) 51.0 2.7 1.0 0.3 3.3 - ---------------------------------------------------------------------------------
37 38 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Bankruptcy MatterS On November 28, 1995, Columbia and its wholly-owned subsidiary, Columbia Transmission emerged from Chapter 11 protection of the United States 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. In July 1998, the Bankruptcy Court, granting a motion by Columbia Transmission, entered an order allowing the claim of the New Bremen Corporation in accordance with the Claims Mediator's Report and Recommendations and the decision of the U.S. 5th Circuit Court of Appeals. In August 1998, New Bremen filed a notice of appeal of this order to the U.S. District Court for the District of Delaware. This litigation was the last remaining producer claim in Columbia Transmission's bankruptcy proceeding. During the first quarter of 1999, Columbia Transmission reached a settlement with New Bremen. The improvement to Columbia's first quarter 1999 consolidated net income was $20.6 million. The settlement was approved by the Bankruptcy Court on April 12, 1999, and on April 26, 1999, Columbia Transmission distributed the producer holdback amounts in accordance with its Plan of Reorganization and the New Bremen settlement. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information required by this item is in Item 7 beginning on page 18. 38 39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index Page - ---------------------------------------------------------------------------------- Report of Independent Public Accountants ................................ 40 Statements of Consolidated Income ...................................... 41 Consolidated Balance Sheets ............................................. 42 Statements of Consolidated Cash Flows ................................... 44 Statements of Consolidated Common Stock Equity .......................... 45 Notes of Consolidated Financial Statements .............................. 46 Schedule V - Valuation and Qualifying Accounts .......................... 71 - ----------------------------------------------------------------------------------
39 40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Columbia Energy Group.: We have audited the accompanying consolidated balance sheets of Columbia Energy Group (a Delaware corporation, the "Corporation") and subsidiaries as of December 31, 1999 and 1998, and the related statements of consolidated income, cash flows and common stock equity for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the Index to Item 8, Financial Statements and Supplementary Data, is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, New York January 25, 2000 40 41 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) STATEMENTS OF CONSOLIDATED INCOME Columbia Energy Group and Subsidiaries
Year Ended December 31, (in millions, except per share amounts) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ NET REVENUES Energy sales $ 2,085.5 $ 1,725.5 $ 2,215.7 Less: Products purchased 1,194.4 766.1 1,117.2 - ------------------------------------------------------------------------------------------------------------------------ Gross Margin 891.1 959.4 1,098.5 Transportation 706.3 577.2 532.4 Production gas sales 120.2 111.8 98.4 Other 277.2 213.5 167.6 - ------------------------------------------------------------------------------------------------------------------------ Total Net Revenues 1,994.8 1,861.9 1,896.9 - ------------------------------------------------------------------------------------------------------------------------ OPERATING EXPENSES Operation and maintenance 937.5 829.2 934.0 Settlement of gas supply charges (31.7) -- -- Depreciation and depletion 229.0 231.9 219.9 Other taxes 211.6 219.5 221.5 - ------------------------------------------------------------------------------------------------------------------------ Total Operating Expenses 1,346.4 1,280.6 1,375.4 - ------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME 648.4 581.3 521.5 - ------------------------------------------------------------------------------------------------------------------------ OTHER INCOME (DEDUCTIONS) Interest income and other, net (Note 15) 29.2 12.3 39.4 Interest expense and related charges (Note 16) (164.4) (144.5) (157.4) - ------------------------------------------------------------------------------------------------------------------------ Total Other Income (Deductions) (135.2) (132.2) (118.0) - ------------------------------------------------------------------------------------------------------------------------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 513.2 449.1 403.5 Income Taxes (Note 8) 158.2 148.8 123.2 - ------------------------------------------------------------------------------------------------------------------------ INCOME FROM CONTINUING OPERATIONS 355.0 300.3 280.3 - ------------------------------------------------------------------------------------------------------------------------ DISCONTINUED OPERATIONS - NET OF TAXES (Loss) from operations (80.0) (31.1) (7.0) Estimated (loss) on disposal (25.8) -- -- - ------------------------------------------------------------------------------------------------------------------------ (Loss) from Discontinued Operations - net of taxes (105.8) (31.1) (7.0) - ------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 249.2 $ 269.2 $ 273.3 - ------------------------------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE Continuing operations $ 4.31 $ 3.60 $ 3.37 (Loss) from discontinued operations (0.97) (0.37) (0.08) Estimated (loss) on disposal (0.31) -- -- - ------------------------------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE $ 3.03 $ 3.23 $ 3.29 - ------------------------------------------------------------------------------------------------------------------------ DILUTED EARNINGS PER SHARE Continuing operations $ 4.29 $ 3.58 $ 3.35 (Loss) from discontinued operations (0.97) (0.37) (0.08) Estimated (loss) on disposal (0.31) -- -- - ------------------------------------------------------------------------------------------------------------------------ DILUTED EARNINGS PER SHARE $ 3.01 $ 3.21 $ 3.27 - ------------------------------------------------------------------------------------------------------------------------ DIVIDENDS PAID PER SHARE* $ 0.875 $ 0.77 $ 0.60 - ------------------------------------------------------------------------------------------------------------------------ AVERAGE COMMON SHARES OUTSTANDING (thousands)* 82,210 83,382 83,100 DILUTED AVERAGE COMMON SHARES (thousands)* 82,709 83,748 83,594 - ------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. * All per share amounts, average common shares outstanding and diluted average common shares have been restated to reflect a three-for-two common stock split, in the form of a stock dividend, effective June 15, 1998. See Note 3A of Notes to Consolidated Financial Statements. 41 42 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) CONSOLIDATED BALANCE SHEETS Columbia Energy Group and Subsidiaries
ASSETS as of December 31, (in millions) 1999 1998 - ---------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT Gas utility and other plant, at original cost $ 8,150.6 $ 7,673.9 Accumulated depreciation (3,708.8) (3,588.7) - ---------------------------------------------------------------------------------------------- Net Gas Utility and Other Plant 4,441.8 4,085.2 - ---------------------------------------------------------------------------------------------- Gas and oil producing properties, full cost method United States cost center 823.5 714.1 Canadian cost center 12.6 5.0 Accumulated depletion (251.6) (225.4) - ---------------------------------------------------------------------------------------------- Net Gas and Oil Producing Properties 584.5 493.7 - ---------------------------------------------------------------------------------------------- Net Property, Plant and Equipment 5,026.3 4,578.9 - ---------------------------------------------------------------------------------------------- INVESTMENTS AND OTHER ASSETS Unconsolidated affiliates 67.6 81.6 Net assets of discontinued operations (9.7) 235.8 Other 61.6 40.5 - ---------------------------------------------------------------------------------------------- Total Investments and Other Assets 119.5 357.9 - ---------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and temporary cash investments 62.6 22.9 Accounts receivable Customer (less allowance for doubtful accounts of $15.8 and $13.9, respectively) 465.4 344.5 Other 87.0 55.2 Gas inventory 144.9 186.0 Other inventories - at average cost 71.1 26.8 Prepayments 74.3 65.6 Regulatory assets 52.7 59.5 Underrecovered gas costs 40.5 24.5 Deferred property taxes 79.8 80.0 Exchange gas receivable 275.4 197.5 Other 39.5 62.8 - ---------------------------------------------------------------------------------------------- Total Current Assets 1,393.2 1,125.3 - ---------------------------------------------------------------------------------------------- REGULATORY ASSETS 358.1 391.4 DEFERRED CHARGES 198.8 77.9 - ---------------------------------------------------------------------------------------------- TOTAL ASSETS $ 7,095.9 $ 6,531.4 - ----------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 42 43 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
CAPITALIZATION AND LIABILITIES as of December 31, (in millions) 1999 1998 - -------------------------------------------------------------------------------------------- COMMON STOCK EQUITY Common stock, par value $.01 per share - issued 83,786,942 and 83,511,878 shares, respectively $ 0.8 $ 835.1 Additional paid in capital 1,611.6 761.8 Retained earnings 586.9 409.5 Unearned employee compensation (0.6) (0.9) Accumulated Other Comprehensive Income: Foreign currency translation adjustment 0.3 (0.2) Treasury stock (135.0) -- - -------------------------------------------------------------------------------------------- Total Common Stock Equity 2,064.0 2,005.3 LONG-TERM DEBT (Note 11) 1,639.7 2,003.1 - -------------------------------------------------------------------------------------------- Total Capitalization 3,703.7 4,008.4 - -------------------------------------------------------------------------------------------- CURRENT LIABILITIES Short-term debt (Note 12) 465.5 144.8 Current maturities of long-term debt 311.3 0.4 Accounts and drafts payable 267.5 180.9 Accrued taxes 199.0 238.3 Accrued interest 32.5 17.3 Estimated rate refunds 21.4 59.2 Supplier obligations -- 72.4 Overrecovered gas costs 14.6 34.3 Transportation and exchange gas payable 297.5 139.2 Other 406.7 367.8 - -------------------------------------------------------------------------------------------- Total Current Liabilities 2,016.0 1,254.6 - -------------------------------------------------------------------------------------------- OTHER LIABILITIES AND DEFERRED CREDITS Deferred income taxes - noncurrent 674.1 655.0 Investment tax credits 32.6 34.1 Postretirement benefits other than pensions 96.4 103.7 Regulatory liabilities 36.4 44.0 Deferred revenue 177.4 191.4 Other 359.3 240.2 - -------------------------------------------------------------------------------------------- Total Other Liabilities and Deferred Credits 1,376.2 1,268.4 - -------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (Note 14) -- -- - -------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION AND LIABILITIES $7,095.9 $6,531.4 - --------------------------------------------------------------------------------------------
43 44 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) STATEMENTS OF CONSOLIDATED CASH FLOWS Columbia Energy Group and Subsidiaries
Year Ended December 31, (in millions) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 249.2 $ 269.2 $ 273.3 Adjustments to reconcile net income to net cash from continuing operations: Loss from discontinued operations 80.0 31.1 7.0 Loss on disposal 25.8 -- -- Depreciation and depletion 229.0 231.9 219.9 Deferred income taxes 45.1 38.6 28.9 Earnings from equity investment, net of distributions 23.0 (8.5) 2.4 Other - net 53.5 135.0 26.8 - ----------------------------------------------------------------------------------------------------------- 705.6 697.3 558.3 Changes in components of working capital: Accounts receivable, net of sale (191.7) 43.8 69.7 Sale of accounts receivable 81.1 -- -- Gas inventory 41.1 40.8 11.0 Prepayments (8.7) (6.0) (4.5) Accounts payable 98.2 7.4 (8.6) Accrued taxes 72.0 50.9 (25.2) Accrued interest 15.2 (12.1) (1.2) Estimated rate refunds (37.8) (9.2) (45.6) Estimated supplier obligations (40.6) (1.5) (41.2) Under/Overrecovered gas costs (35.7) (33.4) 147.9 Exchange gas receivable/payable 80.4 60.1 (85.3) Other working capital 46.7 7.6 (0.8) - ----------------------------------------------------------------------------------------------------------- Net Cash From Continuing Operations 825.8 845.7 574.5 Net Cash From Discontinued Operations 5.8 (138.1) (70.4) - ----------------------------------------------------------------------------------------------------------- Net Cash From Operating Activities 831.6 707.6 504.1 - ----------------------------------------------------------------------------------------------------------- INVESTMENT ACTIVITIES Capital expenditures (462.3) (455.2) (415.7) Acquisitions and other investments - net (368.2) (12.5) (108.5) - ----------------------------------------------------------------------------------------------------------- Net Investment Activities (830.5) (467.7) (524.2) - ----------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Retirement of long-term debt (52.5) (0.9) (0.6) Dividends paid (71.8) (63.9) (49.9) Issuance of common stock 15.5 10.5 11.7 Issuance (repayment) of short-term debt 320.7 (182.4) 77.1 Purchase of treasury stock (135.0) -- -- Other financing activities (38.3) (8.8) (39.3) - ----------------------------------------------------------------------------------------------------------- Net Financing Activities 38.6 (245.5) (1.0) - ----------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and temporary cash investments 39.7 (5.6) (21.1) Cash and temporary cash investments at beginning of year 22.9 28.5 49.6 - ----------------------------------------------------------------------------------------------------------- CASH AND TEMPORARY CASH INVESTMENTS AT END OF YEAR $ 62.6 $ 22.9 $ 28.5 - ----------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest $ 149.3 $ 147.0 $ 145.4 Cash paid for income taxes (net of refunds) $ 61.7 $ 38.3 $ 90.7 - -----------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 44 45 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY Columbia Energy Group and Subsidiaries
Common Stock* --------------------------------------------- Shares Additional Outstanding ** Par Treasury Paid In Retained (in millions, except for share amounts) (Thousands) Value Stock Capital Earnings - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 55,264 $ 552.6 $ -- $ 743.2 $ 259.3 Net income 273.3 Cash dividends: Common stock (49.9) Common stock issued: Long-term incentive plan 232 2.3 11.0 - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 55,496 554.9 -- 754.2 482.7 Comprehensive income: Net income 269.2 Foreign currency translation adjustment Comprehensive income Cash dividends: Common stock (63.9) Common stock issued: Long-term incentive plan 231 2.3 7.6 Three-for-two stock split 27,785 277.9 (278.5) - --------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 83,512 835.1 761.8 409.5 Comprehensive income: Net income 249.2 Foreign currency translation adjustment Comprehensive income Cash dividends: Common stock (71.8) Reduction in par from $10 to $.01 per share (834.3) 834.3 Common stock issued: Long-term incentive plan 275 15.5 Purchase of treasury stock (2,479) (135.0) - --------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999 81,308 $ 0.8 $ (135.0) $1,611.6 $ 586.9 - ---------------------------------------------------------------------------------------------------------------------------------
Accumulated Unearned Other Employee Comprehensive (in millions, except for share amounts) Compensation Income Total - --------------------------------------------------------------------------------------------- Balance at December 31, 1996 $ (1.5) $ -- $ 1,553.6 Net income 273.3 Cash dividends: Common stock (49.9) Common stock issued: Long-term incentive plan 0.4 13.7 - --------------------------------------------------------------------------------------------- Balance at December 31, 1997 (1.1) -- 1,790.7 Comprehensive income: Net income Foreign currency translation adjustment (0.2) Comprehensive income 269.0 Cash dividends: Common stock (63.9) Common stock issued: Long-term incentive plan 0.2 10.1 Three-for-two stock split (0.6) - --------------------------------------------------------------------------------------------- Balance at December 31, 1998 (0.9) (0.2) 2,005.3 Comprehensive income: Net income Foreign currency translation adjustment 0.5 Comprehensive income 249.7 Cash dividends: Common stock (71.8) Reduction in par from $10 to $.01 per share -- Common stock issued: -- Long-term incentive plan 0.3 15.8 Purchase of treasury stock (135.0) - --------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999 $ (0.6) $ 0.3 $ 2,064.0 - ---------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. * Effective May 19, 1999, the authorized number of shares of common stock increased from 100 million to 200 million and the par value of common stock decreased from $10 to $.01 per share. ** The common shares outstanding at December 31, 1997 and 1996 do not reflect the three-for-two common stock split, in the form of a stock dividend, effective June 15, 1998. 45 46 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Columbia Energy Group (Columbia) and all subsidiaries. All intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to the 1998 and 1997 financial statements to conform to the 1999 presentation. B. CASH AND CASH EQUIVALENTS. Columbia considers all highly liquid short-term investments to be cash equivalents. C. DILUTED AVERAGE COMMON SHARES COMPUTATION. Financial Accounting Standards Board Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128), requires dual presentation of basic and diluted earnings per share (EPS). Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilutive effect of stock options. The numerator in calculating both basic and diluted earnings per share for each year is reported net income. The computation of diluted average common shares follows:
Diluted Average Common Shares Computation 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Denominator (thousands) Basic average common shares outstanding 82,210 83,382 83,100 Dilutive potential common shares - options 499 366 494 - --------------------------------------------------------------------------------------------------------------------- DILUTED AVERAGE COMMON SHARES 82,709 83,748 83,594 - ---------------------------------------------------------------------------------------------------------------------
D. BASIS OF ACCOUNTING FOR RATE-REGULATED SUBSIDIARIES. Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71), provides that rate-regulated public utilities 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 transmission and gas distribution 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 Columbia Gas of Ohio, Inc.'s (Columbia of Ohio) 1999 rate agreement (See Note 2), the Public Utilities Commission of Ohio (PUCO) authorized Columbia of Ohio to revise its depreciation accrual rates for the period January 1, 1999 through December 31, 2004. The revised depreciation rates are lower than those which would have been utilized if Columbia of Ohio were not subject to regulation. The amount of depreciation that would have been recorded for 1999 had Columbia of Ohio not been subject to rate regulation is $31.8 million, an $18.8 million increase over the $13 million reflected in rates. Accordingly, a regulatory asset has been established in the amount of $18.8 million at December 31, 1999. 46 47 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) Information for assets and liabilities subject to utility regulation and rate determination are as follows:
TRANSMISSION DISTRIBUTION SUBSIDIARIES SUBSIDIARIES ---------------------------------------------------------- At December 31, ($ in millions) 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- ASSETS - ---------------------------------------------------------------------------------------------------------------------- Environmental costs 95.5 136.7 5.0 6.2 Postemployment and postretirement benefits costs 56.2 60.3 105.5 113.6 Percent of income plan receivables -- -- 8.0 15.3 Retirement income plan costs 12.7 15.2 14.9 16.6 Regulatory effects of accounting for income taxes -- -- 64.4 55.8 Post in-service carrying charges -- -- 16.0 16.9 Underrecovered gas costs -- -- 40.5 24.5 Depreciation -- -- 18.8 -- Other 7.9 8.1 5.9 6.2 - ---------------------------------------------------------------------------------------------------------------------- TOTAL REGULATORY ASSETS 172.3 220.3 279.0 255.1 - ---------------------------------------------------------------------------------------------------------------------- LIABILITIES Rate refunds and reserves 5.3 49.1 16.1 10.1 Overrecovered gas costs -- -- 14.6 34.3 Regulatory effects of accounting for income taxes 15.2 17.3 21.0 21.9 Other 23.1 22.7 2.0 6.6 - ---------------------------------------------------------------------------------------------------------------------- TOTAL REGULATORY LIABILITIES 43.6 89.1 53.7 72.9 - ----------------------------------------------------------------------------------------------------------------------
Regulatory assets of approximately $359.7 million are not presently included in the rate base and consequently are not earning a return on investment. These regulatory assets are being recovered through cost of service. The remaining recovery periods generally range from one to fifteen years. Regulatory assets of approximately $35.1 million require specific rate action. All regulatory assets are probable of recovery. E. GAS UTILITY AND OTHER PLANT AND RELATED DEPRECIATION. Property, plant and equipment (principally utility plant) are stated at original cost. The cost of gas utility and other plant of the rate-regulated subsidiaries includes an allowance for funds used during construction (AFUDC). Property, plant and equipment of other subsidiaries includes interest during construction (IDC). The 1999 before-tax rates for AFUDC and IDC were 5.91% and 6.94%, respectively. The 1998 and 1997 before-tax rates for AFUDC were 7.43% and 7.09%, respectively, and for IDC were 6.96% and 7.05%, respectively. Improvements and replacements of retirement units are capitalized at cost. When units of property are retired, the accumulated provision for depreciation is charged with the cost of the units and the cost of removal, net of salvage. Maintenance, repairs and minor replacements of property are charged to expense. Columbia's subsidiaries provide for annual depreciation on a composite straight-line basis. The average annual depreciation rate for the transmission subsidiaries' property was 2.4% in 1999 and 2.4% in 1998 and 2.5% in 1997. The average annual depreciation rate for the distribution subsidiaries' property was 2.8% in 1999 and 3.1% in 1998 and 3.2% in 1997. F. GAS AND OIL PRODUCING PROPERTIES. Columbia's subsidiaries engaged in exploring for and developing gas and oil reserves follow the full cost method of accounting. Under this method of accounting, all productive and nonproductive costs directly identified with acquisition, exploration and development activities including certain payroll and other internal costs are capitalized. Depletion is based upon the ratio of current year revenues to expected total revenues, utilizing current prices, over the life of production. If costs exceed the sum of the estimated present value of the net future gas and oil revenues and the lower of cost or estimated value of unproved properties, an amount equivalent to the excess is charged to current depletion expense. Gains or losses on the sale or other disposition of gas and oil properties are normally recorded as adjustments to capitalized costs, except in the case of a sale of a significant amount of properties, which would be reflected in the income statement. G. INTANGIBLE ASSETS. Intangible assets are recorded at original cost and are amortized on a straight line basis. Goodwill represents the excess of the purchase price over assets acquired and is being amortized over 40 years. 47 48 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) Customer lists are being amortized over periods of 10 to 20 years. Intangible assets are immaterial to the consolidated financial statements. H. ACCOUNTING FOR RISK MANAGEMENT ACTIVITIES. Subsidiaries in Columbia's exploration and production, marketing and propane operations are exposed to market risk due primarily to fluctuations in commodity prices. In order to help minimize this risk, Columbia has adopted a policy that provides for the use of commodity derivative instruments to help ensure stable cash flow, favorable prices and margins. 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. The hedging objectives include assurance of stable and known cash flows, fixing favorable prices and margins when they become available. Columbia's exploration and production company and propane operations utilize futures and options as well as commodity price swaps and basis swaps. Futures help manage commodity price risk by fixing prices for future production volumes as well as protecting the value and margins of propane and petroleum products inventories. 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. Premiums paid for option agreements are included as current assets in the consolidated balance sheets until they are exercised or expire. Margin requirements for natural gas and propane and petroleum products futures are also recorded as current assets. Unrealized gains and losses on all futures contracts are deferred on the consolidated balance sheets 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 and petroleum products futures contracts are included in products purchased. The cash flows from commodity hedging are included in operating activities in the consolidated statements of cash flows. Columbia and its subsidiaries are exposed to credit losses in the event of nonperformance by the counterparties to its various financial contracts. Management has evaluated such risk and believes that overall business risk is significantly reduced as these financial contracts are primarily with major investment grade financial institutions or their affiliates. Columbia utilizes fixed-to-floating interest rate swap agreements to modify the interest characteristics of a portion of its outstanding long-term debt. The differentials between amounts received and paid under the agreements are recorded as adjustments to interest expense. I. GAS INVENTORY. The distribution subsidiaries' gas inventory is carried at cost on a last-in, first-out (LIFO) basis. The excess of replacement cost of gas inventory at December 31, 1999, over the carrying value is approximately $37.9 million. Liquidation of LIFO layers related to gas delivered by the distribution subsidiaries does not affect income since the effect is passed through to customers as part of purchased gas adjustment tariffs. J. INCOME TAXES AND INVESTMENT TAX CREDITS. Columbia and its subsidiaries record income taxes to recognize full interperiod tax allocations. Under the liability method of income tax accounting, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Previously recorded investment tax credits of the regulated subsidiaries were deferred and are being amortized over the life of the related properties to conform with regulatory policy. K. ESTIMATED RATE REFUNDS. Certain rate-regulated subsidiaries collect revenues subject to refund pending final determination in rate proceedings. In connection with such revenues, estimated rate refund liabilities are recorded which reflect management's current judgment of the ultimate outcome of the proceedings. No provisions are made when, in the opinion of management, the facts and circumstances preclude a reasonable estimate of the outcome. 48 49 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) L. DEFERRED GAS PURCHASE COSTS. Columbia's gas distribution subsidiaries defer differences between gas purchase costs and the recovery of such costs in revenues, and adjust future billings for such deferrals on a basis consistent with applicable tariff provisions. M. REVENUE RECOGNITION. Columbia's gas distribution subsidiaries bill customers on a monthly cycle billing basis. Revenues are recorded on the accrual basis and include an estimate for gas delivered but unbilled at the end of each accounting period. N. ENVIRONMENTAL EXPENDITURES. Columbia accrues for costs associated with environmental remediation obligations when such costs are probable and can be reasonably estimated, regardless of when expenditures are made. The undiscounted estimated future expenditures are based on currently enacted laws and regulations, existing technology and, when possible, site-specific costs. The reserve is adjusted as further information is developed or circumstances change. Rate-regulated subsidiaries applying SFAS No. 71 establish a regulatory asset on the balance sheet to the extent that future recovery of environmental remediation costs is probable through the regulatory process. O. ACCOUNTS RECEIVABLE SALES PROGRAM. Columbia enters into agreements with third parties to sell certain accounts receivable without recourse. These sales are reflected as reductions of accounts receivable in the accompanying consolidated balance sheets and as operating cash flows in the accompanying consolidated statements of cash flows. The costs of this program, which are based upon the purchasers' level of investment and borrowing costs, will be charged to interest expense and related charges in the accompanying consolidated statements of income. P. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Q. STOCK OPTIONS AND AWARDS. Statement of Financial Accounting Standards 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. This statement requires the value of the option at the date of grant be amortized over the vesting period of the option. Columbia continues to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25). For stock appreciation rights, compensation expense is recognized on the aggregate difference between the market price of Columbia's stock and the option price. Restricted stock awards are recorded as deferred compensation in the consolidated balance sheets at the date of grant. Compensation expense related to restricted stock awards is recognized ratably over the vesting period. Compensation expense related to contingent stock awards is recognized over the vesting period. Columbia sets the grant price of the options at the market price of the stock on the grant date. In accordance with APB Opinion No. 25, expense related to stock options is measured by the difference between the grant price and Columbia's stock price on the measurement date (grant date). Since the difference between the grant price and Columbia's stock price on the measurement date is de minimis, no compensation expense is recognized. When stock options are exercised, common stock is credited for the par value of shares issued and additional paid in capital is credited with the consideration in excess of par. 2. REGULATORY MATTERS In 1993, the FERC directed Columbia Gulf to show cause as to why it had not sought FERC abandonment authorization to reduce capacity on its mainline facility. In an August 8, 1997 order, the FERC approved a settlement between Columbia Gulf and FERC's enforcement staff requiring Columbia Gulf to conduct a 30-day open season on additional firm mainline capacity up to its certificated design. Although certain of Columbia Gulf's customers challenged the terms of the settlement, Columbia Gulf concluded the open season on December 15, 1997 which resulted in requests for capacity that exceeded the capacity specified in Columbia Gulf's FERC certificate. In orders issued in December 1998 and 1999, the FERC has rejected challenges to the settlement and denied rehearing. In its order issued December 22, 1999, the FERC affirmed the validity of the 1997 open season but indicated that an additional open season in compliance with the settlement will be necessary. In early February 2000, several appeals of the FERC's orders in this proceeding were filed. Columbia Gulf filed an application with the FERC on June 5, 1998, for authority to increase the maximum certificated capacity of its mainline facilities. The expansion project, referred to as Mainline '99, will increase Columbia Gulf's certificated capacity to nearly 2.2 Bcf/day, by replacing certain compressor units and increasing the horsepower capacity of other compressor stations. Various shippers contracted for the additional service through an 49 50 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) open bidding process held in late 1997 and early 1998. On February 10, 1999, the FERC issued an order approving Columbia Gulf's June 1998 filing and construction commenced on March 3, 1999. On March 12, 1999, requests for rehearing of the FERC order were filed by three parties. On January 31, 2000, the FERC issued an order denying the requests for rehearing and validating the open season held in conjunction with Mainline '99. The FERC said it had previously addressed the validity of the open season in the show cause proceeding discussed above. Columbia Transmission's rate case settlement, approved by the FERC in April 1997, provided for a hearing in the fall of 1998 to address environmental cost recovery that was excluded from the settlement. As a result of settlement discussions, the active parties reached an agreement on the overall components of an environmental settlement. The comprehensive agreement includes such major components as Columbia Transmission's total allowed recovery of environmental remediation program costs and the disposition of any proceeds received by Columbia Transmission from insurance carriers and others. Columbia Transmission filed the stipulation and agreement with the FERC on April 5, 1999 and on September 15, 1999, the FERC approved the settlement. No requests for rehearing were filed. The approval of the settlement did not have a material impact on Columbia's consolidated financial results. The transmission and storage subsidiaries are in confidential and informal discussions with the staff of the FERC (Staff) concerning the scope of authorization for certain past transactions under the relevant filed tariffs. The transmission and storage subsidiaries have initiated these discussions with the FERC. These subsidiaries provided information concerning these transactions to the Staff pursuant to an informal non-public inquiry being conducted by the Staff. Because management does not yet know the position Staff will take, management is unable to reasonably estimate the amount that will have to be paid pursuant to reimbursement or the other remedies. The distribution subsidiaries (Distribution) continue to pursue initiatives that give retail customers the opportunity to purchase natural gas directly from marketers and to use Distribution's facilities for transportation services. These opportunities are being pursued through regulatory initiatives in all of its jurisdictions, which resulted in transportation programs being initiated in all five of its service areas. Once fully implemented, these programs would reduce Distribution's merchant function and provide all customer classes with the opportunity to obtain gas supplies from alternative merchants. As these programs expand to all customers, regulations will have to be implemented to provide for the recovery of transition capacity costs and other transition costs incurred by a utility serving as the supplier of last resort if the marketing company cannot supply the gas. Transition capacity costs are created as customers enroll in these programs and purchase their gas from other suppliers, leaving Distribution with pipeline capacity it has contracted for but no longer needs. The state commissions in Distribution's five jurisdictions 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 and costs resulting from being the supplier of last resort will be mitigated or recovered. On October 25, 1999, Columbia of Ohio and a group comprising diverse interested parties, also known as the Collaborative, filed with the Public Utilities Commission of Ohio (PUCO) a third amendment to its 1994 rate case. The filing, which was approved by the PUCO on December 2, 1999, extends Columbia of Ohio's CHOICE(SM) program through October 31, 2004, freezes base rates through October 31, 2004 and resolves the issue of transition capacity costs. Under the agreement, Columbia of Ohio would assume total financial risk for mitigation of transition capacity costs at no additional cost to customers. Among other items, Columbia of Ohio would have the opportunity to utilize non-traditional revenue sources as a means of offsetting the costs. The agreement also requires Columbia of Ohio to submit a proposal addressing issues related to the merchant function, obligation to serve, and provider of last resort by April 1, 2000. 3. COMMON STOCK EQUITY A. STOCK SPLIT EFFECTED IN THE FORM OF A STOCK DIVIDEND. On May 20, 1998, Columbia's Board of Directors (Board of Directors or Columbia's Board) approved a three-for-two common stock split, effected in the form of a 50% stock dividend (stock split), on June 15, 1998, payable to shareholders of record as of June 1, 1998. In connection with the stock split, 27.8 million shares were issued on June 15, 1998, and $277.9 million was transferred to common stock from retained earnings. The value of fractional shares resulting from the stock split was determined at the closing price on June 1, 1998, and $0.6 million was paid in cash to the shareholders for fractional-share interests. All references in the financial statements and notes to the number of common shares outstanding and per-share amounts, except where otherwise noted, reflect the retroactive effect of the stock split. B. TREASURY STOCK. In February 1999, Columbia's Board authorized the purchase of up to $100 million of its common stock, through February 29, 2000, in the open market or otherwise. In July 1999, Columbia's Board authorized the purchase of an additional $400 million of common stock through July 14, 2000. In October 1999, this 50 51 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) program was suspended pending consideration of strategic alternatives (see Note 5). There can be no assurance as to when the share repurchase program will recommence or if it will resume. If the program were to resume, the timing and terms of additional purchases, and the number of shares actually purchased, will be determined by management based on several factors including market conditions. Purchased shares are held in treasury at cost and are available for general corporate purposes or resale at a future date, or may be retired. As of December 31, 1999, Columbia had purchased 2,478,500 common shares at a cost of $135 million. C. COMMON STOCK - AMENDMENTS. At Columbia's Annual Meeting of Shareholders held on May 19, 1999, the shareholders voted to approve an amendment of Columbia's Restated Certificate of Incorporation to increase the authorized number of shares of common stock from 100 million to 200 million and decrease the par value of common stock from $10 to $.01 per share. This change resulted in a transfer during the second quarter of 1999 of $834.3 million from Common Stock to Additional Paid In Capital. 4. DISCONTINUED OPERATIONS As a result of a strategic assessment commenced in early 1999, on August 30, 1999, Columbia Energy Services announced that it decided to sell its Wholesale and Trading operations. On December 30, 1999, Columbia Energy Services completed the sale of these operations to a wholly-owned subsidiary of Enron Corp. (Enron). The proceeds from the sale were $38.3 million, which is subject to post closing adjustments in the first quarter of 2000. In November 1999, after analysis from such ongoing strategic assessment, it was determined that Columbia Energy Services should focus on its Mass Markets business and exit the Major Accounts business that provides energy services and products to industrial and large commercial customers. In accordance with generally accepted accounting principles, the Columbia Energy Services Wholesale and Trading operations and Major Accounts business are reported as discontinued operations, and therefore the financial statements for prior periods have been reclassified accordingly. The revenues from discontinued operations were $5,371.6 million, $4,684.9 million and $2,217.6 million for the years ended 1999, 1998 and 1997, respectively. The loss from discontinued operations - net of taxes were $105.8 million, $31.1 million and $7 million for the years ended 1999, 1998 and 1997, respectively. The estimated loss on disposal of discontinued operations is $25.8 million, net of income tax benefits of $13.7 million. The net assets of the discontinued operations are as follows:
At December 31, ($ in millions) 1999 1998 - --------------------------------------------------------------------------------------------------------------------- NET ASSETS OF DISCONTINUED OPERATIONS Accounts receivable, net 317.7 645.3 Other assets 18.3 158.8 Accounts payable (317.0) (566.7) Other liabilities (28.7) (1.6) - --------------------------------------------------------------------------------------------------------------------- NET ASSETS OF DISCONTINUED OPERATIONS (9.7) 235.8 - ---------------------------------------------------------------------------------------------------------------------
5. MERGER AGREEMENT On February 28, 2000, Columbia announced that it had entered into an Agreement and Plan of Merger, dated as of February 27, 2000 (Merger Agreement), between Columbia and NiSource, Inc., an Indiana corporation (NiSource). The Board of Directors of Columbia determined to enter into the Merger Agreement after a comprehensive evaluation of strategic alternatives that might generate value greater than that which Columbia's business plan could create. The terms of the Merger Agreement provide that NiSource will organize a new company which shall serve as the holding company for both Columbia and NiSource after the completion of the transaction. Pursuant to the terms of the Merger Agreement, each of Columbia and NiSource will be merged into newly formed special purpose subsidiaries of the new holding company, and each will become a wholly owned subsidiary of the new holding company. Subject to the terms and conditions of the Merger Agreement, upon completion of the transaction, Columbia's shareholders will receive, for each share of Columbia common stock, $70 in cash and a $2.60 face value SAILS(SM) (a unit consisting of a zero coupon debt security with a forward equity contract). Columbia's shareholders also have the option to elect to receive (in lieu of cash and SAILS(SM)) shares in the new holding company in a tax-free exchange, for up to 30% of the outstanding shares of Columbia common stock. Pursuant to the stock election option, each Columbia share will be exchanged for up to $74 in new holding company stock, subject to a collar such that, if the average closing price of NiSource shares during the 30 days prior to the closing of the transaction is greater than $16.50, Columbia shareholders will receive shares of the new holding company valued at $74 for each share of Columbia stock, and if the average closing price of NiSource shares during the 30 days prior to closing of the transaction is $16.50 or below, Columbia shareholders will receive 4.4848 shares of new holding company stock for each Columbia share. Upon completion of the transaction, NiSource shareholders will receive one share of holding company stock for each share of NiSource common stock that they own. The Merger is conditioned upon, among other things, the approvals of the shareholders of both companies and various regulatory commissions. However, if the NiSource shareholder approval is not obtained, the transaction will automatically be restructured so that, instead of each of NiSource and Columbia becoming wholly-owned subsidiaries of the new holding company, Columbia will become a wholly owned subsidiary of NiSource, and Columbia shareholders will receive $70 in cash and a $3.02 face value SAILS(SM) unit of NiSource with no option for Columbia shareholders to elect new holding company stock. 51 52 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) 6. RISK MANAGEMENT ACTIVITIES Subsidiaries in Columbia's exploration and production and energy marketing segments are exposed to market risk due primarily to fluctuations in commodity prices. In order to help minimize this risk, Columbia has adopted a policy that provides for commodity hedging activities to help ensure stable cash flow, favorable prices and margins. Financial instruments authorized for use by Columbia for hedging include futures, swaps and options. Columbia's energy marketing subsidiary utilized financial instruments to help assure adequate margins for its Mass Markets business on the purchase and resale of natural gas and electric power. At December 31, 1999, there were 25 open contracts to purchase natural gas maturing from January 2000 to December 2008, representing a notional quantity amounting to 128 Bcf. Also at December 31, 1999, there were five future equivalent contracts to purchase electric power maturing from January 2000 to May 2000 representing a notional quantity amounting to 85 Gigawatts hours. Unrealized gains or losses deferred on the consolidated balance sheets, at December 31, 1999, with respect to these open contracts were immaterial. During the year ended December 31, 1999, the gains or losses realized on contracts settled were immaterial. Based on a 95% confidence interval and a one-day time horizon, the value-at-risk for Columbia's energy marketing operations was insignificant for both 1999 and 1998. At December 31, 1998, there were 27 open contracts to purchase natural gas maturing from January 1999 to December 2008 representing a notional quantity amounting to 115 Bcf. Unrealized gains or losses deferred on the consolidated balance sheets, at December 31, 1998, with respect to these contracts were immaterial. During the year ended December 31, 1998, the gains or losses realized on contracts settled were immaterial. Columbia's exploration and production subsidiary hedged a portion of its gas production that was subject to price volatility. At December 31, 1999, there were 4,214 open contracts representing a notional quantity amounting to 6.6 Bcf of commodity contracts and 30.4 Bcf of basis contracts for natural gas production through February and October 2000, respectively at a combined average price of $3.61 per Mcf. A total of $6.1 million of unrealized gains have been deferred on the consolidated balance sheets, at December 31, 1999, with respect to these open contracts. During the year ended December 31, 1999, $0.5 million of losses were realized on contracts settled. At December 31, 1998, there were 6,896 open contracts representing a notional quantity amounting to 16.4 Bcf of commodity contracts and 44.1 Bcf of basis contracts for natural gas production through October 1999 at a combined average price of $2.79 per Mcf. A total of $9.1 million of unrealized gains were deferred on the consolidated balance sheets with respect to these open contracts. During the year ended December 31, 1998, $11 million of gains were realized on contracts settled. Columbia's propane subsidiary hedges a portion of its inventory at the time of purchase against the risk of decreasing prices. At December 31, 1999, there were 930 open contracts through March 2000 representing a notional quantity amounting to 22.9 million gallons of petroleum products and 16.2 million gallons of propane at an average price of $0.68 and $0.43 per gallon, respectively. The unrealized gain deferred on the consolidated balance sheets, with respect to these open contracts, is immaterial at December 31, 1999. During the year ended December 31, 1999, $6.1 million of losses were realized on contracts settled. At December 31, 1998, there were 620 open contracts through March 1999 representing a notional quantity amounting to 26 million gallons of propane at an average price of $0.24 per gallon. A total of $0.4 million of unrealized losses were deferred on the consolidated balance sheets with respect to these open contracts. During the year ended December 31, 1998, $1 million of losses were realized on contracts settled. 52 53 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) 7. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). This statement, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and resulting designation. A company may implement SFAS No. 133 as of the beginning of any fiscal quarter, however the statement cannot be applied retroactively. Columbia plans on adopting the statement on January 1, 2001. Columbia does not anticipate that the adoption of this statement will have a significant impact on the consolidated financial statements. 8. INCOME TAXES The components of income tax expense are as follows:
Year Ended December 31, ($ in millions) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ INCOME TAXES Current Federal 109.9 108.4 86.8 State 3.2 1.8 7.5 - ------------------------------------------------------------------------------------------------------------------------------ Total Current 113.1 110.2 94.3 - ------------------------------------------------------------------------------------------------------------------------------ Deferred Federal 68.4 53.3 50.0 State (21.8) (13.2) (19.6) - ------------------------------------------------------------------------------------------------------------------------------ Total Deferred 46.6 40.1 30.4 - ------------------------------------------------------------------------------------------------------------------------------ Deferred Investment Credits (1.5) (1.5) (1.5) - ------------------------------------------------------------------------------------------------------------------------------ Income Taxes Included in Continuing Operations 158.2 148.8 123.2 - ------------------------------------------------------------------------------------------------------------------------------ Income Taxes Related to Discontinued Operations (57.0) (17.0) (4.3) - ------------------------------------------------------------------------------------------------------------------------------ TOTAL INCOME TAXES 101.2 131.8 118.9 - ------------------------------------------------------------------------------------------------------------------------------
Total income taxes from continuing operations are different from the amount that would be computed by applying the statutory Federal income tax rate to book income before income tax. The major reasons for this difference are as follows:
Year Ended December 31, ($ in millions) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ Book income before income taxes 513.2 449.1 403.5 Tax expense at statutory Federal income tax rate 179.6 35.0% 157.2 35.0% 141.2 35.0% Increases (reductions) in taxes resulting from: State income taxes, net of Federal income tax benefit (12.1) (2.4) (7.4) (1.6) (7.9) (2.0) Estimated non-deductible expenses 1.3 0.3 1.6 0.4 0.7 0.2 Effect of change in deferred taxes previously provided (3.5) (0.7) 1.5 0.3 (1.9) (0.5) Other (7.1) (1.4) (4.1) (1.0) (8.9) (2.2) - ------------------------------------------------------------------------------------------------------------------------------ INCOME TAXES FROM CONTINUING OPERATIONS 158.2 30.8% 148.8 33.1% 123.2 30.5% - ------------------------------------------------------------------------------------------------------------------------------
53 54 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) Deferred income taxes result from temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The principal components of Columbia's net deferred tax liability are as follows:
At December 31, ($ in millions) 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities Property basis differences 733.0 688.1 Gas purchase costs 67.7 55.0 Investment in Partnerships 5.4 27.8 Other 28.1 33.1 - --------------------------------------------------------------------------------------------------------------------- Gross Deferred Tax Liabilities 834.2 804.0 - --------------------------------------------------------------------------------------------------------------------- Deferred tax assets Estimated supplier obligations (2.7) (28.2) Estimated rate refunds (12.7) (21.8) Inventory (16.7) (22.1) Unbilled utility revenue (20.1) (20.9) Benefit plan accruals (15.7) (16.2) Environmental liabilities (14.2) (10.5) Tax loss carryforwards (43.7) (43.9) Deferred revenue (20.8) (18.4) Other (46.7) (43.3) - --------------------------------------------------------------------------------------------------------------------- Gross Deferred Tax Assets (193.3) (225.3) - --------------------------------------------------------------------------------------------------------------------- Deferred Tax Asset Valuation Allowance 11.4 31.3 - --------------------------------------------------------------------------------------------------------------------- NET DEFERRED TAX LIABILITY* 652.3 610.0 - ---------------------------------------------------------------------------------------------------------------------
* Includes net current deferred tax assets of $21.8 million and $45.3 million reflected in Current Assets for 1999 and 1998, respectively. As reflected by the valuation allowance in the table above, Columbia had potential tax benefits of $11.4 million and $31.3 million at December 31, 1999 and 1998, respectively, which were not recognized in the statements of consolidated income when generated. These benefits result primarily from state income tax operating loss carryforwards which are available to reduce future tax liabilities. The net decrease of $19.9 million in the valuation allowance reflects management's belief that it is now likely that the majority of the state net operating loss carryforwards will be utilized before they expire. The expiration of the tax loss carryforward benefits, net of federal taxes, in 2000 is $1.4 million, in 2001 is $0.5 million, in 2002 is $0.2 million, in 2003 is $0.3 million, in 2004 is $0.3 million and beyond is $41.0 million. 9. PENSION AND OTHER POSTRETIREMENT BENEFITS Columbia has a noncontributory, qualified defined benefit pension plan covering essentially all employees. Benefits are based primarily on years of credited service and employees' highest three-year average annual compensation in the final five years of service. Effective January 1, 2000, Columbia adopted a cash balance feature to the pension plan that provides benefits based on a percentage, which may vary with age and years of service, of current eligible compensation and current interest credits. Columbia's funding policy complies with Federal law and tax regulations. In addition, Columbia has a nonqualified pension plan that provides benefits to some employees in excess of the qualified plan's Federal tax limits. Columbia also provides medical coverage and life insurance to retirees. Essentially all active employees are eligible for these benefits upon retirement after completing ten consecutive years of service after age 45. Normally, spouses and dependents of retirees are also eligible for medical benefits. Columbia is reflecting the information presented below as of September 30, rather than December 31. The effect of utilizing September 30, rather than December 31, is not significant. On September 30, 1999, Columbia Transmission announced the introduction of a voluntary incentive retirement plan. Approximately 600 Columbia Transmission employees were eligible for the program, which provides a retirement incentive for active employees who are age fifty and above with at least five years of service as of March 1, 2000. During the acceptance period that began on January 1, 2000 and closed on January 31, 2000, 486 employees elected early retirement. The majority of the retirements are scheduled to occur in the first quarter of 2000, at which time the cost of the program will be recorded. In February 2000, the five distribution subsidiaries and Columbia Energy Group Service Corporation announced the introduction of a VIRP. Approximately 880 employees are eligible for the program, which provides a retirement incentive for certain active employees who are age fifty and above with at least five years of service as of June 1, 2000. The acceptance period will end on April 30, 2000. The majority of the retirements are scheduled to occur on June 1, 2000, at which time the cost of the program will be recorded. Retirement costs for these employees are funded through the pension plan and will not have a significant impact on Columbia's consolidated net income. 54 55 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) The following tables provide a reconciliation of the plans' funded status and amounts reflected in Columbia's consolidated balance sheets at December 31:
PENSION BENEFITS OTHER BENEFITS ------------------------ ------------------------ ($ in millions) 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year 946.8 888.9 198.9 309.8 Service cost 30.6 31.3 12.6 13.0 Interest cost 62.9 64.7 14.0 23.4 Plan participants' contributions -- -- 2.4 2.8 Plan amendments 3.9 -- 4.5 (2.2) Actuarial (gain) loss (59.8) 56.0 (12.2) 6.1 Settlements -- -- (24.5) (130.3) Actual expense paid (4.7) (5.2) -- -- Benefits paid (95.9) (88.9) (13.5) (23.7) - --------------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year 883.8 946.8 182.2 198.9 - --------------------------------------------------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 1,091.5 1,164.6 117.0 242.9 Actual return on plan assets 210.0 20.8 26.0 11.2 Columbia contributions -- -- 15.5 32.4 Plan participants' contributions -- -- 2.4 2.8 Settlements -- -- (31.6) (146.9) Actual expense paid (4.7) (5.2) -- (1.7) Benefits paid (95.7) (88.7) (13.5) (23.7) - --------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year 1,201.1 1,091.5 115.8 117.0 - --------------------------------------------------------------------------------------------------------------------------- Funded status of plan at end of year 317.3 144.7 (66.4) (81.9) Unrecognized actuarial net gain (403.4) (237.8) (54.1) (41.5) Unrecognized prior service cost 45.2 45.1 2.6 (2.2) Unrecognized transition obligation 3.5 4.6 -- -- Fourth quarter contributions -- -- 3.3 4.5 - --------------------------------------------------------------------------------------------------------------------------- ACCRUED BENEFIT COST (37.4) (43.4) (114.6) (121.1) - ---------------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS ----------------------- ------------------------ 1999 1998 1999 1998 - --------------------------------------------------------------------------------------------------------- WEIGHTED-AVERAGE ASSUMPTIONS AS OF SEPTEMBER 30, Discount rate assumption 7.75% 6.75% 7.75% 6.75% Compensation growth rate assumption 4.50% 4.40% 4.50% 4.40% Medical cost trend assumption -- -- 5.50% 5.50% Assets earnings rate assumption 9.00% 9.00% 9.00%* 9.00%* - ---------------------------------------------------------------------------------------------------------
* One of the several established medical trusts is subject to taxation which results in an after-tax asset earnings rate that is less than 9.00% 55 56 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) The following table provides the components of the plans expense for each of the three years:
PENSION BENEFITS OTHER BENEFITS ----------------------------------- ---------------------------------- ($ in millions) 1999 1998 1997 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- NET PERIODIC COST Service cost 30.6 31.3 28.7 12.6 13.0 11.2 Interest cost 62.9 64.7 67.6 14.0 23.5 23.1 Expected return on assets (94.1) (99.7) (88.2) (9.4) (18.3) (13.1) Amortization of transition obligation 1.2 1.2 1.2 -- -- -- Recognized gain (10.2) (17.5) (11.3) (2.1) (10.3) (9.6) Prior service cost amortization 3.7 3.7 3.7 (0.4) -- -- Settlement gain -- -- -- (6.1) (46.6) -- - --------------------------------------------------------------------------------------------------------------------------------- NET PERIODIC BENEFITS COST (BENEFIT) (5.9) (16.3) 1.7 8.6 (38.7) 11.6 - ---------------------------------------------------------------------------------------------------------------------------------
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1% point 1% point increase decrease - --------------------------------------------------------------------------------------------------------------------- Effect on service and interest components of net periodic cost $ 2.6 $ (2.4) Effect on accumulated postretirement benefit obligation $ 15.0 $ (13.8) - ---------------------------------------------------------------------------------------------------------------------
During 1999 and 1998, trusts established by Columbia purchased insurance policies that provide both medical and life insurance with respect to liabilities to a selected class of current retirees. As a result, pre-tax gains in the amount of $6.1 million and $46.6 million were recorded in 1999 and 1998, respectively. The 1999 gain is reflected in the consolidated financial statements as a $4 million reduction to benefits expense, and a $2.1 million liability of certain rate-regulated companies. The 1998 gain is reflected in the consolidated financial statements as a $25.4 million reduction to benefits expense, and a $21.2 million liability of certain rate-regulated companies. 10. LONG-TERM INCENTIVE PLAN Columbia has two Long-Term Incentive Plans. Columbia's 1996 Long-Term Incentive Plan (1996 LTIP) which is effective for ten years, beginning February 21, 1996, provides for the granting of nonqualified stock options and incentive stock options, contingent stock awards, stock appreciation rights and restricted stock awards to officers and key employees. The 1996 LTIP also provides for the granting of nonqualified stock options to outside directors. A total of 8,585,000 shares of Columbia's authorized common stock is available under the 1996 LTIP's provisions. Columbia also provides an incentive compensation plan for outside directors under which they may receive benefits in lieu of a retirement plan and defer current compensation in the form of phantom stock units, which equates the amounts granted to the directors with the performance of Columbia's stock. Columbia's 1985 Long-Term Incentive Plan (1985 LTIP), in effect from 1985 through 1995, provided for the granting of nonqualified stock options, stock appreciation rights and contingent stock awards as determined by the Compensation Committee of the Board of Directors. That committee also had the right to modify any outstanding award. A total of 1,500,000 shares of Columbia's authorized common stock was available under the 1985 LTIP's provisions. Stock appreciation rights, which were granted in connection with certain nonqualified stock options, entitle the holders to receive stock, cash or a combination thereof equal to the excess market value over the grant price. Stock options and related stock appreciation rights granted under the 1985 LTIP generally have a maximum term of ten years and vest over two to four years. 56 57 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) Transactions for the three years ended December 31, 1999, are as follows:
Options ----------------------------------- Without Stock With Stock Weighted Average Appreciation Appreciation Exercise Price Rights Rights Per Share - ------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1996 405,675 75,930 $42.88 Granted 1,133,350 -- $63.40 Exercised (183,138) (48,790) $44.31 Forfeited (43,462) (3,240) $62.01 - ------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1997 1,312,425 23,900 $59.37 Granted 853,300 -- $76.22 Exercised (92,821) -- $53.47 Forfeited (9,000) -- $65.48 Adjustment for three-for-two stock split 1,032,700 11,950 $44.32* Granted 20,800 -- $54.14 Exercised (114,579) (26,190) $36.76 Forfeited (22,950) -- $50.77 - ------------------------------------------------------------------------------------------------------------- Outstanding at December 31, 1998 2,979,875 9,660 $44.79 Granted 1,585,200 -- $49.76 Exercised (268,280) (4,860) $41.81 Forfeited (121,795) -- $48.52 - ------------------------------------------------------------------------------------------------------------- OUTSTANDING AT DECEMBER 31, 1999 4,175,000 4,800 $46.76 - ------------------------------------------------------------------------------------------------------------- EXERCISABLE AT DECEMBER 31, 1999 1,884,734 4,800 $42.71 - -------------------------------------------------------------------------------------------------------------
* Reflects repricing of outstanding stock options for the effect of the three-for-two common stock split. Regarding the stock options granted in 1999, 1998 and 1997, such options vest ratably over three years. The following table summaries information on stock options outstanding and exercisable at December 31, 1999:
Options Outstanding Options Exercisable --------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Remaining Average Range of Exercise Number Exercise Price Contractual Life Number Exercise Price Prices Per Share Outstanding Per Share in Years Exercisable Per Share - ------------------------------------------------------------------------------------------------------------------------ $19.33-$20.70 36,000 $19.62 5.43 36,000 $19.62 $31.12-$42.4583 1,430,275 $40.89 6.94 1,430,275 $40.89 $47.3958-$59.938 2,713,525 $50.21 8.74 423,259 $50.84 - ------------------------------------------------------------------------------------------------------------------------ $19.33-$59.938 4,179,800 $46.76 8.09 1,889,534 $42.71 - ------------------------------------------------------------------------------------------------------------------------
There were no contingent stock awards granted in 1999, 1998 or 1997. Restricted stock awards totaling 44,677 shares were granted to one key executive in 1996 of which 8,395 shares vested during 1999, 1998 and 1997, respectively. During 1999, 1998, and 1997, $4.5 million, $2.4 million, and $3.2 million were expensed for the long-term incentive plans, respectively. 57 58 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) Had compensation cost been determined consistent with the provisions of the SFAS No. 123 fair value method (See Note 1), Columbia's net income and earnings per share would have been the pro forma amounts below:
Year Ended December 31 ($ in millions, except per share data) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Net Income As reported 249.2 269.2 273.3 Pro forma 232.4 258.4 266.8 Earnings per share Basic - as reported 3.03 3.23 3.29 - pro forma 2.83 3.10 3.21 Diluted - as reported 3.01 3.21 3.27 - pro forma 2.81 3.09 3.19 Weighted-average fair value of options granted during the year 17.53 17.79 24.85 - ----------------------------------------------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with a dividend yield of zero percentage and the following assumptions used for grants in 1999, 1998, and 1997:
1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Expected Life 7 YRS. 7 yrs. 7 yrs. Interest Rate 5.19%-6.27% 4.90%-5.77% 5.86%-6.89% Volatility 18.18%-21.67% 14.97%-17.40% 18.41%-19.29% - -----------------------------------------------------------------------------------------------------------------------
11. LONG-TERM DEBT The long-term debt (exclusive of current maturities) of Columbia and its subsidiaries is as follows:
At December 31, ($ in millions) 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Columbia Energy Group Debentures 6.39% Series A due November 28, 2000 -- 311.0 6.61% Series B due November 28, 2002 281.5 281.5 6.80% Series C due November 28, 2005 281.5 281.5 7.05% Series D due November 28, 2007 281.5 281.5 7.32% Series E due November 28, 2010 281.5 281.5 7.42% Series F due November 28, 2015 281.5 281.5 7.62% Series G due November 28, 2025 229.2 281.5 - ----------------------------------------------------------------------------------------------------------------------- Total Debentures 1,636.7 2,000.0 Subsidiary Debt: Capitalized lease obligations 2.8 3.1 Other 0.2 -- - ----------------------------------------------------------------------------------------------------------------------- TOTAL LONG-TERM DEBT 1,639.7 2,003.1 - -----------------------------------------------------------------------------------------------------------------------
During 1999, Columbia repurchased $52.45 million of its 7.62% Series G Debentures due November 28, 2025 at a price of approximately 99% of par value. The net impact of the early extinguishment of such debt was immaterial. During 1998, Columbia entered into interest rate swap agreements to modify the interest characteristics of its outstanding long-term debt. At December 31, 1999, Columbia has outstanding four interest rate swap agreements effective through November 28, 2002, on $200 million notional amounts of its 6.61% Series B Debentures due November 28, 2002. In addition, Columbia has outstanding an interest rate swap agreement effective through November 28, 2005, on a $100 million notional amount of its 6.80% Series C Debentures due November 28, 2005. Under the terms of the agreements, Columbia pays interest based on a floating rate index and receives interest based on a fixed rate. The effect of these agreements is to modify the interest rate characterization of a portion of Columbia's long-term debt from fixed to variable. The effect of these interest rate swaps on interest expense in 1999 and 1998 was immaterial. 58 59 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) The aggregate maturities of long-term debt and capitalized lease obligations during the next five years are as follows:
($ in millions) - --------------------------------------------------------------------------------------------------------------------- 2000 311.3 2001 0.4 2002 281.7 2003 0.2 2004 0.3 - ---------------------------------------------------------------------------------------------------------------------
12. SHORT-TERM DEBT AND CREDIT FACILITIES Columbia has two unsecured bank revolving credit facilities available that total $1.35 billion (Credit Facilities). The Credit Facilities consist of a $900 million five-year revolving credit facility and a $450 million 364-day revolving credit facility with a one-year term loan option. The five-year facility provides for the issuance of up to $300 million of letters of credit. Interest rates on borrowings under the Credit Facilities are based upon the London Interbank Offered Rate, Certificate of Deposit rate or Citibank's publicly announced "base rate." Facility fees and borrowing margins are based on Columbia's public debt ratings. At Columbia's current rating, the facility fee charged on the $900 million credit facility is 0.09% and on the $450 million credit facility is 0.06%. The Credit Facilities contain certain covenants that must be met to borrow funds, including restrictions on the incurrence of liens and a maximum leverage ratio. Compensating balances are not required. At December 31, 1999, Columbia had no borrowings outstanding under the Credit Facilities. The maximum indebtedness outstanding during the year occurred on May 11, 1999, in the amount of $32.6 million at an average interest rate of 5.69%. At December 31, 1998, Columbia had no borrowings outstanding under the Credit Facilities. On October 28, 1999, Columbia issued a note payable outside of the Credit Facilities in the amount of $125 million at an interest rate of 6.70%. The note matured on January 28, 2000. As of December 31, 1999, Columbia had $54.7 million of letters of credit outstanding under the Credit Facilities. Fees for letters of credit issued are calculated at rates that are based on Columbia's public debt rating plus a commission of 0.125% to the issuing bank. In addition, Columbia had approximately $4 million of letters of credit outstanding to guarantee certain transactions of an affiliate. Fees for the letter of credit issued were at a rate of 0.625%. At December 31, 1998, Columbia had $44.4 million of letters of credit outstanding under the Credit Facilities. Columbia has an $850 million commercial paper program authorized and rated by the rating agencies. The commercial paper program is supported by the Credit Facilities. At December 31, 1999, Columbia had commercial paper outstanding of $340.5 million (net of discount) at a weighted-average interest rate of 6.34%. The maximum commercial paper indebtedness outstanding during the year occurred on October 25, 1999, in the amount $642.2 million at an average interest rate of 5.72%. At December 31, 1998, Columbia had commercial paper outstanding of $144.8 million (net of discount) at a weighted-average interest rate of 6.12%. Columbia was the guarantor on certain contracts of its marketing affiliate that were sold to Enron effective December 30, 1999. These contracts had not been legally assigned to Enron as of the balance sheet date, therefore the guarantees are still outstanding. Enron has provided Columbia guarantees and indemnification should Columbia be required to perform under the guarantees. At December 31, 1999, Columbia had a $75 million letter of credit outstanding and has issued other guarantees and indemnities in the amount of $646.6 million. As of February 18, 2000, this amount has been reduced to $585.3 million. At December 31, 1999, approximately $12.5 million of investments were pledged as collateral on outstanding letters of credit related to Columbia's wholly-owned insurance company. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires all entities to disclose the fair value of financial instruments, both assets and liabilities, recognized and not recognized in the consolidated balance sheets, for which it is practicable to estimate a fair value. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value may be based on 59 60 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) quoted market prices for the same or similar financial instruments or on valuation techniques, such as the present value of estimated future cash flows using a discount rate commensurate with the risks involved. As cash and temporary cash investments, current receivables, current payables, and certain other short-term financial instruments are all short-term in nature, their carrying amount approximates fair value. Columbia utilizes standby letters of credit (See Note 12) and does not believe it is practicable to estimate their fair value. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: LONG-TERM INVESTMENTS Long-term investments include loans receivable ($7.7 million for 1999 and $3.3 million for 1998) whose estimated fair values are based on the present value of estimated future cash flows using an estimated rate for similar loans. Long-term investments also include pledged assets ($14.4 million for 1999 and $11.8 million for 1998), whose estimated fair value is based on the trading value provided by a financial institution. The financial instruments included in long-term investments are primarily reflected in Investments and Other Assets on the consolidated balance sheets. Long-term investments for which it is practicable to estimate fair value had carrying amounts of $22.1 million and $15.1 million, and estimated fair values of $21.7 million and $14.7 million at December 31, 1999 and 1998, respectively. There are no long-term investments for which it is not practicable to estimate fair value at December 31, 1999 and 1998. LONG-TERM DEBT The estimated fair value of Columbia's debentures, including current maturities and accrued interest, is based on estimates provided by brokers. Long-term debt of $1,960.1 million and $2,012.9 million at December 31, 1999 and 1998, have estimated fair values of $1,858.4 million and $2,088.1 million, respectively. The fair value of Columbia's interest rate swaps agreements are based on the amounts estimated to terminate or settle the agreements. At December 31, 1999 and December 31, 1998, Columbia had interest rate swaps agreements with notional amounts of $300 million. Columbia would have paid $18 million to terminate the agreements at December 31, 1999. The amount that Columbia would have paid to terminate the agreements at December 31, 1998 was immaterial. ACCOUNTS RECEIVABLE SALES PROGRAM In October 1999, Columbia of Ohio entered into an agreement to sell, without recourse, substantially all of its trade accounts receivable to Columbia Accounts Receivable Corporation (CARC), a wholly-owned subsidiary of Columbia. At the same time, CARC entered into an agreement, with a third party, Canadian Imperial Bank of Commerce (CIBC), to sell a percentage ownership interest in a defined pool of accounts receivable (Sales Program). Under this Sales Program, CARC can transfer an undivided interest in a designated pool of its accounts receivable on an ongoing basis up to a maximum of $125 million until April 30, 2000, at which time the maximum decreases to $100 million. The amount available at any measurement date varies based upon the level of eligible receivables. Under this agreement, approximately $81 million of receivables were sold as of December 31, 1999. Under a separate agreement, in conjunction with the Sales Program, Columbia of Ohio acts as agent for CIBC, the ultimate purchaser of the receivables, by performing record keeping and cash collection functions for the accounts receivable sold by CARC. Columbia of Ohio receives a fee, which provides adequate compensation, for such services. 14. OTHER COMMITMENTS AND CONTINGENCIES A. BANKRUPTCY MATTERS. On November 28, 1995, Columbia and its wholly-owned subsidiary, Columbia Transmission emerged from Chapter 11 protection of the United States 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 from July 31, 1991, until emergence. Certain residual unresolved bankruptcy-related matters are still within the jurisdiction of the Bankruptcy Court. During the first quarter of 1999, Columbia Transmission resolved its last remaining producer claim in its bankruptcy proceeding. The improvement to Columbia's first quarter 1999 consolidated net income was $20.6 million. The settlement was approved by the Bankruptcy Court on April 12, 1999 and on April 26, 1999, Columbia Transmission distributed the producer holdback amounts in accordance with its Plan of Reorganization and a producer settlement. 60 61 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) There remain four non-producer claims to be resolved, all of which are being litigated outside of the Bankruptcy Court. Columbia believes adequate reserves have been established for resolution of the remaining non-producer claims. B. CAPITAL EXPENDITURES. Capital expenditures for 2000 are currently estimated at $874.7 million. Of this amount, $148.4 million is for transmission and storage operations, $135.6 million for distribution operations, $165.7 million for exploration and production operations, $43.3 million for energy marketing operations, $376.5 million for power generation, LNG and other operations and $5.2 million for corporate purposes. C. OTHER 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 will not have a material adverse impact on Columbia's consolidated financial position or results of operations. D. ASSETS UNDER LIEN. Substantially all of Columbia Transmission's properties have been pledged to Columbia as security for debt owed by Columbia Transmission to Columbia. Columbia Electric holds indirectly through various subsidiaries, both general and limited partnership interests in the following electric power generation projects: Vineland Cogeneration Limited Partnership (the "Partnership") owns and operates a project-financed non-utility power generation facility in New Jersey. The assets of the Partnership, including plant facilities and contract rights, have been pledged as collateral to an indenture trustee for the benefit of certain bondholders. Gregory Power Partners owns a 550-megawatt equivalent electric power generation plant that is currently under construction in Gregory, Texas. The assets and contract rights have been pledged as collateral for the construction loan. Columbia Electric's investment in these partnerships, as of December 31, 1999, amounted to $13.2 million. E. GUARANTEES AND INDEMNITIES. In connection with the purchase of National Propane Partners, L.P. (National Propane) interests, Columbia has provided an indemnity to reimburse the former Managing General Partner for income taxes that would be due if certain actions by Columbia result in the recognition of certain types of income or gain by the former Managing General Partner. To secure certain partnership transactions, Columbia Electric has provided financial support through letters of credit, indemnification agreements, and guarantees. As of December 31, 1999, agreements for approximately $57 million have been executed. F. INTERNAL REVENUE SERVICE (IRS) AUDIT. The field audit of Columbia's 1995 federal income tax return has been finalized and discussions on all unagreed issues have begun. The audit of tax years 1996 and 1997 began in February 1999. Management believes adequate reserves have been established for issues related to these returns. G. OPERATING LEASES. Payments made in connection with operating leases are primarily charged to operation and maintenance expense as incurred. Such amounts were $61.5 million in 1999, $63.8 million in 1998 and $62.9 million in 1997. Future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year are:
($ in millions) - --------------------------------------------------------------------------------------------------------------------- 2000 34.7 2001 29.4 2002 27.2 2003 26.4 2004 24.1 After 162.7 - ---------------------------------------------------------------------------------------------------------------------
61 62 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) H. PURCHASE COMMITMENTS. Columbia has service agreements that provide for pipeline capacity, transportation and storage services. These agreements which have expiration dates ranging from 2000 to 2017, provide for Columbia to pay fixed monthly charges. The estimated aggregate amounts of such payments at December 31, 1999, were:
($ in millions) - --------------------------------------------------------------------------------------------------------------------- 2000 58.0 2001 52.9 2002 47.8 2003 36.0 2004 32.7 After 185.2 - ---------------------------------------------------------------------------------------------------------------------
Costs incurred under these contracts are recovered under Columbia's regulatory cost recovery mechanisms. I. ENVIRONMENTAL MATTERS. Columbia's subsidiaries are subject to extensive federal, state and local laws and regulations relating to environmental matters. These laws and regulations, which are constantly changing, require expenditures for corrective action at various operating facilities, waste disposal sites and former gas manufacturing sites for conditions resulting from past practices that have subsequently become subject to environmental regulation. Columbia's transmission subsidiaries have implemented programs to continually review compliance with existing environmental standards. In addition, the transmission subsidiaries have reviewed past operational activities and conducted remediation programs where necessary. Columbia Transmission is currently conducting assessment, characterization and remediation activities at specific sites under a 1995 Environmental Protection Agency (EPA) Administrative Order by Consent (AOC). The program pursuant to the AOC covers approximately 240 facilities, approximately 13,000 liquid removal points, approximately 2,200 mercury measurement stations, and about 3,700 storage wells. As of December 31, 1999, field characterization has been performed at many of these sites, and site characterization reports and remediation plans which must be submitted to EPA for approval are in various stages of development and completion. Significant remediation has taken place only at mercury measurement stations and at a limited number of the 240 facilities. Only those site investigation, characterization and remediation costs currently known and determinable can be considered "probable and reasonably estimable" under Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" (SFAS No. 5). As costs become probable and reasonably estimable, the associated reserves will be adjusted as appropriate. Columbia Transmission is unable, at this time, to accurately estimate the time frame and potential costs of the entire program. Management expects that as additional work is performed and more facts become available, it will be able to develop a probable and reasonable estimate for the entire program or a major portion thereof consistent with U.S. Securities and Exchange Commission's Staff Accounting Bulletin No. 92, SFAS No. 5, and American Institute of Certified Public Accountants Statement of Position 96-1. During 1999, actual expenditures of $16.8 million were charged to the liability resulted in a remaining liability of $121.4 million. Columbia Transmission's environmental cash expenditures are expected to be approximately $17 million in 2000 and to remain at this level for the foreseeable future. These expenditures will be charged against the previously recorded liability. Consistent with Statement of Financial Accounting Standards No. 71, a regulatory asset has been recorded to the extent environmental expenditures are probable of recovery through rates. 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 time period over which expenditures will be made. In addition, predecessor companies of Columbia Transmission may have been involved in the operation of manufactured gas plants. When such plants were abandoned, material used and created in the process was sometimes buried at the site. As of the date of this report, Columbia Transmission is unable to determine if it will become liable for any characterization or remediation costs at such sites. Distribution's primary environmental issues relate to 18 former manufactured gas plant sites. Investigations or remedial activities are currently underway at six sites and remedial construction has been completed at two sites. Additional site investigations may be required at some of the remaining sites. To the extent Distribution's site investigations have been conducted, remediation plans developed and any responsibility for remediation established, 62 63 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) the appropriate estimated liabilities have been recorded. Regulatory assets have also been recorded for a majority of these costs as rate recovery has been authorized or is anticipated. Columbia Propane's primary environmental issues relate to former manufactured gas plant sites acquired in the acquisition of National Propane for which accruals have been made. Investigations are currently underway at one site. One other known former manufactured gas plant site is inactive. It is possible that former manufactured gas plant sites exist at two other National Propane properties. Management does not believe that Columbia Propane's environmental expenditures will have a material adverse effect on Columbia's consolidated financial results. The eventual total cost of full future environmental compliance for Columbia is difficult to estimate due to, among other things: (1) the possibility of as yet unknown contamination, (2) the possible effect of future legislation and new environmental agency rules, (3) the possibility of future litigation, (4) the possibility of future designations as a potential responsible party by the EPA and the difficulty of determining liability, if any, in proportion to other responsible parties, (5) possible insurance and rate recoveries, and (6) the effect of possible technological changes relating to future remediation. However, reserves have been established based on information currently available, which resulted in a total recorded net liability of approximately $124.7 million for Columbia at December 31, 1999. As new issues are identified, additional liabilities will be recorded. It is management's continued intent to address environmental issues in cooperation with regulatory authorities in such a manner as to achieve mutually acceptable compliance plans. However, there can be no assurance that fines and penalties will not be incurred. Management expects most environmental assessment and remediation costs to be recoverable through rates. 15. INTEREST INCOME AND OTHER, NET
Year Ended December 3l, ($ in millions) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Interest income 13.5 12.5 19.9 Miscellaneous 15.7 (0.2) 19.5 - ----------------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME AND OTHER, NET 29.2 12.3 39.4 - -----------------------------------------------------------------------------------------------------------------
16. INTEREST EXPENSE AND RELATED CHARGES
Year Ended December 31, ($ in millions) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Interest on debentures 138.0 140.4 140.4 Interest on short-term debt 18.4 10.8 8.0 Discount on prepayment transactions 2.3 - - Interest on rate refunds 3.1 2.3 3.4 Interest on prior years' taxes 6.2 (6.3) 9.1 Allowance for borrowed funds used and interest during construction (3.6) (2.7) (3.5) - ----------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE AND RELATED CHARGES 164.4 144.5 157.4 - -----------------------------------------------------------------------------------------------------------------
17. BUSINESS SEGMENT INFORMATION Columbia is a registered holding company under the Public Utility Holding Company Act of 1935, as amended, and derives substantially all of its revenues and earnings from the operating results of its 19 direct subsidiaries. During 1999, in accordance with generally accepted accounting principles, Columbia revised the presentation of its business segments and accordingly, all prior periods have been restated. Columbia's operations are divided into five primary business segments. The transmission and storage segment offers transportation and storage services for local distribution companies, marketers and industrial and commercial customers located in northeastern, mid-Atlantic, midwestern and southern states and the District of Columbia. The distribution segment provides natural gas service and transportation for residential, commercial and industrial customers in Ohio, Pennsylvania, Virginia, Kentucky and Maryland. The exploration and production segment explores for, develops, produces and markets gas and oil in the United States and in Canada. The energy marketing segment provides gas and electric power to smaller volume retail customers and sells propane and petroleum to wholesale and retail customers in 35 states and the District of Columbia. The power generation, LNG and other segment participates in natural gas fueled electric cogeneration projects, peaking and storage services as well as a telecommunications business. The following tables provide information concerning Columbia's major business segments. Revenues include intersegment sales to affiliated subsidiaries, which are eliminated when consolidated. Affiliated sales are recognized 63 64 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) on the basis of prevailing market or regulated prices. Operating income is derived from revenues and expenses directly associated with each segment.
($ in millions) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- REVENUES Transmission and Storage Unaffiliated 571.3 546.1 519.9 Intersegment 265.1 292.6 318.7 - --------------------------------------------------------------------------------------------------------------------- TOTAL 836.4 838.7 838.6 - --------------------------------------------------------------------------------------------------------------------- Distribution Unaffiliated 2,022.1 1,858.8 2,293.9 Intersegment 0.7 10.7 2.4 - --------------------------------------------------------------------------------------------------------------------- TOTAL 2,022.8 1,869.5 2,296.3 - --------------------------------------------------------------------------------------------------------------------- Exploration and Production Unaffiliated 143.4 125.4 112.3 Intersegment 1.4 2.1 1.0 - --------------------------------------------------------------------------------------------------------------------- TOTAL 144.8 127.5 113.3 - --------------------------------------------------------------------------------------------------------------------- Energy Marketing Unaffiliated 396.0 95.6 78.7 Intersegment 0.7 0.6 1.5 - --------------------------------------------------------------------------------------------------------------------- TOTAL 396.7 96.2 80.2 - --------------------------------------------------------------------------------------------------------------------- Power Generation, LNG and Other Unaffiliated 89.0 19.2 22.0 Intersegment (0.3) (0.1) 0.2 - --------------------------------------------------------------------------------------------------------------------- TOTAL 88.7 19.1 22.2 - --------------------------------------------------------------------------------------------------------------------- Adjustments and eliminations Intersegment (267.6) (305.9) (323.8) - --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED 3,221.8 2,645.1 3,026.8 - ---------------------------------------------------------------------------------------------------------------------
64 65 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued
($ in millions) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) Transmission and Storage 350.1 326.1 258.3 Distribution 254.6 225.8 224.2 Exploration and Production 44.2 37.2 30.9 Energy Marketing (54.5) (13.6) 6.0 Power Generation, LNG and Other 71.5 6.6 9.2 Corporate (17.5) (0.8) (7.1) - --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED 648.4 581.3 521.5 - --------------------------------------------------------------------------------------------------------------------- DEPRECIATION & DEPLETION Transmission and Storage 106.2 101.8 104.3 Distribution 54.5 82.2 78.2 Exploration and Production 36.9 36.5 27.6 Energy Marketing 26.6 5.8 3.6 Power Generation, LNG and Other 0.1 0.1 0.1 Corporate 4.2 5.0 5.5 Adjustments and eliminations 0.5 0.5 0.6 - --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED 229.0 231.9 219.9 - --------------------------------------------------------------------------------------------------------------------- ASSETS Transmission and Storage 2,814.1 2,837.6 2,775.4 Distribution 2,831.3 2,665.1 2,753.2 Exploration and Production 774.3 590.9 564.6 Energy Marketing 576.0 354.0 175.9 Power Generation, LNG and Other 240.9 103.3 85.6 Corporate 4,848.8 4,298.0 4,221.4 Adjustments and eliminations (4,989.5) (4,317.5) (4,316.7) - --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED 7,095.9 6,531.4 6,259.4 - --------------------------------------------------------------------------------------------------------------------- CAPITAL EXPENDITURES Transmission and Storage 183.4 210.0 251.4 Distribution 145.5 151.9 159.5 Exploration and Production 166.5 75.7 135.6 Energy Marketing 315.5 27.9 10.4 Power Generation, LNG and Other 51.0 2.7 1.0 Corporate 5.4 11.0 5.3 - --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED 867.3 479.2 563.2 - ---------------------------------------------------------------------------------------------------------------------
65 66 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued 18. QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data does not always reveal the trend of Columbia's business operations due to nonrecurring items and seasonal weather patterns which affect earnings and related components of net revenues and operating income.
First Second Third Fourth ($ in millions, except per share data) Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------------------------------- 1999 Net Revenues 650.3 384.2 351.0 609.3 Operating Income 283.7 71.0 39.9 253.8 Income from Continuing Operations 160.4 32.6 6.7 155.3 (Loss) from Discontinued Operations - net (10.0) (6.5) (29.4) (59.9) of taxes Net Income (Loss) 150.4(a) 26.1(b) (22.7) 95.4(c) Basic Earnings (Loss) Per Share Continuing Operations 1.93 0.40 0.08 1.91 Discontinued Operations (0.12) (0.08) (0.36) (0.74) --------- ------- ------- ------- Basic Earnings (Loss) per Share 1.81 0.32 (0.28) 1.17 ========= ======= ======= ======= Diluted Earnings (Loss) Per Share Continuing Operations 1.92 0.40 0.08 1.89 Discontinued Operations (0.12) (0.08) (0.36) (0.73) --------- ------- ------- ------- Diluted Earnings (Loss) Per Share 1.80 0.32 (0.28) 1.16 ========= ======= ======= ======= - --------------------------------------------------------------------------------------------------------------------- 1998 Net Revenues 613.2 375.6 337.7 535.4 Operating Income 257.3 77.2 56.1 190.7 Income from Continuing Operations 150.4 27.8 13.8 108.3 (Loss) from Discontinued Operations - net (2.9) (5.0) (2.6) (20.6) of taxes Net Income 147.5(d) 22.8 11.2 87.7 Basic Earnings (Loss) Per Share Continuing Operations 1.80 0.33 0.16 1.30 Discontinued Operations (0.03) (0.06) (0.03) (0.25) --------- ------- ------- ------- Basic Earnings Per Share 1.77 0.27 0.13 1.05 ========= ======= ======= ======= Diluted Earnings (Loss) Per Share Continuing Operations 1.80 0.33 0.16 1.29 Discontinued Operations (0.03) (0.06) (0.03) (0.24) --------- ------- ------- ------- Diluted Earnings Per Share 1.77 0.27 0.13 1.05 ========= ======= ======= ======= - ---------------------------------------------------------------------------------------------------------------------
(a) Includes $20.6 million gain from the producer contract settlement stemming from Columbia's bankruptcy proceedings concluded in 1995. (b) Includes $6.9 million benefit from the reduction in tax expense for state net operating loss carryforwards. (c) Includes $49 million gain recorded in connection with the termination of a cogeneration power purchase contract and $7.8 million gain on the sale of Columbia's interest in the Trailblazer pipeline system. (d) Includes $15 million gain on settlement of postretirement benefit costs and a $10 million benefit from state tax planning initiatives. 19. EXPLORATION AND PRODUCTION ACTIVITIES (UNAUDITED) During 1999, Columbia Resources' acquisition strategy involved six transactions totaling approximately $61 million, added reserves of 65 Bcfe and expanded the gathering infrastructure by more than 450 miles of pipeline. Also in 1999, Columbia Resources discovered reserves in West Virginia in the Trenton-Black river formation at depths exceeding 10,000 feet. On August 7, 1997, Columbia Resources acquired Alamco, Inc. (Alamco), a gas and oil production company operating in the Appalachian Basin. The information contained in the following tables includes amounts attributable to the operations and reserves of Alamco from August 7, 1997. Reserve information contained in the following tables for the U.S. and Canadian properties is management's estimate, which was reviewed by the independent consulting firms of Ryder Scott Company Petroleum Engineers for the U.S. reserves and Sproule Associates Limited for the Canadian reserves. Reserves are reported as net working interest. Gross revenues are reported after deduction of royalty interest payments. 66 67 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued
RESERVE QUANTITY INFORMATION United States Canada - --------------------------------------------------------------------------------------------------------------------- Oil & Other Oil & Other Gas Liquids Gas Liquids Proved Reserves (Bcf) (000 Bbls) (Bcf) (000 Bbls) - --------------------------------------------------------------------------------------------------------------------- Reserves as of December 31, 1996 644.5 774 - - Revisions of previous estimate 69.5 (139) - - Extensions, discoveries and other additions 33.2 59 - - Production (34.7) (210) - - Purchase of reserves-in-place(a) 88.0 1,216 - - - --------------------------------------------------------------------------------------------------------------------- Reserves as of December 31, 1997 800.5 1,700 - - Revisions of previous estimate (23.1) 178 - - Extensions, discoveries and other additions 60.7 94 - - Production (39.0) (201) (0.1) (13) Purchase of reserves-in-place - - 1.1 77 Sale of reserves-in-place (9.6) - - - - --------------------------------------------------------------------------------------------------------------------- Reserves as of December 31, 1998 789.5 1,771 1.0 64 Revisions of previous estimate 34.4 99 - 9 Extensions, discoveries and other additions 116.8 38 0.3 40 Production (45.6) (175) (0.2) (10) Purchase of reserves-in-place 58.2 539 - - Sale of reserves-in-place (2.8) - - - - --------------------------------------------------------------------------------------------------------------------- RESERVES AS OF DECEMBER 31, 1999 950.5 2,272 1.1 103 - --------------------------------------------------------------------------------------------------------------------- Proved developed reserves as of December 31, 1997 653.2 1,330 - - 1998 586.2 1,436 1.0 64 1999 697.2 1,953 1.1 103 - ---------------------------------------------------------------------------------------------------------------------
(a) Includes the purchase of Alamco.
CAPITALIZED COSTS United States Canada Total - --------------------------------------------------------------------------------------------------------------------- ($ in millions) 1999 1998 1997 1999 1998 1997 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- CAPITALIZED COSTS AT YEAR END Proved properties 762.5 673.2 628.4 1.7 1.4 - 764.2 674.6 628.4 Unproved properties (a) 61.0 40.8 31.8 10.9 3.7 - 71.9 44.5 31.8 - --------------------------------------------------------------------------------------------------------------------- Total capitalized costs 823.5 714.0 660.2 12.6 5.1 - 836.1 719.1 660.2 Accumulated depletion (251.3) (225.2) (196.0) (0.3) (0.2) - (251.6) (225.4) (196.0) - --------------------------------------------------------------------------------------------------------------------- NET CAPITALIZED COSTS 572.2 488.8 464.2 12.3 4.9 - 584.5 493.7 464.2 - --------------------------------------------------------------------------------------------------------------------- COSTS CAPITALIZED DURING YEAR (b) Acquisition properties Proved 1.2 - - - 0.7 - 1.2 0.7 - Unproved 8.6 0.6 0.1 2.9 3.0 - 11.5 3.6 0.1 Exploration 6.7 2.3 1.0 1.3 - - 8.0 2.3 1.0 Development 99.4 62.1 132.4 2.9 1.4 - 102.3 63.5 132.4 - --------------------------------------------------------------------------------------------------------------------- COSTS CAPITALIZED 115.9 65.0 133.5 7.1 5.1 - 123.0 70.1 133.5 - ---------------------------------------------------------------------------------------------------------------------
(a) Represents expenditures associated with properties on which evaluations have not been completed. (b) Includes internal costs capitalized pursuant to the accounting policy described in Note 1(F) of Notes to Consolidated Financial Statements of $3.5 million in 1999, $3.3 million in 1998 and $1.4 million in 1997. 67 68 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued)
OTHER EXPLORATION AND PRODUCTION DATA United States Canada - --------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Average sales price per Mcf of gas ($)(a) 2.66 2.91 2.63 2.25 2.61 - Average sales price per barrel of oil and other liquids ($) 14.69 12.53 17.99 19.43 16.42 - Production (lifting) cost per dollar of gross revenue ($) 0.19 0.21 0.24 0.18 0.32 - Depletion rate per dollar of gross revenue ($) 0.26 0.29 0.28 0.24 0.27 - - ---------------------------------------------------------------------------------------------------------------------
(a) Includes the effect of hedging activities.
HISTORICAL RESULTS OF OPERATIONS - --------------------------------------------------------------------------------------------------------------------- United States Canada Total ($ in millions) 1999 1998 1997 1999 1998 1997 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Gross revenues Unaffiliated 122.4 53.7 27.4 0.5 0.6 - 122.9 54.3 27.4 Affiliated 1.4 62.3 69.0 - - - 1.4 62.3 69.0 Production costs 23.7 24.2 23.3 0.1 0.2 - 23.8 24.4 23.3 Depletion 32.8 33.5 26.6 0.1 0.2 - 32.9 33.7 26.6 Income tax expense 25.0 20.7 14.3 0.1 0.1 - 25.1 20.8 14.3 - --------------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS 42.3 37.6 32.2 0.2 0.1 - 42.5 37.7 32.2 - ---------------------------------------------------------------------------------------------------------------------
Results of operations for exploration and production activities exclude administrative and general costs, corporate overhead and interest expense. Income tax expense is expressed at statutory rates less Section 29 credits.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS - --------------------------------------------------------------------------------------------------------------------- United States Canada Total ($ in millions) 1999 1998 1997 1999 1998 1997 1999 1998 1997 - ----------------------------- --------------------------------------------------------------------------------------- Future cash inflows 2,805.4 2,094.4 2,503.0 5.5 3.4 - 2,810.9 2,097.8 2,503.0 Future production costs (739.8) (585.5) (719.9) (2.1) (1.5) - (741.9) (587.0) (719.9) Future development costs (258.3) (200.4) (182.7) (0.1) (0.1) - (258.4) (200.5) (182.7) Future income tax expense (697.5) (487.8) (557.5) (0.9) (0.7) - (698.4) (488.5) (557.5) - ----------------------------- --------------------------------------------------------------------------------------- Future net cash flows 1,109.8 820.7 1,042.9 2.4 1.1 - 1,112.2 821.8 1,042.9 Less: 10% discount 600.6 440.1 582.2 0.9 0.3 - 601.5 440.4 582.2 - ----------------------------- --------------------------------------------------------------------------------------- STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOW 509.2 380.6 460.7 1.5 0.8 - 510.7 381.4 460.7 - ----------------------------- ---------------------------------------------------------------------------------------
Future cash inflows are computed by applying year-end prices to estimated future production of proved gas and oil reserves. Future expenditures (based on year-end costs) represent those costs to be incurred in developing and producing the reserves. Discounted future net cash flows are derived by applying a 10% discount rate, as required by the Financial Accounting Standards Board, to the future net cash flows. This data is not intended to reflect the actual economic value of Columbia's gas and oil producing properties or the true present value of estimated future cash flows since many arbitrary assumptions are used. The data does provide a means of comparison among companies through the use of standardized measurement techniques. 68 69 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) A reconciliation of the components resulting in changes in the standardized measure of discounted cash flows attributable to proved gas and oil reserves for the three years ending December 31, follows:
United States Canada Total - -------------------------------------------------------------------------------------------------------------------------------- ($ in millions) 1999 1998 1997 1999 1998 1997 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Beginning of year 380.6 460.7 433.7 0.8 - - 381.4 460.7 433.7 Gas and oil sales, net of production costs (100.1) (91.9) (73.1) (0.4) (0.4) - (100.5) (92.3) (73.1) Net changes in prices and production costs 74.7 (108.5) (107.8) 0.6 - - 75.3 (108.5) (107.8) Change in future development costs (35.8) (10.0) (16.9) - - - (35.8) (10.0) (16.9) Extensions, discoveries and other additions, net of related costs 107.5 77.5 51.9 0.6 - - 108.1 77.5 51.9 Revisions of previous estimates, net of related costs 33.7 (18.0) 64.0 0.1 - - 33.8 (18.0) 64.0 Sales of reserves-in-place (2.9) (12.0) (4.1) - - - (2.9) (12.0) (4.1) Purchases of reserves-in- place 54.6 - 67.0 - 1.7 - 54.6 1.7 67.0 Accretion of discount 60.0 70.1 64.3 0.1 - - 60.1 70.1 64.3 Net change in income taxes (91.3) 21.1 (30.5) (0.2) (0.5) - (91.5) 20.6 (30.5) Timing of production and other changes 28.2 (8.4) 12.2 (0.1) - - 28.1 (8.4) 12.2 - --------------------------------------------------------------------------------------------------------------------------------- END OF YEAR 509.2 380.6 460.7 1.5 0.8 - 510.7 381.4 460.7 - ---------------------------------------------------------------------------------------------------------------------------------
69 70 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (continued) Schedule V VALUATION AND QUALIFYING ACCOUNTS Columbia Energy Group and Subsidiaries Year Ended December 31, ($ in millions)
Additions - Charged to --------------------------------- Beginning Other Ending Description Balance Income Accounts (a) Deductions (b) Balance - ---------------------------------------------------------------------------------------------------------------------------------- Reserves deducted in the balance sheet from the assets to which they apply: Allowance for doubtful accounts 1999 13.9 24.8 31.8 54.7 15.8 1998 16.6 19.2 26.8 48.7 13.9 1997 15.6 27.9 30.5 57.4 16.6 - ----------------------------------------------------------------------------------------------------------------------------------
(a) Primarily reflects reclassifications to a regulatory asset of the uncollectible accounts related to the Percent of Income Plan (PIP) of Columbia Gas of Ohio, Inc. (b) Principally reflects amounts charged off as uncollectible less amounts recovered. 70 71 ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has not been a change of accountants nor any disagreements concerning accounting and financial disclosure within the past two years. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain information required by this item is contained in Columbia's Proxy Statement related to the 2000 Annual Meeting of Stockholders, to be filed pursuant to Section 14 of the Securities Exchange Act of 1934 and is incorporated herein by reference. Information regarding Columbia's current executive officers, is as follows: OLIVER G. RICHARD III, 47, Chairman, President and Chief Executive Officer of Columbia (since April 28, 1995). Chairman of New Jersey Resources Corporation from 1992 to 1995; President and Chief Executive Officer from 1991 to 1995. President and Chief Executive Officer of Northern Natural Gas Company from 1989 to 1991. Senior Vice President and subsequently Executive Vice President of Enron Gas Pipeline Group from 1987 to 1989. Vice President and General Counsel of Tenngasco, a subsidiary of Tenneco Corporation, from 1985 to 1987. Federal Energy Regulatory Commission Commissioner from 1982 to 1985. PETER M. SCHWOLSKY, 53, Senior Vice President and Chief Legal Officer of Columbia and Columbia Energy Group Service Corporation since August 1995. Senior Vice President from June 1995 to August 1995. Executive Vice President, Law and Corporate Development, for New Jersey Resources Corporation from 1991 to 1995. Of counsel and then Partner with Steptoe & Johnson from 1986 to 1991. MICHAEL W. O'DONNELL, 55, Senior Vice President and Chief Financial Officer of Columbia and Columbia Energy Group Service Corporation since October 1993. Senior Vice President and Assistant Chief Financial Officer of Columbia and Columbia Energy Group Service Corporation from 1989 to 1993. CATHERINE GOOD ABBOTT, 49, Chief Executive Officer and President of Columbia Gas Transmission Corporation and Chief Executive Officer of Columbia Gulf Transmission Company since January 1996. Principal with Gem Energy Consulting, Inc. from 1995 to January 1996. Vice President for various business units of Enron Corporation from 1985 to 1995. PATRICIA A. HAMMICK, 53, Senior Vice President for Strategy and Communications for Columbia since May 1998. Vice President, Strategy Implementation from 1997 through May 1998. Vice President of the Natural Gas Supply Association from 1983 through 1996. Manager, Energy Liaison for the Gulf Oil Exploration and Production Company from 1979 to 1983. ITEM 11. EXECUTIVE COMPENSATION Information required by this item is contained in Columbia's Proxy Statement related to the 2000 Annual Meeting of Stockholders, to be filed pursuant to Section 14 of the Securities Exchange Act of 1934 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is contained in Columbia's Proxy Statement related to the 2000 Annual Meeting of Stockholders, to be filed pursuant to Section 14 of the Securities Exchange Act of 1934 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is contained in Columbia's Proxy Statement related to the 2000 Annual Meeting of Stockholders, to be filed pursuant to Section 14 of the Securities Exchange Act of 1934 and is incorporated herein by reference. 71 72 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Exhibits Reference is made to pages 75 through 77 for the list of exhibits filed as part of this Annual Report on Form 10-K. Pursuant to Item 601(b), paragraph (4)(iii)(A) of Regulation S-K, certain instruments representing long-term debt of Columbia or its subsidiaries have not been included as Exhibits because such debt does not exceed 10% of the total assets of Columbia and its subsidiaries on a consolidated basis. Columbia agrees to furnish a copy of any such instrument to the U.S. Securities and Exchange Commission upon request. Financial Statement Schedules All of the financial statements and financial statement schedules filed as a part of the Annual Report on Form 10-K are included in Item 8. Reports on Form 8-K
Financial Item Statements Reported Included Date of Event Date Filed 5 Yes* October 21, 1999 October 21, 1999 5 No October 24, 1999 October 26, 1999
* Summary of Financial and Operational data for three and nine months ended September 30, 1999. Undertaking made in Connection with 1933 Act Compliance on Form S-8 For purposes of complying with the amendments to the rules governing Form S-8 under the Securities Act of 1933, as amended (the Act), Columbia undertakes the following, which is incorporated by reference into the registration statements on Form S-8, Nos. 333-80797 (filed June 6, 1999), 333-03869 (filed May 16, 1996) and 33-42776 (filed September 13, 1991). Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the U.S. Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the questions whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 72 73 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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) Dated: March 2, 2000 By:/s/Oliver G. Richard III ----------------------- (Oliver G. Richard III) Director (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 2, 2000 /s/ Oliver G. Richard III ------------------------- Oliver G. Richard III Director (Principal Executive Officer) March 2, 2000 /s/ Richard F. Albosta ------------------------- Richard F. Albosta Director March 2, 2000 /s/ Robert H. Beeby ------------------------- Robert H. Beeby Director March 2, 2000 /s/ Wilson K. Cadman ------------------------- Wilson K. Cadman Director March 2, 2000 /s/ Jeffrey W. Grossman ------------------------- Jeffrey W. Grossman Vice President & Controller (Principal Accounting Officer) March 2, 2000 /s/ James P. Heffernan ------------------------- James P. Heffernan Director March 2, 2000 /s/ Karen L. Hendricks ------------------------- Karen L. Hendricks Director March 2, 2000 /s/ Malcolm T. Hopkins ------------------------- Malcolm T. Hopkins Director March 2, 2000 /s/ J. Bennett Johnston ------------------------- J. Bennett Johnston Director March 2, 2000 /s/ Malcolm Jozoff ------------------------- Malcolm Jozoff Director March 2, 2000 /s/ William E. Lavery ------------------------- William E. Lavery Director March 2, 2000 /s/ Gerald E. Mayo ------------------------- Gerald E. Mayo Director March 2, 2000 /s/ Michael W. O'Donnell ------------------------- Michael W. O'Donnell Senior Vice President (Chief Financial Officer) March 2, 2000 /s/ Douglas E. Olesen ------------------------- Douglas E. Olesen Director 73 74 EXHIBIT INDEX Reference is made in the two right-hand columns below to those exhibits which have heretofore been filed with the U.S. Securities and Exchange Commission. Exhibits so referred to are incorporated herein by reference.
Reference File No. Exhibit 2-A* - Agreement and Plan of Merger dated February 27, 2000 between Columbia Energy Group and NiSource Inc. 3-A - Restated Certificate of Incorporation of The Columbia 1-1098 3-A Gas System, Inc., as amended dated as of November 28, 1995. 3-B - By-Laws of The Columbia Gas System, Inc., as amended dated 1-1098 3-B November 18, 1987. 3-C - Certificate of Ownership and Merger, Merging Columbia 1-1098 3-C Energy Group, Inc. into The Columbia Gas System, Inc. 3-D* - Amended and Restated By-Laws of Columbia Energy Group as of February 22, 2000. 4-A - Indenture between The Columbia Gas System, Inc. 33-64555 4-S and Marine Midland Bank, N.A. Trustee, dated as of November 28, 1995. 4-B - First Supplemental Indenture, between The Columbia Gas 33-64555 4-T System, Inc. and Marine Midland Bank, N.A. Trustee, dated as of November 28, 1995. 4-C - Second Supplemental Indenture, between The Columbia Gas 33-64555 4-U System, Inc., and Marine Midland Bank, N.A. Trustee, dated as of November 28, 1995. 4-D - Third Supplemental Indenture, between The Columbia Gas 33-64555 4-V System, Inc. and Marine Midland Bank, N.A. Trustee, dated as of November 28, 1995. 4-E - Fourth Supplemental Indenture, between The Columbia Gas 33-64555 4-W System, Inc. and Marine Midland Bank, N.A. Trustee, dated as of November 28, 1995. 4-F - Fifth Supplemental Indenture, between The Columbia Gas 33-64555 4-X System, Inc. and Marine Midland Bank, N.A. Trustee, dated as of November 28, 1995. 4-G - Sixth Supplemental Indenture, between The Columbia Gas 33-64555 4-Y System, Inc. and Marine Midland Bank, N.A. Trustee, dated as of November 28, 1995. 4-H - Seventh Supplemental Indenture, between The Columbia 33-64555 4-Z Gas System, Inc. and Marine Midland Bank, N.A., Trustee, dated as of November 28, 1995. 4-I - Instrument of Resignation, Appointment and Acceptance dated as 1-1098 4-I of March 1, 1999, between Columbia Energy Group and Marine Midland Bank, as Resigning Trustee and The First National Bank of Chicago, as Successor Trustee 10-P(a) - Pension Restoration Plan of The Columbia Gas 1-1098 10-P System, Inc., amended October 9, 1991. 10-Q(a) - Thrift Restoration Plan of The Columbia Gas 1-1098 10-Q System, Inc. dated January 1, 1989. 10-T - Agreement and Bridge Agreement dated 1-1098 10-T December 1, 1993, between Columbia Gas Transmission Corporation and Consol Pennsylvania Coal Company. 10-AE - U.S. Environmental Protection Agency Administrative 1-1098 10-AE Order by Consent for Removal Actions for Columbia Gas Transmission Corporation dated September 22,1994. 10-AF - Amended and Restated Indenture of Mortgage and 1-1098 10-AF Deed of Trust by Columbia Gas Transmission Corporation to Wilmington Trust Company, dated as of November 28, 1995
(a) Executive Compensation arrangements filed pursuant to Item 14 of Form 10-K. * Filed herewith. 74 75 EXHIBIT INDEX (continued)
Reference File No. Exhibit 10-BB(a) - Annual Incentive Compensation Plan of The Columbia Gas 1-1098 10-BB System, Inc., as amended, dated as of November 16, 1988. 10-BC(a) - Employment Agreement between Oliver G. Richard III 1-1098 10-BC and The Columbia Gas System, Inc., dated March 15, 1995. 10-BE(a) - Employment Agreement between Peter M. Schwolsky 1-1098 10-BE and The Columbia Gas System, Inc., dated May 30, 1995. 10-BF(a) - Employment Agreement between Catherine Good Abbott and The 1-1098 10-BF Columbia Gas System, Inc., dated January 17, 1996. 10-BU - Share Sale and Purchase Agreement between The 1-1098 10-BU Columbia Gas System, Inc. and Anderson Exploration Ltd. dated November 25, 1991. 10-BV - Security Agreement dated as of January 15, 1992, 1-1098 10-BV between The Columbia Gas System, Inc. and Anderson Exploration Ltd. and Montreal Trust Company of Canada. 10-BW - Kotaneelee Litigation Indemnity Agreement dated 1-1098 10-BW as of December 31, 1991, among The Columbia Gas System, Inc. and Columbia Gas Development of Canada Ltd. and Anderson Exploration Ltd. 10-BX - Specified Litigation Indemnity Agreement made 1-1098 10-BX as of December 31, 1991, among The Columbia Gas System, Inc. and Columbia Gas Development of Canada Ltd. and Anderson Exploration Ltd. 10-BY(a) - Columbia Gas Restoration Security Trust 1-1098 10-BY Agreement dated June 1, 1991, with Dauphin Deposit Bank and Trust Company. 10-CA(a) - The Columbia Gas System, Inc. Retirement Plan 1-1098 10-CA for Outside Directors, as amended, August 21, 1991. 10-CB - Credit Agreement, dated as of November 28, 1995, 1-1098 10-CB among The Columbia Gas System, Inc., certain banks party thereto and Citibank, N.A. 10-CC - First Amendment and Supplement to Credit 1-1098 10-CC Agreement, dated December 6, 1995 10-CD - Credit Agreement for $450,000,000, dated March 11, 1998, 1-1098 10-CD among Columbia Energy Group and certain banks party thereto and Citibank, N.A. as Administrative and Syndication Agent. 10-CE - Credit Agreement for $900,000,000, dated March 11, 1998, 1-1098 10-CE among Columbia Energy Group and certain banks party thereto and Citibank, N.A. as Administrative and Syndication Agent. 10-CF - Memorandum of Understanding among the Millennium Pipeline 1-1098 10-CF Project partners (Columbia Transmission, West Coast Energy, MCN Investment Corp. and TransCanada Pipelines Limited) dated December 1, 1997. 10-CG - Agreement of Limited Partnership of Millennium Pipeline 1-1098 10-CG Company, L.P. dated May 31, 1998. 10-CH - Contribution Agreement Between Columbia Gas Transmission 1-1098 1-1098 10-CH 10-CH Corporation and Millennium Pipeline Company, L.P. dated July 31, 1998 10-CI - Regulations of Millennium Pipeline Management Company, L.L.C. 1-1098 10-CI dated May 31, 1998 10-CJ - Amended and Restated Agreement of Cove Point 1-1098 10-CJ LNG Limited Partnership between Columbia LNG and PEPCO Energy Company, Inc. dated January 27, 1994.
(a) Executive Compensation arrangements filed pursuant to Item 14 of Form 10-K. 75 76 EXHIBIT INDEX (continued)
Reference File No. Exhibit 10-CK - Amended and Restated 364-Day Credit Agreement among Columbia 1-1098 10-CK Energy Group and certain banks party thereto and Citibank, N. A. as Administrative and Syndication Agent dated as of March 10, 1999. 10-CM - Plan of Reorganization for Columbia Gas Transmission 1-1098 10-CM Corporation 1-1098 10-CM as filed with the United States Bankruptcy Court for the District of Delaware on January 18, 1994. 10-CO* - Amendment No. 1 to the $450,000,000 Amended and Restated 364-Day Credit Agreement, dated as of March 10,1999, among Columbia Energy Group and certain banks party thereto and Citibank N.A. as administrative and syndication agent. 10-CP* - Amendment No. 1 to the $900,000,000 Credit Agreement, dated as of March 11,1999, among Columbia Energy Group and certain banks party thereto and Citibank N.A. as administrative and syndication agent. 12 * - Statements of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends. 21 * - Subsidiaries of Columbia Energy Group 23-A * - Written consent, dated January 24, 2000, to the filing and use of information contained in such letter report, in Reports and Registration Statements filed during 1999, of Ryder Scott Company Petroleum Engineers, independent petroleum and natural gas consultants. 23-B * - Written consent of Arthur Andersen LLP, independent public accountants, to the incorporation by reference of their report included in the 1999 Annual Report on Form 10-K of Columbia Energy Group and their report included in Columbia Energy Group's 1999 Annual Report to Shareholders in the registration Statements on Form S-3 (File No. 33-64555 and Form S-8 (File Nos. 333-80797, 333-03869 and 33-42776). 23-C* Written consent, dated January 20, 2000, to the filing and use of information contained in such letter report, in Reports and Registration Statements filed during 1999, of Sproule Associates Limited, independent petroleum and natural gas consultants. 27 * - Financial Data Schedule for the period ended December 31, 1999.
* Filed herewith. 76 EX-2.A 2 AGREEMENT AND PLAN OF MERGER COLUMBIA AND NISOURCE 1 Exhibit 2-A AGREEMENT AND PLAN OF MERGER Between COLUMBIA ENERGY GROUP and NISOURCE INC. Dated as of February 27, 2000 2 TABLE OF CONTENTS
Page ---- ARTICLE I FORMATION OF HOLDING COMPANY AND SUBSIDIARIES 2 1.1 Organization of Holdco 2 1.2 Directors and Officers of Holdco 3 1.3 Organization of Merger Subsidiaries 3 1.4 Actions of Directors and Officers 4 1.5 Actions of Parent and the Company 4 ARTICLE II THE MERGERS; CLOSING; EFFECTIVE TIME 2.1 The Mergers 4 (a) Parent Merger 4 (b) Company Merger 5 2.2 Closing 6 2.3 Effective Time 6 2.4 Alternative Structure 7 ARTICLE III EFFECT OF THE MERGERS ON THE CAPITAL STOCK OF PARENT, THE COMPANY AND THE MERGER SUBS; EXCHANGE OF CERTIFICATES 3.1 Merger Sub Shares 8 3.2 Holdco Shares 8 3.3 Conversion of Parent Shares 8 3.4 Conversion of Company Shares 9 3.5 Stock Elections 11 3.6 Proration 13 3.7 Exchange of Company Certificates 13 3.8 Dividends, Etc 15 ARTICLE IV ADJUSTMENT TO PREVENT DILUTION 17 4.1 Adjustments of the Exchange Ratio 17 ARTICLE V REPRESENTATIONS AND WARRANTIES 17 5.1 Representations and Warranties of the Company 17 (a) Organization, Good Standing and Qualification 18 (b) Capital Structure 19 (c) Corporate Authority; Approval and Fairness 20 (d) Governmental Filings; No Violations 21 (e) Company Reports; Financial Statements 22 (f) Absence of Certain Changes 23 (g) Litigation 24 (h) Employee Benefits 24 (i) Compliance with Laws 26 (j) Takeover Statutes 27
3
(k) Environmental Matters 27 (l) Taxes 28 (m) Labor Matters 29 (n) Intellectual Property 29 (o) Brokers and Finders 30 (p) Regulation as a Utility 30 (q) Trading Position Risk Management 30 (r) Registration Statement and Proxy Statement 30 (s) Tax Matters 31 (t) Employment Agreements 31 (u) No Other Representations or Warranties 31 5.2 Representations and Warranties of Parent 31 (a) [RESERVED] 31 (b) Organization, Good Standing and Qualification 31 (c) Capital Structure 32 (d) Corporate Authority and Approval 33 (e) Governmental Filings; No Violations 34 (f) Parent Reports; Financial Statements 35 (g) Absence of Certain Changes 36 (h) Litigation 37 (i) Employee Benefits 37 (j) Compliance with Laws 39 (k) Takeover Statutes 40 (l) Environmental Matters 40 (m) Tax Matters 40 (n) Taxes 40 (o) Labor Matters 41 (p) Intellectual Property 41 (q) Brokers and Finders 42 (r) Available Funds 42 (s) Regulation as a Utility 42 (t) Registration Statement and Proxy Statement 43 (u) No Other Representations or Warranties 43 ARTICLE VI COVENANTS 6.1 Interim Operations of the Company 43 6.2 Acquisition Proposals 47 6.3 Shareholders Meeting 49 (c) Meeting Date 50 6.3A Joint Proxy Statement and Registration Statement 50 (a) Preparation and Filing 50 (b) Letter of the Company's Accountants 51 (c) Letter of Parent's Accountants 51 6.4 Filings; Other Actions; Notification 51 6.5 Access 53 6.6 Stock Exchange De-listing 54
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6.7 Publicity 54 6.8 Benefits 55 (a) Stock Options 55 (b) Employee Benefits 55 (c) Employees 56 (d) Community Involvement 56 (e) Integration Committee 57 (f) Phantom Shares 57 6.9 Expenses 58 6.10 Indemnification; Directors' and Officers' Insurance 58 6.11 Takeover Statute 60 6.12 Parent Vote 61 6.13 1935 Act 61 6.14 Necessary Action 61 6.15 Certain Mergers 61 6.16 Rule 145 Affiliates 62 6.17 Executive Consent Rights 62 6.18 Listing of Units 62 ARTICLE VII CONDITIONS 7.1 Conditions to Each Party's Obligation to Effect the Mergers 62 (a) Shareholder Approval 63 (b) Registration Statement 63 (c) Listing of Shares 63 (d) HSR 63 (e) Other Regulatory Consents 63 (f) Litigation 64 7.2 Conditions to Obligations of Parent 64 (a) Representations and Warranties 64 (b) Performance of Obligations of the Company 65 (c) Consents Under Agreements 65 (d) Material Adverse Effect 65 7.3 Conditions to Obligation of the Company 65 (a) Representations and Warranties 65 (b) Performance of Obligations of Parent 66 (c) Tax Opinion 66 ARTICLE VIII TERMINATION 8.1 Termination by Mutual Consent 66 8.2 Termination by Either Parent or the Company 66 8.3 Termination by the Company 67 8.4 Termination by Parent 68 8.5 Effect of Termination and Abandonment 68 ARTICLE IX MISCELLANEOUS AND GENERAL
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9.1 Survival 70 9.2 Modification or Amendment 70 9.3 Waiver of Conditions 71 9.4 Counterparts 71 9.5 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL 71 9.6 Notices 72 9.7 Entire Agreement; NO OTHER REPRESENTATIONS 72 9.8 No Third Party Beneficiaries 73 9.9 Obligations of Parent and of the Company 73 9.10 Severability 73 9.11 Interpretation 74 9.12 Assignment 74
6 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER (hereinafter called this "Agreement"), dated as of February 27, 2000, between Columbia Energy Group, a Delaware corporation (the "Company") and NiSource Inc., an Indiana corporation ("Parent"). WHEREAS, the boards of directors of each of Parent and the Company have approved and declared it advisable and in the best interests of their respective companies and stockholders to consummate the mergers provided for herein, pursuant to which a newly formed holding company, Parent Holdco, Inc. ("Holdco"), will acquire all of the common stock of each of Parent and the Company through mergers of subsidiaries of Holdco with and into each of Parent and the Company or, if the Parent Requisite Vote (as hereinafter defined) is not obtained, pursuant to which a wholly owned subsidiary of Parent will merge with and into the Company; WHEREAS, for federal income tax purposes, it is intended that (i) the Parent Merger (as hereinafter defined) qualify as a reorganization under the provisions of Section 368(a) of the United States Internal Revenue Code of 1986, as amended (the "Code"); and/or as an exchange under the provisions of Section 351 of the Code and (ii) that, if the Parent Requisite Vote is obtained, the Company Merger (as hereinafter defined) qualify as an exchange under the provisions of Section 351 of the Code; and WHEREAS, the Company and Parent desire to make certain representations, warranties, covenants and agreements in connection with this Agreement. NOW, THEREFORE, in consideration of the premises, and of the representations, warranties, covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE I FORMATION OF HOLDING COMPANY AND SUBSIDIARIES 1.1 Organization of Holdco. As promptly as -2- 7 practicable and in any event no later than five days following the execution of this Agreement, Parent shall cause Holdco to be organized under the laws of the State of Indiana. The Articles of Incorporation and By-Laws of Holdco shall be in such forms as shall be determined by Parent; provided that, if the Parent Requisite Vote has been received, prior to the Closing Date (as hereinafter defined), the Articles of Incorporation of Holdco shall be amended to be substantially in the form of the Articles of Incorporation of Parent in effect as of the date hereof. The authorized capital stock of Holdco shall initially consist of 100 common shares, without par value (the "Holdco Shares"), all of which shares shall be issued to Parent. Parent shall provide the Company with copies of the Articles of Incorporation and By-Laws of Holdco promptly upon the Company's request. 1.2 Directors and Officers of Holdco. The directors and officers of Holdco shall be designated by Parent. Each such officer and director shall remain in office until his or her successor is elected. 1.3 Organization of Merger Subsidiaries. As promptly as practicable, and in any event no later than five days following the execution of this Agreement, Holdco shall cause to be organized for the sole purpose of effectuating the mergers contemplated herein: (a) Parent Acquisition Corp., a corporation to be organized under the laws of the State of Indiana ("PAC"). The Articles of Incorporation and By-Laws of PAC shall be in such forms as shall be determined by Parent. The authorized capital stock of PAC shall initially consist of 100 common shares, without par value ("PAC Shares"), all of which shares shall be issued to Holdco at a price of $1.00 per share. (b) Company Acquisition Corp., a corporation to be organized under the laws of the State of Delaware ("CAC" and, together with PAC, the "Merger Subs"). The Certificate of Incorporation and By-Laws of CAC shall be in such forms as shall be determined by Parent. The authorized capital stock of CAC shall initially consist of 100 shares of common stock, par value $0.01 per share ("CAC Shares"), all of which shares shall be issued to Holdco at a price of $1.00 per share. -3- 8 Parent shall provide the Company with copies of the Articles of Incorporation or Certificate of Incorporation, as the case may be, and By-Laws of PAC and CAC promptly upon the Company's request. 1.4 Actions of Directors and Officers. As promptly as practicable and in any event no later than five days following the execution of this Agreement, Parent shall take all requisite action to designate the directors and officers of Holdco and each of the Merger Subs and to take such steps as may be necessary or appropriate to complete the organization of Holdco and the Merger Subs. Parent shall cause the directors of Holdco and the directors of the Merger Subs to declare advisable, ratify and approve this Agreement. 1.5 Actions of Parent and the Company. As promptly as practicable and in any event no later than five days following the execution of this Agreement, Parent, as the holder of all the outstanding Holdco Shares, shall cause Holdco, as the sole stockholder of each of the Merger Subs, to adopt and declare advisable this Agreement. Parent shall cause Holdco, and Holdco shall cause Parent and the Merger Subs, to perform their respective obligations under this Agreement. As promptly as practicable and in any event no later than five days after the date hereof the parties shall cause this Agreement to be amended to add Holdco and the Merger Subs as parties hereto, and each Merger Sub shall become a constituent corporation in its respective Merger. ARTICLE II THE MERGERS; CLOSING; EFFECTIVE TIME 2.1 The Mergers. Upon the terms and subject to the conditions set forth in this Agreement at the Effective Time (as hereinafter defined), the following transactions shall be consummated: (a) Parent Merger. In accordance with the Indiana Business Corporation Law (the "IBCL") and this Agreement, at the Effective Time, PAC shall be merged with and into Parent, and the separate corporate existence of PAC shall thereupon cease (the "Parent Merger"). Parent shall be the surviving corporation in the Parent Merger and shall -4- 9 continue its corporate existence under the laws of the State of Indiana, and the separate corporate existence of Parent with all its rights, privileges, immunities and franchises shall continue unaffected by the Parent Merger. As a result of the Parent Merger, Parent shall become a wholly owned subsidiary of Holdco. The Parent Merger shall have the effects set forth in the IBCL. Pursuant to the Parent Merger: (i) The Articles of Incorporation of Parent, as in effect immediately prior to the Effective Time, shall be the articles of incorporation of the surviving corporation in the Parent Merger. (ii) The By-Laws of PAC, as in effect immediately prior to the Effective Time, shall be the by-laws of the surviving corporation in the Parent Merger. (iii) The directors of PAC immediately prior to the Effective Time, shall, from and after the Effective Time, be the directors of the surviving corporation in the Parent Merger until their successors are duly appointed or elected in accordance with applicable law. (iv) The officers of Parent immediately prior to the Effective Time, shall, from and after the Effective Time, be the officers of the surviving corporation in the Parent Merger until their successors are duly appointed or elected in accordance with applicable law. (v) The shares of PAC and Parent shall be converted as provided in Article III. (b) Company Merger. In accordance with the Delaware General Corporation Law (the "DGCL") and this Agreement, at the Effective Time, CAC shall be merged with and into the Company, and the separate corporate existence of CAC shall thereupon cease (the "Company Merger" and, together with the Parent Merger, the "Mergers"). The Company shall be the surviving corporation in the Company Merger and shall continue its corporate existence under the laws of the State of Delaware, and the separate corporate existence of the Company with all its rights, privileges, immunities and franchises shall continue unaffected by the Company Merger. As a result of the Company Merger, the Company shall become a wholly owned subsidiary of Holdco. The Company Merger shall have the effects set forth in the -5- 10 DGCL. Pursuant to the Company Merger: (i) The Certificate of Incorporation of the Company, as in effect immediately prior to the Effective Time, shall be the certificate of incorporation of the surviving corporation in the Company Merger. (ii) The By-Laws of CAC, as in effect immediately prior to the Effective Time, shall be the by-laws of the surviving corporation in the Company Merger. (iii) The directors of CAC immediately prior to the Effective Time, shall, from and after the Effective Time, be the directors of the surviving corporation in the Company Merger. (iv) The officers of the Company immediately prior to the Effective Time, shall, from and after the Effective Time, be the officers of the surviving corporation in the Company Merger. (v) The shares of CAC and the Company shall be converted as provided in Article III. 2.2 Closing. The closing of the Mergers (the "Closing") shall take place (i) at the offices of Sullivan & Cromwell, 125 Broad Street, New York, New York at 10:00 A.M. on the third Business Day after the last of the conditions set forth in Article VII (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of those conditions) shall be satisfied or waived (by the party entitled to the benefit of such condition) in accordance with this Agreement or (ii) at such other place and time and/or on such other date as the Company and Parent may agree in writing (the "Closing Date"). For purposes of this Agreement, the term "Business Day" means a day on which banks are not required or authorized by law to close in New York City. 2.3 Effective Time. On the Closing Date, or, if not reasonably practicable, as soon as practicable following the Closing Date, the Company and Parent will cause Articles of Merger relating to the Parent Merger to be executed, acknowledged and filed with the Secretary of State of the State of Indiana and a Certificate of Merger relating to the Company Merger to be executed, acknowledged and filed with the Secretary of State of the State of Delaware. The term -6- 11 "Effective Time" shall mean the time and date which is the later of (i) the date and time of the filing of the Articles of Merger relating to the Parent Merger with the Secretary of State of the State of Indiana and (ii) the date and time of the filing of the Certificate of Merger relating to the Company Merger with the Secretary of State of the State of Delaware. 2.4 Alternative Structure. In the event Parent fails to obtain the Parent Requisite Vote (as defined in Section 5.2(d)) at the Parent Shareholders Meeting (as defined in Section 6.3(b)), the Company, Parent and Holdco hereby agree that the Company Merger will be consummated upon the following terms: (a) the Parent Merger will not be consummated and Holdco will not repurchase Holdco Shares and consequently Holdco shall remain a wholly owned subsidiary of Parent; (b) the term "Effective Time" as used throughout this Agreement shall mean the date and time of the filing of the Certificate of Merger relating to the Company Merger; (c) Parent shall cause Holdco to, and Holdco shall, consummate the Company Merger; and (d) at the Effective Time, each Company Share issued and outstanding immediately prior to the Effective Time, other than Excluded Shares (as defined herein), shall, in lieu of being converted as provided in Section 3.4(a)(i) and (ii), be converted into the right to receive (x) $70 in cash, without interest, and (y) $3.02 in face value of Parent SAILS security units consisting of a zero coupon debt security and a forward equity contract and having the terms set forth in Annex A hereof (the "Parent Units") and (z) the Additional Amount, if any (the sum of (x), (y) and (z) being referred to herein as the "Alternative Structure Merger Consideration"). ARTICLE III EFFECT OF THE MERGERS ON THE CAPITAL STOCK OF PARENT, THE COMPANY AND THE MERGER SUBS; EXCHANGE OF CERTIFICATES 3.1 Merger Sub Shares. -7- 12 (a) At the Effective Time, each PAC Share issued and outstanding immediately prior to the Effective Time shall, by virtue of the Parent Merger and without further action by the holder thereof, be converted into and shall become one common share, without par value, of Parent, as the surviving corporation in the Parent Merger. Each certificate which immediately prior to the Effective Time represented outstanding PAC Shares shall, on and after the Effective Time, be deemed for all purposes to represent the number of shares of the common stock of the surviving corporation into which the PAC Shares represented by such certificate shall have been converted pursuant to the Parent Merger. (b) At the Effective Time, each CAC Share issued and outstanding immediately prior to the Effective Time shall, by virtue of the Company Merger and without further action by the holder thereof, be converted into and shall become one share of common stock, par value $.01 per share, of the Company, as the surviving corporation in the Company Merger. Each certificate which immediately prior to the Effective Time represented outstanding CAC Shares shall, on and after the Effective Time, be deemed for all purposes to represent the number of shares of the common stock of the surviving corporation into which the CAC Shares represented by such certificate shall have been converted pursuant to the Company Merger. 3.2 Holdco Shares. At the Effective Time, Holdco shall repurchase each Holdco Share issued and outstanding immediately prior to the Effective Time for an amount of cash representing the fair market value thereof, as agreed upon by Parent and Holdco. 3.3 Conversion of Parent Shares. (a) At the Effective Time, each common share, without par value, of Parent (a "Parent Share"), issued and outstanding immediately prior to the Effective Time (other than Parent Shares held in the treasury of Parent) shall be converted into one Holdco Share. Upon such conversion, all such Parent Shares shall be canceled and cease to exist, and each certificate theretofore representing Parent Shares shall, without any action on the part of the holder thereof, be deemed to represent an equivalent number of Holdco Shares. The Holdco Shares into which Parent Shares are -8- 13 converted pursuant to the Parent Merger shall be deemed to have been issued at the Effective Time. (b) At the Effective Time, each Parent Share which is then held in the treasury of Parent shall, by virtue of the Parent Merger, cease to be outstanding and shall be canceled and retired without payment of any consideration therefor. (c) At the Effective Time, each outstanding option or right to purchase Parent Shares (a "Parent Option") shall be assumed by Holdco in such manner that it is converted into an option to purchase Holdco Shares, with each such Parent Option otherwise to be exercisable upon the same terms and conditions as then are applicable to such Parent Option, including the number of shares and exercise price provided thereby. At the Effective Time, Holdco shall assume all rights and obligations of Parent under Parent's stock option plans as in effect at the Effective Time and shall continue such plans in accordance with their terms. 3.4 Conversion of Company Shares. (a) At the Effective Time, each share of common stock, par value $.01 per share, of the Company (a "Company Share") issued and outstanding immediately prior to the Effective Time (other than (x) Company Shares the holders of which shall have validly demanded appraisal of such shares pursuant to Section 262 of the DGCL ("Section 262") and shall not have voted such shares in favor of the Company Merger ("Dissenting Shares"), (y) Company Shares owned by Parent or any Subsidiary of Parent and (z) Company Shares held in the treasury of the Company or owned by any Subsidiary of the Company (collectively, "Excluded Shares")) shall be converted into either of the following (the "Merger Consideration"): (i) the right to receive (x) $70 in cash, without interest, and (y) $2.60 in face value of Holdco SAILS security units consisting of a zero coupon debt security and a forward equity contract and having the terms set forth in Annex A hereto (the "Holdco Units")(the Holdco Units or the Parent Units, as the case may be, being referred to herein as the "Units Consideration"), and (z) the Additional Amount, if any (the sum of (x), (y) and (z) being referred to herein as the "Cash and Units Consideration"), or -9- 14 (ii) subject to Section 3.4(b), if the holder thereof shall have validly made and not revoked a Stock Election (as defined in Section 3.5(c)) with respect to such Company Share, a number of fully paid and non-assessable Holdco Shares determined by dividing $74 by the Average Parent Share Price (the "Exchange Ratio"), plus the Additional Amount, if any, provided that in no event shall the Exchange Ratio be more than 4.4848 (the "Stock Consideration"). The "" means an amount in cash equal to 7% interest on $72.29 for the period beginning on the first anniversary date of this Agreement, and ending on the day prior to the Closing Date (calculated on a per annum basis of a 365-day year), less all cash dividends per Company Share, if any, paid on the Company Shares with respect to a record date occurring after the first anniversary date of this Agreement; provided, however, that the Additional Amount shall not be a negative number. "Average Parent Share Price" means the average (rounded to the nearest 1/10,000) of the closing trading prices of the Parent Shares on the New York Stock Exchange Composite Tape on each of the thirty consecutive trading days immediately preceding the second trading day prior to the Closing Date. Upon such conversion, all Company Shares (other than Excluded Shares) shall be canceled and cease to exist, and each holder of Company Shares shall thereafter cease to have any rights with respect to such shares, except the right to receive, without interest, the Merger Consideration or the Alternative Structure Merger Consideration, as the case may be, and cash for fractional Holdco Shares in accordance with Section 3.7(d) upon the surrender of a certificate representing such Company Shares (a "Company Certificate"). (b) Notwithstanding the foregoing, (i) if the aggregate number of Company Shares for which Stock Elections are validly made and not revoked exceeds 30% of the Company Shares outstanding as of the Effective Time (the "Maximum Stock Shares"), the number of Company Shares to be converted into the Stock Consideration shall be prorated as described in Section 3.6, and all other Company Shares (other than -10- 15 Excluded Shares) shall be converted into the Cash and Units Consideration, and (ii) if the aggregate number of Company Shares for which valid Stock Elections are made is less than 10% of the Company Shares outstanding as of the Effective Time, all Company Shares shall be converted into the Cash and Units Consideration and Section 2.4 (other than subparagraph (d) thereof) shall apply and in lieu of the Holdco Units, Parent Units shall be delivered as part of the Merger Consideration. (c) At the Effective Time, each Company Share which is then held in the treasury of the Company or owned by Parent, any Subsidiary of Parent or any Subsidiary of Company shall, by virtue of the Company Merger, cease to be outstanding and shall be canceled and retired without payment of any consideration therefor. (d) Notwithstanding anything in this Section 3.4 to the contrary, Dissenting Shares shall not be converted into or be exchangeable for the right to receive the Merger Consideration or the Alternative Structure Merger Consideration, unless and until the holder of Dissenting Shares shall have failed to perfect or shall have effectively withdrawn or lost such holder's right to appraisal and payment, as the case may be. If such holder shall have so failed to perfect or shall have effectively withdrawn or lost such right, such holder's shares shall thereupon be deemed to have been converted into and to have become exchangeable for, at the Effective Time, the right to receive the Cash and Units Consideration, without any interest thereon. The Company shall give Parent prompt notice of any Dissenting Shares (and shall also give Parent prompt notice of any withdrawals of such demands for appraisal rights), and Parent shall have the right to direct all negotiations and proceedings with respect to any such demands. Neither the Company nor the surviving corporation of the Company Merger shall, except with the prior written consent of Parent, voluntarily make any payment with respect to, or settle or offer to settle, any such demand for appraisal rights. 3.5 Stock Elections. (a) Parent shall authorize one or more transfer agent(s) reasonably acceptable to the Company to receive Stock Elections and to act as Exchange Agent hereunder (the "Exchange Agent") with respect to the Company Merger. -11- 16 (b) Each person who, at the Effective Time, is a record holder of Company Shares (other than Excluded Shares) shall have the right to submit a Form of Election (as defined in Section 3.5(c)) specifying the number of Company Shares that such person desires to have converted into the Stock Consideration. (c) Parent and the Company shall prepare a form (the "Form of Election") pursuant to which any holder of Company Shares may elect to receive the Stock Consideration for any or all of his Company Shares (a "Stock Election"). The Form of Election shall be mailed to the holders of Company Shares as of a date on which Parent and the Company mutually agree, which date is expected to be approximately 45 days prior to the expected Closing Date. Parent and the Company shall use reasonable efforts to make the Form of Election available to all persons who become holders of record of Company Shares between the date on which the Form of Election is mailed to holders of Company Shares and the Election Deadline (as defined in Section 3.5(d)). (d) A Stock Election shall have been validly made only if the Exchange Agent shall have received, by 5:00 p.m. New York, New York time on the second Business Day prior to the Effective Time (the "Election Deadline"), a Form of Election properly completed and signed and accompanied by the Company Certificate or Certificates representing the shares to which such Form of Election relates (or by an appropriate guarantee of delivery of such Company Certificates from a member of any registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company in the United States as set forth in such Form of Election, provided such Company Certificate or Certificates are in fact delivered by the time set forth in such guarantee of delivery). Any holder of Company Shares who has made a Stock Election by submitting a Form of Election to the Exchange Agent may at any time prior to the Election Deadline change such holder's election by submitting a revised Form of Election, properly completed and signed, that is received by the Exchange Agent prior to the Election Deadline. Any holder of Company Shares may at any time prior to the Election Deadline revoke such holder's election and withdraw such holder's Company Certificates deposited with the Exchange Agent by written notice to the Exchange -12- 17 Agent received by the Election Deadline. As soon as practicable after the Election Deadline, the Exchange Agent shall determine the aggregate amounts of Cash and Units Consideration and Stock Consideration and shall notify Holdco of its determination. (e) Parent, with the Company's consent, shall have the right to make rules, not inconsistent with the terms of this Agreement, governing the validity of the Forms of Election, the manner and extent to which Stock Elections are to be taken into account in making the determinations prescribed by Section 3.6, the issuance and delivery of certificates representing Holdco Shares ("Holdco Certificates") into which Company Shares are converted in the Company Merger, and the payment of cash for Company Shares converted into the right to receive the Cash and Units Consideration in the Company Merger. 3.6 Proration. If valid Stock Elections are made for more than the Maximum Stock Shares, then the number of Company Shares covered by each Form of Election to be converted into the Stock Consideration shall be determined by multiplying (i) the number of Company Shares as to which such Form of Election relates by (ii) a fraction, the numerator of which is the Maximum Stock Shares and the denominator of which is the total number of Company Shares for which a valid stock election has been validly made and not withdrawn as of the Effective Time, rounded down to the nearest whole number, and the balance of the Company Shares covered by such Form of Election shall be converted into the Cash and Units Consideration. 3.7 Exchange of Company Certificates. (a) At or prior to the Effective Time, (i) Parent or Holdco shall deposit (or cause to be deposited) with the Exchange Agent, for the benefit of the holders of Company Shares, for exchange in accordance with this Article III, cash in the amount sufficient to pay the aggregate cash portion of the Merger Consideration or the Alternative Structure Merger Consideration, as the case may be, and (ii) Parent or Holdco shall deposit (or cause to be deposited) with the Exchange Agent, for the benefit of the holders of Company Shares, Holdco Certificates and certificates for Holdco Units or Parent Units, as the case may be, for exchange in accordance with this Article III (the cash and shares deposited pursuant to clauses (i) and -13- 18 (ii) being hereinafter referred to as the "Exchange Fund"). The Holdco Shares and Holdco Units or Parent Units, as the case may be, into which Company Shares are converted pursuant to the Company Merger shall be deemed to have been issued at the Effective Time. Any cash (including the cash portion of the Cash and Unit Consideration) deposited with the Exchange Agent shall be invested by the Exchange Agent as Parent reasonably directs, provided that such investments shall be in obligations of or guaranteed by the United States of America and backed by the full faith and credit of the United States of America or in commercial paper obligations rated P-1 and A-1 or better by Moody's Investors Service, Inc. and Standard & Poor's Corporation, respectively, and any net profit resulting from, or interest or income produced by, such investments will be payable to the Company or Parent, as Parent directs. Parent shall pay all charges and expenses, including those of the Exchange Agent, in connection with the exchange of Company Shares for the Merger Consideration or the Alternative Structure Merger Consideration. (b) As soon as reasonably practicable after the Effective Time and in any case no later than 5 days thereafter, the Exchange Agent shall mail to each holder of record of Company Shares immediately prior to the Effective Time (other than Company Shares covered by valid Stock Elections and Excluded Shares) (i) a letter of transmittal (the "Company Letter of Transmittal") (which shall specify that delivery shall be effected, and risk of loss and title to the Company Certificates shall pass, only upon delivery of such Company Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent and the Company shall agree prior to the Effective Time), and (ii) instructions for use in effecting the surrender of the Company Certificates in exchange for the Cash and Unit Consideration with respect to the Company Shares formerly represented thereby. As of the Election Deadline all holders of Company Shares immediately prior to the Effective Time that have not submitted to the Exchange Agent or have properly revoked an effective, properly completed Form of Election shall be deemed not to have made a valid Stock Election. (c) Upon surrender of a Company Certificate for cancellation to the Exchange Agent, together with the Company Letter of Transmittal, duly executed, and such other -14- 19 documents as Parent or the Exchange Agent shall reasonably request, the holder of such Company Certificate shall be entitled to receive in exchange therefor (i) a certified or bank cashier's check in the amount equal to the cash, if any, which such holder has the right to receive pursuant to the provisions of this Article III (including any cash in lieu of fractional Holdco Shares pursuant to Section 3.7(d)), (ii) a certificate representing that number of Holdco Units or Parent Units, if any, and (iii) a Holdco Certificate representing that number of Holdco Shares, if any, which such holder has the right to receive pursuant to this Article III (in each case less the amount of any required withholding taxes), and the Company Certificate so surrendered shall forthwith be canceled. Until surrendered as contemplated by this Section 3.7, each Company Certificate shall be deemed at any time after the Effective Time to represent only the right to receive the Merger Consideration or the Alternative Structure Merger Consideration, as the case may be, with respect to the Company Shares formerly represented thereby. (d) No fractional Holdco Shares shall be issued pursuant to the Company Merger. In lieu of the issuance of any fractional Holdco Shares, cash adjustments will be paid to holders in respect of any fractional Holdco Share that would otherwise be issuable, and the amount of such cash adjustment shall be equal to the product of such fractional amount and the Average Parent Share Price. 3.8 Dividends, Etc. (a) Notwithstanding any other provisions of this Agreement, no dividends or other distributions declared after the Effective Time shall be paid on Holdco Shares issuable with respect to any Company Shares represented by a Company Certificate, until such Company Certificate is surrendered in exchange for Stock Consideration as provided herein. Subject to the effect of applicable laws, following surrender of any such Company Certificate, there shall be paid to the holder of the Holdco Certificates issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore payable with respect to such whole Holdco Shares and not paid, less the amount of any withholding taxes which may be required thereon, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record -15- 20 date after the Effective Time but prior to surrender and a payment date subsequent to surrender payable with respect to such whole Holdco Shares, less the amount of any withholding taxes which may be required thereon. (b) At or after the Effective Time, there shall be no transfers on the stock transfer books of Parent of the Parent Shares (in the event the Parent Merger is consummated) or the Company of the Company Shares that were outstanding immediately prior to the Effective Time. If, after the Effective Time, certificates representing any such shares are presented to the surviving corporations of the Parent Merger or the Company Merger, they shall be canceled and exchanged for certificates for the consideration, if any, deliverable in respect thereof pursuant to this Agreement in accordance with the procedures set forth in this Article III. Company Certificates surrendered by any person constituting an "affiliate" of the Company for purposes of Rule 145(c) under the Securities Act of 1933, as amended (the "Securities Act"), shall not be exchanged until Parent has received a written agreement from such person as provided in Section 6.16. (c) Any portion of the Exchange Fund (including the proceeds of any investments thereof, any Holdco Shares and any Holdco Units or Parent Units) that remains unclaimed by the former stockholders of the Company six months after the Effective Time shall be delivered to Holdco. Any former stockholder of the Company who has not theretofore complied with this Article III shall thereafter look only to the applicable surviving corporation for payment of the Merger Consideration or the Alternative Structure Merger Consideration, as the case may be, and any cash in lieu of fractional shares and unpaid dividends and distributions on the Holdco Shares deliverable in respect of each Company Share such stockholder holds as determined pursuant to this Agreement, in each case without any interest thereon. (d) None of Parent, the Company, Holdco, the surviving corporations of the Mergers, the Exchange Agent or any other person shall be liable to any former holder of Parent Shares or Company Shares for any amount properly delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. (e) In the event that any Company Certificate shall have been lost, stolen or destroyed, upon the making -16- 21 of an affidavit of that fact by the person claiming such Company Certificate to be lost, stolen or destroyed and, if required by Holdco or Parent, as applicable, the posting by such person of a bond in such reasonable amount as Holdco or Parent, as applicable, may direct as indemnity against any claim that may be made against it with respect to such Company Certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Company Certificate the applicable Merger Consideration or Alternative Structure Merger Consideration and any cash in lieu of fractional shares, and unpaid dividends and distributions on Holdco Shares as provided in Section 3.7, deliverable in respect thereof pursuant to this Agreement. ARTICLE IV ADJUSTMENT TO PREVENT DILUTION 4.1 Adjustments of the Exchange Ratio. If, after the date hereof and prior to the Effective Time, the outstanding shares of Parent or the Company shall be changed into a different number of shares by reason of any reclassification, recapitalization, split-up, combination or exchange of shares, or any dividend payable in stock or other securities is declared thereon with a record date within such period, the Exchange Ratio shall be adjusted accordingly to provide to the holders of Company Shares the same economic effect as contemplated by this Agreement prior to such reclassification, recapitalization, split-up, combination, exchange or stock dividend or similar event. ARTICLE V REPRESENTATIONS AND WARRANTIES 5.1 Representations and Warranties of the Company. Except as set forth in the disclosure letter delivered to Parent by the Company on or prior to entering into this Agreement (the "Company Disclosure Letter") or the Company Reports (as defined in Section 5.1(e), the Company hereby represents and warrants to Parent that: (a) Organization, Good Standing and Qualification. Each of the Company and its Subsidiaries is a corporation duly organized, validly existing and in good -17- 22 standing under the laws of its respective jurisdiction of organization and has all requisite corporate or similar power and authority to own and operate its material properties and assets and to carry on its business as presently conducted in all material respects and is qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the ownership or operation of its properties or conduct of its business requires such qualification, except where the failure to be so qualified as a foreign corporation or be in good standing would not be reasonably likely to have, either individually or in the aggregate, a Company Material Adverse Effect. The Company has made available to Parent complete and correct copies of the Company's and its Subsidiaries' certificate of incorporation and by-laws (or comparable governing instruments), as amended to date. The Company's and its Subsidiaries' certificate of incorporation and by-laws (or comparable governing instruments) so delivered are in full force and effect. Section 5.1(a) of the Company Disclosure Letter sets forth a list, as of the date hereof, of all of the Subsidiaries of the Company, the jurisdictions under which such Subsidiaries were incorporated, the percent of the equity interest therein owned by the Company and each Subsidiary of the Company, as applicable and specifies each Subsidiary that is (i) a "public utility company", a "holding company", a "subsidiary company", an "affiliate" of any public-utility company, an "exempt wholesale generator" or a "foreign utility company" within the meaning of Section 2(a)(5), 2(a)(7), 2(a)(8), 2(a)(11), 32(a)(1) or 33(a)(3) of the Public Utility Holding Company Act of 1935, as amended (the "1935 Act"), respectively, (ii) a "public utility" within the meaning of Section 201(e) of the Federal Power Act (the "Power Act") or (iii) a "qualifying facility" within the meaning of the Public Utility Regulatory Policies Act of 1978, as amended ("PURPA"), or that owns such a qualifying facility. As used in this Agreement, the term "Subsidiary" means, with respect to the Company or Parent, as the case may be, any entity, whether incorporated or unincorporated, of which at least a majority of the securities or ownership interests having by their terms ordinary voting power to elect a majority of the board of directors or other persons performing similar functions is directly or indirectly owned or controlled by such party or by one or more of its respective Subsidiaries or by such party and any one or more -18- 23 of its respective Subsidiaries but excludes any such entities that are inactive. As used in this Agreement, the term "Company Material Adverse Effect" means a material adverse effect on the financial condition, business, assets, liabilities or results of operations of the Company and its Subsidiaries taken as a whole; provided, however, that any such effect resulting from or arising out of (i) any change in U.S. generally accepted accounting principles ("GAAP") or interpretations thereof, (ii) economic or business conditions in the United States generally or (iii) conditions generally affecting the electric or gas utility industries, shall not be considered when determining if a Company Material Adverse Effect has occurred. As used in this Agreement, the term "knowledge" or any similar formulation of knowledge shall mean the actual knowledge of, with respect to the Company, those persons set forth in Section 1.1 of the Company Disclosure Letter and, with respect to Parent, those persons set forth in Section 1.1 of the Parent Disclosure Letter (as defined in Section 5.2). (b) Capital Structure. The authorized capital stock of the Company consists of 200,000,000 Shares, of which 81,308,000 Shares were outstanding as of the close of business on December 31, 1999 and 40,000,000 shares of Preferred Stock, par value $0.01 per share (the "Preferred Shares"), of the Company, of which no shares were outstanding as of the date hereof. All of the issued and outstanding Shares have been duly authorized and are validly issued, fully paid and nonassessable. The Company has no Shares reserved for issuance, except that, as of February 25, 2000 there were 10,085,000 Shares reserved in the aggregate for issuance pursuant to the Company's 1985 Long Term Incentive Plan, 1996 Amended and Restated Long Term Incentive Plan and the Columbia Savings Plan (collectively, the "Stock Plans"). Section 5.1(b) of the Company Disclosure Letter sets forth, as of February 25, 2000 the aggregate number of outstanding options to acquire Shares granted by the Company. Each of the outstanding shares of capital stock or other securities of each of the Company's Subsidiaries is duly authorized, validly issued, fully paid and nonassessable and owned by the Company or a direct or indirect wholly owned Subsidiary of the Company, free and clear of any lien, pledge, security interest, claim or other encumbrance. Except as set forth above, there are no preemptive or other outstanding rights, options, warrants, -19- 24 conversion rights, stock appreciation rights, redemption rights, repurchase rights, agreements, arrangements or commitments to issue or to sell any shares of capital stock or other securities of the Company or any of its Subsidiaries or any securities or obligations convertible or exchangeable into or exercisable for, or giving any Person a right to subscribe for or acquire, any securities of the Company or any of its Subsidiaries, and no securities or obligations evidencing such rights are authorized, issued or outstanding. The Company does not have outstanding any bonds, debentures, notes or other obligations the holders of which have the right to vote (or convertible into or exercisable for securities having the right to vote) with the shareholders of the Company on any matter ("Voting Debt"). (c) Corporate Authority; Approval and Fairness. (i) The Company has all requisite corporate power and authority and has taken all corporate action necessary in order to execute, deliver and perform its obligations under this Agreement and to consummate, subject only to approval of this Agreement by the holders of a majority of the outstanding Shares (the "Company Requisite Vote"), the Company Merger. This Agreement has been duly executed and delivered by the Company, and, assuming due authorization, execution and delivery of this Agreement by Parent, is a valid and legally binding agreement of the Company enforceable against the Company in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles (the "Bankruptcy and Equity Exception"). (ii) As of the date hereof the Board of Directors of the Company (A) has approved and declared advisable this Agreement and adopted the plan of merger relating to the Company set forth herein and has resolved to recommend that the shareholders of the Company approve this Agreement and (B) has received the opinion of its financial advisors, Morgan Stanley Dean Witter & Co., Inc. ("Morgan Stanley") and Salomon Smith Barney Inc., to the effect that the consideration to be received by the holders of the Shares in the Company Merger pursuant to this Agreement is fair from a financial point of view to such holders. -20- 25 (d) Governmental Filings; No Violations. (i) Other than any reports, filings, registrations, approvals and/or notices (A) required to be made pursuant to Section 2.3, (B) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934 (the "Exchange Act"), (C) with, to or of the Federal Energy Regulatory Commission (the "FERC"), (D) with, to or of the Kentucky Public Service Commission, the Maryland Public Service Commission, the Public Utilities Commission of Ohio, the Pennsylvania Public Utility Commission, the Virginia State Corporation Commission and the West Virginia Public Service Commission; (E) with, to or of the Securities and Exchange Commission (the "SEC") under the 1935 Act; (F) to comply with applicable Environmental Laws (as defined in Section 5.1(k)); (G) with, to or of The Bermuda Registrar of Companies; (H) with, to or of the Vermont Commissioner of Banking, Insurance, Securities and Health Care Administration; and (I) to comply with the rules and regulations of the New York Stock Exchange, Inc. (the "NYSE"), no notices, reports, registrations or other filings are required to be made by the Company with, nor are any consents, registrations, approvals, permits or authorizations required to be obtained by the Company from, any governmental or regulatory authority, agency, commission, body or other governmental entity (each a "Governmental Entity"), in connection with the execution and delivery of this Agreement by the Company and the consummation by the Company of the Company Merger and the other transactions contemplated hereby, except for those that the failure to make or obtain are not, individually or in the aggregate, reasonably likely to have a Company Material Adverse Effect or prevent, materially delay or materially impair the ability of the Company to consummate the transactions contemplated by this Agreement. (ii) The execution, delivery and performance of this Agreement by the Company do not, and the consummation by the Company of the Company Merger and the other transactions contemplated hereby will not, constitute or result in (A) a breach or violation of, or a default under, either the Restated Certificate of Incorporation of the Company or by-laws of the Company or the comparable governing instruments of any of its Subsidiaries, (B) a breach or violation of, or a default under, or the -21- 26 acceleration of any obligations, the loss of any right or benefit, or the creation of a lien, pledge, security interest or other encumbrance on the assets of the Company or any of its Subsidiaries (with or without notice, lapse of time or both) pursuant to, any agreement, lease, contract, note, mortgage, indenture, arrangement or other obligation not otherwise terminable by the other party thereto on 90 days' or less notice ("Contracts") binding upon the Company or any of its Subsidiaries or any Law (as defined in Section 5.1(i)) or governmental or non-govern mental permit or license to which the Company or any of its Subsidiaries is subject or (C) any change in the rights or obligations of any party under any of the Contracts, except, in the case of clause (B) or (C) above, for any breach, violation, default, acceleration, creation or change that would not, individually or in the aggregate, be reasonably likely to have a Company Material Adverse Effect or prevent, materially delay or materially impair the ability of the Company to consummate the transactions contemplated by this Agreement. (e) Company Reports; Financial Statements. The Company has made available to Parent each registration statement, report, proxy statement or information statement filed by it with the SEC (collectively, including any amendments of any such reports, the "Company Reports") pursuant to the Securities Act or the Exchange Act since January 1, 1998 and prior to the date hereof, including (i) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and (ii) the Company's Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 1999, June 30, 1999 and September 30, 1999, each in the form filed with the SEC (including exhibits, annexes and any amendments thereto). None of the Company Reports (in the case of Company Reports filed pursuant to the Securities Act), as of their effective dates, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading and none of the Company Reports (in the case of Company Reports filed pursuant to the Exchange Act) as of the respective dates first mailed to shareholders contains any statement which, at the time and in the light of the circumstances under which it was made, was false or misleading with respect to any material fact, or omits to state any material -22- 27 fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The consolidated financial statements of the Company and its Subsidiaries included in such Company Reports comply as to form in all material respects with the applicable rules and regulations of the SEC with respect thereto. Each of the consolidated balance sheets included in or incorporated by reference into the Company Reports (including the related notes and schedules) presents fairly, in all material respects, the financial position of the Company and its Subsidiaries as of its date and each of the consolidated statements of income and consolidated statements of cash flow included in or incorporated by reference into the Company Reports (including any related notes and schedules) fairly presents in all material respects the results of operations, retained earnings and changes in financial position, as the case may be, of the Company and its Subsidiaries for the periods set forth therein (subject, in the case of unaudited statements, to the absence of notes and normal year-end audit adjustments), in each case in accordance with GAAP consistently applied during the periods involved, except as may be noted therein. Since December 31, 1999 (the "Audit Date") and through the date hereof, neither the Company nor any of its Subsidiaries has incurred any liabilities or obligations (whether absolute, accrued, fixed, contingent or otherwise and whether due or to become due) of any nature, except liabilities or obligations which (i) were reflected on the audited balance sheet of the Company and its Subsidiaries as of December 31, 1999 (including the notes thereto), (ii) were incurred in the ordinary course of business, consistent with past practices after December 31, 1999, (iii) are disclosed in the Company Reports filed after December 31, 1999, (iv) would not be reasonably likely to, either individually or in the aggregate, have a Company Material Adverse Effect, (v) were incurred in connection with the transactions contemplated by this Agreement or (vi) have been satisfied prior to the date hereof. (f) Absence of Certain Changes. Since the Audit Date, the Company and its Subsidiaries taken as a whole have conducted their business only in the ordinary and usual course of such business and there has not been (i) any change in the financial condition, business, assets, liabilities, or results of operations of the Company and its Subsidiaries that has had or would be reasonably likely to have a Company Material Adverse Effect; (ii) any material -23- 28 damage, destruction or other casualty loss with respect to any material asset or material property owned, leased or otherwise used by the Company or any of its Subsidiaries, not covered by insurance; (iii) any declaration, setting aside or payment of any dividend or other distribution in respect of the capital stock of the Company or any repurchase, redemption or other acquisition by the Company or any Subsidiary of any securities of the Company other than (A) regular quarterly dividends on Shares in the ordinary course (including any periodic increase thereon consistent with past practice) not to exceed $.225 per Share and (B) as expressly contemplated by this Agreement; or (iv) any change by the Company in accounting principles, practices or methods which is not required by a change in GAAP. Since the Audit Date and through the date hereof, except as provided for herein or as disclosed in the Company Reports, there has not been any material increase in the compensation payable or that could become payable by the Company or any of its Subsidiaries to officers or key employees or any material amendment of any of the Compensation and Benefit Plans (as defined in Section 5.1(h)(i)) other than increases or amendments in the ordinary course of business consistent with past practice. (g) Litigation. There are no civil, criminal or administrative actions, suits, claims, hearings, investigations, reviews or proceedings pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries, except for those that would not be reasonably likely to have, either individually or in the aggregate, a Company Material Adverse Effect or prevent or materially delay or materially impair the ability of the Company to consummate the transactions contemplated by this Agreement. (h) Employee Benefits. (i) A copy of each bonus, deferred compensation, pension, retirement, profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase, change in control, retention, restricted stock, stock option, employment, termination, severance, compensation, medical, health or other plan, agreement, policy, practice or arrangement that covers employees or former employees of the Company and its Subsidiaries ("Employees"), or directors or former directors of the -24- 29 Company (the "Compensation and Benefit Plans") and any trust agreement or insurance contract forming a part of such Compensation and Benefit Plans has been made available to Parent prior to the date hereof. All material Compensation and Benefit Plans are listed in Section 5.1(h) of the Company Disclosure Letter and any Compensation and Benefit Plans containing "change of control" or similar provisions therein are specifically identified in Section 5.1(h) of the Company Disclosure Letter. (ii) All Compensation and Benefit Plans, to the extent subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), are in substantial compliance with the applicable provisions of ERISA. Each Compensation and Benefit Plan that is an "employee pension benefit plan" within the meaning of Section 3(2) of ERISA (a "Pension Plan") and that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service (the "IRS"). As of the date hereof, there is no material pending or to the knowledge of the Company threatened litigation relating to the Compensation and Benefit Plans. Neither the Company nor any of its Subsidiaries has engaged in a transaction with respect to any Plan that, assuming the taxable period of such transaction expired as of the date hereof, would subject the Company or any of its Subsidiaries to a material tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA. (iii) No liability under Subtitle C or D of Title IV of ERISA has been or is expected to be incurred by the Company or any of its Subsidiaries with respect to any ongoing, frozen or terminated "single-employer plan", within the meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained by any of them, or the single-employer plan of any entity which is considered one employer with the Company under Section 4001 of ERISA or Section 414 of the Code (an "ERISA Affiliate"). The Company and its Subsidiaries have not incurred and do not expect to incur any withdrawal liability with respect to a multiemployer plan under Subtitle E of Title IV of ERISA (regardless of whether based on contributions of an ERISA Affiliate). No notice of a "reportable event", within the meaning of Section 4043 of ERISA, for which the 30-day reporting requirement has not been waived or extended, other than pursuant to PBGC Reg. Section 4043.66, has been -25- 30 required to be filed for any Pension Plan or by any ERISA Affiliate within the 12-month period ending on the date hereof. (iv) All contributions required to be made under the terms of any Compensation and Benefit Plan as of the date hereof have been timely made or have been reflected on the most recent consolidated balance sheet filed or incorporated by reference in the Company Reports. Neither any Pension Plan nor any single-employer plan of an ERISA Affiliate has an "accumulated funding deficiency" (whether or not waived) within the meaning of Section 412 of the Code or Section 302 of ERISA and no ERISA Affiliate has an outstanding funding waiver. Neither the Company nor any of its Subsidiaries has provided, or is required to provide, security to any Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the Code. (v) Neither the Company nor its Subsidiaries have any obligations for, or liabilities with respect to, retiree health and life benefits under any Compensation and Benefit Plan, except for benefits required to be provided under Section 4980(B) of the Code. (i) Compliance with Laws. As of the date hereof, the business of the Company and its Subsidiaries taken as a whole is not being conducted in violation of any federal, state, local or foreign law, statute, ordinance, rule, regulation, judgment, order, injunction, decree, arbitration award, agency requirement, license or permit of any Governmental Entity (collectively, "Laws"), except for violations that would not be reasonably likely to have, either individually or in the aggregate, a Company Material Adverse Effect or prevent or materially delay or materially impair the ability of the Company to consummate the transactions contemplated by this Agreement. As of the date hereof, no investigation or review by any Governmental Entity with respect to the Company or any of its Subsidiaries is pending or, to the knowledge of the Company, threatened, nor has any Governmental Entity indicated an intention to conduct the same, except for those the outcome of which would not be reasonably likely to have, either individually or in the aggregate, a Company Material Adverse Effect or prevent or materially delay or materially impair the ability of the Company to consummate the transactions -26- 31 contemplated by this Agreement. The Company and its Subsidiaries each has all permits, licenses, franchises, variances, exemptions, orders and other governmental authorizations, consents and approvals from Governmental Entities necessary to conduct its business as presently conducted, except for those the absence of which would not be reasonably likely to have, either individually or in the aggregate, a Company Material Adverse Effect or prevent or materially delay or materially impair the ability of the Company to consummate the Merger and the other transactions contemplated by this Agreement. (j) Takeover Statutes. No "fair price," "moratorium," "control share acquisition" or other similar anti-takeover statute or regulation (each a "Takeover Statute") or any anti-takeover provision in the Company's Restated Certificate of Incorporation and by-laws is applicable to the Company Merger or the other transactions contemplated by this Agreement. (k) Environmental Matters. To the knowledge of the Company, except for such matters that would not be reasonably likely to cause a Company Material Adverse Effect: (i) the operations of the Company and its Subsidiaries are in compliance with all applicable Environ mental Laws; (ii) the Company and its Subsidiaries possess all environmental permits, licenses, authorizations and approvals required under applicable Environmental Laws with respect to the business of the Company and its Subsidiaries as presently conducted and no deficiencies have been asserted by any Governmental Entities with respect to such authorizations; (iii) the Company and its Subsidiaries have not received any written environmental claim, notice or request for information during the past three years concerning any violation or alleged violation of any applicable Environmental Law; and (iv) there are no material writs, injunctions, decrees, orders or judgments outstanding, or any actions, suits or proceedings pending or threatened in writing relating to compliance by the Company or any of its Subsidiaries with any environmental permit or liability of the Company or any of its Subsidiaries under any applicable Environmental Law. The representations and warranties in this Section 5.1(k) constitute the sole representations and warranties of the Company with respect to any Environmental Law or Hazardous Substance. -27- 32 As used herein, the term "Environmental Law" means any applicable law, regulation, code, license, permit, order, judgment, decree or injunction promulgated by any Governmental Entity (A) for the protection of the environment (including air, water, soil and natural resources) or (B) regulating the use, storage, handling, transportation, release or disposal of Hazardous Substances. As used herein, the term "Hazardous Substance" means any substance listed, defined, regulated, designated or classified as hazardous, toxic or radioactive pursuant to any applicable Environmental Law including petroleum and any derivative or by-product thereof. (l) Taxes. The Company and each of its Subsidiaries (i) have duly and timely filed (taking into account any extension of time within which to file) all Tax Returns (as defined below) required to be filed by any of them as of the date hereof and all such filed Tax Returns are complete and accurate in all material respects; (ii) (A) have timely paid all Taxes that are shown as due on such filed Tax Returns, including amounts required to be paid with respect to Taxes as a result of any Tax sharing agreement or similar arrangements ("Tax Sharing Agreement Amounts") or that the Company or any of its Subsidiaries are obligated to withhold from amounts owing to any employee, creditor or third party, except with respect to matters contested in good faith and (B) no penalties or charges are due with respect to the late filing of any Tax Return required to be filed by or with respect to any of them on or before the Effective Time; and (iii) with respect to all Tax Returns filed by or with respect to any of them have not waived any statute of limitations with respect to Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency, except, in each case, for those failures to file or pay or those waivers that would not have a Company Material Adverse Effect. As of the date hereof, there are not pending or proposed or threatened in writing, any deficiency, or any such audits, examinations, investigations or other proceedings in respect of Taxes or Tax matters. Neither the Company nor any of its Subsidiaries has been or is a party to any Tax sharing agreement or similar arrangement. As used in this Agreement, (i) the term "Tax" (including, with correlative meaning, the terms "Taxes", and -28- 33 "Taxable") includes all federal, state, local and foreign income, profits, franchise, gross receipts, environmental, customs duty, capital stock, severances, stamp, payroll, sales, employment, unemployment, disability, use, property, withholding, excise, production, value added, occupancy and other taxes, duties or assessments of any nature whatsoever, together with all interest, penalties and additions imposed with respect to such amounts and any interest in respect of such penalties and additions, and (ii) the term "Tax Return" includes all returns and reports (including elections, declarations, disclosures, schedules, estimates and information returns) required to be supplied to a Tax authority relating to Taxes. (m) Labor Matters. As of the date hereof, neither the Company nor any of its Subsidiaries is the subject of any material proceeding asserting that the Company or any of its Subsidiaries has committed an unfair labor practice nor is there pending or threatened, nor since January 1, 1998 has there been any labor strike, dispute, walk-out, work stoppage, slow-down or lockout involving the Company or any of its Subsidiaries, except for those that, either individually or in the aggregate, are not reasonably likely to have a Company Material Adverse Effect or prevent or materially delay or materially impair the ability of the Company to consummate the transactions contemplated by this Agreement. (n) Intellectual Property. (i) The Company or its Subsidiaries own (free and clear of any and all liens, pledges, security interests, claims or other encumbrances), or are licensed or otherwise possess sufficient legally enforceable rights to use, all patents, trademarks, trade names, service marks, copyrights, technology, know-how, computer software programs or applications, databases and tangible or intangible proprietary information or materials that are currently used in its and its Subsidiaries' businesses (collectively, "Intellectual Property Rights"), except for any such failures to own, be licensed or possess that, individually or in the aggregate, are not reasonably likely to have a Company Material Adverse Effect. (ii) Except as disclosed in the Company Reports filed prior to the date hereof, and except for such matters that, individually or in the aggregate, are not -29- 34 reasonably likely to have a Company Material Adverse Effect, (i) to the knowledge of the Company, the use of the Intellectual Property Rights by the Company or its Subsidiaries does not conflict with, infringe upon, violate or interfere with or constitute an appropriation of any right, title, interest or 1goodwill, including, without limitation, any intellectual property right, patent, trademark, trade name, service mark, copyright of any other Person and (ii) there have been no claims made and neither the Company nor any of its Subsidiaries has received written notice of any claim or otherwise knows that any Intellectual Property Right is invalid, or conflicts with the asserted right of any other Person. (o) Brokers and Finders. Except for Morgan Stanley and Salomon Smith Barney Inc., neither the Company nor any of its officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the Company Merger or the other transactions contemplated by this Agreement. (p) Regulation as a Utility. Neither the Company nor any subsidiary company or affiliate of the Company is subject to regulation as a public utility or public service company (or similar designation) by any state in the United States, by the United States or any agency or instrumentality of the United States or by any foreign country. As used in this Section 5.1(p), the terms "subsidiary company" and "affiliate" shall have the respective meanings ascribed to them in the 1935 Act. (q) Trading Position Risk Management. The Company has established a risk management committee which, from time to time, establishes risk parameters to restrict the level of risk that the Company and its Subsidiaries are authorized to take with respect to the net position resulting from physical commodity transactions, exchange traded futures and options and over-the-counter derivative instruments. (r) Registration Statement and Proxy Statement. None of the information supplied or to be supplied by or on behalf of the Company for inclusion or incorporation by reference in (i) the registration statement on Form S-4 to be filed with the SEC by Holdco in connection with the issuance of shares of Holdco Common Stock and Holdco Units -30- 35 (or by Parent in connection with the issuance of Parent Units) in the Mergers (the "Registration Statement") will, at the time the Registration Statement becomes effective under the Securities Act, and as the same may be amended, at the effective time of such amendment, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and (ii) the joint proxy in definitive form, relating to the meetings of the stockholders of the Company and Parent to be held in connection with the Mergers and the prospectus relating to the Holdco Shares and Holdco Units or the Parent Units, as the case may be, to be issued in the Mergers (the "Joint Proxy Statement/Prospectus") will at the date such Joint Proxy Statement/Prospectus is mailed to such stockholders and, as the same may be amended or supplemented, at the times of such meetings, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (s) Tax Matters. As of the date hereof, neither the Company nor any of its Affiliates has taken or agreed to take any action that would prevent the Company Merger contemplated by this Agreement from qualifying as an exchange under the provisions of Section 351 of the Code. (t) Employment Agreements. Other than those persons listed on Section 5.1(t) of the Company Disclosure Letter, no officer, director or employee of the Company or any of its Subsidiaries is a party to, or a beneficiary of, an employment agreement of the type set forth in Section 5.1(t) of the Company Disclosure Letter. (u) No Other Representations or Warranties. Except for the representations and warranties contained in this Section 5.1, neither the Company nor any other Person makes any other express or implied representation or warranty on behalf of the Company or any of its Affiliates. 5.2 Representations and Warranties of Parent. Except as set forth in the disclosure letter delivered to the Company by Parent on or prior to entering into this Agreement (the "Parent Disclosure Letter") or the Parent Reports (as defined in Section 5.2(f)), Parent represents and warrants to the Company that: -31- 36 (a) [RESERVED] (b) Organization, Good Standing and Qualification. Each of Parent and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of organization and has all requisite corporate or similar power and authority to own and operate its material properties and assets and to carry on its business as presently conducted in all material respects and is qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the ownership or operation of its properties or conduct of its business requires such qualification, except where the failure to be qualified as a foreign corporation or be in good standing would not be reasonably likely to have, either individually or in the aggregate, a Parent Material Adverse Effect. Parent has made available to the Company a complete and correct copy of Parent's and its Subsidiaries' certificates of incorporation and by-laws (or comparable governing instruments), as amended to date. Parent's and its Subsidiaries' certificates of incorporation and by-laws (or comparable governing instruments) so delivered are in full force and effect. As used in this Agreement, the term "Parent Material Adverse Effect" means a material adverse effect on the financial condition, business, assets, liabilities or results of operations of Parent and its Subsidiaries taken as a whole; provided, however, that any such effect resulting from or arising out of (i) any change in GAAP or interpretations thereof, (ii) economic or business conditions in the United States generally or (iii) conditions generally affecting the electric or gas utility industries, shall not be considered when determining if a Parent Material Adverse Effect has occurred. (c) Capital Structure. The authorized capital stock of Parent consists of 400,000,000 Parent Shares, of which 124,098,357 shares were issued and outstanding on January 31, 2000 and 20,000,000 preferred shares, without par value, of which no shares were outstanding as of the date hereof and 4,000,000 shares designated as Series A Junior Participating Preferred Shares and reserved for issuance pursuant to Parent's Share Purchase Rights Plan. All of the issued and outstanding shares of Parent Shares -32- 37 have been duly authorized and are validly issued, fully paid and nonassessable. Parent has no Parent Shares reserved for or subject to issuance, except that, as of December 31, 1999, there were 5,874,956 shares of Parent Shares reserved in the aggregate for issuance pursuant to Parent's 1988 Amended and Restated Long-Term Incentive Plan, 1994 Amended and Restated Long-Term Incentive Plan and Nonemployee Director Stock Incentive Plan (the "Parent Stock Plans"). Each of the outstanding shares of capital stock or other securities of each of Parent's Subsidiaries is duly authorized, validly issued, fully paid and nonassessable and owned by Parent or a direct or indirect wholly owned Subsidiary of Parent, free and clear of any lien, pledge, security interest, claim or other encumbrance. Except as set forth above, there are no preemptive or other outstanding rights, options, warrants, conversion rights, stock appreciation rights, redemption rights, repurchase rights, agreements, arrangements or commitments to issue or to sell any shares of capital stock or other securities of Parent or any of its Subsidiaries or any securities or obligations convertible or exchangeable into or exercisable for, or giving any Person a right to subscribe for or acquire, any securities of Parent or any of its Subsidiaries, and no securities or obligations evidencing such rights are authorized, issued or outstanding. Parent does not have outstanding any bonds, debentures, notes or other obligations the holders of which have the right to vote (or convertible into or exercisable for securities having the right to vote) with the shareholders of Parent on any matter ("Parent Voting Debt"). (d) Corporate Authority and Approval. (i) Parent has all requisite corporate power and authority and has taken all corporate action necessary in order to execute, deliver and perform its obligations under this Agreement, and, subject only to approval of this Agreement by the holders of a majority of the outstanding Parent Shares (the "Parent Requisite Vote"), to consummate the Mergers and the transactions contemplated hereby. If the Parent Requisite Vote is not obtained, this Agreement as modified by Section 2.4 hereof will remain effective and no vote of holders of capital stock of Parent will be necessary to approve this Agreement and the transactions contemplated by Section 2.4 hereof or for Parent, Holdco or CAC to perform their respective obligations hereunder. This Agreement has been duly -33- 38 executed and delivered by Parent and, assuming due authorization, execution and delivery of this Agreement by the Company, is a valid and legally binding agreement of Parent, enforceable against Parent in accordance with its terms, subject to the Bankruptcy and Equity Exception. (ii) Prior to the Effective Time, Parent will have taken all necessary action to permit Holdco to issue the number of Holdco Shares and Holdco Units or to permit Parent to issue the number of Parent Units, as the case may be, required to be issued pursuant to Articles II and III. The Holdco Shares and Holdco Units or the Parent Units, as the case may be, when issued, will be validly issued, fully paid and nonassessable, and no shareholder of Parent will have any preemptive right of subscription or purchase in respect thereof. The Holdco Shares and Holdco Units or the Parent Units, as the case may be, when issued, will be registered under the Securities Act and Exchange Act and registered or exempt from registration under any applicable state securities or "blue sky" laws. (iii) As of the date hereof the Board of Directors of Parent (A) has approved and declared advisable this Agreement and adopted the plan of merger relating to Parent set forth herein and has resolved to recommend that the shareholders of Parent approve this Agreement and (B) has received the opinion of its financial advisor Credit Suisse First Boston to the effect that the Merger Consideration or the Alternate Structure Merger Consideration, as the case may be, is fair to Parent from a financial point of view. (e) Governmental Filings; No Violations. (i) Other than any reports, filings, registrations, approvals and/or notices (A) required to be made pursuant to Section 2.3, (B) required to be made under the HSR Act, the Securities Act and the Exchange Act, (C) with, to or of the SEC under the 1935 Act, (D) with, to or of the FERC, (E) required to be made with the NYSE and (F) with, to or of the Kentucky Public Service Commission, the Maryland Public Service Commission, the Public Utilities Commission of Ohio, the Pennsylvania Public Utility Commission, the Virginia State Corporation Commission, the West Virginia Public Service Commission and the Maine Public Utilities Commission, no notices, reports, registrations or -34- 39 other filings are required to be made by Parent with, nor are any consents, registrations, approvals, permits or authorizations required to be obtained by Parent from, any Governmental Entity, in connection with the execution and delivery of this Agreement by Parent and the consummation by Parent of the Mergers and the other transactions contemplated hereby, except for those that the failure to make or obtain would not be reasonably likely to have, either individually or in the aggregate, a Parent Material Adverse Effect or prevent, materially delay or materially impair the ability of Parent to consummate the transactions contemplated by this Agreement. (ii) The execution, delivery and performance of this Agreement by Parent do not, and the consummation by Parent of the Merger and the other transactions contemplated hereby will not, constitute or result in (A) a breach or violation of, or a default under, either the certificate of incorporation or by-laws of Parent or the comparable governing instruments of any of Parent's Subsidiaries, (B) a breach or violation of, or a default under, or the acceleration of any obligations, the loss of any right or benefit or the creation of a lien, pledge, security interest or other encumbrance on the assets of Parent or any of its Subsidiaries (with or without notice, lapse of time or both) pursuant to any Contracts binding upon Parent or any of its Subsidiaries or any Law or governmental or non-governmental permit or license to which Parent or any of its Subsidiaries is subject or (C) any change in the rights or obligations of any party under any of the Contracts, except, in the case of clause (B) or (C) above, for any breach, violation, default, acceleration, creation or change that would not be reasonably likely to have, either individually or in the aggregate, a Parent Material Adverse Effect or prevent, materially delay or materially impair the ability of Parent to consummate the transactions contemplated by this Agreement. (f) Parent Reports; Financial Statements. Parent has made available to the Company each registration statement, report, proxy statement or information statement filed by it with the SEC (collectively, including any amendments of any such reports, the "Parent Reports") pursuant to the Securities Act or the Exchange Act since January 1, 1998 and prior to the date hereof, including (i) Parent's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and (ii) Parent's Quarterly Reports -35- 40 on Form 10-Q for the quarterly periods ended March 31, 1999, June 30, 1999 and September 30, 1999, each in the form filed with the SEC (including exhibits, annexes and any amendments thereto). None of the Parent Reports (in the case of Parent Reports filed pursuant to the Securities Act), as of their effective dates, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading and none of the Parent Reports (in the case of Parent Reports filed pursuant to the Exchange Act) as of the respective dates first mailed to shareholders contains any statement which, at the time and in the light of the circumstances under which it was made, was false or misleading with respect to any material fact, or omits to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The consolidated financial statements of Parent and its Subsidiaries included in such Parent Reports comply as to form in all material respects with the applicable rules and regulations of the SEC with respect thereto. Each of the consolidated balance sheets included in or incorporated by reference into the Parent Reports (including the related notes and schedules) fairly presents, in all material respects, the financial position of Parent and its Subsidiaries as of its date and each of the consolidated statements of income and consolidated statements of cash flow included in or incorporated by reference into the Parent Reports (including any related notes and schedules) fairly presents, in all material respects, the results of operations, retained earnings and changes in financial position, as the case may be, of Parent and its Subsidiaries for the periods set forth therein, in each case in accordance with GAAP consistently applied during the periods involved, except as may be noted therein. Since September 30, 1999 (the "Parent Audit Date") and through the date hereof, neither Parent nor any of its Subsidiaries has incurred any liabilities or obligations (whether absolute, accrued, fixed, contingent or otherwise and whether due or to become due) of any nature, except liabilities or obligations which (i) were reflected on the audited balance sheet of Parent and its Subsidiaries as of September 30, 1999 (including the notes thereto), (ii) were incurred in the ordinary course of business, consistent with past practices after September 30, 1999, (iii) are disclosed in the Parent Reports filed after September 30, 1999, -36- 41 (iv) would not be reasonably likely to, either individually or in the aggregate, have a Parent Material Adverse Effect, (v) were incurred in connection with the transactions contemplated by this Agreement or (vi) have been satisfied prior to the date hereof. (g) Absence of Certain Changes. Since the Parent Audit Date, Parent and its Subsidiaries taken as a whole have conducted their business only in the ordinary and usual course of such business and there has not been (i) any change in the financial condition, business, assets, liabilities or results of operations of Parent and its Subsidiaries that has had or would be reasonably likely to have a Parent Material Adverse Effect; (ii) any material damage, destruction or other casualty loss with respect to any material asset or material property owned, leased or otherwise used by Parent or any of its Subsidiaries, not covered by insurance; (iii) any declaration, setting aside or payment of any dividend or other distribution in respect of the capital stock of Parent or any repurchase, redemption or other acquisition by Parent or any Subsidiary of any securities of Parent other than (A) quarterly dividends in the ordinary course not to exceed $.30 per share of Parent Shares and (B) as expressly contemplated by this Agreement; or (iv) any change by Parent in accounting principles, practices or methods which is not required or permitted by GAAP. Since the Parent Audit Date and through the date hereof, except as provided for herein or as disclosed in the Parent Reports, there has not been any material increase in the compensation payable or that could become payable by Parent or any of its Subsidiaries to officers or key employees or any material amendment of any of the Parent Compensation and Benefit Plans (as defined in Section 5.2(i)) other than increases or amendments in the ordinary course of business consistent with past practice. (h) Litigation. There are no civil, criminal or administrative actions, suits, claims, hearings, investigations, reviews or proceedings pending or threatened against Parent or any of its Subsidiaries, except for those that would not be reasonably likely to have, either individually or in the aggregate, a Parent Material Adverse Effect or prevent or materially delay or materially impair the ability of Parent to consummate the transactions contemplated by this Agreement. (i) Employee Benefits. -37- 42 (i) A copy of each bonus, deferred compensation, pension, retirement, profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase, change in control, retention, restricted stock, stock option, employment, termination, severance, compensation, medical, health or other plan, agreement, policy, practice or arrangement that covers employees or former employees of the Parent and its Subsidiaries ("Parent Employees"), or directors or former directors of the Parent (the "Parent Compensation and Benefit Plans") and any trust agreement or insurance contract forming a part of such Parent Compensation and Benefit Plans has been made available to the Company prior to the date hereof. All material Parent Compensation and Benefit Plans are listed in Section 5.2(i) of the Parent Disclosure Letter and any Parent Compensation and Benefit Plans containing "change of control" or similar provisions therein are specifically identified in Section 5.2(i) of the Parent Disclosure Letter. (ii) All Parent Compensation and Benefit Plans, to the extent subject to ERISA are in substantial compliance with the applicable provisions of ERISA. Each Parent Compensation and Benefit Plan that is a Pension Plan and that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the IRS. As of the date hereof, there is no material pending or, to the knowledge of Parent or Merger Sub, threatened litigation relating to the Parent Compensation and Benefit Plans. Neither Parent nor any of its Subsidiaries has engaged in a transaction with respect to any Parent Employee Plan that, assuming the taxable period of such transaction expired as of the date hereof, would subject Parent or any of its Subsidiaries to a material tax or penalty imposed by either Section 4975 of the Code or Section 502(i) of ERISA. (iii) No liability under Subtitle C or D of Title IV of ERISA has been or is expected to be incurred by Parent or any of its Subsidiaries with respect to any ongoing, frozen or terminated "single-employer plan", within the meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained by any of them, or the single-employer plan of any entity which is considered an ERISA Affiliate. Parent and its Subsidiaries have not incurred and do not -38- 43 expect to incur any withdrawal liability with respect to a multiemployer plan under Subtitle E of Title IV of ERISA (regardless of whether based on contributions of an ERISA Affiliate). No notice of a "reportable event", within the meaning of Section 4043 of ERISA for which the 30-day reporting requirement has not been waived or extended, other than pursuant to PBGC Reg. Section 4043.66, has been required to be filed for any Pension Plan or by any ERISA Affiliate within the 12-month period ending on the date hereof. (iv) All contributions required to be made under the terms of any Parent Compensation and Benefit Plan as of the date hereof have been timely made or have been reflected on the most recent consolidated balance sheet filed or incorporated by reference in the Parent Reports. Neither any Pension Plan nor any single-employer plan of an ERISA Affiliate has an "accumulated funding deficiency" (whether or not waived) within the meaning of Section 412 of the Code or Section 302 of ERISA and no ERISA Affiliate has an outstanding funding waiver. Neither Parent nor any of its Subsidiaries has provided, or is required to provide, security to any Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the Code. (v) Neither Parent nor any of its Subsidiaries have any obligations for, or liabilities with respect to, retiree health and life benefits under any Parent Compensation and Benefit Plan, except for benefits required to be provided under Section 4980(B) of the Code. (j) Compliance with Laws. As of the date hereof, the business of Parent and its Subsidiaries taken as a whole is not being conducted in violation of any Laws, except for violations that would not be reasonably likely to have, either individually or in the aggregate, a Parent Material Adverse Effect or prevent or materially delay or materially impair the ability of Parent to consummate the transactions contemplated by this Agreement. As of the date hereof, no investigation or review by any Governmental Entity with respect to Parent or any of its Subsidiaries is pending or to the knowledge of Parent threatened, nor has any Governmental Entity indicated an intention to conduct the same, except for those the outcome of which would not be reasonably likely to have, either individually or in the aggregate, a Parent Material Adverse Effect or prevent or -39- 44 materially delay or materially impair the ability of Parent or Merger Sub to consummate the transactions contemplated by this Agreement. Parent and its Subsidiaries each has all permits, licenses, franchises, variances, exemptions, orders and other governmental authorizations, consents and approvals from Governmental Entities necessary to conduct its business as presently conducted, except for those the absence of which would not be reasonably likely to have, either individually or in the aggregate, a Parent Material Adverse Effect or prevent or materially delay or materially impair the ability of Parent to consummate the Merger and the other transactions contemplated by this Agreement. (k) Takeover Statutes. As of the date hereof, no Takeover Statute or any applicable anti-takeover provision in the certificate of incorporation of Parent or by-laws of Parent is applicable to the Mergers or any of the other transactions contemplated by this Agreement. (l) Environmental Matters. To the knowledge of Parent, except for such matters that would not be reasonably likely to cause a Parent Material Adverse Effect: (i) operations of Parent and its Subsidiaries are in compliance with all applicable Environmental Laws; (ii) Parent and its Subsidiaries possess all environmental permits, licenses, authorizations and approvals required under applicable Environmental Laws with respect to the business of Parent and its Subsidiaries as presently conducted and no deficiencies have been asserted by any Governmental Entities with respect to such authorizations; (iii) Parent and its Subsidiaries have not received any written environmental claim, notice or request for information during the past three years concerning any violation or alleged violation of any applicable Environmental Law; and (iv) there are no material writs, injunctions, decrees, orders or judgments outstanding, or any actions, suits or proceedings pending or threatened in writing relating to compliance by Parent or any of its Subsidiaries with any environmental permit or liability of Parent or any of its Subsidiaries under any applicable Environmental Law. The representations and warranties in this Section 5.2(l) constitute the sole representations and warranties of Parent with respect to any Environmental Law or Hazardous Substance. -40- 45 (m) Tax Matters. As of the date hereof, neither Parent nor any of its Affiliates has taken or agreed to take any action that would prevent the Parent Merger from qualifying as a "reorganization" within the meaning of Section 368(a) of the Code. (n) Taxes. Parent and each of its Subsidiaries (i) have duly and timely filed (taking into account any extension of time within which to file) all Tax Returns required to be filed by any of them as of the date hereof and all such filed Tax Returns are complete and accurate in all material respects; (ii) (A) have timely paid all Taxes that are shown as due on such filed Tax Returns, including all Tax Sharing Agreement Amounts, and all amounts that Parent or any of its Subsidiaries are obligated to withhold from amounts owing to any employee, creditor or third party, except with respect to matters contested in good faith and (B) no penalties or charges are due with respect to the late filing of any Tax Return required to be filed by or with respect to any of them on or before the Effective Time; and (iii) with respect to all Tax Returns filed by or with respect to any of them have not waived any statute of limitations with respect to Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency, except, in each case, for those failures to file or pay or those waivers that would not have a Parent Material Adverse Effect. As of the date hereof, there are not pending or proposed or threatened in writing, any deficiency, or any such audits, examinations, investigations or other proceedings in respect of Taxes or Tax matters. Neither Parent nor any of its Subsidiaries has been or is a party to any Tax sharing agreement or similar arrangement. (o) Labor Matters. As of the date hereof, neither Parent nor any of its Subsidiaries is the subject of any material proceeding asserting that Parent or any of its Subsidiaries has committed an unfair labor practice nor is there pending or threatened, nor since January 1, 1998 has there been any labor strike, dispute, walk-out, work stoppage, slow-down or lockout involving Parent or any of its Subsidiaries, except for those that, either individually or in the aggregate, are not likely to have a Parent Material Adverse Effect or prevent or materially delay or materially impair the ability of Parent to consummate the transactions contemplated by this Agreement. (p) Intellectual Property. -41- 46 (i) Parent or its Subsidiaries own (free and clear of any and all liens, pledges, security interests, claims or other encumbrances), or are licensed or otherwise possess sufficient legally enforceable rights to use, all patents, trademarks, trade names, service marks, copyrights, technology, know-how, computer software programs or applications, databases and tangible or intangible proprietary information or materials that are currently used in its and its Subsidiaries' businesses (collectively, "Parent Intellectual Property Rights"), except for any such failures to own, be licensed or possess that, individually or in the aggregate, are not reasonably likely to have a Parent Material Adverse Effect. (ii) Except as disclosed in the Parent Reports filed prior to the date hereof, and except for such matters that, individually or in the aggregate, are not reasonably likely to have a Parent Material Adverse Effect, (i) to the knowledge of Parent, the use of the Parent Intellectual Property Rights by Parent or its Subsidiaries does not conflict with, infringe upon, violate or interfere with or constitute an appropriation of any right, title, interest or goodwill, including, without limitation, any intellectual property right, patent, trademark, trade name, service mark of any other Person and (ii) there have been no claims made and neither Parent nor any of its Subsidiaries has received written notice of any claim or otherwise knows that any Parent Intellectual Property Right is invalid, or conflicts with the asserted right of any other Person. (q) Brokers and Finders. Except for Credit Suisse First Boston and Wasserstein Perella & Co., Inc., neither Parent nor any of its officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the Mergers or the other transactions contemplated by this Agreement. (r) Available Funds. Parent has received a commitment letter from Credit Suisse First Boston and Barclays Bank PLC representing committed funds sufficient to pay the cash portion of the Cash and Unit Consideration and to satisfy all of its obligations hereunder and in connection with the Company Merger and the other transactions contemplated by this Agreement (a copy of which has been provided to the Company) and on the Closing Date -42- 47 will have available all funds necessary to pay the cash portion of the Cash and Unit Consideration and to satisfy all of obligations hereunder and in connection with the Company Merger and the other transactions contemplated by this Agreement. The obligations of Parent hereunder are not subject to any conditions regarding the ability of Parent to obtain financing for the consummation of the transactions contemplated herein. (s) Regulation as a Utility. Neither Parent nor any subsidiary company or affiliate of Parent is subject to regulation as a public utility or public service company (or similar designation) by any state in the United States, by the United States or any agency or instrumentality of the United States or by any foreign country. As used in this Section 5.2(s), the terms "subsidiary company" and "affiliate" shall have the respective meanings ascribed to them in the 1935 Act. (t) Registration Statement and Proxy Statement. None of the information supplied or to be supplied by or on behalf of Holdco, PAC, CAC, or Parent for inclusion or incorporation by reference in (i) the Registration Statement will, at the time the Registration Statement becomes effective under the Securities Act, and as the same may be amended, at the effective time of such amendment, contain any untrue statement or a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) the Joint Proxy Statement/Prospectus will, at the date such Joint Proxy Statement/Prospectus is mailed to the stockholders of the Company and Parent and, as the same may be amended or supplemented, at the times of the meetings of such stockholders to be held in connection with the Mergers, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Registration Statement and the Joint Proxy Statement/Prospectus will comply as to form in all material respects with the provisions of the Securities Act and the Exchange Act and the rules and regulations thereunder. (u) No Other Representations or Warranties. Except for the representations and warranties contained in this Section 5.2, neither Parent nor any other Person makes any other express or implied representation or warranty on -43- 48 behalf of Parent or any of its Affiliates. ARTICLE VI COVENANTS 6.1 Interim Operations of the Company. Except as otherwise set forth in Section 6.1 of the Company Disclosure Letter, including but not limited to the list of capital expenditures of the Company for the years 2000 and 2001 set forth therein, the Company covenants and agrees as to itself and its Subsidiaries that, from the date hereof and prior to the Effective Time (unless Parent shall otherwise approve in writing, which approval shall not be unreasonably withheld or delayed, and except as otherwise expressly contemplated by this Agreement or required by Law): (i) the business of the Company and its Subsidiaries shall be conducted only in the ordinary and usual course and, to the extent consistent therewith, it and its Subsidiaries shall use their respective reasonable best efforts to (a) subject to prudent management of workforce needs and ongoing programs currently in force, preserve its business organization intact and maintain its existing relations and goodwill with customers, suppliers, distributors, creditors, lessors, employees and business associates, (b) maintain and keep material properties and assets in good repair and condition, subject to ordinary wear and tear and (c) maintain in effect all existing governmental permits pursuant to which the Company or any of its Subsidiaries operates; (ii) the Company shall not (w) amend its certificate of incorporation or by-laws or the comparable governing instruments of any of its Subsidiaries except, in the case of its Subsidiaries, for such amendments that would not prevent or materially delay the consummation of the transactions contemplated by this Agreement; (x) split, combine or reclassify its outstanding shares of capital stock; (y) declare, set aside or pay any dividend payable in cash, stock or property in respect of any capital stock (other than (A) dividends from its direct or indirect wholly owned Subsidiaries to it or a wholly owned Subsidiary and (B) regular quarterly dividends on Shares with usual record and payment dates not to exceed $.225 per Share); or -44- 49 (z) repurchase, redeem or otherwise acquire any shares of its capital stock or any securities convertible into or exchangeable or exercisable for any shares of its capital stock or permit any of its Subsidiaries to purchase or otherwise acquire, any shares of its capital stock or any securities convertible into or exchangeable or exercisable for any shares of its capital stock (other than for the purpose of funding or providing benefits under the existing terms of the Compensation and Benefit Plans and any other existing terms of the employee benefit plans, stock option and other incentive compensation plans, directors plans and stock purchase and dividend reinvestment plans); (iii) neither the Company nor any of its Subsidiaries shall issue, sell, pledge, dispose of or encumber any shares of, or securities convertible into or exchangeable or exercisable for, or options, warrants, calls, commitments or rights of any kind to acquire, any shares of its capital stock of any class or any Voting Debt or any other property or assets (other than (A) Shares issuable pursuant to options (whether or not vested) outstanding on the date hereof under the Stock Plans and (B) issuances of additional options or rights to acquire not more than 1,000,000 Company Shares in any calendar year (it being understood that approximately 845,000 options have already been issued by the Company in the year 2000 and that those persons identified on Section 6.1(iii) of the Company Disclosure Letter have already been issued approximately 115,000 options in 2000) nor more than 2,000,000 Company Shares in the aggregate granted pursuant to the terms of the Stock Plans as in effect on the date hereof in the ordinary and usual course of the operation of such Stock Plans consistent with past practice and performance guidelines; provided that option issuances for each of the calendar years 2001 and 2002 for the persons identified on Section 6.1(iii) of the Company Disclosure Letter shall not exceed the option issuances to such persons in the year 2000 and shall not be included for purposes of the 1,000,000 and 2,000,000 option grant limitations set forth above, and issuances of Shares pursuant to options granted after the date hereof pursuant to such Stock Plans; (iv) neither the Company nor any of its Subsidiaries shall, other than in the ordinary and usual course of business, and other than transactions not in excess of $125,000,000 in the aggregate in any calendar year, transfer, lease, license, guarantee, sell, mortgage, -45- 50 pledge, dispose of or encumber any property or assets (including capital stock of any of its Subsidiaries) or incur or modify any indebtedness for borrowed money or guarantee any such indebtedness; (v) neither the Company nor any of its Subsidiaries shall, by any means, make any acquisition of, or investment in, assets or stock (whether by way of merger, consolidation, tender offer, share exchange or other activity) in any transaction or any series of transactions (whether or not related), except for acquisitions not involving a merger, consolidation, tender offer or share exchange for an aggregate purchase price or prices, including the assumption of any debt, not in excess of $125,000,000 in any calendar year; (vi) neither the Company nor any of its Subsidiaries shall, other than in the ordinary and usual course of business, (i) modify, amend, or terminate any material contract, (ii) waive, release, relinquish or assign any material contract (or any of the material rights of the Company or any of its Subsidiaries thereunder), right or claim, or (iii) cancel or forgive any material indebtedness owed to the Company or any of its Subsidiaries; (vii) neither the Company nor any of its Subsidiaries will (i) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, recapitalization or other similar reorganization of the Company or any Subsidiary of the Company, (ii) accelerate or delay collection of notes or accounts receivable in advance of or beyond their regular due dates, other than in the usual and ordinary course of business, or (iii) change any accounting principle, practice or method in a manner that is inconsistent with past practice, except to the extent required by U.S. GAAP as advised by the Company's regular independent accountants; (viii) neither the Company nor any of its Subsidiaries shall terminate, establish, adopt, enter into, make any new grants or awards under, amend or otherwise modify, any Compensation and Benefit Plans (other than issuances of additional Shares or options or rights to acquire Shares granted pursuant to the terms of the Stock Plans as in effect on the date hereof in the ordinary and usual course of the operation of such Stock Plans, subject -46- 51 to the limitations set forth in clause (iii) of this Section 6.1) or enter into any material consulting agreements or arrangements, or increase the salary, wage, bonus or other compensation of any employees except for (A) grants or awards or increases to employees who are not persons set forth in Section 6.1(iii) of the Company Disclosure Letter under existing Compensation and Benefit Plans as in effect as of the date hereof occurring in the ordinary and usual course of business consistent with past practice (which shall include normal periodic performance reviews and related compensation and benefit increases), (B) annual reestablishment of Compensation and Benefit Plans and the provision of individual compensation or benefit plans and agreements for newly hired or appointed officers and employees of the Company and its Subsidiaries who are not executive officers or (C) actions necessary to satisfy existing contractual obligations under Compensation and Benefit Plans or agreements existing as of the date hereof; (ix) other than in the ordinary and usual course of business, neither the Company nor any of its Subsidiaries shall settle or compromise any material claims or litigation or regulatory proceeding; (x) neither the Company nor any of its Subsidiaries shall make any material Tax election or, except as required by applicable Law, permit any insurance policy naming it as a beneficiary or loss-payable payee to be canceled or terminated except in the ordinary and usual course of business or as may be required by applicable Law; (xi) except for (x) capital expenditures set forth in Section 6.1(xi) of the Company Disclosure Letter and (y) acquisitions permitted under clause (v) above, neither the Company nor any of its Subsidiaries shall make, or (to the extent the Company has not previously committed to making such expenditures) commit to make, any capital expenditures; and (xii) neither the Company nor any of its Subsidiaries will authorize or enter into an agreement to do anything prohibited by the foregoing. 6.2 Acquisition Proposals. The Company agrees that neither it nor any of its Subsidiaries nor any of its or its Subsidiaries' officers and directors shall, and that it shall direct and use its best efforts to cause its and its -47- 52 Subsidiaries' employees, agents and other representatives (including any investment banker, attorney or accountant retained by it or any of its Subsidiaries) not to, directly or indirectly, initiate, solicit, encourage or otherwise facilitate any inquiries or the making of any proposal or offer with respect to (i) a merger, recapitalization, reorganization, share exchange, consolidation or similar transaction involving it or its Subsidiaries, (ii) any sale, lease, exchange, mortgage, pledge or transfer of 25% or more of the equity securities of the Company or a business that constitutes 25% or more of the net revenues, net income or the assets of the Company and its Subsidiaries, taken as a whole, in a single transaction or series of related transactions or (iii) any tender offer or exchange offer for 15% or more of the outstanding Shares (any such proposal or offer being hereinafter referred to as an "Acquisition Proposal"). The Company further agrees that neither it nor any of its Subsidiaries nor any of its or its Subsidiaries' officers and directors shall, and that it shall direct and use its reasonable best efforts to cause its and its Subsidiaries' employees, agents and representatives not to, directly or indirectly, engage in any negotiations concerning, or provide any confidential information or data to, or have any discussions with, any Person relating to an Acquisition Proposal, or otherwise facilitate any effort or attempt to make or implement an Acquisition Proposal; provided, however, that prior to the adoption of this Agreement by the Company's Shareholders, nothing contained in this Agreement shall prevent either the Company or any of its representatives or the Board of Directors of the Company from (A) complying with Rule 14e-2 promulgated under the Exchange Act with regard to an Acquisition Proposal or otherwise complying with the Exchange Act; provided that the Company or its Board of Directors shall not be permitted to recommend any such Acquisition Proposal unless it would be permitted to do so in accordance with clause (D) below; (B) providing information in response to a request therefor by a Person who has made a bona fide unsolicited written Acquisition Proposal; (C) engaging in any negotiations or discussions with any Person who has made a bona fide unsolicited written Acquisition Proposal; or (D) recommending such an Acquisition Proposal to the shareholders of the Company or adopting an agreement relating to an Acquisition Proposal, if, and only to the extent that (x) in each such case referred to in clause (B), (C) or (D) above, the Board of Directors of the Company -48- 53 determines in good faith, after consultation with and based upon the advice of outside legal counsel that failure to take such action would result in a breach of the directors' fiduciary duties under applicable law and after consultation with its independent financial advisors of national reputation, that such Acquisition Proposal is reasonably likely to lead to a transaction on terms more favorable from a financial point of view to the Company's shareholders than the transactions contemplated by this Agreement (any such more favorable Acquisition Proposal being referred to as a "Superior Proposal") and (y) in the case of clause (D) above the Board of Directors of the Company determines in good faith that such Acquisition Proposal is reasonably capable of being consummated, taking into account legal, financial, regulatory and other aspects of the proposal and the Person making the proposal, and prior to taking any such action set forth in clauses (B), (C) or (D) above (other than with respect to actions related to entering into a confidentiality agreement), the Company provides reasonable notice to Parent to the effect that it is taking such action and receives from the Person making the Acquisition Proposal an executed confidentiality agreement in reasonably customary form and, in any event, containing terms no more onerous to the Company than those contained in the Confidentiality Agreement (as defined in Section 9.7). Promptly after receiving any Acquisition Proposal or any written inquiry that would be reasonably likely to lead to an Acquisition Proposal and prior to providing any information to or entering into any discussions or negotiations with any Person in connection with an Acquisition Proposal by such Person, the Company shall notify Parent of such Acquisition Proposal (including, without limitation, the material terms and conditions thereof and the identity of the person making it), and shall provide Parent with a copy of any written Acquisition Proposal or amendment or supplements thereto and shall thereafter inform Parent on a prompt basis of any material changes to the terms and conditions of such Acquisition Proposal. The Company agrees that it will immediately cease and cause to be terminated any existing discussions or negotiations with any parties conducted heretofore with respect to any Acquisition Proposal; it being understood that any Acquisition Proposal made prior to the date hereof may, if made at any time after the date hereof, be deemed a Superior Proposal, if it would otherwise fulfill the requirements for being deemed a Superior Proposal hereunder. The Company agrees that it will take the necessary steps to -49- 54 promptly inform the individuals or entities referred to in the first sentence hereof of the obligations undertaken in this Section 6.2. 6.3 Shareholders Meetings. (a) Subject to fiduciary obligations under applicable law, the Company will take, in accordance with applicable law and its Restated Certificate of Incorporation and by-laws, all action necessary to call, give notice of, convene and hold a meeting of holders of Shares, including any adjournment thereof (the "Company Shareholders Meeting") as promptly as practicable after the execution of this Agreement by Parent to consider and vote upon the approval of this Agreement and such other matters as may be appropriate. The Board of Directors of the Company shall recommend such approval and shall take all lawful action reasonably necessary to solicit such approval; provided, however, that the recommendation of the Board of Directors of the Company may be withdrawn or adversely modified if required under applicable law relating to fiduciary duties. Without limiting the generality of the foregoing but subject to the Company's rights pursuant to Sections 6.2 and 8.3, the Company agrees that its obligations pursuant to the first sentence of this Section 6.3(a) shall not be affected by the commencement, public proposal, public disclosure or communication to the Company of any Acquisition Proposal. (b) Subject to fiduciary obligations under applicable law, Parent will take, in accordance with applicable law and its Restated Articles of Incorporation and by-laws, all action necessary to call, give notice of, convene and hold a meeting of its holders of Parent Shares, including any adjournment thereof (the "Parent Shareholders Meeting") as promptly as practicable after the execution of this Agreement to consider and vote upon the approval of this Agreement and such other matters as may be appropriate. The Board of Directors of Parent shall recommend such approval and shall take all lawful action reasonably necessary to solicit such approval, provided, however, that the recommendation of the Board of Directors of the Company may be withdrawn or adversely modified if required under applicable law relating to fiduciary duties. (c) Meeting Date. The Parent Shareholders Meeting shall be held on the day prior to the Company Shareholders -50- 55 Meeting unless otherwise agreed by the Company and Parent. 6.3A Joint Proxy Statement and Registration Statement. (a) Preparation and Filing. As promptly as reasonably practicable after the date hereof, Parent, Holdco and the Company, shall prepare and file with the SEC the Registration Statement and the Joint Proxy Statement/ Prospectus (together the "Joint Proxy/Registration Statement"). Holdco or Parent, as the case may be, shall take such actions as may be reasonably required to cause the Registration Statement to be declared effective under the Securities Act as promptly as practicable after such filing. Each of the parties shall furnish all information concerning itself that is required or customary for inclusion in the Joint Proxy/Registration Statement. No representation, covenant or agreement contained in this Agreement is made by any party hereto with respect to information supplied by any other party hereto for inclusion in the Joint Proxy/Registration Statement. The parties shall take such actions as may be reasonably required to cause the Joint Proxy/Registration Statement to comply as to form in all material respects with the Securities Act, the Exchange Act and the 1935 Act and the rules and regulations thereunder. Holdco or Parent, as the case may be, shall take such action as may be reasonably required to cause the Holdco Shares and Holdco Units or Parent Units to be issued in the Mergers to be approved for listing on the NYSE and any other stock exchanges agreed to by the parties, each upon official notice of issuance. (b) Letter of the Company's Accountants. The Company shall use its reasonable best efforts to cause to be delivered to the Company, Parent and Holdco letters of Arthur Andersen LLP, one dated a date within two (2) business days before the effective date of the Joint Proxy/Registration Statement and one dated the Closing Date, and addressed to the Company and Parent, in form and substance reasonably satisfactory to the Company and Parent and customary in scope and substance for "cold comfort" letters delivered by independent public accountants in connection with registration statements and proxy statements similar to the Joint Proxy/Registration Statement. (c) Letter of Parent's Accountants. Parent shall use its reasonable best efforts to cause to be delivered to -51- 56 Parent, Holdco and the Company letters of Arthur Andersen LLP, one dated a date within two (2) business days before the effective date of the Joint Proxy/Registration Statement and one dated the Closing Date, and addressed to Parent and the Company, in form and substance satisfactory to Parent and the Company and customary in scope and substance for "cold comfort" letters delivered by independent public accountants in connection with registration statements and proxy statements similar to the Joint Proxy/Registration Statement. 6.4 Filings; Other Actions; Notification. (a) The Company and Parent shall cooperate with each other and use (and shall cause their respective Subsidiaries to use) their respective reasonable best efforts to take or cause to be taken all actions, and do or cause to be done all things, necessary, proper or advisable on its part under this Agreement and applicable Laws to consummate and make effective the Merger and the other transactions contemplated by this Agreement as soon as practicable, including preparing and filing as soon as practicable all documentation to effect all necessary notices, reports and other filings and to obtain as soon as practicable all consents (including, but not limited to, the parties cooperating and using their reasonable best efforts to obtain the consents listed in Section 5.1(d) of the Company Disclosure Letter), registrations, approvals, permits and authorizations necessary or advisable to be obtained from any third party and/or any Governmental Entity in order to consummate the Merger or any of the other trans actions contemplated by this Agreement. Subject to applicable Laws relating to the exchange of information and the preservation of any applicable attorney-client privilege, work-product doctrine, self-audit privilege or other similar privilege, Parent and the Company shall have the right to review and comment on in advance, and to the extent practicable each will consult the other on, all the information relating to Parent or the Company, as the case may be, and any of their respective Subsidiaries, that appear in any filing made with, or written materials submitted to, any third party and/or any Governmental Entity in connection with the Merger and the other transactions contemplated by this Agreement. In exercising the foregoing right, each of the Company and Parent shall act reasonably and as promptly as practicable. -52- 57 (b) Subject to applicable Laws and the preservation of any applicable attorney-client privilege, the Company and Parent each shall, upon request by the other, furnish the other with all information concerning itself, its Subsidiaries, directors, officers and shareholders and such other matters as may be reasonably necessary or advisable in connection with any statement, filing, notice or application made by or on behalf of Parent, the Company or any of their respective Subsidiaries to any third party and/or any Governmental Entity in connection with the Merger and the transactions contemplated by this Agreement. (c) Subject to any confidentiality obligations and the preservation of any attorney-client privilege, the Company and Parent each shall keep the other apprised of the status of matters relating to completion of the transactions contemplated hereby, including promptly furnishing the other with copies of notices or other communications received by Parent or the Company, as the case may be, or any of its Subsidiaries, from any third party and/or any Governmental Entity with respect to the Merger and the other transactions contemplated by this Agreement. (d) Without limiting the generality of the undertakings pursuant to this Section 6.4, each of the Company and Parent agrees to take or cause to be taken the following actions: (i) provide promptly to any and all federal, state, local or foreign courts or Governmental Entity with jurisdiction over enforcement of any applicable antitrust laws ("Government Antitrust Entity") information and documents requested by any Government Antitrust Entity or necessary, proper or advisable to permit consummation of the Company Merger and the transactions contemplated by this Agreement and (ii) contest and resist any action seeking to have imposed any order, decree, judgment, injunction, ruling or other order (whether temporary, preliminary or permanent) (an "Order") that would materially delay, restrain, enjoin or otherwise prohibit consummation of the Company Merger and, in the event that any such temporary or preliminary Order is entered in any proceeding that would make consummation of the Company Merger in accordance with the terms of this Agreement unlawful or that would prevent or materially delay consummation of the Company Merger or the other transactions contemplated by this Agreement, Parent agrees to use its best efforts to take promptly any and all -53- 58 steps (including the appeal thereof, the posting of a bond or the taking of the steps contemplated by clause (e) of this paragraph) necessary to vacate, modify or suspend such Order so as to permit such consummation. (e) Without limiting the generality of the covenants contained in this Section 6.4, Parent agrees to, if necessary to prevent any Governmental Authority from issuing any order, injunction, decree, judgment or ruling or the taking of any other action restraining, enjoining or otherwise prohibiting the Company Merger, offer to accept an order to divest (or enter into a consent decree or other agreement giving effect thereto) such of Parent's or the Company's assets as are required to forestall such order, injunction, decree, judgment, ruling or action and to hold separate such assets pending such divestiture. 6.5 Access. Upon reasonable notice, and except as may otherwise be required by applicable Law, the Company shall (and shall cause its Subsidiaries to) afford Parent's officers, employees, counsel, accountants and other authorized representatives ("Representatives") reasonable access, during normal business hours throughout the period prior to the Effective Time, to its executive officers, to its properties, books, contracts and records and, during such period, the Company shall (and shall cause its Subsidiaries to) furnish promptly to Parent all information concerning its business, properties and personnel as may reasonably be requested; provided that no investigation pursuant to this Section shall affect or be deemed to modify any representation or warranty made by the Company, and; provided, further, that the foregoing shall not require the Company to permit any inspection, or to disclose any information, that in the reasonable judgment of the Company, would result in the disclosure of any trade secrets of third parties, the loss of any applicable attorney-client privilege or violate any of its obligations with respect to confidentiality if the Company shall have used reasonable efforts to obtain the consent of such third party to such inspection or disclosure. All requests for information made pursuant to this Section shall be directed to an executive officer of the Company or such Person as may be designated by such executive officer. All such information shall be governed by the terms of the Confidentiality Agreement. From the date hereof until the Effective Time, Parent shall (i) comply with the reasonable requests of the Company to make its officers and employees available to respond to the -54- 59 reasonable inquiries of the Company in connection with the operations of Parent and its Subsidiaries and (ii) furnish to the Company such information concerning its financial condition as may be reasonably requested. 6.6 Stock Exchange De-listing. Holdco or Parent, as the case may be, shall use its best efforts to cause the Company Shares to be removed from quotation on the NYSE and de-registered under the Exchange Act as soon as practicable following the Effective Time. 6.7 Publicity. The initial press release shall be a joint press release and thereafter the Company and Parent each shall consult with the other prior to issuing any press releases or otherwise making public announcements with respect to the Merger and the other transactions contemplated by this Agreement and prior to making any filings with any third party and/or any Governmental Entity with respect thereto, except as may be required by Law or by obligations pursuant to any listing agreement with or rules of any national securities exchange or national market system. 6.8 Benefits. (a) Stock Options. At the Effective Time, each stock option outstanding under the Stock Plans (each, a "Company Option"), whether or not then exercisable, shall be cancelled and only entitle the holder thereof to receive with respect to such Company Option an amount in cash equal to (i) for each share with respect to such Company Option, the excess, if any, of (A) the value of the Merger Consideration or the Alternative Structure Merger Consideration, as the case may be, over (B) the per Share exercise price under such Company Option and (ii) the balance in such holder's Dividend Credit Account pursuant to the stock option agreement with respect to such Company Option. For purposes of this Section 6.8(a), the value of the Merger Consideration or the Alternative Structure Merger Consideration, as the case may be, shall be $72.29 plus an amount in cash equal to 7% interest on $72.29 for the period beginning on the first anniversary date of this Agreement and ending on the day prior to the Closing Date (calculated on a per annum basis of a 365-day year). Parent, or Merger Sub, as applicable, shall be entitled to deduct or withhold from amounts otherwise payable to a holder of a Company -55- 60 Option any amounts required to be withheld under applicable tax laws. The Company shall use its reasonable efforts to obtain, but only if and to the extent required, the consent of each holder of outstanding Company Options to the foregoing treatment of such Company Options and to take any other action reasonably necessary to effectuate the foregoing provisions. (b) Employee Benefits. Parent agrees that, during the period commencing at the Effective Time and ending on the third anniversary thereof, the employees of the Company and its Subsidiaries will continue to be provided with benefits under employee benefit plans that are no less favorable than the greater of (i) those currently provided by the Company and its Subsidiaries to such employees and (ii) those provided by Parent and its Subsidiaries from time to time during such three-year period. Following the Effective Time, Parent shall cause service by employees of the Company and its Subsidiaries (and any predecessor entities) to be taken into account for all purposes (including, without limitation, eligibility to participate, eligibility to commence benefits, vesting, benefit accrual and severance) under the Compensation and Benefit Plans or any other benefit plans of Parent or its Subsidiaries in which such employees participate; provided, however, that with respect to any defined benefit pension plan, such crediting of service shall not result in the duplication of benefits in respect of any period. From and after the Effective Time, Parent shall (i) cause to be waived any pre-existing condition limitations under benefit plans, policies or practices of Parent or its Subsidiaries in which employees of the Company or its Subsidiaries participate (other than those pre-existing condition limitations in effect at the Effective Time under any plans, policies or practices of the Company or its Subsidiaries) and (ii) cause to be credited any deductibles and out-of-pocket expenses incurred by such employees and their beneficiaries and dependents during the portion of the calendar year prior to participation in the benefit plans provided by Parent and its Subsidiaries. Parent and Holdco shall, and Parent and Holdco shall cause the Company to, honor all employee benefit obligations to current and former employees under the Compensation and Benefit Plans. -56- 61 Parent agrees that the transactions contemplated by this Agreement meet the definition of, and shall constitute, a "change in control" under each Compensation and Benefit Plan listed on Schedule 6.8(b) of the Company Disclosure Letter. (c) Employees. Any workforce reductions carried out following the Effective Time by Parent, Holdco or the Company and their respective Subsidiaries shall be done in accordance with all applicable collective bargaining agreements, and all Laws and regulations governing the employment relationship and termination thereof including, without limitation, the Worker Adjustment and Retraining Notification Act and regulations promulgated thereunder, and any comparable state or local law. (d) Community Involvement. Parent acknowledges that after the Effective Time, it intends to provide charitable contributions and community support within the service areas of the Company and its Subsidiaries at levels consistent with past practice. (e) Integration Committee. Parent recognizes that the Company has a talented group of officers and employees that will be important to the future growth of Holdco or Parent, as the case may be, after the Effective Time. In recognition of the foregoing, within seven business days of the date hereof, Parent and the Company will establish an Integration Committee composed in its entirety of two senior executive officers of the Company and two senior executive officers of Parent, as selected by the Company and Parent, respectively (the "Integration Committee"). The Integration Committee shall meet not less than once per month and shall have direct access to the Chief Executive Officer of each of Parent and the Company and will be responsible for proposing alternatives and recommendations regarding the matters and issues arising in connection with the integration of the Company and Parent and their respective businesses, assets and organizations (including without limitation, issues arising in connection with matters contemplated by this Article VI). (f) Phantom Shares. At the Effective Time, each Phantom Share under the Company's Phantom Stock Plan for Outside Directors shall be canceled and only entitle the holder thereof to receive with respect to such Phantom Share -57- 62 an amount in cash equal to the value of the Merger Consideration or the Alternative Structure Merger Consideration, as the case may be. For purposes of this Section 6.8(f), the value of the Merger Consideration or the Alternative Structure Merger Consideration, as the case may be, shall be $72.29 plus an amount in cash equal to 7% interest on $72.29 for the period beginning on the first anniversary date of this Agreement and ending on the date prior to the Closing Date (calculated on a per annum basis of a 365-day year). Parent, or Holdco, as applicable, shall be entitled to deduct or withhold from amounts otherwise payable to a holder of a Phantom Share any amounts required to be withheld under applicable tax laws. The Company shall use its reasonable efforts to obtain, but only if and to the extent required, the consent of each holder of a Phantom Share to the foregoing treatment of such Phantom Shares and to take any other action reasonably necessary to effectuate the foregoing provisions. 6.9 Expenses. Parent shall pay all charges and expenses, including those of the Exchange Agent, in connection with the transactions contemplated in Article II. Except as otherwise provided in this Section 6.9 and Section 8.5(b), whether or not the Mergers are consummated, all costs and expenses incurred in connection with this Agreement and the Mergers and the other transactions contemplated by this Agreement shall be paid by the party incurring such expense, except that each of the Company and Parent shall bear and pay one-half of the costs and expenses incurred in connection with the preparation, printing and mailing of the Joint Proxy/Registration Statement. 6.10 Indemnification; Directors' and Officers' Insurance. (a) From and after the Effective Time, Holdco and Parent shall indemnify and hold harmless, to the fullest extent permitted under applicable law (and Parent shall also advance expenses as incurred to the fullest extent permitted under applicable law, provided the Person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such Person is not entitled to indemnification), each present and former director and officer of the Company and its Subsidiaries (collectively, the "Indemnified Parties") against any costs or expenses (including reasonable attorneys' fees and expenses), judgments, fines, losses, claims, damages or -58- 63 liabilities (collectively, "Costs") incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to matters existing or occurring at or prior to the Effective Time, including the transactions contemplated by this Agreement; provided, however, that Parent shall not be required to indemnify any Indemnified Party pursuant hereto if it shall be determined that the Indemnified Party acted in bad faith and not in a manner such Party believed to be in or not opposed to the best interests of the Company. In addition, Holdco and Parent shall indemnify each present and former director, officer and employee of the Company and its Subsidiaries for any Costs arising out of or pertaining to matters existing or occurring at or prior to the Effective Time to the extent that the Company would have been obligated to indemnify such persons pursuant to its Restated Certificate of Incorporation as in effect as of the date hereof. In the event any claim or claims are asserted or made within six years after the Effective Time, all rights to indemnifica- tion in respect of any such claim or claims shall continue until final disposition of any and all such claims. (b) Any Indemnified Party wishing to claim indemnification under paragraph (a) of this Section 6.10, upon receiving written notification of any such claim, action, suit, proceeding or investigation, shall promptly notify the Company thereof, but the failure to so notify shall not relieve the Company of any liability it may have to such Indemnified Party if such failure does not materially and irreversibly prejudice Parent. In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), (i) subject to receipt of the undertaking to repay advances referred to in paragraph (a) of this Section 6.10, Parent shall pay the reasonable fees and expenses of counsel selected by the Indemnified Party, which counsel shall be reasonably satisfactory to Parent, promptly after statements therefor are received, and otherwise advance to such Indemnified Party upon request reimbursement of documented expenses reasonably incurred, (ii) Parent will cooperate in the defense of any such matter, and (iii) any determination required to be made with respect to whether an Indemnified Party's conduct complies with the standards set forth under applicable Law shall be made by independent counsel mutually acceptable to Parent and the Indemnified Party; provided, -59- 64 however, that (A) Parent shall be obligated pursuant to this paragraph (b) to pay for only one firm of counsel for all Indemnified Parties in any jurisdiction, except to the extent there is, in the opinion of counsel to an Indemnified Party, under applicable standards of professional conduct, a conflict on any significant issue between the positions of such Indemnified Party and any other Indemnified Party or Indemnified Parties, in which case each Indemnified Party with a conflicting position on a significant issue shall be entitled to retain separate counsel mutually satisfactory to Parent and such Indemnified Party, (B) the Indemnified Parties shall cooperate in the defense of any such matter and (C) Parent shall not be liable for any settlement effected without its prior written consent (which consent may not be unreasonably withheld or delayed). (c) Parent or Holdco shall cause the Company to maintain the Company's existing officers' and directors' liability insurance ("D&O Insurance") for a period of six years after the Effective Time so long as the annual premium therefor is not in excess of 200% of the last annual premium paid prior to the date hereof (the "Current Premium"); provided, however, (i) that policies with at least the same coverage, containing terms and conditions which are at least as protective of the insureds thereunder, may be substituted therefor; (ii) if the existing D&O Insurance is terminated or cancelled during such six-year period, the Surviving Corporation shall use its best efforts to obtain as much D&O Insurance as can be obtained for the remainder of such period for a premium not in excess (on an annualized basis) of 200% of the Current Premium and, to the extent permitted by law, shall agree to indemnify the directors and officers for any Costs not covered by such D&O Insurance; and (iii) if the annual premiums for the existing D&O Insurance exceed 200% of the Current Premium, the Surviving Corporation shall obtain as much D&O Insurance as can be obtained for the remainder of such period for a premium not in excess (on an annualized basis) of 200% of the Current Premium. (d) If Parent, Holdco or the Company or any of its successors or assigns (i) shall consolidate with or merge into any other corporation or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) shall transfer all or substantially all of its properties and assets to any individual, corporation or other entity, then, and in each such case, proper provisions shall be made so that the -60- 65 successors and assigns of Parent, Holdco or the Company shall assume all of the obligations set forth in this Section 6.10. (e) The provisions of this Section are intended to be for the benefit of, and shall be enforceable by, each of the Indemnified Parties, their heirs and their representatives. 6.11 Takeover Statute. If any Takeover Statute is or may become applicable to the Mergers or the other transactions contemplated by this Agreement, each of Parent, Holdco and the Company and their respective Boards of Directors shall grant such approvals and take such actions as are necessary so that such transactions may be consummated as promptly as practicable on the terms contemplated by this Agreement or by the Merger and otherwise act to eliminate or minimize the effects of such statute or regulation on such transactions. 6.12 Parent Vote. Parent shall vote (or consent with respect to) or cause to be voted (or a consent to be given with respect to) any Shares and any shares of common stock of a Merger Sub beneficially owned by it or any of its Affiliates or with respect to which it or any of its Affiliates has the power (by agreement, proxy or otherwise) to cause to be voted (or to provide a consent), in favor of the approval of this Agreement at the Company Shareholders Meeting or any other meeting of shareholders of the Company or either Merger Sub, respectively, at which this Agreement shall be submitted for approval and at all adjournments or postponements thereof (or, if applicable, by any action of shareholders of either the Company or either Merger Sub by consent in lieu of a meeting). 6.13 1935 Act. None of the parties hereto shall, nor shall any such party permit any of its Subsidiaries to, except as required or contemplated by this Agreement, engage in any activities that would cause a change in its status, or that of its Subsidiaries, under the 1935 Act if such change would prevent or materially delay the consummation of the transactions contemplated by this Agreement. 6.14 Necessary Action. Neither the Company nor Parent, nor any of their respective Subsidiaries, shall take or fail to take any action that is reasonably likely to result in -61- 66 any failure of the conditions to the Mergers set forth in Article VII, or is reasonably likely to make any representation or warranty of the Company or Parent contained herein inaccurate in any material respect at, or as of any time prior to, the Effective Time, or that is reasonably likely to, individually or in the aggregate, have a Company Material Adverse Effect or a Parent Material Adverse Effect, as the case may be. 6.15 Certain Mergers. Each of the Company and Parent agrees that it shall not, and shall not permit any of its Subsidiaries to (i) acquire or agree to acquire any assets or (ii) acquire or agree to acquire, whether by merger, consolidation, by purchasing a substantial portion of the assets of or equity in, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, if the entering into of a definitive agreement relating thereto or the consummation of such acquisition, merger or consolidation could reasonably be expected to (A) impose any material delay in the expiration of any applicable waiting period or impose any material delay in the obtaining of, or significantly increase the risk of not obtaining, any authorizations, consents, orders, declarations or approvals of any Governmental Entity necessary to consummate the Merger, (B) significantly increase the risk of any Governmental Entity entering an Order (as defined in Section 7.1(e)) prohibiting the consummation of the Merger, (C) significantly increase the risk of not being able to remove any such Order on appeal or otherwise or (D) materially delay or materially impede the consummation of the Merger. 6.16 Rule 145 Affiliates. Prior to the Closing Date, the Company shall identify in a letter to Parent all persons who are, at the Closing Date, "affiliates" of the Company, as such term is used in Rule 145 under the Securities Act. The Company shall use its reasonable best efforts to cause its affiliates to deliver to Parent on or prior to the Closing Date written agreements substantially in the form attached as Annex B. 6.17 Executive Consent Rights. In the event an officer covered by an employment agreement set forth in Section 5.1(t) of the Company Disclosure Letter terminates his employment with the Company prior to the Effective Time, the person replacing such officer shall not be hired by the Company without the prior written consent of Parent (which -62- 67 consent shall not be unreasonably withheld or delayed). 6.18 Listing of Units. Parent agrees to file, within 60 days after the date hereof, a listing application with NYSE covering the listing of the Units and to use its best efforts to pursue the listing of such Units so that the listing is effective prior to the Effective Time. In the event such Units are not accepted for listing despite such best efforts, Parent shall use its best efforts to list such Units on another national securities exchange or the Nasdaq Stock Market so that such listings are effective prior to the Effective Time. ARTICLE VII CONDITIONS 7.1 Conditions to Each Party's Obligation to Effect the Mergers. The respective obligation of each party to effect the Mergers is subject to the satisfaction or waiver at or prior to the Effective Time of each of the following conditions: (a) Shareholder Approval. This Agreement shall have been duly approved by holders of Company Shares constituting the Company Requisite Vote in accordance with applicable Law and the Restated Certificate of Incorporation and by-laws of the Company. (b) Registration Statement. The Registration Statement shall have become effective in accordance with the provisions of the Securities Act, and no stop order suspending such effectiveness shall have been issued and remain in effect. (c) Listing of Shares. In the event that the Parent Requisite Vote is obtained, the Holdco Shares issuable in the Mergers pursuant to Article II shall have been approved for listing on the NYSE, subject to official notice of issuance. (d) HSR. The waiting period applicable to the consummation of the Mergers under the HSR Act shall have expired or been earlier terminated. -63- 68 (e) Other Regulatory Consents. Other than the filing provided for in Section 1.3, the parties shall have made or filed those notices, reports or other filings required to be made or filed with, and obtained those registrations, approvals, permits or authorizations required to be obtained from or filed with any Governmental Entity prior to the consummation of the Mergers and in each case set forth in Sections 5.1(d) and 5.2(e) ("Governmental Consents") and such Governmental Consents shall have become Final Orders, except for those that the failure to make or to obtain, either individually or in the aggregate are not reasonably likely to have a material adverse effect on the combined entity resulting from the transactions contemplated hereby. The Final Orders shall not impose terms or conditions that (a) have or would reasonably be expected to have a material adverse effect on the combined entity resulting from the transactions contemplated hereby, or (b) materially impair the ability of the parties to complete the Mergers or the transactions contemplated hereby. A "Final Order" means action by the relevant regulatory authority that has not been reversed, stayed, enjoined, set aside, annulled or suspended, with respect to which any waiting period prescribed by law before the transactions contemplated hereby may be consummated has expired, and as to which all conditions to the consummation of such transactions prescribed by law, regulation or order have been satisfied. (f) Litigation. No court or Governmental Entity of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, law, ordinance, rule, regulation, judgment, decree, injunction or other order that is in effect and permanently enjoins or otherwise prohibits consummation of the Merger (collectively, an "Order"), nor shall any proceeding brought by a Governmental Entity seeking an Order be pending, provided, however, that the provisions of this Section 7.1(f) shall not be available to any party whose failure to fulfill its obligations hereunder shall have been the cause of, or shall have resulted in, such Order. 7.2 Conditions to Obligations of Parent. The obligations of Parent and Merger Sub to effect the Merger are also subject to the satisfaction or waiver by Parent at or prior to the Effective Time of the following conditions: -64- 69 (a) Representations and Warranties. The representations and warranties of the Company set forth in this Agreement which are not modified by the words "Material Adverse Effect" shall be true and correct in all material respects as of the Closing Date as though made on and as of the Closing Date (except to the extent any such representation or warranty expressly speaks as of an earlier date, which representations and warranties shall be true and correct in all material respects as of such date in the same manner as specified above), and the representations and warranties of the Company set forth in this Agreement which are modified by the words "Material Adverse Effect" shall be true and correct as of the Closing Date as though made on and as of the Closing Date (except to the extent any such representation or warranty expressly speaks as of an earlier date, which representations and warranties shall be true and correct as of such date in the same manner as specified above), and Parent shall have received a certificate signed on behalf of the Company by an executive officer of the Company to such effect. (b) Performance of Obligations of the Company. The Company shall have performed in all material respects all material obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Parent shall have received a certificate signed on behalf of the Company by an executive officer of the Company to such effect. (c) Consents Under Agreements. The Company shall have obtained the consent or approval of each Person whose consent or approval shall be required under any material Contract to which the Company or any of its Subsidiaries is a party except for such consents or approvals the failure of which to obtain would not be reasonably likely to result in a material adverse effect on Parent and the Company (together with all Subsidiaries of Parent and the Company) taken as a whole. (d) Material Adverse Effect. There shall not have occurred any Company Material Adverse Effect or change or condition which would reasonably be expected to have a Company Material Adverse Effect. 7.3 Conditions to Obligation of the Company. The -65- 70 obligation of the Company to effect the Mergers is also subject to the satisfaction or waiver by the Company at or prior to the Effective Time of the following conditions: (a) Representations and Warranties. The representations and warranties of Parent set forth in this Agreement which are not modified by the words "Material Adverse Effect" shall be true and correct in all material respects as of the Closing Date as though made on and as of the Closing Date (except to the extent any such representation or warranty expressly speaks as of an earlier date, which representations and warranties shall be true and correct in all material respects as of such date in the same manner as specified above) and the representations and warranties of Parent set forth in this Agreement which are modified by the words "Material Adverse Effect" shall be true and correct as of the Closing Date as though made on and as of the Closing Date (except to the extent any such representation or warranty expressly speaks as of an earlier date, which representations and warranties shall be true and correct as of such date in the same manner as specified above), and the Company shall have received a certificate signed on behalf of Parent by executive officers of Parent to such effect. (b) Performance of Obligations of Parent. Parent shall have performed and caused Holdco, CAC and PAC to have performed, in all material respects all material obligations required to be performed by each such entity under this Agreement at or prior to the Closing Date, and the Company shall have received a certificate signed on behalf of Parent by an executive officer of Parent to such effect. (c) Tax Opinion. In the event of the Company Merger, the Company shall have received the opinion of Sullivan & Cromwell, counsel to the Company, dated the Closing Date, to the effect that, based on the facts and assumptions stated therein, the Company Merger will qualify as an exchange pursuant to Section 351 of the Code. In rendering its opinion, Sullivan & Cromwell may rely on the representations made in certificates addressed to such counsel by both Parent and the Company. ARTICLE VIII -66- 71 TERMINATION 8.1 Termination by Mutual Consent. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, whether before or after the approval by shareholders of the Company referred to in Section 7.1(a), by mutual written consent of the Company and Parent by action of their respective Boards of Directors. 8.2 Termination by Either Parent or the Company. This Agreement may be terminated and the Mergers may be abandoned at any time prior to the Effective Time by action of the Board of Directors of either Parent or the Company if (a) the Mergers shall not have been consummated by June 30, 2001, whether such date is before or after the date of receipt of the Company Requisite Vote (the "Termination Date"), provided that the Termination Date shall be automatically extended to March 31, 2002 if, on June 30, 2001: (x) any of the Governmental Consents described in Section 7.1(e) have not been obtained or waived, (y) each of the other conditions to the consummation of the Mergers set forth in Article VII has been satisfied or waived or remains capable of satisfaction, and (z) any Governmental Consent that has not yet been obtained is being pursued diligently and in good faith, (b) the approval of the Company's shareholders required by Section 7.1(a) shall not have been obtained at a meeting duly convened therefor or at any adjournment or postponement thereof or (c) any Order permanently restraining, enjoining or otherwise prohibiting consummation of the Mergers shall become final and non-appealable after the parties have used their respective best efforts to have such Order removed, repealed or overturned (whether before or after the approval by the shareholders of the Company) pursuant to Section 6.4, provided that the right to terminate this Agreement pursuant to clause (a) above shall not be available to any party whose failure to fulfill any obligation under this Agreement or under any existing law, order, rule or regulation has caused or resulted in the failure of the Mergers to be consummated. 8.3 Termination by the Company. This Agreement may be terminated and the Mergers may be abandoned by action of the Board of Directors of the Company after three days' prior written notice to Parent at any time prior to (a) the approval of this Agreement by shareholders of the Company -67- 72 referred to in Section 7.1(a), if the Board of Directors of the Company shall approve a Superior Proposal; provided, however, that (i) the Company is not then in breach of Section 6.2, (ii) the Board of Directors of the Company shall have concluded in good faith, after giving effect to any concessions which are offered by Parent during such three-day period, on the basis of the advice of its independent financial advisor of national reputation, that such proposal is a Superior Proposal and (iii) the termination pursuant to this Section 8.3(a) shall not be effective unless the Company shall at or prior to the time of such termination make the payment required by Section 8.5; or (b) the Effective Time, whether before or after the approval by shareholders of the Company referred to in Section 7.1(a) if (x) there has been a breach by Parent of any representation or warranty modified by the words "Material Adverse Effect" or a breach of any other representation or warranty that, individually or in the aggregate, has had a Parent Material Adverse Effect, or there has been a material breach by Parent of any material covenant or agreement contained in this Agreement that is not curable or, if curable, is not cured within 20 days after written notice of such breach is given by the Company to the party committing such breach or (y) if all Governmental Consents have not been obtained and become Final Orders meeting the requirements of Section 7.1(e) by March 31, 2002. 8.4 Termination by Parent. This Agreement may be terminated and the Mergers may be abandoned at any time prior to the Effective Time by action of the Board of Directors of Parent if (a) the Board of Directors of the Company withdraws or adversely modifies its adoption of this Agreement or its recommendation that the shareholders of the Company approve this Agreement, (b) the Board of Directors of the Company shall approve or recommend a Superior Proposal, (c) the Board of Directors of the Company shall resolve or publicly propose to take any of the actions specified in clauses (a) or (b) above, or (d) there has been a breach by the Company of any representation or warranty modified by the words "Material Adverse Effect" or a breach of any other representation or warranty that, individually or in the aggregate, has had a Company Material Adverse Effect, or there has been a material breach by the Company of any material covenant or agreement contained in this Agreement that is not curable or, if curable, is not cured within 20 days after written notice of such breach is given -68- 73 by Parent to the party committing such breach. 8.5 Effect of Termination and Abandonment. (a) In the event of termination of this Agreement and the abandonment of the Merger pursuant to this Article VIII, this Agreement (other than as set forth in Section 9.1) shall become void and of no effect with no liability on the part of any party hereto (or of any of its directors, officers, employees, agents, legal and financial advisors or other representatives); provided, however, that no such termination shall relieve any party hereto of any liability or damages resulting from any breach of this Agreement prior to termination. (b) In the event that this Agreement is terminated by the Company pursuant to Section 8.3(a) or by Parent pursuant to Section 8.4(a), (b) or (c), then the Company shall promptly, but in no event later than two days after the date of such termination (except in the case of a termination pursuant to Section 8.3(a), in which case the payment referred to below shall be made at or prior to the time of such termination), pay Parent a termination fee (as liquidated damages) of $200,000,000 (the "Termination Fee") by wire transfer of same day funds to an account previously designated in writing by Parent to the Company. In the event that (i) an Acquisition Proposal shall have been made to the Company after the date hereof or any Person (other than Parent or any of its Affiliates) shall have publicly announced after the date hereof an intention (whether or not conditional) to make an Acquisition Proposal with respect to the Company and thereafter this Agreement is terminated by either Parent or the Company pursuant to Section 8.2(b) and (ii) (x) the Person making the Acquisition Proposal which was outstanding at the time of the Shareholders Meeting (the "Acquiring Party") acquires, by purchase, merger, consolidation, sale, assignment, lease, transfer or otherwise, in one transaction or any related series of transactions within twelve months after a termination of this Agreement, a majority of the voting power of the outstanding securities of the Company or all or substantially all of the assets of the Company and its Subsidiaries taken as a whole or (y) there is consummated a merger, consolidation or similar business combination between the Company or one of its Subsidiaries and the Acquiring Party or one of its Subsidiaries within twelve -69- 74 months after the relevant termination of this Agreement, or (z) within twelve months after termination of this Agreement, the Company or one of its Subsidiaries enters into a binding agreement with the Acquiring Party for such an acquisition, merger, consolidation or similar business combination then the Company shall promptly, but in no event later than two days after the earlier of consummation of the transaction or transactions with the Acquiring Party or one of its Subsidiaries or the execution of a binding agreement between the Company and the Acquiring Party, pay Parent the Termination Fee in same day funds to an account previously designated by Parent to the Company in writing. In the event that this Agreement is terminated by the Company pursuant to Section 8.3(b)(y) or by Parent or the Company pursuant to 8.2(a) as a result of the failure to meet the condition set forth in Section 7.1(e) or 8.2(c) hereof, then Parent shall, or shall cause Holdco to, promptly, but in no event later than two days after the date of such termination, pay to the Company a termination fee (as liquidated damages) of $50,000,000 (the "Regulatory Termination Fee"). The Company and Parent acknowledge that the agreements contained in this Section 8.5(b) are an integral part of the transactions contemplated by this Agreement, and that, without these agreements neither Parent nor the Company would have entered into this Agreement; accordingly, if the Company or Parent fails to promptly pay any amounts due pursuant to this Section 8.5(b), and in order to obtain such payment Parent or the Company as the case may be commences a suit which results in a judgment against the Company for payment of all or a portion of the Termination Fee, or against Parent for payment of all or a portion of the Regulatory Termination Fee, the Company shall pay to Parent or Parent shall pay the Company, as the case may be, its costs and expenses (including its reasonable attorneys' fees) incurred in connection with such suit, together with interest from the date of termination of this Agreement on the amounts owed at the prime rate of The Chase Manhattan Bank in effect from time to time during such period. The Company's payment of the Termination Fee shall be the sole and exclusive remedy of Parent against the Company and any of its Subsidiaries and their respective directors, officers, employees, agents, advisors or other representatives in the event this Agreement is terminated and the Termination Fee is payable whether or not there has -70- 75 been a breach of this Agreement. ARTICLE IX MISCELLANEOUS AND GENERAL 9.1 Survival. This Article IX and the agreements of the Company, Parent and Holdco, as the case may be contained in Article IV, Sections 6.6 (Stock Exchange De-listing), 6.8 (Benefits), 6.9 (Expenses), 6.10 (Indemnification; Directors' and Officers' Insurance) and 6.18 (Listing of Units) shall survive the consummation of the Merger. This Article IX, the agreements of the Company, Parent and Holdco, as the case may be, contained in Section 6.9 (Expenses), Section 8.5 (Effect of Termination and Abandonment) and the Confidentiality Agreement shall survive the termination of this Agreement. All other representations, warranties, covenants and agreements in this Agreement shall not survive the consummation of the Mergers or the termination of this Agreement. 9.2 Modification or Amendment. Subject to the provisions of applicable Law, at any time prior to the Effective Time, the parties hereto may modify or amend this Agreement, by written agreement executed and delivered by duly authorized officers of the respective parties. 9.3 Waiver of Conditions. The conditions to each of the parties' obligations to consummate the Mergers are for the sole benefit of such party and may be waived by such party in whole or in part to the extent permitted by applicable law. 9.4 Counterparts. This Agreement may be executed in any number of counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. 9.5 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL. THIS AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS TO BE WHOLLY PERFORMED IN SUCH STATE. The parties hereby irrevocably submit to the jurisdiction of the courts of the State of New York and the -71- 76 Federal courts of the United States of America located in the State of New York in each case in the borough of Manhattan solely in respect of the interpretation and enforcement of the provisions of this Agreement and of the documents referred to in this Agreement, and in respect of the transactions contemplated hereby, and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof or of any such document, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Agreement or any such document may not be enforced in or by such courts, and the parties hereto irrevocably agree that all claims with respect to such action or proceeding shall be heard and determined in such a State of New York or Federal court. The parties hereby consent to and grant any such court jurisdiction over the person of such parties and over the subject matter of such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 9.6 or in such other manner as may be permitted by law shall be valid and sufficient service thereof. Each party hereto hereby acknowledges and agrees to waive any right it may have to a trial by jury in respect of any action, suit or proceeding arising out of or relating to this Agreement. 9.6 Notices. Any notice, request, instruction or other document to be given hereunder by any party to the others shall be in writing and delivered personally or sent by registered or certified mail, postage prepaid, or by facsimile: if to Parent NiSource Inc. 801 East 86th Avenue, Merrillville, Indiana 46410. Attention: Stephen P. Adik fax: (219) 647-6060 (with a copy to Peter V. Fazio, Jr., Schiff Hardin & Waite, 6600 Sears Tower 233 South Wacker Drive Chicago, IL 60606-6473 fax: (312) 258-5600). -72- 77 if to the Company Columbia Energy Group, 13880 Dulles Corner Lane Herndon, Virginia 20171-4600 Attention: Michael W. O'Donnell fax: (703) 561-7326 (with a copy to Neil T. Anderson Sullivan & Cromwell 125 Broad Street New York, New York 10004 fax: (212) 558-3588). or to such other persons or addresses as may be designated in writing by the party to receive such notice as provided above. 9.7 Entire Agreement; NO OTHER REPRESENTATIONS. This Agreement (including any exhibits hereto), the Company Disclosure Letter, the Parent Disclosure Letter and the Confidentiality Agreement, dated November 18, 1999 between Parent and the Company (the "Confidentiality Agreement") constitute the entire agreement, and supersede all other prior agreements, understandings, representations and warranties both written and oral, among the parties, with respect to the subject matter hereof. EACH PARTY HERETO AGREES THAT, EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT, NEITHER PARENT NOR THE COMPANY MAKES ANY OTHER REPRESENTATIONS OR WARRANTIES, AND EACH HEREBY DISCLAIMS ANY OTHER REPRESENTATIONS OR WARRANTIES MADE BY ITSELF OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, FINANCIAL AND LEGAL ADVISORS OR OTHER REPRESENTATIVES, WITH RESPECT TO THE EXECUTION AND DELIVERY OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, NOT WITHSTANDING THE DELIVERY OR DISCLOSURE TO THE OTHER OR THE OTHER'S REPRESENTATIVES OF ANY DOCUMENTATION OR OTHER INFORMATION WITH RESPECT TO ANY ONE OR MORE OF THE FORE GOING. 9.8 No Third Party Beneficiaries. Other than with respect to the matters set forth in Section 6.10 (Indemnification; Directors' and Officers' Insurance), this Agreement is not intended to confer upon any Person other -73- 78 than the parties hereto any rights or remedies hereunder. 9.9 Obligations of Parent and of the Company. Whenever this Agreement requires Holdco or a Subsidiary of Parent to take any action, such requirement shall be deemed to include an undertaking on the part of Parent to cause Holdco or such Subsidiary, as the case may be, to take such action. Whenever this Agreement requires Parent to take any action, such requirement shall be deemed to include an undertaking to cause Holdco to take such action. Whenever this Agreement requires a Subsidiary of the Company to take any action, such requirement shall be deemed to include an undertaking on the part of the Company to cause such Subsidiary to take such action and, after the Effective Time, on the part of the Company to cause such Subsidiary to take such action. 9.10 Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. If any provision of this Agreement, or the application thereof to any Person or any circumstance, is invalid or unenforceable, (a) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision and (b) the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected by such invalidity or unenforceability, nor shall such invalidity or unenforceability affect the validity or enforceability of such provision, or the application thereof, in any other jurisdiction. 9.11 Interpretation. The table of contents and headings herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. Where a reference in this Agreement is made to a Section or Exhibit, such reference shall be to a Section of or Exhibit to this Agreement unless otherwise indicated. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." 9.12 Assignment. This Agreement shall not be assignable by operation of law or otherwise; provided, -74- 79 however, that Parent may designate, by written notice to the Company, another wholly owned direct or indirect subsidiary to be a constituent corporation in lieu of either Merger Sub, so long as such designation would not reasonably be expected to (i) impose any material delay in the obtaining of, or significantly increase the risk of not obtaining any authorizations, consents, orders, declarations or approvals of any Governmental Entity necessary to consummate the Mergers or the expiration or termination of any applicable waiting period, (ii) significantly increase the risk of any Governmental Entity entering an order prohibiting the consummation of the Mergers, (iii) significantly increase the risk of not being able to remove any such order on appeal or otherwise or (iv) materially delay the consummation of the Mergers. If the requirements of the previous sentence are met and Parent wishes to designate another wholly owned direct or indirect subsidiary to be a constituent corporation in lieu of either Merger Sub, then, all references herein to that Merger Sub shall be deemed references to such other subsidiary, except that all representations and warranties made herein with respect to that Merger Sub as of the date of this Agreement shall be deemed representations and warranties made with respect to such other subsidiary as of the date of such designation. -75- 80 IN WITNESS WHEREOF, this Agreement has been duly executed, acknowledged and delivered by the duly authorized officers of the parties hereto as of the date first written above. COLUMBIA ENERGY GROUP By: /s/ Oliver G. Richard III ------------------------- Name: Oliver G. Richard III Title: Chairman, President and Chief Executive Officer NISOURCE INC. By: /s/ Gary L. Neale ----------------- Name: Gary L. Neale Title: Chairman, President and Chief Executive Officer 81 ANNEX A SUMMARY OF TERMS FOR HOLDCO/PARENT SAILS(SM) Each SAILS is a unit consisting of a share purchase contract plus a senior debt security. The share purchase contract and the senior debt security will have the following terms and other terms customary for securities of this type. o Share purchase contract o Obligates holder to buy $2.60 or $3.02, as applicable, of Holdco/Parent common shares on settlement date o Settlement date: 4 years after closing o "Contract adjustment payments" pending settlement: none o Stock issuable upon settlement (per $2.60 or $3.02, as applicable, purchase contract): o If average closing price of Holdco/Parent common shares for the 30-day period before settlement date (the "measurement period") is $16.50 or less, then the holder will receive .1576 of a Holdco/Parent common share; o If average closing price of Holdco/Parent common shares for the measurement period is more than $16.50 but less than $23.10, then the holder will receive a number shares of Holdco/Parent common stock equal to $2.60 or $3.02, as applicable, divided by the average closing price of Holdco/Parent common shares (carried to four decimal places); o If the average closing price of Holdco/Parent common shares for the measurement period is more than $23.10, then the holder will receive .1126 of a Holdco/Parent common share; and o Customary anti-dilution provisions, including upon a change in control of Holdco/Parent after the Effective Time o Acceleration of settlement date upon change of control of Holdco/Parent after Effective Time 82 o No early settlement option o Voting rights: none, except with respect to modification of terms of share purchase contract or senior debt securities o Obligation is secured by pledge of companion senior debt security (provided holder may substitute basket of treasuries) o Purchase price will be paid on settlement date using solely proceeds from remarketing of pledged debt security (or proceeds of basket of treasuries), without holder having to provide additional funds. However, at holder's election, holder may deliver $2.60 or $3.02, as applicable, cash to pay purchase price on settlement date, in which case pledged debt security will be released to holder in lieu of being remarketed o NYSE listing o Senior debt security o Maturity: 6 years after closing o Not interest bearing prior to settlement date; after settlement date, bears interest at market rate (determined in remarketing procedure as rate necessary to trade at par) plus 50 basis points o Not redeemable prior to maturity o No sinking fund o Unsecured o No voting rights, except customary rights with respect to modification of indenture o Remarketed on settlement date to determine market interest rate for a par security o Covenants o Customary affirmative covenants to pay principal and interest, maintain office for payment and transfer, pay taxes, maintain corporate existence, etc. o Customary limitation on liens 83 o Customary limitation on mergers, consolidations, sales of assets and similar transactions o No limitation on incurrence of additional indebtedness o No limitation on restricted payments o Events of default o Failure to pay interest for 30 days after due (relevant only after remarketing) o Nonpayment of principal when due o Nonpayment of more than $5 million of indebtedness for borrowed money beyond grace period o Bankruptcy o Failure to perform covenants for 90 days EX-3.D 3 AMENDED & RESTATED BY-LAWS COLUMBIA ENERGY GROUP 1 Exhibit 3-D COLUMBIA ENERGY GROUP ---------- AMENDED AND RESTATED BY-LAWS AMENDED AND RESTATED AS OF FEBRUARY 22, 2000 2 BY-LAWS Of COLUMBIA ENERGY GROUP --------- ARTICLE I. SEAL. The corporate seal of the Corporation shall consist of a metallic stamp circular in form, bearing in its center the figures "1926" and the words "Incorporated" and "Delaware" and on the outer edge the name of the Corporation. ARTICLE II. OFFICES. The location of the Corporation's principal office shall be in the County of New Castle, State of Delaware. The Corporation may, in addition to its principal office in the State of Delaware, establish and maintain an office or offices in such other states and places as the Board of Directors may from time to time find necessary or desirable. The books, documents, and papers of the Corporation, except as may be otherwise required by the laws of the State of Delaware, may be kept outside of the said State at such places as the Board of Directors may from time to time designate. 3 ARTICLE III. CAPITAL STOCK. Every stockholder shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the Chairman of the Board, the President or a Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation; provided, however, that any such signature on the certificate may be a facsimile. In case any officer or officers, Transfer Agent or Registrar who shall have signed, or whose facsimile signature or signatures shall have been used on any such certificate or certificates shall cease to be such officer or officers of the Corporation, Transfer Agent or Registrar, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures shall have been used thereon had not ceased to be such officer or officers of the Corporation, Transfer Agent or Registrar. Such certificates shall be transferable on the stock books of the Corporation in person or by attorney, but, except as hereinafter provided in the case of loss, destruction or mutilation of certificates, no transfer of stock shall be entered until the previous certificate, if any, given for the same shall have been surrendered and cancelled. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. The Board of Directors may make such rules and regulations as it may deem expedient, not inconsistent with these By-Laws, concerning the issue, transfer and registration of certificates for shares of the capital stock of the Corporation. It may 2 4 appoint one or more Transfer Agents or one or more Registrars or both, and may require all certificates of stock to bear the signature of either or both. In order that the Corporation may determine the stockholders entitled to notice of, or to vote at, a meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any other change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix in advance a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If in any case involving the determination of stockholders for any purpose other than notice of or voting at a meeting of stockholders the Board shall not fix such a record date, the record date for determining stockholders for such purpose shall be the close of business on the day on which the Board shall adopt the resolution relating thereto. A determination of stockholders entitled to notice of, or to vote at, a meeting of stockholders, shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. In case of loss, destruction or mutilation of any certificate of stock, another may be issued in its place upon proof of such loss, destruction or mutilation and upon the giving to the Corporation of a bond sufficient to indemnify the Corporation, its Transfer Agents and Registrars, against any claim that may be made against it or them on account of the alleged loss or destruction of any such certificate or the issuance of such new certificate; provided, however, that a new certificate may be issued without requiring any bond when, in the judgment of the Board of Directors, it is proper so to do. 3 5 ARTICLE IV. STOCKHOLDERS' MEETINGS. (a) All meetings of the stockholders shall be held either at the principal office of the Corporation in the State of Delaware, or at such other place, either within or without the State of Delaware as the Board of Directors shall determine. The place at which any given meeting shall be held shall be distinctly specified in the notice of such meeting. (b) The annual meeting of the stockholders of the Corporation, for the election of Directors and for the transaction of such other business as may come before the meeting, shall be held on the third Wednesday in May of each year, at nine o'clock in the morning, unless such day shall fall on a legal holiday, in which event the annual meeting shall be held on the day following. Such date and time of meeting may be changed by action of the Board of Directors. (c) Special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption). (d) If the annual meeting of the stockholders be not held as herein prescribed, the election of Directors may be held at any meeting thereafter called pursuant to these By-Laws. (e) Notice of the annual and of all special meetings of the stockholders shall be given each holder of stock of the Corporation 4 6 having power to vote at such meeting by depositing in the United States mail a written or printed notice of the same not less than ten nor more than sixty days prior to the meeting, with postage prepaid, to each such stockholder of record of the Corporation and addressed to him at his address as registered upon the books of the Corporation. Except in special cases where other provision is made by statute, no publication of any notice of a meeting of stockholders shall be required. Every notice of a meeting of stockholders shall state the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy except a stockholder who shall attend such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Except where otherwise required by statute for an adjournment exceeding thirty days or if a new record date is fixed for the adjourned meeting, notice of any adjourned meeting of the stockholders of the Corporation shall not be required to be given if the time and place thereof are announced at the meeting which is adjourned. It shall be the duty of the officer who shall have charge of the stock ledger of the Corporation to prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing their addresses of record and the number of shares held by each. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city, town or village where the meeting is to be held and which place shall be specified in the notice of the meeting, or, if not so specified, at the place where said meeting is to be held, and the list shall be produced and kept at the time and place of the meeting during the 5 7 whole time thereof, and subject to the inspection of any stockholder who may be present. (f) The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person, or represented by proxy, shall be requisite and shall constitute a quorum at all meetings of the stockholders for the transaction of any business except as otherwise provided by law, by the Certificate of Incorporation or by these By-Laws. If, however, such majority shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat present in person or by proxy shall have power to adjourn the meeting from time to time. At any such adjourned meeting at which the requisite amount of voting stock shall be represented any business may be transacted which might have been transacted at the meeting as originally called. (g) Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. (h) At any annual or special meeting of stockholders, proposals by stockholders and persons nominated for election as directors by stockholders shall be considered only if advance notice thereof has been timely given as provided herein and such proposals or nominations are otherwise proper for consideration under applicable law and the Certificate of Incorporation and By-Laws of the Corporation. Notice of any proposal to be presented by any stockholder or of the name of any person to be nominated by any stockholder for election as a director of the Corporation at any meeting of stockholders shall be delivered to the Secretary of the Corporation at its principal executive office not less than 60 nor more than 90 days prior to the date of the meeting; provided, 6 8 however, that if the date of the meeting is first publicly announced or disclosed (in a public filing or otherwise) less than 70 days prior to the date of the meeting, such advance notice shall be given not more than ten days after such date is first so announced or disclosed. Public notice shall be deemed to have been given more than 70 days in advance of the annual meeting if the Corporation shall have previously disclosed, in these By-Laws or otherwise, that the annual meeting in each year is to be held on a determinable date, unless and until the Board determines to hold the meeting on a different date. Any stockholder who gives notice of any such proposal shall deliver therewith the text of the proposal to be presented and a brief written statement of the reasons why such stockholder favors the proposal and setting forth such stockholder's name and address, the number and class of all shares of each class of stock of the Corporation beneficially owned by such stockholder and any material interest of such stockholder in the proposal (other than as a stockholder). Any stockholder desiring to nominate any person for election as a director of the Corporation shall deliver with such notice a statement in writing setting forth the name of the person to be nominated, the number and class of all shares of each class of stock of the Corporation beneficially owned by such person, the information regarding such person required by paragraphs (a), (e) and (f) of Item 401 of Regulation S-K adopted by the U.S. Securities and Exchange Commission (or the corresponding provisions of any regulation subsequently adopted by the U.S. Securities and Exchange Commission applicable to the Corporation), such person's signed consent to serve as a director of the Corporation if elected, such stockholder's name and address and the number and class of all shares of each class of stock of the Corporation beneficially owned by such stockholder. As used herein, shares "beneficially owned" shall mean all shares as to which such person, together with such person's affiliates and associates (as defined in Rule 12b-2 under the Securities Exchange Act of 1934), may be deemed to beneficially own pursuant to Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, 7 9 as well as all shares as to which such person, together with such person's affiliates and associates, has the right to become the beneficial owner pursuant to any agreement or understanding, or upon the exercise of warrants, options or rights to convert or exchange (whether such rights are exercisable immediately or only after the passage of time or the occurrence of conditions). The person presiding at the meeting, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall determine whether such notice has been duly given and shall direct that proposals and nominees not be considered if such notice has not been given. ARTICLE V. BOARD OF DIRECTORS. (a) The management of business and affairs of the Corporation shall be under the direction of a Board of Directors consisting of not less than thirteen (13) or more than eighteen (18) persons, the exact number to be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time of any such resolution is presented to the Board for adoption). At the 1986 annual meeting of stockholders, the directors shall be divided into three classes, as nearly equal in number as possible, with the term of office of the first class to expire at the 1987 annual meeting of stockholders, the term of office of the second class to expire at the 1988 annual meeting of stockholders and the term of office of the third class to expire at the 1989 annual meeting of the stockholders. Except as otherwise provided in the Corporation's Certificate of Incorporation, at each annual meeting of the stockholders following such initial classification and election, directors elected to succeed those 8 10 directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of the stockholders after their election. (b) Any director of the Corporation may resign at any time by giving written notice thereof to the Corporation. Such resignation shall take effect at the time specified therefor, and unless otherwise specified with respect thereto the acceptance of such resignation shall not be necessary to make it effective. Subject to the rights of the holders of the Preferred Stock to elect directors under specified circumstances, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80 percent of the combined voting power of all of the then outstanding shares of stock of all classes and series of the Corporation entitled to vote generally (the "Voting Stock"), voting together as a single class (it being understood that, for all purposes of these By-Laws, each share of the Preferred Stock shall have the number of votes granted to it pursuant to the Corporation's Certificate of Incorporation or any designation of terms of any class or series of Preferred Stock made pursuant to the Certificate of Incorporation). The Corporation must notify the director of the grounds of his impending removal and the director shall have an opportunity, at the expense of the Corporation, to present his defense to the stockholders by a statement which accompanies or precedes the Corporation's solicitation of proxies to remove him. The term 'entire Board' as used in these By-Laws means the total number of directors which the Corporation would have if there were no vacancies. (c) Newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then in office, even though 9 11 less than a quorum of the Board of Directors, acting at a regular or special meeting. If any applicable provision of the Delaware General Corporation Law expressly confers power on stockholders to fill such a directorship at a special meeting of stockholders, such a directorship may be filled at such a meeting only by the affirmative vote of at least 80 percent of the Voting Stock of the Corporation; provided, however, that when (a) pursuant to the provision of Article Fourth of the Certificate of Incorporation the holders of Preferred Stock have the right, and have exercised such right, to elect directors and (b) The Delaware General Corporation Law expressly confers on stockholders voting rights as aforesaid, if the directorship to be filled had been occupied by a director elected by holders of Common Stock, then such directorship shall be filled by an 80 percent vote as aforesaid, but if such directorship to be filled had been elected by holders of Preferred Stock, then such directorship shall be filled by the majority vote of the holders of Preferred Stock. Any director elected in accordance with the two preceding sentences shall hold office for the remainder of the full term of the directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. No decrease in the authorized number of directors constituting the entire Board of Directors shall shorten the term of any incumbent director. (d) Without prejudice to the general powers conferred by subdivision (a) of this Article, the Board of Directors shall have and exercise each and every power granted to them in Article Ninth of the Certificate of Incorporation of the Corporation. (e) Regular meetings of the Board of Directors shall be held at such office or offices, whether within or without the State of Delaware, and at such times as the Board shall from time to time determine. Special meetings of the Board of Directors may be called at any time by the Chief Executive Officer or, if he is incapacitated or 10 12 unable to call such meetings, by any member of the Board of Directors. Such meetings may take place in the office of the Corporation in the State of Delaware or in such office or offices as the Directors may establish. (f) Except as aforesaid, notice of all special meetings of the Board of Directors shall be given to each Director by five days' service of the same by telegram, or telephone or letter or personally. Notice of any special meeting of the Board of Directors shall state the place and hour of the meeting, but need not state the purposes thereof. Notice of any meeting of the Board or of any Committee need not be given to any Director if waived by him in writing, or by telegraph or cable, whether before or after such meeting be held, or if he shall be present at the meeting; and any meeting of the Board of Directors or of any Committee shall be a legal meeting without any notice thereof having been given, if all the members shall be present thereat. Notice of regular meetings of the Board need not be given. In the absence of written instructions from a Director designating some other address, notice shall be sufficiently given if addressed to him at his usual business address. (g) Except as provided in clause (c) of this Article, one-third of the total number of Directors shall constitute a quorum for the transaction of business at all meetings of the Board of Directors; but less than a quorum may adjourn the meeting. (h) Each Director of the Corporation shall be entitled to receive such fixed sum per meeting of the Board of Directors attended, or such annual sum, or both, as the Board shall from time to time determine, together with his expenses of attendance at such meeting. 11 13 ARTICLE VI. STANDING COMMITTEES. (a) The Board of Directors shall, by resolution adopted by a majority of the whole Board, designate annually three or more of their number, one of whom shall be the Chief Executive Officer, to constitute an Executive Committee which shall have power to authorize the seal of the Corporation to be affixed to all papers which may require it, and shall have and may exercise in the intervals between the meetings of the Board of Directors the powers of the Board in the management of the business and affairs of the Corporation (including the power and authority to declare a dividend and to authorize the issuance of stock) except the power in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the By-Laws of the Corporation. The Executive Committee shall study and report to the Board of Directors on such matters as shall be referred to it by the Board or by the Chairman of the Board or Chief Executive Officer. The Board of Directors may also designate one or more other Directors as alternate members of the Executive Committee, who may replace any absent or disqualified member at any meeting of the Committee. In the absence or disqualification of a member of the Committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another Director to act at the meeting in the place of any such absent or disqualified member. Each member of the Executive Committee shall continue to be a member thereof only during the pleasure of a majority of the whole Board. 12 14 (b) The Board of Directors shall designate the Chairman of the Executive Committee, who may be any member thereof. In the absence from any meeting of the Executive Committee of its Chairman, the Committee may appoint a Chairman of the meeting. At any meeting at which the Executive Committee may exercise its power to act in intervals between the meetings of the Board in the management of the business and affairs of the Corporation, the Secretary of the Corporation shall act as Secretary thereof. In the absence from any such meeting of the Secretary, and at any other meeting of the Committee, the Committee may appoint a Secretary of the meeting. (c) Meetings of the Executive Committee may be called at the request of any member of the Committee. Two days' notice of each meeting of the Executive Committee shall be given by mail, telegraph or telephone or be delivered personally, to each member of the Committee. Notice of any meeting need not be given to any member of the Executive Committee if waived by him in writing or by telegraph or cable, whether before or after such meeting be held, or if he shall be present at the meeting; and any meeting of the Committee shall be a legal meeting without any notice thereof having been given, if all the members of the Committee shall be present thereat. In the absence of written instructions from a member of the Executive Committee designating some other address, notice shall be sufficiently given if addressed to him at his usual business address. Subject to the provisions of this Article VI, the Executive Committee, by resolution of a majority of all of its members, shall fix its own rules of procedure and shall keep a record of its proceedings and report them to the Board of Directors at the next regular meeting thereof after such proceedings shall have been taken. All such proceedings shall be subject to revision or alteration by the Board of Directors; provided, however, that third parties shall not be prejudiced by such revision or alteration. 13 15 (d) A quorum of the Executive Committee for the transaction of business shall consist of not less than one-third of the total number of members thereof nor less than two members thereof, and the act of a majority of those present at a meeting at which a quorum is present shall be the act of the Executive Committee. Less than a quorum may adjourn a meeting. The members of the Executive Committee shall act only as a committee, and the individual members shall have no power as such. (e) Any member of the Executive Committee may resign at any time by giving written notice to the Chief Executive Officer or to the Secretary of the Corporation. Such resignation shall take effect at the time specified in such notice and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. (f) Any vacancy in the Executive Committee shall be filled by the vote of a majority of the whole Board of Directors. (g) The members of the Executive Committee shall be entitled to receive such fees and compensation as the Board of Directors may determine. (h) The Board of Directors may, by resolution adopted by a majority of the whole Board, also appoint such other standing or temporary committees from time to time as they may see fit, investing them with all or any part of their own powers. All committees shall adopt their own rules of procedure and shall keep regular minutes of their transactions in books kept in the office of the Corporation, and shall report the same to the Board of Directors or to the Executive Committee at the various meetings thereof. 14 16 ARTICLE VII. OFFICERS. (a) The officers of the Corporation shall be the President, one or more Vice Presidents, the Secretary and the Treasurer, who shall be elected by the Board of Directors, and such additional Assistant Secretaries, Assistant Treasurers, and special subordinate officers as may from time to time be elected or appointed by the Board of Directors or appointed by the Chief Executive Officer. A Chairman of the Board and a Vice Chairman of the Board may be elected by the Board of Directors. The Board shall designate an officer as the Chief Executive Officer. Any two of the above offices, not counting the title of Chief Executive Officer, may be held by the same person. The Chief Executive Officer shall, if present, preside at all meetings of the stockholders and at all meetings of the Board of Directors, provided, however, that if there is a Chairman of the Board who is not the Chief Executive Officer, the Chairman of the Board, if present, shall preside at all meetings of the stockholders and the Board of Directors. The Chief Executive Officer or an officer designated by him shall make a report on the state of the business of the Corporation at each annual meeting of stockholders. From time to time, the Chief Executive Officer or officers designated by him shall report to the stockholders and to the Board of Directors and to the Executive Committee all matters within the knowledge of the Chief Executive Officer which in his judgment the interests of the Corporation may require to be brought to their notice. All of the officers of the Corporation shall hold office for one year and until others are elected or appointed and qualified in their stead, unless in the election or appointment of the officer it shall be specified that he holds his office for a shorter period or 15 17 subject to the pleasure of the Board of Directors or the Chief Executive Officer. All vacancies in such offices by resignation, death or otherwise may be filled by the Board of Directors. In the case of absence or inability to act of any officer of the Corporation, and of any person herein authorized to act in his place, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer or any Director or other person whom they may select. (b) The Chief Executive Officer shall have general and active supervision and direction over the business and affairs of the Corporation and over its several officers; subject, however, to the control of the Board of Directors and of the Executive Committee. He shall see that all orders and resolutions of the Board of Directors and of the Executive Committee are carried into effect. He may be ex officio a member of all standing committees of the Board of Directors, and he shall perform such other duties as may be assigned to him from time to time by the Board of Directors or by the Executive Committee. (c) The Chairman or Vice Chairman of the Board, if elected, shall perform such duties as from time to time may be assigned by the Board of Directors or by the Executive Committee. (d) The President and the Vice Presidents shall perform such duties as the Board of Directors shall, from time to time, require. (e) The Treasurer shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation, shall deposit all moneys and other valuables in the name and to the credit of the Corporation, in such depositaries as may be directed by the Board of Directors, shall disburse the funds of the Corporation as may be ordered by the Board or the Chief Executive 16 18 Officer taking proper vouchers therefor, and shall render to the Chief Executive Officer and the Directors whenever they may require it an account of all his transactions as Treasurer and of the financial condition of the Corporation. He shall also perform such other duties as the Board of Directors may from time to time require. If required by the Board of Directors he shall give the Corporation a bond in a form and in a sum with surety satisfactory to the Board of Directors for the faithful performance of the duties of his office and the restoration to the Corporation in the case of his death, resignation or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession belonging to the Corporation. At the request of the Treasurer, or in his absence or inability to act, the Assistant Treasurer or, if there be more than one, the Assistant Treasurer designated by the Treasurer, shall perform the duties of the Treasurer and when so acting shall have the powers of and be subject to all the restrictions of the Treasurer. The Assistant Treasurers shall perform such other duties as may from time to time be assigned to them by the Chief Executive Officer, the Treasurer or the Board of Directors. (f) The Secretary shall attend all meetings of the Board of Directors and of the stockholders and act as Clerk thereof and record all votes and the minutes of all proceedings in a book to be kept for that purpose, and shall perform like duties for the standing committees when required. He shall keep in safe custody the seal of the Corporation and, whenever authorized by the Board or the Executive Committee, affix the seal to any instrument requiring the same. He shall see that proper notice is given of all meetings of the stockholders of the Corporation and of the Board of Directors and shall perform such other duties as may be prescribed from time to time by the Board of Directors or the Chief Executive Officer. 17 19 At the request of the Secretary, or in his absence or inability to act, the Assistant Secretary or, if there be more than one, the Assistant Secretary designated by the Secretary, shall perform the duties of the Secretary and when so acting shall have all the powers of and be subject to all the restrictions of the Secretary. The Assistant Secretaries shall perform such other duties as may from time to time be assigned to them by the Chief Executive Officer, the Secretary or the Board of Directors. (g) Any officer of the Corporation may be removed, either with or without cause, at any time, by resolution adopted by the Board of Directors at a regular meeting or at a special meeting of the Board called for that purpose, by any Committee upon whom such power of removal may be conferred by the Board of Directors or by a superior officer upon whom such power of removal may be conferred by the Board of Directors. ARTICLE VIII. CONTRACTS, CHECKS, NOTES, ETC. (a) All contracts and agreements authorized by the Board of Directors or the Executive Committee, and all checks, drafts, notes, bonds, bills of exchange and orders for the payment of money (including orders for repetitive or non-repetitive electronic funds transfers) shall, unless otherwise directed by the Board of Directors, or unless otherwise required by law, be signed by any two of the following officers: the Chairman of the Board, the President, any Vice President, the Treasurer, the Secretary, any Assistant Treasurer or any Assistant Secretary; provided that in every case at least one such officer shall be the Chairman of the Board, the President, a Vice President, the Treasurer or the Secretary. The Board of Directors may, however, notwithstanding the foregoing provision, by resolution adopted at any meeting, 18 20 authorize any of said officers to sign checks, drafts and such orders for the payment of money singly and without necessity of countersignature, and may designate officers of the Corporation other than those named above, or different combinations of such officers, who may, in the name of the Corporation, execute checks, drafts, and such orders for the payment of money in its behalf. Further, the Treasurer is authorized to designate to the Corporation's banks, in writing, individuals employed in the Columbia Energy Group Service Corporation Cash Management Department, who need not be officers or employees of the Corporation, to give in the name of the Corporation telephonic, telegraphic, or electronic transfer instructions for the payment of money, which may, with respect to routine items, include instructions as to the amount to be transferred, to any bank, pursuant to previously issued written orders, signed by officers of the Corporation in any manner provided above, which designate the recipients of such amounts and which identify what shall be treated as routine items. (b) Anything in subdivision (a) of this Article VIII to the contrary notwithstanding, the officers of this Corporation may open in the name of the Corporation special accounts appropriately designated in which shall be deposited funds of the Corporation transferred from the Corporation's other accounts by its checks signed in accordance with the requirements of subdivision (a) of this Article VIII, but from which special accounts funds may be disbursed by check, draft, or other instrument of the Corporation designated as drawn against such special account and signed by the single signature of any one of the executive officers of the Corporation authorized by subdivision (a) of this Article VIII to sign checks, drafts and other instruments of the Corporation or signed by the single signature of any other person expressly authorized by the Board to sign checks, drafts and other instruments disbursing funds from such special accounts. 19 21 (c) Anything in subdivision (a) of this Article VIII to the contrary notwithstanding, (i) bonds, notes, debentures and other evidence of indebtedness of the Corporation issued under an indenture may be executed in the name of the Corporation by the facsimile signature, printed, engraved or otherwise used thereon, of the Chairman of the Board, the President or any Vice President of the Corporation, and the corporate seal affixed thereto or impressed, printed, engraved or otherwise reproduced thereon may be attested by the facsimile signature of the Secretary or an Assistant Secretary of the Corporation, provided that the indenture require the same to be authenticated by the trustee under such indenture, and (ii) interest coupons attached to any such bond, note, debenture or other evidence of indebtedness may be executed on behalf of the Corporation by the facsimile signature of the Treasurer of the Corporation. ARTICLE IX. FISCAL YEAR. The fiscal year of the Corporation shall begin on the first day of January in each year. ARTICLE X. AMENDMENT OF BY LAWS. These By-Laws may be amended, added to, rescinded or repealed at any meeting of the Board of Directors or of the stockholders, provided notice of the proposed change was given in the notice of the meeting or, in the case of a meeting of the Board of Directors, in a notice given not less than two days prior to the meeting; provided, however, that, notwithstanding any other 20 22 provisions of these By-Laws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, the Certificate of Incorporation, any class or series of Preferred Stock or these By-Laws, the affirmative vote of at least 80 percent of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such alteration, amendment or repeal is presented to the Board for adoption), shall be required to alter, amend or repeal Article IV (c), IV (g), V (a), V (b), V (c), and V (g) of these By-Laws or this proviso to this Article X of these By-Laws. ARTICLE XI. NATIONAL EMERGENCY. (a) Definition and Application. For the purposes of this Article XI the term "national emergency" is defined as an emergency situation resulting from an attack upon the United States, a nuclear disaster within the United States, a catastrophe, or other emergency condition, as a result of which attack, disaster, catastrophe or emergency condition a quorum of the Board of Directors cannot readily be convened for action. Persons not directors of the Corporation may conclusively rely upon a determination by the Board of Directors of the Corporation, at a meeting held or purporting to be held pursuant to this Article XI that a national emergency as hereinabove defined exists regardless of the correctness of such determination made or purporting to be made as hereinafter provided. During the existence of a national emergency the provisions of this Article XI shall become operative, but, to the extent not inconsistent with such provisions, the other provisions of these By-Laws shall remain in effect during any 21 23 national emergency and upon its termination the provisions of this Article XI shall cease to be operative. (b) Meetings, etc. When it is determined in good faith by any director that a national emergency exists, special meetings of the Board of Directors may be called by such director. The director calling any such special meeting shall make a reasonable effort to notify all other directors of the time and place of such special meeting, and such effort shall be deemed to constitute the giving of notice of such special meeting, and every director shall be deemed to have waived any requirement, of law or otherwise, that any other notice of such special meeting be given. At any such special meeting two directors shall constitute a quorum for the transaction of business including, without limiting the generality hereof, the filling of vacancies among directors and officers of the Corporation and the election of additional Vice Presidents, Assistant Secretaries and Assistant Treasurers. The act of a majority of the directors present thereat shall be the act of the Board of Directors. If at any such special meeting of the Board of Directors there shall be only one director present, such director present may adjourn the meeting from time to time until a quorum is obtained, and no further notice thereof need be given of any such adjournment. The directors present at any such special meeting shall make reasonable effort to report any action taken thereat to all absent directors, but failure to give such report shall not affect the validity of the action taken at any such meeting. All directors, officers, employees and agents of, and all persons dealing with, the Corporation, if acting in good faith, may conclusively rely upon any action taken at any such special meeting. (c) Amendment. The Board of Directors shall have the power to alter, amend, or repeal any of these By-Laws by the affirmative vote of at least two-thirds (2/3) of the directors present at any special meeting attended by two (2) or more directors and held in the manner prescribed in (b) of this Article, if it is 22 24 determined in good faith by said two-thirds (2/3) that such alteration, amendment or repeal would be conducive to the proper direction of the Corporation's affairs. (d) Chief Executive Officer. If, during the existence of a national emergency, the Chief Executive Officer of the Corporation becomes incapacitated, cannot by reasonable effort be located, or otherwise is unable or unavailable to perform the duties of his office, an Executive Vice President of the Corporation, if there be one, is hereby designated as Chief Executive Officer. The Executive Vice President senior in office, if there be more than one, shall so serve. If an Executive Vice President is unable or unavailable to perform the duties of the Chief Executive Officer of the Corporation, the senior available Vice President shall be designated as Chief Executive Officer, such seniority to be determined by the date on which such Vice President was first elected or appointed to such office. If none of the foregoing officers is able or available to perform the duties of the Chief Executive Officer, the next senior available officer of the Corporation is hereby designated as Chief Executive Officer, such seniority to be determined by the date on which he was first elected or appointed to serve. (e) Substitute Directors. To the extent required to constitute a quorum at any meeting of the Board of Directors during a national emergency, the officers of the Corporation who are present shall be deemed, in order of rank of office and within the same rank in order of election or appointment to such office, directors for such meeting. I, Carolyn McKinney Afshar, Secretary of COLUMBIA ENERGY GROUP, hereby certify that the foregoing constitutes a true and correct copy of the By-Laws of said Corporation, amended and restated as of February 22, 2000. 23 25 IN WITNESS WHEREOF, I have hereunto set my hand and the seal of said Corporation, this 22nd day of February 2000. /s/ Carolyn Afshas ------------------ Secretary 24 EX-10.CO 4 AMENDMENT #1 TO $450,000,000 364-DAY CREDIT AGMT. 1 Exhibit 10-CO AMENDMENT NO. 1 TO THE U.S. $450,000,000 AMENDED AND RESTATED 364-DAY CREDIT AGREEMENT DATED AS OF MARCH 10, 1999 THIS AMENDMENT NO. 1, dated as of February 15, 2000 (this "Amendment No. 1") to the Amended and Restated 364-Day Credit Agreement, dated as of March 10, 1999 (the "Agreement") among Columbia Energy Group, a Delaware corporation (the "Borrower"), the banks, financial institutions and other institutional lenders parties to the Agreement (collectively, the "Lenders"), Salomon Smith Barney Inc., as arranger and book manager, and Citibank N.A., as administrative and syndication agent for the Lenders, evidences the agreement of the parties as follows: WHEREAS, the Borrower and the Required Lenders desire to amend the Agreement in accordance with Section 8.01 thereof. NOW, THEREFORE, in consideration of the foregoing and the respective covenants, agreements and conditions hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. Amendment to Agreement. Section 6.01(h) of the Agreement is amended to delete the following text therefrom: "(iii) any Person or two or more Persons acting in concert shall have acquired by contract or otherwise (excluding employment contracts with officers of the Borrower) or shall have entered into a contract or arrangement (excluding employment contracts with officers of the Borrower), that, upon consummation, will result in its or their acquisition of the power to exercise, directly or indirectly, a controlling influence over the management or policies of the Borrower; or" SECTION 2. Capitalized Terms. Capitalized terms used but not otherwise defined in this Amendment No. 1 shall have the respective meanings ascribed to such terms in the Agreement. 2 SECTION 3. Execution in Counterparts. This Amendment No. 1 may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment No. 1 by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment No. 1. SECTION 4. Governing Law. This Amendment No. 1 shall be governed by, and construed in accordance with the laws of the State of New York. SECTION 5. Jurisdiction, Etc. (a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or federal court of the United States of America sitting in New York City, and any appellate court for any thereof, in any action or proceeding arising out of or relating to this Agreement or the Notes, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the extent permitted by law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or the Notes in the courts of any jurisdiction. (b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the Notes in any New York State or federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. SECTION 6. Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be executed by their respective officers thereunto duly authorized, as of the date first above written. COLUMBIA ENERGY GROUP By: /s/ Michael W. O'Donnell ______________________________ Name: Michael W. O'Donnell Title: Senior Vice President and Chief Financial Officer SALOMON SMITH BARNEY INC., as Arranger and Book Manager By: /s/ J. Christopher Lyons ______________________________ Name: J. Christopher Lyons Title: Attorney-in-Fact CITIBANK, N.A., as Administrative and Syndication Agent By: /s/ J. Christopher Lyons ______________________________ Name: J. Christopher Lyons Title: Attorney-in-Fact Lenders CITIBANK, N.A. By: /s/ J. Christopher Lyons ______________________________ Name: J. Christopher Lyons Title: Attorney-in-Fact THE CHASE MANHATTAN BANK By: /s/ Steven Wood ______________________________ Name: Steven Wood Title: Vice President 4 PNC BANK, NATIONAL ASSOCIATION By: /s/ Thomas A. Majeski ______________________________ Name: Thomas A. Majeski Title: Vice President BANK OF MONTREAL By: /s/ Ian M. Plester ______________________________ Name: Ian M. Plester Title: Director CANADIAN IMPERIAL BANK OF COMMERCE By: /s/ M. Beth Miller ______________________________ Name: M. Beth Miller Title: Authorized Signatory FIRST UNION NATIONAL BANK By: /s/ Michael J. Kolosowski ______________________________ Name: Michael J. Kolosowski Title: Vice President BANKERS TRUST COMPANY By: ______________________________ Name: Title: BANK ONE By: /s/ George R. Schanz ______________________________ Name: George R. Schanz Title: First Vice President 5 ALLFIRST BANK By: /s/ Shaun E. Murphy ______________________________ Name: Shaun E. Murphy Title: Senior Vice President NATIONAL CITY BANK By: /s/ Gregory D. Miller ______________________________ Name: Gregory D. Miller Title: Vice President COMMERZBANK AG, NEW YORK BRANCH By: /s/ Andrew Kjoller ______________________________ /s/ Timothy Chin ______________________________ Name: Andrew Kjoller Timothy Chin Title: Assistant Vice President Assistant Vice President NATIONSBANK, N.A. By: /s/ Paula Z. Kramp ______________________________ Name: Paula Z. Kramp Title: Principal ARAB BANK, PLC By: ______________________________ Name: Title: THE BANK OF NOVA SCOTIA By: /s/ F.C.H. Ashby ______________________________ Name: F.C.H. Ashby Title: Senior Manager Loan Operations 6 BANK OF TOKYO-MITSUBISHI TRUST COMPANY By: /s/ Nicholas R. Battista ______________________________ Name: Nicholas R. Battista Title: Vice President CRESTAR BANK By: /s/ Nancy R. Petrash ______________________________ Name: Nancy R. Petrash Title: Senior Vice President BANCA MONTE DEI PASCHI DI SIENA, S.p.A. By: ______________________________ Name: Title: SOCIETE GENERALE By: /s/ Gordon R. Eadon ______________________________ Name: Gordon R. Eadon Title: Director UNION BANK OF CALIFORNIA By: /s/ David Musicant ______________________________ Name: David Musicant Title: Vice President EX-10.CP 5 AMENDMENT #1 TO U.S. $900,000,000 CREDIT AGMT. 1 Exhibit 10-CP AMENDMENT NO. 1 TO THE U.S. $900,000,000 CREDIT AGREEMENT DATED AS OF MARCH 11, 1998 THIS AMENDMENT NO. 1, dated as of February 15, 2000 (this "Amendment No. 1") to the Credit Agreement, dated as of March 11, 1998 (the "Agreement") among Columbia Energy Group, a Delaware corporation (the "Borrower"), the banks, financial institutions and other institutional lenders listed on the signature page of the Agreement (collectively, the "Lenders") and Citibank N.A., as administrative and syndication agent for the Lenders, evidences the agreement of the parties as follows: WHEREAS, the Borrower and the Required Lenders desire to amend the Agreement in accordance with Section 8.01 thereof. NOW, THEREFORE, in consideration of the foregoing and the respective covenants, agreements and conditions hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. Amendment to Agreement. Section 6.01(h) of the Agreement is amended to delete the following text therefrom: "(iii) any Person or two or more Persons acting in concert shall have acquired by contract or otherwise (excluding employment contracts with officers of the Borrower) or shall have entered into a contract or arrangement (excluding employment contracts with officers of the Borrower), that, upon consummation, will result in its or their acquisition of the power to exercise, directly or indirectly, a controlling influence over the management or policies of the Borrower; or" SECTION 2. Capitalized Terms. Capitalized terms used but not otherwise defined in this Amendment No. 1 shall have the respective meanings ascribed to such terms in the Agreement. 2 SECTION 3. Execution in Counterparts. This Amendment No. 1 may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment No. 1 by telecopier shall be effective as delivery of a manually executed counterpart of this Amendment No. 1. SECTION 4. Governing Law. This Amendment No. 1 shall be governed by, and construed in accordance with the laws of the State of New York. SECTION 5. Jurisdiction, Etc. (a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or federal court of the United States of America sitting in New York City, and any appellate court for any thereof, in any action or proceeding arising out of or relating to this Agreement or the Notes, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the extent permitted by law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or the Notes in the courts of any jurisdiction. (b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the Notes in any New York State or federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. SECTION 6. Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be executed by their respective officers thereunto duly authorized, as of the date first above written. COLUMBIA ENERGY GROUP By: /s/ Michael W. O'Donnell ______________________________ Name: Michael W. O'Donnell Title: Senior Vice President Chief Financial Officer SALOMON SMITH BARNEY INC. as Arranger and Book Manager By: /s/ J. Christopher Lyons ______________________________ Name: J. Christopher Lyons Title: Attorney-in-Fact CITIBANK, N.A. as Administrative and Syndication Agent By: /s/ J. Christopher Lyons ______________________________ Name: J. Christopher Lyons Title: Attorney-in-Fact Lenders CITIBANK, N.A. By: /s/ J. Christopher Lyons ______________________________ Name: J. Christopher Lyons Title: Attorney-in-Fact THE CHASE MANHATTAN BANK By: /s/ Steven Wood ______________________________ Name: Steven Wood Title: Vice President 4 PNC BANK, NATIONAL ASSOCIATION By: /s/ Thomas A. Majeski ______________________________ Name: Thomas A. Majeski Title: Vice President BANK OF MONTREAL By: /s/ Ian M. Plester ______________________________ Name: Ian M. Plester Title: Director CANADIAN IMPERIAL BANK OF COMMERCE By: /s/ M. Beth Miller ______________________________ Name: M. Beth Miller Title: Authorized Signatory FIRST UNION NATIONAL BANK By: /s/ Michael J. Kolosowsky ______________________________ Name: Michael J. Kolosowsky Title: Vice President BANKERS TRUST COMPANY By: ______________________________ Name: Title: BANK ONE By: /s/ George R. Schanz ______________________________ Name: George R. Schanz Title: First Vice President 5 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ Robert Bottamedi ______________________________ Name: Robert Bottamedi Title: Vice President ALLFIRST BANK By: /s/ Shaun E. Murphy ______________________________ Name: Shaun E. Murphy Title: Senior Vice President NATIONAL CITY BANK By: /s/ Gregory D. Miller ______________________________ Name: Gregory D. Miller Title: Vice President COMMERZBANK AG, NEW YORK BRANCH By: /s/ Andrew Kjoller Timothy Chin ______________________________ Name: Andrew Kjoller Timothy Chin Title: Assistant Vice President NATIONSBANK, N.A. By: /s/ Paula Z. Kramp ______________________________ Name: Paula Z. Kramp Title: Principal ARAB BANK, PLC By: ______________________________ Name: Title: 6 THE BANK OF NOVA SCOTIA By: /s/ F.C.H. Ashby ______________________________ Name: F.C.H. Ashby Title: Senior Manager Loan Operations BANK OF TOKYO-MITSUBISHI TRUST COMPANY By: /s/ Nicholas R. Battista ______________________________ Name: Nicholas R. Battista Title: Vice President CREDIT AGRICOLE By: ______________________________ Name: Title: CRESTAR BANK By: /s/ Nancy R. Petrash ______________________________ Name: Nancy R. Petrash Title: Senior Vice President BANCA MONTE DEI PASCHI DI SIENA, S.p.A. By: ______________________________ Name: Title: SOCIETE GENERALE By: /s/ Gordon R. Eadon ______________________________ Name: Gordon R. Eadon Title: Director 7 UNION BANK OF CALIFORNIA By: /s/ David Musicant ______________________________ Name: David Musicant Title: Vice President EX-12 6 STATEMENT OF RATIO OF EARNINGS TO FIXED CHARGES 1 Exhibit 12 COLUMBIA ENERGY GROUP AND SUBSIDIARIES Statements of Ratio of Earnings to Fixed Charges ($ in millions)
Twelve Months Ended December 31, ------------------ 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Consolidated Income (Loss) from Continuing Operations before Income Taxes 513.2 449.1 403.5 331.8 (645.6) Adjustments: Interest during construction (2.8) (2.1) (3.0) (1.1) (20.2) Distributed (Undistributed) equity income (5.8) (0.4) 3.6 1.5 (7.9) Fixed charges * 185.9 164.9 181.3 184.4 1,061.3 ----- ----- ----- ----- ------- Earnings Available 690.5 611.5 585.4 516.6 387.6 ----- ----- ----- ----- ------- Fixed Charges: Interest on long-term and short-term debt 152.9 145.4 145.6 150.8 987.2 Other interest 15.0 1.8 15.2 13.5 53.6 Portion of rentals representing interest 18.0 17.7 20.5 20.1 20.5 ----- ----- ----- ----- ------- Total Fixed Charges ** 185.9 164.9 181.3 184.4 1,061.3 ----- ----- ----- ----- ------- Ratio of Earnings to Fixed Charges 3.71 3.71 3.23 2.80 N/A (a) ===== ===== ===== ===== =======
(a) To achieve a one-to-one coverage, the Corporation would need an additional $673.7 million of earnings in 1995. * Amounts for the twelve months ended December 31, 1995 through December 31, 1998 have been restated to conform to 1999 presentation. ** This amount includes interest expense of $982.9 million including the write-off of unamortized discounts on debentures recorded in 1995. Reference is made to the Statements of Consolidated Income for the twelve months ended December 31, 1995, as reported on Form 10-K and Note 2 of Notes to Consolidated Financial Statements of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1995. EX-21 7 SUBSIDIARY OF THE COLUMBIA ENERGY GROUP 1 Exhibit 21 Subsidiaries of the Columbia Energy Group as of December 31, 1999
State of Segment / Subsidiary Incorporation -------------------- ------------- Transmission and Storage Operations Columbia Gas Transmission Corporation Delaware Columbia Gulf Transmission Company Delaware Columbia Pipeline Corporation Delaware Distribution Operations Columbia Gas of Kentucky, Inc. Kentucky Columbia Gas of Maryland, Inc. Delaware Columbia Gas of Ohio, Inc. Ohio Columbia Gas of Pennsylvania, Inc. Pennsylvania Columbia Gas of Virginia, Inc. Virginia Exploration and Production Operations Columbia Energy Resources, Inc. Texas Energy Marketing Operations Columbia Energy Services Corporation Kentucky Columbia Propane Corporation Delaware Power Generation, LNG and Other Operations Columbia LNG Corporation Delaware Columbia Atlantic Trading Corporation Delaware Columbia Electric Corporation Delaware Columbia Energy Group Capital Corporation Delaware Columbia Network Services Corporation Delaware Corporate Columbia Energy Group Service Corporation Delaware Columbia Insurance Corporation, Ltd Bermuda Columbia Finance Corporation Delaware
EX-23.A 8 CONSENT 1 EXHIBIT 23-A CONSENT As independent petroleum and natural gas consultants, we hereby consent to the filing of this Letter Report dated January 24, 2000 in its entirety as an Exhibit to the 1999 Annual Report of Columbia Energy Group, to the Securities and Exchange Commission on Form 10-K, and any Registration Statement of Columbia Energy Group, relating to the issue of securities to the public during 2000; to the quotation or summarization of portions of this Letter Report, subject to our approval of the related page(s) of the document(s), in the 10-K, the Prospectus included in said Registration Statement(s) or the 1999 annual Report to Stockholders; and, subject to approval of the related page(s) of the document(s), to the use of our name and the reliance upon our authority as experts in said Annual Report to Stockholders, Form 10-K and Prospectus(es). We have no interest of a substantial or material nature in Columbia Energy Group, or in any affiliate, nor are we to receive any such interest as payment for the preparation of this Letter Report; we have not been employed for such preparation on a contingent fee basis; and we are not connected with Columbia Energy Group, or any affiliate as a promoter, underwriter, voting trustee, director, officer, employee, or affiliate. RYDER SCOTT COMPANY, L.P. Houston, Texas January 24, 2000 EX-23.B 9 CONSENT OF ARTHUR ANDERSEN LLP 1 Exhibit 23-B CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated January 25, 2000, included in Columbia Energy Group's 1999 Annual Report on Form 10-K, into the following previously filed registration statements: 1. Form S-8 of Columbia Energy Group (File No. 333-03869) 2. Form S-8 of Columbia Energy Group (File No. 33-42776) 3. Form S-8 of Columbia Energy Group (File No. 333-80797) 4. Form S-3 of Columbia Energy Group (File No. 33-64555) ARTHUR ANDERSEN LLP New York, New York February 25, 2000 EX-23.C 10 EVALUATION OF THE P&NG RESERVES 1 Exhibit 23-C January 20, 2000 RE: EVALUATION OF THE P&NG RESERVES OF COLUMBIA NATURAL RESOURCES (AS OF DECEMBER 31, 1999) CONSTANT PRICE AND COST VERSION FOR U.S. SECURITIES REPORTING REQUIREMENTS As independent petroleum and natural gas consultants, we hereby consent to the filing of this Letter Report in its entirety as an Exhibit to the 1999 Annual Report of Columbia Energy Group to the Securities and Exchange Commission on Form 10-K, and any Registration Statement of Columbia Energy Group, relating to the issue of securities to the public during 2000; to the quotation or summarization of portions of this Letter Report, subject to our approval of the related page(s) of the document(s), in the 10-K, the Prospectus included in said Registration Statement(s) or the 1999 Annual Report to Stockholders; and, subject to approval of the related page(s) of the document(s), to the use of our name and the reliance upon our authority as experts in said Annual Report to Stockholders, Form 10-K and Prospectus(es) and in Part II of said Registration Statement(s). We have no interest of a substantial or material nature in Columbia Energy Group, or in any affiliate, nor are we to receive any such interest as payment for the preparation of this Letter Report; we have not been employed for such preparation on a contingent fee basis; and we are not connected with Columbia Energy Group or any affiliate as a promoter, underwriter, voting trustee, director, officer, employee, or affiliate. /s/ Peter C. Sidey ---------------------------------------- Peter C. Sidey, P.Eng. Senior Reservoir Engineer /s/ H.J. Helwerda ---------------------------------------- H. J. Helwerda, P.Eng. Vice-President, Engineering RNJ:HJH:CR:paob EX-27 11 FINANCIAL DATA SCHEDULE
OPUR1 0000022099 COLUMBIA ENERGY GROUP AND SUBSIDIARIES 1 CEG 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 PER-BOOK 4,441,800 704,000 1,393,200 198,800 358,100 7,095,900 800 1,611,600 586,900 2,064,000 0 0 1,639,700 125,000 0 340,500 311,300 0 2,800 0 2,615,400 7,095,900 3,189,200 158,200 1,346,400 2,540,800 648,400 29,200 677,600 164,400 249,200 0 249,200 71,800 138,000 831,600 3.03 3.01
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