The Columbia Gas System, Inc. Business Information, Profile, and History

Company Perspectives:

The Columbia Gas System, Inc., through its subsidiaries, is active in pursuing opportunities in all segments of the natural gas industry and in related energy resource development. Exemplified by Columbia's three-star logo, these separately managed companies strive to benefit: system shareholders, through enhancing the value of their investments; customers, through efficient, safe, reliable services; and employees, through challenging and rewarding careers.

History of The Columbia Gas System, Inc.

The Columbia Gas System, Inc., is one of the largest integrated natural gas systems in the United States. Columbia has two production subsidiaries that explore for and produce natural gas at numerous sites throughout North America. The company also operates five distribution subsidiaries that serve more than 1.9 million customers--residential, commercial, and industrial--in Ohio, Kentucky, Pennsylvania, Virginia, and Maryland. Columbia also provides wholesale service to other gas distributors. The company operates two interstate gas transmission subsidiaries, Columbia Transmission and Columbia Gulf. These two companies operate a network of 23,000 miles of pipeline. Columbia Transmission transports and stores gas throughout the Northeastern and Mid-Atlantic states, as well as portions of the Midwest. Columbia Gulf transports gas through its pipeline from the Gulf of Mexico to West Virginia, as well as within the Gulf Coast area. Columbia also operates a marketing subsidiary to oversee its own natural gas marketing efforts, and to provide supply and fuel management services to natural gas distribution companies and independent producers. Columbia also owns the largest liquefied natural gas receiving and regasification facility in North America, at Cove Point, Maryland. The company, through two subsidiaries, also sells propane wholesale and retail to more than 68,000 customers.

Strong Foundation: 1906-1960

Columbia Corporation, formed in 1906 in Huntington, West Virginia, produced natural gas in that state and eastern Kentucky for delivery to Cincinnati, Ohio. Later renamed Columbia Gas & Electric Company, it doubled in size with the acquisition of Ohio Fuel Corporation in 1926. The resulting company was incorporated in Delaware as Columbia Gas & Electric Corporation.

The addition of Ohio Fuel greatly increased the volume of gas that the company sold. Natural gas had rapidly decreased in price as gathering and transmission systems improved and usage increased. Columbia's electricity sales, although still significant, were flattening. By the late 1920s it was clear that natural gas held the key to the company's growth. Oil was a companion product that Columbia Gas & Electric exploited.

The arrival of high-pressure pipelines in the late 1920s broadened the company's growth potential; natural gas then could be transported vast distances from the fields where it originated. Columbia pushed its lines eastward throughout Pennsylvania, and into New Jersey and New York state. In 1930 the acquisition of a 50 percent interest in Panhandle Eastern Pipe Line Company allowed Columbia to connect its eastern lines with natural gas fields in Texas. Meanwhile, Columbia Gas & Electric had gained control of virtually all the important reserves in northern Appalachia.

The greater availability of natural gas during the 1930s resulted in an increase in its utilization by industry. Natural gas burns almost twice as hot as manufactured gas and burns more cleanly. As its price fell, demand rose. At the same time that industry was discovering natural gas, however, industrial output was being curtailed due to the Great Depression. As a result, Columbia's earnings declined steadily from 1929 until 1935. In 1935, however, rebounding earnings doubled those of the previous year.

In 1935 the Public Utility Holding Company Act brought Columbia Gas & Electric under federal regulation. Antitrust litigation forced the company to divest Columbia Oil & Gasoline, the subsidiary that controlled Panhandle Eastern Pipe Line Company. In 1936 Detroit, Michigan, was linked with the Columbia system, and natural gas was transmitted directly from Columbia's Texas fields. The connection helped Columbia reach new heights in sales and earnings for 1936.

In 1938 the Justice Department filed an antitrust suit against Columbia Gas & Electric, citing restraint of trade in the natural gas industry, and antitrust suits plagued Columbia for the next few years. In 1946 the company was forced to sell off the last of its electrical subsidiaries, a process that had been underway for several years. The company changed its name to the Columbia Gas System, Inc., in 1948 to reflect this change. Columbia was now almost exclusively in the natural gas business, although oil remained a part of these operations because the two resources were usually found together. During World War II demand for fuel was such that many turned to natural gas. The popularity of natural gas as a fuel was so great by the end of World War II that suppliers could not keep up with demand, and Columbia had to turn down new requests for service. Gas shortages continued until the early 1950s, when pipelines connected Columbia with gas fields in the Southwest and the Gulf of Mexico.

The Columbia Gas System grew in the 1950s through acquisitions in and around the company's chief operating region--northern Appalachia. In 1956 the company began a corporate simplification process aimed at reducing the number of subsidiaries subject to both federal and state regulation. The consolidation was completed in 1971.

Shortages and Other Challenges, 1960s and 1970s

Throughout the 1960s Columbia performed very well. Revenues increased an average of 5.9 percent each year between 1961 and 1971. By 1967 Columbia was the largest integrated natural gas system in the United States. Demand for natural gas had doubled between 1956 and 1970, and throughout the 1970s demand for natural gas heavily outweighed supply. Columbia blamed U.S. regulation of interstate gas prices for this situation.

Columbia reacted to shortages by broadening its search for gas. Drilling efforts increased in Appalachia, offshore Louisiana, and Alaska. Columbia looked to liquefied natural gas (LNG) imports to help fill the gap between supply and demand. LNG was shipped from Algeria to a new regasification plant in Maryland. Although the price of natural gas was climbing, it still remained a relatively cheap form of energy in the early 1970s. In Columbus, Ohio, for example, the cost of heating a home by gas was about half that of using heating oil. Columbia's gas sales reached a new peak in 1972. The relative economy of natural gas continued to grow in 1973 and 1974, when the OPEC oil embargo sent the price of oil to new heights.

By 1974 the natural gas shortage was becoming critical. Regulators were reluctant to grant rate increases, causing Columbia's funds earmarked for new exploration to remain limited. Columbia curtailed delivery of gas, and no new customers were accepted.

In April 1974 Columbia began producing synthetic natural gas from oil at high cost. The company was capable of synthesizing four percent of its needs from a single plant. Natural gas supplies continued to fall far short of demand, and in 1976 25 percent less gas was sold than at the company's peak in 1972.

The severe winter of 1976-77 was devastating for Columbia. Caught without adequate reserves after selling gas it projected would be in excess of demand, the company cut service. Factories and schools closed for weeks in some of the company's operating areas, and public outrage focused on Columbia. Columbia Gas System, then selling seven percent of all natural gas sold in the United States, attempted to remedy the situation by signing long-term contracts to buy gas from producers.

Utility regulators tried to remedy the shortage problem in the late 1970s by allowing rate increases that afforded Columbia improved earnings despite the low volume. Earnings in 1978 were up sharply over 1977.

Legislation was passed in 1978 that effectively deregulated the prices gas producers could charge at the wellhead. Intended to give incentive to producers to drill new wells, it resulted in very rich, long-term deals at guaranteed rates for producers. Hoping to ensure that it would never again experience shortages like those of 1976-77, Columbia Gas System entered into long-term contracts with producers at fixed rates during the late 1970s. It was a seller's market, and producers required pipelines like Columbia to accept take-or-pay clauses, which ensured that any gas the producers tapped would be purchased no matter what the market conditions were.

Columbia then had assured supply. The company's higher prices were more easily passed on to customers since regulation had become less stringent. Problems arose, however, because regulatory approval was required on rate increases or decreases. Once Columbia's price went up, it stayed up until regulatory commissions allowed it to drop. Columbia's gas was actually priced 28 percent above the national average in 1980. In response, Columbia's industrial customers, already annoyed by the interrupted service of the 1970s, defected to cheaper energy sources. In 1982 Columbia's largest single industrial customer, the Sohio Chemical anhydrous-ammonia plant in Lima, Ohio, quit Columbia altogether. The plant had previously bought nearly two percent of Columbia's total output. By the time rate reductions came through, many of Columbia's industrial customers had deserted the company.

Recession, 1980s

The recession of the early 1980s hit Columbia's remaining industrial users hard, causing demand to fall. At the same time, energy prices worldwide collapsed. Columbia still had long-term contracts with producers to buy natural gas at the high prices of the late 1970s--gas it had to buy whether or not it could be sold.

In 1982 the company tried to cancel all its contracts, claiming that the catastrophic effects of the recession on Columbia's customers constituted a force majeure, nullifying the contracts. Producers and other pipelines serving Columbia refused, offering only to renegotiate. Major lawsuits followed in 1983, and, although gas producers eventually did renegotiate with other pipelines and distributors owing to the difficult economic times, Columbia was dealt with less cordially.

In 1985 Columbia faced possible bankruptcy. Still bound to long-term contracts, the company offered its major suppliers $800 million to settle the take-or-pay contracts. Faced with little choice, the producers took the deal. Columbia reduced prices and sold its gas at a total of $1 billion below cost over the next two years.

In the mid-1980s, new Federal Energy Regulatory Commission rules required pipelines to ship other distributors' gas. Columbia entered this business heavily. By 1989 only 30 percent of the natural gas moving through Columbia's pipelines was owned by the company, compared with 90 percent a decade earlier. By 1990 Columbia's share was down to six percent. In the late 1980s Columbia announced it intended to resume shipping its own gas--an activity that was riskier but also more profitable.

Losses plagued the company throughout the later 1980s, as it continued to fulfill its long-term contracts. Columbia continued to write off millions of dollars each year, and expected to continue to do so through 1995. Up to $40 million in losses would be recovered annually through rate increases, but the rest was a certain loss.

Financial Challenges, 1990s

In 1990 unusually warm weather caused gas prices on the spot (short-term) market to remain much lower than expected. Customers began to buy low-cost gas on the spot market, while Columbia was still obligated to buy at the high prices specified in its long-term contracts signed with gas producers in the 1980s and even earlier. The company was again in serious financial straits. The company began negotiations to break some of its long-term contracts, in exchange for a $600 million settlement. But the issues were complicated, and could not be resolved quickly. Columbia suspended its dividend payment in June 1991, and Columbia and a subsidiary, Columbia Gas Transmission, filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code in July. Both companies were granted debtor-in-possession status, allowing them to continue normal business operations.

Columbia's management expected the company to be in bankruptcy for only a short time, as the company's business was basically sound, and Columbia simply needed to reach an agreement with the holders of its crippling contracts. However, sorting out how much the contracts came to was not an easy job. The company claimed that it had contractual obligations totalling $1 billion, while the gas producers it had contracted with claimed in court they were owed $13 billion. There were other complicating factors as well. The Internal Revenue Service filed a $530 million claim against Columbia Gas Transmission, and Transmission customers collectively filed a suit for a refund of $350 million. At issue as well were various transfers of funds between Columbia Gas System and Columbia Transmission and another subsidiary.

While the bankruptcy negotiations dragged on, Columbia took steps to improve its financial position. In 1993 Columbia Transmission got out of the onerous business of selling Columbia's gas, and became principally a storer and transporter. And while Columbia's more than 4,800 gas purchase contracts were up in the air in bankruptcy court, the company was able to begin buying gas at lower market prices. Columbia also invested hundreds of millions of dollars to upgrade its existing pipeline system and expanded its capacity to deliver gas in the eastern part of its service area. The company's income began to rise with these moves, and by 1994 Columbia's net income had reached more than $240 million.

The bankruptcy proceedings remained deadlocked until early 1995. In April, Columbia Gas and its subsidiary Columbia Transmission offered bankruptcy reorganization plans that were acceptable to the companies' creditors. Columbia Gas named a new chairman, Oliver G. Richard 3d, in April as well. The previous chairman, John H. Croom, had said in 1992 that he would retire as soon as Columbia emerged from Chapter 11. The reorganization plans were approved by a judge in November. Columbia agreed to distribute approximately $3.6 billion to its creditors--more than the company had initially claimed it owed, but far less than the $13 billion its creditors had claimed. Columbia Transmission agreed to pay about $1.2 billion to gas producers to settle its contracts, and $2.2 billion to its parent to settle a debt from 1991.

Looking Forward

Columbia's new chairman was able to announce good news shortly after he took office. In March 1996, the company paid its first dividends since it had filed for bankruptcy in 1991. Columbia also made a public offering of five million shares of common stock in March to cover short-term debts. The company anticipated strong earnings in 1996, when it could begin to put its era of bankruptcy behind it.

Principal Subsidiaries: Columbia Gas Development Corporation; Columbia Natural Resources, Inc.; Columbia Gas Transmission Corporation; Columbia Gulf Transmission Company; Columbia LNG Corporation; Columbia Gas of Kentucky, Inc.; Columbia Gas of Ohio, Inc.; Columbia Gas of Maryland, Inc.; Columbia Gas of Pennsylvania, Inc.; Commonwealth Gas Services, Inc.; Columbia Atlantic Trading Corporation; Columbia Coal Gasification Corporation; Columbia Propane Corporation; Commonwealth Propane, Inc.; TriStar Capital Corporation; TriStar Ventures Corporation.