CONTRACT PROBLEMS SQUEEZING COLUMBIA GAS

Financial woes stemming from take or pay contracts may force Columbia Gas Transmission Corp. (CGT) and/or parent Columbia Gas System Inc. (CGS) to declare bankruptcy. Present value of losses flowing from CGT's above market price gas purchase contracts could exceed $1 billion, a potential exposure much larger than the company had previously expected. CGS expects to charge a large portion of the losses to second quarter income.

June 24, 1991

3 min read

Financial woes stemming from take or pay contracts may force Columbia Gas Transmission Corp. (CGT) and/or parent Columbia Gas System Inc. (CGS) to declare bankruptcy.

Present value of losses flowing from CGT's above market price gas purchase contracts could exceed $1 billion, a potential exposure much larger than the company had previously expected. CGS expects to charge a large portion of the losses to second quarter income.

CGT, in an effort to renegotiate all its above market gas purchase contracts, plans to offer producers as much as $600 million of CGT obligations in return for restructuring contracts.

In addition, the parent last week suspended the dividend on its common stock.

The steps are intended to enhance CGS prospects for continued access to bank credit. CGS officials last week met with bank officials to renegotiate CGS credit facilities in view of the compa-ny's financial difficulties.

CGS, Wilmington, Del., is one of the biggest gas trans-mission/distribution/marketing companies in the U.S. CGT operates more than 18,000 miles of pipeline with deliveries of about 1 tcf/year in the eastern U.S.

GAS MARKET WOES

CGS Chairman John Croom said, "The collapse of spot market prices for gas, due in part to the record setting warm winter, made Columbia Transmission's sales rate noncompetitive with delivered spot market gas.

"Recent industry-wide projections indicate that existing gas surpluses resulting from warm weather and development of new gas reserves are likely to hold spot gas prices some 85-90 below earlier forecasts for the next several years, and current projections show the situation is continuing to deteriorate."

Recent studies underscored CGT's worsening contract problems. A larger volume of the gas CGT has under contract exceeds today's average spot market price of $1.30/Mcf, with some priced as high as $6.70/Mcf at the wellhead.

CONTRACT RESTRUCTURING

Looking at likely spot market prices the next several years, CGS decided it was no longer in its best interests for CGT to attempt to deal with producers on any basis that "does not clearly provide a permanent resolution of the all high cost contract problems," Croom said.

James Holland, CGT chairman and chief executive officer, said talks are under way with producers to seek restructuring of high cost contracts to make them market sensitive. He said, "We must have strong encouragement from representative producers by the end of July and commitments from substantially all producers by the beginning of the heating season if these efforts are to succeed."

Croom warned CGS' failure to reestablish and continue to maintain adequate lines of credit with banks or failure of producers to respond promptly and favorably to CGT's efforts to restructure contracts "could force the system, the pipeline subsidiary, or both to seek protection from creditors under the bankruptcy laws."