COLUMBIA PIPELINE POISED TO FILE BANKRUPTCY

Despite efforts to negotiate with banks and producers, Columbia Gas System Inc. (CGS) and its main pipeline subsidiary, Columbia Gas Transmission Corp. (CGT), plan to file separate petitions seeking protection from creditors under Chapter 11 of the Federal Bankruptcy Code.

At the heart of Columbia's woes are long term, above market price, gas purchase contracts and currently low spot market prices. Those elements combined to squeeze cash flow to an inoperable level.

While CGT is one of the largest gas transmission companies in the U.S., at least one financial analyst believes the company's problems are not industry-wide, and Columbia is optimistic about its future.

NO TIMELY RESOLUTION

Since making the announcement that Columbia was walking on thin ice (OGJ, June 24, p. 31), CGT and CGS have been in extensive negotiations with producers and banks in an effort to keep its collective head above water.

CGT has been meeting with producers in an effort to terminate its above market price gas purchase contracts, which are making its sales rates noncompetitive with delivered spot market gas.

James P. Holland, chairman and chief executive officer of CGT, said, "Notwithstanding the favorable reception received thus far from a number of producers, it is now clear that the company cannot resolve the contract negotiations in a timely manner."

The company recently reached proposed settlements resolving Order 94 costs with Texas Eastern Transmission Corp., Panhandle Eastern Pipe Line Co., and Trunkline Gas Co. The agreements, subject to Federal Energy Regulatory Commission approval, call for the simultaneous refund of $18.8 million in payments to Columbia from Texas Eastern and 11.9 million from Panhandle Eastern and Trunkline. Meantime, Columbia will pay about $10 million to Texas Eastern and about $6 million to Panhandle Eastern and Trunkline.

Prior to that, a federal judge in Columbus, Ohio, approved a $56 million settlement of Appalachian basin gas supply contracts (OGJ, June 24, Newsletter).

Holland said CGT will go to court soon and ask permission to reject its above market price gas purchase contracts. Pending rejection of the contracts, CGT is seeking authority to reduce the amount of gas it is required to purchase under those contracts and to pay market clearing prices for the natural gas.

"The reduced volumes involved still exceed Columbia Transmission's current natural gas requirements," Holland said.

"However, by maintaining these minimum take levels during an interim period, we will afford producers time to seek alternative purchasers and to take other steps necessary to protect their production facilities."

Meantime, CGS had been negotiating with its banks to establish its lines of credit.

John H. Croom, CGS chairman and chief executive officer, said, "Although progress has been made in discussions with the banks, it became apparent that it would not be possible to conclude these discussions successfully during the time frame permitted by the system's current cash resources."

NO WIDESPREAD PROBLEM

Although Columbia ranks among the biggest gas transmission/distribution/marketing companies in the U.S., the circumstances that have put it where it is don't appear to be occurring with such severity in other pipeline companies, said a report issued by Fitch Financial Wire shortly after Columbia's problems were disclosed in June.

At that time, with Columbia facing $1 billion in losses on contracts, Fitch lowered its rating on Columbia's senior debt to BB from BBB and placed it on FitchAlert negative.

Fitch notes in 1985 Columbia renegotiated all but 3% of its long term gas contracts, making most of its prices market sensitive. However, the heavy burden of the 3% was compounded by provisions allowing producers to dedicate more reserves under existing contracts, increasing Columbia's long term obligation for high priced gas.

During the last few years Columbia has been able to blend its overall gas supply at an average gas cost, enabling it to remain reasonably competitive, Fitch said. However, as spot prices weakened and Columbia's gas sales declined steadily from 594 bcf in 1985 to 111 bcf in 1990, the company's obligation to buy gas exceeded its ability to market gas, making blending impossible.

Columbia ranked as the second largest gas pipeline company in terms of line mileage with more than 18,000 miles, according to 1989 FERC annual reports for natural gas companies (OGJ, Nov. 26, 1990, p. 61). It ranked 1Oth in terms of net income.

The same source shows 36% of CGS's transmission volumes are from gas sales, whereas selected other transmission companies within the 10 largest have sales amounting to 10-22% of total transmission volume, leaning much heavier on providing gas transportation to others.

Additionally, of the biggest five companies in terms of mileage, CGS reported the highest operating revenue but the lowest net income.

Meantime, Columbia expresses optimism that it can continue operations and the services it provides will not be affected.

"Absent the problem contracts, Columbia Transmission should be able to compete effectively in today's energy market," Holland said.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.