10-Q 1 w65532e10vq.txt FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 9/30/02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended SEPTEMBER 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from ______ to ______ Commission file number 1-1098 COLUMBIA ENERGY GROUP (Exact Name of Registrant as Specified in its Charter) Delaware 13-1594808 --------------------------- ----------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 801 East 86th Avenue Merrillville, Indiana 46410 --------------------------- ----------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (877) 647-5990 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] As of November 1, 2000, all shares of the registrant's Common Shares, $.01 par value, were issued and outstanding, all held beneficially and of record by NiSource Inc. The registrant meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format. COLUMBIA ENERGY GROUP AND SUBSIDIARIES FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 2002 TABLE OF CONTENTS

2 PART I ITEM 1. FINANCIAL STATEMENTS COLUMBIA ENERGY GROUP AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (LOSS) (unaudited)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 3 ITEM 1. FINANCIAL STATEMENTS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 ITEM 1. FINANCIAL STATEMENTS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5 ITEM 1. FINANCIAL STATEMENTS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 6 ITEM 1. FINANCIAL STATEMENTS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (unaudited)

7 ITEM 1. FINANCIAL STATEMENTS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF ACCOUNTING PRESENTATION The accompanying unaudited consolidated financial statements for Columbia Energy Group (Columbia) reflect all normal recurring adjustments that are necessary, in the opinion of management, to present fairly the results of operations in accordance with accounting principles generally accepted in the United States. The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Columbia's Annual Report on Form 10-K (Form 10-K) for the fiscal year ended December 31, 2001. Income (loss) for interim periods may not be indicative of results for the calendar year due to weather variations and other factors. Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 presentation. During the fourth quarter of 2001, Columbia changed its method of accounting for exploration and development activities related to oil and gas reserves from the full cost method to the successful efforts method. The 2001 results have been adjusted to reflect the change to successful efforts accounting in Columbia's Exploration and Production segment. 2. RESTRUCTURING ACTIVITIES During 2000, Columbia developed and began the implementation of a plan to restructure its operations as a result of the acquisition of Columbia by NiSource Inc. (NiSource). The restructuring plan included a severance program, a transition plan to implement operational efficiency throughout Columbia's operations and a voluntary early retirement program. During 2001, the restructuring initiative was continued with the addition of a plan to restructure the operations within the Distribution segment. During the third quarter of 2002, Columbia carried out the first phase of a reorganization initiative, which resulted in the elimination of approximately 13 executive and other management-level positions throughout the organization. Columbia has accrued approximately $1.7 million of salaries and benefits associated with the eliminated positions. As of September 30, 2002, 8 of the approximately 13 employees were terminated. For all of the plans, a total of approximately 835 management, professional, administrative and technical positions have been identified for elimination. As of September 30, 2002, approximately 676 employees had been terminated, of whom approximately 143 employees and 233 employees were terminated during the quarter and nine months ended September 30, 2002, respectively. At September 30, 2002 and December 31, 2001, the consolidated balance sheets reflected liabilities of $20.7 million and $31.4 million related to the restructuring plans, respectively. During the quarter and nine months ended September 30, 2002, $6.5 million and $10.8 million of benefits were paid, respectively, as a result of the restructuring plan. Additionally, during the third quarter and nine months ended September 30, 2002, the restructuring plan liability was reduced by $2.0 million and $1.6 million, respectively. The net adjustment during the third quarter was recorded to accommodate revisions to the estimated amounts to be paid under the 2001 and 2000 plans. During the fourth quarter of 2002, Columbia expects to complete the reorganization initiative, which began in the third quarter. It is expected that a charge of approximately $20 million to $25 million will be recorded in the fourth quarter related to employee severance and the consolidation of facilities. A portion of the liability related to the 2000 charge was transferred to NiSource. This related to the merger of Columbia Energy Group Services, Inc. with NiSource Corporate Services, Inc. The reported liabilities and employee counts have been reduced to take into account the effect of the merger. 3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE On August 21 2001, Columbia sold the stock and assets of Columbia Propane to AmeriGas Partners L.P. (AmeriGas) for approximately $196.0 million, consisting of $152.0 million in cash and $44.0 million of AmeriGas partnership common units. The sale of Columbia Propane resulted in an after-tax loss of $50.6 million. Columbia has also sold substantially all the assets of Columbia Petroleum Corporation. 8 ITEM 1. FINANCIAL STATEMENTS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The loss from discontinued operations are provided in the following table:

Columbia Energy Resources, Inc. has entered into an agreement to sell a portion of its Canadian oil and gas properties. This transaction is expected to occur in the fourth quarter of 2002. The agreement calls for the sale of the majority of the Ontario assets for approximately $2.0 million. Because the fair value is lower than the book value of the assets, Columbia Resources has written down the value of the held-for-sale assets by $0.3 million in the second quarter of 2002. An additional charge of $0.5 million was recorded in the second quarter of 2002 as a result of a determination that the remaining Ontario assets were impaired. The net assets of assets held for sale and discontinued operations were as follows:

4. RISK MANAGEMENT ACTIVITIES Columbia uses commodity-based derivative financial instruments to manage certain risks inherent in its business. Columbia accounts for its derivatives under Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities." HEDGING ACTIVITIES. The activity for 2002 with respect to cash flow hedges included the following:

9 ITEM 1. FINANCIAL STATEMENTS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Unrealized gains and losses on Columbia's cash flow and fair value hedges were recorded as price risk management assets and liabilities. The accompanying Consolidated Balance Sheets reflected price risk management assets related to unrealized gains and losses on hedges of $123.5 million and $65.9 million at September 30, 2002 and December 31, 2001, respectively, of which $16.5 million and $65.8 million were included in "Current Assets" and $107.0 million and $0.1 million were included in "Other Assets." Price risk management liabilities related to unrealized gains and losses on hedges were $12.1 million and $5.4 million at September 30, 2002 and December 31, 2001, respectively, of which $12.1 million and $4.8 million were included in "Current Liabilities" and zero and $0.6 million were included in "Other Liabilities and Deferred Credits." During the third quarter of 2002, a net loss of $0.3 million, net of tax, was recognized in earnings due to the change in value of certain derivative instruments primarily representing time value, and there were no components of the derivatives' fair values excluded in the assessment of hedge effectiveness. Also during the third quarter, Columbia reclassified an insignificant amount related to its cash flow hedges of natural gas production from other comprehensive income to earnings due to the probability that certain forecasted transactions would not occur. It is anticipated that during the next twelve months the expiration and settlement of cash flow hedge contracts will result in net income recognition of amounts currently classified in other comprehensive income of approximately $6.9 million, net of tax. 5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS SFAS NOS. 141 AND 142 - BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141), and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). The key requirements of the two interrelated Statements include mandatory use of the purchase method of accounting for business combinations, discontinuance of goodwill amortization, revised framework for testing goodwill impairment at a "reporting unit" level, and new criteria for the identification and potential amortization of other intangible assets. Other changes to existing accounting standards involve the amount of goodwill to be used in determining the gain or loss on the disposal of assets and a requirement to test goodwill for impairment at least annually. SFAS No. 141 is generally effective for combinations initiated after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Columbia has no goodwill recorded, and therefore, these new statements do not presently affect the company. SFAS NO. 143 - ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its then present value, and the capitalized cost is depreciated over the useful life of the related asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. Columbia is currently evaluating the impact of SFAS No. 143 and does not expect the adoption of the statement to have a material effect on its financial condition or results of operations. 6. TELECOMMUNICATIONS NETWORK Columbia, through its subsidiary Columbia Transmission Communications (Transcom) has built a dark-fiber optics telecommunications network primarily along its pipeline rights-of-way between New York and Washington D.C. For the year ending December 31, 2002, the network is projected to incur a pre-tax operating loss of approximately $10.7 million. Due to the current oversupply of dark fiber in Transcom's market area, management projects that the company will continue to operate at a loss. The company's future profitability will be dependent on, among other factors, a recovery in the telecommunication market. Columbia is currently reviewing the carrying value of its investment in Transcom and whether an impairment charge will be required. Management continues to pursue and evaluate strategic alternatives, including a sale. 10 ITEM 1. FINANCIAL STATEMENTS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. LONG-TERM NOTES RECEIVABLE In 1999, Columbia Transmission sold certain gathering facilities to a third party for approximately $22 million. The buyer executed a promissory note, which provides for payment of the purchase price to Columbia Transmission over a five-year period. In the second quarter of 2002, an appropriate reserve was recorded against the receivable in light of the failure to receive timely payments from the counterparty. During the third quarter, management was able to negotiate a new payment schedule and secure a guarantee from the third party's parent company as security for the loan. At September 30, 2002, the balance of the note was approximately $11.0 million, including interest. 8. MINIMUM PENSION LIABILITY Due to the decline in the equity markets, the fair value of Columbia's pension fund assets has decreased since September 30, 2001. In addition, the discount rate used to measure the accumulated benefit obligation has decreased, resulting in an increase in the estimated minimum liability. In accordance with FASB Statement No. 87, "Employers' Accounting for Pensions," Columbia recorded a minimum pension liability adjustment at September 30, 2002. The adjustment resulted in a decrease to prepaid pension costs of $28.9 million, an increase in intangible assets of $5.3 million, an increase to retirement benefit liabilities of $9.9 million, an increase to deferred income tax assets of $12.6 million, and a decrease to other comprehensive income of $20.9 million after-tax. 9. SALE OF EXPLORATION AND PRODUCTION BUSINESS On October 11, 2002, NiSource announced its intention to sell Columbia Energy Resources, Inc., and its affiliates, including Columbia Natural Resources, Inc., its natural gas exploration and production business. The decision to sell the exploration and production business is part of NiSource's business strategy of focusing on its core, regulated assets and strengthening its balance sheet by reducing debt. NiSource intends to enter into a definitive sale agreement for the exploration and production business by the end of 2002. The results of operations related to the exploration and production business will be displayed as discontinued operations in the fourth quarter 2002 and prior period financial statements will be adjusted to conform to the discontinued operations presentation. 10. LEGAL PROCEEDINGS In the normal course of its business, Columbia and its subsidiaries have been named as defendants in various legal proceedings. In the opinion of management, the ultimate disposition of these currently asserted claims would not have a material adverse impact on Columbia's consolidated financial position. 11 ITEM 1. FINANCIAL STATEMENTS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. PRESENTATION OF SEGMENT INFORMATION Columbia manages its operations in four primary segments: 1) Distribution, 2) Transmission and Storage, 3) Exploration and Production, and 4) Other Products and Services. The following table provides information concerning these major business segments. Revenues include intersegment sales to affiliated subsidiaries, which are eliminated when consolidated. Affiliated sales are recognized on the basis of prevailing market or regulated prices. Operating income (loss) is derived from revenues and expenses directly associated with each segment.

12 ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS COLUMBIA ENERGY GROUP AND SUBSIDIARIES Columbia meets the conditions specified in General Instruction H(1)(a) and (b) to Form 10-Q and is permitted to use the reduced disclosure format for wholly-owned subsidiaries of companies, such as NiSource, that are reporting companies under the Securities Exchange Act of 1934. Accordingly, this Columbia Management's Narrative Analysis of Results of Operations is included in this report, and Columbia has omitted from this report the information called for by Part I. Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operations). Forward Looking Statements The Management's Narrative Analysis, including statements regarding market risk sensitive instruments, contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Investors and prospective investors should understand that many factors govern whether any forward-looking statement contained herein will be or can be achieved. Any one of those factors could cause actual results to differ materially from those projected. These forward-looking statements include, but are not limited to, statements concerning Columbia's plans, proposed dispositions, objectives, expected performance, expenditures and recovery of expenditures through rates, stated on either a consolidated or segment basis, and any and all underlying assumptions and other statements that are other than statements of historical fact. From time to time, Columbia may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of Columbia, are also expressly qualified by these cautionary statements. All forward-looking statements are based on assumptions that management believes to be reasonable; however, there can be no assurance that actual results will not differ materially. Realization of Columbia's objectives and expected performance is subject to a wide range of risks and can be adversely affected by, among other things, increased competition in deregulated energy markets, weather, fluctuations in supply and demand for energy commodities, successful consummation of proposed 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, changes in general economic, capital and commodity market conditions and counter-party credit risk, many of which are beyond the control of Columbia. The following Management's Narrative Analysis should be read in conjunction with the Columbia Annual Report on Form 10-K for the fiscal year ended December 31, 2001. THIRD QUARTER 2002 CONSOLIDATED RESULTS Net Income Columbia reported net income for the third quarter 2002 of $59.9 million versus an operating loss of $106.6 million from the third quarter of 2001. The $166.5 million increase in net income was primarily due to lower operating expenses resulting from a reduction in estimated environmental and litigation expenditures, lower depreciation and depletion expenses, as a result of an impairment of Exploration and Production assets in 2001, a reduction in estimated sales taxes payable related to previous sales of natural gas to retail and wholesale gas marketing customers, lower corporate overhead and insurance recoveries of environmental expenses. In addition, the 2001 period was impacted by a $61.1 million loss from discontinued operations, which reflects the sale of Columbia's propane operations. Slightly offsetting the increase was a decrease in net revenues, which was a result of lower pricing related to increased deliveries of natural gas production under forward sales agreements. The 2001 results reflect the change to successful efforts accounting in the company's Exploration and Production segment. Net Revenues Third quarter 2002 consolidated net revenues (operating revenues less cost of sales) were $352.4 million, a $19.0 million decrease over the same period last year. The decrease in net revenues was a result of lower pricing related to increased deliveries of natural gas production under forward sales agreements and decreased off-system natural gas sales at the gas distribution companies. Expenses Operating expenses for the third quarter of 2002 were $235.6 million, a decrease of $165.9 million from the same period last year. Operating expenses decreased primarily as a result of a reduction in estimated environmental and litigation expenditures, lower depreciation and depletion expenses, as a result of an impairment of Exploration and Production assets in 2001, a reduction in estimated sales taxes payable related to previous sales of natural gas to retail and wholesale gas marketing customers, lower corporate overhead and insurance recoveries of environmental expenses. Other Income (Deductions) Interest expense was $26.1 million for the quarter, a decrease of $14.2 million compared to the third quarter of 2001. The decrease was due to lower short-term interest rates. Other, net for the third quarter of 2002 was $3.9 million, an increase of $1.2 million compared to the prior year. Income Taxes Income tax expense of $34.7 million for the third quarter of 2002 increased $56.9 million due higher pre-tax income. Discontinued Operations For the third quarter of 2002, Columbia had no activity for discontinued operations. During the comparable period in 2001, Columbia recorded an after-tax loss of $61.1 million associated with the sale of its propane business. 13 ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES NINE MONTHS CONSOLIDATED RESULTS Net Income Columbia reported net income for the first nine months of 2002 of $307.9 million, an increase of $245.4 million from the same period in 2001. The increase was primarily due to lower operating expenses resulting from the $89.2 million write-down related to Columbia's telecommunications network that occurred in the 2001 period, a reduction in estimated environmental and litigation expenditures, insurance recoveries of environmental expenses, lower depreciation and depletion expenses, as a result of an impairment of Exploration and Production assets in 2001, lower corporate overhead, a reduction in estimated sales taxes payable related to previous sales of natural gas to retail and wholesale gas marketing customers and lower amounts for uncollectible customer receivables. In addition, the 2001 period was impacted by a $62.1 million loss on discontinued operations associated with the sale of Columbia's propane operations. Slightly offsetting the increase was a decrease in net revenues, which was a result of the impact of unfavorable weather during the heating season, lower pricing related to increased deliveries of natural gas production under forward sales agreements and a gain of $11.4 million from the sale of base which occurred in the 2001 period. The 2001 results reflect the change to successful efforts accounting in the company's Exploration and Production segment. Net Revenues For the first nine months of 2002, consolidated net revenues (operating revenues less cost of sales) were $1,384.5 million, a $40.1 million decrease over the same period last year. This decrease was primarily attributable to 10% warmer weather during the heating season compared to the same period last year, lower pricing related to increased deliveries of natural gas production under forward sales agreements, a reduction in off-system sales and incentive program revenues at the gas distribution companies and a gain of $11.4 million from the sale of base gas that occurred in 2001. Partly offsetting the decrease was increased gas production in the company's Exploration and Production segment. Expenses Operating expenses for the first nine months of 2002 were $822.3 million, a decrease of $282.9 million from the same period last year. The decrease was mainly due to lower operating expenses resulting from the $89.2 million write-down related to Columbia's telecommunications network that occurred in the 2001 period, a reduction in estimated environmental and litigation expenditures, insurance recoveries of environmental expenses, lower depreciation and depletion expenses, as a result of an impairment of Exploration and Production assets in 2001, lower corporate overhead, a reduction in estimated sales taxes payable related to previous sales of natural gas to retail and wholesale gas marketing customers and lower amounts for uncollectible customer receivables. Other Income (Deductions) Interest expense was $84.7 million for the nine months, a decrease of $41.2 million compared to the first nine months of 2001. The decrease was due to lower short-term interest rates. Other, net for the first nine months of 2002 was $15.5 million, an increase of $9.4 million compared to the prior year. Income Taxes Income tax expense of $185.1 million for the first nine months of 2002 increased $106.1 million due to higher pre-tax income. Discontinued Operations For the first nine months in 2002, Columbia had no activity for discontinued operations. During the first nine months of 2001, Columbia recorded an after-tax loss of $62.1 million associated with the sale of its propane business. 14 ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES LIQUIDITY AND CAPITAL RESOURCES A significant portion of Columbia's operations 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 financing, as needed, is used to purchase gas to place in storage for heating season deliveries, perform necessary maintenance of facilities, make capital improvements in plant and expand service. Columbia satisfies its liquidity requirements primarily through internally generated funds and through intercompany borrowing from the NiSource Money Pool. Columbia may borrow on an intercompany basis a maximum of one billion dollars through the NiSource Money Pool as approved by the Securities and Exchange Commission under the Public Utility Holding Company Act of 1935. NiSource Finance Corp. (NFC) provides funding to the NiSource Money Pool from external borrowing sources and maintains an aggregate $1.75 billion revolving credit facility with a syndicate of banks. The credit facility is guaranteed by NiSource. As of September 30, 2002, Columbia did not have any intercompany short-term borrowings with NFC outstanding. At September 30, 2002, Columbia had letters of credit issued and outstanding of $170.6 million. Columbia has entered into interest rate swap agreements to modify the interest characteristics of its outstanding long-term debt. Under the terms of the swap agreements, Columbia pays interest based on a floating rate index and receives interest based on a fixed rate. The effect of these agreements is to modify the interest rate characteristics of a portion of Columbia's long-term debt from fixed to variable and to hedge the fair value of the underlying debt. On September 3, 2002, Columbia entered into "receive fixed" and "pay floating" interest rate swap agreements totaling $281.5 million with three counterparties effective as of September 5, 2002. According to the agreements, Columbia will receive payments based upon a fixed 7.32% interest rate and will pay a floating interest amount based on U.S. 6-month LIBOR-BBA plus 2.66% per annum. In total, Columbia has entered into fixed-to-variable interest rate swaps on $863.0 million of its long-term debt. On November 28, 2002, $281.7 million of Columbia's outstanding 6.61% Series B Debentures will be redeemed using funds from the net proceeds of the November 6, 2002 NiSource common stock offering. Columbia Gas of Ohio is a party to an agreement to sell, without recourse, substantially all of its trade receivables to Columbia Accounts Receivable Corporation (CARC), a wholly owned subsidiary of Columbia. CARC, in turn, is party to an agreement in which it sells a percentage ownership interest in a defined pool of the accounts receivable to a commercial paper conduit. Under these agreements, CARC may not sell any new affiliate receivables to the conduit if Columbia's debt rating falls below BBB or Baa2 at Standard and Poor's and Moody's, respectively. In addition, if Columbia's debt rating falls below investment grade, the agreements terminate and CARC may not sell any new receivables to the conduit. As of September 30, 2002, Columbia Gas of Ohio has sold $32.5 million to the conduit. Management believes that its sources of funding are sufficient to meet the short- and long-term liquidity needs of Columbia. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Omitted pursuant to General Instruction H(2)(c). 15 ITEM 4. CONTROLS AND PROCEDURES COLUMBIA ENERGY GROUP AND SUBSIDIARIES Evaluation of Disclosure Controls and Procedures Columbia's president and chief executive officer and its principal financial officer, after evaluating the effectiveness of Columbia's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) on November 7, 2002, have concluded that, as of such date, Columbia's disclosure controls and procedures were adequate and effective to ensure that material information relating to Columbia and its consolidated subsidiaries would be made known to them by others within those entities. Changes in Internal Controls There were no significant changes in Columbia's internal controls or in other factors that could significantly affect Columbia's disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in Columbia's internal controls. As a result, no corrective actions were required or undertaken. 16 PART II ITEM 1. LEGAL PROCEEDINGS NISOURCE INC. 1. CANADA SOUTHERN PETROLEUM LTD. V. COLUMBIA GAS DEVELOPMENT OF CANADA LTD. This action was originally filed March 7, 1990. The plaintiffs asserted, among other things, that the defendant working interest owners, including Columbia Gas Development of Canada Ltd. (Columbia Canada) and various Amoco affiliates, breached an alleged fiduciary duty to ensure the earliest feasible marketing of gas from the Kotaneelee field (Yukon Territory, Canada). The plaintiffs sought, among other remedies, the return of the defendants' interests in the Kotaneelee field to the plaintiffs, a declaration that such interests are held in trust for the plaintiffs and an order requiring the defendants to promptly market Kotaneelee gas or assessing damages. In November 1993, the plaintiffs amended their Amended Statement of Claim to include allegations that the balance in the Carried Interest Account (an account for operating costs, which are recoverable, by working interest owners), which is in excess of the balance as of November 1988, should be reduced to zero. Columbia Canada consented to the amendment in consideration of the plaintiffs' acknowledgment that approximately $63 million was properly charged to the account. Pursuant to an Indemnification Agreement regarding the Kotaneelee Litigation entered into when Columbia Canada was sold to Anderson Exploration Ltd. (Anderson), Columbia agreed to indemnify and hold Anderson harmless for losses due to this litigation arising out of actions occurring prior to December 31, 1991. An escrow account provides security for the indemnification obligation and is funded by a letter of credit with a face amount of approximately $35,835,000 (Cdn). A trial commenced in the third quarter of 1996 in the Court of Queen's Bench for the Province of Alberta and judgment was issued in September 2001. The court dismissed most of the plaintiffs' claims, including the fiduciary duty claim, but did order a reduction of the Carried Interest Account in the amount of $5.3 million (Cdn.) and ordered that the defendants were not entitled to charge the plaintiffs processing fees. The inability to charge the plaintiffs processing fees does not affect Columbia. The monetary value of these two items has not been determined. The plaintiffs have filed an appeal of the judgment. The Court has not yet set a date when it will hear the appeal; however, it has established a schedule for the filing of the arguments and responses of the parties, all of which must be completed by December 31, 2002. 2. UNITED STATES OF AMERICA EX REL. JACK J. GRYNBERG V. COLUMBIA GAS TRANSMISSION CORP., ET AL. Plaintiff originally filed a complaint under the False Claims Act, on behalf of the United States of America, against approximately seventy pipelines. Plaintiff claimed that the defendants had submitted false royalty reports to the government (or caused others to do so) by mismeasuring the volume and heating content of natural gas produced on Federal land and Indian lands. Plaintiff's original complaint was dismissed without prejudice for misjoinder of parties and for failing to plead fraud with specificity. In 1997, plaintiff then filed over sixty-five new False Claims Act complaints against over 330 defendants in numerous Federal courts. One of those complaints was filed in the Federal District Court for the Eastern District of Louisiana against Columbia and thirteen affiliated entities. Plaintiff's second complaint repeats the mismeasurement claims previously made and adds valuation claims alleging that the defendants have undervalued natural gas for royalty purposes in various ways, including by making sales to affiliated entities at artificially low prices. Most of the Grynberg cases were transferred to Federal court in Wyoming in 1999. In December 1999, the Columbia defendants filed a motion to dismiss plaintiff's second complaint primarily based on a failure to plead fraud with specificity. In May 2001, the Court denied the Columbia defendants' motion to dismiss. The Columbia defendants joined together with numerous other defendants and filed a motion requesting the district court to amend its order to include a certification so that the defendants could request permission from the United States Court of Appeals for the Tenth Circuit to appeal a controlling question of law. That motion was denied on July 2, 2001. Pretrial proceedings continue. 3. PRICE ET AL V. GAS PIPELINES, ET AL. Plaintiff filed an amended complaint in Stevens County, Kansas state court on September 23, 1999, against over 200 natural gas measurers, mostly natural gas pipelines, including Columbia and thirteen affiliated entities. The allegations in Price (formerly known as Quinque) are similar to those made in Grynberg; however, Price broadens the claims to cover all oil and gas leases (other than the Federal and Indian leases that are the subject 17 ITEM 1. LEGAL PROCEEDINGS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES of Grynberg). Price asserts a breach of contract claim, negligent or intentional misrepresentation, civil conspiracy, common carrier liability, conversion, violation of a variety of Kansas statutes and other common law causes of action. Price purports to be a nationwide class action filed on behalf of all similarly situated gas producers, royalty owners, overriding royalty owners, working interest owners and certain state taxing authorities. The defendants had previously removed the case to Federal court. On January 12, 2001, the Federal court remanded the case to state court. In June 2001, the plaintiff voluntarily dismissed ten of the fourteen Columbia entities. Discovery relating to personal jurisdiction has begun. On September 12, 2001 the four remaining Columbia defendants along with other defendants filed a joint motion to dismiss the amended complaint. That motion is currently pending before the court. 4. VIVIAN K. KERSHAW ET AL. V. COLUMBIA NATURAL RESOURCES, INC., ET AL. In February 2000, plaintiff filed a complaint in New York state court against Columbia, Columbia Natural Resources, Inc. (Columbia Natural Resources) and Columbia Transmission. The complaint alleges that Kershaw owns an interest in an oil and gas lease in New York and that the defendants have underpaid royalties on the lease by, among other things, failing to base royalties on the price at which natural gas is sold to the end user and by improperly deducting post-production costs. The complaint also seeks class action status on behalf of all royalty owners in oil and gas leases operated by Columbia Natural Resources. Plaintiff seeks the alleged royalty underpayments and punitive damages. Columbia Natural Resources and Columbia Transmission removed the case to Federal court in March 2000. The Federal court has remanded Kershaw back to New York state court. The Columbia defendants' motion to dismiss was partially granted and partially denied by the New York state court judge on September 24, 2001. On December 3, 2001, the defendants filed an answer to the plaintiffs' complaint. Discovery regarding class certification is ongoing. 5. ANTHONY GONZALEZ, ET AL. V. NATIONAL PROPANE CORPORATION, ET AL. On December 11, 1997, plaintiffs Anthony Gonzalez, Helen Pieczynski, as Special Administrator of the Estate of Edmund Pieczynski, deceased, Michael Brown and Stephen Pieczynski filed a multiple-count complaint for personal injuries in the Circuit Court of Cook County, Illinois against National Propane Corporation and the Estate of Edmund Pieczynski sounding in strict tort liability and negligence. National Propane Corporation was acquired by Columbia in 1999, and this litigation was retained by Columbia when Columbia sold its propane operations in 2001. Plaintiff's complaint arises from an explosion and fire, which occurred in a Wisconsin vacation cottage in 1997. National Propane, L.P. filed a third-party complaint for contribution against Natural Gas Odorizing and Phillips Petroleum Company. Written discovery has been completed and expert discovery is to be completed by October 25, 2002. The case has a scheduled trial date of March 31, 2003. 6. COLUMBIA GAS TRANSMISSION CORP. V. CONSOLIDATION COAL CO., ET AL. On December 21, 1999, Columbia Transmission filed a complaint in Federal court in Pittsburgh, Pennsylvania 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 (Victory) in northern West Virginia. The complaint was served on April 10, 2000. On September 18, 2002, the parties executed a settlement agreement with respect to this matter and the related case described below, allowing Columbia Transmission to continue operating Victory at full capacity during long wall mining. Technical teams from the parties continue to finalize exhibits to the settlement agreement. Once these exhibits are final, the parties will move to dismiss the litigation. 7. MCELROY COAL COMPANY V. COLUMBIA GAS TRANSMISSION CORPORATION On February 12, 2001, McElroy Coal Company (McElroy), an affiliate of Consolidation Coal Co., filed a complaint against Columbia Transmission in Federal court in Wheeling, West Virginia. The West Virginia complaint seeks declaratory and injunctive relief as to McElroy's alleged right to mine coal within Victory, and Columbia Transmission's obligation to take all necessary measures to permit McElroy to longwall mine. The complaint also seeks compensation for the inverse condemnation of any coal that cannot be mined due to Columbia Transmission's Victory operations. Except for the claim of inverse condemnation, McElroy's West Virginia complaint appears to be virtually identical to Consol's original counterclaim to Columbia Transmission's Federal court action in Pennsylvania. On April 10, 2001, the West Virginia case was dismissed 18 ITEM 1. LEGAL PROCEEDINGS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES without prejudice. On September 18, 2002, the parties executed a settlement agreement with respect to this matter and the related case described above, allowing Columbia Transmission to continue operating Victory at full capacity during long wall mining. Technical teams from the parties continue to finalize exhibits to the settlement agreement. Once these exhibits are final, the parties will move to dismiss the litigation. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Omitted pursuant to General Instruction H(2)(b) ITEM 3. DEFAULTS UPON SENIOR SECURITIES Omitted pursuant to General Instruction H(2)(b) ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Omitted pursuant to General Instruction H(2)(b) ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS TO FORM 10-Q (a) Exhibits (12) Statements of Ratio of Earnings to Fixed Charges (filed herewith). (99.1) Certification of Michael W. O'Donnell, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). (99.2) Certification of Dennis W. McFarland, Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). (b) Reports on Form 8-K There were no reports on Form 8-K filed during the third quarter of 2002. 19 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Columbia Energy Group --------------------------------------- (Registrant) Date: November 14, 2002 By: /s/ Jeffrey W. Grossman --------------------------------------- Jeffrey W. Grossman Vice President (Principal Accounting Officer and Duly Authorized Officer) 20 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Michael W. O'Donnell, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Columbia Energy Group; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 By: /s/ Michael W. O'Donnell ------------------------------------- Michael W. O'Donnell President and Chief Executive Officer 21 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Dennis McFarland, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Columbia Energy Group; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 By: /s/ Dennis McFarland ------------------------------------- Dennis McFarland Principal Financial Officer 22

COLUMBIA ENERGY GROUP 10-Q