Kaboom!
For two years now, $3 billion-in-sales Columbia Gas System has languished in Chapter 11, burned by high-priced gas supply contracts. The company' s prospects for coming out of Chapter 11 any time soon are, in a word, grim. Some lawyers involved in the case don't think that will happen until 1995.
So how come the company's stock has shot up 33% so far this year, to nearly $26? Well, Columbia does have a fair-sized production business, and, on average, gas prices for the year should be around 20% higher than in 1992. What has also helped Columbia and other pipeline operators is the fact that the Federal Energy Regulatory Commission is, with Order 636, walking the last mile of a 10-year marathon to remove the regulatory barriers and uncertainties involving the natural gas industry.
Analysts expect Columbia's earnings to grow 41% from last year's $1. 79 per share before special charges to $2.53 this year because operating revenues and profits are up. But some analysts, once bullish on the stock, are reassessing the situation.
Goldman, Sachs analyst David Fleischer was predicting that Columbia' s stock would hit $32 to $35 a share within a year after the company emerges from bankruptcy, arguing that such an estimate represented just the market value of the company's non-pipeline assets (exploration and local gas distribution companies). In recent weeks, however, he has changed his tune, removing hisbuy on the stock.
Others, like Jack Hersh, an analyst at M.J. Whitman, a firm specializing in the securities of distressed companies, figure Columbia is worth between $13 and $16 at the outside.
"There are many reasons why it should be trading at $6 or $7," he says.
At base, the debate focuses on how much Columbia owes the gas producers with whom the company signed "take-or-pay" contracts in the early 1980s and other long-term supply deals decades before that. Columbia claims it's on the hook for only $1 billion in contractual obligations, but the producers say in court papers they are owed $13 billion. Privately, however, many concede that an estimate of just under $3 billion is more like it.
Columbia took a write-off of almost $1 billion in 1985 to settle all the contracts requiring it to pay more than $3 per thousand cubic feet (mcf) for gas. Back then, Columbia could afford to pay $3 or less per mcf for gas because it could offset that price by paying as little as 50 cents per mcf as a result of long-term supply contracts signed in the 1940s.
But all that changed in 1989 with legislation deregulating gas that had been considered "forever regulated." The producers of the gas sold at 1940s prices started charging market value for it. All of a sudden, gas that once cost Columbia 50 cents per mcf jumped to $2. 40 per mcf. No longer was there cheap gas to blend in with the more expensive stuff.
On top of that, natural gas distributors were now allowed to start buying gas directly at the wellhead. So besides getting stuck with price increases, Columbia was left holding lots of supply without anyone to sell it to. So it began negotiations to break its contracts for high-priced gas for a $600 million settlement. Time ran out when the banks closed their credit lines in July 1991.
CEO John Croom and his board had no choice but to file for Chapter 11, but they expected their stay to be brief. The company's 18,800- mile gas pipeline network serving the Northeast and Midwest, and its other subsidiaries, were all healthy. "We're not a typical bankruptcy, " says Columbia CFO Robert Oswald. "Our business is fundamentally sound and we're not posting red ink."
But Chapter 11 has proved much more complex than anticipated. If the courts find in favor of the producers, Columbia's contractual liabilities will increase and could seriously affect the company's bottom line. Even Columbia's chief litigator, John Beerbower of Cravath Swaine & Moore, agrees that using the producers' method brings the total to about $2 billion, twice what Columbia has reserved for. Since the take-or-pay contracts are, in essence, formulas with lots of variables that are difficult to fix at specific values, the method selected is a major wild card.
Other unknowns exist as well. For example, if the settlement is at the high end of the estimates, ifs unlikely that Columbia's pipeline unit, Columbia Gas Transmission, will be able to pay 100 on the dollar. That's because Transmission faces other claims against it besides those filed by the producers. The Internal Revenue Service has a $530 million claim pending against Transmission, and customers collectively have filed for refunds amounting to another $350 million. Even Columbia Gas, the parent company, has a $1.9 billion claim against Transmission, $1.3 billion of it in secured debt. According to court papers, Transmission' s obligations, at worst, total about $2.9 billion, not counting the producers' claims. Yet at the end of 1992, Transmission had only $3. 6 billion in book value, including $1 billion in cash.
Given Transmission's precarious situation, it is no wonder that producers in March 1992 filed a $1.7 billion lawsuit against the deeper-pocketed Columbia Gas as a precaution. Producers allege Columbia siphoned off $1.3 billion in cash from Transmission in the form of dividends, properties, interest and principal payments on unsecured loans. In return, Columbia supposedly gave Transmission $1.3 billion in secured debt.
The suit also alleges that Columbia transferred properties worth an estimated $400 million from Transmission to another of its subsidiaries, Columbia Natural Resources, without consideration in July 1990.
Columbia may be less vulnerable on the first claim than on the second. "It's true that within a year [of transfer] Transmission was bankrupt, " says Cravath's Beerbower. "That subjects it to greater scrutiny. The risk of an adverse outcome is hard to dismiss."
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Lame Duck
Columbia Gas System CEO John Croom, who has headed the company for the past nine years, announced in April that his resignation is imminent. "For some time, I and the board of directors have believed that when the bankruptcy proceedings are behind us, the company should have new management to invigorate the corporation," he says.
So as negotiations with the gas producers meander on, Croom will find himself performing another unpleasant task: launching a search for a new
Ceo.
For the 60-year-old Croom, it will be the second time in recent years the misfortunes of Columbia have forced him into premature retirement. Just two years ago he was vice chairman of the American Gas Association, ready to assume the organization's helm. But shortly after Columbia' s Chapter 11 filing he had to step aside rather than assume the chairmanship. Says one Columbia executive: "You don't have a chair who is the head of a bankrupt company going around the country representing the gas association."
8/10/96
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