10-Q 1 w52066e10-q.txt COLUMBIA ENERGY GROUP 1 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 JUNE 30, 2001 [ ] 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 (IRS Employer incorporation or organization) Identification No.) ~~801 East 86th Avenue, Merrillville, IN 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. Yes [X] No [ ]. 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. 2 COLUMBIA ENERGY GROUP AND SUBSIDIARIES FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED JUNE 30, 2001 TABLE OF CONTENTS

Page ----- PART I FINANCIAL INFORMATION Item 1. Financial Statements Statements of Consolidated Income .......................... 3 Consolidated Balance Sheets ................................ 4 Statements of Consolidated Cash Flows ...................... 6 Statements of Consolidated Common Stock Equity ............. 7 Statements of Consolidated Comprehensive Income ............ 7 Notes ...................................................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12............................... 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 2224 PART II OTHER INFORMATION Item 1. Legal Proceedings 22......................................... 25 Item 2. Changes in Securities and Use of Proceeds 26................. 27 Item 3. Defaults Upon Senior Securities 26........................... 27 Item 4. Submission of Matters to a Vote of Security Holders 26....... 27 Item 5. Other Information 26......................................... 27 Item 6. Exhibits and Reports on Form 8-K 26.......................... 27 Signature 27......................................................... 28

2 3 PART I ITEM 1. FINANCIAL STATEMENTS COLUMBIA ENERGY GROUP AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (unaudited)

Three Months Six Months Ended ~~March~~June 3130, Ended June 30, -------------------- ---------------------- ( in millions) 2001 2000 2001 2000 -------- ---------------------------------------------------------------------------------------------------- ~~(millions)~~NET ~~Net~~REVENUES ~~Revenues~~ Energy sales $ 523.9 $ 223.1 $1,~~168~~691.09 $ ~~638~~861.34 Less: Products purchased ~~854~~353.08 ~~366~~76.2 1,207.8 443.0 -------- ---------------------------------------------------------------------------------------------------- Gross Margin ~~314~~170.01 ~~271~~146.59 484.1 418.4 Transportation ~~258~~164.51 ~~251~~163.9 422.6 415.8 Production gas sales 4620.7 4635.4 67.4 81.8 Other 4830.7 40.4 4979.61 90.0 -------- ---------------------------------------------------------------------------------------------------- Total Net Revenues ~~667~~385.6 ~~619~~386.46 1,053.2 1,006.0 -------- ---------------------------------------------------------------------------------------------------- ~~Operating~~OPERATING ~~Expenses~~EXPENSES Operation and maintenance ~~194~~202.45 ~~213~~220.46 396.9 434.0 Depreciation and depletion 5756.01 6247.41 113.1 109.5 Loss on impairment of telecommunication assets 89.2 -- 89.2 -- Other taxes 6534.2 6939.94 99.4 109.3 -------- ---------------------------------------------------------------------------------------------------- Total Operating Expenses ~~316~~382.0 307.1 698.6 ~~345~~652.78 -------- ---------------------------------------------------------------------------------------------------- ~~Operating~~OPERATING ~~Income~~INCOME ~~351~~3.06 ~~273~~79.75 354.6 353.2 -------- ---------------------------------------------------------------------------------------------------- ~~Other~~OTHER ~~Income~~INCOME (~~Deductions~~DEDUCTIONS) Interest income and other, net (14.2)6 493.8 3.4 98.1 Interest expense and related charges (4638.87) (45.72) (85.5) (90.9) -------- ---------------------------------------------------------------------------------------------------- Total Other Income (Deductions) (4834.01) 48.6 (4182.41) 7.2 -------- ---------------------------------------------------------------------------------------------------- ~~Income~~INCOME ~~from~~(LOSS) ~~Continuing~~FROM ~~Operations~~CONTINUING ~~before~~OPERATIONS ~~Income~~BEFORE ~~Taxes~~INCOME ~~303~~TAXES (30.05) ~~232~~128.31 ~~Income~~272.5 ~~Taxes~~360.4 ~~113~~INCOME TAX EXPENSE (BENEFIT) (10.92) 8845.92 103.7 134.1 -------- ---------------------------------------------------------------------------------------------------- ~~Income~~INCOME ~~from~~(LOSS) ~~Continuing~~FROM ~~Operations~~CONTINUING ~~189~~OPERATIONS (20.13) ~~143~~82.49 168.8 226.3 -------- ---------------------------------------------------------------------------------------------------- ~~Discontinued~~DISCONTINUED ~~Operations~~OPERATIONS - ~~net~~NET ofOF ~~taxes~~TAXES Income (Loss) from operations -- 6(7.38) -- (1.5) Estimated (loss) on disposal -- (27.4) (1.0) (27.4) -- -------- -------------------------------------------------------------------------------------------------- Income (Loss) from Discontinued Operations - net of taxes -- (35.2) (1.0) 6(28.39) -------- ---------------------------------------------------------------------------------------------------- ~~Income~~INCOME ~~before~~(LOSS) ~~Cumulative~~BEFORE ~~Effect~~CUMULATIVE ofEFFECT ~~Accounting~~OF ~~Change~~ACCOUNTING ~~188~~CHANGE (20.13) ~~149~~47.7 167.8 197.4 Cumulative Effect of Accounting Change - net of taxes -- -- 4.0 -- -------- ---------------------------------------------------------------------------------------------------- ~~Net~~NET ~~Income~~INCOME (LOSS) $ ~~192~~(20.13) $ ~~149~~47.7 $ 171.8 $ 197.4 ======== ====================================================================================================

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 3 4 ITEM 1. FINANCIAL STATEMENTS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

AsJUNE of30, December 31, (in millions) 2001 2000 ----------------------------- ~~March 31, December 31, 2001 2000~~ ------------ -------------------------------------- ~~(unaudited)~~ ASSETS (~~millions~~unaudited) ~~Property~~PROPERTY, ~~Plant~~PLANT ~~and~~AND ~~Equipment~~EQUIPMENT Gas utility and other plant, at original cost $ 8,~~158~~057.26 $ 8,174.2 Accumulated depreciation (3,~~810~~837.28) (3,778.3) -------- ----------------------------------------------------------------------- Net Gas Utility and Other Plant 4,~~348~~219.08 4,395.9 -------- ----------------------------------------------------------------------- Gas and oil producing properties, full cost method United States cost center ~~930~~951.21 913.6 Canadian cost center 2022.01 20.2 Accumulated depletion (~~279~~295.59) (272.7) -------- ----------------------------------------------------------------------- Net Gas and Oil Producing Properties ~~670~~677.73 661.1 -------- ----------------------------------------------------------------------- Net Property, Plant and Equipment 54,~~018~~897.71 5,057.0 -------- ----------------------------------------------------------------------- ~~Investments~~INVESTMENTS ~~and~~AND ~~Other~~OTHER ~~Assets~~ASSETS Unconsolidated affiliates 3032.86 28.1 Net assets of discontinued operations ~~250~~242.84 236.3 Affiliated notes receivable 26.2 - Assets held for sale 84.0 - Other 2218.62 27.4 -------- ----------------------------------------------------------------------- Total Investments and Other Assets ~~330~~403.4 291.8 -------- ----------------------------------------------------------------------- ~~Current~~CURRENT ~~Assets~~ASSETS Cash and temporary cash investments 6438.83 73.5 Accounts receivable, net ~~940~~436.04 683.3 Affiliated receivable 5681.27 2.7 Gas inventory 5966.30 147.4 Other inventories - at average cost 1413.07 14.5 Prepayments 7485.70 73.8 Regulatory assets 7074.57 57.4 Underrecovered gas costs 1317.23 169.0 Deferred property taxes 3725.32 45.2 Exchange gas receivable ~~650~~528.80 615.9 Price risk management asset ~~143~~119.06 -- Other 7036.15 (2.3) -------- ----------------------------------------------------------------------- Total Current Assets 21,~~193~~522.94 1,880.4 -------- ----------------------------------------------------------------------- ~~Regulatory~~REGULATORY ~~Assets~~ASSETS ~~354~~353.42 351.8 ~~Deferred~~DEFERRED ~~Charges~~CHARGES 6772.70 45.2 -------- ----------------------------------------------------------------------- ~~Total~~TOTAL ~~Assets~~ASSETS $ 7,~~965~~248.1 $ 7,626.2 ======== =======================================================================

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 5 ITEM 1. FINANCIAL STATEMENTS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS

AsJUNE of30, December 31, (in millions) 2001 2000 ----------------------------- ~~March 31, December 31, 2001 2000~~ ------------ -------------------------------------- ~~(unaudited)~~ CAPITALIZATION AND LIABILITIES (~~millions~~unaudited) CAPITALIZATION Common stock equity $ 2,~~251~~276.85 $ 2,035.9 Long-term debt 1,~~640~~639.18 1,639.1 -------- ----------------------------------------------------------------------- Total Capitalization 3,~~891~~916.93 3,675.0 -------- ----------------------------------------------------------------------- CURRENT LIABILITIES Short- term debt -- 521.0 Current maturities of long-term debt 0.2 0.2 Accounts and drafts payable ~~243~~248.21 398.0 Affiliated payable ~~290~~204.06 7.2 Accrued taxes ~~295~~218.61 177.1 Accrued interest 5018.80 17.7 Estimated rate refunds 38.76 6.8 Overrecovered gas costs ~~208~~119.63 -- Transportation and exchange gas payable ~~389~~261.40 358.5 Deferred revenue ~~423~~278.39 451.5 ~~Price risk management liabilities 104.5 --~~ Other ~~278~~259.53 366.0 -------- ----------------------------------------------------------------------- Total Current Liabilities 21,~~287~~616.81 2,304.0 -------- ----------------------------------------------------------------------- OTHER LIABILITIES AND DEFERRED CREDITS Deferred income taxes, noncurrent 831.36 766.8 Investment tax credits 30.85 31.2 Postretirement benefits other than pensions ~~111~~109.59 114.7 Regulatory liabilities 4333.37 32.4 Deferred revenue ~~526~~493.10 498.0 Other ~~242~~217.40 204.1 -------- ----------------------------------------------------------------------- Total Other Liabilities and Deferred Credits 1,~~785~~715.47 1,647.2 -------- ----------------------------------------------------------------------- TOTAL CAPITALIZATION AND LIABILITIES $ 7,~~965~~248.1 $ 7,626.2 ======== =======================================================================

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5 6 ITEM 1. FINANCIAL STATEMENTS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)

~~Three~~Six Months Ended ~~March~~June 3130, ( in millions) 2001 2000 --------------------- ~~2001 2000~~ ------ ------------------------------------------------------------- ~~(millions)~~ OPERATING ACTIVITIES Net ~~income~~Income $~~192~~ 171.18 $~~149~~ 197.74 Adjustments to reconcile net income to net cash from continuing operations: Loss from discontinued operations -- 1.5 Loss from disposal of discontinued operations 1.0 (627.3)4 Cumulative effect of accounting change, net of tax (4.0) -- Depreciation and depletion 57113.01 62109.45 Deferred income taxes (2261.94) 1022.47 Gain on sale of partnership -- (90.6) Earnings from equity investment, net of distributions (24.75) (36.4) ~~Assets~~Loss ~~held~~on ~~for~~impairment ~~sale~~of --telecommunication ~~(57~~assets 89.2) -- Deferred revenue (0177.16) (925.0) Other - net 1275.16 34(43.85) ------ ---------------------------------------------------------------------------------- ~~232~~203.52 ~~181~~193.40 ~~Change~~---------------------------------------------------------------------------------------- Changes in components of working capital: Accounts receivable, net ~~(297~~261.9)6 87201.6 Affiliated receivable (53112.59) --13.5 Gas inventory 8881.14 ~~132~~48.47 Other inventories - at average cost 0.58 0.46 Prepayments (011.92) 10(2.61) Accounts payable (~~157~~149.39) ~~(57~~14.8)9 Affiliated payable (2197.2)4 -- Accrued taxes ~~132~~41.80 19(9.62) Accrued interest 330.13 352.0 Estimated rate refunds ~~(3.~~1).8 (122.91) Under/Overrecovered gas costs ~~364~~271.40 78(3.91) Exchange gas receivable/payable (49.06) (27126.18) Other working capital (28134.54) (4731.14) ------ ---------------------------------------------------------------------------------- Net Cash ~~From~~from Continuing Operations ~~304~~640.05 ~~401~~299.06 Net Cash ~~From~~from Discontinued Operations ~~(15.5)~~-- 2420.64 ------ ---------------------------------------------------------------------------------- Net Cash ~~From~~from Operating Activities ~~288~~640.5 ~~425~~320.60 ------ ---------------------------------------------------------------------------------- INVESTMENT ACTIVITIES Capital expenditures (69147.68) (73190.9) Acquisitions and other investments - net 67.28 108.8 Other -- (392.71) ------ ---------------------------------------------------------------------------------- Net Investment Activities (63140.40) (~~113~~84.62) ------ ---------------------------------------------------------------------------------- FINANCING ACTIVITIES Dividends paid -- (1836.32) Issuance of common stock -- 04.5 Issuance (repayment) of short-term debt (521.0) (~~287~~136.56) ~~Intercompany short-term financing 292.2 --~~ Purchase of treasury stock -- (38114.21) Other financing activities (514.07) (113.18) ------ ---------------------------------------------------------------------------------- Net Financing Activities (~~233~~535.87) (~~354~~286.62) ------ ---------------------------------------------------------------------------------- Increase (Decrease) in cash and temporary cash investments (835.72) (4250.64) Cash and temporary cash investments at beginning of year 73.5 58.1 ------ ---------------------------------------------------------------------------------- CASH AND TEMPORARY CASH ~~INVESTMENT~~INVESTMENTS AT ~~MARCH~~JUNE 3130* $ 6438.83 $ 157.57 ====== ================================================================================== SUPPLEMENTAL ~~DISCLOSURE~~DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest $ 98.43 $ 982.84 Cash paid for income taxes (net of refunds) $ 57.39 $ 2466.27 ----------------------------------------------------------------------------------------

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. *The Corporation considers all highly liquid short-term investments to be cash equivalents. 6 7 ITEM 1. FINANCIAL STATEMENTS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY

AsJUNE of30, December 31, (in millions) 2001 2000 ------------------------------------- ~~March 31, December 31, 2001 2000~~ -------------- ---------------------------- (unaudited) ~~(millions)~~ Common stock, $.01 par value, authorized and issued 3,000 shares $ -- $ 0.8 Additional paid in capital 1,369.87 1,369.0 Retained earnings ~~858~~838.31 666.5 Accumulated other comprehensive income 2368.7 (0.4) -------------- ----------------------------------------------------------------- TOTAL COMMON STOCK EQUITY $ 2,~~251~~276.85 $ 2,035.9 ============== =================================================================

COLUMBIA ENERGY GROUP AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

JUNE 30, December 31, For the ~~year~~Year to ~~date~~Date ~~period~~Period ~~ended~~Ended, (in millions) 2001 2000 ------------------------------------- ~~March 31, December 31, 2001 2000~~ -------------- ---------------------------- (unaudited) ~~(millions)~~ COMPREHENSIVE INCOME Net income $ ~~192~~171.18 $ 133.7 Other Comprehensive Income (Loss): Foreign currency translation adjustment (10.17) (0.7) Net gain ~~(loss)~~ on cash flow hedges 2569.24 -- -------------- ----------------------------------------------------------------- COMPREHENSIVE INCOME $ ~~216~~240.25 $ 133.0 ============== =================================================================

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 7 8 ITEM 1. FINANCIAL STATEMENTS (continued) ------- -------------------------------- COLUMBIA ENERGY GROUP AND SUBSIDIARIES NOTES 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 generally accepted accounting principles. 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, 2000. Income 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 2000 financial statements to conform to the 2001 presentation. As discussed in Note 5, the 2000 financial statements have been reclassified to report several energy marketing operations as discontinued operations. 2. ACQUISITION On November 1, 2000, NiSource Inc. completed its acquisition of Columbia for an aggregate consideration of approximately $6 billion, consisting of $3,888 million in cash, 72.4 million shares of common stock valued at $1,761 million, and SAILS(SM) (units consisting of a zero coupon debt security coupled with a forward equity contract in NiSource shares) valued at $114 million. NiSource also assumed approximately $2 billion in Columbia debt. NiSource accounted for the acquisition in accordance with the purchase method of accounting, but did not "push-down" the purchase accounting adjustments to the financial statements of Columbia. 3. RESTRUCTURING ACTIVITIES As discussed in the Form 10-K, Columbia implemented a plan to restructure its operations as a result of its acquisition by NiSource, discussed above. As a result of the restructuring plan, it is estimated that approximately 781 management, professional, administrative and technical positions have been or will be eliminated. The restructuring plan included a severance program, a transition plan to implement operational efficiency throughout NiSource's operations and a voluntary early retirement program. As of June 30, 2001, approximately 535 employees had been terminated as a result of the restructuring plan. At June 30, 2001, the consolidated balance sheet reflected an accrual of $39.6 million related to the restructuring plan. 4. PRESENTATION OF SEGMENT INFORMATION Columbia revised its presentation of its primary business segment information beginning with the reporting of second quarter 2000 results. Columbia manages its operations in four primary segments: 1) transmission and storage, 2) distribution, 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 is derived from revenues and expenses directly associated with each segment. 8 9 ITEM 1. FINANCIAL STATEMENTS (continued) ------- -------------------- ----------- COLUMBIA ENERGY GROUP AND SUBSIDIARIES

Three Months Six Months Ended ~~March~~June 3130, Ended June 30, ------------------ -------------------- ($ in millions) 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------- REVENUES ~~Transmission~~TRANSMISSION ~~and~~AND ~~Storage~~STORAGE Unaffiliated ~~183~~141.18 ~~175~~134.7 ~~Intersegment~~324.9 72310.4 69Intersegment 54.41 53.8 126.5 123.2 ------------------------------------------------------------------------------------------------- ~~TOTAL~~Total ~~255~~195.9 188.5 ~~245~~451.14 433.6 ------------------------------------------------------------------------------------------------- ~~Distribution~~DISTRIBUTION Unaffiliated 548.0 278.7 1,~~279~~827.3 ~~757~~1,036.96 Intersegment (0.3) 0.62 - 0.8 ------------------------------------------------------------------------------------------------ ~~TOTAL~~Total 547.7 278.9 1,~~279~~827.63 ~~758~~1,037.54 ------------------------------------------------------------------------------------------------- ~~Exploration~~EXPLORATION ~~and~~AND ~~Production~~PRODUCTION Unaffiliated 5320.3 40.1 72.2 5191.89 Intersegment 126.86 0.72 28.4 0.9 ------------------------------------------------------------------------------------------------- ~~TOTAL~~Total 5546.09 5240.53 100.6 92.8 ------------------------------------------------------------------------------------------------- ~~Other~~OTHER ~~Products~~PRODUCTS ~~and~~AND ~~Services~~SERVICES Unaffiliated 94.26 15.0 13.8 28.5 Intersegment - - 0.1 - ------------------------------------------------------------------------------------------------- ~~TOTAL~~Total 94.36 15.0 13.9 28.5 ------------------------------------------------------------------------------------------------- Adjustments and eliminations (7755.87) (8354.42) (132.2) (124.9) ------------------------------------------------------------------------------------------------- CONSOLIDATED ~~1,521~~739.64 ~~986~~468.5 2,261.0 1,467.4 ------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) Transmission and Storage ~~140~~72.43 ~~123~~66.9 ~~Distribution~~212.7 190.28 ~~131~~Distribution 15.29 6.4 206.1 137.6 Exploration and Production 2510.91 2015.0 36.0 35.8 Other Products and Services (493.89) 01.21 (98.7) 1.3 Corporate (0.78) (29.49) (1.5) (12.3) ------------------------------------------------------------------------------------------------- CONSOLIDATED ~~351~~3.06 ~~273~~79.75 354.6 353.2 -------------------------------------------------------------------------------------------------

9 10 ITEM 1. FINANCIAL STATEMENTS (continued) ------- -------------------- ----------- COLUMBIA ENERGY GROUP AND SUBSIDIARIES 5. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE In May 2000, as a result of its ongoing strategic assessment, Columbia announced that it decided to sell Columbia Propane Corporation (Columbia Propane), a propane marketer. On January 31, 2001, Columbia signed a definitive agreement (as amended and restated on August 7, 2001) to sell the stock and assets of Columbia Propane to AmeriGas Partners L.P. (AmeriGas) for approximately $201.5 million, consisting of $149.0 million in cash and $52.5 million of AmeriGas partnership common units. The transaction, subject to customary conditions, is expected to close in the third quarter of 2001. Columbia has also sold substantially all the assets of Columbia Petroleum Corporation, a diversified petroleum distribution company. Columbia Propane and Columbia Petroleum are reported as discontinued operations and therefore the financial statements for prior periods have been reclassified accordingly. The revenues from discontinued operations were $58.2 million (Propane-$51.1 million and Petroleum-$7.1 million) and $257.6 million (Propane-$208.8 million and Petroleum-$48.8 million) for the three months and six months ended June 30, 2001. The revenues from discontinued operations were $154.0 million (Gas-$34.4 million, Propane-$47.7 million, Petroleum-$61.7 million and Other-$10.2 million) and $500.6 million (Gas-$166.1 million, Propane-$163.8 million, Petroleum-$146.8 million and Other-$23.9 million) for the three months and six months ended June 30, 2000. The loss from discontinued operations and the estimated loss on disposal information are provided in the following table:

Three Months Six Months Ended ~~March~~June 3130, Ended June 30, ------------------ ------------------ ($ in millions) 2001 2000 2001 2000 ----------------------------------------------------------------------------------------------- ~~Income~~Loss from discontinued operations - 10(12.4) - (2.0) Income tax ~~expense~~benefit - (4.16) - (0.5) ----------------------------------------------------------------------------------------------- NET ~~INCOME~~LOSS FROM DISCONTINUED OPERATIONS - 6(7.38) - (1.5) ----------------------------------------------------------------------------------------------- Estimated loss on disposal - (38.1) (1.5) -(38.1) Income tax benefits - (10.7) (0.5) -(10.7) ----------------------------------------------------------------------------------------------- NET ESTIMATED LOSS ON DISPOSAL - (27.4) (1.0) -(27.4) -----------------------------------------------------------------------------------------------

The net assets of the discontinued operations were as follows:

~~March~~JUNE 3130, December 31, ($ in millions) 2001 2000 --------------------------------------------------------------------------------------------------~~------~~ NET ASSETS OF DISCONTINUED OPERATIONS Accounts receivable, net 6933.50 91.3 Property, plant and equipment, net ~~201~~200.97 212.2 Other assets 6268.3 70.2 Accounts payable (4525.98) (68.3) Other liabilities (3733.08) (69.1) -----------------------------------------------------------------------------------------------~~---------~~ NET ASSETS OF DISCONTINUED OPERATIONS ~~250~~242.84 236.3 -----------------------------------------------------------------------------------------------~~---------~~

In September and October 2000, management held discussions with investment banking firms seeking strategic options for the assets of Columbia Transmission Communications Corporation (Transcom), a fiber optics telecommunications network. Although significant uncertainties existed surrounding the estimated costs to complete the fiber optic network, time to market in a competitive environment, and delays due to construction deficiencies and environmental issues, the decision was made to complete the Transcom network and sell the assets. The Company has received subsequent information pertaining to the estimated construction costs and delays. Consequently, management has concluded that the carrying value of the telecommunication assets exceeds the realizable value by approximately $89.2 million. The Company recorded a charge of $89.2 million to Operating Income in the second quarter of 2001. 10 11 ITEM 1. FINANCIAL STATEMENTS (continued) ------- -------------------- ----------- COLUMBIA ENERGY GROUP AND SUBSIDIARIES 6. ACCOUNTING CHANGE Effective January 1, 2001, Columbia adopted the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as subsequently amended by SFAS No. 137 and SFAS No. 138 (collectively referred to as SFAS No. 133). These statements establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and resulting designation. The adoption of this statement on January 1, 2001, resulted in a cumulative after-tax increase to net income of approximately $4 million and an after-tax reduction to other comprehensive income (OCI) of $33.6 million. The adoption also resulted in the recognition of $160.2 million of assets and $193.8 million of liabilities on the consolidated balance sheet. Additionally, the adoption resulted in the reduction of the carrying value of certain long-term debt by $3.8 million. During the second quarter of 2001, $6.2 million of the net losses included in the cumulative effect of a change in accounting principle component of OCI were reclassified into earnings. During the six months ended June 30, 2001, $19.1 million of the net losses included in the cumulative effect of a change in accounting principle component of OCI were reclassified into earnings. Further detail of the assets and liabilities recorded on the consolidated financial statements for the adoption of SFAS No. 133 is as follows:

(in millions) ASSETS LIABILITIES ------------------------------------------------------------------------------------------------- Price Risk Management $ 153.6 $ 209.8 Deferred Taxes - (16.0) Regulatory 6.6 - Debt - (3.8) ------------------------------------------------------------------------------------------------- TOTAL $ 160.2 $ 190.0 -------------------------------------------------------------------------------------------------

As stated above, the initial recording of the cumulative effect of this accounting change included unrealized holding losses of $33.6 million. However, the activity for the second quarter of 2001 and the six months ended June 30, 2001 resulted in unrealized gains on qualifying derivatives of approximately $44.2 and $69.4 million, respectively, as reported in the Statements of Consolidated Shareholder's Equity. The activity for the periods included:

~~(in~~Three ~~millions)~~Months Six Months Ended June 30, Ended June 30, -------------- -------------- ( in millions) 2001 2001 --------------------------------------------------------------------------------------------------- Unrealized gains on derivatives qualifying as cash ~~flow~~FLOW ~~hedges~~HEDGES: Unrealized holding ~~losses~~gain (loss) arising during the period due to cumulative effect of a change in accounting principle, recognized at January 1, 2001, net of tax. $ - $ (33.6) Unrealized holding gains arising during the period on derivatives qualifying as cash flow hedges, net of tax 38.5 4584.93 Reclassification adjustment for net ~~losses~~loss included in net income, net of tax (including losses of $6.2 12and $19.91 million, respectively, related to the cumulative effect of change in accounting principle) 5.7 18.7 -----------------------------------------------------------------------------------------------~~-------------------~~ Net unrealized gains on derivatives qualifying as cash flow hedges, net of tax. $ 2544.2 $ 69.4 -----------------------------------------------------------------------------------------------~~-------------------~~

11 12 ITEM 1. FINANCIAL STATEMENTS (continued) ------- -------------------- ----------- COLUMBIA ENERGY GROUP AND SUBSIDIARIES NiSource's senior management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. In recognition of the increasingly varied and complex nature of the energy business, NiSource's risk management policies and procedures continue to evolve and are subject to ongoing review and modification. Following is additional information regarding the impact of SFAS No. 133 by segment. Distribution ------------ For regulatory incentive purposes, the Columbia Distribution subsidiaries enter into contracts that allow counterparties the option to sell gas to Distribution at specified prices during specified periods of time. Distribution charges the counterparties a fee for this option. The changes in the fair value of the options are primarily due to the difference between the cost of gas during the contracted delivery period and the market price of gas during that same period. Distribution defers a portion of the change in the fair value of the options as either a regulatory asset or liability in accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." The remaining change is recognized currently in earnings. Exploration and Production -------------------------- In conjunction with certain fixed price gas delivery commitments, Columbia Energy Resources, Inc. (Columbia Resources) has purchased financial basis swaps to transfer basis risk from the counterparty back to Columbia Resources. Because these transactions by definition are derivatives and do not qualify for hedge accounting, the mark to fair value of these swaps will directly impact earnings. Additionally, Columbia Resources has engaged in commodity and basis swaps to hedge the anticipated future sale of natural gas. These contracts are derivatives and are designated as cash flow hedges of anticipated future sales. The fair value of these derivatives is recorded in OCI until the related sale occurs. Any ineffectiveness is charged to earnings. Columbia Resources has a net gain of approximately $0.5 million recognized in earnings due to time value in the reporting period and has not excluded components of the derivatives' values in its assessment of hedge effectiveness. It is anticipated that during the next 12 months, expiration of forward swap contracts will result in income recognition for amounts currently classified in OCI of approximately $15.2 million, which will be included in net income. Columbia Resources has forward derivative contracts designated as cash flow hedges through December 2002. At this time, Columbia Resources expects to continue the majority of its cash flow hedges due to the probability that the forecasted events will occur. Other Products and Services --------------------------- Columbia Energy Services, Inc. (Columbia Energy Services) has fixed price gas delivery commitments to three municipalities in the U.S. that qualify as derivative instruments. Columbia Energy Services entered into a forward purchase agreement with a gas supplier, wherein the supplier will fulfill the delivery obligation requirements at a slight premium to index. In order to hedge this anticipated future purchase of gas from the gas supplier, Columbia Energy Services entered into pay fixed/receive floating swaps priced at those locations designated for physical delivery. These swaps are designated as cash flow hedges of the anticipated purchases. Any impacts of changes in the swaps' fair values are included in OCI until the sales are completed. Columbia Energy Services has no net gain or loss recognized in earnings due to ineffectiveness or time value in the reporting period and it has not excluded any component of the derivative instruments' value in its assessment of hedge effectiveness. It is anticipated that during the next 12 months, expiration of forward swap contracts will result in income recognition of amounts currently classified in OCI of approximately $13.6 million, which will be included in net income. Columbia Energy Services has forward swap contracts designated as cash flow hedges through December 2008. At this time, Columbia Energy Services expects to continue its cash flow hedges due to the probability that the forecasted transaction will occur. Gas Transmission and Storage ---------------------------- The adoption and application of SFAS 133 had no impact on this segment. 12 13 ITEM 1. FINANCIAL STATEMENTS (continued) ------- -------------------- ----------- COLUMBIA ENERGY GROUP AND SUBSIDIARIES Interest Rate Swaps ------------------- Columbia utilizes fixed-to-floating interest rate swap agreements to modify the interest characteristics of a portion of its outstanding long-term debt. As a result of these transactions, $300 million of Columbia's long-term debt is now subject to fluctuations in interest rates. Columbia has no net gain or loss recognized in earnings due to ineffectiveness or time value in this reporting period. Columbia has not excluded any component of the derivative instrument's value in its assessments of hedge effectiveness. Columbia would recognize approximately $0.7 million in earnings over the remaining life of the corresponding long-term debt if the hedging relationship was to be discontinued. 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." The key concepts from the two interrelated Statements include mandatory use of the purchase method in accounting for business combinations, discontinuance of goodwill amortization, a revised framework for testing for 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 under the revised framework. The Business Combinations Statement is generally effective for combinations that are initiated after June 30, 2001. The Statement on Goodwill and Other Intangible Assets is effective for fiscal years beginning after December 15, 2001, however, for business combinations consummated after June 30, 2001, the requirements to discontinue goodwill amortization are effective upon issuance of the Statements. The first part of the annual impairment test is to be performed within six months of adopting the Statement on Goodwill and Other Intangible Assets. Columbia will adopt the provisions of the Business Combinations Statement on July 1, 2001, and the Goodwill and Other Intangible Assets Statement on January 1, 2002. Although Columbia is currently evaluating the effects of the Statements, the Company does not expect the adoption of the Statements to have a material impact on its results of operations. In July of 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The Statement 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. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Statement is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. Columbia is currently evaluating the impact that the Statement will have on its results of operations. 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- COLUMBIA ENERGY GROUP AND SUBSIDIARIES Forward Looking Statements -------------------------- The Management's Discussion and 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. In addition, the relative contributions to profitability by each segment, and the assumptions underlying the forward-looking statements relating thereto, may change over time. The following Management's Discussion and Analysis should be read in conjunction with the Columbia Annual Report on Form 10-K for the fiscal year ended December 31, 2000. SECOND QUARTER 2001 CONSOLIDATED RESULTS Income from Continuing Operations --------------------------------- Columbia reported a net loss from continuing operations for the second quarter 2001 of $20.3 million, a decrease of $103.2 million over the second quarter of 2000. The loss was primarily due to a one time charge of $89.2 million ($52.0 million after-tax) for the asset impairment relating to the fiber optics telecommunications network. Also contributing to the decrease was the positive impact of $59.0 million after-tax gain on the sale of Cove Point LNG during the second quarter of 2000. Tempering this decrease were reduced operation and maintenance costs as a result of restructuring initiatives implemented during 2000 to improve operating efficiencies and reduce costs. Net Revenues ------------ Total second quarter 2001 consolidated net revenues (operating revenues less associated products purchased costs) were $385.6 million, a $1.0 million decrease over the same period last year. Increased operating revenues, due to higher gas prices for the Exploration and Production segment and increased transportation service revenues for the Transmission and Storage segment, were offset by reduced gas sales from the Distribution segment, due to 15% warmer weather in the second quarter 2001 over the same period last year. Expenses -------- Operating expenses for the second quarter of 2001 were $382.0 million, an increase of $74.9 million over the same period last year. The increased expense was largely due to the $89.2 million expense provision recorded for the asset impairment relating to the fiber optics telecommunications network. Also, depletion expenses increased $10.0 million due in part to a ceiling test write-down in Columbia Resources' Canadian region. Offsetting these increases was a $18.1 million decrease in operation and maintenance expenses primarily resulting from payroll and benefit cost savings. These savings were achieved in large part by the success of the restructuring initiatives implemented in 2000. Other taxes decreased $5.2 million primarily due to lower property tax rates. 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- COLUMBIA ENERGY GROUP AND SUBSIDIARIES Other Income (Deductions) ------------------------- Other Income (Deductions), which includes interest income and other, net and interest expenses and related charges, reduced pre-tax income by $34.1 million for the second quarter of 2001 compared to a $48.6 million improvement in the same period last year. Interest income and other, net for the second quarter of 2001 of $4.6 million was down $89.2 million, as a result of a $90.6 million pre-tax gain on the sale of Cove Point LNG in the second quarter of 2000. Interest expense and related charges of $38.7 million in the second quarter of 2001 decreased $6.5 million compared to the same period last year, primarily due to reduced short-term borrowings. Income Taxes ------------ Income taxes decreased $55.4 million in the second quarter of 2001 over the same period last year, primarily from the tax benefit recorded due to the loss on the fiber optics telecommunications network. SIX MONTH CONSOLIDATED RESULTS Income from Continuing Operations --------------------------------- Columbia's income from continuing operations for the first half of 2001 was $168.8 million, a decrease of $57.5 million from the corresponding 2000 period. The decrease was largely due to a one time charge of $89.2 million ($52.0 million after-tax) for the asset impairment relating to the fiber optics telecommunications network in the second quarter of 2001 and the $59.0 million after-tax gain on the sale of Cove Point LNG during the second quarter of 2000. Tempering these decreases were increased revenues, due in part to 6% colder weather in the first half of 2001 compared to the same period in 2000. Reduced operation and maintenance costs, mainly labor and benefits, as a result of restructuring initiatives implemented during 2000 also helped offset the above-mentioned decreases. Net Revenues ------------ For the six months ended June 30, 2001, net revenues of $1,053.2 million increased $47.2 million over the same period in 2000. The improvement was primarily a result of colder weather in the first half of 2001 (6% colder than the first six months of 2000), which increased net revenues in the distribution segment by $32.7 million. Increased transportation revenues and other revenues from the sale of base storage gas in the transmission and storage segment of $17.8 million also contributed to the net revenue improvement in the first half. Expenses -------- Operating expenses for the first half of 2001 were $698.6 million, an increase of $45.8 million over the same period last year. The increased expense was primarily due to the $89.2 million expense provision recorded for the asset impairment relating to the fiber optics telecommunications network. Depletion expenses increased slightly, $3.6 million, due in part to a ceiling test write-down in Columbia Resources' Canadian region, offset by a lower depletion rate in 2001. Tempering these increases were a $37.1 million decrease in operation and maintenance expenses. The voluntary incentive retirement program implemented in 2000 helped reduce payroll and benefit costs along with restructuring initiatives, which improved operating efficiencies and contributed to expense reductions. Other taxes decreased $9.9 million as a result of lower property taxes, though partially offset by increased gross receipts taxes. Other Income (Deductions) ------------------------- Other Income (Deductions) reduced income by $82.1 million for the first half of 2001, compared to an increase to income of $7.2 million in the same period last year. Interest income and other, net of $3.4 million, decreased $94.7 million as a result of the $90.6 million pre-tax gain on the sale of Point Cove LNG in the second quarter of 2000. Interest expense and related charges decreased $5.4 million in the first half of 2001, due to a reduction in short-term borrowings related to the 2000 stock repurchase program and lower interest on contingent taxes. 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- COLUMBIA ENERGY GROUP AND SUBSIDIARIES Income Taxes ------------ Income tax expense of $103.7 million in the first half of 2001 decreased $30.4 million from the same period last year, primarily from the tax benefit recorded due to the loss on the fiber optics telecommunications network. Discontinued Operations ----------------------- For the first half of 2001, the estimated loss on disposal of the propane business was $1.0 million after-tax, while the propane and petroleum business reported an after-tax loss of $28.9 million for the same period of 2000. Change in Accounting Principle ------------------------------ On January 1, 2001, Columbia adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This change in accounting, net of taxes, contributed $4.0 million to net income. 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 and long-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. Net cash from continuing operations for the first six months of 2001 was $640.5 million, an increase of $340.9 million from the same period in 2000. This increase was primarily due to timing differences associated with exchange gas activity and other working capital items, including underrecovered gas costs. Columbia satisfies its liquidity requirements primarily through internally generated funds and through a $2.5 billion revolving credit facility (Credit Facility) that was entered into by NiSource Finance Corp., NiSource's financing subsidiary, with a syndicate of banks during the first quarter of 2001. The Credit Facility will be drawn on to refinance and consolidate essentially all of the existing short-term borrowings of NiSource's subsidiaries, including Columbia, as they come due. This new facility is guaranteed by NiSource. As of June 30, 2001, Columbia had $194.6 million of intercompany short-term borrowings with NiSource Finance Corp. outstanding at a weighted average interest rate of 4.27%. In addition, at June 30, 2001, Columbia had letters of credit issued and outstanding of $45.4 million. In 1998, Columbia entered into several fixed-to-floating interest rate swap agreements to modify the interest characteristics of $300 million of its outstanding long-term debt. As a result of these transactions, that portion of Columbia's long-term debt is now subject to fluctuations in interest rates. This allows Columbia to benefit from a lower interest rate environment. In order to maintain a balance between fixed and floating interest rates, Columbia is targeting average annual floating rate debt exposure for 10 to 20% of its outstanding long-term debt. Management believes that its sources of funding are sufficient to meet the short-term and long-term liquidity needs of Columbia. Accounting Change ----------------- Effective January 1, 2001, Columbia adopted the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as subsequently amended by SFAS No. 137 and SFAS No. 138 (collectively referred to as SFAS No. 133). These statements establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign-currency-denominated forecasted transaction. The 16 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- COLUMBIA ENERGY GROUP AND SUBSIDIARIES accounting for changes in the fair value of a derivative depends on the intended use of the derivative and resulting designation. The adoption of this statement on January 1, 2001, resulted in a cumulative after-tax increase to net income of approximately $4 million and an after-tax reduction to other comprehensive income (OCI) of $33.6 million. The adoption also resulted in the recognition of $160.2 million of assets and $193.8 million of liabilities on the consolidated balance sheet. Additionally, the adoption resulted in the reduction of the carrying value of certain long-term debt by $3.8 million. During the second quarter of 2001, $6.2 million of the net losses included in the cumulative effect of a change in accounting principle component of OCI were reclassified into earnings. During the six months ended June 30, 2001, $19.1 million of the net losses included in the cumulative effect of a change in accounting principle component of OCI were reclassified into earnings. NiSource's senior management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in the identification, assessment and control of various risks. In recognition of the increasingly varied and complex nature of the energy business, NiSource's risk management policies and procedures continue to evolve and are subject to ongoing review and modification. See Note 6., "Accounting Change" on page 11 for additional information. 17 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) -------------------------------------------------------------------------------- COLUMBIA ENERGY GROUP AND SUBSIDIARIES TRANSMISSION AND STORAGE OPERATIONS

Three Months Six Months Ended ~~March~~June 3130, Ended June 30, ------------------ ------------------- ( in millions) 2001 2000 2001 2000 ------------ ----------------------------------------------------------------------------------- ~~(millions)~~OPERATING ~~Transmission~~REVENUES ~~and~~Transportation ~~Storage~~revenues $ ~~140~~147.4 $ ~~123~~140.2 $ 341.8 $ 325.8 Storage revenues 44.9 ~~Distribution~~44.1 ~~190~~89.25 ~~131~~88.7 Other revenues 3.6 4.2 ~~Exploration~~20.1 ~~and~~19.1 ~~Production~~----------------------------------------------------------------------------------------------- 25Total Operating Revenues 195.9 20188.85 ~~Other~~451.4 ~~Products~~433.6 ----------------------------------------------------------------------------------------------- OPERATING EXPENSES Operation and ~~Services~~maintenance (82.3 81.1 155.1 159.7 Depreciation 27.4 27.3 54.8) 054.26 ~~Corporate~~Other (0taxes 13.7)9 (13.2 28.4)8 28.5 ----------------------------------------------------------------------------------------------- Total Operating Expenses 123.6 121.6 238.7 242.8 ----------------------------------------------------------------------------------------------- ~~Consolidated~~OPERATING INCOME $ ~~351~~72.03 $ ~~273~~66.9 $ 212.7 $ 190.8 ============ =================================================================================== THROUGHPUT (MDth) Transportation Columbia Transmission Market area 154.9 194.9 539.8 592.0 Columbia Gulf Mainline 170.5 165.9 336.6 313.4 Short-haul 49.8 42.5 88.6 102.9 Intrasegment eliminations (163.9) (161.2) (321.3) (308.7) Columbia Pipeline Deep Water 0.9 0.8 1.8 6.2 ----------------------------------------------------------------------------------------------- TOTAL THROUGHPUT 212.2 242.9 645.5 705.8 -----------------------------------------------------------------------------------------------

Throughput ---------- Columbia Transmission's throughput consists of transportation and storage services for local distribution companies and other customers within its market area, which covers portions of northeastern, mid-Atlantic, mid-western, and southern states and the District of Columbia. Throughput for Columbia Gulf reflects mainline transportation services from Rayne, Louisiana to Leach, Kentucky and short-haul transportation services from the Gulf of Mexico to Rayne, Louisiana. Throughput for the Transmission and Storage segment totaled 212.2 million dekatherms (MDth) for the second quarter of 2001, a decrease of 30.7 MDth from the same period in 2000, due to lower utilization by power generation customers and warm April weather. Throughput for the Transmission and Storage segment totaled 645.5 MDth for the first six months of 2001. An increase in customer demand during the first quarter due to colder weather and increased mainline requirements was more than offset by the overall reduction in power generation and storage customer quantities, resulting in a decrease of 60.3 MDth from the first six months of 2000. Operating Revenues ------------------ Total operating revenues were $195.9 million for the second quarter of 2001, an increase of $7.4 million over the same period in 2000. The increase in revenues was primarily due to higher transportation revenues resulting from contracts signed in the first quarter when the cold weather increased demand. For the first six months of 2001, total operating revenues were $451.4 million, an increase of $17.8 million from the same period last year. This increase is primarily due to higher transportation revenues resulting from contracts signed in the first quarter when the cold weather increased demand. In addition, approximately 5 Bcf of storage gas was sold in the first quarters of both 2001 and 2000, providing additional other revenues of $11.4 million and $10.9 million, respectively. 18 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) -------------------------------------------------------------------------------- COLUMBIA ENERGY GROUP AND SUBSIDIARIES Operating Income ---------------- Second quarter 2001 operating income of $72.3 million increased $5.4 million over the same period last year, due primarily to higher transportation revenues, as discussed above. For the first six months of 2001, operating income was $212.7 million, an increase of $21.9 million from the same period in 2000. The increase is due primarily to the increased revenues coupled with lower payroll and benefit costs as a result of Columbia Transmission's voluntary incentive retirement program implemented in 2000. 19 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) -------------------------------------------------------------------------------- COLUMBIA ENERGY GROUP AND SUBSIDIARIES DISTRIBUTION OPERATIONS

Three Months Six Months Ended ~~March~~June 3130, Ended June 30, ------------------ --------------------- ( in millions) 2001 2000 2001 2000 ------------ ----------------------------------------------------------------------------------- ~~Actual~~NET 2REVENUES Sales revenues $ 491.8 $ 213.8 $1,~~834~~648.4 2$ 841.6 Less: Cost of gas sold 398.4 120.7 1,~~566~~312.1 ~~Normal~~545.9 ----------------------------------------------------------------------------------------------- Net Sales Revenues 93.4 93.1 336.3 295.7 ----------------------------------------------------------------------------------------------- Transportation revenues 55.9 65.1 178.9 195.8 Less: Associated gas costs 2~~,947~~.9 5.6 9.3 18.3 ----------------------------------------------------------------------------------------------- Net Transportation Revenues 53.0 59.5 169.6 177.5 ----------------------------------------------------------------------------------------------- Net Revenues 146.4 152.6 505.9 473.2~~,979~~ %----------------------------------------------------------------------------------------------- ~~Colder~~OPERATING ~~(warmer)~~EXPENSES ~~than~~Operation ~~normal~~and (maintenance 102.8 112.6 206.3 230.1 Depreciation 11.6 11.5 32.8 33.1 Other taxes 16.1 22.1 60.7 72.4) ~~(14)~~----------------------------------------------------------------------------------------------- %Total ~~Colder~~Operating Expenses 130.5 146.2 299.8 335.6 ----------------------------------------------------------------------------------------------- OPERATING INCOME $ 15.9 $ 6.4 $ 206.1 $ 137.6 =============================================================================================== THROUGHPUT (~~warmer~~MDth) ~~than~~Sales ~~prior~~Residential ~~period~~14.3 1116.7 (83.1 76.5 Commercial 5.1 5.8) 31.9 27.0 Industrial and other 0.5 0.6 1.9 2.1 ----------------------------------------------------------------------------------------------- Total Sales 19.9 23.1 116.9 105.6 Transportation 61.7 79.7 174.1 207.9 ----------------------------------------------------------------------------------------------- Total Throughput 81.6 102.8 291.0 313.5 Off-System Sales 45.1 2.5 51.1 10.3 ----------------------------------------------------------------------------------------------- Total Sold and Transported 126.7 105.3 342.1 323.8 ===============================================================================================

DEGREE DAYS (DISTRIBUTION SERVICE TERRITORY)

Three Months Six Months Ended ~~March~~June 3130, Ended June 30, --------------- ------------------ 2001 2000 2001 2000 ------------ ------------ ~~(millions) OPERATING REVENUES Transportation revenues $ 194.4 $ 185.6 Storage revenues 44.6 44.6 Other revenues 16.5 14.9~~ ------------ ------------ ~~Total Operating Revenues 255.5 245.1~~ ------------ ----------------------------------- ~~OPERATING~~Actual ~~EXPENSES~~448 ~~Operation~~579 ~~and~~3,231 ~~maintenance~~3,145 ~~72.8~~Normal ~~78.6~~617 ~~Depreciation~~580 ~~27.4~~3,533 ~~27.~~3,559 ~~Other~~% ~~taxes~~Colder ~~14.~~(warmer) than normal (27%) - (9%) (12%) % Colder (warmer) than prior period (15.3%) 20% 6% (4%) ------------ ------------ ~~Total Operating Expenses 115.1 121.2~~ ------------ ------------ ~~OPERATING INCOME $ 140.4 $ 123.9 ============ ============ THROUGHPUT (Bcf) Transportation Columbia Transmission Market area 366.7 378.1 Columbia Gulf Mainline 162.1 145.7 Short~~-~~haul 37.0 57.5 Intrasegment eliminations (152.9) (140.4)~~ ------------ ------------ ~~Total Throughput 412.9 440.9 ============ ============~~----------------------

20 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) -------------------------------------------------------------------------------- COLUMBIA ENERGY GROUP AND SUBSIDIARIES Throughput ---------- During the second quarter of 2001, total volumes sold and transported of 126.7 million dekatherms (MDth) increased 21.4 MDth from the same period last year, primarily due to 42.6 MDth higher off-system sales. This was offset by decreased sales and transportation volumes to the industrial sector caused by a general production downturn, especially in the steel industry, along with reduced residential and commercial volumes delivered due to 15% warmer weather than in the second quarter of 2000. For the first six months of 2001, total volumes sold and transported of 342.1 MDth increased 18.3 MDth from the first half of 2000. Off-system sales of 51.1 MDth, an increase of 40.8 MDth from the same period last year, along with increased residential and commercial volumes delivered due to 11% colder weather in the first quarter of 2001 compared to 2000, contributed to this increase. Partially offsetting these increases are decreased volumes delivered to the industrial sector caused by a general production downturn during the first half of 2001. Net Revenues ------------ Net revenues for the three months ended June 30, 2001 of $146.4 million were down $6.2 million over the same period in 2000. Warmer weather and decreased transportation revenues contributed to this decrease. For the first half of 2001, net revenues were $505.9 million, up $32.7 million over the same period last year, primarily due to colder weather in the first quarter of 2001 compared to 2000, offset by decreased transportation and off-system revenues. Operating Income ---------------- Operating income for the three months ended June 30, 2001 of $15.9 million increased $9.5 million from the same period in 2000. The decrease in net revenues, as discussed above, was tempered by a $15.7 million decrease in operating expenses. The lower expenses included decreased payroll and benefit costs that resulted from a reduced employee complement due to the voluntary incentive retirement program implemented in 2000. In addition, other taxes decreased due to lower property and gross receipts taxes. For the six months ended June 30, 2001, operating income of $206.1 million increased $68.5 million from the same period last year, primarily due to increased net revenues, as discussed above, and a $35.8 million decrease in operating expenses. Operation and maintenance expenses decreased $23.8 million reflecting payroll and benefit savings from the voluntary incentive retirement program of 2000. Other taxes decreased $11.7 million due to lower property taxes, though partially offset by increased gross receipts taxes. 21 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) -------------------------------------------------------------------------------- COLUMBIA ENERGY GROUP AND SUBSIDIARIES EXPLORATION AND PRODUCTION OPERATIONS

Three Months Six Months Ended ~~March~~June 3130, Ended June 30, ----------------- ------------------ ( in millions) 2001 2000 2001 2000 ------------ ----------------------------------------------------------------------------------- ~~(millions)~~OPERATING ~~NET~~ REVENUES ~~Sales~~Gas revenues $ ~~1,156~~47.6 $ ~~627~~36.83 ~~Less:~~$ ~~Cost~~96.3 of$ ~~gas~~83.8 ~~sold~~Other ~~913~~revenues (0.7) ~~425~~4.20 4.3 9.0 ------------ ------------ ~~Net Sales Revenues 242.9 202.6~~ ------------ ----------------------------------------------------------- ~~Transportation~~Total ~~revenues~~Operating ~~123~~Revenues 46.09 ~~130~~40.73 ~~Less: Associated gas costs 6~~100.46 1292.78 ------------ ------------ ~~Net Transportation Revenues 116.6 118.0~~ ------------ ------------ ~~Net Revenues 359.5 320.6~~ ------------ ----------------------------------- OPERATING EXPENSES Operation and maintenance ~~103~~15.56 ~~117~~15.2 29.5 31.3 Depreciation 21and depletion 17.0 7.0 25.2 2119.64 Other taxes 444.62 503.1 9.9 6.3 ------------ ----------------------------------------------------------------------------------- Total Operating Expenses ~~169~~36.8 25.3 ~~189~~64.46 57.0 ------------ ----------------------------------------------------------------------------------- OPERATING INCOME $ ~~190~~10.21 $ ~~131~~15.20 $ 36.0 $ 35.8 ============ =================================================================================== ~~THROUGHPUT~~GAS PRODUCTION STATISTICS Production (Bcf) ~~Sales~~U.S. ~~Residential~~11.6 6512.9 5726.51 ~~Commercial 25~~27.70 ~~20.4~~Canada ~~Industrial and other~~ 0.1 0.41 0.1 0.41 ------------ ------------ ~~Total Sales 93.0 79.3 Transportation 107.7 123.3~~ ------------ ------------ ~~Total Throughput 200.7 202.6 Off~~-~~System Sales 5.1 7.1~~ ------------ ---------------------------------- Total ~~Sold~~11.7 ~~and~~13.0 ~~Transported 205~~26.82 ~~209~~27.71 ============ =================================================================================== ~~SOURCES~~Average OFPrice ~~GAS~~($ ~~FOR~~per ~~THROUGHPUT (Bcf~~Mcf) ~~Sources of Gas Sold Spot market* 48~~U.6S. 524.706 ~~Producers 1~~2.975 3.67 3.06 ~~Storage~~Canada ~~withdrawals (injections) 48~~5.100 452.373 ~~Other (0~~6.5)69 ~~(14~~2.9)80 ------------ ----------------------------------------------------------------------------------- ~~Total~~OIL ~~Sources~~AND ofLIQUIDS ~~Gas~~PRODUCTION ~~Sold~~STATISTICS ~~98.1~~Production 86(000 Bbls) U.4S. ~~Gas~~41 ~~received~~50 ~~for~~100 ~~delivery~~93 toCanada ~~customers~~2 ~~107.7~~2 ~~123.3~~4 5 ------------ ----------------------------------------------------------------------------------- Total ~~Sources~~43 ~~205.8~~52 ~~209.7~~104 98 ============ =================================================================================== Average Price ($ per Bbl) U.S. 22.75 28.76 24.59 26.38 Canada 28.92 30.40 30.15 29.28 -----------------------------------------------------------------------------------------------

Drilling Activity ----------------- Columbia Resources seeks to achieve asset and profit growth primarily through expanded drilling activities. Columbia Resources participated in 37 gross (35 net) wells during the second quarter of 2001 with a success rate of 88%, adding 11.2 net billion cubic feet equivalents (Bcfe) of gas and oil reserves. During the same period in 2000, Columbia Resources completed 62 gross (56.8 net) wells with an 85% success rate, adding reserves of 12.5 net Bcfe. Columbia Resources' drilling activity in the first half of 2001 resulted in the discovery of 23.6 net Bcfe of gas and oil reserves compared to 15.6 Bcfe in the same period in 2000. Through June 2001, Columbia Resources has participated in 61 gross (57.4 net) wells with a success rate of 93% compared to 85 gross (75 net) wells in the first half of 2000. 22 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) -------------------------------------------------------------------------------- COLUMBIA ENERGY GROUP AND SUBSIDIARIES Volumes ------- Gas production of 11.7 Bcf in the second quarter of 2001 decreased 1.3 Bcf over the same period in 2000. Shut-in production in coal mining territory and compressor outages were primary contributors to this decrease. For the six months ended June 30, 2001, gas production decreased 0.9 Bcf to 26.2 Bcf. This decline is primarily due to the shut-in production and compressor outages discussed above partially offset by improvements to gathering facilities and reduced capacity constraints. Oil and liquids production decreased to 43,000 barrels in the second quarter of 2001, down 9,000 barrels from the same period last year due to normal production declines. For the six months ended June 30, 2001 oil and liquids production was 104,000 barrels, an increase of 6,000 barrels over the same period last year. This increase is due to the recognition in 2001 of prior year production, partially offset by normal production declines. Operating Revenues ------------------ Operating revenues for the second quarter of 2001 of $46.9 million increased $6.6 million over the same quarter in 2000, primarily due to average gas prices of $4.06 per Mcf, an increase of $1.31 per Mcf compared to the same period last year. Columbia Resources' second quarter 2001 natural gas production was fully hedged or committed through fixed price contracts at an average price of $4.15 per Mcf. Operating revenues for the first half of 2001 were $100.6 million, an increase of $7.8 million over the same period in 2000, primarily as a result of a $0.61 per Mcf increase in average gas prices compared to the same period in 2000. Operating Income ---------------- For the three months ended June 30, 2001, operating income of $10.1 million decreased $4.9 million over last year's second quarter. Higher operating revenues, as discussed above, offset by depletion expense increasing $10.0 million is the primary factor of the second quarter decline. Depletion expense increased due to a $8.7 million ceiling test write-down in Columbia Resources' Canadian region and additional expense due to higher depletable revenues. For the first half of 2001, operating income increased $0.2 million. Increased operating expenses offset higher operating revenues. Depletion expenses increased $5.8 million as a result of the ceiling test write-down in the Canadian region of $8.7 million offset by a lower first half 2001 depletion rate. Other taxes increased $3.6 million primarily as a direct result of the higher first half revenues. 23 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) -------------------------------------------------------------------------------- COLUMBIA ENERGY GROUP AND SUBSIDIARIES OTHER PRODUCTS AND SERVICES

Three Months Six Months Ended ~~March~~June 3130, Ended June 30, -------------------- -------------------- (in millions) 2001 2000 2001 2000 ------------- ---- ---- ---- ~~(millions)~~---- OPERATING REVENUES Gas revenues $ 504.4 $ 8.0 $ 4713.5 ~~Other~~$ 17.8 Power generation revenues 5-- 4.3 -- 4.8 LNG revenues -- 1.8 -- 3.8 Other revenues 0.2 50.9 0.4 2.1 ------- ------- ------- ------- Total Operating Revenues 554.6 15.0 5213.9 28.5 ------- ------- ------- ------- OPERATING EXPENSES Products purchased 6.5 5.9 13.5 13.6 Operation and maintenance ~~15.~~2.8 167.18 9.8 13.2 Depreciation ~~and~~-- ~~depletion~~0.1 8-- 0.2 ~~12.4~~Loss ~~Other~~on ~~taxes~~asset ~~5.7~~impairment 389.2 --~~----------~~ 89.2 --~~----------~~ ~~Total~~Other ~~Operating~~taxes ~~Expenses~~-- 290.1 310.71 0.2 ------- ------- ------- ------- Total Operating ~~Income~~Expenses $98.5 2513.9 ~~$ 20~~112.86 ~~============ ============ GAS PRODUCTION STATISTICS Production (Bcf) U~~27.S.2 ~~14.5 14.1 Canada~~ -- -- --- ------- -- ----- ------- ~~Total~~OPERATING ~~14.5~~INCOME ~~14.1~~(LOSS) ~~============~~$ ~~============ Average U~~(93.S.9) ~~Price (~~$ ~~per Mcf) 3~~1.331 ~~3.34~~$ ~~OIL AND LIQUIDS PRODUCTION STATISTICS Production~~ (~~000 Bbls~~98.7) ~~U.S.~~$ ~~59 43 Canada 2~~ 1.3 ~~------------ ------------ Total 61 46~~ ======= ======= ======= ===== ~~Average Price ($ per Bbl) U.S. 25.88 23.65 Canada 31.13 28.12~~==

Operating Revenues ------------------ Operating revenues of $4.6 million for the second quarter of 2001 decreased $10.4 million from the same period last year. The decrease is due to the absence of the Liquefied Natural Gas (LNG) and power generation revenues resulting from the sale of these operations in the second quarter of 2000. In addition, gas revenues recorded for certain long-term sales commitments decreased $3.6 million, largely offset by a similar decrease in gas purchased costs reflected in products purchased expenses. Operating revenues for the first half of 2001 decreased $14.6 million to $13.9 million primarily due to LNG and power generation operations being sold, as well as the loss of gas revenues from long-term gas sales commitments. Operating Income (Loss) ----------------------- Other Products and Services reported an operating loss of $93.9 million in the second quarter of 2001 compared to operating income of $1.1 million for the same period last year. The operating loss is the result of the second quarter charge of $89.2 million for the asset impairment relating to the fiber optics telecommunications network. For the six months ended June 30, 2001, this segment reported an operating loss of $98.7 million compared to operating income of $1.3 million in the first half of last year. Contributing to the reported loss is the fiber optics telecommunications network asset impairment in the second quarter of 2001 and the sale of the LNG and power generation operations being sold in the second quarter of 2000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------- ---------------------------------------------------------- Omitted pursuant to General Instruction H(2)(c). 24 25 PART II ITEM 1. LEGAL PROCEEDINGS COLUMBIA ENERGY GROUP AND SUBSIDIARIES 1. CANADA SOUTHERN PETROLEUM LTD. V. COLUMBIA GAS DEVELOPMENT OF CANADA LTD. This action was originally filed March 7, 1990. The plaintiffs assert, 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 seek, 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, on behalf of Columbia Canada, consented to the amendment in consideration of the plaintiffs' acknowledgment that approximately $63 million was properly charged to the account. However, Columbia and Columbia Canada continue to dispute the claim to the extent that the claim challenges expenditures incurred since November 1988, including expenditures made after Columbia Canada was sold to Anderson Exploration Ltd. (Anderson) effective December 31, 1991. A trial commenced in the third quarter of 1996 in the Court of Queen's Bench. Following multiple lengthy adjournments, the parties have concluded presenting their witnesses and evidence and have made their post-trial arguments. The parties are awaiting the court's ruling. Management continues to believe that its defenses are meritorious, and that the risk of any material liability to Columbia is de minimis. Pursuant to an Indemnification Agreement regarding the Kotaneelee Litigation entered into when Columbia Canada was sold to 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). 2. TRANSCOM. On March 17, April 11 and April 21, 2000, one of Columbia's subsidiaries, Transcom received directives from the Philadelphia District of the U.S. Army Corps of Engineers (Philadelphia District) and an administrative order from the Pennsylvania Department of Environmental Protection (PA DEP) addressing alleged violations of federal and state laws resulting from construction activities associated with Transcom's laying fiber optic cable along portions of a route between Washington, D.C. and New York City. The order and directives required Transcom to largely cease construction activities. On September 18, 2000, Transcom entered into a voluntary settlement agreement with the Philadelphia District under which Transcom contributed $1.2 million to the Pennsylvania chapter of the Nature Conservancy and the Philadelphia District lifted its directives. As a result of the voluntary agreement with the Philadelphia District and communications with the PA DEP, the Maryland Department of the Environment and the Baltimore District of the U.S. Army Corps of Engineers, work in Pennsylvania and Maryland is now ongoing. Transcom cannot predict the nature or amount of total remedies that may be sought in connection with the foregoing construction activities. 3. UNITED STATES OF AMERICA EX REL. JACK J. GRYNBERG V COLUMBIA GAS TRANSMISSION CORP. ET. AL. The plaintiff filed a complaint under the False Claims Act, on behalf of the United States of America, against approximately seventy pipelines, including Columbia Gulf. The 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, the 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 25 26 ITEM 1. LEGAL PROCEEDINGS (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES 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 have joined together with numerous other defendants and have filed a motion requesting the district court to amend its order to include a certification so that the defendant 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. 4. QUINQUE OPERATING CO. 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 fourteen affiliated entities. The allegations in Quinque are similar to those made in Grynberg; however, Quinque broadens the claims to cover all oil and gas leases (other than the Federal and Indian leases that are the subject of Grynberg). Quinque 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. Quinque 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. 5. 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 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 those leases 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 Resources. Plaintiff seeks the alleged royalty underpayments and punitive damages. Columbia Resources and Columbia Transmission removed the case to Federal court in March 2000. The Federal court has now remanded Kershaw back to New York state court. The New York state court judge has heard the Columbia defendants' motion to dismiss the case and has taken the matter under advisement. 6. 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. 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 the parties are conducting oral discovery of the fact witnesses. There has been no trial date set in the matter, and the next court date is October 16, 2001, at which time further scheduling of discovery will occur. 7. 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. Consol's current plans to longwall mine through Victory would destroy certain infrastructure of Victory, including all of Columbia Transmission's storage wells in the path of the mining. The parties are holding discussions concerning resolution of this matter. On December 8, 2000, the court denied Consol's motion to dismiss. On March 5, 2001, the court denied Consol's motion to transfer this action to Federal court in West Virginia (see McElroy Coal Company v. Columbia Gas Transmission Corporation below). On March 27, 2001, the court also granted Columbia's motion to enjoin Consol from further prosecuting the West Virginia action and from initiating any further actions in any other court raising compulsory counterclaims to this action. On April 2, 2001, Consol filed an appeal of the March 27, 2001 order 26 27 ITEM 6. EXHIBITS AND REPORTS TO FORM 10-Q (continued) COLUMBIA ENERGY GROUP AND SUBSIDIARIES to the United States Court of Appeals for the Third Circuit. The appeal has been fully briefed and is awaiting disposition by the United States Court of Appeals for the Third Circuit. Consol also filed a Motion for Leave to File a Counterclaim on April 10, 2001, including a claim for inverse condemnation. The court accepted Consol's Motion for Leave on April 12, 2001. Columbia Transmission filed its response to Consol's counterclaim on May 3, 2001. Meanwhile, discovery is proceeding. 8. 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. As discussed in Columbia Gas Transmission Corp. v. Consolidation Coal Co., et al, above, the federal court in Pittsburgh has granted Columbia's motion to enjoin McElroy from further prosecution of this action and this order is on appeal to the United States Court of Appeals for the Third Circuit. Meanwhile, on April 10, 2001, the West Virginia case was dismissed without prejudice. 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

~~Three~~Exhibit ~~Months~~Number ~~Ended March 31,~~ -------~~-------------------------~~ ~~2001~~12* ~~2000~~Statements ~~------------~~of ~~------------~~Ratio ~~(millions)~~of ~~Operating~~Earnings ~~Revenues~~to ~~Gas~~Fixed ~~revenues~~Charges $*Filed 9.1 $ 9.8 Power generation revenues -- 0.5 LNG revenues -- 2.0 Other revenues 0.2 1.2 ------------ ------------ Total Operating Revenues 9.3 13.5 ------------ ------------ Operating Expenses Products purchased 7.0 7.7 Operation and maintenance 7.0 5.4 Depreciation -- 0.1 Other taxes 0.1 0.1 ------------ ------------ Total Operating Expenses 14.1 13.3 ------------ ------------ Operating Income (Loss) $ (4.8) $ 0.2 ============ ============herewith

There were no reports on Form 8-K filed during the second quarter of 2001. 27 28 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: August 9, 2001 By: /s/ Jeffrey W. Grossman --------------------------------------- Jeffrey W. Grossman Vice President and Controller (Principal Accounting Officer and Duly Authorized Officer) 28

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