UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED
SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 1-3196
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CONSOLIDATED NATURAL GAS COMPANY
A DELAWARE CORPORATION
CNG TOWER, 625 LIBERTY AVENUE, PITTSBURGH, PA 15222-3199
TELEPHONE (412) 690-1000
IRS EMPLOYER IDENTIFICATION NUMBER 13-0596475
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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 and (2) has been subject to such filing
requirements for the past 90 days. Yes___X___ No_______
Number of shares of Common Stock, $2.75 Par Value, outstanding at October 30,
1998: 95,835,320
<PAGE>
CONSOLIDATED NATURAL GAS COMPANY
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended September 30, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
for the Three and Nine Months Ended September 30, 1998 and 1997 1
CONDENSED CONSOLIDATED BALANCE SHEET
at September 30, 1998 (Unaudited), and December 31, 1997..... 2
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
for the Nine Months Ended September 30, 1998 and 1997........ 3
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
for the Three and Nine Months Ended September 30, 1998 and 1997 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................... 21
ITEM 2. CHANGES IN SECURITIES.................................. 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................ 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 21
ITEM 5. OTHER INFORMATION...................................... 21
ITEM 6. EXHIBITS, AND REPORTS ON FORM 8-K...................... 21
SIGNATURES....................................................... 22
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Natural Gas Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(Unaudited) (Thousands of Dollars)
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________
Nine Months to Three Months to
September 30 September 30
________________________ ______________________
1998 1997 1998 1997
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
OPERATING REVENUES
Regulated gas sales.............................. $ 952,262 $1,294,293 $ 132,644 $154,808
Nonregulated gas sales........................... 345,829 305,443 106,426 99,952
__________ __________ __________ ________
Total gas sales.............................. 1,298,091 1,599,736 239,070 254,760
Gas transportation and storage................... 396,517 349,804 109,599 100,094
Other............................................ 258,433 286,626 74,779 108,126
__________ __________ __________ ________
Total operating revenues (Note 3)............ 1,953,041 2,236,166 423,448 462,980
__________ __________ __________ ________
OPERATING EXPENSES
Purchased gas.................................... 613,206 760,435 86,097 68,711
Liquids, capacity and other products purchased... 105,327 146,339 32,270 53,805
Operation expense................................ 446,880 467,783 140,329 156,449
Maintenance...................................... 60,500 64,014 20,502 20,857
Depreciation and amortization.................... 252,937 244,885 83,713 86,741
Taxes, other than income taxes................... 130,115 145,686 35,021 42,881
__________ __________ __________ ________
Subtotal..................................... 1,608,965 1,829,142 397,932 429,444
__________ __________ __________ ________
Operating income before income taxes......... 344,076 407,024 25,516 33,536
Income taxes..................................... 84,425 114,994 (449) 6,289
__________ __________ __________ ________
Operating income............................. 259,651 292,030 25,965 27,247
__________ __________ __________ ________
OTHER INCOME
Interest revenues................................ 2,291 1,203 407 619
Other-net........................................ 15,546 13,744 8,530 4,395
__________ __________ __________ ________
Total other income........................... 17,837 14,947 8,937 5,014
__________ __________ __________ ________
Income before interest charges............... 277,488 306,977 34,902 32,261
__________ __________ __________ ________
INTEREST CHARGES
Interest on long-term debt....................... 80,341 78,250 25,915 25,821
Other interest expense........................... 13,251 3,478 5,622 (495)
Allowance for funds used during construction..... (6,578) (4,576) (2,262) (1,826)
__________ __________ __________ ________
Total interest charges....................... 87,014 77,152 29,275 23,500
__________ __________ __________ ________
INCOME FROM CONTINUING OPERATIONS................ 190,474 229,825 5,627 8,761
DISCONTINUED OPERATIONS (Note 4)
Loss from discontinued energy marketing
services operations, net of applicable
tax benefit.................................... (17,238) (14,811) - (4,223)
Income (loss) from disposal of energy marketing
services operations, including provision for
operating losses during the phase out period,
net of applicable tax or tax benefit........... (29,486) - 2,425 -
_________ __________ ________ ________
NET INCOME....................................... $ 143,750 $ 215,014 $ 8,052 $ 4,538
========= ========= ======== ========
EARNINGS PER COMMON SHARE -- BASIC
Income from continuing operations (Note 11).... $2.01 $2.43 $.06 $.09
Loss from discontinued energy marketing
services operations.......................... (.18) (.16) - (.04)
Income (loss) from disposal of energy
marketing services operations................ (.31) - .02 -
_____ _____ ____ ____
NET INCOME....................................... $1.52 $2.27 $.08 $.05
===== ===== ==== ====
EARNINGS PER COMMON SHARE -- DILUTED
Income from continuing operations (Note 11).... $1.99 $2.38 $.06 $.09
Loss from discontinued energy marketing
services operations.......................... (.17) (.15) - (.04)
Income (loss) from disposal of energy
marketing services operations................ (.31) - .02 -
_____ _____ ____ ____
NET INCOME....................................... $1.51 $2.23 $.08 $.05
===== ===== ==== ====
_____________________________________________________________________________________________________________
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
1
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
Consolidated Natural Gas Company and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
_____________________________________________________________________________
At September At December
30, 1998 31, 1997*
(Unaudited)
_____________________________________________________________________________
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Gas utility and other plant.................... $ 5,138,792 $ 5,004,139
Accumulated depreciation and amortization...... (2,052,227) (1,949,483)
___________ ___________
Net gas utility and other plant........... 3,086,565 3,054,656
___________ ___________
Exploration and production properties.......... 3,935,129 3,710,619
Accumulated depreciation and amortization...... (2,673,758) (2,542,472)
___________ ___________
Net exploration and production properties. 1,261,371 1,168,147
___________ ___________
Net property, plant and equipment......... 4,347,936 4,222,803
___________ ___________
CURRENT ASSETS
Cash and temporary cash investments............ 236,114 65,035
Accounts receivable, less allowance for
doubtful accounts............................ 302,532 951,212
Gas stored - current portion................... 158,450 139,157
Materials and supplies (average cost method)... 33,625 30,256
Unrecovered gas costs.......................... 22,919 55,062
Deferred income taxes - current (net).......... 40,301 -
Prepayments and other current assets........... 182,613 212,919
Net assets of discontinued operations (Note 4). 2,124 -
___________ ___________
Total current assets...................... 978,678 1,453,641
___________ ___________
REGULATORY AND OTHER ASSETS
Other investments (Notes 9 and 10)............. 413,425 223,900
Deferred charges and other assets (Note 3)..... 444,911 413,350
___________ ___________
Total regulatory and other assets......... 858,336 637,250
___________ ___________
Total assets.............................. $ 6,184,950 $ 6,313,694
=========== ===========
STOCKHOLDERS' EQUITY AND LIABILITIES
CAPITALIZATION
Common stockholders' equity (Notes 5, 6 and 7)
Common stock, par $2.75
(Issued: 1998 - 95,914,425 shares;
1997 - 95,623,281 shares).................. $ 263,764 $ 262,964
Capital in excess of par value............... 571,119 566,755
Retained earnings............................ 1,542,197 1,539,587
Treasury stock, at cost
(1998 - 2,860 shares; 1997 - 659 shares)... (156) (38)
Unearned compensation........................ (3,953) (10,950)
___________ ___________
Total common stockholders' equity......... 2,372,971 2,358,318
Long-term debt................................. 1,189,587 1,552,890
___________ ___________
Total capitalization...................... 3,562,558 3,911,208
___________ ___________
CURRENT LIABILITIES
Current maturities on long-term debt........... 269,625 154,000
Commercial paper............................... 685,600 238,700
Accounts payable............................... 264,631 651,365
Estimated rate contingencies and
refunds (Note 3)............................. 80,450 29,112
Amounts payable to customers................... 40,436 880
Taxes accrued.................................. 88,477 125,056
Deferred income taxes - current (net).......... - 13,735
Other current liabilities...................... 164,418 173,393
___________ __________
Total current liabilities................. 1,593,637 1,386,241
___________ ___________
DEFERRED CREDITS
Deferred income taxes.......................... 774,717 712,118
Accumulated deferred investment tax credits.... 25,013 26,658
Deferred credits and other liabilities......... 229,025 277,469
___________ ___________
Total deferred credits.................... 1,028,755 1,016,245
___________ ___________
COMMITMENTS AND CONTINGENCIES
___________ ___________
Total stockholders' equity and liabilities $ 6,184,950 $ 6,313,694
=========== ===========
_____________________________________________________________________________
The Notes to Consolidated Financial Statements are an integral part of this
statement.
*The assets and liabilities of discontinued operations have not been
reclassified at December 31, 1997.
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
Consolidated Natural Gas Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) (Thousands of Dollars)
_____________________________________________________________________________
Nine Months to
September 30
_____________________
1998 1997
_____________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations................ $ 190,474 $ 229,825
Adjustments to reconcile income from continuing
operations to net cash provided by
operating activities
Depreciation and amortization................ 252,937 244,885
Pension cost (credit)........................ (45,641) (38,030)
Stock award amortization..................... 5,178 5,735
Deferred income taxes-net.................... ( 9,141) (26,592)
Changes in current assets and
current liabilities
Accounts receivable-net.................... 262,908 242,210
Inventories................................ (46,078) (35,663)
Unrecovered gas costs...................... 32,143 62,226
Accounts payable........................... (58,029) (110,474)
Estimated rate contingencies and refunds... 51,338 10,930
Amounts payable to customers............... 39,556 37,914
Taxes accrued.............................. (40,027) 16,396
Other-net.................................. 937 38,943
Changes in other assets and
other liabilities.......................... (16,833) 27,130
Other-net.................................... 1,663 114
_________ _________
Net cash provided by continuing operations 621,385 705,549
Net cash provided by (or used in)
discontinued operations.................. 39,686 (8,719)
_________ _________
Net cash provided by operating activities 661,071 696,830
_________ _________
CASH FLOWS USED IN INVESTING ACTIVITIES
Plant construction and other property additions.. (372,529) (331,445)
Proceeds from dispositions of property, plant
and equipment-net.............................. (5,131) (5,668)
Cost of other investments........................ (199,909) (4,958)
_________ _________
Net cash used in continuing operations... (577,569) (342,071)
Net cash provided by (or used in)
discontinued operations.................. 36,162 (5,870)
_________ _________
Net cash used in investing activities.... (541,407) (347,941)
_________ _________
CASH FLOWS PROVIDED BY (OR USED IN) FINANCING ACTIVITIES
Issuance of common stock......................... 7,229 22,084
Repayments of long-term debt..................... (161,698) (104,000)
Commercial paper-net............................. 445,267 (139,816)
Dividends paid................................... (139,333) (138,303)
Purchase of treasury stock....................... (252,545) (12,248)
Sale of treasury stock........................... 161,712 12,266
Other-net........................................ (406) 49
_________ _________
Net cash provided by (or used in)
financing activities..................... 60,226 (359,968)
_________ _________
Net increase (or decrease) in cash and
temporary cash investments............... 179,890 (11,079)
CASH AND TEMPORARY CASH INVESTMENTS AT JANUARY 1. 65,035 44,524
_________ _________
CASH AND TEMPORARY CASH INVESTMENTS AT SEPTEMBER 30 $ 244,925 $ 33,445
========= =========
Continuing operations............................ $ 236,114 $ 21,813
Discontinued operations.......................... 8,811 11,632
_________ _________
Total cash and temporary cash investments
at September 30.......................... $ 244,925 $ 33,445
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for
Interest (net of amounts capitalized).......... $ 71,653 $ 65,130
Income taxes (net of refunds).................. $ 74,839 $ 83,689
Non-cash financing activities
Issuance of common stock under benefit plans... $ (362) $ 1,893
Conversion of 7 1/4% Convertible
Subordinated Debentures...................... $ 88,467 $ 40
_____________________________________________________________________________
The Notes to Consolidated Financial Statements are an integral part of this
statement.
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
Consolidated Natural Gas Company and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited) (Thousands of Dollars)
<TABLE>
<CAPTION>
_____________________________________________________________________________________
Nine Months to Three Months to
September 30 September 30
______________________ ________________________
1998 1997 1998 1997
_____________________________________________________________________________________
<S> <C> <C> <C> <C>
NET INCOME.................... $143,750 $215,014 $ 8,052 $ 4,538
OTHER COMPREHENSIVE INCOME,
NET OF TAX
Foreign currency
translation adjustment..... (1,669) - (1,992) -
_______ ________ _______ _______
COMPREHENSIVE INCOME.......... $142,081 $215,014 $ 6,060 $ 4,538
======== ======== ======= =======
____________________________________________________________________________________
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
4
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
Consolidated Natural Gas Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) With the exception of the Condensed Consolidated Balance Sheet at
December 31, 1997, which is derived from the Consolidated Balance Sheet at
that date which was included in Exhibit 99 to the Annual Report to the
Securities and Exchange Commission (SEC) on Form 10-K for 1997 (1997 Form
10-K), the consolidated financial statements appearing on pages 1 through 4
are unaudited. In the opinion of management, the information furnished
reflects all adjustments necessary to a fair statement of the results for the
interim periods presented.
(2) Because a major portion of the gas sold or transported by the Company's
distribution and transmission operations is ultimately used for space heating,
both revenues and earnings are subject to seasonal fluctuations. Because of
low seasonal demand for gas during the summer months, third quarter results
are usually the least significant of the year for the Company. Seasonal
fluctuations are further influenced by the timing of price relief granted
under regulation to compensate for past cost increases.
(3) Certain increases in prices by the Company and other rate-making issues
are subject to final modification in regulatory proceedings. The related
accumulated provisions pertaining to these matters were $74.9 million and
$15.7 million at September 30, 1998, and December 31, 1997, respectively,
including interest. These amounts are reported in the Condensed Consolidated
Balance Sheet under "Estimated rate contingencies and refunds" together with
$5.6 million and $13.4 million, respectively, which are primarily refunds
received from suppliers and refundable to customers under regulatory
procedures.
The distribution subsidiaries have incurred or are expected to incur
obligations to upstream pipeline companies for costs resulting from the
pipeline companies' transition to restructured services under Federal Energy
Regulatory Commission (FERC) Order 636. The total estimated liability for
such costs was $10.8 million and $17.0 million at September 30, 1998, and
December 31, 1997, respectively. Additional amounts may be accrued in the
future if the pipeline companies receive final FERC approval to recover
such costs. Based on management's current estimates, the distribution
subsidiaries' portion of such costs is not expected to be material. Due to
regulatory actions in two jurisdictions and the past rate-making treatment
of similar costs in the other jurisdictions, management believes that the
distribution subsidiaries should generally be able to pass through all Order
636 transition costs to their customers.
(4) During April 1998, management approved a plan to discontinue the
Company's wholesale trading and marketing of natural gas and electricity,
including integrated energy management. The results of operations of these
activities for the first nine months and third quarter of 1998 and 1997 have
been classified as "Discontinued Operations" in the Consolidated Statement
of Income. The assets and liabilities of these operations at September 30,
1998, have been classified in the Condensed Consolidated Balance Sheet as
"Net assets of discontinued operations." Cash flows in connection with
operating and investing activities for discontinued operations are reported
separately in the Condensed Consolidated Statement of Cash Flows. There were
no cash flows provided by, or used in, financing activities related to
discontinued operations during the first nine months or third quarter of 1998
or 1997.
5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net assets of the Company's discontinued operations at September 30, 1998
are as follows:
_______________________________________________________________________________
At September
30, 1998
_______________________________________________________________________________
(In Thousands)
Gas utility and other plant............................... $ 3,629
Accumulated depreciation and amortization................. (1,080)
_______
Net gas utility and other plant........................ 2,549
Current assets............................................ 42,605
Other assets.............................................. (2,717)
_______
Total assets........................................... $42,437
_______
Current liabilities....................................... $34,571
Deferred credits.......................................... 5,742
_______
Total liabilities...................................... $40,313
_______
Net assets............................................. $ 2,124
=======
______________________________________________________________________________
Summarized results of operations of the discontinued operations are as
follows:
_______________________________________________________________________________
Nine Months to Three Months to
September 30 September 30
________________________ _______________________
1998 1997 1998 1997
______________________________________________________________________________
(In Thousands)
Total operating revenues. $792,586 $1,623,764 $ - $667,497
Operating expenses....... (818,105) (1,646,251) - (674,174)
________ ________ _________ ________
Operating loss before
income taxes........ (25,519) (22,487) - (6,677)
Income tax benefit....... 9,011 8,699 - 2,459
Other income............. 80 1,032 - 676
Interest charges......... (810) (2,055) - (681)
_______ ________ _________ _________
Loss from discontinued
operations............. $(17,238) $(14,811) $ - $ (4,223)
======== ======== ========= ========
Estimated income
(loss) from disposal
before income
taxes......... $(46,446)* $ - $ 3,699 $ -
Income tax
(provision) benefit.... 16,960 - (1,274) -
________ ________ ________ ________
Net income
(loss) from disposal... $(29,486)* $ - $ 2,425 $ -
======== ======== ======== ========
______________________________________________________________________________
* Includes $25.4 million pretax provision ($16.5 million after taxes) for
expected operating losses during the shutdown period April 1, 1998 through
December 31, 1998.
The quarters ended June 30, 1998 and September 30, 1998 included
adjustments to revise certain previous estimates of shut-down costs in
connection with the sale of the capital stock of CNG Energy Services
Corporation (CNG Energy Services), a subsidiary, to Sempra Energy Trading,
a subsidiary of Sempra Energy. Included in the entity sold were contracts
for the purchase and sale of natural gas as well as rights to natural gas
pipeline and storage capacity, mainly in the Northeast and Mid-Atlantic
regions, and related working capital.
On July 31, 1998, the sale of the capital stock was finalized. Proceeds of
$48.9 million received from the sale of this business have been adjusted for
certain working capital items during the third quarter of 1998. The
Company expects that its transition out of the wholesale gas and electricity
businesses will be substantially completed by December 31, 1998.
6
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) A summary of the changes in common stock, capital in excess of par value,
unearned compensation and treasury stock subsequent to December 31, 1997,
follows:
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________
Common Stock
Issued Capital in Treasury Stock
____________________ ____________________
Number Value Excess of Unearned Number
of Shares at Par Par Value Compensation of Shares Cost
____________________________________________________________________________________________________________
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1997............. 95,623 $262,964 $566,755 $(10,950) (1) $ (38)
Common stock issued
Stock options.................. 252 695 10,149 - - -
Stock awards-net............... 31 84 1,335 (1,221) - -
Performance shares-net......... 8 21 402 (423) - -
Amortization and adjustment.... - - (2,205) 8,641 - -
Purchase of treasury stock....... - - - - (4,561) (252,545)
Sale of treasury stock........... - - - - 2,921 161,712
Conversion of debentures......... - - (1,841) - 1,638 90,715
Other............................ - - (3,476) - - -
______ ________ ________ ________ ______ _________
At September 30, 1998............ 95,914 $263,764 $571,119 $ (3,953) (3) $ (156)
====== ======== ======== ======== ====== =========
____________________________________________________________________________________________________________
</TABLE>
(6) In January 1998 the Company called for redemption the entire principal
amount outstanding of its 7 1/4% Convertible Subordinated Debentures due
December 15, 2015, totaling $246.2 million. These debentures were convertible
into shares of the Company's common stock at an initial conversion price of
$54 per share. The redemption price was 102.18% of the principal amount plus
accrued interest payable on February 23, 1998. In anticipation of the call
of this debt, in January 1998 the Company purchased approximately 4.6 million
shares of its common stock in a private transaction to satisfy the conversion
obligation to holders of the Convertible Subordinated Debentures who chose to
convert. The right to convert expired on February 13, 1998, and approximately
1.6 million of the acquired shares were issued on conversion. The remaining
acquired shares were sold in two underwritten offerings during February and
March, 1998.
(7) One of the Company's indentures relating to senior debenture issues
contains restrictions on dividend payments by the Company and acquisitions
of its capital stock. Under these provisions, $472.1 million of consolidated
retained earnings was free from such restrictions at September 30, 1998.
(8) On October 20, 1998, the Company sold $200.0 million of 6% Debentures
Due October 15, 2010. Cash proceeds from the sale were received on October 23,
1998.
On November 4, 1998, the Company announced that it had called its 8 5/8%
Debentures Due December 1, 2011, for redemption at par on December 1, 1998,
to satisfy sinking fund requirements. At September 30, 1998, the outstanding
principal amount of these debentures was $15.6 million.
(9) During March 1998 CNG International Corporation (CNG International)
purchased additional ownership interests in two gas utility holding companies,
Sodigas Pampeana S.A. and Sodigas Sur S.A., and in an electric utility holding
company, Buenos Aires Energy Company, from Loma Negra in Argentina. At
September 30, 1998, CNG International's investment in these Argentine companies
was $120.0 million.
(10) In March 1998 CNG International purchased a 33.3% ownership interest
in the Dampier-to-Bunbury Natural Gas Pipeline (DBNGP) in Western Australia
from the Western Australia Government. Other partners in the purchase
included El Paso Energy Corporation (El Paso) (33.3%), AMP Asset Management
(11.1%), Axiom Funds Management (11.1%) and Hastings Funds Management (11.1%).
The 925-mile pipeline is operated by Epic Energy Australia, an entity in
which CNG International holds a 30.0% ownership interest. At September 30,
1998, CNG International's investment in DBNGP totaled $144.9 million.
7
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In connection with their investment in DBNGP, CNG International and El Paso
formed DBNGP Finance Company LLC (DBNGP Finance). DBNGP Finance is owned 50%
by CNG International and 50% by EPED Holding Company, a wholly-owned
subsidiary of El Paso. Subsequent to the formation of DBNGP Finance, the
equity ownership interests of CNG International and El Paso in DBNGP were
transferred to this entity.
On October 2, 1998, DBNGP Finance borrowed $250.0 million under a Senior
Term Loan Facility (Term Loan). The Term Loan matures October 2, 2001,
can be extended in one-year increments to October 2, 2003, and will bear
interest at a variable rate. Of the gross proceeds received by DBNGP Finance
under the Term Loan, $100.0 million was distributed to CNG International.
In connection with the Term Loan, CNG International entered into an Equity
Contribution Agreement with DBNGP Finance. CNG International is contractually
obligated to make equity contributions to DBNGP Finance equal to the proceeds
distributed to CNG International, plus interest on such proceeds. The Company
is contractually obligated to cause CNG International to make such equity
contributions.
(11) A reconciliation of the income from continuing operations and common
stock share amounts used in the calculation of basic and diluted earnings per
share (EPS) for the three months and nine months ended September 30, 1998 and
1997 follows (income and share amounts in thousands):
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________________________
Nine Months to September 30 Three Months to September 30
________________________________ _________________________________
Income From Per Income From Per
Continuing Share Continuing Share
Operations Shares Amount Operations Shares Amount
___________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
1998
Basic EPS................................. $190,474 94,664 $2.01 $5,627 95,509 $.06
======== ====== ===== ======= ====== ====
Effect of dilutive securities:
Exercise of stock options............... 528 330
Vesting of performance shares........... 375 376
Conversion of 7 1/4% Convertible
Subordinated Debentures............... 1,578 821 - -
________ ______ _______ ______
Diluted EPS............................... $192,052 96,388 $1.99 $5,627 96,215 $.06
======== ====== ===== ====== ====== ====
___________________________________________________________________________________________________________________________
1997
Basic EPS................................. $229,825 94,764 $2.43 $8,761 94,994 $.09
======== ====== ===== ====== ====== ====
Effect of dilutive securities:
Exercise of stock options............... 646 785
Vesting of performance shares........... 357 372
Conversion of 7 1/4% Convertible
Subordinated Debentures............... 9,029 4,559 - * - *
________ _______ _______ ______
Diluted EPS............................... $238,854 100,326 $2.38 $8,761 96,151 $.09
======== ======= ===== ======= ====== ====
*Antidilutive.
___________________________________________________________________________________________________________________________
</TABLE>
8
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Concluded)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
(12) In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
establishes standards for accounting for costs incurred in developing or
procuring computer software for internal use. During April 1998, the AICPA
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5
requires that costs for start-up activities be expensed as incurred. The
provisions of each SOP are effective beginning January 1, 1999. The adoptions
of SOP 98-1 and SOP 98-5 are not expected to have a material effect on the
Company's financial position, results of operations or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes new accounting
standards for derivative instruments and for hedging activities. The
provisions of SFAS No. 133 are effective beginning January 1, 2000. Management
is continuing to review the provisions of SFAS No. 133 to assess its effect on
the Company.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Because of the low seasonal demand for gas during the summer months, sales
and transportation revenues are lower during this period compared to the first
and second quarters, and the third quarter results generally range from a loss
to a small profit. In addition to satisfying cash requirements for operations,
capital expenditures, and dividend payments in the current nine-month period,
available cash was used to partially fund additional investments in Argentina
and Australia.
Due to the seasonality of the regulated subsidiaries' heating business, the
balance sheet at the end of September customarily shows a significant decrease
in accounts receivable from the balance at the end of the previous year. The
balance of accounts receivable at September 30, 1998 is also lower due to
the reclassification of certain amounts to "Net assets of discontinued
operations" in 1998 and the sale of CNG Energy Services in the third quarter
of 1998. Also, by September 30, gas inventories which had been withdrawn
during the early part of the year have been substantially replenished for the
forthcoming heating season.
As discussed in Note 8 to the consolidated financial statements, during
October 1998 the Company sold $200 million of debentures. The proceeds
from this transaction will be used for general corporate purposes, including
reduction of short-term debt and funding of capital expenditures.
As discussed in Note 10 to the consolidated financial statements, in October
1998 CNG International received $100 million in connection with a term loan
entered into by DBNGP Finance. The proceeds received were added to the
treasury funds of the Company.
During the remainder of 1998, funds required for the capital spending program
as well as other general corporate purposes are expected to be obtained from
internal cash generation and, if necessary, external financing. External
financing could be obtained through the issuance of new debt and/or equity
securities. In this regard, the Company's shelf registration with the SEC
permits the sale of up to $338.3 million of debt or equity securities. The
amount and timing of any future sale of these securities will depend on
capital requirements, including financing necessary to enable the Company to
pursue asset acquisition opportunities, and financial market conditions.
The sale of commercial paper will be used to provide short-term financing
to the subsidiaries, primarily for gas inventory and other working capital
requirements. The Company's short-term credit agreement totaling $775 million
is available to support commercial paper borrowings. In addition, borrowings
under the short-term credit agreement may be used to temporarily finance
capital expenditures. This credit agreement is scheduled to expire on
June 25, 1999. There were no amounts outstanding under this credit agreement
at September 30, 1998.
In connection with this discussion of financial condition, reference is also
made to Notes 3 through 10 to the consolidated financial statements.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
A major portion of the gas sold or transported by the Company's distribution
and transmission operations is ultimately used for space heating. As a result,
earnings are affected by changes in the weather. Because most of the operating
subsidiaries are subject to price regulation by federal or state commissions,
earnings can be affected by regulatory delays when price increases are sought
through general rate filings to recover certain higher costs of operation.
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
SYSTEM RESULTS
The Company reported net income for the first nine months of 1998 of $143.8
million, or $1.52 per share, compared with net income of $215.0 million, or
$2.27 per share, in the first nine months of 1997. For the third quarter of
1998, the Company reported net income of $8.1 million, or 8 cents a share,
compared with net income of $4.5 million, or 5 cents a share, in the prior year
period. Earnings for both 1998 periods, however, reflect the Company's
decision to discontinue its wholesale energy trading and marketing operations
(see Note 4 to the consolidated financial statements, page 5). The Company
recognized a loss on these discontinued operations in the first nine months of
1998 of $46.7 million, or 49 cents a share, compared to a loss of $14.8
million, or 16 cents a share, in the first nine months of 1997. During the
third quarter of 1998, the Company recognized income from discontinued
operations of $2.4 million, or 2 cents a share, compared to a loss of $4.2
million, or 4 cents a share, in the prior year quarter. The 1998 third
quarter results reflect the closing of the sale of the Company's wholesale gas
marketing business to Sempra Energy Trading and adjustments to reserves
provided earlier in the year in connection with the decision to discontinue
these operations.
Income from continuing operations in the first nine months of 1998 was $190.5
million, or $2.01 per share, compared to $229.8 million, or $2.43 per share, in
the first nine months of 1997. Results from continuing operations for the first
nine months of 1998 reflect warmer weather, lower average wellhead prices for
gas and oil and lower gas production compared with the prior year period,
partially mitigated by increased oil production and the resolution of certain
regulatory contingencies. Weather in the Company's retail service territories
in the first nine months of 1998 was 21.1% warmer than 1997 and 20.9% warmer
than normal.
Income from continuing operations for the third quarter of 1998 was $5.7
million, or 6 cents a share, compared to $8.7 million, or 9 cents a share,
in the prior year quarter. Results for the third quarter of 1998 reflect
lower gas and oil wellhead prices and production partially offset by the
favorable impact of higher income from international operations, cost
containment efforts and the timing of the recognition of certain taxes
by the distribution segment compared to the prior year quarter. The
Company's distribution operations normally experience an operating loss
in the third quarter because of low seasonal demand for gas in the
summer months.
OPERATING REVENUES
Regulated gas sales revenues decreased $342.0 million, to $952.3 million, in
the first nine months of 1998 with sales volumes declining 47.1 billion cubic
feet (Bcf), to 139.7 Bcf. Average sales rates and volumes declined during
the first nine months of 1998 for each of the Company's major customer classes
-- residential, commercial and industrial -- compared to the prior year
period. Lower volumes were attributable to warmer weather during 1998. In
the 1998 third quarter, regulated gas sales revenues decreased $22.1 million,
to $132.7 million, as sales volumes decreased 3.3 Bcf, to 15.0 Bcf. The
decrease in sales volumes during the third quarter reflects the impact of
former residential sales customers who now purchase gas from other suppliers,
including CNG Retail Services Corporation (CNG Retail).
In the first nine months of 1998, nonregulated gas sales revenues increased
$40.3 million, to $345.8 million, with sales volumes increasing 16.8 Bcf, to
141.8 Bcf. Third quarter 1998 nonregulated gas sales revenues increased $6.4
million, to $106.4 million, as sales volumes increased 5.5 Bcf, to 48.2 Bcf.
The increased sales volumes in both 1998 periods were due in large part to
gas sales by CNG Retail.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Gas transportation and storage revenues were $396.5 million in the first nine
months of 1998 and $109.6 million in the third quarter, up $46.7 million and
$9.5 million, respectively, from the comparable 1997 periods. These increases
reflect gas transportation revenue increases of $40.3 million in the first
nine months of 1998 and $6.6 million in the third quarter attributable largely
to customers switching from sales to transportation service at certain of the
distribution subsidiaries.
Other operating revenues decreased $28.2 million, to $258.4 million, in the
first nine months of 1998 and decreased $33.3 million, to $74.8 million, in
the third quarter. The decreases in both 1998 periods were due chiefly to
lower revenues from oil production and trading activities as a result of
declining oil prices in 1998.
OPERATING EXPENSES
Operating expenses, excluding income taxes, declined $220.3 million in the
first nine months of 1998 and $31.6 million in the third quarter. Total
purchased gas expense declined $147.2 million in the first nine months and
increased $17.4 million in the third quarter of 1998 compared to the prior
year periods. The decline in the first nine months of 1998 was due
primarily to lower average purchase prices, while decreased volume
requirements in connection with warm weather in 1998 also contributed
to the decrease. During the third quarter of 1998, increased volume
requirements in connection with nonregulated gas sales more than offset lower
average purchase prices. Liquids, capacity and other products purchased
was lower in both 1998 periods, decreasing $41.1 million in the first nine
months and $21.7 million in the third quarter. These declines were due to
lower average purchase prices for oil traded by CNG Producing Company (CNG
Producing) and reduced purchases of pipeline capacity by CNG Transmission.
Combined operation and maintenance expense decreased $24.4 million in the first
nine months and $16.4 million in the third quarter of 1998 due largely to
lower maintenance, royalty and miscellaneous operating expenses. For the
nine-month 1998 period, these declines were partially offset by higher
production-related expenses. Depreciation and amortization (DD&A) expense
increased $8.0 million in the first nine months of 1998 due primarily to
higher plant investment. In the third quarter of 1998, DD&A expense decreased
$3.0 million, reflecting declines in both gas and oil production. Taxes,
other than income taxes, declined $15.6 million and $7.9 million in the first
nine months and third quarter of 1998, respectively, due primarily to the
timing of the recognition of certain taxes by the distribution segment.
Income taxes decreased $30.6 million in the first nine months of 1998
reflecting pretax income of $274.9 million in the period compared to pretax
income of $344.8 million in 1997. In the third quarter, income taxes declined
$6.8 million compared to 1997 due in part to lower pretax income in 1998.
OTHER INCOME
Total other income increased $2.9 million, to $17.8 million, in the first nine
months of 1998 and increased $3.9 million, to $8.9 million, in the third
quarter. Interest revenues were up $1.1 million in the first nine months of
1998, due in part to the resolution of certain regulatory matters in the
prior year, and were relatively unchanged in the third quarter compared to
1997. "Other-net" increased $1.8 million during the first nine months of
1998 and $4.1 million in the third quarter compared to the respective prior
year periods. Increases in both 1998 periods were due largely to higher
earnings recognized during the third quarter in connection with CNG
International's equity investments. The increase in the nine-month period
was partially offset by charges incurred related to the redemption of
the Convertible Subordinated Debentures (see Note 6 to the consolidated
financial statements, page 7).
INTEREST CHARGES
Total interest charges increased $9.9 million and $5.7 million in the first
nine months and third quarter of 1998, respectively. These increases were
due primarily to interest on commercial paper borrowings and interest expense
related to $300 million of debentures issued in the fourth quarter of 1997,
partially offset by reduced interest expense in 1998 resulting from the
redemption of the Convertible Subordinated Debentures.
In connection with the discussion of results of operations, reference is also
made to Notes 2, 3, 4, 9 and 10 to the consolidated financial statements.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
DATA BY BUSINESS COMPONENTS
The following table sets forth certain data for the components of the
Company's business.
_____________________________________________________________________________
Nine Months to Three Months to
September 30 September 30
__________________ ________________
1998 1997* 1998 1997*
_____________________________________________________________________________
OPERATING INCOME BEFORE INCOME TAXES (In Millions)
Distribution...................... $ 132.1 $ 171.2 $ (20.0) $ (28.5)
Transmission...................... 136.6 138.7 30.0 32.1
Exploration and production........ 81.0 112.0 18.1 38.6
Other............................. 1.8 (4.5) .1 (3.9)
Corporate and eliminations........ (7.4) (10.4) (2.7) (4.8)
________ ________ _______ _______
Total........................... $ 344.1 $ 407.0 $ 25.5 $ 33.5
======== ======== ======= =======
OPERATING REVENUES (In Millions)
Distribution...................... $1,109.1 $1,409.0 $ 169.7 $ 184.2
Transmission...................... 367.0 352.2 103.2 101.0
Exploration and production........ 466.7 518.4 145.3 187.4
Other............................. 101.7 38.9 34.6 11.9
Corporate and eliminations........ (91.5) (82.3) (29.4) (21.5)
________ ________ _______ _______
Total........................... $1,953.0 $2,236.2 $ 423.4 $ 463.0
======== ======== ======= =======
GAS SALES (In Bcf)
Distribution...................... 139.9 186.8 15.0 18.3
Exploration and production........ 120.8 123.8 40.6 42.8
Other............................. 28.3 2.8 11.7 .4
Eliminations...................... (7.5) (1.6) (4.1) (.5)
________ ________ _______ _______
Total sales..................... 281.5 311.8 63.2 61.0
======== ======== ======= =======
GAS TRANSPORTATION (In Bcf)
Distribution...................... 141.9 133.5 36.8 34.9
Transmission...................... 439.9 521.3 104.5 110.9
Exploration and production........ .4 .6 .1 .1
Eliminations...................... (122.5) (131.1) (32.6) (25.8)
________ ________ _______ _______
Total transportation............ 459.7 524.3 108.8 120.1
======== ======== ======= =======
_____________________________________________________________________________
* Certain amounts have been reclassified due to the energy marketing services
operations being reported as discontinued operations.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
DISTRIBUTION
Operating income before income taxes of the gas distribution operations was
$132.1 million in the first nine months of 1998, compared to $171.2 million in
the first nine months of 1997. Distribution throughput in the first nine
months of 1998 declined 12%, to 281.8 Bcf. Results for the first nine months
of 1998 reflect weather that was 20.9% warmer than normal and 21.1% warmer
than the first nine months of 1997. Lower operation and maintenance expenses
and the timing of the recognition of certain taxes in the first nine months
of 1998 partially mitigated the impact of the warm winter weather.
Residential gas sales volumes declined 35.6 Bcf in the first nine months of
1998 to 106.4 Bcf. The distribution operations transported 8.7 Bcf of gas in
the first nine months of 1998 on behalf of former residential sales customers
who now purchase gas from other suppliers, including CNG Retail, compared to
.5 Bcf in 1997. Sales to commercial customers declined 10.4 Bcf to 31.1 Bcf
while volumes transported to these customers increased .3 Bcf to 29.5 Bcf.
Total deliveries to industrial customers decreased .3 Bcf, to 100.8 Bcf,
compared with the prior year. Industrial transport volumes were up 1.0 Bcf to
99.0 Bcf, while sales volumes declined 1.3 Bcf to 1.8 Bcf. Off-system transport
volumes were down 1.1 Bcf in the first nine months of 1998, to 4.7 Bcf.
In the third quarter of 1998, the distribution operations reported an operating
loss before income taxes of $20.0 million, compared to an operating loss before
income taxes of $28.5 million in the 1997 third quarter. Lower operating costs
and the timing of the recognition of certain taxes in 1998 contributed to the
improved third quarter results. Residential gas sales volumes of 10.6 Bcf were
down 3.0 Bcf compared to the 1997 third quarter. Gas transported on behalf of
former residential sales customers totaled 1.1 Bcf in the third quarter of
1998, up .7 Bcf from the 1997 quarter. Commercial sales volumes were down
.1 Bcf, to 4.1 Bcf, while gas transported to these customers was 4.6 Bcf, up
.7 Bcf. Deliveries to industrial customers increased .1 Bcf reflecting an
increase in transport volumes of .3 Bcf partially offset by a decline in sales
volumes of .2 Bcf.
TRANSMISSION
Operating income before income taxes of the gas transmission operations in
the first nine months of 1998 was $136.6 million, down $2.1 million from $138.7
million in the 1997 period. In the third quarter of 1998, operating income
before income taxes was $30.0 million, a decrease of $2.1 million from 1997.
Operating income for the first nine months of 1998 reflects the favorable
resolution of certain regulatory contingencies during the second quarter.
Transmission throughput decreased 81.4 Bcf in the first nine months of 1998,
to 439.9 Bcf, due largely to warmer weather in the northeast, and declined
6.4 Bcf in the 1998 third quarter.
EXPLORATION AND PRODUCTION
The exploration and production operations reported operating income before
income taxes of $81.0 million in the first nine months of 1998, compared to
$112.0 million in the first nine months of 1997. Results for the first nine
months of 1998 reflect the impact of lower average gas and oil wellhead prices
and lower gas production, partially offset by higher oil production. In the
1998 third quarter, operating income before income taxes was $18.1 million,
down from $38.6 million in 1997. Third quarter 1998 results reflect declines
in gas and oil production due in large part to four hurricanes and tropical
storms that forced temporary shutdowns of oil and natural gas wells in the
Gulf of Mexico, and lower average gas and oil wellhead prices.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The Company's average gas wellhead price was $2.29 per thousand cubic feet
(Mcf) in the first nine months of 1998, 10 cents per Mcf lower than the
comparable 1997 period but still favorable in comparison with industry-wide
prices in 1998. In the third quarter, the average gas price was $2.05 per
Mcf, down from $2.27 in the third quarter of 1997. Gas production in the
first nine months of 1998 was 113.5 Bcf, down 3.4 Bcf from 1997. Third
quarter gas production was 36.6 Bcf, down 4.8 Bcf from 1997. The Company's
average oil wellhead price was $12.18 per barrel in the first nine months of
1998, down from $16.21 per barrel in the prior year period. The average oil
wellhead price for the third quarter of 1998 was $11.26 per barrel compared
to $16.00 per barrel in 1997. The decline in oil prices for both 1998 periods
is consistent with the worldwide trend in prices during the year. Oil
production in the first nine months of 1998 was 5.8 million barrels, up 9%
from 5.3 million barrels in 1997 due largely to Neptune, a deep-water project
in the Gulf of Mexico which began production in March 1997. Third quarter 1998
oil production was 1.8 million barrels, down from 2.3 million barrels in 1997.
OTHER
Operating income before income taxes for "Other" increased $6.3 million and
$4.0 million in the first nine months and third quarter of 1998, respectively,
compared to the prior year periods. The increases in both 1998 periods
reflect higher operating income at CNG Retail and CNG Field Services Company
(formerly CNG Storage Service Company).
SELECTED TWELVE-MONTH DATA
The following selected financial data (unaudited) relates to the twelve months
ended September 30, 1998 (in thousands of dollars):
______________________________________________________________________________
Operating revenues..................................... $2,893,985
Operating expenses..................................... 2,390,271
Operating income before income taxes............... 503,714
Income taxes........................................... 125,700
Other income........................................... 15,332
Interest charges....................................... 113,789
Income from continuing operations...................... 279,557
Discontinued operations................................ (46,441)
Net income......................................... $ 233,116
Earnings per share of common stock -- basic........ $2.46*
Earnings per share of common stock -- diluted...... $2.44*
Times fixed charges earned............................. 4.03
______________________________________________________________________________
*Includes loss from discontinued operations of $.49 per share - basic ($.48
per share - diluted).
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
OTHER INFORMATION
YEAR 2000 TECHNOLOGY ISSUE
Similar to all business entities, the Company will be impacted by the inability
of some computer application software programs to distinguish between the year
1900 and 2000 due to a commonly-used programming convention.
In the early 1990s, the Company identified business systems in need of
technology updates to successfully adapt to changes in the business climate
and the emerging competitive marketplace. These changes required the Company
to move toward common, integrated systems and computing platforms.
Accordingly, many systems representing older technology, which were not year
2000 ready, were targeted for replacement. This plan is being executed
through major initiatives such as a company-wide implementation of Oracle
Financial Applications, the development of a new revenue and customer
information system for the distribution subsidiaries called "CAMP," and the
development and implementation of applications for gas control management and
asset and facilities mapping. Through these initiatives over 75 application
systems, including associated technical infrastructure, are being replaced.
In 1997, the Company formalized its approach to year 2000 issues with the
creation of a Year 2000 Project Office (Project Office) at the corporate level
to coordinate company-wide year 2000 activities. All of the Company's
operating subsidiaries are participating in this effort under the direction of
the Project Office.
The Company is addressing year 2000 issues via a systematic methodology that
mitigates risk and incorporates a thorough due diligence process. This
strategy recognizes that there is no standardized or sanctioned definition of
"year 2000 compliance" as its meaning varies broadly depending on the
industry, component, vendor, and/or device. The Company's strategy
prioritizes the critical areas of the business to eliminate any potential
impact on safety, and to mitigate or eliminate any adverse effect on revenues,
assets, customer service and the environment that may result from the date
change event.
PROJECT DESCRIPTION AND ACTIVITIES
The major areas of focus of the Company's year 2000 efforts include
application systems, process control components, technical infrastructure,
physical infrastructure, and business partner and vendor relationships. These
project areas are summarized below:
APPLICATION SYSTEMS. Application systems encompass all automated systems,
including those developed internally and those purchased from vendors.
These systems include traditional business applications, as well as
operations and engineering applications.
PROCESS CONTROL COMPONENTS (EMBEDDED TECHNOLOGY). Process control devices
automate certain production, transportation and delivery functions in
connection with natural gas, oil and liquids. These devices, such as flow
computers and pressure regulators, generally include embedded computer
technology.
TECHNICAL INFRASTRUCTURE. This category represents the underlying technical
architecture which supports the Company's application systems, e-mail, and
similar infrastructure. This infrastructure includes mainframe hardware
and software, application servers, local and wide area networks, desktop
personal computers and telecommunications.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
PHYSICAL INFRASTRUCTURE. This category represents the Company's physical
plant, including office buildings. Building infrastructure such as elevators,
HVAC systems, security and fire alarm systems are examples of components
included in this category.
BUSINESS PARTNER AND VENDOR RELATIONSHIPS. This area involves analysis of
critical business partner and vendor relationships and third party commitment
to addressing year 2000 issues via discussion, contract reviews and additional
detailed assessment as considered necessary.
For each of the areas described above, the Company employs a five-phase process
methodology as follows:
(1) INVENTORY: In this phase, the Company compiles comprehensive
inventories of each of the major project areas.
(2) ASSESSMENT AND ANALYSIS: This phase is performed to determine the
extent to which year 2000 issues exist in any of the inventoried areas
and, if so, whether the issue is controllable (can be remedied by
the Company) or non-controllable (is dependent upon vendor
representation and/or remediation and can only be tested by the
Company).
(3) REPAIR AND REPLACEMENT: Renovations, replacements, and upgrades are
made during this phase to remedy year 2000 issues.
(4) TESTING: During this phase, independent testing is performed to
ensure year 2000 issues have been mitigated.
(5) CONTINGENCY PLANNING: This phase involves developing contingency plans
for critical business processes and strategic business partner and
vendor relationships if repair and/or renovation activities are either
unsuccessful or are not expected to be completed in a timely manner.
For critical areas, this activity is vital to ensure that all
potential year 2000 issues which are not identified and corrected in
the normal course of due diligence are addressed through contingency
planning.
The Company utilizes a multi-vendor strategy to maximize the effectiveness
of its year 2000 efforts. The Company's primary external consultants include
Compuware Inc. (analysis and renovation of mainframe and client/server
application systems, tools for testing of application systems and professional
services for application systems test planning) and Keane, Inc. (process
control component analysis, test planning and execution, operations and
engineering application systems inventory and analysis, risk assessment and
contingency planning).
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
PROJECT STATUS
The following summarizes the Company's progress in the major project areas
through October 30, 1998:
<TABLE>
<CAPTION>
PHASE
Contingency
PROJECT AREA Inventory Assessment Repair/ Testing Planning
Replace
<S> <C> <C> <C> <C> <C>
APPLICATION
SYSTEMS Complete Complete In progress In progress In progress
PROCESS CONTROL
COMPONENTS Complete Complete In progress In progress In progress
TECHNICAL
INFRASTRUCTURE Complete Complete In progress In progress In progress
PHYSICAL
INFRASTRUCTURE In progress In progress In planning In planning In planning
BUSINESS Ongoing Ongoing Not Not In progress
PARTNERS AND process process applicable applicable
SUPPLIERS
</TABLE>
APPLICATION SYSTEMS. During the assessment phase, approximately 80
application systems were identified requiring some degree of repair or
replacement. However, the Company's actions to upgrade to newer, more
functional versions of vendor software have mitigated many existing year 2000
issues. These upgrade activities will continue through mid-1999. Repair and
replacement activities for internally developed application systems began in
March 1998 and are approximately 60% complete. Such renovation activities are
expected to be substantially complete by the end of 1998, with testing
continuing into 1999. Reference is made to "Risks," page 19, for information
on the status of CAMP.
PROCESS CONTROL COMPONENTS. For process control components inventoried by
the Company, approximately 43% are not date sensitive, and therefore are not
affected by year 2000 issues. For date sensitive components, the Company
estimates a year 2000 failure rate of approximately 10% to 12%. Replacement
of affected components will continue through early 1999, while testing of
components believed to be year 2000 ready is in progress and approximately
10% complete.
TECHNICAL INFRASTRUCTURE. Technical infrastructure has been analyzed directly
with vendors and via the use of an external vendor research database service.
This information is being used to guide year 2000 upgrades of infrastructure
as necessary. Repair, replacement and testing activities are approximately
55% complete for all categories of technical infrastructure. However, efforts
in the critical area of application servers are 81% complete. The Company
plans to complete a substantial portion of year 2000 upgrades by the end of
1998, with testing continuing into 1999.
The Company is developing plans to determine the status of year 2000 readiness
of its desktop personal computers. However, updated desktop infrastructure is
being deployed that is year 2000 ready concurrent with the implementation of
many new application systems described above. The Company plans to confirm
year 2000 readiness of this infrastructure via testing, which is expected to
be completed by mid-1999.
PHYSICAL INFRASTRUCTURE. The Company is in the process of inventorying
physical infrastructure components that may be subject to year 2000 problems.
Critical physical infrastructure components that are related to process control
have been inventoried and assessed in the process control area of the project.
The inventory and analysis phases for remaining physical infrastructure should
continue through year-end 1998, after which repair activity will begin. Where
facilities are leased, the Company is identifying and working with building
managers/lessors to ensure they are actively addressing the year 2000 issue.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
BUSINESS PARTNER AND VENDOR RELATIONSHIPS. Strategic business partner and
vendor relationships have been given priority in the inventory phase, and
assessment has begun via questionnaires and interviews. The Company will
continue to prioritize, identify and assess business partner and vendor
relationships until significant areas of risk have been identified and
mitigated, and is also preparing contingency plans in the event mitigation
efforts are not successful. The Company plans to inventory all significant
relationships by the end of 1998, including the year 2000 status of operations
in Argentina and Australia in which the Company has equity investments.
COSTS
Based upon project status as described above, the Company expects to spend a
total of approximately $22.6 million in connection with its Project Office
efforts, its use of external consultants and the remediation of affected
application systems. This estimate includes approximately $6.8 million of
capitalized costs for hardware and software used (or expected to be used) in
the testing phase, and for application system and technical infrastructure
replacements. This estimate excludes costs incurred or expected to be incurred
in connection with the development and installation of major new application
systems which are expected to be year 2000 ready. Also, this estimate does
not include the Company's potential share of year 2000 costs that may be
incurred by partnerships and joint ventures in which the Company participates
but is not the operator. As of September 30, 1998, the Company has incurred
costs totaling $3.4 million (of which $1.0 million has been capitalized) in
connection with its year 2000 efforts.
RISKS
Continuing difficulties and delays in the development of CAMP for use by
the distribution subsidiaries have caused the Company to invoke a contingency
plan which involves renovation of the current revenue application system and
20 related application systems to make such systems year 2000 ready. These
current systems collectively address the business processes which were to be
handled by CAMP. Actions under this contingency plan began in August 1998
with implementation, including testing, scheduled to be completed by August
1999. The estimate of $22.6 million referred to above includes approximately
$5.0 million of costs in connection with this CAMP contingency plan.
Concurrent with this effort, the Company is continuing the development of CAMP
and has capitalized $47.2 million related to this project as of September 30,
1998. The CAMP core software is a licensed product of the Company's
independent accountants, PricewaterhouseCoopers LLP (PwC), and PwC is the
primary information systems consultant on this project. Under a worst case
scenario, the current revenue application systems would not be year 2000
ready by the end of 1999 and CAMP would not be successfully implemented
and year 2000 ready. Therefore, a secondary contingency plan to outsource
certain billing processes is also under development.
If a material year 2000 problem is not corrected in a timely manner, an
interruption in, or a failure of, certain normal business activities or
operations of the Company could occur. Such instances could materially and
adversely affect the Company's financial position, cash flows and/or results
of operations. Due to the uncertainty inherent in the year 2000 issue,
including the uncertainty of year 2000 readiness of third party vendors,
business partners and customers, the Company cannot determine at this time
whether the consequences of any year 2000 failures will have a material impact
on its financial position, cash flows or results of operations. However, the
Company's Project Office activities and the implementation of new application
systems are expected to reduce the risk of a material year 2000 failure.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Concluded)
STATE REGULATORY MATTERS
As previously reported, on July 28, 1998, the Public Service Commission of West
Virginia approved a settlement agreement filed by Hope Gas, Inc. (Hope Gas) in
connection with its January 5, 1998 general rate filing. The new rates become
effective November 1, 1998. Under the settlement, Hope Gas is not permitted to
request an increase in rates prior to January 1, 2002, nor is it obligated to
file for new rates after that date. The approved settlement agreement grants
Hope Gas a combined $6.5 million annual revenue increase for both base rates and
gas costs. Hope Gas had originally proposed a $14.5 million annual increase in
revenues.
INTERNATIONAL ACTIVITIES
Reference is made to Notes 9 and 10 to the consolidated financial statements,
page 7, regarding the Company's investments in Argentina and Australia.
EXPLORATION AND PRODUCTION
CNG Producing, acting alone or with partners, was the high bidder on seven
tracts offered at the federal government's August 26, 1998 Gulf of Mexico lease
sale. The Company's bids totaled $5.7 million for the properties, four of
which are located in deepwater areas of the Gulf of Mexico. The Company's
working interests in the deepwater properties would range from 20% to 60%
each, while working interests in the other three properties would be 100% each.
The government has accepted the Company's bids on six of the tracts and the
Company is awaiting a decision on the remaining tract.
On November 9, 1998, CNG Producing announced that a consortium of which it is
a member made a deepwater natural gas discovery at the North Marlin Prospect
at Viosca Knoll Block 827 in the Gulf of Mexico. The well will be drilled
deeper to assess the field's potential. Shell Deepwater Development, Inc. has
a 35% working interest in the field and is the operator, while CNG Producing
holds a 35% working interest and Murphy Exploration and Production Company
holds a 30% interest.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this Form 10-Q, including Management's Discussion
and Analysis of Financial Condition and Results of Operations, are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such because
the context of the statement will include words such as the Company "believes,"
"anticipates," "expects" or words of similar import. Similarly, statements
that describe the Company's future plans, objectives or goals are also
forward-looking statements. Such statements may address future events and
conditions concerning capital expenditures, earnings, risk management,
litigation, the year 2000 technology issues and costs, environmental matters,
rate and other regulatory matters, liquidity and capital resources, and
financial accounting matters. Actual results in each instance could differ
materially from those currently anticipated in such statements, due to factors
such as: natural gas and electric industry restructuring, including ongoing
state and federal activities; the weather; demographics; general economic
conditions and specific economic conditions in the Company's distribution
service areas; developments in the legislative, regulatory and competitive
environment in which the Company operates; and other circumstances affecting
anticipated revenues and costs.
Risks in connection with the Company's year 2000 efforts include the Company's
ability to successfully identify, correct and test, in a timely manner,
potential year 2000 problems which could have a significant impact on
specific business functions or processes, and the ability of third party
vendors, business partners and customers to ensure year 2000 readiness of
their systems and business operations.
**********
In connection with the financial information included in PART I of this report,
reference is made to the Company's 1997 Form 10-K, including Exhibit 99 there
to, and its quarterly reports to the SEC on Form 10-Q for the quarters ended
March 31 and June 30, 1998.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material new legal proceedings instituted in the third
quarter of 1998, and there have been no material developments during the
quarter in the legal proceedings disclosed in the Company's 1997 Form 10-K
or in any earlier Form 10-Q for 1998 as then pending.
Reference is made to "STATE REGULATORY MATTERS," page 20, for a description
of certain regulatory proceedings.
ITEM 2. CHANGES IN SECURITIES
(a) None.
(b) Limitations on the payment of dividends by the Company are set forth
in Note 7 to the consolidated financial statements, page 7, and
reference is made thereto.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None, other than as described below.
The SEC has amended Rule 14a-4(c) under the Securities Exchange Act of 1934
(the "1934 Act") which governs the Company's use of discretionary proxy voting
authority with respect to shareholder proposals that are not being included in
the Company's proxy solicitation materials pursuant to Rule 14a-8 of the 1934
Act. Therefore, in the event a shareholder does not notify the Company by
January 19, 1999, of an intent to present such a proposal at the Company's
1999 annual meeting, the Company's management proxies will have the right to
exercise their discretionary authority in connection with the matter submitted
by the shareholder, without discussion of the matter in the proxy statement.
ITEM 6. EXHIBITS, AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K - None
EXHIBITS
______________________________________________________________________________
SEC
Exhibit
Number Description of Exhibit
______________________________________________________________________________
(11) Statement re Computation of Per Share Earnings:
Computations of Earnings Per Common Share -- Basic, and Earnings
Per Common Share -- Diluted of Consolidated Natural Gas Company
and Subsidiaries for the three months and nine months ended September
30, 1998 and 1997
(12) Statement re Computation of Ratios:
Ratio of Earnings to Fixed Charges of Consolidated Natural Gas Company
and Subsidiaries for the twelve months ended September 30, 1998
(27) Financial Data Schedule has been filed electronically
______________________________________________________________________________
21
<PAGE>
SIGNATURES
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.
CONSOLIDATED NATURAL GAS COMPANY
_______________________________________
(Registrant)
D. M. WESTFALL
_______________________________________
D. M. Westfall, Senior Vice President,
Non-Regulated Business
and Chief Financial Officer
S. R. MCGREEVY
_______________________________________
S. R. McGreevy, Vice President,
Accounting and Financial Control
November 12, 1998
22
<PAGE>
EXHIBIT INDEX
______________________________________________________________________________
SEC
Exhibit
Number Description of Exhibit
______________________________________________________________________________
(11) Statement re Computation of Per Share Earnings:
Computations of Earnings Per Common Share -- Basic, and Earnings
Per Common Share -- Diluted of Consolidated Natural Gas Company and
Subsidiaries for the three months and nine months ended September 30,
1998 and 1997 is filed herewith
(12) Statement re Computation of Ratios:
Ratio of Earnings to Fixed Charges of Consolidated Natural Gas Company
and Subsidiaries for the twelve months ended September 30, 1998 is
filed herewith
(27) Financial Data Schedule is filed herewith
______________________________________________________________________________
EXHIBIT 11
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
________________________________________________________________________________________________________________________
Nine Months to Three Months to
September 30, 1998 September 30, 1998
_______________________________ ________________________________
Per Share Per Share
Net Income Shares Amount Net Income Shares Amount
________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
EARNINGS PER COMMON SHARE -- BASIC
Income from continuing operations......... $190,474 94,664 $2.01 $5,627 95,509 $.06
Loss from discontinued energy
marketing services operations........... (17,238) (.18) - -
Income (loss) from disposal of energy
marketing services operations........... (29,486) (.31) 2,425 .02
________ _______ _____ ______ ______ ____
NET INCOME................................ $143,750 94,664 $1.52 $8,052 95,509 $.08
======== ======= ===== ====== ====== ====
EARNINGS PER COMMON SHARE -- DILUTED
Income from continuing operations......... $190,474 94,664 $5,627 95,509
Effect of dilutive securities:
Exercise of stock options............... 528 330
Vesting of performance shares........... 375 376
Conversion of 7 1/4% Convertible
Subordinated Debentures............... 1,578 821 - -
________ _______ ______ ______
Income from continuing operations,
as adjusted............................. 192,052 96,388 $1.99 5,627 96,215 $.06
Loss from discontinued energy
marketing services operations........... (17,238) (.17) - -
Income (loss) from disposal of
energy marketing services
operations.............................. (29,486) (.31) 2,425 .02
________ _______ _____ ______ ______ ____
NET INCOME, AS ADJUSTED $145,328 96,388 $1.51 $8,052 96,215 $.08
======== ======= ===== ====== ====== ====
________________________________________________________________________________________________________________________
Nine Months to Three Months to
September 30, 1997 September 30, 1997
_______________________________ ________________________________
Per Share Per Share
Net Income Shares Amount* Net Income Shares Amount*
________________________________________________________________________________________________________________________
<S>
EARNINGS PER COMMON SHARE -- BASIC
Income from continuing operations......... $229,825 94,764 $2.43 $8,761 94,994 $.09
Loss from discontinued energy
marketing services operations........... (14,811) (.16) (4,223) (.04)
________ _______ _____ ______ ______ ____
NET INCOME................................ $215,014 94,764 $2.27 $4,538 94,994 $.05
======== ======= ===== ====== ====== ====
EARNINGS PER COMMON SHARE -- DILUTED
Income from continuing operations......... $229,825 94,764 $8,761 94,994
Effect of dilutive securities:
Exercise of stock options............... 646 785
Vesting of performance shares........... 357 372
Conversion of 7 1/4% Convertible
Subordinated Debentures............... 9,029 4,559 - -
________ _______ ______ ______
Income from continuing operations,
as adjusted............................. 238,854 100,326 $2.38 8,761 96,151 $.09
Loss from discontinued energy
marketing services operations........... (14,811) (.15) (4,223) (.04)
________ _______ _____ ______ ______ ____
NET INCOME, AS ADJUSTED $224,043 100,326 $2.23 $4,538 96,151 $.05
======== ======= ===== ====== ====== ====
________________________________________________________________________________________________________________________
</TABLE>
*Per share amounts have been restated in conformity with SFAS No. 128.
EXHIBIT 12
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
_____________________________________________________________________________
Twelve Months to September 30 1998
_____________________________________________________________________________
Earnings:
Income from continuing operations......................... $279,557
Add income taxes.......................................... 125,700
________
Income from continuing operations before income taxes... 405,257
Distributed income from unconsolidated investees,
less equity in earnings thereof......................... (2,186)
________
Subtotal................................................ 403,071
________
Add fixed charges:
Interest on long-term debt, including amortization
of debt discount and expense less premium............. 107,018
Other interest expense.................................. 15,547
Portion of rentals deemed to be representative
of the interest factor................................ 9,731
Fixed charges associated with 50% projects with debt.... 927
________
TOTAL FIXED CHARGES......................................... 133,223
________
TOTAL EARNINGS.............................................. $536,294
========
RATIO OF EARNINGS TO FIXED CHARGES.......................... 4.03
========
_____________________________________________________________________________
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF CONSOLIDATED NATURAL
GAS COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-START> JAN-01-1998
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,086,565
<OTHER-PROPERTY-AND-INVEST> 1,261,371
<TOTAL-CURRENT-ASSETS> 978,678
<TOTAL-DEFERRED-CHARGES> 444,911
<OTHER-ASSETS> 413,425
<TOTAL-ASSETS> 6,184,950
<COMMON> 263,764
<CAPITAL-SURPLUS-PAID-IN> 530,839
<RETAINED-EARNINGS> 1,542,197
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,372,971
0
0
<LONG-TERM-DEBT-NET> 1,189,587
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 685,600
<LONG-TERM-DEBT-CURRENT-PORT> 269,625
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,703,338
<TOT-CAPITALIZATION-AND-LIAB> 6,184,950
<GROSS-OPERATING-REVENUE> 1,953,041
<INCOME-TAX-EXPENSE> 84,425
<OTHER-OPERATING-EXPENSES> 1,608,965
<TOTAL-OPERATING-EXPENSES> 1,693,390
<OPERATING-INCOME-LOSS> 259,651
<OTHER-INCOME-NET> 17,837
<INCOME-BEFORE-INTEREST-EXPEN> 277,488
<TOTAL-INTEREST-EXPENSE> 87,014
<NET-INCOME> 143,750
0
<EARNINGS-AVAILABLE-FOR-COMM> 143,750
<COMMON-STOCK-DIVIDENDS> 139,473
<TOTAL-INTEREST-ON-BONDS> 91,580
<CASH-FLOW-OPERATIONS> 661,071
<EPS-PRIMARY> 1.52
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</TABLE>
