UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED
JUNE 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 July 31,
1998: 95,880,471
<PAGE>
CONSOLIDATED NATURAL GAS COMPANY
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended June 30, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
for the Three and Six Months Ended June 30, 1998 and 1997.... 1
CONDENSED CONSOLIDATED BALANCE SHEET
at June 30, 1998 (Unaudited), and December 31, 1997.......... 2
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
for the Six Months Ended June 30, 1998 and 1997.............. 3
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
for the Three and Six Months Ended June 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.................... 9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................... 17
ITEM 2. CHANGES IN SECURITIES.................................. 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................ 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 17
ITEM 5. OTHER INFORMATION...................................... 18
ITEM 6. EXHIBITS, AND REPORTS ON FORM 8-K...................... 18
SIGNATURES....................................................... 19
<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>
____________________________________________________________________________________________________________
Six Months to Three Months to
June 30 June 30
________________________ ______________________
1998 1997 1998 1997
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
OPERATING REVENUES
Regulated gas sales.............................. $ 819,618 $1,139,485 $ 207,672 $331,889
Nonregulated gas sales........................... 239,403 205,491 107,828 100,088
__________ __________ __________ ________
Total gas sales.............................. 1,059,021 1,344,976 315,500 431,977
Gas transportation and storage................... 286,918 249,710 120,485 107,176
Other............................................ 183,654 178,500 94,443 90,265
__________ __________ __________ ________
Total operating revenues (Note 3)............ 1,529,593 1,773,186 530,428 629,418
__________ __________ __________ ________
OPERATING EXPENSES
Purchased gas.................................... 527,109 691,724 122,098 189,667
Liquids, capacity and other products purchased... 73,057 92,534 28,752 45,366
Operation expense................................ 306,551 311,334 149,841 150,217
Maintenance...................................... 39,998 43,157 19,791 23,244
Depreciation and amortization.................... 169,224 158,144 85,566 83,106
Taxes, other than income taxes................... 95,094 102,805 40,670 47,688
__________ __________ __________ ________
Subtotal..................................... 1,211,033 1,399,698 446,718 539,288
__________ __________ __________ ________
Operating income before income taxes......... 318,560 373,488 83,710 90,130
Income taxes..................................... 84,874 108,705 15,377 22,467
__________ __________ __________ ________
Operating income............................. 233,686 264,783 68,333 67,663
__________ __________ __________ ________
OTHER INCOME
Interest revenues................................ 1,884 584 360 290
Other-net........................................ 7,016 9,349 6,063 5,073
__________ __________ __________ ________
Total other income........................... 8,900 9,933 6,423 5,363
__________ __________ __________ ________
Income before interest charges............... 242,586 274,716 74,756 73,026
__________ __________ __________ ________
INTEREST CHARGES
Interest on long-term debt....................... 54,426 52,429 26,029 25,820
Other interest expense........................... 7,629 3,973 4,106 660
Allowance for funds used during construction..... (4,316) (2,750) (2,193) (1,490)
__________ __________ __________ ________
Total interest charges....................... 57,739 53,652 27,942 24,990
__________ __________ __________ ________
INCOME FROM CONTINUING OPERATIONS................ 184,847 221,064 46,814 48,036
DISCONTINUED OPERATIONS (Note 4)
Loss from discontinued energy marketing
services operations, net of applicable
tax benefit.................................... (17,238) (10,588) - (9,051)
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........... (31,911) - 10,989 -
_________ __________ ________ ________
NET INCOME....................................... $ 135,698 $ 210,476 $ 57,803 $ 38,985
========= ========= ======== ========
EARNINGS PER COMMON SHARE -- BASIC
Income from continuing operations (Note 9)..... $1.96 $2.33 $.49 $.51
Loss from discontinued energy marketing
services operations.......................... (.18) (.11) - (.10)
Income (loss) from disposal of energy
marketing services operations................ (.34) - .12 -
_____ _____ ____ ____
NET INCOME....................................... $1.44 $2.22 $.61 $.41
===== ===== ==== ====
EARNINGS PER COMMON SHARE -- DILUTED
Income from continuing operations (Note 9)..... $1.92 $2.27 $.49 $.50
Loss from discontinued energy marketing
services operations.......................... (.17) (.11) - (.09)
Income (loss) from disposal of energy
marketing services operations................ (.33) - .11 -
_____ _____ ____ ____
NET INCOME....................................... $1.42 $2.16 $.60 $.41
===== ===== ==== ====
_____________________________________________________________________________________________________________
</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 June At December
30, 1998 31, 1997*
(Unaudited)
_____________________________________________________________________________
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Gas utility and other plant.................... $ 5,067,831 $ 5,004,139
Accumulated depreciation and amortization...... (2,015,274) (1,949,483)
___________ ___________
Net gas utility and other plant........... 3,052,557 3,054,656
___________ ___________
Exploration and production properties.......... 3,859,143 3,710,619
Accumulated depreciation and amortization...... (2,630,716) (2,542,472)
___________ ___________
Net exploration and production properties. 1,228,427 1,168,147
___________ ___________
Net property, plant and equipment......... 4,280,984 4,222,803
___________ ___________
CURRENT ASSETS
Cash and temporary cash investments............ 72,507 65,035
Accounts receivable, less allowance for
doubtful accounts............................ 389,529 951,212
Gas stored - current portion................... 64,058 139,157
Materials and supplies (average cost method)... 34,537 30,256
Unrecovered gas costs.......................... 28,907 55,062
Deferred income taxes - current (net).......... 14,054 -
Prepayments and other current assets........... 164,996 212,919
___________ ___________
Total current assets...................... 768,588 1,453,641
___________ ___________
REGULATORY AND OTHER ASSETS
Other investments (Note 8)..................... 410,280 223,900
Deferred charges and other assets (Note 3)..... 432,112 413,350
___________ ___________
Total regulatory and other assets......... 842,392 637,250
___________ ___________
Total assets.............................. $ 5,891,964 $ 6,313,694
=========== ===========
STOCKHOLDERS' EQUITY AND LIABILITIES
CAPITALIZATION
Common stockholders' equity (Notes 5, 6 and 7)
Common stock, par $2.75
(Issued: 1998 - 95,888,311 shares;
1997 - 95,623,281 shares).................. $ 263,693 $ 262,964
Capital in excess of par value............... 571,879 566,755
Retained earnings............................ 1,582,649 1,539,587
Treasury stock, at cost
(1998 - 2,087 shares; 1997 - 659 shares)... (121) (38)
Unearned compensation........................ (6,100) (10,950)
___________ ___________
Total common stockholders' equity......... 2,412,000 2,358,318
Long-term debt................................. 1,204,919 1,552,890
___________ ___________
Total capitalization...................... 3,616,919 3,911,208
___________ ___________
CURRENT LIABILITIES
Current maturities on long-term debt........... 254,000 154,000
Commercial paper............................... 384,200 238,700
Accounts payable............................... 205,964 651,365
Estimated rate contingencies and
refunds (Note 3)............................. 48,204 29,112
Amounts payable to customers................... 36,758 880
Taxes accrued.................................. 104,858 125,056
Deferred income taxes - current (net).......... - 13,735
Temporary replacement reserve - gas
inventory.................................... 21,527 -
Other current liabilities...................... 146,706 173,393
Net liabilities of discontinued operations
(Note 4)..................................... 16,431 -
___________ __________
Total current liabilities................. 1,218,648 1,386,241
___________ ___________
DEFERRED CREDITS
Deferred income taxes.......................... 743,830 712,118
Accumulated deferred investment tax credits.... 25,559 26,658
Deferred credits and other liabilities......... 287,008 277,469
___________ ___________
Total deferred credits.................... 1,056,397 1,016,245
___________ ___________
COMMITMENTS AND CONTINGENCIES
___________ ___________
Total stockholders' equity and liabilities $ 5,891,964 $ 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)
_____________________________________________________________________________
Six Months to June 30
_____________________
1998 1997
_____________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations................ $ 184,847 $ 221,064
Adjustments to reconcile income from continuing
operations to net cash provided by
operating activities
Depreciation and amortization................ 169,224 158,144
Pension cost (credit)........................ (27,766) (25,354)
Stock award amortization..................... 4,082 3,077
Deferred income taxes-net.................... (11,946) 1,140
Changes in current assets and
current liabilities
Accounts receivable-net.................... 233,408 144,010
Inventories................................ 47,430 109,966
Unrecovered gas costs...................... 26,155 49,222
Accounts payable........................... (117,828) (91,980)
Estimated rate contingencies and refunds... 19,092 7,079
Amounts payable to customers............... 35,878 2,485
Taxes accrued.............................. (18,573) 39,457
Temporary replacement reserve - gas
inventory................................ 21,527 26,544
Other-net.................................. 6,831 (4,309)
Changes in other assets and
other liabilities.......................... 23,625 20,372
Other-net.................................... 1,543 60
_________ _________
Net cash provided by continuing operations 597,529 660,977
Net cash provided by (or used in)
discontinued operations.................. 45,439 (4,247)
_________ _________
Net cash provided by operating activities 642,968 656,730
_________ _________
CASH FLOWS USED IN INVESTING ACTIVITIES
Plant construction and other property additions.. (233,226) (209,322)
Proceeds from dispositions of property, plant
and equipment-net.............................. (2,980) (3,515)
Cost of other investments........................ (197,725) (17)
_________ _________
Net cash used in continuing operations... (433,931) (212,854)
Net cash used in discontinued operations......... (1,697) (1,527)
_________ _________
Net cash used in investing activities.... (435,628) (214,381)
_________ _________
CASH FLOWS PROVIDED BY (OR USED IN) FINANCING ACTIVITIES
Issuance of common stock......................... 9,893 8,344
Repayments of long-term debt..................... (161,698) (104,000)
Commercial paper-net............................. 144,888 (264,001)
Dividends paid................................... (92,831) (92,115)
Purchase of treasury stock....................... (252,510) (3,790)
Sale of treasury stock........................... 161,712 3,806
Other-net........................................ (71) 49
_________ _________
Net cash used in financing activities.... (190,617) (451,707)
_________ _________
Net increase (or decrease) in cash and
temporary cash investments............... 16,723 (9,358)
CASH AND TEMPORARY CASH INVESTMENTS AT JANUARY 1. 65,035 44,524
_________ _________
CASH AND TEMPORARY CASH INVESTMENTS AT JUNE 30... $ 81,758 $ 35,166
========= =========
Continuing operations............................ $ 72,507 $ 22,377
Discontinued operations.......................... 9,251 12,789
_________ _________
Total cash and temporary cash investments
at June 30............................... $ 81,758 $ 35,166
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for
Interest (net of amounts capitalized).......... $ 62,538 $ 60,005
Income taxes (net of refunds).................. $ 59,199 $ 49,709
Non-cash financing activities
Issuance of common stock under benefit plans... $ 773 $ 34
Conversion of 7 1/4% Convertible
Subordinated Debentures...................... $ 88,467 $ 10
_____________________________________________________________________________
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>
_____________________________________________________________________________________
Six Months to June 30 Three Months to June 30
______________________ ________________________
1998 1997 1998 1997
_____________________________________________________________________________________
<S> <C> <C> <C> <C>
NET INCOME.................... $135,698 $210,476 $57,803 $38,985
OTHER COMPREHENSIVE INCOME,
NET OF TAX
Foreign currency
translation adjustment..... 323 - 35 -
_______ ________ _______ _______
COMPREHENSIVE INCOME.......... $136,021 $210,476 $57,838 $38,985
======== ======== ======= =======
____________________________________________________________________________________
</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.
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 $42.0 million
and $15.7 million at June 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
$6.2 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 $13.0 million and $17.0 million at June 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 six months and second 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 June 30, 1998,
have been classified in the Condensed Consolidated Balance Sheet as "Net
liabilities 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 six months or second quarter of 1998
or 1997.
5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net liabilities of the Company's discontinued operations at June 30, 1998 are
as follows:
_______________________________________________________________________________
At June
30, 1998
_______________________________________________________________________________
(In Thousands)
Gas utility and other plant............................... $ 21,462
Accumulated depreciation and amortization................. (9,351)
________
Net gas utility and other plant........................ 12,111
Current assets............................................ 251,759
Other assets.............................................. (1,814)
________
Total assets........................................... $262,056
________
Liability for estimated loss on disposal.................. $ 50,145
Other current liabilities................................. 220,600
Deferred credits.......................................... 7,742
________
Total liabilities...................................... $278,487
________
Net liabilities........................................ $(16,431)
========
______________________________________________________________________________
Summarized results of operations of the discontinued operations are as
follows:
_______________________________________________________________________________
Six Months to June 30 Three Months to June 30
________________________ _______________________
1998 1997 1998 1997
______________________________________________________________________________
(In Thousands)
Total operating revenues. $792,586 $956,267 $ - $401,436
Operating expenses....... (818,105) (972,077) - (414,576)
________ ________ ________
Operating loss before
income taxes........ (25,519) (15,810) - (13,140)
Income tax benefit....... 9,011 6,240 - 4,597
Other income............. 80 356 - 174
Interest charges......... (810) (1,374) - (682)
_______ ________ _________ _________
Loss from discontinued
operations............. $(17,238) $(10,588) $ - $ (9,051)
======== ======== ========= ========
Estimated income
(loss) from disposal
before income
taxes......... $(50,145)* $ - $ 15,855 $ -
Income tax
(provision) benefit.... 18,234 - (4,866) -
________ ________ ________ ________
Net income
(loss) from disposal... $(31,911)* $ - $ 10,989 $ -
======== ======== ======== ========
______________________________________________________________________________
* Includes $22.3 million pretax provision ($14.4 million after taxes) for
expected operating losses during the shutdown period April 1, 1998 through
December 31, 1998.
The quarter ended June 30, 1998 includes a favorable adjustment
to revise certain previous estimates of shut-down costs in light of terms
reached in the Company's agreement to sell the capital stock of CNG Energy
Services Corporation, 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
approximately $48.0 million received from the sale of this business are
subject to final working capital adjustments during the third quarter of 1998.
As a result of the sale, the Company now expects that its transition out of
the wholesale gas and electricity businesses will be substantially completed
by September 30, 1998, and December 31, 1998, respectively.
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.................. 242 664 9,733 - - -
Performance shares-net......... 16 45 844 (889) - -
Stock awards-net............... 7 20 398 (339) - -
Amortization and adjustment.... - - (534) 6,078 - -
Purchase of treasury stock....... - - - - (4,560) (252,510)
Sale of treasury stock........... - - - - 2,921 161,712
Conversion of debentures......... - - (1,841) - 1,638 90,715
Other............................ - - (3,476) - - -
______ ________ ________ ________ ______ _________
At June 30, 1998................. 95,888 $263,693 $571,879 $ (6,100) (2) $ (121)
====== ======== ======== ======== ====== =========
____________________________________________________________________________________________________________
</TABLE>
(6) As previously reported, 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, $510.6 million of consolidated
retained earnings was free from such restrictions at June 30, 1998.
(8) As previously reported, 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 June 30, 1998, CNG International's aggregate
investment in these Argentine companies was $119.1 million.
Also during March 1998, CNG International purchased a 33.3% ownership interest
in the AlintaGas Dampier-to-Bunbury Natural Gas Pipeline (Alinta) in
Western Australia from the Western Australia Government. Other partners in
the purchase included El Paso Energy Corporation (33.3%), AMP Asset Management
(11.1%), Axiom Funds Management (11.1%) and Hastings Funds Management (11.1%).
The 925-mile pipeline will be operated by Epic Energy Australia, an entity in
which CNG International holds a 30.0% ownership interest. At June 30, 1998,
CNG International's investment in Alinta totaled $144.1 million.
7
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Concluded)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
(9) 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 six months ended June 30, 1998 and
1997 follows (income and share amounts in thousands):
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________________________
Six Months to June 30 Three Months to June 30
________________________________ _________________________________
Income From Income From Per
Continuing Per Share Continuing Share
Operations Shares Amount Operations Shares Amount
___________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
1998
Basic EPS................................. $184,847 94,234 $1.96 $46,814 95,447 $.49
======== ====== ===== ======= ====== ====
Effect of dilutive securities:
Exercise of stock options............... 628 651
Vesting of performance shares........... 374 380
Conversion of 7 1/4% Convertible
Subordinated Debentures................. 1,578 1,721 - -
________ ______ _______ ______
Diluted EPS............................... $186,425 96,957 $1.92 $46,814 96,478 $.49
======== ====== ===== ======= ====== ====
___________________________________________________________________________________________________________________________
1997
Basic EPS................................. $221,064 94,647 $2.33 $48,036 94,701 $.51
======== ====== ===== ======= ====== ====
Effect of dilutive securities:
Exercise of stock options............... 577 501
Vesting of performance shares........... 349 344
Conversion of 7 1/4% Convertible
Subordinated Debentures................. 6,055 4,559 - * - *
________ _______ _______ ______
Diluted EPS............................... $227,119 100,132 $2.27 $48,036 95,546 $.50
======== ======= ===== ======= ====== ====
*Antidilutive.
___________________________________________________________________________________________________________________________
</TABLE>
(10) 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 reviewing the provisions of SFAS No. 133 and is assessing its effect on
the Company.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Because of the seasonal nature of the regulated subsidiaries' heating
business, a substantial portion of the Company's cash receipts are realized
in the first six months of the year. In addition to satisfying cash
requirements for operations, capital expenditures, and dividend payments in
the current six month period, available cash was used to make additional
investments in Argentina and Australia.
Due to the significant amount of revenues generated during the first six
months of a year, the consolidated balance sheet at the end of June customarily
shows an increase in cash and temporary cash investments over the balance at
the end of the previous year. After the winter heating season and by June 30,
accounts receivable have declined, as is customary, from the high levels at
the end of the previous year and March of the current year. The balance of
accounts receivable at June 30, 1998 has also declined due to the
reclassification of certain amounts to "Net assets of discontinued operations"
in 1998.In addition, the inventory of stored gas was reduced during the six
months of 1998 due to the demand for gas during the winter heating season.
Under the LIFO accounting method, the excess of the estimated current cost of
replacing inventories of gas withdrawn from storage during the early part of the
year over LIFO inventory cost at the time of withdrawal is recorded in the
income statement and as a current liability. The amount charged to expense in
the first six months of 1998 was $73.8 million compared to $53.9 million in
1997. As the volume of gas withdrawn from storage is replaced either
partially or in its entirety later in the year, the liability is eliminated.
In the event the inventory is not entirely replaced, any remaining liability
is eliminated by an adjustment to purchased gas expense.
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 has a shelf registration with the SEC
that permits the sale of up to $538.3 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 June 30, 1998.
In connection with this discussion of financial condition, reference is also
made to Notes 3, 5, 7 and 8 to the consolidated financial statements.
9
<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 SIX MONTHS ENDED JUNE 30, 1998 AND 1997
SYSTEM RESULTS
The Company reported net income for the first six months of 1998 of $135.7
million, or $1.44 per share, compared with net income of $210.5 million, or
$2.22 per share, in the first six months of 1997. For the second quarter
of 1998, the Company reported net income of $57.8 million, or 61 cents a share,
compared with net income of $39.0 million, or 41 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 six months of
1998 of $49.1 million, or 52 cents a share, compared to a loss of $10.6
million, or 11 cents a share, in the first half of 1997. During the second
quarter of 1998, the Company recognized income from discontinued operations
of $11.0 million, or 12 cents a share, compared to a loss of $9.1 million,
or 10 cents a share, in the prior year quarter. The 1998 second quarter
results reflect a favorable adjustment to revise certain previous estimates
of shut-down costs in light of terms reached in the Company's agreement to
sell its wholesale gas marketing business.
Income from continuing operations in the first six months of 1998 was $184.8
million, or $1.96 per share, compared to $221.1 million, or $2.33 per share,
in the 1997 first half. Income from continuing operations for the second
quarter of 1998 was $46.8 million, or 49 cents a share, compared to $48.1
million, or 51 cents a share, in the prior year quarter. Results from
continuing operations for both 1998 periods reflect warmer weather and lower
average wellhead prices for oil compared with the respective 1997 periods,
partially mitigated by increased gas and oil production and the resolution
of certain regulatory contingencies. Average wellhead prices for natural gas
were lower in the first half of 1998 compared to the prior year period but
were higher in the 1998 second quarter compared to the second quarter of 1997.
Weather in the Company's retail service territories in the first half of 1998
was 19.5% warmer than 1997 and 20.0% warmer than normal. In the second quarter
of 1998, weather was 37.1% warmer than last year and 17.9% warmer than normal.
OPERATING REVENUES
Regulated gas sales revenues decreased $319.9 million, to $819.6 million, in
the first six months of 1998 with sales volumes declining 43.8 billion cubic
feet (Bcf), to 124.7 Bcf. In the 1998 second quarter, regulated gas sales
revenues decreased $124.2 million, to $207.7 million, as sales volumes
decreased 16.7 Bcf, to 29.8 Bcf. Average sales rates and volumes declined
during both 1998 periods for each of the Company's major customer classes --
residential, commercial and industrial -- compared to the respective 1997
periods. Lower volumes were attributable to warmer weather during both 1998
periods.
In the first six months of 1998, nonregulated gas sales revenues increased
$33.9 million, to $239.4 million, with sales volumes increasing 11.3 Bcf to
93.6 Bcf, due in large part to gas sales by CNG Retail Services Corporation
(CNG Retail). Second quarter 1998 nonregulated gas sales revenues increased
$7.7 million, to $107.8 million, as sales volumes increased slightly.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Gas transportation and storage revenues were $286.9 million in the first half
of 1998 and $120.5 million in the second quarter, up $37.2 million and $13.3
million, respectively, from the comparable 1997 periods. These increases
reflect gas transportation revenue increases of $33.7 million in the first
half of 1998 and $9.9 million in the second quarter attributable primarily
to customers switching from sales to transportation service at certain of the
distribution subsidiaries.
Other operating revenues increased $5.2 million, to $183.7 million, in the first
six months of 1998 and increased $4.1 million, to $94.4 million, in the second
quarter. The increases in both 1998 periods were due chiefly to the resolution
of certain regulatory contingencies in the second quarter of 1998, partially
offset by declines in revenues from the sale of products extracted from natural
gas and oil trading activities.
OPERATING EXPENSES
Operating expenses, excluding income taxes, declined $188.7 million in the
first half of 1998 and $92.6 million in the second quarter. Total purchased
gas expense declined $164.6 million in the first half and $67.5 million in the
second quarter of 1998 compared to the prior year periods due primarily to
decreased volume requirements in connection with warm weather in both 1998
periods. Lower average purchase prices also contributed to the decline in the
first six months of 1998. Liquids, capacity and other products purchased was
lower in both 1998 periods, decreasing $19.4 million in the first half and
$16.5 million in the second quarter. These declines were due to reduced
purchases of pipeline capacity by CNG Transmission and lower average purchase
prices for oil traded by CNG Producing Company (CNG Producing). Combined
operation and maintenance expense decreased $8.0 million in the first six
months and $3.9 million in the second quarter of 1998 due largely to lower
maintenance and miscellaneous operating expenses, partially offset by higher
production-related expenses. Depreciation and amortization (DD&A) expense
increased $11.0 million in the first half of 1998, due primarily to higher gas
and oil production volumes. In the second quarter of 1998, DD&A expense
increased $2.3 million.
Income taxes decreased $23.8 million in the first half of 1998 reflecting
pretax income of $269.7 million in the period compared to pretax income of
$329.8 million in 1997. In the second quarter, income taxes declined $7.1
million compared to 1997 due in part to lower pretax income in 1998.
OTHER INCOME
Total other income declined $1.0 million, to $8.9 million, in the first six
months of 1998 and increased $1.2 million, to $6.5 million, in the second
quarter. Interest revenues were up $1.3 million in the first half of 1998,
due in part to the resolution of certain regulatory matters in the prior year,
and were relatively unchanged in the second quarter compared to 1997.
"Other-net" declined $2.3 million during the 1998 first half and increased
$1.0 million in the second quarter compared to the respective prior year
periods. The decline in the six-month period was due largely to charges
incurred in connection with the redemption in early 1998 of the Convertible
Subordinated Debentures (see Note 6 to the consolidated financial statements,
page 7), while the second quarter increase was due in part to higher earnings
from equity investments.
INTEREST CHARGES
Total interest charges increased $4.2 million and $3.1 million in the first
half and second quarter of 1998, respectively. These increases were due
primarily to interest expense related to the $300 million of debentures issued
in the fourth quarter of 1997 and interest on commercial paper borrowings,
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 and 4 to the consolidated financial statements.
11
<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.
_____________________________________________________________________________
Six Months to Three Months to
June 30 June 30
__________________ ________________
1998 1997* 1998 1997*
_____________________________________________________________________________
OPERATING INCOME BEFORE INCOME TAXES (In Millions)
Distribution...................... $ 152.1 $ 199.7 $ 14.5 $ 27.3
Transmission...................... 106.6 106.6 45.6 34.9
Exploration and production........ 62.9 73.4 28.2 35.1
Other............................. 1.7 (.6) .7 .3
Corporate and eliminations........ (4.7) (5.6) (5.3) (7.4)
________ ________ _______ _______
Total........................... $ 318.6 $ 373.5 $ 83.7 $ 90.2
======== ======== ======= =======
OPERATING REVENUES (In Millions)
Distribution...................... $ 939.4 $1,224.8 $ 254.0 $ 366.6
Transmission...................... 263.8 251.2 118.1 103.8
Exploration and production........ 321.4 331.0 157.4 165.7
Other............................. 67.0 26.9 22.4 16.3
Corporate and eliminations........ (62.0) (60.7) (21.5) (22.9)
________ ________ _______ _______
Total........................... $1,529.6 $1,773.2 $ 530.4 $ 629.5
======== ======== ======= =======
GAS SALES (In Bcf)
Distribution...................... 124.9 168.5 29.8 46.5
Exploration and production........ 80.2 81.0 40.7 41.7
Other............................. 16.6 2.4 4.8 2.4
Eliminations...................... (3.4) (1.1) (1.7) (.5)
________ ________ _______ _______
Total sales..................... 218.3 250.8 73.6 90.1
======== ======== ======= =======
GAS TRANSPORTATION (In Bcf)
Distribution...................... 105.1 98.6 42.3 43.1
Transmission...................... 335.4 410.4 119.7 152.0
Exploration and production........ .3 .5 .2 .3
Eliminations...................... (89.9) (105.3) (37.4) (41.7)
________ ________ _______ _______
Total transportation............ 350.9 404.2 124.8 153.7
======== ======== ======= =======
_____________________________________________________________________________
* Certain amounts have been reclassified due to the energy marketing services
operations being reported as discontinued operations.
12
<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
$152.1 million in the first six months of 1998, compared to $199.7 million
in the first half of 1997. Distribution throughput in the first half of 1998
declined 14%, to 230.0 Bcf. Results for the first half of 1998 reflect weather
that was 20.0% warmer than normal and 19.5% warmer than the first six months
of 1997. The effect of lower combined operation and maintenance expense in
the first half of 1998 partially mitigated the impact of the warm winter
weather.
Residential gas sales volumes declined 32.6 Bcf in the first six months of 1998
to 95.8 Bcf. The distribution operations transported 7.6 Bcf of gas in the
first six months of 1998 on behalf of former residential sales customers who
now purchase gas from other suppliers, including CNG Retail. Sales to
commercial customers declined 10.3 Bcf to 27.0 Bcf while volumes transported
to these customers decreased .4 Bcf to 24.9 Bcf. Total deliveries to
industrial customers decreased .4 Bcf, to 70.7 Bcf, compared with the prior
year. Industrial transport volumes were up .7 Bcf to 69.2 Bcf, while sales
volumes declined 1.1 Bcf to 1.5 Bcf. Off-system transport volumes were down
1.3 Bcf in the first half of 1998, to 3.4 Bcf.
In the second quarter of 1998, the distribution operations reported operating
income before income taxes of $14.5 million, compared to $27.3 million in the
1997 second quarter. Results for the 1998 quarter reflect weather that was
17.9% warmer than normal and 37.1% warmer than the prior year quarter
Lower operating costs in 1998 partially offset the effects of the warm
weather. Residential gas sales volumes of 23.0 Bcf were down 12.8 Bcf
compared to the 1997 quarter. Gas transported on behalf of former residential
sales customers totaled 2.9 Bcf in the second quarter of 1998. Commercial
sales volumes were down 4.0 Bcf, to 6.0 Bcf, while gas transported to these
customers was 6.2 Bcf, down 3.0 Bcf. Deliveries to industrial customers
increased .3 Bcf reflecting an increase in transport volumes of .5 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 six months of 1998 was $106.6 million, unchanged from the 1997
period. In the second quarter of 1998, operating income before income taxes
was $45.6 million, an increase of $10.7 million from $34.9 million in 1997.
The higher operating income in 1998 reflects the resolution of certain
regulatory contingencies during the second quarter.
Transmission throughput decreased 75.0 Bcf in the first six months and 32.3 Bcf
in the second quarter of 1998 due largely to warmer weather in the northeast
in 1998.
EXPLORATION AND PRODUCTION
The exploration and production operations reported operating income before
income taxes of $62.9 million in the first six months of 1998, compared to
$73.4 million in the first half of 1997. Results for the first half of 1998
reflect the impact of lower average gas and oil wellhead prices that more
than offset the effects of higher gas and oil production. In the second
quarter, operating income before income taxes was $28.2 million, down from
$35.1 million in 1997 due largely to lower average oil wellhead prices.
The Company's average gas wellhead price was $2.41 per thousand cubic feet
(Mcf) in the first six months of 1998, $.05 per Mcf lower than 1997 but still
favorable in comparison with industry-wide prices in 1998. In the second
quarter, the average gas price was $2.31 per Mcf, up from $2.22 in the second
quarter of 1997. Gas production in the first six months of 1998 was 76.9 Bcf,
up 1.4 Bcf from 75.5 Bcf in 1997. Second quarter gas production was 39.4 Bcf,
up slightly from 39.2 Bcf in 1997. The Company's average oil wellhead price
was $12.60 per barrel in the first half of 1998, down from $16.36 per barrel
in the prior year period. The average oil wellhead price for the second
quarter of 1998 was $12.71 per barrel compared to $15.74 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 six months of 1998
was 4.0 million barrels, up 31% from 3.1 million barrels in 1997. Second
quarter 1998 oil production was 1.9 million barrels, up from 1.8 million barrels
in 1997. The increase in oil production in both 1998 periods was due largely
to Neptune, a deep-water project in the Gulf of Mexico which began production
in March 1997.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
SELECTED TWELVE-MONTH DATA
The following selected financial data (unaudited) relates to the twelve months
ended June 30, 1998 (in thousands of dollars):
______________________________________________________________________________
Operating revenues..................................... $2,933,517
Operating expenses..................................... 2,421,783
Operating income before income taxes............... 511,734
Income taxes........................................... 132,438
Other income........................................... 11,409
Interest charges....................................... 108,014
Income from continuing operations...................... 282,691
Discontinued operations................................ (53,089)
Net income......................................... $ 229,602
Earnings per share of common stock -- basic........ $2.43*
Earnings per share of common stock -- diluted...... $2.41*
Times fixed charges earned............................. 4.27
______________________________________________________________________________
*Includes loss from discontinued operations of $.56 per share - basic ($.54
per share - diluted).
OTHER INFORMATION
YEAR 2000 TECHNOLOGY ISSUE
Similar to all business entities, the Company will be impacted by the inability
of computer application software programs to distinguish between the year 1900
and 2000 due to a commonly-used programming convention. Unless such programs
are modified or replaced prior to 2000, calculations and interpretations based
on date-based arithmetic or logical operations performed by such programs may
be incorrect.
Management's plan to address the impact of the Year 2000 issue on the Company
focuses on the following areas: application systems, process control systems
(embedded chips), technology infrastructure, physical infrastructure, and
third party business partners and suppliers with which the Company has
significant relationships. Management's analysis and review of these areas
is comprised primarily of five phases: developing an inventory of hardware,
software and embedded chips; assessing the degree to which each area is
currently in compliance with Year 2000 requirements; performing renovations
and repairs as needed to attain compliance; testing to ensure compliance;
and developing a contingency plan if repair and renovation efforts are either
unsuccessful or untimely.
Management has substantially completed the inventory and assessment phases
regarding application systems, process control systems and technology
infrastructure, and is performing renovations, repairs and testing of the former
two categories. The review of physical infrastructure and business partners
and suppliers is in the inventory stage. While the Company anticipates that
any additional inventory and assessment efforts will be completed in 1998,
renovation, repair and testing of affected areas will continue through 1999.
The Company expects to spend approximately $15.0 million for these Year 2000
compliance efforts.
In addition to the activities described above, the Company is currently
replacing many of its financial and operating software programs with new
programs that will be Year 2000 compliant. These new programs have
significantly reduced the costs the Company expects to incur to become Year
2000 compliant. However, the Company has formed a contingency team to develop
a workplan in the event that such programs are not fully operational by the end
of 1999. The costs associated with this effort are being evaluated and cannot
yet be determined.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
STATE REGULATORY MATTERS
As previously reported, on April 29, 1998, the Virginia State Corporation
Commission issued a final order in connection with the September 25, 1996
expedited rate application of Virginia Natural Gas, Inc. (Virginia Natural
Gas). The order results in an annual revenue increase of $7.2 million,
retroactive to October 25, 1996, the date new rates went into effect subject
to refund. Customer refunds resulting from the order are scheduled to be made
in August 1998. The order reflects an imputed return on equity of 10.9%. In
its filing, Virginia Natural Gas had requested a $13.9 million increase in
annual revenues and a return on equity of 11.3%.
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 Note 8 to the consolidated financial statements, page
7, regarding the Company's additional investments in Argentina and Australia
during the first quarter of 1998.
EXPLORATION AND PRODUCTION
As previously reported, CNG Producing, acting alone or with partners, was the
high bidder on three tracts offered at the federal government's March 18,
1998 Gulf of Mexico lease sale. The Company's bids totaled $4.0 million for
properties in which it would have working interests of 100%, 66.67% and 50%.
Two of the properties are located in deep water areas of the Gulf of Mexico.
The government has accepted all three of the bids.
LIMITATION ON CAPITALIZED COSTS
As disclosed in Note 1 to the 1997 consolidated financial statements, included
in Exhibit 99 to the 1997 Form 10-K, CNG Producing and CNG Transmission
follow the full cost method of accounting for their gas and oil producing
activities prescribed by the SEC. Under this method, the total capitalized
costs, net of related deferred taxes, are subject to a limitation based on the
present value of estimated future net revenues expected to be received from
the production of proved reserves. If net capitalized costs exceed this amount
at the end of any quarter, a permanent impairment of the assets is required to
be charged to expense in that period.
There are a number of factors, including prices, that determine whether or not
an impairment is required. Because gas wellhead prices are subject to sudden
and seasonal fluctuations, an impairment of these gas and oil properties is a
possibility at any quarterly measurement date, unless other factors such as
lower production costs or proved reserve additions mitigate the impact of a
price decline.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Concluded)
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 issue, 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.
***********
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
thereto, and its quarterly report to the SEC on Form 10-Q for the quarter
ended March 31, 1998.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material new legal proceedings instituted in the second
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, except as noted below.
As previously reported, The East Ohio Gas Company (East Ohio Gas) has
finalized its voluntary self disclosure to the Environmental Protection
Agency (EPA) concerning its collection and handling practices for pipeline
fluids that periodically are contaminated with polychlorinated biphenyls
(PCBs). This matter was settled in June 1998 when East Ohio Gas paid a penalty
of $193,260 to the EPA and signed a Consent Agreement Consent Order (CACO)
with the EPA. In the CACO, East Ohio Gas neither admitted nor denied the
violations alleged by the EPA.
Reference is made to "STATE REGULATORY MATTERS," page 15, 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
The Company's Annual Meeting of Shareholders was held on April 14, 1998.
Common shareholders voted on three items. The voting results on these
matters were as follows:
1. Election of three Directors.
Votes Votes Broker
Nominees For Withheld Non-Votes
________ __________ __________ _________
J. W. Connolly 74,976,134 3,279,872 0
George A. Davidson, Jr. 76,248,319 2,007,687 0
Richard P. Simmons 76,251,999 2,004,007 0
Directors whose term of office continued after the meeting:
Term expiring May 1999: Raymond E. Galvin, Paul E. Lego
and Margaret A. McKenna
Term expiring May 2000: William S. Barrack, Jr., Ray J. Groves
and Steven A. Minter
2. Ratification of the appointment of Price Waterhouse LLP (now
PricewaterhouseCoopers LLP) as independent accountants.
Votes Votes Broker
For Against Abstentions Non-Votes
__________ ___________ ___________ _________
77,087,489 779,720 388,797 0
3. Action on a stockholder-proposed resolution regarding the
shareholder rights plan.
Votes Votes Broker
For Against Abstentions Non-Votes
__________ ___________ ___________ _________
37,061,333 29,656,146 1,924,655 9,613,872
17
<PAGE>
ITEM 5. OTHER INFORMATION
None, other than as described elsewhere in this report.
ITEM 6. EXHIBITS, AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
As previously reported, the Company filed Current Reports on Form 8-K with the
SEC regarding the following matters on the dates indicated below:
Filing Date Description
____________ ___________
April 3 Press release re: acquisition of additional
interests in international investments
April 21 Press release re: discontinuance of wholesale
energy marketing services operations
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 six months ended June
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 June 30, 1998
(27) Financial Data Schedule has been filed electronically
______________________________________________________________________________
18
<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
August 7, 1998
19
<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 six months ended June 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 June 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>
________________________________________________________________________________________________________________________
Six Months to Three Months to
June 30, 1998 June 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......... $184,847 94,234 $1.96 $46,814 95,447 $.49
Loss from discontinued energy
marketing services operations........... (17,238) (.18) - -
Income (loss) from disposal of energy
marketing services operations........... (31,911) (.34) 10,989 .12
________ _______ _____ _______ ______ ____
NET INCOME................................ $135,698 94,234 $1.44 $57,803 95,447 $.61
======== ======= ===== ======= ====== ====
EARNINGS PER COMMON SHARE -- DILUTED
Income from continuing operations......... $184,847 94,234 $46,814 95,447
Effect of dilutive securities:
Exercise of stock options............... 628 651
Vesting of performance shares........... 374 380
Conversion of 7 1/4% Convertible
Subordinated Debentures............... 1,578 1,721 - -
________ _______ _______ ______
Income from continuing operations,
as adjusted............................. 186,425 96,957 $1.92 46,814 96,478 $.49
Loss from discontinued energy
marketing services operations........... (17,238) (.17) - -
Income (loss) from disposal of
energy marketing services
operations.............................. (31,911) (.33) 10,989 .11
________ _______ _____ _______ ______ ____
NET INCOME, AS ADJUSTED $137,276 96,957 $1.42 $57,803 96,478 $.60
======== ======= ===== ======= ====== ====
________________________________________________________________________________________________________________________
Six Months to Three Months to
June 30, 1997 June 30, 1997
_______________________________ ________________________________
Per Share Per Share
Net Income Shares Amount* Net Income Shares Amount*
________________________________________________________________________________________________________________________
<S>
EARNINGS PER COMMON SHARE -- BASIC
Income from continuing operations......... $221,064 94,647 $2.33 $48,036 94,701 $.51
Loss from discontinued energy
marketing services operations........... (10,588) (.11) (9,051) (.10)
________ _______ _____ _______ ______ ____
NET INCOME................................ $210,476 94,647 $2.22 $38,985 94,701 $.41
======== ======= ===== ======= ====== ====
EARNINGS PER COMMON SHARE -- DILUTED
Income from continuing operations......... $221,064 94,647 $48,036 94,701
Effect of dilutive securities:
Exercise of stock options............... 577 501
Vesting of performance shares........... 349 344
Conversion of 7 1/4% Convertible
Subordinated Debentures............... 6,055 4,559 - -
________ _______ _______ ______
Income from continuing operations,
as adjusted............................. 227,119 100,132 $2.27 48,036 95,546 $.50
Loss from discontinued energy
marketing services operations........... (10,588) (.11) (9,051) (.09)
________ _______ _____ _______ ______ ____
NET INCOME, AS ADJUSTED $216,531 100,132 $2.16 $38,985 95,546 $.41
======== ======= ===== ======= ====== ====
________________________________________________________________________________________________________________________
</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 June 30 1998
_____________________________________________________________________________
Earnings:
Income from continuing operations......................... $282,691
Add income taxes.......................................... 132,438
________
Income from continuing operations before income taxes... 415,129
Distributed income from unconsolidated investees,
less equity in earnings thereof......................... 2,066
________
Subtotal................................................ 417,195
________
Add fixed charges:
Interest on long-term debt, including amortization
of debt discount and expense less premium............. 106,924
Other interest expense.................................. 9,430
Portion of rentals deemed to be representative
of the interest factor................................ 9,736
Fixed charges associated with 50% projects with debt.... 1,523
________
TOTAL FIXED CHARGES......................................... 127,613
________
TOTAL EARNINGS.............................................. $544,808
========
RATIO OF EARNINGS TO FIXED CHARGES.......................... 4.27
========
_____________________________________________________________________________
<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 JUNE 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,052,557
<OTHER-PROPERTY-AND-INVEST> 1,228,427
<TOTAL-CURRENT-ASSETS> 768,588
<TOTAL-DEFERRED-CHARGES> 432,112
<OTHER-ASSETS> 410,280
<TOTAL-ASSETS> 5,891,964
<COMMON> 263,693
<CAPITAL-SURPLUS-PAID-IN> 531,599
<RETAINED-EARNINGS> 1,582,649
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,412,000
0
0
<LONG-TERM-DEBT-NET> 1,204,919
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 384,200
<LONG-TERM-DEBT-CURRENT-PORT> 254,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,670,904
<TOT-CAPITALIZATION-AND-LIAB> 5,891,964
<GROSS-OPERATING-REVENUE> 1,529,593
<INCOME-TAX-EXPENSE> 84,874
<OTHER-OPERATING-EXPENSES> 1,211,033
<TOTAL-OPERATING-EXPENSES> 1,295,907
<OPERATING-INCOME-LOSS> 233,686
<OTHER-INCOME-NET> 8,900
<INCOME-BEFORE-INTEREST-EXPEN> 242,586
<TOTAL-INTEREST-EXPENSE> 57,739
<NET-INCOME> 135,698
0
<EARNINGS-AVAILABLE-FOR-COMM> 135,698
<COMMON-STOCK-DIVIDENDS> 92,959
<TOTAL-INTEREST-ON-BONDS> 96,081
<CASH-FLOW-OPERATIONS> 642,968
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.42
</TABLE>
