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
MARCH 31, 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 April 30,
1998: 95,806,206
<PAGE>
CONSOLIDATED NATURAL GAS COMPANY
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended March 31, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
for the Quarters Ended March 31, 1998 and 1997............... 1
CONDENSED CONSOLIDATED BALANCE SHEET
at March 31, 1998 (Unaudited), and December 31, 1997......... 2
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
for the Quarters Ended March 31, 1998 and 1997............... 3
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
for the Quarters Ended March 31, 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...................................... 16
ITEM 2. CHANGES IN SECURITIES.................................. 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................ 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 16
ITEM 5. OTHER INFORMATION...................................... 16
ITEM 6. EXHIBITS, AND REPORTS ON FORM 8-K...................... 16
SIGNATURES....................................................... 18
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Natural Gas Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(Unaudited) (Thousands of Dollars)
____________________________________________________________________________
Three Months to March 31
________________________
1998 1997
____________________________________________________________________________
OPERATING REVENUES
Regulated gas sales............................ $ 611,946 $ 807,596
Nonregulated gas sales......................... 131,575 105,403
__________ __________
Total gas sales............................ 743,521 912,999
Gas transportation and storage................. 166,433 142,534
Other.......................................... 89,211 88,235
__________ __________
Total operating revenues (Note 3).......... 999,165 1,143,768
__________ __________
OPERATING EXPENSES
Purchased gas.................................. 405,011 502,057
Liquids, capacity and other
products purchased........................... 44,305 47,168
Operation expense ............................. 156,710 161,117
Maintenance.................................... 20,207 19,913
Depreciation and amortization.................. 83,658 75,038
Taxes, other than income taxes................. 54,424 55,117
__________ __________
Subtotal................................... 764,315 860,410
__________ __________
Operating income before income taxes....... 234,850 283,358
Income taxes................................... 69,497 86,238
__________ __________
Operating income........................... 165,353 197,120
__________ __________
OTHER INCOME
Interest revenues.............................. 1,524 294
Other-net...................................... 953 4,276
__________ __________
Total other income......................... 2,477 4,570
__________ __________
Income before interest charges............. 167,830 201,690
__________ __________
INTEREST CHARGES
Interest on long-term debt..................... 28,397 26,609
Other interest expense......................... 3,523 3,313
Allowance for funds used during construction... (2,123) (1,260)
__________ __________
Total interest charges..................... 29,797 28,662
__________ __________
INCOME FROM CONTINUING OPERATIONS.............. 138,033 173,028
DISCONTINUED OPERATIONS (Note 4)
Loss from discontinued energy marketing
services operations, net of applicable
tax benefit.................................. (17,238) (1,537)
Loss on disposal of energy marketing
services operations, including
provision for operating losses
during the phase out period,
net of applicable tax benefit................ (42,900) -
__________ __________
NET INCOME..................................... $ 77,895 $ 171,491
========== ==========
EARNINGS PER COMMON SHARE -- BASIC
Income from continuing operations (Note 9)... $1.48 $1.83
Loss from discontinued energy marketing
services operations........................ (.18) (.02)
Loss on disposal of energy marketing
services operations........................ (.46) -
_____ _____
NET INCOME..................................... $ .84 $1.81
===== =====
EARNINGS PER COMMON SHARE -- DILUTED
Income from continuing operations (Note 9)... $1.45 $1.76
Loss from discontinued energy marketing
services operations........................ (.18) (.02)
Loss on disposal of energy marketing
services operations........................ (.45) -
_____ _____
NET INCOME..................................... $ .82 $1.74
===== =====
____________________________________________________________________________
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 March At December
31, 1998 31, 1997*
(Unaudited)
_____________________________________________________________________________
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Gas utility and other plant.................... $ 5,018,135 $ 5,004,139
Accumulated depreciation and amortization...... (1,979,341) (1,949,483)
___________ ___________
Net gas utility and other plant........... 3,038,794 3,054,656
___________ ___________
Exploration and production properties.......... 3,777,012 3,710,619
Accumulated depreciation and amortization...... (2,585,700) (2,542,472)
___________ ___________
Net exploration and production properties. 1,191,312 1,168,147
___________ ___________
Net property, plant and equipment......... 4,230,106 4,222,803
___________ ___________
CURRENT ASSETS
Cash and temporary cash investments............ 126,448 65,035
Accounts receivable, less allowance for
doubtful accounts............................ 589,672 951,212
Gas stored - current portion................... 20,714 139,157
Materials and supplies (average cost method)... 30,735 30,256
Unrecovered gas costs.......................... 34,891 55,062
Deferred income taxes - current (net).......... 2,613 -
Prepayments and other current assets........... 178,073 212,919
___________ ___________
Total current assets...................... 983,146 1,453,641
___________ ___________
REGULATORY AND OTHER ASSETS
Other investments.............................. 416,031 223,900
Deferred charges and other assets (Note 3)..... 416,054 413,350
___________ ___________
Total regulatory and other assets......... 832,085 637,250
___________ ___________
Total assets.............................. $ 6,045,337 $ 6,313,694
=========== ===========
STOCKHOLDERS' EQUITY AND LIABILITIES
CAPITALIZATION
Common stockholders' equity (Notes 5,6 and 7)
Common stock, par $2.75
(Issued: 1998 - 95,711,150 shares;
1997 - 95,623,281 shares).................. $ 263,206 $ 262,964
Capital in excess of par value............... 567,484 566,755
Retained earnings............................ 1,571,342 1,539,587
Treasury stock, at cost (1998 - 1,270 shares;
1997 - 659 shares)......................... (73) (38)
Unearned compensation........................ (8,251) (10,950)
___________ ___________
Total common stockholders' equity......... 2,393,708 2,358,318
Long-term debt................................. 1,304,613 1,552,890
___________ ___________
Total capitalization...................... 3,698,321 3,911,208
___________ ___________
CURRENT LIABILITIES
Current maturities on long-term debt........... 154,000 154,000
Commercial paper............................... 493,200 238,700
Accounts payable............................... 190,585 651,365
Estimated rate contingencies and
refunds (Note 3)............................. 38,734 29,112
Amounts payable to customers................... 21,693 880
Taxes accrued.................................. 162,155 125,056
Deferred income taxes - current (net).......... - 13,735
Temporary replacement reserve - gas
inventory.................................... 73,780 -
Other current liabilities...................... 157,918 173,393
Net liabilities of discontinued
operations (Note 4).......................... 27,422 -
___________ ___________
Total current liabilities................. 1,319,487 1,386,241
___________ ___________
DEFERRED CREDITS
Deferred income taxes.......................... 727,666 712,118
Accumulated deferred investment tax credits.... 26,102 26,658
Deferred credits and other liabilities......... 273,761 277,469
___________ ___________
Total deferred credits.................... 1,027,529 1,016,245
___________ ___________
COMMITMENTS AND CONTINGENCIES
___________ ___________
Total stockholders' equity and liabilities $ 6,045,337 $ 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)
_____________________________________________________________________________
Three Months to March 31
________________________
1998 1997
_____________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations................ $ 138,033 $ 173,028
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities
Depreciation and amortization................ 83,658 75,038
Pension cost (credit)........................ (13,883) (12,677)
Stock award amortization..................... 1,662 1,449
Deferred income taxes-net.................... (3,777) 4,949
Changes in current assets and
current liabilities
Accounts receivable-net.................... 19,346 (46,090)
Inventories................................ 94,576 132,558
Unrecovered gas costs...................... 20,171 15,491
Accounts payable........................... (153,504) (107,295)
Estimated rate contingencies and refunds... 9,622 (3,737)
Amounts payable to customers............... 20,813 -
Taxes accrued.............................. 37,990 54,870
Temporary replacement reserve - gas
inventory................................ 73,780 53,881
Other-net.................................. 8,995 33,551
Changes in other assets and
other liabilities.......................... 13,033 (11,105)
Other-net.................................... 1,704 (1)
_________ _________
Net cash provided by continuing operations 352,219 363,910
Net cash provided by discontinued operations. 49,744 28,888
_________ _________
Net cash provided by operating activities 401,963 392,798
_________ _________
CASH FLOWS USED IN INVESTING ACTIVITIES
Plant construction and other property additions.. (100,609) (105,303)
Proceeds from dispositions of property, plant
and equipment-net.............................. (2,056) (1,541)
Cost of other investments........................ (190,863) (2,316)
_________ _________
Net cash used in investing activities.... (293,528) (109,160)
Net cash used in discontinued operations......... (844) (840)
_________ _________
Net cash used in investing activities.... (294,372) (110,000)
_________ _________
CASH FLOWS PROVIDED BY (OR USED IN) FINANCING ACTIVITIES
Issuance of common stock......................... 2,889 3,750
Repayments of long-term debt..................... (161,698) (104,000)
Commercial paper-net............................. 253,658 (140,432)
Dividends paid................................... (46,386) (46,044)
Purchase of treasury stock....................... (252,462) (1,595)
Sale of treasury stock........................... 161,712 1,602
Other-net........................................ (71) (115)
_________ _________
Net cash used in financing activities.... (42,358) (286,834)
_________ _________
Net increase (or decrease) in cash
and temporary cash investments......... 65,233 (4,036)
CASH AND TEMPORARY CASH INVESTMENTS AT JANUARY 1. 65,035 44,524
_________ _________
CASH AND TEMPORARY CASH INVESTMENTS AT MARCH 31.. $ 130,268 $ 40,488
========= =========
Continuing operations............................ $ 126,448 $ 25,521
Discontinued operations.......................... 3,820 14,967
_________ _________
Total cash and temporary cash
investments at March 31................ $ 130,268 $ 40,488
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for
Interest (net of amounts capitalized).......... $ 11,793 $ 13,416
Income taxes (net of refunds).................. $ 5,578 $ (14,019)
Non-cash financing activities
Issuance of common stock under benefit plans... $ (560) $ (4,081)
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)
_____________________________________________________________________________
Three Months to March 31
________________________
1998 1997
_____________________________________________________________________________
NET INCOME..................................... $77,895 $171,491
OTHER COMPREHENSIVE INCOME, NET OF TAX
Foreign currency translation adjustment..... 288 -
_______ ________
COMPREHENSIVE INCOME........................... $78,183 $171,491
======= ========
_____________________________________________________________________________
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 $31.3 million and
$15.7 million at March 31, 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 $7.4
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 $13.9 million and $17.0 million at March 31, 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 Company expects that its
transition out of the wholesale energy trading and marketing businesses
will be completed by December 31, 1998. The results of operations of these
activities for the quarters ended March 31, 1998 and 1997 have been classified
as Discontinued Operations in the Consolidated Statement of Income. The
assets and liabilities of these operations at March 31, 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 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 March 31, 1998 are
as follows:
_______________________________________________________________________________
At March
31, 1998
_______________________________________________________________________________
(In Thousands)
Gas utility and other plant............................... $20,609
Accumulated depreciation and amortization................. (8,638)
_______
Net gas utility and other plant........................ 11,971
Current assets............................................ 337,415
Other assets.............................................. (568)
________
Total assets........................................... $348,818
________
Liability for estimated loss on disposal.................. $ 66,000
Other current liabilities................................. 310,018
Deferred credits.......................................... 222
________
Total liabilities...................................... $376,240
________
Net liabilities........................................ $(27,422)
========
______________________________________________________________________________
Summarized results of operations of the discontinued operations are as
follows:
______________________________________________________________________________
Three Months to March 31
_______________________________
1998 1997
______________________________________________________________________________
(In Thousands)
Total operating revenues................... $792,586 $554,831
Operating expenses......................... (818,105) (557,501)
________ ________
Operating loss before
income taxes............................ (25,519) (2,670)
Income tax benefit......................... 9,011 1,643
Other income............................... 80 182
Interest charges........................... (810) (692)
_______ _______
Loss from discontinued operations.......... $(17,238) $(1,537)
======== =======
Estimated loss on disposal
before income taxes*....................... $(66,000) $ -
Income tax benefit......................... 23,100 -
________ ________
Net loss on disposal*...................... $(42,900) $ -
======== ========
______________________________________________________________________________
* Includes $22.0 million pretax provision ($14.3 million after taxes) for
expected operating losses during the shutdown period April 1, 1998 through
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.................. 79 219 3,153
- - - -
Performance shares-net......... 5 13 226
(239) - -
Stock awards-net............... 4 10 189
(152) - -
Amortization and adjustment.... - - (998)
3,090 - -
Purchase of treasury stock....... - - -
- - (4,559) (252,462)
Sale of treasury stock........... - - -
- - 2,921 161,712
Conversion of debentures......... - - (1,841)
- - 1,638 90,715
______ ________ ________
________ ______ ________
At March 31, 1998................ 95,711 $263,206 $567,484 $
(8,251) (1) $ (73)
====== ======== ========
======== ====== ========
________________________________________________________________________________
____________________________
</TABLE>
(6) The Company's 7 1/4% Convertible Subordinated Debentures, due December
15, 2015, were convertible into shares of the Company's common stock at an
initial conversion price of $54 per share. On January 23, 1998, the Company
called for redemption the entire principal amount outstanding totaling $246.2
million. 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, on January 15, 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, $499.4 million of consolidated
retained earnings was free from such restrictions at March 31, 1998.
(8) During March 1998, CNG International Corporation (CNG International)
purchased an additional 9.05% ownership interest in two gas utility holding
companies, Sodigas Pampeana S.A. and Sodigas Sur S.A., and an additional 5.0%
ownership interest in an electric utility holding company, Buenos Aires
Energy Company (BAECO), from Loma Negra in Argentina. At March 31, 1998, CNG
International owned 21.55% of each of the gas utility holding companies and
25.0% of BAECO, and its aggregate investment in these Argentine companies was
$124.3 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 March 31, 1998,
CNG Internationals investment in the Alinta project totaled $143.2 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 each of the quarters ended March 31, 1998 and 1997 follows
(income and share amounts in thousands):
_______________________________________________________________________________
Income From
Continuing Per Share
Operations Shares Amount
_______________________________________________________________________________
For the three months ended March 31, 1998
Basic EPS................................. $138,033 93,008 $1.48
======== ====== =====
Effect of dilutive securities:
Exercise of stock options............... 604
Vesting of performance shares........... 369
Conversion of 7 1/4% Convertible
Subordinated Debentures................. 1,578 2,490
________ ______
Diluted EPS............................... $139,611 96,471 $1.45
======== ====== =====
_______________________________________________________________________________
For the three months ended March 31, 1997
Basic EPS................................. $173,028 94,593 $1.83
======== ====== =====
Effect of dilutive securities:
Exercise of stock options............... 652
Vesting of performance shares........... 354
Conversion of 7 1/4% Convertible
Subordinated Debentures................. 3,014 4,559
________ _______
Diluted EPS............................... $176,042 100,158 $1.76
======== ======= =====
_______________________________________________________________________________
(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
adoption of these new accounting standards is not expected to have a material
effect on the Companys financial position, results of operations or cash
flows.
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
quarter of the year. In addition to satisfying cash requirements for
operations, capital expenditures, and dividend payments in the current year
quarter period, available cash was used to make additional investments in
Argentina and Australia.
Due to the significant amount of revenues generated during the first quarter,
the balance sheet at the end of March customarily shows an increase in cash and
temporary cash investments and an increase in accounts receivable over balances
at the end of the previous year. However, the balance of accounts receivable
at March 31, 1998 is less than the balance at December 31, 1997 due to the
reclassification of certain amounts to "Net assets of discontinued operations"
in 1998 and lower regulated gas sales in the first quarter of 1998 due to warm
winter weather.
The inventory of stored gas was reduced during the first quarter of the year
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 three months of 1998 was $73.8 million compared to $53.9 million
in the first quarter of 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
principally from internal cash generation. 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.
On February 13, 1998, the Company entered into a $250 million short-term credit
agreement with a bank. This agreement expired on May 13, 1998. The Company
also has a $775 million short-term credit agreement with a group of banks,
which is scheduled to expire on June 26, 1998; however, the Company expects
that this agreement will be renewed or replaced with a comparable agreement.
Borrowings under such credit agreements may be used for general corporate
purposes, including the support of commercial paper notes, and to temporarily
finance capital expenditures. There were no amounts outstanding under these
credit agreements at March 31, 1998. If necessary, additional external
financing during the remainder of 1998 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.
Reference is made to Note 6 to the consolidated financial statements, page
7, regarding the Company's redemption and conversion of its 7 1/4% Convertible
Subordinated Debentures during the first quarter of 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 ENDED MARCH 31, 1998 AND 1997
SYSTEM RESULTS
The Company reported net income for the first three months of 1998 of $77.9
million, or $.84 per share, compared with net income of $171.5 million, or
$1.81 per share, in the first three months of 1997. Earnings for the first
quarter of 1998, however, include charges in connection with the Company's
decision to discontinue its wholesale energy trading and marketing operations
amounting to $60.1 million after taxes, or $.64 per share (see Note 4 to the
consolidated financial statements, page 5). The Company recognized a loss on
these discontinued operations in the first quarter of 1997 amounting to
$1.5 million after taxes, or $.02 per share. Income from continuing
operations in the first quarter of 1998 was $138.0 million, or $1.48 per
share, compared to $173.0 million, or $1.83 per share, in the first three
months of 1997.
Results from continuing operations in the first quarter of 1998 reflect warmer
weather and lower average wellhead prices for natural gas and oil compared
with last year. These factors were partially mitigated by increased gas and
oil production and ongoing cost containment efforts.
Weather in the Company's retail service territories in the 1998 first quarter
was 13.6% warmer than 1997 and 20.5% warmer than normal. The warmer weather
resulted in lower space-heating sales by the Company's distribution
subsidiaries and reduced transportation volumes by the transmission operations.
OPERATING REVENUES
Regulated gas sales revenues decreased $195.7 million, to $611.9 million, in
the first three months of 1998 compared to the prior year period, as sales
volumes decreased 27.1 billion cubic feet (Bcf) to 94.9 Bcf due to warm winter
weather. Average sales rates and volumes both declined during the 1998 quarter
for each of the Company's major customer classes -- residential, commercial
and industrial. Lower average sales rates for each category reflect lower gas
purchase prices in 1998. Nonregulated gas sales revenues increased $26.2
million, to $131.6 million, with sales volumes increasing 11.1 Bcf to 49.8 Bcf,
due in large part to the inclusion in 1998 of gas sales by CNG Retail Services
Corporation (CNG Retail).
Gas transportation and storage revenues increased $23.9 million in the first
three months of 1998, to $166.4 million. Gas transportation revenues increased
$23.8 million compared to 1997 as higher average rates more than offset the
effect of lower volumes.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Other operating revenues increased $1.0 million in the first three months of
1998, to $89.2 million. Revenues from the sale of oil and condensate
production increased $4.3 million due to higher volumes. Revenues from the
sale of products extracted from natural gas decreased $5.2 million in the
first quarter of 1998 due largely to lower sales rates for by-products at
CNG Transmission Corporation (CNG Transmission). Other revenues increased
$1.9 million in the first quarter of 1998 due to increases in miscellaneous
revenue categories.
OPERATING EXPENSES
Operating expenses, excluding income taxes, declined $96.1 million in the first
three months of 1998, to $764.3 million. Total purchased gas expense declined
$97.1 million, to $405.0 million. Decreased volume requirements in connection
with warm winter weather and lower average purchase prices during the first
quarter of 1998 were the primary reasons for the decline in purchased gas
expense. Liquids, capacity and other products purchased declined $2.9 million,
to $44.3 million, due in part to reduced purchases of pipeline capacity by CNG
Transmission. Combined operation and maintenance expense in the first quarter
of 1998 was $176.9 million, a decrease of $4.1 million, due largely to lower
royalties paid and lower miscellaneous operating expenses. Depreciation and
amortization increased $8.7 million, due chiefly to higher gas and oil
production in the 1998 first quarter. Taxes, other than income taxes,
declined slightly, to $54.4 million.
Income taxes decreased $16.7 million in the first quarter of 1998 reflecting
pretax income from continuing operations of $207.5 million in that quarter,
compared to pretax income from continuing operations of $259.2 million in the
prior year period.
OTHER INCOME
Total other income declined $2.2 million, to $2.4 million, in the first quarter
of 1998. Interest revenues were $1.5 million in the first quarter of 1998, up
$1.2 million compared to the 1997 period due in part to the resolution of
certain regulatory matters in the prior year. "Other-net" declined $3.4
million during the 1998 quarter due largely to charges incurred in connection
with the redemption in 1998 of the Convertible Subordinated Debentures
(see Note 6 to the consolidated financial statements, page 7).
INTEREST CHARGES
Total interest charges in the first three months of 1998 increased
$1.1 million, to $29.8 million, due primarily to interest expense related
to the $300 million of debentures issued in the fourth quarter of 1997.
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.
_____________________________________________________________________________
Three Months to
March 31
___________________
1998 1997*
_____________________________________________________________________________
OPERATING INCOME BEFORE INCOME TAXES (In Millions)
Distribution................................ $ 137.6 $ 172.4
Transmission................................ 61.0 71.7
Exploration and production.................. 34.7 38.3
Other....................................... 1.0 (.9)
Corporate and eliminations.................. .6 1.8
________ ________
Total..................................... $ 234.9 $ 283.3
======== ========
OPERATING REVENUES (In Millions)
Distribution................................ $ 685.4 $ 858.2
Transmission................................ 145.7 147.4
Exploration and production.................. 164.0 165.3
Other....................................... 44.6 10.6
Corporate and eliminations.................. (40.5) (37.8)
________ ________
Total..................................... $ 999.2 $1,143.7
======== ========
GAS SALES (In Bcf)
Distribution................................ 95.1 122.0
Exploration and production.................. 39.5 39.3
Other....................................... 11.8 -
Eliminations................................ (1.7) (.6)
________ ________
Total sales............................... 144.7 160.7
======== ========
GAS TRANSPORTATION (In Bcf)
Distribution................................ 62.8 55.5
Transmission................................ 215.7 258.4
Exploration and production.................. .1 .2
Eliminations................................ (52.5) (63.6)
________ ________
Total transportation...................... 226.1 250.5
======== ========
_____________________________________________________________________________
* 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
$137.6 million in the first three months of 1998, down $34.8 million from the
1997 quarter, due chiefly to warmer weather. Distribution throughput in the
first quarter of 1998 declined 11% to 157.9 Bcf, reflecting weather that was
both warmer than normal and warmer than 1997. The effect of lower combined
operation and maintenance expense in the first quarter of 1998 helped to
mitigate the impact of the warm winter weather.
Residential gas sales volumes declined 19.8 Bcf in the first three months of
1998 to 72.8 Bcf. The distribution operations transported 4.7 Bcf of gas in
the first quarter of 1998 on behalf of former residential sales customers who
now purchase gas from other suppliers, including CNG Retail. Sales to
commercial customers declined 6.3 Bcf to 21.0 Bcf while volumes transported
to these customers increased 2.6 Bcf to 18.7 Bcf. Total deliveries to
industrial customers decreased .7 Bcf, to 38.3 Bcf, compared with the prior
year. Industrial transport volumes were up .2 Bcf to 37.3 Bcf, while sales
volumes declined .9 Bcf to 1.0 Bcf. Off-system transport volumes were down
.2 Bcf in the 1998 quarter, to 2.1 Bcf.
TRANSMISSION
Operating income before income taxes of the gas transmission operations in the
1998 first quarter was $61.0 million, down $10.7 million from $71.7 million in
the 1997 period. The decline in operating results in 1998 was due principally
to lower rates for natural gas liquids and the favorable impact of the
settlement of certain regulatory issues in the 1997 quarter. Transmission
throughput decreased 42.7 Bcf in the first quarter of 1998, to 215.7 Bcf,
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 $34.7 million in the first three months of 1998, compared to
$38.3 million in the first quarter of 1997. Results for the first quarter
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.
The Companys average gas wellhead price was $2.50 per thousand cubic feet
(Mcf) in the 1998 first quarter, $.21 per Mcf lower than the 1997 quarter
but still favorable in comparison with industry-wide prices in 1998. Gas
production in the first three months of 1998 was 37.5 Bcf, up 1.2 Bcf from
36.3 Bcf in 1997. The Companys average oil wellhead price was $12.49 per
barrel in the first quarter of 1998, compared to $17.28 in the prior year
period. Oil production in the first quarter of 1998 was 2,076,100 barrels,
up 67% from 1,239,500 barrels in 1997. The increase in oil production 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 March 31, 1998 (in thousands of dollars):
______________________________________________________________________________
Operating revenues..................................... $3,028,380
Operating expenses..................................... 2,510,233
Operating income before income taxes............... 518,147
Income taxes........................................... 139,528
Other income........................................... 10,349
Interest charges....................................... 105,055
Income from continuing operations...................... 283,913
Discontinued operations................................ (73,129)
Net income......................................... $ 210,784
Earnings per share of common stock -- basic........ $2.23*
Earnings per share of common stock -- diluted...... $2.23*
Times fixed charges earned............................. 4.41
______________________________________________________________________________
*Includes loss from discontinued operations of $.77 per share - basic ($.73
per share - diluted).
OTHER INFORMATION
STATE REGULATORY MATTERS
As previously reported, on January 5, 1998, Hope Gas, Inc. filed with the
Public Service Commission of West Virginia for a $14.5 million annual revenue
increase. The rate increase request is intended to cover improvements and
extensions made to its pipeline system. If approved, the new rates would
become effective November 1, 1998.
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 will be made later in 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%.
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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Concluded)
EXPLORATION AND PRODUCTION
CNG Producing, acting alone or with partners, was the high bidder on three
tracts offered at the federal governments March 18, 1998 Gulf of Mexico lease
sale. The Companys 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 bids must still be
accepted by the government.
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, 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.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material new legal proceedings instituted in the first
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
as then pending, except as noted below.
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 may have been
contaminated with polychlorinated biphenyls (PCBs). The practices were
initially reported to the EPA in 1995 after a routine environmental survey
conducted by East Ohio Gas. A final complaint outlining alleged violations
of PCB regulations by East Ohio Gas is expected to be issued by the EPA and
settlement of the matter is expected imminently. Accordingly, East Ohio Gas
expects to pay a penalty of approximately $200,000 to the EPA in June, 1998.
The Company's previously provided reserves are considered adequate in
connection with payment of the penalty. This matter will be settled upon
receipt by the EPA of the penalty payment and the signing of the Consent
Agreement/Consent Order (CACO) by East Ohio Gas and the EPA. In the CACO,
East Ohio Gas will neither admit nor deny the violations alleged by the EPA.
Reference is made to "State Regulatory Matters," page 14, 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 elsewhere in this report.
ITEM 6. EXHIBITS, AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
The Company filed Current Reports on Form 8-K with the SEC regarding the
following matters on the dates indicated below:
1998 Filing Date Description
________________ ___________
January 16 Impairment of Canadian oil producing properties
February 18 Two press releases re: earnings, reserves,
production and other matters
March 4 Press release re: participation in an inter-
national investment
March 25 Press release re: expected first quarter 1998
earnings
April 3 Press release re: acquisition of additional
interests in international investments
April 21 Press release re: discontinuance of wholesale
energy marketing services operations
16
<PAGE>
ITEM 6. EXHIBITS, AND REPORTS ON FORM 8-K (Concluded)
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 ended March 31, 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 March 31, 1998
(27) Financial Data Schedule has been filed electronically
______________________________________________________________________________
17
<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
May 15, 1998
18
<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 ended March 31, 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 March 31, 1998 is filed
herewith
(27) Financial Data Schedule is filed herewith
______________________________________________________________________________
EXHIBIT 11
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
COMPUTATION OF PER COMMON SHARE EARNINGS
(In Thousands, Except Per Share Data)
_______________________________________________________________________________
Per Share
Net Income Shares Amount*
_______________________________________________________________________________
For the three months ended March 31, 1998
EARNINGS PER COMMON SHARE -- BASIC
Income from continuing operations......... $138,033 93,008 $1.48
Loss from discontinued energy
marketing services operations........... (17,238) (.18)
Loss on disposal of energy
marketing services operations........... (42,900) (.46)
_______ _______ _____
NET INCOME................................ $ 77,895 93,008 $ .84
======== ======= =====
EARNINGS PER COMMON SHARE -- DILUTED
Income from continuing operations......... $138,033 93,008
Effect of dilutive securities:
Exercise of stock options............... 604
Vesting of performance shares........... 369
Conversion of 7 1/4% Convertible
Subordinated Debentures................. 1,578 2,490
________ ______
Income from continuing operations,
as adjusted............................. 139,611 96,471 $1.45
Loss from discontinued energy
marketing services operations........... (17,238) (.18)
Loss on disposal of energy marketing
services operations..................... (42,900) (.45)
________ _______ _____
NET INCOME, AS ADJUSTED $79,473 96,471 $ .82
======= ======= =====
_______________________________________________________________________________
For the three months ended March 31, 1997
EARNINGS PER COMMON SHARE -- BASIC
Income from continuing operations......... $173,028 94,593 $1.83
Loss from discontinued energy
marketing services operations............ (1,537) (.02)
Loss on disposal of energy
marketing services operations............ - -
________ _______ _____
NET INCOME................................ $171,491 94,593 $1.81
======== ======= =====
EARNINGS PER COMMON SHARE -- DILUTED
Income from continuing operations......... $173,028 94,593
Effect of dilutive securities:
Exercise of stock options............... 652
Vesting of performance shares........... 354
Conversion of 7 1/4% Convertible
Subordinated Debentures................. 3,014 4,559
________ _______
Income from continuing operations,
as adjusted............................. 176,042 100,158 $1.76
Loss from discontinued energy
marketing services operations........... (1,537) (.02)
Loss on disposal of energy marketing
services operations..................... - -
________ _______ _____
NET INCOME, AS ADJUSTED $174,505 100,158 $1.74
======== ======= =====
_______________________________________________________________________________
*Prior year 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 March 31 1998
_____________________________________________________________________________
Earnings:
Income from continuing operations......................... $283,913
Add income taxes.......................................... 139,528
________
Income from continuing operations
before income taxes..................................... 423,441
Distributed income from unconsolidated investees,
less equity in earnings thereof......................... (152)
________
Subtotal................................................ 423,289
________
Add fixed charges:
Interest on long-term debt, including amortization
of debt discount and expense less premium............. 106,715
Other interest expense.................................. 5,977
Portion of rentals deemed to be representative
of the interest factor................................ 9,580
Fixed charges associated with 50% projects with debt.... 1,934
________
TOTAL FIXED CHARGES......................................... 124,206
________
TOTAL EARNINGS.............................................. $547,495
========
RATIO OF EARNINGS TO FIXED CHARGES.......................... 4.41
========
_____________________________________________________________________________
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<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 MARCH 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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