UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED
SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 1-3196
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CONSOLIDATED NATURAL GAS COMPANY
A DELAWARE CORPORATION
CNG TOWER, 625 LIBERTY AVENUE, PITTSBURGH, PA 15222-3199
TELEPHONE (412) 690-1000
IRS EMPLOYER IDENTIFICATION NUMBER 13-0596475
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes___X___ No_______
Number of shares of Common Stock, $2.75 Par Value, outstanding at October 29,
1999: 95,928,496
<PAGE>
CONSOLIDATED NATURAL GAS COMPANY
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended September 30, 1999
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
for the Three and Nine Months Ended September 30, 1999 and 1998.. 1
CONDENSED CONSOLIDATED BALANCE SHEET
at September 30, 1999 (Unaudited), and December 31, 1998..... 2
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
for the Nine Months Ended September 30, 1999 and 1998........ 3
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
for the Three and Nine Months Ended September 30, 1999 and 1998 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................ 23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................... 24
ITEM 2. CHANGES IN SECURITIES.................................. 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................ 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 24
ITEM 5. OTHER INFORMATION...................................... 24
ITEM 6. EXHIBITS, AND REPORTS ON FORM 8-K...................... 24
SIGNATURES....................................................... 26
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Natural Gas Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(Unaudited) (Thousands of Dollars)
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________
Nine Months to Three Months to
September 30 September 30
________________________ ______________________
1999 1998 1999 1998
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
OPERATING REVENUES
Regulated gas sales.............................. $ 943,463 $ 952,262 $ 121,342 $132,644
Nonregulated gas sales........................... 421,327 345,829 134,091 106,426
__________ __________ __________ ________
Total gas sales.............................. 1,364,790 1,298,091 255,433 239,070
Gas transportation and storage................... 412,422 396,517 107,942 109,599
Other............................................ 341,281 258,433 142,235 74,779
__________ __________ __________ ________
Total operating revenues (Note 3)............ 2,118,493 1,953,041 505,610 423,448
__________ __________ __________ ________
OPERATING EXPENSES
Purchased gas.................................... 604,902 613,206 71,079 86,097
Liquids, capacity and other products purchased... 193,114 105,327 73,839 32,270
Operation expense................................ 468,172 446,880 157,071 140,329
Maintenance...................................... 76,846 60,500 28,380 20,502
Depreciation and amortization.................... 277,750 252,937 95,854 83,713
Taxes, other than income taxes................... 143,692 130,115 34,388 35,021
__________ __________ __________ ________
Subtotal..................................... 1,764,476 1,608,965 460,611 397,932
__________ __________ __________ ________
Operating income before income taxes......... 354,017 344,076 44,999 25,516
Income taxes..................................... 33,248 84,425 1,561 (449)
__________ __________ __________ ________
Operating income............................. 320,769 259,651 43,438 25,965
__________ __________ __________ ________
OTHER INCOME (DEDUCTIONS)
Interest revenues................................ 1,716 2,291 481 407
Merger-related expense (Note 2) ................. (173,010) - (7,672) -
Other-net........................................ 8,995 15,546 5,418 8,530
__________ __________ __________ ________
Total other income (deductions).............. (162,299) 17,837 (1,773) 8,937
__________ __________ __________ ________
Income before interest charges............... 158,470 277,488 41,665 34,902
__________ __________ __________ ________
INTEREST CHARGES
Interest on long-term debt....................... 76,899 80,341 24,714 25,915
Other interest expense........................... 20,563 13,251 9,327 5,622
Allowance for funds used during construction..... (8,775) (6,578) (3,196) (2,262)
__________ __________ __________ ________
Total interest charges....................... 88,687 87,014 30,845 29,275
__________ __________ __________ ________
INCOME FROM CONTINUING OPERATIONS................ 69,783 190,474 10,820 5,627
DISCONTINUED OPERATIONS (Note 5)
Loss from discontinued energy marketing
services operations, net of applicable
tax benefit.................................... - (17,238) - -
Income (loss) from disposal of energy marketing
services operations, including provision for
operating losses during the phase out period,
net of applicable tax or tax benefit........... - (29,486) - 2,425
_________ __________ ________ ________
NET INCOME....................................... $ 69,783 $ 143,750 $ 10,820 $ 8,052
========= ========= ======== ========
EARNINGS PER COMMON SHARE -- BASIC
Income from continuing operations (Note 9)..... $.73 $2.01 $.11 $.06
Loss from discontinued operations.............. - (.18) - -
Income (loss) from disposal of
discontinued operations...................... - (.31) - .02
_____ _____ _____ ____
NET INCOME....................................... $.73 $1.52 $.11 $.08
===== ===== ==== ====
EARNINGS PER COMMON SHARE -- DILUTED
Income from continuing operations (Note 9)..... $.72 $1.99 $.11 $.06
Loss from discontinued operations.............. - (.17) - -
Income (loss) from disposal of
discontinued operations...................... - (.31) - .02
_____ _____ ____ ____
NET INCOME....................................... $.72 $1.51 $.11 $.08
===== ===== === ====
____________________________________________________________________________________________________________
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
1
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
Consolidated Natural Gas Company and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
_____________________________________________________________________________
At September At December
30, 1999 31, 1998
(Unaudited)
_____________________________________________________________________________
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Gas utility and other plant.................... $ 5,175,908 $ 5,091,793
Accumulated depreciation and amortization...... (2,100,812) (1,999,484)
___________ ___________
Net gas utility and other plant........... 3,075,096 3,092,309
___________ ___________
Exploration and production properties.......... 4,379,466 4,080,672
Accumulated depreciation and amortization...... (2,888,321) (2,734,517)
___________ ___________
Net exploration and production properties. 1,491,145 1,346,155
___________ ___________
Net property, plant and equipment......... 4,566,241 4,438,464
___________ ___________
CURRENT ASSETS
Cash and temporary cash investments............ 113,703 135,453
Accounts receivable, less allowance for
doubtful accounts............................ 347,831 562,297
Gas stored - current portion................... 138,314 120,665
Materials and supplies (average cost method)... 26,256 27,940
Unrecovered gas costs.......................... 37,797 34,860
Deferred income taxes - current (net).......... 1,607 21,786
Prepayments and other current assets........... 278,491 258,899
___________ ___________
Total current assets...................... 943,999 1,161,900
___________ ___________
REGULATORY AND OTHER ASSETS
Other investments ............................. 349,384 302,307
Deferred charges and other assets.............. 519,451 459,229
___________ ___________
Total regulatory and other assets......... 868,835 761,536
___________ ___________
Total assets.............................. $ 6,379,075 $ 6,361,900
=========== ===========
STOCKHOLDERS' EQUITY AND LIABILITIES
CAPITALIZATION
Common stockholders' equity (Notes 6 and 7)
Common stock, par $2.75
(Issued: 1999 - 95,948,452 shares;
1998 - 95,944,551 shares).................. $ 263,858 $ 263,848
Capital in excess of par value............... 567,329 571,972
Retained earnings............................ 1,523,280 1,591,543
Treasury stock, at cost (1999 - 19,956
shares; 1998 - 495,123 shares)............. (1,206) (26,359)
Unearned compensation........................ - (1,396)
___________ ___________
Total common stockholders' equity......... 2,353,261 2,399,608
Long-term debt (Note 8)........................ 1,763,015 1,379,729
___________ ___________
Total capitalization...................... 4,116,276 3,779,337
___________ ___________
CURRENT LIABILITIES
Current maturities on long-term debt........... 21,375 111,125
Commercial paper............................... 560,338 558,900
Accounts payable............................... 312,284 423,695
Estimated rate contingencies and
refunds (Note 4)............................. 48,016 78,266
Amounts payable to customers................... 18,542 48,339
Taxes accrued.................................. 40,569 122,788
Other current liabilities...................... 187,862 201,224
__________ __________
Total current liabilities................. 1,188,986 1,544,337
___________ ___________
DEFERRED CREDITS
Deferred income taxes.......................... 817,627 780,928
Accumulated deferred investment tax credits.... 22,844 24,475
Deferred credits and other liabilities......... 233,342 232,823
___________ ___________
Total deferred credits.................... 1,073,813 1,038,226
___________ ___________
COMMITMENTS AND CONTINGENCIES
___________ ___________
Total stockholders' equity and liabilities $ 6,379,075 $ 6,361,900
=========== ===========
_____________________________________________________________________________
The Notes to Consolidated Financial Statements are an integral part of this
statement.
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
Consolidated Natural Gas Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited) (Thousands of Dollars)
_____________________________________________________________________________
Nine Months to
September 30
_____________________
1999 1998*
_____________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations................ $ 69,783 $ 190,474
Adjustments to reconcile income from continuing
operations to net cash provided by
operating activities
Depreciation and amortization................ 277,750 252,937
Pension cost (credit)-net.................... (50,985) (42,190)
Stock award amortization..................... 6,607 5,178
Deferred income taxes-net.................... 47,746 (9,141)
Changes in current assets and
current liabilities
Accounts receivable-net.................... 214,287 262,908
Inventories................................ (15,965) (46,078)
Unrecovered gas costs...................... (2,937) 32,143
Accounts payable........................... (77,410) (58,029)
Estimated rate contingencies and refunds... (30,250) 51,338
Amounts payable to customers............... (29,797) 39,556
Taxes accrued.............................. (82,218) (40,027)
Other-net.................................. (32,448) (1,174)
Changes in other assets and
other liabilities.......................... 13,710 (18,173)
Other-net.................................... 126 1,663
_________ _________
Net cash provided by continuing operations 307,999 621,385
Net cash provided by
discontinued operations................... 1,106 39,686
_________ _________
Net cash provided by operating activities 309,105 661,071
_________ _________
CASH FLOWS USED IN INVESTING ACTIVITIES
Plant construction and other property additions
Acquisition of exploration and
production assets............................ (123,276) -
Other.......................................... (339,107) (372,529)
Proceeds from dispositions of property, plant
and equipment-net.............................. (5,365) (5,131)
Cost of other investments........................ (40,686) (199,909)
_________ _________
Net cash used in continuing operations... (508,434) (577,569)
Net cash provided by discontinued operations..... - 36,162
_________ _________
Net cash used in investing activities.... (508,434) (541,407)
_________ _________
CASH FLOWS PROVIDED BY (OR USED IN) FINANCING ACTIVITIES
Issuance of common stock......................... 196 7,229
Issuance of long-term debt....................... 396,680 -
Repayments of long-term debt..................... (104,000) (161,698)
Commercial paper-net............................. 898 445,267
Dividends paid................................... (139,081) (139,333)
Purchase of treasury stock....................... (12,292) (252,545)
Sale of treasury stock........................... 32,520 161,712
Other-net........................................ - (406)
_________ _________
Net cash provided by financing activities 174,921 60,226
_________ _________
Net increase (or decrease) in cash and
temporary cash investments............... (24,408) 179,890
CASH AND TEMPORARY CASH INVESTMENTS AT JANUARY 1. 138,112 65,035
_________ _________
CASH AND TEMPORARY CASH INVESTMENTS AT SEPTEMBER 30 $ 113,704 $ 244,925
========= =========
Continuing operations............................ $ 113,703 $ 236,114
Discontinued operations.......................... 1 8,811
_________ _________
Total cash and temporary cash investments
at Sept.30............................... $ 113,704 $ 244,925
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for
Interest (net of amounts capitalized).......... $ 71,612 $ 71,653
Income taxes (net of refunds).................. $ 19,415 $ 74,839
Non-cash financing activities
Issuance of common stock under benefit plans... $ 171 $ (362)
Conversion of 7 1/4% Convertible
Subordinated Debentures...................... $ - $ 88,467
_____________________________________________________________________________
*Certain amounts reclassified for comparative purposes.
The Notes to Consolidated Financial Statements are an integral part of this
statement.
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
Consolidated Natural Gas Company and Subsidiaries
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited) (Thousands of Dollars)
<TABLE>
<CAPTION>
________________________________________________________________________________________
Nine Months to Three Months to
September 30 September 30
______________________ ___________________________
1999 1998 1999 1998
_____________________________________________________________________________________
<S> <C> <C> <C> <C>
NET INCOME.................... $69,783 $143,750 $10,820 $ 8,052
OTHER COMPREHENSIVE INCOME,
NET OF TAX
Foreign currency
translation adjustment..... 1,131 (1,669) (576) (1,992)
_______ ________ _______ _______
COMPREHENSIVE INCOME.......... $70,914 $142,081 $10,244 $ 6,060
======= ======== ======= =======
____________________________________________________________________________________
</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, 1998, 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 1998 (1998 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) On February 22, 1999, the Company and Dominion Resources, Inc. (DRI)
announced that a definitive merger agreement was approved by the boards of
directors of both companies. DRI is a holding company with businesses in
regulated and competitive electric power, natural gas and oil development
and selected financial services. DRI's principal business subsidiary is
Virginia Electric and Power Company, a regulated public utility engaged in
the generation, transmission, distribution and sale of electric energy in
Virginia and northeastern North Carolina.
The Company announced on May 11, 1999 that, after careful consideration,
the Board of Directors had unanimously rejected an unsolicited merger proposal
from Columbia Energy Group. In addition, on May 11, 1999, the Company
announced that the Board of Directors had unanimously approved an Amended and
Restated Agreement and Plan of Merger (Amended Plan of Merger) with DRI.
Under the Amended Plan of Merger, the Company's shareholders would receive a
combination of DRI common stock and cash with an aggregate firm value of $66.60
per share of common stock. Up to 60% of the consideration to the Company's
shareholders will be in the form of DRI common stock and the balance will be
in cash. The merger transaction is conditioned, among other things, upon the
opinions of counsel on the tax-free nature of the stock portion of the
transaction and approvals of various federal regulatory agencies.
On June 30, 1999, the shareholders of both the Company and DRI voted to approve
the merger of the two companies.
The Pennsylvania Public Utility Commission, the Public Service Commission of
West Virginia, the Virginia State Corporation Commission (VSCC) and the North
Carolina Utilities Commission have each approved the pending merger. VSCC
approval was based upon an agreement announced August 9, 1999 among the
Company, DRI and the VSCC staff to sell or spin off Virginia Natural Gas,
Inc. (VNG), a wholly-owned subsidiary of the Company, within 12 months after
the merger is completed. In addition, the VSCC intends to issue another order
when it determines that approvals pending from the SEC are not inconsistent
with the VSCC's September 17, 1999 order.
While not required for consummation of the merger, The Public Utility
Commission of Ohio has filed a statement with the SEC in support of the
pending merger.
On November 5, 1999, the Federal Trade Commission (FTC) accepted a proposed
consent agreement that would allow DRI to acquire the Company, provided DRI
divests VNG to alleviate perceived anticompetitive effects that would result
from the merger. The FTC's decision is subject to public comment until
December 7, 1999, after which the FTC will decide whether to make it final.
The Federal Energy Regulatory Commission (FERC) voted on November 10, 1999,
to conditionally approve the planned merger. The companies intend to file
a response with the FERC accepting the conditions.
5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The companies have applied for and expect to receive required SEC approval of
the merger under the Public Utility Holding Company Act of 1935 (PUHCA). It is
expected that DRI will become a registered holding company under PUHCA at the
time of the merger. Under one of the proposed structures, the Company will
be merged into a wholly-owned subsidiary of DRI (New CNG). The Company's
subsidiaries will become subsidiaries of New CNG, with New CNG becoming a
registered holding company under PUHCA.
Shareholder approval of the merger constituted a change of control as defined
in the Company's stock incentive plans. Accordingly, the vesting of stock
options and certain other stock awards was accelerated pursuant to the
provisions of the plans and/or award agreements. Also, the change of control
effectively granted limited stock appreciation rights to holders of vested
stock options and certain other stock awards. Specifically, the plan and/or
award agreements permitted the holder to elect, during the period July 1, 1999
through August 29, 1999, to receive a cash payment in exchange for surrendering
vested stock options and awards. This provision covered outstanding vested
stock options granted since 1989 to approximately 700 employees. The amount
received was based on the value determined per the associated plans, which
considered the option exercise price, award value, and the change of control
price as defined in the plans. Based on the value of the awards expected to
be surrendered and cashed out, the Company recognized a charge to Other Income
(Deductions) for the quarter ended June 30, 1999. This charge amounted to
$153.5 million and reduced second quarter net income by $96.8 million, or
$1.01 per share.
The Company also recorded charges to Other Income (Deductions) for other
merger-related costs, including direct incremental costs of the pending merger
(including fees of financial advisors, legal counsel and other costs).
These charges totaled $19.5 million and $7.7 million for the nine months and
three months ended September 30, 1999, and reduced net income by $.18 per share
and $.06 per share, respectively. The Company expects to incur additional
costs of approximately $60 million in connection with the pending merger after
the final regulatory approvals are received.
(3) Because a major portion of the gas sold or transported by the
Company's distribution and transmission operations is ultimately used for
space heating, both revenues and earnings are subject to seasonal fluctuations.
Because of the low seasonal demand for gas during the summer months, third
quarter results are usually the least significant of the year for the Company.
Seasonal fluctuations are further influenced by the timing of price relief
granted under regulation to compensate for past cost increases.
(4) 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 $37.4 million
and $59.9 million at September 30, 1999, and December 31, 1998, respectively,
including interest. These amounts are reported in the Condensed Consolidated
Balance Sheet under "Estimated rate contingencies and refunds" together with
$10.6 million and $18.4 million, respectively, which are primarily refunds
received from suppliers and refundable to customers under regulatory
procedures.
(5) 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. On July 31, 1998, the sale of the
capital stock of CNG Energy Services Corporation, formerly a wholly-owned
subsidiary of the Company, to Sempra Energy Trading, a subsidiary of Sempra
Energy, was finalized. Included in the transaction 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. Proceeds of $37.4 million were received from the sale of the
stock, as adjusted for working capital items. The Company's transition out of
the wholesale gas and electricity business was substantially complete at
December 31, 1998. The remaining net liabilities associated with discontinued
operations at September 30, 1999 and December 31, 1998 were not material.
6
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The results of operations of these activities for the three- and nine-month
periods ended September 30, 1998 are classified as "Discontinued Operations"
in the Consolidated Statement of Income. 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.
Summarized results of operations of the discontinued operations are as
follows:
_______________________________________________________________________________
Nine Months to Three Months to
September 30, 1998 September 30, 1998
_______________________________________________________________________________
(In Thousands)
Total operating revenues........ $ 792,586 $ -
Operating expenses.............. (818,105) -
________ ________
Operating loss before
income taxes............... (25,519) -
Income tax benefit.............. 9,011 -
Other income.................... 80 -
Interest charges................ (810) -
________ ________
Loss from discontinued
operations.................... $ (17,238) $ -
========= ========
Estimated income (loss)
from disposal before
income taxes.................. $ (46,446)* $ 3,699
Income tax
(provision) benefit........... 16,960 (1,274)
________ ________
Net income
(loss) from disposal.......... $(29,486)* $ 2,425
======== ========
______________________________________________________________________________
* Amounts include $25.4 million pretax provision ($16.5 million after taxes)
for expected operating losses during the shutdown period.
The quarters ended June 30, 1998 and September 30, 1998 included adjustments
to revise certain previous estimates of shut-down costs in light of terms
included in the Company's agreement to sell the capital stock of CNG Energy
Services Corporation.
(6) A summary of the changes in common stock, capital in excess of par value,
unearned compensation and treasury stock subsequent to December 31, 1998,
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, 1998............. 95,945 $263,848 $571,972 $(1,396) (495) $ (26,359)
Common stock issued
Stock options and awards....... 3 10 173 - - -
Amortization and adjustment.... - - - 1,449 - -
Purchase of treasury stock....... - - - - (225) (12,292)
Sale of treasury stock........... - - (4,816) (53) 700 37,445
______ ________ ________ ________ ______ _________
At September 30, 1999............ 95,948 $263,858 $567,329 $ - (20) $ (1,206)
====== ======== ======== ======== ====== =========
________________________________________________________________________________________________________________
</TABLE>
7
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) One of the indentures relating to the Company's debenture issues
contains restrictions on dividend payments by the Company and acquisitions of
its capital stock. Under these provisions, $411.5 million of consolidated
retained earnings was free from such restrictions at September 30, 1999.
(8) On September 21, 1999, the Company sold $400.0 million of 7 1/4% Notes
Due October 1, 2004. The Notes are noncallable. Cash proceeds from the sale
were received on September 24, 1999.
(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 nine months ended September 30, 1999 and
1998 follows (income and share amounts in thousands):
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________________________
Nine Months to September 30 Three Months to September 30
________________________________ _________________________________
Income From Income From Per
Continuing Per Share Continuing Share
Operations Shares Amount Operations Shares Amount
___________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
1999
Basic EPS................................. $ 69,783 95,691 $.73 $ 10,820 95,928 $.11
======== ====== ==== ======== ====== ====
Effect of dilutive securities:
Exercise of stock options............... 382 25
Vesting of performance shares........... 294 -
________ ______ _______ ______
Diluted EPS............................... $ 69,783 96,367 $.72 $ 10,820 95,953 $.11
======== ====== ==== ======== ====== ====
_____________________________________________________________________________________________________________________________
1998
Basic EPS................................. $190,474 94,664 $2.01 $ 5,627 95,509 $.06
======== ====== ===== ======= ====== ====
Effect of dilutive securities:
Exercise of stock options............... 528 330
Vesting of performance shares........... 375 376
Conversion of 7 1/4% Convertible
Subordinated Debentures................. 1,578 821 - -
________ ______ _______ ______
Diluted EPS............................... $192,052 96,388 $1.99 $ 5,627 96,215 $.06
======== ====== ===== ======= ====== ====
___________________________________________________________________________________________________________________________
</TABLE>
(10) In June 1998, the Financial Accounting Standards Board (FASB) 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. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133." SFAS No. 137 delays, by one year, the effective date of SFAS No. 133.
Accordingly, the Company must adopt the provisions of SFAS No. 133 effective
January 1, 2001. The adoption of SFAS No. 133 is not expected to have a
material effect on the Company's financial position, results of operations or
cash flows.
8
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) The following tables present segment information pertaining to the
Company's operations:
<TABLE>
<CAPTION>
_________________________________________________________________________________________________________________________________
Exploration
and Corporate and
Distribution Transmission Production Other Eliminations Total
_________________________________________________________________________________________________________________________________
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS TO SEPTEMBER 30, 1999
Operating Revenues
Nonaffiliated
Regulated gas sales . . . . . $943,463 $ - $ - $ - $ - $ 943,463
Nonregulated gas sales. . . . - - 285,274 136,053 - 421,327
Gas transportation and
storage . . . . . . . . . . 151,035 260,895 376 116 - 412,422
Liquid sales. . . . . . . . . - - 229,337 - - 229,337
Other . . . . . . . . . . . . 18,910 31,904 42,392 18,670 68 111,944
________ ________ ________ _______ ________ __________
Total nonaffiliated. . . . 1,113,408 292,799 557,379 154,839 68 2,118,493
Affiliated. . . . . . . . . . . 4,401 85,052 38,293 18,379 (146,125) -
________ ________ ________ _______ ________ __________
Total operating revenues. . 1,117,809 377,851 595,672 173,218 (146,057) 2,118,493
Operating expenses
Purchased gas. . . . . . . . . . 553,089 11,752 33,556 145,119 (138,614) 604,902
Liquids, capacity and other
products purchased . . . . . . - 46,556 141,168 6,494 (1,104) 193,114
Operation expense. . . . . . . . 227,596 88,366 141,008 22,008 (10,806) 468,172
Maintenance. . . . . . . . . . . 39,866 19,918 16,268 163 631 76,846
Depreciation and amortization. . 57,997 42,104 172,051 1,295 4,303 277,750
Taxes, other than income taxes . 103,072 27,009 7,035 1,006 5,570 143,692
________ ________ ________ _______ _______ __________
Operating income before
income taxes. . . . . . . . 136,189 142,146 84,586 (2,867) (6,037) 354,017
________ ________ ________ _______ _______ __________
Income taxes . . . . . . . . . . 31,939 49,793 18,513 (495) (66,502) 33,248
Interest revenues. . . . . . . . (10) 2,362 670 1,009 (2,315) 1,716
Equity in earnings of
equity investees . . . . . . . - 4,465 4,505 4,297 - 13,267
Merger-related expense . . . . . - - - - 173,010 173,010
Other revenues-net . . . . . . . (3,122) (71) 96 (1,167) (8) (4,272)
Interest charges . . . . . . . . 34,890 17,165 21,909 1,884 12,839 88,687
________ ________ ________ _______ _______ __________
Income from continuing
operations . . . . . . . . . . $ 66,228 $ 81,944 $ 49,435 $ (117) $(127,707) $ 69,783
======== ======== ======== ======= ======= ==========
Gas Sales (In Bcf) . . . . . . . 150.4 - 144.4 61.6 (29.3) 327.1
===== ===== ==== ==== ===== =====
Gas Transportation (In Bcf). . . 151.4 474.7 .4 - (136.2) 490.3
===== ===== ==== ==== ===== =====
_________________________________________________________________________________________________________________________________
</TABLE>
9
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
_________________________________________________________________________________________________________________________________
Exploration
and Corporate and
Distribution Transmission Production Other Eliminations Total
_________________________________________________________________________________________________________________________________
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS TO SEPTEMBER 30, 1998
Operating revenues
Nonaffiliated
Regulated gas sales . . . . . $951,139 $ - $ - $ 1,123 $ - $ 952,262
Nonregulated gas sales. . . . - - 275,742 70,087 - 345,829
Gas transportation and
storage . . . . . . . . . . 134,988 260,903 311 315 - 396,517
Liquid sales. . . . . . . . . - - 160,318 - - 160,318
Other . . . . . . . . . . . . 19,377 43,168 22,506 8,182 4,882 98,115
________ _________ ________ ________ ________ ___________
Total nonaffiliated. . . . 1,105,504 304,071 458,877 79,707 4,882 1,953,041
Affiliated. . . . . . . . . . . 3,600 69,103 7,855 14,867 (95,425) -
________ _________ ________ ________ ________ ___________
Total operating revenues . 1,109,104 373,174 466,732 94,574 (90,543) 1,953,041
Operating expenses
Purchased gas . . . . . . . . . 574,491 34,973 25,727 69,749 (91,734) 613,206
Liquids, capacity and other
products purchased. . . . . . - 12,053 88,413 4,861 - 105,327
Operation expense . . . . . . . 216,763 94,271 120,082 16,845 (1,081) 446,880
Maintenance . . . . . . . . . . 33,952 18,850 6,186 83 1,429 60,500
Depreciation and amortization . 59,838 48,215 139,706 2,075 3,103 252,937
Taxes, other than income taxes. 91,946 26,682 5,640 767 5,080 130,115
________ _________ ________ ________ ________ __________
Operating income before
income taxes . . . . . . . 132,114 138,130 80,978 194 (7,340) 344,076
________ _________ ________ ________ ________ __________
Income taxes. . . . . . . . . . 33,708 44,895 17,199 (1,697) (9,680) 84,425
Interest revenues . . . . . . . 831 3,884 772 1,681 (4,877) 2,291
Equity in earnings of
equity investees. . . . . . . - 7,483 3,382 6,098 - 16,963
Other revenues-net. . . . . . . 1,878 687 195 136 (4,313) (1,417)
Interest charges. . . . . . . . 36,548 18,957 15,956 7,295 8,258 87,014
________ _________ ________ ________ ________ __________
Income from continuing
operations. . . . . . . . . . $ 64,567 $ 86,332 $ 52,172 $ 2,511 $(15,108) $ 190,474
======== ========= ======== ======== ======== ==========
Gas Sales (In Bcf). . . . . . . 139.9 - 120.8 28.3 (7.5) 281.5
===== ===== ===== ==== ====== =====
Gas Transportation (In Bcf) . . 141.9 439.9 .4 - (122.5) 459.7
===== ===== ===== ==== ====== =====
_________________________________________________________________________________________________________________________________
</TABLE>
10
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
_________________________________________________________________________________________________________________________________
Exploration
and Corporate and
Distribution Transmission Production Other Eliminations Total
_________________________________________________________________________________________________________________________________
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS TO SEPTEMBER 30, 1999
Operating revenues
Nonaffiliated
Regulated gas sales . . . . . $121,342 $ - $ - $ - $ - $ 121,342
Nonregulated gas sales. . . . - - 98,679 35,412 - 134,091
Gas transportation and
storage . . . . . . . . . . 32,268 75,453 105 116 - 107,942
Liquid sales. . . . . . . . . - - 98,557 - - 98,557
Other . . . . . . . . . . . . 5,524 13,787 17,211 7,088 68 43,678
________ _________ ________ ________ ________ ___________
Total nonaffiliated. . . . 159,134 89,240 214,552 42,616 68 505,610
Affiliated. . . . . . . . . . . 765 23,536 15,279 5,762 (45,342) -
________ _________ ________ ________ ________ ___________
Total operating revenues . 159,899 112,776 229,831 48,378 (45,274) 505,610
Operating expenses
Purchased gas . . . . . . . . . 54,687 3,985 15,423 39,353 (42,369) 71,079
Liquids, capacity and other
products purchased. . . . . . - 11,059 60,398 2,980 (598) 73,839
Operation expense . . . . . . . 72,891 31,162 50,697 7,755 (5,434) 157,071
Maintenance . . . . . . . . . . 14,918 7,792 5,248 46 376 28,380
Depreciation and amortization . 19,311 14,117 60,706 408 1,312 95,854
Taxes, other than income taxes. 21,424 8,503 2,547 293 1,621 34,388
________ _________ ________ ________ ________ __________
Operating income before
income taxes . . . . . . . (23,332) 36,158 34,812 (2,457) (182) 44,999
________ _________ ________ ________ ________ __________
Income taxes. . . . . . . . . . (14,444) 12,061 8,069 (1,027) (3,098) 1,561
Interest revenues . . . . . . . (51) 618 170 255 (511) 481
Equity in earnings of
equity investees. . . . . . . - 992 1,563 3,777 - 6,332
Merger-related expense. . . . . - - - - 7,672 7,672
Other revenues-net. . . . . . . (418) 37 36 (796) 227 (914)
Interest charges. . . . . . . . 11,211 5,214 8,825 753 4,842 30,845
________ _________ ________ ________ ________ __________
Income from continuing
operations. . . . . . . . . . $(20,568) $ 20,530 $ 19,687 $ 1,053 $ (9,882) $ 10,820
======== ========= ======== ======== ======== ==========
Gas Sales (In Bcf). . . . . . . 15.2 - 48.6 16.2 (9.3) 70.7
==== ===== ==== ==== ==== ====
Gas Transportation (In Bcf). . 38.9 109.2 .1 - (35.4) 112.8
==== ===== ==== ==== ===== =====
_________________________________________________________________________________________________________________________________
</TABLE>
11
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Concluded)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
<TABLE>
<CAPTION>
_________________________________________________________________________________________________________________________________
Exploration
and Corporate and
Distribution Transmission Production Other Eliminations Total
_________________________________________________________________________________________________________________________________
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS TO SEPTEMBER 30, 1998
Operating revenues
Nonaffiliated
Regulated gas sales . . . . . $132,644 $ - $ - $ - $ - $ 132,644
Nonregulated gas sales. . . . - - 82,766 23,660 - 106,426
Gas transportation and
storage . . . . . . . . . . 30,637 78,541 105 316 - 109,599
Liquid sales. . . . . . . . . - - 49,601 - - 49,601
Other . . . . . . . . . . . . 6,061 7,355 7,533 2,844 1,385 25,178
________ _________ ________ ________ ________ ___________
Total nonaffiliated. . . . 169,342 85,896 140,005 26,820 1,385 423,448
Affiliated. . . . . . . . . . . 337 18,964 5,360 5,817 (30,478) -
________ _________ ________ ________ ________ ___________
Total operating revenues . 169,679 104,860 145,365 32,637 (29,093) 423,448
Operating expenses
Purchased gas . . . . . . . . . 70,276 11,650 9,823 23,102 (28,754) 86,097
Liquids, capacity and other
products purchased. . . . . . - 884 28,820 2,532 34 32,270
Operation expense . . . . . . . 65,337 30,988 38,676 6,109 (781) 140,329
Maintenance . . . . . . . . . . 11,416 6,695 1,950 48 393 20,502
Depreciation and amortization . 19,621 15,962 46,226 703 1,201 83,713
Taxes, other than income taxes. 23,056 8,250 1,769 501 1,445 35,021
________ _________ ________ ________ ________ __________
Operating income before
income taxes . . . . . . . (20,027) 30,431 18,101 (358) (2,631) 25,516
________ _________ ________ ________ ________ __________
Income taxes. . . . . . . . . . (11,280) 10,723 2,407 (1,706) (593) (449)
Interest revenues . . . . . . . 607 1,700 184 581 (2,665) 407
Equity in earnings of
equity investees. . . . . . . - 2,925 1,242 3,614 - 7,781
Other revenues-net. . . . . . . 118 509 77 (449) 494 749
Interest charges. . . . . . . . 11,297 7,801 5,366 2,427 2,384 29,275
________ _________ ________ ________ ________ __________
Income from continuing
operations. . . . . . . . . . $(19,319) $ 17,041 $ 11,831 $ 2,667 $ (6,593) $ 5,627
======== ========= ======== ======== ======== ==========
Gas Sales (In Bcf). . . . . . . 15.0 - 40.6 11.7 (4.1) 63.2
==== ===== ==== === ==== ====
Gas Transportation (In Bcf) . . 36.8 104.5 .1 - (32.6) 108.8
==== ===== ==== ==== ===== =====
_________________________________________________________________________________________________________________________________
</TABLE>
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Because of the low seasonal demand for gas during the summer months, sales and
transportation revenues are lower during this period compared to the first and
second quarters, and the third quarter results generally range from a loss to
a small profit. In addition to satisfying cash requirements for operations,
capital expenditures, and dividend payments in the current and prior year
nine-month periods, available cash was used to cash out stock options and
awards and to pay other costs in connection with the pending merger (see Note 2
to the consolidated financial statements, page 5) and to acquire exploration
and production assets during 1999 and to partially fund additional investments
in Argentina and Australia during 1998.
Due to the seasonality of the regulated subsidiaries' heating business, the
balance sheet at the end of September customarily shows a significant decrease
in accounts receivable from the balance at the end of the previous year. Also,
by September 30, gas inventories which had been withdrawn during the early part
of the year have been substantially replenished for the forthcoming heating
season.
As discussed in Note 8 to the consolidated financial statements, page 8, during
September 1999 the Company sold $400 million of long-term notes. The proceeds
from this transaction will be used for general corporate purposes, including
reduction of short-term debt and funding of capital expenditures. During the
remainder of 1999, 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. Borrowings under the Company's $1 billion short-term credit
agreement may be used for general corporate purposes, including the support of
commercial paper notes, and to temporarily finance capital expenditures. This
credit agreement is scheduled to expire on June 22, 2000. There were no
amounts outstanding under this credit agreement at September 30, 1999.
Due to the pending merger, Fitch IBCA, Moody's Investors Service and Standard
& Poor's are reviewing the Company's rated debt for possible downgrade.
In connection with this discussion of financial condition, reference is also
made to Notes 4, 6 and 7 to the consolidated financial statements.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
(ALL PER SHARE REFERENCES, UNLESS INDICATED, ARE STATED AS BASIC EARNINGS
PER SHARE.)
RESULTS OF OPERATIONS
A major portion of the gas sold or transported by the Company's distribution
and transmission operations is ultimately used for space heating. As a
result, earnings are affected by changes in the weather. Because most of
the operating subsidiaries are subject to price regulation by federal or state
commissions, earnings can be affected by regulatory delays when price increases
are sought through general rate filings to recover certain higher costs of
operation.
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
SYSTEM RESULTS
The Company reported net income for the first nine months of 1999 of $69.8
million, or $.73 per share, compared with net income of $143.8 million, or
$1.52 per share, in the first nine months of 1998. For the third quarter of
1999, the Company reported net income of $10.8 million, or $.11 a share,
compared with net income of $8.1 million, or $.08 a share, in the prior year
quarter.
Earnings for both 1998 periods reflect the Company's decision to discontinue
its wholesale energy trading and marketing operations (see Note 5 to the
consolidated financial statements, page 6). The Company recognized a loss on
these discontinued operations in the first nine months of 1998 of $46.7
million. During the third quarter of 1998, the Company recognized income from
discontinued operations of $2.4 million which reflected the sale of the
Company's wholesale gas marketing business and adjustments to reserves provided
earlier in 1998 in connection with the decision to discontinue these
operations. Accordingly, income from continuing operations in the first nine
months and third quarter of 1998 was $190.5 million, or $2.01 per share, and
$5.7 million, or $.06 a share, respectively.
Income from continuing operations for the first nine months of 1999 includes
costs related to the pending merger with DRI amounting to $173.0 million (see
Note 2 to the consolidated financial statements, page 5) and workforce
reduction costs totaling $10.8 million, while third quarter 1999 results
include merger-related expenses of $7.7 million and workforce reduction
costs of $2.4 million. Income from continuing operations for the first
nine months of 1998 included a gain of $13.9 million associated with a
favorable resolution of a regulatory contingency. Excluding special items,
income from continuing operations for the first nine months of 1999 would
have been $191.1 million, or $1.99 per share, compared to $176.6 million,
or $1.87 per share, in the first nine months of 1998. Third quarter 1999
income from continuing operations, excluding special items, was $18.0 million,
or $.19 per share.
Results from continuing operations for the first nine months of 1999 reflect
colder weather and increased gas and oil production, partially offset by lower
average wellhead prices for gas and oil compared with the comparable 1998
period. Weather in the Company's retail service territories in the first nine
months of 1999 was 17.0% colder than 1998 but still 7.4% warmer than normal.
Higher average gas and oil wellhead prices and increased gas and oil production
contributed to improved results during the third quarter of 1999. The
Company's distribution operations normally experience an operating loss in the
third quarter because of low seasonal demand for gas in the summer months.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
OPERATING REVENUES
Regulated gas sales revenues decreased $8.8 million, to $943.5 million, in the
first nine months of 1999 with sales volumes increasing 10.4 billion cubic feet
(Bcf), to 150.1 Bcf. Sales volumes increased during the first nine months of
1999 for the Company's residential and commercial customers and declined
slightly for industrial customers. Average sales rates for all three customer
groups declined compared to the first nine months of 1998 reflecting lower
purchased gas costs in 1999. In the 1999 third quarter, regulated gas sales
revenues decreased $11.3 million, to $121.4 million, compared to the 1998 third
quarter as sales volumes increased slightly, to 15.2 Bcf. Sales volumes for
residential and commercial customers were up in the 1999 third quarter on a
combined basis, while average sales prices for those customer groups declined.
Average sales rates for industrial customers increased during the quarter,
while sales volumes were flat.
In the first nine months of 1999, nonregulated gas sales revenues increased
$75.5 million, to $421.3 million, with sales volumes increasing 35.2 Bcf,
to 177.0 Bcf. Third quarter 1999 nonregulated gas sales revenues increased
$27.7 million, to $134.1 million, as sales volumes increased 7.3 Bcf, to
55.5 Bcf. Sales volume increases in both 1999 periods were due in large part
to gas sales by CNG Field Services Company and higher production and sales by
CNG Producing Company (CNG Producing).
Gas transportation and storage revenues were $412.4 million in the first nine
months of 1999, up $15.9 million from the first nine months of 1998. In the
third quarter of 1999, gas transportation and storage revenues were $107.9
million, down $1.7 million from the prior year quarter. Gas transportation
revenues increased $21.1 million in the first nine months, attributable
primarily to customers switching from sales to transportation service at
certain of the distribution subsidiaries, while storage service revenues
declined $5.2 million. Gas transportation revenues were down slightly in the
third quarter of 1999, while storage service revenues declined $1.6 million.
Other operating revenues increased $82.9 million, to $341.3 million, in the
first nine months of 1999 and increased $67.4 million, to $142.2 million, in
the third quarter. The improvements in both 1999 periods are due chiefly
to increased revenues from oil and condensate sales and from sales of products
extracted from natural gas.
OPERATING EXPENSES
Operating expenses, excluding income taxes, increased $155.6 million in the
first nine months of 1999 and $62.7 million in the third quarter. Total
purchased gas expense decreased $8.3 million in the first nine months of 1999,
to $604.9 million, and declined $15.0 million, to $71.1 million, in the third
quarter. Lower average purchase prices, partially offset by increased volume
requirements in connection with colder weather during the first quarter of
1999, was the primary reason for the decrease in the nine-month period. Lower
average purchase prices and lower purchased volumes caused the 1999 third
quarter decline. Liquids, capacity and other products purchased was higher in
both 1999 periods, increasing $87.8 million in the first nine months and $41.6
million in the third quarter. These increases were due largely to increased
oil trading activity by CNG Producing and increased purchases of pipeline
capacity by CNG Transmission Corporation (CNG Transmission). Combined
operation and maintenance expense increased $37.6 million in the first nine
months and $24.5 million in the third quarter of 1999 due primarily to
workforce reduction costs and higher royalty and maintenance expenses.
Depreciation and amortization expense increased $24.9 million in the first
nine months of 1999 and $12.2 million in the third quarter due chiefly to
higher gas and oil production in 1999. Taxes, other than income taxes,
increased $13.6 million in the first nine months of 1999 due primarily to
the timing of the recognition of certain taxes by one of the distribution
subsidiaries, and decreased slightly in the third quarter.
Income taxes declined $51.2 million in the first nine months of 1999 due to
lower pretax income. In the third quarter of 1999, income taxes increased
$2.0 million due in large part to higher pretax income in the 1999 period.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
OTHER INCOME
Total other income (deductions) declined $180.1 million in the first nine
months of 1999 and $10.7 million in the third quarter. These declines reflect
expenses totaling $173.0 million and $7.7 million recognized in the first nine
months and third quarter of 1999, respectively, in connection with the
Company's pending merger with DRI (see Note 2 to the consolidated financial
statements, page 5). Interest revenues decreased $.6 million in the first
nine months of 1999 and were flat in the third quarter. "Other-net" declined
$6.5 million in the first nine months of 1999 and $3.1 million in the third
quarter due in part to lower income from equity investments.
INTEREST CHARGES
Total interest charges of $88.7 million in the first nine months of 1999 were
up $1.7 million from the prior year period, while third quarter interest
charges increased $1.7 million, to $30.9 million. The increased interest
charges in 1999 were due largely to higher interest costs associated with
commercial paper borrowings, which more than offset reduced interest expense
from long-term debt.
In connection with the discussion of results of operations, reference is also
made to Notes 3 and 11 to the consolidated financial statements.
BUSINESS SEGMENT RESULTS
DISTRIBUTION
Operating income before income taxes of the gas distribution operations was
$136.2 million in the first nine months of 1999, compared to $132.1 million in
the first nine months of 1998. Excluding workforce reduction costs totaling
$9.3 million related to a previously announced restructuring, 1999 nine-month
operating results would have been $145.5 million. Distribution throughput in
the first nine months of 1999 increased 20.0 Bcf, to 301.8 Bcf, reflecting
weather that was 17.0% colder than the prior year period. Improved results
for the first nine months of 1999 were partially mitigated by higher
maintenance expense and higher taxes, other than income taxes.
Residential gas sales volumes increased 8.3 Bcf in the first nine months of
1999 to 114.7 Bcf. The distribution operations transported 11.8 Bcf of gas in
the first nine months of 1999, compared to 8.7 Bcf in the first nine months of
1998, on behalf of former residential sales customers who now purchase gas from
other suppliers, including CNG Retail Services Corporation. Sales to
commercial customers increased 2.5 Bcf to 33.6 Bcf while volumes transported to
these customers increased 1.4 Bcf to 30.9 Bcf. Total deliveries to industrial
customers increased 3.8 Bcf, to 104.6 Bcf, compared with the prior year.
Industrial transport volumes were up 3.9 Bcf to 102.9 Bcf, while sales volumes
declined slightly, to 1.7 Bcf. Off-system transport volumes were up 1.1 Bcf in
the first nine months of 1999, to 5.8 Bcf.
In the third quarter of 1999, the distribution operations reported an operating
loss before income taxes of $23.3 million, compared to an operating loss before
income taxes of $20.0 million in the 1998 third quarter. Results for the 1999
quarter reflect higher operating and maintenance costs. Workforce reduction
costs also reduced third quarter 1999 pretax operating results by $1.2 million.
Residential gas sales volumes of 10.5 Bcf were down .1 Bcf compared to the 1998
quarter. Gas transported on behalf of former residential sales customers
totaled 1.2 Bcf in the third quarter of 1999, up .1 Bcf from the prior year
quarter. Commercial sales volumes were up .3 Bcf, to 4.4 Bcf, while gas
transported to these customers was 4.1 Bcf, down .5 Bcf. Deliveries to
industrial customers increased 2.0 Bcf due entirely to increased transport
volumes.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
TRANSMISSION
Operating income before income taxes of the gas transmission operations in the
first nine months of 1999 was $142.1 million, up $4.0 million from the first
nine months of 1998. However, results for the first nine months of 1998
include $13.9 million resulting from the favorable resolution of a regulatory
contingency during the second quarter. Lower operation and depreciation
expenses contributed to the higher nine-month 1999 results. In the third
quarter of 1999, operating income before income taxes was $36.1 million, an
increase of $5.7 million from 1998. The improved third quarter 1999 results
were due in part to increased prices for natural gas by-products.
Transmission throughput increased 34.8 Bcf in the first nine months, due
largely to colder weather in the Northeast in early 1999, and increased 4.7 Bcf
in the third quarter compared to the prior year periods.
EXPLORATION AND PRODUCTION
The exploration and production operations reported operating income before
income taxes of $84.6 million in the first nine months of 1999, compared to
$81.0 million in the first nine months of 1998. The effect of higher gas and oil
production in the first nine months of 1999 was only partially offset by lower
average gas and oil wellhead prices. In the third quarter, operating income
before income taxes was $34.8 million, up from $18.1 million in 1998. The
improvement in the 1999 third quarter results reflects the impact of higher
average gas and oil wellhead prices and higher gas and oil production. Results
for the third quarter of 1998 reflected lower gas and oil production due in
large part to four hurricanes and tropical storms that forced temporary
shutdowns of oil and natural gas wells in the Gulf of Mexico.
The Company's average gas wellhead price was $2.15 per thousand cubic feet
(Mcf) in the first nine months of 1999, $.14 lower than 1998. In the third
quarter, the average gas price was $2.25 per Mcf, up from $2.05 in the third
quarter of 1998. Gas production in the first nine months of 1999 was 134.8 Bcf,
up 21.3 Bcf from 1998. The increase in gas production in the first nine months
of 1999 was due chiefly to increased production at the Main Pass 223 and High
Island 571 fields and new production at the Nautilus/Atlantis/Nemo complex in
the Gulf of Mexico. Third quarter gas production was 45.8 Bcf, up 9.2 Bcf from
1998 due in part to new production at the Nautilus/Atlantis/Nemo complex in the
Gulf of Mexico and at the newly-acquired Lopeno Field in South Texas.
The Company's average oil wellhead price was $12.06 per barrel in the first
nine months of 1999, down slightly from $12.18 per barrel in the prior year
period. The average oil wellhead price for the third quarter of 1999 was
$14.71 per barrel compared to $11.26 in 1998. The movement in oil prices for
both 1999 periods is consistent with the worldwide trend in prices during the
year. Oil production in the first nine months of 1999 was 7.8 million barrels,
up 34% from 5.8 million barrels in 1998. Third quarter 1999 oil production was
2.7 million barrels, up 48% from 1.8 million barrels in 1998. The increase in
oil production in both 1999 periods was due largely to new production at the
Nautilus/Atlantis/Nemo complex that began in late 1998 and early 1999,
and increased production at Neptune as the result of development work
performed in 1998.
See ITEM 3., "QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK",
page 23, for information regarding CNG Producing's use of derivatives at
September 30, 1999. In addition to these financial instruments, CNG Producing
has long-term sales contracts primarily with various cogeneration facilities
to hedge the risk of future price decreases. Minimum contract volumes and
prices for the remainder of 1999 and the following five years are summarized
below:
_______________________________________________________________________________
Volumes Weighted Average Price
Year (Bcf) (Mcf)
_______________________________________________________________________________
Remainder of 1999 5.7 $2.95
2000 19.7 $3.00
2001 15.6 $2.93
2002 11.3 $2.98
2003 8.8 $3.13
2004 8.4 $3.31
_______________________________________________________________________________
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
OTHER
The "Other" segment reported an operating loss before income taxes of $2.9
million in the first nine months of 1999, compared to operating income before
income taxes of $.3 million in the first nine months of 1998. This segment
reported an operating loss before income taxes of $2.5 million in the third
quarter of 1999, a decline of $2.2 million compared to the prior year quarter.
The decreases in both 1999 periods are due primarily to operating losses at the
Company's unregulated retail marketing subsidiaries.
SELECTED TWELVE-MONTH DATA
The following selected financial data (unaudited) relates to the twelve months
ended September 30, 1999 (in thousands of dollars):
______________________________________________________________________________
Operating revenues..................................... $2,925,858
Operating expenses..................................... 2,418,779
Operating income before income taxes............... 507,079
Income taxes........................................... 78,472
Other income (loss).................................... (145,436)
Interest charges....................................... 116,151
Income from continuing operations...................... 167,020
Discontinued operations................................ (2,221)
Net income......................................... $ 164,799
Earnings per common share -- basic................. $1.72
Earnings per common share -- diluted............... $1.71
Times fixed charges earned............................. 2.70
______________________________________________________________________________
OTHER INFORMATION
YEAR 2000 TECHNOLOGY ISSUE
Reference is made to Exhibit 99 to the Company's 1998 Form 10-K regarding the
Company's approach to addressing the Year 2000 technology issue.
PROJECT STATUS
The following summarizes the Company's progress in the major project areas
through September 30, 1999:
<TABLE>
<CAPTION>
PHASE
Continuity
PROJECT AREA Inventory Assessment Repair/ Testing Planning
Replace
<S> <C> <C> <C> <C> <C>
APPLICATION
SYSTEMS Complete Complete Repair: Complete Complete for Complete
Replacement: Critical
In progress Applications
PROCESS CONTROL
COMPONENTS Complete Complete October 1999 October 1999 Complete
TECHNICAL
INFRASTRUCTURE Complete Complete Complete Complete Complete
PHYSICAL
INFRASTRUCTURE Complete Complete In progress In progress Complete
BUSINESS Not Not Complete
PARTNERS AND Complete Complete applicable applicable
SUPPLIERS
</TABLE>
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
APPLICATION SYSTEMS. During the assessment phase, approximately 80 application
systems were identified requiring some degree of repair or replacement.
However, the Company's actions to upgrade to newer, more functional versions
of vendor software have mitigated many existing year 2000 issues. These
upgrade activities continued through mid-1999. Repair and replacement
activities for internally developed application systems began in March 1998.
All repair activities were completed by September 1999, while some
replacement activities will continue into the fourth quarter of 1999. None
of the replacement activities are considered to be critical. Testing of all
critical application systems is complete and additional testing is being
performed in the time remaining until the date change. Overall, the Company
considers all of its critical application systems portfolio to be year 2000
ready. For critical application systems, "year 2000 ready" indicates that
the Company has completed repair or replacement activities and independent
testing. Reference is made to "Risks," page 21, for information on the
status of the development of a new revenue and customer information system
for the distribution subsidiaries called "CAMP."
In July 1999, the Company implemented year 2000 change control methods
to ensure future stability in the application system and technical
infrastructure environments. On October 1, 1999, the Company implemented
a year 2000 Production Moratorium to restrict changes to application systems,
technical infrastructure and process control components.
PROCESS CONTROL COMPONENTS. For process control components inventoried by the
Company, approximately 43% are not date sensitive, and therefore are not
affected by year 2000 issues. For date sensitive components, the Company has
experienced via testing activities a year 2000 failure rate of less than 1%.
Replacement of a small number of non-compliant components will continue through
the remainder of 1999 as year 2000 compliant upgrades and replacements become
available from vendors. Unit testing activities for the Company's regulated
businesses are approximately 89% complete, while unit testing for the Company's
E&P business is 93% complete. System testing of the interaction of process
control components began in April 1999 and is expected to be completed in
October 1999.
TECHNICAL INFRASTRUCTURE. Technical infrastructure has been analyzed directly
with vendors and via the use of an external vendor research database service.
This information is being used to guide year 2000 upgrades of infrastructure as
necessary. Repair, replacement and testing activities are nearly 100% complete
for all categories of technical infrastructure, while efforts in the critical
area of application servers are 97% complete. The Company completed a
substantial portion of year 2000 upgrades by the end of 1998, and is continuing
with testing in 1999. The Company is also closely monitoring the status of
vendor-supplied products to ensure their continuing year 2000 compliance.
The Company has completed an inventory of its desktop personal computers
and continues to deploy updated desktop infrastructure that is year 2000
ready concurrent with the implementation of various new application systems.
The Company has completed testing to confirm year 2000 readiness of this
infrastructure and associated software, and has completed the implementation of
year 2000 operating system upgrades. The Company has also completed
examining the year 2000 aspects of user-created desktop files, applications and
spreadsheets and repairs are being made as necessary.
PHYSICAL INFRASTRUCTURE. The Company has completed an inventory and analysis
of gas and non-gas related physical infrastructure components that may be
subject to year 2000 problems. Of the facilities inventoried, 109 are
considered critical. The Company is currently focusing its efforts on testing
components (such as HVAC, security systems, and universal power supplies) which
are considered critical. This activity is expected to be completed in October
1999.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The Company has also focused its efforts in the facilities area on electrical
power backup. The loss of electrical power to the Company's compression
facilities is a major risk to the continued, reliable transmission and
delivery of natural gas. The Company continues to make capital improvements
to its system in case of failure of electricity suppliers. Electric generators
are being added or improved in 91 critical facilities so that CNG can generate
its own power, if needed, to run critical gas delivery systems. These
generators can also supply power to CNG's microwave telecommunications system.
Load testing, to ensure adequate power is available to continue the
transmission and delivery of natural gas, has been completed in these critical
facilities.
Where facilities are leased, the Company has identified and contacted building
managers/lessors to ensure they are actively addressing the year 2000 issue.
The Company is also using facilities information as a primary component of its
continuity planning effort.
BUSINESS PARTNER AND VENDOR RELATIONSHIPS. Strategic business partner and
vendor relationships have been identified and assessed through questionnaires
and interviews. Over 1,900 business partner and vendor relationships have
been identified and queried. Of the business partners and vendors identified,
approximately 600 are prioritized as strategic to key Company business
processes. Of these strategic relationships, over 50% have already reported to
the Company that they are either compliant or making good progress in
mitigating any year 2000 issues. In conjunction with business continuity
planning, the Company has validated its business partner inventory, obtained
updated status information, and completed risk assessments to rate each
of the critical business partners. To validate business continuity planning
assumptions, various segments of the Company are conducting face-to-face
meetings with critical business partners and developing cooperative
relationships where necessary to further mitigate risk. Risk assessment will
continue throughout 1999. The Company's analysis includes the year 2000 status
of operations in Argentina and Australia in which the Company has investments.
CONTINUITY PLANNING. CNG commenced full scale business continuity planning in
October 1998. This project seeks to complement year 2000 activities that
have been performed to date by ensuring that critical business processes are
operational during and after the date change. Business continuity planning
consists of developing and testing different types of plans, including a
"zero day" plan, a continuity plan and a recovery plan. CNG has identified
the set of critical business processes (15 major processes, 140+ sub
processes) for which continuity planning is essential. The Company has
completed development of continuity planning methodology, identified
critical business processes throughout the Company, and trained business
continuity managers to develop and coordinate plans. As of September 1999,
267 plans were identified and are completed. The majority of these plans are
related to the activities of the Company's regulated businesses, in areas such
as gas supply, gas control, transmission and storage, and distribution,
focusing on safety and continuity of gas supply as important factors. Business
continuity planning is 92% complete for this segment of the Company's
business. The Company is also actively performing recovery and zero-day
planning for application systems which are critical to continued operations.
Through continuity planning, the Company is also identifying capital
improvements which are necessary to support the various continuity plans.
The Company expects to spend $1.3 million in permanent capital improvements,
such as the purchase and deployment of power generators by the end of 1999.
This activity is currently in progress.
The Company has also performed successful rehearsals of two of its critical
continuity plans: SCADA and telecommunications. The SCADA system measures
operating conditions, flow rates, and the status of control devices, such as
flow and pressure regulators, valves and compressors, and transmits real-time
data to central control rooms. Employees at 80 critical storage, transmission
and distribution sites performed all operations manually under the assumption
that the SCADA system was unavailable. Data that is normally handled by SCADA
was collected manually and called in via CNG's microwave system,
telephones and fax machines. For further assurance, approximately 60 employees
were also stationed on hilltops, testing the viability of using radios to share
data if telephones also failed. Results of the test are being used to further
strengthen continuity plans in the SCADA and telecommunications areas.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
COSTS
Based upon project status as described above, the Company expects to spend a
total of approximately $16.0 million in connection with its Year 2000 Project
Office efforts, its use of external consultants and the repair of affected
application systems. This estimate includes capitalized costs for hardware and
software used (or expected to be used) in the testing phase, and for
application system and technical infrastructure replacements. This estimate
excludes costs incurred or expected to be incurred in connection with the
development and installation of major new application systems which are
expected to be year 2000 ready, the Company's potential share of year 2000
costs that may be incurred by partnerships and joint ventures in which the
Company participates but is not the operator, and internal labor costs other
than those of the core Project Office. As of September 30, 1999, the Company
has incurred costs approximating $9.9 million (of which $1.4 million has been
capitalized) in connection with its year 2000 efforts. Total costs incurred
as of September 30, 1999, as a proportion of the total year 2000 budget, is not
indicative of the progress of the project.
RISKS
Significant progress continues in the development of CAMP for use at Hope Gas
and EOG Energy Choice. However, previous technical difficulties and delays
have caused the Company to invoke a contingency plan which involves renovation
of the current revenue application system for the other distribution
subsidiaries and 20 related application systems to make such systems year 2000
ready. These current systems collectively address the business processes which
were to be handled by CAMP. Renovation, implementation and testing activities
have been completed in connection with this contingency plan. Under a worst
case scenario, the current revenue application systems would not be year 2000
ready by the end of 1999 for the other distribution subsidiaries and CAMP would
not be successfully implemented or year 2000 ready at Hope Gas and EOG Energy
Choice. The estimate of $16.0 million referred to above includes approximately
$3.4 million of costs in connection with the CAMP contingency plan. Concurrent
with this effort, the Company is continuing the development of CAMP and has
capitalized $62.4 million related to this project as of September 30, 1999.
The CAMP core software is a licensed product of the Company's independent
accountants, PricewaterhouseCoopers LLP (PwC), and PwC is the primary
information systems consultant on this project.
If a material year 2000 problem is not corrected in a timely manner, an
interruption in, or a failure of, certain normal business activities or
operations of the Company could occur. Such instances could materially
and adversely affect the Company's financial position, cash flows and/or
results of operations. Due to the uncertainty inherent in the year 2000 issue,
including the uncertainty of year 2000 readiness of third party vendors,
business partners and customers, the Company cannot determine at this time
whether the consequences of any year 2000 failures will have a material impact
on its financial position, cash flows or results of operations. However,
the Company's Project Office activities and the implementation of new
application systems are expected to reduce the risk of a material year 2000
failure.
ATLANTIC ALLIANCE PROJECT
On July 19, 1999, CNG Transmission and Tennessee Gas Pipeline Company, a
business unit of El Paso Energy Corporation, announced the Atlantic Alliance
Project to jointly offer natural gas transportation service of up to 750,000
dekatherms per day from the Chicago market center and the Niagara Import Point
into eastern markets. The Atlantic Alliance will combine the use of existing
facilities and rights-of-way with construction of limited incremental
facilities to provide the new services. Construction will be in phases to
correspond with customer service requests. However, the full 750,000
dekatherms per day could be available as early as November 1, 2001, pending
required approval of the Federal Energy Regulatory Commission.
The Atlantic Alliance will target developing markets in New York, Pennsylvania,
and New England. It will include access to Transcontinental Gas Pipe Line
Corporation facilities and the proposed MarketLink Project at Leidy,
Pennsylvania, and to Columbia Gas Transmission Corporation facilities and the
proposed Millennium Project at Horseheads or Greenwood, New York.
21
<PAGE>
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 five
tracts offered at the federal government's August 25, 1999 Gulf of Mexico
lease sale. The Company's bids totaled $5.7 million for the properties, three
of which are located in deepwater areas of the Gulf of Mexico. The Company's
working interests in the deepwater properties will be 50% each, while working
interests in the other two properties will be 100% each. 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 the Company's pending merger with DRI, capital
expenditures, earnings, risk management, litigation, the year 2000
technology issues and costs, environmental matters, rate and other regulatory
matters, liquidity and capital resources, and financial accounting and
reporting matters. Actual results in each instance could differ materially
from those currently anticipated in such statements, due to factors such as:
natural gas and electric industry restructuring, including ongoing state and
federal activities; the weather; demographics; general economic conditions
and specific economic conditions in the Company's distribution service areas;
developments in the legislative, regulatory and competitive environment in
which the Company operates; and other circumstances affecting anticipated
revenues and costs.
Risks in connection with the Company's year 2000 efforts include the Company's
ability to successfully identify, correct and test, in a timely manner,
potential year 2000 problems which could have a significant impact on specific
business functions or processes, and the ability of third party vendors,
business partners and customers to ensure year 2000 readiness of their systems
and business operations.
22
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As described in the 1998 Form 10-K, the Company utilizes over-the-counter (OTC)
price swap agreements, option contracts, and exchange-traded futures contracts
to manage market price risk inherent in the production, purchase and sale of
natural gas and oil and stored gas inventories.
In connection with its price risk management activities, CNG Producing has
hedged the following natural gas and crude oil production using derivatives as
of September 30, 1999:
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________________________________
FINANCIAL INSTRUMENT 1999 2000 2001 2002 2003
<C> <C> <C> <C> <C>
OIL (000 barrels)
Futures/Swaps . . . . . . . . . . . . 1,715 1,080
Weighted Average Price (per barrel) . $18.22 $19.93
Two-way Collars . . . . . . . . . . . 100 5,124
Weighted Average Price (per barrel) . $18.50-$21.00 $16.11-$19.11
GAS (million mmbtu)
Futures/Swaps . . . . . . . . . . . . 27.4 29.0 29.0 29.0 29.0
Weighted Average Price (per mmbtu). . $2.61 $2.33 $2.32 $2.35 $2.38
Three-way Collars . . . . . . . . . . 1.0 72.0 12.0 12.0 12.0
Weighted Average Price (per mmbtu). . $3.06-$3.36 $2.41-$2.61 $2.45-$2.70 $2.49-$2.74 $2.54-$2.79
Average Collar Floor Price. . . . . . $2.60 $2.10 $2.13 $2.13 $2.14
Average Differential. . . . . . . . . $0.46 $0.31 $0.32 $0.36 $0.40
___________________________________________________________________________________________________________________________________
</TABLE>
For the three-way collars above, if the market price falls below the collar
floor, then the price received will equal the market price plus the
differential.
CNG Producing's hedging activities in connection with its natural gas and
crude oil production resulted in aggregate unrealized losses at
September 30, 1999 of $53.9 million and $28.4 million, respectively.
Realized gains (losses) incurred by CNG Producing related to price risk
management activities are summarized below (in thousands):
_______________________________________________________________________________
NINE MONTHS TO THREE MONTHS TO
SEPTEMBER 30 SEPTEMBER 30
_________________ ________________
1999 1998 1999 1998
Natural Gas . . . . . . $ 110 $20,304 $(14,301) $4,201
Crude Oil . . . . . . . $(9,594) $10,863 $ (7,257) $2,887
_______________________________________________________________________________
Unrealized and realized gains and losses related to the use of derivatives do
not reflect the impact on earnings of the related physical transactions.
The effect of these physical transactions has, or is expected to, substantially
offset the financial gains and losses arising from the use of derivatives.
At September 30, 1999, unrealized gains and losses arising from the Company's
use of derivatives, other than at CNG Producing, were not material.
***************
In connection with the financial information included in PART I of this report,
reference is made to the Company's 1998 Form 10-K, including Exhibit 99 thereto,
and its quarterly reports to the SEC on Form 10-Q for the quarters ended March
31 and June 30, 1999.
23
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material new legal proceedings instituted in the third
quarter of 1999, and there have been no material developments during the
quarter in the legal proceedings disclosed in the Company's 1998 Form 10-K or
in any earlier Form 10-Q for 1999 as then pending, except as noted below.
A qui tam action (one in which the plaintiff sues for the government as well as
for itself, and gets to keep part of the recovery) was brought by Jack
Grynberg, an oil and gas entrepreneur, against a major part of the gas
industry, including the Company and several of its subsidiaries. The complaint,
which was filed on July 2, 1997, was under seal pending Department of Justice
review. The Department of Justice declined to intervene and the seal was lifted
in May 1999. The Company was served in the Western District of Louisiana on
May 1, 1999. The suit alleges fraudulent mismeasurement of gas volumes and
underreporting of gas royalties from gas production taken from federal leases.
The cases have been removed to the Eastern District of Wyoming, where a motion
to dismiss will be filed by the Company.
A class action was filed by Quinque Operating Co. and others against
approximately 300 defendants, including the Company and several of its
subsidiaries, in Stevens County Kansas. The complaint, which was served
on the Company and its subsidiaries on September 24, 1999, alleged fraud,
misrepresentation, conversion and assorted other claims, in the measurement
and payment of gas royalties from privately held gas leases. The cases have
been moved to the U.S. District Court of Kansas, pending consolidation with
the Grynberg case.
The Company believes the above complaints to be without merit. Management
believes that the ultimate resolution of the issues will not have a material
adverse effect on the Company's financial position, results of operations, or
cash flows.
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 8, 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
As previously reported, on July 1, 1999, the Company filed a Form 8-K
which included, as an Exhibit, a press release concerning the results of
the special shareholder meetings held concurrently by the Company and
DRI regarding shareholder approval of the pending merger.
24
<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 and nine months ended
September 30, 1999 and 1998
(12) Statement re Computation of Ratios:
Ratio of Earnings to Fixed Charges of Consolidated Natural Gas Company
and Subsidiaries for the twelve months ended September 30, 1999
(27) Financial Data Schedule has been filed electronically
______________________________________________________________________________
25
<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,
Nonregulated Business
and Chief Financial Officer
S. R. MCGREEVY
_______________________________________
S. R. McGreevy, Vice President,
Accounting and Financial Control
November 12, 1999
26
<PAGE>
EXHIBIT INDEX
______________________________________________________________________________
SEC
Exhibit
Number Description of Exhibit
______________________________________________________________________________
(11) Statement re Computation of Per Share Earnings:
Computations of Earnings Per Common Share -- Basic, and Earnings
Per Common Share -- Diluted of Consolidated Natural Gas Company and
Subsidiaries for the three months and nine months ended September
30, 1999 and 1998 is filed herewith
(12) Statement re Computation of Ratios:
Ratio of Earnings to Fixed Charges of Consolidated Natural Gas Company
and Subsidiaries for the twelve months ended September 30, 1999 is
filed herewith
(27) Financial Data Schedule is filed herewith
______________________________________________________________________________
EXHIBIT 11
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
________________________________________________________________________________________________________________________
Nine Months to Three Months to
September 30, 1999 September 30, 1999
_______________________________ ________________________________
Per Share Per Share
Net Income Shares Amount Net Income Shares Amount
________________________________________________________________________________________________________________________
<S>
EARNINGS PER COMMON SHARE -- BASIC
Income from continuing operations......... $ 69,783 95,691 $.73 $ 10,820 95,928 $.11
________ ______ ____ _______ ______ ____
NET INCOME................................ $ 69,783 95,691 $.73 $ 10,820 95,928 $.11
======== ====== ==== ======== ====== ====
EARNINGS PER COMMON SHARE -- DILUTED
Income from continuing operations......... $ 69,783 95,691 $ 10,820 95,928
Effect of dilutive securities:
Exercise of stock options............... 382 25
Vesting of performance shares........... 294 -
________ _______ _______ ______
Income from continuing operations,
as adjusted............................. 69,783 96,367 $.72 10,820 95,953 $.11
________ _______ ____ ________ ______ ___
NET INCOME, AS ADJUSTED................... $ 69,783 96,367 $.72 $ 10,820 95,953 $.11
======== ======= ==== ======== ====== ====
________________________________________________________________________________________________________________________
Nine Months to Three Months to
September 30, 1998 September 30, 1998
_______________________________ ________________________________
Per Share Per Share
Net Income Shares Amount Net Income Shares Amount
________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
EARNINGS PER COMMON SHARE -- BASIC
Income from continuing operations......... $190,474 94,664 $2.01 $ 5,627 95,509 $.06
Loss from discontinued operations......... (17,238) (.18) - -
Income (loss) from disposal of
discontinued operations................. (29,486) (.31) 2,425 .02
________ _______ _____ _______ ______ ____
NET INCOME................................ $143,750 94,664 $1.52 $ 8,052 95,509 $.08
======== ======= ===== ======= ====== ====
EARNINGS PER COMMON SHARE -- DILUTED
Income from continuing operations......... $190,474 94,664 $ 5,627 95,509
Effect of dilutive securities:
Exercise of stock options............... 528 330
Vesting of performance shares........... 375 376
Conversion of 7 1/4% Convertible
Subordinated Debentures............... 1,578 821 - -
________ _______ _______ ______
Income from continuing operations,
as adjusted............................. 192,052 96,388 $1.99 5,627 96,215 $.06
Loss from discontinued operations......... (17,238) (.17) - -
Income (loss) from disposal of
discontinued operations................. (29,486) (.31) 2,425 .02
________ _______ _____ _______ ______ ____
NET INCOME, AS ADJUSTED................... $145,328 96,388 $1.51 $ 8,052 96,215 $.08
======== ======= ===== ======= ====== ====
</TABLE>
EXHIBIT 12
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
_____________________________________________________________________________
Twelve Months to September 30 1999
_____________________________________________________________________________
Earnings:
Income from continuing operations......................... $167,020
Add income taxes.......................................... 78,472
________
Income from continuing operations before income taxes... 245,492
Distributed income from unconsolidated investees,
less equity in earnings thereof......................... (7,617)
________
Subtotal................................................ 237,875
________
Add fixed charges:
Interest on long-term debt, including amortization
of debt discount and expense less premium............. 102,865
Other interest expense.................................. 26,971
Portion of rentals deemed to be representative
of the interest factor............................... 9,692
________
TOTAL FIXED CHARGES......................................... 139,528
________
TOTAL EARNINGS.............................................. $377,403
========
RATIO OF EARNINGS TO FIXED CHARGES.......................... 2.70
========
_____________________________________________________________________________
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITEM 1 OF CONSOLIDATED NATURAL
GAS COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-START> JAN-01-1999
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,075,096
<OTHER-PROPERTY-AND-INVEST> 1,491,145
<TOTAL-CURRENT-ASSETS> 943,999
<TOTAL-DEFERRED-CHARGES> 519,451
<OTHER-ASSETS> 349,384
<TOTAL-ASSETS> 6,379,075
<COMMON> 263,858
<CAPITAL-SURPLUS-PAID-IN> 527,049
<RETAINED-EARNINGS> 1,523,280
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,353,261
0
0
<LONG-TERM-DEBT-NET> 1,763,015
<SHORT-TERM-NOTES> 0
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0
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0
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</TABLE>
