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
MARCH 31, 1999
COMMISSION FILE NUMBER 1-3196
-------------
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
-------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes___X___ No_______
Number of shares of Common Stock, $2.75 Par Value, outstanding at April 30,
1999: 95,733,731
<PAGE>
CONSOLIDATED NATURAL GAS COMPANY
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended March 31, 1999
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF INCOME (Unaudited)
for the Quarters Ended March 31, 1999 and 1998............... 1
CONDENSED CONSOLIDATED BALANCE SHEET
at March 31, 1999 (Unaudited), and December 31, 1998......... 2
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
for the Quarters Ended March 31, 1999 and 1998............... 3
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Unaudited)
for the Quarters Ended March 31, 1999 and 1998............... 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................... 19
ITEM 2. CHANGES IN SECURITIES.................................. 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................ 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 19
ITEM 5. OTHER INFORMATION...................................... 19
ITEM 6. EXHIBITS, AND REPORTS ON FORM 8-K...................... 19
SIGNATURES....................................................... 21
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Natural Gas Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(Unaudited) (Thousands of Dollars)
____________________________________________________________________________
Three Months to March 31
________________________
1999 1998
____________________________________________________________________________
OPERATING REVENUES
Regulated gas sales............................ $ 626,760 $ 611,946
Nonregulated gas sales......................... 151,870 131,575
__________ _________
Total gas sales............................ 778,630 743,521
Gas transportation and storage................. 184,222 166,433
Other.......................................... 83,596 89,211
__________ _________
Total operating revenues (Note 3).......... 1,046,448 999,165
__________ _________
OPERATING EXPENSES
Purchased gas.................................. 415,474 405,011
Liquids, capacity and other
products purchased........................... 58,034 44,305
Operation expense ............................. 152,173 156,710
Maintenance.................................... 24,039 20,207
Depreciation and amortization.................. 87,320 83,658
Taxes, other than income taxes................. 66,101 54,424
__________ _________
Subtotal................................... 803,141 764,315
__________ _________
Operating income before income taxes....... 243,307 234,850
Income taxes................................... 75,663 69,497
__________ _________
Operating income........................... 167,644 165,353
__________ _________
OTHER INCOME
Interest revenues.............................. 654 1,524
Other-net...................................... (145) 953
__________ _________
Total other income......................... 509 2,477
__________ _________
Income before interest charges............. 168,153 167,830
__________ _________
INTEREST CHARGES
Interest on long-term debt..................... 26,560 28,397
Other interest expense......................... 5,292 3,523
Allowance for funds used during construction... (2,686) (2,123)
__________ _________
Total interest charges..................... 29,166 29,797
__________ _________
INCOME FROM CONTINUING OPERATIONS.............. 138,987 138,033
DISCONTINUED OPERATIONS (Note 5)
Loss from discontinued energy marketing
services operations, net of applicable
tax benefit.................................. - (17,238)
Loss from disposal of energy marketing
services operations, including
provision for operating losses
during the phase out period,
net of applicable tax benefit................ - (42,900)
__________ _________
NET INCOME..................................... $ 138,987 $ 77,895
========== ==========
EARNINGS PER COMMON SHARE -- BASIC
Income from continuing operations (Note 8)... $1.46 $1.48
Loss from discontinued operations............ - (.18)
Loss from disposal of discontinued
operations................................. - (.46)
_____ _____
NET INCOME..................................... $1.46 $ .84
===== =====
EARNINGS PER COMMON SHARE -- DILUTED
Income from continuing operations (Note 8)... $1.44 $1.45
Loss from discontinued operations............ - (.18)
Loss from disposal of discontinued
operations................................. - (.45)
_____ _____
NET INCOME..................................... $1.44 $ .82
===== =====
____________________________________________________________________________
The Notes to Consolidated Financial Statements are an integral part of this
statement.
1
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
Consolidated Natural Gas Company and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
_____________________________________________________________________________
At March At December
31, 1999 31, 1998
(Unaudited)
_____________________________________________________________________________
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Gas utility and other plant.................... $ 5,128,195 $ 5,091,793
Accumulated depreciation and amortization...... (2,034,507) (1,999,484)
___________ ___________
Net gas utility and other plant........... 3,093,688 3,092,309
___________ ___________
Exploration and production properties.......... 4,203,060 4,080,672
Accumulated depreciation and amortization...... (2,774,989) (2,734,517)
___________ ___________
Net exploration and production properties. 1,428,071 1,346,155
___________ ___________
Net property, plant and equipment......... 4,521,759 4,438,464
___________ ___________
CURRENT ASSETS
Cash and temporary cash investments............ 65,570 135,453
Accounts receivable, less allowance for
doubtful accounts............................ 600,654 562,297
Gas stored - current portion................... 13,634 120,665
Materials and supplies (average cost method)... 30,301 27,940
Unrecovered gas costs.......................... 24,089 34,860
Deferred income taxes - current (net).......... 21,625 21,786
Prepayments and other current assets........... 181,685 258,899
___________ ___________
Total current assets...................... 937,558 1,161,900
___________ ___________
REGULATORY AND OTHER ASSETS
Other investments.............................. 307,627 302,307
Deferred charges and other assets.............. 463,276 459,229
___________ ___________
Total regulatory and other assets......... 770,903 761,536
___________ ___________
Total assets.............................. $ 6,230,220 $ 6,361,900
=========== ===========
STOCKHOLDERS' EQUITY AND LIABILITIES
CAPITALIZATION
Common stockholders' equity (Notes 6 and 7)
Common stock, par $2.75
(Issued: 1999 - 95,944,551 shares;
1998 - 95,944,551 shares).................. $ 263,848 $ 263,848
Capital in excess of par value............... 570,647 571,972
Retained earnings............................ 1,685,044 1,591,543
Treasury stock, at cost (1999 - 565,434 shares;
1998 - 495,123 shares)..................... (30,328) (26,359)
Unearned compensation........................ (1,086) (1,396)
___________ ___________
Total common stockholders' equity......... 2,488,125 2,399,608
Long-term debt................................. 1,380,002 1,379,729
___________ ___________
Total capitalization...................... 3,868,127 3,779,337
___________ ___________
CURRENT LIABILITIES
Current maturities on long-term debt........... 107,125 111,125
Commercial paper............................... 388,258 558,900
Accounts payable............................... 291,833 423,695
Estimated rate contingencies and
refunds (Note 4)............................. 53,896 78,266
Amounts payable to customers................... 43,674 48,339
Taxes accrued.................................. 130,076 122,788
Temporary replacement reserve - gas inventory.. 108,080 -
Other current liabilities...................... 177,522 201,224
___________ ___________
Total current liabilities................. 1,300,464 1,544,337
___________ ___________
DEFERRED CREDITS
Deferred income taxes.......................... 806,604 780,928
Accumulated deferred investment tax credits.... 23,931 24,475
Deferred credits and other liabilities......... 231,094 232,823
___________ ___________
Total deferred credits.................... 1,061,629 1,038,226
___________ ___________
COMMITMENTS AND CONTINGENCIES
___________ ___________
Total stockholders' equity and liabilities $ 6,230,220 $ 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)
_____________________________________________________________________________
Three Months to March 31
________________________
1999 1998*
_____________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations................ $ 138,987 $ 138,033
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities
Depreciation and amortization................ 87,320 83,658
Pension cost (credit)-net.................... (16,995) (12,759)
Stock award amortization..................... 2,320 1,662
Deferred income taxes-net.................... 23,828 (3,777)
Changes in current assets and
current liabilities
Accounts receivable-net.................... (36,150) 19,346
Inventories................................ 104,670 94,576
Unrecovered gas costs...................... 10,771 20,171
Accounts payable........................... (136,099) (153,504)
Estimated rate contingencies and refunds... (24,370) 9,622
Amounts payable to customers............... (4,665) 20,813
Taxes accrued.............................. 7,288 37,990
Temporary replacement reserve - gas
inventory................................ 108,080 73,780
Other-net.................................. 51,881 9,325
Changes in other assets and
other liabilities.......................... 10,673 11,579
Other-net.................................... 78 1,704
_________ _________
Net cash provided by continuing operations 327,617 352,219
Net cash provided by discontinued operations. 1,854 49,744
_________ _________
Net cash provided by operating activities 329,471 401,963
_________ _________
CASH FLOWS USED IN INVESTING ACTIVITIES
Plant construction and other property additions.. (169,645) (100,609)
Proceeds from dispositions of property, plant
and equipment-net.............................. (1,334) (2,056)
Cost of other investments........................ (3,761) (190,863)
_________ _________
Net cash used in continuing operations... (174,740) (293,528)
Net cash used in discontinued operations......... - (844)
_________ _________
Net cash used in investing activities.... (174,740) (294,372)
_________ _________
CASH FLOWS PROVIDED BY (OR USED IN) FINANCING ACTIVITIES
Issuance of common stock......................... - 2,889
Repayments of long-term debt..................... (4,000) (161,698)
Commercial paper-net............................. (169,084) 253,658
Dividends paid................................... (46,267) (46,386)
Purchase of treasury stock....................... (11,121) (252,462)
Sale of treasury stock........................... 3,474 161,712
Other-net........................................ - (71)
_________ _________
Net cash used in financing activities.... (226,998) (42,358)
_________ _________
Net increase (or decrease) in cash
and temporary cash investments......... (72,267) 65,233
CASH AND TEMPORARY CASH INVESTMENTS AT JANUARY 1. 138,112 65,035
_________ _________
CASH AND TEMPORARY CASH INVESTMENTS AT MARCH 31.. $ 65,845 $ 130,268
========= =========
Continuing operations............................ $ 65,570 $ 126,448
Discontinued operations.......................... 275 3,820
_________ _________
Total cash and temporary cash
investments at March 31................ $ 65,845 $ 130,268
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for
Interest (net of amounts capitalized).......... $ 8,781 $ 11,793
Income taxes (net of refunds).................. $ 3,108 $ 5,578
Non-cash financing activities
Issuance of common stock under benefit plans... $ 88 $ (560)
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)
_____________________________________________________________________________
Three Months to March 31
________________________
1999 1998
_____________________________________________________________________________
NET INCOME..................................... $138,987 $77,895
OTHER COMPREHENSIVE INCOME, NET OF TAX
Foreign currency translation adjustment..... 620 288
________ ________
COMPREHENSIVE INCOME........................... $139,607 $78,183
======== =======
_____________________________________________________________________________
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 (merger agreement) was approved
by the boards of directors of both companies. Under the terms of the merger
agreement, DRI will acquire all of the Company's shares of common stock
in a stock-for-stock transaction. Pursuant to the merger agreement, each share
of the Company's common stock will be converted into 1.52 shares of DRI common
stock (reference is made to "Subsequent Events," page 6, for additional
information on the structure of the proposed merger). 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 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 become a wholly owned subsidiary of DRI. The Company's subsidiaries will
remain subsidiaries of the Company. The Company will also remain a registered
holding company under PUHCA.
Pursuant to the terms of the Company's stock incentive plans, holders of
vested stock options and awards are granted limited stock appreciation rights
upon a change of control. For a period of 60 days subsequent to the change
of control, the employee may elect to receive shares of the Company's stock
in exchange for vested stock options or awards. The number of shares
received would be based on the formula included in the associated plans,
which considers the option price, award value, and the Company's stock price
during the 30-day period prior to the change of control. The Company would
incur charges to compensation expense in 1999 upon the exercise of any of the
rights whether or not the merger is consummated. The amount of the charge
will be determined based on the value of the shares per the formula, the
option price or value of the award exchanged, and the number of rights
exercised. It is not possible to estimate the likelihood that such rights
will be exercised or to estimate the Company's stock price during the period.
Therefore, no liability has been recorded in the consolidated financial
statements at March 31, 1999 for this matter.
The Company expects to record charges to expense in 1999 to cover the direct
costs of the planned merger (including fees of financial advisors, legal
counsel and independent accountants), the costs associated with employment
agreements, and the costs associated with merger integration. The direct
costs of the merger are estimated to be $23 million. The estimated charges and
nature of costs included in this estimate are subject to change. As of March
31, 1999, the Company had deferred $5.5 million of merger-related costs on
its consolidated balance sheet pending consummation of the merger transaction.
5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUBSEQUENT EVENTS
On April 5, 1999, the Company and DRI filed a preliminary joint proxy statement/
prospectus with the SEC related to the planned merger.
On April 18, 1999, the Company received an unsolicited merger proposal from
Columbia Energy Group (Columbia).
The Company announced on May 11, 1999 that, after careful consideration, the
Board of Directors had unanimously rejected the Columbia proposal. In
addition, on May 11, 1999, the Company announced that the Board of Directors
had unanimously approved a revised merger agreement with DRI. Under the
revised agreement, 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
revised merger transaction is conditioned, among other things, upon the
approvals of shareholders of both companies, opinions of counsel on the
tax-free nature of the stock portion of the transaction, approvals of various
federal regulatory agencies, and the completion of regulatory processes in the
states where the combined company will operate. The transaction is not
conditioned upon obtaining financing.
(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. 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 $40.2 million and
$59.9 million at March 31, 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 $13.7
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 business was substantially complete
at December 31, 1998. The remaining net liabilities associated with
discontinued operations at March 31, 1999 and December 31, 1998 were not
material.
The results of operations of these activities for the first quarter of
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.
6
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summarized results of operations of the discontinued operations are as
follows:
______________________________________________________________________________
Three Months to March 31, 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 loss from disposal
before income taxes*....................... $(66,000)
Income tax benefit......................... 23,100
________
Net loss from disposal*.................... $(42,900)
========
_____________________________________________________________________________
* Amounts include $22.0 million pretax provision ($14.3 million after taxes)
for expected operating losses during the shutdown period.
(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
Amortization and adjustment.... - - - 342 - -
Purchase of treasury stock....... - - - - (206) (11,121)
Sale of treasury stock........... - - (1,325) (32) 136 7,152
______ ________ ________ ________ ______ _________
At March 31, 1999................ 95,945 $263,848 $570,647 $ (1,086) (565) $ (30,328)
====== ======== ======== ======== ====== =========
_____________________________________________________________________________________________________________
</TABLE>
(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, $574.9 million of consolidated
retained earnings was free from such restrictions at March 31, 1999.
7
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) 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 ended March 31, 1999 and 1998 follows
(income and share amounts in thousands):
_______________________________________________________________________________
Three Months to March 31
________________________________
Income From Per
Continuing Share
Operations Shares Amount
_______________________________________________________________________________
1999
Basic EPS................................. $138,987 95,385 $1.46
======== ====== =====
Effect of dilutive securities:
Exercise of stock options............... 403
Vesting of performance shares........... 428
________ ______
Diluted EPS............................... $138,987 96,216 $1.44
======== ====== =====
_______________________________________________________________________________
1998
Basic EPS................................. $138,033 93,008 $1.48
======== ====== =====
Effect of dilutive securities:
Exercise of stock options............... 604
Vesting of performance shares........... 369
Conversion of 7 1/4% Convertible
Subordinated Debentures............... 1,578 2,490
________ ______
Diluted EPS............................... $139,611 96,471 $1.45
======== ====== =====
_______________________________________________________________________________
(9) During 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," and SOP 98-5,
"Reporting on the Costs of Start-Up Activities." SOP 98-1 establishes
standards for accounting for costs incurred in developing or procuring computer
software for internal use. SOP 98-5 requires that costs for start-up activities
be expensed as incurred. The provisions of each SOP were adopted beginning
January 1, 1999 and did not have a material effect on the Company's financial
position, results of operations or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes new accounting
standards for derivative instruments and for hedging activities. The
provisions of SFAS No. 133 are effective beginning January 1, 2000. 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)
(10) 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>
Three Months to March 31, 1999
______________________________
Operating Revenues
Nonaffiliated
Regulated gas sales . . . . . $626,760 $ - $ - $ - $ - $ 626,760
Nonregulated gas sales. . . . - - 85,953 65,917 - 151,870
Gas transportation and
storage . . . . . . . . . . 75,003 109,070 149 - - 184,222
Liquid sales. . . . . . . . . - - 49,051 - - 49,051
Other . . . . . . . . . . . . 7,049 9,429 11,723 6,344 - 34,545
________ ________ ________ _______ ________ __________
Total nonaffiliated . . . . . 708,812 118,499 146,876 72,261 - 1,046,448
Affiliated . . . . . . . . . . . 1,822 39,025 11,054 9,015 (60,916) -
________ ________ ________ _______ ________ __________
Total operating revenues . . . 710,634 157,524 157,930 81,276 (60,916) 1,046,448
Operating expenses
Purchased gas. . . . . . . . . . 392,777 3,840 8,844 68,709 (58,696) 415,474
Liquids, capacity and other
products purchased . . . . . . - 25,825 30,700 1,575 (66) 58,034
Operation expense. . . . . . . . 78,347 30,860 39,589 6,802 (3,425) 152,173
Maintenance. . . . . . . . . . . 11,829 5,302 6,771 43 94 24,039
Depreciation and amortization. . 19,326 13,905 51,798 444 1,847 87,320
Taxes, other than income taxes . 51,729 9,519 2,218 431 2,204 66,101
________ ________ ________ _______ _______ __________
Operating income before
income taxes. . . . . . . . 156,626 68,273 18,010 3,272 (2,874) 243,307
________ ________ ________ _______ _______ __________
Income taxes . . . . . . . . . . 50,565 24,621 2,958 849 (3,330) 75,663
Interest revenues. . . . . . . . (7) 841 283 379 (842) 654
Equity in earnings of
equity investees . . . . . . . - 1,542 1,390 472 - 3,404
Other revenues-net . . . . . . . (2,606) (62) 32 (91) (822) (3,549)
Interest charges . . . . . . . . 12,892 5,675 5,923 644 4,032 29,166
________ ________ ________ _______ _______ __________
Income from continuing
operations . . . . . . . . . . $ 90,556 $ 40,298 $ 10,834 $ 2,539 $(5,240) $ 138,987
======== ======== ======== ======= ======= ==========
Gas Sales (In Bcf) . . . . . . . 107.4 - 46.2 29.3 (11.7) 171.2
===== ===== ==== ==== ===== =====
Gas Transportation (In Bcf). . . 65.6 252.7 .1 - (60.3) 258.1
===== ===== ==== ==== ===== =====
_________________________________________________________________________________________________________________________________
</TABLE>
9
<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 March 31, 1998
______________________________
Operating Revenues
Nonaffiliated
Regulated gas sales . . . . . $610,824 $ - $ - $ 1,122 $ - $ 611,946
Nonregulated gas sales. . . . - - 98,502 33,073 - 131,575
Gas transportation and
storage . . . . . . . . . . 65,060 101,297 79 (3) - 166,433
Liquid sales. . . . . . . . . - - 56,190 - - 56,190
Other . . . . . . . . . . . . 7,170 13,979 7,806 2,424 1,642 33,021
________ _________ ________ ________ ________ ___________
Total nonaffiliated . . . . . 683,054 115,276 162,577 36,616 1,642 999,165
Affiliated. . . . . . . . . . . 2,386 33,178 1,373 4,988 (41,925) -
________ _________ ________ ________ ________ ___________
Total operating revenues. . . 685,440 148,454 163,950 41,604 (40,283) 999,165
Operating expenses
Purchased gas . . . . . . . . . 393,644 11,347 8,500 32,495 (40,975) 405,011
Liquids, capacity and other
products purchased. . . . . . - 12,548 30,520 1,237 - 44,305
Operation expense . . . . . . . 81,117 32,240 39,967 6,599 (3,213) 156,710
Maintenance . . . . . . . . . . 11,836 5,402 2,526 12 431 20,207
Depreciation and amortization . 20,258 16,127 45,723 673 877 83,658
Taxes, other than income taxes. 40,962 9,286 2,065 128 1,983 54,424
________ _________ ________ ________ ________ __________
Operating income before
income taxes . . . . . . . 137,623 61,504 34,649 460 614 234,850
________ _________ ________ ________ ________ __________
Income taxes. . . . . . . . . . 44,576 22,874 8,760 663 (7,376) 69,497
Interest revenues . . . . . . . 122 868 450 554 (470) 1,524
Equity in earnings of
equity investees. . . . . . . - 2,719 1,158 752 - 4,629
Other revenues-net. . . . . . . 1,190 (410) 33 754 (5,243) (3,676)
Interest charges. . . . . . . . 13,419 5,345 5,337 1,648 4,048 29,797
________ _________ ________ ________ ________ __________
Income from continuing
operations. . . . . . . . . . $ 80,940 $ 36,462 $ 22,193 $ 209 $ (1,771) $ 138,033
======== ========= ======== ======== ======== ==========
Gas Sales (In Bcf). . . . . . . 95.1 - 39.5 11.8 (1.7) 144.7
==== ===== ==== ==== ===== =====
Gas Transportation (In Bcf). . . 62.8 215.7 .1 - (52.5) 226.1
==== ===== ==== ==== ===== =====
_________________________________________________________________________________________________________________________________
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Because of the seasonal nature of the regulated subsidiaries' heating business,
a substantial portion of the Company's cash receipts are realized in the first
quarter of the year. In addition to satisfying cash requirements for
operations, capital expenditures, and dividend payments in the current and
prior year quarter periods, available cash was used to repay commercial paper
borrowings during the first quarter of 1999 and to make additional investments
in Argentina and Australia during the first quarter of 1998.
Due to the significant amount of revenues generated during the first quarter,
the balance sheet at the end of March typically shows an increase in cash and
temporary cash investments and an increase in accounts receivable over balances
at the end of the previous year. However, the balance of cash and temporary
cash investments at March 31, 1999, is less than the balance at December 31,
1998, due largely to the net repayment of commercial paper borrowings noted
above.
The inventory of stored gas was reduced during the first quarter of the year
due to the demand for gas during the winter heating season. Under the LIFO
accounting method, the excess of the estimated current cost of replacing
inventories of gas withdrawn from storage during the early part of the year
over LIFO inventory cost at the time of withdrawal is recorded in the income
statement and as a current liability. The amount charged to expense in the
first three months of 1999 was $108.1 million compared to $73.8 million in the
first quarter of 1998. As the volume of gas withdrawn from storage is
replaced either partially or in its entirety later in the year, the liability
is eliminated. In the event the inventory is not entirely replaced, any
remaining liability is eliminated by an adjustment to purchased gas expense.
During the remainder of 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.
The Company has a $775 million short-term credit agreement with a group of
banks, which is scheduled to expire on June 25, 1999; however, the Company
expects that this agreement will be renewed or replaced with a comparable
agreement. Borrowings under the credit agreement may be used for general
corporate purposes, including the support of commercial paper notes, and to
temporarily finance capital expenditures. There were no amounts outstanding
under this credit agreement at March 31, 1999. If necessary, additional
external financing during the remainder of 1999 could be obtained through
the issuance of new debt and/or equity securities. In this regard, the
Company has a shelf registration with the SEC that permits the sale of up
to $338.3 million of debt or equity securities. The amount and timing of
any future sale of these securities will depend on capital requirements,
including financing necessary to enable the Company to pursue asset acquisition
opportunities, and financial market conditions. Reference is made to Note 2 to
the consolidated financial statements, page 5, for a discussion of the proposed
merger between the Company and DRI. Due to the proposed 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.
11
<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 ENDED MARCH 31, 1999 AND 1998
SYSTEM RESULTS
The Company reported net income for the first three months of 1999 of
$139.0 million, or $1.46 per share, compared with net income of $77.9 million,
or $.84 per share, in the first three months of 1998. Earnings for the first
quarter of 1998, however, include charges in connection with the Company's
decision to discontinue its wholesale energy trading and marketing operations
amounting to $60.1 million after taxes, or $.64 per share (see Note 5 to the
consolidated financial statements, page 6). Income from continuing operations
in the first quarter of 1998 was $138.0 million, or $1.48 per share.
Results for the first quarter of 1999 reflect the effects of colder weather
and increased gas and oil production compared with the prior year quarter.
However, the impact of these positive factors were mitigated by sharply lower
average wellhead prices for natural gas and oil.
Weather in the Company's retail service territories in the 1999 first quarter
was 20.0% colder than 1998 but 4.6% warmer than normal. The colder weather
in 1999 resulted in higher space-heating sales by the Company's distribution
subsidiaries and increased transportation volumes by the transmission
operations.
OPERATING REVENUES
Regulated gas sales revenues increased $14.8 million, to $626.7 million,
in the first three months of 1999 compared to the prior year period, as
sales volumes increased 12.2 billion cubic feet (Bcf) to 107.1 Bcf due to
colder weather. Sales volumes increased during the 1999 quarter for the
Company's residential and commercial customers, while sales volumes declined
slightly for industrial customers. Average sales rates for all three customer
groups declined compared to the prior year quarter reflecting lower purchased
gas prices in 1999. Nonregulated gas sales revenues increased $20.3 million,
to $151.9 million, with sales volumes increasing 14.3 Bcf to 64.1 Bcf, due in
large part to gas sales in 1999 by CNG Field Services Company (CNG Field
Services, formerly CNG Storage Service Company).
Gas transportation and storage revenues increased $17.8 million in the first
three months of 1999, to $184.2 million. Gas transportation revenues increased
$18.7 million compared to 1998 as higher volumes more than offset the effect
of lower average rates.
Other operating revenues decreased $5.6 million in the first three months of
1999, to $83.6 million. Revenues from the sale of oil and condensate
production decreased $5.7 million due to lower prices. Revenues from the
sale of products extracted from natural gas decreased $5.3 million in the
first quarter of 1999 due largely to lower sales rates for by-products at
CNG Transmission Corporation (CNG Transmission). Other revenues increased
$5.4 million in the first quarter of 1999 due to increases in various revenue
categories.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
OPERATING EXPENSES
Operating expenses, excluding income taxes, increased $38.8 million in the
first three months of 1999, to $803.1 million. Total purchased gas expense
increased $10.5 million, to $415.5 million. Increased volume requirements
in connection with colder weather during the first quarter of 1999, partially
offset by lower average purchase prices, was the primary reason for the
increase. Liquids, capacity and other products purchased increased $13.7
million, to $58.0 million, due chiefly to increased purchases of pipeline
capacity by CNG Transmission. Combined operation and maintenance expense in
the first quarter of 1999 was $176.2 million, down slightly compared to the
prior year period. Depreciation and amortization increased $3.6 million,
to $87.3 million, due chiefly to higher gas and oil production in the 1999
first quarter. Taxes, other than income taxes, increased $11.7 million, to
$66.1 million, due primarily to the timing of the recognition of certain taxes
by one of the distribution subsidiaries.
Income taxes increased $6.2 million in the first quarter of 1999 reflecting
higher pretax income and a higher effective tax rate compared to the first
quarter of 1998.
OTHER INCOME
Total other income declined $1.9 million, to $.5 million, in the first quarter
of 1999. Interest revenues were $.7 million in the first quarter of 1999, down
$.8 million compared to the prior year quarter reflecting lower interest rates.
"Other-net" decreased $1.1 million during the 1999 first quarter due largely to
lower income from equity investments.
INTEREST CHARGES
Total interest charges decreased slightly in the first quarter of 1999, to
$29.1 million, compared to the prior year quarter.
In connection with the discussion of results of operations, reference is also
made to Notes 2, 4, and 5 to the consolidated financial statements.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
BUSINESS SEGMENT RESULTS
DISTRIBUTION
Operating income before income taxes of the gas distribution operations was
$156.6 million in the first three months of 1999, up $19.0 million from the
1998 quarter due chiefly to colder weather. Distribution throughput in the
first quarter of 1999 increased 15.1 Bcf, to 173.0 Bcf, reflecting weather
that was colder than 1998. The effect of lower combined operation and
maintenance expense in the first quarter of 1999 also contributed to
improved results. However, improved results in 1999 were partially
mitigated by higher taxes, other than income taxes.
Residential gas sales volumes increased 10.3 Bcf in the first three months
of 1999 to 83.1 Bcf. The distribution operations transported 7.7 Bcf of gas
in the first quarter of 1999, compared to 4.7 Bcf in the prior year quarter,
on behalf of former residential sales customers who now purchase gas from
other suppliers, including CNG Retail. Sales to commercial customers
increased 1.9 Bcf to 22.9 Bcf while volumes transported to these customers
decreased .6 Bcf to 18.1 Bcf. Total deliveries to industrial customers
increased .8 Bcf, to 39.1 Bcf, compared with the prior year. Industrial
transport volumes were up .8 Bcf to 38.1 Bcf, while sales volumes were
unchanged from the prior year at 1.0 Bcf. Off-system transport volumes were
down .4 Bcf in the 1999 quarter, to 1.7 Bcf.
TRANSMISSION
Operating income before income taxes of the gas transmission operations in the
1999 first quarter was $68.3 million, up $6.8 million from $61.5 million in the
1998 first quarter. The improvement in operating results was due principally
to the benefits of a rate case settlement recognized in the 1999 first
quarter, partially offset by the effect of lower rates for natural gas
by-products. Transmission throughput increased 37.0 Bcf in the first quarter
of 1999, to 252.7 Bcf, due largely to colder weather in the northeast in 1999.
EXPLORATION AND PRODUCTION
The exploration and production operations reported operating income before
income taxes of $18.0 million in the first three months of 1999, compared to
$34.7 million in the first quarter of 1998. Results for the first quarter of
1999 reflect the impact of sharply lower average gas and oil wellhead prices
that more than offset the effects of higher gas and oil production.
The Company's average gas wellhead price was $2.01 per thousand cubic feet
(Mcf) in the 1999 first quarter, $.49 per Mcf lower than the 1998 quarter but
still favorable in comparison with industry-wide prices in 1999. Gas
production in the first three months of 1999 was 42.4 Bcf, up 4.9 Bcf from
37.5 Bcf in 1998. The increase in gas production was due chiefly to the
Nautilus/Atlantis/Nemo complex in the Gulf of Mexico that began production in
late 1998. The Company's average oil wellhead price was $8.76 per barrel in
the first quarter of 1999, compared to $12.49 in the prior year period. Oil
production in the first quarter of 1999 was 2.3 million barrels, up 11% from
2.1 million barrels in 1998. The increase in oil production was due largely to
higher production from Neptune, a deepwater project in the Gulf of Mexico.
OTHER
Operating income before income taxes for "Other" increased $2.8 million in the
first quarter of 1999 compared to the prior year period. The increase reflects
higher operating income at CNG Field Services.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
SELECTED TWELVE-MONTH DATA
The following selected financial data (unaudited) relates to the twelve months
ended March 31, 1999 (in thousands of dollars):
______________________________________________________________________________
Operating revenues..................................... $2,807,689
Operating expenses..................................... 2,302,094
Operating income before income taxes............... 505,595
Income taxes........................................... 135,815
Other income........................................... 32,732
Interest charges....................................... 113,847
Income from continuing operations...................... 288,665
Discontinued operations................................ 11,193
Net income......................................... $ 299,858
Earnings per common share -- basic................. $3.14*
Earnings per common share -- diluted............... $3.11*
Times fixed charges earned............................. 4.12
______________________________________________________________________________
*Includes income from discontinued operations of $.12 per share - basic ($.11
per share - diluted).
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 March 31, 1999:
<TABLE>
<CAPTION>
PHASE
Continuity
PROJECT AREA Inventory Assessment Repair/ Testing Planning
Replace
<S> <C> <C> <C> <C> <C>
APPLICATION
SYSTEMS Complete Complete In progress In progress In progress
PROCESS CONTROL
COMPONENTS Complete Complete In progress In progress In progress
TECHNICAL
INFRASTRUCTURE Complete Complete In progress In progress In progress
PHYSICAL
INFRASTRUCTURE In progress In progress In planning In planning In planning
BUSINESS Ongoing Ongoing Not Not In progress
PARTNERS AND process process applicable applicable
SUPPLIERS
</TABLE>
15
<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 will continue through mid-1999. Repair and replacement activities
for internally developed application systems began in March 1998 and all
critical activities were completed at March 31, 1999. Testing of all critical
application systems is scheduled to be completed by June 30, 1999, while less
critical replacement activities will continue into the third quarter of 1999.
Reference is made to "Risks," page 17, for information on the status of the
development of a new revenue and customer information system for the
distribution subsidiaries called "CAMP."
PROCESS CONTROL COMPONENTS. For process control components inventoried by
the Company, approximately 43% are not date sensitive, and therefore are
not affected by year 2000 issues. For date sensitive components, the Company
is experiencing via testing activities a year 2000 failure rate of
approximately 2% to 3%. 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 are approximately 74% complete, while system testing of the
interaction of process control components began in April 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 approximately
92% complete for all categories of technical infrastructure, while efforts in
the critical area of application servers are 93% 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 is installing software upgrades
and hardware replacements. The Company is also examining the year 2000
aspects of user-created desktop files, applications and spreadsheets. This
activity will continue throughout 1999.
PHYSICAL INFRASTRUCTURE. The Company has completed an inventory of gas and
non-gas related physical infrastructure components that may be subject to year
2000 problems. Of the facilities inventoried, 111 are considered critical.
By mid-1999, analysis efforts will be completed and any necessary repairs,
particularly as they relate to gas-related facilities, will be performed.
Where facilities are leased, the Company has identified and contacted building
managers/lessors to ensure they are actively addressing the year 2000 issue as
a primary effort in continuity planning.
BUSINESS PARTNER AND VENDOR RELATIONSHIPS. Strategic business partner and
vendor relationships have been identified and assessment continues via
questionnaires and interviews. Over 1,200 business partner and vendor
relationships had been identified and queried. Of the business partners and
vendors identified, only about 250 have been 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. The Company will continue to
prioritize, identify and assess business partner and vendor relationships
until significant areas of risk have been identified and mitigated, and is also
preparing contingency plans in the event mitigation efforts are not successful.
The Company's analysis includes the year 2000 status of operations in Argentina
and Australia in which the Company has investments.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
CONTINUITY PLANNING. 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. The Company has
completed development of continuity planning methodology and has identified
critical business processes throughout the Company. Business continuity
managers have been identified and trained in the continuity planning
methodology, and are currently engaged in building continuity plans. This
activity is expected to be completed in July 1999. Methodology is now being
developed and implemented for testing plans as they are completed. Through
continuity planning, the Company is also identifying capital improvements which
are necessary to support the various continuity plans. While the Company is
not yet able to estimate the cost of these capital upgrades, such costs are not
expected to be material.
COSTS
Based upon project status as described above, the Company expects to spend a
total of approximately $20.4 million in connection with its Year 2000 Project
Office efforts, its use of external consultants and the remediation of affected
application systems. This estimate includes $4.9 million of capitalized costs
for hardware and software used (or expected to be used) in the testing phase,
and for application system and technical infrastructure replacements. This
estimate excludes costs incurred or expected to be incurred in connection
with the development and installation of major new application systems which
are expected to be year 2000 ready, 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 March 31, 1999, the Company
has incurred costs approximating $5.5 million (of which $1.9 million has been
capitalized) in connection with its year 2000 efforts. Total costs incurred
as of March 31, 1999, as a proportion of the total year 2000 budget, is not
indicative of the progress of the project; substantial completion of all
critical areas is expected by June 30, 1999.
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 activities have been completed
in connection with this contingency plan and implementation, including
testing, is scheduled to be completed by August 1999. 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 $20.4 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 $56.7 million related to this project as of March 31, 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.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Concluded)
EXPLORATION AND PRODUCTION
CNG Producing Company, acting alone or with partners, was the high bidder
on nine tracts offered at the federal government's March 17, 1999 Gulf of
Mexico lease sale. The Company's bids totaled $7.3 million for the
properties, six of which are located in deepwater areas of the Gulf of Mexico.
The Company's working interests in three of the deepwater properties would be
100% each, while working interests in the other three deepwater tracts would
be 50% each. The Company would have 100% working interests in two of the three
remaining properties and a 33.3% interest in the third. Two of the deepwater
bids have been accepted by the government and the remaining seven bids are
still subject to acceptance.
OTHER
On April 14, 1999, CNG Power Company, a wholly-owned subsidiary of the Company,
and DRI signed an agreement (Agreement) to develop natural gas-fired power
generation facilities along the Company's natural gas pipeline system. Under
the terms of the Agreement, the companies have identified 45 potential
development sites along the Company's natural gas pipeline network in Ohio,
Pennsylvania, New York, West Virginia and Virginia. A separate development
entity is to be formed for each suitable site pursuant to an operating
agreement or other appropriate documents to be mutually agreed upon between
the parties. Affiliates of the Company and DRI will develop, own, operate and
maintain the facilities on an equal basis.
The Company has guaranteed the performance of CNG Power Company under the
Agreement. The Agreement is not conditioned upon the proposed merger of the
Company and DRI (see Note 2 to the consolidated financial statements, page 5).
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 proposed 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.
*********
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.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material new legal proceedings instituted in the first
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 as
then pending, except as noted below.
On April 20, 1999, the Company and the directors party to the suit were served
with a purported Class Action Complaint, Civil Action No. 17114-NC, styled
Gerold Garfinkel v. Raymond E. Galvin, Paul E. Lego, Margaret A. McKenna,
William S. Barrack, Jr., Steven A. Minter, J. W. Connolly, George A. Davidson,
Jr., Richard P. Simmons, and Consolidated Natural Gas Company. The Complaint
was filed in the Delaware Court of Chancery on April 20, 1999. The Complaint
seeks injunctive relief in the form of an order to the individual Board
members to sell the Company for the highest value to the shareholders, an
accounting of any damages resulting from any failure to sell the Company for
the highest value, a determination with respect to the reasonableness of
the break-up fee in the agreement with DRI and other miscellaneous relief.
The Complaint also seeks an award of costs and attorneys' fees. The Company
is aware that several additional purported Class Action Complaints against the
Company and its directors seeking essentially the same relief were filed
in the same court on April 20, 1999, and May 12, 1999, but those Complaints
have not yet been served.
ITEM 2. CHANGES IN SECURITIES
(a) See response to Item 6. below re: March 4, 1999 filing.
(b) Limitations on the payment of dividends by the Company are set forth in
Note 7 to the consolidated financial statements, page 7, and reference is made
thereto.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None, other than as described elsewhere in this report.
ITEM 6. EXHIBITS, AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
On March 1, 1999, the Company filed a Current Report on Form 8-K regarding its
proposed merger with DRI (see Note 2 to the consolidated financial statements,
page 5).
On March 4, 1999, the Company filed a Registration Statement on Form 8-A/A
which included, as Exhibits, Amendment Nos. 1 and 2 to the Consolidated
Natural Gas Company Rights Agreement (Rights Agreement). The Rights Agreement
was initially filed with the SEC on January 23, 1996, as an Exhibit to a
Current Report on Form 8-K.
On May 7, 1999, the Company filed a Current Report on Form 8-K regarding
the Company's adoption of amendments to the Severance Pay Policy of
Consolidated Natural Gas Company and Its Participating Subsidiaries Who Are
Not Represented by a Recognized Union.
19
<PAGE>
ITEM 6. EXHIBITS, AND REPORTS ON FORM 8-K (Concluded)
EXHIBITS
______________________________________________________________________________
SEC
Exhibit
Number Description of Exhibit
______________________________________________________________________________
(11) Statement re Computation of Per Share Earnings:
Computations of Earnings Per Common Share -- Basic, and Earnings
Per Common Share -- Diluted of Consolidated Natural Gas Company
and Subsidiaries for the three months ended March 31, 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 March 31, 1999
(27) Financial Data Schedule has been filed electronically
(99) Press Release, dated May 11, 1999, regarding the Company's amended
merger agreement with DRI
______________________________________________________________________________
20
<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
May 14, 1999
21
<PAGE>
EXHIBIT INDEX
______________________________________________________________________________
SEC
Exhibit
Number Description of Exhibit
______________________________________________________________________________
(11) Statement re Computation of Per Share Earnings:
Computations of Earnings Per Common Share -- Basic, and Earnings
Per Common Share -- Diluted of Consolidated Natural Gas Company and
Subsidiaries for the three months ended March 31, 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 March 31, 1999 is filed
herewith
(27) Financial Data Schedule is filed herewith
(99) Press Release, dated May 11, 1999, regarding the Company's amended
merger agreement with DRI is filed herewith
______________________________________________________________________________
EXHIBIT 11
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(In Thousands, Except Per Share Data)
_______________________________________________________________________________
Per Share
Net Income Shares Amount
_______________________________________________________________________________
For the three months ended March 31, 1999
EARNINGS PER COMMON SHARE -- BASIC
Income from continuing operations......... $138,987 95,385 $1.46
Loss from discontinued energy
marketing services operations........... - -
Loss from disposal of energy
marketing services operations........... - -
_______ _______ _____
NET INCOME................................ $138,987 95,385 $1.46
======== ======= =====
EARNINGS PER COMMON SHARE -- DILUTED
Income from continuing operations......... $138,987 95,385
Effect of dilutive securities:
Exercise of stock options............... 403
Vesting of performance shares........... 428
________ ______
Income from continuing operations,
as adjusted............................. 138,987 96,216 $1.44
Loss from discontinued energy
marketing services operations........... - -
Loss from disposal of energy marketing
services operations..................... - -
________ ______ _____
NET INCOME, AS ADJUSTED................... $138,987 96,216 $1.44
======= ====== =====
_______________________________________________________________________________
For the three months ended March 31, 1998
EARNINGS PER COMMON SHARE -- BASIC
Income from continuing operations......... $138,033 93,008 $1.48
Loss from discontinued energy
marketing services operations............ (17,238) (.18)
Loss from disposal of energy
marketing services operations............ (42,900) (.46)
________ _______ _____
NET INCOME................................ $ 77,895 93,008 $ .84
======== ======= =====
EARNINGS PER COMMON SHARE -- DILUTED
Income from continuing operations......... $138,033 93,008
Effect of dilutive securities:
Exercise of stock options............... 604
Vesting of performance shares........... 369
Conversion of 7 1/4% Convertible
Subordinated Debentures................. 1,578 2,490
________ ______
Income from continuing operations,
as adjusted............................. 139,611 96,471 $1.45
Loss from discontinued energy
marketing services operations........... (17,238) (.18)
Loss from disposal of energy marketing
services operations..................... (42,900) (.45)
________ ______ _____
NET INCOME, AS ADJUSTED................... $ 79,473 96,471 $ .82
======== ====== =====
_______________________________________________________________________________
EXHIBIT 12
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
_____________________________________________________________________________
Twelve Months to March 31 1999
_____________________________________________________________________________
Earnings:
Income from continuing operations......................... $288,665
Add income taxes.......................................... 135,815
________
Income from continuing operations
before income taxes..................................... 424,480
Distributed income from unconsolidated investees,
less equity in earnings thereof......................... (1,658)
________
Subtotal................................................ 422,822
________
Add fixed charges:
Interest on long-term debt, including amortization
of debt discount and expense less premium............. 104,470
Other interest expense.................................. 21,428
Portion of rentals deemed to be representative
of the interest factor................................ 9,685
________
TOTAL FIXED CHARGES......................................... 135,583
________
TOTAL EARNINGS.............................................. $558,405
========
RATIO OF EARNINGS TO FIXED CHARGES.......................... 4.12
========
_____________________________________________________________________________
<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 MARCH 31,
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,093,688
<OTHER-PROPERTY-AND-INVEST> 1,428,071
<TOTAL-CURRENT-ASSETS> 937,558
<TOTAL-DEFERRED-CHARGES> 463,276
<OTHER-ASSETS> 307,627
<TOTAL-ASSETS> 6,230,220
<COMMON> 263,848
<CAPITAL-SURPLUS-PAID-IN> 530,367
<RETAINED-EARNINGS> 1,731,303
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,534,384
0
0
<LONG-TERM-DEBT-NET> 1,380,002
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 388,258
<LONG-TERM-DEBT-CURRENT-PORT> 107,125
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,829,317
<TOT-CAPITALIZATION-AND-LIAB> 6,230,220
<GROSS-OPERATING-REVENUE> 1,046,448
<INCOME-TAX-EXPENSE> 75,663
<OTHER-OPERATING-EXPENSES> 803,141
<TOTAL-OPERATING-EXPENSES> 878,804
<OPERATING-INCOME-LOSS> 167,644
<OTHER-INCOME-NET> 509
<INCOME-BEFORE-INTEREST-EXPEN> 168,153
<TOTAL-INTEREST-EXPENSE> 29,166
<NET-INCOME> 138,987
0
<EARNINGS-AVAILABLE-FOR-COMM> 138,987
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 96,447
<CASH-FLOW-OPERATIONS> 327,131
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.44
</TABLE>
CONSOLIDATED NATURAL GAS ANNOUNCES AMENDED MERGER AGREEMENT WITH
DOMINION RESOURCES
CNG SHAREHOLDERS TO RECEIVE $66.60 PER CNG SHARE
IN A COMBINATION OF STOCK AND CASH
PITTSBURGH - MAY 11, 1999 - Consolidated Natural Gas Company ("CNG")
[NYSE: CNG] today announced that its Board of Directors unanimously approved
a revised merger agreement with Dominion Resources, Inc. [NYSE: D] under which
CNG shareholders would receive a combination of Dominion common stock and cash
with a firm value of $66.60 per CNG share. Up to 60 percent of the
consideration to CNG shareholders will be in the form of Dominion common stock
and the balance will be in cash. The common stock portion of the transaction
is expected to be tax-free to CNG shareholders.
The CNG Board today also announced that after careful consideration it has
rejected the unsolicited proposal from Columbia Energy Group [NYSE: CG]. The
CNG board concluded that the revised Dominion transaction is better for CNG
shareholders due to its certainty and timing, the strategic benefits of a gas
and electric combination, and the upside potential to shareholders of an
investment in the combined CNG/Dominion.
The Board, in reaching its decision, relied in part on the advice of its
financial and regulatory advisors. In studying a possible combination with
Columbia Energy, a thorough review of the regulatory situation in each of the
principal states in which the combined company would operate was conducted.
This review included the analyses and advice of several regulatory experts,
including former public utility commissioners.
CNG shareholders will receive the Dominion dividend in effect at the time of
the closing of the transaction. Dominion has said that it intends to maintain
its current dividend of $2.58 per share.
George A. Davidson, Jr., chairman and chief executive officer of CNG, said,
"We believe that a combination of CNG and Dominion best serves our shareholders
because it makes strategic sense and has a straightforward roadmap to
completion. Together, we will have the scale, scope and skills to be
successful in the competitive energy marketplace."
<PAGE>
-2-
CNG noted that its regulatory filings for the CNG/Dominion combination are
largely completed. On April 5, 1999, filings were made with the Securities
and Exchange Commission and in North Carolina, Pennsylvania, Virginia, and
West Virginia. The Hart-Scott-Rodino filing was made on May 10, 1999 and CNG
anticipates filing with the Federal Energy Regulatory Commission shortly. It
is anticipated that the CNG/Dominion transaction would close, at the latest,
in early 2000.
Mr. Davidson continued, "The combined company will be able to offer a complete
line of energy products as the $300 billion gas and electric industries
converge. The combined company will be able to offer energy, gas and/or
electricity, to both retail and wholesale customers, through the combined
company's generation and pipeline assets. We expect to cross-market gas to
electric customers and electricity to gas customers. In addition, the combined
company will benefit from the arbitrage available among fuel sources."
A CNG/Dominion combination will have an energy portfolio of more than 20,000
megawatts of power generation, and nearly 3 trillion cubic feet equivalent in
natural gas and oil reserves producing more than 300 billion cubic feet
equivalent annually. It will operate a major interstate gas pipeline system
and the largest natural gas storage system in North America. The combined
company will rank as one of the largest independent oil and gas producers in
North America measured by reserves.
The combined CNG/Dominion will form one of the nation's largest integrated
energy companies, serving nearly 4 million retail customers in five states.
Market capitalization of the combined entity will be approximately $25
billion - consisting of approximately $14.4 billion in equity, $9.5 billion
in debt and minority interests, and $1.1 billion in preferred stock.
CNG shareholders will have the right to make an election, subject to
pro-ration, as to whether they would prefer to receive cash or stock. Under
the terms of the agreement, approximately 40 percent of the CNG shares will be
converted into $66.60 in cash. Each of the remaining CNG shares will be
converted into a number of shares of Dominion common stock, not to exceed 1.52,
with a value equal to $66.60. If the value of 1.52 Dominion shares is less
than $66.60, a cash "top-up" will be added to bring the total per share value
to $66.60. The amount of cash to be paid to CNG shareholders will be reduced,
and replaced by Dominion stock with an equivalent value, if necessary, to
ensure that legal opinions can be delivered that the stock consideration
received by CNG shareholders will not result in the recognition of gain for
tax purposes.
<PAGE>
-3-
The transaction is conditioned, among other things, upon the approvals of
shareholders of both companies, opinions of counsel on the tax-free nature of
the stock portion of the transaction, approvals of various federal regulatory
agencies, and the completion of regulatory processes in the states where the
combined company will operate. The transaction is not conditioned upon
obtaining financing.
Merrill Lynch & Co. acted as financial advisor to CNG. Cahill Gordon & Reindel
and Buchanan, Ingersoll P.C. acted as legal counsel to CNG.
Consolidated Natural Gas Company (CNG) is one of the nation's largest
producers, transporters, distributors and retail marketers of natural gas.
The company's natural gas transmission and distribution operations serve
customers in Ohio, Pennsylvania, Virginia, West Virginia, New York and other
states in the Northeast and Mid-Atlantic regions. CNG explores for and
produces oil and natural gas in the United States and Canada, and makes
selective investments abroad.
THIS PRESS RELEASE CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. THE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES. DISCUSSION OF
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM MANAGEMENT'S
PROJECTIONS, FORECASTS, ESTIMATES AND EXPECTATIONS MAY INCLUDE FACTORS THAT ARE
BEYOND THE COMPANY'S ABILITY TO CONTROL OR ESTIMATE PRECISELY, SUCH AS
ESTIMATES OF FUTURE MARKET CONDITIONS AND THE BEHAVIOR OF OTHER MARKET
PARTICIPANTS. OTHER FACTORS INCLUDE, BUT ARE NOT LIMITED TO, WEATHER
CONDITIONS, ECONOMIC CONDITIONS IN THE COMPANY'S SERVICE TERRITORY,
FLUCTUATIONS IN ENERGY-RELATED COMMODITY PRICES, CONVERSION ACTIVITY, OTHER
MARKETING EFFORTS AND OTHER UNCERTAINTIES. OTHER RISK FACTORS ARE DETAILED
FROM TIME TO TIME IN THE COMPANY'S SEC REPORTS.
# # #
