<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q
___________
(Mark one)
X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 1-3196
CONSOLIDATED NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 13-0596475
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
120 TREDEGAR STREET
RICHMOND, VIRGINIA 23219
(Address of principal executive offices) (Zip Code)
(804) 819-2000
(Registrant's telephone number)
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 (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
-
As of April 30, 2000, there were issued and outstanding 100 shares of the
registrant's common stock, without par value, all of which were held,
beneficially and of record, by Dominion Resources, Inc.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b)
OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE>
CONSOLIDATED NATURAL GAS COMPANY
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended March 31, 2000
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
for the Three Months Ended March 31, 2000 and 1999........... 1
CONDENSED CONSOLIDATED BALANCE SHEETS
at March 31, 2000 (Unaudited), and December 31, 1999......... 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
for the Three Months Ended March 31, 2000 and 1999........... 3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
for the Three Months Ended March 31, 2000 and 1999........... 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................ 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 13
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Natural Gas Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months ended
March 31
-----------------------
<S> <C>
2000 1999
Operating Revenues
Regulated gas sales.............................. $ 640,440 $ 626,760
Nonregulated gas sales........................... 198,496 139,781
---------- ----------
Total gas sales................................. 838,936 766,541
Gas transportation and storage................... 181,565 184,222
Other............................................ 149,090 79,050
---------- ----------
Total operating revenues........................ 1,169,591 1,029,813
---------- ----------
Operating Expenses
Purchased gas.................................... 461,958 415,474
Liquids, capacity and other products purchased... 94,471 58,034
Restructuring and other merger-related costs..... 172,781 -
Operation expense................................ 151,516 135,538
Maintenance...................................... 20,154 24,039
Depreciation and amortization.................... 98,111 87,320
Taxes, other than income taxes................... 54,810 66,101
---------- ----------
Subtotal........................................ 1,053,801 786,506
---------- ----------
Operating income before income taxes............ 115,790 243,307
Income taxes..................................... 31,533 75,663
---------- ----------
Operating income................................ 84,257 167,644
---------- ----------
Other Income (Deductions)
Interest income.................................. 947 654
Other-net........................................ 4,562 (145)
---------- ----------
Total other income (deductions)................. 5,509 509
---------- ----------
Income before interest charges.................. 89,766 168,153
---------- ----------
Interest Charges
Interest on long-term debt....................... 31,074 26,560
Other interest expense........................... 9,078 5,292
Allowance for funds used during construction (2,909) (2,686)
---------- ----------
Total interest charges.......................... 37,243 29,166
---------- ----------
Net Income....................................... $ 52,523 $ 138,987
========== ==========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
1
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Consolidated Natural Gas Company
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
At At
March 31, December 31,
2000 1999
(Unaudited)
- -----------------------------------------------------------------------------------------
<S> <C>
ASSETS
Property, Plant and Equipment
Gas utility and other plant................................ $ 4,633,159 $ 4,648,120
Accumulated depreciation and amortization.................. (1,991,982) (1,959,475)
----------- -----------
Net gas utility and other plant....................... 2,641,177 2,688,645
----------- -----------
Exploration and production properties...................... 4,582,313 4,392,319
Accumulated depreciation and amortization.................. (2,957,878) (2,853,703)
----------- -----------
Net exploration and production properties............. 1,624,435 1,538,616
----------- -----------
Net property, plant and equipment..................... 4,265,612 4,227,261
----------- -----------
Current Assets
Cash and temporary cash investments........................ 39,610 93,891
Accounts receivable, less allowance for doubtful accounts.. 575,352 526,902
Receivables from affiliated companies...................... 7,231 -
Gas stored - current portion............................... 12,418 86,312
Materials and supplies..................................... 18,747 20,336
Unrecovered gas costs...................................... 44,850 38,074
Deferred income taxes - current (net)...................... - 674
Prepayments and other current assets....................... 296,900 299,914
Net assets held for sale................................... 593,788 371,508
----------- -----------
Total current assets.................................. 1,588,896 1,437,611
----------- -----------
Regulatory and Other Assets
Other investments.......................................... 96,792 353,795
Deferred charges and other assets.......................... 589,908 516,552
----------- -----------
Total regulatory and other assets..................... 686,700 870,347
----------- -----------
Total assets.......................................... $ 6,541,208 $ 6,535,219
=========== ===========
STOCKHOLDER'S EQUITY AND LIABILITIES
Capitalization
Common stockholder's equity
Common stock, no par value................................ $ 2,391,888 $ 263,858
Capital in excess of par value............................ 40,280 567,382
Retained earnings......................................... (50,717) 1,545,664
Treasury stock, at cost................................... - (594)
----------- -----------
Total common stockholder's equity..................... 2,381,451 2,376,310
Long-term debt............................................. 1,764,115 1,763,678
----------- -----------
Total capitalization.................................. 4,145,566 4,139,988
----------- -----------
Current Liabilities
Commercial paper........................................... 549,226 685,731
Accounts payable........................................... 275,153 334,956
Estimated rate contingencies and refunds................... 39,787 44,914
Amounts payable to customers............................... - 3,955
Payables to affiliated companies........................... 5,258 -
Taxes accrued.............................................. 126,164 134,257
Deferred income taxes-current (net)........................ 3,325 -
Temporary replacement reserve - gas inventory.............. 89,859 -
Other current liabilities.................................. 120,368 149,413
----------- -----------
Total current liabilities............................. 1,209,140 1,353,226
----------- -----------
Deferred Credits
Deferred income taxes...................................... 804,275 808,031
Accumulated deferred investment tax credits................ 19,035 19,524
Deferred credits and other liabilities..................... 363,192 214,450
----------- -----------
Total deferred credits................................ 1,186,502 1,042,005
----------- -----------
Commitments and Contingencies
Total stockholder's equity and liabilities............ $ 6,541,208 $ 6,535,219
=========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Consolidated Natural Gas Company
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Thousands of Dollars)
Three Months ended
March 31
--------------------
<S> <C>
2000 1999
Cash Flows Provided by (or Used in) Operating Activities
Net income....................................................... $ 52,523 $ 138,987
Adjustments to reconcile net income to net cash
provided by (or used in) operating activities
Depreciation and amortization.................................. 98,111 87,320
Restructuring and other merger-related costs................... 170,296 -
Pension cost (credit)-net...................................... (18,388) (16,995)
Stock award amortization....................................... - 2,320
Deferred income taxes-net...................................... 8,102 23,828
Changes in current assets and current liabilities
Accounts receivable-net....................................... (47,708) (36,150)
Receivables from affiliated companies consolidated............ (7,231) -
Inventories................................................... 75,483 104,670
Unrecovered gas costs......................................... (6,776) 10,771
Accounts payable.............................................. (54,574) (136,099)
Payables to affiliated companies consolidated................. 5,258 -
Estimated rate contingencies and refunds...................... (5,127) (24,370)
Amounts payable to customers.................................. (3,955) (4,665)
Taxes accrued................................................. (7,519) 7,288
Temporary replacement reserve-gas inventory................... 89,859 108,080
Other-net..................................................... 78,882 51,881
Net assets held for sale...................................... 24,036 -
Changes in other assets and other liabilities.................. (70,189) 10,673
Other-net...................................................... (213) 1,932
--------- ---------
Net cash provided by operating activities.................... 380,870 329,471
--------- ---------
Cash Flows Provided by (or Used in) Investing Activities
Plant construction and other property additions
Acquisition of exploration and production assets................ (106,270) (62,279)
Other........................................................... (107,225) (107,366)
Proceeds from dispositions of property, plant and equipment-net.. 7,754 (1,334)
Cost of other investments........................................ (1,755) (3,761)
--------- ---------
Net cash used in investing activities........................ (207,496) (174,740)
--------- ---------
Cash Flows Provided by (or Used in) Financing Activities
Repayments of long-term debt..................................... - (4,000)
Commercial paper-net............................................. (134,791) (169,084)
Dividends paid................................................... (92,830) (46,267)
Purchase of treasury stock....................................... (34) (11,121)
Sale of treasury stock........................................... - 3,474
--------- ---------
Net cash used in financing activities........................ (227,655) (226,998)
--------- ---------
Net decrease in cash and
temporary cash investments.................................. (54,281) (72,267)
Cash and Temporary Cash Investments at January 1................. 93,891 138,112
--------- ---------
Cash and Temporary Cash Investments at March 31.................. $ 39,610 $ 65,845
========= =========
Supplemental Cash Flow Information
Non-cash financing activities
Issuance of common stock under benefit plans.................... $ 29 $ 88
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
Consolidated Natural Gas Company
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited) (Thousands of Dollars)
Three Months ended March 31
---------------------------
2000 1999
Net Income....................................... $52,523 $138,987
Other comprehensive income, net of tax
Foreign currency translation adjustment......... (1,077) 620
------- --------
Comprehensive Income............................. $51,446 $139,607
======= ========
The Notes to Consolidated Financial Statements are an integral part of this
statement.
4
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
Consolidated Natural Gas Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) With the exception of the Condensed Consolidated Balance Sheet at December
31, 1999, which is derived from the Consolidated Balance Sheet at that date
which was included in Exhibit I to Consolidated Natural Gas Company's (CNG or
the Company) Form 8-K filed with the Securities and Exchange Commission on
January 27, 2000 (January 27, 2000 Form 8-K), the consolidated financial
statements are unaudited. In the opinion of management, these unaudited
consolidated financial statements contain all adjustments, including normal
recurring accruals, necessary to present fairly the financial position as of
March 31, 2000, and the results of operations and cash flows for the three
months ended March 31, 2000 and 1999.
Certain amounts in the 1999 consolidated financial statements have been
reclassified to conform to the 2000 presentation of revenues, royalty expense,
and production and reserves statistics. This change conforms CNG's presentation
to that widely used by the industry.
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.
The consolidated financial statements include the accounts of the Company and
its subsidiaries, with all significant intercompany transactions and accounts
being eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
These financial statements should be read in conjunction with the consolidated
financial statements, and notes thereto, included in the January 27, 2000 Form
8-K.
(2) On January 28, 2000, Dominion Resources, Inc. (Dominion) acquired all of the
outstanding shares of CNG's common stock for $6.4 billion, consisting of
approximately 87 million shares of Dominion common stock and approximately $2.9
billion of cash. The acquisition was completed by merging CNG into a new
subsidiary of Dominion. The name of the new Dominion subsidiary was changed to
Consolidated Natural Gas Company at the time of the merger.
(3) Dominion and its subsidiaries developed and began the implementation of a
plan to restructure the operations of the combined companies. The restructuring
plan includes the following components:
o An involuntary severance program;
o A transition plan to implement operational changes to provide
efficiencies, including the consolidation of post-merger operations and
the integration of information technology systems;
o A voluntary early retirement program.
For the three months ended March 31, 2000, CNG recognized $172.8 million of
restructuring and other merger-related costs as discussed below:
Restructuring Liability Recognized At March 31, 2000
Dominion and its subsidiaries established a comprehensive involuntary severance
package for salaried employees whose positions will be eliminated. Severance
payments are based on the individual's base salary and years-of-service at the
time of termination. Under the restructuring plan, approximately 400 employee
positions at CNG and its subsidiaries have been identified for elimination.
Restructuring charges related to workforce reduction costs approximating $43.7
million were accrued in the first quarter of 2000, reflecting management's best
estimate of severance and related costs to be incurred under the plan. At March
31, 2000, a total of 131 positions had been eliminated, resulting in severance
payments totaling $748,000.
5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
Other Restructuring and Merger-related Costs
Dominion has implemented a new hedging strategy for its combined operations.
Under its new strategy, Dominion created an enterprise risk management group
with responsibility for managing Dominion's aggregate energy portfolio,
including the related commodity price risk, across its consolidated operations.
Previously, individual business segments managed their respective energy
portfolios and related price risk exposure on a stand-alone basis. Dominion
management believes this new structure should result in a more effective risk
management approach, thus maximizing the value of Dominion's diversified energy
portfolio and market opportunities. As part of the implementation of the new
strategy, Dominion and CNG management evaluated CNG's hedging strategy
associated with its oil and gas operations in relation to Dominion's combined
operations. As a result of the evaluation, CNG designated its portfolio of
derivative contracts that existed at January 28, 2000 as held for purposes other
than hedging for accounting purposes. This action required such contracts to be
carried at fair value in the balance sheet with unrealized gains and losses
included in the determination of net income. In addition, the Company entered
into "offsetting" contracts for those contracts in the January 28, 2000
portfolio that would not be settled during the first quarter of 2000. The mark-
to-market accounting for these contracts held for purposes other than hedging
resulted in the recognition of losses of $55.1 million for the three months
ended March 31, 2000. Due to the Company's establishing the offsetting portfolio
of derivative contracts, absent any not yet identified future losses from credit
risk exposure, no additional losses are expected to result as these derivative
contracts mature through 2003. See Note 8 for further discussion.
Settlement of certain employment contracts due to change of control, resulting
directly from the merger, totaled $30.9 million. The change of control also
required payments of $25.7 million under seismic licensing agreements used in
the Company's oil and gas operations. Other costs included merger-related
transaction costs and fees totaling $9.2 million and accelerated depreciation of
information technology systems that will be abandoned on January 1, 2001 and
related conversion costs of $5.0 million.
CNG is expected to incur additional charges relating to restructuring and other
merger-related activities as business operations are consolidated and
administrative functions are integrated.
Early Retirement Program
On January 28, 2000, Dominion and its subsidiaries announced an early retirement
program (ERP). This program is a voluntary program for all salaried employees of
CNG, excluding officers, and employees of Virginia Natural Gas (VNG) and CNG
International. The early retirement option will provide up to three additional
years of age and three additional years of employee service, subject to age and
service maximums under the retirement plan, for purposes of the benefit formula
under the retirement plan. Employees of CNG and its participating subsidiaries
who have attained age 52 and completed at least 12 years of service as of July
1, 2000 are eligible under the ERP. To elect early retirement, eligible
employees must notify the companies during the period from April 3 through May
17.
The expense and related liability associated with the ERP will be recognized
upon the Company's receipt of eligible employees' elections to accept the ERP.
Employees who are involuntarily terminated are also eligible to elect early
retirement under the ERP. However, the amount of severance pay may be subject to
reduction as a result of the additional retirement plan benefits provided by the
ERP. Whether the ERP is made available to employees covered by collective
bargaining agreements and the period for electing to retire under the ERP is
subject to discussion with union representatives. At March 31, 2000, the ERP had
been accepted by one union.
(4) There have been no significant developments with regard to commitments and
contingencies, including environmental matters, as disclosed in Notes 17 and 18
to the consolidated financial statements included in the January 27, 2000 Form
8-K, nor have any significant new matters arisen during the first quarter of
2000.
(5) 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 $37.6 million and $38.7 million at
March 31, 2000, and December 31, 1999, respectively, including interest. These
amounts are reported in the Condensed Consolidated Balance Sheet under
"Estimated rate contingencies and refunds" together with $2.2 million and $6.2
million, respectively, which are primarily refunds received from suppliers and
refundable to customers under regulatory procedures.
6
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(6) At March 31, 2000, the Company's net assets held for sale included the net
assets of VNG of $342.0 million and CNG International of $251.8 million. CNG is
required to spin-off or sell VNG pursuant to conditions set forth by the
Virginia State Corporation Commission and Federal Trade Commission in connection
with their approval of the acquisition of CNG by Dominion. See Note 10 for
additional information on the sale of VNG. After Dominion acquired CNG in the
first quarter of 2000, CNG decided to sell CNG International as part of its
desire to focus on the United States oil and gas markets. CNG International
engages in energy-related activities outside of the United States and holds
equity investments in Australia and Argentina.
(7) The Financial Accounting Standards Board has issued an Exposure Draft
proposing amendments to Statement of Financial Accountings Standards (SFAS) No.
133, Accounting for Derivative Instruments and Hedging Activities. If adopted,
the proposed new accounting standard will become effective with the
implementation of SFAS No. 133. The Exposure Draft addresses various
implementation issues including expanded availability of exclusions of normal
purchase and normal sale agreements from classification as derivatives. The
Company is in the process of assessing the impact and method of adoption of SFAS
No. 133 and has not estimated the financial impact of adoption. To the extent
that any of the contracts are subject to fair value accounting, implementing
appropriate hedging strategies could possibly mitigate the potential impact on
earnings volatility.
(8) Dominion has implemented a new hedging strategy for its combined operations.
Under its new strategy, Dominion created an enterprise risk management group
with responsibility for managing Dominion's aggregate energy portfolio,
including the related commodity price risk, across its consolidated operations.
Previously, individual business segments managed their respective energy
portfolios and related price risk exposure on a stand-alone basis. Dominion
management believes this new structure should result in a more effective risk
management approach, thus maximizing the value of Dominion's diversified energy
portfolio and market opportunities.
As part of the implementation of the new strategy, Dominion and CNG management
evaluated CNG's hedging strategy associated with its oil and gas operations in
relation to Dominion's combined operations. As a result of the evaluation, CNG
designated its portfolio of derivative contracts that existed at January 28,
2000 as held for purposes other than hedging for accounting purposes. This
action required a change to mark-to-market accounting where derivative contracts
are carried at fair value in the balance sheet with any future unrealized gains
and losses included in the determination of net income. At January 28, 2000, the
fair value of the derivative contracts represented a net unrealized loss of
approximately $ 69.8 million. This net unrealized loss will be included in the
determination of net income, as an adjustment to revenues, through net
settlement accounting as such contracts mature through 2003. At March 31, 2000,
approximately $56.2 million of the $69.8 million of net hedging losses are
included in Deferred Charges and Other Assets, pending future settlement of the
related contracts.
In addition, CNG entered into "offsetting" contracts for those contracts in the
January 28, 2000 portfolio that would not be settled during the first quarter of
2000. Up to the date that the offsetting contracts were entered into, the mark-
to-market accounting for the original portfolio resulted in a loss of
approximately $55.1 million for the three months ended March 31, 2000. Due to
the Company's establishing the offsetting portfolio of derivative contracts,
absent any not yet identified future losses from credit risk exposure, no
additional material losses are expected to result as these derivative contracts
mature through 2003. Related to these contracts, a liability representing future
contract settlements of approximately $97.5 million is reported in Deferred
Credits and Other Liabilities at March 31, 2000.
The following chart describes the contracts from the original January 28, 2000
portfolio that have not yet matured, for which offsetting contracts have been
entered, at March 31, 2000:
<TABLE>
<CAPTION>
Original Portfolio
- -------------------------------------------------------------------------------------------------------
<S> <C>
Related Commodity Contract
Type of Instrument Item Quantity Maturity
- -------------------------------------------------------------------------------------------------------
Options ("collars") Natural gas 90 Bcf, on a net basis 2003
Oil 3,850,000 barrels 2000
- -------------------------------------------------------------------------------------------------------
Swaps Natural gas 108 Bcf 2003
- -------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the first quarter of 2000, Dominion began the implementation of the new
risk management strategy. Accordingly, CNG and its subsidiaries entered into new
derivative contracts and designated them as hedges of sales of future oil and
gas production. At March 31, 2000, unrealized gains and unrealized losses
related to these contracts were approximately $6.2 million and $14.1 million,
respectively. CNG's hedging portfolio of derivative contracts related to its oil
and gas exploration and production operations at March 31, 2000 follows:
Current Hedging Portfolio
Hedged Commodity
Type of Instrument Item Quantity Maturity
- --------------------------------------------------------------------------------
Options ("collars") Natural gas 26.9 Bcf, on a net basis 2001
Oil 2,908,000 barrels 2001
- --------------------------------------------------------------------------------
Swaps Natural gas 75.8 Bcf, on a net basis 2000
Oil 2,562,000 barrels 2000
- --------------------------------------------------------------------------------
The net deferred losses at March 31, 2000 on the original hedging portfolio of
contracts and the current hedging portfolio of contracts, to the extent
realized, should generally be offset by future sales revenue from oil and gas
production.
(9) The Company is organized primarily on the basis of products and services
sold in the United States. For a detailed description of the Company's business
segments, reference is made to Note 19 to the consolidated financial statements
included in the January 27, 2000 Form 8-K. Corporate and Eliminations includes
the effects of the restructuring and other related costs for the first quarter
2000 as the individual segments were not held accountable for the charges. Note
that 1999 segment information has been restated to reflect the inclusion of
Dominion Field Services, Inc., formerly CNG Field Services Company, in the
Transmission segment (previously included in Other).
<TABLE>
<CAPTION>
Exploration
and Corporate and
Distribution Transmission Production Other Eliminations Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
(In Thousands)
Three Months ended March
31, 2000
- ---------------------------
Nonaffiliated operating revenues $727,746 $169,537 $203,846 $ 55,077 $ - $1,156,206
Affiliated operating
revenues.................. 1,278 61,027 20,998 10,065 (79,983) 13,385
Operating income before income
taxes..................... 161,164 81,097 52,832 3,144 (182,447) 115,790
Net income................. 95,387 47,754 31,312 2,105 (124,035) 52,523
Gas Sales (In Bcf)......... 102.2 23.0 44.4 16.5 (14.8) 171.3
Gas Transportation (In Bcf) 73.6 240.0 .2 - (51.7) 262.1
Three Months ended March
31, 1999
- ---------------------------
Nonaffiliated operating revenues $708,812 $141,672 $130,241 $ 49,088 $ - $1,029,813
Affiliated operating revenues 1,822 51,099 11,054 48 (64,023) -
Operating income before income
taxes............ 156,626 72,070 18,010 (525) (2,874) 243,307
Net income................. 90,556 42,573 10,834 264 (5,240) 138,987
Gas Sales (In Bcf)......... 107.4 14.4 39.3 13.6 (10.3) 164.4
Gas Transportation (In Bcf) 65.6 252.7 .1 - (60.3) 258.1
</TABLE>
(10) On May 8, 2000, Dominion and CNG reached an agreement with AGL Resources
Inc (AGL) regarding the sale of VNG. AGL will pay from $500 million to $550
million in cash depending upon the final structure of the sale. The parties
expect the sale to close by December 31, 2000.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Forward-Looking Information
Certain matters discussed in this Form 10-Q, including Management's Discussion
and Analysis of 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 Consolidated Natural Gas Company (CNG or 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 acquisition by Dominion Resources, Inc.
(Dominion), capital expenditures, earnings, risk management, litigation,
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.
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, 2000 and 1999
System Results
The Company's net income for the first three months of 2000 was $52.5 million,
compared with net income of $139.0 million in the first three months of 1999.
The lower net income reflects the effect of comparatively milder weather and the
restructuring and merger-related costs associated with CNG's acquisition by
Dominion.
Weather in the first quarter of 2000 was 7% warmer than 1999 and 12% warmer than
normal resulting in lower distribution sales and transmission transport volumes.
Merger-related costs associated with CNG's acquisition by Dominion reduced net
income by $117.9 million. Higher oil and gas wellhead prices, increased gas
production and higher by-product prices were positive factors in the 2000
quarter.
Operating Revenues
Regulated gas sales revenues increased $13.7 million, to $640.4 million, in the
first three months of 2000 compared to the prior year period due to higher sales
prices. Average sales rates for all three customer groups increased compared to
the 1999 quarter reflecting higher purchased gas prices in first quarter of
2000. Sales volumes decreased 4.9 billion cubic feet (Bcf) to 102.2 Bcf due to
milder weather. Sales volumes decreased for the Company's residential and
commercial customers, while sales volumes increased for industrial customers.
Nonregulated gas sales revenues increased $58.7 million, to $198.5 million, with
sales volumes increasing 11.8 Bcf to 69.1 Bcf, due in large part to increased
gas sales in 2000 by Dominion Field Services, Inc., formerly CNG Field Services
Company.
Gas transportation and storage revenues decreased $2.6 million in the first
three months of 2000, to $181.6 million reflecting lower gas transportation
volumes and slightly lower rates at Dominion Transmission, Inc., formerly CNG
Transmission Corporation. This decrease was partially offset by increased gas
transportation revenues at the Company's distribution operations and increased
gas storage revenues.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
(Continued)
Other operating revenues increased $70.0 million in the first three months of
2000, to $149.1 million. Revenues from the sale of oil and condensate production
increased $12.4 million due to higher prices. Brokered oil sales increased $36.9
million reflecting relatively flat volumes but a sharp rise in oil prices.
Revenues from the sale of products extracted from natural gas increased $17.2
million in the first quarter of 2000 as a result of higher by- product sales
prices.
Operating Expenses
Operating expenses, excluding income taxes, increased $267.3 million in the
first three months of 2000, to $1.05 billion. Purchased gas increased $46.5
million, to $462.0 million. This increase reflects an approximate 10% increase
in average gas prices during the first quarter 2000 as compared to the 1999
quarter on relatively flat volumes of gas purchased and withdrawn from storage.
Liquids, capacity and other products purchased increased $36.5 million, to $94.5
million, due chiefly to increased prices for oil purchased to satisfy brokered
oil sales. Restructuring and other merger-related costs totaling $172.8 million
were incurred in connection with CNG's acquisition by Dominion in the first
quarter of 2000 (see Note 3 to the consolidated financial statements). Combined
operation and maintenance expense in the first quarter of 1999 was $171.6
million, an increase of $12.0 million compared to the prior year quarter. This
increase reflects primarily an increased accrual for uncollectible customer
accounts as a result of conforming CNG's credit policy to that of Dominion.
Depreciation and amortization increased $10.8 million, to $98.1 million, due
chiefly to the acquisition of additional producing properties in late 1999 and
early 2000. Taxes, other than income taxes, decreased $11.3 million, to $54.8
million, reflecting lower Ohio excise taxes and the discontinuance of
Pennsylvania gross receipts tax as of January 1, 2000. This decrease in gross
receipts taxes was accompanied by a decrease in revenues as customer collections
for this tax ceased for gas services provided on or after January 1, 2000.
Income taxes decreased $44.1 million in the first quarter of 2000 reflecting
lower pretax income and a higher effective tax rate compared to the first
quarter of 1999.
Interest Charges
Total interest charges increased in the first quarter of 2000, as compared to
the prior year quarter, reflecting higher levels of long-term debt and higher
interest rates on commercial paper during the comparative periods.
In connection with the discussion of results of operations, reference is also
made to Note 5, 8 and 9 to the consolidated financial statements.
Business Segment Results
Distribution
Operating income before income taxes of the gas distribution operations was
$161.2 million for the first three months of 2000, up $4.6 million from the same
quarter in 1999. This moderate increase reflects higher gas transport volumes
and higher average sales rates in first quarter 2000 compared to the 1999
quarter. These factors helped offset the effect of lower gas sales due to
comparatively milder weather in the 2000 quarter. Total distribution throughput
in the first quarter of 2000 increased 2.8 Bcf, to 175.8 Bcf, reflecting lower
residential and commercial gas sales volumes due to comparatively milder weather
offset by increased transport volumes, primarily to industrial and off-system
customers. Average sales rates were higher for all customer classes, reflecting
higher purchased gas costs.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
(Continued)
Residential gas sales volumes decreased 5.1 Bcf in the first three months of
2000 to 78.0 Bcf due to the milder weather in the 2000 quarter. The distribution
operations transported 8.1 Bcf of gas for residential customers in the first
quarter of 2000, compared to 7.7 Bcf in 1999. Sales to commercial customers did
not change materially from first quarter 1999 levels while volumes transported
to these customers increased 1.6 Bcf to 19.7 Bcf. Total sales to industrial
customers was also flat for the first quarter of 2000 compared with the prior
year while transport volumes were up 3.7 Bcf to 41.8 Bcf. Off-system transport
volumes increased 2.3 Bcf in the first quarter 2000 to 4.0 Bcf.
Transmission
Operating income before income taxes of the gas transmission operations in the
first quarter of 2000 was $81.1 million, up $9 million from $72.1 million in the
first quarter 1999. These results primarily reflect higher prices for natural
gas by-products and lower taxes other than income taxes partially offset by
lower gas transport revenues. Dominion Field Services, Inc. recorded a pretax
operating loss in the first quarter 2000 due to the bankruptcy of one of its
customers, and produced a moderate contribution to operating income before
income taxes for the 1999 quarter.
Gas transportation revenues decreased approximately $9.8 million for the first
quarter 2000 reflecting a decrease in transport volumes of 12.7 Bcf, or 5
percent, due largely to milder weather in the first quarter of 2000 as compared
to the prior year quarter. Revenues from the sale of natural gas by-products
increased $12.8 million for the first quarter of 2000 as compared to the same
quarter in 1999 reflecting sharply higher prices for all products, which more
than offset a 9% decrease in volumes.
Exploration and Production
The exploration and production operations reported operating income before
income taxes of $52.8 million in the first three months of 2000, compared to
$18.0 million in the first quarter of 1999. Operating results for the first
quarter of 2000 reflect higher gas and oil wellhead prices and a 9 percent
increase in gas production.
The Company's average gas wellhead price was $2.56 per thousand cubic feet (Mcf)
in the 2000 first quarter, $.50 per Mcf higher than the 1999 quarter. Gas
production in the first three months of 2000 was 40.1 Bcf, up 3.5 Bcf from 36.6
Bcf in 1999. The Company's average oil price was $14.67 per barrel in the first
quarter of 2000, compared to $8.28 in the prior year period. Oil production of
1.9 million barrels in the first quarter of 2000 did not change significantly
from first quarter 1999 levels.
Other
Operating income before income taxes for "Other" increased $3.7 million in the
first quarter of 2000 compared to the prior year period reflecting higher
operating income at CNG Retail.
Other Information
Year 2000
CNG experienced a successful transition to the Year 2000 and through February
29, 2000. The Company's natural gas production, transmission, and distribution
systems continued to operate smoothly through the transition periods. CNG's
customers have not experienced natural gas service interruptions as a result of
a Year 2000 problem. The Company expects no significant Year 2000 problems in
the future.
Year 2000 costs of $13 million have been expended as of March 31, 2000.
Additional costs for the remainder of 2000 are anticipated to be insignificant.
CNG cannot estimate or predict the potential adverse consequences that could
result from a third party's failure to effectively address remaining Year 2000
issues, if any, but believes that any impact would be short-term in nature and
would not have a material adverse impact on results of operations.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
(Continued)
Restructuring Costs
CNG is expected to incur additional charges relating to restructuring and other
merger-related activities as business operations are consolidated and
administrative functions are integrated. The planned workforce reductions and
the accelerated depreciation in 2000 of information technology systems that will
be abandoned on January 1, 2001 should avoid future annualized operating costs
of approximately $38 million that would have otherwise been incurred.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported, 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. On or about March
15, 2000, the Parties submitted a Stipulation of Dismissal to the Court.
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 cases have been consolidated with
the Grynberg case, as previously reported, and have been stayed pending the
ruling on the motion to dismiss.
CNG's interstate natural gas pipeline, Dominion Transmission, Inc. is involved
in several proceedings before the Enforcement Section of the Office of the
General Counsel at the Federal Energy Regulatory Commission. These proceedings
concern an audit of Dominion Transmission's compliance with marketing affiliate
regulations, certain storage well drilling practices, and a matter affecting
capacity allocation for the pipeline's services. These proceedings are in
various stages of discovery, and their outcome cannot be determined at this
time. The Company does not anticipate that these proceedings will result in a
material adverse effect to the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits:
10 Dominion Resources, Inc. Incentive Compensation Plan, as restated effective
April 16, 1999 (Exhibit 10(xiv), Dominion Resources, Inc. Form 10-K for the
fiscal year ended December 31, 1999, File No. 1-8489, incorporated by
reference).
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K;
The Company filed a Current Report on Form 8-K/A, dated April 4, 2000, relating
to the change in certifying accountant for the Company.
13
<PAGE>
SIGNATURE
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)
/s/ S. R. McGreevy
--------------------------------
S. R. McGreevy, Vice President,
Accounting and Financial Control
May 12, 2000
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