Egads

"Under a worst case scenario, the current revenue application systems would not be year 2000 ready by the end of 1999 for the other distribution subsidiaries and CAMP would not be successfully implemented or year 2000 ready at Hope Gas and EOG Energy Choice. The estimate of $16.0 million referred to above includes approximately $3.4 million of costs in connection with the CAMP contingency plan. Concurrent with this effort, the Company is continuing the development of CAMP and has capitalized $62.4 million related to this project as of September 30, 1999. "
 

 CONSOLIDATED NATURAL GAS CO - Quarterly Report (SEC form 10-Q)

November 12, 1999

The Company reported net income for the first nine months of 1999 of $69.8 million, or $.73 per share, compared with net income of $143.8 million, or $1.52 per share, in the first nine months of 1998. For the third quarter of 1999, the Company reported net income of $10.8 million, or $.11 a share, compared with net income of $8.1 million, or $.08 a share, in the prior year quarter.
 

YEAR 2000 TECHNOLOGY ISSUE

Reference is made to Exhibit 99 to the Company's 1998 Form 10-K regarding the Company's approach to addressing the Year 2000 technology issue.
 

PROJECT STATUS
The following summarizes the Company's progress in the major project areas through September 30, 1999:

                                           PHASE
                                                                                    Continuity
PROJECT AREA     Inventory      Assessment     Repair/              Testing          Planning
                                               Replace
APPLICATION
SYSTEMS           Complete      Complete      Repair: Complete     Complete for     Complete
                                              Replacement:         Critical
                                              In progress          Applications
PROCESS CONTROL
COMPONENTS        Complete      Complete      October 1999         October 1999     Complete

TECHNICAL

INFRASTRUCTURE    Complete      Complete      Complete             Complete         Complete

PHYSICAL

INFRASTRUCTURE    Complete      Complete      In progress          In progress      Complete

BUSINESS                                      Not                  Not              Complete
PARTNERS AND      Complete      Complete      applicable           applicable
SUPPLIERS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

APPLICATION SYSTEMS. During the assessment phase, approximately 80 application systems were identified requiring some degree of repair or replacement. However, the Company's actions to upgrade to newer, more functional versions of vendor software have mitigated many existing year 2000 issues. These upgrade activities continued through mid-1999. Repair and replacement activities for internally developed application systems began in March 1998. All repair activities were completed by September 1999, while some replacement activities will continue into the fourth quarter of 1999. None of the replacement activities are considered to be critical. Testing of all critical application systems is complete and additional testing is being performed in the time remaining until the date change. Overall, the Company considers all of its critical application systems portfolio to be year 2000 ready. For critical application systems, "year 2000 ready" indicates that the Company has completed repair or replacement activities and independent testing. Reference is made to "Risks," page 21, for information on the status of the development of a new revenue and customer information system for the distribution subsidiaries called "CAMP."

In July 1999, the Company implemented year 2000 change control methods to ensure future stability in the application system and technical infrastructure environments. On October 1, 1999, the Company implemented a year 2000 Production Moratorium to restrict changes to application systems, technical infrastructure and process control components.

PROCESS CONTROL COMPONENTS. For process control components inventoried by the Company, approximately 43% are not date sensitive, and therefore are not affected by year 2000 issues. For date sensitive components, the Company has experienced via testing activities a year 2000 failure rate of less than 1%. Replacement of a small number of non-compliant components will continue through the remainder of 1999 as year 2000 compliant upgrades and replacements become available from vendors. Unit testing activities for the Company's regulated businesses are approximately 89% complete, while unit testing for the Company's E&P business is 93% complete. System testing of the interaction of process control components began in April 1999 and is expected to be completed in October 1999.

TECHNICAL INFRASTRUCTURE. Technical infrastructure has been analyzed directly with vendors and via the use of an external vendor research database service. This information is being used to guide year 2000 upgrades of infrastructure as necessary. Repair, replacement and testing activities are nearly 100% complete for all categories of technical infrastructure, while efforts in the critical area of application servers are 97% complete. The Company completed a substantial portion of year 2000 upgrades by the end of 1998, and is continuing with testing in 1999. The Company is also closely monitoring the status of vendor-supplied products to ensure their continuing year 2000 compliance.

The Company has completed an inventory of its desktop personal computers and continues to deploy updated desktop infrastructure that is year 2000 ready concurrent with the implementation of various new application systems. The Company has completed testing to confirm year 2000 readiness of this infrastructure and associated software, and has completed the implementation of year 2000 operating system upgrades. The Company has also completed examining the year 2000 aspects of user-created desktop files, applications and spreadsheets and repairs are being made as necessary.

PHYSICAL INFRASTRUCTURE. The Company has completed an inventory and analysis of gas and non-gas related physical infrastructure components that may be subject to year 2000 problems. Of the facilities inventoried, 109 are considered critical. The Company is currently focusing its efforts on testing components (such as HVAC, security systems, and universal power supplies) which are considered critical. This activity is expected to be completed in October 1999.
 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

The Company has also focused its efforts in the facilities area on electrical power backup. The loss of electrical power to the Company's compression facilities is a major risk to the continued, reliable transmission and delivery of natural gas. The Company continues to make capital improvements to its system in case of failure of electricity suppliers. Electric generators are being added or improved in 91 critical facilities so that CNG can generate its own power, if needed, to run critical gas delivery systems. These generators can also supply power to CNG's microwave telecommunications system. Load testing, to ensure adequate power is available to continue the transmission and delivery of natural gas, has been completed in these critical facilities.

Where facilities are leased, the Company has identified and contacted building managers/lessors to ensure they are actively addressing the year 2000 issue. The Company is also using facilities information as a primary component of its continuity planning effort.

BUSINESS PARTNER AND VENDOR RELATIONSHIPS. Strategic business partner and vendor relationships have been identified and assessed through questionnaires and interviews. Over 1,900 business partner and vendor relationships have been identified and queried. Of the business partners and vendors identified, approximately 600 are prioritized as strategic to key Company business processes. Of these strategic relationships, over 50% have already reported to the Company that they are either compliant or making good progress in mitigating any year 2000 issues. In conjunction with business continuity planning, the Company has validated its business partner inventory, obtained updated status information, and completed risk assessments to rate each of the critical business partners. To validate business continuity planning assumptions, various segments of the Company are conducting face-to-face meetings with critical business partners and developing cooperative relationships where necessary to further mitigate risk. Risk assessment will continue throughout 1999. The Company's analysis includes the year 2000 status of operations in Argentina and Australia in which the Company has investments.

CONTINUITY PLANNING. CNG commenced full scale business continuity planning in October 1998. This project seeks to complement year 2000 activities that have been performed to date by ensuring that critical business processes are operational during and after the date change. Business continuity planning consists of developing and testing different types of plans, including a "zero day" plan, a continuity plan and a recovery plan. CNG has identified the set of critical business processes (15 major processes, 140+ sub processes) for which continuity planning is essential. The Company has completed development of continuity planning methodology, identified critical business processes throughout the Company, and trained business continuity managers to develop and coordinate plans. As of September 1999, 267 plans were identified and are completed. The majority of these plans are related to the activities of the Company's regulated businesses, in areas such as gas supply, gas control, transmission and storage, and distribution, focusing on safety and continuity of gas supply as important factors. Business continuity planning is 92% complete for this segment of the Company's business. The Company is also actively performing recovery and zero-day planning for application systems which are critical to continued operations.

Through continuity planning, the Company is also identifying capital improvements which are necessary to support the various continuity plans. The Company expects to spend $1.3 million in permanent capital improvements, such as the purchase and deployment of power generators by the end of 1999. This activity is currently in progress.

The Company has also performed successful rehearsals of two of its critical continuity plans: SCADA and telecommunications. The SCADA system measures operating conditions, flow rates, and the status of control devices, such as flow and pressure regulators, valves and compressors, and transmits real-time data to central control rooms. Employees at 80 critical storage, transmission and distribution sites performed all operations manually under the assumption that the SCADA system was unavailable. Data that is normally handled by SCADA was collected manually and called in via CNG's microwave system, telephones and fax machines. For further assurance, approximately 60 employees were also stationed on hilltops, testing the viability of using radios to share data if telephones also failed. Results of the test are being used to further strengthen continuity plans in the SCADA and telecommunications areas.
 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
 

COSTS
Based upon project status as described above, the Company expects to spend a total of approximately $16.0 million in connection with its Year 2000 Project Office efforts, its use of external consultants and the repair of affected application systems. This estimate includes capitalized costs for hardware and software used (or expected to be used) in the testing phase, and for application system and technical infrastructure replacements. This estimate excludes costs incurred or expected to be incurred in connection with the development and installation of major new application systems which are expected to be year 2000 ready, the Company's potential share of year 2000 costs that may be incurred by partnerships and joint ventures in which the Company participates but is not the operator, and internal labor costs other than those of the core Project Office. As of September 30, 1999, the Company has incurred costs approximating $9.9 million (of which $1.4 million has been capitalized) in connection with its year 2000 efforts. Total costs incurred as of September 30, 1999, as a proportion of the total year 2000 budget, is not indicative of the progress of the project.
 

RISKS
Significant progress continues in the development of CAMP for use at Hope Gas and EOG Energy Choice. However, previous technical difficulties and delays have caused the Company to invoke a contingency plan which involves renovation of the current revenue application system for the other distribution subsidiaries and 20 related application systems to make such systems year 2000 ready. These current systems collectively address the business processes which were to be handled by CAMP. Renovation, implementation and testing activities have been completed in connection with this contingency plan. Under a worst case scenario, the current revenue application systems would not be year 2000 ready by the end of 1999 for the other distribution subsidiaries and CAMP would not be successfully implemented or year 2000 ready at Hope Gas and EOG Energy Choice. The estimate of $16.0 million referred to above includes approximately $3.4 million of costs in connection with the CAMP contingency plan. Concurrent with this effort, the Company is continuing the development of CAMP and has capitalized $62.4 million related to this project as of September 30, 1999. The CAMP core software is a licensed product of the Company's independent accountants, PricewaterhouseCoopers LLP (PwC), and PwC is the primary information systems consultant on this project.

If a material year 2000 problem is not corrected in a timely manner, an interruption in, or a failure of, certain normal business activities or operations of the Company could occur. Such instances could materially and adversely affect the Company's financial position, cash flows and/or results of operations. Due to the uncertainty inherent in the year 2000 issue, including the uncertainty of year 2000 readiness of third party vendors, business partners and customers, the Company cannot determine at this time whether the consequences of any year 2000 failures will have a material impact on its financial position, cash flows or results of operations. However, the Company's Project Office activities and the implementation of new application systems are expected to reduce the risk of a material year 2000 failure

-- Brian (imager@home.com), November 14, 1999

Answers

continuity planning = 60 employees on hilltops! Imagine if only ten of them find it necessary to take care of their families instead of go to work!

-- cmd0903 (cmd0903@aol.com), November 14, 1999.

Looks very comforting except for a couple of details, such as:

"Over 1,900 business partner and vendor relationships have been identified and queried. Of the business partners and vendors identified, approximately 600 are prioritized as strategic to key Company business processes. Of these strategic relationships, over 50% have already reported to the Company that they are either compliant or making good progress in mitigating any year 2000 issues."

Well now, of that 50% (950 I presume), they neglected to say how many are actually 'compliant'. This can be interpreted as anything from 949 compliant and 1 'making good progress' or 1 compliant and 949 'making good progress'. So, absolute best case (as presented) is that 950 of their business partners and vendors will be compliant. This does not bode well for their ability to conduct business as usual (eg continued delivery of gas).

This should get anyone off the couch and down to the fireplace dealer!

Good luck to us all.

TA

-- TA (ready@ihope.now), November 14, 1999.

cmd0903

Tough questions. Contingency planning is going to require many hands.

TA

Often reading these disclosures bring up more questions than answers. But then it gives you ideas on where to look the next time.

Best of luck folks

-- Brian (imager@home.com), November 14, 1999.