<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549


                                    FORM 10-Q


 [X]            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                      For the Quarterly period ended JUNE 30, 1998
                                                     -------------

 [ ]            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 1-1098
                                                 ------


                              COLUMBIA ENERGY GROUP
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)


                            Delaware                       13-1594808
                ----------------------------------------------------------
                (State or other jurisdiction of           (IRS Employer
                 incorporation or organization)        Identification No.)

             13880 Dulles Corner Lane, Herndon, VA            20171-4600
            ------------------------------------------------------------
            (Address of principal executive offices)     (Zip Code)



        Registrant's telephone number, including area code (703) 561-6000
                                                           --------------       


        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
                                               ---        ---

        Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:  Common Stock, $10
Par Value: 83,371,109 shares outstanding at June 30, 1998.


<PAGE>   2




                     COLUMBIA ENERGY GROUP AND SUBSIDIARIES
                           FORM 10-Q QUARTERLY REPORT
                       FOR THE QUARTER ENDED JUNE 30, 1998

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                            Page
                                                                                                            ----
<S>                <C>                                                                                     <C> 
PART I              FINANCIAL INFORMATION
------              ---------------------
Item 1              Financial Statements

                        Statements of Consolidated Income                                                     3

                        Condensed Consolidated Balance Sheets                                                 4

                        Consolidated Statements of Cash Flows                                                 6

                        Consolidated Statements of Common Stock Equity                                        7

                        Notes                                                                                 8


Item 2              Management's Discussion and Analysis of
                        Financial Condition and Results of Operations                                        11


Item 3              Quantitative and Qualitative Disclosures About Market Risks                              30


PART II             OTHER INFORMATION
-------             -----------------
Item 1              Legal Proceedings                                                                        30

Item 2              Changes in Securities and Use of Proceeds                                                31

Item 3              Defaults Upon Senior Securities                                                          31

Item 4              Submission of Matters to a Vote of Security Holders                                      31

Item 5              Other Information                                                                        32

Item 6              Exhibits and Reports on Form 8-K                                                         32

                    Signature                                                                                33
</TABLE>



                                       2
<PAGE>   3



                         PART I - FINANCIAL INFORMATION
                         ITEM 1 - FINANCIAL STATEMENTS


Columbia Energy Group and Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME (unaudited)

<TABLE>
<CAPTION>
                                                                   Three Months                             Six Months
                                                                  Ended June 30,                          Ended June 30,
                                                      ----------------------------------       -------------------------------
                                                            1998                1997              1998                 1997
                                                      ----------------    --------------       ------------      -------------
                                                                         (millions, except per share amounts)
<S>                                                      <C>                  <C>             <C>                  <C> 
NET REVENUES
    Energy sales                                          $1,149.0             $ 629.5         $2,748.6             $1,960.2
    Less:  Products purchased                                936.8               400.3          2,156.0              1,297.0
                                                          --------             -------         --------             --------

    Gross Margin                                             212.2               229.2            592.6                663.2

    Transportation                                           121.5               120.3            282.7                268.8
    Production gas sales                                      11.7                 8.4             29.1                 13.7
    Other                                                     40.2                49.2            103.7                 89.5
                                                          --------             -------         --------             --------
Total Net Revenues                                           385.6               407.1          1,008.1              1,035.2
                                                          --------             -------         --------             --------

OPERATING EXPENSES
    Operation                                                192.8               200.6            377.2                399.5
    Maintenance                                               24.1                26.8             45.8                 51.4
    Depreciation and depletion                                52.8                49.2            126.0                120.4
    Other taxes                                               45.0                46.2            134.0                123.0
                                                          --------             -------         --------             --------
Total Operating Expenses                                     314.7               322.8            683.0                694.3
                                                          --------             -------         --------             --------

OPERATING INCOME                                              70.9                84.3            325.1                340.9
                                                          --------             -------         --------             --------

OTHER INCOME (DEDUCTIONS)
    Interest income and other, net                             3.2                 6.1              5.5                 20.4
    Interest expense and related charges                     (38.5)              (38.0)           (80.1)               (78.3)
                                                          --------             -------         --------             --------
Total Other Income (Deductions)                              (35.3)              (31.9)           (74.6)               (57.9)
                                                          --------             -------         --------             --------

INCOME BEFORE INCOME TAXES                                    35.6                52.4            250.5                283.0
Income Taxes                                                  12.8                17.5             80.2                 85.4
                                                          --------             -------         --------             --------

NET INCOME                                                $   22.8             $  34.9         $  170.3             $  197.6
                                                          ========             =======         ========             ========

EARNINGS PER SHARE OF COMMON STOCK*                       $   0.27             $  0.42         $   2.04             $   2.38

DIVIDENDS PAID PER SHARE OF COMMON STOCK*                 $   0.20             $  0.17         $   0.37             $   0.27

AVERAGE COMMON SHARES OUTSTANDING (thousands)*              83,335              83,050           83,299               83,019
</TABLE>


*   All per share amounts and average common shares outstanding have been
    restated to reflect a three-for-two common stock split, in the form of a
    stock dividend, effective June 15, 1998.

The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.


                                       3

<PAGE>   4



                         PART I - FINANCIAL INFORMATION
                    ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)





Columbia Energy Group and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                       As of
                                                                               -----------------------------------------------------
                                                                                     June 30,                        December 31,
                                                                                       1998                              1997
                                                                               ---------------------             -------------------
                                                                                   (unaudited)
ASSETS                                                                                               (millions)
PROPERTY, PLANT AND EQUIPMENT
<S>                                                                                <C>                                 <C>  
    Gas utility and other plant, at original cost                                   $ 7,457.7                           $ 7,368.9
    Accumulated depreciation                                                         (3,555.3)                           (3,481.5)
                                                                                    ---------                           ---------
    Net Gas Utility and Other Plant                                                   3,902.4                             3,887.4
                                                                                    ---------                           ---------

    Gas and oil producing properties, full cost method
       United States cost center                                                        672.4                               660.2
       Canadian cost center                                                               3.7                                   -
    Accumulated depletion                                                              (212.3)                             (196.0)
                                                                                    ---------                           ---------
    Net Gas and Oil Producing Properties                                                463.8                               464.2
                                                                                    ---------                           ---------
Net Property, Plant and Equipment                                                     4,366.2                             4,351.6
                                                                                    ---------                           ---------

INVESTMENTS AND OTHER ASSETS                                                             96.9                                85.2
                                                                                    ---------                           ---------

CURRENT ASSETS
    Cash and temporary cash investments                                                  47.7                                28.7
    Accounts receivable, net                                                            723.9                               868.5
    Gas inventory                                                                       130.1                               226.8
    Other inventories - at average cost                                                  31.0                                35.6
    Prepayments                                                                          79.1                               107.7
    Regulatory assets                                                                    63.3                                64.6
    Underrecovered gas costs                                                             13.3                                41.4
    Deferred property taxes                                                              39.2                                80.8
    Exchange gas receivable                                                             209.0                               189.0
    Other                                                                                42.7                                64.6
                                                                                    ---------                           ---------
Total Current Assets                                                                  1,379.3                             1,707.7
                                                                                    ---------                           ---------

REGULATORY ASSETS                                                                       383.0                               400.9
DEFERRED CHARGES                                                                         76.6                                66.9
                                                                                    ---------                           ---------

TOTAL ASSETS                                                                        $ 6,302.0                           $ 6,612.3
                                                                                    =========                           =========
</TABLE>

The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.


                                       4

<PAGE>   5


                         ITEM 1 - FINANCIAL STATEMENTS
                 PART I - FINANCIAL INFORMATION (CONTINUED)


Columbia Energy Group and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                             As of
                                                                     ------------------------------------------------------
                                                                           June 30,                       December 31,
                                                                             1998                             1997
                                                                     ---------------------            ---------------------
                                                                         (unaudited)
CAPITALIZATION AND LIABILITIES                                                            (millions)
<S>                                                                       <C>                              <C>
CAPITALIZATION
    Common stock equity                                                    $1,935.0                         $1,790.7
    Long-term debt                                                          2,002.2                          2,003.5
                                                                           --------                         --------
Total Capitalization                                                        3,937.2                          3,794.2
                                                                           --------                         --------

CURRENT LIABILITIES
    Short-term debt                                                            45.9                            328.1
    Accounts and drafts payable                                               455.2                            536.7
    Accrued taxes                                                             109.9                            140.9
    Accrued interest                                                           32.8                             29.4
    Estimated rate refunds                                                     53.7                             68.4
    Estimated supplier obligations                                             72.6                             73.9
    Transportation and exchange gas payable                                   124.6                             89.2
    Overrecovered gas costs                                                    67.8                             84.6
    Other                                                                     315.6                            367.0
                                                                           --------                         --------
Total Current Liabilities                                                   1,278.1                          1,718.2
                                                                           --------                         --------

OTHER LIABILITIES AND DEFERRED CREDITS
    Deferred income taxes, noncurrent                                         644.4                            618.4
    Investment tax credits                                                     34.9                             35.6
    Postretirement benefits other than pensions                               102.7                            148.8
    Regulatory liabilities                                                     46.3                             41.3
    Other                                                                     258.4                            255.8
                                                                           --------                         --------
Total Other Liabilities and Deferred Credits                                1,086.7                          1,099.9
                                                                           --------                         --------

TOTAL CAPITALIZATION AND LIABILITIES                                       $6,302.0                         $6,612.3
                                                                           ========                         ========
</TABLE>




                                       5

<PAGE>   6


                         PART I - FINANCIAL INFORMATION
                   ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)



Columbia Energy Group and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

<TABLE>
<CAPTION>
                                                                                            Six Months
                                                                                          Ended June 30,
                                                                     -------------------------------------------------
                                                                           1998                            1997
                                                                     ------------------              -----------------
                                                                                        (millions)
<S>                                                                     <C>                             <C> 
OPERATING ACTIVITIES
   Net income                                                            $ 170.3                         $ 197.6
   Adjustments for items not requiring (providing) cash:
      Depreciation and depletion                                           126.0                           120.4
      Deferred income taxes                                                 34.3                            (6.5)
      Earnings from equity investment, net of distributions                 (3.7)                           (0.6)
      Other - net                                                           (3.3)                          (28.0)
                                                                         -------                         -------
                                                                           323.6                           282.9
   Change in components of working capital:
      Accounts receivable                                                  123.1                             2.8
      Gas inventory                                                         96.7                            84.6
      Prepayments                                                           28.6                           (31.4)
      Accounts payable                                                     (25.0)                           54.4
      Accrued taxes                                                        (31.0)                           33.3
      Accrued interest                                                       3.4                             2.5
      Estimated rate refunds                                               (14.7)                          (27.1)
      Estimated supplier obligations                                        (1.3)                          (37.1)
      Under/Overrecovered gas costs                                         11.3                           207.3
      Exchange gas receivable/payable                                       15.9                           (11.0)
      Other working capital                                                 21.6                            10.9
                                                                         -------                         -------
Net Cash from Operations                                                   552.2                           572.1
                                                                         -------                         -------

INVESTMENT ACTIVITIES
   Capital expenditures                                                   (163.4)                         (141.4)
   Other investments - net                                                  (8.5)                           (8.6)
                                                                         -------                         -------
Net Investment Activities                                                 (171.9)                         (150.0)
                                                                         -------                         -------

FINANCING ACTIVITIES
   Retirement of long-term debt                                             (0.9)                           (0.5)
   Dividends paid                                                          (31.1)                          (22.1)
   Issuance of common stock                                                  5.4                             5.5
   Issuance (repayment) of short-term debt                                (281.4)                         (250.0)
   Other financing activities                                              (53.3)                          (14.6)
                                                                         -------                         -------
Net Financing Activities                                                  (361.3)                         (281.7)
                                                                         -------                         -------

Increase in Cash and Temporary Cash Investments                             19.0                           140.4
Cash and temporary cash investments at beginning of year                    28.7                            49.8
                                                                         -------                         -------
Cash and temporary cash investments at June 30 *                         $  47.7                         $ 190.2
                                                                         =======                         =======

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
   Cash paid for interest                                                   74.5                            71.6
   Cash paid for income taxes (net of refunds)                              32.0                            34.7
</TABLE>

* Columbia considers all highly liquid short-term investments to be cash
equivalents.

The accompanying Notes to the Consolidated Financial Statements are an
integral part of these statements.

                                       6

<PAGE>   7




                         PART I - FINANCIAL INFORMATION
                   ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)


Columbia Energy Group and Subsidiaries
CONSOLIDATED STATEMENTS OF COMMON STOCK EQUITY

<TABLE>
<CAPTION>
                                                                                              As of
                                                                             ------------------------------------
                                                                                 June 30,         December 31,
                                                                                   1998               1997
                                                                             ----------------   -----------------
                                                                                (unaudited)
                                                                                          (millions)
<S>                                                                            <C>                 <C> 
COMMON STOCK EQUITY

Common stock, $10 par value, authorized
   100,000,000 shares, outstanding 83,371,109
   and 55,495,460* shares, respectively                                          $  833.7           $  554.9

Additional paid in capital                                                          758.3              754.2

Retained earnings                                                                   344.0              482.7

Unearned employee compensation                                                       (0.9)              (1.1)

Accumulated Other Comprehensive Income:
   Foreign currency translation adjustment                                           (0.1)                 -
                                                                                 --------           --------

TOTAL COMMON STOCK EQUITY                                                        $1,935.0           $1,790.7
                                                                                 ========           ========
</TABLE>

* The common shares outstanding for December 31, 1997 do not reflect the
three-for-two common stock split, effected on June 15, 1998.

The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.


                                       7

<PAGE>   8




                         PART I - FINANCIAL INFORMATION
                   ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)


Columbia Energy Group and Subsidiaries

NOTES

1.          Basis of Accounting Presentation
            The accompanying unaudited condensed consolidated financial
            statements for the Columbia Energy Group (Columbia) reflect all
            normal recurring adjustments that are necessary, in the opinion of
            management, to present fairly the results of operations in
            accordance with generally accepted accounting principles.

            The accompanying financial statements should be read in conjunction
            with the financial statements and notes thereto included in
            Columbia's 1997 Annual Report on Form 10-K and Quarterly Report on
            Form 10-Q for the first quarter of 1998. Income for interim periods
            may not be indicative of results for the calendar year due to
            weather variations and other factors. Certain reclassifications have
            been made to the 1997 financial statements to conform to the 1998
            presentation.

2.          Settlement of Retiree Benefit Obligation
            In March 1998, trusts established by Columbia purchased insurance
            policies that provide both medical and life insurance with respect
            to liabilities to a selected class of current retirees. This
            resulted in a settlement of $152.1 million of Columbia's obligation
            and a gain in the amount of $46.7 million, pre-tax. This gain is
            reflected in the financial statements as a $23.1 million reduction
            to benefits expense, and a $23.6 million liability of certain
            rate-regulated companies.

3.          Earnings Per Share
            Financial Accounting Standards Board Statement of Financial
            Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128)
            requires dual presentation of Basic and Diluted earnings per share
            (EPS) by entities with complex capital structures and also requires
            restatement of all prior-period EPS data presented. Basic EPS
            includes no dilution and is computed by dividing income available to
            common stockholders by the weighted-average number of common shares
            outstanding for the period. Diluted EPS reflects the potential
            dilution if certain securities are converted into common stock.

            Under the requirements of SFAS No. 128, Columbia's Diluted EPS is
            as follows:

<TABLE>
<CAPTION>

                                                                                Three Months                   Six Months
                                                                               Ended June 30,                 Ended June 30,
                                                                            --------------------         ---------------------
             Diluted EPS Computation                                         1998           1997           1998           1997
             =================================================================================================================
             <S>                                                            <C>           <C>            <C>          <C>   
             Net Income (millions)                                          $  22.8       $  34.9        $ 170.3       $ 197.6
             -----------------------------------------------------------------------------------------------------------------
             Denominator (thousands)
               Average common shares outstanding                             83,335        83,050         83,299        83,019
               Dilutive potential common shares - options                       391           235            391           235
             -----------------------------------------------------------------------------------------------------------------
               Diluted Average Common Shares                                 83,726        83,285         83,690        83,254
             -----------------------------------------------------------------------------------------------------------------
             DILUTED EARNINGS PER SHARE OF COMMON STOCK                     $  0.27       $  0.42        $  2.03       $  2.37
             =================================================================================================================
</TABLE>

            The number of shares reflect a three-for-two common stock split
effected in the form of a stock dividend (see Note 4).



                                       8

<PAGE>   9



                         PART I - FINANCIAL INFORMATION
                   ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)

4.          Stock Split Effected in the Form of a Stock Dividend
            On May 20, 1998, Columbia's board of directors approved a
            three-for-two common stock split, effected in the form of a 50%
            stock dividend (stock split), on June 15, 1998, payable to
            shareholders of record as of June 1, 1998. In connection with the
            stock split, 27.8 million shares were issued on June 15, 1998, and
            $277.9 million was transferred to common stock from retained
            earnings. The value of fractional shares resulting from the stock
            split was determined at the closing price on June 1, 1998, and $0.6
            million was paid in cash to the shareholders for fractional-share
            interests. All references in the financial statements and notes to
            the number of common shares outstanding and per-share amounts,
            except where otherwise noted, reflect the retroactive effect of the
            stock split.

5.          New Accounting Standards
            In March 1998, the Accounting Standards Executive Committee of the
            American Institute of Certified Public Accountants issued Statement
            of Position 98-1, "Accounting for the Costs of Computer Software
            Developed for Internal Use" (SOP 98-1). This statement requires the
            capitalization of certain internal-use software costs, once certain
            criteria are met. Columbia adopted this statement in June 1998,
            retroactive to the beginning of the year. The adoption of SOP 98-1
            did not have a material effect on Columbia's financial statements.

            In April 1998, the Accounting Standards Executive Committee of the
            American Institute of Certified Public Accountants issued Statement
            of Position 98-5, "Reporting on the Costs of Start-Up Activities"
            (SOP 98-5). This statement requires that certain costs of start-up
            activities, including organization costs, be expensed as incurred.
            SOP 98-5 is effective for financial statements for fiscal years
            beginning after December 15, 1998. Columbia does not anticipate that
            the adoption of this statement will have a significant impact on the
            consolidated financial statements.

            In June 1998, the Financial Accounting Standards Board issued
            Statement of Financial Accounting Standards No. 133, "Accounting for
            Derivative Instruments and Hedging Activities" (SFAS No. 133). This
            statement establishes accounting and reporting standards for
            derivative instruments, including certain derivative instruments
            embedded in other contracts, (collectively referred to as
            derivatives) and for hedging activities. SFAS No. 133 requires an
            entity to recognize all derivatives as either assets or liabilities
            in the balance sheet and measure those instruments at fair value. If
            certain conditions are met, a derivative may be specifically
            designated as (a) a hedge of the exposure to changes in the fair
            value of a recognized asset or liability or an unrecognized firm
            commitment, (b) a hedge of the exposure to variable cash flows of a
            forecasted transaction, or (c) a hedge of the foreign currency
            exposure of a net investment in a foreign operation, an unrecognized
            firm commitment, an available-for-sale security, or a
            foreign-currency-denominated forecasted transaction. The accounting
            for changes in the fair value of a derivative depends on the
            intended use of the derivative and the resulting designation. This
            statement is effective for all fiscal quarters of fiscal years
            beginning after June 15, 1999. Columbia does not anticipate that the
            adoption of this statement will have a significant impact on the
            consolidated results of operations.




                                       9
<PAGE>   10



                         PART I - FINANCIAL INFORMATION
                   ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)

 6.         Long-Term Debt - Interest Rate Swap
            At June 30, 1998, Columbia had entered into an interest rate swap
            agreement through November 28, 2002, on a $50 million notional
            amount of its 6.61% Series B Debentures due November 28, 2002. Under
            the terms of the agreement, Columbia pays interest based on a
            floating rate index and receives interest based on a fixed rate. The
            effect is to modify the interest rate characterization of a portion
            of the long-term debt from fixed to variable.

7.          Business Segment Information
            Effective June 30, 1998, in accordance with generally accepted
            accounting principles, Columbia revised the presentation of its
            business segments. Columbia's operations are divided into five
            primary business segments. The transmission and storage segment
            offers transportation and storage services for local distribution
            companies and industrial and commercial customers located in
            Northeastern, middle Atlantic, Midwestern, and Southern states and
            the District of Columbia. The distribution segment provides natural
            gas service and transportation for residential, commercial and
            industrial customers in Ohio, Pennsylvania, Virginia, Kentucky and
            Maryland. The exploration and production segment explores for,
            develops, produces, and markets gas and oil in the United States and
            in Canada. The marketing segment provides gas and electricity
            supply, fuel management and transportation-related services to a
            diverse customer base including cogenerators, local distribution
            companies, industrial plants, commercial businesses, joint marketing
            partners and residential customers. The propane, power generation
            and LNG segment includes the sale of propane at wholesale and retail
            to customers in eight states, participation in natural gas fueled
            electric generation projects and peaking services.



                                       10

<PAGE>   11


                         PART I - FINANCIAL INFORMATION
                ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS


                   OPERATING INCOME (LOSS) BY SEGMENT

<TABLE>
<CAPTION>
                                                                 Three Months                              Six Months
                                                                Ended June 30,                           Ended June 30,
                                                       ---------------------------------        --------------------------------
                                                               1998         1997                        1998         1997
                                                       ---------------------------------        --------------------------------
                                                                                       (millions)
<S>                                                          <C>          <C>                        <C>            <C>  

Transmission and Storage                                      $58.8        $64.8                       $176.6         $156.3

Distribution                                                   13.4         21.3                        133.5          161.9

Exploration and Production                                      8.5          5.4                         22.9           17.1

Marketing                                                      (7.6)        (0.4)                       (13.1)           0.6

Propane, Power Generation and LNG                              (0.2)        (0.2)                         7.3           10.1

Corporate                                                      (2.0)        (6.6)                        (2.1)          (5.1)
                                                              -----        -----                       ------         ------

   TOTAL                                                      $70.9        $84.3                       $325.1         $340.9
                                                              =====        =====                       ======         ======
</TABLE>



              DEGREE DAYS (DISTRIBUTION SERVICE TERRITORY)

<TABLE>
<CAPTION>
                                                                 Three Months                            Six Months
                                                                Ended June 30,                         Ended June 30,
                                                        -----------------------------         -------------------------------
                                                             1998            1997                 1998               1997
                                                        -------------     -----------         -------------     -------------
<S>                                                         <C>              <C>                 <C>              <C> 
Actual                                                       518              837                 2,837             3,530

Normal                                                       580              580                 3,527             3,527

% Colder (warmer) than normal                                (11)              44                   (20)                -

% Colder (warmer) than prior period                          (38)              19                   (20)               (7)
</TABLE>





                                       11

<PAGE>   12

                         PART I - FINANCIAL INFORMATION
                ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                              CONSOLIDATED RESULTS

Forward-Looking Statements
The Management's Discussion and Analysis, including statements regarding market
risk sensitive instruments, and Item 3 hereof contain "forward-looking
statements," within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Investors and prospective investors should understand that several factors
govern whether any forward-looking statement contained herein will be or can be
achieved. Any one of those factors could cause actual results to differ
materially from those projected. These forward-looking statements include, but
are not limited to, statements concerning Columbia's plans, objectives, expected
performance, expenditures and recovery of expenditures through rates, stated on
either a consolidated or segment basis, and any and all underlying assumptions
and other statements that are other than statements of historical fact. From
time to time, Columbia may publish or otherwise make available forward-looking
statements of this nature. All such subsequent forward-looking statements,
whether written or oral and whether made by or on behalf of Columbia, are also
expressly qualified by these cautionary statements. All forward-looking
statements are based on assumptions that management believes to be reasonable;
however, there can be no assurance that actual results will not differ
materially. Realization of Columbia's objectives and expected performance is
subject to a wide range of risks and can be adversely affected by, among other
things, competition, weather, regulatory and legislative changes as well as
changes in general economic, capital and commodity market conditions, many of
which are beyond the control of Columbia. In addition, the relative
contributions to profitability by segment, and the assumptions underlying the
forward-looking statements relating thereto, may change over time due to changes
in the marketplace.

With respect to any references made to ratings assigned to Columbia's debt
securities, there can be no assurance that Columbia will be successful in
maintaining its credit quality, or that such credit ratings will continue for
any given period of time, or that they will not be revised downward or withdrawn
entirely by the rating agencies. Credit ratings reflect only the views of the
rating agencies, whose methodology and the significance of their ratings may be
obtained from them.

Second Quarter Results

                                   Net Income
Columbia's second quarter 1998 net income was $22.8 million, or $0.27 per share,
a decrease of $12.1 million, or $0.15 per share, from the same period last year
due to 38% warmer weather and additional infrastructure investment and staffing
costs in the marketing segment. The second quarter of 1998 was 11% warmer than
normal, while the same period last year was 44% colder than normal. In addition,
the second quarter of 1997 reflected a $12.4 million after-tax improvement from
Columbia Gas Transmission Corporation's (Columbia Transmission) sale of storage
base gas, as provided for by its rate settlement. Except where otherwise noted,
all per share amounts are adjusted to reflect the three-for-two stock split, in
the form of a stock dividend (stock split), that occurred in June 1998.

                                    Revenues
Total consolidated net revenues (operating revenues less associated products
purchased costs) for the second quarter of 1998 were $385.6 million, a $21.5
million decrease from the same period last year, reflecting reduced
weather-sensitive gas sales for the distribution segment and $19.1 million of
revenues last year from Columbia Transmission's regulatory settlement. Tempering
these decreases were higher net revenues from the marketing segment due to a
significant increase in natural gas sales, as well as current period net
revenues from electric power sales that began in late 1997. The increase in the
marketing segment's natural gas sales was primarily in low-margin wholesale
sales that significantly increased energy sales revenues and related products
purchased costs.


                                       12

<PAGE>   13




                         PART I - FINANCIAL INFORMATION
                ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                        CONSOLIDATED RESULTS (CONTINUED)


                                    Expenses
For the three months ended June 30, 1998, operating expenses of $314.7 million
were $8.1 million lower than the same period last year, primarily reflecting a
$10.5 million decrease in operation and maintenance costs. This decrease was
attributable to restructuring initiatives recently implemented for the
transmission and distribution segments as well as $11.9 million of restructuring
costs recorded last year. Partially offsetting these improvements were
additional investments in the marketing segment's infrastructure and higher
costs related to staff additions.

                           Other Income (Deductions)
Other Income (Deductions), which includes interest income and other and interest
expense, reduced income by $35.3 million in the current quarter compared to a
reduction to income of $31.9 million in the same period last year. This change
primarily reflected reduced interest income on temporary cash investments.

                                  Income Taxes
For the three months ended June 30, 1998, income tax expense of $12.8 million
decreased $4.7 million from the same period last year,  primarily  reflecting
lower pre-tax income.

Six Month Results

                                   Net Income
Columbia's net income for the first half of 1998 was $170.3 million, a decrease
of $27.3 million from the same period last year. After adjusting for the stock
split, earnings decreased $0.34 per share to $2.04 per share. This decrease was
largely due to the record-breaking first quarter warm weather that continued
into the second quarter making the first six months of 1998 the warmest on
record for Columbia.

Other significant items affecting net income for the first half of 1998 included
the favorable effect of a $15.9 million after-tax reduction in the cost of
certain postretirement benefits resulting from a buyout of a portion of those
liabilities with an insurance carrier, a benefit of $10 million from tax
planning initiatives and a gain of $8.7 million from the sale of certain storage
volumes. In addition, lower operating expenses for the rate-regulated
subsidiaries and increased gas production and prices for the exploration and
production segment also contributed to the 1998 results. Reducing net income was
Columbia's continued investment in its marketing operations. Net income for the
first half of last year was improved $12.8 million by the implementation of tax
planning initiatives, $12.4 million from Columbia Transmission's regulatory
settlement and $5.5 million from a gain on the deactivation of a storage field.

                                    Revenues
For the first six months of 1998, net revenues of $1,008.1 million represented a
decrease of $27.1 million from the same period last year, primarily reflecting
the adverse effect of this year's warmer weather on the distribution segment and
Columbia Transmission's regulatory settlement in 1997, mentioned previously.
This decrease was partially offset by a $13.5 million increase in the gross
margin from the marketing segment, a $13.4 million increase from the sale in the
first quarter of 1998 of 5 billion cubic feet (Bcf) of storage base gas and
higher revenues from increased gas production and prices. Natural gas sales for
Columbia's marketing segment during the first half of 1998 totaled 711.6 Bcf, an
increase of 483.2 Bcf, or over 200%, from the same period last year, while its
1998 electric power sales were 3,353,000 megawatt hours.

                                    Expenses
Operating expenses of $683 million for the six months ended June 30, 1998,
decreased $11.3 million when compared to the same period last year, largely
reflecting a reduction of $27.9 million in operation


                                       13

<PAGE>   14


                         PART I - FINANCIAL INFORMATION
                ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                        CONSOLIDATED RESULTS (CONTINUED)


and maintenance expense. This decrease was primarily the result of a
$25.6 million reduction in the cost of certain postretirement benefits,
reflecting a buyout with an insurance carrier of a portion of Columbia's
liabilities. Last year's expenses were also higher because of $12.8 million of
restructuring costs. The transmission and distribution segment's operation and
maintenance expense also decreased as a result of cost conservation measures
and efficiencies gained through recently implemented restructuring activities.
Tempering these improvements were $27.2 million of higher operating expenses
for the marketing operations. Depreciation and depletion expense increased $5.6
million due primarily to an increase in depletion expense for the exploration
and production segment resulting from the acquisition of Alamco, Inc. (Alamco).
Higher gross receipts and property taxes in the distribution segment were the
principal reasons for the $11 million increase in other taxes.


                           Other Income (Deductions)
Through the first half of 1998, Other Income (Deductions) reduced income by
$74.6 million compared to a reduction of $57.9 million in the same period last
year. Interest income and other of $5.5 million from the first six months of
1998 decreased $14.9 million when compared to the same period last year due
largely to an $8.5 million gain recorded in 1997 for a payment received from the
deactivation of a storage field that allowed the owner of the coal reserves to
mine the property. Also reducing other income was reduced interest income on
temporary cash investments. Interest expense and related charges of $80.1
million increased $1.8 million from the same period in 1997 primarily reflecting
increased interest on short-term borrowings. Both periods included $70.2 million
of interest expense on long-term debt.

                                  Income Taxes
Income tax expense for the first six months of 1998 was $80.2 million, a
decrease of $5.2 million primarily reflecting lower pre-tax income. Income
benefited from reductions to income tax expense of $10 million in 1998 and $12.8
million in 1997 due to the implementation of tax planning initiatives.

Liquidity and Capital Resources
A significant portion of Columbia's operations is subject to seasonal
fluctuations in cash flow. During the heating season, which is primarily from
November through March, cash receipts from sales and transportation services
typically exceed cash requirements. Conversely, during the remainder of the
year, cash on hand, together with external short-term and long-term financing,
as needed, is used to purchase gas to place in storage for heating season
deliveries, perform necessary maintenance of facilities, make capital
improvements in plant and expand service into new areas.

For the first half of 1998, net cash from operations was $552.2 million, a $19.9
million decrease from the same period last year, due largely to lower cash from
working capital reflecting a decrease in the overrecovery of gas costs by the
distribution subsidiaries, as well as the effect of warmer weather in 1998. The
decrease in the overrecovery position primarily reflects higher gas prices in
the current period compared to the first half of 1997. The recovery of the
commodity portion of the distribution subsidiaries' rates is provided for under
the current regulatory process.

Columbia satisfies its liquidity requirements through internally generated funds
and the use of two unsecured bank revolving credit facilities that total $1.35
billion (Credit Facilities). The Credit Facilities were established in March
1998, and replaced the $1 billion five-year revolving credit facility entered
into by Columbia in November 1995. The Credit Facilities also support Columbia's
commercial paper program.



                                       14
<PAGE>   15



                         PART I - FINANCIAL INFORMATION
                ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                        CONSOLIDATED RESULTS (CONTINUED)



Columbia's Credit Facilities consist of a $900 million five-year revolving
credit facility and a $450 million 364-day revolving credit facility with a
one-year term loan option. The five-year facility provides for the issuance of
up to $300 million of letters of credit.

As of June 30, 1998, Columbia had outstanding approximately $134.9 million of
letters of credit and $45.9 million of commercial paper.

Interest rates on borrowings under the Credit Facilities are based upon the
London Interbank Offered Rate, Certificate of Deposit rates or other short-term
interest rates. The interest rate margins and facility fees on the commitment
amount are based on Columbia's public debt ratings. In 1997, Fitch Investors
Service (Fitch) and Standard & Poor's Ratings Group (S&P) upgraded Columbia's
long-term debt rating to BBB+ and BBB+, respectively. In July 1998, Moody's
Investors Service, Inc. (Moody's) upgraded Columbia's long-term debt rating to
A3. Under the Credit Facilities, higher debt ratings result in lower facility
fees and interest rates on borrowings. Columbia's commercial paper ratings are
F-2 by Fitch, P-2 by Moody's and A-2 by S&P.

Columbia entered into a fixed-to-floating interest rate swap agreement to modify
the interest characteristics of $50 million of its outstanding debt in the
second quarter of 1998. As a result of this transaction, that portion of
Columbia's long-term debt is now exposed to fluctuations in interest rates. In
the opinion of management the overall risk to Columbia is not material.

Columbia has an effective shelf registration statement on file with the U. S.
Securities and Exchange Commission for the issuance of up to $1 billion in
aggregate of debentures, common stock or preferred stock in one or more series.
In March 1996, Columbia issued 5,750,000 shares of common stock under the shelf
registration and used the proceeds to reduce borrowings incurred under the prior
credit facility and to retire $400 million of preferred stock issued in late
1995. No further issuances of the remaining $750 million available under the
shelf registration are scheduled at this time.

Management believes that its sources of funding are sufficient to meet
short-term and long-term liquidity needs not met by cash flows from operations.

Presentation of Segment Information
In accordance with generally accepted accounting principles, beginning with this
report Columbia has revised its reporting of primary business segment
information for the current and prior periods. Marketing operations are now
reported in a separate segment rather than the former marketing, propane and
power generation segment. Columbia LNG Corporation's results are now reported in
the propane, power generation and LNG segment, rather than the transmission and
storage segment.

Impact of Year 2000 on Computer Systems
As previously reported in Columbia's 1997 Annual Report on Form 10-K, Columbia
is in the process of reviewing its computer applications and their interaction
with third parties to address the Year 2000 issue. Based on the review to date,
certain applications have been found not to be Year 2000 compliant. It is
anticipated that all major applications will have been reviewed and, if
necessary, corrected or replaced by the year 2000. At the present time,
management does not anticipate that the cost of correcting or replacing those
applications that are not Year 2000 compliant will have a material impact on
Columbia's financial condition.


                                       15

<PAGE>   16



                         PART I - FINANCIAL INFORMATION
                ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


                      TRANSMISSION AND STORAGE OPERATIONS

<TABLE>
<CAPTION>
                                                             Three Months                                  Six Months
                                                            Ended June 30,                               Ended June 30,
                                                 ------------------------------------         ------------------------------------
                                                       1998                1997                     1998                1997
                                                 ----------------    ----------------         ----------------    ----------------
                                                                                    (millions)
<S>                                                  <C>                <C>                       <C>                 <C>
OPERATING REVENUES
    Transportation revenues                          $ 134.5             $ 136.8                   $ 314.6             $ 317.0
    Storage revenues                                    45.7                48.3                      92.3                91.8
    Other revenues                                       4.9                22.6                      23.1                29.7
                                                     -------             -------                   -------             -------
Total Operating Revenues                               185.1               207.7                     430.0               438.5
                                                     -------             -------                   -------             -------

OPERATING EXPENSES
    Operation and maintenance                           89.0               102.5                     174.5               201.4
    Depreciation                                        24.0                26.6                      50.0                52.9
    Other taxes                                         13.3                13.8                      28.9                27.9
                                                     -------             -------                   -------             -------
Total Operating Expenses                               126.3               142.9                     253.4               282.2
                                                     -------             -------                   -------             -------

OPERATING INCOME                                     $  58.8             $  64.8                   $ 176.6             $ 156.3
                                                     =======             =======                   =======             =======


THROUGHPUT (BCF)
Transportation
    Columbia Transmission
        Market area                                    166.9               196.4                     523.6               574.2
    Columbia Gulf
        Mainline                                       151.1               161.9                     281.8               312.9
        Short-haul                                      59.4                57.0                     121.6               119.0
        Intrasegment eliminations                     (147.4)             (160.6)                   (272.4)             (305.4)
                                                     -------             -------                   -------             -------
Total Throughput                                       230.0               254.7                     654.6               700.7
                                                     =======             =======                   =======             =======
</TABLE>




                                       16

<PAGE>   17



                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)




Market Expansion Projects

                          Millennium Pipeline Project
The proposed Millennium Pipeline Project (Millennium Project), in which Columbia
Transmission is participating and will serve as developer and operator, will
transport western gas supplies to Northeast and middle Atlantic markets. The
442-mile pipeline will connect to TransCanada Pipe Lines Ltd. at a new Lake Erie
export point and transport up to approximately 700 million cubic feet per day to
eastern markets. Ten shippers have signed agreements for the available capacity.
A filing with the Federal Energy Regulatory Commission (FERC), requesting
approval of the Millennium Project, was made in December 1997. This filing
begins the extensive review process, including opportunities for public review,
communication and comment. On June 3, 1998, the Millennium Project sponsors
announced that the proposed in-service date has been revised to November 1,
2000. The current sponsors of the proposed Millennium Project are Columbia
Transmission, Westcoast Energy, Inc., TransCanada Pipe Lines Ltd., and MCN
Energy Group, Inc.

                                  Mainline '99
Columbia Gulf Transmission Company (Columbia Gulf) filed an application with the
FERC on June 5, 1998, for authority to increase the maximum certificated
capacity of its mainline facilities. The expansion project, referred to as
Mainline '99, will increase Columbia Gulf's certificated capacity to nearly 2.2
Bcf/day by replacing certain compressor units and increasing the horsepower
ratings of certain compressor stations. Various shippers have contracted for the
additional service through an open bidding process held in 1997. Construction
relating to the compressor replacements is scheduled to begin in the first
quarter of 1999. The proposed in-service date for the requested Mainline '99
project is December 1, 1999, subject to regulatory approval.

Regulatory Matters

                Challenge to Columbia Transmission's Rate Design
Pursuant to a provision of Columbia Transmission's 1997 rate settlement, the New
York Public Service Commission (NYPSC) had the right to request a hearing
challenging the appropriateness of the Straight Fixed Variable (SFV) rate design
for Columbia Transmission. In a decision rendered in April 1998, the presiding
Administrative Law Judge granted a motion, filed jointly by several interested
parties, to dismiss the challenge by NYPSC. The judge found that the NYPSC
failed to demonstrate that continued use of the SFV rate design on Columbia
Transmission's system would be unjust or unreasonable. On May 26, 1998, the
NYPSC filed an appeal of the Administrative Law Judge's decision.

                        Columbia Gulf's Rate Settlement
Columbia Gulf filed a general rate case in October 1996, which became effective
on May 1, 1997, subject to refund. Active parties in the proceeding unanimously
agreed to the terms of settlement that was filed with the FERC on March 3, 1998.
The settlement was approved by the FERC on April 29, 1998 and became final 30
days thereafter. The approval of the settlement did not have a material impact
on Columbia's financial results.

                           Sale of Certain Facilities
As previously reported in Columbia's 1997 Annual Report on Form 10-K, Columbia
Transmission has agreed to sell certain natural gas pipeline facilities that
consist of approximately 341 miles of pipeline, together with property and
associated facilities, located in New York and Pennsylvania. On May 22, 1998,
Columbia Transmission filed an application with the FERC seeking authority to
abandon the facilities by sale to Norse Pipeline, LLC for $21.8 million. The
sale of these assets will not have a material impact on Columbia's financial
results.



                                       17

<PAGE>   18



                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)


Also as previously reported in Columbia's 1997 Annual Report on Form 10-K,
Columbia Transmission is in the process of selling its gathering facilities. As
part of this process, Columbia Transmission's anticipated sale of 750 miles of
gathering facilities to Columbia Natural Resources, Inc. (Columbia Resources),
has been delayed due to a dispute with a gas distribution company. The delay in
the sale of these assets is not expected to have a material impact on Columbia's
financial results.

Bankruptcy-related Producer Claims
On April 27, 1998, the Claims Mediator issued a recommended finding disallowing
the claim of KV Oil & Gas (KV). On July 10, 1998, the United States Bankruptcy
Court for the District of Delaware (Bankruptcy Court) approved Columbia
Transmission's motion to have the claim disallowed. KV did not appeal the order,
which became final on July 20, 1998.

On July 24, 1998, the Bankruptcy Court entered an Order allowing the claim of
New Bremen Corporation in accordance with the Claims Mediator's Report and
Recommendations and the decision of the U.S. 5th Circuit Court of Appeals. New
Bremen had ten days in which to file notice of an appeal of this Order to the U.
S. District Court. No notice was filed. During Columbia Transmission's
bankruptcy proceedings, New Bremen filed a recalculated claim for approximately
$88 million. Columbia Transmission believes that the Court's Order granting its
motion will result in an allowed claim amount that will be immaterial.

Environmental Matters
Columbia's transmission subsidiaries have implemented programs to continually
review compliance with existing environmental standards. In addition, Columbia
Transmission continues to review past operational activities and to formulate
remediation programs where necessary. Columbia Transmission is currently
conducting assessment, characterization and remediation activities at specific
sites under a 1995 Environmental Protection Agency (EPA) Administrative Order by
Consent (AOC).

Consistent with Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation," a regulatory asset has been
recorded to the extent environmental expenditures are expected to be recovered
through rates. As previously reported in Columbia's 1997 Annual Report on Form
10-K, Columbia Transmission's 1997 rate settlement excluded the issue of
environmental cost recovery and provided that a hearing be held to address this
issue. The procedural schedule established by the presiding Administrative Law
Judge provided for a hearing to commence in the fall of 1998. However, at the
request of Columbia Transmission and other active parties, the schedule was
suspended on May 5, 1998, in order to afford the parties an opportunity to
pursue settlement discussions. These discussions are ongoing, however, it is not
possible to predict whether or not they will be successful. Columbia
Transmission also continues to pursue recovery of environmental expenditures
from its insurance carriers and has met with some success; however at this time,
management is unable to determine the total amount or final disposition of any
such recovery. Management does not believe that Columbia Transmission's
environmental expenditures will have a material adverse effect on its
operations, liquidity or financial position, based on known facts and existing
laws and regulations and the long period over which expenditures will be made.

Throughput
Columbia Transmission's throughput consists of transportation and storage
services for local distribution companies and other customers within its market
area, which covers fifteen Northeastern, mid-Atlantic, Midwestern and Southern
states and the District of Columbia. Throughput for Columbia Gulf reflects


                                       18

<PAGE>   19






                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)


mainline transportation services from Rayne, Louisiana, to West Virginia and
short-haul transportation services from the Gulf of Mexico to Rayne, Louisiana.

Throughput for the transmission and storage segment totaled 230 Bcf for the
second quarter of 1998, and 654.6 Bcf for the six months ended June 30, 1998.
This represents a decrease of 24.7 Bcf and 46.1 Bcf, respectively, from the same
periods last year, primarily reflecting the impact of warmer weather. This
decrease was partially offset by increased throughput associated with new
contracts attributable to Columbia Transmission's market expansion project that
was placed in service in November 1997.

Operating Revenues
Total operating revenues were $185.1 million for the second quarter of 1998 and
$430 million for the six months ended June 30, 1998. This represents a decrease
of $22.6 million and $8.5 million, respectively, compared to the same periods in
1997. This decrease was principally due to the recording of $19.1 million of
revenues in the second quarter of 1997 for the sale of base gas provided for in
Columbia Transmission's regulatory settlement. Revenues in both the current
quarter and year-to-date period were also lower compared to last year due to the
sale of certain gathering facilities in 1997. Revenues were improved in the
current six-month period by the first quarter sale of approximately 5 Bcf of
base gas volumes that were part of Columbia Transmission's overall 1997 rate
settlement. Increased revenues from transportation and storage services,
primarily related to Columbia Transmission's market expansion contracts, and the
effect of Columbia Gulf's regulatory settlement in May 1998 also contributed to
current period revenues.

Operating Income
Operating income for the second quarter was $58.8 million, a decrease of $6
million from the same period last year, reflecting $22.6 million lower operating
revenues that were partially offset by $16.6 million lower operating expenses.
Operation and maintenance expense decreased $13.5 million due to operating
efficiencies gained through restructuring initiatives and reduced costs
attributable to the sale of certain facilities as mentioned above. Part of the
decline in operation and maintenance expense was approximately $7.9 million of
restructuring costs recorded in the second quarter of 1997.

For the first half of 1998, operating income for the transmission and storage
segment of $176.6 million increased $20.3 million over the same period last year
as $28.8 million lower operating expenses more than offset lower operating
revenues. Operation and maintenance expense declined $26.9 million compared to
the same period in 1997, primarily reflecting savings achieved through the
implementation of restructuring initiatives and a $4.5 million reduction in the
cost of certain postretirement benefits, as discussed previously. As mentioned
above, approximately $7.9 million of restructuring costs were recorded in the
second quarter of 1997, which contributed to the decline.


                                       19

<PAGE>   20







                         PART 1 - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


                             DISTRIBUTION OPERATIONS

<TABLE>
<CAPTION>
                                                                    Three Months                          Six Months
                                                                   Ended June 30,                        Ended June 30,
                                                          -------------------------------       --------------------------------
                                                                1998           1997                   1998              1997
                                                          --------------    -------------       --------------    --------------
                                                                                        (millions)
<S>                                                           <C>            <C>                 <C>                 <C> 
NET REVENUES
    Sales revenues                                             $276.5         $342.8               $1,020.5           $1,368.0
    Less: Cost of gas sold                                      158.3          207.5                  639.8              926.6
                                                               ------         ------               --------           --------
    Net Sales Revenues                                          118.2          135.3                  380.7              441.4
                                                               ------         ------               --------           --------

    Transportation revenues                                      35.8           33.3                   93.5               75.4
    Less: Associated gas costs                                    4.4            3.3                   10.0                6.2
                                                               ------         ------               --------           --------
    Net Transportation Revenues                                  31.4           30.0                   83.5               69.2
                                                               ------         ------               --------           --------

Net Revenues                                                    149.6          165.3                  464.2              510.6
                                                               ------         ------               --------           --------

OPERATING EXPENSES
    Operation and maintenance                                    92.0          102.6                  183.9              212.8
    Depreciation                                                 16.7           12.4                   50.5               48.0
    Other taxes                                                  27.5           29.0                   96.3               87.9
                                                               ------         ------               --------           --------
Total Operating Expenses                                        136.2          144.0                  330.7              348.7
                                                               ------         ------               --------           --------

OPERATING INCOME                                               $ 13.4         $ 21.3               $  133.5           $  161.9
                                                               ======         ======               ========           ========

THROUGHPUT (BCF)
    Sales
        Residential                                              20.9           29.7                   92.9              118.1
        Commercial                                                7.1           10.6                   33.7               44.7
        Industrial and other                                      0.8            0.7                    2.4                1.0
                                                               ------         ------               --------           --------
    Total Sales                                                  28.8           41.0                  129.0              163.8
    Transportation                                               62.5           61.0                  146.6              133.0
                                                               ------         ------               --------           --------
Total Throughput                                                 91.3          102.0                  275.6              296.8
Off-System Sales                                                 22.4           10.9                   51.4               42.2
                                                               ------         ------               --------           --------
Total Sold or Transported                                       113.7          112.9                  327.0              339.0
                                                               ======         ======               ========           ========

SOURCES OF GAS FOR THROUGHPUT (BCF)
    Sources of Gas Sold
        Spot market*                                             57.6           76.8                  119.0              138.4
        Producers                                                 2.9            8.1                    8.6               19.6
        Storage withdrawals (injections)                        (25.9)         (50.7)                  37.8               32.0
        Other                                                    16.6           17.7                   15.0               16.0
                                                               ------         ------               --------           --------
    Total Sources of Gas Sold                                    51.2           51.9                  180.4              206.0
    Transportation received for delivery to customers            62.5           61.0                  146.6              133.0
                                                               ------         ------               --------           --------
Total Sources                                                   113.7          112.9                  327.0              339.0
                                                               ======         ======               ========           ========
</TABLE>

* Purchase contracts of less than one year.



                                       20

<PAGE>   21




                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                      DISTRIBUTION OPERATIONS (CONTINUED)

Market Conditions
The unusually mild temperatures experienced in the first quarter of 1998
continued into the second quarter. Second quarter weather was 38% warmer than
the same period in 1997 and 11% warmer than normal. As a result, Columbia's
distribution subsidiaries' (Distribution) weather-sensitive deliveries in the
second quarter decreased approximately 16 Bcf from the same quarter last year.
Weather in Distribution's market area through the first half of 1998 was the
warmest on record for that six-month period. It was 20% warmer than the first
six months of 1997 as well as 20% warmer than normal, resulting in a decrease of
34 Bcf in weather-sensitive deliveries from the same period last year.

Regulatory Matters
On March 31, 1998, Columbia Gas of Ohio, Inc. (Columbia of Ohio) filed with the
Public Utilities Commission of Ohio (PUCO) seeking approval to extend its
Customer CHOICE(R) program to all of its nearly 1.3 million Ohio customers. On
June 18, 1998, the PUCO approved the request, with suppliers free to sign up
customers starting August 1, 1998. The PUCO approval to expand and continue the
program was based on the success of Columbia of Ohio's pilot program in three
northwestern Ohio counties where more than 60,000 customers, including 30
percent of eligible residential customers and 46 percent of eligible small
commercial customers, chose to participate.

On July 9, 1998, Columbia Gas of Pennsylvania, Inc. (Columbia of Pennsylvania)
received permission from the Pennsylvania Public Utility Commission (PPUC) to
expand its pilot Customer CHOICE(R) program into five additional counties.
Customers can begin shopping for a new supplier in August 1998 for gas to be
delivered in November. Programs have been in operation in Allegheny and
Washington counties and the approved extension means that over two-thirds of
Columbia of Pennsylvania's 382,000 customer base would be eligible to
participate in the Customer CHOICE(R) program. Meanwhile, Columbia of
Pennsylvania continues to push for a legislative proposal that would set the
terms for natural gas retail competition statewide.

Columbia Gas of Virginia, Inc. (Columbia of Virginia) filed a rate case with the
Virginia State Corporation Commission (VSCC) in May 1998, requesting a $13.8
million increase in annual revenue. Of the requested increase, $8.5 million is
currently being collected, subject to refund, through interim rates from
Columbia of Virginia's 1997 rate filing, which is currently pending before the
VSCC. Rates reflecting the requested additional increase of $5.3 million will go
into effect, also subject to refund, in mid-October 1998. As detailed in the May
1998 filing, the additional revenue increase is necessary to recover plant
additions including those required to replace facilities due to age and
condition along with normal increases in operating expenses. Resolution of these
proceedings will not have a material impact on Columbia's consolidated results.
Columbia of Virginia's two-year pilot transportation program for residential and
small commercial customers began December 1, 1997 and is open to approximately
27,000 customers in the Gainsville market area of Northern Virginia. There are
now over 4,900 customers participating in the program and they are being served
by 7 marketers out of a total of 9 approved to participate. Columbia of Virginia
anticipates expanding the program and eventually have it available to all of its
165,000 customers, depending on the results of the pilot program.

On July 27, 1998, Columbia Gas of Kentucky, Inc. (Columbia of Kentucky) received
approval from the Kentucky Public Service Commission to extend their pilot
off-system sales program for another year until July 31, 1999. The off-system
sales program has been in effect on a pilot basis for two years since August 1,
1996. Columbia of Kentucky must file by July 1, 1999 to continue the program
beyond August 1, 1999.



                                       21

<PAGE>   22



                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                      DISTRIBUTION OPERATIONS (CONTINUED)



Volumes
Throughput for the second quarter of 1998 was 91.3 Bcf, a decrease of 10.7 Bcf
from the same period in 1997, as the impact of warmer weather was partially
offset by the return to full production at a major industrial customer that had
been idled by a labor strike last year. An increase in transportation volumes
and customer growth also partially offset the adverse impact of the unusual
weather.

For the first half of 1998, throughput of 275.6 Bcf was 21.2 Bcf lower than the
first six months of 1997 as the impact of the record warm weather on tariff
sales was partially offset by customer growth, an increase in transportation
volumes and the return to full production at the major industrial customer.

Net Revenues
Net revenues for the quarter ended June 30, 1998, were $149.6 million, down
$15.7 million from the second quarter of 1997. This decrease primarily reflects
a decline of approximately $25.6 million due to the adverse impact of warm
weather that was partially offset by the beneficial effect of a Columbia of Ohio
regulatory settlement.

For the six months ended June 30, 1998, net revenues were $464.2 million, down
$46.4 million from the same period last year. This decrease primarily reflects
the effect of warmer weather that reduced net revenues approximately $51.8
million compared to the first half of 1997 and was only partially offset by
Columbia of Ohio's regulatory settlement.

Operating Income
Operating income for the second quarter of 1998 was $13.4 million, down $7.9
million from the same period last year. The decline in net revenues was tempered
by a $7.8 million decrease in operating expenses. Operation and maintenance
expense for the second quarter of 1998 was down $10.6 million from the same
period last year primarily reflecting a reduction in net labor and benefits
costs of $7.5 million due to the 1997 restructuring, which resulted in a
reduction in the workforce of approximately 220 employees. Depreciation expense
increased by $4.3 million due in part to plant additions.

For the first six months of 1998, operating income of $133.5 million decreased
$28.4 million from the same period last year due to the decline in net revenues
partially offset by an $18 million decline in operating expenses. Operation and
maintenance expense for the first six months of 1998 decreased $28.9 million
from the same period last year primarily reflecting a $15.9 million decrease in
benefits expense to reflect a reduction in certain postemployment benefits costs
and also due to the ongoing beneficial impact of restructuring. Other taxes
increased $8.4 million primarily due to higher gross receipts and property
taxes. Depreciation expense increased by $2.5 million again due in part to plant
additions.


                                       22

<PAGE>   23



                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                      EXPLORATION AND PRODUCTION OPERATIONS

<TABLE>
<CAPTION>
                                                           Three Months                                Six Months
                                                          Ended June 30,                             Ended June 30,
                                                ------------------------------------       ------------------------------------
                                                     1998                1997                   1998                 1997
                                                ----------------    ----------------       ----------------    ----------------
                                                                                   (millions)
<S>                                                <C>                   <C>                   <C>                 <C> 
OPERATING REVENUES
    Gas revenues                                    $ 28.8                $ 25.8                $ 62.4              $ 53.7
    Other revenues                                     3.6                   0.9                   7.4                 2.0
                                                    ------                ------                ------              ------
Total Operating Revenues                              32.4                  26.7                  69.8                55.7
                                                    ------                ------                ------              ------

OPERATING EXPENSES
    Operation and maintenance                         12.4                  11.4                  22.8                20.1
    Depreciation and depletion                         8.7                   7.8                  18.9                14.6
    Other taxes                                        2.8                   2.1                   5.2                 3.9
                                                    ------                ------                ------              ------
Total Operating Expenses                              23.9                  21.3                  46.9                38.6
                                                    ------                ------                ------              ------

OPERATING INCOME                                    $  8.5                $  5.4                $ 22.9              $ 17.1
                                                    ======                ======                ======              ======


GAS PRODUCTION STATISTICS
Production (Bcf)
    U.S.                                              10.2                   8.4                  20.1                16.7
    Canada                                             0.1                     -                   0.1                   -
                                                    ------                ------                ------              ------
      Total                                           10.3                   8.4                  20.2                16.7
                                                    ======                ======                ======              ======

Average Price ($ per Mcf)
    U.S.                                              2.81                  2.67                  3.09                2.72
    Canada                                            2.66                     -                  2.79                   -

OIL AND LIQUIDS PRODUCTION STATISTICS
Production (000Bbls)
    U.S.                                                48                    48                   106                 100
    Canada                                               4                     -                     4                   -
                                                    ------                ------                ------              ------
      Total                                             52                    48                   110                 100
                                                    ======                ======                ======              ======

Average Price ($ per Bbl)
    U.S.                                             12.66                 17.67                 13.45               19.45
    Canada                                           17.37                     -                 17.56                   -
      Average                                        12.84                 17.67                 13.61               19.45
</TABLE>





                                       23

<PAGE>   24



                        PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                     EXPLORATION AND PRODUCTION (CONTINUED)


Drilling Activity
During the first half of 1998, Columbia Resources participated in 41 gross
wells, of which 73% were successful. These wells added 5.7 net billion cubic
feet equivalent (Bcfe) to reserves, an increase of 3.4 net Bcfe over the first
six months of 1997.

Joint Venture with CanEnerco Limited
During the second quarter of 1998, Columbia Resources entered into a Joint
Venture Agreement with CanEnerco Limited (CanEnerco), a Canadian Corporation, to
jointly develop drilling properties located in southwestern Ontario. This
agreement will include approximately 50,000 net acres owned by CanEnerco and
5,000 net acres owned by Columbia Natural Resources Canada Ltd., a wholly-owned
subsidiary of Columbia Resources.

Volumes
Gas production for the current quarter of 10.3 Bcf increased 1.9 Bcf, or 23%,
over the second quarter of 1997. The properties purchased from Alamco
represented two-thirds of this increase. For the six months ended June 30, 1998,
gas production increased 3.5 Bcf to 20.2 Bcf.

Operating Revenues
Second quarter operating revenues for 1998 increased $5.7 million from the same
period last year to $32.4 million. For the quarter ended June 30, 1998, Columbia
Resources' average gas sales price was $2.81 per Mcf compared to $2.67 per Mcf,
in the second quarter of 1997. In addition, third party gathering revenues
increased $1.6 million. As previously reported in Columbia's 1997 Annual Report
on Form 10-K, certain gathering facilities were transferred from Columbia
Transmission to Columbia Resources in the third quarter of 1997.

Operating revenues of $69.8 million for the first six months of 1998 increased
$14.1 million over the same period last year, primarily due to the increase in
production and higher gas prices. Columbia Resources' average gas sales price
for the six months ended June 30, 1998, was $3.09 per Mcf, up 14% over the same
period last year. The stronger natural gas prices reflected the benefit of
hedging activity last fall when prices were significantly higher. Third party
gathering revenues also increased $3.6 million. Revenues in 1997 benefited from
$4.1 million of revenues recorded in 1997 for a payment made by a cogeneration
partnership to allow it to terminate its gas purchase contract with Columbia
Resources.

Operating Income
Operating income for the three and six months ended June 30, 1998, were $8.5
million and $22.9 million, respectively. This is an increase of $3.1 million and
$5.8 million, respectively, over the same periods last year. The income
improvements occurred notwithstanding higher operation and maintenance expenses
due to additional costs associated with the acquisition of Alamco and the
transfer of gathering facilities, as well as an increase in depletion expense
due to the additional investment in the exploration and production segment.


                                       24


<PAGE>   25



                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                              MARKETING OPERATIONS

<TABLE>
<CAPTION>
                                                                Three Months                               Six Months
                                                               Ended June 30,                            Ended June 30,
                                                     ----------------------------------         --------------------------------
                                                           1998               1997                  1998               1997
                                                     ----------------   ---------------         -------------    ---------------
                                                                                       (millions)
<S>                                                  <C>                   <C>                    <C>                 <C> 
OPERATING REVENUES
    Gas revenues                                      $781.7                $295.9                 $1,640.8            $602.0
    Power revenues                                      91.5                     -                     97.8                 -
                                                      ------                ------                 --------            ------
    Total Revenues                                     873.2                 295.9                  1,738.6             602.0

    Less: Products purchased                           861.5                 291.7                  1,715.6             592.5
                                                      ------                ------                 --------            ------

Gross Margin                                            11.7                   4.2                     23.0               9.5
                                                      ------                ------                 --------            ------

OPERATING EXPENSES
    Operation and maintenance                           18.0                   4.3                     33.5               8.2
    Depreciation                                         0.7                   0.1                      1.4               0.2
    Other taxes                                          0.6                   0.2                      1.2               0.5
                                                      ------                ------                 --------            ------
Total Operating Expenses                                19.3                   4.6                     36.1               8.9
                                                      ------                ------                 --------            ------

OPERATING INCOME (LOSS)                               $ (7.6)               $ (0.4)                $  (13.1)           $  0.6
                                                      ======                ======                 ========            ======


MARKETING SALES
    Gas (billion cubic feet)                           347.4                 121.7                    711.6             228.4
    Power (thousand megawatt hours)                    3,048                     -                    3,353                 -
</TABLE>




                                       25

<PAGE>   26



                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                        MARKETING OPERATIONS (CONTINUED)

Columbia's wholesale and retail nonregulated natural gas and electric power
marketing operations are conducted by Columbia Energy Services Corporation
(Columbia Energy Services). These businesses provide integrated energy-related
products and services to wholesale, industrial and commercial, and residential
customers nationwide. The wholesale business line provides products and services
to wholesale customers, including gas and electricity supply, fuel management
and transportation-related services, management of energy-related assets, energy
commodity sales and services, risk management products and financial services.
The retail business line provides energy-related products and services to a
diverse customer base, including industrial and commercial customers as well as
residential customers.

Wholesale Energy Activity
Wholesale energy activity can be categorized into two broad business lines: gas
trading and marketing and electric power trading. Gas trading and marketing
activities have grown significantly since June 30, 1997, when Columbia Energy
Services acquired PennUnion Energy Services, LLC (Penn Union), an energy
marketing affiliate of the Pennzoil Company. Columbia Energy Services' marketing
volumes are exceeding 4.2 Bcf per day as a result of this acquisition together
with internal growth.

Electric power trading and marketing activities began in December 1997. During
the first six months of 1998, Columbia Energy Services has continued to expand
its presence in the electricity market. In the first quarter of 1998, Columbia
Energy Services joined the Pennsylvania-New Jersey-Maryland electric power pool
that covers much of the heavily populated mid-Atlantic region of the U.S. During
the second quarter of 1998, Columbia Energy Services, through a subsidiary,
began trading electricity nationwide when it gained membership into the Western
System Power Pool (WSPP). The WSPP, formed by a group of electric utilities in
the 1980s to buy electricity from energy marketers, binds members to a common
marketing agreement thereby providing a more efficient trading process.

A ten-year natural gas supply contract between Columbia Energy Services and a
municipal gas authority was signed in July 1998. Effective August 1, 1998,
Columbia Energy Services will sell to the municpal gas authority approximately
45 Bcf of natural gas over the ten years. As part of the agreement, in July
1998, the municipal gas authority made an advance payment of $73.5 million for
such future deliveries.

In June 1998, Columbia Energy Services signed a long-term energy management
contract with Hopewell Cogeneration Limited Partnership (HCLP), a 365-megawatt
combined-cycle, natural gas-fired generation facility in Hopewell, Virginia.
Columbia Energy Services began providing HCLP with natural gas on June 1, 1998.
HCLP has a baseload volume of approximately 5,000 million British thermal units
(MMBtu) daily for steam generation and a daily peak demand volume of up to
75,000 MMBtu for electric generation to be sold to Virginia Electric and Power
Company. In addition to supplying HCLP's natural gas, Columbia Energy Services
will also manage HCLP's fuel oil reserve tanks.

Retail Energy Activity
Retail energy activity can also largely be categorized into two broad business
lines: industrial and commercial retail activity and mass market retail
activity. These retail business lines provide energy expertise to end-use
customers, both for gas and power retail markets. These business lines are
favorably positioned for electric retail market unbundling and deregulation.
During 1998, for example, Columbia Energy Services plans to initiate marketing
retail power to customers in Pennsylvania. Under the Pennsylvania program, a
portion of electric power customers for seven Pennsylvania electric companies
will be able to choose their power supplier beginning January 1, 1999, with
customer choice for all customers expected by January 1, 2001.



                                       26

<PAGE>   27



                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                        MARKETING OPERATIONS (CONTINUED)


Columbia Energy Services is also offering diverse products and services by
participating in several state or local programs related to the deregulation of
retail markets, including Ohio, Pennsylvania, Virginia, Maryland, New Jersey,
and Illinois. For example, Columbia Service Partners, Inc. (Columbia Service), a
subsidiary of Columbia Energy Services, initiated two homeowners' warranty
programs in Pennsylvania. In May 1998, Water Line Guarantee program began in
Allegheny County including Pittsburgh. The Water Line Guarantee program provides
protection of customer-owned water-supply pipes from the curb to the meter
inside the home. This service is expected to be offered in other western
Pennsylvania counties by year-end 1998. In September 1998, Columbia Service
plans to offer the House Line Guarantee program to western Pennsylvania. This
warranty program provides warranty protection to customer-owned gas lines inside
homes.

Gross Margins
Gross margins (revenues less associated products purchased costs) for the second
quarter of 1998 almost tripled compared to the same period last year. Gas
revenues represent the majority of this growth, primarily due to increased
volumetric growth. Gas marketing volumes for Columbia Energy Services almost
tripled for the second quarter, reflecting its significant growth plus the
effect of the PennUnion acquisition and the agreement with Kerr-McGee
Corporation to purchase and market its off-shore natural gas production. Power
revenues were approximately $92 million for the second quarter of 1998
reflecting three million megawatt hours of power sales. There were no power
revenues in the second quarter of 1997.

For the six months ended June 30, 1998, gross margins totaled $23 million,
compared to $9.5 million for the same period last year. This is primarily due to
increased growth in both natural gas volumes and the addition of power traded
volumes. Gas marketing volumes of 711.6 Bcf for the first half of 1998 were over
three times the same period in 1997.

Operating Income (Loss)
An operating loss of $7.6 million for the second quarter of 1998, was $7.2
million greater than the $400,000 loss in last year's second quarter. Operating
expenses of $19.3 million for the second quarter of 1998 were approximately
$14.7 million more than the same period last year. For the first six months of
1998, the marketing segment had an operating loss of $13.1 million compared to
operating income of $600,000 for the first half of 1997, largely due to higher
operating expenses. The higher expenses for the second quarter and year-to-date
periods related to several changes in the business. These changes reflect
Columbia Energy Services' strategy to build its systems and infrastructure,
allowing for future growth in conjunction with the continued deregulation of the
industry. In addition, higher expenses for the second quarter and first six
months of 1998 include costs associated with the development of new products and
services, such as a new internet-based business called Energy.com Corporation as
well as costs associated with adding new mass-market retail customers and
increased staffing levels.


                                       27

<PAGE>   28



                        PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


                  PROPANE, POWER GENERATION AND LNG OPERATIONS

<TABLE>
<CAPTION>
                                                         Three Months                                 Six Months
                                                        Ended June 30,                              Ended June 30,
                                             ------------------------------------        -----------------------------------
                                                   1998                1997                    1998                1997
                                             ----------------    ----------------        ---------------    ----------------
                                                                                (millions)
<S>                                             <C>                 <C>                        <C>                <C>
NET REVENUES
    Propane revenues                             $11.3                $12.7                     $37.6              $41.2
    Less: Products purchased                       5.6                  7.0                      18.5               23.2
                                                 -----                -----                     -----              -----
    Net Propane Revenues                           5.7                  5.7                      19.1               18.0

    Power Generation                               2.3                  2.3                       3.8                8.4

    Other Revenues                                 2.0                  2.6                       4.4                5.4
                                                 -----                -----                     -----              -----

Net Revenues                                      10.0                 10.6                      27.3               31.8
                                                 -----                -----                     -----              -----

OPERATING EXPENSES
    Operation and maintenance                      8.5                  9.4                      16.8               18.9
    Depreciation                                   1.2                  0.9                       2.2                1.7
    Other taxes                                    0.5                  0.5                       1.0                1.1
                                                 -----                -----                     -----              -----
Total Operating Expenses                          10.2                 10.8                      20.0               21.7
                                                 -----                -----                     -----              -----

OPERATING INCOME (LOSS)                          $(0.2)               $(0.2)                    $ 7.3              $10.1
                                                 =====                =====                     =====              =====


PROPANE SALES (MILLIONS OF GALLONS)
    Retail                                         8.6                  8.8                      31.4               29.9
    Wholesale and Other                            1.4                  3.3                       3.4                7.0
                                                 -----                -----                     -----              -----
Total Propane Sales                               10.0                 12.1                      34.8               36.9
                                                 =====                =====                     =====              =====
</TABLE>




                                       28

<PAGE>   29



                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

            PROPANE, POWER GENERATION AND LNG OPERATIONS (CONTINUED)

Propane Acquisition
In May 1998, Columbia Propane Corporation (Columbia Propane) purchased the
propane assets of James E. Zerkel, Inc., a company in northwest Virginia that
sells approximately 2.8 million gallons of propane annually to 6,000 customers.

Power Generation
On June 4, 1998, Columbia Electric Corporation (Columbia Electric) and LGE Power
Inc., a subsidiary of LGE Energy Corporation, announced an agreement for
Columbia Electric to participate in the development of a natural gas-fired
cogeneration project. The facility will have a total capacity of approximately
550 megawatts and will provide steam and electric services to a Reynolds Metals
plant in Gregory, Texas. The project will also provide electricity to the Texas
energy market and is expected to begin commercial operation in the Electric
Reliability Council of Texas (ERCOT) region in the summer of 2000. Final
negotiation of project documents and financial arrangements are scheduled to be
completed by this fall.

Net Revenues
Net revenues for the second quarter of 1998 decreased $600,000 from the same
period last year to $10 million. Columbia Propane's net revenues of $5.7 million
in the second quarter of 1998 were unchanged from last year's second quarter, as
the decrease in volumes sold was offset by slightly higher margins. Propane
sales decreased 2.1 million gallons due primarily to warmer weather that was
only partially offset by additional sales from recent acquisitions. Other
miscellaneous revenues decreased $600,000 in the second quarter of 1998 compared
to the same period last year.

For the first six months of 1998, net revenues of $27.3 million decreased $4.5
million from last year primarily due to Columbia Electric's $3.2 million revenue
improvement recorded in the first quarter of 1997 from the assumption of a
cogeneration partnership fuel transportation contract. Propane net revenues
increased $1.1 million due to higher margins achieved in the first quarter of
1998 and additional retail sales attributable to recent acquisitions. Propane
volumes in total for the first six months of 1998 decreased 2.1 million gallons
compared to the same period last year due to warmer weather and lower spot
sales.

Operating Income (Loss)
An operating loss of $200,000 for the second quarter of 1998 was unchanged from
the same period last year, because the $600,000 decrease in net revenues was
offset by a similar decrease in operating expenses. In the second quarter of
1997, Columbia Electric recorded a $600,000 loss on the sale of the cogeneration
partnership assets. Operating income for Columbia LNG Corporation for the second
quarter of 1998 reflected a small improvement over the same period last year.

Operating income of $7.3 million for the six months ended June 30, 1998,
decreased $2.8 million from the same period last year, primarily due to the
decrease in net revenues tempered by $1.7 million lower operating expense.
Higher operating costs for the first six months of 1998 from recent propane
acquisitions and additional start-up costs for new services were more than
offset by the loss recorded last year for the cogeneration partnership,
mentioned above and a reduction in certain postretirement benefit costs 
recorded in the first quarter of 1998.



                                       29

<PAGE>   30



                         PART I - FINANCIAL INFORMATION


Item 3.              Quantitative and Qualitative Disclosures About Market Risk

                     Columbia entered into a fixed-to-floating interest rate
                     swap agreement to modify the interest characteristics of
                     $50 million of its outstanding debt in the second quarter
                     1998. As a result of this transaction, that portion of
                     Columbia's long-term debt is now exposed to fluctuations in
                     interest rates. The overall risk to Columbia is not
                     material in the opinion of management.

                     There have not been any material changes regarding
                     quantitative and qualitative disclosures about market risk
                     from the information reported in Columbia's 1997 Annual
                     Report on Form 10-K.


                          PART II - OTHER INFORMATION


Item l.                 Legal Proceedings

            No new reportable matters have arisen and there have been no
            material developments in any legal proceedings reported in
            Columbia's Annual Report on Form 10-K for the year ended December
            31, 1997, except as follows:

            I.    Purchase and Production Matters
                    A.  Pending Producer Matters
                        New Bremen Corp. v. Columbia Gas Transmission Corp.
                        and Columbia Gulf Transmission Co., No. 88V-631
                        (Dist. Ct. Austin County, TX). On July 24, 1998, the
                        Bankruptcy Court entered an Order allowing the claim of
                        New Bremen Corporation in accordance with the Claims
                        Mediator's Report and Recommendations and the decision
                        of the U.S. 5th Circuit Court of Appeals. New Bremen
                        had ten days in which to file notice of an appeal of
                        this Order to the U. S. District Court.  No notice
                        was filed.  During Columbia Transmission's bankruptcy
                        proceedings, New  Bremen filed a recalculated claim
                        for approximately $88 million.  Columbia Transmission
                        believes that the Court's Order granting its motion
                        will result in an allowed claim amount that is
                        immaterial.

            II.    Other
                    A.  MarkWest Hydrocarbon, Inc., Arbitration Proceeding,
                        AAA Case No. 77 181 0035 98 (filed February 13, 1998);
                        Columbia Gas Transmission Corp. v. MarkWest
                        Hydrocarbon, Inc., U.S. D.C., S.D. W.Va., Case No.
                        2:98-03622 (filed April 28, 1998). In the Settlement
                        of Columbia Transmission's last rate case in Docket
                        No. RP95-408, approved by the FERC on April 17, 1997,
                        Columbia Transmission, MarkWest Hydrocarbon, Inc.
                        ("MarkWest") and other parties agreed that Columbia
                        Transmission's gathering and products extraction rates
                        and services would be "unbundled" in compliance with
                        Order No. 636 and that MarkWest would acquire Columbia
                        Transmission's interests in certain products
                        extraction facilities and provide gas processing
                        services to certain shippers on Columbia Transmission's
                        system.  In February, 1998, negotiations surrounding
                        the transfer of facilities and processing services
                        to MarkWest reached an impasse, resulting in an
                        arbitration proceeding and a court proceeding.
                        Columbia Transmission believes MarkWest's claims are
                        essentially without merit, and that any financial
                        consequence to Columbia Transmission will not be
                        material.



                                       30

<PAGE>   31

                           PART II - OTHER INFORMATION

                        Arbitration Proceeding. On February 13, 1998, MarkWest
                        filed a demand for arbitration. In response to
                        Columbia's Transmission's request, the Arbitration
                        Panel (Panel), by orders dated June 10 and June 16,
                        directed MarkWest to file a more specific statement of
                        the claims to be arbitrated and to explain why the
                        claims are arbitrable. MarkWest filed an Amended Demand
                        for Arbitration on June 19, wherein MarkWest seeks an
                        order, inter alia, declaring that certain
                        pre-settlement agreements between Columbia Transmission
                        and MarkWest have not terminated and that specific
                        performance by Columbia Transmission is required.
                        Markwest also alleges interference with its existing
                        and prospective contracts, misrepresentation and civil
                        conspiracy by Columbia Transmission, Columbia Energy
                        Group and Columbia Resources to interfere with
                        MarkWest's business. MarkWest seeks compensatory
                        damages for past and future losses in an amount not
                        less than $391.55 million as well as exemplary damages.
                        Columbia Transmission answered and filed contingent
                        counterclaims on July 2 and contested the arbitrability
                        of all but three issues. On August 3, 1998, the Panel
                        issued an order whereby it found to be non-arbitrable
                        all of MarkWest's claims except those that relate to
                        obligations arising directly under two of the parties'
                        agreements, some of which Columbia Transmission agreed
                        were subject to arbitration. The Panel's decision
                        effectively dismisses MarkWest's interference,
                        fraudulent concealment, misrepresentation and civil
                        conspiracy claims described above. The Panel's decision
                        will reduce, by an amount Columbia Transmission cannot
                        determine, MarkWest's alleged damages.

                        Court Proceeding. Columbia Transmission filed a
                        complaint against MarkWest on April 28, 1998, in
                        Federal District Court for the Southern District of
                        West Virginia seeking, inter alia, (i) a declaratory
                        order that certain gas processing agreements are
                        terminated in whole or in part, (ii) a declaratory
                        order that MarkWest has breached the Settlement of
                        Docket No. RP 95-408, and (iii) an injunction against
                        MarkWest interfering with Columbia Transmission's
                        efforts to spin off its products extraction business.
                        On August 3, 1998, the U.S. District Court issued a
                        memorandum opinion and order granting MarkWest's motion
                        to stay proceedings and compel arbitration.


Item 2.           Changes in Securities and Use of Proceeds

                       None


Item 3.           Defaults Upon Senior Securities

                       None


Item 4.           Submission of Matters to a Vote of Security Holders

                  On May 20, 1998, Columbia held its Annual Meeting of
                  Stockholders.  On the record date,  Columbia had 55,517,028
                  shares of common stock outstanding, each of which was
                  entitled to one vote at the meeting. The election of four
                  directors each to serve a term of three years and the
                  election of Arthur Andersen LLP as independent public
                  accountants were voted upon and approved by the requisite
                  number of shares present in person or by proxy at the
                  meeting.


                                       31

<PAGE>   32


                          PART II - OTHER INFORMATION

      The following is a summary of the results of that meeting:

                  A.  Election of Directors

<TABLE>
<CAPTION>
                  Name of Director               Votes For      Votes Withheld
                  ----------------               ---------      --------------
                 <S>                            <C>               <C> 
                  Richard F. Albosta             44,186,958         509,281 
                  Malcolm Jozoff                 44,164,106         515,072
                  Gerald E. Mayo                 44,179,908         513,594
                  Douglas E. Olesen              44,185,411         509,242
</TABLE>

                  B. Election of Arthur Andersen LLP as independent public 
accountants:

<TABLE>
<CAPTION>
                           Votes For            Votes Against        Abstain
                           ---------            -------------        -------
                         <S>                       <C>               <C>
                          44,266,053               309,556           115,284
</TABLE>

Item 5.           Other Information

                  Rule 14a-4 of the Securities and Exchange Commission's proxy
                  rules allows a company to use discretionary voting authority
                  to vote on matters coming before an annual meeting of
                  stockholders, which matters are not already included in the
                  proxy materials, if the company does not have notice of the
                  matter at least 45 days before the date corresponding to the
                  date on which it first mailed its proxy materials for the
                  prior year's annual meeting of stockholders or the date
                  specified by an overriding advance notice provision in the
                  company's Bylaws. Columbia's Bylaws do not contain such an
                  advance notice provision.

                  Accordingly, for Columbia's Annual Meeting of Stockholders,
                  that is expected to be held on May 19, 1999, stockholders must
                  submit such written notice to the Corporate Secretary on or
                  before February 13, 1999. Proposals for matters to be included
                  in Columbia's proxy materials must still be received by the
                  Corporate Secretary on or before November 30, 1998.


Item 6.           Exhibits and Reports on Form 8-K

<TABLE>
<CAPTION>
                        Exhibit
                        Number
                        -------
                        <S>          <C>
                          3-D         Restated Certificate of Incorporation of Columbia Energy Group, amended and
                                      restated effective as of January 16, 1998
                          3-E         By-Laws of Columbia Energy Group, amended and restated as of January 16, 1998
                          12          Statements of Ratio of Earnings to Fixed Charges
                          27          Financial Data Schedule
</TABLE>

                 The following reports on Form 8-K were filed during the second
                 quarter of 1998.

<TABLE>
<CAPTION>
                                                    Financial
                               Item                Statements
                             Reported               Included             Date of Event                    Date Filed
                             --------              ----------           ----------------               --------------
                                <S>                 <C>                  <C>                          <C> 
                                 5                    No                  May 20, 1998                  May 21, 1998
                                 5                   Yes *                July 13, 1998                 July 13, 1998
</TABLE>

                   * Summary of Financial and Operational data for three and six
                     months ended June 30, 1998.


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<PAGE>   33




                                   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.










                                               Columbia Energy Group
                                            -----------------------------
                                                  (Registrant)









   Date:  August 14, 1998              By:     /s/ Jeffrey W. Grossman
                                          -------------------------------------
                                                  Jeffrey W. Grossman
                                              Vice President and Controller
                                              (Principal Accounting Officer
                                              and Duly Authorized Officer)






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