<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 SEPTEMBER 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 by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. 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: 83,449,828 shares outstanding at September 30, 1998.


<PAGE>   2
                     COLUMBIA ENERGY GROUP AND SUBSIDIARIES
                           FORM 10-Q QUARTERLY REPORT
                    FOR THE QUARTER ENDED SEPTEMBER 30, 1998

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                Page
<S>                                                                             <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             34


PART II  OTHER INFORMATION

Item 1         Legal Proceedings                                                 34

Item 2         Changes in Securities and Use of Proceeds                         35

Item 3         Defaults Upon Senior Securities                                   35

Item 4         Submission of Matters to a Vote of Security Holders               35

Item 5         Other Information                                                 35

Item 6         Exhibits and Reports on Form 8-K                                  35

               Signature                                                         36
</TABLE>
<PAGE>   3
                         PART I - FINANCIAL INFORMATION
                         ITEM 1 - FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                              Three Months                     Nine Months
                                                          Ended September 30,              Ended September 30,
                                                       ------------------------         ------------------------
                                                          1998           1997              1998          1997
                                                       ----------   ----------          ----------    ----------
                                                                 (millions, except per share amounts) 
 <S>                                                    <C>           <C>                <C>           <C>
NET REVENUES                                                                                                   
 Energy sales                                          $ 1,287.2     $ 843.0             $4,032.6      $2,800.0
 Less: Products purchased                                1,107.9       662.0              3,263.9       1,959.0
                                                        --------     -------             ---------     --------
 Gross Margin                                             179.3        181.0                768.7         841.0

 Transportation                                           113.2        105.7                395.9         374.5
 Production gas sales                                      12.8          9.0                 41.9          22.7
 Other                                                     44.9         35.6                151.8         128.3     
                                                       --------      -------             --------      --------
Total Net Revenues                                        350.2        331.3              1,358.3       1,366.5

OPERATING EXPENSES
 Operation                                                190.7        202.0                567.9         601.5
 Maintenance                                               22.6         21.7                 68.4          73.1
 Depreciation and depletion                                49.6         42.8                175.6         163.2
 Other taxes                                               33.2         35.1                167.2         158.1
                                                       --------      -------             --------      --------
Total Operating Expenses                                  296.1        301.6                979.1         995.9
                                                       --------      -------             --------      --------
OPERATING INCOME                                           54.1         29.7                379.2         370.6
                                                       --------      -------             --------      --------
OTHER INCOME (DEDUCTIONS)
 Interest income and other, net                             3.8          7.5                  9.3          27.9
 Interest expense and related charges                     (40.4)       (37.0)              (120.5)       (115.3)
                                                       --------      -------             --------      --------
Total Other Income (Deductions)                           (36.6)       (29.5)              (111.2)        (87.4)
                                                       --------      -------             --------      --------
INCOME BEFORE INCOME TAXES                                 17.5          0.2                268.0         283.2     
Income Taxes                                                6.3          0.1                 86.5          85.5
                                                       --------      -------             --------      --------
NET INCOME                                             $   11.2      $   0.1             $  181.5      $  197.7
                                                       ========      ========             ========      ========
EARNINGS PER SHARE OF COMMON STOCK*                    $  0.13       $    --             $   2.18      $   2.38

DIVIDENDS PAID PER SHARE OF COMMON STOCK*              $  0.20       $   0.16            $   0.57      $   0.43      

AVERAGE COMMON SHARES OUTSTANDING (thousands)*          83,430         83,131              83,345        83,058      

</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 Consolidated Financial Statements are an integral 
part of these statements.


<PAGE>   4
                         PART I - FINANCIAL INFORMATION
                   ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)


Columbia Energy Group and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS  


<TABLE>
<CAPTION>
                                                                          As of
                                                             -------------------------------
                                                             September 30,      December 31,
                                                                 1998               1997
                                                             -------------      ------------
                                                              (unaudited)
                                                                        (millions)
<S>                                                          <C>                <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT
  Gas utility and other plant, at original cost                $ 7,571.9          $ 7,368.9
  Accumulated depreciation                                      (3,580.8)          (3,481.5)
                                                               ---------          ---------
  Net Gas Utility and Other Plant                                3,991.1            3,887.4
                                                               ---------          ---------
  Gas and oil producing properties, full cost method
    United States cost center                                      676.8              660.2
    Canadian cost center                                             4.8                 --
  Accumulated depletion                                           (217.3)            (196.0)
                                                               ---------          ---------
  Net Gas and Oil Producing Properties                             464.3              464.2
                                                               ---------          ---------
Net Property, Plant and Equipment                                4,455.4            4,351.6
                                                               ---------          ---------
INVESTMENTS AND OTHER ASSETS                                        96.2               85.2
                                                               ---------          ---------


CURRENT ASSETS
  Cash and temporary cash investments                               26.6               28.7
  Accounts receivable, net                                         667.2              868.5
  Gas inventory                                                    241.0              226.8
  Other inventories--at average cost                                29.7               35.6
  Prepayments                                                      106.2              107.7
  Regulatory assets                                                 59.8               64.6
  Underrecovered gas costs                                          23.7               41.4
  Deferred property taxes                                           23.8               80.8
  Exchange gas receivable                                          193.0              189.0
  Other                                                             50.3               64.6
                                                               ---------          ---------
Total Current Assets                                             1,421.3            1,707.7
                                                               ---------          ---------

REGULATORY ASSETS                                                  374.5              400.9
DEFERRED CHARGES                                                    84.2               66.9
                                                               ---------          ---------
TOTAL ASSETS                                                   $ 6,431.6          $ 6,612.3
                                                               =========          =========
</TABLE>


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



                                       4
<PAGE>   5
                         PART I - FINANCIAL INFORMATION
                   ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)


Columbia Energy Group and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS  


<TABLE>
<CAPTION>
                                                                          As of
                                                             -------------------------------
                                                             September 30,      December 31,
                                                                 1998               1997
                                                             -------------      ------------
                                                              (unaudited)
                                                                        (millions)
<S>                                                          <C>                <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
  Common stock equity                                          $ 1,932.1          $ 1,790.7
  Long-term debt                                                 2,002.1            2,003.5
                                                               ---------          ---------
Total Capitalization                                             3,934.2            3,794.2
                                                               ---------          ---------

CURRENT LIABILITIES
  Short-term debt                                                   97.7              328.1
  Accounts and drafts payable                                      461.0              536.7
  Accrued taxes                                                     70.9              140.9
  Accrued interest                                                  70.4               29.4
  Estimated rate refunds                                            54.0               68.4
  Estimated supplier obligations                                    72.4               73.9
  Transportation and exchange gas payable                          168.9               89.2
  Overrecovered gas costs                                           33.8               84.6
  Other                                                            294.4              367.0
                                                               ---------          ---------
Total Current Liabilities                                        1,323.5            1,718.2
                                                               ---------          ---------

OTHER LIABILITIES AND DEFERRED CREDITS
  Deferred income taxes, noncurrent                                654.3              618.4
  Investment tax credits                                            34.5               35.6
  Postretirement benefits other than pensions                       96.3              148.8
  Regulatory liabilities                                            44.8               41.3
  Other                                                            344.0              255.8
                                                               ---------          ---------
Total Other Liabilities and Deferred Credits                     1,173.9            1,099.9
                                                               ---------          ---------
TOTAL CAPITALIZATION AND LIABILITIES                            $6,431.6           $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>
                                                                       Nine Months   
                                                                   Ended September 30,
                                                                 ----------------------
                                                                   1998           1997
                                                                 -------        -------
                                                                       (millions)
<S>                                                              <C>            <C>
OPERATING ACTIVITIES
  Net income                                                     $ 181.5        $ 197.7)
  Adjustments for items not requiring (providing) cash:     
    Depreciation and depletion                                     175.6          163.2
    Deferred income taxes                                           44.3          (15.7)
    Earnings from equity investment, net of distributions           (5.7)          (0.4)
    Other -- net                                                    79.6          (20.6)
                                                                 -------        -------
                                                                   475.3          324.2
  Change in components of working capital:
    Accounts receivable                                            179.8          155.1
    Gas inventory                                                  (14.2)         (66.2)
    Prepayments                                                      1.5          (26.7)
    Accounts payable                                               (18.1)          79.5
    Accrued taxes                                                  (70.0)         (16.9)
    Accrued interest                                                40.1           39.4
    Estimated rate refunds                                         (14.4)         (27.7)
    Under/Overrecovered gas costs                                  (33.0)         147.9
    Exchange gas receivable/payable                                 76.4          (12.6)
    Other working capital                                            8.7          (13.9)
                                                                 -------        -------
Net Cash from Operations                                           632.1          582.1
                                                                 -------        -------
INVESTMENT ACTIVITIES
  Capital expenditures                                            (301.2)        (295.3)
  Purchase of Alamco, Inc.                                            --          (99.4)
  Other investments -- net                                          (8.5)          (4.5)
                                                                 -------        -------
Net Investment Activities                                         (309.7)        (399.2)
                                                                 -------        -------
FINANCING ACTIVITIES
  Retirement of long-term debt                                      (0.9)          (0.6) 
  Dividends paid                                                   (47.8)         (36.1)
  Issuance of common stock                                           8.1            7.9
  Issuance (repayment) of short-term debt                         (229.7)        (170.0)
  Other financing activities                                       (54.2)         (12.6)
                                                                 -------        -------
Net Financing Activities                                          (324.5)        (211.4)
                                                                 -------        -------
Decrease in Cash and Temporary Cash Investments                     (2.1)         (28.5)
Cash and temporary cash investments at beginning of year            28.7           49.8
                                                                 -------        -------
Cash and temporary cash investments at September 30*             $  26.6        $  21.3
                                                                 =======        =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Cash paid for interest                                            75.0           72.9
  Cash paid for income taxes (net of refunds)                       44.6           52.5
</TABLE>


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

The accompanying Notes to 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
                                                              ----------------------------
                                                              September 30,   December 31, 
                                                                   1998           1997
                                                              -------------   ------------
                                                               (unaudited)
                                                                       (millions)
<S>                                                              <C>             <C>
COMMON STOCK EQUITY
Common stock, $10 par value, authorized                          
  100,000,000 shares, outstanding 83,449,828
  and 55,495,460* shares, respectively                           $  834.5        $  554.9
                                                                 
Additional paid in capital                                          760.2           754.2

Retained earnings                                                   338.5           482.7

Unearned employee compensation                                       (0.9)           (1.1)

Accumulated Other Comprehensive Income:
  Foreign currency translation adjustment                            (0.2)             --
                                                                 --------        --------

TOTAL COMMON STOCK EQUITY                                        $1,932.1        $1,790.7
                                                                 ========        ========
</TABLE>


The accompanying Notes to 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 Reports on Form 10-Q for
         the first and second quarters 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 $46.6 million, pre-tax. This gain is reflected in the
         financial statements as a $25.4 million reduction to benefits expense,
         and a $21.2 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                 Nine Months
                                                           Ended September 30,         Ended September 30,
                                                           --------------------       ---------------------
         Diluted EPS Computation                               1998        1997         1998          1997
         ==================================================================================================
<S>                                                        <C>            <C>         <C>           <C> 
         Net Income (millions)                               $  11.2      $  0.1      $ 181.5      $  197.7
         ---------------------------------------------------------------------------------------------------
         Denominator (thousands)
           Average common shares outstanding                  83,430      83,131       83,345        83,058
                                                                          
           Dilutive potential common shares - options            351         329          351           329
         ---------------------------------------------------------------------------------------------------
           Diluted Average Common Shares                      83,781      83,460       83,696        83,387
         --------------------------------------------------------------------------------------------------
         DILUTED EARNINGS PER SHARE OF COMMON STOCK           $ 0.13       $   -      $  2.17      $   2.37
         ==================================================================================================
</TABLE>

         The number of shares reflects 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.

 6.      Interest Rate Swap
         On June 16, 1998, Columbia entered into an interest rate swap agreement
         effective through November 28, 2002, on a $50 million notional amount
         of its 6.61% Series B Debentures due November 28, 2002. On October 15,
         1998, Columbia entered into two additional interest rate swap
         agreements. One agreement is effective through November 28, 2005, on a
         $100 million 



                                       9
<PAGE>   10
                         PART I - FINANCIAL INFORMATION
                    ITEM 1 -FINANCIAL STATEMENTS (CONTINUED)



         notional amount of 6.80% Series C Debentures due November 28, 2005. The
         second agreement is effective through November 28, 2002, on a $50
         million notional amount of 6.61% Series B Debentures due November 28,
         2002. Under the terms of the agreements, Columbia pays interest based
         on a floating rate index and receives interest based on a fixed rate.
         The effect of these agreements is to modify the interest rate
         characterization of a portion of Columbia's long-term debt from fixed
         to variable. The effect of these interest rate swaps on interest
         expense at September 30, 1998 was immaterial.

7.       Business Segment Information
         Effective with the second quarter 1998 Form 10-Q, 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                  Nine Months
                                    Ended September 30,           Ended September 30,
                                   ---------------------         ---------------------
                                    1998          1997            1998          1997
                                   -------      --------         -------       -------
                                                       (millions)
<S>                                <C>          <C>              <C>           <C>
Transmission and Storage             $54.7        $ 37.9          $231.3        $194.2 
Distribution                           1.6         (11.4)          135.1         150.5
Exploration and Production             5.5           5.6            28.4          22.7
Marketing                             (6.5)         (1.3)          (19.6)         (0.7)
Propane, Power Generation and LNG     (1.0)         (0.1)            6.3          10.0
Corporate                             (0.2)         (1.0)           (2.3)         (6.1)
                                   -------      --------         -------        ------
TOTAL                                $54.1        $ 29.7          $379.2         $370.6
                                   =======      ========         =======        =======

</TABLE>
                                           

                  DEGREE DAYS (DISTRIBUTION SERVICE TERRITORY)


<TABLE>
<CAPTION>                               Three Months                  Nine Months
                                    Ended September 30,           Ended September 30,
                                   ---------------------         ---------------------
                                    1998          1997            1998          1997
                                   -------      --------         -------       -------
<S>                                <C>          <C>              <C>           <C>
Actual                                  41           108           2,878         3,638 
Normal                                  41            41           3,568         3,568
% Colder (warmer) than normal           --           163             (19)            2
% Colder (warmer) than prior 
period                                 (62)            5             (21)           (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 Impact of Year 2000 on Computer Systems, 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 many 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, impact of
the year 2000 on computer systems, 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 Columbia's year 2000 program, the dates on
which Columbia believes its year 2000 program will be completed are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events. However, there can be no guarantee that these estimates will
be achieved, or that there will not be a delay in, or increased costs associated
with, the implementation of the year 2000 program. Specific factors that might
cause differences between the estimates and actual results include, but are not
limited to, the availability and cost of personnel trained in these areas, the
ability to timely locate and correct all relevant computer codes for both IT and
non-IT Systems, the nature and amount of programming and testing required to
upgrade or replace IT and non-IT Systems, timely responses to, and corrections
by, third-parties and suppliers, the ability to implement interfaces between,
and among, IT and non-IT Systems for which remediation or an upgrade is
performed, the nature and amount of testing, verification and reporting required
by relevant government regulatory authorities, including federal and state
utility regulation bodies, and other similar uncertainties.

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.

Third Quarter Results
                                   Net Income
Columbia's third quarter 1998 net income was $11.2 million, or $0.13 per share,
compared to $100,000 for the same period last year. Columbia's earnings in the
third quarter typically are minimal or negative due to the seasonal nature of
the distribution segment's operations, which derives most of its income during
the first- and fourth-quarter heating season. The third quarter improvement
primarily reflected increased revenue from the distribution segment's gas
management activities, such as off-system sales, together with the effect of
nonrecurring expense items that were recorded in last year's third quarter.




                                       12
<PAGE>   13

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



                              CONSOLIDATED RESULTS
These 1997 items included a $6.6 million after-tax valuation reserve for the
sale of certain pipeline facilities and a $6.1 million after-tax reserve for
restructuring and relocation activities. Columbia's continued investment in the
marketing segment infrastructure and higher operation and maintenance costs for
Columbia Gas Transmission Corporation (Columbia Transmission), tempered the
improvement in the 1998 period.

                                    Revenues
Total consolidated net revenues (operating revenues less associated products
purchased costs) for the three months ended September 30, 1998, were $350.2
million, an $18.9 million increase over the same period last year, primarily
reflecting the higher revenues from the distribution segment's gas management
activities. Also contributing to the increase were improved net revenues from
the marketing segment, reflecting higher natural gas sales volumes, as well as
revenues from electric power sales that began in late 1997 and higher
partnership income recorded for cogeneration activities. The increase in the
marketing segment's natural gas sales was largely offset by higher related
products purchased costs.

                                    Expenses
Operating expenses for the third quarter of 1998 were $296.1 million, $5.5
million lower than the same period last year. The decrease primarily reflected
the nonrecurring expense items recorded in 1997, discussed above, offset by
higher operating expenses in the marketing and transmission and storage
segments. The nonrecurring expenses in 1997 included a $10.1 million valuation
reserve for the sale of certain pipeline facilities and a $9.4 million reserve
for relocation and restructuring costs, both of which were mentioned previously.
Partially offsetting the effect of these items were expenses in the third
quarter of 1998 related to additional investments in the marketing segment's
infrastructure and higher costs related to staff additions as well as increased
expenses reflecting the timing of certain maintenance activities in the
transmission and storage segment. Depreciation and depletion expense in the
third quarter of 1998 was $6.8 million higher than the same period last year due
to additional plant in service and increased depletion expense for the
exploration and production segment reflecting higher depletable revenues and a
higher depletion rate.

                            Other Income (Deductions)
Other Income (Deductions), which includes interest income and other interest
expense, reduced income by $36.6 million in the current quarter compared to a
reduction to income of $29.5 million in the same period last year. Interest
income decreased $3.7 million, primarily due to lower interest income on
temporary investments and a decrease in other miscellaneous income. Interest
expense was $3.4 million higher than the same period last year as a result of
additional interest on prepayments received from third parties.

                                  Income Taxes
For the three months ended September 30, 1998, income tax expense of $6.3
million increased $6.2 million compared with the same period last year,
primarily reflecting higher pre-tax income.

Nine-Month Results
                                   Net Income
Columbia's net income for the first nine months of 1998 was $181.5 million, or
$2.18 per share, a decrease of $16.2 million, or $0.20 per share, from the same
period last year. This decrease was largely due to the record-breaking warm
weather experienced earlier in 1998 and costs associated with Columbia's
continued investment in the marketing segment. The nine-month results for both
years were affected by several significant items.



                                       13
<PAGE>   14
                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONSOLIDATED)



                        CONSOLIDATED RESULTS (CONTINUED)

Significant items affecting net income for the first nine months of 1998
included the favorable effect of a $16.5 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. Lower operating expenses for the rate-regulated subsidiaries and
increased gas production and prices for the exploration and production segment
also contributed favorably to the 1998 results. Reducing net income in the
current period was Columbia's continued investment in its marketing segment. Net
income for the first nine months 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. Decreasing last year's nine-month net income
were $14.4 million of costs for restructuring and relocation activities and a
$6.6 million valuation reserve for the sale of certain pipeline facilities.

                                    Revenues
Net revenues of $1,358.3 million for the nine months ended September 30, 1998,
reflected a decrease of $8.2 million from the same period last year, due
primarily to the adverse effect of this year's warmer weather on the
distribution segment and the effect of Columbia Transmission's 1997 regulatory
settlement. This decrease was partially offset by a $19.6 million increase in
the marketing segment's gross margin due to higher gas sales and the addition of
electric power sales in 1998, as well as higher revenues from transportation
services and gas management activities. Also improving revenues in the current
period was 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 nine months of 1998 totaled 1,070.6 Bcf, nearly twice
the level for the same period last year, while its nine-month 1998 electric
power sales were 10,069,000 megawatt hours.

                                    Expenses
Operating expenses of $979.1 million for the year-to-date period ended September
30, 1998, decreased $16.8 million when compared to the same period last year,
largely reflecting a reduction of $38.3 million in operation and maintenance
expense despite $35.9 million of higher operation and maintenance expenses for
the marketing operations. The lower operation and maintenance expense was
primarily the result of a $25.4 million reduction in the cost of certain
postretirement benefits, reflecting a buyout with an insurance carrier of a
portion of Columbia's liabilities. In comparison to this year, 1997 expenses
were higher due to the recording of $12.8 million of restructuring costs. The
transmission and storage segment's and the distribution segment's operation and
maintenance expense also decreased as a result of cost conservation measures and
efficiencies gained through recently implemented restructuring activities.
Depreciation and depletion expense increased $12.4 million due primarily to an
increase in depletion expense for the exploration and production segment
resulting from a higher depletion rate together with the effect of increased
production from both the acquisition of Alamco, Inc. (Alamco) in 1997 and the
success of Columbia Natural Resources Inc.'s (Columbia Resources) drilling
program. Higher gross receipts and property taxes in the distribution segment
were the principal reasons for the $9.1 million increase in other taxes.

                            Other Income (Deductions)
Through the first nine months of 1998, Other Income (Deductions) reduced income
by $111.2 million compared to a reduction of $87.4 million in the same period
last year. Interest income and other, net of $9.3 million decreased $18.6
million when compared to the same period last year, due largely to the 



                                       14
<PAGE>   15
                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONSOLIDATED)



                        CONSOLIDATED RESULTS (CONTINUED)

effect of 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 income for the current period was lower
interest income on temporary cash investments. Interest expense and related
charges of $120.5 million increased $5.2 million over the same period in 1997
primarily reflecting increased interest on certain prepayments. Both periods
included approximately $105.3 million of interest expense on long-term debt.

                                  Income Taxes
Income tax expense for the first nine months of 1998 was $86.5 million,
essentially unchanged from the same period last year. Net 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.

Net cash from operations for the first nine months of 1998 was $632.1 million,
an increase of $50 million over the same period last year. This increase
primarily reflects higher prepayments received for the delivery of natural gas
over multiple years and higher deferred taxes. These increases were partially
offset by working capital changes, including reduced accounts payable, a
decrease in the overrecovery of gas costs by the distribution subsidiaries as
well as the effect of warm weather in 1998. The decrease in the overrecovery
position primarily reflects higher gas prices in the current period compared to
the same period in 1997. The recovery of gas costs in 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.

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 September 30, 1998, Columbia had approximately $117 million of letters of
credit and $97.7 million of commercial paper outstanding.

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. Columbia's long-term debt
rating is BBB+ by Standard & Poor's Ratings Group (S&P). During the third
quarter, Moody's Investors Service, Inc. (Moody's) and Fitch Investors Service
(Fitch) each upgraded their rating of Columbia's long-term debt to A3 and A,
respectively. Under the Credit Facilities, higher debt ratings result in lower




                                       15
<PAGE>   16
                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONSOLIDATED)



                        CONSOLIDATED RESULTS (CONTINUED)

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.

During 1998, Columbia entered into fixed-to-floating interest rate swap
agreements to modify the interest characteristics of $200 million of its
outstanding long-term debt. As a result of these transactions, that portion of
Columbia's long-term debt is now exposed to fluctuations in interest rates.

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 the
1998 Second Quarter Form 10-Q, Columbia 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.

Market Risk Exposure
As reported in the 1997 Annual Report on Form 10-K, certain subsidiaries of
Columbia have used derivative instruments such as commodity futures contracts,
basis swaps and options to hedge prices on commitments for natural gas, electric
power and propane.

In the third quarter of 1998, Columbia's policy was expanded to allow open
trading positions in electric power for its marketing operations to take
advantage of market information or strategic opportunities related to uncovered
exposure to commodity price or basis risk. Also in the third quarter, trading
activity in weather derivatives was authorized. Positions in power and weather
are controlled within predetermined limits as provided by Columbia's senior
management. Columbia's policy prohibits any Columbia subsidiary from entering
into trading positions that are not effectively connected with its business. The
risks associated with these trading activities are managed consistent with
policies approved by Columbia's Board of Directors.

Columbia employs multiple risk control mechanisms to mitigate market risk
including, for power-related activities, value-at-risk measures, using a
variance/covariance methodology, and volumetric limits. Value-at-risk estimates
the size and probability of future potential gains and losses. Based on a 95%
confidence interval and a one-day time horizon, the value at risk for the
marketing segment's power trading activities was approximately $1 million as of
October 31, 1998.

Impact of Year 2000 on Computer Systems
The Year 2000 issue is a worldwide concern because many existing computer
programs and certain computer hardware were initially designed without
considering the impact of the change to the year 



                                       16
<PAGE>   17
                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONSOLIDATED)



                        CONSOLIDATED RESULTS (CONTINUED)

2000. If not corrected, certain computer systems could fail or create erroneous
results.

Columbia has a program underway that is evaluating its information technology
(IT) and non-IT systems to determine if they are year 2000 compliant and, if
these systems are not year 2000 compliant, what corrective action is necessary.
IT and non-IT systems that are currently being identified, tested and, as
necessary, corrected or replaced with compliant systems include: 1) mission
critical processes that relate to the safety or dependability of Columbia's
natural gas delivery system and other core business operations; 2) customer
billing, vendor payment, shareholder records and payroll systems; as well as 3)
other processes relevant to Columbia's continued operations. Embedded chips and
other non-IT hardware that are found to not be year 2000 compliant are being
replaced or upgraded as appropriate. In addition, to ensure timely completion of
all phases of the year 2000 project, Columbia is utilizing external consultants
with specific year 2000 expertise on certain aspects of the project.

Columbia's year 2000 program is divided into separate phases that provide for
the timely assessment, remediation and testing of IT and non-IT systems as
appropriate. The assessment phase covers the inventory of systems and the
determination as to where potential problems exist. If a system can not be
determined to be either compliant or not date sensitive, it is deemed
non-compliant and scheduled for inclusion in the remediation/testing phases.
Based on the estimated total man hours necessary to complete this phase,
assessment for all systems that are deemed mission critical to Columbia's
operations is approximately 95% complete. The assessment phase for the
non-critical IT and non-IT processes is nearly 100% complete. The remediation
phase is for the correction of any year 2000 compliance issues through repair or
replacement. It is estimated that this phase is approximately 45% complete for
IT systems and 1% complete for non-IT systems. The testing phase, which is
estimated to be approximately 42% complete and 2% complete for IT and non-IT
systems, respectively, is designed to provide assurance that the remediation
effort has been successful. Critical devices are tested regardless of whether a
manufacturer/vendor may have indicated that the device was year 2000 compliant.
Columbia currently has in place general contingency plans in the event that a
computer system, facility or process fails; however, Columbia is evaluating the
need for special contingency plans in the event that a year 2000 problem should
arise in spite of Columbia's efforts to ensure year 2000 compliance. Where
appropriate, specific year 2000 contingency plans will be developed for those
systems that are essential to Columbia's ongoing businesses. Contingency plans
involve having alternate suppliers, processes or personnel on stand-by for
essential processes. Columbia's planning for the year 2000 contingency phase for
mission critical processes is just getting underway.

For the overall year 2000 project, the estimated completion date for the
assessment phase is yearend 1998. The remediation phase is anticipated to be
completed by the end of the first quarter of 1999 with the testing phase
completed by the end of the second quarter of 1999. Any year 2000 specific
contingency plans that may be necessary are scheduled to be completed by the end
of July 1999.

Another area of concern is Columbia's exposure from third parties that may not
be year 2000 compliant. Columbia is in the process of contacting third parties
with which it conducts business to obtain assurance that they will be year 2000
compliant, utilizing letters and, where appropriate, questionnaires. Columbia
has mailed letters to many of its significant vendors and service providers and
has verbally communicated with many strategic customers to determine the extent
interfaces with such entities are vulnerable to year 2000 problems and whether
the products and services purchased from or by such entities are year 2000
compliant. Columbia has received responses from a large number of these third
parties with many of the companies providing written assurances that they expect
to address all of their significant year 2000 issues on a timely basis. A
follow-up mailing to significant vendors and service 




                                       17
<PAGE>   18
                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONSOLIDATED)



                        CONSOLIDATED RESULTS (CONTINUED)

providers that did not initially respond, or whose responses were deemed
unsatisfactory by Columbia, is currently underway.

The total estimated cost of assessing, testing and remediating Columbia's IT and
non-IT systems for year 2000 compliance, along with the cost of developing
contingency plans, is approximately $14.2 million. The bulk of Columbia's budget
will be applied to the remediation and testing phases. The estimated total cost
of the year 2000 project represents management's assessment, based on
information currently available, scope of the project, work already completed
and estimated remaining work. The expenditures necessary to become year 2000
compliant will be satisfied through Columbia's cash flow from operations.

As part of its normal operations, Columbia continuously operates in a
safety-conscious, high-reliability environment and has numerous backup systems
in place. As a result of the extensive planning that has been incorporated into
Columbia's current contingency plans and the year 2000 project, management
believes that the most reasonably likely worst case year 2000 scenario would
involve minor failures that were not detected and corrected during the project.
These failures should not be of the type that could result in the disruption of
services and will, in all likelihood, be corrected quickly. However, the failure
of Columbia or a key third party supplier to correct a material year 2000
problem could result in an interruption in, or a failure of, certain normal
business activities or operations including Columbia's ability to deliver
energy. For such a failure to be material, numerous backup systems or processes
would also have to fail. For example, an interruption in electric service along
Columbia's pipeline system could impact the operation of one or more compressor
stations or other field facilities and equipment. This impact, if coupled with
the failure of critical back-up systems and processes, could materially and
adversely affect Columbia's operations, liquidity and financial condition. Due
to the general uncertainty inherent in the year 2000 issue, due in part to the
uncertainty of the year 2000 readiness of third party suppliers and customers,
Columbia is unable to determine at this time whether the consequences of any
likely year 2000 failures will have a material impact on Columbia's operations,
liquidity or financial condition.



                                       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


<TABLE>
<CAPTION>
                                     Three Months              Nine Months
                                  Ended September 30,      Ended September 30,
                                  -------------------      -------------------
                                    1998       1997          1998       1997
                                  --------   --------      --------   --------
                                                   (millions)
<S>                               <C>        <C>           <C>        <C>
OPERATING REVENUES
  Transportation revenues          $ 130.6    $ 131.8       $ 445.2    $ 448.8
  Storage revenues                    45.4       45.2         137.7      137.0
  Other revenues                       4.0        3.3          27.1       33.0
                                   -------    -------       -------    -------
Total Operating Revenues             180.0      180.3         610.0      618.8
                                   -------    -------       -------    -------

OPERATING EXPENSES
  Operation and maintenance           87.5      103.6         262.0      305.0
  Depreciation                        25.8       25.8          75.8       78.7
  Other taxes                         12.0       13.0          40.9       40.9
                                   -------    -------       -------    -------
Total Operating Expenses             125.3      142.4         387.7      424.6
                                   -------    -------       -------    -------
OPERATING INCOME                   $  54.7    $  37.9       $ 231.3    $ 194.2
                                   =======    =======       =======    =======

THROUGHPUT (BCF)
Transportation
  Columbia Transmission
    Market area                      151.0      145.4         674.6      719.6
  Columbia Gulf
    Mainline                         138.8      145.4         420.6      458.3
    Short-haul                        56.7       66.1         178.3      185.1
    Intrasegment eliminations       (134.4)    (142.6)       (406.8)    (448.0)
                                   -------    -------       -------    -------
Total Throughput                     212.1      214.3         866.7      915.0
                                   =======    =======       =======    =======
</TABLE>




                                       19
<PAGE>   20
                         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 (MMcf) 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 began the extensive review process, including opportunities for public
review, communication and comment. The Millennium Project sponsors have
announced that the proposed in-service date is expected to be 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 contracted for the
additional service through an open bidding process held in late 1997 and early
1998. Subject to regulatory approval, construction relating to the compressor
replacements is scheduled to begin in the first quarter of 1999. The proposed
in-service date for the Mainline '99 project is December 1, 1999.

          Proposed East Lateral Expansion and SunStar Pipeline Projects
Columbia Gulf announced plans in September 1998, for the expansion of its
onshore East Lateral system at Grand Isle, Louisiana and for a new 56-mile Gulf
of Mexico pipeline. The expansion of the East Lateral will provide additional
capacity to shippers from Grand Isle, Louisiana. The planned expansion, which
will add approximately 600 MMcf per day of incremental firm transportation
capacity, would be accomplished by adding new facilities and expanding existing
facilities. The proposed SunStar Pipeline Project (formerly called the Sea Star
Pipeline Project), in which Columbia Gulf is participating and will serve as the
developer and operator, will transport gas from the deep water areas of the Gulf
of Mexico to gas processing facilities located at Grand Isle, Louisiana. This
offshore pipeline project is complementary to the proposed expansion of the East
Lateral facilities, mentioned above.

Columbia Gulf conducted open seasons in the fall of 1998 to obtain binding
commitments from interested parties for the additional capacity from the East
Lateral Expansion and the SunStar Pipeline Project. Columbia Gulf is currently
in the process of evaluating the bids.

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. In May 1998, the NYPSC
filed an appeal of the Administrative Law Judge's decision and on October 6,
1998, 



                                       20
<PAGE>   21
                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                 TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)




the FERC affirmed the judge's decision. The NYPSC filed for rehearing of the
FERC's decision on November 5, 1998.

                           Sale of Certain Facilities
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 Resources has been delayed due to a dispute with a gas
distribution company. The complaint has since been dismissed and the anticipated
closing date of the sale is year-end 1998. The sale of these assets will not
have a material impact on Columbia's financial results.

In addition, 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 a third party
for $21.8 million. On November 4, 1998, the FERC issued an order authorizing the
abandonment. The sale of these assets will not have a material impact on
Columbia's financial results.

                       Bankruptcy-related Producer Claims
On July 24, 1998, the U.S. Bankruptcy Court for the District of Delaware,
granting a motion by Columbia Transmission, 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 did not file a notice of an appeal of this Order to the U. S. District
Court within the requisite time for appeal. However, on August 21, 1998, New
Bremen filed a motion to extend the time for filing a notice of appeal based on
the grounds of excusable neglect. On August 24, 1998, the Bankruptcy Court
granted the motion. On August 28, 1998, New Bremen filed a notice of appeal to
the U.S. District Court for the District of Delaware.

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. As a result of these discussions, Columbia
Transmission reported to the Administrative Law Judge on September 10, 1998,
that an agreement in principle had been reached among the active parties on the
overall components of an environmental remediation settlement. The agreement in
principle is comprehensive, and includes such major components as Columbia
Transmission's total allowed recovery of environmental remediation program
costs, and the disposition 



                                       21
<PAGE>   22
                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                 TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)



of recovery by Columbia Transmission from insurance carriers and others. On
October 9, 1998, Columbia Transmission reported to the Administrative Law Judge
that consensus had been reached with all but two parties on the allocation of
the costs to Columbia Transmission's various services and customers. Columbia
Transmission further advised the judge that it would continue to attempt to
secure unanimity on allocation and would turn to drafting the stipulation and
agreement that will be filed with the FERC. 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, Middle Atlantic, Midwestern and
Southern states and the District of Columbia. Throughput for Columbia Gulf
reflects 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 212.1 Bcf for the
third quarter of 1998, and 866.7 Bcf for the nine months ended September 30,
1998. Throughput for the third quarter of 1998 decreased 2.2 Bcf from the same
period last year, due to reduced customer usage along Columbia Gulf's mainline
and short-haul deliveries. This decrease was only partially offset by an
increase from Columbia Transmission's market expansion project that was placed
in service in November 1997. Throughput for the year-to-date period through
September 30, 1998, decreased 48.3 Bcf from the same period last year,
reflecting the impact of warmer weather in the first half of 1998, tempered by
increased throughput from Columbia Transmission's market expansion project and
higher electric generation demand for natural gas.

Operating Revenues
Total operating revenues were $180 million for the third quarter of 1998 and
$610 million for the nine months ended September 30, 1998. Operating revenues
for the third quarter were substantially the same as the third quarter of 1997,
while operating revenues for the first nine months of 1998 reflected a decrease
of $8.8 million when compared to the same period last year. This decrease was
principally due to the effect of recording $19.1 million of revenues in the
second quarter of 1997 for the sale of base gas as provided for in Columbia
Transmission's regulatory settlement. Revenues in both the current quarter and
year-to-date period were also reduced from the same respective periods last
year, due to the sale of certain gathering facilities in 1997. Revenues were
improved in the current nine-month period by the sale in early 1998 of
approximately 5 Bcf of storage base gas that was part of Columbia Transmission's
overall 1997 rate settlement. Transportation and storage service revenues
benefited from Columbia Transmission's market expansion contracts, a contract
termination fee, as well as the effect of Columbia Gulf's regulatory settlement
entered into in May 1998.

Operating Income
Operating income for the third quarter of 1998 was $54.7 million, an increase of
$16.8 million from the same period last year, primarily reflecting two
nonrecurring expense items recorded in 1997. These items included a $10.1
million valuation reserve recorded for the loss on the anticipated sale of
certain pipeline facilities and a $9.4 million reserve for relocation and
restructuring costs. Absent these two items, operation and maintenance expense
increased $2.4 million due primarily to higher outside service costs reflecting
timing differences for certain maintenance activities.



                                       22
<PAGE>   23
                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                 TRANSMISSION AND STORAGE OPERATIONS (CONTINUED)



For the first nine months of 1998, operating income for the transmission and
storage segment of $231.3 million increased $37.1 million over the same period
last year as $45.9 million of lower operating expenses more than offset lower
operating revenues. Operation and maintenance expense for the first nine months
of 1998 declined $43 million compared to the same period in 1997, primarily
reflecting savings achieved through the implementation of restructuring
initiatives, the reserve in 1997 for the loss on the anticipated sale of certain
pipeline facilities, as mentioned above, and a $4.5 million reduction in the
cost of certain postretirement benefits. Approximately $17.3 million of
restructuring costs recorded in the second and third quarters of 1997, also
contributed to the decline in operating expenses.



                                       23
<PAGE>   24
                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


                            DISTRIBUTION OPERATIONS


<TABLE>
<CAPTION>                               Three Months                  Nine Months
                                    Ended September 30,           Ended September 30,
                                   ---------------------         ----------------------
                                    1998          1997            1998          1997
                                   -------      --------         --------     ---------
                                                       (millions)
<S>                                <C>          <C>              <C>           <C>
NET REVENUES
  Sales revenues                    $178.6        $166.5         $1,199.1      $1,534.5
  Less: Cost of gas sold              83.3          77.6            723.1       1,004.2
                                   -------      --------         --------     ---------  
  Net Sales Revenues                  95.3          88.9            476.0         530.3
                                   -------      --------         --------     --------- 
  Transportation revenues             29.1          22.4            122.6          97.8
  Less: Associated gas costs           2.5           1.7             12.5           7.9
                                   -------      --------         --------     ---------
  Net Transportation Revenues         26.6          20.7            110.1          89.9
                                   -------      --------         --------     ---------
Net Revenues                         121.9         109.6            586.1         620.2
                                   -------      --------         --------     ---------

OPERATING EXPENSES
  Operation and maintenance           91.8          94.8            275.7         307.6
  Depreciation                        11.4           7.8             61.9          55.8
  Other taxes                         17.1          18.4            113.4         106.3
                                   -------      --------         --------     ---------
Total Operating Expenses             120.3         121.0            451.0         469.7
                                   -------      --------         --------     ---------
OPERATING INCOME (LOSS)             $  1.6        $(11.4)        $  135.1     $   150.5
                                   =======      ========         ========     =========

THROUGHPUT (BEF)
  Sales
     Residential                      10.0          11.1            102.9         129.2
     Commercial                        4.0           4.7             37.7          49.4
     Industrial and other              0.7           0.8              3.1           1.8
                                   -------      --------         --------     ---------
Total Sales                           14.7          16.6            143.7         180.4
Transportation                        60.2          54.0            206.8         187.0
                                   -------      --------         --------     ---------
Total Throughput                      74.9          70.6            350.5         367.4
Off-System Sales                       8.9           3.1             60.3          45.3
                                   -------      --------         --------     ---------
Total Sold or Transported             83.8          73.7            410.8         412.7
                                   =======      ========         ========     =========
SOURCES OF GAS FOR THROUGHPUT(BCF)
  Sources of Gas Sold
     Spot market*                     47.9          72.1            166.9         210.5
     Producers                         2.8           8.8             11.4          28.4
     Storage withdrawals
     (injections)                    (44.8)        (56.1)            (7.0)        (24.1)
     Other                            17.7          (5.1)            32.7          10.9
                                   -------      --------         --------     ---------
  Total Sources of Gas Sold           23.6          19.7            204.0         225.7 
  Transportation received for
  delivery to customers               60.2          54.0            206.8         187.0
                                   -------      --------         --------     ---------
Total Sources                         83.8          73.7            410.8         412.7
                                   =======      ========         ========     =========

* Purchase contracts of less than one year.
</TABLE>                          
                                                          
         


<PAGE>   25
                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                       DISTRIBUTION OPERATIONS (CONTINUED)

Market Conditions
Weather in Columbia's distribution subsidiaries' (Distribution) market area for
the first nine months of 1998 was the warmest on record. It was 21% warmer than
the first nine months of 1997 and 19% warmer than normal. As a result, there was
a 34 Bcf decrease in weather-sensitive deliveries from the same period last
year.

Regulatory Matters
Distribution continues to sign up customers for its Customer CHOICE(SM) programs
in Ohio, Pennsylvania, Virginia and Maryland. More than 235,000 customers, or
16% of the eligible customers, are participating in the programs.

As previously reported in Columbia's Second Quarter 1998 Form 10-Q, 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 has been
collected through interim rates in effect since October 1997, subject to refund.
These interim rates are the result of Columbia of Virginia's 1997 rate filing,
which is currently pending before the VSCC. Rates reflecting the requested
additional increase of $5.3 million went into effect, also subject to refund, in
mid-October 1998. Higher revenues are 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.

Environmental Matters
Distribution's primary environmental issues relate to 15 former manufactured gas
plant sites. Investigations or remedial activity are currently underway at eight
sites and additional site investigations may be required at some of the
remaining sites. To the extent Distribution's site investigations have been
conducted, remediation plans developed and any responsibility for remediation
action established, the appropriate liabilities have been recorded. Regulatory
assets have also been recorded for a majority of these costs as rate recovery
has been allowed or is anticipated.

Volumes
Total volumes sold or transported for the three months ended September 30, 1998
of 83.8 Bcf, improved 10.1 Bcf from the same period in 1997, primarily due to
increased off-system sales, as well as transportation volumes for new customers,
the impact of warm summer weather on electric generation and the return to full
production at a major industrial customer that had been idled by a labor strike
last year.

For the first nine months of 1998, total volumes sold or transported of 410.8
Bcf were 1.9 Bcf lower than the same period in 1997, due to this year's record
warm weather. Increased off-system sales and the return to full production at
the major industrial customer, increased transportation volumes and customer
growth largely offset the effect of the record warm weather.

Net Revenues
Net revenues for the three months ended September 30, 1998, were $121.9 million,
up $12.3 million from the same period last year. This improvement is primarily
attributable to higher revenues from gas management activities that Columbia Gas
of Ohio, Inc. (Columbia of Ohio) was allowed to retain under the terms of its
1997 regulatory settlement.



                                       25
<PAGE>   26
                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                       DISTRIBUTION OPERATIONS (CONTINUED)



For the nine months ended September 30, 1998, net revenues were $586.1 million,
down $34.1 million from 1997. This decrease primarily reflects the effect of the
record warm weather that reduced net revenues approximately $52 million compared
to the first nine months of 1997, which was only partially offset by Columbia of
Ohio's regulatory settlement.

Operating Income (Loss)
Operating income of $1.6 million for the three months ended September 30, 1998
was an improvement of $13 million over the operating loss of $11.4 million
during the same period in 1997, due to the increase in net revenues.

For the first nine months of 1998, operating income of $135.1 million decreased
$15.4 million from the same period last year, as the decline in net revenues was
partially offset by an $18.7 million decrease in operating expenses. Operation
and maintenance expense for the first nine months of 1998 decreased $31.9
million from the same period last year, primarily reflecting a reduction in
postretirement benefits costs of $15.9 million and the ongoing beneficial impact
of the restructuring initiatives implemented in 1997. Other taxes increased $7.1
million, primarily due to higher gross receipts taxes and depreciation expense
increased by $6.1 million due in part to plant additions.




                                       26
<PAGE>   27

                         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               Nine Months
                              Ended September 30,       Ended September 30,
                              -------------------       -------------------
                                1998      1997            1998       1997
                              --------  --------        --------   --------
                                                 (millions)
<S>                           <C>       <C>             <C>        <C>
OPERATING REVENUES
  Gas revenues                  $24.1     $23.9           $86.5      $77.6
  Other revenues                  2.7       0.8            10.1        2.8
                                -----     -----           -----      -----
Total Operating Revenues         26.8      24.7            96.6       80.4
                                -----     -----           -----      -----

OPERATING EXPENSES
  Operation and maintenance      10.4      10.8            33.2       30.9
  Depreciation and depletion      8.6       6.0            27.5       20.6
  Other taxes                     2.3       2.3             7.5        6.2
                                -----     -----           -----      -----
Total Operating Expenses         21.3      19.1            68.2       57.7
                                -----     -----           -----      -----
OPERATING INCOME                $ 5.5     $ 5.6           $28.4      $22.7
                                =====     =====           =====      =====

GAS PRODUCTION STATISTICS
Production (Bcf)
  U.S.                            8.5       8.6            28.6       25.3
  Canada                           --        --             0.1         --
                                -----     -----           -----      -----
    Total                         8.5       8.6            28.7       25.3
                                =====     =====           =====      =====

Average Price ($ per Mcf)
  U.S.                           2.83      2.36            3.01       2.59
  Canada                         2.44        --            2.70         --

OIL AND LIQUIDS PRODUCTION
  STATISTICS
Production (000Bbls)
  U.S.                             46        57             152        157
  Canada                            4        --               8         --
                                -----     -----           -----      -----
    Total                          50        57             160        157
                                =====     =====           =====      =====

Average Price ($ per Bbl)
  U.S.                          11.55     15.20           12.87       17.90
  Canada                        17.04        --           17.31          --
    Average                     11.98     15.20           13.10       17.90
</TABLE>



                                       27
<PAGE>   28
                         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 nine months of 1998, Columbia Resources, Columbia's exploration
and production subsidiary, participated in 87 gross wells, of which 65 were
successful, adding 17.2 net billion cubic feet equivalent (Bcfe) to reserves.
Columbia Resources currently has 11 rigs operating in 6 states and is on track
to accomplish its goal of drilling 185 wells during 1998.

Volumes
Gas production for the third quarter of 1998 of 8.5 Bcf was essentially
unchanged from the third quarter of 1997. Temporary pipeline repairs and a delay
in new production coming on line was offset by new production from the purchase
in 1997 of Alamco and the success of Columbia Resources' drilling program. Full
production is expected to resume during the fourth quarter; however, the
estimated total production for 1998 is expected to be approximately 40 Bcf, down
from the earlier estimate of 50 Bcf. For the nine months ended September 30,
1998, gas production increased 3.4 Bcf to 28.7 Bcf. The year-to-date production
increase primarily reflects the purchase of Alamco's properties and new
production brought on line during the year.

Operating Revenues
Third quarter operating revenues for 1998 increased $2.1 million from the same
period last year to $26.8 million, as the slight production decline was more
than offset by higher gas prices. For the three months ended September 30, 1998,
Columbia Resources' average gas sales price was $2.83 per Mcf compared to $2.36
per Mcf in the third quarter of 1997. In addition, third party gathering
revenues increased by $1.8 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. These
gathering revenues are largely offset by related operation and maintenance
expense.

Operating revenues of $96.6 million for the first nine months of 1998 increased
$16.2 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 nine months ended September 30, 1998, was $3.01 per Mcf, up 16% 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 increased by $5.7 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 of $5.5 million for the three months ended September 30, 1998,
decreased $100,000 from the same period in 1997. This small decline reflects a
$2.6 million increase in depreciation and depletion expense due to the
additional investment in the exploration and production segment which more than
offset the improvement in operating revenues.

For the nine months ended September 30, 1998, operating income of $28.4 million
improved $5.7 million over the same period last year. The increase in operating
revenues was mitigated by a $6.9 million increase in depreciation and depletion
expense due to additional investments, along with an increase of $2.3 million in
operation and maintenance expense, largely due to expense associated with
gathering activities.



                                       28
<PAGE>   29
                         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                     Nine Months
                                        Ended September 30,              Ended September 30,
                                     ------------------------         ------------------------
                                        1998           1997              1998          1997
                                     ----------   ----------          ----------    ----------
                                                            (millions) 
 <S>                                  <C>           <C>                <C>           <C>
OPERATING REVENUES
 Gas revenues                          $ 751.4         $681.0            $2,392.2      $1,283.0  
 Power revenues                          361.8             --               459.6            --
                                      --------        -------            --------      --------
Total Operating Revenues               1,113.2          681.0             2,851.8       1,283.0

Less: Products purchased               1,099.5          673.4             2,815.1       1,265.9                           
                                      --------        -------            --------      --------
Gross Margin                              13.7            7.6                36.7          17.1
                                      --------        -------            --------      --------
OPERATING EXPENSES
 Operation and maintenance                18.6            8.0                52.1          16.2
 Depreciation                              1.0            0.7                 2.4           0.9
 Other taxes                               0.6            0.2                 1.8           0.7
                                      --------        -------            --------      --------
Total Operating Expenses                  20.2            8.9                56.3          17.8
                                      --------        -------            --------      --------
OPERATING (LOSS)                      $   (6.5)       $  (1.3)           $  (19.6)     $   (0.7)
                                      ==+=====        =======            ========      ========
MARKETING SALES
 Gas (Bcf)                               359.0          323.0             1,070.6         551.4
 Power (thousand megawatt hours)         6,716             --              10,069            --
</TABLE>


                                       29
<PAGE>   30
                         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, as well as
residential customers. These businesses can be categorized broadly into two
business lines: wholesale energy operations and services, and retail industrial,
commercial, and residential products and services. The wholesale business
provides products and services to wholesale customers nationwide, 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 provides
energy-related products and services to a diverse customer base, including
industrial and commercial operations, as well as residential customers. Products
and services include gas and electricity supply, fuel management and insurance
services.

Wholesale Energy Activity
Wholesale energy activity can be categorized into two broad businesses: gas
marketing and trading, and electric power marketing and trading. Gas marketing
and trading activities have grown significantly during 1998. In the third
quarter of 1998, Columbia Energy Services was the twelfth largest gas marketer
in the United States, as reported by Gas Daily, a trade publication. This growth
included the effect of an increased presence in Southeast and Midwest markets,
as well as an expanded portfolio of storage and transportation assets. During
1998, the marketing segment made significant investments in risk management
infrastructure and related financial products and services. Consequently,
Columbia Energy Services has been able to add a number of structured
transactions to its overall trading and marketing portfolio including prepayment
agreements with municipal agencies for delivery of natural gas to them over a
multi-year period.

In addition to natural gas commodity marketing and trading activities, the
marketing segment entered the electricity trading business in December 1997.
Since that time, the marketing segment has rapidly expanded its trading and
scheduling operations in Northeast, Midwest, Southwest and the Western United
States electric regions.

Retail Energy Activity
Retail energy activity can be categorized into the efforts of two broad
strategic business units: Major Accounts retail activity and Mass Market retail
activity. These retail business units provide energy expertise to end-use
customers, both for gas and power retail market. Management believes they are
favorably positioned for electric retail market unbundling and deregulation.
During 1998, Columbia Energy Services initiated gas marketing programs in Ohio,
Pennsylvania, Michigan, Maryland, Indiana, Virginia and New Jersey. These
efforts significantly increased Columbia Energy Services' Mass Market customer
base since the beginning of 1998. Additional plans are currently being
implemented to enter the Georgia market for retail natural gas. In Georgia,
where Columbia Energy Services was certified by the Georgia Public Service
Commission to sell natural gas, all 1.2 million Atlanta Gas Light retail
customers will either choose a new natural gas supplier or be assigned to a
provider, once certain conditions are met. During 1999, Columbia Energy Services
plans to initiate marketing to power customers in Pennsylvania. Under the
Pennsylvania program, certain electric power customers will be able to choose
their power supplier beginning January 1, 1999, with all customers having the
ability to choose their power supplier by January 1, 2000.

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, in Ohio, Pennsylvania, Virginia, 



                                       30
<PAGE>   31
                         PART I - FINANCIAL INFORMATION
                ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
            FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

                        MARKETING OPERATIONS (CONTINUED)


Maryland, New Jersey, and Illinois. For example, two energy efficiency software
products, sponsored by Columbia Energy Services, were launched during the third
quarter of 1998. These software products are targeted toward residential and
commercial customers.

Gross Margins
Gross margins of $13.7 million for the third quarter of 1998 increased $6.1
million from the same period last year. Electric power marketing activities,
which began in late-1997, represented the majority of this growth. Electric
power traded in the third quarter of 1998 was 6,716 thousand megawatt hours,
more than twice the level for the second quarter of this year. The impact of an
11 percent increase in third quarter 1998 gas marketing volumes was partially
offset by the effect of lower wholesale margins.

For the nine months ended September 30, 1998, gross margins totaled $36.7
million, compared to $17.1 million for the same period last year. This is
primarily due to increased growth in both natural gas volumes and the addition
of electric power volumes. Gas marketing volumes of 1,070.6 Bcf nearly doubled
from the same period in 1997.

Operating Loss
An operating loss of $6.5 million for the third quarter of 1998 was $5.2 million
greater than the $1.3 million loss in same period last year, due to operating
expenses that were $11.3 million larger than in the third quarter of 1997. For
the nine months ended September 30, 1998, the marketing segment had an operating
loss of $19.6 million compared to a loss of $700,000 for the first nine months
of 1997. The increase in operating expenses of $38.5 million in the 1998
nine-month period is a result of the implementation of Columbia Energy Services'
strategy to build its systems and infrastructure, positioning itself for future
growth in conjunction with the continued deregulation of the industry. In
addition, higher current period expenses include costs associated with the
development of new products and services and costs related to adding new Mass
Market retail customers.

Columbia Energy Services is in the process of analyzing certain
financial records with unidentified amounts that primarily resulted from the
integration of the operations of PennUnion Energy Services L.L.C. in 1997 and
the ongoing implementation of new accounting systems in 1998. As these records
are reconciled there may be amounts identified, without adequate third party
documentation, that will be charged to income. Management does not believe that
these amounts, in total, will be material to Columbia's consolidated financial
statements.


                                       31
<PAGE>   32
                         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              Nine Months
                                    Ended September 30,      Ended September 30,
                                    -------------------      -------------------
                                      1998       1997          1998       1997
                                    --------   --------      --------   --------
                                                     (millions)
<S>                                 <C>        <C>           <C>        <C>
NET REVENUES
  Propane revenues                    $ 8.6     $ 9.5          $43.0      $47.7
  Less: Products purchased              5.1       6.4           23.6       29.6
                                      -----     -----          -----      -----
  Net Propane Revenues                  3.5       3.1           19.4       18.1
  Power Generation                      2.6       0.3            6.4        8.7
  Other Revenues                        5.1       4.9           12.7       13.3
                                      -----     -----          -----      -----
Net Revenues                           11.2       8.3           38.5       40.1
                                      -----     -----          -----      -----

OPERATING EXPENSES
  Operation and maintenance            10.3       7.1           27.1       26.0
  Depreciation                          1.4       0.9            3.6        2.6
  Other taxes                           0.5       0.4            1.5        1.5
                                      -----     -----          -----      -----
Total Operating Expenses               12.2       8.4           32.2       30.1
                                      -----     -----          -----      -----

OPERATING INCOME (LOSS)               $(1.0)    $(0.1)         $ 6.3      $10.0
                                      =====     =====          =====      =====

PROPANE SALES (MILLIONS OF GALLONS)
  Retail                                8.4       8.6           39.8       38.5
  Wholesale and Other                   1.3       2.3            4.7        9.3
                                      -----     -----          -----      -----
Total Propane Sales                     9.7      10.9           44.5       47.8
                                      =====     =====          =====      =====
</TABLE>




                                       32
<PAGE>   33
                         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)


Power Generation
On January 29, 1998, Columbia Electric Corporation (Columbia Electric) and
Westcoast Energy Inc. signed a joint venture agreement, with equal ownership
interests, to develop a third natural gas-fired electricity-generating plant by
mid-2001. In total, the three plants are anticipated to provide approximately
1,000 megawatts of electricity using approximately 160 MMcf per day of natural
gas. In early August 1998, the parties formed a limited liability company, which
subsequently purchased the proposed site in Eddystone, Pennsylvania, for the
development of a 500 megawatt electricity production facility.

Net Revenues
Net revenues for the third quarter of 1998 increased $2.9 million from the same
period last year to $11.2 million. Columbia Electric's power generation net
revenues for the three months ended September 30, 1998, increased by $2.3
million from the same period last year to $2.6 million. This increase was
primarily the result of a $1.8 million reclassification in 1997 for the
recording of certain gas transportation revenues. Fuel management expenses were
reclassified from operating expense and netted with gas transportation revenues;
therefore the change in reporting did not effect operating income. Net propane
revenues of $3.5 million in the third quarter of 1998 increased $0.4 million
from last year's third quarter reflecting higher margins. Propane sales to the
low-margin wholesale market were up significantly in the current quarter, but a
sharp drop in spot sales more than offset the increase in wholesale sales. Other
miscellaneous revenues increased $0.2 million in the third quarter of 1998
compared to the same period last year.

For the first nine months of 1998, net revenues of $38.5 million decreased $1.6
million from the same period last year. The decrease largely reflects the net
effect of 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. This decrease was partially offset by an increase in
propane net revenues of $1.3 million due to higher margins achieved in the first
quarter of 1998 and additional retail sales attributable to recent acquisitions.
Total propane volumes for the first nine months of 1998 decreased 3.3 million
gallons compared to the same period last year due to warmer weather and lower
spot sales.

Operating Income (Loss) 
An operating loss of $1 million for the third quarter of 1998 was $900,000
greater than the same period last year, as the $2.9 million increase in net
revenues was more than offset by a $3.8 million increase in operating expenses.
The acquisition of three propane companies during the first half of 1998
contributed to the higher operating costs.

Operating income of $6.3 million for the first nine months of 1998 decreased
$3.7 million from the same period in 1997, due to the decrease in net revenues
along with $2.1 million higher operating expenses. Higher operating costs from
recent propane acquisitions and additional start-up costs for new services were
partially offset by a reduction in certain postretirement benefit costs recorded
in the first quarter of 1998.



                                       33
<PAGE>   34
                         PART I - FINANCIAL INFORMATION



Item 3.        Quantitative and Qualitative Disclosures About Market Risk

              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 other than
              the information reported on page 16 of the Management's Discussion
              and Analysis under "Market Risk Exposure".

                           PART II - OTHER INFORMATION


Item 1.       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 and Quarterly Reports on Form 10-Q for the first and
              second quarters of 1998 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); In re The Columbia Gas System, Inc. and
         Columbia Gas Transmission Corporation, No. 91-803 and No. 91-804 (U.S.
         Bankr. Ct. Dist. of Del.). 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
         failed to file a timely notice of appeal. On August 21, 1998, New
         Bremen filed a motion to extend its time for filing on the grounds of
         excusable neglect. On August 24, 1998, the Bankruptcy Court granted the
         motion and provided 10 days for a New Bremen to file a notice of
         appeal. On August 28, 1998, New Bremen filed a notice of appeal to the
         U.S. District Court for the District of Delaware.

II.      Other.
         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 February 1998, negotiations surrounding the
         transfer of certain facilities and processing services to MarkWest,
         pursuant to the Federal Energy Regulatory Commission's Order on
         Uncontested Settlement (the "FERC Order"), 79 FERC P. 61,044 (1997),
         reached an impasse, resulting in an arbitration proceeding and a court
         proceeding. On September 16, 1998, the Federal Energy Regulatory
         Commission issued an order pursuant to which Columbia Transmission will
         retain certain quantities of gas from its customers through its
         retainage adjustment mechanism as provided in the FERC Order, but not
         deliver those quantities to MarkWest pending resolution of the court
         and arbitration proceedings. On October 30, 1998, the Arbitration Panel
         issued its New Ruling on Arbitrable Issues and Vacation of Ruling of
         July 29, 1998. The ruling was issued in response to the U.S. District
         Court's order dated August 3, 1998. The Panel held that certain claims
         regarding contract interpretation, asserted contractual obligations,
         and asserted breach thereof are arbitrable, as is the issue of whether
         the FERC Settlement terminated certain agreements. The Panel reaffirmed
         its earlier ruling that none of the tort claims raised by MarkWest are
         arbitrable.



                                       34
<PAGE>   35
                           PART II - OTHER INFORMATION



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

               None


Item 5.       Other Information

                None


Item 6.       Exhibits and Reports on Form 8-K

<TABLE>
<CAPTION>
                  Exhibit
                  Number 
                  ------ 
<S>                         <C>
                   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 third
quarter of 1998.

<TABLE>
<CAPTION>
                         Financial
           Item         Statements
         Reported        Included         Date of Event             Date Filed
         --------        --------         -------------             ----------
<S>                     <C>             <C>                     <C> 
             5             Yes*         October 13, 1998        October 13, 1998
</TABLE>


      * Summary of Financial and Operational data for three and nine months
ended September 30, 1998.



                                       35
<PAGE>   36
                           PART II - OTHER INFORMATION

                                    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: November 16, 1998                  By: /s/ Jeffrey W. Grossman
                                             -----------------------------------
                                                   Jeffrey W. Grossman
                                                Vice President and Controller
                                                (Principal Accounting Officer
                                                and Duly Authorized Officer)




                                       36