CONSOLIDATED NATURAL GAS CO, DEF 14A, 1997-03-24

CONSOLIDATED NATURAL GAS CO
DEF 14A, 1997-03-24
NATURAL GAS TRANSMISISON & DISTRIBUTION

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<PAGE>

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:

[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement

[_] Definitive Additional Materials

[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12

CONSOLIDATED NATURAL GAS COMPANY
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

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(2) Aggregate number of securities to which transaction applies:

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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):

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(4) Proposed maximum aggregate value of transaction:

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(5) Total fee paid:

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[_] Fee paid previously with preliminary materials.

[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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(2) Form, Schedule or Registration Statement No.:

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(3) Filing Party:

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(4) Date Filed:

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Notes:

<PAGE>

CNG CONSOLIDATED
NATURAL GAS
COMPANY

CNG CONSOLIDATED 1997 Notice of
NATURAL GAS Annual Meeting and
COMPANY Proxy Statement

CNG CONSOLIDATED
NATURAL GAS
COMPANY

CNG CONSOLIDATED
NATURAL GAS
COMPANY
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Chairman's Letter...................................................... 1
Notice of Meeting...................................................... 2
Proxy Statement........................................................ 3
Principal Security Owners.............................................. 3
Election of Directors.................................................. 4
Board Committees....................................................... 9
Security Ownership..................................................... 11
Compensation Table..................................................... 12
Option Grant Table..................................................... 13
Option Exercise Table.................................................. 14
Compensation Committee Report.......................................... 14
Directors Compensation................................................. 19
Benefit Plans.......................................................... 20
Independent Accountants................................................ 22
1997 Stock Incentive Plan.............................................. 23
Stockholder Proposals.................................................. 27
Other Matters.......................................................... 30
Exhibit A--1997 Stock Incentive Plan................................... 32
Appendix I--1996 Financial Statements and Notes to Statements.......... Enclosed
</TABLE>
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY
March 21, 1997

Dear Stockholder:

You are cordially invited to attend the 1997 Annual Meeting of Stockholders to
be held on Tuesday, May 20, 1997, at 10:00 a.m. Central Time at the Hyatt
Regency Hotel, 15747 John F. Kennedy Blvd., Houston, Texas 77032.

The business items to be acted on during the Meeting are listed in the Notice
of Meeting and are described more fully in the Proxy Statement. The Board of
Directors has given careful consideration to these proposals and believes that
Proposals 1, 2 and 3 are in the best interests of the Company and that
Proposals 4, 5 and 6 are not in the best interests of the Company. The Board
recommends that you vote FOR Proposals 1, 2 and 3 and AGAINST Proposals 4, 5
and 6.

It is important that you be represented at the Annual Meeting in person or by
proxy. Whether or not you plan to attend, we urge you to mark, sign, date and
return the enclosed proxy card promptly in the postage paid envelope provided.
If you plan to attend, please check the appropriate box on the proxy card.

Thank you for your cooperation.

Sincerely,

/s/ George A. Davidson, Jr.

George A. Davidson, Jr.
Chairman of the Board and
Chief Executive Officer

1
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

The Annual Meeting of Consolidated Natural Gas Company will be held on
Tuesday, May 20, 1997, at 10:00 a.m. Central Time at the Hyatt Regency Hotel,
15747 John F. Kennedy Blvd., Houston, Texas 77032. Stockholders of record at
the close of business on March 21, 1997, will be entitled to vote at the
Meeting and any adjournment thereof.

The agenda for the Meeting includes:

1. Election of three Directors.
2. Ratification of the appointment of Price Waterhouse LLP as independent
accountants.
3. A proposal to approve the adoption of the 1997 Stock Incentive Plan.
4. Action on a stockholder-proposed resolution regarding options.
5. Action on a stockholder-proposed resolution regarding bonuses.
6. Action on a stockholder-proposed resolution regarding the shareholder
rights plan.
7. Transaction of any other business which may properly be brought before the
Meeting.

In the event you cannot be present in person, please sign and promptly return
the enclosed proxy card in the accompanying postage paid envelope so that your
shares will be represented at the Meeting. Prompt return of proxies will save
the Company the expense of further requests for proxies to ensure a quorum.

By order of the Board of
Directors,

/s/ Laura J. McKeown

Laura J. McKeown
Secretary

Pittsburgh, Pennsylvania
March 21, 1997

ATTENTION: STOCKHOLDERS PARTICIPATING IN THE DIVIDEND REINVESTMENT PLAN
The accompanying proxy card reflects the total shares of Common Stock
registered in your name directly, as well as any full shares credited to your
Dividend Reinvestment Plan account.

2
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY
PROXY STATEMENT

This statement and proxy card, mailed to stockholders commencing March 27,
1997, are furnished in connection with the solicitation by the Board of
Directors of Consolidated Natural Gas Company of proxies to be voted at the
Annual Meeting of Stockholders, and any adjournment thereof, for the purposes
stated in the Notice of the Annual Meeting. Any stockholder who cannot attend
is requested to sign and return the accompanying proxy card promptly. The
proxy reflects the number of shares registered in a stockholder's name
directly and, for participants in the Company's Dividend Reinvestment Plan,
includes full shares credited to a participant's Dividend Reinvestment Plan
account. Proxies so given will be voted on all matters brought before the
Meeting and, as to the matters with respect to which a choice is specified,
will be voted as directed. The cost of solicitation will be paid by the
Company. In addition to the use of the mails, proxies may be solicited
personally, or by telephone, telecopy or other electronic means, by employees
of the Company and its subsidiaries with no special compensation to these
employees. Georgeson & Company Inc., Wall Street Plaza, New York, New York
10005, has been retained to assist in the solicitation of proxies at an
estimated cost of $8,000. The Company will reimburse brokerage houses and
other custodians, nominees and fiduciaries for expenses incurred in sending
proxy material to their principals.
Any proxy given pursuant to this solicitation may be revoked at any time
prior to exercise by written notice to the Corporate Secretary, by filing a
later dated executed proxy, or by attending and voting at the Annual Meeting.
The address of the principal executive offices of the Company is Consolidated
Natural Gas Company, CNG Tower, 625 Liberty Avenue, Pittsburgh, Pennsylvania
15222-3199.

VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Holders of Common Stock, $2.75 par value, of record on March 21, 1997, have
one vote for each share held. On January 31, 1997, 94,940,555 shares of Common
Stock were outstanding. A majority of the outstanding shares will constitute a
quorum at the Meeting. Abstentions and broker non-votes are counted for
purposes of determining the presence or absence of a quorum for the
transaction of business. Abstentions are counted in tabulations of the votes
cast on proposals presented to stockholders. Broker non-votes are not counted
for purposes of determining whether a proposal has been approved.
The following table indicates the beneficial ownership, as of December 31,
1996, of the Company's Common Stock with respect to the only person known to
the Company to be the beneficial owner of more than 5% of such Common Stock.
On December 31, 1996, 94,933,631 shares of Common Stock were outstanding.
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Name and Address of Amount and Nature Percent of Outstanding
Beneficial Owner of Beneficial Ownership Common Stock
- - ------------------------------------------------------------------------------
<S> <C> <C>
Trustees, Alternate Thrift
Trust of Employees Thrift
Plans(/1/)
CNG Tower, 625 Liberty Avenue, 5,276,694(/2/) 5.6%
Pittsburgh, PA 15222-3199
Trustees, Long-Term Thrift
Trust of Employees Thrift
Plan(/1/)
CNG Tower, 625 Liberty Avenue, 4,223,214(/3/) 4.4%
Pittsburgh, PA 15222-3199
</TABLE>
- - -------------
(/1/) The Alternate and Long-Term Thrift Trusts beneficially hold shares for
employees under the various Company sponsored defined contribution plans.
(/2/) Such shares are beneficially owned in varying amounts by 3,737 employees,
no one of whom beneficially owned in excess of 9,000 shares in the Plans,
or 1/100ths of 1% of the shares outstanding. Such shares are voted
pursuant to confidential instructions of participating employees and in
the absence of instructions such shares are not voted. A Registration
Statement relating to various investment options available to participants
in the Plans has been made effective under the Securities Act of 1933 and
is on file with the Securities and Exchange Commission (SEC).
(/3/) Such shares are beneficially owned in varying amounts by 2,559 employees,
no one of whom beneficially owned in excess of 14,000 shares in the Plan,
or 2/100ths of 1% of the shares outstanding. Such shares are voted
pursuant to confidential instructions of participating employees and in
the absence of instructions such shares are not voted. A Registration
Statement relating to various investment options available to participants
in the Plan has been made effective under the Securities Act of 1933 and
is on file with the SEC.
- - -------------------------------------------------------------------------------

3
<PAGE>

The Board of Directors does not know of any other persons or groups who
beneficially own 5% or more of the outstanding shares of Common Stock.

ANNUAL REPORT
Commencing on or about March 27, 1997, the Company's Summary Annual Report for
the year ended December 31, 1996, was mailed together with this Notice of
Annual Meeting and Proxy Statement. Financial statements for the year ended
December 31, 1996, are Appendix I to this Notice of Annual Meeting and Proxy
Statement and were mailed to stockholders of record on March 21, 1997. The
Company will provide a copy of the Summary Annual Report to anyone else upon
request in writing to the Corporate Secretary, Consolidated Natural Gas
Company, CNG Tower, 625 Liberty Avenue, Pittsburgh, Pennsylvania 15222-3199.

PROPOSAL 1
ELECTION OF DIRECTORS

The Board of Directors consists of ten members divided into three classes.
Each class has a three-year term, and only one class is elected each year.
There are no family relationships among any of the nominees, continuing
Directors and Executive Officers of the Company nor any arrangement or
understanding between any Director or Executive Officer or any other person
pursuant to which any of the nominees has been nominated. During 1996, each of
the members of the Board of Directors attended more than 75% of the aggregate
of the Board meetings and meetings held by all committees of the Board on
which the Director served during the periods that the Director served, except
for Mr. Peirson.
On recommendation of the Nominating Committee of the Board of Directors,
three incumbent Class I Directors have been designated nominees for
reelection; each has consented to be a nominee and to serve if elected. Ms.
Wyse and Mr. Peirson, having reached the mandatory retirement age, will retire
on the date of the Annual Meeting, at which time the size of the Board shall
be decreased from ten to eight members. The remaining Directors will continue
to serve in accordance with their previous elections. The names and other
information concerning the three persons nominated for a term of three years
and the five continuing Board members are set forth by Class on pages 5
through 7 of this Proxy Statement. The personal information has been furnished
to the Company by the nominees and other Directors. Unless you specify
otherwise on your signed proxy card, your shares will be voted FOR the
election of the three persons named below to three-year terms as Directors. In
the event of an unexpected vacancy on the slate of nominees, your shares will
be voted for the election of a substitute nominee if one shall be designated
by the Board. If any nominee for election as Director is unable to serve,
which the Board of Directors does not anticipate, the persons named in the
proxy may vote for another person in accordance with their judgment.

VOTE NEEDED FOR ELECTION OF DIRECTORS
Directors are elected by a plurality of the votes of the shares of Common
Stock present in person or represented by proxy and entitled to vote at the
Annual Meeting. Any shares not voted (whether by abstention, broker non-vote
or votes withheld) are not counted as votes cast for such individuals and will
be excluded from the vote.

BOARD RECOMMENDATION
The Board recommends that stockholders vote FOR Proposal 1, and the
accompanying proxy will be so voted, unless a contrary specification is made.

4
<PAGE>

DIRECTORS NOMINATED FOR ELECTION TO THE BOARD WITH A TERM EXPIRING MAY 2000

PICTURE WILLIAM S. BARRACK, JR. Member: Audit Committee
Age 67 CNG International Business
Director since 1994 Oversight Committee
Ethics Committee
Nominating Committee

Mr. Barrack served as Senior Vice President of Texaco Inc.,
Harrison, New York, an integrated international oil company and a
producer of natural gas, from 1983 to his retirement in 1992. He
served as a Senior Director of Caltex Petroleum Corporation from 1982 to 1992,
President of Texaco Oil Trading & Supply Company from 1983 to 1984, and
Chairman and Chief Executive Officer of Texaco Limited-London from 1980 to
1983. Prior thereto, he served in various marketing, producing and management
positions with Texaco Inc. since 1953. Mr. Barrack is a Director of Standard
Commercial Corporation.

PICTURE RAY J. GROVES Member: Audit Committee
Age 61 CNG International Business
Director since 1994 Oversight Committee
Financial Policy Committee
Nominating Committee

Mr. Groves served as Chairman and Chief Executive Officer of Ernst
& Young, New York, New York, a public accounting firm, from 1991 to
his retirement in 1994. He served as Co-Chief Executive Officer of
the firm from 1989 to 1991 and served as Chairman and Chief Executive Officer
of Ernst & Whinney from 1977 to 1989. Mr. Groves was admitted as a Partner in
the firm in 1966, having joined the firm in 1957. Mr. Groves is the Chairman
of Legg Mason Merchant Banking Inc., a Director of Electronic Data Systems
Corp., Marsh & McLennan Companies, Inc. and RJR Nabisco, Inc. Mr. Groves
serves as a Trustee of The Business Council for the United Nations, the Public
Policy Institute, The Ohio State University Foundation and as a Managing
Director and Treasurer of the Metropolitan Opera Association.

PICTURE STEVEN A. MINTER Chair: Compensation and Benefits Committee
Age 58 Member: Ethics Committee
Director since 1988 Nominating Committee

Mr. Minter has been the Executive Director and President of The
Cleveland Foundation, Cleveland, Ohio, since 1984, an organization
supporting health, human services, cultural and educational
programs in the greater Cleveland area. He had been Associate
Director and Program Officer of The Cleveland Foundation from 1975 to 1980 and
from 1981 to 1983. He served as Under Secretary of the U.S. Department of
Education, Washington, D.C., from 1980 to 1981. He was the Commissioner of
Public Welfare for the Commonwealth of Massachusetts from 1970 to 1975. Mr.
Minter is a Director of Goodyear Tire & Rubber Company, Rubbermaid Inc. and
KeyCorp. He is also a Trustee of the College of Wooster and of The Foundation
Center.

5
<PAGE>

CONTINUING DIRECTORS WITH A TERM EXPIRING MAY 1998

PICTURE J. W. CONNOLLY Chair: Financial Policy Committee
Age 63 Member: CNG International Business
Director since 1984 Oversight Committee
Compensation and Benefits
Committee
Executive Committee
Nominating Committee

Mr. Connolly served as Senior Vice President and Director of H. J.
Heinz Company, Pittsburgh, Pennsylvania, a processed food products
manufacturer, from 1985 to his retirement in December 1993. He served as
President and Chief Executive Officer of Heinz U.S.A., a division of the H. J.
Heinz Company, from 1980 to 1985, and served as Executive Vice President of
that company from 1979 to 1980. He was President and Chief Executive Officer of
The Hubinger Company, a Heinz Company subsidiary, from 1976 to 1979, Treasurer
of H. J. Heinz Company from 1973 to 1976, and a Vice President of Ore-Ida
Foods, Inc., a Heinz Company subsidiary, from 1967 to 1973. An attorney by
profession, Mr. Connolly joined the Law Department of the H. J. Heinz Company
in 1961. He is a Director of Mellon Bank Corporation, Mellon Bank, N.A.,
Presbyterian-University Health System and the University of Pittsburgh Medical
Center System. He is also Chairman, Board of Trustees of the University of
Pittsburgh.

PICTURE GEORGE A. DAVIDSON, JR. Chair: Executive Committee
Age 58 Member: Financial Policy Committee
Director since 1985 Nominating Committee

Mr. Davidson has served as Chairman of the Board and Chief
Executive Officer of the Company since May 1987, and has been
employed by Consolidated since 1966. He served as Vice Chairman
and Chief Operating Officer of the Company from January 1987 to
May 1987, and Vice Chairman from October 1985 to January 1987. He
served as President of CNG Transmission Corporation(/1/) from 1984 through
1985. He had been Vice President, System Gas Operations, for Consolidated
Natural Gas Service Company, Inc.,(/1/) from 1981 to 1984, and was Assistant
Vice President, Rates and Certificates, of that company from 1975 to 1981. Mr.
Davidson held various other positions in the Rates and Certificates Department
from 1966 to 1975. Mr. Davidson serves on the National Petroleum Council and
the Allegheny Conference on Community Development. He is the immediate-past
Chairman and a Director of the American Gas Association, and a Director of PNC
Bank Corp. and B. F. Goodrich Company. He is also a Trustee of the University
of Pittsburgh.

PICTURE RICHARD P. SIMMONS Chair: Audit Committee
Age 65 Member: Ethics Committee
Director since 1990 Executive Committee
Nominating Committee

Mr. Simmons has served as Chairman, Chairman of the Executive
Committee, President and Chief Operating Officer of Allegheny
Teledyne, Pittsburgh, Pennsylvania, an international specialty
steel manufacturer since August 1996. He served as Chairman and
Chairman of the Executive Committee of Allegheny Ludlum Corporation, a
predecessor company, since 1990. He served as Chairman and Chief Executive
Officer of Allegheny Ludlum from 1980 to 1990, and as a Director of that
company since 1980. He had been a Director of Allegheny Ludlum Industries from
1973 to 1980 and a member of the Executive Office of that company from 1978 to
1980. Mr. Simmons is a Director of PNC Bank Corp. He is a member of the
Massachusetts Institute of Technology Corporation and Development Committee,
Director and Chairman of the Pittsburgh Symphony Society, President and a
member of the Executive Committee of the Allegheny Conference on Community
Development and a member of the Executive Committee and Director of the
Southwestern Pennsylvania United Way.

(/1/)Wholly owned subsidiary of the Company.

6
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CONTINUING DIRECTORS WITH A TERM EXPIRING MAY 1999

PICTURE PAUL E. LEGO Chair: CNG International Business
Age 66 Oversight Committee
Director since 1991 Member: Compensation and Benefits
Committee
Executive Committee
Financial Policy Committee
Nominating Committee

Mr. Lego served as Chairman and Chief Executive Officer of
Westinghouse Electric Corporation, an electronic products and
services, environmental systems and broadcasting company, Pittsburgh,
Pennsylvania, from 1990 to his retirement in January 1993. He served that
company as President and Chief Operating Officer from 1988 to 1990 and as a
Director from 1988 to 1993. He had been Senior Executive Vice President,
Corporate Resources from 1985 to 1988, Executive Vice President, Westinghouse
Industries & International Group from 1983 to 1985 and Executive Vice
President, Westinghouse Industry Products from 1980 to 1983. Prior thereto, he
served in various engineering and management capacities with Westinghouse since
1956. Mr. Lego is the non-executive Chairman of the Board of Commonwealth
Aluminum Corporation and a Director of the Lincoln Electric Company and USX
Corporation. He is a member of the Business Council and a Trustee of the
University of Pittsburgh.

PICTURE MARGARET A. MCKENNA Member: Compensation and Benefits
Age 51 Committee
Director since 1994 Ethics Committee
Nominating Committee

Ms. McKenna has served as President of Lesley College, Cambridge,
Massachusetts, since 1985. She served as Vice President, Program
Planning, Radcliffe College from 1982 to 1985 and as Director of
its Bunting Institute from 1981 to 1985. Prior thereto, she had
served as Deputy Under Secretary of the U.S. Department of
Education, Deputy Counsel to the President of the United States, and in posts
with the International Association of Human Rights agencies and U.S. Department
of Justice. Ms. McKenna is a Director of Best Products and The Stride Rite
Corporation.

7
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DIRECTORS RETIRING IN MAY 1997

PICTURE WALTER R. PEIRSON Chair: Nominating Committee
Age 70 Member: Audit Committee
Director since 1989 Financial Policy Committee

Mr. Peirson served as a Director of Amoco Corporation, Chicago,
Illinois, an integrated oil company and producer of natural gas,
from 1976 to 1989, and as an Executive Vice President of that
company from 1978 until his retirement in 1989. Mr. Peirson served
as President of Amoco Oil Company from 1974 to 1978, Executive
Vice President from 1971 to 1974 and Vice President-Marketing of that company
from 1968 to 1971. He was President of Tuloma Gas Products Co., a subsidiary of
Standard Oil Company (Indiana), from 1964 to 1968. He served as President of
General Gas Corporation from 1962 to 1964 and Executive Vice President of that
company from 1961 to 1962. He was an attorney at Standard Oil Company of
Indiana from 1955 to 1961. He is a Director of the Federal Signal Corporation
and a Trustee of the Museum of Science and Industry in Chicago, Illinois.

PICTURE LOIS WYSE Chair: Ethics Committee
Age 70 Member: Compensation and Benefits
Director since 1978 Committee
Nominating Committee

Ms. Wyse has been President of Wyse Advertising, Inc., a
Cleveland-based advertising agency with offices in New York, New
York, since February 1979, and prior thereto had been an Executive
Vice President of the same firm since 1970. She is a Contributing
Editor of Good Housekeeping magazine, a syndicated columnist for
United Features Syndicate, and a widely published author. She is a Trustee of
Beth Israel Medical Center.

8
<PAGE>

THE BOARD OF DIRECTORS AND CERTAIN COMMITTEES THEREOF

BOARD OF DIRECTORS
The Company is managed under the direction of the Board of Directors, which
met eight times in 1996. To assist it in various areas of responsibility, the
Board has established several standing committees that are briefly described
below.

AUDIT COMMITTEE
The Audit Committee is composed of four non-employee Directors. Among its
functions are: reviewing the scope and effectiveness of audits by the
independent accountants and the Company's internal auditing staff; selecting
and recommending to the Board of Directors the employment of independent
accountants, subject to ratification by the stockholders; receiving and acting
on comments and suggestions by the independent accountants and by the internal
auditors with respect to their audit activities; approving fees charged by the
independent accountants; and reviewing the Company's annual financial
statements before their release. The Committee met four times in 1996.

CNG INTERNATIONAL BUSINESS OVERSIGHT COMMITTEE
The CNG International Business Oversight Committee is composed of four non-
employee Directors. Its function is to review and take action on matters
concerning CNG International Corporation. The Committee shall advise, consult
and assist in the screening of projects prior to their recommendation to the
Board of Directors for investment. The Committee was created in September 1996
and met one time in 1996.

COMPENSATION AND BENEFITS COMMITTEE
The Compensation and Benefits Committee is composed of five non-employee
Directors. The Committee approves the salary budgets for all non-union
employees and establishes the salaries of the Officers and other personnel on
the executive payroll of the Company and its subsidiaries. The Committee also
has general supervision over the administration of all non-union employee
pension, compensation and benefit plans of the Company and its subsidiaries;
reviews proposals with respect to the creation of and changes in such plans;
and makes appropriate recommendations with respect thereto to the Board of
Directors. The Committee met eight times in 1996.

ETHICS COMMITTEE
The Ethics Committee consists of five non-employee Directors. Its function is
to review and act on all situations subject to the provisions and procedures
of the Company's Business Ethics Policy and to monitor the Company's
environmental compliance activities. The Committee met three times in 1996.

EXECUTIVE COMMITTEE
The Executive Committee consists of three non-employee Directors and the
Chairman of the Board. It has the authority to act in emergency situations and
can exercise all the powers of the Board of Directors. The Committee did not
meet in 1996.

FINANCIAL POLICY COMMITTEE
The Financial Policy Committee consists of four non-employee Directors and the
Chairman of the Board. Its function is to oversee the short-term and long-term
financial activities and planning of the Company, including dividend actions.
The Committee met two times in 1996.

NOMINATING COMMITTEE
The Nominating Committee consists of nine non-employee Directors and the
Chairman of the Board. It reviews the qualifications of Director candidates on
the basis of recognized achievements and their ability to bring skills and
experience to the deliberations of the Board. It also recommends qualified
candidates to the Board, including the slate of nominees submitted to the
stockholders at the Annual Meeting; reviews the size and composition of the
Board; annually reviews Directors' compensation and benefits,

9
<PAGE>

and makes recommendations to the Board and monitors the Company's management
succession program. The Committee met three times in 1996.
Stockholders who wish to propose candidates to the Nominating Committee for
election to the Board at the 1998 Annual Meeting should write to the Corporate
Secretary, Consolidated Natural Gas Company, CNG Tower, 625 Liberty Avenue,
Pittsburgh, Pennsylvania 15222-3199, between February 11, 1998 and March 13,
1998, stating in detail the qualifications of such candidates for
consideration by the Committee. Any such recommendation should be accompanied
by a written statement from the candidate of his or her consent to be
considered as a candidate and, if nominated and elected, to serve as a
Director.

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SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS

The following table lists the beneficial ownership, as of December 31, 1996,
of the Company's Common Stock by each current Director, named executive and
all current Directors and Officers as a group.

- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(a) (b) (a) + (b)
---------------------------- -----------
Number of Number of Director's
Shares Shares Under Deferred Percent of
Name of Beneficially Exercisable Compensation Outstanding
Beneficial Owner Owned(/1/)(/2/) Options(/3/) Stock Credits(/4/) Common Stock
- - -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
W. S. Barrack, Jr. 768 537 .001
R. W. Best 40,521 .043
J. W. Connolly 1,000 3,622 .001
G. A. Davidson, Jr. 127,320 118,067 .258
R. J. Groves 1,257 2,286 .001
P. E. Lego 800 .001
M. A. McKenna 300 720 --(/5/)
S. A. Minter 1,400 .001
W. R. Peirson 2,300 8,556 .002
H. P. Riley 37,104 .039
R. P. Simmons 1,300 4,608 .001
D. M. Westfall 41,535 13,561 .058
S. E. Williams 36,563 24,211 .064
L. Wyse 700 .001
Directors and Officers
of the Company
as a group (18
persons) 316,953 191,381 20,329 .535
</TABLE>
- - -------------
(/1/) Includes shares owned by spouses and, in the case of employees, shares
beneficially owned under the Long-Term Thrift Trust of the Employees
Thrift Plan and the Employee Stock Ownership Plan. Unless otherwise noted,
the Directors and Officers have sole voting and investment power.
(/2/) Includes Performance Restricted Stock Awards and Restricted Stock Awards
granted on January 2, 1996, pursuant to the Long Term Strategic Incentive
Program, the terms of which are further described in the Compensation and
Benefits Committee Report. Performance Restricted Stock Awards were
granted as follows: Messrs. Best, 26,300; Davidson, 70,000; Riley, 26,300;
Westfall, 26,300 and Williams, 19,500. Restricted Stock Awards were
granted as follows: Messrs. Best, 5,100; Davidson, 14,000; Riley, 5,100;
Westfall, 5,100 and Williams, 3,800. On October 14, 1996, Mr. Best was
granted an additional Performance Restricted Stock Award of 7,221 shares
and an additional Restricted Stock Award of 1,900 shares.
(/3/) Includes shares subject to options exercisable on December 31, 1996, and
options which will become exercisable within 60 days thereafter.
(/4/) Director's compensation deferred in the form of CNG stock credits, as
described under Non-Employee Directors' Compensation on page 19, is not
included in the percentage shown in the last column.
(/5/) Less than .001% of outstanding shares.
- - -------------------------------------------------------------------------------

11
<PAGE>

COMPENSATION OF EXECUTIVE OFFICERS

The following table sets forth the compensation of the named Executive
Officers for the last three completed fiscal years of the Company.

SUMMARY COMPENSATION TABLE
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------- --------------------------
Other Restricted Shares All
Name and Annual Stock Underlying Other
Principal Position Year Salary Bonus Compensation(/1/) Award(s)(/2/) Options(/3/) Compensation(/5/)
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
R. W. Best 1996 $330,000 $205,000 $51,127 40,521 134,050(/3/) $15,854
(Sr. Vice President, 1995 -- -- -- -- -- --
Regulated Businesses) 1994 -- -- -- -- -- --
G. A. Davidson, Jr. 1996 598,750 360,000 10,061 84,000 280,000(/3/) 56,465
(Chairman and Chief 1995 568,000 213,600 7,511 0 77,768(/4/) 42,853
Executive Officer, 1994 564,400 0 9,119 0 29,607(/4/) 42,617
Director)
H. P. Riley 1996 256,250 162,000 57,184 31,400 105,000(/3/) 13,029
(President, CNG 1995 83,335 46,200 7,594 6,204 7,755(/4/) 5,416
Producing Company) 1994 -- -- -- -- -- --
D. M. Westfall 1996 217,050 139,000 10,684 31,400 105,000(/3/) 16,322
(Sr. Vice President and 1995 174,600 67,800 1,717 1,506 13,886(/4/) 13,519
Chief Financial Officer) 1994 144,800 0 3,867 0 2,644(/4/) 11,146
S. E. Williams 1996 240,900 153,000 4,457 23,300 78,000(/3/) 18,286
(Sr. Vice President and 1995 227,400 68,300 3,504 0 22,085(/4/) 17,307
General Counsel) 1994 219,500 0 1,561 0 8,546(/4/) 14,270
</TABLE>
- - -------------
(/1/) Includes only tax reimbursements for Messrs. Davidson, Westfall and
Williams. No amounts are included in this column for the Executive Split-
Dollar Life Insurance Plan because the executives' contributions to this
plan are greater than or equal to the term life insurance costs that apply
to the underlying life insurance policies. Includes living expenses and
personal travel of $27,721 for Mr. Best and $26,730 for Mr. Riley and
related tax reimbursements of $22,177 for Mr. Best and $21,385 for Mr.
Riley in 1996.
(/2/) Restricted Stock Award Grants are reported at aggregate market value at
the date of grant. Restrictions on the awards granted in 1996 lapse in
1999 on the anniversary of the grant date. Restricted Stock Award Grants
are based on the individual's level of performance and responsibility. See
page 14 for dividend details. At December 31, 1996, the number of
restricted stock holdings for each of the named Executive Officers was:
Mr. Best, 40,521; Mr. Davidson, 84,000; Mr. Riley, 36,053; Mr. Westfall,
32,529 and Mr. Williams, 23,554. The aggregate values of such holdings at
December 31, 1996, at the year-end closing price of $55.25 per share, for
each of the named Executive Officers was: Mr. Best, $2,238,785; Mr.
Davidson, $4,641,000; Mr. Riley, $1,991,928; Mr. Westfall, $1,797,227 and
Mr. Williams, $1,301,359.
(/3/) Triannual Non-Qualified Stock Options.
(/4/) Non-Qualified Stock Options.
(/5/) Comprising annual employer matching thrift plan contributions and ESOP
allocations.
- - -------------------------------------------------------------------------------

12
<PAGE>

The following table contains information concerning the grant of Triannual
Stock Options to the named Executive Officers as of the end of the last fiscal
year of the Company. No Stock Appreciation Rights ("SARs") have been granted.

TRIANNUAL OPTION GRANTS IN LAST FISCAL YEAR
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------
Potential Realizable
Number of % of Total Value at Assumed Annual
Shares Options Exercise Rates of Stock Price
Underlying Granted to or Base Appreciation for Option Term(/2/)
Options Employees Price Per Expiration ---------------------------------
Name Granted(/1/) in Fiscal Yr. Share Date 0% 5% 10%
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
G. A. Davidson, Jr. 280,000 9.31% $44.875 2006 0 $ 7,902,061 $ 20,025,374
R. W. Best(/3/) 105,000 3.49 44.875 2006 0 -- --
29,050 .97 52.625 2006 0 -- --
H. P. Riley 105,000 3.49 44.875 2006 0 2,963,273 7,509,515
D. M. Westfall 105,000 3.49 44.875 2006 0 2,963,273 7,509,515
S. E. Williams 78,000 2.59 44.845 2006 0 2,201,288 5,578,497
- - -----------------------------------------------------------------------------------------------------------
All Shareholders N/A N/A N/A N/A 0 $2,679,183,363 $6,789,576,668
- - -----------------------------------------------------------------------------------------------------------
All Optionees Receiving
Triannual Option Grants 3,006,383 100.00 42.375- 2006 0 $ 84,845,078 $ 215,014,086
56.875
- - -----------------------------------------------------------------------------------------------------------
Optionee Gain as % of
All Shareholder Gain N/A N/A N/A N/A N/A 3.17% 3.17%
- - -----------------------------------------------------------------------------------------------------------
</TABLE>
(/1/) All material terms of the Triannual Options granted in 1996 are as
follows: Triannual Options are granted at the fair market value of a share
on the date of grant. If the annual return on equity for the CNG System
for the three-year period ended December 31, 1998 is (i) less than 11.3%,
all of the Triannual Options will be exercisable on March 1, 1999, after
which they will expire, (ii) at least 11.3% but less than 11.7%, one-half
of the Triannual Options will be exercisable on March 1, 1999, after which
they will expire, and one-half of the Triannual Options will vest and have
an exercise period extending from March 1, 1999 until January 2, 2006, and
(iii) at least 11.7%, all of the Triannual Options vest and will have an
exercise period extending from March 1, 1999 until January 2, 2006.
Options expire at the earlier of the expiration date of the option or,
three years following separation from employment due to retirement, one
year after separation from employment due to death or permanent disability
or three months after separation from employment for any other reason.
Grants of Triannual Options are based upon an executive's level within the
Company.
(/2/) Based on actual option term (10-year) and annual compounding at rates
shown. The dollar amounts under these columns are the result of
calculations at 0% and at the 5% and 10% rates set by the Securities and
Exchange Commission and therefore are not intended to forecast possible
future appreciation, if any, of the Company's stock price. No gain to the
optionees is possible without stock price appreciation, which will benefit
all shareholders commensurately. A 0% gain in stock price appreciation
will result in 0 dollars for the optionees. The Company did not use an
alternative formula for a grant date valuation, as the Company is not
aware of any formula which will determine with reasonable accuracy a
present value based on future unknown or volatile factors.
(/3/) Mr. Best resigned from the Company on March 8, 1997, options granted in
1996 were forfeited.
- - -------------------------------------------------------------------------------

13
<PAGE>

The following table sets forth information with respect to the named Executive
Officers concerning the exercise of options during the last fiscal year of the
Company and unexercised options held as of the end of the fiscal year.

AGGREGATED NON-QUALIFIED STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND
DECEMBER 31, 1996, YEAR-END NON-QUALIFIED STOCK OPTION VALUES
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised,
Underlying Unexercised In-the-Money Options
Shares Options Held at Year-End at Year-End(/2/)
Acquired On Value ------------------------- -------------------------
Name Exercise Realized(/1/) Exercisable Unexercisable Exercisable Unexercisable
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
R. W.
Best 0 $ 0 0 0 $ 0 $ 0
G. A.
Davidson,
Jr. 0 0 84,396 122,380 1,093,918 1,952,591
H. P.
Riley 0 0 0 7,755 0 118,264
D. M.
Westfall 0 0 8,821 17,859 109,051 299,158
S. E.
Williams 274 5,514 15,194 31,987 180,871 509,882
</TABLE>
- - ----------------
(/1/) Market value of underlying shares at time of exercise minus the exercise
price.
(/2/) Market value of underlying shares at year-end market price of $55.25 per
share minus the exercise price.
- - -------------------------------------------------------------------------------

LONG-TERM INCENTIVE PLAN AWARDS IN THE LAST FISCAL YEAR
In 1996, Restricted Stock Awards were granted in the following amounts to:
Messrs. Best, 7,000; Davidson, 14,000; Riley, 5,100; Westfall, 5,100 and
Williams 3,800. Restrictions on this award lapse on March 1, 1999. Dividends
are paid on the shares from the date of the grant. Restricted Stock Awards are
based on an individual's level of responsibility. Also, in 1996, Performance
Restricted Stock Awards were granted in the following amounts to: Messrs.
Best, 33,521; Davidson, 70,000; Riley, 26,300; Westfall 26,300 and Williams
19,500. Subject to achievement of performance levels described in the
Compensation and Benefits Committee report, restrictions on this award lapse
on March 1, 1999, and once vested, the shares must be held until March 1,
2001. Dividends on the shares are held by the Company from the date of the
grant, subject to the achievement of performance levels. Performance
Restricted Stock Awards are based on an individual's level of responsibility.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AGREEMENTS
Messrs. Davidson, Riley, Westfall and Williams entered into agreements with
the Company dated December 12, 1995, and Mr. Best entered into an agreement
with the Company dated January 1, 1996, that have provisions which become
operative upon a defined change of control of the Company. Such agreements
preserve for three years following a change of control the annual salary
levels and employee benefits as are then in effect for these executives and
provide that, in the event of certain terminations of employment, these
executives shall receive severance payments equal to 2.99 times their
respective annual compensation prior to severance. The agreements also provide
for the Company to reimburse the employee for the payment of certain excise
taxes and for a related tax gross-up payment, if any, payable in connection
with compensation paid under such agreement.

COMPENSATION AND BENEFITS COMMITTEE REPORT

SUMMARY
The Company's executive compensation programs are administered by the
Compensation and Benefits Committee of the Board of Directors (the
"Committee"), which is composed of five non-employee Directors. The Committee
reviews and approves all issues pertaining to executive compensation. Total
compensation is designed in relationship to compensation paid by competitor
organizations. Base salary and long-term incentive compensation are targeted
to median market levels and short-term incentive compensation is goal-based
and structured to be comparable to that paid by competitor organizations. The
objective of the Company's three compensation programs (base salary, short-
term incentive and long-

14
<PAGE>

term incentive) is to provide a total compensation package that will enable
the Company to attract, motivate and retain outstanding individuals and align
their success with that of the Company's shareholders.
Competitor organizations are defined annually as part of the compensation
administration process and include fully integrated natural gas companies as
well as broader industry comparatives, e.g., comparably sized general
industrial companies and, where appropriate, specific energy companies.

BASE SALARY
The level of base salary paid to executives for 1996 was determined on the
basis of performance and experience. The Company measures or identifies its
base salary structure by range midpoints in comparison to base salaries
offered by competitors. Salary levels are targeted to, and in 1996, correspond
to the median range of compensation paid by competitor organizations. These
are not the same companies that comprise the Value Line Natural Gas
Diversified Industry Index shown on the shareholder return performance
presentation. The specific competitive marketplace that the Company and its
subsidiaries use in base salary analysis is determined based on the nature and
level of the positions being analyzed and the labor markets from which
individuals would be recruited. The Committee also considered the
competitiveness of the entire compensation package in its determination of
salary levels.

SHORT-TERM INCENTIVE COMPENSATION
Short-term incentive compensation plans are used at both CNG Corporate and
Business Segment levels. The appropriateness of applying an incentive
compensation arrangement to any given position is determined based on the
nature of the position, its potential for contribution and the then-current
competitive environment. Short-term incentive opportunity is structured so
that awards are competitive at a level commensurate with the performance level
achieved by the Company with consideration for the employee's performance and
level of responsibility. The short-term incentive plan has threshold, target
and maximum bonus levels for the various executive levels based on competitive
data. For the named Executive Officers, the threshold bonus level is 18% to
24% of base pay, the target bonus level is 45% to 60% of base pay, and the
maximum bonus level is 63% to 84% of base pay. At the executive level, the
primary form of short-term incentive compensation is a cash bonus pool
arrangement, for which all employees on the Company's system executive payroll
are eligible.
Individual Business Segment Pools and a CNG Corporate Pool are established
if the Business Segments and the CNG System attain certain levels of
performance. The Business Segment Pools are calculated as a percent of the
eligible base payroll using the weighted differential between established
Business Segment goals and actual performance. The CNG Corporate Pool is
calculated as a percent of eligible base payroll, using the weighted
differential between CNG System goals and actual performance and CNG Corporate's
ability to control its operating expenses.
Executives participate in the bonus pools with payout opportunities
determined by actual individual performance and the level of responsibility
within their respective Business Segments and within the CNG System. A pool will
not be established at Corporate unless 95% of the net income goal is achieved
for the CNG System, or for a Business Segment if 85%-95% of the net income goal
is not achieved. If the net income threshold is achieved and the total weighted
average achievement for all goals is 85%, threshold bonus pools are created; at
100% of goal, target bonus pools are created; and, at 115% or greater of goal
achievement, maximum bonus pools are created. At less than the threshold level,
there are no bonus pools. The performance measures for the CNG Corporate Pool
(weighted as indicated) are based on the System's return on equity vs. peers
(20%), System net income (40%), CNG Corporate controllable operations and
maintenance expenses (25%), and System net cash flow (15%), with specific
performance goals established based on the Company's annual long-range forecast,
actual prior year performance and business plan objectives. Performance targets
are set to meet or exceed the performance of peer companies. The performance
measures for each Business Segment (weighted as indicated) are: for the
Distribution Group companies, Segment net income (50%), Segment cash flow (10%),
and Segment controllable operations and maintenance expenses (40%); CNG
Transmission Corporation, net income

15
<PAGE>

(50%), cash flow (10%) and controllable operations and maintenance expenses
(40%); for CNG Energy Services Corporation, net income (100%); and CNG
Producing Company, net income (40%), cash flow (15%), full-cycle finding and
development costs (20%), and controllable operations and maintenance expenses
(25%). For the last fiscal year, CNG Corporate achieved 111.2% of its goals,
the Distribution Group Segment achieved 99.5% of its goals, CNG Transmission
achieved 115.0% of its goals, CNG Producing achieved 115.0% of its goals and
CNG Energy Services did not achieve its goal, at least at the threshold level.
Based on 1996 performance, the following bonus pools were established: CNG
Corporate, $3,252,790; Distribution Group Segment, $1,214,671; CNG
Transmission, $1,065,834; CNG Producing, $880,719 and no bonus pool was
established for CNG Energy Services.

LONG-TERM INCENTIVE COMPENSATION
Long-term incentive compensation plans are limited to only those employees who
are in positions which can affect the long-term success of the Company,
including both the establishment and execution of the Company's business
strategies. Through 1996, the 1991 Stock Incentive Plan and the 1995 Stock
Incentive Plan have been the principal methods for providing long-term
incentive compensation, and compensation thereunder principally takes the form
of Non-Qualified Stock Option grants and Restricted Stock Awards. The purposes
of long-term incentive compensation are to: (i) focus key executives' efforts
on performance that will increase the value of the Company to its
shareholders; (ii) align the interests of management with those of the
shareholders; (iii) provide a competitive long-term incentive and capital
accumulation opportunity; and (iv) provide a retention incentive for selected
key executives.
The Committee's review in 1995 of the Company's total executive
compensation package indicated that the Company's long-term incentive
compensation program was significantly below that of comparable employers. In
addition, the Committee desired to strengthen the link between improvement in
shareholder return and the exercisability of stock options and the vesting of
restricted shares issued under the Company's long-term incentive programs. As a
result, the Committee has adopted the Long-Term Strategic Incentive Program and
the Long-Term Capital Accumulation Program.
Under the Long Term Strategic Incentive Program, executives who are driving
the strategy of the Company are granted Performance Restricted Stock Awards
("Performance Shares") and Triannual Non-Qualified Stock Options ("Triannual
Options") in amounts which are intended to be competitive with comparable
employers. Executives who are responsible for strategy implementation are
granted Triannual Options in amounts which are intended to be competitive with
comparable employers. Grants under the Long-Term Strategic Incentive Program
are to be made every three years, with the first such grants having been made
on January 2, 1996.
Performance Shares granted under the Long-Term Strategic Incentive Program
to an executive will vest or be forfeited after a three-year performance period
based upon the System's attainment of return on equity targets. With respect to
those executives employed within a business unit of the Company, both the CNG
System return on equity target and objective success goals for the executive's
business unit under an integrated three-year plan must be achieved for vesting
to occur. For Performance Shares granted on January 2, 1996, which are subject
to achievement of the CNG System return on equity targets, if the average annual
return on equity for the System for the three-year period ended December 31,
1998 is (i) less than 11.3%, no Performance Shares will vest, (ii) at least
11.3% but less than 11.7%, one-half of such Performance Shares will vest on
March 1, 1999, and (iii) if at least 11.7%, all such Performance Shares will
vest on March 1, 1999. The Performance Shares that were granted on January 2,
1996 are also subject to the achievement of business unit success goals and will
be forfeited or will vest all or in part on March 1, 1999, depending upon
whether business unit success goals have been met. The Committee reserves the
right to reduce the number of Performance Shares that vest based on factors that
it deems appropriate. Executives will not receive dividends on Performance
Shares until they have vested, at which time, dividends otherwise payable prior
to the vesting date will be paid to the executive without interest. Executives
may vote Performance Shares until they are forfeited.
Triannual Options granted on January 2, 1996, pursuant to the newly
established Long-Term Strategic Incentive Program are granted at the fair
market value of a share on the date of grant. If the annual return

16
<PAGE>

on equity for the CNG System for the three-year period ended December 31, 1998
is (i) less than 11.3%, all of the Triannual Options will be exercisable on
March 1, 1999, after which they will expire, (ii) at least 11.3% but less than
11.7%, one-half of the Triannual Options will be exercisable on March 1, 1999,
after which they will expire, and one-half of the Triannual Options will vest
and have an exercise period extending from March 1, 1999 until January 2,
2006, and (iii) at least 11.7%, all of the Triannual Options vest and will
have an exercise period extending from March 1, 1999 until January 2, 2006.
Options expire at the earlier of (a) the expiration date of the option or (b)
(1) three years following separation from employment due to retirement, (2)
one year after separation from employment due to death or permanent disability
or (3) three months after separation from employment for any other reason.
Grants of Triannual Options are based upon an executive's level within the
Company. The Company generally intends to make grants under the Long-Term
Strategic Incentive Program every three years; however, executives that are
hired or promoted during the three-year performance period will receive a pro-
rated grant of Triannual Options.
Restricted Stock was granted January 2, 1996, to the executives who are
driving the strategy of the Company under the Long-Term Capital Accumulation
Program and such stock will vest March 1, 1999. Once vested, taxes will be
payable by the executive and the executive must then hold the net shares,
after taxes are paid by withholding a portion of the shares, until March 1,
2001. Restricted Stock Awards are based on an individual's level of
responsibility.
Under the Long-Term Capital Accumulation Program on January 2, 1996,
employees who are responsible for implementing the strategy were granted Annual
Non-Qualified Stock Options. These options are granted at the fair market value
of a share on the date of grant of the option. The option expires on the tenth
anniversary of the grant date and is exercisable in installments of up to 25% of
the shares on or after the second, third, fourth and fifth anniversaries of the
grant. If an employee retires, he or she has three years to exercise vested
options. If an employee dies or becomes disabled, he or she, or the executor of
his or her estate, has one year to exercise vested options. If an employee
leaves due to involuntary separation, he or she has three months to exercise
vested options. Subject to the vesting schedule, options are exercisable from
time to time up to the expiration date. Annual Non-Qualified Stock Option grants
are based on an individual's level of responsibility.

COMPENSATION CONSULTANT
The Committee utilizes the services of an independent compensation consultant
to assess market relativity of the executive compensation packages. Consistent
with the Company's compensation philosophy, adjustments are made to any
executive compensation components necessary to achieve levels of compensation
at the median market position.

TAX MATTERS
Effective for the tax-year ended December 31, 1994, Section 162(m) of the
Internal Revenue Code places certain limits on the deductibility of non-
performance based executive compensation. It is the policy of the Company to
preserve the tax deductibility of compensation to the extent that it is in the
best interest of the Company. Current and anticipated levels of executive
compensation do not subject the Company to the limitations under Section
162(m).

CEO'S COMPENSATION
Mr. Davidson's compensation for 1996 was determined in the general context of
the programs described above. Mr. Davidson's 1996 incentive compensation goals
were based in part on the following measures of the Company's performance
(weighted as shown): System net income (20%), System cash flow (defined as
cash flow from operations less dividends) (5%), return on equity (compared to
peer companies) (10%), System controllable operations and maintenance expense
(10%), credit rating of the Company's long-term debt (10%), price to earnings
ratio (compared to published summary data) (10%), and the continued
improvement in System exploration and production financial performance (15%).
In addition, Mr. Davidson's 1996 incentive compensation goals were based upon
his support for CNG Energy Services Corporation to ensure its success in 1996
(10%), development of a slate of potential acquisitions and

17
<PAGE>

divestitures (5%,) and discretion of the Committee (5%). Mr. Davidson's
threshold bonus level is 24% of base pay, his target bonus level is 60% of
base pay and his maximum bonus level is 84% of base pay. Based on the above
criteria, the Committee awarded $360,000 in short-term incentive compensation
to Mr. Davidson for 1996.

S. A. Minter, Chair
J. W. Connolly
P. E. Lego
M. A. McKenna
L. Wyse

18
<PAGE>

SHAREHOLDER RETURN PERFORMANCE PRESENTATION
Set forth below is a line graph comparing the yearly cumulative total
shareholder return on CNG's Common Stock against the cumulative total return of
the S&P 500 Stock Index and the Value Line Natural Gas Diversified Industry
Index for the period of five years commencing December 31, 1991, and ended
December 31, 1996.
The Value Line Index includes Burlington Resources, Cabot Oil & Gas,
Coastal Corporation, Columbia Gas System, Inc., Consolidated Natural Gas
Company, Eastern Enterprises, Enron Corp., ENSERCH Corporation, Equitable
Resources, Inc., KN Energy, Inc., National Fuel Gas, NorAm Energy, PanEnergy
Corp, Questar Corporation, Seagull Energy Corporation, Sonat Inc., Southwestern
Energy, Valero Energy Corp. and Williams Companies.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*

[GRAPH APPEARS HERE]
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG CNG, S&P 500 INDEX AND VALUE LINE INDEX

<TABLE>
<CAPTION>
Measurement period S&P 500 VALUE LINE
(Fiscal year Covered) CNG INDEX INDEX
- - --------------------- -------- ------- ----------
<S> <C> <C> <C>
Measurement PT -
$100 $100 $100
FYE 12/31/92 $110 $108 $114
FYE 12/31/93 $119 $118 $134
FYE 12/31/94 $ 94 $120 $122
FYE 12/31/95 $126 $165 $166
FYE 12/31/96 $159 $203 $216

</TABLE>

*Assumes $100 investment on December 31, 1991, and reinvestment of dividends.

NON-EMPLOYEE DIRECTORS' COMPENSATION
Non-employee Directors are currently paid a $24,000 annual retainer, a $2,000
per diem fee for attending each Board meeting, including all Board Committee
meetings held in conjunction with such Board meeting, and a $1,000 per diem fee
for participating in telephonic Board or Board Committee meetings. Committee
Chairpersons receive an additional annual fee of $3,000.
Directors may elect to defer receipt of these payments until after
retirement from the Board. Such payments are deferred in the form of cash
credits or Consolidated Natural Gas Company Common Stock credits. Such stock
credits are valued as Common Stock equivalents equal to the number of shares
that could have been purchased at the closing price on the date the compensation
was earned. As of the date any dividend is paid on the Company's Common Stock, a
credit is made to each participant's deferred account equal to the number of
shares of Common Stock that could have been purchased on such date with the
dividend paid. Amounts deferred in the form of cash credits earn interest,
compounded quarterly, at a rate equal to the closing prime commercial rate at
The Chase Manhattan Bank N.A. on the last day of each quarter. Payments are made
in cash, in a lump sum or in annual installments over a period not exceeding ten
years. The entire undistributed deferred amount will be distributed in a lump
sum upon a participating Director's death.

19
<PAGE>

Effective January 1, 1997, subject to shareholder approval of the 1997 Stock
Incentive Plan, Directors will receive an annual grant of 200 shares of the
Company's Common Stock, par value $2.75 per share, subject to restrictions or
the same amount of Consolidated Natural Gas Company Common Stock credits and
options on 1,000 shares of the Company's Common Stock. Such grants are to be
made on the date of the Annual Meeting of Stockholders. Newly elected
Directors will receive an initial grant of 400 shares of the Company's Common
Stock, par value $2.75 per share, subject to restrictions or the same amount
of Consolidated Natural Gas Company Common Stock credits and options on 2,000
shares of the Company's Common Stock. Such grants are to be made on the date
of the Director's election to the Board. The restrictions on such stock shall
lapse in 25% installments on the anniversary date of each grant or shall lapse
in total upon the Director's retirement at age 70 or the Director's ceasing to
serve due to death or disability. The Consolidated Natural Gas Company Common
Stock credits are described above.
It is intended that no further annual grants will be made under the Non-
Employee Directors' Restricted Stock Plan. From 1994 to 1996, non-employee
Directors received an annual grant of 100 shares of the Company's Common
Stock, par value $2.75 per share, subject to restrictions. Such grants were
made on the date of the Annual Meeting of Stockholders. The restrictions on
such stock shall lapse in 25% installments on the anniversary date of each
grant or shall lapse in total upon the Director's retirement at age 70 or the
Director's ceasing to serve due to death or disability.
Effective January 1, 1997, the Board of Directors voted to terminate the
post-retirement retainer for newly elected non-employee Directors. In the past,
the annual retainer paid to non-employee Directors, as set by the Board of
Directors from time to time, was continued to be paid for life to each non-
employee Director retired at age 70, or at an earlier age due to disability,
provided the non-employee Director served a minimum of four years and agreed to
be generally available as a consultant. Current Directors may elect to waive the
post-retirement retainer and receive shares of Restricted Company Stock or
Consolidated Natural Gas Company Common Stock credits in an amount equal to the
present value of the expected post-retirement retainer. Payments under the
continued post-retirement retainer arrangement cease at the death of the
Director.
Employee Directors do not receive any compensation for service as
Directors.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, the following Directors served as members of the Compensation and
Benefits Committee: S. A. Minter, Chair, J. W. Connolly, P. E. Lego, M. A.
McKenna and L. Wyse.
The Company has Credit Agreements totaling $775 million with a group of
banks. Each participating bank is compensated with a fee of .06% on its
respective commitment amounts.
Currently, PNC Bank, Pittsburgh, Pennsylvania, the subsidiary of PNC Bank
Corp., of which Messrs. Davidson and Simmons are Directors, provides a
commitment of $100 million under the Credit Agreements. Mellon Bank, N.A.,
Pittsburgh, Pennsylvania, of which Mr. Connolly is a Director, provides a
commitment of $100 million under the Credit Agreements. Society National Bank,
Cleveland, Ohio, the subsidiary of KeyCorp (formerly Society Corporation), of
which Mr. Minter is a Director, provides a commitment of $90 million under the
Credit Agreements. There were no borrowings under these agreements in 1996.
The Company has, since 1977, retained Wyse Advertising, Inc., of which Ms.
Wyse is the President and a principal stockholder. Wyse Advertising plans,
creates, writes and designs media communications at commission rates and
billing practices which are comparable to such rates and practices charged by
non-affiliated firms. During 1996, the Company paid aggregate commissions of
$865,412 to Wyse Advertising.

BENEFIT PLANS

LIFE INSURANCE AND RELATED BENEFIT PLANS
The Company maintains a program composed of Split Dollar Life Insurance Plans
and Supplemental Death Benefit Plans for employees on the executive payroll of
the Company and its subsidiaries, as well as non-employee Directors, which
provides death benefits to beneficiaries of those individuals. There

20
<PAGE>

were 141 eligible employees on December 31, 1996, and 89 were participating.
Five non-employee Directors were also participating. The plans are under the
general supervision of the Compensation and Benefits Committee of the Board.
Continuation of the plans beyond retirement requires the Committee's approval.
The costs for the Split Dollar Life Insurance Plans are shared by the Company
and the participants. Each year an employee participant pays a premium based
on age and amount of individual coverage, which is approximately twice annual
salary. Each year Director participants pay a premium based on age and amount
of individual coverage. The Company pays all additional premiums and expects
to receive proceeds approximately equal to its investment in the policy
through the total coverage exceeding the participant's individual coverage.
The Supplemental Death Benefit Plans provide for payments to a deceased
participant's beneficiaries over a period of years.

RETIREMENT PROGRAMS
A non-contributory Pension Plan is maintained for employees who are not
represented by a recognized union, including Officers of the Company and its
subsidiaries. On December 31, 1996, all 2,861 eligible employees of the
Company and its subsidiary companies were participating in the Pension Plan.
The Company also maintains an unfunded Short Service Supplemental Retirement
Plan for certain management employees whose commencement of service with the
Company occurred after the employee had acquired experience of considerable
value to the Company and who will have less than 32 years of service at normal
retirement.
The following table illustrates maximum annual benefits--including any
supplemental payment described above but before being reduced by the required
offset--at normal retirement date (age 65) on the individual life annuity
basis for the indicated levels of final average annual salary and various
periods of service.

PENSION PLAN TABLE
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Annual Pension Benefit for Years of Service Indicated
------------------------------------------------------
Average Annual Salary 15 20 25 35 40
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$100,000................. $ 34,000 $ 45,300 $ 55,000 $ 59,500 $ 68,000
150,000................. 51,000 68,000 82,500 89,300 102,000
200,000................. 68,000 90,700 110,000 119,000 136,000
250,000................. 85,000 113,300 137,500 148,800 170,000
300,000................. 102,000 136,000 165,000 178,500 204,000
350,000................. 119,000 158,700 192,500 208,300 238,000
400,000................. 136,000 181,300 220,000 238,000 272,000
450,000................. 153,000 204,000 247,500 267,800 306,000
500,000................. 170,000 226,700 275,000 297,500 340,000
550,000................. 187,000 249,300 302,500 327,300 374,000
600,000................. 204,000 272,000 330,000 357,000 408,000
650,000................. 221,000 294,700 357,500 386,800 442,000
700,000................. 238,000 317,300 385,000 416,500 476,000
- - --------------------------------------------------------------------------------
</TABLE>

The 1996 salaries, projected service to age 65, and estimated annual
retirement benefits on the individual life form of annuity, assuming
continuation of their December 1996 salaries until age 65 for each of the
individuals in the Summary Compensation table, are as follows:

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<PAGE>

ESTIMATED ANNUAL RETIREMENT BENEFITS
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years of Years of Estimated Annual
1996 Service at Service Retirement Benefits
Name(/1/) Salary Year-End 1996 at Age 65 at Age 65
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
G. A. Davidson, Jr........ $598,750 30 37 $377,377
H. P. Riley............... 256,250 1 6 38,193
D. M. Westfall............ 217,050 27 43 155,486
S. E. Williams............ 240,900 22 39 155,800
</TABLE>
- - -------------
(/1/)Mr. Best resigned from the Company on March 8, 1997 and accordingly is
not mentioned in this table.
- - -------------------------------------------------------------------------------
The Company also maintains a Supplemental Retirement Benefit Plan under which
payments may be made, at the sole discretion of the Compensation and Benefits
Committee of the Board, to individuals comprising the executive payroll. As of
December 31, 1996, there were 141 potentially eligible employees. The decision
to grant a Supplemental Retirement Benefit is based on a review of the
retiring employee's total available benefits. Payments under such plan during
1996 amounted to $431,500. The maximum annual supplemental annuity under this
plan is 10% of an individual's final average annual salary. Assuming
continuation of their December 1996 salaries until age 65, the individuals
named in the Summary Compensation table would be eligible to receive the
following maximum annual supplemental retirement benefits: Mr. Davidson,
$60,490; Mr. Riley, $25,750; Mr. Westfall, $22,080 and Mr. Williams, $24,340.
The benefits described above have not been reduced by the limitations
imposed on qualified plans by the Internal Revenue Code. As permitted by the
Internal Revenue Code, the Board of Directors has adopted a policy whereby
supplemental payments may be made, as necessary, to maintain the benefit levels
earned under the benefit plans.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Based on the Company's review of copies of all Section 16(a) forms filed by
the Officers and Directors of the Company, the Company believes that in 1996
there was compliance with all filing requirements applicable to its Officers
and Directors, except that one report covering an 864-share sale transaction
for Mr. Robert M. Sable, Jr., Treasurer, was filed late.

PROPOSAL 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS

Price Waterhouse LLP has audited the accounts of the Company and its
subsidiaries since 1943. On recommendation of the Audit Committee, the Board
of Directors has, subject to ratification by the stockholders, appointed Price
Waterhouse LLP to audit the accounts of the Company and its subsidiaries for
the fiscal year 1997. Audit fees to Price Waterhouse LLP in 1996 incurred by
the Company and its subsidiaries were approximately $1,396,900. A
representative of Price Waterhouse LLP will be present at the Meeting to
respond to appropriate questions and will have an opportunity to make a
statement if he or she desires to do so. Accordingly, the following
resolutions will be offered at the Meeting:
RESOLVED, That the appointment, by the Board of Directors of the Company,
of Price Waterhouse LLP to audit the accounts of the Company and its subsidiary
companies for the fiscal year 1997, effective upon ratification by the
stockholders be, and it hereby is, ratified; and
FURTHER RESOLVED, That a representative of Price Waterhouse LLP shall
attend the next Annual Meeting and any special meetings of stockholders that may
be held in the interim.

VOTE NEEDED FOR APPOINTMENT OF INDEPENDENT ACCOUNTANTS
An affirmative vote of the holders of a majority of the Company's Common
Stock, represented in person or by proxy and entitled to vote at the Meeting,
is necessary for ratification. If the stockholders do not ratify the
appointment of Price Waterhouse LLP, the selection of independent accountants
will be reconsidered by the Audit Committee and the Board of Directors.

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<PAGE>

BOARD RECOMMENDATION
The Board recommends that stockholders vote FOR Proposal 2, and the
accompanying proxy will be so voted, unless a contrary specification is made.

PROPOSAL 3
STOCK INCENTIVE PLAN

There will be presented to the Meeting a proposal to adopt the 1997 Stock
Incentive Plan.

INTRODUCTION
On December 10, 1996, the Board of Directors of the Company adopted the 1997
Stock Incentive Plan (the "Plan") subject to stockholder approval. The Plan
provides for awards to Directors, key employees, including Officers and
Directors who are also employees of the Company and its subsidiaries and
affiliated companies ("Affiliates"). It is estimated that approximately 400
individuals are currently eligible for consideration as participants in the
Plan. The purposes of the Plan are to attract and retain Directors and key
employees, to reward employees for superior performance and to strengthen the
mutuality of interests between Directors, employees and the Company's
shareholders. The Plan is designed to meet these purposes by providing
Directors and employees with a proprietary interest in pursuing the long-term
growth, profitability and financial success of the Company in order to provide
such Directors and employees with additional motivation to continue in the
Company's employ and to further its profitable growth. The Plan, if adopted by
the stockholders, will become effective as of January 1, 1997, and will
replace the Company's existing 1991 Stock Incentive Plan, the 1995 Stock
Incentive Plan, and the Company's Non-Employee Directors' Restricted Stock
Plan, and no further awards will be made under such plans. The Plan was
devised to restructure the existing Stock Incentive Plan and will provide the
Board with greater flexibility to address the compensation needs of the
Company. A full copy of the Plan is attached as Exhibit A to the Proxy
Statement. The major features of the Plan are summarized below and such
summary is qualified in its entirety by reference to the Plan.

SUMMARY OF AWARDS UNDER THE PLAN
GENERAL. The maximum number of shares of Common Stock available for issuance
under the Plan in each calendar year during which the Plan is in effect shall
equal 1.1% of the total number of issued and outstanding shares of Common
Stock as of the first day of each such year plus the number of any shares
which are reserved but not then subject to grants under the Company's 1991
Stock Incentive Plan, or the 1995 Stock Incentive Plan or the Non-Employee
Directors' Restricted Stock Plan (the "Existing Plans") as of the date this
Plan is approved by stockholders. As of January 1, 1997, there were 94,933,631
shares of Common Stock issued and outstanding. Therefore, 1,044,270 shares
(1.1%) would be available for issuance in calendar year 1997 under the Plan,
if the Plan is approved by the stockholders; as of February 28, 1997, there
are 3,730,203 shares which are reserved but not subject to grants under the
Company's Existing Plans which will also be available for issuance under the
Plan. In no event, however, shall more than 4,000,000 shares of Common Stock
be cumulatively available under the Plan for awards of Incentive Stock Options
under the Plan.
The Plan limits the number of shares with respect to which Options or Stock
Appreciation Rights may be granted during a calendar year to any individual
participant to 900,000 shares. The stock issuable under the Plan may be
authorized and unissued shares or treasury shares, including shares
repurchased by the Company for purposes of the Plan. If any shares subject to
any award are forfeited or payment is made in the form of cash, cash
equivalents or property other than shares, or the award otherwise terminates
without payment being made to the participant in the form of shares, the
shares subject to such awards will again be available under the Plan. At
February 28, 1997, the last reported sale price of the Company's Common Stock
on the New York Stock Exchange was $51.00 per share.
The Plan will be administered by the Compensation and Benefits Committee of
the Board of Directors (the "Committee"), the members of which are eligible
for awards under the Plan (See Directors Compensation). The Committee is
authorized to designate participants, determine the types and number

23
<PAGE>

of awards to be granted, set the terms, conditions and provisions of awards,
cancel or suspend awards, prescribe forms of award agreements, interpret the
Plan, establish, amend and rescind rules and regulations relating to the Plan,
and make all other determinations which may be necessary or advisable to the
administration of the Plan.
The Plan permits the granting of any or all of the following types of
awards: (i) stock options including Incentive Stock Options ("ISOs"), (ii) Stock
Appreciation Rights ("SARs"), (iii) Restricted Stock, (iv) Deferred Stock, (v)
Performance Awards conditioned upon meeting performance criteria, (vi) Dividend
Equivalents, and (vii) other awards denominated or payable in, or valued in
whole or in part by reference to, or otherwise based on or related to, Common
Stock or other securities of the Company. Generally, awards under the Plan are
granted for no consideration other than prior and future services. Awards
granted under the Plan may, in the discretion of the Committee, be granted alone
or in addition to, in tandem with or in substitution for any other award under
the Plan or other plan of the Company or of an Affiliate. If an award is granted
in substitution for another award, the participant must surrender such other
award in consideration of the grant of the new award. Awards granted in addition
to or in tandem with other awards may be granted either at the same time or at
different times.

STOCK OPTIONS AND SARS. The Committee is authorized to grant to participants
stock options, including ISOs and SARs, entitling the participant to receive
the excess of the fair market value of a share on the date of exercise or
other specified date over the grant price of the SAR. The purchase price per
share of stock subject to a stock option and the grant price of an SAR is
determined by the Committee but may not be less than the fair market value of
the stock on the date of grant. The term of each option or SAR is fixed by the
Committee. Such awards are exercisable at such time or times in whole or in
part as determined by the Committee, except that ISOs or SARs granted in
tandem therewith may not be exercised after the expiration of ten years from
the date granted. Options may be exercised by payment of the purchase price in
cash, stock, outstanding awards or other property or any combination thereof
having a fair market value equal to the exercise price as the Committee
determines. Methods of exercise and settlement and other terms of the SARs
will be determined by the Committee.

RESTRICTED AND DEFERRED STOCK. The Committee may award Restricted Stock,
generally consisting of shares which may not be disposed of by participants
until certain restrictions established by the Committee lapse. Such
restrictions may lapse in whole or in installments as the Committee
determines. A participant receiving Restricted Stock will have all of the
rights of a stockholder of the Company, including the right to vote the shares
and the right to receive any dividends unless the Committee otherwise
determines. The Committee may also make Deferred Stock awards, generally
consisting of a right to receive shares at the end of specified deferral
periods. Awards of Deferred Stock are subject to such limitations as the
Committee may impose, which limitations may lapse at the end of the deferral
period in installments or otherwise. Deferred Stock awards carry no voting or
dividend rights or other rights associated with stock ownership. Upon
termination of employment during the restriction or deferral period,
Restricted or Deferred Stock will be forfeited subject to such exceptions, if
any, as are authorized by the Committee. The maximum number of shares of
Restricted Stock which may cumulatively be issued under the Plan shall be
three percent (3%) of the number of shares of Common Stock issued and
outstanding.

PERFORMANCE AWARDS. The Committee may make awards which confer upon a
participant rights, valued as determined by the Committee and payable to or
exercisable by the participant based on the attainment of certain performance
objectives. Under this provision of the Plan, the Committee selects one or
more periods during which performance criteria established by the Committee
are measured for the purpose of determining the extent to which a Performance
Award has been earned. Participants earn the right to the Performance Awards
by achieving the performance targets established for such awards. Performance
Awards may be denominated or payable in cash, deferred cash, Common Stock or
other awards or other property as determined by the Committee.

24
<PAGE>

DIVIDEND EQUIVALENTS. The Committee is authorized to grant Dividend
Equivalents conferring on a participant the right to receive, currently or on
a deferred basis, interest or dividends, or interest or dividend equivalents.
Dividend Equivalents may be paid directly to a participant or may be
reinvested under the Plan.

OTHER STOCK-BASED AWARDS. In order to enable the Company to respond to
material developments in the area of taxes and other legislation and
regulations and interpretations thereof, and to trends in executive
compensation practices, the Plan authorizes the Committee to grant awards that
are denominated or payable in, valued in whole or in part by reference to, or
otherwise based on or related to securities of the Company. The Committee
determines the terms and conditions of such awards, including consideration
paid for awards granted as purchase rights (which consideration generally may
not be less than the fair market value of a share on the date the purchase
right is granted).

PAYMENT AND DEFERRAL OF AWARDS. Awards may be settled in cash, stock, other
awards or other property, at the discretion of the Committee. The Committee
may require or permit participants to defer the distribution of all or part of
an award in accordance with such terms and conditions as the Committee may
establish. The Plan authorizes the Committee to place shares or other property
in trusts or make other arrangements to provide for payment of the Company's
obligations under the Plan. The Committee may condition the payment of an
award on the withholding of taxes and may provide that a portion of the stock
or other property to be distributed will be withheld to satisfy such tax
obligations.

LIMITATIONS OF AWARDS. Awards granted under the Plan may not be pledged or
otherwise encumbered by a participant. Unless otherwise determined by the
Committee, no awards are assignable or transferable by a participant except by
will or by the laws of descent and distribution, except to the Company or an
Affiliate under the terms of the Plan. Each award will be exercisable during
the participant's lifetime only by the participant, or if permitted by the
Committee, a participant may, in the manner established by the Committee,
designate a beneficiary to exercise the participants' rights and receive
distributions with respect to an award upon the death of the participant.

ADJUSTMENTS. In the event of any change affecting the shares of Common Stock
by reason of any dividend or distribution (whether in cash, Common Stock or
other securities), recapitalization, stock split, reverse stock split,
reorganization, merger, consolidation, split off, spin off, combination,
repurchase or exchange of Common Stock or other securities, or other similar
corporate transaction or event, the Committee may make such substitution or
adjustment in the aggregate number or kind of shares which may be distributed
under the Plan and in the number, kind and exercise, grant or purchase price
of shares subject to the outstanding awards granted under the Plan, or make
provisions for a cash payment relating to any award, as it deems to be
appropriate in order to prevent dilution or enlargement of a participant's
rights under the Plan. The Committee is also authorized to make adjustments in
the terms and conditions of, and the criteria in, awards in recognition of
unusual or nonrecurring events affecting the Company or any Affiliate or their
financial statements, or changes in applicable laws, regulations or accounting
principles.

AMENDMENT TO AND TERMINATION OF THE PLAN
The Board may amend, alter, suspend, discontinue or terminate the Plan without
the consent of the stockholders or participants, except that stockholder
approval of such action will be sought if such approval is required by any
federal or state law or regulation, or if the Board in its discretion
determines that obtaining such stockholder approval is advisable. In addition,
subject to the terms of the Plan, no amendment or termination of the Plan may
materially and adversely affect the rights of a participant under any award
granted under the Plan. Unless earlier terminated by the Board, no award may
be granted under the Plan after December 31, 2007.

25
<PAGE>

CHANGE OF CONTROL
In the event of a change of control of the Company, all outstanding awards
under the Plan, regardless of any limitations or restrictions, become fully
exercisable and freed of all restrictions unless otherwise provided by the
Committee at the time of grant of the award or unless waived or deferred by a
participant. In such event, with certain exceptions, participants may elect to
surrender any outstanding award and receive in satisfaction thereof a cash or
stock or other payment equal to the value of their outstanding awards based on
the "change of control price" (as defined in the Plan) of the shares of the
Company subject to the award of the fair market value of any property other
than shares of the Company relating to such award, except that with respect to
an ISO or an SAR granted in tandem with an ISO the cash payment shall be based
on the fair market value of the shares subject to the ISO or SAR on the date
on which the Change of Control occurred. For the purposes of the Plan, a
Change of Control is deemed to have occurred: (i) upon the acquisition, with
certain exceptions, by any person of 20% or more of the Company's outstanding
voting securities; (ii) if individuals constituting the Board as of the
effective date of the Plan, together with those who first became Directors
subsequent to such date and whose recommendation, election or nomination for
election to the Board was approved by a vote of at least a majority of the
Directors then still in office who either were Directors as of the effective
date of the Plan or whose recommendation, election or nomination for election
was previously so approved, cease for any reason to constitute a majority of
the Board; (iii) with certain exceptions, upon stockholder approval of a
merger, consolidation, recapitalization or reorganization of the Company,
reverse split of any class of voting securities, or an acquisition of
securities or assets of the Company or consummation of any such transaction if
stockholder approval is not required; or (iv) upon stockholder approval of a
plan of liquidation or the sale or disposition of substantially all of the
Company's assets. Upon the occurrence of a Change of Control, or a Potential
Change of Control (as defined by the Plan), the Company is required to fund a
trust for the benefit of participants with monies or other property at least
equal to the value of all outstanding awards under the Plan.

TAX IMPLICATIONS OF THE PLAN
The Company believes that under present law the following are the federal
income tax consequences generally arising with respect to awards granted under
the Plan. The grant of an option or SAR (including a stock-based award in the
form of a purchase right) will create no income tax consequences for the
participant or the Company. A participant will have no taxable income upon
exercising an ISO (except that the alternative minimum tax may apply), and the
Company will receive no deduction at that time. Upon exercising an option
other than an ISO, a participant must generally recognize ordinary income
equal to the difference between the exercise price and the fair market value
of the freely transferable and nonforfeitable stock acquired on the date of
exercise, and upon exercising an SAR, a participant must generally recognize
ordinary income equal to the cash or the fair market value of the freely
transferable and nonforfeitable stock received. Different tax rules may apply
with respect to participants who are subject to Section 16 of the Securities
Exchange Act of 1934, as amended, when they acquire stock in a transaction
deemed to be a nonexempt purchase under that statute. In each case, the
Company will be entitled to a deduction for the amount recognized as ordinary
income by a participant.
The treatment to a participant of a disposition of shares acquired upon the
exercise of an SAR or option depends on how long the shares have been held,
and on whether such shares are acquired by exercising an ISO or by exercising
an option other than an ISO. Generally, there will be no income tax
consequences to the Company in connection with a disposition of shares
acquired under an option except that the Company will be entitled to a
deduction (and the employee will recognize ordinary taxable income) if shares
acquired under an ISO are disposed of before the applicable ISO holding
periods have been satisfied.
With respect to other awards granted under the Plan that may be settled
either in cash or in stock or other property that is either not restricted as to
transferability or not subject to a substantial risk of forfeiture, a
participant must generally recognize ordinary income equal to the cash or the
fair market value of shares or other property received. The Company will
generally be entitled to a deduction at the same time in the same amount. With
respect to awards involving stock or other property that is restricted

26
<PAGE>

as to transferability and subject to a substantial risk of forfeiture, a
participant must generally recognize ordinary income equal to the fair market
value of shares or other property received at the first time the shares or
other property become transferable or not subject to a substantial risk of
forfeiture, whichever occurs earlier. The Company will generally be entitled
to a deduction for the same amount. A participant may elect to be taxed at the
time of grant of shares or other property rather than upon lapse of
restrictions on transferability or the substantial risk of forfeiture. Such
election must be made and filed with the Internal Revenue Service within
thirty (30) days of the grant of shares or other property, and also must be
filed with the Company.
Section 162(m) of the Internal Revenue Code generally limits the deductible
amount of annual compensation paid (including, unless an exception applies,
compensation otherwise deductible in connection with awards granted under the
Plan) by a public company to a "covered employee" (the chief executive officer
and four other most highly compensated executive officers of the Company) to
no more than $1 million. [The Company currently intends to structure stock
options granted and other awards made under the Plan to comply with an
exception to nondeductibility under Section 162(m) of the Code.
The foregoing provides only a general description of the application of
federal income tax laws to certain types of awards under the Plan. The summary
does not address the effects of foreign, state and local tax laws.

VOTE NEEDED FOR APPROVAL OF THE PROPOSAL
Approval of this proposal requires an affirmative vote by the holders of the
majority of the shares present in person or represented by proxy and entitled
to vote. Abstentions are counted in the tabulations of the votes cast on
proposals presented to stockholders. Broker non-votes are not counted for
purposes of determining whether a proposal has been approved.

BOARD RECOMMENDATION
The Board recommends that stockholders vote FOR Proposal 3, and the
accompanying proxy will be so voted unless a contrary specification is made.

PROPOSAL 4
STOCKHOLDER'S PROPOSAL CONCERNING OPTIONS

Robert W. Moulton, 9460 Doral Drive, Pittsburgh, Pennsylvania, who owns 128
shares of the Company's Common Stock, has submitted the resolution set forth
below for inclusion in this Proxy Statement for the Company's 1997 Annual
Meeting of Shareholders.

THE STOCKHOLDER'S PROPOSAL
OPTIONS RESOLUTION
"RESOLVED: The Company Directors consider the discontinuance of all options,
rights, etc. after termination of existing agreements with management and
Directors. This does not include other employees of the company."

THE STOCKHOLDER'S SUPPORTING STATEMENT
The cost of above is substantial and this is undervaluing our (all
shareholders) holdings with each issuance.

MANAGEMENT'S COMMENTS
This proposal calls for the Company to discontinue the practice of granting
stock options to management and Directors. Management strongly believes that
discontinuing this practice would not be in the interests of the stockholders.
The Company grants stock options to key employees to encourage and facilitate
the employees' personal ownership of the Company's Common Stock. When granted,
each stock option has an exercise price equal to the market price of the
stock. For an option to be of value to the employee, the market

27
<PAGE>

price of the Common Stock must increase. This directly aligns the financial
interests of key employees with those of the stockholders, which helps to
focus employee attention on the strategies and actions needed to create and
enhance value for stockholders over the long term. In the Board's view,
discontinuing stock option grants would weaken this alignment and not be in
the Stockholders' interests.
At the Company's 1991 Annual Meeting, the stockholders were asked to vote
on the 1991 Stock Incentive Plan. One of the components of this Plan is a
program of granting stock options to key employees. Over 76% of the votes cast
were in favor of the Plan. The Board believes that this vote demonstrates that
shareholders strongly support and endorse the making of such grants.

VOTE NEEDED FOR APPROVAL OF THE PROPOSAL
Approval of this proposal requires an affirmative vote of the holders of a
majority of the shares present in person or represented by proxy and entitled
to vote. Abstentions are counted in tabulations of the votes cast on proposals
presented to stockholders. Broker non-votes are not counted for purposes of
determining whether a proposal has been approved.

BOARD RECOMMENDATION
The Board recommends that stockholders vote AGAINST Proposal 4, and the
accompanying proxy will be so voted, unless a contrary specification is made.

PROPOSAL 5
STOCKHOLDER'S PROPOSAL CONCERNING BONUSES

Fred Wilson and Mazie M. Wilson, 3011 N. Miles Drive, Edmond, Oklahoma, who
own 200 shares of the Company's Common Stock have submitted the resolution set
forth below for inclusion in this Proxy Statement for the Company's 1997
Annual Meeting of Shareholders.

THE STOCKHOLDER'S PROPOSAL
BONUS RESOLUTION
"RESOLVED: That all bonuses in excess of $30,000 for Executive Officers only
be approved by the stockholders at the Annual Stockholders Meeting."

THE STOCKHOLDER'S SUPPORTING STATEMENT
It is my opinion that the executives are not justified in receiving the
unusually large incentives and bonuses which are apparently awarded by the
Board of Directors. It seems that the fine salaries that they already receive
should be sufficient justification and incentive for doing a good job. If the
executives cannot get along on the fantastic salaries that they are being paid
then let them move on to "greener" pastures.

MANAGEMENT'S COMMENTS
This proposal calls for all bonuses in excess of $30,000 for Executive
Officers only be approved by the stockholders at the Annual Stockholders
Meeting. Management strongly believes that this practice would not be in the
interests of the stockholders.
The objective of the Company's compensation programs is to provide a total
compensation package that will enable the Company to attract, motivate and
retain outstanding individuals and align their success with that of the
Company's shareholders. The opportunity for an Executive Officer to earn a
bonus is based on the nature of the position, its potential for contribution,
the level of responsibility and the competitive environment.
A bonus opportunity is established only if the Company attains a certain
level of performance. Payments are only made upon the successful achievement of
Board Compensation and Benefit Committee approved goals. The achievement of
established goals directly aligns the financial interests of Executive Officers
and others with those of the shareholders. In management's view, limiting
bonuses to below market levels would weaken this alignment and not be in the
shareholders' interests.

28
<PAGE>

BOARD RECOMMENDATION
The Board recommends that stockholders vote AGAINST Proposal 5, and the
accompanying proxy will be so voted, unless a contrary specification is made.

PROPOSAL 6
STOCKHOLDER'S PROPOSAL CONCERNING RIGHTS PLAN

Amalgamated Bank of New York, LongView Collective Investment Fund, 11-15 Union
Square West, New York, New York, which owns 23,300 shares of the Company's
Common Stock, has submitted the resolution set forth below for inclusion in
this Proxy Statement for the Company's 1997 Annual Meeting of Shareholders.

THE STOCKHOLDER'S PROPOSAL
SHAREHOLDER RIGHTS PLAN RESOLUTION
"RESOLVED: That the shareholders of Consolidated Natural Gas Company ("CNG" or
the "Company") request the Board of Directors to redeem the shareholder rights
previously issued unless such issuance is approved by the affirmative vote of
shareholders, to be held as soon as may be practicable."

THE STOCKHOLDER'S SUPPORTING STATEMENT
In 1995, the CNG Board of Directors issued, without shareholder approval,
certain shareholder rights (the "rights") pursuant to a shareholder rights
plan. We strongly believe that such rights are a type of anti-takeover device,
commonly known as a poison pill, which injures shareholders by reducing
management accountability and adversely affecting shareholder value.
The shareholders of the Company believe the terms of the rights are
designed to discourage or thwart an unwanted takeover of the Company. While
management and the Board of Directors should have appropriate tools to ensure
that all shareholders benefit from any proposal to acquire the Company, the
Shareholders do not believe that the future possibility of a takeover justifies
the unilateral imposition of such a poison pill. Rather, we believe that the
shareholders should have the right to vote on the necessity of such a powerful
tool, which could be used to entrench existing management. Rights plans like the
Company's have become increasingly unpopular in recent years.
The negative effects of poison pill rights plans on the trading value of
companies' stock have been the subject of extensive research. A 1986 study
(covering 245 companies adopting poison pills between 1983 and July 1986) was
prepared by the Office of the Chief Economist of the U.S. Securities and
Exchange Commission on the effect of poison pills on the wealth of target
shareholders. It states that "empirical tests, taken together, show that
poison pills are harmful to target shareholders, on net." A 1992 study by
Professor John Pound of Harvard's Corporate Research Project and Lilli A.
Gordon of the Gordon Group found a correlation between high corporate
performance and the absence of poison pills.
We believe that such an important corporate governance practice that can
have a significant adverse impact on shareholder value should be eliminated or,
at the very least, be voted on by shareholders.
Last year, 50.8% of the shares that were voted for or against this proposal
were cast in favor of the resolution. We therefore submit this shareholder
proposal based on our belief that the unilateral and undeniable undemocratic
adoption of the rights plan by the Company is unjustified, that the continued
existence of such a rights plan by the Company is unjustified and not in the
best interests of the shareholders.
We urge you to vote FOR this resolution!

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MANAGEMENT'S COMMENTS
The Board of Directors adopted the shareholder protection rights plan (the
"Rights Plan") in 1995 because the Board believed the Rights Plan would better
enable the Board to represent the interests of all shareholders in the event
of a hostile effort to acquire Consolidated Natural Gas Company and take
advantage of its shareholders.
The Board has considered the arguments of the proponents of this proposal
and discussed other companies' experience with similar plans. The Board
continues to believe that the Rights Plan serves the interest of the
shareholders. If there were an offer to purchase the Company on terms that were
unfair to some or all shareholders, the Board believes the Rights Plan would
encourage the bidder to negotiate with the Board. The Board also believes that
shareholder rights plans have not historically prevented fair bids, but have
been a factor in increasing the value paid to shareholders in hostile
acquisitions.
In March and October 1988, Georgeson & Company, a nationally recognized
proxy solicitation and investor relations firm, found that companies adopting
rights plans do not lessen the value of their stock, and, more importantly, that
companies with rights plans received higher takeover premiums than those
companies without rights plans. The March 1988 Georgeson study concluded that
companies with rights plans received takeover premiums averaging 69% higher than
those received by companies not protected by such plans. Similarly, a March 1993
study by Robert Comment and G. William Schwert of the Bradley Policy Research
Center, University of Rochester, determined that rights plans do not deter
takeovers, Additionally, Comment and Schwert found that rights plans are
associated with higher takeover premiums for selling stockholders.
The Board specifically examined its fiduciary responsibilities under
Delaware law when it adopted the Rights Plan in November 1995. It is important
to note that the Company's Board is an independent board, consisting of nine
outside directors and one inside director. The Board has been comprised
primarily of outside directors since 1983, providing further assurance that the
Rights Plan will not be used for entrenchment purposes. The Board adopted the
Rights Plan with the aim of protecting the interests of all of the shareholders
and maximizing the value of their investments in the Company.
Based on the Board's collective business experience and knowledge of the
Company, it believes that the adoption of the Rights Plan was a valid exercise
of its fiduciary obligations to all stockholders, and is in accord with the
Board's responsibility under Delaware law to manage and direct the management
of the Company's business and affairs. The Board does not believe that the
Rights Plan will deter an acquisition offer that adequately reflects the
underlying value of the Company and that is fair to all stockholders, nor will
it deter the initiation of a proxy contest.

BOARD RECOMMENDATION
The Board recommends that stockholders vote AGAINST Proposal 6, and the
accompanying proxy will be so voted, unless a contrary specification is made.

OTHER MATTERS

PROCEDURE FOR SUBMISSION OF 1998 STOCKHOLDER PROPOSALS
The 1998 Annual Meeting of Stockholders will be held on Tuesday, April 14,
1998. Proposals by stockholders for inclusion in the 1998 Annual Meeting Proxy
Statement must be received by the Corporate Secretary, Consolidated Natural
Gas Company, CNG Tower, 625 Liberty Avenue, Pittsburgh, Pennsylvania 15222-
3199, prior to November 4, 1997. All such proposals are subject to the
applicable rules and requirements of the Securities and Exchange Commission.

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OTHER BUSINESS
The Board of Directors does not intend to bring any business before the
Meeting other than that listed in the foregoing Notice and is not aware of any
business intended to be presented to the Meeting by any other person. Should
other matters properly come before the Meeting, the persons named in the
accompanying proxy will vote said proxy in such manner as they may, in their
discretion, determine.

/s/ Laura J. McKeown
Laura J. McKeown
Secretary

March 21, 1997

NOTE: YOUR SHARES CANNOT BE VOTED UNLESS YOU SIGN AND RETURN YOUR PROXY CARD,
OR ATTEND THE MEETING AND VOTE IN PERSON.

EXHIBIT A
CONSOLIDATED NATURAL GAS COMPANY
1997 STOCK INCENTIVE PLAN

APPENDIX I
CONSOLIDATED NATURAL GAS COMPANY
1996 FINANCIAL STATEMENTS AND NOTES
(ENCLOSED)

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EXHIBIT A

CONSOLIDATED NATURAL GAS COMPANY
1997 STOCK INCENTIVE PLAN

SECTION 1. Purposes.
1.01. The purposes of the CNG 1997 Stock Incentive Plan (the
"Plan") are to enable Consolidated Natural Gas Company (together
with any successor thereto, the "Company"), and its Affiliates to
attract and retain key employees and Directors and the best
available personnel for positions of substantial responsibility,
to reward such employees and Directors for superior performance,
and to strengthen the mutuality of interests between such
employees and Directors and the Company's shareholders. The Plan
is designed to meet this intent by providing such employees and
Directors with a proprietary interest in pursuing the long-term
growth, profitability and financial success of the Company in
order to provide them with additional motivation to continue in
the Company's employ and service and to further its profitable
growth.

SECTION 2. Definitions; Construction.
2.01 Definitions. In addition to the terms defined elsewhere in
the Plan, the following terms as used in the Plan shall have the
following meanings when used with initial capital letters:
2.01.1. "Affiliate" means any entity other than the Company in
which the Company owns, directly or indirectly, at least 20
percent of the combined voting power of all classes of stock of
such entity or at least 20 percent of the ownership interests in
such entity.
2.01.2. "Award" means any Option, Stock Appreciation Right,
Restricted Stock, Deferred Stock, Performance Award, Dividend
Equivalent, or Other Stock-Based Award, or any other right or
interest relating to Shares or cash granted under the Plan.
2.01.3. "Award Agreement" means any written agreement, contract or
other instrument or document evidencing an Award.
2.01.4. "Board" means the Company's Board of Directors.
2.01.5. "Code" means the Internal Revenue Code of 1986, as amended
from time to time, together with rules, regulations and
interpretations promulgated thereunder.
2.01.6. "Committee" means the Compensation and Benefits Committee
or such other Committee of the Board as may be designated by the
Board to administer the Plan, as referred to in Section 3.01
hereof; provided, however, that the Committee shall qualify to
administer the Plan as contemplated by Rule 16b-3 of the Exchange
Act or any successor and it shall be comprised solely of two or
more members of the Board who each qualify as "Outside Directors"
for purposes of Section 162(m) of the Code.
2.01.7. "Common Stock" means the Common Stock, $2.75 par value,
and such other securities of the Company as may be substituted for
Shares pursuant to Section 8.01 hereof.
2.01.8. "Deferred Stock" means Shares, granted under Section 6.05
hereof, receipt of which is deferred for a specified deferral
period.
2.01.9. "Disability" means disability as determined under
procedures established by the Committee for purposes of the Plan.
2.01.10. "Dividend Equivalent" means a right, granted under
Section 6.07 hereof, to receive interest or dividends, or interest
or dividend equivalents.
2.01.11. "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
2.01.12. "Fair Market Value" means, as of any date, with respect
to Shares at any time that Shares are listed on the New York Stock
Exchange, the closing sale price as of that date or nearest
preceding date on which a sale was reported; provided, however, if
in a

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given case the Fair Market Value of Shares is not an even multiple
of one dollar, such Fair Market Value may be rounded up or down to
a whole number if specified by the Committee; and, with respect to
Shares at any time that Shares are not listed on the New York
Stock Exchange, or property other than Shares, the fair market
value of such Shares or other property determined by such methods
or procedures as shall be established from time to time by the
Committee.
2.01.13. "Incentive Stock Option" means an Option that is intended
to meet the requirements of Section 422 of the Code or any
successor provision thereto and is expressly designated as an
Incentive Stock Option.
2.01.14. "Option" means a right, granted under Section 6.02
hereof, to purchase Shares or other Awards at a specified price
during specified time periods. An Option may be either an
Incentive Stock Option or a non-qualified stock option, which is
an Option not intended to be an Incentive Stock Option.
2.01.15. "Other Stock-Based Awards" means a right, granted under
Section 6.08 hereof, that relates to or is valued by reference to
Shares or other Awards relating to Shares, Awards valued by
reference to the value of securities of or the performance of
specified Affiliates, Awards based upon the operation of the cash
bonus program including the deferral program and Awards related to
such other Company sponsored programs such as but not limited to
the System Supplemental Retirement Plan for Certain Management
Employees of Consolidated Natural Gas Company and Its
Participating Subsidiaries, the Consolidated Natural Gas Company
Supplemental Retirement Benefit Plan and the Unfunded Supplemental
Benefit Plan for Employees of Consolidated Natural Gas Company and
Its Participating Subsidiaries Who Are Not Represented by a
Recognized Union.
2.01.16. "Participant" means a key employee of the Company or any
Affiliate and any member of the Board who is granted an Award
under the Plan.
2.01.17. "Performance Award" means a right, granted under Section
6.06 hereof, to receive Awards based upon performance criteria
specified by the Committee.
2.01.18. "Person" shall have the meaning assigned in the Exchange
Act.
2.01.19. "Restricted Stock" means Shares, granted under Section
6.04 hereof, that are subject to certain restrictions.
2.01.20. "Rule 16b-3" means Rule 16b-3, as amended from time to
time, or any successor to such Rule promulgated by the Securities
and Exchange Commission under Section 16 of the Exchange Act.
2.01.21. "Shares" means the Common Stock of the Company, $2.75 par
value, and such other securities of the Company as may be
substituted for Shares pursuant to Section 8.01 hereof.
2.01.22. "Stock Appreciation Right" means a right, granted under
Section 6.03 hereof, to be paid an amount measured by the
appreciation in the Fair Market Value of Shares from the date of
grant to the date of exercise.
Definitions of the terms "Change of Control," "Change of Control
Price," "Potential Change of Control," "Related Party" and "Voting
Securities" are set forth in Section 9.03 hereof.
2.02. Construction. For purposes of the Plan, the following rules
of construction shall apply:
2.02.1. The word "or" is disjunctive but not necessarily
exclusive.
2.02.2. Words in the singular include the plural; words in the
plural include the singular; and words in the neuter gender
include the masculine and feminine genders and words in the
masculine or feminine gender include the other and neuter genders.

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SECTION 3. Administration.
3.01. The Plan shall be administered by the Committee. The
Committee shall have full and final authority to take the
following actions, in each case subject to and consistent with the
provisions of the Plan:
(i)to designate Participants;
(ii)to determine the type or types of Awards to be granted to
each Participant;
(iii)to determine the number of Awards to be granted, the
number of Shares or amount of cash or other property to which
an Award will relate, the terms and conditions of any Award
(including, but not limited to, any exercise price, grant
price or purchase price, any limitation or restriction, any
schedule for lapse of limitations, forfeiture restrictions or
restrictions on exercisability or transferability, and
accelerations or waivers thereof, based in each case on such
considerations as the Committee shall determine), and all
other matters to be determined in connection with an Award;
(iv)to determine whether, to what extent and under what
circumstances an Award may be settled in, or the exercise
price of an Award may be paid in, cash, Shares, other Awards
or other property, or an Award may be accelerated, vested,
canceled, forfeited, exchanged or surrendered;
(v)to determine whether, to what extent and under what
circumstances cash, Shares, other Awards, other property and
other amounts payable with respect to an Award shall be
deferred either automatically or at the election of the
Committee or at the election of the Participant;
(vi)to interpret and administer the Plan and any instrument or
agreement relating to, or Award made under, the Plan;
(vii)to prescribe the form of each Award Agreement, which need
not be identical for each Participant;
(viii)to adopt, amend, suspend, waive and rescind such rules
and regulations as the Committee may deem necessary or
advisable to administer the Plan;
(ix)to correct any defect or supply any omission or reconcile
any inconsistency, and to construe and interpret the Plan, the
rules and regulations, any Award Agreement or other instrument
entered into or Award made under the Plan; and
(x)to make all other decisions and determinations as may be
required under the terms of the Plan or as the Committee may
deem necessary or advisable for the administration of the
Plan.
Any action of the Committee with respect to the Plan shall be
final, conclusive and binding on all Persons, including the
Company, Affiliates, Participants, any Person claiming any rights
under the Plan from or through any Participant, employees and
stockholders. The express grant of any specific power to the
Committee, and the taking of any action by the Committee, shall
not be construed as limiting any power or authority of the
Committee. The Committee may delegate to Officers or managers of
the Company or of any Affiliate the authority, subject to such
terms as the Committee shall determine, to perform administrative
functions under the Plan and, with respect to Participants who are
not subject to Section 16 of the Exchange Act, to take such
actions and perform such functions under the Plan as the Committee
may specify. Each member of the Committee shall be entitled to, in
good faith, rely or act upon any report or other information
furnished to him by any Officer, manager or other employee of the
Company or any Affiliate, the Company's independent certified
public accountants, or any executive compensation consultant or
other professional retained by the Company to assist in the
administration of the Plan. Except as may be required under
Section 7.02, any and all

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powers, authorizations and discretions granted by the Plan to the
Committee shall likewise be exercisable at any time by the Board.

SECTION 4. Shares Subject to the Plan.
4.01. The maximum number of shares of Common Stock in respect for
which Awards may be granted under the Plan, subject to adjustment
as provided in Section 8.01 of the Plan, in each calendar year
during any part of which the Plan is effective shall be one and
one-tenth percent (1.1%) of the total issued and outstanding
shares of the Common Stock as of the first day of each such year
the Plan is in effect, plus any shares which are reserved but not
then subject to grants under the Company's 1991 Stock Incentive
Plan (the "1991 Plan"), the Company's 1995 Employee Stock
Incentive Plan (the "1995 Plan"), and the Company's Non-Employee
Directors' Restricted Stock Plan (the "Directors' Plan") as of the
date this Plan is approved by the shareholders of the Company. Any
unused portion of the number of shares available for grant
hereunder for any calendar year, together with any additional
shares that have become available under the 1991 Plan, the 1995
Plan, or the Directors' Plan shall be carried forward and be made
available for Awards in succeeding calendar years. Notwithstanding
the foregoing, in no event shall more than four million
(4,000,000) shares of Common Stock be cumulatively available for
Awards of Incentive Stock Options under the Plan. The maximum
number of shares of Restricted Stock which may cumulatively be
issued under the Plan shall be three percent (3%) of the number of
shares of Common Stock issued and outstanding; provided, however,
that the limitation set forth in this sentence shall not apply
with respect to Restricted Stock which vests only after attainment
of performance criteria established by the Committee and such
performance-based Restricted Stock shall not count toward such
maximum.
For purposes of this Section 4.01, the number of Shares to
which an Award relates shall be counted against the number of Shares
reserved and available under the Plan at the time of grant of the
Award, unless such number of Shares cannot be determined at that
time, in which case the number of Shares actually distributed
pursuant to the Award shall be counted against the number of Shares
reserved and available under the Plan at the time of distribution;
provided, however, that Awards related to or retroactively added to,
or granted in tandem with, substituted for or converted into, other
Awards shall be counted or not counted against the number of Shares
reserved and available under the Plan in accordance with procedures
adopted by the Committee so as to ensure appropriate counting but
avoid double counting; and provided, further, that the number of
Shares deemed to be issued under the Plan upon exercise of an Option
or an Other Stock-Based Award in the nature of a stock purchase
right shall be reduced by the number of Shares surrendered by the
Participant in payment of the exercise or purchase price of the
Award.
If any Shares to which an Award relates are forfeited, or
payment is made to the Participant in the form of cash, cash
equivalents or other property other than Shares, or the Award
otherwise terminates without payment being made to the Participant
in the form of Shares, any Shares counted against the number of
Shares reserved and available under the Plan with respect to such
Award shall, to the extent of any such forfeiture, alternative
payment or termination, again be available for Awards under the
Plan.
Subject to adjustment as provided in Section 8.01 hereof, the
maximum number of Shares with respect to which Options or Stock
Appreciation Rights may be granted during a calendar year to any
Participant under this Plan shall be 900,000 Shares.
Any Shares distributed pursuant to an Award may consist, in
whole or in part, of authorized and unissued Shares or of treasury
Shares, including Shares repurchased by the Company for purposes
of the Plan.

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SECTION 5. Eligibility.
5.01. Awards may be granted only to individuals who are (i) key
employees (including employees who also are Directors or Officers)
of the Company or any Affiliate or (ii) members of the Board
(whether or not they are also employees of the Company or any
Affiliate). In determining the eligibility of an employee to
receive an Award, the Committee shall consider the position and
responsibilities of the employee being considered, the nature and
value to the Company or a Subsidiary of his services and
accomplishments, his present and potential contribution to the
success of the Company or its Subsidiaries and such other factors
as the Committee may deem relevant.

SECTION 6. Specific Terms of Awards.
6.01. General. Subject to the terms of the Plan and any applicable
Award Agreement, Awards may be issued as set forth in this Section
6. In addition, the Committee may impose on any Award or the
exercise thereof, at the date of grant or thereafter (subject to
the terms of Section 10.01), such additional terms and conditions,
not inconsistent with the provisions of the Plan, as the Committee
shall determine, including terms requiring forfeiture of Awards in
the event of termination of employment or service on the Board by
the Participant. Except as provided in Section 7.01, or as
required by applicable law, Awards shall be granted for no
consideration other than prior and future services.
6.02. Options. The Committee is authorized to grant Options to
Participants on the following terms and conditions:
(i)Exercise Price. The exercise price per Share of an Option
shall be determined by the Committee; provided, however, that,
except as provided in Section 7.01, such exercise price shall
not be less than the Fair Market Value of a Share on the date
of grant of such Option and in no event shall be less than the
par value of a Share.
(ii)Option Term. The term of each Option shall be determined
by the Committee.
(iii)Methods of Exercise. The Committee shall determine the
time or times at which an Option may be exercised in whole or
in part, the methods by which such exercise price may be paid
or deemed to be paid, and the form of such payment, including,
without limitation, cash, Shares, other outstanding Awards or
other property (including notes or other contractual
obligations of Participants to make payment on a deferred
basis, to the extent permitted by law) or any combination
thereof, having a Fair Market Value equal to the exercise
price.
(iv)Incentive Stock Options. The terms of any Incentive Stock
Option granted under the Plan shall comply in all material
respects with the provisions of Section 422 of the Code or any
successor provision thereto. Incentive Stock Options may only
be issued to employees of the Company or a "subsidiary
corporation" (within the meaning of Section 424(f) of the
Code) of the Company.
6.03. Stock Appreciation Rights. The Committee is authorized to
grant Stock Appreciation Rights to Participants on the following
terms and conditions:
(i)Right to Payment. A Stock Appreciation Right shall confer
on the Participant to whom it is granted a right to receive,
upon exercise thereof, the excess of (i) the Fair Market Value
of a Share on the date of exercise or, if the Committee shall
so determine in the case of any such right other than one
related to any Incentive Stock Option, at any time during a
specified period before or after the date of exercise, over
(ii) the grant price of the Stock Appreciation Right as
determined by the Committee as of the date of grant of the
Stock Appreciation Right, which, except as provided in Section
7.01, shall not be less than the Fair Market Value of a Share
on the date of grant.

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(ii)Other Terms. The term, methods of exercise, methods of
settlement and any other terms and conditions of any Stock
Appreciation Right shall be determined by the Committee.
6.04. Restricted Stock. The Committee is authorized to grant
Restricted Stock to Participants on the following terms and
conditions:
(i)Issuance and Restrictions. Restricted Stock shall be
subject to such restrictions on transferability and other
restrictions as the Committee may impose (including, without
limitation, limitations on the right to vote Restricted Stock
or the right to receive dividends thereon), which restrictions
may lapse separately or in combination at such times, under
such circumstances, in such installments or otherwise, as the
Committee shall determine at the time of grant or thereafter.
(ii)Forfeiture. Except as otherwise determined by the
Committee at the time of grant or thereafter, upon termination
of employment or service on the Board (as determined under
criteria established by the Committee) during the applicable
restriction period, Restricted Stock that is at that time
subject to restrictions shall be forfeited and reacquired by
the Company; provided, however, that the Committee may
provide, by rule or regulation or in any Award Agreement, that
restrictions on Restricted Stock shall be waived in whole or
in part in the event of terminations resulting from specified
causes, and the Committee may in other cases waive in whole or
in part restrictions on Restricted Stock.
(iii)Certificates for Shares. Restricted Stock granted under
the Plan may be evidenced in such manner as the Committee
shall determine, including, without limitation, issuance of
certificates representing Shares. Certificates representing
Shares of Restricted Stock shall be registered in the name of
the Participant and shall bear an appropriate legend referring
to the terms, conditions and restrictions applicable to such
Restricted Stock.
6.05. Deferred Stock. The Committee is authorized to grant
Deferred Stock to Participants on the following terms and
conditions:
(i)Issuance and Limitations. Delivery of Shares shall occur
upon expiration of the deferral period specified for the Award
of Deferred Stock by the Committee. In addition, an Award of
Deferred Stock shall be subject to such limitations as the
Committee may impose, which limitations may lapse at the
expiration of the deferral period or at other specified times,
separately or in combination, in installments or otherwise, as
the Committee shall determine at the time of grant or
thereafter. A Participant awarded Deferred Stock shall have no
voting rights and shall have no rights to receive dividends in
respect of Deferred Stock, unless and only to the extent that
the Committee shall award Dividend Equivalents in respect of
such Deferred Stock.
(ii)Forfeiture. Except as otherwise determined by the
Committee upon termination of employment or service on the
Board (as determined under criteria established by the
Committee) during the applicable deferral period, Deferred
Stock that is at that time subject to deferral (other than a
deferral at the election of the Participant) shall be
forfeited; provided, however, that the Committee may provide,
by rule or regulation or in any Award Agreement, that
forfeiture of Deferred Stock shall be waived in whole or in
part in the event of terminations resulting from specified
causes, and the Committee may in other cases waive in whole or
in part the forfeiture of Deferred Stock.
6.06. Performance Awards. The Committee is authorized to grant
Performance Awards to Participants on the following terms and
conditions:

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(i)Right to Payment. A Performance Award shall confer upon the
Participant rights, valued as determined by the Committee, and
payable to, or exercisable by, the Participant to whom the
Performance Award is granted, in whole or in part, as the
Committee shall establish. The performance criteria and all
other terms and conditions of the Performance Award shall be
determined by the Committee upon the grant of each Performance
Award or thereafter.
(ii)Other Terms. A Performance Award may be denominated or
payable in cash, deferred cash, Shares, other Awards or other
property, and other terms and conditions of Performance Awards
shall be, as determined by the Committee.
6.07. Dividend Equivalents. The Committee is authorized to grant
Dividend Equivalents to Participants. Dividend Equivalents shall
confer upon the Participant rights to receive, currently or on a
deferred basis, interest or dividends, or interest or dividend
equivalents, with respect to a number of Shares, or otherwise, as
determined by the Committee. The Committee may provide that
Dividend Equivalents shall be paid or distributed when accrued or
shall be deemed to have been reinvested in additional Shares or
additional Awards or otherwise reinvested.
6.08. Other Stock-Based Awards. The Committee is authorized,
subject to limitations under applicable law, to grant to
Participants such other Awards that are denominated or payable in,
valued in whole or in part by reference to, or otherwise based on,
or related to, Shares, as deemed by the Committee to be consistent
with the purposes of the Plan, including, without limitation,
purchase rights, Shares awarded which are not subject to any
restrictions or conditions, convertible or exchangeable
debentures, exchangeable securities or other rights convertible or
exchangeable into Shares, as the Committee in its discretion may
determine. The Committee shall determine the terms and conditions
of such Awards. Except as provided in Section 7.01, Shares or
securities delivered pursuant to a purchase right granted under
this Section 6.08 shall be purchased for such consideration, paid
for by such methods and in such forms, including, without
limitation, cash, Shares, outstanding Awards or other property or
any combination thereof, as the Committee shall determine,
provided that the value of such consideration shall not be less
than the Fair Market Value of such Shares on the date of grant of
such purchase right and in no event shall be less than the par
value of a Share.
6.09. Exchange Provisions. The Committee may at any time offer to
exchange or buy out any previously granted Award for a payment in
cash, Shares, another Award or other property, based on such terms
and conditions as the Committee shall determine and communicate to
the Participant at the time that such offer is made.

SECTION 7. General Terms of Awards.
7.01. Stand-Alone, Tandem and Substitute Awards. Awards granted
under the Plan may, in the discretion of the Committee, be granted
either alone or in addition to, in tandem with or in substitution
for, any other Award granted under the Plan or any award granted
under the Long-Term Incentive Plan, or any other plan of the
Company or any Affiliate (subject to the terms of Section 10.01)
including a business entity to be acquired by the Company. If an
Award is granted in substitution for another Award or award, the
Committee shall require the surrender of such other Award or award
in consideration for the grant of the new Award. Awards granted in
addition to or in tandem with other Awards or awards may be
granted either at the same time as or at a different time from the
grant of such other Awards or awards. The exercise price of any
Option, the grant price of any Stock Appreciation Right or the
purchase price of any other Award conferring a right to purchase
Share retroactively granted in tandem with an outstanding Award or
award shall be either not less than the Fair Market Value of
Shares at the date of grant of the later Award or equal to the
Fair Market Value of Shares at the date of grant of the

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earlier Award or award. Notwithstanding the foregoing, the
exercise price of any Option, grant price of any Stock
Appreciation Right or purchase price of any other Award conferring
a right to purchase Shares which is granted in exchange or
substitution for an option, stock appreciation right or other
award granted by the Company (other than in connection with a
transaction described in Section 8.01 hereof) shall not be less
than the exercise price, grant price or purchase price of the
exchanged or substituted option, stock appreciation right or other
award, and outstanding Awards shall not be amended (other than in
connection with a transaction described in section 8.01 hereof) to
reduce the exercise price, grant price or purchase price of any
such Award.
7.02. Decisions Required to be Made by the Committee. Other
provisions of the Plan and any Award Agreement notwithstanding, if
any decision regarding an Award or the exercise of any right by a
Participant, at any time such Participant is subject to Section 16
of the Exchange Act or is a "covered employee" under Section
162(m) of the Code, is required to be made or approved by the
Committee in order that a grant to or transaction by such
Participant will be exempt under Rule 16b-3 or qualify as
"qualified performance-based compensation" for purposes of Section
162(m) of the Code and the Treasury Regulations issued thereunder,
then the Committee shall retain full and exclusive power and
authority to make such decision or to approve or disapprove any
such decision by the Participant.
7.03. Term of Awards. The term of each Award shall be for such
period as may be determined by the Committee; provided, however,
that in no event shall the term of any Incentive Stock Option, or
a Stock Appreciation Right granted in tandem therewith, exceed a
period of ten years from the date of its grant.
7.04. Form of Payment of Awards. Subject to the terms of the Plan
and any applicable Award Agreement, payments or substitutions to
be made by the Company or an Affiliate upon the grant or exercise
of an Award may be made in such forms as the Committee shall
determine at the time of grant or thereafter (subject to the terms
of Section 10.01), including, without limitation, cash, Shares,
other Awards or other property or any combination thereof, and may
be made in a single payment or substitution, in installments or on
a deferred basis, in each case in accordance with rules and
procedures established by the Committee. Such rules and procedures
may include, without limitation, provisions for the payment or
crediting of reasonable interest on installment or deferred
payments or the grant or crediting of Dividend Equivalents in
respect of installment or deferred payments.
7.05. Limits on Transfer of Awards; Beneficiaries. No right or
interest of a Participant in any Award shall be pledged,
encumbered or hypothecated to or in favor of any Person other than
the Company or an Affiliate, or shall be subject to any lien,
obligation or liability of such Participant to any Person other
than the Company or an Affiliate. Unless otherwise determined by
the Committee, no Award and no rights or interests therein shall
be assignable or transferable by a Participant otherwise than by
will or the laws of descent and distribution except to the Company
or any Affiliate under the terms of the Plan; provided, however,
that, if so determined by the Committee, a Participant may, in the
manner established by the Committee, designate a beneficiary or
beneficiaries to exercise the rights of the Participant, and to
receive any distribution with respect to any Award, upon the death
of the Participant. A beneficiary, guardian, legal representative
or other Person claiming any rights under the Plan from or through
any Participant shall be subject to all the terms and conditions
of the Plan and any Award Agreement applicable to such Participant
as well as any additional restrictions or limitations deemed
necessary or appropriate by the Committee.
7.06. Registration and Listing Compliance. No Award shall be paid
and no Shares shall be distributed with respect to any Award in a
transaction subject to the registration

39
<PAGE>

requirements of the Securities Act of 1933, as amended, or any
state securities law or subject to a listing requirement under any
listing agreement between the Company and any national securities
exchange, and no Award shall confer upon any Participant rights to
such delivery or distribution, until such laws and contractual
obligations of the Company have been complied with in all material
respects.
7.07. Stock Certificates. All certificates for Shares delivered
under the terms of the Plan shall be subject to such stop-transfer
orders and other restrictions as the Committee may deem advisable
under federal or state securities laws, rules and regulations
thereunder, and the rules of any national securities exchange or
automated quotation system on which Shares are listed or quoted.
The Committee may cause a legend or legends to be placed on any
such certificates to make appropriate reference to such
restrictions or any other restrictions or limitations that may be
applicable to Shares. In addition, during any period in which
Awards or Shares are subject to restrictions or limitations under
the terms of the Plan or any Award Agreement, or during any period
during which delivery or receipt of an Award or Shares has been
deferred by the Committee or a Participant, the Committee may
require any Participant to enter into an agreement providing that
certificates representing Shares issuable or issued pursuant to an
Award shall remain in the physical custody of the Company or such
other Person as the Committee may designate.

SECTION 8. Adjustment Provisions.
8.01. In the event that the Committee shall determine that any
dividend or other distribution (whether in the form of cash,
Shares, other securities or other property), recapitalization,
stock split, reverse stock split, reorganization, merger,
consolidation, split up, spin off, combination, repurchase,
exchange of Shares or other securities of the Company, or other
similar corporate transaction or event affects the Shares such
that an adjustment is determined by the Committee to be
appropriate in order to prevent dilution or enlargement of
Participants' rights under the Plan, then the Committee shall, in
such manner as it may deem equitable, adjust any or all of (i) the
number and kind of Shares which may thereafter be issued in
connection with Awards; (ii) the number of Shares with respect to
which Options or Stock Appreciation Rights may be granted during a
calendar year to any Participant; (iii) the number and kind of
Shares issued or issuable in respect of outstanding Awards; and
(iv) the exercise price, grant price or purchase price relating to
any Award or, if deemed appropriate, make provision for a cash
payment with respect to any outstanding Award; provided, however,
in each case, that, with respect to Incentive Stock Options, no
such adjustment shall be authorized to the extent that such
authority would cause the plan to violate Section 422(b)(1) of the
Code or any successor provision thereto. In addition, the
Committee is authorized to make adjustments in the terms and
conditions of, and the criteria in, Awards in recognition of
unusual or nonrecurring events (including, without limitation,
events described in the preceding sentence) affecting the Company
or any Affiliate or the financial statements of the Company or any
Affiliate, or in response to changes in applicable laws,
regulations or accounting principles.
8.02. Anything in this Plan to the contrary notwithstanding, in
the case of any Award which is intended to qualify as "qualified
performance-based compensation" within the meaning of Section
162(m) of the Code, if the Award Agreement so provides, the
Committee shall have no discretion to increase the amount of
compensation payable under the Award to the extent such an
increase would cause the Award to lose its qualification as such
qualified performance-based compensation.

SECTION 9. Change of Control Provisions.
9.01. Acceleration of Exercisability and Lapse of Restrictions;
Cash-Out of Awards. In the event of a Change of Control, the
following acceleration and cash-out provisions shall apply unless
otherwise provided by the Committee at the time of the Award
grant.

40
<PAGE>

(i)All outstanding Awards pursuant to which the Participant
may have rights the exercise of which is restricted or
limited, shall become fully exercisable; unless the right to
lapse of restrictions or limitations is waived or deferred by
a Participant prior to such lapse, all restrictions or
limitations (including risks of forfeiture and deferrals) on
outstanding Awards subject to restrictions or limitations
under the Plan shall lapse; and all performance criteria and
other conditions to payment of Awards under which payments of
cash, Shares or other property are subject to conditions shall
be deemed to be achieved or fulfilled and shall be waived by
the Company.
(ii)For a period of up to 60 days following a Change of
Control, the Participant may elect to surrender any
outstanding Award and to receive, in full satisfaction
therefor, a cash payment equal to the value of such Award
calculated on the basis of the Change of Control Price of any
Shares or the Fair Market Value of any property other than
Shares relating to such Award; provided, however, that in the
case of an Incentive Stock Option, or a Stock Appreciation
Right granted in tandem therewith, the payment shall be based
upon the Fair Market Value of Shares on the date on which the
Change of Control occurred; provided further, however, that in
the case of a Change of Control described in Section
9.03.1(iii) or (iv) hereof, the payment described in this
sentence shall not necessarily be made in cash but instead
shall be made in the same form (i.e., cash, Shares, other
securities or a combination thereof) as holders of Shares
receive in exchange for their Shares in the transaction that
results in the Change of Control. In the event that an Award
is granted in tandem with another Award such that the
Participant's right to payment for such Award is an
alternative to payment of another Award, the Participant
electing to surrender any such tandem Award shall surrender
all alternative Awards related thereto and receive payment for
the Award which produces the highest payment to the
Participant.
9.02. Creation and Funding of Trust. Upon the earlier of the
occurrence of a Potential Change of Control or a Change of
Control, the Company shall deposit with the trustee of a trust for
the benefit of Participants monies or other property having a Fair
Market Value at least equal to the value of cash, Shares and other
property to be paid or distributed in connection with Awards
outstanding at that date. The trust shall be a grantor trust which
shall preserve the "unfunded" status of Awards under the Plan.
Subsequent to a Potential Change of Control which is no longer
continuing and prior to any Change of Control, upon the request of
the Company, the trustee shall deliver the monies or other
property held in the trust to the Company.
9.03. Definition of Certain Terms. For purposes of this Section 9,
the following definitions, in addition to those set forth in
Section 2.01, shall apply:
9.03.1. "Change of Control" means and shall be deemed to have
occurred if
(i)any Person, other than the Company or a Related Party, is
or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of Voting
Securities representing 20 percent or more of the total voting
power of all the then-outstanding Voting Securities, except
that there shall be excluded from the number of Voting
Securities deemed to be beneficially owned by a Person a
number of Voting Securities representing not more than 10
percent of the then-outstanding voting power if such Person is
(a) eligible to file a Schedule 13G pursuant to Rule 13d-
1(b)(1) under the Exchange Act with respect to Voting
Securities or (b) an underwriter who becomes the beneficial
owner of more than 20 percent of the then-outstanding Voting
Securities pursuant to a firm commitment underwriting
agreement with the Company; or
(ii)the individuals who, as of the effective date of the Plan,
constitute the Board of Directors of the Company together with
those who first become Directors

41
<PAGE>

subsequent to such date and whose recommendation, election or
nomination for election to the Board was approved by a vote of
at least a majority of the Directors then still in office who
either were Directors as of the effective date of the Plan or
whose recommendation, election or nomination for election was
previously so approved (the "Continuing Directors"), cease for
any reason to constitute a majority of the members of the
Board; or
(iii)the stockholders of the Company approve a merger,
consolidation, recapitalization or reorganization of the
Company, reverse split of any class of Voting Securities, or
an acquisition of securities or assets by the Company, or
consummation of any such transaction if stockholder approval
is not obtained, other than (a) any such transaction which
would result in at least 75 percent of the total voting power
represented by the voting securities of the surviving entity
outstanding immediately after such transaction being
beneficially owned by at least 75 percent of the holders of
outstanding Voting Securities immediately prior to the
transaction, with the voting power of each such continuing
holder relative to other such continuing holders not
substantially altered in the transaction, or (b) any such
transaction which would result in a Related Party beneficially
owning more than 50 percent of the voting securities of the
surviving entity outstanding immediately after such
transaction; or
(iv)the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the
Company's assets other than any such transaction which would
result in a Related Party owning or acquiring more than 50
percent of the assets owned by the Company immediately prior
to the transaction.
9.03.2. "Change of Control Price" means, with respect to a Share,
the higher of (i) the highest reported sales price of Shares on
the New York Stock Exchange during the 30 calendar days preceding
a Change of Control or (ii) the highest price paid or offered in a
transaction which either (a) results in a Change of Control or (b)
would be consummated but for another transaction which results in
a Change of Control and, if it were consummated, would result in a
Change of Control. With respect to clause (ii) in the preceding
sentence, the "price paid or offered" will be equal to the sum of
(i) the face amount of any portion of the consideration consisting
of cash or cash equivalents and (ii) the Fair Market Value of any
portion of the consideration consisting of real or personal
property other than cash or cash equivalents, as established by an
independent appraiser selected by the Committee.
9.03.3. "Potential Change of Control" means and shall be deemed to
have arisen if (i) the Company enters into an agreement, the
consummation of which would result in the occurrence of a Change
of Control; or (ii) any Person (including the Company) publicly
announces an intention to take or to consider taking actions which
if consummated would constitute a Change of Control; or (iii) any
Person, other than a Related Party, files with the Securities and
Exchange Commission a Schedule 13D pursuant to Rule 13d-1 under
the Exchange Act with respect to more than 7.5 percent of any
outstanding class of Voting Securities; or (iv) the Committee
adopts a resolution to the effect that, for purposes of the Plan,
a Potential Change of Control has arisen. A Potential Change of
Control will be deemed to continue (i) with respect to an
agreement within the purview of clause (i) of the preceding
sentence, until the agreement is canceled or terminated; or (ii)
with respect to an announcement within the purview of clause (ii)
of the preceding sentence, until the Person making the
announcement publicly abandons the stated intention or fails to
act on such intention for a period of 12 calendar months; or (iii)
with respect to the filing of a Schedule 13D within the purview of
clause (iii) of the preceding sentence, until the Person involved
publicly announces that its ownership of the Voting Securities is
for investment

42
<PAGE>

purposes only and not for the purpose of seeking a Change of
Control or such Person disposes of the Voting Securities; or (iv)
with respect to any Potential Change of Control, until a Change of
Control has occurred or the majority of the Continuing Directors
and the Committee, acting jointly, on reasonable belief after due
investigation, adopt a resolution that the Potential Change of
Control has ceased to exist.
9.03.4. "Related Party" means (i) a majority-owned subsidiary of
the Company; or (ii) an employee or group of employees of the
Company or any majority-owned subsidiary of the Company; or (iii)
a trustee or other fiduciary holding securities under an employee
benefit plan of the Company or any majority-owned subsidiary of
the Company; or (iv) a corporation owned directly or indirectly by
the stockholders of the Company in substantially the same
proportion as their ownership of Voting Securities.
9.03.5. "Voting Securities or Security" means any securities of
the Company which carry the right to vote generally in the
election of directors.

SECTION 10. Amendments to and Termination of the Plan.
10.01. The Board may amend, alter, suspend, discontinue or
terminate the Plan without the consent of stockholders or
Participants, except that, without the approval of the
stockholders of the Company, no amendment, alteration, suspension,
discontinuation or termination shall be made if stockholder
approval is required by any federal or state law or regulation, or
if the Board in its discretion determines that obtaining such
stockholder approval is for any reason advisable; provided,
however, that, without the consent of the Participant, no
amendment, alteration, suspension, discontinuation or termination
of the Plan may materially and adversely affect the rights of such
Participant under any Award theretofore granted to him. The
Committee may waive any conditions or rights under, amend any
terms of, or amend, alter, suspend, discontinue or terminate, any
Award theretofore granted, prospectively or retrospectively;
provided, however, that, without the consent of a Participant, no
amendment, alteration, suspension, discontinuation or termination
of any Award may materially and adversely affect the rights of
such Participant under any Award theretofore granted to him.

SECTION 11. General Provisions.
11.01. No Rights to Awards; No Stockholder Rights. Nothing in this
Plan shall give any Participant or employee any right or claim to
be granted any Award under the Plan, and there is no obligation
for uniformity of treatment of Participants and employees. No
Award shall confer on any Participant any of the rights of a
stockholder of the Company unless and until Shares are in fact
issued to such Participant in connection with such Award.
11.02. Withholding. The Company or any Affiliate is authorized to
withhold from any Award granted or any payment due under the Plan,
including from a distribution of Shares, amounts of withholding
taxes due with respect to an Award, its exercise or any payment
thereunder, and to take such other action as the Committee may
deem necessary or advisable to enable the Company and Participants
to satisfy obligations for the payment of withholding taxes and
tax liabilities in excess thereof. This authority shall include
authority to withhold or receive Shares, Awards or other property
and to make cash payments in respect thereof in satisfaction of
such tax obligations.
11.03. No Right to Employment. Nothing contained in the Plan or
any Award Agreement shall confer, and no grant of an Award shall
be construed as conferring, upon any Participant any right to
continue in the employ of the Company or any Affiliate or to
interfere in any way with the right of the Company or any
Affiliate to terminate his employment at any time or increase or
decrease his compensation from the rate in existence at the time
of granting of an Award, except as may be expressly provided in
any Award Agreement or other compensation arrangement.

43
<PAGE>

11.04. Unfunded Status of Awards; Creation of Trusts. The Plan is
intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made
to a Participant pursuant to an Award, nothing contained in the
Plan or any Award shall give any such Participant any rights that
are greater than those of a general unsecured creditor of the
Company; provided, however, that, in addition to the requirements
of Section 9.02, the Committee may authorize the creation of
trusts or make other arrangements to meet the Company's
obligations under the Plan to deliver cash, Shares or other
property pursuant to any Award, which trusts or other arrangements
shall be consistent with the "unfunded" status of the Plan unless
the Committee otherwise determines.
11.05. No Limit on Other Compensatory Arrangements. Nothing
contained in the Plan shall prevent the Company or any Affiliate
from adopting other or additional compensation arrangements (which
may include, without limitation, employment agreements with
executives and arrangements which relate to Awards under the
Plan), and such arrangements may be either generally applicable or
applicable only in specific cases.
11.06. No Fractional Shares. No fractional Shares shall be issued
or delivered pursuant to the Plan or any Award. The Committee
shall determine whether cash, other Awards or other property shall
be issued or paid in lieu of fractional Shares or whether such
fractional Shares or any rights thereto shall be forfeited or
otherwise eliminated.
11.07. Governing Law. The validity, interpretation, construction
and effect of the Plan and any rules and regulations relating to
the Plan shall be governed by the laws of the State of Delaware
(without regard to provisions governing conflicts of laws) and
applicable federal law.
11.08. Severability. If any provision of the Plan or any Award is
or becomes or is deemed invalid, illegal or unenforceable in any
jurisdiction, or would disqualify the Plan or any Award under any
law deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform to applicable laws or if it
cannot be construed or deemed amended without, in the
determination of the Committee, materially altering the intent of
the Plan, it shall be deleted and the remainder of the Plan shall
remain in full force and effect; provided, however, that, unless
otherwise determined by the Committee, the provision shall not be
construed or deemed amended or deleted with respect to any
Participant whose rights and obligations under the Plan are not
subject to the law of such jurisdiction or the law deemed
applicable by the Committee.

SECTION 12. Effective Date and Termination.
12.01. The Plan shall become effective as of January 1, 1997,
subject to the approval of the Plan by the affirmative vote of
holders of a majority of Shares present in person or represented
by proxy at the Company's 1997 Annual Meeting of Stockholders, or
any adjournment thereof. Any Awards granted under the Plan prior
to such approval of stockholders shall be effective when made
(unless otherwise specified by the Committee at the time of grant)
but shall be conditioned upon and subject to such approval of the
Plan by stockholders. No award may be granted under the Plan after
December 31, 2007.

44
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY
CNG Tower
625 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3199

GAS DISTRIBUTION
The East Ohio Gas Company
Cleveland, Ohio

The Peoples Natural Gas Company
Pittsburgh, Pennsylvania

Virginia Natural Gas, Inc.
Norfolk, Virginia

Hope Gas, Inc.
Clarksburg, West Virginia

GAS TRANSMISSION
CNG Transmission Corporation
Clarksburg, West Virginia

EXPLORATION AND PRODUCTION
CNG Producing Company
New Orleans, Louisiana

ENERGY MARKETING SERVICES
CNG Energy Services Corporation
Pittsburgh, Pennsylvania

CNG Power Company
Pittsburgh, Pennsylvania

OTHER
CNG International Corporation
Reston, Virginia
Sydney, Australia

[LOGO OF CNG]
<PAGE>
Exhibit 99

CNG CONSOLIDATED
NATURAL GAS
COMPANY

CNG CONSOLIDATED 1996 Financial
NATURAL GAS Report
COMPANY

CNG CONSOLIDATED
NATURAL GAS
COMPANY

CNG CONSOLIDATED
NATURAL GAS Appendix I
COMPANY

<PAGE>

TABLE OF CONTENTS
PAGE
----
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 1
Selected Financial Data................................................... 16
Report of Independent Accountants......................................... 17
Consolidated Statement of Income for the Years 1994 through 1996.......... 19
Consolidated Balance Sheet at December 31, 1995 and 1996.................. 20
Consolidated Statement of Cash Flows for the Years 1994 through 1996...... 22
Notes to Consolidated Financial Statements................................ 23
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

RESULTS OF OPERATIONS

NET INCOME
Net income in 1996 was $298.3 million, or $3.16 a share, compared with net
income of $21.3 million, or $.23 a share, in 1995. Net income in 1994 was
$183.2 million, or $1.97 a share.

Earnings for both 1995 and 1996 reflect the impact of special charges in those
years. Excluding the impact of charges related to workforce reduction programs
totaling $9.9 million after taxes, or $.10 a share, 1996 net income would have
been $308.2 million, or $3.26 a share. Earnings for 1995 included the effects
of three special charges. During the first quarter, the Company recorded a
non-cash charge to write down the cost of gas and oil producing properties,
amounting to $145.0 million after taxes, or $1.56 a share. In the second
quarter, the Company recognized a non-cash charge of $20.3 million after
taxes, or $.22 a share, in connection with a write-down of coal properties. In
addition, during 1995 the Company recorded charges totaling $25.6 million
after taxes, or $.27 a share, for workforce reductions. Excluding these
special items, net income for 1995 would have been $212.3 million, or $2.28 a
share. Reference is made to Notes 3 and 4 to the consolidated financial
statements, pages 27 and 28, for details of the special charges recognized in
1995 and 1996.

Higher wellhead prices for natural gas and oil, increased gas and oil
production, colder weather, cost controls and the full year impact of new
rates in place for most of the Company's gas distribution customers
contributed to the improved results for 1996. Weather in the Company's retail
service areas was 5.6 percent colder than normal and 5.5 percent colder than
1995. Normal weather represents a measure of temperature experienced over an
historical time frame, the length of which may differ depending on the
regulatory jurisdiction.

During 1995, the favorable effects of new rates in place for most of the
Company's gas distribution and transmission customers, colder weather and
lower aggregate wage and benefit costs in the latter part of the year
resulting from the workforce reduction programs more than offset the impact of
continued low wellhead prices for natural gas and lower gas and oil
production. Weather in the Company's retail service territories was .5 percent
colder than normal and 2.2 percent colder than in 1994.

Warmer than normal weather, higher operating costs, lower average wellhead gas
prices, reduced gas production and higher interest expense affected results
for 1994.

OPERATING REVENUES
Operating revenues include revenues from gas and oil sales, transportation and
storage of gas, brokering activities, by-product operations and, beginning in
1995, wholesale electric sales. Total operating revenues in 1996 were $3,794.3
million, an increase of $487.0 million compared to 1995 operating revenues of
$3,307.3 million.

Regulated gas sales revenues of $1,752.2 million in 1996 were up $154.8
million compared to 1995, with sales volumes increasing 4.1 billion cubic feet
(Bcf) to 294.0 Bcf. Revenues and volumes from the Company's residential
customers increased in 1996 reflecting colder weather compared to 1995, while
revenues and volumes declined for the industrial customer class. While gas
sales volumes for the Company's commercial customer group declined in 1996,
revenues increased compared to 1995 reflecting higher average sales rates.

Nonregulated gas sales revenues increased $94.8 million in 1996, while sales
volumes decreased 160.5 Bcf compared to 1995. The effect of higher gas sales
prices, coupled with the impact of higher production, more than offset the
effect of reduced transaction volumes of the energy marketing services
component.

Gas transportation and storage revenues increased $8.7 million in 1996
compared to the prior year, to $465.1 million. The increase was due to higher
gas transportation revenues, which increased $13.4 million due to higher
volumes and rates. Lower storage service revenues partly offset this increase.
Other operating revenues increased $228.7 million in 1996 to $484.5 million.
The increase over 1995 was due

1
<PAGE>

chiefly to an increase of $108.8 million in revenues from oil and condensate
production and brokering from the exploration and production operations and an
additional $87.7 million of wholesale electric sales by the energy marketing
services component.

Total operating revenues in 1995 increased $271.3 million from $3,036.0
million in 1994. Regulated gas sales revenues in 1995 decreased $81.9 million
from 1994, to $1,597.4 million, with sales volumes increasing 4.9 Bcf to 289.9
Bcf. Colder weather compared with 1994 led to the increase in sales volumes
while lower unit purchased gas costs reflected in revenues was responsible for
the decline in sales revenue. Nonregulated gas sales revenues increased $274.1
million in 1995, with sales volumes increasing 223.8 Bcf over the 1994 period
to 556.6 Bcf. These increases were attributable to the growth of the Company's
energy marketing services component. The increased volumes sold more than
offset the effects of lower wellhead prices and production at the exploration
and production operations. Gas transportation and storage revenues were $456.4
million in 1995, up $46.8 million over 1994. The increase was due principally
to higher transportation revenues, which increased $39.5 million due to both
increased volumes and rates. Other operating revenues increased $32.3 million
in 1995, to $255.8 million, reflecting wholesale sales of electricity of $21.8
million by the energy marketing services component.

OPERATING EXPENSES
Operating expenses, including taxes, increased 8 percent in 1996, to $3,402.1
million. Operating expenses in 1995 were $3,160.8 million, up 14 percent from
$2,775.1 million in 1994. Excluding the impact of the workforce reduction
charges in 1996 and 1995 and the impairment of gas and oil producing
properties in 1995, operating expenses for 1996 and 1995 would have been
$3,392.2 million and $2,990.2 million, respectively.

Purchased gas consistently represents the largest operating expense item for
the Company. Purchased gas costs were $1,615.0 million in 1996, $1,590.1
million in 1995 and $1,424.0 million in 1994. This expense is influenced
primarily by changes in gas sales requirements, the price and mix of gas
supplies, and the timing of recoveries of deferred purchased gas costs. During
1996, the effect of higher average purchase prices more than offset the impact
of decreased volume requirements in connection with nonregulated gas sales and
the deferral of purchased gas costs by the regulated subsidiaries. Total
purchased gas expense was higher in 1995 due primarily to increased volume
requirements associated with nonregulated gas sales. This factor more than
offset lower unit purchased gas costs, which reflected the nationwide decline
in gas prices during 1995.

Transport capacity and other purchased products expense includes the cost of
pipeline capacity not associated with gas purchased and the cost of liquids,
by-products and, beginning in 1995, electricity purchased for resale. This
expense increased $193.1 million in 1996 due chiefly to electricity purchased
for resale by the energy marketing services component and oil purchased for
resale by CNG Producing Company (CNG Producing). This expense increased $46.5
million in 1995 primarily due to increased transport capacity purchased from
other pipeline companies and electricity purchased for resale totaling $19.6
million.

Excluding the effect of the 1996 and 1995 workforce reduction charges of $15.2
million and $42.6 million, respectively, combined operation and maintenance
expense increased $77.2 million in 1996 due in large part to increased royalty
expense in 1996 resulting from higher gas and oil wellhead prices and
production. The increase in 1996 was partially offset by lower payroll costs
and reductions in certain administrative expenses. Maintenance expense
increased $4.2 million in 1996 to $90.1 million.

Excluding the effect of the workforce reduction charges, combined operation
and maintenance expense increased $7.5 million in 1995. Higher customer-
related expenses, slightly higher overhead costs and the regulator-mandated
adjustment for certain previously deferred costs in connection with the
settlement of CNG Transmission Corporation's (CNG Transmission) rate case were
factors contributing to the $10.8 million increase in operation expense. Lower
royalties paid as a result of both lower gas wellhead prices and production
and the benefits of the workforce reduction programs in the latter part of
1995 helped to minimize the increase. Maintenance expense declined $3.3
million, to $85.9 million, in 1995.

2
<PAGE>

Total depreciation and amortization expense increased $47.6 million in 1996
due largely to higher gas and oil production volumes. Depreciation and
amortization charges were down $22.7 million in 1995 due to lower amortization
charges for the Company's exploration and production operations. Amortization
of gas and oil producing properties declined in 1995 primarily as the result
of the lower investment following the impairment of these properties in the
first quarter. Reserve additions and lower production also contributed to the
lower charges in 1995. Depreciation expense for the regulated subsidiaries was
higher in both 1996 and 1995 due principally to the increased level of plant
investment.

Taxes, other than income taxes, decreased $.7 million in 1996 due in large
part to lower excise and payroll taxes and decreased $.9 million in 1995 due
chiefly to lower revenue-based taxes.

Income taxes increased $152.8 million in 1996 compared to 1995 due to higher
pretax earnings. Income taxes decreased $79.4 million in 1995 compared to the
prior year due mainly to lower pretax earnings.

OTHER INCOME
Total other income was $9.3 million in 1996, compared to total other
deductions of $20.5 million in 1995 and total other income of $9.7 million in
1994. Excluding the write-down of coal properties of $31.3 million, 1995 total
other income would have been $10.8 million. Interest revenues declined $6.8
million in 1996 compared to the prior year due largely to the lower level of
temporary cash investments in 1996. Interest revenues increased $4.1 million
in 1995 due primarily to the higher level of temporary cash investments during
that year. Interest revenues were up $1.7 million in 1994, reflecting CNG
Transmission's billing of Federal Energy Regulatory Commission (FERC) Order
636 transition costs in late 1993 and August 1994. The increase in "Other-net"
of $5.4 million in 1996 compared to 1995 reflects increased earnings from the
Company's equity investments and losses related to minor property dispositions
at certain regulated subsidiaries in 1995 that did not recur in 1996,
partially offset by a charge of $5.0 million recognized in connection with an
early extinguishment of debt in December 1996. The decline in "Other-net" in
1995 compared to 1994 was due largely to the property dispositions in that
year.

INTEREST CHARGES
Interest on long-term debt increased $6.0 million in 1996 due primarily to
debenture sales of $150 million each in April 1995, October 1996 and December
1996. Interest on long-term debt was up $7.0 million in 1995 due chiefly to
interest expense related to the April 1995 debenture issuance. Other interest
expense declined $7.5 million in 1996 compared to the prior year due largely
to lower interest expense related to customer refunds. Other interest expense
increased in 1995 as a result of higher interest rates on commercial paper
borrowings. The amounts of interest expense capitalized in 1996 and 1995 were
lower than in 1994 due to the lower investment in unproved properties held by
the exploration and production operations.

FOURTH QUARTER RESULTS
The Company's net income for the fourth quarter of 1996 was $88.0 million
compared with $87.4 million earned in the 1995 fourth quarter, an increase of
$.6 million. On a per share basis, the 1996 quarter was $.93 compared with
$.94 in 1995. The 1996 quarter, however, reflects special charges for
workforce reductions totaling $7.8 million after taxes, or $.08 per share. The
Company's average gas wellhead price was $2.62 per thousand cubic feet (Mcf),
up $.51 per Mcf compared with the 1995 quarter, while gas production increased
40 percent over 1995. These positive factors were partially offset by the
effect of weather which was 7.8 percent warmer than in the 1995 fourth quarter
and the charge recognized in connection with an early extinguishment of debt
(see "Capital Resources and Liquidity," page 13).

3
<PAGE>

- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarters Ended December 31, 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C>
(In Millions)
Operating revenues.......................................... $ 1,229.2 $ 935.5
Operating expenses.......................................... (1,066.4) (775.0)
--------- -------
Operating income before income taxes........................ 162.8 160.5
Income taxes................................................ (46.1) (44.6)
Other income/expenses-net................................... (28.7) (28.5)
--------- -------
Net income.................................................. $ 88.0 $ 87.4
========= =======
Per common share (in dollars)............................... $.93 $.94
Average shares outstanding (thousands)...................... 94,882 93,442
- - --------------------------------------------------------------------------------
</TABLE>

NEW ACCOUNTING STANDARDS
Effective January 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The
adoption of SFAS No. 121 did not have a material effect on the Company's
financial position, results of operations or cash flows. Reference is made to
Note 1 to the consolidated financial statements, page 23, regarding SFAS No.
121.

In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, "Accounting for Stock-Based Compensation." Although the Company has
not changed its accounting method for stock-based compensation as permitted by
this standard, it has included the disclosures pursuant to SFAS No. 123 in
Note 10 to the consolidated financial statements, page 34.

COMPONENTS OF THE BUSINESS
Due to the regulated nature of the distribution and transmission components of
the Company's business, operating results can be affected by regulatory delays
when price increases are sought through general rate filings to recover
certain higher costs of operations. Weather is also an important factor since
a major portion of the gas sold or transported by the distribution and
transmission operations is ultimately used for space heating.

The following presents the operating results for each of the Company's
business components. Reference is made to Note 18 to the consolidated
financial statements, page 43, for additional disaggregated information
pertaining to the Company's operations.

4
<PAGE>

OPERATING INCOME BEFORE INCOME TAXES
Operating income before income taxes for the Company's business components for
the last three years is shown in the table below.
<TABLE>
- - -------------------------------------------------------------------------------------------------
<CAPTION>
Operating Income Before Income Taxes 1996* 1995** 1994
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
Distribution............................................................. $258.4 $207.5 $159.0
Transmission............................................................. 178.8 150.4 146.3
Exploration and production............................................... 133.2 (200.5) 34.0
Energy marketing services................................................ (9.1) (5.7) --
Other***................................................................. (3.2) 2.9 7.6
Corporate and eliminations............................................... (10.1) (5.1) (3.5)
------ ------ ------
Total................................................................... $548.0 $149.5 $343.4
====== ====== ======
</TABLE>
* Amounts for the distribution, transmission, exploration and production,
energy marketing services and corporate components include the effect of
workforce reduction charges totaling $8.2 million, $5.1 million, $.6
million, $.3 million and $1.0 million, respectively.
** Amount for the exploration and production operations includes the impact
of the write-down of gas and oil producing properties amounting to $226.2
million. Amounts for the distribution, transmission, exploration and
production, energy marketing services and corporate components include the
effect of workforce reduction charges totaling $22.3 million, $6.0
million, $7.7 million, $.5 million and $4.6 million, respectively.
*** Includes Consolidated LNG, CNG Research and CNG Coal. Amounts for 1996
include CNG International and CNG Products and Services. CNG Energy
Services, CNG Power and CNG Power Services are included in the 1994
amounts.
- - -------------------------------------------------------------------------------

DISTRIBUTION
"Distribution" represents the results of the five retail gas distribution
subsidiaries, including their minor gas and oil production activities.
Effective January 1, 1997, West Ohio Gas Company (West Ohio Gas) was merged
with The East Ohio Gas Company (East Ohio Gas)(see "State Regulatory Issues,"
page 12).

Sales growth in the Company's residential service areas in Ohio, Pennsylvania
and West Virginia has generally been limited since such areas have experienced
minimal population growth, and the vast majority of households in these areas
already use natural gas for space heating. Opportunity for growth in the
retail sales market is expected to continue at Virginia Natural Gas, Inc.
(Virginia Natural Gas), due to customer conversions from other energy sources
and the past and potential future expansion of its service territory. Since
the Company's acquisition of this subsidiary in 1990, it has experienced an
annual customer growth rate of about 4 percent, well above the 1 percent rate
for the other distribution subsidiaries.

Similar to the unbundling in recent years of the services provided by gas
pipeline companies, gas distribution companies are now preparing for the
expected deregulation and unbundling of the retail energy market. To this end,
on September 25, 1996, East Ohio Gas filed a proposal with the Public
Utilities Commission of Ohio (PUCO) to permit open access for all of its Ohio
customers. If approved, open access service to customers who do not already
have such an option--small business and residential customers--would be phased
in. Under open access programs, natural gas suppliers other than the local gas
utility can use the utility's existing lines to deliver gas to customers.
Under this proposal, Ohio customers would also have the option of continuing
to purchase natural gas from East Ohio Gas. In addition, The Peoples Natural
Gas Company (Peoples Natural Gas) plans to open its system to customer choice
in Pennsylvania during the spring of 1997. Peoples Natural Gas has begun a
customer information campaign to educate customers about their new options for
unbundled service.

In addition to the initiatives at East Ohio Gas and Peoples Natural Gas, in
early 1997 the Company formed a new nonregulated unit, CNG Retail Services
Corporation. This subsidiary was created to market natural gas, electricity,
and related products and services to residential, commercial and small
industrial customers, including those within the Company's traditional service
territories. This new subsidiary is expected to enable the Company to take
full advantage of emerging deregulated energy markets for both gas and
electricity.

5
<PAGE>

OPERATING INCOME BEFORE INCOME TAXES
Excluding workforce reduction charges amounting to $8.2 million in 1996 and
$22.3 million in 1995, operating income before income taxes for the gas
distribution operations for 1996 and 1995 would have been $266.6 million and
$229.8 million, respectively. Improved results for 1996 reflect colder
weather, cost control efforts and the full year impact of general rate
increases that went into effect in the latter part of 1995 at Peoples Natural
Gas, Hope Gas, Inc. (Hope Gas) and East Ohio Gas. Overall, weather in the
Company's retail service areas was 5.5 percent colder than 1995 and 5.6
percent colder than normal.

Excluding workforce reduction charges, operating income before income taxes
for the gas distribution operations in 1995 was up $70.8 million from 1994. In
addition to the general rate increases placed into effect in late 1994 and in
1995 at four distribution subsidiaries, colder weather, the addition of new
customers, higher transport volumes and lower wage and benefit costs in the
latter part of the year due to the workforce reduction programs contributed
favorably to 1995 results. Overall, weather in the Company's retail service
territories was 2.2 percent colder than 1994 and .5 percent colder than
normal.

Operating income before income taxes for the gas distribution operations
declined $7.9 million in 1994 due principally to warmer weather and higher
costs of operations. Overall, weather in the Company's retail service area was
3 percent warmer than 1993 and 4 percent warmer than normal. Two subsidiaries
were granted rate increases and another began collecting higher rates, subject
to refund. However, the increases were placed into effect in the latter part
of the year and did not have a significant impact on 1994 results.

OPERATING REVENUES
Operating revenues of the gas distribution operations increased $160.3 million
in 1996 compared to 1995, to $1,905.5 million. Gas sales revenues were up
$152.3 million reflecting both higher average sales prices and higher sales
volumes. Average sales prices increased due to the impact of both higher unit
purchased gas costs passed through to customers and higher rates in place for
most of the Company's distribution customers. Colder weather was a major
factor in the increased sales volumes. Gas transportation and storage revenues
increased $10.1 million resulting from both higher volumes and rates.

Revenues of the gas distribution operations in 1995 declined $60.4 million
from the prior year. Gas sales revenues declined $81.0 million as lower
average sales prices more than offset the impact of higher sales volumes. The
lower average sales prices were the result of lower unit purchased gas costs
reflected in the rates charged to customers. Rate increases in late 1994 and
in 1995, however, helped hold down the decline in sales revenues. Gas
transportation and storage revenues increased $20.4 million in 1995 due to
both increased volumes and rates.

DISTRIBUTION THROUGHPUT
Since distribution sales largely represent retail sales for space heating,
changes in sales volumes from one period to another are primarily a function
of the weather. In addition to sales service, the distribution operations
provide gas transportation services to a wide range of customers, primarily
commercial and industrial end users. Therefore, the volume of gas transported
can be affected by changes in both economic and market conditions.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Distribution Throughput 1996 1995 1994
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Billion Cubic
Feet)
Sales......................................................... 294.2 289.9 285.0
Transportation................................................ 174.2 164.8 151.1
----- ----- -----
Throughput.................................................. 468.4 454.7 436.1
===== ===== =====
- - --------------------------------------------------------------------------------
</TABLE>
Colder weather and the net addition of approximately 17,000 residential and
commercial customers during 1996 contributed to the 1 percent increase in gas
sales volumes compared to the prior year. Residential gas sales volumes
increased 6.2 Bcf, to 218.7 Bcf, in 1996. Commercial sales decreased 3.0 Bcf
while volumes transported to these customers were up 7.2 Bcf. Deliveries to
industrial customers

6
<PAGE>

were higher in 1996, increasing .6 Bcf to 138.8 Bcf. Sales to industrial
customers declined .4 Bcf to 6.9 Bcf, while transportation volumes increased
1.0 Bcf to 131.9 Bcf. Transportation to off-system customers increased 1.2 Bcf
in 1996.

Gas sales volumes were up 2 percent in 1995, reflecting colder weather and the
net addition of about 24,800 residential and commercial customers. Residential
and commercial gas sales increased 6.6 Bcf and .4 Bcf, respectively, compared
to 1994. While industrial sales volumes declined 2.1 Bcf, transportation
volumes to those customers increased 9.8 Bcf. Gas transported for commercial
customers was 29.8 Bcf in 1995, up 5.4 Bcf compared to 1994. Transportation to
off-system customers declined 1.5 Bcf in 1995.

TRANSMISSION
"Transmission" includes the results of the gas transmission, storage, by-
product and certain other activities of CNG Transmission and, prior to April
1, 1995, the activities of CNG Storage Service Company (CNG Storage). CNG
Storage was formed primarily to engage in the sale, lease or brokerage of gas
storage capacity obtained from third parties including the sale or lease of
base gas. The results of CNG Storage were not significant to the transmission
operations. Gas and oil production activities of CNG Transmission are included
in exploration and production operations.

Changing regulatory policies intended to increase competition in the natural
gas industry have been the principal factor affecting transmission operations
over the past several years. With the implementation of Order 636 effective
October 1, 1993, CNG Transmission abandoned its traditional sales service
which consisted of various elements of gas sales, transportation and storage
that were offered and priced as a single bundled service. Customers now have
even greater access to the Company's pipeline and storage capacity, together
with a range of options available with respect to gas transportation and
storage services.

OPERATING INCOME BEFORE INCOME TAXES
Excluding workforce reduction charges of $5.1 million in 1996 and $6.0 million
in 1995, operating income before income taxes for the gas transmission
operations for 1996 and 1995 would have been $183.9 million and $156.4
million, respectively. Cost control efforts and increased gas transportation
and by-products revenues contributed to improved results in 1996.

Excluding workforce reduction charges, operating income before income taxes of
the gas transmission operations increased $10.1 million in 1995 compared to
1994. Higher rates resulting from CNG Transmission's general rate filing which
became effective July 1, 1994, and cost controls were the major factors for
the improved results in 1995.

Operating income before income taxes increased $2.9 million in 1994 and
reflected the first full year of applying the straight fixed variable rate
design under which operating income is less influenced by changes in
throughput than in the past. Significant factors affecting 1994 operating
results included increased transportation and storage service revenues,
competition from other pipelines, and higher operating costs not yet reflected
in rates.

OPERATING REVENUES
Total operating revenues of the gas transmission operations were $32.4 million
higher in 1996 compared to 1995. Gas transportation and storage revenues
increased $9.7 million due to higher gas transportation revenues, which
increased $14.9 million due to higher volumes and rates. This increase was
partly offset by decreased storage service revenues. Revenues from the sale of
by-products increased $9.7 million due chiefly to higher sales rates.

Total operating revenues of the gas transmission operations increased $11.7
million in 1995 to $471.0 million. Gas transportation and storage revenues
increased $27.4 million in 1995 due primarily to higher transportation
revenues, which increased $24.3 million as higher rates more than offset
slightly lower transport volumes. Revenues from the sale of by-products
declined $10.2 million, due to the overall decline in volumes of products
sold.

7
<PAGE>

TRANSMISSION THROUGHPUT
The changing regulatory environment has created a number of opportunities for
pipeline companies to expand and serve new markets. The Company has taken
advantage of selected market expansion opportunities, concentrating its
efforts primarily in the Northeast and along the East Coast. This expansion
takes advantage of the Company's network of underground storage facilities and
the location and nature of its gridlike pipeline system as a link between the
country's major longline gas pipelines and the increasing energy demands of
East Coast markets. The Company's pipelines are part of an interconnected gas
transmission system which will enable retail end users to take advantage of
the accessibility of supplies nationwide in the evolving deregulation of the
gas industry at the retail level (see "Distribution," page 5, and "Gas and
Electric Industry Developments," page 11). In addition, such a network allows
the Company to manage its gas supply requirements in an efficient and flexible
manner.

Variations in weather conditions can also have a significant impact on the
throughput of the transmission operations, since a substantial portion of the
gas deliveries of these operations is ultimately used by space-heating
customers. Also, transmission operations provide transportation services to a
wide range of customers, including commercial and industrial end users,
electric power generators, and local utility companies. Therefore, the volume
of gas transported can also be affected by changes in economic and market
conditions. However, operating income for the transmission operations is not
significantly influenced by changes in throughput due to the straight fixed
variable rate design.

Total throughput for the gas transmission operations, consisting entirely of
transportation volumes and including intercompany activity, was 758.4 Bcf,
744.0 Bcf, and 748.4 Bcf for the years 1996, 1995 and 1994, respectively.
Throughput during the first quarter of 1996 was up 12 percent compared to the
prior year quarter due in part to colder weather while throughput for the
remainder of the year was lower than in 1995. First quarter 1995 throughput
was lower than the prior year period due to warmer weather, while throughput
was up for the balance of 1995 compared to 1994.

EXPLORATION AND PRODUCTION
"Exploration and production" includes the results of CNG Producing and the gas
and oil production activities of CNG Transmission.

OPERATING INCOME BEFORE INCOME TAXES
Operating income before income taxes for the exploration and production
operations in 1996 was $133.2 million, compared with an operating loss before
income taxes of $200.5 million in 1995. However, the 1996 results include
workforce reduction charges of $.6 million while the 1995 results reflect a
non-cash charge of $226.2 million for the impairment of gas and oil producing
properties and workforce reduction charges totaling $7.7 million. Excluding
these special items, operating income before income taxes would have been
$133.8 million and $33.4 million for 1996 and 1995, respectively. The effects
of higher gas and oil wellhead prices and higher gas and oil production
contributed to the significantly improved operating results in 1996. Higher
prices and production also resulted in increased royalty expense and higher
production-related costs compared to the prior year. The Company added 272 Bcf
of gas equivalent from additions, revisions, and purchases of gas and oil
reserves in 1996.

Excluding special items, operating results for 1995 would have been slightly
lower than operating income before income taxes of $34.0 million in 1994. The
impact of continued low gas wellhead prices and lower gas and oil production
slightly offset the favorable impact of higher oil wellhead prices, a $7.5
million reduction in production-related expenses, and reductions in overhead
costs in 1995. In addition, depreciation and amortization expense was $32.1
million lower in 1995 resulting from the impairment of gas and oil producing
properties, the effect of gas and oil reserve additions, and lower production.
Reserves equivalent to 210 Bcf of gas were added in 1995.

Exploration and production operating income before income taxes in 1994
decreased $13.3 million. The effect of the decline in total operating revenues
due to lower prices and production was partially offset by decreases in
royalty expense and depreciation and amortization of $9.4 million and $21.2
million, respectively. The lower level of royalty expense is attributable
primarily to reduced gas and oil production during 1994. Lower production,
together with the recognition of additional proved gas and

8
<PAGE>

oil reserves in the Gulf of Mexico, resulted in lower depreciation and
amortization expense for 1994. Reserves equivalent to 190 Bcf of gas at Viosca
Knoll 826, a deep-water project in the Gulf of Mexico in which the Company
holds a 50 percent interest, were added in 1994 and represent the largest
single addition of reserves in the Company's history.

GAS AND OIL PRODUCTION AND PRICES
The following table sets forth the Company's gas and oil production and
average wellhead prices for the exploration and production operations for the
last three years:
<TABLE>
- - --------------------------------------------------------------------------------
<CAPTION>
Production 1996 1995 1994
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
GAS (BCF)
Nonregulated............................................ 144.5 102.6 113.7
Regulated*.............................................. 3.0 4.6 5.8
------- ------- -------
Total................................................. 147.5 107.2 119.5
======= ======= =======
OIL (000 BBLS)
Nonregulated............................................ 4,765.9 3,131.7 3,333.0
Regulated*.............................................. -- 17.2 23.8
------- ------- -------
Total................................................. 4,765.9 3,148.9 3,356.8
======= ======= =======
AVERAGE WELLHEAD PRICES
(NONREGULATED ONLY)
Gas (per Mcf)........................................... $ 2.46 $ 1.89 $ 2.16
Oil (per Bbl)........................................... $17.60 $16.04 $14.45
</TABLE>

*Cost-of-service. East Ohio Gas sold all of its remaining gas and oil reserves
during 1995. Hope Gas sold all of its remaining gas reserves to CNG Producing
during 1996. At December 31, 1996, the Company's remaining cost-of-service gas
reserves were held by Peoples Natural Gas.
- - --------------------------------------------------------------------------------
The Company's average gas wellhead price in 1996 was $2.46 per Mcf, up $.57
from $1.89 in 1995. Gas production in 1996 was 147.5 Bcf, up 38 percent from
1995. The increase in gas production during 1996 was due partially to the
impact of two significant Gulf of Mexico projects which commenced production
in the 1996 first quarter, Popeye and Main Pass 225. Production also benefited
from the effect of production enhancement efforts at existing Company-operated
fields. Average oil wellhead prices were $17.60 per barrel in 1996, up $1.56
from 1995, while oil production increased 51 percent from the prior year. The
increase in oil production in 1996 was due in large part to production from
the Popeye project.

Consistent with prices nationwide, the Company's gas wellhead prices in 1995
were below prior year levels for most of the period as the average gas price
of $1.89 per Mcf was $.27 less than the 1994 price. As a result of continued
weak gas prices, the Company voluntarily shut in a portion of its production
at various times during 1995 which, in addition to normal declines at certain
properties, resulted in a decline in production compared to 1994. While
average oil wellhead prices rose $1.59 per barrel in 1995, oil production was
lower than 1994 due primarily to normal production declines at older
properties.

OPERATING REVENUES
Total operating revenues for the exploration and production operations
increased 75 percent in 1996, to $632.3 million. Of the $159.3 million
increase in gas sales revenues in 1996, $90.8 million was due to higher
average gas prices and $68.5 million reflected increased volumes. Revenues
from oil and condensate production and brokering increased $108.9 million in
1996, with $77.7 million of the increase attributable to increased volumes and
the remaining increase due to higher rates. Revenues from oil brokering
increased $74.6 million while revenues from the sale of oil and condensate
production increased $34.3 million.

9
<PAGE>

Total operating revenues decreased $127.9 million in 1995, to $361.5 million.
Gas sales revenues declined $134.0 million, reflecting the continued low level
of gas wellhead prices and lower production compared to 1994. Revenues from
oil and condensate production and brokering increased $10.5 million in 1995.
Revenues from oil brokering were up $8.8 million due to both higher volumes
sold and higher rates, while revenues from oil and condensate production were
up $1.7 million as higher rates more than offset the effect of lower volumes.

ENERGY MARKETING SERVICES
"Energy marketing services" represents the results of CNG Energy Services
Corporation (CNG Energy Services) and CNG Power Services Corporation (CNG
Power Services). These subsidiaries, which are under a single management team,
were reported as one business component beginning in 1995. The results for
these subsidiaries were included in the "Other" component in 1994.

CNG Energy Services markets Company-owned gas production and arranges gas
supplies, transportation, storage and related services for customers. CNG
Energy Services also holds the Company's ownership interests in seven
independent power plants. CNG Power Services purchases and resells electricity
at market-based rates.

The energy marketing services component reported an operating loss before
income taxes of $9.1 million in 1996 compared to an operating loss before
income taxes of $5.7 million in 1995. The 1996 and 1995 results include
workforce reduction charges totaling $.3 million and $.5 million,
respectively. In addition to higher overhead costs, the 1996 loss occurred in
part because this component contracted for quantities of natural gas to supply
power plants during the summer air-conditioning season; these quantities
proved to be too high when third quarter 1996 weather turned cooler than
expected. Reduced transaction volumes during 1996 also adversely impacted 1996
operating results. Total throughput for this component was 427.1 Bcf in 1996
as compared to 570.8 Bcf in 1995. Power marketing, which includes the sale of
wholesale electricity, increased to 4,958,000 megawatt-hours in 1996 compared
to 1,948,000 megawatt-hours in 1995.

In addition to depressed gas margins throughout the year, 1995 operating
results also reflected a $5.3 million pretax charge recognized by CNG Energy
Services in December 1995 in connection with a mark-to-market valuation of
exchange-traded futures contracts used to manage price risk exposure related
to its stored gas inventories.

Income recognized in connection with CNG Energy Service's investments in 1996
and 1995 totaled $5.8 million and $3.9 million, respectively. These amounts
are not included in operating income or loss before income taxes but are
reflected in "Other income" for the component.

LIMITATION ON CAPITALIZED COSTS
As indicated in Note 1 to the consolidated financial statements, CNG Producing
and CNG Transmission follow the full cost method of accounting for their gas
and oil producing activities prescribed by the Securities and Exchange
Commission (SEC). Reference is made to Note 3 to the consolidated financial
statements, page 27, regarding the Company's recognition under the SEC full
cost rules of an impairment of its gas and oil producing properties at March
31, 1995. No additional impairment of these properties was required during the
remainder of 1995 or during 1996.

There are a number of factors, including prices, that determine whether or not
an impairment is required. Gas wellhead prices were strong during the fourth
quarter of 1996, and continued to be firm in the early part of 1997. However,
since gas wellhead prices are subject to sudden fluctuations, the impairment
of these gas and oil properties is a possibility at any quarterly measurement
date, unless other factors such as lower production costs or proved reserve
additions mitigate the impact of the price decline.

INTERNATIONAL ACTIVITIES
In January 1996, the Company formed a new subsidiary, CNG International
Corporation (CNG International). The purpose of CNG International is to engage
in energy-related activities outside the United States.

10
<PAGE>

In December 1996, CNG International and El Paso Energy Corporation (El Paso)
entered into a joint venture to own and operate the Australian pipeline assets
formerly held by Tenneco Energy. CNG International and El Paso each own 30
percent of Epic Energy Pty Ltd. (Epic Energy), an Australian entity formed to
hold the investment's operating assets. The remaining 40 percent ownership
interest in Epic Energy is held equally among four Australian investors--
Allgas Energy, AMP Investments, Axion Funds Management and Hastings Funds
Management. The primary operating assets of the venture include two major
long-distance natural gas pipelines from Australia's Cooper Basin. One of the
pipelines carries gas from the city of Moomba south to Adelaide, while the
other was recently built and will carry gas from the city of Ballera east to
Wallumbilla, Queensland. CNG International's net investment in Epic Energy
totaled $38.7 million at December 31, 1996 and will be accounted for under the
equity method.

A marketing alliance formed in late 1994 among CNG Energy Services and two
Canadian firms, Hydro-Quebec and Noverco, was terminated in December 1996. The
informal alliance created by the three companies did not evolve into a formal
partnership due principally to regulatory impediments.

FEDERAL AND STATE REGULATORY MATTERS

GAS AND ELECTRIC INDUSTRY DEVELOPMENTS
In the post-Order 636 gas industry environment, competition at the retail
level is receiving increased attention by state regulators. Several states
have commenced proceedings to evaluate restructuring of the natural gas
industry at the retail level. These proceedings have generally focused on
unbundling, incentive ratemaking, market-based rates and customer choice (see
"Distribution," page 5).

In addition to the further deregulation of the gas industry, the emerging
unbundling of services provided by electric utilities may ultimately result in
the convergence of both industries to create one overall, highly competitive
marketplace for a customer's total energy needs. During 1995 and 1996,
regulators at the federal and state levels finalized initiatives to promote
increased competition in the electric industry. These initiatives included
issuance in April 1996 of FERC Order Nos. 888 and 889 (Orders 888 and 889). By
requiring open access to the national electric transmission grid, Order 888
fosters increased competition in both the generation of electricity and the
supply of bulk power to major wholesale customers. A companion order, Order
889, addresses the timing, information access and other administrative details
associated with the FERC deregulation initiative. Other signs of an
increasingly deregulated electric utility environment include retail
competition plans adopted in several states, pilot retail wheeling programs
and pro-competition legislation proposed at both the federal and state levels.

Reflecting the evolution to a more competitive energy environment, the pace
and size of business combinations among natural gas and electric utilities
increased significantly during 1996. These business combinations have
generally been initiated to provide benefits from economies of scale, to
reduce costs by the elimination of duplicate facilities and processes, and to
improve the strategic and competitive position of the surviving entity. Recent
and pending regulatory actions may serve to further facilitate more business
combinations in the energy industry. The FERC has streamlined its regulatory
review process regarding pending mergers. In addition, the SEC has recommended
legislation to conditionally repeal the Public Utility Holding Company Act of
1935 (PUHCA), to which the Company is subject, in conjunction with legislation
which would grant the various state regulatory commissions greater oversight
authority of companies currently subject to the PUHCA. If legislation to
repeal or significantly modify the provisions of the PUHCA becomes law,
certain restrictions related to diversification activities, including business
combinations, for gas and electric companies subject to the PUHCA may be
eased.

Through its actions in recent years, the Company believes it is well-
positioned to compete in an evolving and increasingly deregulated energy
marketplace. The creation in 1997 of CNG Retail Services Corporation and the
ongoing development of the energy marketing services component, in conjunction
with streamlining and restructuring of its existing distribution, transmission
and exploration and production operations, reflects the Company's proactive
approach to meeting the demands of a more competitive and dynamic business
environment.

11
<PAGE>

FERC ORDER 636
With FERC approval, CNG Transmission implemented Order 636 effective October
1, 1993, in accordance with the terms of a comprehensive stipulation and
agreement (Settlement) reached with customers and others. Accordingly, from
late 1993 through 1996 CNG Transmission direct billed transition costs to
customers and affiliates totaling $178.6 million, net of refunds. Amounts
remaining to be collected at December 31, 1996 in connection with these direct
billings are not significant.

The Settlement also allows CNG Transmission to file with the FERC for rate
increases to recover both stranded and new facilities costs related to the
implementation of Order 636. The recovery of $5.0 million of stranded costs
was included in the settlement agreement approved by the FERC November 29,
1995 regarding its December 1993 general rate filing. Certain additional
stranded costs have been deferred in accordance with the Settlement pending
CNG Transmission's general rate filing in 1997. Through 1996, CNG Transmission
has incurred $8.0 million of new facilities costs related to Order 636, and
expects to incur up to $22.0 million in additional costs for such facilities.

Based on management's current estimates, the operating environment under Order
636 and any uncertainties pertaining to the recovery of remaining transition
costs should not have a material adverse effect on the Company's financial
position, results of operations or cash flows. Reference is made to Note 2 to
the consolidated financial statements for additional information regarding
Order 636 transition costs.

STATE REGULATORY ISSUES
On September 25, 1996, Virginia Natural Gas filed an expedited rate
application with the Virginia State Corporation Commission requesting an
annual revenue increase of $13.9 million. The requested rate increase reflects
the recovery of higher operating costs and additional investment in facilities
required to serve customers on Virginia Natural Gas' system. The new rates
went into effect, subject to refund, on October 25, 1996.

On December 19, 1996, the PUCO approved the Company's merger of West Ohio Gas
into East Ohio Gas effective January 1, 1997. The merger is part of an overall
objective to improve the cost-effectiveness of the distribution operations and
to better position the Company for competing in the future energy environment.

ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment. These laws and
regulations govern both current and future operations and potentially extend
to plant sites formerly owned or operated by the subsidiaries, or their
predecessors.

Reference is made to Note 16 to the consolidated financial statements, page
41, for a detailed description of environmental matters.

Estimates of liability in the environmental area are based on current
environmental laws and regulations and existing technology. The exact nature
of environmental issues which the Company may encounter in the future cannot
be predicted. Additional environmental liabilities may result in the future as
more stringent environmental laws and regulations are implemented and as the
Company obtains more specific information about its existing sites and
production facilities. At present, no estimate of any such additional
liability, or range of liability amounts, can be made. However, the amount of
any such liabilities could be material.

EFFECTS OF INFLATION
Although inflation rates have been moderate in recent years, any change in
price levels has an effect on operating results due to the capital intensive
and regulated nature of the Company's major business components. The Company
attempts to minimize the effects of inflation through cost control,
productivity improvements and regulatory actions where appropriate.

12
<PAGE>

FINANCIAL CONDITION

DIVIDEND AND COMMON STOCK MATTERS
In December 1996, the Board of Directors continued the quarterly dividend on
the common stock at 48.5 cents a share. Total dividends paid to common
shareholders in 1996 were $183.0 million compared with $180.8 million in 1995
and $180.4 million in 1994.

During 1996, a total of 1,372,716 original issue shares were issued through
various Company-sponsored plans, including 768,531 shares acquired by
employees through the exercise of outstanding stock options.

Under the Company's stock repurchase plan, up to 4 million shares of the
outstanding common stock can be repurchased. The shares may be purchased in
the open market from time-to-time, depending on market conditions. The Company
may also acquire shares of its common stock through certain provisions of the
various stock incentive plans. The shares repurchased or acquired are held as
treasury stock and are available for reissuance for general corporate purposes
or in connection with various employee benefit plans. No treasury shares were
held by the Company at December 31, 1995. During 1996, no open market
purchases were made by the Company. The Company acquired 146,667 shares in
1996 through the provisions of its employee incentive plans at a cost of
$8,144,000, or an average price of $55.53 a share. All of these shares were
sold before year-end to the Company's benefit plans.

CAPITAL SPENDING
The current capital spending program for 1997 is estimated at $525.9 million,
a 6.1 percent decrease compared with total capital spending in 1996. The
estimated 1997 budget has been allocated as follows: distribution, $150.3
million; transmission, $82.7 million; exploration and production, $231.4
million; energy marketing services, $5.6 million; and corporate and other,
$55.9 million. The decreased level of capital expenditures anticipated for
1997 assumes slightly lower spending for exploration and production
operations, reflecting reduced spending on deep-water projects and increased
conventional drilling, both onshore and offshore. Transmission and
distribution operations expenditures will primarily be limited to spending for
enhancements and improvements in the pipeline system and related facilities.
The "corporate and other" category includes expenditures to upgrade
information systems technology, primarily to centralize and consolidate
services and financial systems, and to invest in selected international
projects.

Funds required for the capital spending program, as well as for other general
corporate purposes, are expected to be obtained principally from internal cash
generation. Although the Company does not expect to require long-term
financing in 1997 to support capital spending, it may turn to the market to
take advantage of other opportunities and to increase its financial
flexibility.

CAPITAL RESOURCES AND LIQUIDITY
Because of the seasonal nature of the regulated subsidiaries' heating
business, a substantial portion of the Company's cash receipts are realized in
the first half of the year. However, cash requirements for capital
expenditures, dividends, debt retirements and other working capital needs do
not track this pattern of cash receipts. Consequently, additional cash needs
are satisfied through the sale of short-term commercial paper notes or by the
issuance of long-term debt. As shown in the Consolidated Statement of Cash
Flows, net cash provided by operating activities was $407.2 million, $552.7
million and $631.3 million for the years 1996, 1995 and 1994, respectively.
The decline in net cash provided by operating activities in 1996 was due in
part to the deferral of purchased gas costs in excess of costs currently
recovered in rates and the payment of customer refunds during the period.
Lower gas wellhead prices and rate-related refunds made to customers were the
principal reasons for the lower cash flows from operations in 1995.

During October 1996, the Company sold $150 million of 6 7/8% Debentures Due
October 15, 2026. The Debentures are noncallable but will be redeemed at par
at the option of the holder on October 15, 2006. In December 1996, the Company
sold $150 million of 6 5/8% Debentures Due December 1, 2008. The net proceeds
from these sales were, and will be, used to finance, in part, 1996 and 1997
capital expenditures and to reduce short- and/or long-term debt.

13
<PAGE>

During December 1996, the Company called for redemption $53.125 million
principal amount of the 8 5/8% Debentures Due December 1, 2011. In connection
with the call, the Company placed funds into an irrevocable trust in December
1996 for the sole purpose of paying the principal amount and related call
premium and accrued interest. As such, the debt was removed from the
Consolidated Balance Sheet at December 31, 1996. Payment was made from the
trust on February 1, 1997. This transaction resulted in a charge amounting to
$5.0 million in 1996.

The Company has shelf registrations with the SEC for the sale of up to $50
million of debt securities. In addition, the Company anticipates filing a new
shelf registration during 1997 which would allow it to sell up to an
additional $950 million of debt and/or equity securities. The amount and
timing of any future sale of these securities will depend on capital
requirements, including financing necessary to enable the Company to pursue
asset acquisition opportunities, and financial market conditions.

The Company's embedded long-term debt cost, excluding current maturities, at
year-end 1996 was 7.27 percent, compared with 7.69 percent for 1995 and 7.74
percent for 1994. The long-term debt to capitalization ratio was 39.3 percent
at the end of 1996, and 38.7 percent and 34.5 percent at year-end 1995 and
1994, respectively. Under the provisions of one of the indentures covering the
Company's outstanding senior debenture issues, the ratio cannot exceed 60
percent. The Company's senior debentures are rated A1 by Moody's Investors
Service, AA- by Standard & Poor's, AA- by Duff and Phelps, and AA by Fitch
Investors Service.

At December 31, 1996, the Company had two short-term credit agreements with a
group of banks, for $475 million and $300 million. The Company made no
borrowings under these agreements during 1996 and there were no amounts
outstanding under any credit agreements at December 31, 1996 or 1995.

The Company utilizes short-term borrowings to finance gas inventories and
other working capital requirements. Funds from the sale of commercial paper
notes were used for these purposes in 1996, of which $374 million was
outstanding at year-end. The Company may utilize unused portions of its credit
agreements to provide support for commercial paper notes.

In the normal course of business, certain of the nonregulated subsidiaries
utilize derivatives to manage exposure to price risk in connection with the
production, purchase and sale of natural gas and oil, purchase and sale of
electricity, and for stored gas inventories. The use of derivatives exposes
the Company to market risk and credit risk. Market risk represents the
potential loss that can be caused by a change in the market value of a
particular commitment. Although the use of derivatives generally reduces
market risk exposure due to unfavorable price fluctuations, risk management
activities, while not significant, can result in the assumption of a limited
degree of price risk in certain isolated transactions. Credit risk relates to
the risk of loss that the Company would incur as a result of nonperformance by
counterparties pursuant to the terms of their contractual obligations. The
Company does not have a significant exposure to any individual counterparty to
its energy price risk management activities. Management has operating
procedures in place to evaluate market and credit risks and believes that the
Company's exposure to risks associated with derivatives is not material in
relation to the Company's financial position, results of operations or cash
flows. Reference is made to Notes 1 and 15 to the consolidated financial
statements, pages 23 and 39, regarding energy price risk management
activities.

FORWARD-LOOKING INFORMATION
Certain matters discussed in this document, including Management's Discussion
and Analysis of Financial Condition and Results of Operations, are "forward-
looking statements" intended to qualify for the safe harbors from liability
established by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as the Company "believes,"
"anticipates," "expects" or words of similar import. Similarly, statements
that describe the Company's future plans, objectives or goals are also
forward-looking statements. Such statements may address future events and
conditions concerning capital expenditures, earnings, litigation, rate and
other regulatory matters, liquidity and capital resources, and financial
accounting matters. Actual results in each instance could differ materially
from those currently anticipated in such statements, due to factors such as:
natural gas and electric industry restructuring, including

14
<PAGE>

ongoing state and federal activities; the weather; demographics; general
economic conditions and specific economic conditions in the Company's
distribution service areas; developments in the legislative, regulatory and
competitive markets in which the Company operates; and other circumstances
affecting anticipated revenues and costs.

SUMMARY OF FINANCIAL DATA
The Company's Summary of Financial Data is on page 16.

15
<PAGE>

SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------
Summary of Financial Data (Thousand $) 1996* 1995* 1994 1993 1992
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS
Gas sales................................... $2,844,709 $2,595,103 $2,402,861 $2,615,036 $1,951,545
Gas transportation, storage and other....... 949,600 712,222 633,167 569,049 569,305
Total operating revenues.................. 3,794,309 3,307,325 3,036,028 3,184,085 2,520,850
Purchased gas............................... 1,614,983 1,590,137 1,424,020 1,594,373 990,604
Transport capacity and other purchased
products................................... 346,747 153,577 107,094 79,001 73,001
Operation and maintenance................... 789,356** 739,612*** 689,575 677,666 657,825
Depreciation and amortization............... 304,171 256,636 279,317 294,648 287,840
Impairment of gas and oil producing
properties................................. -- 226,209 -- -- --
Taxes, other than income taxes.............. 191,078 191,698 192,617 181,053 169,315
Operating income before income taxes...... 547,974 149,456 343,405 357,344 342,265
Income taxes................................ 155,830 2,943 82,427 99,906 68,623
Other income-net............................ 9,304 10,760 9,694 10,531 4,749
Write-down of coal properties............... -- 31,266 -- -- --
Interest charges............................ 103,175 104,663 87,501 79,475 83,433
Income before change in accounting
principle.................................. 298,273 21,344 183,171 188,494 194,958
Cumulative effect of applying SFAS No. 109.. -- -- -- 17,422 --
Net income................................ 298,273 21,344 183,171 205,916 194,958
Per share of common stock
Income before change in accounting
principle............................... $3.16 $.23 $1.97 $2.03 $2.19
Cumulative effect of applying SFAS
No. 109................................. -- -- -- .19 --
Net income................................ $3.16 $.23 $1.97 $2.22 $2.19
Average common shares outstanding........... 94,434,336 93,246,114 92,999,693 92,808,156 89,127,805
Return on average stockholders' equity...... 14.0% 1.0% 8.4% 9.6% 9.7%
Times fixed charges earned.................. 4.76 1.21 3.53 3.95 3.41
- - --------------------------------------------------------------------------------------------------------
DIVIDENDS--CASH
Paid per common share....................... $1.94 $1.94 $1.94 $1.92 $1.90
Payout ratio.............................. 61.4% 843.5% 98.5% 86.5% 86.8%
Declared per common share................... $1.94 $1.94 $1.94 $1.925 $1.905
- - --------------------------------------------------------------------------------------------------------
ASSETS
Total assets................................ $6,000,605 $5,418,293 $5,518,673 $5,437,188 $5,158,871
Property, plant and equipment
Total investment.......................... 8,304,205 7,929,350 7,676,956 7,346,028 7,087,102
Accumulated depreciation.................. 4,226,905 4,016,945 3,650,310 3,429,760 3,212,202
Capital expenditures and acquisitions....... 560,293 439,393 437,785 342,569 441,518
- - --------------------------------------------------------------------------------------------------------
CAPITAL STRUCTURE
Total common stockholders' equity........... $2,205,152 $2,045,818 $2,184,334 $2,176,432 $2,132,838
Long-term debt.............................. 1,426,315 1,291,811 1,151,973 1,158,648 1,111,956
---------- ---------- ---------- ---------- ----------
Total capitalization...................... $3,631,467 $3,337,629 $3,336,307 $3,335,080 $3,244,794
========== ========== ========== ========== ==========
Long-term debt ratio........................ 39.3% 38.7% 34.5% 34.7% 34.3%
Shares of common stock outstanding at year-
end........................................ 94,933,631 93,591,623 93,027,847 92,933,828 92,557,017
Common stockholders' equity per share....... $23.23 $21.86 $23.48 $23.42 $23.04
- - --------------------------------------------------------------------------------------------------------
</TABLE>
*Certain amounts and ratios are not comparable with prior years due to special
charges.
**Includes special charges for workforce reduction costs of $15,195,000.
***Includes special charges for workforce reduction costs of $42,555,000.
- - --------------------------------------------------------------------------------

16
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Consolidated Natural Gas Company

In our opinion, the consolidated financial statements appearing on pages 19
through 50 of this Appendix I to the proxy statement for the 1997 annual meeting
of stockholders present fairly, in all material respects, the financial position
of Consolidated Natural Gas Company and subsidiaries (the Company) at December
31, 1996 and 1995, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

600 Grant Street
Pittsburgh, Pennsylvania 15219-9954
February 18, 1997

17
<PAGE>

(THIS PAGE WAS INTENTIONALLY LEFT BLANK)

18
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31, 1996 1995 1994
- - -------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING REVENUES
Regulated gas sales......................................... $1,752,223 $1,597,379 $1,679,235
Nonregulated gas sales...................................... 1,092,486 997,724 723,626
---------- ---------- ----------
Total gas sales........................................... 2,844,709 2,595,103 2,402,861
Gas transportation and storage.............................. 465,110 456,370 409,632
Other....................................................... 484,490 255,852 223,535
---------- ---------- ----------
Total operating revenues (Note 2)......................... 3,794,309 3,307,325 3,036,028
---------- ---------- ----------
OPERATING EXPENSES
Purchased gas............................................... 1,614,983 1,590,137 1,424,020
Transport capacity and other purchased products............. 346,747 153,577 107,094
Operation expense (Note 4).................................. 699,289 653,731 600,421
Maintenance................................................. 90,067 85,881 89,154
Depreciation and amortization (Note 3)...................... 304,171 256,636 279,317
Impairment of gas and oil producing properties (Note 3)..... -- 226,209 --
Taxes, other than income taxes.............................. 191,078 191,698 192,617
---------- ---------- ----------
Subtotal.................................................. 3,246,335 3,157,869 2,692,623
---------- ---------- ----------
Operating income before income taxes...................... 547,974 149,456 343,405
Income taxes (Note 7)....................................... 155,830 2,943 82,427
---------- ---------- ----------
Operating income.......................................... 392,144 146,513 260,978
---------- ---------- ----------
OTHER INCOME (DEDUCTIONS)
Interest revenues........................................... 2,281 9,095 5,006
Write-down of coal properties (Note 3)...................... -- (31,266) --
Other-net................................................... 7,023 1,665 4,688
---------- ---------- ----------
Total other income (deductions)........................... 9,304 (20,506) 9,694
---------- ---------- ----------
Income before interest charges............................ 401,448 126,007 270,672
---------- ---------- ----------
INTEREST CHARGES
Interest on long-term debt.................................. 101,814 95,823 88,788
Other interest expense...................................... 7,224 14,732 7,992
Allowance for funds used during construction................ (5,863) (5,892) (9,279)
---------- ---------- ----------
Total interest charges.................................... 103,175 104,663 87,501
---------- ---------- ----------
NET INCOME.................................................. $ 298,273 $ 21,344 $ 183,171
========== ========== ==========
Earnings per share of common stock........................ $3.16 $.23 $1.97
Average common shares outstanding (thousands)............. 94,434 93,246 93,000
- - -------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.

19
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At December 31, 1996 1995
- - ------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT (Note 3)
Gas utility and other plant.......................... $ 4,848,392 $ 4,710,086
Accumulated depreciation and amortization............ (1,840,129) (1,785,965)
----------- -----------
Net gas utility and other plant................... 3,008,263 2,924,121
----------- -----------
Exploration and production properties................ 3,455,813 3,219,264
Accumulated depreciation and amortization............ (2,386,776) (2,230,980)
----------- -----------
Net exploration and production properties......... 1,069,037 988,284
----------- -----------
Net property, plant and equipment................. 4,077,300 3,912,405
----------- -----------
CURRENT ASSETS
Cash and temporary cash investments.................. 44,524 36,277
Accounts receivable
Customers........................................... 647,207 522,391
Unbilled revenues and other......................... 161,525 144,253
Allowance for doubtful accounts..................... (15,167) (10,306)
Inventories, at cost
Gas stored--current portion (Note 8)................ 170,513 112,429
Materials and supplies (average cost method)........ 33,070 35,815
Unrecovered gas costs (Note 2)....................... 108,016 25,123
Deferred income taxes--current (net)................. -- 20,993
Prepayments and other current assets................. 243,333 181,686
----------- -----------
Total current assets.............................. 1,393,021 1,068,661
----------- -----------
REGULATORY AND OTHER ASSETS
Unamortized abandoned facilities (Note 9)............ 15,791 28,672
Other investments.................................... 149,858 60,939
Deferred charges and other assets (Notes 2, 4, 6, 7,
15 and 16).......................................... 364,635 347,616
----------- -----------
Total regulatory and other assets................. 530,284 437,227
----------- -----------
Total assets...................................... $ 6,000,605 $ 5,418,293
=========== ===========
- - ------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.

20
<PAGE>

- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At December 31, 1996 1995
- - ------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C>
STOCKHOLDERS' EQUITY AND LIABILITIES
CAPITALIZATION
Common stockholders' equity (Note 10)
Common stock, par value $2.75 per share
Authorized, 1996--400,000,000 shares, 1995--
200,000,000 shares
Issued, 1996--94,933,631 shares, 1995--93,591,623
shares............................................ $ 261,068 $ 257,377
Capital in excess of par value...................... 537,002 478,535
Retained earnings (Note 12)......................... 1,424,624 1,309,906
Unearned compensation............................... (17,542) --
----------- -----------
Total common stockholders' equity................. 2,205,152 2,045,818
Long-term debt (Note 13)............................. 1,426,315 1,291,811
----------- -----------
Total capitalization.............................. 3,631,467 3,337,629
----------- -----------
CURRENT LIABILITIES
Current maturities on long-term debt................. 104,000 10,250
Commercial paper (Note 14)........................... 374,000 336,000
Accounts payable..................................... 535,296 410,296
Estimated rate contingencies and refunds (Note 2).... 21,602 59,363
Amounts payable to customers......................... -- 40,315
Taxes accrued........................................ 97,336 114,335
Deferred income taxes--current (net) (Note 7)........ 36,096 --
Dividends declared................................... 46,043 45,392
Other current liabilities............................ 150,047 95,339
----------- -----------
Total current liabilities......................... 1,364,420 1,111,290
----------- -----------
DEFERRED CREDITS
Deferred income taxes (Note 7)....................... 681,334 672,266
Accumulated deferred investment tax credits.......... 28,838 31,031
Deferred credits and other liabilities (Notes 7 and
15)................................................. 294,546 266,077
----------- -----------
Total deferred credits............................ 1,004,718 969,374
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 17)
----------- -----------

Total stockholders' equity and liabilities........ $ 6,000,605 $ 5,418,293
=========== ===========
- - ------------------------------------------------------------------------------
</TABLE>

21
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1996 1995 1994
- - -------------------------------------------------------------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................................... $ 298,273 $ 21,344 $ 183,171
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization................................. 304,171 256,636 279,317
Impairment of gas and oil producing properties................ -- 226,209 --
Write-down of coal properties................................. -- 31,266 --
Deferred income taxes-net..................................... 63,230 (48,767) (60,744)
Investment tax credit......................................... (2,201) (2,198) (2,567)
Changes in current assets and current liabilities
Accounts receivable-net...................................... (139,179) (116,529) 81,896
Inventories.................................................. (55,339) 77,024 (48,566)
Unrecovered gas costs........................................ (82,893) (11,988) 5,467
Accounts payable............................................. 94,131 69,761 11,198
Estimated rate contingencies and refunds..................... (37,761) (24,041) 25,948
Amounts payable to customers................................. (40,315) (55,825) 68,538
Taxes accrued................................................ (16,999) 19,922 (17,685)
Other-net.................................................... (6,006) 13,643 (2,901)
Changes in other assets and other liabilities................. 28,305 92,553 108,219
Other-net..................................................... (252) 3,714 37
--------- --------- ---------
Net cash provided by operating activities.................... 407,165 552,724 631,328
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES
Plant construction and other property additions................. (439,489) (434,739) (416,051)
Proceeds from dispositions of property, plant and
equipment-net.................................................. 9,079 14,066 164
Cost of other investments-net................................... (87,735) (7,464) (14,902)
--------- --------- ---------
Net cash used in investing activities........................ (518,145) (428,137) (430,789)
--------- --------- ---------
CASH FLOWS PROVIDED BY (OR USED IN) FINANCING ACTIVITIES
Issuance of common stock........................................ 37,726 19,058 279
Issuance of debentures.......................................... 299,567 148,899 --
Repayments of long-term debt.................................... (68,750) -- --
Unsecured loan repayment........................................ (4,000) (4,000) --
Commercial paper borrowings (or repayments)-net................. 37,853 (103,399) (15,601)
Dividends paid.................................................. (183,020) (180,782) (180,415)
Other-net....................................................... (149) (9) (1)
--------- --------- ---------
Net cash provided by (or used in) financing activities....... 119,227 (120,233) (195,738)
--------- --------- ---------
Net increase in cash and temporary cash investments.......... 8,247 4,354 4,801
CASH AND TEMPORARY CASH INVESTMENTS AT JANUARY 1................ 36,277 31,923 27,122
--------- --------- ---------
CASH AND TEMPORARY CASH INVESTMENTS AT DECEMBER 31.............. $ 44,524 $ 36,277 $ 31,923
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for
Interest (net of amounts capitalized)......................... $ 109,602 $ 102,663 $ 91,011
Income taxes (net of refunds)................................. $ 108,742 $ 58,949 $ 154,860
Non-cash financing activities
Conversion of 7 1/4% Convertible Subordinated Debentures...... $ -- $ -- $ 3,795
Issuance of common stock under benefit plans.................. $ 25,570 $ 1,121 $ 666
- - -------------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.

22
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Methods of allocating costs to accounting periods by the subsidiary companies
subject to federal or state accounting and rate regulation may differ from
methods generally applied by nonregulated companies. However, when the
accounting allocations prescribed by regulatory authorities are used for
ratemaking, the economic effects thereof determine the application of
generally accepted accounting principles. Significant accounting policies of
Consolidated Natural Gas Company (the Parent Company) and subsidiaries (the
Company) within this framework are summarized in this Note.

USE OF ESTIMATES
The consolidated financial statements reflect certain estimates and
assumptions made by management that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses
for the periods presented.

PRINCIPLES OF CONSOLIDATION
The Parent Company owns all of the capital stock of its subsidiaries. The
consolidated financial statements represent the accounts of the Company after
the elimination of intercompany transactions.

The Company follows the equity method of accounting for investments in
partnerships and corporate joint ventures when the Company is able to
influence the financial and operating policies of the investee. For all other
investments, the cost method is applied.

REVENUE RECOGNITION
Revenues from gas sales and transportation services are recognized in the same
period in which the related gas volumes are delivered to customers. The
Company bills and recognizes sales revenues from residential and certain
commercial and industrial customers on the basis of scheduled meter readings.
In addition, revenues are recorded for estimated deliveries of gas to these
customers from the meter reading date to the end of the accounting period. For
wholesale and other commercial and industrial customers, revenues are based
upon actual deliveries of gas to the end of the period.

UNRECOVERED GAS COSTS
Where permitted by regulatory authorities, the Company defers the difference
between the cost of gas (including certain related costs) and the amount of
such costs included in current rates. The differences are accounted for as
either unrecovered gas costs or amounts payable to customers. Unrecovered
amounts are recognized as purchased gas costs in future periods when the costs
are recovered through adjusted rates.

ENERGY PRICE RISK MANAGEMENT ACTIVITIES
In the normal course of business, certain of the nonregulated subsidiaries
utilize commodity futures and option contracts and derivative financial
instruments to manage exposure to price risk in connection with the
production, purchase and sale of natural gas and oil, purchase and sale of
electricity, and for stored gas inventories. Derivative financial instruments
may also be used from time to time to manage foreign currency risk in
connection with certain contractual commitments. Exchange-traded instruments
which permit settlement by physical delivery of the commodity under contract
are not considered derivative financial instruments under SFAS No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments." The derivative financial instruments utilized by the
subsidiaries include over-the-counter (OTC) commodity price swap agreements,
OTC foreign currency swap agreements and OTC options which require settlement
in cash. Under the price swap agreements, the subsidiaries make payments to,
or receive payments from, counterparties generally based on the difference
between fixed

23
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

and variable gas and oil prices or on prices at different receipt points as
specified in the contracts. Under foreign currency swap agreements, payments
are made to, or received from, counterparties generally based on the
difference in the current foreign exchange rate. Settlement takes place under
the swap agreements on a monthly basis, and amounts received or paid are
recognized as an adjustment to gas and oil sales revenues, purchased gas
expense or transport capacity costs in that month to correspond with the
recognition of the related physical transaction.

For derivative financial instruments or exchange-traded contracts that qualify
(based on correlation to price movements of gas and oil) and are designated as
hedges, related gains or losses are deferred and subsequently recognized in
income, as revenues or expense, in the same period the hedged transaction
occurs. The value of derivatives that do not qualify for hedge accounting
treatment are marked-to-market each period, with gains and losses recognized
in the operating income of that period.

Margin accounts for open futures contracts are recorded in the Consolidated
Balance Sheet under "Prepayments and other current assets." Deferred losses or
gains are reflected in the Consolidated Balance Sheet under "Deferred charges
and other assets" and "Deferred credits and other liabilities," respectively.
Cash flows from price risk management activities are reported in the
Consolidated Statement of Cash Flows as an operating activity--consistent with
the category of the cash flows from the underlying physical transaction.

PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION

GAS UTILITY AND OTHER PLANT
The property, plant and equipment accounts are stated at the cost incurred or,
where required by regulatory authorities, "original cost." Additions and
betterments are charged to the property accounts at cost. Upon normal
retirement of a plant asset, its cost is charged to accumulated depreciation
together with costs of removal less salvage. The costs of maintenance, repairs
and replacing minor items are charged principally to expense as incurred.

EXPLORATION AND PRODUCTION PROPERTIES
CNG Producing and CNG Transmission follow the full cost method of accounting
for gas and oil producing activities prescribed by the SEC. Under the full
cost method, all costs directly associated with property acquisition,
exploration, and development activities are capitalized, with the principal
limitation that such amounts not exceed the present value of estimated future
net revenues to be derived from the production of proved gas and oil reserves.
If net capitalized costs exceed the estimated value at the end of any
quarterly period, then a permanent write-down of the assets must be recognized
in that period.

The gas producing activities of Peoples Natural Gas are subject to cost-of-
service rate regulation and are exempt from the accounting methods prescribed
by the SEC.

DEPRECIATION AND AMORTIZATION
Depreciation and amortization are recorded over the estimated service lives of
plant assets by application of the straight-line method or, in the case of gas
and oil producing properties, the unit-of-production method.

Under the full cost method of accounting, amortization is also accrued on
estimated future costs to be incurred in developing proved gas and oil
reserves, and on estimated dismantlement and abandonment costs net of
projected salvage values. However, the costs of investments in unproved
properties and major development projects are excluded from amortization until
it is determined whether or not proved reserves are attributable to such
properties.

ACCOUNTING FOR IMPAIRMENTS
Effective January 1, 1996, the Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." This standard requires

24
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

that long-lived assets and certain intangibles be reviewed for impairment when
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If the aggregate estimated future cash flows to
be derived from an asset are less than its carrying amount, an impairment must
be recognized. The Company's gas and oil producing activities that are subject
to the SEC's full cost accounting method will continue to be evaluated for
impairment under SEC Regulation S-X. SFAS No. 121 also requires the write-off
of a regulatory asset if and when it is no longer probable that future
revenues will provide for the recovery of the carrying value of the asset. The
adoption of SFAS No. 121 did not have a material effect on the Company's
financial position, results of operations or cash flows.

ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
The subsidiaries subject to cost-of-service rate regulation capitalize the
estimated costs of funds used during the construction of major projects. Under
regulatory practices, those companies are permitted to include the costs
capitalized in rate base for rate-making purposes when the completed
facilities are placed in service. The remaining subsidiaries capitalize
interest costs as part of the cost of acquiring certain assets. Generally,
interest is capitalized on unproved properties and major construction and
development projects on which amortization is not yet being recognized.
In determining the allowance for funds used during construction, the
following ranges of rates reflect the pretax cost of borrowed funds used to
finance construction expenditures: 1994--3 3/8% to 8 1/4%; 1995--5 3/4% to 8
3/8% and 1996--5 1/2% to 8 1/8%. Equity funds capitalized in those years were
not significant.

INCOME TAXES
The current provision for income taxes represents amounts paid or currently
payable. Investment tax credits which were required to be deferred by
regulatory authorities are being amortized as credits to income over the
estimated service lives of the related properties.

PENSION AND OTHER BENEFIT PROGRAMS

PENSION PROGRAM
The Company has qualified noncontributory defined benefit pension plans
covering substantially all employees. Benefits payable under the plans are
based primarily on each employee's years of service, age and base salary
during the five years prior to retirement. Net pension costs are determined by
an independent actuary, and the plans are funded on an annual basis to the
extent such funding is deductible under federal income tax regulations. Plan
assets consist primarily of equity securities, fixed income securities and
insurance contracts. The pension program also includes the payment of
supplemental pension benefits to certain retirees depending on retirement
dates, and the payment of benefits to certain retired executives under
company-sponsored nonqualified employee benefit plans. Certain of these
nonqualified benefit plans have been partially funded through contributions to
a grantor trust.

OTHER POSTRETIREMENT BENEFITS
In addition to pension plans, the Company sponsors defined benefit
postretirement plans covering both salaried and hourly employees and certain
dependents. The plans provide medical benefits as well as life insurance
coverage. These benefits are provided through insurance companies and other
providers with the annual cash outlays based on the claim experience of the
related plans.

Employees who retire on or after attaining age 55 and having rendered at least
15 years of service, or employees retiring on or after attaining age 65, are
eligible to receive benefits under the plans. The plans are both contributory
and noncontributory, depending on age, retirement date, the plan elected by
the employee, and whether the employee is covered under a collective
bargaining agreement. Most of the medical plans contain cost-sharing features
such as deductibles and coinsurance. For certain of the contributory medical
plans, retiree contributions are adjusted annually.

25
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

ENVIRONMENTAL EXPENDITURES
Environmental-related expenditures associated with current operations are
generally expensed as incurred. Expenditures for the assessment and/or
remediation of environmental conditions related to past operations are charged
to expense or are deferred pending probable recovery in future rate-making
proceedings. In this connection, a liability is recognized when the assessment
or remediation effort is probable and the future costs are estimable.
Estimated future costs for the abandonment and restoration of gas and oil
properties are accrued currently through charges to depreciation.

Claims for recovery of environmental-related costs from insurance carriers and
other third parties or through regulatory procedures are recognized separately
as assets when future recovery is deemed probable.

EARNINGS PER SHARE
Earnings per share of common stock is computed based on the weighted average
number of common shares outstanding during the period. Under the methods
prescribed by generally accepted accounting principles, the assumed exercise
of outstanding stock options and conversion of the Company's outstanding
convertible subordinated debentures are not considered to have a dilutive
effect on earnings per share.

TEMPORARY CASH INVESTMENTS
Temporary cash investments consist of short-term, highly liquid investments
that are readily convertible to cash and present no significant interest rate
risk. For purposes of the Consolidated Statement of Cash Flows, temporary cash
investments are considered to be cash equivalents.

2. RATE MATTERS

The Company accounts for its regulated operations in accordance with SFAS No.
71, "Accounting for the Effects of Certain Types of Regulation." When the
accounting allocations prescribed by regulatory authorities are used for
ratemaking, the allocation of costs among accounting periods by the Company's
regulated subsidiaries resulted in the recognition of regulatory assets and
liabilities at December 31, 1995 and 1996 as follows:
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1996 1995
- - -------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Regulatory assets:
Unrecovered gas costs (Note 1).............................. $108,016 $ 25,123
Order 636 transition costs (Note 2)......................... 27,727 37,021
Workforce reduction costs (Note 4).......................... 11,139 16,379
Other postretirement benefits (Note 6)...................... 58,966 68,026
Deferred income taxes (Note 7).............................. 101,825 105,159
Abandoned facilities (Note 9)............................... 15,791 28,672
Environmental-related expenditures (Note 16)................ 11,047 13,932
Other....................................................... 21,357 26,571
-------- --------
Total regulatory assets.................................... $355,868 $320,883
======== ========
Regulatory liabilities:
Amounts payable to customers (Note 1)....................... $ -- $ 40,315
Estimated rate contingencies and refunds (Note 2)........... 21,602 59,363
Income taxes refundable to customers-net (Note 7)........... 57,867 61,678
-------- --------
Total regulatory liabilities............................... $ 79,469 $161,356
======== ========
- - -------------------------------------------------------------------------------
</TABLE>

26
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company assesses on an ongoing basis the recoverability of costs
recognized as regulatory assets and its ability to continue to apply SFAS No.
71 to its regulated operations. In the event that all or a portion of the
Company's regulated operations ceased to meet the requirements of SFAS No. 71,
the Company would be required to assess the carrying value of certain assets
and liabilities previously subject to regulation.

ESTIMATED RATE CONTINGENCIES AND REFUNDS
Certain increases in prices by the Company and other rate-making issues are
subject to final modification in regulatory proceedings. The related
accumulated provisions pertaining to these matters were $24,239,000 and
$6,851,000 at December 31, 1995 and 1996, including interest. These amounts
are reported in the Consolidated Balance Sheet under "Estimated rate
contingencies and refunds" together with $35,124,000 and $14,751,000,
respectively, which are primarily refunds received from suppliers and
refundable to customers under regulatory procedures.

ORDER 636 TRANSITION COSTS
As approved by the FERC, CNG Transmission has billed its customers, including
certain affiliates, a total of $178.6 million, representing unrecovered
purchased gas costs and unrecovered sales-related transportation costs,
resulting from its transition to restructured services under Order 636. Of the
total amount billed by CNG Transmission to the distribution subsidiaries, the
portion remaining to be recovered from their customers at December 31, 1996 is
not material to the Company's financial position, results of operations or
cash flows.

The distribution subsidiaries have incurred or are expected to incur
additional obligations to upstream pipeline companies for transition costs
under Order 636. The total estimated liability for such costs was $37,021,000
and $27,727,000 at December 31, 1995 and 1996, respectively. Additional
amounts are likely to be accrued in the future once the pipeline companies
receive final FERC approval to recover these costs. Based on management's
current estimates, the distribution subsidiaries' portion of such costs is not
expected to be material.

Based on regulatory actions in two jurisdictions and the past rate-making
treatment of similar costs in the other jurisdictions, management believes
that the distribution subsidiaries should generally be able to pass through
all Order 636 transition costs to their customers.

3. PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION

IMPAIRMENT OF GAS AND OIL PRODUCING PROPERTIES
As described in Note 1, certain of the subsidiaries follow the full cost
method of accounting for gas and oil producing activities as prescribed by the
SEC. Under these rules, the Company recognized an impairment of its gas and
oil producing properties at March 31, 1995, due primarily to the decline in
gas wellhead prices. The non-cash charge amounted to $226,209,000 and reduced
1995 net income by $145,000,000, or $1.56 per share.

DEPRECIATION AND AMORTIZATION
Amortization of capitalized costs under the full cost method of accounting for
the Company's exploration and production operations amounted to $1.15 per Mcf
equivalent of gas and oil produced in 1994, $.98 in 1995, and $.93 in 1996.
The 1995 amount includes the effect of the write-down of the gas and oil
producing properties noted above.

27
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Costs of unproved properties capitalized under the full cost method of
accounting that are excluded from amortization at December 31, 1996, and the
years in which such excluded costs were incurred, follow:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Incurred in Years Ended December 31,
DECEMBER 31, -------------------------------------
1996 1996 1995 1994 Prior
- - --------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Property acquisition costs... $23,867 $13,762 $ 3,938 $3,153 $3,014
Exploration costs............ 21,420 11,967 6,090 1,642 1,721
Capitalized interest......... 4,134 946 1,245 992 951
------- --------- --------- -------- --------
Total...................... $49,421 $26,675 $11,273 $5,787 $5,686
======= ========= ========= ======== ========
- - --------------------------------------------------------------------------------
</TABLE>

There are no significant properties, as defined by the SEC, excluded from
amortization at December 31, 1996. As gas and oil reserves are proved through
drilling or as properties are judged to be impaired, excluded costs and any
related reserves are transferred on an ongoing, well-by-well basis into the
amortization calculation.

WRITE-DOWN AND SUBSEQUENT SALE OF COAL PROPERTIES
In early 1995, the Company initiated an evaluation of the possible disposition
of the coal reserves and related properties owned by CNG Coal Company (CNG
Coal). These reserves had been acquired in the late 1960s and 1970s to meet
expected long-term gas supply needs through coal gasification. However, due to
gas industry deregulation, excess gas supplies nationwide, and both low demand
and prices for coal, the Company concluded that it was not economically
feasible to develop such reserves, nor were these assets aligned with the
Company's longer-term strategy.

A property appraisal was completed during the second quarter of 1995 by an
independent geological firm, which indicated that a write-down was warranted.
Accordingly, at June 30, 1995, the cost of these properties was written down
resulting in a pretax charge amounting to $31,266,000. This charge reduced
1995 net income by $20,323,000, or 22 cents per share, but had no effect on
the Company's cash flow. In July 1996, CNG Coal completed the sale of its coal
properties to a subsidiary of Cyprus Amax Minerals Company. Sale proceeds
consist of an initial cash payment, cash to be received in the form of equal
annual installments, and payments to be received from the future production of
the coal reserves. The proceeds from the sale approximated the book value of
these properties.

4. WORKFORCE REDUCTION COSTS

Workforce reduction programs approved during 1995 by the Board of Directors
consisted of a voluntary early retirement program and an involuntary separation
program. The early retirement incentives included five additional years of age
and service for determining pension benefits. The early retirement program was
offered at six subsidiaries from April 1 through May 31, 1995, and at a seventh
subsidiary from July 1 through August 31, 1995. Eligible employees at each
subsidiary were required to retire before December 31, 1995. The involuntary
separation program involved severance benefit payments to affected employees.

In January 1996, unions at two subsidiaries approved the adoption of a workforce
reduction program that consisted of a voluntary early retirement program and a
voluntary separation program. The early retirement incentives were similar to
those offered at other subsidiaries during 1995. The early retirement program
was offered from February 1 through March 31, 1996, with eligible employees
retiring effective April 1, 1996. The voluntary separation program involved
severance benefit payments to affected employees. In September 1996, the Board
of Directors approved a separate voluntary early retirement program for West
Ohio Gas. The program included early retirement incentives similar to those

28
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

offered previously at other subsidiaries and was offered from October 1
through November 29, 1996, with eligible employees retiring effective December
1, 1996.

During 1995 and 1996, a total of 571 and 119 eligible employees, respectively,
elected to accept the early retirement offer and an additional 217 and 57,
respectively, were separated from the Company in conjunction with these
programs. In addition, during the fourth quarter of 1996 the Company recorded
a provision for severance and related benefits to be paid to affected
employees in connection with the Company's efforts to combine and streamline
certain business functions. As a result of these workforce reduction programs,
the Company recorded charges to "Operation expense" in the 1995 and 1996
Consolidated Statements of Income amounting to $42,555,000 and $15,195,000,
respectively. These charges reduced 1995 and 1996 net income by $25,618,000,
or 27 cents per share, and $9,855,000, or 10 cents per share, respectively.
The portion of the 1996 charges recognized in the fourth quarter amounted to
$11,816,000 and reduced net income for the quarter by $7,786,000, or 8 cents
per share. In addition, certain of the regulated subsidiaries have deferred,
as a regulatory asset, a portion of their workforce reduction costs pending
recovery in future rates. The balance of these deferrals was $11,139,000 at
December 31, 1996. The total workforce reduction costs include the impact of
curtailment accounting for the pension and postretirement benefit plans.
Details of the costs are shown in the following table.
- - -------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
-------------------------- ---------------------------
Amounts Amounts Total Amounts Amounts Total
Expensed Deferred Costs Expensed Deferred Costs
- - ---------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Pension and nonqualified
benefit plans:
Special termination
benefits.............. $ 4,436 $-- $ 4,436 $30,284 $ 6,893 $37,177
Curtailment gain-net.. (792) -- (792) (5,891) (277) (6,168)
Postretirement benefit
plans:
Special termination
benefits.............. -- -- -- 1,086 62 1,148
Curtailment loss-net.. 1,292 -- 1,292 6,008 9,656 15,664
Severance and other..... 10,259 91 10,350 11,068 45 11,113
------- --- ------- ------- ------- -------
Total................. $15,195 $91 $15,286 $42,555 $16,379 $58,934
======= === ======= ======= ======= =======
- - ---------------------------------------------------------------------------------
</TABLE>

5. PENSION COSTS

Net pension cost, as determined by an independent actuary, included the
following components:
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- - ------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Service cost--benefits earned during the
period......................................... $ 23,741 $ 23,741 $ 28,509
Interest cost on projected benefit obligation.. 67,426 62,125 59,006
Return on plan assets.......................... (205,481) (265,460) (33,363)
Net amortization and deferral.................. 86,522 162,002 (60,228)
Curtailment and special termination benefits... 3,644 24,393 --
Special voluntary retirement programs.......... 800 800 800
--------- --------- --------
Net pension cost (or credit)................. $ (23,348) $ 7,601 $ (5,276)
========= ========= ========
- - ------------------------------------------------------------------------------
</TABLE>

29
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In 1989, Peoples Natural Gas offered special retirement incentives to certain
salaried and hourly employees. The additional pension payments resulting from
these incentives are being paid from the assets of the applicable pension
plans. The estimated cost of these additional benefits, amounting to
approximately $8,000,000, was deferred and is being amortized to expense over
a 10-year period which began October 1, 1990, in accordance with the rate-
making treatment approved by the Pennsylvania Public Utility Commission.

The following table sets forth the funded status of the plans, as determined
by an independent actuary, at December 31, 1995 and 1996:
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Plans Where
Plans Where Assets Accumulated Benefits
Exceed Accumulated Benefits Exceed Assets
---------------------------- ----------------------
December 31, 1996 1995 1996 1995
- - -------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Actuarial present value
of:
Vested benefit
obligation............ $ 708,224 $ 711,644 $ 22,111 $ 25,203
============= ============= ========== ==========
Accumulated benefit
obligation............ $ 737,868 $ 740,890 $ 26,627 $ 28,858
============= ============= ========== ==========
Projected benefit
obligation............ $ 927,531 $ 952,260 $ 32,420 $ 36,044
Plan assets at fair
value................... 1,539,039 1,395,778 -- --
------------- ------------- ---------- ----------
Plan assets in excess
of (or less than)
projected benefit
obligation............ 611,508 443,518 (32,420) (36,044)
Unrecognized net loss (or
gain)................... (501,869) (354,370) (2,076) 1,358
Unrecognized net
obligation (or asset)... (67,980) (77,300) 19,864 21,396
Unrecognized prior
service cost............ 5,227 5,634 1,617 2,341
Recognition of minimum
liability............... -- -- (13,612) (17,909)
------------- ------------- ---------- ----------
Prepaid pension cost
(or pension liability). $ 46,886 $ 17,482 $ (26,627) $ (28,858)
============= ============= ========== ==========
- - -------------------------------------------------------------------------------
</TABLE>
The projected benefit obligation at December 31, 1995 and 1996, was determined
using an annual discount rate of 7.0% and 7.5%, respectively, and an average
assumed annual rate of salary increase of 5.5%. The expected long-term rate of
return on plan assets was 8.0% per annum at December 31, 1995 and 9.0% at
December 31, 1996.

The Company applied the provisions of SFAS No. 87 to certain nonqualified
employee benefit plans effective July 1, 1995. The minimum liability
recognized relating to both the Company's nonqualified employee benefit and
supplemental pension plans was $17,909,000 and $13,612,000 at December 31,
1995 and 1996. The related intangible asset recognized as of those dates
amounted to $15,605,000 and $11,486,000, respectively. These amounts are
included in the Consolidated Balance Sheet under "Deferred credits and other
liabilities" and "Deferred charges and other assets." Adjustments of the
minimum liability and intangible asset due to changes in assumptions or the
financial status of the plans resulted in a charge to retained earnings of
$262,000 at December 31, 1995, and a credit to retained earnings of $116,000
at December 31, 1996.

30
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. OTHER POSTRETIREMENT BENEFITS

Net periodic postretirement benefit cost, as determined by an independent
actuary, included the following components:
<TABLE>
- - -------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31, 1996 1995 1994
- - -------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Service cost--benefits attributed to service during
the period.......................................... $11,940 $11,549 $12,708
Interest cost on accumulated postretirement benefit
obligation.......................................... 26,450 28,017 24,380
Return on plan assets............................... (645) (145) (28)
Amortization of transition obligation............... 11,801 14,420 14,420
Curtailment and special termination benefits........ 1,292 7,094 --
Net amortization and deferral....................... 2,283 380 4
------- ------- -------
Net periodic postretirement benefit cost.......... $53,121 $61,315 $51,484
======= ======= =======
- - -------------------------------------------------------------------------------
</TABLE>
The following table reconciles the plans' combined funded status, as
determined by an independent actuary, with amounts included in the
Consolidated Balance Sheet at December 31, 1995 and 1996:
<TABLE>
- - -------------------------------------------------------------------------------
<CAPTION>
December 31, 1996 1995
- - -------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................... $ 280,593 $ 271,209
Fully eligible active plan participants................ 16,882 25,475
Other active plan participants......................... 80,960 88,235
--------- ---------
Total accumulated postretirement benefit obligation.. 378,435 384,919
Plan assets at fair value................................ 53,153 12,127
--------- ---------
Accumulated postretirement benefit obligation in excess
of plan assets......................................... (325,282) (372,792)
Unrecognized prior service cost.......................... (6,591) (20,887)
Unrecognized net loss.................................... 54,088 64,166
Unrecognized transition obligation....................... 188,248 230,853
--------- ---------
Accrued postretirement benefit liability............... $ (89,537) $ (98,660)
========= =========
- - -------------------------------------------------------------------------------
</TABLE>
As permitted, the Company elected to amortize the accumulated postretirement
benefit obligation existing at January 1, 1993 (transition obligation) over a
20-year period. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation at December 31, 1995 and 1996,
was 7.0% and 7.5%, respectively. The average assumed annual rate of salary
increase for the applicable life insurance plans was 5.0% for 1995 and 5.5%
for 1996.

The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for the medical plans is 8.0% for 1997,
declining gradually to 5.0% in 2003 and remaining at that level thereafter.
The health care cost trend rate assumption has a significant effect on the
amounts reported. If the health care cost trend rate were increased by 1% in
each year, the accumulated postretirement benefit obligation as of December
31, 1996, would be increased by $36.4 million. A 1% change would also increase
the aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1996 by $5.4 million.

The majority of the estimated postretirement benefit costs and the transition
obligation is attributable to the rate-regulated subsidiaries. Pending the
expected recovery of SFAS No. 106 costs and related deferrals in regulatory
proceedings, these subsidiaries have deferred the differences between SFAS
No. 106 costs and amounts included in rates. In general, the rate-regulated
subsidiaries have obtained

31
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
approval for recovery in rates from their respective regulatory commissions
for the increased level of expense resulting from SFAS No. 106. The amount of
SFAS No. 106 costs deferred at December 31, 1995 and 1996, was $68,026,000 and
$58,966,000, respectively, which is included in the Consolidated Balance Sheet
under "Deferred charges and other assets."

The FERC and certain state regulatory authorities have indicated that when
SFAS No. 106 costs are recovered in rates, amounts collected must be deposited
in irrevocable trust funds dedicated for the sole purpose of paying
postretirement benefits. Accordingly, four subsidiaries fund postretirement
benefit costs via voluntary employees' beneficiary associations (VEBAs). The
remaining subsidiaries do not prefund postretirement benefit costs, but rather
pay claims as presented. Assets held by the VEBAs consist primarily of short-
term fixed income securities.

7. INCOME TAXES

"Income taxes" in the Consolidated Statement of Income include the following:
<TABLE>
- - --------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31, 1996 1995 1994
- - --------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Current provision
Federal......................................... $ 80,962 $ 44,705 $126,362
State........................................... 13,839 9,203 19,376
Deferred income taxes-net
Federal......................................... 60,758 (47,146) (50,443)
State........................................... 2,472 (1,621) (10,301)
Investment tax credit............................. (2,201) (2,198) (2,567)
-------- -------- --------
Total........................................... $155,830 $ 2,943 $ 82,427
======== ======== ========
- - --------------------------------------------------------------------------------
</TABLE>
Income taxes differed from the amounts shown in the next table that were
computed by applying the statutory federal income tax rate of 35% to reported
income before taxes. The reasons for the differences follow:
<TABLE>
- - -------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31, 1996 1995 1994
- - -------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Income before taxes............................... $454,103 $24,287 $265,598
======== ======= ========
Computed "expected" tax expense................... $158,936 $ 8,500 $ 92,959
Increases (or reductions) in tax resulting from:
Production tax credit........................... (9,344) (8,472) (7,987)
Investment tax credit........................... (2,201) (2,198) (2,567)
State income taxes.............................. 10,602 4,928 5,899
Miscellaneous................................... (2,163) 185 (5,877)
-------- ------- --------
Total income taxes............................ $155,830 $ 2,943 $ 82,427
======== ======= ========
Effective tax rate.............................. 34.3% 12.1% 31.0%
- - -------------------------------------------------------------------------------
</TABLE>
The current and noncurrent deferred income taxes reported in the Consolidated
Balance Sheet at December 31, 1996, represent the net expected future tax
consequences attributable to temporary differences between the carrying
amounts of nontax assets and liabilities and their tax bases. These temporary
differences and the related tax effect were as follows:

32
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
- - -------------------------------------------------------------------------------
<CAPTION>
1996
----------------------------
Deferred Deferred income
December 31, income taxes taxes--current
- - -------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Deferred tax liabilities:
Excess of tax over book depreciation............ $516,241 $ --
Exploration and intangible well drilling costs.. 215,415 --
Unrecovered gas costs........................... -- 38,863
Other........................................... 76,906 --
-------- -------
Total liabilities............................. 808,562 38,863
-------- -------
Deferred tax assets:
Tax basis step-up in connection with acquisition
of subsidiary................................... 19,170 --
Deferred investment tax credits................. 17,114 --
Overheads capitalized for tax purposes.......... 13,747 --
Supplier and other refunds...................... -- 277
Other........................................... 77,197 2,490
Valuation allowance............................. -- --
-------- -------
Total assets.................................. 127,228 2,767
-------- -------
Total deferred income taxes................... $681,334 $36,096
======== =======
- - -------------------------------------------------------------------------------
</TABLE>
A regulatory liability amounting to $57,867,000 has been recorded representing
the reduction to previously recorded deferred income taxes associated with
rate-regulated activities that are expected to be refundable to customers, net
of certain taxes collectible from customers. Also, a regulatory asset
corresponding to the recognition of additional deferred income taxes not
previously recorded because of past rate-making practices amounting to
$101,825,000 has been recorded at December 31, 1996. These amounts are
included in the Consolidated Balance Sheet under "Deferred credits and other
liabilities" and "Deferred charges and other assets," respectively.

8. GAS STORED

The distribution subsidiaries, except Virginia Natural Gas, value their stored
gas inventory under the LIFO method. Based upon the average price of gas
purchased during 1996, the current cost of replacing the inventory of "Gas
stored--current portion" exceeded the amount stated on a LIFO basis by
approximately $196,474,000 at December 31, 1996. Virginia Natural Gas and CNG
Energy Services value their stored gas inventory under the weighted average
cost method.

A portion of gas in underground storage used as a pressure base and for
operational balancing is included in "Property, Plant and Equipment" in the
amounts of $126,393,000 and $126,366,000 at December 31, 1995 and 1996,
respectively.

9. UNAMORTIZED ABANDONED FACILITIES

In 1988, Consolidated LNG received FERC approval for the abandonment of its
interest in liquefied natural gas facilities at Cove Point, Maryland. In
connection with the abandonment, Consolidated LNG recorded a deferred asset in
accordance with the provisions of SFAS No. 90, "Accounting for Abandonments
and Disallowances of Plant Costs." This deferred asset, which represents the
present value of allowable costs expected to be recovered, is being amortized
over the 10-year recovery period which began March 1, 1988, as prescribed in
the FERC order.

33
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. COMMON STOCKHOLDERS' EQUITY

A summary of the changes in stockholders' equity follows:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Capital in Excess
Issued of Par Value Treasury Stock
------------------ -------------------------- -----------------
Number Value Retained Unearned Number
of Shares at Par Paid-In Other Total Earnings Compensation of Shares Cost
- - -------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... 92,934 $255,568 $413,801 $40,280 $454,081 $1,466,783 $ -- -- $ --
Net income.............. -- -- -- -- -- 183,171 -- -- --
Cash dividends declared
Common stock ($1.94 per
share)................. -- -- -- -- -- (180,461) -- -- --
Common stock issued
Conversion of
debentures............ 70 193 3,669 -- 3,669 -- -- -- --
Stock awards-net....... 16 45 621 -- 621 -- -- -- --
Stock options.......... 8 21 258 -- 258 -- -- -- --
Purchase of treasury
stock.................. -- -- -- -- -- -- -- (6) (257)
Sale of treasury stock.. -- -- (1) -- (1) -- -- 6 257
Pension liability
adjustment............. -- -- -- -- -- 386 -- -- --
------ -------- -------- ------- -------- ---------- --------- ---- -------
Balance at December 31,
1994................... 93,028 255,827 418,348 40,280 458,628 1,469,879 -- -- --
Net income.............. -- -- -- -- -- 21,344 -- -- --
Cash dividends declared
Common stock ($1.94 per
share)................ -- -- -- -- -- (181,055) -- -- --
Common stock issued
Stock options.......... 217 596 7,453 -- 7,453 -- -- -- --
System Thrift Plans.... 213 586 7,586 -- 7,586 -- -- -- --
DRP*................... 104 287 3,837 -- 3,837 -- -- -- --
Stock awards-net....... 30 81 1,040 -- 1,040 -- -- -- --
Purchase of treasury
stock.................. -- -- -- -- -- -- -- (17) (634)
Sale of treasury stock.. -- -- (9) -- (9) -- -- 17 634
Pension liability
adjustment
(Note 5)............... -- -- -- -- -- (262) -- -- --
------ -------- -------- ------- -------- ---------- --------- ---- -------
Balance at December 31,
1995................... 93,592 257,377 438,255 40,280 478,535 1,309,906 -- -- --
Net income.............. -- -- -- -- -- 298,273 -- -- --
Cash dividends declared
Common stock ($1.94 per
share)................ -- -- -- -- -- (183,671) -- -- --
Common stock issued
Stock options.......... 769 2,113 29,662 -- 29,662 -- -- -- --
Performance shares-net. 378 1,040 16,336 -- 16,336 -- (17,376) -- --
Stock awards-net....... 98 270 4,404 -- 4,404 -- (4,560) -- --
DRP*................... 97 268 4,688 -- 4,688 -- -- -- --
Amortization and
adjustment............ -- -- 3,520 -- 3,520 -- 4,394 -- --
Purchase of treasury
stock.................. -- -- -- -- -- -- -- (147) (8,144)
Sale of treasury stock
and other.............. -- -- (143) -- (143) -- -- 147 8,144
Pension liability
adjustment
(Note 5)............... -- -- -- -- -- 116 -- -- --
------ -------- -------- ------- -------- ---------- --------- ---- -------
Balance at December 31,
1996................... 94,934 $261,068 $496,722 $40,280 $537,002 $1,424,624 $(17,542) -- $ --
====== ======== ======== ======= ======== ========== ========= ==== =======
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Dividend Reinvestment Plan.

34
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

SHAREHOLDER RIGHTS PLAN
During 1995, the Board of Directors adopted a shareholder rights plan and on
January 23, 1996, declared a dividend of one right (Right) for each share of
common stock outstanding at the close of business on February 28, 1996. Each
Right would entitle the holder to purchase from the Company one-half of one
share of common stock at a price of $175 per share ($87.50 per half-share),
subject to adjustment (Purchase Price), if certain conditions are met in
connection with a possible acquisition of the common stock of the Company by a
third party. If the Rights become exercisable, each holder may exercise a
Right and receive common stock (or, in certain cases, cash, property or other
securities) of the Company or common stock of the acquiring company having a
value equal to twice the Right's then current Purchase Price.

Also, under certain conditions, the Board of Directors may exchange the
Rights, in whole or in part, at an exchange ratio of one share of common stock
(and/or other securities, cash or other assets having the same value as a
share of common stock) per Right, subject to adjustment, or may redeem the
Rights in whole at a price of $0.01 per Right. Until a Right is exercised or
exchanged for common stock, the holder, as such, is not a stockholder of the
Company. Unless earlier exercised or redeemed, the Rights will expire on
February 28, 2006.

UNISSUED SHARES
At December 31, 1996, 305,066,369 shares of common stock were unissued. Of
these, a total of 14,738,762 shares have been registered with the SEC for
possible issuance under various benefit plans. Shares acquired by these plans
can consist of original issue shares, treasury shares or shares purchased in
the open market. In addition, 2,001,512 shares have been registered with the
SEC for possible issuance to shareholders under the Dividend Reinvestment Plan
and 4,559,353 shares are registered for issuance upon conversion of the
Company's convertible subordinated debentures.

TREASURY STOCK
Under a stock repurchase plan approved by the Board of Directors, the Company
can purchase in the open market up to 4,000,000 shares of its common stock.
The Company may also acquire shares of its common stock through certain
provisions of the Company's various stock incentive plans. Shares repurchased
or acquired are held as treasury stock and are available for reissuance for
general corporate purposes or in connection with various employee benefit
plans. When treasury shares are reissued, the difference between the market
value at reissuance and the cost of shares is reflected in "Capital in excess
of par value." The cost of any shares held as treasury stock is shown as a
reduction in common stockholders' equity in the Consolidated Balance Sheet. No
treasury shares were held at December 31, 1995 or 1996.

1991 STOCK INCENTIVE PLAN
The 1991 Stock Incentive Plan (1991 Plan) provides for the granting of stock
awards, stock options and other stock-based awards to employees of the
Company. The maximum number of shares available for issuance in each calendar
year is determined in accordance with a formula contained in the plan. During
1996, 4,036,272 shares were available for issuance under the plan.

Stock awards granted under the plan may be in the form of restricted stock or
deferred stock. Shares issued as restricted stock awards are held by the
Company until the attached restrictions lapse. Deferred stock awards generally
consist of a right to receive shares at the end of specified deferral periods.
The market value of the stock award on the date granted is recorded as
compensation expense over the applicable restriction or deferral period.

Stock options granted under the plan allow the purchase of common shares at a
price not less than fair market value at the date of grant and not less than
par value. The options generally are exercisable in

35
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

four equal annual installments commencing with the second anniversary of the
grant and expire after 10 years from the date of grant.

Stock appreciation rights may also be granted, either alone or in tandem with
stock options. These rights permit the recipient to receive, upon exercise,
the excess of the fair market value of a share on the date of exercise over
the grant price. The grant price is generally the fair market value of the
stock on the date of grant. As of December 31, 1996, no stock appreciation
rights have been granted under the plan.

The 1991 Plan also provides for the granting of performance awards, dividend
equivalents, or other awards which may be based on, or related to, shares of
the Company's common stock. The granting of stock awards constitutes a non-
cash financing activity of the Company.

1995 EMPLOYEE STOCK INCENTIVE PLAN
The 1995 Employee Stock Incentive Plan (1995 Plan) was established in
conjunction with the Long-Term Strategic Incentive Program described below.
This plan provides for the granting of stock-based awards to certain key
employees similar to those granted under the 1991 Plan. During 1996, 4,000,000
shares were available for issuance under the plan.

LONG-TERM STRATEGIC INCENTIVE PROGRAM
In December 1995, the Board of Directors approved the Long-Term Strategic
Incentive Program. Grants under this program, consisting of performance
restricted stock awards (performance shares) and stock options, are expected
to be made every three years. Performance shares will vest contingent upon
attainment of certain strategic business results over a three-year period.
Stock options granted under this program vest after three years and will be
exercisable for one day. The exercise period can be extended from the vesting
date up to 10 years from the grant date for all or a portion of the options if
certain strategic business results are attained over the vesting period.
Awards under this program utilize shares available under both the 1991 Plan
and the 1995 Plan.

1997 STOCK INCENTIVE PLAN
The 1997 Stock Incentive Plan (1997 Plan) will be submitted for approval by
the Company's shareholders at the May 1997 Annual Meeting. The provisions of
the 1997 Plan will be similar to those of the 1991 Plan. During 1997, the
total number of shares expected to be available for grant under the 1997 Plan
will be 5,248,469 shares.

LONG-TERM INCENTIVE PLAN
The Long-Term Incentive Plan, which provided for the issuance of common shares
to key employees as either restricted stock awards or stock options,
terminated by its terms on November 9, 1991. However, the provisions of the
plan continue with respect to any restricted stock awards and stock options
granted prior to the termination date. The terms and conditions of the options
granted under this plan are similar to those under the 1991 Plan.

ACCOUNTING FOR STOCK AWARDS AND STOCK OPTIONS
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." As permitted by the standard, the Company has elected to
continue to follow existing accounting guidance, Accounting Principles Board
Opinion No. 25 and related interpretations (APB No. 25), for stock-based
compensation. However, SFAS No. 123 requires companies electing to follow
existing accounting rules to disclose in a note the pro forma effects as if
the fair value based method of accounting had been applied. The Company
recorded compensation expense of $2,154,000, $751,000 and $8,650,000 for the
years ended December 31, 1994, 1995 and 1996, respectively, in connection with
its performance shares, restricted stock and other stock compensation awards.
In accordance with APB No. 25, no compensation expense has been recognized for
the Company's stock options.

36
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of the Company's stock option activity under the plans described
above for the years ended December 31, 1994 through 1996, follows:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted Average
Number Option Price
of Shares Per Share
- - --------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Shares under option:
At January 1, 1994............................ 1,962 $41.90
Granted....................................... 651 $43.98
Exercised..................................... (8) $36.51
Cancelled..................................... (48) $42.89
-----
At December 31, 1994.......................... 2,557 $42.43

Granted....................................... 1,078 $37.32
Exercised..................................... (217) $35.88
Cancelled..................................... (470) $41.14
-----
At December 31, 1995.......................... 2,948 $41.25

Granted*...................................... 3,534 $45.53
Exercised..................................... (769) $41.37
Cancelled*.................................... (196) $43.13
-----
At December 31, 1996.......................... 5,517 $43.90
=====
</TABLE>
*Includes 3,006,000 options granted and 65,000 options cancelled in connection
with the Long-Term Strategic Incentive Program.

Options were exercisable for the purchase of 691,421 shares, 1,048,064 shares,
and 673,305 shares at December 31, 1994, 1995 and 1996, respectively.
Effective January 2, 1997, additional options for the purchase of 515,000
shares were granted to eligible employees.
- - --------------------------------------------------------------------------------

The following table summarizes information about stock options outstanding at
December 31, 1996.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------------
Weighted Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- - ------------------------------------------------------------------------------------------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C>
$32.50 --$40 1,080 7.39 YRS. $36.86 177 $36.27
$40.125--$50 4,040 8.43 YRS. $44.83 370 $44.72
$50.125--$56.875 397 7.43 YRS. $52.70 126 $50.66
- - ------------------------------------------------------------------------------------------------------
</TABLE>

The weighted average fair value of stock options granted during each of the
years 1995 and 1996 was $5.50 and $5.84, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted average assumptions for grants in
1995 and 1996, respectively: dividend yield of 5.0 percent and 4.3 percent,
expected volatility of 19.2 percent and 17.5 percent, risk-free interest rates
of 6.9 percent and 5.4 percent, and expected lives of 4.9 years for both
years. If compensation expense for the Company's stock options granted in 1995
and 1996 had been determined based on the fair value at the grant dates for
such awards in accordance with SFAS No. 123, the effect on the Company's net
income and earnings per share for each of the years ended December 31, 1995
and 1996 would have been immaterial.

37
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company granted stock awards totaling 17,000 shares in 1994, 34,000 shares
in 1995, and 103,000 shares in 1996 with weighted average market prices per
share on award dates of $41.35, $39.15, and $47.43, respectively. In addition,
404,000 performance shares were issued during 1996 at a weighted average
market price of $45.87 per share.

11. PREFERRED STOCK

During 1996, amendments to the Company's Certificate of Incorporation were
approved to eliminate the existing authorized shares of cumulative preferred
stock and to authorize a new class of preferred stock. Accordingly, the
existing 2,500,000 authorized shares of preferred stock of $100 par value were
eliminated and replaced with 5,000,000 authorized shares of a new class of
preferred stock of $100 par value. There were no shares of preferred stock
issued or outstanding at December 31, 1995 or 1996.

12. DIVIDEND RESTRICTIONS

One of the Company's indentures relating to senior debenture issues contains
restrictions on dividend payments by the Company and acquisitions of its
capital stock. Under the indenture provisions, $613,562,000 of consolidated
retained earnings was free from such restrictions at December 31, 1996. The
indenture also imposes dividend limitations on the subsidiaries, but at
December 31, 1996, these limitations did not restrict their ability to pay
dividends to the Company.

13. LONG-TERM DEBT

Long-term debt, excluding current maturities, follows:
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1996 1995
- - -------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Debentures
6 5/8%, Due December 1, 2008.......................... $ 150,000 $ --
6 7/8%, Due October 15, 2026.......................... 150,000 --
7 3/8%, Due April 1, 2005............................. 150,000 150,000
6 5/8%, Due December 1, 2013.......................... 150,000 150,000
5 3/4%, Due August 1, 2003............................ 150,000 150,000
5 7/8%, Due October 1, 1998........................... 150,000 150,000
8 3/4%, Due October 1, 2019........................... 150,000 150,000
8 3/4%, Due June 1, 1999.............................. 100,000 100,000
9 3/8%, Due February 1, 1997.......................... -- 100,000
8 5/8%, Due December 1, 2011.......................... 31,250 93,750
Unamortized debt discount, less premium............... (7,429) (8,304)
Convertible Subordinated Debentures
7 1/4%, Due December 15, 2015......................... 246,205 246,205
Unamortized debt discount............................. (1,711) (1,840)
9.94% Unsecured loan due January 1, 1999................ 8,000 12,000
---------- ----------
Total................................................. $1,426,315 $1,291,811
========== ==========
- - -------------------------------------------------------------------------------
</TABLE>
The aggregate principal amounts of the Company's debentures maturing in the
years 1997 through 2001 are: $100,000,000; $150,000,000; $107,125,000;
$15,830,000 and $19,625,000.

38
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Discounts and premiums and the expenses incurred in connection with the
issuance of debentures are being amortized on a basis which will equitably
distribute the amount to "Interest on long-term debt" over the life of each
debenture issue.

During the 1996 fourth quarter, the Company called for redemption $53,125,000
principal amount of the 8 5/8% Debentures Due December 1, 2011. In connection
with the call, the Company placed funds into an irrevocable trust in December
1996 for the sole purpose of paying the principal amount and related call
premium and accrued interest. As such, the debt has been removed from the
Consolidated Balance Sheet at December 31, 1996. Payment was made from the
trust on February 1, 1997. This transaction resulted in a 1996 charge of
$5,012,000.

The Company's 7 1/4% Convertible Subordinated Debentures, which mature on
December 15, 2015, are convertible into shares of the Company's common stock
at any time prior to maturity at an initial conversion price of $54 per share.
Under additional terms of the issue, on December 15, 2000, the Company is
obligated to purchase, at the option of the holder, any debenture then
outstanding for 100% of the principal amount plus accrued interest.

The 9.94% unsecured loan due January 1, 1999, is an obligation of Virginia
Natural Gas. This $20,000,000 loan, which is being repaid in five annual
installments of $4,000,000 each beginning January 1, 1995, has been guaranteed
by the Company.

14. SHORT-TERM BORROWINGS

The weighted average interest rate on the Company's commercial paper notes
outstanding at December 31, 1995 and 1996, was 5.79% and 5.70%, respectively.

The Company has a $475,000,000 credit agreement and a $300,000,000 credit
agreement with a group of banks. Borrowings under these agreements are in the
form of revolving credits and may, at the option of the Company, be structured
either as syndicated loans by a group of participating banks or money market
loans by individual banks. The loans may be borrowed, paid or repaid and
reborrowed on a few days notice. Varying interest rate options are available
for syndicated loans, while the interest rate on money market loans is
determined from quotes rendered by the participating banks. These agreements
may be used for general corporate purposes, including the support of
commercial paper notes. The agreements are currently scheduled to expire on
June 27, 1997; however, the Company expects that the agreements will be
renewed or replaced by comparable agreements. A facility fee is charged under
the agreements but is not considered significant. There were no borrowings
under these agreements at December 31, 1996.

15. FINANCIAL INSTRUMENTS

FAIR VALUES
The estimated fair value of the Company's long-term debt, including current
maturities, was as follows at December 31, 1995 and 1996:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
Carrying Carrying
December 31, Amount Fair Value Amount Fair Value
- - --------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Long-term debt...................... $1,539,455 $1,563,440 $1,312,205 $1,368,002
- - --------------------------------------------------------------------------------
</TABLE>
The fair values were estimated based upon closing transactions and/or
quotations for the Company's debentures as of those dates. Temporary cash
investments and commercial paper notes are stated at amounts which approximate
fair value due to the short maturities of those financial instruments.

39
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

DERIVATIVE FINANCIAL INSTRUMENTS AND ENERGY PRICE RISK MANAGEMENT ACTIVITIES

FUTURES AND OPTIONS CONTRACTS
The Company's energy price risk management activities include exchange-traded
futures and options contracts which can be settled through the purchase or
delivery of commodities. CNG Producing uses futures and options to manage
commodity price risk in connection with the production and sale of crude oil,
while CNG Energy Services uses such instruments to manage similar risk
regarding gas and electricity purchase and sale commitments and stored gas
inventories.

At December 31, 1996, CNG Producing's price risk management activities
included crude oil futures contracts under hedging activities maturing through
December 1997 covering 444,000 barrels of oil. Also at December 31, 1996, CNG
Energy Services had natural gas futures contracts related to gas purchase and
sale commitments and gas storage inventory covering 2.5 Bcf of gas on a net
basis maturing through December 1998.

For contracts used by the Company that qualify and have been designated as
hedges, any gains or losses resulting from market price changes are expected
to be generally offset by the related physical transaction. The Company's net
unrealized gain related to futures contracts was approximately $2,300,000 at
December 31, 1996. The net unrealized loss at December 31, 1996, related to
options contracts was not material to the Company's financial position,
results of operations or cash flows.

SWAP AGREEMENTS
In addition to exchange-traded futures and options contracts, the nonregulated
subsidiaries enter into OTC price swap agreements to manage their exposure to
commodity price risk under existing sales commitments. At December 31, 1996,
CNG Energy Services had swap agreements of varying duration outstanding with
several counterparties to exchange monthly payments on net notional quantities
of 33.5 Bcf of gas over the ensuing 2 years. In addition, CNG Producing
Company had one swap outstanding at December 31, 1996, to exchange payments on
net notional quantities of approximately 1 million barrels of oil through
December 1997. Net notional quantities or amounts do not represent the
quantities or amounts exchanged by the parties and, thus, are not a measure of
the exposure of the Company through its use of derivatives. The amounts
exchanged are calculated on the basis of monthly notional quantities and other
terms of the agreements. The Company's net unrealized loss related to these
swap agreements was approximately $1,100,000 at December 31, 1996. Profits
expected on anticipated sales related to the hedged transactions should
generally offset the estimated unrealized losses on the swap agreements.

CNG Energy Services also has a 10-year foreign currency swap agreement to
manage foreign exchange rate risk in connection with the payment of demand
charges for pipeline capacity in Canada. The aggregate notional amount
underlying this swap agreement was approximately $64,500,000 at December 31,
1996. The unrealized gain related to the foreign currency swap agreement was
approximately $7,300,000 at December 31, 1996.

MARKET AND CREDIT RISK
The use of derivatives exposes the Company to market risk and credit risk.
Market risk represents the potential loss that can be caused by a change in
the market value of a particular commitment. Although the use of derivatives
generally reduces market risk exposure due to unfavorable price fluctuations,
such risk management activities, while not significant, can also result in the
assumption of a limited degree of price risk in certain isolated transactions.
Credit risk relates to the risk of loss that the Company would incur as a
result of nonperformance by counterparties pursuant to the terms of their
contractual obligations. The Company does not have a significant exposure to
any individual counterparty to its energy price risk management activities.
Management has operating procedures in place to evaluate market and credit
risks and believes that the Company's exposure to risks associated with
derivatives is not material in relation to the Company's financial position,
results of operations or cash flows.

40
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. ENVIRONMENTAL MATTERS

The Company is subject to various federal, state and local laws and
regulations relating to the protection of the environment. These laws and
regulations govern both current and future operations and potentially extend
to plant sites formerly owned or operated by the subsidiaries, or their
predecessors.

The Company has taken a proactive position with respect to environmental
concerns. As part of normal business operations, subsidiaries periodically
monitor their properties and facilities to identify and resolve potential
environmental matters, and the Company conducts general environmental surveys
on a continuing basis at its operating facilities to monitor compliance with
environmental laws and regulations. As part of this process, voluntary surveys
at subsidiary sites have been conducted to determine the extent of any
possible soil contamination due to hazardous substances, such as mercury, and
when contamination has been discovered remediation efforts are undertaken.
Further, on August 16, 1990, CNG Transmission entered into a Consent Order and
Agreement with the Commonwealth of Pennsylvania Department of Environmental
Resources (DER) in which CNG Transmission has agreed with the DER's
determination of certain violations of the Pennsylvania Solid Waste Management
Act, the Pennsylvania Clean Streams Law and the rules and regulations
promulgated thereunder. No civil penalties have been assessed as of this date.
Pursuant to the Order and Agreement, CNG Transmission is performing sampling,
testing and analysis, and conducting a program of remediation at some of its
Pennsylvania facilities. Total remediation costs in connection with these
sites and the Order and Agreement are not expected to be material with respect
to the Company's financial position, results of operations or cash flows.
Based on current information, the Company has recognized a gross estimated
liability amounting to $15,220,000 at December 31, 1996, for future costs
expected to be incurred to remediate or mitigate hazardous substances at these
sites and at facilities covered by the Order and Agreement.

Inasmuch as certain environmental-related expenditures are expected to be
recoverable in future regulatory proceedings, a regulatory asset amounting to
$11,047,000 at December 31, 1996, is included in the Consolidated Balance
Sheet under the caption "Deferred charges and other assets." Also, uncontested
claims amounting to $2,375,000 at December 31, 1996, were recognized for
environmental-related costs probable for recovery through joint-interest
operating agreements.

The total amounts included in operating expenses for remediation and other
environmental-related costs, and the components of such costs, are as follows:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- - --------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Recurring costs for ongoing operations.................... $4,174 $3,094 $3,479
Mandated remediation and other compliance costs........... (419) 2,307 214
Voluntary remediation costs............................... 2,705 1,630 507
Other..................................................... 3 79 28
------ ------ ------
Total................................................... $6,463 $7,110 $4,228
====== ====== ======
- - --------------------------------------------------------------------------------
</TABLE>
CNG Transmission and certain of the distribution subsidiaries are subject to
the Federal Clean Air Act (Clean Air Act) and the Federal Clean Air Act
Amendments of 1990 (1990 amendments) which added significantly to the existing
Clean Air Act requirements. As a result of the 1990 amendments, these
subsidiaries were required to install Reasonably Available Control Technology
at some compressor stations by May 31, 1995, to reduce nitrogen oxide
emissions. Compliance required capital expenditures to similarly retrofit some
of the compressor engines along the Company's pipeline system. The Company has
completed the installation of emission control equipment and the installation
and testing of compressor engines and related equipment required by the 1990
amendments. The 1990 amendments may also require installation of Maximum
Available Control Technology (MACT) at certain of the Company's compressor
stations to control the emissions of certain hazardous air pollutants. The
Company

41
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

is participating with industry groups and the Environmental Protection Agency
in the development of these regulations but is unable to estimate the cost of
installing MACT, if required.

The Company expended $23.3 million in 1994, $11.3 million in 1995, and $6.8
million in 1996 to comply with the 1990 amendments. The total capital
expenditures required to comply with the 1990 amendments are expected to be
recoverable through future regulatory proceedings.

The Company has determined that it is associated with 16 former manufactured
gas plant sites, five of which are currently owned by subsidiaries. Studies
conducted by other utilities at their former manufactured gas plants have
indicated that their sites contain coal tar and other potentially harmful
materials. None of the 16 former sites with which the Company is associated is
under investigation by any state or federal environmental agency, and no
investigation or action is currently anticipated. At this time it is not known
if, or to what degree, these sites may contain environmental contamination.
Therefore, the Company is not able to estimate the cost, if any, that may be
required for the possible remediation of these sites.

The Company discovered in the course of conducting a routine environmental
survey at East Ohio Gas that some of its practices for collecting and handling
pipeline fluids that may have been contaminated with polychlorinated biphenyls
(PCBs) may not have complied with environmental regulations. The appropriate
agencies have been notified as part of the federal self-disclosure process and
discussions are continuing with the agencies to gain approval of revised
collection and handling procedures. A thorough investigation of all collection
and handling practices at East Ohio Gas is continuing and the Company
anticipates providing the results of this investigation to the appropriate
agencies in 1997. The discrepancies in the procedures were primarily in
connection with recordkeeping and did not involve spills, leaks, or other
mishandling of PCB contaminated fluids and did not damage the environment. The
Company anticipates that penalties, if any, incurred in connection with this
matter may be mitigated as a result of the Company's self disclosure. The
amount of any liabilities in connection with this matter is not expected to be
material with respect to the Company's financial position, results of
operations or cash flows.

17. COMMITMENTS AND CONTINGENCIES

Lease arrangements of the Company are principally for office space, business
machines and transportation equipment. None of these arrangements,
individually or in the aggregate, are material capital leases. Rental expense
incurred in the years 1994 through 1996 was not material, and future rental
payments required under leases in effect at December 31, 1996, are not
material.

It is estimated that the Company's 1997 capital spending program will amount
to $525,900,000, and that approximately $231,000,000 of that amount will be
directed to gas and oil producing activities. In connection with the capital
spending program, the Company has entered into certain contractual
commitments. Contractual commitments in the ordinary course of business
include requirements by CNG Energy Services to purchase capacity on
nonaffiliated pipelines to meet both committed and anticipated future long-
term customer gas supply needs.

The Company has claims and suits pending against it, but, in the opinion of
management and counsel, the ultimate liability will not have a material effect
on its financial position, results of operations or cash flows.

42
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18. DISAGGREGATED INFORMATION

In addition to operating in all phases of the natural gas business, the
Company explores for and produces oil and provides a variety of energy
marketing services.

Distribution represents the retail gas distribution subsidiaries. These
subsidiaries sell gas and/or provide transportation services to residential,
commercial and industrial customers in Ohio, Pennsylvania, Virginia and West
Virginia, and are subject to price regulation by their respective state
utility commissions.

Transmission operations include the activities of CNG Transmission, an
interstate pipeline company regulated by the FERC which provides gas
transportation, storage and related services to affiliates and to utilities
and end users in the Midwest, the Mid-Atlantic states and the Northeast.
Transmission operations also include, prior to April 1, 1995, the activities
of CNG Storage. CNG Storage is engaged in providing natural gas storage
facilities and a wide range of storage-related services to affiliates and
other customers, including the sale or lease of base gas, and the sale, lease
or brokerage of gas storage capacity obtained from third parties.

Exploration and production includes the results of CNG Producing and the gas
and oil production activities of CNG Transmission. These operations are
located throughout the United States and in the Gulf of Mexico. CNG Producing
also owns a working interest in a heavy oil program in Alberta, Canada.

Energy marketing services is comprised of CNG Energy Services and subsidiaries
(including CNG Storage), and CNG Power Services. CNG Energy Services markets
Company-owned gas production and arranges gas supplies, transportation,
storage and related services throughout North America. CNG Energy Services
also holds the Company's ownership interests in seven independent power
plants. CNG Power Services is the power marketing subsidiary that purchases
and resells electricity at market-based rates. The results of these
subsidiaries were included in the "Other" component in 1994.

The activities of CNG International, CNG Products and Services Company (CNG
Products and Services), Consolidated LNG, CNG Research Company and CNG Coal
are included in the "Other" category. CNG International was formed in 1996 to
engage in energy-related activities outside of the United States. CNG Products
and Services began operations in 1996 and provides certain energy-related
services to customers of the Company's distribution subsidiaries and others.

Transactions between affiliates are recognized at prices which approximate
market value. Significant transactions between the operating components are
eliminated to reconcile the disaggregated information to consolidated amounts.
Identifiable assets of each component are those assets that are used in its
operations.

43
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents disaggregated information pertaining to the
Company's operations:

- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Exploration Energy Corporate
and Marketing and
Distribution Transmission Production Services Other Eliminations Total
- - -------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
1996
Operating revenues
Nonaffiliated.......... $1,902,551 $ 383,108 $ 292,964 $1,206,848 $ 8,838 $ -- $3,794,309
Affiliated............. 2,961 120,292 339,323 149,635 9,834 (622,045) --
---------- ---------- ---------- ---------- -------- --------- ----------
Total................. 1,905,512 503,400 632,287 1,356,483 18,672 (622,045) 3,794,309
Other operating
expenses............... 1,572,959 264,542 333,336 1,363,871 21,780 (614,324) 2,942,164
Depreciation and
amortization........... 74,132 60,107 165,715 1,681 48 2,488 304,171
---------- ---------- ---------- ---------- -------- --------- ----------
Operating income before
income taxes........... $ 258,421 $ 178,751 $ 133,236 $ (9,069) $ (3,156) $ (10,209) $ 547,974
========== ========== ========== ========== ======== ========= ==========
Capital expenditures.... $ 143,050 $ 85,904 $ 247,103 $ 35,531 $ 42,570 $ 6,135 $ 560,293
Identifiable assets..... $2,902,917 $1,481,612 $1,232,992 $ 473,766 $ 94,608 $(185,290) $6,000,605
- - -------------------------------------------------------------------------------------------------------------
1995
Operating revenues
Nonaffiliated.......... $1,738,947 $ 365,888 $ 174,442 $1,020,789 $ 7,259 $ -- $3,307,325
Affiliated............. 6,280 105,138 187,012 87,611 10,168 (396,209) --
---------- ---------- ---------- ---------- -------- --------- ----------
Total................. 1,745,227 471,026 361,454 1,108,400 17,427 (396,209) 3,307,325
Other operating
expenses............... 1,466,776 261,091 438,477 1,113,014 14,543 (392,668) 2,901,233
Depreciation and
amortization........... 70,972 59,552 123,492 1,072 -- 1,548 256,636
---------- ---------- ---------- ---------- -------- --------- ----------
Operating income before
income taxes........... $ 207,479 $ 150,383 $ (200,515) $ (5,686) $ 2,884 $ (5,089) $ 149,456
========== ========== ========== ========== ======== ========= ==========
Capital expenditures.... $ 160,480 $ 81,557 $ 176,789 $ 19,567 $ -- $ 1,000 $ 439,393
Identifiable assets..... $2,645,004 $1,483,631 $1,155,092 $ 317,490 $ 54,425 $(237,349) $5,418,293
- - -------------------------------------------------------------------------------------------------------------
1994
Operating revenues
Nonaffiliated.......... $1,804,317 $ 348,141 $ 411,876 $ -- $471,694 $ -- $3,036,028
Affiliated............. 1,296 111,147 77,564 -- 44,966 (234,973) --
---------- ---------- ---------- ---------- -------- --------- ----------
Total................. 1,805,613 459,288 489,440 -- 516,660 (234,973) 3,036,028
Other operating
expenses............... 1,579,259 259,078 299,872 -- 508,303 (233,206) 2,413,306
Depreciation and
amortization........... 67,401 53,944 155,558 -- 736 1,678 279,317
---------- ---------- ---------- ---------- -------- --------- ----------
Operating income before
income taxes........... $ 158,953 $ 146,266 $ 34,010 $ -- $ 7,621 $ (3,445) $ 343,405
========== ========== ========== ========== ======== ========= ==========
Capital expenditures.... $ 146,882 $ 108,647 $ 166,022 $ -- $ 15,198 $ 1,036 $ 437,785
Identifiable assets..... $2,595,615 $1,543,790 $1,372,747 $ -- $283,799 $(277,278) $5,518,673
- - -------------------------------------------------------------------------------------------------------------
</TABLE>

19. SUPPLEMENTARY FINANCIAL INFORMATION--UNAUDITED

(A)GAS AND OIL PRODUCING ACTIVITIES (EXCLUDING COST-OF-SERVICE RATE-REGULATED
ACTIVITIES)
This information has been prepared in accordance with SFAS No. 69,
"Disclosures about Oil and Gas Producing Activities," and related SEC
pronouncements. Statement No. 69 is a comprehensive, standard set of required
disclosures about the gas and oil producing activities of publicly traded
companies. The following disclosures exclude the gas and oil producing
activities subject to cost-of-service rate regulation. Certain disclosures
about these gas and oil activities, which are exempt from the accounting
methods prescribed by the SEC, are included under "Cost-of-Service Properties"
in this Note (A).

44
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

CAPITALIZED COSTS
The aggregate amounts of costs capitalized by subsidiaries for their gas and
oil producing activities, and related aggregate amounts of accumulated
depreciation and amortization, follow:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1996 1995
- - --------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C>
Capitalized costs of
Proved properties....................................... $3,057,682 $2,871,560
Unproved properties..................................... 317,462 270,315
---------- ----------
Subtotal.............................................. 3,375,144 3,141,875
---------- ----------
Accumulated depreciation of
Proved properties....................................... 2,224,471 2,090,498
Unproved properties..................................... 134,481 116,256
---------- ----------
Subtotal.............................................. 2,358,952 2,206,754
---------- ----------
Net capitalized costs................................. $1,016,192 $ 935,121
========== ==========
- - --------------------------------------------------------------------------------
</TABLE>
As described in Note 3, the Company was required to recognize an impairment of
its gas and oil producing properties during 1995. The non-cash charge amounted
to $226,209,000 and is reflected in the amounts included above.

TOTAL COSTS INCURRED
The following costs were incurred by subsidiaries in their gas and oil
producing activities during the years 1994 through 1996:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- - --------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Property acquisition costs
Proved properties.................................. $ 42,880 $ 5,824 $ 4,000
Unproved properties................................ 17,911 9,686 18,998
-------- -------- --------
Subtotal......................................... 60,791 15,510 22,998
Exploration costs.................................... 49,622 50,974 48,514
Development costs.................................... 125,139 102,574 82,020
-------- -------- --------
Total............................................ $235,552 $169,058 $153,532
======== ======== ========
- - --------------------------------------------------------------------------------
</TABLE>

45
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

RESULTS OF OPERATIONS
The elements of the "results of operations for gas and oil producing
activities" that follow are as required and defined by the FASB. The Company
cautions that these standardized disclosures do not represent the results of
operations based on its historical financial statements. In addition to
requiring different determinations of revenues and costs, the disclosures
exclude the impact of interest expense and corporate overheads.
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- - -------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Revenues (net of royalties) from:
Sales to nonaffiliated companies................ $ 84,239 $ 60,139 $201,820
Transfers to other operations................... 289,892 150,930 55,007
-------- --------- --------
Total......................................... 374,131 211,069 256,827
-------- --------- --------
Less:Production (lifting) costs................... 55,679 40,812 42,723
Depreciation and amortization.................. 157,358 117,163 150,936
Impairment of producing properties............. -- 226,209 --
Income tax expense............................. 49,367 (68,615) 15,446
-------- --------- --------
Results of operations............................. $111,727 $(104,500) $ 47,722
======== ========= ========
- - -------------------------------------------------------------------------------
</TABLE>

COMPANY-OWNED RESERVES (NON-COST-OF-SERVICE RESERVES)
Estimated net quantities of proved gas and oil (including condensate) reserves
in the United States and Canada at December 31, 1994 through 1996, and changes
in the reserves during those years, are shown in the two schedules which
follow:
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- - --------------------------------------------------------------------------------
(In Bcf)
<S> <C> <C> <C>
PROVED DEVELOPED AND UNDEVELOPED RESERVES*--GAS
At January 1............................................... 985 901 885
Changes in reserves
Extensions, discoveries and other additions.............. 124 167 111
Revisions of previous estimates.......................... 5 17 16
Production............................................... (145) (103) (114)
Purchases of gas in place................................ 96 7 8
Sales of gas in place.................................... (25) (4) (5)
----- ---- ----
At December 31............................................. 1,040 985 901
===== ==== ====
PROVED DEVELOPED RESERVES*--GAS
At January 1............................................... 717 730 761
At December 31............................................. 900 717 730
</TABLE>

*Net before royalty.
- - -------------------------------------------------------------------------------
Included in the caption "Extensions, discoveries and other additions" for 1995
are 110 Bcf of proved undeveloped reserves for which development costs will be
incurred in future years. The preceding proved developed and undeveloped gas
reserves at December 31, 1994 through 1996, include United States reserves of
900, 984 and 1,039 Bcf which, together with the Canadian reserves and the gas
reserves

46
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

reported under "Cost-of-Service Properties," are as contained in reports of
Ralph E. Davis Associates, Inc., independent geologists.
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- - -------------------------------------------------------------------------------
(In Thousand Bbls)
<S> <C> <C> <C>
PROVED DEVELOPED AND UNDEVELOPED RESERVES*--OIL
At January 1.......................................... 45,791 46,255 27,596
Changes in reserves
Extensions, discoveries and other additions......... 5,976 1,965 24,709
Revisions of previous estimates..................... 2,711 1,117 (2,791)
Production.......................................... (4,766) (3,132) (3,333)
Purchases of oil in place........................... 804 163 77
Sales of oil in place............................... (59) (577) (3)
------ ------ ------
At December 31........................................ 50,457 45,791 46,255
====== ====== ======
PROVED DEVELOPED RESERVES*--OIL
At January 1.......................................... 19,838 20,379 21,936
At December 31........................................ 24,989 19,838 20,379
</TABLE>

*Net before royalty.
- - -------------------------------------------------------------------------------
Included in the caption "Extensions, discoveries and other additions" for 1994
are 22,305 thousand barrels of proved undeveloped reserves for which
development costs will be incurred in future years. The foregoing proved
developed and undeveloped oil reserves at December 31, 1994 through 1996,
include United States reserves of 40,918, 39,964 and 41,818 thousand barrels,
respectively. These, together with the Canadian reserves and the oil reserves
reported under "Cost-of-Service Properties," are as contained in reports of
Ralph E. Davis Associates, Inc.

STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN
The following tabulation has been prepared in accordance with the FASB's rules
for disclosure of a standardized measure of discounted future net cash flows
relating to Company-owned proved gas and oil reserve quantities.
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1996 1995 1994
- - -------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Future cash inflows........................... $4,022,381 $2,668,837 $2,303,024
Less:Future development and production costs.. 711,067 659,532 626,344
Future income tax expense................ 1,049,234 602,158 490,079
---------- ---------- ----------
Future net cash flows......................... 2,262,080 1,407,147 1,186,601
Less annual discount (10% a year)............. 830,083 565,404 482,109
---------- ---------- ----------
Standardized measure of discounted future net
cash flows.................................... $1,431,997 $ 841,743 $ 704,492
========== ========== ==========
- - -------------------------------------------------------------------------------
</TABLE>
In the foregoing determination of future cash inflows, sales prices for gas
were based on contractual arrangements or market prices at each year end.
Prices for oil were based on average prices received from sales in the month
of December each year. Future costs of developing and producing the proved gas
and oil reserves reported at the end of each year shown were based on costs
determined at each such year end, assuming the continuation of existing
economic conditions. Future income taxes were computed by applying the
appropriate year-end or future statutory tax rate to future pretax net cash
flows, less the tax basis of the properties involved, and giving effect to tax
deductions, or permanent differences and tax credits.

47
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

It is not intended that the FASB's standardized measure of discounted future
net cash flows represent the fair market value of the Company's proved
reserves. The Company cautions that the disclosures shown are based on
estimates of proved reserve quantities and future production schedules which
are inherently imprecise and subject to revision, and the 10% discount rate is
arbitrary. In addition, present costs and prices are used in the
determinations and no value may be assigned to probable or possible reserves.

The following tabulation is a summary of changes between the total
standardized measure of discounted future net cash flows at the beginning and
end of each year.
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- - -------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Standardized measure of discounted future
net cash flows at January 1............... $ 841,743 $ 704,492 $ 768,263
Changes in the year resulting from
Sales and transfers of gas and oil produced
during the year, less production costs.... (318,583) (170,257) (214,104)
Prices and production and development costs
related to future production.............. 632,118 150,634 (153,962)
Extensions, discoveries and other
additions,
less production and development costs..... 295,236 181,664 144,342
Previously estimated development costs
incurred during the year.................. 62,706 62,958 46,568
Revisions of previous quantity estimates... 106,800 8,336 4,228
Accretion of discount...................... 119,555 98,736 108,417
Income taxes............................... (306,290) (70,927) 33,029
Purchases and sales of proved reserves in
place-net................................. 112,601 1,794 4,122
Other (principally timing of production)... (113,889) (125,687) (36,411)
---------- --------- ---------
Standardized measure of discounted future
net cash flows at December 31............. $1,431,997 $ 841,743 $ 704,492
========== ========= =========
- - -------------------------------------------------------------------------------
</TABLE>

COST-OF-SERVICE PROPERTIES
As previously stated, activities subject to cost-of-service rate regulation
are excluded from the foregoing information. At December 31, 1995 and 1996,
net capitalized costs of cost-of-service properties amounted to $14,809,000
and $10,015,000, respectively. Related proved reserves of gas and oil are
located in the United States, and amounted to 71, 56 and 43 Bcf of gas at
December 31, 1994 through 1996, and 256 thousand barrels of oil at December
31, 1994. There were no cost-of-service oil reserves at December 31, 1995 or
1996. East Ohio Gas sold all of its remaining gas and oil reserves during
1995. Hope Gas sold all of its remaining gas reserves to CNG Producing during
1996. At December 31, 1996, the Company's remaining cost-of-service gas
reserves were held by Peoples Natural Gas. Gas production for the years 1994
through 1996 amounted to 6, 4 and 3 Bcf, respectively. Oil production for 1994
and 1995 amounted to 24 and 17 thousand barrels, respectively.

Future revenues associated with production of the foregoing gas and oil
reserves would be based upon cost-of-service ratemaking and historical asset
costs, with rate of return levels determined by various state regulatory
commissions.

48
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(B) QUARTERLY FINANCIAL DATA
A summary of the quarterly results of operations for the years 1995 and 1996
follows. Because a major portion of the gas sold or transported by the
Company's distribution and transmission operations is ultimately used for
space heating, both revenues and earnings are subject to seasonal
fluctuations, and third quarter results are usually the least significant of
the year for the Company. Seasonal fluctuations are further influenced by the
timing of price relief granted under regulation to compensate for certain past
cost increases.

- - -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter
------------------------------------------------
First (a) Second (b) Third (c) Fourth (d)
- - -------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
1996
Total operating revenues........... $1,315,084 $ 654,950 $595,057 $1,229,218
Operating income before income
taxes.............................. 302,176 71,949 11,045 162,804
Net income (loss).................. 180,800 34,617 (5,118) 87,974
Earnings (loss) per share of common
stock (e).......................... 1.92 .37 (.05) .93
1995
Total operating revenues........... $1,191,637 $ 664,972 $515,142 $ 935,574
Operating income before income
taxes.............................. (15,918) 2,999 1,956 160,419
Net income (loss).................. (21,396) (33,512) (11,215) 87,467
Earnings (loss) per share of common
stock.............................. (.23) (.36) (.12) .94
</TABLE>

(a) The 1996 first quarter includes charges related to workforce reductions
that reduced operating income before income taxes by $3,379,000 and net
income by $2,069,000, or $.02 per share (see Note 4 to the consolidated
financial statements). The 1995 first quarter includes the effect of an
impairment of gas and oil producing properties that reduced operating
income before income taxes by $226,209,000 and net income by $145,000,000,
or $1.56 per share (see Note 3 to the consolidated financial statements).
(b) The 1995 second quarter includes charges related to workforce reductions
that reduced operating income before income taxes by $36,412,000 and net
income by $23,668,000, or $.25 per share. Net income was also reduced by
the write-down of coal properties amounting to $20,323,000, or $.22 per
share (see Notes 3 and 4 to the consolidated financial statements).
(c) The 1995 third quarter includes charges related to workforce reductions
that reduced operating income before income taxes by $3,457,000 and net
income by $2,343,000, or $.02 per share (see Note 4 to the consolidated
financial statements).
(d) The 1996 fourth quarter includes charges related to workforce reductions
that reduced operating income before income taxes by $11,816,000 and net
income by $7,786,000, or $.08 per share (see Note 4 to the consolidated
financial statements).
(e) The sum of the quarterly amounts does not equal the year's amount because
the quarterly calculations are based on a changing number of average
shares outstanding. In addition, first quarter fully diluted earnings per
share was $1.86.
- - -----------------------------------------------------------------------------

49
<PAGE>

CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)

(C) COMMON STOCK MARKET PRICES AND RELATED MATTERS
At December 31, 1996, there were 35,816 holders of the Company's common stock.
The principal market for the stock is the New York Stock Exchange. Quarterly
price ranges and dividends declared on the common stock for the years 1995 and
1996 follow. Restrictions on the payment of dividends are discussed in Note
12.
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter
-------------------------------
First Second Third Fourth
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Market Price Range
1996--High...................................... $47 1/8 $52 1/4 $57 1/8 $59 5/8
--Low....................................... $41 1/2 $43 1/2 $49 $51 1/8
1995--High...................................... $38 3/4 $40 $41 $46 1/4
--Low....................................... $33 5/8 $37 1/8 $35 3/4 $37 3/8
Dividends Declared per Share
1996............................................ $.485 $.485 $.485 $.485
1995............................................ $.485 $.485 $.485 $.485
- - --------------------------------------------------------------------------------
</TABLE>

50
<PAGE>

PROXY

[LOGO OF CONSOLIDATED NATURAL GAS]

CONSOLIDATED NATURAL GAS COMPANY
Proxy Solicited on Behalf of the Board of Directors of the Company
for the Annual Meeting of Stockholders May 20, 1997

The undersigned hereby appoints G.A. Davidson, Jr., D.M. Westfall and S.E.
Williams, and each or any of them, proxies with full power of substitution to
vote the stock of the undersigned, as directed hereon, at the Annual Meeting of
Stockholders of CONSOLIDATED NATURAL GAS COMPANY to be held at the Hyatt Regency
Hotel, 15747 John F. Kennedy Blvd., Houston, Texas 77032 on Tuesday, May 20,
1997, at 10:00 a.m. (Central Time), and at any adjournment thereof, and, in
their discretion, on any other matters that may properly come before the
Meeting.
(change of address)

Election of Directors -----------------------------------------

Nominees: W.S. Barrack, Jr., -----------------------------------------
R.J. Groves and S.A. Minter
-----------------------------------------

-----------------------------------------
(If you have written in the above space,
please mark the Change of Address Box on
the reverse side of this card.)

Please specify your choices by marking the appropriate boxes, SEE REVERSE SIDE.
When properly executed, this proxy will be voted in accordance with your
instructions, or, IF YOU GIVE NO INSTRUCTIONS, this proxy will be voted FOR
Items 1, 2 and 3 and AGAINST Items 4, 5 and 6.

[SEE REVERSE SIDE]

- - --------------------------------------------------------------------------------
FOLD AND DETACH HERE

March 21, 1997

Dear Stockholder:

Effective February 24, 1997, First Chicago Trust Company of New York (First
Chicago) began serving CNG stockholders as CNG's new transfer agent, registrar
and administrator of the CNG Dividend Reinvestment Plan. Also, effective May 1,
1997 First Chicago will begin serving as CNG's Rights Plan agent.

You may call First Chicago toll-free at 1-800-414-6443 between 8:30 a.m. and
7:00 p.m. Eastern Time. You may correspond with the agent by writing to First
Chicago Trust Company, PO Box 2500, Jersey City, NJ 07303-2500, via the Internet
at http://www.fctc.com, or via e-mail at [email protected].

Thank you for your cooperation and support.

Sincerely,

/s/ George A. Davidson, Jr.

George A. Davidson, Jr.
Chairman of the Board and
Chief Executive Officer

<PAGE>

[X] Please mark your votes as in this example.

The Board of Directors recommends a vote FOR Items 1, 2, and 3 and AGAINST Items
4, 5, and 6.

FOR WITHHELD
1. Election of Directors (see reverse) [_] [_]

For, except vote withheld from the following nominee(s): _______________________

2. Ratification of Price Waterhouse as FOR AGAINST ABSTAIN
independent accountants. [_] [_] [_]

3. Approve adoption of the 1997 Stock FOR AGAINST ABSTAIN
Incentive Plan. [_] [_] [_]

4. Adoption of a shareholder-proposed FOR AGAINST ABSTAIN
resolution regarding options. [_] [_] [_]

5. Adoption of a shareholder-proposed FOR AGAINST ABSTAIN
resolution regarding bonuses. [_] [_] [_]

6. Adoption of a shareholder-proposed FOR AGAINST ABSTAIN
resolution regarding the rights plan. [_] [_] [_]

Change
of Attend
Address [_] Meeting [_]

SIGNATURE(S)__________________________________________ DATE____________________
NOTE: Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such.

- - -------------------------------------------------------------------------------
FOLD AND DETACH HERE

PLEASE VOTE, SIGN, AND RETURN THE ABOVE PROXY

CONSOLIDATED NATURAL GAS COMPANY

Annual Meeting of Stockholders

DATE: May 20, 1997

TIME: 10:00 a.m. (Central Time)

PLACE: Hyatt Regency Hotel
15747 John F. Kennedy Blvd.,
Houston, Texas 77032