<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 1-3196
--------------
CONSOLIDATED NATURAL GAS COMPANY
A DELAWARE CORPORATION
CNG TOWER, 625 LIBERTY AVENUE, PITTSBURGH, PA 15222-3199
TELEPHONE (412) 227-1000
IRS EMPLOYER IDENTIFICATION NUMBER 13-0596475
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Common Stock: Registered:
$2.75 Par Value New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
Debentures:
6 5/8% Debentures Due December 1, 2008 New York Stock Exchange
6 7/8% Debentures Due October 15, 2026 New York Stock Exchange
7 3/8% Debentures Due April 1, 2005 New York Stock Exchange
6 5/8% Debentures Due December 1, 2013 New York Stock Exchange
5 3/4% Debentures Due August 1, 2003 New York Stock Exchange
5 7/8% Debentures Due October 1, 1998 New York Stock Exchange
8 3/4% Debentures Due October 1, 2019 New York Stock Exchange
8 3/4% Debentures Due June 1, 1999 New York Stock Exchange
8 5/8% Debentures Due December 1, 2011 New York Stock Exchange
Convertible Subordinated Debentures:
7 1/4% Convertible Subordinated Debentures
Due December 15, 2015 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
--------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The aggregate market value of the voting stock held by non-affiliates of the
registrant amounted to $5,265,515,622 as of January 31, 1997. It was assumed
in this calculation that the registrant's affiliates are all of its directors
and/or officers, and they beneficially owned 279,600 shares of voting stock at
that date.
Shares of Common Stock, $2.75 Par Value, outstanding at January 31, 1997:
94,940,555.
The registrant's "Notice of Annual Meeting and Proxy Statement, 1997" and
Appendix I thereto are hereby incorporated by reference into Parts I, II, III
and IV of this Form 10-K.
<PAGE>
CONSOLIDATED NATURAL GAS COMPANY
FORM 10-K ANNUAL REPORT
For the Year Ended December 31, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
FORWARD-LOOKING INFORMATION............................................ 1
---------------------------
PART I
------
ITEM 1. BUSINESS
The Company............................................... 2
Governmental Regulation................................... 3
Capital Expenditures...................................... 4
Competitive Conditions.................................... 4
Gas Supply................................................ 8
Gas Sales and Transportation.............................. 11
Gas Sales, Supply, Transportation and Storage Statistics.. 13
Market Expansion.......................................... 14
Rate Matters.............................................. 15
Executive Officers of the Company......................... 16
ITEM 2. PROPERTIES
General Information on Facilities......................... 17
Map--Principal Facilities................................. 18
Map--Exploration and Production Areas..................... 19
Gas and Oil Producing Activities.......................... 20
ITEM 3. LEGAL PROCEEDINGS......................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 22
PART II
-------
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS...................................... 22
ITEM 6. SELECTED FINANCIAL DATA................................... 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............... 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................... 23
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY........... 23
ITEM 11. EXECUTIVE COMPENSATION.................................... 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................... 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 24
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K................................................. 24
SIGNATURES ............................................................ 28
----------
</TABLE>
<PAGE>
CONSOLIDATED NATURAL GAS COMPANY
FORM 10-K ANNUAL REPORT
For the Year Ended December 31, 1996
FORWARD-LOOKING INFORMATION
- ---------------------------
Certain matters discussed in this Annual Report on Form 10-K for Consolidated
Natural Gas Company and its subsidiaries (the Company) 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 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.
1
<PAGE>
CONSOLIDATED NATURAL GAS COMPANY
FORM 10-K ANNUAL REPORT
For the Year Ended December 31, 1996
PART I
------
ITEM 1. BUSINESS
THE COMPANY
Consolidated Natural Gas Company is a Delaware corporation organized on July
21, 1942, and a public utility holding company registered under the Public
Utility Holding Company Act of 1935 (PUHCA). It is engaged solely in the
business of owning and holding all of the outstanding equity securities of
fifteen directly owned subsidiary companies.
The Parent Company and subsidiaries at December 31, 1996, are listed below. 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. At December 31, 1996, the Company had 6,426 regular employees.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
State of
Name of Company Incorporation
- -------------------------------------------------------------------------------
<S> <C>
CONSOLIDATED NATURAL GAS COMPANY (Parent Company)................ Delaware
All wholly owned subsidiaries of the Parent Company:
Consolidated Natural Gas Service Company, Inc. (Service
Company)........................................................ Delaware
The East Ohio Gas Company (East Ohio Gas)....................... Ohio
The Peoples Natural Gas Company (Peoples Natural Gas)........... Pennsylvania
Virginia Natural Gas, Inc. (Virginia Natural Gas)............... Virginia
Hope Gas, Inc. (Hope Gas)....................................... West Virginia
West Ohio Gas Company (West Ohio Gas)*.......................... Ohio
CNG Transmission Corporation (CNG Transmission)................. Delaware
CNG Producing Company (CNG Producing)........................... Delaware
CNG Energy Services Corporation (CNG Energy Services)........... Delaware
CNG Power Services Corporation (CNG Power Services)............. Delaware
CNG International Corporation (CNG International)............... Delaware
Consolidated System LNG Company (Consolidated LNG).............. Delaware
CNG Research Company (CNG Research)............................. Delaware
CNG Coal Company (CNG Coal)..................................... Delaware
CNG Financial Services, Inc. (CNG Financial).................... Delaware
</TABLE>
*Effective January 1, 1997, West Ohio Gas merged with East Ohio Gas.
- -------------------------------------------------------------------------------
The principal cities served at retail by the gas distribution subsidiaries
(East Ohio Gas, West Ohio Gas, Peoples Natural Gas, Virginia Natural Gas and
Hope Gas) are: Cleveland, Akron, Youngstown, Canton, Warren, Lima, Ashtabula
and Marietta in Ohio; Pittsburgh (a portion), Altoona and Johnstown in
Pennsylvania; Norfolk, Newport News, Virginia Beach, Chesapeake, Hampton and
Williamsburg in Virginia; and Clarksburg and Parkersburg in West Virginia. At
December 31, 1996, the Company served at retail approximately 1,841,000
residential, commercial and industrial gas sales customers in Ohio,
Pennsylvania, Virginia and West Virginia. Variations in weather conditions can
materially affect the volume of gas delivered by the distribution
subsidiaries, as 98 percent of their residential and commercial customers use
gas for space heating.
CNG Transmission is an interstate gas transmission subsidiary that operates a
regional interstate pipeline system serving each of the distribution
subsidiaries, and nonaffiliated utility and end-user customers in the Midwest,
the Mid-Atlantic states and the Northeast. Through its wholly owned
subsidiary, CNG Iroquois, Inc., CNG Transmission holds a 16 percent general
partnership interest in the Iroquois Gas
2
<PAGE>
ITEM 1. BUSINESS (Continued)
Transmission System, L.P., a Delaware limited partnership that owns and
operates an interstate natural gas pipeline extending from the Canada-United
States border near Iroquois, Ontario, to Long Island, New York. The Iroquois
pipeline transports Canadian gas to utility and power generation customers in
metropolitan New York and New England.
CNG Producing is a gas and oil exploration and production subsidiary whose
activities are conducted primarily in the Gulf of Mexico, the southern and
western United States, the Appalachian region, and in Canada.
CNG Energy Services is a nonregulated energy marketing subsidiary that markets
Company-owned gas production and offers an array of gas sales, transportation,
storage and other services that can be arranged separately or in various
combinations to meet the individual energy needs of customers. CNG Energy
Services also holds the Company's ownership interests in seven independent
power plants, including a 34% limited partnership interest in Lakewood
Cogeneration, L.P. (Lakewood Partnership), which operates a 237-megawatt
cogeneration facility in Lakewood, New Jersey.
CNG Power Services is a power marketing subsidiary with Federal Energy
Regulatory Commission (FERC) approval to purchase and resell electricity at
market-based rates. CNG Power Services also owns a 1% general partnership
interest in the Lakewood Partnership.
CNG International was formed in 1996 to engage in energy-related activities
outside of the United States. CNG International holds a 30 percent ownership
interest in Epic Energy Pty Ltd. (Epic Energy), an Australian entity that owns
and operates two major long-distance natural gas pipelines in Australia.
Consolidated LNG was organized to import and regasify liquefied natural gas
(LNG) for sale to CNG Transmission. However, Consolidated LNG ended its
involvement in LNG operations in 1982 and is currently recovering its
undepreciated investment in LNG-related facilities, plus carrying charges and
taxes, through a FERC-approved amortization surcharge.
CNG Research administers proprietary research activities. Amounts spent on
research activities in the calendar years 1994 through 1996 by all the
subsidiaries were not material.
CNG Coal formerly owned coal reserves and a related plant site. In 1995, the
Company recognized a pretax charge of $31.3 million in connection with a
write-down of the value of these coal properties. In July 1996, CNG Coal
completed the sale of its properties to a subsidiary of Cyprus Amax Minerals
Company.
Service Company is a subsidiary service company, authorized by the Securities
and Exchange Commission (SEC) under the PUHCA. It advises and assists the
other subsidiary companies on administrative and technical matters and manages
centralized activities and facilities for their benefit. It also provides
services to the Parent Company.
CNG Financial was formed to engage in financing of gas-utilizing equipment,
but has not yet engaged in any such transactions.
GOVERNMENTAL REGULATION
The Company is subject to regulation by the SEC pursuant to the PUHCA. After
an in-depth study of the PUHCA in the context of fundamental changes in the
energy industry over the past decade, the SEC's Division of Investment
Management issued a report in 1995 on the regulation of public utility holding
companies. This report contains recommendations for legislative action,
including repeal of the PUHCA with more oversight responsibility borne by the
FERC and state commissions. The report also proposes reform to remove a
substantial portion of the administrative burden inherent in the current PUHCA
regulatory policies and procedures. The SEC initiated action in 1995 to
implement such reform. In addition, legislation for the repeal of the PUHCA
was introduced in Congress during 1996, but was not enacted. Legislation for
repeal of the PUHCA in connection with electric industry deregulation (see
"Gas
3
<PAGE>
ITEM 1. BUSINESS (Continued)
and Electric Industry Developments," page 5) has been introduced again in
Congress in 1997, and it is anticipated that federal legislation for stand-
alone repeal will be introduced again during 1997.
CNG Transmission and Consolidated LNG are "natural-gas companies" subject to
the Natural Gas Act of 1938, as amended. CNG Transmission's interstate
transportation and storage activities are regulated under such Act and are
conducted in accordance with tariffs and service agreements on file with the
FERC. CNG Energy Services and CNG Power Services, public utilities as defined
by section 201 of the Federal Power Act, are also subject to limited FERC
regulation. The distribution subsidiaries are subject to regulation by the
respective utility commissions in the states within which they operate.
Certain subsidiaries are subject to various provisions of the five statutes
which are referred to as the National Energy Act of 1978. One of these
statutes, the National Energy Conservation Policy Act, requires utilities to
offer home energy audits and other assistance to residential customers.
The Natural Gas Pipeline Safety Act of 1968 (which, among other things,
authorizes the establishment and enforcement of federal pipeline safety
standards) subjects the interstate pipeline of CNG Transmission to the safety
jurisdiction of the Department of Transportation. Intrastate facilities remain
within the safety jurisdiction of the state regulatory agencies, presuming
compliance by such agencies with certain prerequisites contained in such Act.
The Company is subject to the provisions of various federal laws dealing with
the protection of the environment. 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 which added
significantly to the existing requirements established by the Clean Air Act.
In addition, the subsidiary companies are subject to the environmental laws
and regulations of state and local governmental authorities in the areas
within which the subsidiaries have operations or facilities.
CAPITAL EXPENDITURES
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. The capital budget will be reviewed during the year and is subject
to revision.
COMPETITIVE CONDITIONS
Various regulatory and market trends have combined to increase competition for
the Company in recent years, and for the gas industry in general. The factors
affecting the Company include: regulatory efforts, such as the FERC's various
initiatives to increase competition in the industry; the overall availability
of gas nationwide at relatively low prices; competition from producers and
other sellers and brokers of gas for the retail and wholesale markets;
expansion of competition among distribution companies for industrial and
commercial customers; competition with existing and proposed pipelines, and
projects to import gas from Canada and other foreign countries; and
competition with other energy forms, such as electricity, fuel oil and coal.
4
<PAGE>
ITEM 1. BUSINESS (Continued)
RESTRUCTURING OF INTERSTATE PIPELINE INDUSTRY
FERC Order 636 has significantly increased competition in the natural gas
industry. In the restructured marketplace, local gas utilities and large-
volume end users, including former pipeline sales customers, bear all the
responsibilities and risks for arranging the procurement of their gas supplies
and contracting with pipelines to transport purchases.
The restructuring of the interstate natural gas pipeline industry has also
affected the distribution subsidiaries. Industrial and large commercial gas
users now purchase a large portion of their gas supplies directly from
producers, from marketers, or on the spot market. However, the distribution
subsidiaries have, for the most part, been able to retain these customers by
providing transportation service for such supplies. The most significant
effect on local distribution companies of Order 636 has been on their gas
supply procurement and storage practices, as these companies now bear all the
responsibilities and risks for arranging the acquisition, delivery and storage
of their own gas supplies. However, as the distribution subsidiaries have been
managing a part of their own gas supplies for a number of years, the
transition to the more competitive environment under Order 636 did not have a
significant impact on their operations. Storage facilities owned and operated
by the distribution and transmission operations as well as storage capacity
acquired have become even more important factors in gas supply management.
Gas producers throughout the industry, including CNG Producing, are faced with
a more diverse and active market with purchasers seeking to balance the
advantage of lower-cost spot market supplies with the security of higher-
priced, longer-term contracts. The presence of gas and energy marketing firms
has added to the competition for CNG Producing. As a result, CNG Energy
Services has been the primary marketing agent for all of the Company's
nonregulated gas production since January 1, 1995 (see "Energy Marketing
Services," page 8).
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
"Retail Unbundling," page 14).
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 PUHCA, to which the Company is
subject, in conjunction with legislation which would grant the various
5
<PAGE>
ITEM 1. BUSINESS (Continued)
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.
DISTRIBUTION
The distribution subsidiaries generally operate in long-established service
areas and have extensive facilities already in place. Growth in the Company's
traditional service areas in Ohio, Pennsylvania and West Virginia is limited
in that natural gas is already the fuel of choice for heating and for most
significant industrial applications. These areas have experienced minimal
population growth in recent years, and almost all customers have become more
energy efficient, resulting in lower gas usage per customer. In addition, the
economies of these areas, which were formerly based mainly on heavy industry,
have diversified with increased emphasis on high technology and service
oriented firms.
However, opportunities for growth in the distribution operations are expected
to continue at Virginia Natural Gas. This subsidiary offers the potential for
future growth through its expanding service territory and the prospect of
conversion of space-heating customers and commercial and industrial
applications to gas. The completion in 1992 of the intrastate pipeline in
Virginia has provided Virginia Natural Gas and its customers with new gas
supply sources through access to the Company's transmission and storage
facilities, and has afforded additional opportunities for growth in both gas
sales and transportation, especially in the power generation markets.
The Clean Air Act may also provide opportunities for increased throughput in
the Company's distribution markets. The Company is promoting the use of
natural gas as a means for industrial customers and electric generators to
reduce emissions. The Clean Air Act and the more recent Energy Policy Act of
1992 contain a number of provisions relating to the use of alternative fuel
vehicles. The Company is participating in various programs to demonstrate the
advantages and environmental benefits of natural gas powered vehicles.
Competition in the markets served by the distribution subsidiaries continues
to increase. As the gas industry has restructured and government regulations
have changed, a marketplace has evolved with new and traditional competitors--
the usual oil and electric companies, other gas companies, producers seeking
to gain direct access to the Company's customers, and gas brokers and dealers
seeking to supplant supplies with spot market gas. Natural gas faces price
competition with other energy forms, and certain of the distribution
companies' industrial customers have the ability to switch to fuel oil or coal
if desired. In addition, competition is increasing among local distribution
companies to provide gas sales and transportation services to commercial and
residential customers (see "Retail Unbundling," page 14). Currently, local
distribution companies operate in what are essentially dual markets--a
traditional utility market, where a utility has an obligation to provide
service and offers a "bundled" package of services to all customers; and a
"contract" market, where obligations are defined by contract terms and large
customers can elect individually or in various combinations whatever gas
supplies, storage and/or transportation services they require. The Company has
responded to this competitive environment by offering an expanded range of
services to its customers. The distribution subsidiaries routinely provide a
variety of firm and interruptible services, including gas transportation,
storage, supply pooling and balancing, and brokering, to industrial and
commercial customers.
6
<PAGE>
ITEM 1. BUSINESS (Continued)
TRANSMISSION
CNG Transmission operates a regional interstate pipeline system with the
principal pipeline and storage facilities located in Ohio, Pennsylvania, West
Virginia and New York. CNG Transmission offers gas transportation, storage and
related services to its affiliates, as well as to utilities and end users in
the Northeast, Mid-Atlantic and Midwest regions of the country.
The changing regulatory environment has provided CNG Transmission and other
pipeline companies with unique opportunities for expansion. CNG Transmission
has taken advantage of selected market expansion opportunities, concentrating
its efforts primarily in the Northeast and along the East Coast. CNG
Transmission's large underground storage capacity and the location of its
gridlike pipeline system as a link between the country's major gas pipelines
and large markets on the East Coast have been key factors in the success of
these expansion efforts. 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 "Gas and Electric Industry
Developments," page 5 and "Retail Unbundling," page 14). In addition, such a
network allows the Company to manage its gas supply requirements in an
efficient and flexible manner.
CNG Transmission competes with domestic as well as Canadian pipeline companies
and gas marketers seeking to provide or arrange transportation, storage and
other services for customers. Also, certain end users have the ability to
switch to fuel oil or coal if desired. Although competition is based primarily
on price, the range of services that can be provided to customers is also an
important factor. The combination of capacity rights held on certain longline
pipelines, a large storage capability and the availability of numerous receipt
and delivery points along its own pipeline system, enables CNG Transmission to
tailor its services to meet the individual needs of customers.
EXPLORATION AND PRODUCTION
Exploration and production operations are conducted by CNG Producing in
several of the major gas and oil producing basins in the United States, both
onshore and offshore. In this highly competitive business, the Company
competes with a large number of entities ranging in size from large
international oil companies with extensive financial resources to small, cash
flow-driven independent producers.
CNG Producing faces significant competition in the bidding for federal
offshore leases and in obtaining leases and drilling rights for onshore
properties. Since CNG Producing is the operator of a number of properties, it
also faces competition in securing drilling equipment and supplies for
exploration and development. From the production perspective, the marketing of
gas and oil is highly competitive with price being the most significant
factor. Effective January 1, 1995, CNG Energy Services became the primary
marketing agent for all of the Company's nonregulated gas production. When the
economics warrant, the Company attempts to sell its gas production under long-
term contracts to customers such as electric power generators and others that
require a secure source of supply. However, these arrangements represent only
a portion of the Company's gas production. Further, the deliverability of gas
produced is also influenced by competition for downstream pipeline
transportation capacity. In response to the unbundling of sales services
previously offered by pipelines, CNG Producing and CNG Energy Services have
taken actions to expand and diversify the Company's customer base. CNG Energy
Services continues to develop new marketing strategies and contracts to
address customer needs for intermediate and long-term gas supplies as well as
other energy services.
The exploration for and production of gas and oil is subject to various
federal and state laws and regulations which may, among other things, limit
well drilling activity and volumes produced. Changes in these laws and
regulations can impact the exploration and production operations.
7
<PAGE>
ITEM 1. BUSINESS (Continued)
ENERGY MARKETING SERVICES
The Company's energy marketing services operations, comprised of CNG Energy
Services and CNG Power Services, are engaged in a variety of energy-related
activities in highly competitive markets. These activities, which are under a
single management team, include fuel management, gas trading, energy price
risk management, pipeline capacity and storage management, power marketing and
electric generation.
Energy marketing services competes with the marketing operations of both
independent and major energy companies in addition to electric utilities,
independent power producers, local distribution companies, and various energy
brokers. As a result of the continuing efforts to deregulate both natural gas
and electric utility operations, the economic differences among different
forms of energy are expected to be reduced in the future. Competition is based
largely upon pricing, availability and reliability of supply, technical and
financial capabilities, regional presence and international experience.
GAS SUPPLY
GENERAL INFORMATION
The Company's gas supply is obtained from various sources including: purchases
from major and independent producers in the Southwest and Midwest regions;
purchases from local producers in the Appalachian area; purchases from gas
marketers; purchases on the spot market; production from Company-owned wells
in the Appalachian area, the Southwest, and the Midwest; and withdrawals from
the Company's underground storage fields.
Regulatory actions, economic factors, and changes in customers and their
preferences continue to reshape the Company's gas sales markets. A significant
number of industrial customers and many commercial customers currently
purchase a large portion of their gas supplies from producers, marketers, or
on the spot market, and contract with the transmission and distribution
subsidiaries for transportation and other services. Since these customers are
less reliant on the distribution subsidiaries for sales service, the volume of
gas that these subsidiaries must obtain to meet sales requirements has been
reduced. This trend is likely to continue as the state regulatory environment
proceeds towards unbundling of services at the retail level. The distribution
subsidiaries and CNG Energy Services have the responsibility and risk for
obtaining their own gas supplies.
The Company's available gas supply in 1996 was again in a surplus position--
where available supplies exceed sales requirements. Considering the Company's
large storage capacity, the volumes obtainable under its gas purchase and gas
supply contracts, Company-owned gas reserves, and assuming the future
availability of spot market gas, the Company believes that supplies will be
available to meet sales requirements for several years. Gas supply statistics
for the past five years are on page 13.
GAS PURCHASED
Purchased gas volumes were 618.3 billion cubic feet (Bcf) in 1996,
representing 83 percent of the Company's total 1996 gas supply of 744.5 Bcf.
Spot market and short-term purchases were 553.4 Bcf, or about 74 percent of
the total 1996 supply. Volumes purchased under contracts with Appalachian area
producers totaled 64.9 Bcf, or 9 percent of the 1996 supply.
While spot market gas supplies have historically been obtained at lower
prices, the availability and price of such supplies to distribution companies
can be severely impacted by market swings in supply and demand, often due to
sudden changes in weather conditions. The distribution subsidiaries must weigh
the benefits of generally lower-cost spot market purchases with the security
of longer-term contract arrangements. To ensure a secure supply, the
distribution subsidiaries have purchased a larger portion of
8
<PAGE>
ITEM 1. BUSINESS (Continued)
their gas supplies directly from producers on a firm basis. However, spot
market gas will continue to be part of the Company's supply mix, particularly
for CNG Energy Services.
Gas purchased from producers and on the spot market is delivered to the
distribution subsidiaries using the firm transport capacity contracted for on
interstate pipelines. At December 31, 1996, the subsidiaries had 365 Bcf of
firm transport capacity to move supplies from purchase locations to market,
yielding deliveries of up to 1.0 Bcf of gas a day. These pipelines include CNG
Transmission, Tennessee Gas Pipeline Company, Panhandle Eastern Pipe Line
Company, Texas Eastern Transmission Corporation, ANR Pipeline Company, Texas
Gas Transmission Corporation, Transcontinental Gas Pipe Line Corporation and
Columbia Gas Transmission Corporation. CNG Energy Services also uses firm
transportation capacity to receive supplies from producers and make deliveries
to customers.
GAS STORAGE
The Company's underground storage complex plays an important part in balancing
gas supply with sales demand and is essential to servicing the Company's large
volume of space-heating business. In addition, storage capacity is an
important element in the effective management of both gas supply and pipeline
transport capacity. The Company operates 26 underground gas storage fields
located in Ohio, Pennsylvania, West Virginia and New York. The Company owns 21
of these storage fields and has joint-ownership with other companies in 5 of
the fields. The total designed capacity of the storage fields is approximately
885 Bcf. The Company's share of the total capacity is about 669 Bcf. About
one-half of the total capacity is base gas which remains in the reservoirs at
all times to provide the primary pressure which enables the balance of the gas
to be withdrawn as needed.
CNG Transmission operates 719 Bcf of the total designed storage capacity and
owns 503 Bcf of the Company's capacity. CNG Transmission utilizes a large
portion of its turnable capacity to provide approximately 252 Bcf of gas
storage service for others. This service is provided principally to other
pipelines and nonaffiliated utilities whose primary service areas are along
the East Coast. CNG Transmission also provides storage service to affiliates,
end users and to many of its former wholesale gas sales customers.
Two of the distribution subsidiaries, East Ohio Gas and Peoples Natural Gas,
own and operate the remaining 166 Bcf of storage capacity. In addition to
owning their own storage, these companies, as well as most of the other
subsidiaries, have ready access to a portion of the storage capacity operated
by CNG Transmission. The distribution subsidiaries and CNG Energy Services
also have capacity available in storage fields owned by others.
The Company controls other acreage in the Appalachian area suitable for the
development of additional storage facilities which would enable further
expansion of capacity to meet possible future storage needs.
GAS AND OIL PRODUCING ACTIVITIES
After experiencing several years of adverse conditions in the industry, the
exploration and production operations posted a significant turnaround during
1996, boosted by higher gas and oil wellhead prices and increased production.
While the Company's 1997 capital spending program for exploration and
production operations is expected to be lower than 1996 spending, the
Company's long-range capital planning budget provides for additional amounts
for project-specific expenditures in this business segment, if and when
needed. Part of the Company's strategy for its exploration and production
operations is to further balance offshore and onshore production, and to
increase the oil portion of total production.
The Company's gas wellhead prices in 1996 averaged $2.46 a thousand cubic feet
(Mcf), up from $1.89 in 1995. Consistent with prices nationwide, the Company's
gas wellhead prices in 1996 were above prior
9
<PAGE>
ITEM 1. BUSINESS (Continued)
year levels for most of the period. The Company's average gas wellhead prices
are generally higher and less volatile than industry spot prices since its
average price reflects a mix of longer-term contracts. However, due to market-
based pricing mechanisms under many of the contracts, the Company's gas prices
generally follow industry trends. The average oil wellhead price in 1996
increased to $17.60 a barrel, compared with $16.04 in 1995, consistent with
the general increase in world oil prices.
The Company's total gas production in 1996 was 147.5 Bcf, up from 107.2 Bcf in
1995. Oil production was 4.8 million barrels, up 51 percent from 3.1 million
barrels in 1995.
During 1996, CNG Producing participated in the drilling of 152 gross wells (43
net), compared with 53 gross wells (26 net) drilled in 1995. The following
table sets forth 1996 drilling activity by region:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross Wells Drilled
Exploratory Development
- --------------------------------------------------------------------------------
<S> <C> <C>
Onshore (Southwest and West)............................ 5 4
Gulf of Mexico.......................................... 15 17
Appalachian Region...................................... -- 4
Canada.................................................. -- 107
--- ---
Total................................................. 20 132
=== ===
- --------------------------------------------------------------------------------
</TABLE>
Of the total 152 wells drilled in 1996, 137 were successful, a 90 percent
success rate. Of the 20 exploratory wells drilled, 8 were successful. In
response to market conditions, the Company increased its drilling activity
during 1996 in connection with an enhanced oil recovery program in Alberta,
Canada.
Total Company-owned proved gas reserves at year-end were 1,083 Bcf, up from
1,041 Bcf at the end of 1995. Proved oil reserves were 50.5 million barrels,
compared with 45.8 million barrels in 1995. CNG added 272 Bcf of gas
equivalent from additions, revisions, and purchases of gas and oil reserves in
1996 (See "Company-Owned Reserves," page 20). During 1996, major discoveries
were made in the Main Pass and West Cameron areas of the Gulf of Mexico, and
reserves equivalent to 47 Bcf of natural gas were acquired in Utah.
Natural gas production began in January 1996 at Popeye, a deep-water natural
gas discovery in the Green Canyon area of the Gulf of Mexico. The field is
producing over 140 million cubic feet of gas per day from two wells flowing
through a state of the art subsea facility developed to produce gas 2,000 feet
below sea level. The Company's portion of production from this field was the
equivalent of 28 Bcf of gas during 1996, including 1.1 million barrels of
condensate. CNG Producing's interest in this property is 37.5 percent. Shell
Offshore, Inc. is the operator in the joint venture and Mobil Oil Exploration
and Producing Southeast and BP Exploration Inc. are the other participants.
Production began in the first quarter of 1997 at Neptune, a deep-water oil
discovery at Viosca Knoll 826. This project, in which the Company holds a 50
percent interest, added proved reserves equivalent to 190 Bcf of gas in 1994,
representing the largest single addition to the Company's reserves in its
history. Additional proved reserves at Neptune equivalent to 18 Bcf of gas
were added during 1996. Facilities have been designed with Oryx Energy
Company, the operating partner, to produce up to 25,000 barrels of oil and 30
million cubic feet of natural gas a day. Neptune uses an innovative floating
production facility called a Spar, a 700-foot-long cylindrical structure that,
during 1996, was towed to the site, turned on end and anchored to the sea
floor with cables. This is the first time a Spar has been used in the Gulf of
Mexico to support a production platform.
Participation in the Popeye and Neptune projects has provided the Company
access to new technologies and the experience necessary to better evaluate
additional deep-water opportunities. Accordingly, the Company is evaluating a
deep-water prospect, Navarro, located in the Green Canyon area of the Gulf of
Mexico. This prospect is operated by the British-Borneo Petroleum Syndicate.
The Company expects to determine the commercial viability of this prospect by
the end of 1997.
10
<PAGE>
ITEM 1. BUSINESS (Continued)
The Company's gas gathering interests in the Gulf of Mexico are being expanded
as part of the merger of two undersea gathering systems. Effective December
31, 1996, Main Pass Gas Gathering Company (Main Pass), in which the Company
had a 33 1/3 percent ownership interest, was merged with Dauphin Island
Gathering System. Main Pass serves Company properties at Main Pass 223 and 225
and the Neptune project. The combined system, called Dauphin Island Gathering
Partners, is expected to be linked and expanded by adding 78 miles of 24-inch
pipe by the winter of 1997-98. The expansion will add 500 million cubic feet
of gas per day of capacity, bringing the total to 1.15 Bcf per day. CNG Energy
Services holds a 13.6 percent interest in the combined system. Other partners
are subsidiaries of PanEnergy Corp., MCN Corporation, Coastal Corporation and
Dauphin Island Gathering Company.
CNG Producing was the successful bidder on 5 leases offered in the federal
government's Gulf of Mexico lease sales in 1996, acquiring 5 blocks off the
coast of Louisiana. At year-end 1996, the Company held 2.0 million net acres
of exploration and production properties, approximately the same as year-end
1995. The Company's lease holdings include about 1.5 million net acres in the
Appalachian area, 328,600 in the offshore Gulf of Mexico, and 199,500 in the
inland areas of the Southwest, Gulf Coast and West. The Company holds a 21
percent interest in heavy oil properties in Alberta, Canada. Proved reserves
associated with the Canadian properties approximated 1 Bcf of gas and 8.6
million barrels of oil at December 31, 1996. On an energy-equivalent basis,
these reserves represent about 4 percent of the Company's total proved
reserves at that date.
The Company drilled 4 wells in the Appalachian Region during 1996. The Company
plans to continue production from these properties and to maintain its strong
acreage position in the Appalachian Region, and may seek to acquire additional
properties in this area that meet the Company's longer-term strategy.
The Company will continue to review its property inventory during 1997, and
sales of selected properties are possible depending on economic conditions.
GAS SALES AND TRANSPORTATION (Five-year statistics are on page 13.)
GAS SALES CUSTOMERS
Customers of the Company's gas distribution subsidiaries are as follows:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Customers Total* Residential Commercial Industrial Wholesale Nonregulated
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31,
1996 1,841,963 1,713,504 125,842 1,764 37 816
1995 1,824,497 1,695,949 126,304 1,736 12 496
1994 1,799,649 1,672,630 124,803 1,697 14 505
1993 1,777,157 1,656,752 118,170 1,688 31 516
1992 1,759,284 1,637,781 119,358 1,694 32 419
- --------------------------------------------------------------------------------
</TABLE>
*Includes residential and commercial space-heating customers as follows: 1992-
1,715,850; 1993-1,738,945; 1994-1,762,207; 1995-1,788,778; and 1996-1,808,062.
REGULATED GAS SALES
Sales of gas to residential customers in 1996 were 219 Bcf, up 7 Bcf from
1995, while sales to commercial customers were 67 Bcf in 1996, down 3 Bcf
compared to 1995. Residential gas sales volumes increased as colder weather
during 1996 resulted in higher gas usage by space-heating customers. The
weather in the Company's retail service areas in 1996 was 5 percent colder
than 1995, and was 6 percent colder than normal. Residential and commercial
sales volumes also reflect the net
11
<PAGE>
ITEM 1. BUSINESS (Continued)
addition of about 17,000 customers in 1996. The decline in commercial sales
volumes reflects the conversion of certain customers to users of
transportation service.
Industrial sales in 1996 were 7 Bcf, consistent with 1995. Due to both
availability and price, many industrial users buy gas directly from producers,
from marketers, or on the spot market, and contract with the subsidiaries for
transportation service. Total gas deliveries (sales and transportation) to
industrial customers were 139 Bcf in 1996, compared with 138 Bcf in 1995.
NONREGULATED SALES
Nonregulated gas sales in 1996 were 396 Bcf, down from 557 Bcf in 1995. Gas
sales by CNG Energy Services were 369 Bcf, compared to 523 Bcf in 1995.
Volumes related to gas brokering activity were 19 Bcf in 1996, down from 25
Bcf in 1995. Sales of Company-produced gas to nonaffiliates were 8 Bcf,
compared with 9 Bcf in 1995.
GAS TRANSPORTATION
Total transportation volumes in 1996 were 758 Bcf, up from 750 Bcf in 1995.
Transportation during the first quarter of 1996 was up 10 percent compared to
the prior year quarter due in part to colder weather. Total transportation
volumes include volumes transported by the distribution subsidiaries for
commercial, industrial and off-system customers amounting to 174 Bcf in 1996,
up 9 Bcf over 1995. This increase reflects transportation volumes for
commercial customers which were up 7 Bcf compared to the prior year.
12
<PAGE>
ITEM 1. BUSINESS (Continued)
GAS SALES, SUPPLY, TRANSPORTATION AND STORAGE STATISTICS
(Excludes affiliated transactions)
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
GAS SALES REVENUES (MILLIONS)
Regulated
Residential.................... $1,346.1 $1,214.2 $1,254.9 $1,222.5 $1,091.4
Commercial..................... 361.6 345.9 373.4 372.6 337.3
Industrial..................... 30.6 32.6 45.8 55.4 50.0
Wholesale...................... 13.9 4.7 5.2 422.7 190.8
Nonregulated.................... 1,092.5 997.7 723.6 541.8 282.0
-------- -------- -------- -------- --------
Total........................ $2,844.7 $2,595.1 $2,402.9 $2,615.0 $1,951.5
======== ======== ======== ======== ========
AVERAGE SALES RATES PER MCF
Regulated
Residential.................... $ 6.15 $ 5.71 $ 6.09 $ 5.76 $ 5.24
Commercial..................... 5.41 4.95 5.38 5.13 4.65
Industrial..................... 4.47 4.49 4.89 4.43 4.00
Wholesale...................... * * * 5.24 *
Nonregulated.................... 2.76 1.79 2.17 2.40 2.10
Weighted average............. $ 4.12 $ 3.07 $ 3.89 $ 4.33 $ 4.35
======== ======== ======== ======== ========
GAS REQUIREMENTS (BCF)
Regulated gas sales
Residential.................... 218.7 212.5 205.9 212.3 208.1
Commercial..................... 66.8 69.8 69.4 72.7 72.6
Industrial..................... 6.9 7.3 9.4 12.5 12.5
Wholesale...................... 1.6 .3 .3 80.7 21.2
Nonregulated gas sales.......... 396.1 556.6 332.8 226.0 134.4
-------- -------- -------- -------- --------
Total sales.................. 690.1 846.5 617.8 604.2 448.8
Used and unaccounted for........ 54.4 51.0 48.3 44.0 51.7
-------- -------- -------- -------- --------
Total requirements........... 744.5 897.5 666.1 648.2 500.5
======== ======== ======== ======== ========
GAS SUPPLY (BCF)
Purchased gas................... 618.3 771.1 559.6 485.2 370.6
Storage (input) withdrawal...... (21.3) 19.2 (13.0) 33.5 1.9
Gas produced
Gulf region.................... 108.1 68.3 76.4 81.6 78.9
Appalachian area............... 26.0 27.2 27.8 29.4 33.1
Other areas.................... 13.4 11.7 15.3 18.5 16.0
-------- -------- -------- -------- --------
Total produced............... 147.5 107.2 119.5 129.5 128.0
-------- -------- -------- -------- --------
Total supply................. 744.5 897.5 666.1 648.2 500.5
======== ======== ======== ======== ========
PURCHASED GAS COSTS
(MILLIONS)**................... $1,843.2 $1,611.9 $1,375.8 $1,349.5 $1,132.1
======== ======== ======== ======== ========
AVERAGE PURCHASE RATES PER
MCF**.......................... $ 2.98 $ 2.09 $ 2.46 $ 2.78 $ 3.05
======== ======== ======== ======== ========
GAS TRANSPORTATION
Revenues (Millions)............. $ 346.6 $ 333.2 $ 293.7 $ 222.5 $ 201.0
======== ======== ======== ======== ========
Gas Transported (Bcf)........... 758.5 749.8 724.9 587.5 613.1
======== ======== ======== ======== ========
GAS STORED AT DECEMBER 31 (BCF). 426.2 406.4 427.4 416.4 450.4
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------
</TABLE>
*Demand charges and low sales volumes produce an average rate which is not
meaningful.
**Includes transportation charges.
13
<PAGE>
ITEM 1. BUSINESS (Continued)
MARKET EXPANSION
In recent years the Company has pursued a broad program designed to expand its
interstate pipeline system and extend its marketing territory. The Company's
principal objective has been to build long-term supply relationships with
customers in the growing markets at the perimeter of its system, markets which
offer opportunities for growth in throughput due to their increasing demand
for energy. The Company has taken advantage of selected market expansion
opportunities, concentrating its efforts primarily in the Northeast and along
the East Coast. These markets are particularly attractive in that gas space
heating is not yet as widely used in these areas as in the Company's
traditional service areas of western Pennsylvania, eastern Ohio, West Virginia
and upstate New York. Because of its large gas storage capacity and the
location of its gridlike pipeline system in close proximity to these markets,
the Company has an opportunity to be an important gas supplier to utilities
with growing space-heating markets and for customers seeking an
environmentally clean, efficient fuel for electric generation.
RETAIL UNBUNDLING
Similar to the unbundling 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 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, 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.
INTERNATIONAL ACTIVITIES
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, 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.
14
<PAGE>
ITEM 1. BUSINESS (Continued)
ADDITIONAL USES FOR NATURAL GAS
During 1996, the Company continued its involvement with a number of gas
burning technologies that provide opportunities to improve customer efficiency
while promoting the use of natural gas in markets that are not sensitive to
the weather or economic downturn. The advancement of such technologies appears
beneficial as business entities strive to comply with provisions of the Clean
Air Act, legislation which applies strict anti-pollution standards to
factories, fleet and mass transit vehicles, and electric power plants. The law
is likely to increase demand for natural gas, but the extent thereof will
depend on how the Act is implemented and enforced. Gas demand could also
increase as the result of the Energy Policy Act of 1992 which requires and
encourages large vehicle fleets to operate on alternative fuels such as
natural gas. The Energy Policy Act also created a new class of independent
power producers exempt from utility regulation, which could lead to the
construction of additional gas-fueled generating facilities.
The Company is also pursuing other technological opportunities, including gas
cooling equipment, fuel cell power generation, coal drying processes and the
promotion of natural gas powered vehicles (NGVs). Fleet operators and mass
transit authorities are using NGVs for both fuel cost efficiencies and to
reduce environmental pollution. Despite the environmental benefits of NGVs, it
appears unlikely that such vehicles will replace a significant number of
gasoline powered vehicles in the near future, given the lack of a nationwide
network of refueling facilities and the current cost of retrofitting vehicles.
However, effective September 1, 1996, the Energy Policy Act requires state
fleets and alternate fuel providers in the nation's 250 largest urban areas to
acquire alternative fuel vehicles. A certain percentage of new light-duty
fleet vehicles must be capable of operating on alternative fuels, which
include natural gas.
RATE MATTERS
The regulated subsidiaries continue to seek general rate increases on a timely
basis to recover increased operating costs and to ensure that rates of return
are compatible with the cost of raising capital. In addition to general rate
increases, subsidiary companies make separate filings with their respective
regulatory commissions to reflect changes in the costs of purchased gas.
As previously reported, 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.
15
<PAGE>
ITEM 1. BUSINESS (Concluded)
EXECUTIVE OFFICERS OF THE COMPANY (Note 1)
<TABLE>
- ------------------------------------------------------------------------------------
<CAPTION>
Name, Age and Business Experience
Position (Note 2) During Past Five Years
- ------------------------------------------------------------------------------------
<S> <C>
George A. Davidson, Jr. Mr. Davidson was elected to his present position on May
(58) 19, 1987, and has been a Director since October 1985.
Chairman of the Board
and
Chief Executive Officer,
and Director
Robert W. Best (50) Mr. Best was elected to this position on July 1, 1996. He
Senior Vice President, joined the Company as Senior Vice President on January 1,
Regulated Businesses 1996. Prior to joining the Company, Mr. Best was Senior
(Note 3) Vice President, Natural Gas of Transco Energy from
February 1992 to May 1995 and President and Chief
Operating Officer of Texas Gas (a wholly owned subsidiary
of Transco Energy) from April 1989 to May 1995.
David M. Westfall (49) Mr. Westfall was elected to his present position on
Senior Vice President December 1, 1995. He served as Senior Vice President,
and Financial from January 1995 to November 1995. From January
Chief Financial Officer 1988 to January 1995, he served as Senior Vice President
at CNG Transmission.
Stephen E. Williams (48) Mr. Williams was elected to his present position on
Senior Vice President January 1, 1993. He served as Associate General Counsel
and from September 1992 to January 1993. From April 1987 to
General Counsel September 1992, he served as General Counsel and Secretary
of CNG Transmission.
Stephen R. McGreevy (46) Mr. McGreevy was elected to his present position on March
Vice President, 1, 1993. He served as Controller from January 1986 to
Accounting March 1993.
and Financial Control
Laura J. McKeown (38) Ms. McKeown was elected to her present position on May 16,
Secretary 1989.
Robert M. Sable, Jr. Mr. Sable was elected to his present position on May 1,
(45) 1995. He served as Senior Assistant Treasurer from January
Treasurer 1993 to April 1995 and Assistant Treasurer from May 1987
to January 1993.
Thomas F. Garbe (44) Mr. Garbe was elected to his present position on March 1,
Controller 1993. He served as Senior Assistant Controller from May
1991 to March 1993.
- ------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) The Company has been advised that there are no family relationships
between any of the officers listed, and there is no arrangement or
understanding between any of them and any other person pursuant to which
the individual was elected as an officer.
(2) The By-Laws of the Company provide that each officer shall hold office
until a successor is chosen and qualified.
(3) Mr. Best resigned from the Company effective March 8, 1997.
16
<PAGE>
ITEM 2. PROPERTIES
GENERAL INFORMATION ON FACILITIES (Maps are on pages 18 and 19.)
The Company's total gross investment in property, plant and equipment was $8.3
billion at December 31, 1996. The largest portion of this investment (60%) is
in facilities located in the Appalachian area. Another significant portion
(25%) is located in the Gulf of Mexico.
Of the $8.3 billion investment, $3.7 billion is in production and gathering
systems, of which 61 percent is invested in the Gulf of Mexico and the Gulf
coast and 24 percent in the Appalachian area. The Company's production
subsidiary, CNG Producing, accounts for $3.2 billion of the $3.7 billion
investment, and CNG Transmission and the distribution subsidiaries account for
the remaining $.5 billion. In addition to the wells and acreage listed
elsewhere in ITEM 2, this investment includes 6,394 miles of gathering lines
which are located almost entirely within the Appalachian area.
The Company's investment in its gas distribution network includes 29,482 miles
of pipe, exclusive of service pipe, the cost of which represents 60% of the
$1.8 billion invested in the total function.
The Company's storage operation, the largest in the industry, consists of 26
storage fields, 332,604 acres of operated leaseholds, 2,066 storage wells and
816 miles of pipe. The investment in storage properties is $719 million,
including $128 million of cushion gas stored.
Of the $1.6 billion invested in transmission facilities, 67% represents the
cost of 7,094 miles of pipe required to move large volumes of gas throughout
the Company's operating area.
The Company has 96 compressor stations with 487,319 installed compressor
horsepower. Some of the stations are used interchangeably for several
functions.
The Company's investment in its natural gas system is considered suitable to
do all things necessary to bring gas to the consumer. The Company's properties
provided the capacity to meet a record system peak day sendout, including
transportation service, of 11.4 Bcf on February 6, 1995. The system peak day
sendout in 1996 was 10.0 Bcf on February 4.
17
<PAGE>
The following graphic material which appeared in the paper format version of the
document is omitted from this electronic format document:
Map of Principal Facilities at December 31, 1996
This map shows the primary operating areas of Consolidated Natural Gas Company
in Ohio, Pennsylvania, Virginia and West Virginia. The map shows the principal
cities served at retail including Cleveland, Akron, Youngstown, Canton, Warren,
Lima, Ashtabula and Marietta in Ohio; Pittsburgh (a portion), Altoona and
Johnstown in Pennsylvania; Norfolk, Newport News and Williamsburg in Virginia;
and Clarksburg and Parkersburg in West Virginia. The map also shows the general
location of Consolidated's pipelines and joint venture pipelines, including gas
delivery connections with customers and gas receipt or delivery connections with
other pipelines. Also shown on the map are the general locations of certain
compressor facilities and underground storage fields.
18
<PAGE>
The following graphic material which appeared in the paper format version of the
document is omitted from this electronic format document:
Map of Exploration and Production Areas at December 31, 1996
This United States map shows the general areas in which Consolidated conducts
its exploration and production activities. These areas include: the Gulf of
Mexico, offshore Louisiana and Texas; the Gulf Coast Basin; Permian Basin;
Anadarko Basin; Arkoma Basin; Black Warrior Basin; San Juan Basin; Williston
Basin; Michigan Basin; Rocky Mountain Basins and the Appalachian Region. Also
shown is the general location of Consolidated's Canadian exploration and
production properties in Alberta, Canada.
19
<PAGE>
ITEM 2. PROPERTIES (Continued)
GAS AND OIL PRODUCING ACTIVITIES
Properties and activities subject to cost-of-service rate regulation are shown
together with non-cost-of-service properties (those subject to contractual
arrangements, and Canadian properties) and activities in the statistical
presentations which follow.
COMPANY-OWNED RESERVES
Estimated net quantities of proved gas and oil reserves at December 31, 1994
through 1996, follow:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Proved Total Proved Total Proved Total
Developed Proved Developed Proved Developed Proved
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gas Reserves (Bcf)
Non-cost-of-service........ 900 1,040 717 985 730 901
Cost-of-service*........... 43 43 56 56 71 71
------ ------ ------ ------ ------ ------
Total.................... 943 1,083 773 1,041 801 972
====== ====== ====== ====== ====== ======
Oil Reserves (000 Bbls)
Non-cost-of-service........ 24,989 50,457 19,838 45,791 20,379 46,255
Cost-of-service*........... -- -- -- -- 256 256
------ ------ ------ ------ ------ ------
Total.................... 24,989 50,457 19,838 45,791 20,635 46,511
====== ====== ====== ====== ====== ======
</TABLE>
* 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.
- -------------------------------------------------------------------------------
CNG Producing, Hope Gas and CNG Transmission file Form EIA-23 with the
Department of Energy. The reserves reported on Form EIA-23 at December 31,
1995, as well as those which will be reported at December 31, 1996, are not
reconcilable with Company-owned reserves because they are calculated on an
operated basis and include working interest reserves of all parties.
QUANTITIES OF GAS AND OIL PRODUCED
Net quantities (net before royalty) of gas and oil produced during each of the
last three years follow:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gas Production (Bcf)
Non-cost-of-service......................................... 145 103 114
Cost-of-service............................................. 3 4 6
----- ----- -----
Total..................................................... 148 107 120
===== ===== =====
Oil Production (000 Bbls)
Non-cost-of-service......................................... 4,766 3,132 3,333
Cost-of-service............................................. -- 17 24
----- ----- -----
Total..................................................... 4,766 3,149 3,357
===== ===== =====
- --------------------------------------------------------------------------------
</TABLE>
The average sales price (including transfers to other operations as determined
under Financial Accounting Standards Board rules) per Mcf of non-cost-of-
service gas produced during the years 1994 through 1996 was $2.16, $1.89 and
$2.46, respectively. The respective average sales prices for oil were $14.45,
$16.04
20
<PAGE>
ITEM 2. PROPERTIES (Continued)
and $17.60 per barrel. The average production (lifting) cost per Mcf
equivalent of non-cost-of-service gas and oil produced during the years 1994
through 1996 was $.32, $.34 and $.32, respectively.
PRODUCTIVE WELLS
The number of productive gas and oil wells in which the subsidiaries have an
interest at December 31, 1996, follow:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Gas Wells Oil Wells
----------- ---------
<S> <C> <C> <C> <C>
Gross Net Gross Net
- --------------------------------------------------------------------------------
Non-cost-of-service*...................................... 5,141 4,456 965 397
Cost-of-service........................................... 1,474 1,188 -- --
----- ----- ----- ---
Total................................................... 6,615 5,644 965 397
===== ===== ===== ===
- --------------------------------------------------------------------------------
</TABLE>
*Includes 80 gross (23 net) multiple completion gas wells and 22 gross (8 net)
multiple completion oil wells.
ACREAGE
The following table sets forth the gross and net developed and undeveloped
acreage of the subsidiaries at December 31, 1996:
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Developed Acreage Undeveloped Acreage
------------------- -------------------
Gross Net Gross Net
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-cost-of-service..................... 1,574,889 1,186,979 628,130 410,329
Cost-of-service......................... 390,718 390,718 28,575 28,575
--------- --------- --------- ---------
Total................................. 1,965,607 1,577,697 656,705 438,904
========= ========= ========= =========
- --------------------------------------------------------------------------------
</TABLE>
Approximately 40% of the foregoing non-cost-of-service undeveloped net acreage
and 100% of the cost-of-service undeveloped net acreage is located in the
Appalachian area.
NET WELLS DRILLED IN THE CALENDAR YEAR
The number of non-cost-of-service net wells completed during each of the last
three years follow (there were no cost-of-service wells completed during this
three-year period):
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Exploratory Development Total
-------------- --------------- --------------
Productive Dry Productive* Dry Productive Dry
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Years Ended December 31,
1996............................ 4 5 33 1 37 6
1995............................ 4 9 12 1 16 10
1994............................ 2 10 22 1 24 11
- --------------------------------------------------------------------------------
</TABLE>
*Includes Canadian completions: 1996--23 wells, 1995--3 wells and 1994--1
well.
As of December 31, 1996, 16 gross (5 net) non-cost-of-service wells were in
process of drilling, including wells temporarily suspended. As of December 31,
1996, the Company was engaged in waterflood projects in Oklahoma, a gas
injection program in the Rocky Mountains, and an enhanced oil recovery program
in Alberta, Canada.
21
<PAGE>
ITEM 2. PROPERTIES (Concluded)
GAS PURCHASE CONTRACT RESERVES (AT DECEMBER 31, 1996) AND AVAILABILITY OF
SUPPLY (CALENDAR YEAR 1997)
Gas purchase reserves under contract with independent producers in the
Appalachian area total 381 Bcf at December 31, 1996. In addition, at December
31, 1996, the Company had gas supply contracts with various other producers
and marketers with contract lengths ranging from a few months to eight years.
The volume of gas available to the Company under these supply contracts totals
284 Bcf if all volumes are requested. These gas purchase contract reserve and
gas supply contract volume amounts are as contained in the February 11, 1997
report of Ralph E. Davis Associates, Inc. Of the total 381 Bcf under contract
from Appalachian producers, the volume of gas expected to be purchased in 1997
under such contracts is not estimable as such contracts are generally life-of-
the-well arrangements and contain provisions adaptable to changing market
conditions. Of the total 284 Bcf available under contract from other producers
and marketers, approximately 211 Bcf of gas will be available to the Company
in 1997, assuming all volumes are requested.
The Company anticipates that substantial volumes of gas will be available for
purchase during 1997 on the spot market. Due to the nature of spot market
transactions, the volumes of such gas available to the Company in 1997 cannot
be reasonably estimated. However, for the calendar year 1997, the Company
expects its distribution subsidiaries to have approximately 356 Bcf of firm
transport capacity available on upstream pipelines and 124 Bcf of storage
capacity available to meet their customer requirements.
The volumes expected to be available from Company-owned wells in 1997 amount
to 158 Bcf of gas and 7,731 thousand barrels of oil. Included in these amounts
are 155 Bcf of gas and 7,731 thousand barrels of oil expected to be available
from the Company's non-cost-of-service properties. The foregoing volumes are
based on the Company's current production estimates of proved gas and oil
reserves. Actual production may differ from these amounts due to a number of
factors, including changing market conditions and the acquisition or sale of
reserves.
ITEM 3. LEGAL PROCEEDINGS
Environmental-related information is hereby incorporated by reference to the
Notes to Consolidated Financial Statements contained in Appendix I to the
Company's definitive proxy statement filed with the SEC pursuant to Regulation
14A and included as Exhibit 99 to this Form 10-K. Reference is made thereto as
follows: Note 16, page 41.
Reference is made to "Rate Matters," page 15, for descriptions of certain
regulatory proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
-------
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
This information is hereby incorporated by reference to the Notes to
Consolidated Financial Statements contained in Appendix I to the Company's
definitive proxy statement filed with the SEC pursuant to Regulation 14A and
included as Exhibit 99 to this Form 10-K. Reference is made thereto as
follows: Note 19(C), page 50.
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
This information is hereby incorporated by reference to page 16 of Appendix I
to the Company's definitive proxy statement filed with the SEC pursuant to
Regulation 14A and included as Exhibit 99 to this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This information is hereby incorporated by reference to pages 1 through 15 of
Appendix I to the Company's definitive proxy statement filed with the SEC
pursuant to Regulation 14A and included as Exhibit 99 to this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUPPLEMENTARY DATA
This information is hereby incorporated by reference to the Notes to
Consolidated Financial Statements contained in Appendix I to the Company's
definitive proxy statement filed with the SEC pursuant to Regulation 14A and
included as Exhibit 99 to this Form 10-K. Reference is made thereto as
follows: Gas and Oil Producing Activities--Note 19(A), page 44; Quarterly
Financial Data--Note 19(B), page 49.
FINANCIAL STATEMENTS
This information is hereby incorporated by reference to pages 17 through 50 of
Appendix I to the Company's definitive proxy statement filed with the SEC
pursuant to Regulation 14A and included as Exhibit 99 to this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information concerning the directors of the Company is hereby incorporated by
reference to the Company's definitive proxy statement filed with the SEC
pursuant to Regulation 14A. Information concerning the executive officers of
the Company is on page 16 of this Report.
ITEM 11. EXECUTIVE COMPENSATION
This information is hereby incorporated by reference to the Company's
definitive proxy statement filed with the SEC pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is hereby incorporated by reference to the Company's
definitive proxy statement filed with the SEC pursuant to Regulation 14A.
23
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is hereby incorporated by reference to the Company's
definitive proxy statement filed with the SEC pursuant to Regulation 14A.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the calendar year
1996, the year for which this Form 10-K is being filed.
DOCUMENTS FILED AS A PART OF THIS REPORT
Financial Statements
All of the financial statements filed as a part of this Report are hereby
incorporated by reference to Appendix I to the Company's definitive proxy
statement filed with the SEC pursuant to Regulation 14A and included as
Exhibit 99 to this Form 10-K. Reference is made thereto as follows:
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Page in
Appendix I
- -------------------------------------------------------------------------------
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
Schedule II--Valuation and Qualifying Accounts...................... Note 2
</TABLE>
Notes:
(1) Schedules I, III, IV, and V have been excluded because they are not
applicable.
(2) Omitted inasmuch as amounts involved are not significant.
- -------------------------------------------------------------------------------
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-52585,
33-63931 and 333-10869) and Form S-8 (Nos. 2-77204, 2-97948, 33-40478, 33-
44892 and 333-18783) of Consolidated Natural Gas Company of our report dated
February 18, 1997, appearing on page 17 of Appendix I to the Consolidated
Natural Gas Company proxy statement for the 1997 annual meeting of
stockholders which is incorporated in this Annual Report on Form 10-K. We also
consent to the references to us under the heading "Experts" in certain
Prospectuses.
PRICE WATERHOUSE LLP
600 Grant Street
Pittsburgh, Pennsylvania 15219-9954
March 24, 1997
24
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
EXHIBITS
- --------------------------------------------------------------------------------
SEC
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
(3) Articles of Incorporation and By-Laws:
(3A) Certificate of Incorporation of Consolidated Natural Gas Company,
restated October 4, 1990 (incorporated by reference to Exhibit A-
1 to the Application-Declaration of Consolidated Natural Gas
Company on Form U-1, File No. 70-7811), as amended May 31, 1996
(such amendment incorporated by reference to Exhibit 4(B) to the
Form S-3 Registration Statement under the Securities Act of 1933,
Consolidated Natural Gas Company, Registration No. 333-10869)
(3B) By-Laws of Consolidated Natural Gas Company, last amended
February 18, 1997, are filed herewith
(4) Instruments Defining the Rights of Security Holders, Including
Indentures:
(4A) (1) Indentures of Consolidated Natural Gas Company:
Indentures of Consolidated Natural Gas Company are incorporated
by reference to previously filed material as indicated on the
list filed herewith
(2) Note Purchase Agreement of Virginia Natural Gas:
Note Purchase Agreement dated as of January 1, 1989, between
Virginia Natural Gas, Inc. and the Aid Association for Lutherans
relating to $20,000,000 principal amount of 9.94% Senior Notes,
Series A, due January 1, 1999 (incorporated by reference to
Exhibit B-1 to the Application-Declaration of Consolidated
Natural Gas Company on Form U-1, File No. 70-7667)
(4B) Section 203 of the Delaware General Corporation Law, "Business
Combinations With Interested Stockholders," effective February 2,
1988 (incorporated by reference to Exhibit (4B) filed with
Consolidated Natural Gas Company's Form 10-K for the year ended
December 31, 1987, File No. 1-3196). Other portions of the
Delaware General Corporation Law affecting security holder rights
are considered routine and are not filed hereunder
(4C) Description of Consolidated Natural Gas Company Rights Agreement,
is hereby incorporated by reference to Exhibit 1 to the Current
Report on Form 8-K filed on January 23, 1996
(10) Material Contracts:
The following exhibits are filed with this Form 10-K by being
incorporated by reference to their filing in the Company's Forms 10-K
for previous years. The following table indicates for each of such
exhibits the Form 10-K, File No. 1-3196, where such exhibit was filed.
Exhibits not included in this table are filed herewith or incorporated
by reference to another source as indicated below.
<TABLE>
<CAPTION>
Form 10-K Exhibit Number Reporting Year of Form 10-K
------------------------ ---------------------------
<S> <C>
(10A), (10B), (10C), (10E), (10G) 1987
(10H), (10I) 1989
(10F), (10J), (10L) 1994
(10D), (10K), (10N) 1995
</TABLE>
25
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Continued)
EXHIBITS (Continued)
- --------------------------------------------------------------------------------
SEC
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
(10A) Form of Split Dollar Insurance Agreement between Consolidated
Natural Gas Company and certain employees and Directors
(10B) Form of Supplemental Death Benefit Payment Agreement between
Consolidated Natural Gas Company and certain employees and
Directors
(10C) Consolidated Natural Gas Company Supplemental Retirement Benefit
Plan
(10D) System Supplemental Retirement Plan for Certain Management
Employees of Consolidated Natural Gas Company and Its
Participating Subsidiaries, as amended December 12, 1995
(10E) Form of agreement between Consolidated Natural Gas Company and
non-employee Directors for deferral of payment of retainer and
attendance fees, effective before 1987
(10F) Deferred Compensation Plan for Directors of Consolidated Natural
Gas Company, effective for years beginning with 1987, as amended
December 13, 1994
(10G) Consolidated Natural Gas Company Cash Incentive Bonus Deferral
Plan
(10H) Form of Change of Control Employment Agreement between
Consolidated Natural Gas Company and certain employees
(10I) Form of Change of Control Salary Continuation Agreement between
Consolidated Natural Gas Company and certain employees
(10J) Consolidated Natural Gas Company Annual Executive Incentive
Program, as amended December 13, 1994
(10K) Unfunded Supplemental Benefit Plan for Employees of Consolidated
Natural Gas Company and Its Participating Subsidiaries Who Are
Not Represented by a Recognized Union, as amended December 12,
1995
(10L) Consolidated Natural Gas Company Non-Employee Directors'
Restricted Stock Plan
(10M) Consolidated Natural Gas Company 1995 Employee Stock Incentive
Plan, as amended September 10, 1996, is filed herewith
(10N) Form of Change of Control Employment Agreement between
Consolidated Natural Gas Company and certain employees dated
December 12, 1995
(10O) Consolidated Natural Gas Company 1991 Stock Incentive Plan, as
amended September 10, 1996, is filed herewith
(10P) Trust Agreement between Consolidated Natural Gas Company and
Mellon Bank (Trustee) relating to funding of certain beneficial
plans for certain employees, dated June 1, 1995, is filed
herewith
(10Q) Consolidated Natural Gas Company 1997 Stock Incentive Plan is
incorporated by reference to Exhibit A in the Company's 1997
definitive proxy statement filed with the SEC
26
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(Concluded)
EXHIBITS (Concluded)
- --------------------------------------------------------------------------------
SEC
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
(11) Statement re Computation of Per Share Earnings:
Computations of Earnings Per Share of Common Stock, Primary Earnings
Per Share, and Fully Diluted Earnings Per Share of Consolidated
Natural Gas Company and Subsidiaries for the years ended December 31,
1994 through 1996, are filed herewith
(12) Statement re Computation of Ratios:
Ratio of Earnings to Fixed Charges of Consolidated Natural Gas Company
and Subsidiaries for the calendar years 1992-1996, inclusive, are
filed herewith
(21) Subsidiaries of the Registrant:
Subsidiaries of Consolidated Natural Gas Company, is filed herewith
(23) Consents of Experts and Counsel:
(23A) Report of Ralph E. Davis Associates, Inc., independent
geologists, dated February 11, 1997, and consent letter
authorizing the filing of such report as an exhibit to
Consolidated Natural Gas Company's Form 10-K for the year ended
December 31, 1996, are filed herewith
(23B) Consent of Price Waterhouse LLP--included as part of this ITEM
14
(27) Financial Data Schedule, is filed herewith
(99) Appendix I to the Consolidated Natural Gas Company "Notice of Annual
Meeting and Proxy Statement, 1997," is filed herewith
- -------------------------------------------------------------------------------
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CONSOLIDATED NATURAL GAS COMPANY
--------------------------------
(Registrant)
/S/ GEORGE A. DAVIDSON, JR.
By --------------------------------
(George A. Davidson, Jr.)
Chairman of the Board
March 24, 1997 and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 24, 1997.
/S/ GEORGE A. DAVIDSON, JR. /S/ PAUL E. LEGO
- ------------------------------- --------------------------------
(George A. Davidson, Jr.) (Paul E. Lego)
Chairman of the Board Director
and Chief Executive Officer,
and Director
/S/ D. M. WESTFALL /S/ MARGARET A. MCKENNA
- ------------------------------- --------------------------------
(D. M. Westfall) (Margaret A. McKenna)
Senior Vice President Director
and Chief Financial Officer
/S/ S. R. MCGREEVY /S/ STEVEN A. MINTER
- ------------------------------- --------------------------------
(S. R. McGreevy) (Steven A. Minter)
Vice President, Accounting Director
and Financial Control
/S/ WILLIAM S. BARRACK, JR. /S/ WALTER R. PEIRSON
- ------------------------------- --------------------------------
(William S. Barrack, Jr.) (Walter R. Peirson)
Director Director
/S/ J. W. CONNOLLY /S/ RICHARD P. SIMMONS
- ------------------------------- --------------------------------
(J. W. Connolly) (Richard P. Simmons)
Director Director
/S/ RAY J. GROVES /S/ LOIS WYSE
- ------------------------------- --------------------------------
(Ray J. Groves) (Lois Wyse)
Director Director
28
<PAGE>
EXHIBIT INDEX
-------------------------------------------------------------------------------
SEC
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
(3) Articles of Incorporation and By-Laws:
(3A) Certificate of Incorporation of Consolidated Natural Gas Company,
restated October 4, 1990 (incorporated by reference to Exhibit A-
1 to the Application-Declaration of Consolidated Natural Gas
Company on Form U-1, File No. 70-7811), as amended May 31, 1996
(such amendment incorporated by reference to Exhibit 4(B) to the
Form S-3 Registration Statement under the Securities Act of 1933,
Consolidated Natural Gas Company, Registration No. 333-10869)
(3B) By-Laws of Consolidated Natural Gas Company, last amended
February 18, 1997, are filed herewith
(4) Instruments Defining the Rights of Security Holders, Including
Indentures:
(4A) (1) Indentures of Consolidated Natural Gas Company:
Indentures of Consolidated Natural Gas Company are incorporated
by reference to previously filed material as indicated on the
list filed herewith
(2) Note Purchase Agreement of Virginia Natural Gas:
Note Purchase Agreement dated as of January 1, 1989, between
Virginia Natural Gas, Inc. and the Aid Association for Lutherans
relating to $20,000,000 principal amount of 9.94% Senior Notes,
Series A, due January 1, 1999 (incorporated by reference to
Exhibit B-1 to the Application-Declaration of Consolidated
Natural Gas Company on Form U-1, File No. 70-7667)
(4B) Section 203 of the Delaware General Corporation Law, "Business
Combinations With Interested Stockholders," effective February 2,
1988 (incorporated by reference to Exhibit (4B) filed with
Consolidated Natural Gas Company's Form 10-K for the year ended
December 31, 1987, File No. 1-3196). Other portions of the
Delaware General Corporation Law affecting security holder rights
are considered routine and are not filed hereunder
(4C) Description of Consolidated Natural Gas Company Rights Agreement,
is hereby incorporated by reference to Exhibit 1 to the Current
Report on Form 8-K filed on January 23, 1996
(10) Material Contracts:
The following exhibits are filed with this Form 10-K by being
incorporated by reference to their filing in the Company's Forms 10-K
for previous years. The following table indicates for each of such
exhibits the Form 10-K, File No. 1-3196, where such exhibit was filed.
Exhibits not included in this table are filed herewith or incorporated
by reference to another source as indicated below.
<TABLE>
<CAPTION>
Form 10-K Exhibit Number Reporting Year of Form 10-K
------------------------ ---------------------------
<S> <C>
(10A), (10B), (10C), (10E), (10G) 1987
(10H), (10 I) 1989
(10F), (10J), (10L) 1994
(10D), (10K), (10N) 1995
</TABLE>
(10A) Form of Split Dollar Insurance Agreement between Consolidated
Natural Gas Company and certain employees and Directors
<PAGE>
- --------------------------------------------------------------------------------
SEC
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
(10B) Form of Supplemental Death Benefit Payment Agreement between
Consolidated Natural Gas Company and certain employees and
Directors
(10C) Consolidated Natural Gas Company Supplemental Retirement
Benefit Plan
(10D) System Supplemental Retirement Plan for Certain Management
Employees of Consolidated Natural Gas Company and Its
Participating Subsidiaries, as amended December 12, 1995
(10E) Form of agreement between Consolidated Natural Gas Company and
non-employee Directors for deferral of payment of retainer and
attendance fees, effective before 1987
(10F) Deferred Compensation Plan for Directors of Consolidated
Natural Gas Company, effective for years beginning with 1987,
as amended December 13, 1994
(10G) Consolidated Natural Gas Company Cash Incentive Bonus Deferral
Plan
(10H) Form of Change of Control Employment Agreement between
Consolidated Natural Gas Company and certain employees
(10I) Form of Change of Control Salary Continuation Agreement between
Consolidated Natural Gas Company and certain employees
(10J) Consolidated Natural Gas Company Annual Executive Incentive
Program, as amended December 13, 1994
(10K) Unfunded Supplemental Benefit Plan for Employees of
Consolidated Natural Gas Company and Its Participating
Subsidiaries Who Are Not Represented by a Recognized Union, as
amended December 12, 1995
(10L) Consolidated Natural Gas Company Non-Employee Directors'
Restricted Stock Plan
(10M) Consolidated Natural Gas Company 1995 Employee Stock Incentive
Plan, as amended September 10, 1996, is filed herewith
(10N) Form of Change of Control Employment Agreement between
Consolidated Natural Gas Company and certain employees dated
December 12, 1995
(10O) Consolidated Natural Gas Company 1991 Stock Incentive Plan, as
amended September 10, 1996, is filed herewith
(10P) Trust Agreement between Consolidated Natural Gas Company and
Mellon Bank (Trustee) relating to funding of certain beneficial
plans for certain employees, dated June 1, 1995, is filed
herewith
(10Q) Consolidated Natural Gas Company 1997 Stock Incentive Plan is
incorporated by reference to Exhibit A in the Company's 1997
definitive proxy statement filed with the SEC
<PAGE>
-------------------------------------------------------------------------------
SEC
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
(11) Statement re Computation of Per Share Earnings:
Computations of Earnings Per Share of Common Stock, Primary Earnings
Per Share, and Fully Diluted Earnings Per Share of Consolidated
Natural Gas Company and Subsidiaries for the years ended December 31,
1994 through 1996, are filed herewith
(12) Statement re Computation of Ratios:
Ratio of Earnings to Fixed Charges of Consolidated Natural Gas Company
and Subsidiaries for the calendar years 1992-1996, inclusive, are
filed herewith
(21) Subsidiaries of the Registrant:
Subsidiaries of Consolidated Natural Gas Company, is filed herewith
(23) Consents of Experts and Counsel:
(23A) Report of Ralph E. Davis Associates, Inc., independent
geologists, dated February 11, 1997, and consent letter
authorizing the filing of such report as an exhibit to
Consolidated Natural Gas Company's Form 10-K for the year ended
December 31, 1996, are filed herewith
(23B) Consent of Price Waterhouse LLP - included as part of ITEM 14
(27) Financial Data Schedule, is filed herewith
(99) Appendix I to the Consolidated Natural Gas Company "Notice of Annual
Meeting and Proxy Statement, 1997," is filed herewith
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 3.B
CONSOLIDATED NATURAL GAS COMPANY
BYLAWS
AS LAST AMENDED
FEBRUARY 18, 1997
<PAGE>
CONSOLIDATED NATURAL GAS COMPANY
--ooOoo--
BYLAWS
OFFICES
-------
1. The principal office shall be in the City of Wilmington, County of New
Castle, State of Delaware, and the name of the resident agent in charge thereof
is The Corporation Trust Company.
2. The corporation may also have offices at such other places as the board
of directors may from time to time determine or the business of the corporation
may require
STOCKHOLDERS' MEETING
---------------------
3. The annual meetings of the stockholders for the election of directors
shall be held at the office of the corporation in the City of Wilmington, County
of New Castle, State of Delaware, or at such other place, within or without the
State of Delaware, as may from time to time be designated by the board of
directors. The board of directors shall authorize the Secretary of the
corporation to select the location within said place for the holding of such
meeting. Meetings of stockholders for any other purpose may be held either
within or without the State of Delaware at such place and time as shall be
designated in the notice of the meetings.
4. The annual meeting of stockholders shall be held on the second Tuesday
in the month of April in each year if not a legal holiday, and if a legal
holiday then on the next secular day following, at such time as shall be
designated by the Secretary and set forth in the notice of the meeting. The
stockholders shall elect directors by a plurality vote, by ballot, and transact
such other business as may properly be brought before the meeting.
5. Written notice of annual meeting shall be served upon or mailed to each
stockholder entitled to vote thereat at such address as appears on the books of
the corporation, at least thirty days prior to the meeting.
1
<PAGE>
6. At least ten days before every election of directors, a complete list
of the stockholders entitled to vote at said election, arranged in alphabetical
order, with the residence of each and the number of voting shares held by each,
shall be prepared by the Secretary. Such list shall be open at the place where
the election is to be held for said ten days, to the examination of any
stockholder, and shall be produced and kept at the time and place of election
during the whole time thereof, and subject to the inspection of any stockholder
who may be present.
7. Except as otherwise provided by applicable law, the Certificate of
Incorporation or these Bylaws, a special meeting of the stockholders of the
corporation may be called at any time by the chairman of the board and shall be
called by the chairman of the board or secretary at the request in writing of a
majority of the board of directors, or at the request in writing of the holders
of seventy-five percent or more of the issued and outstanding shares of stock of
the corporation entitled to vote thereon. Such request shall state the purpose
or purposes of the proposed meeting.
8. Written notice of a special meeting of stockholders stating the time
and place and object thereof, shall be served upon or mailed to each stockholder
entitled to vote thereat at such address as appears on the books of the
corporation, at least twenty days before such meeting.
9. Business transacted at all special meetings shall be confined to the
objects stated in the call.
9-A. The Company shall appoint inspectors of election for meetings of
stockholders in accordance with the provisions of applicable law. Such
inspectors of election shall have the powers, duties, and responsibilities as
provided by applicable law.
10. The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall be
requisite and shall constitute a quorum at all meetings of the stockholders for
the transaction of business except as otherwise provided by statute, by the
certificate of incorporation or by these Bylaws. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a
2
<PAGE>
quorum shall be present or represented any business may be transacted which
might have been transacted at the meeting as originally notified.
11. When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which by express provision of the statutes or of the certificate of
incorporation or of these Bylaws, a different vote is required in which case
such express provision shall govern and control the decision of such question.
12. At any meeting of the stockholders every stockholder having the right
to vote shall be entitled to vote in person, or by proxy appointed by an
instrument in writing subscribed by such stockholder and bearing a date not more
than three years prior to said meeting, unless said instrument provides for a
longer period. Each stockholder shall have one vote for each share of stock
having voting power, registered in his name on the books of the corporation, and
except where the transfer books of the corporation shall have been closed or a
date shall have been fixed as a record date for the determination of its
stockholders entitled to vote, no share of stock shall be voted on at any
election of directors which shall have been transferred on the books of the
corporation within twenty days next preceding such elections of directors.
12-A. The stockholders of the corporation may act by written consent in
lieu of a meeting in the manner set forth in Section 10(A) of Article FOURTH of
the Certificate of Incorporation.
DIRECTORS
---------
13. The number of directors which shall constitute the whole Board shall
be fixed by resolution of a majority of the whole Board. The directors shall be
elected at annual meetings of stockholders and shall be divided into three
classes as nearly equal in number as possible. The term of office of the first
class shall expire on the date of the 1985 annual meeting of stockholders; the
term of office of the second class shall expire one year thereafter; and that of
the third class, two years thereafter. At each annual meeting after such
classification, the successors to the class of directors whose terms shall
expire in that year, shall be elected directors for a term of three years
except, however, the Board may, by resolution adopted by a majority of the whole
Board, elect directors to serve for interim periods. Each director shall be
elected to serve until his successor shall be elected and shall qualify,
provided that the term of office of a director who is an employee of the Company
or any of its subsidiary companies shall
3
<PAGE>
expire contemporaneously with his or her retirement from active service with the
Company, except in such case where the majority of the Board requests that an
employee director continue to serve, and provided further that the term of
office of a director shall expire on the date of the annual meeting immediately
subsequent to the date of his or her 70th birthday. Directors need not be
stockholders.
13-A. Unless recommended by the board of directors for election, no person
shall be elected a director, unless notice in writing of a nomination by a
stockholder of the corporation shall be received by the secretary of the
corporation not more than sixty and not less than thirty calendar days before
the date of the meeting at which the election is to take place. Such notice
must set forth (i) the name, age, business address and (if known) residence
address of each nominee proposed in such notice; (ii) the principal occupation
or employment of each such nominee; (iii) a description of the business
experience during the last five years of each such nominee; and (iv) the number
of shares of capital stock of the corporation beneficially owned by each such
nominee. In addition, such notice must be signed by a stockholder duly
qualified to attend and vote at the meeting (other than the person or persons
nominated) and must contain a notice in writing signed by each nominee of his
willingness to be elected and to serve as a director.
If a nomination by a stockholder is not made in accordance with the
foregoing procedures, the chairman of the meeting shall have the power to
declare such nomination to be null, void and of no force or effect and to
disregard such nomination in conducting the election of directors at such
meeting.
14. The directors may hold their meetings and keep the books of the
corporation outside of Delaware, at such offices of the corporation or at such
other places as they may from time to time determine.
15. If the office of any director or directors becomes vacant by reason of
death, resignation, retirement, disqualification, removal from office, or
otherwise a majority of the remaining directors, though less than a quorum,
shall choose a successor or successors, who shall hold office for the unexpired
term in respect to which such vacancy occurred.
16. The property and business of the corporation shall be managed by its
board of directors which may exercise all such powers of the corporation and do
all such lawful acts and things as are not by statute or by the certificate of
incorporation or by these by laws directed or required to be exercised or done
by the stockholders.
4
<PAGE>
COMMITTEES OF DIRECTORS
-----------------------
17. The board of directors may, by resolution or resolutions passed by a
majority of the whole board, designate one or more committees, each committee to
consist of two or more of the directors of the corporation, which to the extent
provided in said resolution or resolutions, shall have and may exercise the
powers of the board of directors in the management of the business and affairs
of the corporation, and may have power to authorize the seal of the corporation
to be affixed to all papers which may require it. Such committee or committees
shall have such name or names as may be determined from time to time by
resolution adopted by the board of directors.
18. The committee shall keep regular minutes of their proceedings and
report the same to the board when required.
COMPENSATION OF DIRECTORS
-------------------------
19. Directors who are not employees of the Company or any of its
subsidiary companies shall be paid an annual fee as compensation for serving as
a director and, in addition, shall receive fees and expenses for attendance at
meetings of the board of directors or meetings of standing committees of the
board of directors, all as may be allowed by resolution of the board.
INDEMNIFICATIONS
----------------
20-A. Each person who at any time is, or shall have been a director,
officer, or employee of the Corporation, or serves or has served as a director,
officer, employee, fiduciary or other representative of another company,
partnership, joint venture, trust, association or other enterprise (including
any employee benefit plan), where such service was specifically requested by the
Corporation in accordance with clause (e) below, or the established guidelines
for participation in outside positions (such service hereinafter being referred
to as "Outside Service"), and is threatened to be or is made a party to any
threatened, pending, or completed claim, action, suit or Proceeding, whether
civil, criminal, administrative or investigative ("Proceeding"), by reason of
the fact that he is, or was, a director, officer or employee of the Corporation
or a director, officer, employee, fiduciary or other representative of such
other enterprise, shall be indemnified against expenses (including attorney's
fees), judgments, fines
5
<PAGE>
and amounts paid in settlement ("Loss") actually and reasonably incurred by him
in connection with any such Proceeding to the full extent permitted under the
General Corporation Law of the State of Delaware, as the same exists or may
hereafter be amended, (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than said Law permitted the Corporation to provide prior
to such amendment). The Corporation shall indemnify any person seeking indemnity
in connection with any Proceeding (or part thereof) initiated by such person
only if such Proceeding (or part thereof) initiated by such person was
authorized by the Board of Directors of the Corporation. With respect to any
Loss arising from Outside Service, the Corporation shall provide such
indemnification only if and to the extent that (i) such other company,
partnership, joint venture, trust, association or enterprise is not legally
permitted or financially able to provide such indemnification, and (ii) such
Loss is not paid pursuant to any insurance policy other than any insurance
policy maintained by the Corporation.
20-B. The right to be indemnified pursuant hereto shall include the right
to be paid by the Corporation for expenses, including attorney's fees, incurred
in defending any such Proceeding in advance of its final disposition; provided,
however, that the payment of such expenses in advance of the final disposition
of such Proceeding shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director, officer, or employee, in which
such director, officer or employee agrees to repay all amounts so advanced if it
should be determined ultimately that such director, officer or employee is not
entitled to be indemnified under applicable law.
20-C. The right of any director or officer (but not employee) to be
indemnified or to the reimbursement or advancement of expenses pursuant hereto
(i) is a contract right based upon good and valuable consideration, pursuant to
which the person entitled thereto may bring suit as if the provisions hereof
were set forth in a separate written contract between the Corporation and the
director or officer, and (ii) shall continue to exist after the rescission or
restrictive modification hereof with respect to events occurring prior thereto.
20-D. The right to be indemnified or to the reimbursement or advancement
of expenses pursuant hereto shall in no way be exclusive of any other rights of
indemnification or advancement to which any such director, officer or employee
may be entitled, under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
6
<PAGE>
continue as to a person who has ceased to be a director, officer or employee and
shall inure to the benefit of the heirs, executors and administrators of such
person.
20-E. Any person who is serving or has served as a director, officer,
employee or fiduciary of (i) another corporation of which a majority of the
shares entitled to vote in the election of its directors is held by the
Corporation at the time of such service, or (ii) any employee benefit plan of
the Corporation or of any corporation referred to in clause E(i), shall be
deemed to be doing or have done so at the request of the Corporation.
MEETINGS OF THE BOARD
---------------------
21. The first meeting of the board following an annual meeting of
stockholders shall be held at such time and place either within or without the
State of Delaware as shall be fixed by a majority of the directors and no notice
of such meeting shall be necessary to the newly elected directors in order
legally to constitute the meeting provided a quorum shall be present, or they
may meet at such place and time as shall be fixed by the consent in writing of
all the directors.
22. Regular meetings of the board may be held without notice at such time
and place either within or without the State of Delaware as shall from time to
time be determined by the board.
23. Special meetings of the board may be called by the chairman of the
board on two days' notice to each director, either personally or by mail or by
telegram; special meetings shall be called by the chairman of the board or
secretary in like manner and on like notice on written request of two directors.
24. At all meetings of the board a majority of the number of directors
then constituting the whole board shall be necessary and sufficient to
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the board of directors, except as may be otherwise specifically provided by
statute or by these Bylaws. If a quorum shall not be present at any meeting of
directors the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
7
<PAGE>
NOTICES
-------
25. Whenever under the provisions of the statutes or of the certificate of
incorporation or of these Bylaws, notice is required to be given to any director
or stockholder, it shall not be construed to mean personal notice, but such
notice may be given in writing, by mail, by depositing the same in the post
office or letter box, in a post-paid sealed wrapper, addressed to such director
or stockholder at such address as appears on the books of the corporation, or,
in default of other address, to such director or stockholder at the General Post
Office in the City of Wilmington, Delaware, and such notice shall be deemed to
be given at the time when the same shall be thus mailed.
26. Whenever any notice is required to be given under the provisions of
the statutes or of the certificate of incorporation, or of these Bylaws, a
waiver thereof in writing signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be deemed
equivalent thereto. Whenever the vote of stockholders at a meeting thereof is
required or permitted to be taken in connection with any corporate action by any
provisions of the statutes or of the certificate of incorporation or of these
Bylaws, the meeting and vote of stockholders may be dispensed with, if all the
stockholders who would have been entitled to vote upon the action if such
meeting were held, shall consent in writing to such corporate action being
taken.
OFFICERS
--------
27. The officers of the corporation shall be elected or appointed by the
board of directors and shall be a chairman of the board, a president, one or
more vice chairmen, one or more vice-presidents, a secretary, a treasurer, and a
controller. The chairman of the board and the president shall be chosen from
among the directors.
28. The board of directors at its first meeting after each annual meeting
of stockholders shall choose the officers of the corporation. In its discretion
the board of directors, by a vote of the majority thereof, may leave unfilled
any office except those of the chairman of the board, treasurer and secretary.
29. The board shall elect or appoint such other officers and agents as it
shall deem necessary, who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the board. Any two offices (but not more than two) may be held by the
same person.
8
<PAGE>
30. The salaries of all officers and agents of the corporation shall be
fixed by the board of directors.
31. The officers of the corporation shall hold office until their
successors are chosen and qualify in their stead. Any officer elected or
appointed by the board of directors may be removed at any time by the
affirmative vote of a majority of the whole board of directors. If the office
of any officer becomes vacant for any reason, the vacancy shall be filled by the
board of directors.
THE CHAIRMAN OF THE BOARD, THE PRESIDENT AND VICE CHAIRMEN
----------------------------------------------------------
32. The chairman of the board shall be in general charge of the business
of the corporation and shall have the duty to see that all orders and
resolutions of the board are carried into effect. He shall preside at all
meetings of the stockholders and directors and shall perform such other duties
as the Bylaws or the board of directors shall prescribe.
32-A. The president shall have active direction of the affairs of the
corporation subject to the chairman of the board and the board of directors. In
the absence or disability of the chairman of the board, the president shall
preside at meetings of the stockholders and directors and exercise the powers
and duties of the chairman of the board.
32-B. A vice chairman shall perform such duties as the board of directors
shall designate. In the absence of the president, one or more vice chairmen may
perform those duties as prescribed to the president in paragraph 32-A.
33. The chairman of the board or the president or a vice chairman shall
execute bonds, mortgages, and other contracts requiring a seal, under the seal
of the corporation, except where required or permitted by law to be otherwise
signed and executed and except where the signing and execution thereof shall be
expressly delegated by the board of directors to some other officer or agent of
the corporation.
VICE-PRESIDENTS
---------------
34. The vice presidents of the corporation, in such order as may be
designated by the board of directors, shall, in the absence or disability of the
president, perform the duties and exercise the powers of the president. The
vice-president designated as chief financial officer of the corporation shall
have general responsibility for the financial operations of the corporation
9
<PAGE>
and for all receipts and disbursements of funds of the corporation. Each vice
president shall perform such other duties as the board of directors shall
prescribe.
THE SECRETARY AND ASSISTANT SECRETARIES
---------------------------------------
35. The secretary shall attend all sessions of the board and all meetings
of the stockholders and record all votes and the minutes of all proceedings in a
book to be kept for that purpose and shall perform like duties for the standing
committees when required. He shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the board of directors, and
shall perform such other duties as may be prescribed by the board of directors,
chairman of the board or president. He shall keep in safe custody the seal of
the corporation and, when authorized by the board, affix the same to any
instrument requiring it and, when so affixed, it shall be attested by his
signature or by the signature of the treasurer or an assistant secretary.
36. The assistant secretaries in the order designated by the board shall,
in the absence or disability of the secretary, perform the duties and exercise
the powers of the secretary and shall perform such other duties as the board of
directors shall prescribe.
THE TREASURER AND ASSISTANT TREASURERS
--------------------------------------
37. The treasurer shall, under the supervision and direction of the vice-
president designated as chief financial officer of the corporation, have the
custody of the corporate funds and securities and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the corporation and
shall deposit all moneys and other valuable effects in the name and to the
credit of the corporation in such depositories as may be designated by the board
of directors.
38. He shall disburse the funds of the corporation as may be ordered by
the board, taking proper vouchers for disbursements, and shall render to the
chairman of the board, the president and directors, at the regular meetings of
the board, or whenever they may require it, an account of all his transactions
as treasurer and of the financial condition of the corporation.
39. If required by the board of directors, he shall give the corporation a
bond (which shall be renewed every six years) in such sum and with such surety
or sureties as shall be satisfactory to the board for the faithful performance
of the duties of his office and for the restoration to the corporation, in case
of his death, resignation, retirement or removal from
10
<PAGE>
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
40. The assistant treasurers in the order designated by the board shall,
in the absence or disability of the treasurer, perform the duties and exercise
the powers of the treasurer and shall perform such other duties as the board of
directors shall prescribe.
THE CONTROLLER AND ASSISTANT CONTROLLERS
----------------------------------------
40-A. The controller shall, under the supervision and direction of the
vice-president, accounting and financial control, act as the principal
accounting officer of the corporation and shall be responsible for the keeping
of complete and accurate records of the business, assets, liabilities and
transactions of the corporation, for the preparation of such financial
statements of the corporation as may be required by law or requested by the
board of directors or the chairman of the board, for the coordination on behalf
of the corporation of the audits made by independent accountants of the
corporation's books, records and financial statements, and for all matters
relating to the accounting by the corporation for its operations and financial
position.
40-B. If required by the board of directors, the controller shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the board for the faithful
performance of the duties of his office and for the restoration to the
corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
40-C. The assistant controllers in the order designated by the board
shall, in the absence or disability of the controller, perform the duties and
exercise the powers of the controller.
CERTIFICATES OF STOCK
---------------------
41. The certificates of stock of the corporation shall be numbered and
shall be entered in the books of the corporation as they are issued. They shall
exhibit the holder's name and number of shares and shall be signed by the
chairman or a vice-chairman of the board of directors, or the president or a
vice-president, and by the treasurer or an assistant treasurer, or the secretary
or an assistant secretary. The stock certificate shall be countersigned by a
11
<PAGE>
transfer agent or an assistant transfer agent or a transfer clerk acting on
behalf of the corporation, or a registrar. Any or all the signatures on the
certificate may be a facsimile.
TRANSFERS OF STOCK
------------------
42. Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
CLOSING OF TRANSFER BOOKS
-------------------------
43. The board of directors shall have power to close the stock transfer
books of the corporation for a period not exceeding fifty days preceding the
date of any meeting of stockholders or the date for payment of any dividend or
the date for the allotment of rights or the date when any change or conversion
or exchange of capital stock shall go into effect or for a period of not
exceeding fifty days in connection with obtaining the consent of stockholders
for any purpose; provided, however, that in lieu of closing the stock transfer
books as aforesaid, the board of directors may fix in advance a date, not
exceeding fifty days preceding the date of any meeting of stockholders, or the
date for the payment of any dividend, or the date for the allotment of rights,
or the date when any change or conversion or exchange of capital stock shall go
into effect, or a date in connection with obtaining such consent, as a record
date for the determination of the stockholders entitled to notice of, and to
vote at, any such meeting, and any adjournment thereof, or entitled to receive
payment of any such dividend, or to any such allotment of rights, or to exercise
the rights in respect of any such change, conversion or exchange of capital
stock, or to give such consent, and in such case such stockholders and only such
stockholders as shall be stockholders of record on the date so fixed shall be
entitled to such notice of, and to vote at, such meeting and any adjournment
thereof, or to receive payment of such dividend, or to receive such allotment of
rights, or to exercise such rights, or to give such consent, as the case may be,
notwithstanding any transfer of any stock on the books of the corporation after
any such record date fixed as aforesaid.
12
<PAGE>
REGISTERED STOCKHOLDERS
-----------------------
44. The corporation shall be entitled to treat the holder of record of any
share or shares of stock as the holder in fact thereof and, accordingly, shall
not be bound to recognize any equitable or other claim to or interest in such
share on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Delaware.
LOST CERTIFICATE
----------------
45. The board of directors may direct a new certificate or certificates to
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificate of stock to be
lost or destroyed. When authorizing such issue of new certificate or
certificates, the board of directors, may in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require and/or give the corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost or
destroyed.
DIVIDENDS
---------
46. Dividends upon the capital stock of the corporation, subject to the
provisions of the certificate of incorporation, if any, may be declared by the
board of directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the certificate of incorporation.
47. Before payment of any dividend there may be set aside out of any funds
of the corporation available for dividends such sum or sums as the directors
from time to time, in their absolute discretion, think proper as a reserve fund
to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the corporation, or for such other purpose as the
directors shall think conducive to the interest of the corporation, and the
directors may modify or abolish any such reserve in the manner in which it was
created.
13
<PAGE>
DIRECTORS' ANNUAL STATEMENT
---------------------------
48. The board of directors shall present at each annual meeting and when
called for by vote of the stockholders at any special meeting of the
stockholders, a full and clear statement of the business and condition of the
corporation.
CHECKS
------
49. All checks or demands for money and notes of the corporation shall be
signed by such officer or officers or such other person or persons as the board
of directors may from time to time designate.
FISCAL YEAR
-----------
50. The fiscal year shall be the calendar year.
SEAL
----
51. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its organization and the words "Corporate Seal,
Delaware". Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
AMENDMENTS
----------
52. Except as otherwise provided in the Certificate of Incorporation or
these Bylaws, these Bylaws may be altered or repealed: (i) at any regular
meeting of the stockholders or at any special meeting of the stockholders at
which a quorum is present or represented, provided notice of the proposed
alteration or repeal be contained in the notice of such special meeting, by the
affirmative vote of a majority of the stock entitled to vote at such meeting and
present or represented thereat, or (ii) by the affirmative vote of a majority of
the board of directors at any regular meeting of the board or at any special
meeting of the board if notice of the proposed alteration or repeal be contained
in the notice of such special meeting; provided, however, that no change of the
time or place of the meeting for the election of directors shall be made within
sixty days next before the day on which such meeting is to be held, and that in
case of any change of such time or place, notice thereof shall be given to each
stockholder in person or by letter mailed to his last known post office address
at least twenty days before the meeting is held.
14
<PAGE>
EXHIBIT 4A(1)
INDENTURES OF CONSOLIDATED NATURAL GAS COMPANY
----------------------------------------------
The Indentures, Supplemental Indentures and Securities Resolutions between
Consolidated Natural Gas Company and its debenture Trustees, as listed below,
are incorporated by reference to material previously filed with the Commission
as indicated:
Manufacturers Hanover Trust Company (now The Chase Manhattan Bank)
Indenture dated as of May 1, 1971 (Exhibit (5) to Certificate of
Notification at Commission File No. 70-5012)
Eleventh Supplemental Indenture thereto dated as of December 1, 1986
(Exhibit (5) to Certificate of Notification at Commission File No.
70-7079)
Thirteenth Supplemental Indenture thereto dated as of February 1, 1989
(Exhibit (5) to Certificate of Notification at Commission File No.
70-7336)
Fourteenth Supplemental Indenture thereto dated as of June 1, 1989
(Exhibit (5) to Certificate of Notification at Commission File No.
70-7336)
Fifteenth Supplemental Indenture thereto dated as of October 1, 1989
(Exhibit (5) to Certificate of Notification at Commission File No.
70-7651)
Sixteenth Supplemental Indenture thereto dated as of October 1, 1992
(Exhibit (4) to Certificate of Notification at Commission File No.
70-7651)
Seventeenth Supplemental Indenture thereto dated as of August 1, 1993
(Exhibit (4) to Certificate of Notification at Commission File No.
70-8167)
Eighteenth Supplemental Indenture thereto dated as of December 1, 1993
(Exhibit (4) to Certificate of Notification at Commission File No.
70-8167)
United States Trust Company of New York
Indenture dated as of April 1, 1995 (Exhibit (4) to Certificate of
Notification at Commission File No. 70-8107)
Securities Resolution No. 1 effective as of April 12, 1995 (Exhibit 2 to
Form 8-A filed April 21, 1995 under file No. 1-3196 and relating to the
7 3/8% Debentures Due April 1, 2005)
Securities Resolution No. 2 effective as of October 16, 1996 (Exhibit 2 to
Form 8-A filed October 18, 1996 under file No. 1-3196 and relating to the
6 7/8% Debentures Due October 15, 2026)
Securities Resolution No. 3 effective as of December 10, 1996 (Exhibit 2 to
Form 8-A filed December 12, 1996 under file No. 1-3196 and relating to
the 6 5/8% Debentures Due December 1, 2008)
The Chase Manhattan Bank (National Association)
Indenture dated as of December 15, 1990 (Exhibit (4A)(1) to Consolidated
Natural Gas Company's Form 10-K for the year ended December 31, 1990,
File No. 1-3196)
<PAGE>
EXHIBIT 10M
CONSOLIDATED NATURAL GAS COMPANY
1995 EMPLOYEE STOCK INCENTIVE PLAN
SECTION 1. Purposes.
--------
1.01 The purposes of the CNG 1995 Employee 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 who are not officers or directors of the Company for purposes of
Section 16 of the Exchange Act and the best available personnel for positions of
substantial responsibility, to reward such employees for superior performance
and to strengthen the mutuality of interests between such employees and the
Company's shareholders. The Plan is designed to meet this intent by providing
such employees 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 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, or Dividend
Equivalent, 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.
<PAGE>
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.
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 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
-2-
<PAGE>
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 "Option" means a right, granted under Section 6.02
hereof, to purchase Shares or other Awards at a specified price during
specified time periods. All Options shall be non-qualified stock
options; i.e., options that do not meet the requirements of Section
---
422 of the Code.
2.01.14 "Participant" means a key employee of the Company or any
Affiliate who is not a director or officer of the Company for purposes
of Section 16 of the Exchange Act and who is granted an Award under
the Plan.
2.01.15 "Performance Award" means a right, granted under Section
6.06 hereof, to receive Awards based upon performance criteria
specified by the Committee.
2.01.16 "Person" shall have the meaning assigned in the Exchange
Act.
2.01.17 "Restricted Stock" means Shares, granted under Section
6.04 hereof, that are subject to certain restrictions.
2.01.18 "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.
2.01.19 "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.
2.01.20 "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.
-3-
<PAGE>
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.
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
-4-
<PAGE>
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 to take such actions and perform
such functions under the Plan as the Committee may specify. Each
-5-
<PAGE>
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. Any and all 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, shall be 4,000,000.
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 another 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.
-6-
<PAGE>
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.
SECTION 5. Eligibility.
-----------
5.01 Awards may be granted only to individuals who are employees of
the Company or any Affiliate and who are not directors or officers of the
Company for purposes of Section 16 of the Exchange Act. 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 and 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 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.
-7-
<PAGE>
(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.
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, 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.
(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
-8-
<PAGE>
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 (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
-9-
<PAGE>
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 (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:
(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
-10-
<PAGE>
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 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 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 Shares:
(i) granted in substitution for an outstanding Award or award
shall either be not less than the Fair Market Value of Shares at the
date such substitute Award is granted or not less than such Fair
Market Value at that date reduced to reflect the Fair Market Value of
the Award or award required to be surrendered by the Participant as a
condition to receipt of a substitute Award; or
(ii) 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
-11-
<PAGE>
Value of Shares at the date of grant of the earlier Award or award.
7.02 Term of Awards. The term of each Award shall be for
--------------
such period as may be determined by the Committee.
7.03 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.
7.04 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.
-12-
<PAGE>
7.05 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 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.
7.06 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
-13-
<PAGE>
and kind of Shares issued or issuable in respect of outstanding Awards; and
(iii) 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. 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.
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.
(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 a Change of Control described in Section 9.03.l(ii), (iii)
or (iv) hereof, the payment described in this
-14-
<PAGE>
sentence 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
-15-
<PAGE>
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 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
-16-
<PAGE>
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 calender 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
-17-
<PAGE>
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 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; 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.
-18-
<PAGE>
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.
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
-19-
<PAGE>
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. Notwithstanding anything in the Plan to the
contrary, the terms of each Award shall be construed so as to be consistent
with such other arrangements in effect at the time of the Award.
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 conflict 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.
-20-
<PAGE>
SECTION 12. Effective Date and Termination.
------------------------------
12.01 The Plan shall become effective as of December 12, 1995. No
award may be granted under the Plan after December 12, 2005.
-21-
<PAGE>
EXHIBIT 10.O
CONSOLIDATED NATURAL GAS COMPANY
1991 STOCK INCENTIVE PLAN
SECTION 1. Purposes.
1.01 The purposes of the CNG 1991 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 the
best available personnel for positions of substantial responsibility, to reward
such employees for superior performance and to strengthen the mutuality of
interests between such employees and the Company's shareholders. The Plan is
designed to meet this intent by providing such employees 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 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.
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.
<PAGE>
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 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 422A of the Code or any successor
provision thereto.
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 granted an Award under the Plan.
A-2
<PAGE>
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.
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,
A-3
<PAGE>
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
A-4
<PAGE>
Section 7.02.3, any and all 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 percent (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 Long-Term Incentive Plan (the "LTIP") as of the date this Plan is
approved by the shareholders of the Company. Notwithstanding the foregoing, in
no event shall more than three million (3,000,000) shares of Common Stock be
cumulatively available for Awards of Incentive Stock Options under the Plan.
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. 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 LTIP, shall be carried
forward and be made available for Awards in succeeding calendar years.
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.
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.
SECTION 5. Eligibility.
5.01 Awards may be granted only to individuals who are key employees
(including employees who also are directors or officers) of the Company or any
Affiliate; provided, however, that no Award shall be granted to any member of
the Committee or to any individual who has served as a member of the Committee
at any time during the one-year period prior to the date an Award is to be
granted to such individual. In determining the eligibility of an employee to
A-5
<PAGE>
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 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 422A of the Code or any successor provision
thereto.
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
A-6
<PAGE>
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.
(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 (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.
A-7
<PAGE>
(ii) Forfeiture. Except as otherwise determined by the Committee
upon termination of employment (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:
(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 and, with respect to Participants who
are subject to Section 16 of the Exchange Act, to comply with Rule 16b-3 and
applicable law 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 which consideration shall
not be less
A-8
<PAGE>
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 Shares:
(i) granted in substitution for an outstanding Award or award shall
either be not less than the Fair Market Value of Shares at the date such
substitute Award is granted or not less than such Fair Market Value at that
date reduced to reflect the Fair Market Value of the Award or award
required to be surrendered by the Participant as a condition to receipt of
a substitute Award; or
(ii) 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 earlier Award or award.
7.02 Certain Restrictions Under Rule 16b-3. If, at any time, the
provisions of this Plan are inconsistent with Rule 16b-3 as then in effect, this
Plan shall be deemed to be amended, without further action on the part of the
Committee or the Board, to the extent necessary to comply with Rule 16b-3, as
then in effect, except to the extent any such amendment to the Plan requires
stockholder approval.
7.02.1 Six-Month Limitations on Sales and Exercises. Other
provisions of the Plan and any Award Agreement notwithstanding, equity
security, as defined under the Exchange Act, offered pursuant to the Plan
to a Participant who is at the time subject to Section 16 of the Exchange
Act may not be sold for at least six months after acquisition, except in
case of death or Disability, and any derivative security, as defined under
the Exchange Act, issued pursuant to the Plan to a Participant who is at
the time subject to Section 16 of the Exchange Act
A-9
<PAGE>
shall not be exercisable for at least six months, except in case of death
or Disability, unless such sale or exercise is permissible under the
provisions of Rule 16b-3.
7.02.2 Nontransferability. Other provisions of the Plan and any
Award Agreement notwithstanding, Awards which constitute derivative
securities, including Options, Stock Appreciation Rights and other rights,
shall not be transferable by a Participant except by will or the laws of
descent and distribution and shall be exercisable during a Participant's
lifetime only by such Participant or his guardian or legal representative;
provided, however, that the Committee may determine that these restrictions
on transferability shall not apply to Awards granted to any Participant
who, at the time of the initial grant and the transfer, is not subject to
Section 16 of the Exchange Act.
7.02.3 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,
is required to be made or approved by the Committee in order that the Plan
will continue to meet the requirements of Rule 16b-3 or in order that a
transaction by such Participant will be exempt under Rule 16b-3, 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
(subject to the requirements of Section 7.02.2 hereof), 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,
A-10
<PAGE>
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 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 and kind of Shares issued or issuable in respect of
outstanding Awards; and (iii) 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
A-11
<PAGE>
the plan to violate Section 422A(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.
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.
(i) All outstanding Awards pursuant to which the Participant may
have rights the exercise of which is restricted or limited, shall become
fully exercisable, except as may be otherwise provided in Section 7.02.1;
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,
except as may be otherwise provided in Section 7.02.1; 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, except as may
be otherwise required to comply with Rule 16b-3.
(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(ii), (iii) or
(iv) hereof, the payment described in this sentence 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. Except as provided in
Section 9.01(iii), in no event will an Award be surrendered or a
Participant have the right to receive cash under this Section 9.01(ii) with
respect to an Award (a) if the Participant is subject to Section 16 of the
Exchange Act and at least six months shall not have elapsed from the date
on which the Participant was granted the Award before the date of the
Change of Control (unless this restriction is not at such time required
under Rule 16b-3) or (b) if the Participant had the power to control the
occurrence or timing of the Change of Control.
A-12
<PAGE>
(iii) In the event that any Award is subject to limitations under
Section 7.02.1 or Section 9.01(ii) at the time of a Change of Control,
then, solely for the purpose of determining the rights of the Participant
with respect to such Award, a Change of Control shall be deemed to occur at
the close of business on the first business day following the date on which
the limitations on such Award under Section 7.02.1 have expired.
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 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
A-13
<PAGE>
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 purposes only and
A-14
<PAGE>
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
A-15
<PAGE>
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.
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. Notwithstanding anything in the Plan to the
contrary (other than the provisions of Section 7.02), the terms of each Award
shall be construed so as to be consistent with such other arrangements in effect
at the time of the Award.
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,
A-16
<PAGE>
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, 1991, 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 1991 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, 2000.
A-17
<PAGE>
EXIBIT 10.P
TRUST AGREEMENT
between
CONSOLIDATED NATURAL GAS COMPANY
and
MELLON BANK
Effective
June 1, 1995
<PAGE>
CONSOLIDATED NATURAL GAS COMPANY
MELLON BANK
TRUST AGREEMENT
TABLE OF CONTENTS
Page
----
ARTICLE I: ESTABLISHMENT OF TRUST.......................................3
1.1 Trust......................................................3
1.2 Description of Trust.......................................3
1.3 Acceptance by the Trustee..................................3
ARTICLE II: CLAIMS OF COMPANY'S CREDITORS................................4
2.1 No Security Interest.......................................4
2.2 Suspension of Payments.....................................4
2.3 Resumption of Payments.....................................4
2.4 Notice of Insolvency.......................................5
2.5 Insolvency.................................................5
ARTICLE III: POWERS OF TRUSTEE............................................6
3.1 Investment of the Trust....................................6
3.2 Investment Powers of Trustee...............................8
3.3 Administrative Powers of Trustee...........................8
3.4 Summary of Plan and Trust Responsibilities.................9
ARTICLE IV: TRUST OBLIGATION TO PAY PLAN BENEFITS.......................12
4.1 Nature of Trust Beneficiaries' Interest...................12
4.2 Obligations...............................................12
4.3 Individual Bookkeeping Accounts...........................12
4.4 Determination of Benefits Payable to Participants or
Beneficiaries.............................................13
4.5 Payment upon Constructive Receipt.........................17
ARTICLE V: CONTRIBUTIONS AND WITHDRAWALS................................18
5.1 Contributions.............................................18
5.2 Application of Contributions..............................19
5.3 Recovery of Trust Assets by the Company...................19
5.4 Transfer of Excess Assets to the Company..................20
5.5 Company as Owner of Assets................................20
ARTICLE VI: TAXES, EXPENSES AND COMPENSATION............................21
6.1 Taxes on Trust............................................21
6.2 Withholding Taxes; Employment Taxes.......................21
6.3 Expenses and Compensation.................................21
ARTICLE VII: ADMINISTRATION AND RECORDS.................................23
<PAGE>
7.1 Records...................................................23
7.2 Settlement of Accounts....................................23
7.3 Audit.....................................................24
7.4 Judicial Settlement.......................................24
7.5 Delivery of Records to Successor..........................24
7.6 Tax Filings...............................................24
ARTICLE VIII: REMOVAL OR RESIGNATION OF THE TRUSTEE AND
DESIGNATION OF SUCCESSOR TRUSTEE.........................25
8.1 Resignation...............................................25
8.2 Removal...................................................25
8.3 Successor Trustee.........................................26
8.4 Transfer of Trust Fund to Successor.......................26
ARTICLE IX: ENFORCEMENT OF TRUST AGREEMENT AND LEGAL
PROCEEDINGS...............................................27
ARTICLE X: TERMINATION..................................................28
10.1 Terminations..............................................28
10.2 No Further Liability......................................28
ARTICLE XI: AMENDMENT...................................................29
11.1 Amendment.................................................29
11.2 Compliance with ERISA, the Code and other Laws............29
11.3 Execution of Amendments...................................29
ARTICLE XII: MISCELLANEOUS..............................................30
12.1 Nonalienation.............................................30
12.2 Communications............................................30
12.3 Authority to Act..........................................30
12.4 Authenticity of Instruments...............................30
12.5 Binding Effect............................................31
12.6 Inquiry as to Authority...................................31
12.7 Responsibility for Company Action.........................31
12.8 Successor to Trustee......................................31
12.9 Laws of Pennsylvania to Govern............................31
12.10 Reports...................................................31
12.11 Counterparts..............................................31
12.12 Participant to Include Beneficiary........................32
SCHEDULE A
<PAGE>
TRUST AGREEMENT
---------------
THIS AGREEMENT, made as of the 1st day of June, 1995, between
CONSOLIDATED NATURAL GAS COMPANY, a corporation organized and existing under the
laws of the State of Delaware (the "Company"), and MELLON BANK, a banking
institution organized and doing business under the laws of the United States
with an office in Pittsburgh, Pennsylvania (the "Trustee").
WITNESSETH:
WHEREAS, the Company and certain of its subsidiaries have established
and maintain certain unfunded employee benefit plans, agreements and
arrangements for the benefit of a select group of highly compensated management
employees of the Company and its subsidiaries (which plans, agreements and
arrangements are each referred to herein individually as the "Plan" and
collectively as the "Plans"). The Plans are identified in Schedule A hereto,
which includes, inter alia, "Administrative Guidelines" for the determination of
----- ----
Benefits under the Plans and payment thereof from the Trust, and which will be
supplemented annually as provided in Section 4.4(b). Each of the management
employees entitled to benefits under one or more of the Plans is hereinafter
referred to individually as a "Participant" and collectively as the
"Participants." Each Plan provides for the payment of certain benefits (the
"Benefits") to certain of the Participants and their beneficiaries, if any,
designated by the respective Participants (or by the Plan) as being entitled to
any payments due under the terms of the Plan in the event of a Participant's
death ("Beneficiary" or "Beneficiaries"). The Company and its subsidiaries have
incurred and expect to continue to incur liabilities pursuant to the terms of
the Plans; and the Company wishes to establish the trust provided for herein
(the "Trust") to aid the Company and its subsidiaries in meeting their
obligations under the Plans. Moreover, and as provided in detail in the
Administrative Guidelines in Schedule A, the Company intends the assets of each
account established under the Trust ("Account" or "Accounts") to be available to
pay benefits solely to Participants who accrued benefits payable under a Plan or
Plans pursuant to their employment by the Company and/or those subsidiaries
identified in Schedule A. Except as otherwise provided in the immediately
preceding sentence, the Company intends the assets of the Trust to constitute a
unitary, nonsegmented source of funds
<PAGE>
from which to pay benefits under all of the Plans as if they were a single plan,
with no benefit under any particular Plan having any priority over any other
benefit under that Plan or under any other Plan and with no assets of the Trust
designated to pay any particular benefit.
The Trust is intended to be a "grantor trust" with the corpus and
income of the Trust treated as assets and income of the Company for federal
income tax purposes pursuant to Sections 671-677 of the Internal Revenue Code of
1986, as amended (the "Code"). The Company intends that the assets of the Trust
will be subject to the claims of creditors of the Company and its subsidiaries
as provided in Article II hereof. Amounts transferred to the Trust and the
earnings thereon shall be used by the Trustee to satisfy the liabilities of the
Company and its subsidiaries in accordance with the provisions hereof. Upon
satisfaction of all liabilities of the Company and its subsidiaries with respect
to all Participants and Beneficiaries, the Trust shall terminate and the
remaining assets, if any, of the Trust shall revert to the Company.
The Company and its subsidiaries intend that the existence of the
Trust shall not alter the characteristics of the Plans as unfunded plans
maintained primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees for purposes of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and shall
not be construed to provide income for income tax purposes to any Participant or
Beneficiary under the Plans prior to the actual payment of benefits thereunder.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the Company and the Trustee agree as follows:
-2-
<PAGE>
ARTICLE I: ESTABLISHMENT OF TRUST
----------------------------------
1.1 Trust. The Company hereby establishes a Trust with the Trustee,
-----
consisting of such sums of money and other property acceptable to the Trustee as
from time to time shall be paid or delivered to the Trustee, which property may
include life insurance contracts (the "Policies" or "Policy"). All such money
and other property, all investments and reinvestments made therewith, or
proceeds thereof, and all earnings and profits thereon, less all payments and
charges as authorized herein shall constitute the "Trust Fund" or "Fund." The
Trust Fund shall be held by the Trustee in Trust and shall be dealt with in
accordance with the provisions of this Trust Agreement.
1.2 Description of Trust. The Company represents and agrees that
--------------------
the Trust established under this Agreement is, and is intended to be, a
depository arrangement with the Trustee for the setting aside of cash and other
assets of the Company as and when the Company so determines in its sole
discretion for the meeting of part or all of its future retirement and death
benefit obligations to some or all of the Participants and their Beneficiaries
under the Plans. Contributions by the Company to the Trust shall be in amounts
determined solely by the Company. The Trustee has no obligation to determine
the amount of any contribution and, except as provided in Section 5.1, with
respect to drawing upon letters of credit, has no duty to enforce payment of any
contribution. The Company further represents that the Plans are unfunded
deferred compensation plans for a select group of management or highly
compensated employees, and as such are exempt from the application of ERISA
except for the disclosure requirements applicable to such plans, for which the
Company bears full responsibility as to compliance. The Company further
represents that the Plans are not qualified under Section 401 of the Code and
therefore, are not subject to any of the Code requirements applicable to tax-
qualified plans.
1.3 Acceptance by the Trustee. The Trustee accepts the Trust
-------------------------
established under this Trust Agreement on the terms and subject to the
provisions set forth herein, and agrees to discharge and perform fully and
faithfully all of the duties and obligations imposed upon it under this Trust
Agreement. The Trustee has no responsibility or duties regarding the
administration of the Plans, except for the duties specifically described in
this Agreement.
-3-
<PAGE>
ARTICLE II: CLAIMS OF COMPANY'S CREDITORS
------------------------------------------
2.1 No Security Interest. It is the intent of the parties hereto
--------------------
that the Trust Fund is and shall remain at all times subject to the claims of
the Company's general creditors in the event of the Company's insolvency or
bankruptcy and that each Account established under the Trust shall remain at all
times subject to the claims of the general creditors of subsidiary(ies) of the
Company which is (are) identified in Schedule A in the event of such
subsidiary's or subsidiaries' insolvency or bankruptcy. Accordingly, the
Company shall not create a security interest in the Trust Fund in favor of any
Participant or Beneficiary of the Plans or any creditor.
2.2 Suspension of Payments. Notwithstanding any provisions in this
----------------------
Agreement to the contrary, if at any time while the Trust is still in existence
the Company or a subsidiary identified in Schedule A becomes insolvent or
bankrupt (as defined herein), the Trustee shall upon receipt of written notice
thereof under Section 2.4 suspend the payment of all Benefits from the Fund (in
the event the Company becomes insolvent or bankrupt) or from the Account
identified in Schedule A as relating to such subsidiary (in the event a
subsidiary becomes insolvent or bankrupt) and shall hold the Fund or Account for
the benefit of the Company's or subsidiary's general creditors, and shall
deliver the entire amount of the Trust Fund or Account only as a court of
competent jurisdiction, or duly appointed receiver or other person authorized to
act by such a court, may direct to make the Trust Fund or Account available to
satisfy the claims of the Company's or subsidiary's general creditors. Unless
the Trustee has actual knowledge of the Company's insolvency or bankruptcy, the
Trustee shall have no duty to inquire whether the Company or subsidiary is
insolvent or bankrupt.
2.3 Resumption of Payments. The Trustee shall resume all its duties
----------------------
and responsibilities under this Trust Agreement including payments of Benefits
to Participants and Beneficiaries of the Plans within 30 days of the Trustee's
determination that the Company or subsidiary is not insolvent or bankrupt (or is
no longer insolvent or bankrupt). In making such determination, the Trustee may
retain outside experts competent to advise the Trustee as to whether the Company
or subsidiary has or still is, in fact, insolvent or bankrupt. The expense of
retaining such outside experts shall be deemed a Trust expense within the
meaning of Section 6.3.
-4-
<PAGE>
The first payments to a Participant or Beneficiary, pursuant to a resumption of
payments, following such discontinuance shall include the aggregate amount of
all payments which would have been made to the Participant or Beneficiary in
accordance with the Plans during the period of such discontinuance, less the
aggregate amount of payments of Benefits under the Plans made to the Participant
or Beneficiary by the Company or subsidiary during any such period of
discontinuance.
2.4 Notice of Insolvency. By its approval and execution of this
--------------------
Agreement, the Company represents and agrees that its Board of Directors and
Chief Executive Officer, as from time to time acting, shall have the fiduciary
duty and responsibility on behalf of the Company's creditors to give to the
Trustee prompt written notice of any event of the Company's or a subsidiary's
insolvency or bankruptcy and the Trustee shall be entitled to rely thereon to
the exclusion of all directions or claims to pay Benefits thereafter made.
2.5 Insolvency. The Company or subsidiary shall be deemed to be
----------
insolvent or bankrupt upon the occurrence of any of the following:
(a) The Company or subsidiary is unable to pay its debts as they
fall due; or
(b) The Company or subsidiary shall make an assignment for the benefit
of creditors, file a petition in bankruptcy, petition or apply to any tribunal
for the appointment of a custodian, receiver, liquidator, sequestrator, or any
trustee for it or a substantial part of its assets, or shall commence any cause
under any bankruptcy, reorganization, arrangement, readjustment of debt,
dissolution, or liquidation law or statute of any jurisdiction (federal or
state), whether now or hereafter in effect; or if there shall have been filed
any such petition or application, or any such case shall have been commenced
against it, in which an order for relief is entered or which remains
undismissed; or the Company or subsidiary by any act or omission shall indicate
its consent to, approval of or acquiescence in any such petition, application or
case or order for relief or to the appointment of a custodian, receiver or any
trustee for it or any substantial part of any of its property, or shall suffer
any such custodianship, receivership, or trusteeship to continue undischarged.
-5-
<PAGE>
ARTICLE III: POWERS OF TRUSTEE
-------------------------------
3.1 Investment of the Trust.
-----------------------
(a) The Trust Fund shall be invested by the Trustee in accordance with
the written investment guidelines provided from time to time to the Trustee by
the Company or by an investment committee appointed by the Board of Directors of
the Company. If no such guidelines are received by the Trustee, the assets of
the Trust Fund, other than the Policies, shall be invested in investments
emphasizing safety of principal, such as a short-term income fund maintained by
the Trustee, or in short-term debt securities issued or guaranteed by the U.S.
government, cash equivalents, and the like. Subject to the foregoing, the
Trustee shall have the power to invest or reinvest assets in the Trust Fund in
any personal or intangible property, without restriction to securities or
property of the character authorized for investments by trustees under any
statute or other laws of any state, district or territory, including without
limitation any of the following: common or preferred stocks or other evidences
of ownership in any corporation, partnership, mutual fund, investment company,
association, joint venture or business trust; indebtedness issued by
corporations (including those convertible to common stock), or issued or
guaranteed by the United States or any agency or instrumentality thereof, or any
state, municipality or agency or instrumentality thereof; savings accounts,
certificates of deposits and other types of time deposits and other types of
time deposits with any financial institution under the supervision of the United
States or any state, including the Trustee in its corporate capacity or any
affiliate, department or division of the same; or individual or group insurance
policies, including annuity or investment contracts, where directed by the
Company; provided, that permitted investments shall not include any interest,
direct or indirect, in real estate. Permitted investments shall also include
units in any common, collective or pooled trust fund operated or maintained
exclusively for the commingling and collective investment of monies or other
assets of plans like the Plan, including without limitation any fund operated or
maintained by the Trustee. Notwithstanding any other provision of this
Agreement, to the extent trust assets are used to acquire units in any
collective trust, the terms and conditions of its trust indenture shall solely
govern the investment duties and responsibilities of the fund trustee, and to
the extent required by law, the terms and conditions of
-6-
<PAGE>
such trust indenture shall be incorporated herein by reference. For purposes of
valuation, the value of the interest maintained by the Trust in such collective
fund shall be the fair market value of the collective fund units held,
determined in accordance with generally recognized valuation procedures. The
Company expressly understands and agrees that any such collective fund may
provide for the lending of its securities by the fund trustee and that such
fund's trustee will receive compensation for the lending of securities that is
separate from any compensation of the Trustee hereunder, or any compensation of
the fund trustee for the management of such fund.
(b) Notwithstanding anything in the Trust Agreement to the contrary,
(i) the Company shall have the right and power at any time and from time to time
to contribute one or more Policies to the Trust Fund, and to direct the Trustee
to acquire one or more Policies and to pay premiums from the Trust Fund in
accordance with any such Policy, and (ii) except as the Company shall otherwise
direct, the Trustee shall hold each Policy as part of the Trust Fund and shall
neither transfer any Policy, make or cause to be made any loans, withdrawals,
surrenders or other distributions under any Policy, nor surrender, assign,
amend, modify or terminate any Policy; provided, however, the foregoing
notwithstanding, if the Company fails to contribute Qualified Assets to the
Trust pursuant to Section 5.1(c), the Trustee will surrender any or all policies
to obtain cash to pay Benefits to Participants or Beneficiaries; and the Trustee
may make or cause to be made loans, withdrawals, surrenders or other
distributions under any or all Policies, or surrender any Policy, to the extent
necessary to obtain cash to pay administrative expenses.
(c) All Policies on the life of a Participant (whether contributed by
the Company or purchased by the Trustee at the Company's direction pursuant to
Section 3.1(b)) shall be held by such Trustee until the death benefit proceeds
of such policy have been duly paid following the Participant's death; or the
Policy has been surrendered in whole or in part for its cash value for the
purpose of paying deferred compensation benefits to the Participant; or
surrendered in whole or in part for its cash value following the Participant's
forfeiture of all or part of the Benefits under a Plan (of which whole or
partial forfeiture the Company shall notify the Participant and the Trustee in
writing).
-7-
<PAGE>
3.2 Investment Powers of Trustee. Except as limited by Section 3.1
----------------------------
or as otherwise provided in this Trust Agreement, the Trustee shall have the
following investment powers and authority with respect to all property
constituting a part of the Trust Fund in its discretion:
(a) To retain any property at any time received by it.
(b) To participate in any plan or reorganization, consolidation,
merger, combination, liquidation, or other similar plan relating to any such
property, and to consent to or oppose any such plan or any action thereunder, or
any contract, lease, mortgage, purchase, sale, or other action by any
corporation or other entity any of the securities of which may at any time be
held in the Trust Fund, and to do any act with reference thereto.
(c) To be the owner of any individual life insurance contracts or
individual or group annuity contracts and to take such action with respect to
such contracts as necessary to carry out the terms of this Trust Agreement,
including but not limited to payment of insurance premiums, repayment of policy
loans, and complete or partial surrender of such contracts to pay Plan Benefits
or Trust expenses (not otherwise provided for).
(d) Generally to do all acts, whether or not expressly authorized,
that the Trustee deems necessary or desirable for the protection of the Fund and
to carry out the purposes of this Trust Agreement.
3.3 Administrative Powers of Trustee. Except as limited by Section
--------------------------------
3.1 or as otherwise provided in this Trust Agreement, the Trustee shall have the
following administrative powers in its sole and absolute discretion:
(a) To register or hold any securities or other property held by it in
its own name or in the name of any custodian of such property or of its nominee,
including the nominee of any system for the central handling of securities, with
or without the addition of words indicating that such securities are held in a
fiduciary capacity, to deposit or arrange for the deposit of any such securities
with such a system and to hold any securities in bearer form.
(b) To engage any legal counsel, including counsel to the Company, or
any other suitable agents (including outside investment managers), accountants,
actuaries,
-8-
<PAGE>
consultants, and other providers of services, to consult with them with respect
to the implementation and construction of this Trust Agreement, the duties of
the Trustee hereunder, the transactions contemplated by this Trust Agreement or
any act which the Trustee proposes to take or omit, to rely upon the advice of
and services performed by such persons and to pay their reasonable fees,
expenses and compensation from the Trust Fund.
(c) To exercise any right to draw cash pursuant to a letter of credit
on the Company's account which has been issued in favor of the Trust, as
described in Section 5.1.
(d) To determine whether the Company or a subsidiary is insolvent as
provided in Section 2.5 hereof.
(e) To transfer excess Trust assets to the Company as provided in
Section 5.4 hereof.
(f) Generally to do all acts, whether or not expressly authorized,
that the Trustee deems necessary or desirable for the protection of the Fund and
to carry out the purposes of this Trust Agreement.
3.4 Summary of Plan and Trust Responsibilities. The Company intends
------------------------------------------
the assets of each Account under the Trust to be available to pay benefits
solely to Participants who accrued benefits payable under a Plan or Plans
pursuant to their employment by the Company and/or those subsidiaries identified
in Schedule A. Except as otherwise provided in the immediately preceding
sentence, the Company intends the assets of the Trust to constitute a unitary,
nonsegmented source of funds from which to pay all benefits under all of the
Plans as if they were a single plan, with no benefit under any particular Plan
having any priority over any other benefit under that Plan or under any other
Plan and with no assets of the Trust designated to pay any particular benefit.
The Company further intends that no Plans be subject to the funding and design
requirements of ERISA. The Company and the Trustee agree that the Trustee has
no duty or obligation to:
a. determine the amount of any contribution to the Trust;
-9-
<PAGE>
b. except as specifically provided in Section 5.1, with respect to
drawing upon letters of credit, enforce the payment of any
contribution to the Trust;
c. determine any benefit for any Participant or Beneficiary under
any Plan; and
d. except as otherwise provided in this Section 3.4, make any
determination as to the allocation of any Trust asset to any
particular Plan, its Participants or their Beneficiaries.
It is understood that the Trustee's only fiduciary obligation is to hold and
manage assets contributed to the Trust in accordance with the provisions of this
Agreement and that the Trustee has no duty or obligation to administer or manage
any provision of any Plan. All Plan administrative duties are the sole
responsibility of the Company or its duly appointed Plan administrators or
consultants. In accordance herewith, the Trustee has no duty or obligation to
act except upon the written direction of the Company or its duly appointed Plan
administrators or consultants (which written directions to include the
information in Schedule A as delivered to the Trustee from time to time), and
the Company agrees to indemnify and hold the Trustee unharmed against all loss
or liability (including expenses and reasonable attorneys' fees) to which it may
be subject by reason of any acts taken in accordance with any directions, or
acts omitted to be taken in good faith due to an absence of directions, from the
Company, and all loss or liability arising out of any other action or failure to
act by the Trustee in executing its duties under this Agreement unless
occasioned by the Trustee's own negligence or misconduct. No Participant,
beneficiary or third party shall have any cause of action against the Trustee
for complying with such written direction.
Notwithstanding anything else in this Agreement to the contrary: (1) the
Trustee is not a party to, and has no duties or responsibilities under, the
Plan; (2) in any and all cases where the Trustee is required by this Agreement
to act with reference to Plan terms, the Company shall have the responsibility
to certify the relevant provisions to the Trustee in writing, and the Trustee
shall be entitled to rely upon such certification until notified otherwise in
writing by the Company; (3) absent written certification to the Trustee pursuant
to this paragraph, the Trustee shall be
-10-
<PAGE>
chargeable with no knowledge of any Plan terms and shall be deemed to be in
compliance with the Plan; and (4) in any case in which a provision of this
Agreement conflicts with any provision in the Plan, this Agreement shall
control. Notwithstanding the preceding sentence, the Trustee reserves the right
to seek a judicial and/or administrative determination as to its proper course
of action under this Agreement.
-11-
<PAGE>
ARTICLE IV: TRUST OBLIGATION TO PAY PLAN BENFITS
-------------------------------------------------
4.1 Nature of Trust Beneficiaries' Interest. The establishment of
---------------------------------------
the Trust and the payment or delivery to the Trustee of assets shall not vest in
any Participant or Beneficiary any right, title or interest in and to any assets
of the Trust. To the extent that any Participant or Beneficiary acquires the
right to receive payments under a Plan, such right shall be no greater than the
right of any unsecured general creditor of the Company or relevant subsidiary
and such Participant or Beneficiary shall have only the unsecured promise of the
Company or subsidiary that such payments will be made.
4.2 Obligations.
-----------
(a) Obligation of Company. Notwithstanding anything in this Trust
---------------------
Agreement to the contrary, the Company shall remain primarily liable to pay Plan
Benefits.
(b) Obligation of Trustee. The Trustee shall make cash payments of
---------------------
Benefits, or shall transfer ownership of Policies, to Participants and
Beneficiaries at such times and in such amounts as are required of the Company
under the Plans as determined by the Company, or its duly appointed Plan
administrators or consultants, pursuant to Section 4.4 hereof. The Trustee has
no obligation to determine any Participant's or Beneficiary's Benefits under any
Plan, but, as provided in Section 4.4, may rely on Schedule A for determinations
or instructions regarding the payment of Benefits. The Trustee does not
guarantee the adequacy of the Trust Fund to meet and discharge any or all of the
Company's liabilities under the Plans, and, except as specifically provided in
Section 5.1 with respect to drawing upon letters of credit, the Trustee has no
obligation to require the Company to provide any funding into the Trust to
discharge such liabilities under the Plans. The Trustee is not liable for
investment performance or other loss to the Trust Fund except to the extent that
it is judicially determined that it failed to discharge its duties hereunder.
4.3 Individual Bookkeeping Accounts. The Trustee shall establish
-------------------------------
and maintain bookkeeping accounts on behalf of the Trust for particular
Participants or Beneficiaries only as directed by the Company.
-12-
<PAGE>
4.4 Determination of Benefits Payable to Participants or
----------------------------------------------------
Beneficiaries.
- -------------
(a) Determination of Benefits.
-------------------------
(1) Prior to a Change in Control (as defined in Section 4.4(f)), the
Company shall be responsible for determining a Participant's eligibility for
benefits under the Plans and the amount and duration thereof, and shall instruct
the Trustee accordingly. The Trustee shall observe the Company's instructions
unless the Participant or Beneficiary objects thereto and pursues resolution of
the dispute through legal proceedings or arbitration, in which case the Trustee
shall observe the court decree or arbitrator's award in paying benefits (if any
are awarded) to the Participant or Beneficiary.
(2) After the occurrence of a Change in Control, the Trustee shall pay
benefits to each Participant based on the last accrued benefit data provided to
the Trustee by the Company, pursuant to Section 4.4(b), prior to the Change in
Control, unless the Company and the Participant agree upon a different benefit
amount, or the Participant or the Company objects thereto and pursues resolution
of the dispute through legal proceedings or arbitration, in which case the
Trustee shall observe the court decree or arbitrator's award in paying benefits
(if any are awarded) to the Participant or Beneficiary.
(3) A Participant or Beneficiary may apply in writing directly to the
Trustee for payment of a Benefit that (i) has been awarded to the Participant or
Beneficiary by a final court decree or arbitration award, and (ii) has not been
paid by the Company. Such application shall be accompanied by a certified copy
of such court decree or arbitration award. Subject to the provisions of Article
II hereof, upon receiving an application for payment of a Benefit accompanied by
a certified copy of a court decree or arbitration award, the Trustee shall
notify the Company of the application, including the amount of the Benefit
payable, and the Trustee shall make such payments as are required by the court
decree or arbitration award, after providing the Company with an opportunity to
prove to the satisfaction of the Trustee that the Company has paid the Benefit
to the Participant or Beneficiary.
(b) Provision of Accrued Benefit Data to Trustee. At least annually,
--------------------------------------------
or more frequently, in the Company's sole discretion as determined by the
Company's Annuities and
-13-
<PAGE>
Benefits Committee (the "Committee"), the Committee shall provide, or cause to
be provided, to the Trustee in writing the information described below, which
shall be added to and become a part of Schedule A to this Agreement. Much of
such information depends upon definitions and other provisions of the Plan
documents establishing the respective Plans, and the Company acknowledges that
it is solely responsible for interpreting the Plan documents and determining the
required information on the basis thereof. Such written information, which shall
be certified by the Committee or by the Company's Vice President, Human
Resources, shall set forth the identity of each Participant then participating
in each Plan, together with all data necessary to calculate and pay his or her
benefit under each Plan in which he or she participates, including, without
limiting the generality of the foregoing, the following:
. Name
. Social Security number
. Birth date
. Mailing address
. Direct bank deposit information
. Amount of benefit
. Payment date or dates
. Duration of benefit payments
. Name, Social Security number and birth date of joint
annuitant or beneficiary
(c) In making payment of the Benefits from the assets of the Trust,
the Trustee may rely completely on the information and benefit determinations
provided to it pursuant to Section 4.4(a) and (b) and shall be fully protected
and indemnified by the Company for so doing. Moreover, the Trustee shall be
under no obligation to commence any action seeking judicial, arbitral or
administrative relief in the event that the Company or the Committee does not
comply with its obligations under Sections 4.4(a) and (b) hereof or the
respective Participants or Beneficiaries do not pursue appropriate legal or
other remedies to resolve any dispute.
-14-
<PAGE>
(d) The Trustee, if so directed by the Company, may also arrange for
the payment of periodic Plan Benefits directly by an insurance Company under the
terms of a Policy (as, e.g., by the periodic partial surrender of insurance
----
coverage under the Policy to generate cash) or by surrendering the Policy in
exchange for an annuity contract, owned by the Trust, to pay such Plan Benefits.
(e) Upon the death of a Participant to whom payment of periodic
benefits has begun, with the written agreement of the Company, the Trustee shall
have the right, in its sole discretion, to pay the Participant's Beneficiary the
commuted value of any remaining guaranteed periodic benefits under the Plan in a
single cash lump sum.
(f) For purposes of this Agreement, a "Change in Control" means and
shall be deemed to have occurred if:
(1) any person or entity, other than the Company or a Related Party,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Security Exchange Act of 1934 ("Exchange Act")), directly or indirectly, of
Voting Securities representing twenty percent (20%) 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 or entity a number of Voting Securities representing not more than ten
percent (10%) of the then-outstanding voting power if such person or entity 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 twenty percent (20%) of the then-outstanding
Voting Securities pursuant to a firm commitment underwriting agreement with the
Company; or
(2) 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 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
-15-
<PAGE>
election was previously so approved (the "Continuing Directors"), cease for
any reason to constitute a majority of the members of the Board; or
(3) 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 seventy-five
percent (75%) 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 seventy-five percent (75%) 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
fifty percent (50%) of the voting securities of the surviving entity outstanding
immediately after such transaction; or
(4) 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
fifty percent (50%) of the assets owned by the Company immediately prior to the
transaction.
For purposes of this Section 4.4(f), (A) "Related Party" means (i) a majority-
owned subsidiary of the Company, (ii) an employee or group of employees of the
Company or any majority-owned subsidiary of the Company, (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 and (B) "Voting
Securities or Security" means any securities of the Company which carry the
right to vote generally in the election of directors.
The Trustee shall be entitled, at any time and from time to time, to
demand written certification from the Secretary of the Company regarding whether
a Change in Control has occurred. Pending the receipt of a response,
satisfactory to the Trustee in form and detail, to such
-16-
<PAGE>
demand, the Trustee shall assume that a Change in Control has not occurred;
provided, however, that in the event the Trustee, within the ten day period
following such demand by the Trustee, does not receive a written certification
from the Secretary of the Company, satisfactory to the Trustee in form and
detail, that a Change in Control has not occurred, the Trustee shall assume that
a Change in Control has occurred.
4.5 Payment upon Constructive Receipt. Notwithstanding any other
---------------------------------
provision of this Trust Agreement, if any amounts held in the Trust are found
in a "determination" (within the meaning of Section 1313(a) of the Code) to have
been includable in gross income of a Participant or Beneficiary prior to payment
of such amounts from the Trust, the Trustee shall, as soon as practicable, to
the extent the Company has not made such payment from its own assets, pay to
such Participant or Beneficiary an amount equal to the product of (i) the amount
determined to have been includable in gross income in such determination, and
(ii) the sum of the maximum marginal federal, state and local individual income
tax rates, as determined by the Company, in effect with respect to such
Participant or Beneficiary during the taxable year to which the "determination"
applies, and shall both reduce the Participant's or Beneficiary's future
Benefits accordingly and charge the applicable Participant Account of such
Participant or Beneficiary. The Trustee shall not make any distribution to a
Participant or Beneficiary pursuant to this Section 4.5 unless it has received a
copy of the "determination" described above. The Company shall be primarily
liable for making the payment described in this Section 4.5.
-17-
<PAGE>
ARTICLE V: CONTRIBUTIONS AND WITHDRAWALS
-----------------------------------------
5.1 Contributions
-------------
(a) The Company shall deliver to the Trustee such cash, Policies or
other property, which may include letters of credit on the Company's account
issued in favor of the Trust by a national bank (which may include the
Commercial Department of the Trustee), as the Company shall from time to time
determine.
(b) Notwithstanding the foregoing, the Trustee shall not be liable for
any failure by the Company to provide contributions sufficient to pay Benefits
under the Plans in full or to cause required transfers of Qualified Assets to be
made as herein required.
(c) The term "Qualified Assets" when used in this Trust Agreement
shall refer to cash or cash equivalents; letters of credit on the Company's
account issued in favor of the Trust by a national bank (which may include the
Commercial Department of the Trustee); shares of stock and other securities
readily tradeable on an established national exchange; and such other assets
which the Trustee, in its sole discretion, agrees to accept.
(d) (1) If the Trustee is directed to pay benefits under the
Plans from the Trust or the Trustee is due compensation or reimbursement for its
expenses, the Trustee shall for these purposes apply the assets then held in the
Trust in the following order of priority:
a. Cash, cash equivalents, stock and other readily
tradeable securities;
b. Cash available under any letter of credit on the
Company's account which has been issued in favor of
the Trust;
c. Policies, as described in Section 5.1(d)(2).
(2) At any time or from time to time if the Trustee (having applied
assets in the priority stated in Section 5.1(d)(1)) determines that in order to
generate cash to pay current or future Plan Benefits, it is necessary to
surrender any Policies; or the Trustee determines that in order to generate cash
to pay administrative expenses, it is necessary to either borrow from, withdraw
from, encumber in any manner or surrender all or part of any Policy,
-18-
<PAGE>
including without limitation partial surrenders or distributions of policy
values; the Trustee shall notify the Company in writing of its intention to so
surrender such Policies, or to so borrow, withdraw, encumber or surrender, as
the case may be, and the amount thereof. Thereupon, the Company shall have the
option within 30 days to contribute Qualified Assets to the Trust in the amount
stated in the notice, and the Trustee shall then refrain from making such
complete surrender, loan, withdrawal, encumbrance or partial surrender until
such subsequent time(s), if any, that the Trustee again determines that it is
necessary to either completely surrender, borrow from, withdraw from, encumber
or partially surrender one or more Policies, whereupon the Trustee shall again
give written notice of its intention to borrow, withdraw, encumber or surrender
and the Company shall again have the option to contribute Qualified Assets, in
the manner set forth above in this Section 5.1(d)(1).
(3) Notwithstanding any other provision in this Trust Agreement, in
the event the Company, upon written notice duly given by the Trustee, does not
exercise its option to contribute Qualified Assets to the Trust in the amount
stated in the Trustee's notice within the time period allowed, the Trustee shall
then be authorized to borrow from, withdraw from, encumber in any manner and/or
surrender all or any of the Policies, in the manner described in 5.1(d)(1), even
if the cash raised therefrom is in excess of the amount stated in such notice.
5.2 Application of Contributions. Contributions by the Company as
----------------------------
provided for herein shall be applied by the Trustee first to the payment of its
fees and expenses and second to the payment of premiums on Policies held by the
Trust.
5.3 Recovery of Trust Assets by the Company.
----------------------------------------
Except as provided in Sections 5.4 and 5.5 and Articles II and XI
hereof, the Trust Fund shall be held for the exclusive purpose of providing
Benefits to Participants and their Beneficiaries and defraying expenses of the
Trust in accordance with the provisions hereof. Accordingly, except as provided
in Sections 5.4 and 5.5 and Articles II and X hereof, no part of the income or
corpus of the Trust Fund shall be recoverable by or for the benefit of the
Company.
-19-
<PAGE>
5.4 Transfer of Excess Assets to the Company. The Company may
----------------------------------------
withdraw assets from the Trust, under the conditions set forth below, if:
(1) the Company shall deliver to the Trustee the report of an enrolled
actuary determining the present value of all future benefits payable under the
Plan with respect to current Participants, based upon reasonable assumptions
regarding, inter alia, interest, future compensation increases, and post-
retirement mortality, but assuming no turnover or pre-retirement mortality; and
(2) the assets of the Trust exceed such present value of all
future benefits by more than 25%.
Under such circumstances, the Trustee shall deliver assets of the Trust to the
Company equal to the amount or value requested by the Company, provided,
however, that the remaining assets of each Account in the Trust after such
withdrawal shall be not less in value than 125% of such present value of all
future benefits in each such Account.
5.5 Company as Owner of Assets. All assets of the Trust, including
--------------------------
any allocated to a bookkeeping account for the purpose of paying benefits, are
intended by the Company to satisfy the Company's legal liability under the Plans
in respect of the Participants and their Beneficiaries. If after payment of or
provision for all Benefits due a Participant or Beneficiary, there is any
balance remaining in a bookkeeping account or there are otherwise excess
proceeds from a Policy, such excess shall revert to the Company in accordance
with this Trust Agreement. The Company agrees that all income, deductions, and
credits of each such bookkeeping account belong to it as owner for income tax
purposes and will be included on the Company's income tax returns or any other
required tax returns and will be the sole obligation of and paid by the Company.
-20-
<PAGE>
ARTICLE VI: TAXES, EXPENSES AND COMPENSATION
---------------------------------------------
6.1 Taxes on Trust. The Company shall from time to time pay taxes
--------------
of any and all kinds whatsoever which at any time are levied or assessed upon or
become payable in respect of the Trust Fund, the income or any property forming
a part thereof, or any security transaction pertaining thereto. The Trustee
shall, at Company expense, contest the validity of such taxes in any manner
deemed appropriate by the Company or its counsel, but only if the Trustee has
received an indemnity bond or other security satisfactory to it to pay any
expenses of such contest. Alternatively, the Company may itself contest the
validity of any such taxes.
6.2 Withholding Taxes; Employment Taxes. Any amounts paid to a
-----------------------------------
Participant or Beneficiary pursuant to Article IV shall be reduced by the amount
of taxes required by law to be withheld, and the Company shall calculate the
amounts to be withheld and shall direct the Trustee with respect thereto. The
Trustee, in its sole discretion, may either pay such taxes required to be
withheld to the Company, whereupon the Company shall have full responsibility
for the payment of all withholding taxes to the appropriate tax authorities, or
pay such taxes directly for the benefit of the Company; in either such event,
the Company shall timely furnish each Participant or Beneficiary with the
appropriate tax information form evidencing such payment and the amount thereof.
The Company shall be solely responsible for calculating and paying employment
taxes (e.g., employer FICA, FUTA, state unemployment), if any, attributable to
Trust payments to Plan Beneficiaries.
6.3 Expenses and Compensation. The Trustee shall be paid
-------------------------
compensation by the Company (or, in the event the Company fails to make such
payments, from the Trust Fund), in accordance with the Trustee's regular
schedule or fees for trust services and applicable investment management
services for similar trusts, as in effect from time to time, unless the Company
and the Trustee otherwise agree. The Trustee shall be reimbursed by the Company
(or in the event the Company fails to make such reimbursement, from the Trust
Fund), for the Trustee's reasonable expenses of management and administration of
the Trust, including reasonable compensation of counsel and any actuary,
consultant or other agent engaged by the Trustee to assist it in such management
and administration. The Trustee shall submit to the Company a statement for its
compensation and expense reimbursement, setting forth adequate detail to
establish the basis
-21-
<PAGE>
therefor. The Trustee shall claim expenses and compensation to be paid from the
Accounts established in the Trust Fund based on the relative value of assets
held in each such Account in the Trust Fund, first from assets not allocated to
separate bookkeeping accounts established under Section 4.3 for the payment of
Benefits; and if such unallocated assets are insufficient, then from assets
which have been allocated under Section 4.3.
-22-
<PAGE>
ARTICLE VII: ADMINISTRATION AND RECORDS
----------------------------------------
7.1 Records. The Trustee shall keep or cause to be kept accurate
-------
and detailed accounts of any investments, receipts, disbursements and other
transactions hereunder, and all accounts, books, and records relating thereto
shall be open to inspection and audit at all reasonable times by any person
designated by the Company. All such accounts, books, and records shall be
preserved (in original form, or on microfilm, magnetic tape, or any other
similar process) for such period as the Trustee may determine, but the Trustee
may only destroy such accounts, books, and records after first notifying the
Company in writing of its intention to do so and transferring to the Company any
of such accounts, books, and records requested.
7.2 Settlement of Accounts. Within 60 days after the close of each
----------------------
calendar year, and within 60 days after the removal or resignation of the
Trustee or the termination of the Trust, the Trustee shall file with the Company
a written account setting forth all investments, receipts, disbursements and
other transactions effected by it during the preceding calendar year, or during
such period from the close of the prior calendar year, to the date of such
removal, resignation, or termination, including a description of all investments
and securities purchased and sold, with the cost or net proceeds of such
purchases or sales, and showing all cash, securities, and other property held at
the end of such calendar year or other period. Each account so filed shall be
open to inspection at the office of the Trustee during normal business hours by
the Company and by any person appointed in writing by a majority of the
Participants identified in the last preceding annual accrued benefit information
provided to the Trustee pursuant to Section 4.4(c). For purposes of any such
appointment, each Participant shall have one "vote", irrespective of how many of
the Plans he participates in, and multiple beneficiaries of a single deceased
Participant shall share one vote. (Hereinafter, such person, if any is so
appointed, is referred to as "the Participant's representative".)
If within 90 days after the filing of such account neither the Company
nor the Participants' representative, if any, has filed with the Trustee notice
of any objection to any act or transaction of the Trustee, the initial account
shall become an account stated as between the Trustee, the Company, and all
persons having or claiming to have an interest in the Trust Fund. If
-23-
<PAGE>
any objection has been filed, and if the Company or the Participants'
representative who filed such objection is satisfied that it should be
withdrawn, the objecting party shall in writing filed with the Trustee signify
its approval of the account, and it shall become an account stated as between
the Trustee, the Company, and all persons having or claiming to have an interest
in the Trust Fund. If the account is adjusted following an objection thereto,
the Trustee shall file with the Company and make available for inspection by the
Participants' representative the adjusted account, and if within 30 days after
such filing of an adjusted account neither the Company nor the Participants'
representative, if any, has filed with the Trustee notice of any objection to
the transactions as so adjusted, the adjusted account shall become an account
stated as between the Trustee, the Company, and all persons having or claiming
to have an interest in the Trust Fund.
When an account is stated it shall be finally settled, and the Trustee
shall, to the maximum extent permitted by applicable law, be forever released
and discharged from all liability and accountability with respect to the
propriety of its acts and transactions shown in such account.
7.3 Audit. The Trustee shall from time to time permit an
-----
independent certified public accountant selected by the Company to have access
during ordinary business hours to such records as may be necessary to audit the
Trustee's accounts.
7.4 Judicial Settlement. Nothing contained in this Trust Agreement
-------------------
shall be construed as depriving the Trustee or the Company of the right to have
a judicial settlement of the Trustee's account.
7.5 Delivery of Records to Successor. In the event of removal or
--------------------------------
resignation of the Trustee, the Trustee shall deliver to the successor Trustee
all records which shall be required by the successor Trustee to enable it to
carry out the provisions of this Trust Agreement.
7.6 Tax Filings. In addition to any returns required of the Trustee
-----------
by law, the Trustee shall prepare and file such tax reports and other returns as
the Company and the Trustee may from time to time agree.
-24-
<PAGE>
ARTICLE VIII: REMOVAL OR RESIGNATION OF THE
TRUSTEE AND DESIGNATION OF SUCCESSOR TRUSTEE
--------------------------------------------
8.1 Resignation.
-----------
(a) The Trustee may resign at any time upon 90 days prior written
notice. If such resignation occurs prior to a Change in Control, the Trustee's
notice thereof shall be to the Company, and the Company shall make a good faith
effort, following receipt of notice of resignation from the Trustee, to find and
to appoint a successor trustee which is a bank or trust Company with assets in
excess of $2 billion and net worth in excess of $100 million, and which shall
adhere to the obligations imposed on the Trustee under the terms of the Trust
Agreement. If such resignation occurs after a Change in Control, the Trustee's
written notice thereof shall be to both the Company and to each Plan Participant
whose home address is identified on the last written data on Plan Participants
provided to the Trustee by the Company prior to the Change in Control. In such
case, a successor Trustee may be appointed pursuant to the written agreement of
at least 25% of the Participants (including Beneficiaries of deceased
Participants) in the Plans. (For purposes of Section 8.1, multiple
Beneficiaries of a single Participant shall count as one vote.)
(b) In the event that the Company or at least 25% of Plan
Participants, as the case may be, shall fail to appoint a successor trustee
within 90 days of the Trustee's notice of resignation, the Trustee shall be
entitled to seek judicial removal and appointment of a successor trustee which
is a bank or trust Company with assets in excess of $2 billion and a net worth
in excess of $100 million.
(c) In any event, the Trustee shall continue to be custodian of the
Trust Fund until the new trustee is in place, and the Trustee shall be entitled
to expenses and fees through the later of the effective date of its resignation
as Trustee or the end of its custodianship of the Trust Fund.
8.2 Removal.
-------
(a) Prior to a Change in Control, the Company may remove any Trustee
with or without cause at any time upon at least 90 days notice in writing to the
Trustee. Such removal of the Trustee by the Company shall not be effective
until the Company has
-25-
<PAGE>
appointed, in writing, a successor Trustee, which must be a bank or trust
Company with assets in excess of $2 billion and a net worth in excess of $100
million, and such successor has accepted the appointment in writing.
(b) After a Change in Control shall have occurred, a Trustee may be
removed with or without cause at any time upon at least ninety (90) days notice
in writing to the Trustee pursuant to the written agreement of at least 25% of
the Participants in the Plans as of the date preceding the effective date of a
Change in Control, who shall appoint a successor Trustee satisfying the
requirements set forth in Section 8.2(a). Alternatively, at least 25% of the
Participants in the Plans as of the date preceding the effective date of a
Change in Control may petition the Orphans Court Division, Court of Common
Pleas, Allegheny County, Pennsylvania, for appointment of a successor Trustee.
8.3 Successor Trustee. All of the provisions set forth herein with
-----------------
respect to the Trustee shall relate to each successor trustee with the same
force and effect as if such successor had been originally named as the Trustee
hereunder.
8.4 Transfer of Trust Fund to Successor. Upon the resignation or
-----------------------------------
removal of the Trustee and appointment of a successor, the Trustee shall
promptly transfer and deliver the Trust Fund to such successor, the Trustee's
responsibility hereunder shall be limited to managing the assets in its
possession and transferring such assets to the successor, and settling its final
account. Neither the Trustee nor the successor shall be liable for the acts of
the other.
-26-
<PAGE>
ARTICLE IX: ENFORCEMENT OF TRUST
AGREEMENT AND LEGAL PROCEEDINGS
-------------------------------
9.1 The Company shall have the right to enforce any provision of
this Trust Agreement and either the Trustee on behalf of Participants and
Beneficiaries or any Participant (or the Participant's designated beneficiary
or, absent such designation, the legal representative of the Participant's
estate) as a Beneficiary of the Trust shall have the right to enforce any
provision of this Trust Agreement that affects the right, title, and interest of
such Participant (or other person) in the Trust. In any action or proceeding
affecting the Trust the only necessary parties shall be the Company, the
Trustee, and the Participants and, except as otherwise required by applicable
law, no other person shall be entitled to any notice or service of process. Any
judgment entered in such an action or proceeding shall, to the maximum extent
permitted by applicable law, be binding and conclusive on all persons having or
claiming to have any interest in the Trust. Time is of the essence of this
Agreement and in case any provision of this Agreement is enforced by the Trustee
or by any Participant or Beneficiary by law or through an attorney-at-law, or
under advice therefrom, then the Company shall pay all costs of such enforcement
of collection, including reasonable attorney's fees.
-27-
<PAGE>
ARTICLE X: TERMINATION
-----------------------
10.1 Terminations. The Trust shall continue until (i) all Benefit
------------
payments required by Article VI or other provisions of this Trust Agreement have
been made or (ii) the Trust Fund contains no assets and retains no claims to
recover assets from the Company pursuant to any provision hereof, whichever
shall occur first. If the Trust terminates pursuant to this Section 10.1, the
Trustee, after its final account has been settled as provided in Section 8.2,
shall distribute to the Company the net balance of any assets of the Trust
remaining after all Benefits and expenses have been paid.
10.2 No Further Liability. Upon making distribution of the Trust
--------------------
Fund pursuant to the preceding paragraphs of this Article X, the Trustee shall
be relieved from all further liability. The powers of the Trustee hereunder
shall continue so long as any assets of the Trust Fund remain in its hands.
-28-
<PAGE>
ARTICLE XI: AMENDMENT
----------------------
11.1 Amendment. Except as provided in Section 11.2, this Trust
---------
Agreement may be amended, by agreement of the Company and the Trustee, only to
make nonsubstantive changes which do not have a material adverse effect on the
rights of Participants and Beneficiaries under the Plans.
11.2 Compliance with ERISA, the Code and Other Laws. Notwithstanding
----------------------------------------------
anything in this Article XI to the contrary, this Trust Agreement and the Plan
shall be amended from time to time (without the consent of any Participant) to
maintain the Plan as an unfunded plan maintained primarily for the purpose of
providing deferred compensation for select group of management or highly
compensated employees for purposes of ERISA, the Code, or any other applicable
law; to maintain the Trust as a "grantor trust", and insure that contributions
to the Trust by the Company will not constitute a taxable event and income and
gains of the Trust Fund will not be taxable as income and gains to the Trust or
to Participants under the Plan and that Benefits paid to Participants from the
Trust Fund will be deductible by the Company in the year of payment; and to
effectuate compliance with any other applicable legal requirements.
11.3 Execution of Amendments. The Company and the Trustee shall
-----------------------
execute such amendments of this Trust Agreement as shall be necessary to give
effect to any amendment made pursuant to this Article XI.
-29-
<PAGE>
ARTICLE XII: MISCELLANEOUS
---------------------------
12.1 Nonalienation. No amount payable to or in respect of any
-------------
Participant at any time under the Trust shall be subject in any manner to
alienation by anticipation, sale, transfer, assignment, bankruptcy, pledge,
attachment, charge, or encumbrance of any kind, and (i) any attempt to so
alienate, sell, transfer, assign, pledge, attach, charge, or otherwise encumber
any such amount, whether presently or thereafter payable, shall be void, and
(ii) the Trust Fund shall in no manner be liable for or subject to the debts or
liabilities of any Participant. Notwithstanding the foregoing, the Fund shall
at all times remain subject to the claims of creditors of the Company in the
event the Company becomes insolvent as provided in Article II.
12.2 Communications.
--------------
(a) Communications to the Company shall be addressed to the Company at
Consolidated Natural Gas Company, 20th Floor, CNG Tower, 625 Liberty Avenue,
Pittsburgh, PA 15222-3199, Attn: Plan Administrator, provided, however, that
upon the Company's written request, such communications shall be sent to such
other address as the Company may specify.
(b) Communications to the Trustee shall be addressed to the Trustee at
Mellon Bank, Attention: Earl G. Kleckner, Vice President, One Mellon Bank
Center,
Room 151-3346, Pittsburgh, PA 15258-0001, provided, however, that upon the
Trustee's written request, such communications shall be sent to such other
address as the Trustee may specify.
(c) No communication shall be binding on the Trustee until it is
received by the Trustee, and no communication shall be binding on the Company
until it is received by the Company.
12.3 Authority to Act. The Secretary of the Company shall from time
----------------
to time certify to the Trustee the person or persons authorized to act for the
Company and provide the Trustee with such information regarding the Company as
the Trustee may reasonably request. The Trustee may continue to rely on any
such certification until notified to the contrary.
12.4 Authenticity of Instruments. The Trustee shall be fully
---------------------------
protected in acting upon any instrument, certificate, or paper believed by it to
be genuine and to be signed or
-30-
<PAGE>
presented by the proper person or persons, and the Trustee shall be under no
duty to make any investigation or inquiry as to any statement contained in any
such writing but may accept the same as conclusive evidence of the truth and
accuracy of the statements therein contained.
12.5 Binding Effect. This Trust Agreement shall be binding upon the
--------------
Company and the Trustee and their respective successors and assigns.
12.6 Inquiry as to Authority. A third party dealing with the Trustee
-----------------------
shall not be required to make inquiry as to the authority of the Trustee to take
any action nor be under any obligation to follow the proper application by the
Trustee of the proceeds of sale of any property sold by the Trustee or to
inquire into the validity or propriety of any act of the Trustee.
12.7 Responsibility for Company Action. The Trustee assumes no
---------------------------------
obligation or responsibility with respect to any action required by this Trust
Agreement on the part of the Company.
12.8 Successor to Trustee. Any corporation into which the Trustee
--------------------
may be merged or with which it may be consolidated, or any corporation resulting
from any merger, reorganization, or consolidation to which the Trustee may be a
party, or any corporation to which all or substantially all the Trust business
of the Trustee may be transferred shall be the successor of the Trustee
hereunder without the execution or filing of any instrument or the performance
of any act.
12.9 Laws of Pennsylvania to Govern. This Trust Agreement and the
------------------------------
Trust established hereunder shall be governed by and construed, enforced, and
administered in accordance with the laws of the Commonwealth of Pennsylvania and
the Trustee shall be liable to account only in the courts of that Commonwealth.
12.10 Reports. The Trustee shall not be required to file any annual
-------
or other returns or reports to any court, or to give any bond, or to secure any
order or consent of any court, to carry out any of the powers conferred on the
Trustee or to make any other reports to any court.
12.11 Counterparts. This Trust Agreement may be executed in any
------------
number of counterparts, each of which shall be deemed to be the original
although the others shall not be produced.
-31-
<PAGE>
12.12 Participant to Include Beneficiary. The term Participant when
----------------------------------
used herein shall be deemed to include the Beneficiary of any Participant who
becomes entitled to receive or is receiving Benefits under any of the Plans on
account of the death of such Participant.
IN WITNESS WHEREOF, this Trust Agreement has been duly executed by the
parties hereto as of the day and year first above written.
CONSOLIDATED NATURAL GAS COMPANY
By:________________________________
L. D. Johnson
Vice Chairman and Chief
Financial Officer
(Corporate Seal)
Attest:______________________________
Secretary
MELLON BANK, TRUSTEE
By:_________________________________
Vice President
(Corporate Seal)
Attest:_____________________________
Secretary
-32-
<PAGE>
Schedule A
to
Trust Agreement between
Consolidated Natural Gas Company
and
Mellon Bank
Contents:
--------
1. Consolidated Natural Gas Company Rabbi Trust Administrative Guidelines
2. Information on Accrued Benefits as of December 31, 1994
3. Information regarding Accounts in Trust:
Assets in Account A shall be available to pay benefits solely to
Participants who accrued benefits payable under the Executive
Incentive Deferral Plan pursuant to their employment by CNG Producing
Company or CNG Energy Services Company.
Assets in Account B shall be available to pay benefits solely to
Participants who accrued benefits payable under the Executive
Incentive Deferral Plan or the Non-Employee Directors Deferred
Compensation Plan pursuant to their employment by Consolidated Natural
Gas Company or any subsidiary other than CNG Producing Company or CNG
Energy Services Company.
Additional Accounts may be established by the Company in the future.
<PAGE>
EXHIBIT 11
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings Per Share of Common Stock,
as Shown on the Consolidated Statement of Income
Net income..................................................... $298,273 $21,344 $183,171
-------- ------- --------
Average common shares outstanding.............................. 94,434 93,246 93,000
-------- ------- --------
Earnings per share of common stock........................... $3.16 $.23 $1.97
======== ======= ========
Primary Earnings Per Share (Note 1)
Net income..................................................... $298,273 $21,344 $183,171
-------- ------- --------
Average common shares outstanding.............................. 94,434 93,246 93,000
Incremental shares resulting from
assumed exercise of stock options............................ 736 99 78
-------- ------- --------
Average common shares, as adjusted............................. 95,170 93,345 93,078
-------- ------- --------
Primary earnings per share................................... $3.13 $.23 $1.97
======== ======= ========
Fully Diluted Earnings Per Share
Net income..................................................... $298,273 $21,344 $183,171
Interest on 7 1/4% Convertible Subordinated
Debentures, net of tax effect................................ 11,823 11,913 12,465
-------- ------- --------
Net income, as adjusted........................................ $310,096 $33,257 $195,636
-------- ------- --------
Average common shares outstanding.............................. 94,434 93,246 93,000
Incremental shares resulting from
assumed exercise of stock options............................ 862 154 96
Shares issuable from assumed conversion of 7 1/4%
Convertible Subordinated Debentures.......................... 4,559 4,559 4,577
-------- ------- --------
Average common shares, as adjusted............................. 99,855 97,959 97,673
-------- ------- --------
Fully diluted earnings per share............................. $3.11(1) $.34(2) $2.00(2)
======== ======= ========
- -------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
(2) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15
because the assumed conversion of the 7 1/4% Convertible Subordinated
Debentures produces an antidilutive result.
<PAGE>
EXHIBIT 12
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings:
Income before cumulative
effect of change
in accounting principle..................... $298,273 $ 21,344 $183,171 $188,494 $194,958
Add income taxes (excluding
cumulative effect of change
in accounting principle).................... 155,830 2,943 82,427 99,906 68,623
-------- -------- -------- -------- --------
Income before income taxes................ 454,103 24,287 265,598 288,400 263,581
Distributed income from unconsolidated
investees, less equity in earnings
thereof..................................... (1,084) 1,501 560 2,960 (1,707)
-------- -------- -------- -------- --------
Subtotal.................................. 453,019 25,788 266,158 291,360 261,874
-------- -------- -------- -------- --------
Add fixed charges:
Interest on long-term debt, including
amortization of debt discount and
expense less premium...................... 101,814 95,823 88,788 85,265 93,594
Other interest expense...................... 7,224 14,732 7,992 4,995 7,170
Portion of rentals deemed to
be representative of
the interest factor....................... 9,449 9,565 8,486 8,378 7,822
Fixed charges associated
with 50% projects with debt............... 2,157 1,388 - - _
-------- -------- -------- -------- --------
TOTAL FIXED CHARGES............................ 120,644 121,508 105,266 98,638 108,586
-------- -------- -------- -------- --------
TOTAL EARNINGS................................. $573,663 $147,296 $371,424 $389,998 $370,460
======== ======== ======== ======== ========
RATIO OF EARNINGS TO FIXED
CHARGES....................................... 4.76 1.21 3.53 3.95 3.41
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF CONSOLIDATED NATURAL GAS COMPANY
------------------------------------------------
<TABLE>
<CAPTION>
Percent Voting
Securities
Owned by
Place of Immediate
Name of Company Incorporation Parent Company
- -------------------------------------------------------------------------------
<S> <C> <C>
CONSOLIDATED NATURAL GAS COMPANY Delaware
Subsidiary companies:
Consolidated Natural Gas Service Company Delaware 100%
CNG Transmission Corporation Delaware 100%
CNG Iroquois, Inc. Delaware 100%
The East Ohio Gas Company Ohio 100%
The Peoples Natural Gas Company Pennsylvania 100%
Virginia Natural Gas, Inc. Virginia 100%
Hope Gas, Inc. West Virginia 100%
West Ohio Gas Company/1/ Ohio 100%
CNG Producing Company Delaware 100%
CNG Pipeline Company Texas 100%
CNG Energy Services Corporation Delaware 100%
CNG Main Pass Gas Gathering Corporation Delaware 100%
CNG Oil Gathering Corporation Delaware 100%
CNG Power Company Delaware 100%
CNG Market Center Services, Inc. Delaware 100%
CNG Bear Mountain, Inc. Delaware 100%
Granite Road Cogen, Inc. Texas 100%
CNG Products and Services, Inc. Delaware 100%
CNG Technologies, Inc. Delaware 100%
CNG Storage Service Company Delaware 100%
CNG International Corporation Delaware 100%
CNG Cayman One Ltd. Cayman Islands 100%
CNGI Australia Pty. Limited Australia 99%
CNG Cayman Two Ltd. Cayman Islands 100%
CNGI Australia Pty. Limited Australia 1%
CNG Power Services Corporation Delaware 100%
CNG Lakewood, Inc. Delaware 100%
Consolidated System LNG Company Delaware 100%
CNG Research Company Delaware 100%
CNG Coal Company Delaware 100%
CNG Financial Services, Inc. Delaware 100%
</TABLE>
1 Effective January 1, 1997, West Ohio Gas Company merged with The East Ohio
Gas Company.
<PAGE>
RALPH E. DAVIS ASSOCIATES, INC.
[LOGO] EXHIBIT 23A
February 11, 1997
CONSOLIDATED NATURAL GAS COMPANY
CNG Tower
625 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3199
Report Covering Natural Gas Supply
And Owned Oil Reserves
December 31, 1996
----------------------------------
Gentlemen:
Consolidated Natural Gas Company, through its subsidiaries
(collectively Consolidated or the Company) is engaged in exploring for,
developing, producing, purchasing, gathering, transporting, storing and
distributing natural gas, together with by-product operations. The principal
market area of the Company's retail operations is in Ohio, Pennsylvania,
Virginia and West Virginia. Consolidated operates a regional interstate
pipeline system that supplies natural gas to affiliates, and to utilities and
end-users in the Midwest, Mid-Atlantic states and the Northeast. Exploration
and production activities are carried on primarily in the Appalachian area, the
Gulf Coast area (including offshore), the Mid-Continent area, the Permian Basin
area, the Rocky Mountain area and in Canada.
The history of the operations in the Appalachian area covers a period
of over 100 years. Prior to l943, Consolidated's gas supply was obtained from
company-owned production and by purchase from fields located within the
Appalachian area. From 1943 to 1993 Consolidated purchased gas from pipeline
companies which obtained their gas supply from fields in the Gulf Coast and
Southwest. Since 1993, however, all remaining long-term gas purchase contracts
with pipelines have been replaced with firm transport contracts as the result of
Federal Energy Regulatory Commission (FERC) Order 636. Consolidated purchases
gas under contracts with producers and marketers, and also purchases gas on the
spot market. A substantial part of
<PAGE>
Consolidated Natural Gas Company February 11, 1997
Page 2
these gas supplies are also obtained from fields in the Gulf Coast and
Southwest. Since 1957 Consolidated has also been engaged in exploration and
production of gas in Louisiana and the Texas Gulf Coast, including offshore.
During the twelve months ended December 31, 1996 most of the gas produced and
purchased by the Company was obtained from the Southwest. All gas volumes herein
are stated at a measuring base of 14.73 pounds per square inch absolute.
APPALACHIAN AREA RESERVES
-------------------------
Studies of the natural gas available from Appalachian gas fields lead
us to conclude that the Company may expect to obtain for a number of years a
supply from this area. The development which has occurred in this natural gas
province has resulted in extensive drilling of shallow formations in much of the
area. The entire sedimentary section has not been adequately tested in the
Appalachian area and there is the possibility that natural gas is present in
commercial quantities below the known producing formations. Consolidated has
participated in programs to test deeper formations. Consolidated has also found
that reentry into old wells has been beneficial in finding commercial quantities
behind pipe.
We estimate Consolidated's proved reserves in the Appalachian fields,
as of December 31, 1996, to be 300 billion cubic feet (including CNG Producing
Company's Appalachian reserves) from company-owned wells and 381 billion cubic
feet from gas purchase wells, for a total of 681 billion cubic feet, exclusive
of gas in storage reservoirs. Total additions to the reserves controlled by the
Company in the Appalachian fields have in the past been substantial. It is
possible that future exploration and development will locate appreciable new
reserves. In addition, subsidiary companies had remaining working interest oil
reserves estimated at 393,161 barrels (including CNG Producing Company's
Appalachian oil reserves) in the Appalachian area.
CNG PRODUCING COMPANY
---------------------
CNG Producing Company is Consolidated's primary exploration and
production subsidiary. As of December 31, 1996, the estimated proved working
interest reserves of CNG Producing Company are 892 billion cubic feet of gas and
50,273,717 barrels of crude oil and
<PAGE>
Consolidated Natural Gas Company February 11, 1997
Page 3
condensate. The foregoing totals include approximately 1 billion cubic feet of
gas and 8,638,612 barrels of heavy oil reserves in Canada.
In the United States, CNG Producing Company has proved reserves in 10
states and the offshore area of the Gulf Coast. The majority of CNG Producing
Company's United States reserves are in the Gulf Coast and Mid-Continent areas.
The estimated proved reserves in the United States are 891 billion cubic feet of
gas and 41,635,105 barrels of crude oil and condensate.
The estimated Appalachian proved reserves as of December 31, 1996 for
CNG Producing Company, which are included in the total Appalachian reserves
disclosed earlier in this report, are 109 billion cubic feet of gas and 101,350
barrels of oil. In addition to the Appalachian area, CNG Producing Company
conducts exploration and development programs in other areas, including the San
Juan Basin in New Mexico. The San Juan Basin has a history of oil and gas
production from conventional sources, but recent interest in the area stems from
an unconventional source of gas supply. This interest is the Fruitland Coal
formation, where CNG Producing Company and others are producing gas from the
coal beds. The estimated San Juan Basin proved reserves of CNG Producing
Company as of December 31, 1996 are 9 billion cubic feet.
SOUTHWEST GAS
-------------
Consolidated's subsidiaries have gas supply contracts with various gas
producing companies and marketing groups with remaining terms ranging from a few
months to as long as eight (8) years. Purchase entitlements under these
contracts total approximately 284 billion cubic feet, if all volumes are
requested. This estimate gives no consideration to the estimated volumes of
spot market gas which may be purchased in the future.
GAS STORAGE
-----------
The Company owns and operates 26 gas storage fields, five of which are
owned and operated jointly with other companies. One storage field is owned and
operated jointly with Texas Eastern, one with Tennessee, one with North Penn
Gas, one with both Tennessee and
<PAGE>
Consolidated Natural Gas Company February 11, 1997
Page 4
National Fuel Gas Supply Corporation, and another with both Texas Eastern and
Transcontinental. Consolidated's net injected gas stored at December 31, 1996,
was 479 billion cubic feet (including 53 billion cubic feet of remaining non-
recoverable native gas, and 60 billion cubic feet of non-recoverable base gas.)
The proximity of these storage fields to principal markets and their
high deliverability are important factors in enabling the Company to meet peak
loads and daily requirements during the heating season, and permit the gas
purchased to be taken relatively uniformly in summer and winter.
There are additional depleted, or nearly depleted, gas fields in the
Appalachian area which can be converted to storage fields if needed.
POTENTIAL SUPPLY SOURCES
------------------------
In order to meet the demands for gas in its market area over the long-
term future, Consolidated may need additional supplies over those available from
the sources discussed above.
Canadian authorities have increased the volumes of gas which may be
imported into the United States. Gas presently being imported from Canada is
principally obtained from provinces in Western Canada. In the future, the
availability of additional gas will probably be dependent on gas from frontier
areas such as the MacKenzie Basin - Beaufort Sea area and/or the Arctic Islands.
Such additional gas from Canada may be available in part to Consolidated
directly or through other suppliers.
Other potential sources of gas include Alaska, Mexico, liquefied
natural gas from abroad, synthetic gas from coal or other feed stock and
additional coalbed methane.
SUMMARY AND CONCLUSIONS
-----------------------
We have estimated proved working interest crude oil and condensate
reserves owned by Consolidated from sources in the United States and Canada at
50,565,528 barrels as of December 31, 1996 as follows:
<PAGE>
Consolidated Natural Gas Company February 11, 1997
Page 5
<TABLE>
<CAPTION>
Stock Tank Barrels
------------------
<S> <C>
Appalachian Field Reserves 291,811
- --------------------------
CNG Producing Company
- ---------------------
Southwest 50,172,367
Appalachian 101,350
----------
Sub Total 50,273,717
TOTAL - OWNED OIL AND CONDENSATE RESERVES 50,565,528
</TABLE>
We have estimated the gas reserves available to Consolidated from
sources in the United States and Canada at 2,227 billion cubic feet as of
December 31, 1996 as follows:
<TABLE>
<CAPTION>
Billion
Cubic Feet
at 14.73 psia
-------------
<S> <C>
Appalachian Field Reserves
- --------------------------
Company-Owned Wells 191
Gas Purchase Contract Wells 381
Gas in Storage Reservoirs 479
-----
Sub-Total 1,051
CNG Producing Company Reserves
- ------------------------------
Company-Owned Wells
Southwest 783
Appalachian 109
-----
Sub-Total 892
Gas Supply Contracts 284
- --------------------
TOTAL - CONTROLLED GAS RESERVES 2,227
</TABLE>
Consolidated's requirements for the twelve months ended December 31,
1996, including sales of gas produced in Canada, were approximately 744 billion
cubic feet, compared to requirements of 897 billion cubic feet in 1995.
Additional supplies are expected to become available from the
Appalachian area, the Gulf Coast and other areas and from company-owned
reserves.
<PAGE>
Consolidated Natural Gas Company February 11, 1997
Page 6
Potential sources of supply include additional gas from Canada, Mexico
and Alaska, liquefied natural gas from abroad, gas from the reforming of liquid
hydrocarbons such as naphtha and oil, gas from coal gasification and coalbed
methane.
The time at which these additional supplies will become available
cannot be definitely predicted. However, Consolidated is in a favorable
position to secure gas supplies from many directions, including its proven
reserves, the volume of gas in underground storage, the prospects for additional
supplies from its traditional supply areas, the several potential supply sources
and the Company's own program to augment its supply.
Yours very truly,
RALPH E. DAVIS ASSOCIATES, INC.
/s/ Thomas N. Sudderth
________________________________________
Thomas N. Sudderth
President
TNS:sw
<PAGE>
RALPH E. DAVIS ASSOCIATES, INC.
[LOGO]
March 21, 1997
CONSENT OF INDEPENDENT GEOLOGISTS
---------------------------------
We hereby consent to the use of our report dated February 11, 1997,
relating to the total gas supply and Company-owned oil and gas reserves of
Consolidated Natural Gas Company, to be filed as an Exhibit to Consolidated
Natural Gas Company's Annual Report on Form 10-K for the year ended December 31,
1996. We further consent to the filing hereof as an Exhibit to said Annual
Report on Form 10-K.
We also consent to the incorporation by reference into (i) the Registration
Statements on Form S-3 (Nos. 33-52585, 33-63931 and 333-10869) and Form S-8
(Nos. 2-77204, 2-97948, 33-40478, 33-44892 and 333-18783) of Consolidated
Natural Gas Company, and (ii) the prospectuses made a part thereof, of our
estimates of Company-owned oil and gas reserves in the United States and Canada
included in Consolidated Natural Gas Company's Annual Report on Form 10-K for
the year ended December 31, 1996. We also consent to the references to us under
the heading "Experts" in such Prospectuses.
/s/ Thomas N. Sudderth
____________________________________________
Thomas N. Sudderth
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN EXHIBIT 99 OF CONSOLIDATED NATURAL
GAS COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,008,263
<OTHER-PROPERTY-AND-INVEST> 1,069,037
<TOTAL-CURRENT-ASSETS> 1,393,021
<TOTAL-DEFERRED-CHARGES> 364,635
<OTHER-ASSETS> 165,649
<TOTAL-ASSETS> 6,000,605
<COMMON> 261,068
<CAPITAL-SURPLUS-PAID-IN> 496,722
<RETAINED-EARNINGS> 1,424,624
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,205,152
0
0
<LONG-TERM-DEBT-NET> 1,426,315
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 374,000
<LONG-TERM-DEBT-CURRENT-PORT> 104,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,913,876
<TOT-CAPITALIZATION-AND-LIAB> 6,000,605
<GROSS-OPERATING-REVENUE> 3,794,309
<INCOME-TAX-EXPENSE> 155,830
<OTHER-OPERATING-EXPENSES> 3,246,335
<TOTAL-OPERATING-EXPENSES> 3,402,165
<OPERATING-INCOME-LOSS> 392,144
<OTHER-INCOME-NET> 9,304
<INCOME-BEFORE-INTEREST-EXPEN> 401,448
<TOTAL-INTEREST-EXPENSE> 103,175
<NET-INCOME> 298,273
0
<EARNINGS-AVAILABLE-FOR-COMM> 298,273
<COMMON-STOCK-DIVIDENDS> 183,671
<TOTAL-INTEREST-ON-BONDS> 103,257
<CASH-FLOW-OPERATIONS> 407,165
<EPS-PRIMARY> 3.13
<EPS-DILUTED> 3.11
</TABLE>
<PAGE>
Exhibit 99
CNG CONSOLIDATED
NATURAL GAS
COMPANY
CNG CONSOLIDATED
NATURAL GAS
COMPANY
CNG CONSOLIDATED
NATURAL GAS
COMPANY
CNG CONSOLIDATED
NATURAL GAS
COMPANY
CNG CONSOLIDATED
NATURAL GAS
COMPANY
CNG CONSOLIDATED 1996 Financial
NATURAL GAS Report
COMPANY
CNG CONSOLIDATED
NATURAL GAS
COMPANY
CNG CONSOLIDATED
NATURAL GAS
COMPANY
CNG CONSOLIDATED
NATURAL GAS
COMPANY
CNG CONSOLIDATED
NATURAL GAS
COMPANY
CNG CONSOLIDATED
NATURAL GAS
COMPANY
CNG CONSOLIDATED
NATURAL GAS
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.
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.
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
