UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
CONSOLIDATED NATURAL GAS COMPANY
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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Notes:
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
1999 Notice of
Annual Meeting and
Proxy Statement
CONSOLIDATED NATURAL GAS COMPANY
TABLE OF CONTENTS
Page
----
Chairman's Letter...................................................... 1
Notice of Meeting...................................................... 2
Proxy Statement........................................................ 3
Voting Securities and Principal Holders................................ 3
Election of Directors.................................................. 4
Board Committees....................................................... 9
Security Ownership..................................................... 11
Compensation Table..................................................... 12
Option Grants.......................................................... 13
Option Exercise Table.................................................. 14
Human Resources Committee Report....................................... 15
Shareholder Performance Graph.......................................... 19
Directors' Compensation................................................ 19
Benefit Plans.......................................................... 20
Independent Accountants................................................ 22
Approval of Performance Restricted Stock Awards........................ 23
Stockholder's Proposal................................................. 24
Other Matters.......................................................... 25
Appendix I--1998 Financial Statements and Notes to Statements.......... Enclosed
CONSOLIDATED NATURAL GAS COMPANY
February 22, 1999
Dear Stockholder:
You are cordially invited to attend the 1999 Annual Meeting of Stockholders to
be held on Tuesday, April 13, 1999, at 10:00 a.m. Eastern Time at the Sheraton
Airport Plaza Hotel, I-85 & Billy Graham Parkway, Charlotte, North Carolina
28208.
The business items to be acted on during the Meeting are listed in the Notice
of Meeting and are described more fully in the Proxy Statement. The Board of
Directors has given careful consideration to these proposals and believes that
Proposals 1, 2 and 3 are in the best interests of the Company and its
stockholders and that Proposal 4 is not in the best interests of the Company
or its stockholders. The Board recommends that you vote FOR Proposals 1, 2 and
3 and AGAINST Proposal 4.
It is important that you be represented at the Annual Meeting in person or by
proxy. Whether or not you plan to attend, we urge you to mark, sign, date and
return the enclosed proxy card promptly in the postage-paid envelope provided
or call the toll-free telephone number on the proxy card to give your voting
instructions. If you plan to attend, please check the appropriate box on the
proxy card or advise while voting by telephone.
Thank you for your cooperation.
Sincerely,
/s/ George A. Davidson, Jr.
George A. Davidson, Jr.
Chairman of the Board and
Chief Executive Officer
1
CONSOLIDATED NATURAL GAS COMPANY
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
The Annual Meeting of Consolidated Natural Gas Company will be held on Tuesday,
April 13, 1999, at 10:00 a.m. Eastern Time at the Sheraton Airport Plaza Hotel,
I-85 & Billy Graham Parkway, Charlotte, North Carolina 28208. Stockholders of
record at the close of business on February 22, 1999, will be entitled to vote
at the Meeting and any adjournment thereof.
The agenda for the Meeting includes:
1. Election of three Directors.
2. Ratification of the appointment of PricewaterhouseCoopers LLP as
independent accountants.
3. A proposal to approve the performance restricted stock awards granted
under the 1999-2001 Long-Term Strategic Incentive Program.
4. Action on a stockholder-proposed resolution regarding bonuses.
5. Transaction of any other business which may be properly brought before
the Meeting.
In the event you cannot be present in person, please sign and promptly return
the enclosed proxy card in the accompanying postage-paid envelope, or call the
toll-free telephone number on the proxy card to give your voting instructions,
so that your shares will be represented at the Meeting. Prompt return of
proxies will save the Company the expense of further requests for proxies to
ensure a quorum.
By order of the Board of
Directors,
/s/ E. J. Marks, III
E. J. Marks, III
Corporate Secretary
Pittsburgh, Pennsylvania
February 22, 1999
ATTENTION: Stockholders Participating in the Dividend Reinvestment Plan
The accompanying proxy card reflects the total shares of Common Stock
registered in your name directly, as well as any full shares credited to your
Dividend Reinvestment Plan account.
2
CONSOLIDATED NATURAL GAS COMPANY
PROXY STATEMENT
This statement and proxy card, mailed to stockholders commencing on or about
March 5, 1999, are furnished in connection with the solicitation by the Board
of Directors of Consolidated Natural Gas Company of proxies to be voted at the
Annual Meeting of Stockholders, and any adjournment thereof, for the purposes
stated in the Notice of the Annual Meeting. Stockholders can give proxies by
mailing their signed proxy cards or by calling a toll-free telephone number.
The telephone voting procedures are designed to authenticate stockholders'
identities, to allow stockholders to give their voting instructions, and to
confirm that stockholders' instructions have been recorded properly. Specific
instructions for stockholders who wish to use the telephone voting procedure
are set forth on the enclosed proxy card. Any stockholder who cannot attend
the Annual Meeting is requested to sign and return the accompanying proxy card
or call the toll-free telephone number on the proxy card promptly.
The proxy reflects the number of shares registered in a stockholder's name
directly and, for participants in the Company's Dividend Reinvestment Plan,
includes full shares credited to a participant's Dividend Reinvestment Plan
account. Proxies so given will be voted on all matters brought before the
Meeting and, as to the matters with respect to which a choice is specified,
will be voted as directed. The cost of solicitation will be paid by the
Company. In addition to the use of the mails, proxies may be solicited
personally, or by telephone, telecopy or other electronic means, by employees
of the Company and its subsidiaries with no special compensation to these
employees. Georgeson & Company Inc., Wall Street Plaza, New York, New York
10005, has been retained to assist in the solicitation of proxies at an
estimated cost of $8,000. The Company will reimburse brokerage houses and
other custodians, nominees and fiduciaries for expenses incurred in sending
proxy material to their principals.
Any proxy given pursuant to this solicitation may be revoked at any time
prior to exercise by written notice to the Corporate Secretary, by filing a
later dated executed proxy, or by attending and voting at the Annual Meeting.
The address of the principal executive offices of the Company is Consolidated
Natural Gas Company, CNG Tower, 625 Liberty Avenue, Pittsburgh, Pennsylvania
15222-3199.
Voting Securities and Principal Holders
Holders of Common Stock, $2.75 par value, of record on February 22, 1999, have
one vote for each share held. On January 31, 1999, 95,397,649 shares of Common
Stock were outstanding. A majority of the outstanding shares will constitute a
quorum at the Meeting. Abstentions and broker non-votes are counted for
purposes of determining the presence or absence of a quorum for the
transaction of business. Abstentions are counted in tabulations of the votes
cast on proposals presented to stockholders. Broker non-votes are not counted
for purposes of determining whether a proposal has been approved.
The following table indicates the beneficial ownership, as of December 31,
1998, of the Company's Common Stock with respect to the only persons known to
the Company to be the beneficial owner of more than 5% of such Common Stock.
On December 31, 1998, 95,449,428 shares of Common Stock were outstanding.
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Name and Address of Amount and Nature Percent of Outstanding
Beneficial Owner of Beneficial Ownership Common Stock
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Morgan Stanley, Dean Witter &
Co.
1585 Broadway, New York, NY
10036 5,224,572 5.5%
Trustees, Alternate Thrift
Trust of Employees Thrift
Plans(/1/)
CNG Tower, 625 Liberty Avenue,
Pittsburgh, PA 15222-3199 2,874,257(/2/) 3.0%
Trustees, Long-Term Thrift
Trust of Employees Thrift
Plan(/1/)
CNG Tower, 625 Liberty Avenue,
Pittsburgh, PA 15222-3199 5,576,492(/3/) 5.8%
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(/1/)The Alternate and Long-Term Thrift Trusts beneficially hold shares for
employees under the various Company sponsored defined contribution plans.
(/2/)Such shares are beneficially owned in varying amounts by 1,995 employees,
no one of whom beneficially owned in excess of 9,000 shares in the Plans,
or 1/100ths of 1% of the shares outstanding. Such shares are voted
pursuant to confidential
3
instructions of participating employees and, in the absence of
instructions, such shares are not voted. A Registration Statement relating
to various investment options available to participants in the Plans has
been made effective under the Securities Act of 1933 and is on file with
the Securities and Exchange Commission (SEC).
(/3/) Such shares are beneficially owned in varying amounts by 3,872 employees,
no one of whom beneficially owned in excess of 14,900 shares in the Plan,
or 2/100ths of 1% of the shares outstanding. Such shares are voted
pursuant to confidential instructions of participating employees and, in
the absence of instructions, Trustees, Long-Term Thrift Trust of
Employees Thrift Plan shall vote unvoted shares in the same proportion as
shares voted pursuant to confidential instructions. A Registration
Statement relating to various investment options available to
participants in the Plan has been made effective under the Securities Act
of 1933 and is on file with the SEC.
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The Board of Directors does not know of any other persons or groups who
beneficially own 5% or more of the outstanding shares of Common Stock.
Annual Report
Commencing on or about March 5, 1999, the Company's Summary Annual Report and
financial statements for the year ended December 31, 1998, were mailed
together with this Notice of Annual Meeting and Proxy Statement to
stockholders of record on February 22, 1999. The financial statements are
included as part of Appendix I to this Notice of Annual Meeting and Proxy
Statement. The Company will provide a copy of the Summary Annual Report to
anyone else upon request in writing to the Corporate Secretary, Consolidated
Natural Gas Company, CNG Tower, 625 Liberty Avenue, Pittsburgh, Pennsylvania
15222-3199.
Merger Agreement
On February 22, 1999, the Company and Dominion Resources, Inc. (DRI) announced
that a definitive merger agreement was approved by the boards of directors of
both companies. Under the terms of the merger agreement, DRI intends to
acquire all of the Company's shares of Common Stock in a stock-for-stock
transaction. A detailed explanation of the merger, which requires shareholder
approval, will be set forth in the proxy statement relating to the
stockholder's meeting at which such approval will be sought.
Notice of Recent Amendments to Rights Agreement
On January 19, 1999, the Board of Directors amended the existing Rights
Agreement to conform it to recent Delaware Court decisions. The Agreement was
amended to remove references to actions that could be taken only by directors
who were in office as of the adoption of the Rights Agreement (commonly
referred to as the "dead-hand" provision). On February 19, 1999, the Board of
Directors amended the existing Rights Agreement. Rights Amendment No. 2
provides that notwithstanding anything in the Rights Agreement to the
contrary, neither DRI nor any of its "Affiliates" and "Associates" shall be
considered an "Acquiring Person" and no "Shares Acquisition Date" or
"Distribution Date" (each as defined in the Rights Agreement) has occurred or
will occur, in any such case as a result of the approval, execution or
delivery of the merger agreement or the consummation of the transactions
contemplated.
PROPOSAL 1
ELECTION OF DIRECTORS
The Board of Directors consists of nine members divided into three classes.
Each class has a three-year term, and only one class is elected each year.
There are no family relationships among any of the nominees, continuing
Directors and Executive Officers of the Company nor any arrangement or
understanding between any Director or Executive Officer or any other person
pursuant to which any of the nominees has been nominated. During 1998, each of
the members of the Board of Directors attended more than 75% of the aggregate
of the Board meetings and meetings held by all committees of the Board on
which the Director served during the periods that the Director served.
On recommendation of the Governance Committee of the Board of Directors,
three incumbent Class III Directors have been designated nominees for
reelection; each has consented to be a nominee and to serve if elected. The
remaining Directors will continue to serve in accordance with their previous
4
elections. The names and other information concerning the three persons
nominated for a term of three years and the six continuing Board members are
set forth by Class on pages 6 through 8 of this Proxy Statement. However,
since the bylaws of the Company state that the term of office of a Director
shall expire on the date of the Annual Meeting of Stockholders following his
or her 70th birthday, it is anticipated that Mr. Lego will serve two years of
the three-year term to which he is nominated. The personal information has
been furnished to the Company by the nominees and other Directors. Unless you
specify otherwise on your signed proxy card, your shares will be voted FOR the
election of the three persons named to three-year terms as Directors. In the
event of an unexpected vacancy on the slate of nominees, your shares will be
voted for the election of a substitute nominee if one shall be designated by
the Board. If any nominee for election as Director is unable to serve, which
the Board of Directors does not anticipate, the persons named in the proxy may
vote for another person in accordance with their judgment.
Vote Needed for Election of Directors
Directors are elected by a plurality of the votes of the shares of Common
Stock present in person or represented by proxy and entitled to vote at the
Annual Meeting. Any shares not voted (whether by abstention, broker non-vote
or votes withheld) are not counted as votes cast for such individuals and will
be excluded from the vote.
Board Recommendation
The Board recommends that stockholders vote FOR Proposal 1, and the
accompanying proxy will be so voted, unless a contrary specification is made.
5
DIRECTORS NOMINATED FOR ELECTION TO THE BOARD WITH A TERM EXPIRING APRIL 2002
Raymond E. Galvin Member: Audit Committee
Age 67 Financial Committee
[PHOTO Director since 1998 International Committee
APPEARS
HERE]
Mr. Galvin served as President of Chevron U.S.A. Production
Company, an oil and gas exploration, development and production
company, Houston, Texas, from January 1992 until his retirement
in February 1997 and as a Director of Chevron Corporation from
1995 until 1997. He served as Senior Vice President, Exploration,
Land and Production, for Chevron U.S.A. from 1988 to 1992, and a Vice
President of Chevron Corporation from 1988 to 1997. Upon implementation of the
Gulf-Chevron Corporation merger in 1985 and until 1988, he served as Vice
President, Exploration, Land and Production, for Chevron U.S.A. Inc. in its
Southern and Eastern Regions. Prior thereto, he served in various engineering
and management positions with Gulf Oil Corporation from 1953 to 1985. He
currently serves on the Board of Trustees of the Houston Museum of Natural
Science and on the Houston Advisory Board of the Nature Conservancy of Texas.
He is a fellow, External Advisory Council, College of Engineering, Texas A&M
University.
Paul E. Lego Chair: International Committee
Age 68 Member: Executive Committee
[PHOTO Director since 1991 Financial Committee
APPEARS Human Resources Committee
HERE]
Mr. Lego served as Chairman and Chief Executive Officer of
Westinghouse Electric Corporation, Pittsburgh, Pennsylvania, an
electronic products and services, environmental systems and
broadcasting company from 1990 to his retirement in January 1993.
He served that company as President and Chief Operating Officer from 1988 to
1990 and as a Director from 1988 to 1993. He had been Senior Executive Vice
President, Corporate Resources from 1985 to 1988, Executive Vice President,
Westinghouse Industries & International Group from 1983 to 1985 and Executive
Vice President, Westinghouse Industry Products from 1980 to 1983. Prior
thereto, he served in various engineering and management capacities with
Westinghouse since 1956. Mr. Lego is the non-executive Chairman of the Board
of Commonwealth Industries, Inc. and a Director of the Lincoln Electric
Company, USX Corporation and Orlimar Golf Company. He is a member of the
Business Council and a Trustee of the University of Pittsburgh.
Margaret A. McKenna Chair: Compliance Committee
Age 53 Member: Governance Committee
[PHOTO Director since 1994 Human Resources Committee
APPEARS
HERE]
Ms. McKenna has served as President of Lesley College, Cambridge,
Massachusetts, since 1985. She served as Vice President, Program
Planning, Radcliffe College from 1982 to 1985 and as Director of
its Bunting Institute from 1981 to 1985. Prior thereto, she had
served as Deputy Under Secretary of the U.S. Department of
Education, Deputy Counsel to the President of the United States, and in posts
with the International Association of Human Rights agencies and U.S.
Department of Justice. Ms. McKenna is a Director of The Stride Rite
Corporation.
6
CONTINUING DIRECTORS WITH A TERM EXPIRING APRIL 2000
William S. Barrack, Jr. Member: Audit Committee
Age 69 Compliance Committee
[PHOTO Director since 1994 Executive Committee
APPEARS International Committee
HERE]
Mr. Barrack served as Senior Vice President of Texaco Inc.,
Harrison, New York, an integrated international oil company and a
producer of natural gas, from 1983 to his retirement in 1992. He
served as a Senior Director of Caltex Petroleum Corporation from
1982 to 1992, President of Texaco Oil Trading & Supply Company from 1983 to
1984, and Chairman and Chief Executive Officer of Texaco Limited-London from
1980 to 1983. Prior thereto, he served in various marketing, producing and
management positions with Texaco Inc. since 1953. Mr. Barrack is a Director of
Standard Commercial Corporation.
Ray J. Groves Chair: Governance Committee
Age 63 Member: Audit Committee
Director since 1994 Financial Committee
[PHOTO
APPEARS
HERE]
Mr. Groves served as Chairman and Chief Executive Officer of
Ernst & Young, New York, New York, a public accounting firm, from
1991 to his retirement in 1994. He served as Co-Chief Executive
Officer of the firm from 1989 to 1991 and served as Chairman and
Chief Executive Officer of Ernst & Whinney from 1977 to 1989. Mr. Groves was
admitted as a Partner in the firm in 1966, having joined the firm in 1957. Mr.
Groves is the Chairman of Legg Mason Merchant Banking Inc., a Director of
Allegheny Teledyne Incorporated, American Water Works Company Inc., Electronic
Data Systems Corp., LAI Worldwide Inc., Marsh & McLennan Companies, Inc., and
RJR Nabisco, Inc. Mr. Groves serves as a Trustee of The Public Policy
Institute, Vice Chairman of The Ohio State University Foundation and as a
Managing Director, Treasurer and Secretary of the Metropolitan Opera
Association.
Steven A. Minter Chair: Human Resources Committee
Age 60 Member: Compliance Committee
[PHOTO Director since 1988 Governance Committee
APPEARS
HERE]
Mr. Minter has been the Executive Director and President of The
Cleveland Foundation, Cleveland, Ohio, since 1984, an
organization supporting health, human services, cultural and
educational programs in the greater Cleveland area. He had been
Associate Director and Program Officer of The Cleveland
Foundation from 1975 to 1980 and from 1981 to 1983. He served as Under
Secretary of the U.S. Department of Education, Washington, D.C., from 1980 to
1981. He was the Commissioner of Public Welfare for the Commonwealth of
Massachusetts from 1970 to 1975. Mr. Minter is a Director of Goodyear Tire &
Rubber Company, Rubbermaid Inc., and KeyCorp. He is also a Trustee of the
College of Wooster and of The Foundation Center.
7
CONTINUING DIRECTORS WITH A TERM EXPIRING APRIL 2001
J. W. Connolly Chair: Financial Committee
Age 65 Member: Executive Committee
[PHOTO Director since 1984 Human Resources Committee
APPEARS International Committee
HERE]
Mr. Connolly served as Senior Vice President and Director of H.
J. Heinz Company, Pittsburgh, Pennsylvania, a processed food
products manufacturer, from 1985 to his retirement in December
1993. He served as President and Chief Executive Officer of Heinz
U.S.A., a division of the H. J. Heinz Company, from 1980 to 1985, and served
as Executive Vice President of that company from 1979 to 1980. He was
President and Chief Executive Officer of The Hubinger Company, a Heinz Company
subsidiary, from 1976 to 1979, Treasurer of H. J. Heinz Company from 1973 to
1976, and a Vice President of Ore-Ida Foods, Inc., a Heinz Company subsidiary,
from 1967 to 1973. An attorney by profession, Mr. Connolly joined the Law
Department of the H. J. Heinz Company in 1961. He is a Director of Mellon Bank
Corporation, Mellon Bank, N.A., First Vice Chairperson for UPMC Health System
Board of Directors, and Second Vice Chairperson for the Joint UPMC
Presbyterian/UPMC Shadyside Boards of Directors. He is also Chairman, Board of
Trustees of the University of Pittsburgh.
George A. Davidson, Jr. Chair: Executive Committee
Age 60 Member: Financial Committee
Director since 1985
[PHOTO
APPEARS
HERE]
Mr. Davidson has served as Chairman of the Board and Chief
Executive Officer of the Company since May 1987, and has been
employed by Consolidated since 1966. He served as Vice Chairman
and Chief Operating Officer of the Company from January 1987 to
May 1987, and Vice Chairman from October 1985 to January 1987. He
served as President of CNG Transmission Corporation(/1/) from 1984 through
1985. He had been Vice President, System Gas Operations, for Consolidated
Natural Gas Service Company, Inc.,(/1/) from 1981 to 1984, and was Assistant
Vice President, Rates and Certificates, of that company from 1975 to 1981. Mr.
Davidson held various other positions in the Rates and Certificates Department
from 1966 to 1975. Mr. Davidson serves on the National Petroleum Council and
the Allegheny Conference on Community Development. He is a Director of the
American Gas Association, PNC Bank Corp. and BFGoodrich Company. Mr. Davidson
is Chairman of the Board of the Pittsburgh Cultural Trust and a Director of
the Pittsburgh Foundation. He is also a Trustee of the University of
Pittsburgh.
Richard P. Simmons Chair: Audit Committee
Age 67 Member: Compliance Committee
Director since 1990 Executive Committee
[PHOTO Governance Committee
APPEARS
HERE]
Mr. Simmons has served as Chairman, President and Chief Executive
Officer of Allegheny Teledyne Incorporated, Pittsburgh,
Pennsylvania, an international specialty steel manufacturer since
February 1997. He served as Chairman of Allegheny Teledyne
Incorporated since August 1996. He served as Chairman and Chairman of the
Executive Committee of Allegheny Ludlum Corporation, a predecessor company,
since 1990. He served as Chairman and Chief Executive Officer of Allegheny
Ludlum from 1980 to 1990 and as a Director of that company since 1980. He was
a Director of Allegheny Ludlum Industries from 1973 to 1980 and a member of
the Executive Office of that company from 1978 to 1980. Mr. Simmons is a
Director of PNC Bank Corp. He is a member of the Massachusetts Institute of
Technology Corporation and Chairman and a member of the Executive Committee of
the Allegheny Conference on Community Development.
- - -------------
(/1/)Wholly owned subsidiary of the Company.
8
THE BOARD OF DIRECTORS AND ITS COMMITTEES
Board of Directors
The Company is managed under the direction of the Board of Directors, which
met seven times in 1998. To assist it in various areas of responsibility, the
Board has established several standing committees that are briefly described
below.
Audit Committee
The Audit Committee is comprised of four non-employee Directors. The Audit
Committee assists the Board in fulfilling its oversight responsibilities by
reviewing the financial information to be provided to shareholders and others,
and by reviewing the audit process and any related internal control findings
of the internal auditors and independent accountants. The Committee also
selects and recommends to the Board the employment of independent accountants
and approves fees charged by independent accountants. The Committee met five
times in 1998.
Compliance Committee
The Compliance Committee consists of four non-employee Directors. It reviews
and monitors policies and procedures to prevent, detect and deter violations
of the law and violations of the Company's Business Ethics Policy. It also
reviews the results of the Annual Business Ethics and Compliance Surveys. The
Committee met three times in 1998.
Executive Committee
The Executive Committee consists of four non-employee Directors and the
Chairman of the Board. It has the authority to act in emergency situations and
can exercise all the powers of the Board of Directors. The Committee did not
meet in 1998.
Financial Committee
The Financial Committee consists of four non-employee Directors and the
Chairman of the Board. Its function is to oversee the short-term and long-term
financial activities and planning of the Company, including dividend actions.
The Committee met six times in 1998.
Governance Committee
The Governance Committee consists of four non-employee Directors. It monitors
corporate governance matters, including the structure, process and procedures
of the Board, and reviews the qualifications of Director candidates on the
basis of recognized achievements and their ability to bring skills and
experience to the deliberations of the Board. It also recommends qualified
candidates to the Board, including the slate of nominees submitted to the
stockholders at the Annual Meeting; reviews the size and composition of the
Board; annually reviews Directors' compensation and benefits; makes
recommendations to the Board; and monitors the Company's CEO succession plans.
The Committee met five times in 1998.
Stockholders who wish to propose candidates to the Governance Committee for
election to the Board at the 2000 Annual Meeting should write to the Corporate
Secretary, Consolidated Natural Gas Company, CNG Tower, 625 Liberty Avenue,
Pittsburgh, Pennsylvania 15222-3199, in accordance with the Company's bylaws,
stating in detail the qualifications of such candidates for consideration by
the Committee. Any such recommendation should be accompanied by a written
statement from the candidate of his or her consent to be considered as a
candidate and, if nominated and elected, to serve as a Director.
Human Resources Committee
The Human Resources Committee is comprised of four non-employee Directors. The
Committee reviews senior executive succession plans, compliance with
affirmative action and workforce diversity plans. It approves the salary
budgets and incentive plans for all non-union employees, reviews senior
executive
9
salary changes and incentive awards and establishes the salary and incentives
of the Chairman and Chief Executive Officer. The Committee also has general
supervision over the administration of all non-union employee pension,
compensation and benefit plans of the Company and its subsidiaries; reviews
proposals with respect to the creation of and changes in such plans; and makes
recommendations with respect thereto to the Board of Directors. The Committee
met six times in 1998.
International Committee
The International Committee is comprised of four non-employee Directors. Its
function is to review and take action on matters concerning CNG International
Corporation. The Committee advises, consults and assists in the screening of
projects prior to their recommendation to the Board of Directors for
investment. The Committee met five times in 1998.
10
SECURITY OWNERSHIP OF DIRECTORS AND OFFICERS
The following table lists the beneficial ownership, as of December 31, 1998,
of the Company's Common Stock by each current Director, named executive, and
all current Directors and Officers as a group.
- - -------------------------------------------------------------------------------------
(a) (b) (a) + (b)
--------------- ------------ -------------
Number of Number of Director's Percent of
Shares Shares Under Deferred Outstanding
Name of Beneficially Exercisable Compensation Common
Beneficial Owner Owned(/1/)(/2/) Options(/3/) Stock Credits(/4/) Stock
- - -------------------------------------------------------------------------------------
R. L. Adams 21,449 71,750 .098
W. S. Barrack, Jr. 824 6,411 .001
J. W. Connolly 1,000 9,135 .001
G. A. Davidson, Jr. 129,053 369,443 .522
R. E. Galvin 1,000 1,371 .001
R. J. Groves 1,349 9,510 .001
P. E. Lego 800 5,834 .001
M. A. McKenna 3,967 1,923 .004
S. A. Minter 1,800 4,186 .002
R. M. Sable, Jr. 9,425 46,872 .059
R. P. Simmons 6,693 6,706 .007
D. M. Westfall 44,492 136,447 .190
S. E. Williams 38,705 124,410 .171
Directors and Officers
of the Company
as a group
(17 persons) 283,616 902,924 45,076 1.243
- - -------------
(/1/)Includes shares owned by spouses and, in the case of employees, shares
beneficially owned under the Long-Term Thrift Trust of the Employees
Thrift Plan and the Employee Stock Ownership Plan. Unless otherwise
noted, the Directors and Officers have sole voting and investment power.
(/2/)Includes Performance Restricted Stock Awards and Restricted Stock Awards
granted pursuant to the 1996-1998 Long-Term Strategic Incentive Program
and the 1997 Stock Incentive Plan. Pursuant to the 1999-2001 Long-Term
Strategic Incentive Program, the terms of which are further described in
the Human Resources Committee Report, Performance Restricted Stock Awards
were granted, subject to shareholder approval and any modification of
terms by the Committee, as follows: Messrs. Adams, 42,000; Davidson,
84,000; Sable, 13,500; Westfall, 42,000; and Williams, 31,400.
(/3/)Includes shares subject to options exercisable on December 31, 1998, and
options which will become exercisable within 60 days thereafter.
(/4/)Director's compensation deferred in the form of CNG stock credits, as
described under Non-Employee Directors' Compensation on page 19, is not
included in the percentage shown in the last column.
- - -------------------------------------------------------------------------------
11
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the compensation of the named Executive
Officers for the last three completed fiscal years of the Company.
SUMMARY COMPENSATION TABLE
- - -----------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
----------------------------------- --------------------------
Other Restricted Shares All
Name and Annual Stock Underlying Other
Principal Position Year Salary Bonus Compensation(/1/) Award(s)(/2/) Options(/3/) Compensation(/5/)
- - -----------------------------------------------------------------------------------------------------------------
R. L. Adams 1998 $283,500 $139,100 $ 1,807 2,025 6,750 $14,374
(Sr. Vice President, 1997 208,333 120,000 1,587 0 0 10,624
Regulated Business; 1996 92,424 90,000 0 19,417 65,000 4,621
President, CNG
Transmission
Corporation)
G. A. Davidson, Jr. 1998 689,700 0 11,780 0 0 69,169
(Chairman and Chief 1997 632,650 400,000 8,922 0 0 63,472
Executive Officer, 1996 598,750 360,000 10,061 84,000 280,000 56,465
Director)
R. M. Sable, Jr. 1998 183,333 0 51 0 0 13,220
(Vice President and 1997 155,533 70,000 40 7,875 14,167(/4/) 7,984
Treasurer) 1996 124,917 61,900 1,344 0 27,500(/4/) 6,463
D. M. Westfall 1998 331,867 0 2,931 2,650 8,750 200,089(/6/)
(Sr. Vice President, 1997 245,800 150,000 2,640 0 0 18,643
Nonregulated Business 1996 217,050 139,000 10,684 31,400 105,000 16,322
and Chief Financial
Officer)
S. E. Williams 1998 275,967 0 4,074 2,025 6,750 20,896
(Sr. Vice President and 1997 254,570 140,000 3,265 0 0 19,300
General Counsel) 1996 240,900 153,000 4,457 23,300 78,000 18,286
- - -------------
(/1/)Includes only tax reimbursements for Messrs. Adams, Davidson, Sable,
Westfall and Williams. No amounts are included in this column for the
Executive Split-Dollar Life Insurance Plan because the executives'
contributions to this plan are greater than or equal to the term life
insurance costs that apply to the underlying life insurance policies.
(/2/)Restricted Stock Award and Performance Restricted Stock Award Grants are
based on the individual's level of performance and responsibility.
Restrictions on the Restricted Stock Awards lapse on March 1, 1999, and
once vested must be held until March 1, 2001. Restrictions on the
Performance Restricted Stock Awards lapse on March 1, 1999, subject to
the achievement of performance levels. Dividends are paid on Restricted
Stock from the date of grant. Dividends on Performance Restricted Stock
are held by the Company from the date of the grant, subject to the
achievement of performance levels. At December 31, 1998, the number of
Restricted Stock holdings for each of the named Executive Officers was:
Messrs. Adams, 3,492; Davidson, 14,000; Sable, 1,686; Westfall, 5,951;
and Williams, 4,125 and the number of Performance Restricted Stock
holdings for each of the named Executive Officers was: Messrs. Adams,
17,950; Davidson, 70,000; Sable, 6,592; Westfall, 28,475; and Williams,
21,200. The aggregate values of such holdings at December 31, 1998, at
the year-end closing price of $54.00 per share, for each of the named
Executive Officers was: Messrs. Adams, $1,157,868; Davidson, $4,536,000;
Sable, $447,012; Westfall, $1,859,004; and Williams, $1,367,550.
(/3/)Comprised of Triannual Non-Qualified Stock Options granted pursuant to
the 1996-1998 Long-Term Strategic Incentive Program. Does not include
Triannual Options granted pursuant to the 1999-2001 Program. On January
4, 1999, the Company granted the following number of Triannual Options
pursuant to the 1999-2001 Program: Messrs. Adams, 105,000; Davidson,
280,000; Sable, 45,000; Westfall, 140,000; and Williams, 105,000.
(/4/)Mr. Sable received a grant of 2,500 NQSOs in 1996 and 1997. Mr. Sable
received the following grants of Triannual Options: 1996, 25,000; 1997,
11,667.
(/5/)Comprising annual employer matching thrift plan contributions and ESOP
allocations.
(/6/Comprising)annual employer matching thrift plan contributions and ESOP
allocations of $25,089 and a special recognition award of $175,000 for the
completion of special strategic projects in 1998.
- - -------------------------------------------------------------------------------
12
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of Triannual Non-
Qualified Stock Options to the named Executive Officers as of the end of the
last fiscal year of the Company. No Stock Appreciation Rights ("SARs") have
been granted.
TRIANNUAL OPTION GRANTS IN LAST FISCAL YEAR
- - -----------------------------------------------------------------------------------------------------------
Individual Grants
-----------------------------------------------
Potential Realizable
Number of % of Total Value at Assumed Annual
Shares Options Exercise Rates of Stock Price
Underlying Granted to or Base Appreciation for Option Term(/2/)
Options Employees Price Per Expiration ---------------------------------
Name Granted(/1/) in Fiscal Yr. Share Date 0% 5% 10%
- - -----------------------------------------------------------------------------------------------------------
R. L. Adams 6,750 8.43% $56.813 2006 0 $ 241,173 $ 611,181
G. A. Davidson, Jr. 0 0 -- -- 0 0 0
R. M. Sable, Jr. 0 0 -- -- 0 0 0
D. M. Westfall 8,750 10.93 56.813 2006 0 312,632 792,271
S. E. Williams 6,750 8.43 56.813 2006 0 241,173 611,181
- - -----------------------------------------------------------------------------------------------------------
All Shareholders N/A N/A N/A N/A 0 $3,410,349,879 $8,642,496,175
- - -----------------------------------------------------------------------------------------------------------
All Optionees Receiving
Triannual Option Grants 80,083 100.00 41.875- 2006 0 $ 2,861,317 $ 7,251,138
59.375
- - -----------------------------------------------------------------------------------------------------------
Optionee Gain as % of
All Shareholder Gain N/A N/A N/A N/A N/A 0.08% 0.08%
- - -----------------------------------------------------------------------------------------------------------
(/1/)All material terms of the Triannual Options granted in 1998 are in the
Human Resources Committee Report under Long-Term Incentive Compensation.
(/2/)Based on actual option term (10-year) and annual compounding at rates
shown. The dollar amounts under these columns are the result of
calculations at 0% and at the 5% and 10% rates set by the Securities and
Exchange Commission and therefore are not intended to forecast possible
future appreciation, if any, of the Company's stock price. No gain to the
optionees is possible without stock price appreciation, which will benefit
all shareholders commensurately. A 0% gain in stock price appreciation
will result in 0 dollars for the optionees. The Company did not use an
alternative formula for a grant date valuation, as the Company is not
aware of any formula which will determine with reasonable accuracy a
present value based on future unknown or volatile factors.
- - --------------------------------------------------------------------------------
13
The following table sets forth information with respect to the named Executive
Officers concerning the exercise of options during the last fiscal year of the
Company and unexercised options held as of the end of the fiscal year.
AGGREGATED NON-QUALIFIED STOCK OPTION EXERCISES IN LAST FISCAL YEAR
AND DECEMBER 31, 1998, YEAR-END NON-QUALIFIED STOCK OPTION VALUES
- - -----------------------------------------------------------------------------------------
Number of Shares Value of Unexercised,
Underlying Unexercised In-the-Money Options
Shares Options Held at Year-End at Year-End(/2/)
Acquired On Value ------------------------- -------------------------
Name Exercise Realized(/1/) Exercisable Unexercisable Exercisable Unexercisable
- - -----------------------------------------------------------------------------------------
R. L.
Adams 0 $ 0 0 0 $ 0 $ 0
G. A.
Davidson,
Jr. 38,884 785,252 62,600 46,285 480,287 724,392
R. M.
Sable,
Jr. 0 0 8,065 5,748 97,287 37,309
D. M.
Westfall 512 8,224 18,565 7,603 244,884 122,806
S. E.
Williams 2,000 33,250 32,003 13,178 397,730 206,047
- - ----------------
(/1/)Market value of underlying shares at time of exercise minus the exercise
price.
(/2/)Market value of underlying shares at year-end market price of $54.00 per
share minus the exercise price.
- - -------------------------------------------------------------------------------
LONG-TERM INCENTIVE PLAN AWARDS IN THE LAST FISCAL YEAR
In 1998, Restricted Stock Awards were granted pursuant to the 1996-1998 Long-
Term Incentive Program in the following amounts to: Messrs. Adams, 325;
Westfall, 475; and Williams, 325. Restrictions on this award lapse on March 1,
1999 and once vested, the shares must be held until March 1, 2001. Dividends
are paid on the shares from the date of the grant. Restricted Stock Awards are
based on an individual's level of responsibility. Also, in 1998, Performance
Restricted Stock Awards were granted pursuant to the 1996-1998 Program in the
following amounts to: Messrs. Adams, 1,700; Westfall, 2,175; and Williams,
1,700. Subject to achievement of performance levels described in the Human
Resources Committee report, restrictions on this award lapse on March 1, 1999.
Dividends on the shares are held by the Company from the date of the grant,
subject to the achievement of performance levels. Performance Restricted Stock
Awards are based on an individual's level of responsibility.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AGREEMENTS
On January 19, 1999, the Board of Directors revised existing change of control
agreements for the named executive officers. In the event of certain
terminations of employment, these executives shall receive severance payments
equal to 3.00 times their respective base salary plus annual bonus, as
defined. The agreements also provide for the Company to reimburse the employee
for the payment of certain excise taxes and for a related tax gross-up
payment, if any, payable in connection with compensation paid under such
agreement as well as welfare benefits, outplacement support and enhanced
retirement benefits.
Mr. Davidson entered into an agreement with the Company dated December 22,
1998. This agreement provides for the following until Mr. Davidson's announced
retirement date of August 1, 2000, or until such date as both parties agree:
(i) a base salary of $700,000 per year and an annual increase of the higher of
five percent of base salary or the average executive percentage increase in
base salary; (ii) short-term incentive compensation when payment of incentives
is authorized by the Board pursuant to the Company's short-term incentive
plan; (iii) Mr. Davidson will continue to participate in the Company's long-
term incentive plans; and (iv) Mr. Davidson will receive all normal benefits
and perquisites available to a senior executive of the Company. Mr. Davidson
may not disclose any confidential knowledge or information of the Company or
any of its subsidiaries.
The agreement also states the Company's obligations to Mr. Davidson and/or
his estate due to termination from permanent disability or death. The Company
would be obligated to provide all
14
compensation and benefits as described above, along with any applicable health
insurance and other welfare benefits.
Mr. Davidson may elect to resign prior to August 1, 2000, if the Company
selects a successor or eliminates or reduces the duties of his position. In
this case the Company is obligated to pay all the compensation and benefits as
described above as if Mr. Davidson's employment had continued through August
1, 2000.
HUMAN RESOURCES COMMITTEE REPORT
SUMMARY
The Company's executive compensation programs are administered by the Human
Resources Committee of the Board of Directors (the "Committee"), which is
comprised of four non-employee Directors. The Committee reviews and approves
all issues pertaining to executive compensation. Total compensation is
designed in relationship to compensation paid by competitor organizations.
Base salary and long-term incentive compensation are targeted to median market
levels, and short-term incentive compensation is goal-based and structured to
be comparable to that paid by competitor organizations. The objective of the
Company's three compensation programs (base salary, short-term incentive and
long-term incentive) is to provide a total compensation package that will
enable the Company to attract, motivate and retain outstanding individuals and
align their success with that of the Company's shareholders.
Competitor organizations are defined annually as part of the compensation
administration process and include fully integrated natural gas companies as
well as broader industry comparatives, e.g., comparably sized general
industrial companies and, where appropriate, specific energy companies.
BASE SALARY
The level of base salary paid to executives for 1998 was determined on the
basis of performance and experience. The Company measures or identifies its
base salary structure by a range of market reference points in comparison to
base salaries offered by competitors. Salary levels are targeted to and, in
1998, correspond with the median range of compensation paid by competitor
organizations. These are not the same companies that comprise the Peer Group
index shown on the shareholder return performance presentation. The specific
competitive marketplace that the Company and its subsidiaries use in base
salary analysis is determined based on the nature and level of the positions
being analyzed and the labor markets from which individuals would be
recruited. The Committee also considered the competitiveness of the entire
compensation package in its approval of salary levels paid to senior
executives.
SHORT-TERM INCENTIVE COMPENSATION
Short-term incentive compensation plans are used at both CNG Corporate and
Business Segment levels. Short-term incentive opportunity is structured so
that awards are competitive at a level commensurate with the performance level
achieved by the Company with consideration for the executive's performance and
level of responsibility. The short-term incentive plan has threshold, target
and maximum bonus levels for the various executive levels based on competitive
data. For the named Executive Officers, the threshold bonus level is 14% to
24% of base pay, the target bonus level is 35% to 60% of base pay, and the
maximum bonus level is 49% to 84% of base pay. At the executive level, the
primary form of short-term incentive compensation is a cash bonus pool
arrangement, for which all employees on the Company's system executive payroll
are eligible.
Individual Business Segment Pools and a CNG Corporate Pool are established
if the Business Segments or the CNG System attain certain levels of
performance. The CNG Corporate Pool is calculated as a percent of eligible
base payroll, using the weighted differential between CNG System goals and
actual performance. CNG Transmission's Pool is calculated using the weighted
differential between its goals and actual performance.
15
Executives participate in the bonus pools with payout opportunities
determined by actual individual performance and the level of responsibility
within their respective Business Segments and within the CNG System. A pool
will not be established at Corporate unless 90% of the net income goal is
achieved for the CNG System. A pool will not be established at CNG
Transmission unless 90% of the net income goal is achieved for CNG
Transmission. If the net income threshold is achieved and the total weighted
average achievement for all goals is 85%, threshold bonus pools are created;
at 100% of goal, target bonus pools are created; and, at 115% or greater of
goal achievement, maximum bonus pools are created. At less than the threshold
level, there are no bonus pools. The performance measures for the CNG
Corporate Pool (weighted as indicated) are based on the System's return on
equity vs. peers (20%), System net income (55%), and Corporate controllable
operations and maintenance expenses (25%), with specific performance goals
established based on the Company's annual long-range forecast, actual prior
year performance and business plan objectives. The performance measures for
CNG Transmission (weighted as indicated) are: net income (60%), controllable
operations and maintenance expenses (30%) and net cash flow (10%). For the
last fiscal year, CNG Corporate achieved 85% of its net income goal which was
not sufficient to establish a bonus pool. CNG Transmission achieved 111.5% of
its goals. Based on its performance, a bonus pool was established at CNG
Transmission of $2,209,100.
CEO's COMPENSATION
Mr. Davidson's base salary was determined in the general context of the
Summary and Base Salary sections above. Mr. Davidson's incentive compensation
was determined according to the agreement dated December 22, 1998 (see the
section above titled, "Employment Contracts and Termination of Employment
Agreements") and Mr. Davidson's incentive compensation goal (summarized
below):
- - ------------------------------------------------
Earnings Per Share Bonus Level
- - ------------------------------------------------
Less than $3.20 0
$3.20-$4.07 60% (Target)
$4.08 and greater 84% (Maximum)
- - ------------------------------------------------
Based on the Company's 1998 earnings per share, the Committee did not award
any short-term incentive compensation to Mr. Davidson for 1998.
LONG-TERM INCENTIVE COMPENSATION
Under the Long-Term Strategic Incentive Program, executives who are driving
the strategy of the Company may be granted Performance Restricted Stock,
Triannual Non-Qualified Stock Options (Triannual Options) and/or other awards
in amounts which are intended to be competitive with comparable employers.
Executives who are responsible for strategy implementation are granted
Triannual Options in amounts which are intended to be competitive with
comparable employers. Grants under the Long-Term Strategic Incentive Program
can be made every three years. The first grants were made on January 2, 1996.
1996-1998 Long-Term Strategic Incentive Program
Performance Shares granted during the 1996-1998 performance period to a
Corporate executive have been earned based upon the System's attainment of
return on equity targets for this period. Performance criteria for a Corporate
executive was based on the following: if the average annual return on equity
for the System for the three-year period ended December 31, 1998 is (i) less
than 11.3%, no Performance Shares will vest, (ii) at least 11.3% but less than
11.7%, one-half of such Performance Shares will vest on March 1, 1999, and
(iii) if at least 11.7%, all such Performance Shares will vest on March 1,
1999. Performance shares granted to a CNG Transmission executive included an
additional goal of return on CNG Transmission's net assets. If return on net
assets is (i) less than 12%, no Performance Shares will vest, or (ii) at least
12%, all such Performance Shares will vest on March 1, 1999. Return on equity
for the period was 12.4% and CNG Transmission's return on net assets was
16.6%, therefore, the
16
Performance Shares will vest on March 1, 1999. The Committee reserves the
right to reduce the number of Performance Shares that vest based on factors
that it deems appropriate. Executives will not receive dividends on
Performance Shares until they have vested, at which time, dividends otherwise
payable prior to the vesting date will be paid to the executive without
interest.
Triannual Options granted during the 1996-1998 performance period to an
executive have also been earned. Triannual Options were granted at the fair
market value of a share on the date of grant. Performance criteria was based
on the following: if the annual return on equity for the CNG System for the
three-year period ended December 31, 1998 is (i) less than 11.3%, all of the
Triannual Options will be exercisable on March 1, 1999, after which they will
expire, (ii) at least 11.3% but less than 11.7%, one-half of the Triannual
Options will be exercisable on March 1, 1999, after which they will expire,
and one-half of the Triannual Options will vest and have an exercise period
which will expire on January 2, 2006 and (iii) at least 11.7%, all of the
Triannual Options vest and will expire on January 2, 2006. Options expire at
the earlier of the expiration date of the option or, three years following
separation from employment due to retirement, one year after separation from
employment due to death or permanent disability or three months after
separation from employment for any other reason. Grants of Triannual Options
are based upon an executive's level within the Company.
1999-2001 Long-Term Strategic Incentive Program
Purpose
The purposes of the Program are to attract, retain and reward key employees;
motivate these employees for superior performance and to align and strengthen
their interests to the Company's shareholders.
Performance Criteria
Total Company shareholder return versus a sector-weighted index (the Peer
Group) comprised of the S&P 500--Natural Gas Index (25%), S&P Midcap 400--
Natural Gas Utilities Index (50%) and the S&P Midcap 400--Oil & Gas Index
(25%) will be used in determining the payout of the Program. Total shareholder
return is defined as the share price change from the closing price on the last
business day of 1998 compared with the closing price of the last business day
of 2001 plus reinvested dividends paid over the three-year performance period.
Awards under the Program will vest only if the Company's total shareholder
return is greater than the Peer Group during the specified performance period;
no vesting will occur if the Company's total shareholder return is less than
the Peer Group during the specified performance period.
Administration
The Program Administrator (normally the Committee) will interpret the Program,
prescribe, amend, and rescind rules relating to it, select eligible
participants, and take all other actions necessary for its administration.
These actions will be final and binding upon all participants. Notwithstanding
anything in the Program to the contrary, the Program Administrator, in its
absolute discretion, may bifurcate the Program so as to restrict, limit, or
condition the applicability of any provision of the Program to the Chief
Executive Officer and the Company's four highest compensated officers other
than the Chief Executive Officer (the "covered employees") without so
restricting, limiting, or conditioning the Program with respect to other
participants.
Awards Under the Program
Awards under the Program may be granted as shares of Common Stock, common
stock equivalents or such other awards allowed under the Program. For the
three-year period, the maximum number of Performance Restricted Stock to any
eligible employee is 84,000 shares, or common stock equivalents,
17
and 280,000 shares issuable upon exercise of Triannual Non-Qualified Stock
Options. Executives, including the covered employees, will not receive
dividends on Performance Restricted Stock until the award has vested, at which
time dividends otherwise payable prior to the vesting date will be paid to the
executive without interest. If the performance criteria is met and vesting
occurs the Company, in its discretion, will distribute the awards in Common
Stock or cash.
Acceleration of Awards
Upon retirement, disability or death, the awards may be prorated based on the
number of quarters, and any partial quarters, the executive was an active
employee during the performance period; the awards will vest only if the
performance criteria is met. Upon a Change of Control, the awards may be
prorated based on the number of years, and any partial years, the executive
was an active employee during the performance period and may then vest without
regard whether or not the performance criteria is met. Retirement, disability,
death and Change of Control are all terms defined in the 1997 Stock Incentive
Plan and referred to in the award agreements.
COMPENSATION CONSULTANT
The Committee utilizes the services of an independent compensation consultant
to assess market relativity of the executive compensation packages. Consistent
with the Company's compensation philosophy, adjustments are made to any
executive compensation components in order to achieve levels of compensation
at the median market position.
TAX MATTERS
Section 162(m) of the Internal Revenue Code imposes a limitation on the
Company's income tax deduction for annual compensation in excess of $1 million
paid to certain employees, generally the Chief Executive Officer and the four
other most highly compensated Executive Officers. The Human Resources
Committee intends to structure compensation that rewards performance while
preserving maximum deductibility of all compensation awards. Towards this end,
the Board of Directors has recommended that the shareholders approve the
Company's Performance Restricted Stock Awards granted under the 1999-2001
Long-Term Strategic Incentive Program. It is not currently anticipated that
compensation realized by any Executive Officer will result in a material loss
of tax deductions.
S. A. Minter, Chair
J. W. Connolly
P. E. Lego
M. A. McKenna
18
SHAREHOLDER RETURN PERFORMANCE PRESENTATION
Set forth below is a line graph comparing the yearly cumulative total
shareholder return on CNG's Common Stock against the cumulative total return of
the S&P 500 Stock Index and a sector weighted Peer Group Index comprised of the
S&P 500--Natural Gas Index (25%), S&P Midcap 400--Natural Gas Utilities Index
(50%) and S&P Midcap 400--Oil & Gas Index (25%) for the period of five years
commencing December 31, 1993, and ended December 31, 1998.
The Peer Group index shown is comprised of the companies listed in the above
named indices. These companies are: S&P 500--Natural Gas Index: The Coastal
Corporation, Columbia Energy Group, Consolidated Natural Gas Company, Eastern
Enterprises, Enron Corp., NICOR Inc., ONEOK, Inc., Peoples Energy Corp., Sempra
Energy, Sonat and Williams Companies, Inc.; S&P Midcap 400--Natural Gas
Utilities Index: AGL Resources Inc., El Paso Energy, Indiana Energy, Inc., KN
Energy, Keyspan Energy, MCN Energy Group Inc., National Fuel Gas Company,
Questar Corp. and Washington Gas Light Co.; and S&P Midcap 400--Oil & Gas
Index: Murphy Oil Corporation, Noble Affiliates Inc., Ocean Energy, Inc.,
Pioneer Natural Resources Company, Quaker State Corp., Ranger Oil Limited,
Seagull Energy Corporation, TOSCO Corporation, Ultramar Diamond Shamrock
Corporation, Valero Energy Corp. and Varco Intl.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
[GRAPH APPEARS HERE]
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG CNG, S&P 500 INDEX, PEER GROUP INDEX AND VALUE LINE INDEX
Measurement period S&P 500 PEER GROUP VALUE LINE
(Fiscal year Covered) CNG INDEX INDEX INDEX
- - --------------------- ---- ------- ---------- ----------
Measurement PT -
12/31/93 $100 $100 $100 $100
FYE 12/31/94 $ 79 $101 $ 92 $ 87
FYE 12/31/95 $107 $139 $119 $119
FYE 12/31/96 $135 $171 $160 $152
FYE 12/31/97 $153 $229 $196 $186
FYE 12/31/98 $142 $294 $168 $188
*Assumes $100 investment on December 31, 1993, and reinvestment of dividends.
Last year the Company included the Value Line Natural Gas Industry Index. The
Value Line Index was replaced with the sector weighted Peer Group Index to
better represent the Company's asset mix and market capitalization.
NON-EMPLOYEE DIRECTORS' COMPENSATION
Non-employee Directors are currently paid a $24,000 annual retainer, a $2,000
per diem fee for attending each Board meeting, including all Board Committee
meetings held in conjunction with such Board meeting, and a $1,000 per diem fee
for participating in telephonic Board or Board Committee meetings. Committee
Chairpersons receive an additional annual fee of $3,000.
Directors may elect to defer receipt of these payments until after retirement
from the Board. Such payments are deferred in the form of cash credits or
Consolidated Natural Gas Company Common Stock credits. Such stock credits are
valued as Common Stock equivalents equal to the number of shares that could
have been purchased at the closing price on the date the compensation was
earned. As of the date any dividend is paid on the Company's Common Stock, a
credit is made to each participant's deferred
19
account equal to the number of shares of Common Stock that could have been
purchased on such date with the dividend paid. Amounts deferred in the form of
cash credits earn interest, compounded quarterly, at a rate equal to the
closing prime commercial rate at The Chase Manhattan Bank N.A. on the last day
of each quarter. Payments are made in cash, in a lump sum or in annual
installments over a period not exceeding ten years. The entire undistributed
deferred amount will be distributed in a lump sum upon a participating
Director's death.
Directors receive an annual grant of 200 shares of the Company's Common
Stock, subject to restrictions, or the same amount of Consolidated Natural Gas
Company Common Stock credits and options on 1,000 shares of the Company's
Common Stock. Such grants are to be made on the date of the Annual Meeting of
Stockholders. Newly elected Directors will receive an initial grant of 400
shares of the Company's Common Stock, subject to restrictions, or the same
amount of Consolidated Natural Gas Company Common Stock credits and options on
2,000 shares of the Company's Common Stock. Such grants are to be made on the
date of the Director's election to the Board. The restrictions on such stock
shall lapse in 25% installments on the anniversary date of each grant or shall
lapse in total upon the Director's retirement at age 70 or the Director's
ceasing to serve due to death or disability. The Consolidated Natural Gas
Company Common Stock credits are described above.
Effective January 1, 1997, the Board of Directors voted to terminate the
post-retirement retainer for newly elected non-employee Directors and all
current directors elected to waive the post-retirement retainer and receive
the present value of such benefit in deferred stock credits or restricted
common stock of the Company. In the past, the annual retainer paid to non-
employee Directors, as set by the Board of Directors from time to time, was
continued to be paid for life to each non-employee Director retired at age 70,
or at an earlier age due to disability, provided the non-employee Director
served a minimum of four years and agreed to be generally available as a
consultant. Payments under the continued post-retirement retainer arrangement
cease at the death of the Director.
Employee Directors do not receive any compensation for service as Directors.
HUMAN RESOURCES COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, the following Directors served as members of the Human Resources
Committee: S. A. Minter, Chair, J. W. Connolly, P. E. Lego and M. A. McKenna.
The Company now has a Credit Agreement totaling $775 million with a group of
banks. Each participating bank is compensated with a fee of .04% on its
respective commitment amounts.
Currently, PNC Bank, Pittsburgh, Pennsylvania, the subsidiary of PNC Bank
Corp., of which Messrs. Davidson and Simmons are Directors, provides a
commitment of $100 million under the Credit Agreement. Mellon Bank, N.A.,
Pittsburgh, Pennsylvania, of which Mr. Connolly is a Director, provides a
commitment of $102.5 million under the Credit Agreement. Key Bank, NA,
Cleveland, Ohio, the subsidiary of KeyCorp of which Mr. Minter is a Director,
provides a commitment of $100 million under the Credit Agreement. There were
no borrowings under the Agreement in 1998.
BENEFIT PLANS
LIFE INSURANCE AND RELATED BENEFIT PLANS
The Company maintains a program composed of Split Dollar Life Insurance Plans
and Supplemental Death Benefit Plans for employees on the executive payroll of
the Company and its subsidiaries, as well as non-employee Directors, which
provides death benefits to beneficiaries of those individuals. There were 135
eligible employees on December 31, 1998 and 80 were participating. Five non-
employee Directors also were participating. The plans are under the general
supervision of the Human Resources Committee of the Board. Continuation of the
plans beyond retirement requires the Committee's approval. The costs for the
Split Dollar Life Insurance Plans are shared by the Company and the
participants. Each year an employee participant pays a premium based on age
and amount of individual coverage, which is
20
approximately twice annual salary. Each year, Director participants pay a
premium based on age and amount of individual coverage. The Company pays all
additional premiums and expects to receive proceeds approximately equal to its
investment in the policy through the total coverage exceeding the
participant's individual coverage. The Supplemental Death Benefit Plans
provide for payments to a deceased participant's beneficiaries over a period
of years.
RETIREMENT PROGRAMS
A non-contributory Pension Plan is maintained for employees who are not
represented by a recognized union, including Officers of the Company and its
subsidiaries. On December 31, 1998, all 2,822 eligible employees of the
Company and its subsidiary companies were participating in the Pension Plan.
The Company also maintains an unfunded Short Service Supplemental Retirement
Plan for certain management employees whose commencement of service with the
Company occurred after the employee had acquired experience of considerable
value to the Company and who will have less than 32 years of service at normal
retirement.
The following table illustrates maximum annual benefits--including any
supplemental payment described above but before being reduced by the required
offset--at normal retirement date (age 65) on the individual life annuity
basis for the indicated levels of final average annual salary and various
periods of service.
PENSION PLAN TABLE
- - --------------------------------------------------------------------------------
Annual Pension Benefit for Years of Service Indicated
------------------------------------------------------
Average Annual Salary 15 20 25 35 40
- - --------------------------------------------------------------------------------
$100,000................. $ 34,000 $ 45,300 $ 55,000 $ 59,500 $ 68,000
150,000................. 51,000 68,000 82,500 89,300 102,000
200,000................. 68,000 90,700 110,000 119,000 136,000
250,000................. 85,000 113,300 137,500 148,800 170,000
300,000................. 102,000 136,000 165,000 178,500 204,000
350,000................. 119,000 158,700 192,500 208,300 238,000
400,000................. 136,000 181,300 220,000 238,000 272,000
450,000................. 153,000 204,000 247,500 267,800 306,000
500,000................. 170,000 226,700 275,000 297,500 340,000
550,000................. 187,000 249,300 302,500 327,300 374,000
600,000................. 204,000 272,000 330,000 357,000 408,000
650,000................. 221,000 294,700 357,500 386,800 442,000
700,000................. 238,000 317,300 385,000 416,500 476,000
- - --------------------------------------------------------------------------------
The 1998 salaries, projected service to age 65, and estimated annual
retirement benefits on the individual life form of annuity, assuming
continuation of their December 1998 salaries until age 65 for each of the
individuals in the Summary Compensation table, are as follows:
ESTIMATED ANNUAL RETIREMENT BENEFITS
- - --------------------------------------------------------------------------------
Years of Years of Estimated Annual
1998 Service at Service Retirement Benefits
Name Salary Year-End 1998 at Age 65 at Age 65
- - --------------------------------------------------------------------------------
R. L. Adams................ $283,500 2 28 $167,114
G. A. Davidson, Jr......... 689,700 32 37 437,430
R. M. Sable, Jr............ 183,333 20 38 113,359
D. M. Westfall............. 331,867 29 43 257,925
S. E. Williams............. 275,967 24 39 181,658
- - --------------------------------------------------------------------------------
21
The Company also maintains a Supplemental Retirement Benefit Plan under
which payments may be made, at the sole discretion of the Human Resources
Committee of the Board, to individuals comprising the executive payroll. As of
December 31, 1998, there were 135 potentially eligible employees. The decision
to grant a Supplemental Retirement Benefit is based on a review of the
retiring employee's total available benefits. Payments under such plan during
1998 amounted to $448,900. The maximum annual supplemental annuity under this
plan is 10% of an individual's final average annual salary. Assuming
continuation of their December 1998 salaries until age 65, the individuals
named in the Summary Compensation table would be eligible to receive the
following maximum annual supplemental retirement benefits: Messrs. Adams,
$31,360; Davidson, $70,000; Sable, $18,500; Westfall, $36,010 and Williams,
$28,250.
The benefits described above have not been reduced by the limitations
imposed on qualified plans by the Internal Revenue Code. As permitted by the
Internal Revenue Code, the Board of Directors has adopted a policy whereby
supplemental payments may be made, as necessary, to maintain the benefit
levels earned under the benefit plans.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Based on the Company's review of copies of all Section 16(a) forms filed by
the Officers and Directors of the Company, the Company believes that in 1998
there was compliance with all filing requirements applicable to its Officers
and Directors.
PROPOSAL 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP has audited the accounts of the Company and its
subsidiaries since 1943. On recommendation of the Audit Committee, the Board
of Directors has, subject to ratification by the stockholders, appointed
PricewaterhouseCoopers LLP to audit the accounts of the Company and its
subsidiaries for the fiscal year 1999. Audit fees to PricewaterhouseCoopers
LLP in 1998 incurred by the Company and its subsidiaries were approximately
$1,685,000. A representative of PricewaterhouseCoopers LLP will be present at
the Meeting to respond to appropriate questions and will have an opportunity
to make a statement if he or she desires to do so. Accordingly, the following
resolutions will be offered at the Meeting:
RESOLVED, That the appointment, by the Board of Directors of the Company, of
PricewaterhouseCoopers LLP to audit the accounts of the Company and its
subsidiary companies for the fiscal year 1999, effective upon ratification by
the stockholders be, and it hereby is, ratified; and
FURTHER RESOLVED, That a representative of PricewaterhouseCoopers LLP shall
attend the next Annual Meeting and any special meetings of stockholders that
may be held in the interim.
Vote Needed for Appointment of Independent Accountants
An affirmative vote of the holders of a majority of the Company's Common
Stock, represented in person or by proxy and entitled to vote at the Meeting,
is necessary for ratification. If the stockholders do not ratify the
appointment of PricewaterhouseCoopers LLP, the selection of independent
accountants will be reconsidered by the Audit Committee and the Board of
Directors.
Board Recommendation
The Board recommends that stockholders vote FOR Proposal 2, and the
accompanying proxy will be so voted, unless a contrary specification is made.
22
PROPOSAL 3
APPROVAL OF THE COMPANY'S PERFORMANCE RESTRICTED STOCK AWARDS GRANTED UNDER
THE 1999-2001 LONG-TERM STRATEGIC INCENTIVE PROGRAM
Summary
Effective for the tax year ended December 31, 1994, the Internal Revenue Code
was amended by the addition of Section 162(m), which limits the tax deduction
available to a company with respect to compensation paid to certain Executive
Officers, unless the compensation qualifies as "performance based." Triannual
Non-Qualified Stock Options are granted to Executive Officers under a
shareholder approved Plan, the 1997 Stock Incentive Plan, that complies with
the requirements of Section 162(m) regarding performance based compensation.
The Board of Directors through its Human Resources Committee (the "Committee")
has adopted the 1999-2001 Long-Term Strategic Incentive Program. The Board
believes that in light of Section 162(m), it is desirable to submit the
Performance Restricted Stock Awards granted under the Program for Stockholder
approval. This will enable the Awards to these executives to qualify as
"performance based" compensation for purposes of Section 162(m), and thereby
continue to be deductible by the Company without regard to the deduction limit
otherwise imposed by such Section. All awards under the Program are issued
pursuant to the 1997 Stock Incentive Plan and are subject to the provisions of
the award agreement. If the Proposal is not approved by the shareholders, the
Committee will consider whether it is appropriate to take any alternate action
or actions that would allow the Company to award incentives to covered
employees that are fully deductible by the Company under the Internal Revenue
Code.
1999-2001 Long-Term Strategic Incentive Program
Purpose
The purposes of the Program are to attract, retain and reward key employees;
motivate these employees for superior performance and to align and strengthen
their interests to the Company's shareholders.
Performance Criteria
Total Company shareholder return versus a sector-weighted index (the Peer
Group) comprised of the S&P 500--Natural Gas Index (25%), S&P Midcap 400--
Natural Gas Utilities Index (50%) and the S&P Midcap 400--Oil & Gas Index
(25%) will be used in determining the payout of the Program. Total shareholder
return is defined as the share price change from the closing price on the last
business day of 1998 compared with the closing price of the last business day
of 2001 plus reinvested dividends paid over the three-year performance period.
Awards under the Program will vest only if the Company's total shareholder
return is greater than the Peer Group during the specified performance period;
no vesting will occur if the Company's total shareholder return is less than
the Peer Group during the specified performance period.
Administration
The Program Administrator (normally the Committee) will interpret the Program,
prescribe, amend, and rescind rules relating to it, select eligible
participants, and take all other actions necessary for its administration.
These actions will be final and binding upon all participants. Notwithstanding
anything in the Program to the contrary, the Program Administrator, in its
absolute discretion, may bifurcate the Program so as to restrict, limit, or
condition the applicability of any provision of the Program to the Chief
Executive Officer and the Company's four highest compensated officers other
than the Chief Executive Officer (the "covered employees") without so
restricting, limiting, or conditioning the Program with respect to other
participants.
23
Awards Under the Program
Awards under the Program may be granted as shares of Common Stock, common
stock equivalents or such other awards allowed under the Program. For the
three-year period, the maximum number of Performance Restricted Stock to any
eligible employee is 84,000 shares, or common stock equivalents, and 280,000
shares issuable upon exercise of Triannual Non-Qualified Stock Options.
Executives, including the covered employees, will not receive dividends on
Performance Restricted Stock until the award has vested, at which time
dividends otherwise payable prior to the vesting date will be paid to the
executive without interest. If the performance criteria is met and vesting
occurs the Company, in its discretion, will distribute the awards in Common
Stock or cash.
Acceleration of Awards
Upon retirement, disability or death, the awards may be prorated based on the
number of quarters, and any partial quarters, the executive was an active
employee during the performance period; the awards will vest only if the
performance criteria is met. Upon a Change of Control, the awards may be
prorated based on the number of years, and any partial years, the executive
was an active employee during the performance period and may then vest without
regard whether or not the performance criteria is met. Retirement, disability,
death and Change of Control are all terms defined in the 1997 Stock Incentive
Plan and referred to in the award agreements.
Vote Needed for Approval of the Proposal
Approval of this proposal requires an affirmative vote of the holders of a
majority of the shares present in person or represented by proxy and entitled
to vote. Abstentions are counted in tabulations of the votes cast on proposals
presented to stockholders. Broker non-votes are not counted for purposes of
determining whether a proposal has been approved.
Board Recommendation
The Board recommends that stockholders vote FOR Proposal 3, and the
accompanying proxy will be so voted, unless a contrary specification is made.
PROPOSAL 4
STOCKHOLDER'S PROPOSAL CONCERNING BONUSES
Fred Wilson and Mazie M. Wilson, 3011 N. Miles Drive, Edmond, Oklahoma, who
own 200 shares of the Company's Common Stock have submitted the resolution set
forth below for inclusion in this proxy statement for the Company's 1999
Annual Meeting of Shareholders.
The Stockholder's Proposal
Bonus Resolution
"RESOLVED: That all bonuses be voted on by the shareholders and limited to 10%
of the annual salaries of the executive officers compensations. The executive
officers are identified as those filling the positions as follows:
1. Chairman and Chief Executive Officer
2. Vice President Accounting and Financial Control
3. President CNG Producing Co.
4. Senior Vice President & Chief Financial Officer
5. Senior Vice President & General Counsel"
The Stockholder's Supporting Statement
It is my opinion that the executive officers are grossly overpaid. I believe
that any man can live very comfortably on a lot less than what the executive
officers are currently being paid. I am currently retired and on a fixed
income with little or no incentive income prospects. These executives are not
unique; as
24
they all have great staffs and/or assistants at their disposal to advise them
in all their decision making. It is therefore my opinion that the executives
are not justified in receiving the unusually large bonuses which are
apparently spontaneously awarded by the Board of Directors. It seems that the
fine salaries should be sufficient justification and incentive for doing a
good job.
Management's Comments
This proposal calls for certain Executive Officers' bonuses to be approved by
the stockholders and to be limited to 10% of their salaries. Management
strongly believes that this practice would not be in the interests of the
stockholders.
The objective of the Company's compensation programs is to provide a total
compensation package that will enable the Company to attract, motivate and
retain outstanding individuals and align their success with that of the
Company's shareholders. The opportunity for an Executive Officer to earn a
bonus is based on the nature of the position, its potential for contribution,
the level of responsibility and the competitive environment.
A bonus opportunity is established only if the Company attains a certain
level of performance. Payments are made only upon the successful achievement
of goals approved by the Human Resources Committee. The achievement of
established goals directly aligns the financial interests of Executive
Officers and others with those of the Shareholders. In management's view,
limiting bonuses to below market levels would weaken this alignment and fail
to serve the shareholders' interests.
Vote Needed for Approval of the Proposal
Approval of this proposal requires an affirmative vote of the holders of a
majority of the shares present in person or represented by proxy and entitled
to vote. Abstentions are counted in tabulations of the votes cast on proposals
presented to stockholders. Broker non-votes are not counted for purposes of
determining whether a proposal has been approved.
Board Recommendation
The Board recommends that stockholders vote AGAINST Proposal 4, and the
accompanying proxy will be so voted, unless a contrary specification is made.
OTHER MATTERS
Procedure for Submission of 2000 Stockholder Proposals
The 2000 Annual Meeting of Stockholders will be held on Tuesday, April 11,
2000. Proposals by stockholders for inclusion in the 2000 Annual Meeting Proxy
Statement must be received by the Corporate Secretary, Consolidated Natural
Gas Company, CNG Tower, 625 Liberty Avenue, Pittsburgh, Pennsylvania 15222-
3199, prior to November 3, 1999. All such proposals are subject to the
applicable rules and requirements of the Securities and Exchange Commission.
The SEC has amended Rule 14a-4(c) under the Securities Exchange Act of 1934
(the "1934 Act") which governs the Company's use of discretionary proxy voting
authority with respect to shareholder proposals that are not being included in
the Company's proxy solicitation materials pursuant to Rule 14a-8 of the 1934
Act. Therefore, in the event a shareholder does not notify the Company at
least 45 days before the date the Company mailed its proxy material for the
prior year's annual meeting of shareholders (which date would be January 19,
2000 for the Company's 2000 Annual Meeting) of an intent to present such a
proposal at the Company's Annual Meeting, the Company's management proxies
will have the right to exercise their discretionary authority in connection
with the matter submitted by the shareholder, without discussion of the matter
in the Proxy Statement.
25
OTHER BUSINESS
The Board of Directors does not intend to bring any business before the
Meeting other than that listed in the foregoing Notice and is not aware of any
business intended to be presented to the Meeting by any other person. Should
other matters properly come before the Meeting, the persons named in the
accompanying proxy will vote said proxy in such manner as they may, in their
discretion, determine.
/s/ E. J. Marks, III
E. J. Marks, III
Corporate Secretary
February 22, 1999
NOTE: YOUR SHARES CANNOT BE VOTED UNLESS YOU SIGN AND RETURN YOUR PROXY CARD,
GIVE YOUR PROXY BY CALLING THE TOLL-FREE TELEPHONE NUMBER, OR ATTEND THE
MEETING AND VOTE IN PERSON.
APPENDIX I
CONSOLIDATED NATURAL GAS COMPANY
1998 FINANCIAL STATEMENTS AND NOTES
(ENCLOSED)
26
Consolidated Natural Gas Company
CNG Tower
625 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3199
Regulated Business
The East Ohio Gas Company
Cleveland, Ohio
The Peoples Natural Gas Company
Pittsburgh, Pennsylvania
Virginia Natural Gas, Inc.
Norfolk, Virginia
Hope Gas, Inc.
Clarksburg, West Virginia
CNG Transmission Corporation
Clarksburg, West Virginia
Nonregulated Business
CNG Producing Company
New Orleans, Louisiana
CNG Retail Services Corporation
Pittsburgh, Pennsylvania
International
CNG International Corporation
Reston, Virginia
LOGO CNG
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
LOGO CONSOLIDATED NATURAL GAS COMPANY
1998 Financial
Report
Appendix I
TABLE OF CONTENTS
Page
----
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 1
Selected Financial Data................................................... 21
Report of Independent Accountants......................................... 22
Consolidated Statement of Income for the Years 1996 through 1998.......... 23
Consolidated Balance Sheet at December 31, 1997 and 1998.................. 24
Consolidated Statement of Cash Flows for the Years 1996 through 1998...... 26
Consolidated Statement of Comprehensive Income for the Years 1996 through
1998..................................................................... 27
Notes to Consolidated Financial Statements................................ 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(All per share references, unless indicated, are stated as basic earnings per
share. Prior year amounts have been restated, as applicable, to present
continuing operations separate from discontinued operations.)
SUBSEQUENT EVENT
On February 22, 1999, Consolidated Natural Gas Company (the Company) and
Dominion Resources, Inc. (DRI) announced that a definitive merger agreement
(merger agreement) was approved by the boards of directors of both companies.
Under the terms of the merger agreement, DRI intends to acquire all of the
Company's shares of common stock in a stock-for-stock transaction. Reference
is made to Note 19 to the consolidated financial statements, page 52,
regarding this subsequent event.
RESULTS OF OPERATIONS
Net Income
Net income in 1998 was $238.8 million, or $2.52 a share, compared with net
income of $304.4 million, or $3.21 a share, in 1997. Net income in 1996 was
$298.3 million, or $3.17 a share. These results, however, reflect the
Company's decision to discontinue its wholesale energy trading and marketing
operations in 1998 (see Note 2 to the consolidated financial statements, page
30). The Company recognized a loss on discontinued operations in 1998 of $48.9
million, or $.51 a share. Losses from discontinued operations during 1997 and
1996 totaled $14.5 million and $11.1 million, respectively, or $.15 and $.12 a
share.
Income From Continuing Operations
Income from continuing operations was $287.7 million, $318.9 million and
$309.4 million for 1998, 1997 and 1996, respectively. On a per share basis,
income from continuing operations was $3.03 in 1998, compared to $3.36 and
$3.29 in 1997 and 1996, respectively.
1998
Income from continuing operations declined $31.2 million in 1998. The effects
of warm winter weather and lower average wellhead prices for gas and oil were
only partially mitigated by ongoing cost reduction efforts and the impact of
higher oil production. Weather in the Company's retail service areas was 17.8%
warmer than normal and 19.3% warmer than 1997. The warmer than normal weather
in 1998 reduced earnings by $.47 per share. Normal weather represents a
measure of temperature experienced over an historical time frame, the length
of which may differ depending on the regulatory jurisdiction. When compared to
normal, 1998 was the second warmest year in the Company's history.
1997
Income from continuing operations in 1997 increased $9.5 million from the
prior year. The favorable impact of higher gas and oil production and
continued cost containment efforts more than offset the effects of warmer
weather and lower average wellhead prices for both gas and oil. Weather in the
Company's retail service areas was 1.9% colder than normal but 4.3% warmer
than 1996.
1996
Income from continuing operations in 1996 reflected 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. Weather in the Company's retail service
areas was 5.6% colder than normal and 5.5% colder than 1995.
1
Operating Revenues
Operating revenues include revenues from gas and oil sales, transportation and
storage of gas, gas and oil trading activities and by-product operations.
Total operating revenues in 1998 were $2,760.4 million, a decrease of $416.7
million from 1997.
Regulated gas sales revenues declined $477.3 million during 1998 compared to
the prior year, to $1,373.7 million. Regulated sales volumes declined 64.9
billion cubic feet (Bcf), to 207.1 Bcf, due chiefly to warmer weather in 1998.
Residential customers switching to transport service also caused a decline in
sales volumes. In addition, lower average sales rates for all three major
customer classes--residential, commercial and industrial--reflecting lower
purchased gas costs contributed to the decline in revenues.
Nonregulated gas sales revenues increased $61.0 million in 1998, to $494.4
million, with sales volumes increasing 36.1 Bcf, to 207.1 Bcf. The increased
sales volumes in 1998 were due to gas sales by CNG Retail Services Corporation
(CNG Retail), in its first full year of operation, and CNG Field Services
Company (CNG Field Services).
Gas transportation and storage revenues rose $53.8 million, to $545.9
million, in 1998. This improvement includes a $47.6 million increase
associated with gas transportation revenues due largely to customers switching
from sales to transport service at certain of the distribution subsidiaries.
Other operating revenues declined $54.2 million in 1998, to $346.4 million,
due primarily to lower revenues from oil production and oil trading activities
as a result of declining oil prices during 1998.
Regulated gas sales revenues of $1,851.0 million in 1997 were up $97.3
million compared to 1996, despite sales volumes decreasing 22.2 Bcf to 272.0
Bcf. The decline in volumes was due to warmer weather and the effect of the
displacement of sales volumes to other suppliers, including CNG Retail. Sales
revenues attributable to the Company's residential and commercial customers
increased during 1997 as higher average sales rates, reflecting the recovery
of previously deferred purchased gas costs, more than offset reduced volumes
compared to 1996.
Nonregulated gas sales revenues increased $37.3 million in 1997 to $433.4
million, with sales volumes increasing 11.3 Bcf to 171.0 Bcf. The increases in
revenues and volumes reflect higher gas production at CNG Producing Company
(CNG Producing). Gas transportation and storage revenues rose $12.5 million in
1997 compared to the prior year, to $492.1 million, reflecting both higher gas
transportation and storage service revenues. Other operating revenues
increased $74.6 million in 1997 to $400.6 million. Revenues from oil trading
were up $39.7 million, while revenues from the sale of oil and condensate
production increased $33.5 million. In both cases, the impact of higher
volumes more than offset a decline in oil prices.
Operating Expenses
Operating expenses, including income taxes, decreased to $2,392.9 million in
1998, compared to $2,766.7 million and $2,555.7 million in 1997 and 1996,
respectively.
Purchased gas consistently represents the largest operating expense category
for the Company. Purchased gas costs were $900.4 million in 1998, $1,114.1
million in 1997 and $963.2 million in 1996. This expense is influenced
primarily by changes in gas sales requirements, the price of gas supplies, and
the timing of recoveries of deferred purchased gas costs. The decline in 1998
was due primarily to decreased volume requirements in connection with the warm
weather in 1998, while lower average purchase prices also contributed to the
decrease. The recognition of previously deferred purchased gas costs and
volumes sold by CNG Retail were the primary factors for the increase from 1996
to 1997.
Liquids, capacity and other products purchased expense includes the cost of
oil, condensate and by-products purchased for resale, electricity purchased
for resale by CNG Retail, and pipeline capacity not associated with gas
purchased. During 1998, this expense decreased $65.2 million due primarily to
lower average purchase prices for oil traded by CNG Producing and less
pipeline capacity purchased by CNG Transmission Corporation (CNG
Transmission). This expense increased $31.2 million in 1997 due primarily to
increased oil trading activity by CNG Producing.
2
Combined operation and maintenance expense decreased $48.8 million in 1998
due largely to lower royalty expense, lower amortization expense related to
abandoned facilities and lower general and administrative expenses. The
decline in 1998 was partially offset by workforce reduction charges recognized
in the fourth quarter of 1998 due principally to the plan to reorganize the
management structure of the Company's regulated operations. Excluding the
effect of workforce reduction charges included in the 1996 amounts, combined
operation and maintenance expense increased $14.8 million in 1997. This
increase was due in part to higher royalty expense and production-related
costs. These costs were partially offset by lower employment costs.
Total depreciation and amortization (DD&A) expense increased $5.3 million in
1998 due to higher oil production volumes and $21.7 million in 1997 due
largely to higher gas and oil production volumes.
Taxes, other than income taxes, declined $14.3 million in 1998 due chiefly
to the timing of the recognition of certain tax expense by one of the
distribution subsidiaries and were up $2.9 million in 1997 due in part to
higher excise taxes.
Income taxes declined $26.7 million in 1998 due to lower pretax income and a
lower effective tax rate. Income taxes decreased $6.0 million in 1997 due
largely to a lower effective tax rate.
Other Income
Total other income was $34.7 million in 1998, compared to $12.4 million in
1997 and $9.0 million in 1996. "Other-net" increased $20.8 million during 1998
due principally to increased earnings from equity investments at CNG
International. The increase in "Other-net" in 1997 compared to 1996 is due
largely to a charge of $5.0 million recognized in connection with an early
extinguishment of debt in December 1996. Interest revenues increased $1.5
million in 1998 and decreased slightly in 1997.
Interest Charges
Interest on long-term debt increased $1.4 million in 1998 and $3.1 million in
1997. The 1998 increase was primarily due to a full year of interest expense
on the $300 million of debentures issued in the fourth quarter of 1997,
partially offset by reduced interest expense in 1998 resulting from the
redemption of the convertible subordinated debentures. The increase in 1997
was due largely to a full year of interest expense related to the $300 million
of debentures issued in the fourth quarter of 1996, partially offset by the
redemption in early 1997 of $100 million of debentures and the early
extinguishment of $53.1 million of debt in late 1996. Other interest expense
increased $13.9 million in 1998 due primarily to interest on commercial paper
borrowings. Other interest expense increased $2.4 million in 1997.
Fourth Quarter Results
Net income for the fourth quarter of 1998 was $95.0 million, or $1.00 per
share, compared to $89.4 million, or $.94 per share, in 1997. Income from
continuing operations for the fourth quarter of 1998 was $97.2 million, or
$1.02 per share, compared to $89.1 million, or $.94 per share, in the prior
year quarter. Results for 1998 reflect lower operating costs which helped
offset significantly lower wellhead prices and warmer weather in that year.
Also, the prior year quarter included a non-cash charge of $6.7 million after
taxes, or $.07 per share, related to an impairment of Canadian oil producing
properties. The change in other income/expenses--net reflects higher equity
income from CNG International and gains on asset dispositions in 1998, while
the 1997 fourth quarter includes a charge in connection with the decision to
sell and write down the carrying value of the Company's interests in four
independent power projects. The Company's 1998 average gas wellhead price was
$2.17 per thousand cubic feet (Mcf), down $.37 per Mcf, while average oil
wellhead prices declined $5.95 per barrel compared to the prior year quarter,
to $9.74 per barrel. Weather in the fourth quarter of 1998 was 16.1% warmer
than the prior year quarter.
3
- - --------------------------------------------------------------------------------
Quarters Ended December 31, 1998 1997
- - ---------------------------------------------------------------------------------
(In Millions)
Operating revenues............................................. $ 807.4 $ 940.9
Operating expenses............................................. (654.4) (781.2)
------- -------
Operating income before income taxes........................... 153.0 159.7
Income taxes................................................... (45.2) (41.3)
Other income/expenses-net...................................... (10.6) (29.3)
------- -------
Income from continuing operations.............................. 97.2 89.1
Income (loss) from discontinued operations..................... (2.2) .3
------- -------
Net income..................................................... $ 95.0 $ 89.4
======= =======
Earnings (loss) per common share--basic (in dollars)
Continuing operations......................................... $1.02 $ .94
Discontinued operations....................................... (.02) --
------- -------
Net income..................................................... $1.00 $ .94
======= =======
Earnings (loss) per common share--diluted (in dollars)
Continuing operations......................................... $1.01 $ .92
Discontinued operations....................................... (.02) --
------- -------
Net income..................................................... $ .99 $ .92
======= =======
- - ---------------------------------------------------------------------------------
New Accounting Standards
During 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income," SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," and SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS
No. 130 establishes standards for the reporting and display of comprehensive
income and its components. Reference is made to the Consolidated Statement of
Comprehensive Income, page 27. Reference is also made to Notes 1 and 18 to the
consolidated financial statements, pages 28 and 48, regarding SFAS No. 131.
SFAS No. 132 revises the Company's disclosures about pension and other
postretirement benefit plans. Reference is made to Note 7 to the consolidated
financial statements, page 34, regarding SFAS No. 132. The adoption of SFAS
Nos. 130, 131 and 132 did not have a material effect on the Company's financial
position, results of operations or cash flows.
Also during 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," and SOP 98-5,
"Reporting on the Costs of Start-Up Activities." SOP 98-1 establishes standards
for accounting for costs incurred in developing or procuring computer software
for internal use. SOP 98-5 requires that costs for start-up activities be
expensed as incurred. The provisions of each SOP are effective beginning
January 1, 1999, and the adoption of each SOP is not expected to have a
material effect on the Company's financial position, results of operations or
cash flows.
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," in 1998. SFAS No. 133
establishes new accounting standards for derivative instruments and for hedging
activities. The provisions of SFAS No. 133 are effective beginning January
1, 2000. The adoption of SFAS No. 133 is not expected to have a material effect
on the Company's financial position, results of operations or cash flows.
SEGMENTS OF THE BUSINESS
Due to the regulated nature of the distribution and transmission segments 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
4
portion of the gas sold or transported by the distribution and transmission
operations is ultimately used for space heating.
Operating results for each of the Company's business segments, which include
affiliated transactions, follow. Reference is made to Note 18 to the
consolidated financial statements, page 48, for additional segment
information.
- - -------------------------------------------------------------------------------
Operating Income Before Income Taxes 1998 1997 1996
- - -------------------------------------------------------------------------------------------------
(In Millions)
Distribution............................................................. $208.2 $266.6 $258.4
Transmission............................................................. 183.6 180.9 181.6
Exploration and production............................................... 116.6 142.8 133.2
Other (a)................................................................ (1.4) (7.3) (.9)
Corporate and eliminations............................................... (9.9) (16.3) (10.3)
------ ------ ------
Total................................................................... $497.1 $566.7 $562.0
====== ====== ======
(a) Includes CNG International, CNG Products and Services, CNG Power, CNG
Field Services (formerly CNG Storage Services), Consolidated LNG, CNG
Research and CNG Coal. Amounts for 1998 and 1997 also include CNG Retail.
- - -------------------------------------------------------------------------------
Distribution
"Distribution" represents the results of the four retail gas distribution
subsidiaries: The East Ohio Gas Company (East Ohio Gas), The Peoples Natural
Gas Company (Peoples Natural Gas), Virginia Natural Gas, Inc. (Virginia
Natural Gas) and Hope Gas, Inc. (Hope Gas).
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, 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%, compared to a growth rate of less
than 1% for the other distribution subsidiaries.
Similar to the unbundling of the services provided by gas pipeline
companies, gas distribution companies are adapting to the deregulation and
unbundling of the retail energy market. 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.
CNG Retail, created in 1997, markets natural gas, electricity, and consumer
products and services to residential, commercial and small industrial
customers, including those within the Company's traditional service
territories. CNG Retail is expected to enable the Company to take advantage of
emerging deregulated energy markets for both gas and electricity.
During the spring of 1997, Peoples Natural Gas opened its system in
Pennsylvania to customer choice. In addition, on July 2, 1997, the Public
Utilities Commission of Ohio approved East Ohio Gas' "Energy Choice" (EOG
Energy Choice) pilot program which allows approximately 15% of East Ohio Gas'
residential and small business customers the opportunity to purchase their
natural gas from competing suppliers, if they so choose.
Distribution Operating Income Before Income Taxes
1998
Operating income before income taxes declined $58.4 million in 1998, to $208.2
million, compared to 1997. The impact of warmer weather in 1998 was partially
mitigated by lower operation expenses and the timing of the recognition of
excise tax expense. Weather in the Company's retail service areas was 17.8%
warmer than normal and 19.3% warmer than 1997. The 1998 period also included a
$4.5 million charge for workforce reduction costs recognized in the fourth
quarter in connection with the Company's plan to reorganize and centralize the
management of its regulated operations.
5
1997
Operating income before income taxes was $266.6 million in 1997, up $8.2
million from the prior year. However, the 1996 period included workforce
reduction charges of $8.2 million. The effect of warmer weather in 1997 offset
the impact of lower operation and maintenance expenses during the year.
Weather in the Company's retail service areas was 1.9% colder than normal and
4.3% warmer than 1996.
1996
Operating income before income taxes increased $50.9 million in 1996. 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 and East Ohio Gas. Weather in the
Company's retail service areas was 5.5% colder than 1995 and 5.6% colder than
normal. Operating results for 1996 and 1995 include workforce reduction
charges of $8.2 million and $22.3 million, respectively.
Distribution Operating Revenues
Operating revenues decreased $414.8 million, to $1,611.8 million, in 1998.
Average sales rates and volumes declined in 1998 compared to the prior year.
Sales rates declined due to the pass-through of lower purchased gas costs.
Lower volumes in 1998 reflected warmer weather during the year and the impact
of former residential sales customers who now purchase gas from other
suppliers, including CNG Retail. Gas transportation and storage revenues
increased $44.0 million in 1998 due to both higher volumes and rates. The
increase in gas transportation volumes reflects the switch by residential
customers from sales to transport service.
Operating revenues increased $121.1 million in 1997, to $2,026.6 million.
Gas sales revenues increased $101.1 million as higher average sales rates,
reflecting the recovery of previously deferred purchased gas costs, more than
offset the effect of reduced sales volumes. Gas transportation and storage
revenues increased $21.5 million in 1997 due to both higher 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.
- - -------------------------------------------------------------------------------
Distribution Throughput 1998 1997 1996
- - --------------------------------------------------------------------------------
(In Billion Cubic Feet)
Sales................................................... 207.6 272.7 294.2
Transportation.......................................... 198.9 189.4 174.2
------- ------- -------
Throughput............................................ 406.5 462.1 468.4
======= ======= =======
- - --------------------------------------------------------------------------------
Gas sales volumes declined in 1998 compared to the prior year primarily as a
result of warmer weather and the continued displacement of sales volumes to
other suppliers. Residential gas sales volumes declined 47.9 Bcf in 1998, to
159.9 Bcf. The distribution subsidiaries transported 14.6 Bcf of gas in 1998,
compared to 2.7 Bcf in 1997, on behalf of former residential sales customers
who now purchase gas from other suppliers, including CNG Retail. Sales to
commercial customers declined 15.4 Bcf to 44.3 Bcf while volumes transported
to these customers decreased .3 Bcf to 43.0 Bcf, both declines being
attributable to the warm weather. Total deliveries to industrial customers
decreased 2.6 Bcf, to 135.7 Bcf. Industrial transport volumes were down .8 Bcf
to 133.2 Bcf, while sales volumes declined 1.8 Bcf to 2.5 Bcf. Off-system
transport volumes were down 1.3 Bcf in 1998, to 8.1 Bcf.
Warmer weather and the effect of the displacement of sales volumes to other
suppliers, including CNG Retail, were the reasons for the decrease in gas
sales volumes in 1997 compared to 1996.
6
Residential gas sales volumes decreased 10.9 Bcf, to 207.8 Bcf, in 1997.
Commercial sales decreased 7.1 Bcf while volumes transported to these
customers were up 9.0 Bcf. Deliveries to industrial customers were lower in
1997, decreasing .5 Bcf to 138.3 Bcf. Sales to industrial customers declined
2.6 Bcf to 4.3 Bcf, while transportation volumes increased 2.1 Bcf to 134.0
Bcf. Transportation to off-system customers increased 4.1 Bcf in 1997.
Transmission
"Transmission" includes the results of the gas transmission, storage, by-
product and certain other activities of CNG Transmission and the by-products
business of CNG Power. Gas and oil production activities of CNG Transmission
are included in the exploration and production segment.
Transmission Operating Income Before Income Taxes
1998
Operating income before income taxes was $183.6 million in 1998, an increase
of $2.7 million compared to the prior year. The 1998 results include the
impact of the favorable resolution of a regulatory contingency amounting to
$13.9 million and a charge for workforce reduction costs of $1.1 million.
Also, the 1997 results included a charge amounting to $5.8 million recognized
in connection with CNG Transmission's withdrawal from participation in a gas
storage development project.
1997
Operating income before income taxes declined slightly in 1997, to $180.9
million. While the 1997 period included the charge for the storage project
indicated above, 1996 results included a $5.1 million charge for workforce
reduction costs.
1996
Operating income before income taxes was $181.6 million in 1996. Cost control
efforts and increased gas transportation and by-products revenues contributed
to the improved results in 1996. Workforce reduction charges for these
operations were about the same in 1996 and 1995.
Transmission Operating Revenues
Total operating revenues increased $3.2 million during 1998, to $502.5
million. Gas transportation revenues increased $4.1 million, as higher average
rates more than offset lower volumes, and gas storage service revenues
increased $3.0 million. Revenues from the sale of by-products declined $18.2
million due to lower sales rates. Higher other operating revenues for 1998
include $13.9 million relating to the favorable resolution of a regulatory
contingency.
Total operating revenues declined $17.8 million in 1997, to $499.3 million.
Gas transportation revenues declined $15.7 million due to both lower volumes
and rates, and revenues from the sale of by-products decreased $5.1 million
due primarily to lower sales rates. These decreases were partially offset by
an increase of $2.8 million in gas storage service revenues.
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 is
supported by 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. A further expansion project in conjunction with East Ohio
Gas and others will provide additional capacity at minimal cost. CNG
Transmission's pipeline and storage facilities will continue to 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).
7
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, due to the straight fixed variable rate design, operating
income for the transmission operations is not significantly influenced by
changes in throughput.
Total throughput for the gas transmission operations, consisting entirely of
transportation volumes, was 612.5 Bcf, 732.8 Bcf and 758.4 Bcf for the years
1998, 1997 and 1996, respectively.
Exploration and Production
"Exploration and production" (E&P) includes the results of CNG Producing and
the gas and oil production activities of CNG Transmission.
E&P Operating Income Before Income Taxes
1998
Operating income before income taxes in 1998 was $116.6 million, a decline of
$26.2 million from 1997. Results for 1998 reflect the impact of lower average
gas and oil wellhead prices and lower gas production, partially offset by
higher oil production. Both oil and gas production were negatively impacted
during the third quarter of 1998 due to four hurricanes and tropical storms
that forced temporary shutdowns of oil and natural gas wells in the Gulf of
Mexico. These storms also delayed development efforts at the Nautilus complex,
delaying initial production at that location until the first quarter of 1999.
During 1998, CNG Producing added 374 Bcf of gas equivalent from additions,
revisions, and purchases of gas and oil reserves and also purchased 39 Bcf of
gas reserves from an affiliate, Peoples Natural Gas. The 1997 results include
a non-cash, pretax charge of $10.4 million related to the Company's impairment
of its Canadian oil producing properties.
1997
Operating income before income taxes in 1997 was $142.8 million, up $9.6
million from 1996. As noted above, the 1997 results include an impairment
charge of $10.4 million. The 1997 results reflect increased gas and oil
production that more than offset the impact of lower average wellhead prices
for gas and oil, higher royalty expense, increased operating costs related to
bringing certain new production on line and increased workover activity.
During 1997, the Company added 315 Bcf of gas equivalent from additions,
revisions, and purchases of gas and oil reserves.
1996
Operating income before income taxes in 1996 was $133.2 million, compared with
an operating loss before income taxes of $200.5 million in 1995. However, 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 $33.4 million in 1995. 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.
Gas and Oil Production, Prices and Other Information
The following table sets forth the Company's gas and oil production, average
wellhead prices and other information for the E&P operations for the last
three years:
8
- - -------------------------------------------------------------------------------
1998 1997 1996
- - --------------------------------------------------
Gas (Bcf)
Nonregulated............. 154.9 155.3 144.5
Regulated*............... 2.6 2.8 3.0
------- ------- -------
Total................... 157.5 158.1 147.5
======= ======= =======
Oil (000 Bbls)
Nonregulated............. 7,894.7 7,312.0 4,765.9
======= ======= =======
Average Wellhead Prices--
Nonregulated
Gas (per Mcf)............ $ 2.26 $ 2.43 $ 2.46
Oil (per Bbl)............ $11.54 $16.07 $17.60
Other E&P Data--
Nonregulated
DD&A (per Mcf
equivalent).............. $.89 $.88 $.93
Average production
(lifting) cost (per Mcf
equivalent).............. $.31 $.33 $.32
* Cost-of-service. Cost-of-service gas reserves were held solely by Peoples
Natural Gas and sold to CNG Producing during 1998.
- - -------------------------------------------------------------------------------
The Company's average gas wellhead price was $2.26 per Mcf in 1998, down
$.17 from 1997 but still favorable compared to industry-wide prices in 1998
due to a market price hedging program. For 1999, the Company has used
derivatives to effectively sell forward approximately 102.3 Bcf of gas
production as of February 1, 1999 at an average price of $2.25 per Mcf. Gas
production in 1998 was down .6 Bcf, to 157.5 Bcf, compared to 1997. Average
oil wellhead prices were $11.54 per barrel in 1998, down $4.53 from 1997,
while oil production increased nearly 600,000 barrels, to 7.9 million barrels.
The increase in oil production in 1998 was due in part to a full year of
production at Neptune, a deep-water project in the Gulf of Mexico which began
production in March 1997.
The Company's average gas wellhead price was $2.43 per Mcf in 1997, down
slightly from 1996. Gas production for 1997 was 158.1 Bcf, an increase of 10.6
Bcf compared to the prior year. Production from several new fields in the Gulf
of Mexico contributed to the 1997 increase. Oil wellhead prices averaged
$16.07 a barrel during 1997, down $1.53 from 1996, while production increased
53% compared to the prior year. The increase in oil production in 1997 was due
largely to the impact of Neptune.
E&P Operating Revenues
Total operating revenues for the E&P operations were $631.1 million in 1998, a
decline of $74.6 million from 1997. Gas sales revenues decreased $9.4 million
due to both lower volumes and lower average gas prices compared to 1997.
Revenues from oil and condensate production and trading declined $71.9 million
in 1998 as the effect of lower average sales prices outweighed the impact of
higher sales volumes. Revenues from oil trading decreased $45.6 million and
revenues from oil and condensate production declined $26.3 million. Other
operating revenues increased $6.7 million in 1998.
Total operating revenues were $705.7 million in 1997, an increase of $73.4
million compared to 1996. Gas sales revenues decreased $.5 million, as
increased sales volumes were more than offset by the effect of lower average
gas prices. Revenues from oil and condensate production and trading increased
$73.0 million in 1997, with higher sales volumes more than offsetting the
impact of lower rates. Revenues from oil trading rose $39.7 million and
revenues from oil and condensate production increased $33.3 million.
Other
This component, as described in the operating results table on page 5,
reported operating losses before income taxes of $1.4 million, $7.3 million
and $.9 million in 1998, 1997 and 1996, respectively. Start-up costs of CNG
Retail and CNG Products and Services are reflected in their combined losses of
$5.3 million, $3.8 million and $1.5 million in 1998, 1997 and 1996,
respectively. Partially offsetting the 1998 losses was $8.8 million of pretax
operating income from CNG Field Services. Also helping to offset start-up
costs somewhat was pretax operating income from Consolidated LNG of $.2
million, $1.4 million and
9
$2.6 million for the years 1998, 1997 and 1996, respectively, reflecting the
recognition of deferred income pursuant to a regulatory order.
Results of this component for 1998, 1997 and 1996 also reflect the
operations of CNG International, which had pretax operating losses of $4.7
million, $6.8 million and $3.8 million, respectively. However, earnings from
CNG International's operations are attributable to investments in foreign
utilities and pipelines which are accounted for under the equity method and
are excluded from the operating income amounts. CNG International reported net
income of $2.5 million for 1998 and reported net losses of $3.8 million in
1997 and $2.6 million in 1996.
Discontinued Operations
During April 1998, management approved a plan to discontinue the Company's
wholesale trading and marketing of natural gas and electricity, including
integrated energy management. On July 31, 1998, the sale of the capital stock
of CNG Energy Services Corporation, formerly a wholly-owned subsidiary of the
Company, to Sempra Energy Trading, a subsidiary of Sempra Energy, was
finalized. Included in the transaction were contracts for the purchase and
sale of natural gas as well as rights to natural gas pipeline and storage
capacity, mainly in the Northeast and Mid-Atlantic regions, and related
working capital. Proceeds of $37.4 million were received from the sale of the
stock, as adjusted for working capital items. The Company's transition out of
the wholesale gas business was substantially complete at December 31, 1998.
Losses from discontinued operations, net of applicable tax benefits, were
$17.2 million, $14.5 million and $11.1 million for the years 1998, 1997 and
1996, respectively. In addition, during 1998 the Company recognized a loss on
disposal of the discontinued operations, including a provision for operating
losses during the phase out period, of $31.7 million, net of applicable tax
benefit.
International Activities
During December 1997, CNG International acquired ownership interests in two
gas utility holding companies, Sodigas Pampeana S.A. and Sodigas Sur S.A., and
in an electric utility holding company, Buenos Aires Energy Company (BAECO),
from CEI Citicorp Holdings S.A. in Argentina. The gas utility holding
companies have ownership interests in two gas distribution companies, Camuzzi
Gas Pampeana and Camuzzi Gas del Sur, and BAECO has an ownership interest in
an electric distribution company, EDEA. The service territories of these
companies span from Buenos Aires province to the southernmost tip of
Argentina. In March 1998 CNG International purchased additional interests in
Sodigas Pampeana S.A., Sodigas Sur S.A. and BAECO from Loma Negra, bringing
the Company's ownership interests in these entities to 21.55%, 21.55% and 25%,
respectively. Camuzzi Argentina S.A. maintains majority ownership interests in
the holding companies. At December 31, 1998, CNG International's investments
in the Argentine holding companies totaled $122.8 million.
In March 1998 CNG International purchased a 33.3% ownership interest in the
Dampier-to-Bunbury Natural Gas Pipeline (DBNGP) in Western Australia from the
Western Australia Government. One of CNG International's partners in the
purchase was El Paso Energy Corporation (El Paso), which also holds a 33.3%
ownership interest. In connection with their investments in DBNGP, CNG
International and El Paso formed DBNGP Finance Company LLC (DBNGP Finance).
DBNGP Finance is owned 50% by CNG International and 50% by EPED Holding
Company, a wholly-owned subsidiary of El Paso. Subsequent to the formation of
DBNGP Finance, the equity ownership interests of CNG International and El Paso
in DBNGP were transferred to this entity.
In October 1998 DBNGP Finance borrowed $250 million under a Senior Term Loan
Facility (Term Loan). The Term Loan matures October 2, 2001, can be extended
in one-year increments to October 2, 2003, and will bear interest at a
variable rate. Of the gross proceeds received by DBNGP Finance under the Term
Loan, $100 million was distributed to CNG International. In connection with
the Term Loan, CNG International entered into an Equity Contribution Agreement
with DBNGP Finance. CNG International is contractually obligated to make
equity contributions to DBNGP Finance equal to the Term Loan proceeds
distributed to CNG International, plus interest on such proceeds, in the event
that DBNGP
10
Finance is unable to service this debt. The Company is contractually obligated
to cause CNG International to make such contributions.
CNG International's investments in Australia at December 31, 1998, including
DBNGP Finance, totaled $77.6 million.
Limitation on Capitalized Costs
As indicated in Note 1 to the consolidated financial statements, the Company
follows the full cost method of accounting for its gas and oil producing
activities prescribed by the Securities and Exchange Commission (SEC).
Reference is made to Note 5 to the consolidated financial statements, page 33,
regarding the Company's recognition under the SEC full cost rules of an
impairment of its gas and oil producing properties at December 31, 1997.
There are a number of factors, including prices, that determine whether or
not an impairment is required. Because gas wellhead prices are subject to
sudden and seasonal fluctuations, an 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 a price decline.
Federal and State Regulatory Matters
Gas and Electric Industry Developments
Gas industry competition at the retail level is receiving increased attention
from both regulators and legislators. Governments in three of the states in
which the Company operates distribution subsidiaries have enacted or
considered legislation regarding deregulation of natural gas at the retail
level. In Ohio, a 1996 law established customer choice as a state policy in
the supply of natural gas services. Implementation of the law, which allows
retail customers to obtain gas from an array of suppliers, is under way. In
Pennsylvania, pending legislation would unbundle gas utility merchant
functions and permit the Pennsylvania Public Utility Commission to certify
marketers, in addition to gas utilities, as suppliers of last resort, creating
competition in a traditional gas utility function. Most recently, Virginia has
begun to consider gas unbundling legislation.
In addition to restructuring of the gas industry, the emerging unbundling of
services provided by electric utilities is leading toward the convergence of
the two industries to create one overall, highly competitive marketplace for a
customer's total energy needs. Regulators and legislators at the federal level
and in many states are considering, or are already implementing, initiatives
to promote increased competition in the electric industry. A major development
was the issuance in 1996 of FERC 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. The companion order, Order 889, addresses the
timing, information access and other administrative details associated with
the FERC deregulation initiative. Congress also is considering legislation
intended to facilitate the move to competition in the electric industry.
Although progress status varies, pro-competition electric legislation is at
least under consideration in many states. In Ohio, leaders of the General
Assembly have predicted passage in 1999 of a bill to assure customer choice.
In Pennsylvania, the 1996 Electric Generation Customer Choice and Competition
Act required the transition to a competitive retail electric market to begin
in January 1999, with full competition by 2001. In Virginia, the General
Assembly may enact a restructuring bill which would phase in retail
competition starting on January 1, 2002. Regulators and legislators in West
Virginia are also debating issues related to electric industry restructuring.
Reflecting the evolution to a more competitive energy environment, the pace
and size of business combinations among natural gas and electric utilities has
increased in recent years (reference is made to Note 19 to the consolidated
financial statements, page 52, regarding the Company's proposed merger with
DRI). 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.
11
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, Congress has
considered legislation to conditionally repeal the Public Utility Holding
Company Act of 1935 (PUHCA), to which the Company is subject. While it seems
unlikely that Congress will enact PUHCA legislation on a stand-alone basis, it
appears more likely that any comprehensive electric restructuring bill will
include a PUHCA repeal provision. If legislation to repeal or significantly
modify the provisions of the PUHCA becomes law, certain federal restrictions
related to diversification activities, including business combinations, for
gas and electric companies subject to the PUHCA may be eased.
To focus the distribution and transmission operations on being more
responsive to customer needs and to enable them to more effectively seize
growth opportunities in the competitive marketplace, the Company announced a
significant reorganization of the management structure of its regulated
businesses in December 1998. The new structure brings all five regulated
subsidiaries--CNG Transmission, East Ohio Gas, Peoples Natural Gas, Virginia
Natural Gas and Hope Gas--under the leadership of a single management team.
This new team will manage by business process rather than by company. However,
all five companies will remain separate legal entities and will retain their
names.
Federal and State Regulatory Issues
On April 29, 1998, the Virginia State Corporation Commission issued a final
order in connection with the September 25, 1996 expedited rate application of
Virginia Natural Gas. The order resulted in an annual revenue increase of $7.2
million, retroactive to October 25, 1996, the date new rates went into effect
subject to refund. Customer refunds resulting from the order were made in
1998. The order reflects an imputed return on equity of 10.9%. In its filing,
Virginia Natural Gas had requested a $13.9 million increase in annual revenues
and a return on equity of 11.3%.
On July 28, 1998, the Public Service Commission of West Virginia approved a
settlement agreement filed by Hope Gas in connection with its January 5, 1998
general rate filing. The new rates became effective November 1, 1998. Under
the settlement, Hope Gas is not permitted to request an increase in rates
prior to January 1, 2002, nor is it obligated to file for new rates after that
date. The approved settlement agreement grants Hope Gas a combined $6.5
million annual revenue increase for both base rates and gas costs. Hope Gas
had originally proposed a $14.5 million annual increase in revenues.
On November 24, 1998, the FERC approved a settlement filed by CNG
Transmission in connection with its July 1, 1997 general rate filing. The
settlement resolves the outstanding issues in the case and maintains the
preexisting level of annual revenues. The settlement reflects an imputed
return on equity of 10.7%. CNG Transmission made interim customer refunds
amounting to $39.2 million in December 1998, and expects to make a final
settlement refund of approximately $19 million by the end of the first quarter
of 1999. In its filing, CNG Transmission had requested a $71 million increase
in annual revenues and a return on equity of 14.5%.
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
46, 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.
12
Effects of Inflation
Although inflation rates have been low to 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.
FINANCIAL CONDITION
Dividend and Common Stock Matters
In December 1998, the Board of Directors continued the quarterly dividend on
the common stock at $.485 a share. Total dividends paid to common shareholders
in 1998 were $185.9 million compared with $184.6 million in 1997 and $183.0
million in 1996.
During 1998, a total of 335,333 original issue shares were issued through
various Company-sponsored plans, including 282,273 shares acquired by
employees through the exercise of outstanding stock options.
Under the Company's stock repurchase plan, up to 10 million shares of the
Company's common stock can be repurchased in the open market. Shares may also
be purchased in private transactions. 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. In January 1998, the Company purchased
approximately 4.6 million shares of its common stock in a private transaction
for use in satisfying the conversion rights of debentures called for
redemption (see "Call of Debentures," Page 14). The Company acquired 220,462
shares in 1997 at a cost of $12.3 million, or an average price of $55.73 a
share, primarily to fund certain nonqualified benefit plans via a grantor
trust. At December 31, 1998 and 1997, a total of 495,123 and 659 shares,
respectively, were being held as treasury stock.
Capital Spending
The current capital spending program for 1999 is estimated at $524.5 million,
a 31% decrease compared with total capital spending in 1998. The estimated
1999 budget has been allocated as follows: exploration and production, $337.0
million; distribution, $128.4 million; transmission, $51.3 million; and
corporate and other, $7.8 million. The decreased level of capital expenditures
planned for 1999 anticipates lower spending for international projects, which
will be evaluated on a case-by-case basis. Exploration and production
operations reflect increased spending on deep-water projects and increased
conventional onshore and offshore drilling. 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.
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. The Company may require long-term financing in 1999
to support capital spending, and may also utilize the capital markets to take
advantage of other opportunities, including exploration and production
acquisitions, or 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 from continuing operations
was $767.4 million, $784.1 million and $424.9 million for the years 1998, 1997
and 1996, respectively. The increase in net cash provided by operating
activities in 1997 was due in part to higher gas sales revenues in 1997,
including the
13
recovery of previously deferred purchased gas costs by the distribution
subsidiaries, and the payment of customer refunds in 1996 that did not recur
in 1997.
In October 1998, the Company sold $200 million of 6% Debentures Due October
15, 2010. The proceeds were used for general corporate purposes including
capital expenditures, reduction of short-term debt, repurchase of Company
stock, and the acquisition, retirement or redemption of debt securities.
The Company has a shelf registration with the SEC which would allow it to
sell up to an additional $338.3 million of debt 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 1998 was 6.96%, compared with 7.20% for 1997 and 7.27% for 1996. The
long-term debt to capitalization ratio was 36.5%, 39.7% and 39.3% at the end
of 1998, 1997 and 1996, respectively. Under the provisions of one of the
indentures covering the Company's outstanding senior debenture issues, the
ratio cannot exceed 60%. The Company's senior debentures are rated A2 by
Moody's Investors Service, AA-- by Standard & Poor's, AA-- by Duff and Phelps,
and AA by Fitch Investors Service.
At December 31, 1998, the Company had a short-term credit agreement with a
group of banks for $775 million. The Company made no borrowings under this
agreement during 1998 and there were no amounts outstanding under any credit
agreements at December 31, 1998 or 1997.
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 1998, of which $558.9 million was
outstanding at year-end. The Company may utilize unused portions of its credit
agreements to provide support for commercial paper notes.
Call of Debentures
In January 1998 the Company called for redemption the entire principal amount
outstanding of its 7 1/4% Convertible Subordinated Debentures, totaling $246.2
million. These debentures were convertible into shares of the Company's common
stock at an initial conversion price of $54 per share. The redemption price
was 102.18% of the principal amount plus accrued interest payable on
February 23, 1998. In anticipation of the call, in January 1998 the Company
purchased approximately 4.6 million shares of its common stock in a private
transaction to satisfy the potential conversion obligation. The right to
convert expired on February 13, 1998, and approximately 1.6 million of the
acquired shares were issued on conversion. The remaining acquired shares were
sold in two underwritten offerings during February and March 1998.
Year 2000 Technology Issue
Similar to all business entities, the Company will be impacted by the
inability of some computer application software programs to distinguish
between the year 1900 and 2000 due to a commonly-used programming convention.
In the early 1990s, the Company identified business systems in need of
technology updates to successfully adapt to changes in the business climate
and the emerging competitive marketplace. These changes required the Company
to move toward common, integrated systems and computing platforms.
Accordingly, many systems representing older technology, which were not year
2000 ready, were targeted for replacement. This plan is being executed through
major initiatives such as a company-wide implementation of Oracle Financial
Applications, the development of a new revenue and customer information system
for the distribution subsidiaries called "CAMP," and the development and
implementation of applications for gas control management and asset and
facilities mapping. Through these initiatives over 75 application systems,
including associated technical infrastructure, are being replaced.
In 1997, the Company formalized its approach to year 2000 issues with the
creation of a Year 2000 Project Office (Project Office) at the corporate level
to coordinate company-wide year 2000 activities. All of the Company's
operating subsidiaries are participating in this effort under the direction of
the Project Office.
14
The Company is addressing year 2000 issues via a systematic methodology that
mitigates risk and incorporates a thorough due diligence process. This
strategy recognizes that the definition of "year 2000 compliance" varies
broadly depending on the industry, component, vendor, and/or device. The
Company's strategy prioritizes the critical areas of the business to eliminate
any potential impact on safety, and to mitigate or eliminate any adverse
effect on revenues, assets, customer service and the environment that may
result from the date change event.
Project Description and Activities
The major areas of focus of the Company's year 2000 efforts include
application systems, process control components, technical infrastructure,
physical infrastructure, and business partner and vendor relationships. These
project areas are summarized below:
Application Systems. Application systems encompass all automated systems,
including those developed internally and those purchased from vendors. These
systems include traditional business applications, as well as operations and
engineering applications.
Process Control Components (embedded technology). Process control devices
automate certain production, transportation and delivery functions in
connection with natural gas, oil and liquids. These devices, such as flow
computers and pressure regulators, generally include embedded computer
technology.
Technical Infrastructure. This category represents the underlying technical
architecture which supports the Company's application systems, e-mail, and
similar infrastructure. This infrastructure includes mainframe hardware and
software, application servers, local and wide area networks, desktop personal
computers and telecommunications.
Physical Infrastructure. This category represents the Company's physical
plant, including office buildings. Building infrastructure such as elevators,
HVAC systems, security and fire alarm systems are examples of components
included in this category.
Business Partner and Vendor Relationships. This area involves analysis of
critical business partner and vendor relationships and third party commitment
to addressing year 2000 issues via discussion, contract reviews and additional
detailed assessment as considered necessary.
For each of the areas described above, the Company employs a five-phase
process methodology as follows:
(1) Inventory: In this phase, the Company compiles comprehensive
inventories of each of the major project areas.
(2) Assessment and Analysis: This phase is performed to determine the
extent to which year 2000 issues exist in any of the inventoried areas
and, if so, whether the issue is controllable (can be remedied by the
Company) or non-controllable (is dependent upon vendor representation
and/or remediation and can only be tested by the Company).
(3) Repair and Replacement: Renovations, replacements, and upgrades are
made during this phase to remedy year 2000 issues.
(4) Testing: During this phase, independent testing is performed to ensure
year 2000 issues have been mitigated.
(5) Continuity Planning: This phase is focused on ensuring continuity of
major and critical business processes that could be affected by year
2000 events. This effort includes "zero-day" (December 31, 1999),
contingency, and recovery planning in combination to consider and
mitigate the effects of unknown internal and external year 2000 risks.
The Company utilizes a multi-vendor strategy to maximize the effectiveness
of its year 2000 efforts. The Company's primary external consultants include
Compuware Inc. (analysis and renovation of mainframe and client/server
application systems, tools for testing of application systems and professional
services for application systems test planning) and Keane, Inc. (process
control component analysis, test planning and execution; operations and
engineering application systems inventory and analysis; continuity planning;
and facilities/physical infrastructure inventory and analysis).
15
Project Status
The following summarizes the Company's progress in the major project areas
through December 31, 1998:
- - -------------------------------------------------------------------------------
Phase
Project Area Inventory Assessment Repair/ Testing Continuity
Replace Planning
- - ---------------
Application Complete Complete In progress In progress In progress
Systems
- - ------------------------------------------------------------------------------
Process Control Complete Complete In progress In progress In progress
Components
- - ------------------------------------------------------------------------------
Technical Complete Complete In progress In progress In progress
Infrastructure
- - ------------------------------------------------------------------------------
Physical In progress In progress In planning In planning In planning
Infrastructure
- - ------------------------------------------------------------------------------
Business Ongoing Ongoing Not Not In progress
Partners and process process applicable applicable
Suppliers
- - -------------------------------------------------------------------------------
Application Systems. During the assessment phase, approximately 80
application systems were identified requiring some degree of repair or
replacement. However, the Company's actions to upgrade to newer, more
functional versions of vendor software have mitigated many existing year 2000
issues. These upgrade activities will continue through mid-1999. Repair and
replacement activities for internally developed application systems began in
March 1998 and are substantially complete at year end 1998, with testing
continuing through mid-1999. Reference is made to "Risks," page 17, for
information on the status of CAMP.
Process Control Components. For process control components inventoried by
the Company, approximately 43% are not date sensitive, and therefore are not
affected by year 2000 issues. For date sensitive components, the Company
estimates a year 2000 failure rate of approximately 10% to 12%. Replacement of
a small number of non-compliant components will continue through early 1999,
while testing of components believed to be year 2000 ready continues and is
approximately 44% complete.
Technical Infrastructure. Technical infrastructure has been analyzed
directly with vendors and via the use of an external vendor research database
service. This information is being used to guide year 2000 upgrades of
infrastructure as necessary. Repair, replacement and testing activities are
approximately 92% complete for all categories of technical infrastructure,
while efforts in the critical area of application servers are 93% complete.
The Company had completed a substantial portion of year 2000 upgrades by the
end of 1998, and is continuing with testing into 1999.
The Company has developed plans to determine the status of year 2000
readiness of its desktop personal computers. Inventory activities began in
December 1998, and are expected to continue through February 1999, after which
any repair or replacement activities will commence. Updated desktop
infrastructure continues to be deployed that is year 2000 ready concurrent
with the implementation of many new application systems described above. The
Company plans to confirm year 2000 readiness of this infrastructure via
testing, which is expected to be completed by mid-1999.
16
Physical Infrastructure. The Company has completed the inventorying of non-
gas related physical infrastructure components that may be subject to year
2000 problems, and is currently verifying its inventory of gas-related
facilities. Critical physical infrastructure components that are related to
process control have been inventoried and assessed in the process control area
of the project. Repair activities, if necessary, will follow the verification
process. Where facilities are leased, the Company is identifying and working
with building managers/lessors to ensure they are actively addressing the year
2000 issue as a primary effort in continuity planning.
Business Partner and Vendor Relationships. Strategic business partner and
vendor relationships have been given priority in the inventory phase, and
assessment continues via questionnaires and interviews. Over 1,000 strategic
relationships had been identified and queried by the end of 1998. The Company
will continue to prioritize, identify and assess business partner and vendor
relationships until significant areas of risk have been identified and
mitigated, and is also preparing contingency plans in the event mitigation
efforts are not successful. The Company had performed a preliminary analysis
of all significant relationships by the end of 1998, including the year 2000
status of operations in Argentina and Australia in which the Company has
investments.
Continuity Planning. The Company has completed development of a continuity
planning methodology and has identified critical business processes. Business
continuity managers have been identified and will be trained in the continuity
planning methodology in early 1999. Continuity plans are expected to be
developed commencing February 1999, drawing upon an extensive inventory of
contingency and recovery plans already in operation.
Costs
Based upon project status as described above, the Company expects to spend a
total of approximately $22.6 million in connection with its Project Office
efforts, its use of external consultants and the remediation of affected
application systems. This estimate includes $6.8 million of capitalized costs
for hardware and software used (or expected to be used) in the testing phase,
and for application system and technical infrastructure replacements. This
estimate excludes costs incurred or expected to be incurred in connection with
the development and installation of major new application systems which are
expected to be year 2000 ready, the Company's potential share of year 2000
costs that may be incurred by partnerships and joint ventures in which the
Company participates but is not the operator, and internal labor costs other
than those of the core Project Office. As of December 31, 1998, the Company
has incurred costs approximating $5.4 million (of which $1.5 million has been
capitalized) in connection with its year 2000 efforts. Total costs incurred as
of December 31, 1998, as a proportion of the total year 2000 budget, is not
indicative of the overall completion rate of the project, which is estimated
to be over 50%.
Risks
Significant progress has been made in the development of CAMP for use at Hope
Gas and EOG Energy Choice. However, previous technical difficulties and delays
have caused the Company to invoke a contingency plan which involves renovation
of the current revenue application system for the other distribution
subsidiaries and 20 related application systems to make such systems year 2000
ready. These current systems collectively address the business processes which
were to be handled by CAMP. Renovation activities have been completed in
connection with this contingency plan and implementation, including testing,
is scheduled to be completed by August 1999. Under a worst case scenario, the
current revenue application systems would not be year 2000 ready by the end of
1999 for the other distribution subsidiaries and CAMP would not be
successfully implemented or year 2000 ready at Hope Gas and EOG Energy Choice.
The estimate of $22.6 million referred to above includes approximately $2.3
million of costs in connection with the CAMP contingency plan. Concurrent with
this effort, the Company is continuing the development of CAMP and has
capitalized $53.0 million related to this project as of December 31, 1998. The
CAMP core software is a licensed product of the Company's independent
accountants, PricewaterhouseCoopers LLP (PwC), and PwC is the primary
information systems consultant on this project.
17
If a material year 2000 problem is not corrected in a timely manner, an
interruption in, or a failure of, certain normal business activities or
operations of the Company could occur. Such instances could materially and
adversely affect the Company's financial position, cash flows and/or results
of operations. Due to the uncertainty inherent in the year 2000 issue,
including the uncertainty of year 2000 readiness of third party vendors,
business partners and customers, the Company cannot determine at this time
whether the consequences of any year 2000 failures will have a material impact
on its financial position, cash flows or results of operations. However, the
Company's Project Office activities and the implementation of new application
systems are expected to reduce the risk of a material year 2000 failure.
Price Risk Management Activities
In the normal course of business, certain of the Company's operations are
subject to market risk and credit risk in connection with the production,
purchase and sale of natural gas and oil and stored gas inventories. In
addition, the Company's foreign equity investments are subject to foreign
currency risk. Reference is made to Note 15 to the consolidated financial
statements, Page 45, regarding the fair value of the Company's long-term debt
which is comprised of fixed-rate instruments.
Market and Credit Risk
Price risk management activities expose the Company to market risk. Market
risk represents the potential loss that can be caused by the change in market
value of a particular commitment. The Company has appropriate operating
procedures in place that are administered by experienced management to help
ensure that proper internal controls are maintained. In addition, the Company
has established an independent function at the Corporate level to monitor
compliance with the price risk management policies of all subsidiaries.
Price risk management activities also expose the Company to credit risk.
Credit risk represents the potential loss that the Company would incur as a
result of nonperformance by counterparties pursuant to the terms of their
contractual obligations. The Company maintains credit policies with respect to
its counterparties that management believes minimize overall credit risk. Such
policies include the evaluation of a prospective counterparty's financial
condition, collateral requirements where deemed necessary, and the use of
standardized agreements which facilitate the netting of cash flows associated
with a single counterparty. The Company also monitors the financial condition
of existing counterparties on an ongoing basis. Considering the system of
internal controls in place and credit reserve levels at December 31, 1998, the
Company believes it unlikely that a material adverse effect on its financial
position, results of operations or cash flows would occur as a result of
counterparty nonperformance.
The Company uses over-the-counter (OTC) price swap agreements, exchange-
traded futures contracts, and option contracts to manage market risk inherent
in the production, purchase and sale of natural gas and oil and stored gas
inventories. The level of market risk exposure from these activities is
maintained within risk management guidelines.
Use of Derivatives--Natural Gas
Information as of December 31, 1998 and 1997 for derivatives that are
sensitive to changes in natural gas prices follow. Net notional quantities are
used to calculate the payments and quantities to be exchanged under the
contractual terms of the futures contracts and swap agreements and are not a
measure of the Company's exposure to the use of these derivatives. It should
also be noted that these disclosures exclude information about the Company's
natural gas commodity purchase and sale commitments which are sensitive to
changes in natural gas prices, and information related to firm transportation
and storage agreements for which the Company must make specified minimum
payments each month. Therefore, the information presented regarding the use of
derivatives by the Company does not reflect the earnings impact of the
physical transactions that may offset the financial gains and losses arising
from the use of derivatives.
18
The following table presents net notional quantities and weighted average
settlement prices by expected maturity date for futures contracts used to
hedge natural gas price risk. All of the contracts included in the table below
have been designated as hedges of the future production, purchase and/or sale
of natural gas. At December 31, 1998, the Company held no futures contracts
with maturity dates extending beyond 2001.
- - -------------------------------------------------------------------------------
Expected Maturity Date Unrealized
------------------------- Gain
Exchange- 1999 2000 2001 Total at 12/31/98
Traded Futures Contracts
- - -------------------------------------------------------------------------------
(In Thousands)
Contract volumes (in 10,000
mmbtu), purchased (sold)...... (7,048) 314 51 (6,683) $16,418
Weighted average settlement
price (per mmbtu)............. $2.18 $2.17 $2.29
- - -------------------------------------------------------------------------------
At December 31, 1997, the Company held futures contracts related to natural
gas purchase and sale commitments and storage inventory covering 2.9 Bcf of
gas on a net basis maturing through 2000 having a net unrealized loss of $1.1
million.
The following table presents natural gas price swap information for
agreements in which the Company is obligated to pay or receive a fixed price
in exchange for receiving or paying a variable price at a location, and those
in which the Company pays or receives an amount based on prices at different
locations. At December 31, 1998, the Company had not entered into any price
swap agreements extending beyond 2003. All of the swap agreements included in
the table below have been entered into to hedge the risk of market price
changes in connection with the future production, purchase and/or sale of
natural gas. The weighted average variable pay and receive forward prices are
based upon quotes obtained from third party brokers and dealers that are
active in the respective markets.
- - ---------------------------------------------------------------------------------
Price Swap Agreements
Expected Maturity Date
(Quantities in 10,000 mmbtu) ----------------------------- Fair Value
(Rates per mmbtu) 1999 2000 2001 2002 2003 Total at 12/31/98
- - ---------------------------------------------------------------------------------
(In Thousands)
Pay Fixed, Receive Variable
- - ---------------------------
Net notional quantities..... 7,922 4,734 3,958 16,614 $(23,491)
Weighted average pay rate.. $ .99 $ .97 $1.31
Weighted average receive
rate....................... $ .78 $ .88 $1.24
Receive Fixed, Pay Variable
- - ---------------------------
Net notional quantities..... 4,540 2,708 1,854 1,718 1,704 12,524 $ 13,388
Weighted average pay rate.. $1.27 $1.68 $2.12 $2.22 $2.27
Weighted average receive
rate....................... $1.57 $1.68 $2.08 $2.23 $2.28
- - ---------------------------------------------------------------------------------
At December 31, 1997, the Company had price swap agreements of varying
duration outstanding to exchange monthly payments on net notional quantities
of gas over the ensuing five years. Net notional quantities and related fair
value at that date for swap agreements in which the Company pays a fixed price
in exchange for a variable price totaled 324.5 Bcf and $(26.3) million,
respectively. For swap agreements in which the Company pays a variable price
in exchange for a fixed price, net notional quantities and related fair value
at December 31, 1997 totaled 297.2 Bcf and $28.7 million, respectively.
Use of Derivatives--Other
At December 31, 1998, the Company was not a party to price swap agreements,
futures or option contracts in connection with the production or sale of crude
oil.
At December 31, 1997, the Company held futures contracts expiring in 1998
covering the sale of 1,750,000 barrels of oil with a weighted average
settlement price of $18.24 per barrel and an aggregate unrealized gain of
approximately $4.4 million. Also at December 31, 1997, the Company had a
foreign currency swap agreement with an aggregate notional amount of $51.0
million and an unrealized gain of $4.5 million. The Company terminated its
involvement in this swap agreement during 1998 in connection with the sale of
its wholesale marketing business.
19
Forward-Looking Information
Certain matters discussed in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere herein 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 the Company's proposed merger with DRI, capital
expenditures, earnings, risk management, litigation, the year 2000 technology
issues and costs, environmental matters, rate and other regulatory matters,
liquidity and capital resources, and financial accounting and reporting
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 environment in
which the Company operates; and other circumstances affecting anticipated
revenues and costs.
Risks in connection with the Company's year 2000 efforts include the
Company's ability to successfully identify, correct and test, in a timely
manner, potential year 2000 problems which could have a significant impact on
specific business functions or processes, and the ability of third party
vendors, business partners and customers to ensure year 2000 readiness of
their systems and business operations.
Summary of Financial Data
The Company's Summary of Financial Data is on page 21.
20
SELECTED FINANCIAL DATA
- - --------------------------------------------------------------------------------
Summary of Financial Data (Thousand $) 1998 1997 1996(b) 1995(b) 1994
- - -------------------------------------------------------------------------------------------------------
Earnings (a)
Gas sales.................................. $1,868,110 $2,284,384 $2,149,771 $1,837,159 $2,402,861
Gas transportation, storage and other...... 892,296 892,726 805,687 666,416 633,167
Total operating revenues................. 2,760,406 3,177,110 2,955,458 2,503,575 3,036,028
Purchased gas.............................. 900,401 1,114,080 963,217 864,591 1,424,020
Liquids, capacity and other products 145,277 210,575 179,307 87,434 107,094
purchased.................................
Operation and maintenance.................. 708,378 757,220 757,321 719,273 689,575
Depreciation and amortization.............. 329,913 324,638 302,883 255,949 279,317
Impairment of gas and oil producing -- 10,351 -- 226,209 --
properties................................
Taxes, other than income taxes............. 179,299 193,584 190,683 190,716 192,617
Operating income before income taxes..... 497,138 566,662 562,047 159,403 343,405
Income taxes............................... 129,649 156,269 162,315 7,381 82,427
Other income-net........................... 34,700 12,442 8,975 10,661 9,694
Write-down of coal properties.............. -- -- -- 31,266 --
Interest charges........................... 114,478 103,927 99,325 102,584 87,501
Income from continuing operations.......... 287,711 318,908 309,382 28,833 183,171
Discontinued Operations (Note 2)
Loss from discontinued energy marketing
services operations, net of applicable tax
benefit................................... (17,238) (14,528) (11,109) (7,489) --
Loss from disposal of energy marketing
services operations, including provision
for operating losses during the phase out
period, net of applicable tax benefit..... (31,707) -- -- -- --
Net Income................................. 238,766 304,380 298,273 21,344 183,171
Earnings per common share--basic
Income from continuing operations.......... $3.03 $3.36 $3.29 $.31 $1.97
Loss from discontinued operations.......... (.18) (.15) (.12) (.08) --
Loss from disposal of discontinued
operations................................ (.33) -- -- -- --
Net Income................................. $2.52 $3.21 $3.17 $.23 $1.97
Earnings per common share--diluted
Income from continuing operations.......... $3.00 $3.30 $3.24 $.31 $1.97
Loss from discontinued operations.......... (.18) (.15) (.11) (.08) --
Loss from disposal of discontinued
operations................................ (.33) -- -- -- --
Net Income................................. $2.49 $3.15 $3.13 $.23 $1.97
Return on average stockholders' equity..... 10.0% 13.3% 14.0% 1.0% 8.4%
Times fixed charges earned................. 4.03 4.90 5.04 1.32 3.53
- - -------------------------------------------------------------------------------------------------------
Dividends--Cash
Paid per common share...................... $1.94 $1.94 $1.94 $1.94 $1.94
Payout ratio............................. 77.0% 60.4% 61.2% 843.5% 98.5%
Declared per common share.................. $1.94 $1.94 $1.94 $1.94 $1.94
- - -------------------------------------------------------------------------------------------------------
Assets
Total assets............................... $6,361,900 $6,313,694 $6,000,605 $5,418,293 $5,518,673
Property, plant and equipment
Total investment......................... 9,172,465 8,714,758 8,304,205 7,929,350 7,676,956
Accumulated depreciation................. 4,734,001 4,491,955 4,226,905 4,016,945 3,650,310
Capital expenditures and acquisitions...... 762,916 609,373 560,293 439,393 437,785
- - -------------------------------------------------------------------------------------------------------
Capital Structure
Total common stockholders' equity.......... $2,399,608 $2,358,318 $2,205,152 $2,045,818 $2,184,334
Long-term debt............................. 1,379,729 1,552,890 1,426,315 1,291,811 1,151,973
---------- ---------- ---------- ---------- ----------
Total capitalization..................... $3,779,337 $3,911,208 $3,631,467 $3,337,629 $3,336,307
========== ========== ========== ========== ==========
Long-term debt ratio....................... 36.5% 39.7% 39.3% 38.7% 34.5%
Shares outstanding at year-end............. 95,449,428 95,622,622 94,933,631 93,591,623 93,027,847
Common stockholders' equity per share...... $25.14 $24.66 $23.23 $21.86 $23.48
- - -------------------------------------------------------------------------------------------------------
(a) Amounts for the years 1995 through 1997 have been restated, as applicable,
to present continuing operations separate from discontinued operations.
(b) Certain amounts and ratios are not comparable with prior years due to
special charges.
21
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 23
through 58 of this Appendix I to the proxy statement for the 1999 annual
meeting of stockholders present fairly, in all material respects, the
financial position of Consolidated Natural Gas Company and subsidiaries
(collectively, the Company) at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1998, 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.
PRICEWATERHOUSECOOPERS LLP
600 Grant Street
Pittsburgh, Pennsylvania 15219-9954
February 9, 1999, except for Note 19,
which is as of February 22, 1999
22
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
- - --------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
- - -------------------------------------------------------------------------------
(Thousands of Dollars)
Operating Revenues
Regulated gas sales........................ $1,373,691 $1,851,001 $1,753,667
Nonregulated gas sales..................... 494,419 433,383 396,104
---------- ---------- ----------
Total gas sales.......................... 1,868,110 2,284,384 2,149,771
Gas transportation and storage............. 545,933 492,080 479,588
Other...................................... 346,363 400,646 326,099
---------- ---------- ----------
Total operating revenues (Note 4)........ 2,760,406 3,177,110 2,955,458
---------- ---------- ----------
Operating Expenses
Purchased gas.............................. 900,401 1,114,080 963,217
Liquids, capacity and other products
purchased.................................. 145,277 210,575 179,307
Operation expense (Note 6)................. 618,010 666,612 667,254
Maintenance................................ 90,368 90,608 90,067
Depreciation and amortization (Note 5)..... 329,913 324,638 302,883
Impairment of gas and oil producing
properties (Note 5)........................ -- 10,351 --
Taxes, other than income taxes............. 179,299 193,584 190,683
---------- ---------- ----------
Subtotal................................. 2,263,268 2,610,448 2,393,411
---------- ---------- ----------
Operating income before income taxes..... 497,138 566,662 562,047
Income taxes (Note 8)...................... 129,649 156,269 162,315
---------- ---------- ----------
Operating income......................... 367,489 410,393 399,732
---------- ---------- ----------
Other Income
Interest revenues.......................... 3,165 1,663 2,024
Other-net.................................. 31,535 10,779 6,951
---------- ---------- ----------
Total other income....................... 34,700 12,442 8,975
---------- ---------- ----------
Income before interest charges........... 402,189 422,835 408,707
---------- ---------- ----------
Interest Charges
Interest on long-term debt................. 106,307 104,927 101,814
Other interest expense..................... 19,659 5,774 3,374
Allowance for funds used during
construction............................... (11,488) (6,774) (5,863)
---------- ---------- ----------
Total interest charges................... 114,478 103,927 99,325
---------- ---------- ----------
Income From Continuing Operations.......... 287,711 318,908 309,382
Discontinued Operations (Note 2)
Loss from discontinued energy marketing
services operations, net of applicable
tax benefit............................... (17,238) (14,528) (11,109)
Loss from disposal of energy marketing
services operations, including provision
for operating losses during the phase out
period, net of applicable tax benefit..... (31,707) -- --
---------- ---------- ----------
Net Income................................. $ 238,766 $ 304,380 $ 298,273
========== ========== ==========
Earnings per common share--basic
Income from continuing operations (Note
3)....................................... $3.03 $3.36 $3.29
Loss from discontinued operations......... (.18) (.15) (.12)
Loss from disposal of discontinued
operations............................... (.33) -- --
---------- ---------- ----------
Net Income................................. $2.52 $3.21 $3.17
========== ========== ==========
Earnings per common share--diluted
Income from continuing operations (Note
3)....................................... $3.00 $3.30 $3.24
Loss from discontinued operations......... (.18) (.15) (.11)
Loss from disposal of discontinued
operations............................... (.33) -- --
---------- ---------- ----------
Net Income................................. $2.49 $3.15 $3.13
========== ========== ==========
- - -------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of this
statement.
23
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- - --------------------------------------------------------------------------------
At December 31, 1998 1997
- - -------------------------------------------------------------------------------
(Thousands of Dollars)
Assets
Property, Plant and Equipment (Note 5)
Gas utility and other plant.......................... $ 5,091,793 $ 5,004,139
Accumulated depreciation and amortization............ (1,999,484) (1,949,483)
----------- -----------
Net gas utility and other plant.................... 3,092,309 3,054,656
----------- -----------
Exploration and production properties................ 4,080,672 3,710,619
Accumulated depreciation and amortization............ (2,734,517) (2,542,472)
----------- -----------
Net exploration and production properties.......... 1,346,155 1,168,147
----------- -----------
Net property, plant and equipment.................. 4,438,464 4,222,803
----------- -----------
Current Assets
Cash and temporary cash investments.................. 135,453 65,035
Accounts receivable
Customers........................................... 363,503 804,015
Unbilled revenues and other......................... 221,833 176,787
Allowance for doubtful accounts..................... (23,039) (29,590)
Inventories, at cost
Gas stored--current portion (Note 9)................ 120,665 139,157
Materials and supplies (average cost method)........ 27,940 30,256
Unrecovered gas costs (Note 4)....................... 34,860 55,062
Deferred income taxes--current (net) (Note 8)........ 21,786 --
Prepayments and other current assets................. 258,899 212,919
----------- -----------
Total current assets............................... 1,161,900 1,453,641
----------- -----------
Regulatory and Other Assets
Other investments.................................... 302,307 223,900
Deferred charges and other assets (Notes 4, 6, 7, 8
and 16).............................................. 459,229 413,350
----------- -----------
Total regulatory and other assets.................. 761,536 637,250
----------- -----------
Total assets....................................... $ 6,361,900 $ 6,313,694
=========== ===========
- - -------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of this
statement.
24
- - --------------------------------------------------------------------------------
At December 31, 1998 1997
- - -------------------------------------------------------------------------------
(Thousands of Dollars)
Stockholders' Equity and Liabilities
Capitalization
Common stockholders' equity (Note 10)
Common stock, par value $2.75 per share
Authorized--400,000,000 shares
Issued, 1998--95,944,551 shares, 1997--95,623,281
shares............................................ $ 263,848 $ 262,964
Capital in excess of par value...................... 571,972 566,755
Retained earnings (Note 12)......................... 1,591,543 1,539,587
Treasury stock, at cost (1998--495,123 shares,
1997--659 shares).................................. (26,359) (38)
Unearned compensation............................... (1,396) (10,950)
----------- -----------
Total common stockholders' equity.................. 2,399,608 2,358,318
Long-term debt (Note 13)............................. 1,379,729 1,552,890
----------- -----------
Total capitalization............................... 3,779,337 3,911,208
----------- -----------
Current Liabilities
Current maturities on long-term debt................. 111,125 154,000
Commercial paper (Note 14)........................... 558,900 238,700
Accounts payable..................................... 423,695 651,365
Estimated rate contingencies and refunds (Note 4).... 78,266 29,112
Amounts payable to customers (Note 4)................ 48,339 880
Taxes accrued........................................ 122,788 125,056
Deferred income taxes--current (net) (Note 8)........ -- 13,735
Dividends declared................................... 46,277 46,377
Other current liabilities............................ 154,947 127,016
----------- -----------
Total current liabilities.......................... 1,544,337 1,386,241
----------- -----------
Deferred Credits
Deferred income taxes (Note 8)....................... 780,928 712,118
Accumulated deferred investment tax credits.......... 24,475 26,658
Deferred credits and other liabilities (Notes 4, 7
and 8)............................................... 232,823 277,469
----------- -----------
Total deferred credits............................. 1,038,226 1,016,245
----------- -----------
Commitments and Contingencies (Note 17)
----------- -----------
Total stockholders' equity and liabilities......... $ 6,361,900 $ 6,313,694
=========== ===========
- - -------------------------------------------------------------------------------
25
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- - --------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
- - -----------------------------------------------------------------------------------
(Thousands of Dollars)
Cash Flows From Operating Activities
Income from continuing operations................ $ 287,711 $ 318,908 $ 309,382
Adjustments to reconcile income from continuing
operations to net cash
provided by operating activities
Depreciation and amortization.................. 329,913 324,638 302,883
Impairment of gas and oil producing properties. -- 10,351 --
Pension cost (credit)-net...................... (56,496) (46,011) (24,317)
Stock award amortization....................... 7,460 8,209 7,774
Deferred income taxes-net...................... 17,901 4,186 62,164
Investment tax credit.......................... (2,171) (2,193) (2,201)
Changes in current assets and current
liabilities
Accounts receivable-net....................... 4,244 (14,953) (54,040)
Inventories................................... (2,584) 38,125 (55,277)
Unrecovered gas costs......................... 20,202 52,954 (82,893)
Accounts payable.............................. 92,795 (1,511) 3,064
Estimated rate contingencies and refunds...... 49,154 7,510 (37,761)
Amounts payable to customers.................. 47,459 880 (40,315)
Taxes accrued................................. (614) 23,834 (17,063)
Other-net..................................... (40,282) 3,517 6,791
Changes in other assets and other liabilities.. 14,716 55,750 46,985
Other-net...................................... (2,015) (70) (252)
--------- --------- ---------
Net cash provided by continuing operations.... 767,393 784,124 424,924
Net cash provided by (or used in) discontinued
operations...................................... 44,735 (42,016) (17,759)
--------- --------- ---------
Net cash provided by operating activities..... 812,128 742,108 407,165
--------- --------- ---------
Cash Flows Used in Investing Activities
Plant construction and other property additions.. (561,654) (514,705) (434,247)
Proceeds from dispositions of property, plant and
equipment-net................................... (1,267) 1,056 9,067
Cost of other investments-net.................... (104,233) (86,763) (88,214)
--------- --------- ---------
Net cash used in continuing operations........ (667,154) (600,412) (513,394)
Net cash provided by (or used in) discontinued
operations...................................... 35,605 (6,256) (4,751)
--------- --------- ---------
Net cash used in investing activities......... (631,549) (606,668) (518,145)
--------- --------- ---------
Cash Flows Provided by (or Used in) Financing
Activities
Issuance of common stock......................... 11,719 28,722 37,726
Issuance of debentures........................... 196,888 294,945 299,567
Repayments of long-term debt..................... (327,323) (119,625) (72,750)
Commercial paper-net............................. 318,159 (134,368) 37,853
Dividends paid................................... (185,858) (184,608) (183,020)
Purchase of treasury stock....................... (280,863) (12,286) (8,144)
Sale of treasury stock........................... 162,763 12,266 8,142
Other-net........................................ (2,987) 25 (147)
--------- --------- ---------
Net cash provided by (or used in) financing
activities................................... (107,502) (114,929) 119,227
--------- --------- ---------
Net increase in cash and temporary cash
investments.................................. 73,077 20,511 8,247
Cash and Temporary Cash Investments at January 1. 65,035 44,524 36,277
--------- --------- ---------
Cash and Temporary Cash Investments at December
31.............................................. $ 138,112 $ 65,035 $ 44,524
========= ========= =========
Continuing operations............................ $ 135,453 $ 49,566 $ 21,583
Discontinued operations.......................... 2,659 15,469 22,941
--------- --------- ---------
Total cash and temporary cash investments at
December 31.................................. $ 138,112 $ 65,035 $ 44,524
========= ========= =========
Supplemental Cash Flow Information
Cash paid for
Interest (net of amounts capitalized)........... $ 121,924 $ 114,314 $ 109,602
Income taxes (net of refunds)................... $ 92,380 $ 126,372 $ 108,742
Non-cash financing activities
Issuance of common stock under benefit plans.... $ (240) $ 2,742 $ 25,570
Conversion of 7 1/4% Convertible Subordinated
Debentures..................................... $ 88,467 $ 40 $ --
- - -----------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of this
statement.
26
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
- - --------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
- - -------------------------------------------------------------------------------
(Thousands of Dollars)
Net Income........................................ $238,766 $304,380 $298,273
Other comprehensive income, net of tax
Pension liability adjustment.................... 60 (309) 116
Foreign currency translation adjustment......... (1,112) (4,166) --
-------- -------- --------
Comprehensive Income.............................. $237,714 $299,905 $298,389
======== ======== ========
- - -------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of this
statement.
27
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 subsidiaries 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 (collectively, 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.
Segment Information
In 1998, the Company adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," and replaces an "industry segment" disclosure approach with a
"management" approach. SFAS No. 131 requires the internal organization used by
management for making operating decisions and assessing performance to be the
basis of the Company's reportable segments.
Revenue Recognition
Revenues from sales and transportation services are recognized in the same
period in which the related 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 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.
Price Risk Management Activities
In the normal course of business, the Company utilizes derivative financial
instruments and derivative commodity instruments to manage exposure to price
risk in connection with the production, purchase and sale of natural gas and
oil, and for stored gas inventories. These derivatives include exchange-traded
futures and options contracts, which permit settlement by physical delivery of
the commodity, and over-the-counter (OTC) commodity price swap agreements and
options, which require settlement in cash.
28
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For derivatives 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.
Under the OTC price swap agreements, the Company makes payments to, or
receives payments from, counterparties generally based on the difference
between fixed and variable gas and oil prices or on prices at different
receipt points as specified in the contracts. Settlement takes place under the
swap agreements on a monthly basis for the portion of the swap that has
expired, and amounts received or paid are recognized as an adjustment to gas
and oil sales revenues, purchased gas expense or transport capacity costs in
the applicable settlement month.
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. Maintenance, repairs and related
costs are charged principally to expense as incurred.
Exploration and Production Properties
The Company follows 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 limitation test is performed separately for each cost center, with
cost centers established on a country-by-country basis.
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.
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.
29
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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: 1998--5 1/2% to 7 1/8%; 1997--5 5/8% to 7
5/8% 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
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 and the payment of benefits
to certain retired executives under company-sponsored nonqualified employee
benefit plans. Certain of these nonqualified plans are funded through
contributions to a grantor trust.
The Company also sponsors defined benefit postretirement plans, covering
both salaried and hourly employees and certain dependents, that provide
medical and life insurance coverage benefits. 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 and cost-sharing features are adjusted annually.
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 considered probable.
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.DISCONTINUED OPERATIONS
During April 1998, management approved a plan to discontinue the Company's
wholesale trading and marketing of natural gas and electricity, including
integrated energy management. On July 31, 1998, the
30
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
sale of the capital stock of CNG Energy Services Corporation, formerly a
wholly-owned subsidiary of the Company, to Sempra Energy Trading, a subsidiary
of Sempra Energy, was finalized. Included in the transaction were contracts
for the purchase and sale of natural gas as well as rights to natural gas
pipeline and storage capacity, mainly in the Northeast and Mid-Atlantic
regions, and related working capital. Proceeds of $37.4 million were received
from the sale of the stock, as adjusted for working capital items. The
Company's transition out of the wholesale gas business was substantially
complete at December 31, 1998. The remaining net liabilities associated with
discontinued operations at December 31, 1998 were not material.
The results of operations of these activities for the years ended December
31, 1998, 1997 and 1996 are classified as "Discontinued Operations" in the
Consolidated Statement of Income. Cash flows in connection with operating and
investing activities for discontinued operations are reported separately in
the Consolidated Statement of Cash Flows. There were no cash flows provided
by, or used in, financing activities related to discontinued operations for
the years ended December 31, 1998, 1997 or 1996.
Summarized results of operations of the discontinued operations are as
follows:
- - -------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- - -------------------------------------------------------------------------------
(In Thousands)
Total operating revenues.................... $ 792,586 $ 2,532,910 $ 838,851
Operating expenses.......................... (818,105) (2,554,386) (852,924)
--------- ----------- ---------
Operating loss before income taxes......... (25,519) (21,476) (14,073)
Income tax benefit.......................... 9,011 9,216 6,485
Other income................................ 80 1,074 329
Interest charges............................ (810) (3,342) (3,850)
--------- ----------- ---------
Loss from discontinued operations........... $ (17,238) $ (14,528) $ (11,109)
========= =========== =========
Loss from disposal before income taxes...... $ (48,263) $ -- $ --
Income tax benefit.......................... 16,556 -- --
--------- ----------- ---------
Net loss from disposal...................... $ (31,707) $ -- $ --
========= =========== =========
- - -------------------------------------------------------------------------------
3.EARNINGS PER SHARE
In 1997, the Company adopted the provisions of SFAS No. 128, "Earnings per
Share," and restated earnings per share (EPS) amounts for all prior annual and
quarterly periods presented. The adoption of SFAS No. 128 did not have a
material effect on the Company's EPS for any of the periods presented.
A reconciliation of the income from continuing operations and common stock
share amounts used in the calculation of basic and diluted EPS for each of the
years ended December 31, 1998, 1997 and 1996 follows (income and share amounts
in thousands):
- - -------------------------------------------------------------------------------
Income From
Continuing Per Share
Operations Shares Amount
- - -------------------------------------------------------------------------------
For the year ended December 31, 1998
Basic EPS......................................... $287,711 94,836 $3.03
======== ====== =====
Effect of dilutive securities:
Exercise of stock options........................ 511
Vesting of performance shares.................... 374
Conversion of 7 1/4% Convertible Subordinated
Debentures...................................... 1,578 614
-------- ------
Diluted EPS....................................... $289,289 96,335 $3.00
======== ====== =====
- - -------------------------------------------------------------------------------
31
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- - -------------------------------------------------------------------------------
Income From
Continuing Per Share
Operations Shares Amount
- - -------------------------------------------------------------------------------
For the year ended December 31, 1997
Basic EPS........................................ $318,908 94,868 $3.36
======== ======= =====
Effect of dilutive securities:
Exercise of stock options....................... 674
Vesting of performance shares................... 359
Conversion of 7 1/4% Convertible Subordinated
Debentures..................................... 12,128 4,559
-------- -------
Diluted EPS...................................... $331,036 100,460 $3.30
======== ======= =====
- - -------------------------------------------------------------------------------
For the year ended December 31, 1996
Basic EPS........................................ $309,382 94,076 $3.29
======== ======= =====
Effect of dilutive securities:
Exercise of stock options....................... 482
Vesting of performance shares................... 98
Conversion of 7 1/4% Convertible Subordinated
Debentures..................................... 11,823 4,559
-------- -------
Diluted EPS...................................... $321,205 99,215 $3.24
======== ======= =====
- - -------------------------------------------------------------------------------
Performance shares are considered contingent shares as defined by SFAS No.
128. Although such shares are issued and outstanding, they are excluded from
the calculation of basic earnings per share.
4.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, 1998 and 1997 as follows:
- - -------------------------------------------------------------------------------
December 31, 1998 1997
- - -------------------------------------------------------------------------------
(In Thousands)
Regulatory assets:
Unrecovered gas costs (Note 1).............................. $ 34,860 $ 55,062
Order 636 transition costs.................................. 6,461 17,020
Workforce reduction costs (Note 6).......................... 9,275 8,832
Other postretirement benefits (Note 7)...................... 52,142 55,070
Deferred income taxes (Note 8).............................. 102,797 103,323
Environmental-related expenditures (Note 16)................ 7,291 7,322
Other....................................................... 11,642 19,215
-------- --------
Total regulatory assets.................................... $224,468 $265,844
======== ========
Regulatory liabilities:
Amounts payable to customers (Note 1)....................... $ 48,339 $ 880
Estimated rate contingencies and refunds.................... 78,266 29,112
Income taxes refundable to customers-net (Note 8)........... 27,170 55,035
-------- --------
Total regulatory liabilities............................... $153,775 $ 85,027
======== ========
- - -------------------------------------------------------------------------------
32
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 these
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 $59.9 million and
$15.7 million at December 31, 1998 and 1997, including interest. These amounts
are reported in the Consolidated Balance Sheet under "Estimated rate
contingencies and refunds" together with $18.4 million and $13.4 million,
respectively, which are primarily refunds received from suppliers and
refundable to customers under regulatory procedures.
Order 636 Transition Costs
The distribution subsidiaries have incurred obligations to upstream pipeline
companies for costs resulting from the pipeline companies' transition to
restructured services under FERC Order 636. The total estimated liability for
such costs was $6.5 million and $17.0 million at December 31, 1998 and 1997,
respectively. Additional amounts, if any, to be accrued in the future are not
expected to be material. These transition costs are being passed through to
customers of the Company's distribution subsidiaries.
5.PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Impairment of Gas and Oil Producing Properties
As described in Note 1, the Company follows the full cost method of accounting
for gas and oil producing activities. Under these rules, the Company
recognized an impairment of its Canadian oil producing properties at
December 31, 1997, due primarily to the decline in market prices for heavy oil
production. This non-cash charge amounted to $10.4 million and reduced 1997
net income by $6.7 million, or $.07 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 $.89 per Mcf
equivalent of gas and oil produced in 1998, $.88 in 1997 and $.93 in 1996.
Costs of unproved properties capitalized under the full cost method of
accounting that are excluded from amortization at December 31, 1998, and the
years in which such excluded costs were incurred, follow:
- - --------------------------------------------------------------------------------
December 31, Incurred in Years Ended December 31,
-------------------------------------
1998 1998 1997 1996 Prior
- - --------------------------------------------------------------------------------
(In Thousands)
Property acquisition costs... $ 59,315 $ 20,874 $ 31,164 $ 4,181 $ 3,096
Exploration costs............ 48,679 23,469 18,121 2,316 4,773
Capitalized interest......... 9,995 1,604 5,363 1,181 1,847
-------- --------- --------- -------- --------
Total...................... $117,989 $ 45,947 $ 54,648 $ 7,678 $ 9,716
======== ========= ========= ======== ========
- - --------------------------------------------------------------------------------
There are no significant properties, as defined by the SEC, excluded from
amortization at December 31, 1998. 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.
33
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6.WORKFORCE REDUCTION COSTS
During the fourth quarter of 1998, the Company recorded a provision for
severance and other employee-related costs in connection with actions to
improve efficiencies and reorganize business processes at both its corporate
and regulated subsidiaries. The Company anticipates that these actions will be
substantially completed during 1999.
During 1996, unions at two subsidiaries implemented a workforce reduction
program that consisted of a voluntary early retirement program and a voluntary
separation program. A voluntary early retirement program for West Ohio Gas
(now a division of East Ohio Gas) was also offered during 1996. In conjunction
with these programs, 119 eligible employees elected to accept early retirement
offers and an additional 57 were separated from the Company. 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 its workforce reduction programs, the Company recorded
charges in 1998 and 1996 amounting to $9.4 million and $15.2 million,
respectively. These charges reduced 1998 and 1996 net income by $6.1 million,
or $.06 per share, and $9.9 million, or $.10 per share, respectively. In
addition, certain of the regulated subsidiaries have deferred, as a regulatory
asset, a portion of workforce reduction costs from previous years' programs
pending recovery in rates. The balance of these deferrals was $9.3 million at
December 31, 1998.
7.PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS
The following table provides reconciliations of the changes in the Company's
pension and other postretirement benefit plan obligations and asset fair
values for each of the years ended December 31, 1998 and 1997, and a statement
of the funded status as of December 31, 1998 and 1997:
- - -------------------------------------------------------------------------------
Pension Other Postretirement
Benefit Plans Benefit Plans
---------------------- ----------------------
Years Ended December 31, 1998 1997 1998 1997
- - -------------------------------------------------------------------------------
(In Thousands)
Change in benefit obligation:
Benefit obligation--January 1.. $1,037,728 $ 959,951 $ 358,748 $ 378,435
Service cost................... 24,852 21,374 10,021 9,901
Interest cost.................. 69,320 68,635 23,714 25,854
Participant contributions...... -- -- 3,027 3,000
Plan amendments................ -- -- (569) (6,723)
Actuarial (gain) loss.......... 60,981 55,378 (11,331) (29,342)
Curtailment (gain)............. (1,658) -- (130) --
Benefit payments............... (67,539) (67,610) (21,407) (22,377)
---------- ---------- ---------- ----------
Benefit obligation--December
31............................. $1,123,684 $1,037,728 $ 362,073 $ 358,748
========== ========== ========== ==========
Change in plan assets:
Fair value of plan assets--
January 1...................... $1,804,852 $1,539,039 $ 79,740 $ 53,153
Actual return on plan assets... 328,928 330,296 5,207 2,972
Employer contributions......... 2,911 3,127 45,326 42,992
Participant contributions...... -- -- 3,027 3,000
Benefit payments............... (67,539) (67,610) (21,407) (22,377)
---------- ---------- ---------- ----------
Fair value of plan assets--
December 31.................... $2,069,152 $1,804,852 $ 111,893 $ 79,740
========== ========== ========== ==========
- - -------------------------------------------------------------------------------
34
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- - -------------------------------------------------------------------------------
Pension Other Postretirement
Benefit Plans Benefit Plans
-------------------- ----------------------
December 31, 1998 1997 1998 1997
- - -------------------------------------------------------------------------------
(In Thousands)
Funded status:
Funded status--December 31....... $ 945,468 $ 767,124 $ (250,180) $ (279,008)
Unrecognized net obligation
(asset).......................... (33,195) (40,237) 158,231 170,102
Unrecognized (gain) loss-net..... (774,732) (649,740) 11,711 24,253
Unrecognized prior service cost.. 4,755 5,720 (5,562) (6,178)
--------- --------- ---------- ----------
Net amount recognized............ $ 142,296 $ 82,867 $ (85,800) $ (90,831)
========= ========= ========== ==========
- - -------------------------------------------------------------------------------
Amounts recognized in the Consolidated Balance Sheet at December 31 consist
of the following:
Prepaid benefit cost............... $ 159,317 $ 97,527 $ -- $ --
Accrued benefit liability.......... (28,536) (27,607) (85,800) (90,831)
Intangible asset................... 9,006 10,346 -- --
Accumulated other comprehensive
income............................. 2,509 2,601 -- --
--------- --------- --------- ---------
Net amount recognized.............. $ 142,296 $ 82,867 $ (85,800) $ (90,831)
========= ========= ========= =========
- - -------------------------------------------------------------------------------
The Company has nonqualified pension and supplemental pension plans which
do not have "plan assets" as defined by generally accepted accounting
principles. The total projected benefit obligation for these plans was $33.3
million and $32.3 million at December 31, 1998 and 1997, respectively, and is
included in the table above. The minimum liability recognized relating to
these plans was $11.5 million and $12.9 million at December 31, 1998 and 1997.
The related intangible asset recognized as of those dates amounted to $9.0
million and $10.3 million, respectively. Adjustments of the minimum liability
and intangible asset due to changes in assumptions or the financial status of
these plans resulted in a credit (charge) to other comprehensive income of $.1
million, $(.3) million and $.1 million for the years ended December 31, 1998,
1997 and 1996, respectively.
The majority of estimated other postretirement benefit costs (SFAS No. 106
costs) and related 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. The
rate-regulated subsidiaries have obtained 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, 1998 and 1997, was $52.1 million and $55.1 million, respectively.
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.
35
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Weighted average assumptions used in the determination of the benefit
obligations include the following:
- - --------------------------------------------------------------------------------
Other
Pension Postretirement
Benefit Plans Benefit Plans
------------- ---------------
December 31, 1998 1997 1998 1997
- - --------------------------------------------------------------------------------
Discount rate..................................... 6.5% 7.0% 6.5% 7.0%
Expected return on plan assets.................... 9.0% 9.0% 6.5% 6.5%
Rate of compensation increase..................... 5.5% 5.5% 5.5% 5.5%
- - --------------------------------------------------------------------------------
Net periodic benefit costs, as determined by independent actuaries,
included the following components:
- - -------------------------------------------------------------------------------------
Other Postretirement
Pension Benefit Plans Benefit Plans
------------------------------- -------------------------
Years Ended December 31, 1998 1997 1996 1998 1997 1996
- - -------------------------------------------------------------------------------------
(In Thousands)
Service cost............ $ 24,852 $ 21,374 $ 23,741 $10,021 $ 9,901 $11,940
Interest cost........... 69,320 68,635 67,426 23,714 25,854 26,450
Expected return on
assets................. (131,640) (118,671) (108,753) (4,413) (2,859) (645)
Prior service cost
amortization........... 965 1,125 1,128 (406) (408) (406)
Actuarial (gain) loss... (11,315) (10,402) (3,545) 206 271 2,689
Transition obligation
amortization........... (7,042) (7,929) (7,789) 11,302 11,418 11,801
Curtailment and special
termination benefits... (1,658) -- 3,644 (215) -- 1,292
Special voluntary
retirement programs.... 800 800 800 -- -- --
--------- --------- --------- ------- ------- -------
Net periodic benefit
cost (credit).......... $ (55,718) $ (45,068) $ (23,348) $40,209 $44,177 $53,121
========= ========= ========= ======= ======= =======
- - -------------------------------------------------------------------------------------
For measurement purposes, a 6.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 4% for 2003 and remain at that level
thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the postretirement health care plans. A 1% change in the
assumed health care cost trend rate would have the following effects on 1998
service and interest cost and the accumulated postretirement benefit
obligation at December 31, 1998:
- - -------------------------------------------------------------------------------
1% Increase 1% Decrease
- - -------------------------------------------------------------------------------
(In Thousands)
Effect on aggregate service and interest cost
components of net
periodic cost......................................... $ 4,014 $ (3,587)
Effect on the health care component of the accumulated
postretirement benefit obligation..................... $28,564 $(25,247)
- - -------------------------------------------------------------------------------
36
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8.INCOME TAXES
"Income taxes" in the Consolidated Statement of Income include the following:
- - -------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- - -------------------------------------------------------------------------------
(In Thousands)
Income tax expense attributable to continuing
operations:
Current provision
Federal........................................ $ 96,295 $136,095 $ 88,447
State.......................................... 17,624 18,181 13,904
Deferred income taxes-net
Federal........................................ 21,390 4,175 59,619
State.......................................... (3,489) 11 2,546
Investment tax credit........................... (2,171) (2,193) (2,201)
-------- -------- --------
Income tax expense attributable to continuing
operations....................................... 129,649 156,269 162,315
Income tax benefit attributable to discontinued
operations....................................... (25,567) (9,216) (6,485)
-------- -------- --------
Total.......................................... $104,082 $147,053 $155,830
======== ======== ========
- - -------------------------------------------------------------------------------
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
pretax income from continuing operations. The reasons for the differences
follow:
- - -------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- - -------------------------------------------------------------------------------
(In Thousands)
Income before taxes--continuing operations....... $417,360 $475,177 $471,697
======== ======== ========
Computed "expected" tax expense--continuing
operations....................................... $146,076 $166,312 $165,094
Increases (or reductions) in tax resulting from:
Production tax credit........................... (11,351) (10,359) (9,344)
Investment tax credit........................... (2,171) (2,193) (2,201)
State income taxes.............................. 9,188 11,825 10,693
Miscellaneous................................... (12,093) (9,316) (1,927)
-------- -------- --------
Income taxes attributable to continuing
operations...................................... $129,649 $156,269 $162,315
======== ======== ========
Effective tax rate.............................. 31.1% 32.9% 34.4%
- - -------------------------------------------------------------------------------
37
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The current and noncurrent deferred income taxes reported in the
Consolidated Balance Sheet at December 31, 1998 and 1997 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:
- - ----------------------------------------------------------------------------------
1998 1997
---------------------------- ----------------------------
Deferred Deferred Income Deferred Deferred Income
December 31, Income Taxes Taxes-Current Income Taxes Taxes-Current
- - ----------------------------------------------------------------------------------
(In Thousands)
Deferred tax
liabilities:
Excess of tax over book
depreciation.......... $559,430 $ -- $537,684 $ --
Exploration and
intangible well
drilling costs........ 244,832 -- 225,111 --
Unrecovered gas costs.. -- 15,908 -- 19,424
Net pension credits.... 78,212 -- 52,420 --
Other.................. 36,145 -- 25,721 --
-------- -------- -------- -------
Total liabilities..... 918,619 15,908 840,936 19,424
-------- -------- -------- -------
Deferred tax assets:
Tax basis step-up in
connection with
acquisition of
subsidiary............ 18,096 -- 18,619 --
Deferred investment tax
credits............... 14,443 -- 15,854 --
Overheads capitalized
for tax purposes...... 11,138 -- 8,226 --
Supplier and other
refunds............... -- 18,503 -- 187
Other.................. 94,014 19,191 86,119 5,502
Valuation allowance.... -- -- -- --
-------- -------- -------- -------
Total assets.......... 137,691 37,694 128,818 5,689
-------- -------- -------- -------
Total deferred tax
liability (asset).... $780,928 $(21,786) $712,118 $13,735
======== ======== ======== =======
- - ----------------------------------------------------------------------------------
A regulatory liability amounting to $27.2 million has been recorded at
December 31, 1998 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 $102.8 million has been recorded at December 31, 1998.
9.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 1998, the current cost of replacing the inventory of "Gas
stored--current portion" exceeded the amount stated on a LIFO basis by
approximately $171.3 million at December 31, 1998. Virginia Natural Gas and
CNG Retail 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
amount of $126.4 million at December 31, 1998 and 1997.
38
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:
- - ------------------------------------------------------------------------------------------------------------------------
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)
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 7).... -- -- -- -- -- 116 -- -- --
------ -------- -------- ------- -------- ---------- -------- ------ ---------
Balance at December 31,
1996................... 94,934 261,068 496,722 40,280 537,002 1,424,624 (17,542) -- --
Net income.............. -- -- -- -- -- 304,380 -- -- --
Cash dividends declared
Common stock ($1.94 per
share)................ -- -- -- -- -- (184,942) -- -- --
Common stock issued
Stock options.......... 612 1,683 23,615 -- 23,615 -- -- -- --
DRP*................... 62 171 3,244 -- 3,244 -- -- -- --
Stock awards-net....... 25 69 1,318 -- 1,318 -- (1,350) -- --
Conversion of
debentures............ 1 2 38 -- 38 -- -- -- --
Performance shares-net. (11) (29) (106) -- (106) -- 135 -- --
Amortization and
adjustment............ -- -- 1,490 -- 1,490 -- 7,807 -- --
Purchase of treasury
stock.................. -- -- -- -- -- -- -- (220) (12,286)
Sale of treasury stock
and other.............. -- -- 154 -- 154 -- -- 219 12,248
Pension liability
adjustment (Note 7).... -- -- -- -- -- (309) -- -- --
Cumulative translation
adjustment............. -- -- -- -- -- (4,166) -- -- --
------ -------- -------- ------- -------- ---------- -------- ------ ---------
Balance at December 31,
1997................... 95,623 262,964 526,475 40,280 566,755 1,539,587 (10,950) (1) (38)
Net income.............. -- -- -- -- -- 238,766 -- -- --
Cash dividends declared
Common stock ($1.94 per
share)................ -- -- -- -- -- (185,758) -- -- --
Common stock issued
Stock options.......... 282 777 11,548 -- 11,548 -- -- -- --
Stock awards-net....... 32 86 1,364 -- 1,364 -- (1,283) -- --
Performance shares-net. 8 21 402 -- 402 -- (423) -- --
Amortization and
adjustment............ -- -- (2,393) -- (2,393) -- 11,321 -- --
Purchase of treasury
stock.................. -- -- -- -- -- -- -- (5,081) (280,326)
Sale of treasury stock
and other.............. -- -- (3,863) -- (3,863) -- (61) 2,949 163,290
Conversion of
debentures............. -- -- (1,841) -- (1,841) -- -- 1,638 90,715
Pension liability
adjustment (Note 7).... -- -- -- -- -- 60 -- -- --
Cumulative translation
adjustment............. -- -- -- -- -- (1,112) -- -- --
------ -------- -------- ------- -------- ---------- -------- ------ ---------
Balance at December 31,
1998................... 95,945 $263,848 $531,692 $40,280 $571,972 $1,591,543 $ (1,396) (495) $ (26,359)
====== ======== ======== ======= ======== ========== ======== ====== =========
- - ------------------------------------------------------------------------------------------------------------------------
*Dividend Reinvestment Plan.
39
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. 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, 1998, 304,055,449 shares of common stock were unissued. Shares
have been registered with the SEC for possible issuance under various benefit
plans or to shareholders under the Dividend Reinvestment Plan. Shares acquired
pursuant to these plans can consist of original issue shares, treasury shares
or shares purchased in the open market. In addition, at December 31, 1998, the
Company has a shelf registration with the SEC which would allow it to sell up
to an additional $338.3 million of debt or equity securities.
Treasury Stock
Under a plan approved by the Board of Directors, the Company can purchase in
the open market up to 10,000,000 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." At
December 31, 1998 and 1997, a total of 495,123 and 659 shares, respectively,
were being held as treasury stock.
Pre-1997 Stock Award and Option Plans
Prior to 1997, stock awards, stock options and other stock-based awards were
granted to employees under the Long-Term Incentive Plan, the 1991 Stock
Incentive Plan (1991 Plan) and the 1995 Employee Stock Incentive Plan (1995
Plan). The Long-Term Incentive Plan terminated by its terms on November 9,
1991. In addition, there were no shares authorized for issuance under either
the 1991 Plan or the 1995 Plan at December 31, 1998. However, the provisions
of these plans continue with respect to stock awards granted whose
restrictions have not yet lapsed and stock options granted which have not been
exercised at December 31, 1998.
1997 Stock Incentive Plan
The 1997 Stock Incentive Plan (1997 Plan) provides for the granting of stock
awards, stock options and other stock-based awards to employees and directors
of the Company effective January 1, 1997, including grants made on or after
that date pursuant to the Long-Term Strategic Incentive Program described
below. The maximum number of shares authorized for issuance in each calendar
year is determined in accordance with a formula contained in the 1997 Plan. At
December 31, 1998, 6,235,017 shares were authorized for issuance under the
1997 Plan.
40
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. These options, other than tri-annual options granted under the
Long-Term Strategic Incentive Program, generally are exercisable in four equal
annual installments commencing with the second anniversary of the grant and
expire after 10 years from the date of grant.
The granting of stock awards constitutes a non-cash financing activity of
the Company.
Long-Term Strategic Incentive Program
Grants under the Long-Term Strategic Incentive Program, consisting of
performance restricted stock awards (performance shares or performance stock
credits) and stock options, are expected to be made every three years, with
the first such grants made on January 2, 1996.
Performance shares will vest contingent upon attainment of certain
strategic business results over a three-year period. The market value of the
performance shares on the grant date, as adjusted quarterly for changes in the
current market price of the Company's common stock, is recorded as
compensation expense over the three-year vesting period.
Stock options granted under this program (tri-annual options) vest after
three years and will be exercisable from the vesting date until ten years from
the grant date if certain strategic business results are attained during the
vesting period. However, the exercise period will be reduced to one day for
all or a portion of the options granted if such results are not achieved. As
the number of options are known and the option price equals the market price
at the grant date, no compensation expense is recognized for these options
under generally accepted accounting principles.
Accounting for Stock Awards and Stock Options
As permitted by generally accepted accounting principles, the Company follows
Accounting Principles Board Opinion No. 25 and related interpretations (APB
No. 25) for accounting for stock-based compensation. The Company granted stock
awards, including performance shares, totaling 54,000 shares in 1998, 98,000
shares in 1997, and 507,000 shares in 1996 with weighted average market prices
per share on award dates of $49.54, $52.53 and $46.19, respectively. The
Company recorded compensation expense of $9.4 million, $9.7 million and $8.7
million for the years ended December 31, 1998, 1997 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.
In addition, performance stock credits equal to 475,400 shares of common
stock were granted January 4, 1999, related to the 1999-2001 performance
period.
41
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of stock option activity for the years ended December 31, 1996
through 1998, follows:
- - --------------------------------------------------------------------------------
Weighted Average
Number Option Price
of Shares Per Share
- - --------------------------------------------------------------------------------
(In Thousands)
Shares under option:
At January 1, 1996............................ 2,948 $41.25
Granted (1)................................... 3,534 $45.53
Exercised..................................... (769) $41.37
Cancelled (1)................................. (196) $43.13
-----
At December 31, 1996.......................... 5,517 $43.90
Granted (2)................................... 885 $54.09
Exercised..................................... (612) $41.33
Cancelled (2)................................. (583) $45.74
-----
At December 31, 1997.......................... 5,207 $45.73
Granted (3)................................... 914 $58.34
Exercised..................................... (309) $41.73
Cancelled (3)................................. (307) $51.32
-----
At December 31, 1998.......................... 5,505 $47.73
=====
(1) Includes 3,006,000 tri-annual options granted and 65,000 tri-annual
options cancelled.
(2) Includes 332,084 tri-annual options granted and 367,883 tri-annual options
cancelled.
(3) Includes 106,750 tri-annual options granted and 96,114 tri-annual options
cancelled.
Options were exercisable for the purchase of 734,741 shares, 599,534 shares
and 673,305 shares at December 31, 1998, 1997 and 1996, respectively.
Effective January 4, 1999, additional options for the purchase of 3,662,000
shares were granted to eligible employees.
- - -------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
at December 31, 1998.
- - -------------------------------------------------------------------------------
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)
$34.75--
$40.00 549 5.48 yrs. $37.06 230 $36.69
$40.01--
$50.00 3,088 6.58 yrs. $44.97 440 $44.93
$50.01--
$59.94 1,868 7.69 yrs. $56.00 65 $50.87
- - ------------------------------------------------------------------------------------------------------
42
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the weighted-average fair value of stock
options granted during 1996 through 1998 and the weighted-average assumptions
used to compute fair values under the Black-Scholes option-pricing model:
- - -------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- - -------------------------------------------------------------------------------
Option fair value......................................... $10.49 $ 8.96 $ 5.84
Assumptions
Dividend yield.......................................... 3.3% 3.6% 4.3%
Expected volatility..................................... 19.8% 16.8% 17.5%
Risk-free interest rate................................. 5.7% 6.4% 5.4%
Expected option life (years)............................ 4.8 4.8 4.9
- - -------------------------------------------------------------------------------
If compensation expense for the Company's stock options granted during 1996
through 1998 had been determined based on the fair value at the grant dates
for such awards, the effect on the Company's net income and EPS for each of
the years would have been as follows:
- - --------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- - --------------------------------------------------------------------------------
Net income (In Millions):
As reported.............................................. $238.8 $304.4 $298.3
Pro forma................................................ $231.7 $298.8 $294.1
Basic EPS:
As reported.............................................. $ 2.52 $ 3.21 $ 3.17
Pro forma................................................ $ 2.44 $ 3.15 $ 3.13
Diluted EPS:
As reported.............................................. $ 2.49 $ 3.15 $ 3.13
Pro forma................................................ $ 2.42 $ 3.10 $ 3.08
- - --------------------------------------------------------------------------------
11.PREFERRED STOCK
The Company's authorized preferred stock consists of 5,000,000 shares at a par
value of $100 each. There were no shares of preferred stock issued or
outstanding at December 31, 1998 or 1997.
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, $493.1 million of consolidated
retained earnings was free from such restrictions at December 31, 1998. The
indenture also imposes dividend limitations on the subsidiaries, but at
December 31, 1998, these limitations did not restrict their ability to pay
dividends to the Company.
43
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13.LONG-TERM DEBT
Long-term debt, excluding current maturities, follows:
- - --------------------------------------------------------------------------------
December 31, 1998 1997
- - --------------------------------------------------------------------------------
(In Thousands)
Debentures
6%,Due October 15, 2010............................... $ 200,000 $ --
6.8%,Due December 15, 2027............................ 300,000 300,000
6 5/8%, Due December 1, 2008.......................... 150,000 150,000
6 7/8%, Due October 15, 2026.......................... 150,000 150,000
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
8 3/4%, Due October 1, 2019........................... 142,875 150,000
8 3/4%, Due June 1, 1999.............................. -- 100,000
8 5/8%, Due December 1, 2011.......................... -- 15,625
Unamortized debt discount, less premium............... (13,146) (11,319)
Convertible Subordinated Debentures
7 1/4%, Due December 15, 2015......................... -- 246,165
Unamortized debt discount............................. -- (1,581)
9.94% Unsecured loan due January 1, 1999................ -- 4,000
---------- ----------
Total............................................... $1,379,729 $1,552,890
========== ==========
- - --------------------------------------------------------------------------------
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.
The aggregate principal amounts of the Company's debentures maturing in the
years 1999 through 2003 are: $107.1 million; $7.1 million; $7.1 million; $7.1
million and $157.1 million.
In January 1998 the Company called for redemption the entire principal
amount outstanding of its 7 1/4% Convertible Subordinated Debentures, totaling
$246.2 million. These debentures were convertible into shares of the Company's
common stock at an initial conversion price of $54 per share. The redemption
price was 102.18% of the principal amount plus accrued interest payable on
February 23, 1998. In anticipation of the call, in January 1998 the Company
purchased approximately 4.6 million shares of its common stock in a private
transaction to satisfy the potential conversion obligation. The right to
convert expired on February 13, 1998, and approximately 1.6 million of the
acquired shares were issued on conversion. The remaining acquired shares were
sold in two underwritten offerings during February and March, 1998.
In March 1998, CNG International purchased a 33.3% ownership interest in
the Dampier-to-Bunbury Natural Gas Pipeline (DBNGP) in Western Australia from
the Western Australia Government. One of CNG International's partners in the
purchase was El Paso Energy Corporation (El Paso), which also holds a 33.3%
ownership interest. In connection with their investments in DBNGP, CNG
International and El Paso formed DBNGP Finance Company LLC (DBNGP Finance).
DBNGP Finance is owned 50% by CNG International and 50% by EPED Holding
Company, a wholly-owned subsidiary of El Paso. Subsequent to the formation of
DBNGP Finance, the equity ownership interests of CNG International and El Paso
in DBNGP were transferred to this entity.
In October 1998, DBNGP Finance borrowed $250.0 million under a Senior Term
Loan Facility (Term Loan). The Term Loan matures October 2, 2001, can be
extended in one-year increments to October 2, 2003, and bears interest at a
variable rate. Of the gross proceeds received by DBNGP Finance under the
44
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Term Loan, $100.0 million was distributed to CNG International. In connection
with the Term Loan, CNG International entered into an Equity Contribution
Agreement with DBNGP Finance. CNG International is contractually obligated to
make equity contributions to DBNGP Finance equal to the Term Loan proceeds
distributed to CNG International, plus interest on such proceeds, in the event
that DBNGP Finance is unable to service this debt. The Company is
contractually obligated to cause CNG International to make such equity
contributions.
14.SHORT-TERM BORROWINGS
The weighted average interest rate on the Company's commercial paper notes
outstanding at December 31, 1998 and 1997, was 5.22% and 6.21%, respectively.
The Company has a $775.0 million credit agreement with a group of banks.
Borrowings under this agreement 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. This agreement may be used for general corporate
purposes, including the support of commercial paper notes. This agreement is
currently scheduled to expire on June 25, 1999; however, the Company expects
that the agreement will be renewed or replaced by a comparable agreement. A
facility fee is charged under this agreement but is not considered
significant. There were no borrowings under this agreement at December 31,
1998.
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, 1998 and 1997:
- - --------------------------------------------------------------------------------
1998 1997
---------------------
---------------------
Carrying Fair Carrying Fair
December 31, Amount Value Amount Value
- - --------------------------------------------------------------------------------
(In Thousands)
Long-term debt...................... $1,504,000 $1,584,633 $1,719,790 $1,789,577
- - --------------------------------------------------------------------------------
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.
Derivatives and Price Risk Management Activities
The Company's price risk management activities include exchange-traded futures
and options contracts, which can be settled through the purchase or delivery
of commodities, and OTC price swap agreements and options, which require
settlement in cash. These instruments are used to manage commodity price risk
regarding the production, purchase and sale of natural gas and oil and for
stored gas inventories.
Futures Contracts
At December 31, 1998, the Company had natural gas futures contracts related to
gas purchase and sale commitments and gas storage inventory covering 66.8 Bcf
of gas on a net basis maturing through 2001. As these contracts 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 $16.4 million at December 31, 1998.
45
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Swap Agreements
In addition to futures and options contracts, the Company enters into OTC
price swap agreements to manage its exposure to commodity price risk under
existing sales commitments. At December 31, 1998, the Company had swap
agreements of varying duration outstanding with several counterparties to
exchange monthly payments on net notional quantities of gas over the ensuing
five years. Net notional quantities at December 31, 1998 related to those swap
agreements in which the Company pays a fixed price in exchange for a variable
price totaled 166.1 Bcf, while net notional quantities related to agreements
in which the Company pays a variable price in exchange for a fixed price
totaled 125.2 Bcf. 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 swap
agreements was approximately $10.1 million at December 31, 1998. Profits
expected on anticipated sales related to the hedged transactions should
generally offset the estimated unrealized losses on the swap agreements.
Market and Credit Risk
Price risk management activities expose the Company to market risk. Market
risk represents the potential loss that can be caused by the change in market
value of a particular commitment. The Company has appropriate operating
procedures in place that are administered by experienced management to help
ensure that proper internal controls are maintained. In addition, the Company
has established an independent function at the Corporate level to monitor
compliance with the price risk management policies of all subsidiaries.
Price risk management activities also expose the Company to credit risk.
Credit risk represents the potential loss that the Company would incur as a
result of nonperformance by counterparties pursuant to the terms of their
contractual obligations. The Company maintains credit policies with respect to
its counterparties that management believes minimize overall credit risk. Such
policies include the evaluation of a prospective counterparty's financial
condition, collateral requirements where deemed necessary, and the use of
standardized agreements which facilitate the netting of cash flows associated
with a single counterparty. The Company also monitors the financial condition
of existing counterparties on an ongoing basis. Considering the system of
internal controls in place and credit reserve levels at December 31, 1998, the
Company believes it unlikely that a material adverse effect on its financial
position, results of operations or cash flows would occur as a result of
counterparty nonperformance.
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 audits
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
46
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
have been assessed. Pursuant to the Order and Agreement, CNG Transmission
continues to perform sampling, testing and analysis, and conducts 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. The Company has recognized an estimated liability
amounting to $10.0 million at December 31, 1998, 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 has been
recognized amounting to $7.3 million at December 31, 1998. Also, uncontested
claims amounting to $1.5 million at December 31, 1998, 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:
- - --------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- - --------------------------------------------------------------------------------
(In Thousands)
Recurring costs for ongoing operations................ $2,595 $3,430 $4,174
Mandated remediation and other compliance costs....... 3,538 1,473 (419)
Voluntary remediation costs........................... 11 228 2,705
Other................................................. 195 14 3
------ ------ ------
Total............................................... $6,339 $5,145 $6,463
====== ====== ======
- - --------------------------------------------------------------------------------
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 to reduce nitrogen oxide emissions and to acquire
Title V permits for major facilities. Progress is on schedule for these
permits, with no major expenditures anticipated.
The 1990 amendments will also require installation of Maximum Available
Control Technology (MACT) to control the emissions of certain hazardous air
pollutants from compressor engines. The Company cannot estimate what its
expenditures for MACT-related controls will be. However, the mandated controls
will not affect a large number of its compressor engines and the related costs
are not expected to be material.
Additionally, the Company may be required, under an Environmental
Protection Agency nitrogen oxide state implementation program call, to include
additional compressor engines in the control mandates for the 1990 Amendments.
The estimated costs of such federal and/or state imposed hardware additions
are not expected to be material.
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.
47
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Estimates of liability in the environmental area are based on current
environmental laws 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 1996 through 1998 was not material, and future rental
payments required under leases in effect at December 31, 1998, are not
material.
It is estimated that the Company's 1999 capital spending program will
amount to $524.5 million, and that approximately $337.0 million 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.
The Company has claims and suits arising in the ordinary course of business
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.
18.SEGMENT INFORMATION
As indicated in Note 1, in 1998 the Company adopted the provisions of SFAS No.
131. The Company is organized primarily on the basis of products and services
sold in the United States.
The operations of the four retail gas distribution subsidiaries have been
aggregated into the "Distribution" segment. 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. CNG
Transmission also holds a 16% general partnership interest in the Iroquois Gas
Transmission System, L.P., a limited partnership that owns and operates an
interstate natural gas pipeline that transports Canadian gas to utility and
power generation customers in New York and New England. Transmission
operations also include the by-products business of CNG Power.
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.
The activities of CNG International, CNG Field Services, CNG Retail, CNG
Products and Services Company (CNG Products and Services), CNG Power,
Consolidated LNG, CNG Research Company and CNG Coal are included in the
"Other" category. CNG International engages in energy-related activities
outside of the United States and holds equity investments in Australia,
Argentina and Latin America. CNG Retail was established in 1997 to pursue
opportunities arising from the deregulation of the energy industry at the
retail level. CNG Products and Services provides certain energy-related
services to customers of the Company's distribution subsidiaries and others.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies." Transactions between
affiliates are recognized at prices which approximate market value.
Significant transactions between the operating components are eliminated to
reconcile the segment information to consolidated amounts.
48
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents segment information pertaining to the Company's
operations:
- - ------------------------------------------------------------------------------------------------------
Exploration Corporate
and and
Distribution Transmission Production Other Eliminations Total
- - ------------------------------------------------------------------------------------------------------
(In Thousands)
1998
Operating revenues
Nonaffiliated
Regulated gas sales.... $1,372,568 $ -- $ -- $ 1,123 $ -- $1,373,691
Nonregulated gas sales. -- -- 369,736 124,683 -- 494,419
Gas transportation and
storage............... 197,888 347,600 436 9 -- 545,933
Liquid sales........... -- -- 204,030 -- -- 204,030
Other.................. 35,498 54,887 34,042 12,899 5,007 142,333
---------- ---------- ---------- -------- -------- ----------
Total nonaffiliated... 1,605,954 402,487 608,244 138,714 5,007 2,760,406
Affiliated.............. 5,855 100,060 22,860 23,684 (152,459) --
---------- ---------- ---------- -------- -------- ----------
Total operating
revenues............. 1,611,809 502,547 631,104 162,398 (147,452) 2,760,406
Operating expenses
Purchased gas........... 835,222 46,559 39,972 125,223 (146,575) 900,401
Liquids, capacity and
other
products purchased..... -- 24,662 115,397 5,218 -- 145,277
Operation expense....... 311,154 128,701 156,024 25,406 (3,275) 618,010
Maintenance............. 50,579 28,011 9,823 245 1,710 90,368
Depreciation and
amortization........... 75,064 57,343 185,902 6,769 4,835 329,913
Taxes, other than income
taxes.................. 131,575 33,684 7,344 916 5,780 179,299
---------- ---------- ---------- -------- -------- ----------
Operating income
before income taxes.. 208,215 183,587 116,642 (1,379) (9,927) 497,138
---------- ---------- ---------- -------- -------- ----------
Income taxes............ 58,314 60,708 23,117 (300) (12,190) 129,649
Interest revenues....... 703 4,394 1,118 2,379 (5,429) 3,165
Equity in earnings of
equity investees....... -- 8,667 4,791 11,917 -- 25,375
Other revenues-net...... 6,678 1,122 250 1,699 (3,589) 6,160
Interest charges........ 46,847 25,098 21,650 8,249 12,634 114,478
---------- ---------- ---------- -------- -------- ----------
Income from continuing
operations............. $ 110,435 $ 111,964 $ 78,034 $ 6,667 $(19,389) $ 287,711
========== ========== ========== ======== ======== ==========
- - ------------------------------------------------------------------------------------------------------
Other significant non-
cash items:
Pension cost (credit)-
net................... $ (42,529) $ (15,801) $ 1,423 $ 213 $ 198 $ (56,496)
Stock award
amortization.......... $ 1,039 $ 634 $ 1,708 $ 322 $ 3,757 $ 7,460
- - ------------------------------------------------------------------------------------------------------
Investment in equity
investees.............. $ -- $ 36,785 $ 47,834 $210,608 $ -- $ 295,227
Total assets............ $2,946,758 $1,553,518 $1,523,936 $350,258 $(12,570) $6,361,900
Capital expenditures.... $ 146,563 $ 56,748 $ 352,781 $193,118 $ 11,903 $ 761,113
- - ------------------------------------------------------------------------------------------------------
49
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- - --------------------------------------------------------------------------------------------------
Exploration Corporate
and and
Distribution Transmission Production Other Eliminations Total
- - --------------------------------------------------------------------------------------------------
(In Thousands)
1997
Operating revenues
Nonaffiliated
Regulated gas sales.... $1,844,221 $ -- $ -- $ 6,780 $ -- $1,851,001
Nonregulated gas sales. -- -- 396,282 37,101 -- 433,383
Gas transportation and
storage............... 153,904 337,475 701 -- -- 492,080
Liquid sales........... -- -- 275,902 -- -- 275,902
Other.................. 24,577 60,639 27,287 5,787 6,454 124,744
---------- ---------- ---------- -------- --------- ----------
Total nonaffiliated... 2,022,702 398,114 700,172 49,668 6,454 3,177,110
Affiliated.............. 3,859 101,179 5,508 12,962 (123,508) --
---------- ---------- ---------- -------- --------- ----------
Total operating
revenues............. 2,026,561 499,293 705,680 62,630 (117,054) 3,177,110
Operating expenses
Purchased gas........... 1,158,721 8,592 31,535 34,817 (119,585) 1,114,080
Liquids, capacity and
other products
purchased.............. -- 53,203 157,101 271 -- 210,575
Operation expense....... 324,150 133,681 166,990 34,056 7,735 666,612
Maintenance............. 50,533 28,426 9,604 47 1,998 90,608
Depreciation and
amortization........... 77,389 62,258 181,356 406 3,229 324,638
Impairment of gas and
oil producing
properties............. -- -- 10,351 -- -- 10,351
Taxes, other than income
taxes.................. 149,198 32,263 5,917 347 5,859 193,584
---------- ---------- ---------- -------- --------- ----------
Operating income
before income taxes.. 266,570 180,870 142,826 (7,314) (16,290) 566,662
---------- ---------- ---------- -------- --------- ----------
Income taxes............ 74,699 64,512 31,686 (2,940) (11,688) 156,269
Interest revenues....... 1,172 2,011 1,330 2,322 (5,172) 1,663
Equity in earnings of
equity investees....... -- 8,929 3,275 5,462 -- 17,666
Other revenues-net...... (2,152) (86) 217 (6,996) 2,130 (6,887)
Interest charges........ 48,419 24,051 22,372 1,983 7,102 103,927
---------- ---------- ---------- -------- --------- ----------
Income from continuing
operations............. $ 142,472 $ 103,161 $ 93,590 $ (5,569) $ (14,746) $ 318,908
========== ========== ========== ======== ========= ==========
- - --------------------------------------------------------------------------------------------------
Other significant non-
cash items:
Impairment of gas and
oil producing
properties............ $ -- $ -- $ 10,351 $ -- $ -- $ 10,351
Pension cost (credit)-
net................... $ (33,335) $ (12,819) $ 1,257 $ 81 $ (1,195) $ (46,011)
Stock award
amortization.......... $ 1,201 $ 836 $ 1,847 $ 279 $ 4,046 $ 8,209
- - --------------------------------------------------------------------------------------------------
Investment in equity
investees.............. $ -- $ 34,518 $ 38,558 $143,122 $ -- $ 216,198
Total assets............ $2,879,312 $1,501,640 $1,360,068 $827,497 $(254,823) $6,313,694
Capital expenditures.... $ 147,213 $ 49,300 $ 299,897 $ 95,801 $ 10,906 $ 603,117
- - --------------------------------------------------------------------------------------------------
50
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- - --------------------------------------------------------------------------------------------------
Exploration Corporate
and and
Distribution Transmission Production Other Eliminations Total
- - --------------------------------------------------------------------------------------------------
(In Thousands)
1996
Operating revenues
Nonaffiliated
Regulated gas sales.... $1,746,650 $ -- $ -- $ 7,017 $ -- $1,753,667
Nonregulated gas sales. -- -- 396,104 -- -- 396,104
Gas transportation and
storage............... 132,486 346,570 532 -- -- 479,588
Liquid sales........... -- -- 202,907 -- -- 202,907
Other.................. 26,377 65,713 26,456 1,878 2,768 123,192
---------- ---------- ---------- -------- --------- ----------
Total nonaffiliated... 1,905,513 412,283 625,999 8,895 2,768 2,955,458
Affiliated.............. (1) 104,891 6,288 13,299 (124,477) --
---------- ---------- ---------- -------- --------- ----------
Total operating
revenues............. 1,905,512 517,174 632,287 22,194 (121,709) 2,955,458
Operating expenses
Purchased gas........... 1,025,186 7,421 51,691 -- (121,081) 963,217
Liquids, capacity and
other products
purchased.............. -- 63,599 115,708 -- -- 179,307
Operation expense....... 352,706 142,265 147,851 22,369 2,063 667,254
Maintenance............. 53,774 24,494 10,791 11 997 90,067
Depreciation and
amortization........... 74,132 60,394 165,715 154 2,488 302,883
Taxes, other than income
taxes.................. 141,293 37,403 7,299 545 4,143 190,683
---------- ---------- ---------- -------- --------- ----------
Operating income
before income taxes.. 258,421 181,598 133,232 (885) (10,319) 562,047
---------- ---------- ---------- -------- --------- ----------
Income taxes............ 76,334 63,105 34,609 1,760 (13,493) 162,315
Interest revenues....... 1,051 4,244 4,359 2,073 (9,703) 2,024
Equity in earnings of
equity investees....... -- 7,199 1,967 3,792 -- 12,958
Other revenues-net...... (503) 177 125 53 (5,859) (6,007)
Interest charges........ 44,853 23,962 20,130 1,842 8,538 99,325
---------- ---------- ---------- -------- --------- ----------
Income from continuing
operations............. $ 137,782 $ 106,151 $ 84,944 $ 1,431 $ (20,926) $ 309,382
========== ========== ========== ======== ========= ==========
- - --------------------------------------------------------------------------------------------------
Other significant non-
cash items:
Pension cost (credit)-
net................... $ (19,142) $ (6,494) $ 1,900 $ -- $ (581) $ (24,317)
Stock award
amortization.......... $ 876 $ 546 $ 1,225 $ -- $ 5,127 $ 7,774
- - --------------------------------------------------------------------------------------------------
Investment in equity
investees.............. $ -- $ 34,389 $ 31,460 $ 72,820 $ -- $ 138,669
Total assets............ $2,900,620 $1,496,976 $1,264,453 $519,861 $(181,305) $6,000,605
Capital expenditures.... $ 143,050 $ 85,904 $ 271,392 $ 48,570 $ 6,135 $ 555,051
- - --------------------------------------------------------------------------------------------------
51
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19.SUBSEQUENT EVENT
On February 22, 1999, the Company and Dominion Resources, Inc. (DRI) announced
that a definitive merger agreement (merger agreement) was approved by the
boards of directors of both companies. Under the terms of the merger
agreement, DRI intends to acquire all of the Company's shares of common stock
in a stock-for-stock transaction. Pursuant to the merger agreement, each share
of the Company's common stock will be converted into 1.52 shares of DRI common
stock. The transaction is conditioned, among other things, upon approvals of
shareholders of both companies, opinions of independent accountants that the
transaction will be treated as a pooling of interests for accounting purposes,
approvals of various federal regulatory agencies and the completion of
regulatory processes in states where the combined company will operate. DRI is
a holding company with businesses in regulated and competitive electric power,
natural gas and oil development and selected financial services. DRI's
principal business subsidiary is Virginia Electric and Power Company, a
regulated public utility engaged in the generation, transmission, distribution
and sale of electric energy in Virginia and northeastern North Carolina.
20.SUPPLEMENTARY FINANCIAL INFORMATION--UNAUDITED
(A)Gas and Oil Producing Activities (Excluding Cost-of-Service Rate-Regulated
Activities)
The following disclosures exclude the Company's gas producing activities
subject to cost-of-service rate regulation. Certain disclosures about these
activities are included under "Cost-of-Service Properties" in this Note (A).
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:
- - -------------------------------------------------------------------------------
December 31, 1998 1997
- - -------------------------------------------------------------------------------
(In Thousands)
Capitalized costs of
Proved properties....................................... $3,594,042 $3,293,851
Unproved properties..................................... 389,977 328,174
---------- ----------
Subtotal............................................... 3,984,019 3,622,025
---------- ----------
Accumulated depreciation of
Proved properties....................................... 2,542,026 2,367,105
Unproved properties..................................... 160,222 146,417
---------- ----------
Subtotal............................................... 2,702,248 2,513,522
---------- ----------
Net capitalized costs.................................. $1,281,771 $1,108,503
========== ==========
- - -------------------------------------------------------------------------------
As described in Note 5, the Company recognized an impairment of its
Canadian oil producing properties at December 31, 1997. The non-cash charge
amounted to $10.4 million and is reflected in the amounts included above.
52
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total Costs Incurred
The following costs were incurred by subsidiaries in their gas and oil
producing activities during the years 1996 through 1998:
- - -------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- - -------------------------------------------------------------------------------
(In Thousands)
Property acquisition costs
Proved properties.................................. $ 20,597 $ 14,142 $ 42,880
Unproved properties................................ 29,512 43,951 17,911
-------- -------- --------
Subtotal.......................................... 50,109 58,093 60,791
Exploration costs................................... 115,429 101,891 49,622
Development costs................................... 176,220 118,746 125,139
-------- -------- --------
Total............................................. $341,758 $278,730 $235,552
======== ======== ========
- - -------------------------------------------------------------------------------
Results of Operations
The Company cautions that the following standardized disclosures required by
the FASB 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.
- - -------------------------------------------------------------------------------
Years Ended December 31, 1998 1997* 1996*
- - -------------------------------------------------------------------------------
(In Thousands)
Revenues (net of royalties) from:
Sales to nonaffiliated companies................... $357,729 $403,233 $360,973
Transfers to other operations...................... 24,785 7,973 13,158
-------- -------- --------
Total............................................. 382,514 411,206 374,131
-------- -------- --------
Less:Production (lifting) costs..................... 62,937 65,286 55,679
Depreciation and amortization.................... 176,587 172,046 157,358
Impairment of producing properties............... -- 10,351 --
Income tax expense............................... 40,977 48,987 49,367
-------- -------- --------
Results of operations............................... $102,013 $114,536 $111,727
======== ======== ========
*Certain amounts reclassified to reflect discontinued operations.
- - -------------------------------------------------------------------------------
53
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 1996 through 1998, and changes
in the reserves during those years, are shown in the two schedules which
follow:
- - -------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- - --------------------------------------------------------------------------------
(In Bcf)
Proved developed and undeveloped reserves*--Gas
At January 1............................................. 1,141 1,040 985
Changes in reserves
Extensions, discoveries and other additions............. 214 210 124
Revisions of previous estimates......................... 70 31 5
Production.............................................. (155) (155) (145)
Purchases of gas in place**............................. 43 29 96
Sales of gas in place................................... -- (14) (25)
----- ----- -----
At December 31........................................... 1,313 1,141 1,040
===== ===== =====
Proved developed reserves*--Gas
At January 1............................................. 925 900 717
At December 31........................................... 1,052 925 900
*Net before royalty.
**Amount for 1998 includes 39 Bcf of reserves transferred by sale to CNG
Producing from an affiliate, Peoples Natural Gas.
- - -------------------------------------------------------------------------------
The preceding proved developed and undeveloped gas reserves at December 31,
1998, 1997 and 1996, include United States reserves of 1,312, 1,140 and 1,039
Bcf which, together with the Canadian reserves and the gas reserves reported
under "Cost-of-Service Properties," are as contained in reports of Ralph E.
Davis Associates, Inc., independent geologists.
- - -------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- - --------------------------------------------------------------------------------
(In Thousand Bbls)
Proved developed and undeveloped reserves*--Oil
At January 1.......................................... 50,627 50,457 45,791
Changes in reserves
Extensions, discoveries and other additions.......... 11,275 4,582 5,976
Revisions of previous estimates...................... 2,960 1,741 2,711
Production........................................... (7,895) (7,312) (4,766)
Purchases of oil in place............................ 107 1,182 804
Sales of oil in place................................ -- (23) (59)
------ ------ ------
At December 31........................................ 57,074 50,627 50,457
====== ====== ======
Proved developed reserves*--Oil
At January 1.......................................... 37,568 24,989 19,838
At December 31........................................ 42,750 37,568 24,989
*Net before royalty.
- - -------------------------------------------------------------------------------
The foregoing proved developed and undeveloped oil reserves at December 31,
1998, 1997 and 1996 include United States reserves of 51,230, 44,160 and
41,818 thousand barrels, respectively. These, together with the Canadian
reserves, are as contained in reports of Ralph E. Davis Associates, Inc.
54
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
- - -------------------------------------------------------------------------------
December 31, 1998 1997 1996
- - -------------------------------------------------------------------------------
(In Thousands)
Future cash inflows........................... $2,562,741 $3,197,532 $4,022,381
Less:Future development and production costs.. 756,352 658,281 711,067
Future income tax expense.................. 482,585 766,233 1,049,234
---------- ---------- ----------
Future net cash flows......................... 1,323,804 1,773,018 2,262,080
Less annual discount (10% a year)............. 435,540 606,509 830,083
---------- ---------- ----------
Standardized measure of discounted future net
cash flows.................................... $ 888,264 $1,166,509 $1,431,997
========== ========== ==========
- - -------------------------------------------------------------------------------
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.
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.
55
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
- - -------------------------------------------------------------------------------
Years Ended December 31, 1998 1997 1996
- - -------------------------------------------------------------------------------
(In Thousands)
Standardized measure of discounted future
net cash flows at January 1............... $1,166,509 $1,431,997 $ 841,743
Changes in the year resulting from
Sales and transfers of gas and oil
produced
during the year, less production costs... (319,577) (345,920) (318,583)
Prices and production and development
costs
related to future production............. (657,675) (660,014) 632,118
Extensions, discoveries and other
additions,
less production and development costs.... 144,595 256,366 295,236
Previously estimated development costs
incurred during the year................. 71,172 38,409 62,706
Revisions of previous quantity estimates.. 38,015 101,352 106,800
Accretion of discount..................... 166,707 209,210 119,555
Income taxes.............................. 180,611 159,528 (306,290)
Purchases and sales of proved reserves in
place-net................................ 35,639 40,815 112,601
Other (principally timing of production).. 62,268 (65,234) (113,889)
---------- ---------- ----------
Standardized measure of discounted future
net cash flows at December 31............. $ 888,264 $1,166,509 $1,431,997
========== ========== ==========
- - -------------------------------------------------------------------------------
Cost-of-Service Properties
As previously stated, activities subject to cost-of-service rate regulation,
consisting solely of gas reserves and related production, are excluded from
the foregoing information. In December 1998, Peoples Natural Gas, a
subsidiary, transferred by sale all of its remaining gas production properties
to CNG Producing, a nonregulated subsidiary. At December 31, 1997, net
capitalized costs of cost-of-service properties amounted to $8.4 million.
Related proved reserves of gas are located in the United States and amounted
to 42 and 43 Bcf at December 31, 1997 and 1996. Gas production for the years
1998, 1997 and 1996 amounted to 2, 3 and 3 Bcf, respectively.
56
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 1998 and 1997
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.
- - -------------------------------------------------------------------------------
Quarter
------------------------------------
First Second Third Fourth
- - -------------------------------------------------------------------------------
(In Thousands)
1998
Total operating revenues................. $999,165 $530,428 $423,448 $807,365
Operating income before income taxes..... $234,850 $ 83,710 $ 25,516 $153,062
Income from continuing operations........ $138,033 $ 46,814 $ 5,627 $ 97,237
Discontinued operations (Note 2)
Loss from discontinued energy marketing
services operations, net of applicable
tax benefit............................ $(17,238) $ -- $ -- $ --
Income (loss) from disposal of energy
marketing services operations,
including provision for operating
losses during the phase out period,
net of applicable tax or tax benefit... $(42,900) $ 10,989 $ 2,425 $ (2,221)
Net income............................... $ 77,895 $ 57,803 $ 8,052 $ 95,016
Earnings per common share--basic*
Income from continuing operations....... $1.48 $.49 $.06 $1.02
Loss from discontinued operations....... (.18) -- -- --
Income (loss) from disposal of
discontinued operations................ (.46) .12 .02 (.02)
-------- -------- -------- --------
Net income............................... $ .84 $.61 $.08 $1.00
======== ======== ======== ========
Earnings per common share--diluted*
Income from continuing operations....... $1.45 $.49 $.06 $1.01
Loss from discontinued operations....... (.18) -- -- --
Income (loss) from disposal of
discontinued operations................ (.45) .11 .02 (.02)
-------- -------- -------- --------
Net income............................... $ .82 $.60 $.08 $ .99
======== ======== ======== ========
- - -------------------------------------------------------------------------------
57
CONSOLIDATED NATURAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
- - -------------------------------------------------------------------------------
Quarter
----------------------------------------
First Second Third Fourth
- - -------------------------------------------------------------------------------
(In Thousands)
1997
Total operating revenues.............. $1,143,768 $629,418 $462,980 $940,944
Operating income before income taxes.. $ 283,358 $ 90,130 $ 33,536 $159,638
Income from continuing operations..... $ 173,028 $ 48,036 $ 8,761 $ 89,083
Discontinued operations (Note 2)
Income (loss) from discontinued
energy marketing services
operations, net of applicable tax or
tax benefit......................... $ (1,537) $ (9,051) $ (4,223) $ 283
Net income............................ $ 171,491 $ 38,985 $ 4,538 $ 89,366
Earnings per common share--basic*
Income from continuing operations.... $1.83 $ .51 $ .09 $.94
Income (loss) from discontinued
operations.......................... (.02) (.10) (.04) --
---------- -------- -------- --------
Net income............................ $1.81 $ .41 $ .05 $.94
========== ======== ======== ========
Earnings per common share--diluted*
Income from continuing operations.... $1.76 $ .50 $ .09 $.92
Income (loss) from discontinued
operations.......................... (.02) (.09) (.04) --
---------- -------- -------- --------
Net income............................ $1.74 $ .41 $ .05 $.92
========== ======== ======== ========
- - -------------------------------------------------------------------------------
*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.
(C)Common Stock Market Prices and Related Matters
At December 31, 1998, there were 33,121 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 1998 and
1997 follow. Restrictions on the payment of dividends are discussed in Note
12.
- - -------------------------------------------------------------------------------
Quarter
---------------------------------------
First Second Third Fourth
- - --------------------------------------------------------------------------------
Market Price Range
1998--High.............................. $60 1/2 $60 1/8 $59 $55 15/16
--Low............................... $53 1/4 $54 15/16 $41 11/16 $50 7/16
1997--High.............................. $57 3/4 $54 7/8 $60 11/16 $60 15/16
--Low............................... $49 5/8 $47 3/8 $53 9/16 $52 5/16
Dividends Declared per Share
1998.................................... $.485 $.485 $.485 $.485
1997.................................... $.485 $.485 $.485 $.485
- - --------------------------------------------------------------------------------
58
PLEASE MARK YOUR
[X] VOTES AS IN THIS
EXAMPLE.
- - --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2 AND 3 AND AGAINST ITEM
4.
- - -------------------------------------------------------------------------------
FOR WITHHELD
1. ELECTION OF [ ] [ ]
DIRECTORS
(SEE REVERSE)
For, except vote withheld from the following nominee(s):
- - -----------------------------------------------
FOR AGAINST ABSTAIN
2. Ratification of [ ] [ ] [ ]
PricewaterhouseCoopers
LLP as Independent
accountants.
FOR AGAINST ABSTAIN
3. Approval of adoption [ ] [ ] [ ]
of Performance
Restricted Stock
Awards.
FOR AGAINST ABSTAIN
4. Adoption of a shareholder- [ ] [ ] [ ]
proposed resolution
regarding bonuses.
- - -------------------------------------------------------------------------------
Change [ ] Attend [ ]
of Meeting
Address
SIGNATURE(S) DATE
----------------------------------- --------------------
NOTE: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such.
- - -------------------------------------------------------------------------------
FOLD AND DETACH HERE. PLEASE VOTE, SIGN, AND RETURN THE ABOVE PROXY OR
VOTE ELECTRONICALLY BY TELEPHONE
CONSOLIDATED NATURAL GAS COMPANY
ANNUAL MEETING OF STOCKHOLDERS
Dear Stockholder,
Consolidated Natural Gas Company encourages you to take advantage of a
convenient way by which you can vote your shares--electronically through the
telephone. This eliminates the need to return the proxy card.
To vote your shares electronically through the telephone:
-On a touch-tone telephone call 1-800-OK2-VOTE (1-800-652-8683)
-24 hours a day, 7 days a week
-Listen to the recording for instructions
-Use the control number printed in the box above to access the system
-Use your phone key pad to vote
Your electronic vote authorizes the named proxies in the same manner as if you
marked, signed, dated and returned the proxy card. If you choose to vote your
shares electronically, there is no need for you to mail back your proxy card.
YOUR VOTE IS IMPORTANT, THANK YOU FOR VOTING.
CONSOLIDATED
CNG(R) NATURAL GAS
COMPANY
CONSOLIDATED NATURAL GAS COMPANY
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
FOR THE ANNUAL MEETING OF STOCKHOLDERS APRIL 13, 1999
The undersigned hereby appoints G.A. Davidson, Jr., D.M. Westfall and S.E.
P Williams, and each or any of them, proxies with full power of substitution
R to vote the stock of the undersigned, as directed hereon, at the Annual
O Meeting of Stockholders of CONSOLIDATED NATURAL GAS COMPANY to be held at
X the Sheraton Airport Plaza Hotel, I-85 & Billy Graham Parkway, Charlotte,
Y NC 28208 at 10:00 a.m. (Eastern Time), and at any adjournment thereof, and,
in their discretion, on any other matters that may properly come before the
Meeting.
(change of address)
Election of Directors ---------------------------
---------------------------
Nominees: 1. Raymond E. Galvin ---------------------------
2. Paul E. Lego ---------------------------
3. Margaret A. McKenna (If you have written in the
above space, please mark the
Change of Address Box on the
reverse side of this card.)
PLEASE SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES, SEE REVERSE SIDE.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED IN ACCORDANCE WITH YOUR
INSTRUCTIONS, OR, IF YOU GIVE NO INSTRUCTIONS, THIS PROXY WILL BE VOTED FOR
ITEMS 1, 2 AND 3 AND AGAINST ITEM 4.
-----------
SEE REVERSE
SIDE
-----------
- - --------------------------------------------------------------------------------
FOLD AND DETACH HERE
FEBRUARY 22, 1999
Dear Stockholder:
CNG and First Chicago Trust Company, a division of EquiServe, recently began
offering access to your Stockholder Account through the Internet. Access
instructions and your unique secure password were provided with either your
February dividend check, Dividend Reinvestment Statement, or Electronic Funds
Transfer confirmation. You can also call 1-877-THE-WEB7 (1-877-843-9327) and a
password will be mailed to you.
You may also call First Chicago at anytime toll-free at 1-800-414-6443, customer
service representatives are available between 8:30 a.m. and 7:00 p.m. Eastern
Time. You may also correspond by writing to First Chicago Trust Company, a
division of EquiServe, PO Box 2500, Jersey City, NJ 07023, via the Internet at
http://www.equiserve.com, or via e-mail at fct@em.fcnbd.com.
Sincerely,
/s/ GEORGE A. DAVIDSON, JR.
--------------------------------
George A. Davidson, Jr.
Chairman of the Board and
Chief Executive Officer