CONSOLIDATED NATURAL GAS CO - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE YEAR ENDED DECEMBER 31, 1993

COMMISSION FILE NUMBER 1-3196
_________________

CONSOLIDATED NATURAL GAS COMPANY
A DELAWARE CORPORATION
CNG TOWER, 625 LIBERTY AVENUE, PITTSBURGH, PA 15222-3199
TELEPHONE (412) 227-1000
IRS EMPLOYER IDENTIFICATION NUMBER 13-0596475
_________________

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

Common Stock: Registered:

$2.75 Par Value New York Stock Exchange

Debentures:
6 5/8% Debentures Due December 1, 2013 New York Stock Exchange
5 3/4% Debentures Due August 1, 2003 New York Stock Exchange
5 7/8% Debentures Due October 1, 1998 New York Stock Exchange
8 3/4% Debentures Due October 1, 2019 New York Stock Exchange
8 3/4% Debentures Due June 1, 1999 New York Stock Exchange
9 3/8% Debentures Due February 1, 1997 New York Stock Exchange
8 5/8% Debentures Due December 1, 2011 New York Stock Exchange

Convertible Subordinated Debentures:
7 1/4% Convertible Subordinated Debentures
Due December 15, 2015 New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
_________________

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ___x____

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes __x__ No _____

The aggregate market value of the voting stock held by non-affiliates of the
registrant amounted to $4,270,115,002 as of January 31, 1994. It was assumed
in this calculation that the registrant's affiliates are all of its directors
and/or officers, and they beneficially owned 109,953 shares of voting stock at
that date.

Number of shares of Common Stock, $2.75 Par Value, outstanding at January 31,
1994: 92,938,540.

The registrant's "Notice of Annual Meeting and Proxy Statement, 1994" is hereby
incorporated by reference into Part III of this Form 10-K.

CONSOLIDATED NATURAL GAS COMPANY
FORM 10-K ANNUAL REPORT
For the Year Ended December 31, 1993

TABLE OF CONTENTS
PART I Page

ITEM 1. BUSINESS
The Company and its Subsidiaries . . . . . . 1
Governmental Regulation . . . . . . . . . 3
Capital Expenditures . . . . . . . . . . 3
Competitive Conditions . . . . . . . . . 4
Gas Supply . . . . . . . . . . . . . 7
Gas Sales and Transportation . . . . . . . 11
Gas Sales, Supply and Transportation Statistics . 13
Market Expansion . . . . . . . . . . . 14
Rate Matters. . . . . . . . . . . . . 16
Executive Officers of the Company. . . . . . 18
ITEM 2. PROPERTIES
General Information on Facilities. . . . . . 19
Map - Principal Facilities . . . . . . . . 20
Map - Exploration and Production Areas . . . . 21
Gas and Oil Producing Activities . . . . . . 22
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . 25
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. . . . . . 88

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. . 88
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . 88
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . 88
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . 88

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K. . . . . . . . . . . . . . 88

SIGNATURES . . . . . . . . . . . . . . . . . 92

CONSOLIDATED NATURAL GAS COMPANY
FORM 10-K ANNUAL REPORT
For the Year Ended December 31, 1993

PART I
ITEM 1. BUSINESS

THE COMPANY AND ITS SUBSIDIARIES

Consolidated Natural Gas Company is a Delaware corporation organized on July
21, 1942, and a public utility holding company registered under the Public
Utility Holding Company Act of 1935. It is engaged solely in the business of
owning and holding all of the outstanding equity securities of sixteen directly
owned subsidiary companies.

Consolidated Natural Gas Company and its subsidiaries ("Consolidated" or the
"Company") at December 31, 1993, are listed below. The subsidiary companies
are engaged in, and their total operating revenues are derived from, all phases
of the natural gas business -- exploration, production, purchasing, gathering,
transmission, storage, distribution, and marketing, together with by-product
operations (see Note 2 to the Financial Statements, page 57). At December 31,
1993, Consolidated had 7,625 regular employees.

_______________________________________________________________________________
__________________

State of
Name of Company
Incorporation
_______________________________________________________________________________
__________________

CONSOLIDATED NATURAL GAS COMPANY ("Parent Company") . . . . . . . . .
Delaware
All wholly owned subsidiaries of the Parent Company:
Consolidated Natural Gas Service Company, Inc. ("Service Company") . . .
Delaware
CNG Transmission Corporation ("CNG Transmission") . . . . . . . . .
Delaware
The East Ohio Gas Company ("East Ohio Gas") . . . . . . . . . . .
Ohio
The Peoples Natural Gas Company ("Peoples Natural Gas") . . . . . . .
Pennsylvania
Virginia Natural Gas, Inc. ("Virginia Natural Gas") . . . . . . . .
Virginia
Hope Gas, Inc. ("Hope Gas") . . . . . . . . . . . . . . . .
West Virginia
West Ohio Gas Company ("West Ohio Gas") . . . . . . . . . . . .
Ohio
The River Gas Company ("River Gas"). . . . . . . . . . . . . .
West Virginia
CNG Producing Company ("CNG Producing") . . . . . . . . . . . .
Delaware
CNG Energy Company ("CNG Energy") . . . . . . . . . . . . . .
Delaware
CNG Gas Services Corporation ("CNG Gas Services") . . . . . . . . .
Delaware
CNG Storage Service Company ("CNG Storage") . . . . . . . . . . .
Delaware
Consolidated System LNG Company ("Consolidated LNG") . . . . . . . .
Delaware
CNG Research Company ("CNG Research") . . . . . . . . . . . . .
Delaware
CNG Coal Company ("CNG Coal"). . . . . . . . . . . . . . . .
Delaware
CNG Financial Services, Inc. ("CNG Financial") . . . . . . . . . .
Delaware
_______________________________________________________________________________
__________________

The principal cities served at retail by Consolidated's gas distribution
subsidiaries (East Ohio Gas, River Gas, West Ohio Gas, Peoples Natural Gas,
Virginia Natural Gas and Hope Gas) are: Cleveland, Akron, Youngstown, Canton,
Warren, Lima, Ashtabula and Marietta in Ohio; Pittsburgh (a portion), Altoona
and Johnstown in Pennsylvania; Norfolk, Newport News, Virginia Beach,
Chesapeake, Hampton and Williamsburg in Virginia; and Clarksburg and
Parkersburg in West Virginia. At December 31, 1993, Consolidated served at
retail approximately 1,777,000 residential, commercial and industrial gas sales
customers in Ohio, Pennsylvania, Virginia and West Virginia. With 98 percent
of their residential and commercial customers using gas for space heating,
variations in weather conditions can materially affect the volume of gas
delivered by the distribution subsidiaries of the Company.

1

ITEM 1. BUSINESS (Continued)

CNG Transmission is the Company's interstate gas transmission subsidiary. CNG
Transmission operates a regional interstate pipeline system serving each of the
Company's distribution subsidiaries, and nonaffiliated utility and end-user
customers in the Midwest, the Mid-Atlantic states and the Northeast.
Regulatory efforts intended to increase competition in the natural gas industry
have resulted in significant changes in the operations of CNG Transmission over
the past several years. Under the most recent regulatory initiative, Federal
Energy Regulatory Commission ("FERC") Order 636, interstate pipeline companies,
including CNG Transmission, were required to revise customer contracts and
service tariffs and further "unbundle" their services into separate sales,
transportation and storage transactions, with such services offered and priced
separately. CNG Transmission implemented FERC Order 636 on October 1, 1993
(see "FERC Order 636," page 39) and thereby abandoned its traditional "bundled"
sales service. CNG Transmission now offers a number of gas transportation and
storage service options, along with related services, to a broad range of
customers. Because a substantial part of its gas deliveries is ultimately used
by space-heating customers, variations in weather conditions can materially
affect the volume of gas transported and stored by CNG Transmission.

Through its wholly owned subsidiary, CNG Iroquois, Inc., CNG Transmission holds
a 9.4 percent general partnership interest in the Iroquois Gas Transmission
System, L.P., a Delaware limited partnership formed to construct, own and
operate an interstate natural gas pipeline extending from the Canada-United
States border near Iroquois, Ontario, to Long Island, New York. The Iroquois
pipeline transports Canadian gas to utility and power generation customers in
metropolitan New York and New England.

CNG Producing is Consolidated's exploration and production subsidiary. Gas and
oil exploration and production activities are conducted by this subsidiary
primarily in the Gulf of Mexico, the southern and western United States, the
Appalachian region, and in Canada. In addition, CNG Producing participates in
coalbed methane projects throughout the United States.

CNG Energy develops new business opportunities for the Company in energy-re-
lated markets. It invests in and develops independent power producer projects
and conducts a gas liquids business.

CNG Gas Services (formerly CNG Trading Company) is Consolidated's unregulated
gas marketing subsidiary. CNG Gas Services markets a portion of Company-owned
production and, during 1993, began offering the equivalent of the "bundled"
services previously provided by CNG Transmission. CNG Gas Services offers an
array of gas sales, transportation, storage and other services that can be
arranged separately or in various combinations to meet the individual needs of
customers in the post-Order 636 environment.

CNG Storage was formed to engage in providing natural gas storage facilities
and a wide range of storage-related services to affiliates and other customers,
including the sale or lease of base gas, and the sale, lease or brokerage of
gas storage capacity obtained from third parties.

Consolidated LNG was organized to import and regasify liquefied natural gas
("LNG") for sale to CNG Transmission. However, Consolidated LNG has ended its
involvement in LNG operations and is currently recovering its undepreciated
investment in LNG-related facilities, plus carrying charges and taxes, through
a FERC approved amortization surcharge.

CNG Research administers the Company's proprietary research activities.
Amounts spent on research activities in the calendar years 1991 through 1993 by
all of the subsidiary companies were not material.

CNG Coal owns Consolidated's coal reserves and a related plant site. The
Company's recoverable raw coal reserves are approximately 615 million tons, as
estimated by John T. Boyd Company, Mining and Geological Engineers. Most of
these coal reserves are located in Greene County, Pennsylvania, principally in
the Sewickley and Pittsburgh coal seams. The Company has various options under
review with respect to these properties.

2

ITEM 1. BUSINESS (Continued)

Service Company is a subsidiary service company, authorized by the Securities
and Exchange Commission ("SEC") under the Public Utility Holding Company Act of
1935 ("PUHCA"). It advises and assists the other subsidiary companies on
administrative and technical matters and manages centralized activities and
facilities for their benefit. It also provides services to the Parent Company.

CNG Financial was formed to engage in certain financing transactions, but has
not yet engaged in any such transactions.

GOVERNMENTAL REGULATION

The Company and its subsidiaries are subject to regulation by the SEC pursuant
to the PUHCA.

CNG Transmission and Consolidated LNG are "natural-gas companies" subject to
the Natural Gas Act of 1938, as amended. Their sales in interstate commerce
for resale and interstate transportation and storage activities are regulated
under such Act and are made in accordance with gas tariffs and service
agreements on file with the FERC. The distribution subsidiaries of the Company
are subject to regulation by the respective utility commissions in the states
within which they operate.

Certain subsidiaries are subject to various provisions of the five statutes
which are referred to as the National Energy Act of 1978. One of these
statutes, the Natural Gas Policy Act of 1978 ("NGPA"), established maximum
lawful wellhead prices for various categories of natural gas and provided for
decontrol of certain natural gas prices at various times. However, the
Decontrol Act of 1989 effected the total decontrol of natural gas wellhead
prices on January 1, 1993. Another statute, the National Energy Conservation
Policy Act, requires utilities to offer home energy audits and other assistance
to residential customers.

The Natural Gas Pipeline Safety Act of 1968 (which, among other things, author-
izes the establishment and enforcement of federal pipeline safety standards)
subjects the interstate pipeline of CNG Transmission to the safety jurisdiction
of the Department of Transportation. Intrastate facilities remain within the
safety jurisdiction of the state regulatory agencies, presuming compliance by
such agencies with certain prerequisites contained in such Act.

Consolidated is subject to the provisions of various federal laws dealing with
the protection of the environment. In addition, the subsidiary companies are
subject to the environmental laws and regulations of state and local
governmental authorities in the areas within which the subsidiaries have
operations or facilities. Reference is made to "Environmental Matters" on page
42, and to Notes 15 and 16 to the Financial Statements, for additional
information on environmental-related matters. (See "LEGAL PROCEEDINGS," page
25.)

CAPITAL EXPENDITURES

Consolidated's current capital budget for 1994 is estimated at $439.6 million,
a 28 percent increase over the $342.6 million spent in 1993. The 1994 budget
reflects increased projected expenditures for all of the Company's major
business components.

Expenditures for the exploration and production operations are estimated to be
$153.0 million in 1994, up from $110.7 million in 1993. The higher amount in
1994 includes funds for development of the "Popeye" deep-water project in the
Gulf of Mexico, and provides for an increased level of exploratory drilling.
Distribution operations spending in 1994 is expected to be $141.8 million,
compared with $115.4 million in 1993. The increased level of spending will
allow for continued growth, as well as improvements in the gas distribution
system and related facilities. Although the multi-year expansion program of
the transmission operations is substantially complete, the Company continues to
make

3

ITEM 1. BUSINESS (Continued)

enhancements to its pipeline network to better serve customers. Transmission
expenditures in 1994 are budgeted at $124.4 million, up from $113.4 million
spent in 1993. The 1994 capital budget also includes $17.9 million in
connection with CNG Energy's investment in the Lakewood cogeneration project in
New Jersey.

CNG Transmission and certain of the Company's distribution subsidiaries are
subject to the Federal Clean Air Act and the Federal Clean Air Act Amendments
of 1990 ("1990 amendments") which added significantly to the existing
requirements established by the Federal Clean Air Act. These subsidiaries
operate compressor stations that are covered by the new nitrogen oxide emission
standard established as a result of the 1990 amendments. The Company will have
until May 31, 1995, to comply with the emission standard. The Company expects
that compliance will require significant capital expenditures to modify the
compressor engines along the Company's pipeline system. However, the actual
cost of compliance will be dependent upon the requirements imposed by the
environmental agencies of the states in which the compressor stations are
located. Based on the Company's preliminary estimates and analyses,
approximately $46 million of capital expenditures may be required over the next
two years. The actual amounts required to comply with the 1990 amendments are
expected to be recoverable through future regulatory proceedings.

Consolidated's capital budget will be reviewed during the year in light of
market conditions and is subject to revision. (See "Capital Spending," page
44.)

COMPETITIVE CONDITIONS

Various regulatory and market trends have combined to increase competition for
Consolidated in recent years, and for the gas industry in general. The factors
affecting the Company include regulatory efforts, such as the FERC's various
initiatives to increase competition in the industry; the overall availability
of gas nationwide; competition from local producers and other sellers and
brokers of gas for the retail and wholesale markets; competition with existing
and proposed pipelines, and projects to import gas from Canada and other
foreign countries; and competition with other energy forms, such as
electricity, fuel oil and coal.

RESTRUCTURING OF INTERSTATE PIPELINE INDUSTRY

During 1993, the final portion of the FERC's plan to restructure the interstate
natural gas pipeline industry was set in motion as pipeline companies began
implementing the provisions of FERC Order 636. Similar to previous FERC
actions to enable more direct access to gas supplies and open access to
pipeline transportation systems, Order 636 has significantly increased
competition in the natural gas industry. Order 636 required interstate
pipelines, including CNG Transmission, to "unbundle" their services into
separate sales, transportation and storage services and to offer and price such
services separately. In the restructured marketplace, local gas utilities and
large-volume end-users, including former pipeline sales customers, now bear all
the responsibilities and risks for arranging the procurement of their gas
supplies and contracting with pipelines to transport purchases. Other
significant changes required by Order 636 included a basic change in the way
rates are designed. Under the new rate design, return on equity and related
income taxes are recovered as part of a fixed monthly charge. Previously,
these costs were recovered through usage or commodity rates. As the result of
Order 636, each pipeline company was required to revise its customer contracts
and service tariffs. The Order allows pipelines to recover 100 percent of all
prudently incurred costs resulting from the transition to the new rules. CNG
Transmission implemented FERC Order 636 on October 1, 1993 (see "FERC Order
636," page 39) and thereby abandoned its traditional "bundled" sales service.
CNG Transmission now offers a number of gas transportation and storage service
options, along with related services, to a broad range of customers.

4

ITEM 1. BUSINESS (Continued)

The restructuring of the interstate natural gas pipeline industry has also
affected the distribution subsidiaries. Industrial and large commercial gas
users now purchase a large portion of their gas supplies directly from
producers, from marketers, or on the spot market. The distribution
subsidiaries have, for the most part, however, been able to retain these
customers by providing transportation service for such supplies. The most
significant effect on local distribution companies of Order 636 has been on
their gas supply procurement and storage practices. Since bundled pipeline
sales service is no longer available, these companies now bear all the
responsibilities and risks for arranging the acquisition, delivery and storage
of their own gas supplies. As a result of previous FERC initiatives,
Consolidated's distribution subsidiaries have been managing a part of their own
gas supplies for the last several years. Therefore, the transition to the more
competitive environment under Order 636 did not have a significant impact on
their operations. Additionally, as a result of Order 636, storage facilities
owned and operated by the Company's distribution and transmission operations as
well as storage capacity acquired will be even more important factors in gas
supply management.

Also, as a result of the restructuring, gas producers throughout the industry,
including CNG Producing, now face a more diverse and active market with
purchasers seeking to balance the advantage of lower-cost spot market supplies
with the security of higher-priced, longer-term contracts.

DISTRIBUTION

Consolidated's distribution subsidiaries generally operate in long-established
service areas and have extensive facilities already in place. Growth in the
Company's traditional service areas in Ohio, Pennsylvania and West Virginia is
limited in that natural gas is already the fuel of choice for heating and for
most significant industrial applications. These areas have experienced minimal
population growth in the past, and almost all customers have become more energy
efficient, resulting in lower gas usage per customer. In addition, the
economies of these areas, which were formerly based mainly on heavy industry,
have diversified with increased emphasis on high technology and service
oriented firms.

However, opportunities for growth in the Company's distribution operations are
expected to continue at Virginia Natural Gas. This subsidiary offers the
potential for future growth through its expanding service territory and the
prospect of conversion of space-heating customers and commercial and industrial
applications to gas. The completion in 1992 of the intrastate pipeline in
Virginia has provided Virginia Natural Gas and its customers with new gas
supply sources through access to Consolidated's transmission system and storage
facilities, and has afforded additional opportunities for growth in both gas
sales and transportation, especially in the power generation markets.

The Clean Air Act may also provide opportunities for increased throughput in
the Company's distribution markets. Consolidated is promoting the use of
natural gas as a means for industrial customers and electric generators to
reduce emissions. The Clean Air Act and the more recent Energy Policy Act of
1992 contain a number of provisions relating to the use of alternative fuel
vehicles. Consolidated is participating in various programs to demonstrate the
advantages and environmental benefits of natural gas powered vehicles.

The Company's distribution markets continue to be competitive. As the gas
industry has restructured and government regulations have changed, a
marketplace has evolved with new and traditional competitors -- the usual oil
and electric companies, other gas companies, local producers seeking to gain
direct access to the Company's customers, and gas brokers and dealers seeking
to supplant supplies with spot market gas. Natural gas faces price competition
with other energy forms, and certain of the distribution companies' industrial
customers have the ability to switch to fuel oil or coal if desired. Local
distribution companies operate in what are essentially dual markets -- a
traditional utility market, where a utility has an obligation to provide
service and offers a "bundled" package of services to all

5

ITEM 1. BUSINESS (Continued)

customers; and a "contract" market, where obligations are defined by contract
terms and large customers can elect individually or in various combinations
whatever gas supplies, storage and/or transportation services they require.
Consolidated has responded to this competitive environment by offering an
expanded range of services to its customers. The Company's distribution
subsidiaries now routinely provide a variety of firm and interruptible
services, including gas transportation, storage, supply pooling and balancing,
and brokering, to industrial and commercial customers.

TRANSMISSION

CNG Transmission operates a regional interstate pipeline system with the
principal pipeline and storage facilities located in Ohio, Pennsylvania, West
Virginia and New York. Regulatory efforts intended to increase competition in
the natural gas industry have resulted in significant changes in the operations
of CNG Transmission over the past several years. Beginning with open access
transportation and culminating with the significant service restructuring
required by FERC Order 636, the role of the Company's transmission operations
has changed from primarily that of a merchant, or wholesaler, of gas to one
that provides a wide range of services. Although CNG Transmission no longer
provides its traditional bundled sales service, it continues to offer gas
transportation, storage and related services to its affiliates, as well as to
utilities and end-users in the Northeast, Mid-Atlantic and Mid-West regions of
the country.

The changing regulatory policies have provided CNG Transmission and other
pipeline companies with unique opportunities for expansion. CNG Transmission
has directed its expansion efforts toward potential high-volume, weather-
sensitive markets and areas with growing power generation needs. This
expansion has occurred in many directions, with particular emphasis on
Northeast and East Coast markets. CNG Transmission's large underground storage
capacity and the location of its pipeline system as a link between the
country's major gas pipelines and large markets on the East Coast have been key
factors in the success of these expansion efforts.

CNG Transmission competes with domestic as well as Canadian pipeline companies
and gas marketers seeking to provide or arrange transportation, storage and
other services for customers. Also, certain end users have the ability to
switch to fuel oil or coal if desired. Although competition is based primarily
on price, the range of services that can be provided to customers is also an
important factor. The combination of capacity rights held on certain longline
pipelines, a large storage capability and the availability of numerous receipt
and delivery points along its own pipeline system, enables CNG Transmission to
tailor its services to meet the individual needs of customers.

On October 1, 1993, CNG Transmission implemented Order 636 in accordance with
the terms of a comprehensive settlement reached with customers and others (see
"FERC Order 636," page 39). CNG Transmission's former wholesale sales
customers now have the responsibility and risk inherent in contracting for
their own gas supplies. However, since customers have greater access to the
Company's pipeline and storage capacity, both increased gas transportation and
storage service are expected to help offset the impact of lower gas sales.
Consolidated continues to provide the equivalent of bundled services through
its unregulated marketing subsidiary, CNG Gas Services. This company offers a
range of gas sales, transportation, storage and other service options that can
be arranged separately or in various combinations to meet the individual needs
of customers.

EXPLORATION AND PRODUCTION

Consolidated's exploration and production operations are conducted by CNG
Producing in several of the major gas and oil producing basins in the United
States, both onshore and offshore. In this highly competitive business,
Consolidated competes with a large number of companies ranging in size from
large international oil companies with extensive financial resources to small,
cash flow-driven independent producers.

6

ITEM 1. BUSINESS (Continued)

CNG Producing faces significant competition in the bidding for federal offshore
leases and in obtaining leases and drilling rights for onshore properties.
Since CNG Producing is the operator of a number of properties, it also faces
competition in securing drilling equipment and supplies for exploration and
development. From the production perspective, the marketing of gas and oil is
also highly competitive with price being the most significant factor. When the
economics warrant, Consolidated attempts to sell its gas production under long-
term contracts to customers such as electric power generators and others that
require a secure source of supply. These arrangements generally command a
premium over spot market prices. Further, the implementation by pipeline
companies of the FERC's Order 636 could impact the deliverability of gas
produced due to increased competition for limited downstream pipeline
transportation capacity. In response to the unbundling of sales services
previously offered by pipelines, CNG Producing and CNG Gas Services have taken
actions to expand and diversify the Company's customer base. These
subsidiaries continue to develop new marketing strategies and contracts to
address customer needs for intermediate and long-term gas supplies as well as
other services in the post-Order 636 era.

The exploration for and production of gas and oil is subject to various federal
and state laws and regulations which may, among other things, limit well
drilling activity and volumes produced. Changes in these laws and regulations
can impact Consolidated's exploration and production operations.

GAS SUPPLY

GENERAL INFORMATION

Consolidated's gas supply is obtained from various sources including: purchases
from major and independent producers in the Southwest and Midwest regions;
purchases from local producers in the Appalachian area; purchases from gas
marketers; purchases on the spot market; production from Company-owned wells in
the Appalachian area, the Southwest, and the Midwest; and withdrawals from the
Company's underground storage fields.

Regulatory actions, economic factors, and changes in customers and their
preferences over the past several years have reshaped the Company's gas sales
markets. A significant number of industrial customers and some commercial
customers now purchase a large portion of their gas supplies from producers,
marketers, or on the spot market, and contract with the Company's transmission
and distribution subsidiaries for transportation and other services. Since
these customers are less reliant on the distribution subsidiaries for sales
service, the volume of gas that these subsidiaries must obtain to meet sales
requirements has been reduced. In addition, the implementation of FERC Order
636 by CNG Transmission in effect removed that subsidiary from its merchant
role thereby eliminating its need to purchase gas for resale. The former
merchant service contracted for by wholesale customers was converted to
transportation and storage services in 1993. Since CNG Transmission no longer
provides traditional sales service, its former sales customers, including the
Company's distribution subsidiaries, now have the responsibility and risk for
obtaining their own gas supplies.

Consolidated's available gas supply in 1993 was again in a surplus position --
where available supplies exceed sales requirements. Considering the Company's
large storage capacity, the volumes obtainable under its gas purchase
contracts, Company-owned gas reserves, and assuming the future availability of
spot market gas, the Company believes that supplies will be available to meet
requirements for several years. Gas supply statistics for the past five years
are on page 13.

7

ITEM 1. BUSINESS (Continued)

GAS PURCHASED

Purchased gas volumes were 485.2 billion cubic feet in 1993, representing 75
percent of the Company's total 1993 gas supply of 648.2 billion cubic feet.
Spot market gas purchases were 392.2 billion cubic feet, or about 61 percent of
the total 1993 supply. Volumes purchased under contracts with producers,
primarily in the Appalachian area, totaled 79.4 billion cubic feet, or 12
percent of the 1993 supply. Purchases from pipeline companies were 13.6
billion cubic feet in 1993, or 2 percent of the 1993 supply.

In response to the regulatory and market changes over the past several years,
the Company has been converting its long-term gas purchase contracts with
interstate pipelines to firm transport contracts. As a result of these
contract conversions, gas volumes purchased from the pipeline companies have
declined and have been replaced, in large part, with contracts directly with
producers and lower-cost spot market gas. As pipelines implemented FERC Order
636 in 1993, the Company's remaining long-term purchase contracts with these
companies were converted to firm transportation.

While spot market gas supplies have historically been obtained at lower prices,
the availability of spot market gas supplies to distribution companies can be
severely impacted by sudden swings in supply and demand. The distribution
subsidiaries now must weigh the benefits of generally lower-cost spot market
purchases with the security of longer-term contract arrangements. To ensure a
secure supply in the post-Order 636 market, the Company's distribution
subsidiaries anticipate purchasing a larger portion of their gas supplies
directly from producers on a firm basis. Although the volume of gas obtained
on the spot market by the distribution subsidiaries is expected to decline,
spot market gas will continue to be an important part of the Company's supply
mix, particularly for CNG Gas Services.

Gas purchased from producers and on the spot market is delivered to the
subsidiaries using their firm transport capacity on interstate pipelines. At
December 31, 1993, the subsidiaries had 425 billion cubic feet of firm
transport capacity on upstream pipelines, yielding deliveries of up to 1,174
million cubic feet a day. These upstream pipelines include Tennessee Gas
Pipeline Company, Panhandle Eastern Pipe Line Company, Texas Eastern
Transmission Corporation, ANR Pipeline Company, Texas Gas Transmission
Corporation, Transcontinental Gas Pipe Line Corporation and Columbia Gas
Transmission Corporation.

GAS STORAGE

Consolidated's vast underground storage complex plays an important part in
balancing gas supply with sales demand and is essential to servicing the
Company's large volume of space heating business. The Company operates 26
underground gas storage fields located in Ohio, Pennsylvania, West Virginia and
New York. The Company owns 21 of these storage fields and has joint-ownership
with other companies in 5 of the fields. The total designed capacity of the
storage fields is approximately 885 billion cubic feet. The Company's share of
the total capacity is about 669 billion cubic feet. About one-half of the
total capacity is base gas which remains in the reservoirs at all times to
provide the primary pressure which enables the balance of the gas to be
withdrawn as needed.

CNG Transmission operates 710 billion cubic feet of the total storage capacity
and owns 503 billion cubic feet of the Company's capacity. CNG Transmission
utilizes a large portion of its turnable capacity to provide approximately 252
billion cubic feet of gas storage service for others. This service is provided
to pipelines and utilities whose primary service areas are along the East
Coast. CNG Transmission also provides storage service to affiliates, end-users
and to many of its former wholesale gas sales customers.

8

ITEM 1. BUSINESS (Continued)

Two of the Company's distribution subsidiaries, East Ohio Gas and Peoples
Natural Gas, own and operate the remaining 166 billion cubic feet of storage
capacity. In addition to owning their own storage, these companies, as well as
most of the Company's other subsidiaries have ready access to a part of the
storage capacity operated by CNG Transmission. Certain distribution
subsidiaries also have capacity available in storage fields owned by others.
In the post-Order 636 environment, available storage capacity will be an
important element in the effective management of both gas supply and pipeline
transport capacity.

Consolidated controls other acreage in the Appalachian area suitable for the
development of additional storage facilities which would enable further
expansion of capacity to meet possible future storage needs.

GAS AND OIL PRODUCING ACTIVITIES

Over the past several years, Consolidated's exploration and production
operations have been affected by the generally adverse conditions in the
industry. The effects of persistent warm weather, the lingering gas oversupply
situation, and low gas and oil wellhead prices have all contributed to a
difficult operating environment. Also during this time, the level of capital
spending for exploration and development activities was reduced as a greater
proportion of capital resources was devoted to the Company's pipeline expansion
projects. As a result of these conditions, Consolidated reduced its
exploration and production activities. During 1992, natural gas market
conditions improved as spot market prices rebounded after falling to a low of
about $1.00 per thousand cubic feet in February 1992. The improving conditions
continued in 1993 as gas prices firmed generally above $2.00. Conditions in
oil markets, however, worsened during 1993.

Consolidated's gas wellhead prices in 1993 averaged $2.24 a thousand cubic
feet, up from $2.05 in 1992. Gas wellhead prices were strong throughout most
of 1993 and were above 1992 levels for most of the year. Consolidated's
average gas wellhead prices are generally higher, and less volatile than
industry spot prices since its average price reflects a mix of longer-term
contracts. However, due to market-sensitive contracts, Consolidated's prices
generally follow industry trends. Consolidated's average oil wellhead price in
1993 was $15.66 per barrel, down from $18.15 in 1992. Oil prices were weak
through most of the year and fell sharply near year-end, reflecting the trend
in world prices.

The Company's total gas production in 1993 was 129.5 billion cubic feet, up
from 128.0 billion cubic feet produced in 1992. Oil production was 3.9 million
barrels, down 13 percent from 4.5 million barrels in 1992. Although gas
production was up slightly in 1993, it was limited somewhat due to reduced
deliverability at certain properties and the sale of selected properties in the
Appalachian area. The lower oil production in 1993 was attributable primarily
to normal production declines at older properties.

In light of the difficult industry conditions of the past few years,
Consolidated has restructured its exploration and production operations and
refocused its efforts into selected geographic areas. These efforts are
currently directed to moderate- and low-risk prospects, principally in the Gulf
of Mexico.

The Company has also taken steps to address the recent declines in short-term
deliverability. During 1993, the Company completed a series of well workovers
and a compression project that had been postponed in prior years due to the low
level of gas prices. While these efforts have helped restore short-term
deliverability, any significant increases will be dependent primarily on future
exploratory successes.

9

ITEM 1. BUSINESS (Continued)

During 1993, Consolidated participated in the drilling of 65 gross wells (22
net), compared with 106 gross wells (68 net) drilled in 1992. The following
table sets forth 1993 drilling activity by region:
_______________________________________________________________________________
Gross Wells Drilled
Exploratory Development
_______________________________________________________________________________

Onshore (Southwest and West). . . . . . . 7 32
Gulf of Mexico . . . . . . . . . . . 15 7
Canada . . . . . . . . . . . . . . - 4
__ __
Total. . . . . . . . . . . . . . 22 43
== ==
_______________________________________________________________________________

Of the total 65 wells in which the Company participated during 1993, 46 were
successful, a 71 percent success rate. Of the 22 exploratory wells drilled, 6
were successful.

Although Consolidated's drilling program was reduced in 1993, it resulted in a
number of successful completions. An exploratory well drilled at South Marsh
Island Block 154 in the Gulf of Mexico resulted in a natural gas and oil
discovery. Consolidated is the operator of this property and owns a 50 percent
working interest. The South Marsh Island 154 discovery was brought onto
production in just seven months by using a refitted production platform from
one of the Company's depleted fields. Another significant success in the Gulf
in 1993 was at the West Cameron Block 76 field. After doubling the Company's
interest in the field to 40 percent in 1992, a new development well resulted in
the largest single addition to Consolidated's reserves in 1993. Other
successes offshore included wells drilled at Vermilion Block 255 and at West
Cameron Block 293.

A large part of the Company's development drilling in 1993 occurred at the Sand
Dunes field located in the New Mexico portion of the Permian Basin.
Consolidated participated in the drilling of 26 development wells in this area
and has added approximately 900 barrels of oil a day to the Company's
production. Consolidated's working interest in these wells averaged about 26
percent. Development drilling is expected to continue in this field during
1994.

Also during 1994, development will continue at "Popeye," a deep-water natural
gas discovery in the Green Canyon area of the Gulf of Mexico. Consolidated
entered into an agreement in 1992 with Shell Offshore, Inc., under which the
Company acquired half of Shell's 75 percent interest in this property. In
return, Consolidated will pay some $60 million for development of the field.
Other participants in the joint venture are Mobil Oil Exploration and Producing
Southeast and BP Exploration Inc. Participation in the Popeye project is
providing Consolidated access to a new technology and the experience necessary
to better evaluate future deep-water opportunities.

Despite difficult industry conditions, Consolidated remains committed to its
exploration and production operations. The Company plans to increase its
exploration and production spending by 38 percent in 1994 to $153.0 million.
The anticipated expenditures include funds for the development of Popeye and
provide for an increased level of exploratory drilling.

10

ITEM 1. BUSINESS (Continued)

Consolidated did not participate in drilling activity in the Appalachian Basin
during 1993, and there is no drilling planned for this area in 1994. In the
past, gas from this area commanded a higher price because of its location in
proximity to major gas markets. However, as a result of industry changes and
revised rate structures, pipeline companies can transport gas to these markets
at low commodity rates that negate somewhat the location premium associated
with these reserves. The Company expects to continue production from these
properties and plans to maintain its strong acreage position in the Appalachian
Basin. Drilling activity can be resumed with very short lead times if market
and economic conditions warrant. Selected Appalachian properties were sold
during 1993, but the acreage and reserves were not material.

Total Company-owned proved gas reserves at year-end were 960 billion cubic
feet, down from 998 billion cubic feet at the end of 1992. Proved oil reserves
were 27.9 million barrels, compared with 29.5 million barrels in 1992. Because
of the low level of drilling activity, new reserves added during 1993 were not
sufficient to replace the volumes of gas produced during the year. (See
"Company-Owned Reserves," page 22.)

Consolidated was the successful bidder on nine leases offered in the federal
government's Gulf of Mexico lease sales in 1993, acquiring five blocks off
Louisiana and four blocks off Texas. At year-end 1993, Consolidated held 2.6
million net acres of exploration and production properties, down from 2.7
million at year-end 1992. The Company's lease holdings include about 1.8
million net acres in the Appalachian area, 386,000 in the offshore Gulf of
Mexico, and 495,700 in the inland areas of the Southwest, Gulf Coast and West.

The Company will continue to review its property inventory during 1994, and
sales of selected properties are possible depending on economic conditions.
Included in the properties which may be sold is Consolidated's 21 percent
interest in heavy oil properties in Alberta, Canada. Proved reserves
associated with the Canadian properties approximated 1.1 billion cubic feet of
gas and 5.7 million barrels of oil at December 31, 1993. On an energy-
equivalent basis, these reserves represent about 3 percent of Consolidated's
total proved reserves at that date.

GAS SALES AND TRANSPORTATION

Total gas sales in 1993 were 604 billion cubic feet, up 35 percent from the 449
billion cubic feet sold in 1992. Transportation volumes were 587 billion cubic
feet in 1993, a 4 percent decrease from the 613 billion cubic feet transported
in 1992. (Five-year statistics are on page 13.)

GAS SALES CUSTOMERS

At December 31, 1993, the Company's distribution subsidiaries served almost 1.7
million residential customers, over 118,000 commercial customers and more than
1,800 industrial customers in Ohio, Pennsylvania, Virginia and West Virginia.
_______________________________________________________________________________
Residential
Customers Total and Commercial Industrial Wholesale Nonregulated
_______________________________________________________________________________
December 31,
1993 1,777,320 1,774,922 1,851 31 516
1992 1,759,428 1,757,139 1,838 32 419
1991 1,738,098 1,735,803 1,849 31 415
1990 1,718,016 1,715,824 1,787 32 373
1989 1,543,845 1,541,680 1,750 36 379
_______________________________________________________________________________

11

ITEM 1. BUSINESS (Continued)

RESIDENTIAL AND COMMERCIAL SALES

Sales of gas to residential customers in 1993 were 212 billion cubic feet, up 4
billion cubic feet from 1992, while sales to commercial customers were 73
billion cubic feet, virtually unchanged compared with 1992. Residential gas
sales volumes increased as slightly colder weather in 1993 resulted in higher
gas usage by space-heating customers. The weather in the Company's retail
service areas in 1993 was 2 percent colder than in 1992 but still warmer than
normal. Also contributing to the increase was the net addition of about 17,800
residential and commercial customers, including about 7,800 at Virginia Natural
Gas.

INDUSTRIAL SALES

Industrial sales in 1993 were 12 billion cubic feet, about the same as in 1992.
Due to both availability and price, many of the Company's industrial customers
now buy gas directly from producers, from marketers, or on the spot market, and
contract with the subsidiary companies for transportation service. The total
gas deliveries (sales and transportation) to industrial customers was 128
billion cubic feet in 1993, compared with 127 billion cubic feet in 1992.

WHOLESALE SALES

Total wholesale sales were 81 billion cubic feet in 1993, up from 21 billion
cubic feet in 1992. The increase in sales volumes was due to the sale by CNG
Transmission of approximately 58 billion cubic feet of gas from storage
inventory in anticipation of the transition to restructured services under FERC
Order 636. These sales, which were made primarily to customers outside the
Company's traditional Northern Market area at reduced prices under alternative
FERC-approved tariff schedules, increased available capacity to provide future
storage service and reduced certain transition costs under Order 636.

NONREGULATED SALES

Nonregulated gas sales in 1993 were 226 billion cubic feet, up from 134 billion
cubic feet in 1992. Sales of Company-produced gas to nonaffiliates was 88
billion cubic feet, compared with 109 billion cubic feet in 1992. Gas sales by
CNG Gas Services were 100 billion cubic feet in 1993, its first year of
operations. Volumes related to gas brokering activity were 38 billion cubic
feet in 1993, up from 25 billion cubic feet in 1992.

GAS TRANSPORTATION

Total transportation volumes in 1993 amounted to 587 billion cubic feet, down
from 613 billion cubic feet in 1992. Increased wholesale sales volumes, due
largely to CNG Transmission's sales from storage inventory prior to its
transition to FERC Order 636, was the principal reason for the lower
transportation volumes in 1993. In the fourth quarter of 1993, following CNG
Transmission's implementation of Order 636, gas transportation volumes
increased due primarily to volumes transported for customers in the Northern
Market area and Virginia. Total volumes transported by the distribution
subsidiaries for commercial, industrial and off-system customers were up 2
billion cubic feet over 1992.

12

ITEM 1. BUSINESS (Continued)

GAS SALES, SUPPLY AND TRANSPORTATION STATISTICS
(Excludes affiliated transactions)

_______________________________________________________________________________
___________________________________
Years Ended December 31, 1993 1992
1991 1990 1989
_______________________________________________________________________________
___________________________________

GAS SALES REVENUES (MILLIONS)
Regulated
Residential and commercial. . . . . . . $1,595.1 $1,428.7
$1,373.1 $1,361.0 $1,457.1
Industrial . . . . . . . . . . . . 55.4 50.0
46.0 64.2 67.2
Wholesale - Northern Market . . . . . . 230.0 125.7
311.6 375.2 475.4
- Off-system . . . . . . . . 192.7 65.1
115.2 153.7 131.0
Nonregulated . . . . . . . . . . . . 541.8 282.0
237.0 280.2 256.7
________ ________
________ ________ ________
Total . . . . . . . . . . . . $2,615.0 $1,951.5
$2,082.9 $2,234.3 $2,387.4
======== ========
======== ======== ========

AVERAGE SALES RATES PER MCF
Regulated
Residential and commercial. . . . . . . $ 5.60 $ 5.09
$ 5.25 $ 5.39 $ 5.23
Industrial . . . . . . . . . . . . 4.43 4.00
4.09 4.22 4.35
Wholesale - Northern Market . . . . . . * *
4.69 4.97 4.56
- Off-system . . . . . . . . 3.49 *
4.03 4.34 4.07
Nonregulated . . . . . . . . . . . . 2.40 2.10
2.01 2.27 2.19
Weighted average. . . . . . . . . $ 4.33 $ 4.35
$ 4.29 $ 4.45 $ 4.36
======== ========
======== ======== ========

GAS REQUIREMENTS (BCF)
Regulated gas sales
Residential and commercial. . . . . . . 285.0 280.7
261.7 252.5 278.8
Industrial . . . . . . . . . . . . 12.5 12.5
11.2 15.2 15.5
Wholesale - Northern Market . . . . . . 25.5 9.4
66.4 75.5 104.2
- Off-system . . . . . . . . 55.2 11.8
28.6 35.4 32.2
Nonregulated gas sales. . . . . . . . . 226.0 134.4
118.1 123.4 117.1
________ ________
________ ________ ________
Total sales . . . . . . . . . . 604.2 448.8
486.0 502.0 547.8
Used and unaccounted for . . . . . . . . 44.0 51.7
34.5 44.7 28.9
________ ________
________ ________ ________
Total requirements . . . . . . . . 648.2 500.5
520.5 546.7 576.7
======== ========
======== ======== ========

GAS SUPPLY (BCF)
Purchased gas. . . . . . . . . . . . 485.2 370.6
377.2 434.4 416.5
Storage (input) withdrawal . . . . . . . 33.5 1.9
10.5 (34.8) 12.7
Gas produced
Appalachian area . . . . . . . . . . 29.4 33.1
35.3 43.5 45.9
Gulf region. . . . . . . . . . . . 81.6 78.9
84.2 89.4 90.0
Other areas. . . . . . . . . . . . 18.5 16.0
13.3 14.2 11.6
________ ________
________ ________ ________
Total produced . . . . . . . . . 129.5 128.0
132.8 147.1 147.5
________ ________
________ ________ ________
Total supply . . . . . . . . . . 648.2 500.5
520.5 546.7 576.7
======== ========
======== ======== ========

PURCHASED GAS COSTS (MILLIONS)** . . . . . $1,358.2 $1,132.1
$1,093.6 $1,440.7 $1,328.7
======== ========
======== ======== ========

AVERAGE PURCHASE RATES PER MCF** . . . . . $ 2.80 $ 3.05
$ 2.90 $ 3.32 $ 3.19
======== ========
======== ======== ========

GAS TRANSPORTATION
Revenues (Millions). . . . . . . . . . $ 222.5 $ 201.0
$ 154.9 $ 147.5 $ 128.6
======== ========
======== ======== ========

Gas Transported (Bcf) . . . . . . . . . 587.5 613.1
446.7 377.8 388.6
======== ========
======== ======== ========
_______________________________________________________________________________
___________________________________

* Demand charges and low sales volumes produce an average rate which is not
meaningful.
** Includes transportation charges.

13

ITEM 1. BUSINESS (Continued)

MARKET EXPANSION

For the past several years Consolidated has pursued a broad program designed to
expand its interstate pipeline system and extend its marketing territory.
Consolidated's principal objective has been to build long-term supply
relationships with customers in the growing markets at the perimeter of its
system, markets which offer opportunities for growth in throughput due to their
increasing demand for energy. Consolidated has concentrated its transmission
expansion efforts toward potentially high-volume, weather sensitive markets and
areas with growing power generation needs located primarily in the Northeast
and along the East Coast. These markets are particularly attractive in that
gas space heating is not yet as widely used in these areas as in the Company's
traditional service areas of western Pennsylvania, eastern Ohio, West Virginia
and upstate New York. Because of its large gas storage capacity and the
location of its gridlike pipeline system in close proximity to these markets,
Consolidated has an opportunity to be an important gas supplier to utilities
with growing space heating markets and for customers seeking an environmentally
clean, efficient fuel for electric generation.

Consolidated is also developing and promoting additional uses for natural gas.
These technologies provide opportunities for the use of natural gas in markets
that are not sensitive to the weather. The more stringent air quality
standards required under the Federal Clean Air Act and the various provisions
of the Energy Policy Act of 1992 should help advance the development and use of
these and other technologies.

TRANSMISSION EXPANSION

During 1993, the final phase of the expansion of CNG Transmission's interstate
pipeline between Lebanon, Ohio, and its storage field at Leidy, Pennsylvania,
was completed. This $240 million project was the primary, and largest,
component of the Company's $600 million multi-year transmission expansion
program. The new pipeline and additional compressor facilities added to this
main line will be used to transport up to 370 million cubic feet of gas a day
on behalf of Transcontinental Gas Pipe Line Corporation and customers of ANR
Pipeline Company for ultimate delivery to East Coast markets.

Also in 1993, CNG Transmission expanded its market area further to the south.
On November 1, 1993, CNG Transmission began providing a combination of storage
and transportation service to Public Service Company of North Carolina, Inc.
Under this 20-year contract, CNG Transmission is providing about 30 million
cubic feet of gas a day. Since the Company's pipeline system does not extend
into North Carolina, CNG Transmission delivers the gas to Transcontinental Gas
Pipe Line Corporation at Nokesville in northern Virginia, and Transcontinental
delivers the gas by displacement in North Carolina.

With the transmission construction program essentially complete, the Company is
now pursuing new growth opportunities available for its expanded pipeline
system. In March 1994, Consolidated announced plans to create a new gas market
center that will offer service at points along CNG Transmission's pipeline
system to utilities, interstate pipelines, large end-users and marketers
throughout the Mid-Atlantic and the East Coast. This market center is being
developed by CNG Transmission and Texaco's Sabine Pipe Line Company. The hub
is expected to begin operating in 1994 offering services such as intra-hub
transfers, parking and wheeling, together with a new service designed to reduce
the administrative burden associated with buying and selling gas. These
services are designed to help minimize transaction costs and give buyers and
sellers more options for trading. The CNG/Sabine Center is expected to further
increase throughput and also offer new marketing opportunities for CNG Gas
Services.

14

ITEM 1. BUSINESS (Continued)

TECHNOLOGY-BASED MARKETS

During 1993, Consolidated continued its involvement with a number of relatively
new gas burning technologies. These applications provide opportunities to
improve customer efficiency while promoting the use of natural gas in market
sectors that are not sensitive to the weather or economic downturn. The future
advancement of such technologies also appears promising as business entities
strive to comply with provisions of the Federal Clean Air Act. This
legislation applies strict anti-pollution standards to factories, fleet and
mass transit vehicles, and to electric power plants. The law is likely to
increase demand for natural gas, but the extent thereof will depend on how the
Act is implemented and enforced. Gas demand could also increase as the result
of the Energy Policy Act of 1992. This Act requires and encourages large
vehicle fleets to operate on alternative fuels such as natural gas. The Energy
Policy Act also created a new class of independent power producers exempt from
utility regulation, which could lead to the construction of additional gas-
fueled generating facilities.

With regard to these market expansion efforts, Consolidated has participated
extensively in developing and marketing a technology called "cofiring," in
which a small amount of gas is burned along with coal in an electric utility or
industrial boiler. Cofiring has resulted in improved boiler efficiency and has
reduced certain emissions which are responsible for acid rain. Consolidated is
also promoting "reburn," which is a more advanced version of cofiring. Under
this technique, natural gas is injected into the upper part of a boiler,
creating a fuel-rich zone where nitrogen oxide is transformed into harmless
nitrogen.

Consolidated is also pursuing other technological opportunities, including gas
cooling equipment, fuel cell power generation, coal drying processes and the
promotion of natural gas powered vehicles ("NGVs"). Fleet operators and mass
transit authorities are turning to NGVs for both fuel cost efficiencies and as
a way to reduce environmental pollution. Despite the environmental benefits of
NGVs, it appears unlikely that such vehicles will replace a significant number
of gasoline powered vehicles in the near future, given the lack of a nationwide
network of refueling facilities and the current cost of retrofitting individual
vehicles. However, beginning in 1997, the Clean Air Act could require 22 of
the country's most polluted regions to convert a portion of their fleet
vehicles to natural gas. Consolidated supplies natural gas to utilities that
serve Baltimore, Washington, D.C., and New York, three metropolitan areas
directly affected by this provision of the Act.

15

ITEM 1. BUSINESS (Continued)

RATE MATTERS (See Note 3 to the Financial Statements, page 57.)

The Company's average unit selling price of gas to its customers was $4.33 per
thousand cubic feet in 1993, compared with $4.35 in 1992 and $4.29 in 1991.
Average sales prices in 1993 were higher for all retail categories and for
Company-produced gas. However, CNG Transmission's sales from storage inventory
had a significant influence on the overall average unit selling price since
such sales were made at lower rates under alternative FERC-approved tariff
schedules in anticipation of the implementation of Order 636. The higher
average selling price in 1992 compared with 1991 reflects the upward industry
trend in gas wellhead prices experienced in 1992.

The Company's utility subsidiaries continue to seek general rate increases on a
timely basis to recover increased operating costs and to ensure that rates of
return are compatible with the cost of raising capital. In addition to general
rate increases, subsidiary companies make separate filings with their
respective regulatory commissions to reflect changes in the costs of purchased
gas.

The following is a summary of rate activity during 1993 and to date.

CNG TRANSMISSION

In April 1992, the FERC issued Order 636, a comprehensive set of regulations
designed to encourage competition and continue the significant restructuring of
the interstate natural gas pipeline industry that the FERC first set in motion
with its Order 436. As the result of Order 636, each pipeline company was
required to revise its customer contracts and service tariffs. On November 2,
1992, CNG Transmission filed with the FERC a revised service tariff complying
with the provisions of the Order. On March 31, 1993 (as amended June 15,
1993), CNG Transmission filed a comprehensive stipulation and agreement
("Settlement") which revised substantially the November 2, 1992, filing. On
July 16, 1993, the FERC issued an order approving CNG Transmission's amended
Settlement, subject to certain modifications, clarifications and
justifications. Following a series of Commission orders relating to these
matters, CNG Transmission implemented Order 636 in accordance with the terms of
the Settlement (Docket No. RS92-14) on October 1, 1993. (See "FERC Order 636,"
page 39.)

On December 30, 1993, CNG Transmission filed a general rate filing with the
FERC requesting an annual revenue increase of $106.6 million. CNG Transmission
requested an 11.78 percent overall rate of return and a 14.00 percent return on
equity. The rate increase request is intended to cover higher operating costs,
increased plant investment, and the recovery of $9.2 million in transition
costs related to stranded facilities because of Order 636. The increase is
expected to become effective, after the suspension period, on July 1, 1994,
subject to refund.

VIRGINIA NATURAL GAS

On June 22, 1993, the Virginia State Corporation Commission approved a $10.4
million annual revenue increase for Virginia Natural Gas. The new rates were
effective retroactive to September 4, 1992, and reflect an 11.75 percent return
on equity. In its April 1992 filing, Virginia Natural Gas had requested a
$14.1 million annual increase in revenues and a 12.25 percent return on equity.

16

ITEM 1. BUSINESS (Continued)

PEOPLES NATURAL GAS

On October 28, 1993, Peoples Natural Gas filed with the Pennsylvania Public
Utility Commission for a $28.4 million increase in base rates. In its filing,
Peoples Natural Gas requested a 10.00 percent overall rate of return and a
12.25 percent return on equity. The rate increase request is intended to cover
higher operating expenses. If approved, the new rates would become effective
on August 6, 1994. Peoples Natural Gas also filed to recover, over four years,
$20.1 million in estimated transition costs related to FERC Order 636.

HOPE GAS

On October 29, 1993, the Public Service Commission of West Virginia granted
Hope Gas an indicated $1.9 million annual revenue increase effective
November 1, 1993. The approved rates reflect an 8.78 percent overall rate of
return and a 10.20 percent return on equity. In its March 1993 filing, Hope
Gas had requested an $8.2 million increase in revenues and an estimated 12.30
percent return on equity. On November 8, 1993, Hope Gas filed a petition for
rehearing in the case.

EAST OHIO GAS

On January 18, 1994, East Ohio Gas filed with the Public Utilities Commission
of Ohio ("PUCO") for a $99.1 million increase in base rates. East Ohio Gas is
seeking a 10.95 percent overall rate of return and a 12.50 percent return on
equity. The rate increase request is intended to cover higher operating costs
and increases in plant investment. The filing also reflects the proposed
merger of River Gas into East Ohio Gas and the combining of the operations and
service areas of the two subsidiary companies. A decision by the PUCO is
expected in October 1994. In addition, East Ohio Gas is negotiating with
customers and the PUCO staff as to the future recovery of transition costs to
be incurred under FERC Order 636.

17

ITEM 1. BUSINESS (Concluded)

EXECUTIVE OFFICERS OF THE COMPANY (Note 1)
_______________________________________________________________________________
Name, Age and Business Experience
Position (Note 2) During Past Five Years
_______________________________________________________________________________

George A. Davidson, Jr. (55) Mr. Davidson was elected to his present
Chairman of the Board and position on May 19, 1987, and has been a
Chief Executive Officer, Director since October 1985.
and Director

Lester D. Johnson (62) Mr. Johnson was elected to his present
Executive Vice President and position on March 1, 1992, and has been
Chief Financial Officer, a Director since May 1992. He served as
and Director Senior Vice President and Chief
Financial Officer from January 1986 to
March 1992.

David E. Weatherwax (63) Mr. Weatherwax was elected to his
Senior Vice President, present position on January 1, 1993. He
Administration served as Senior Vice President,
Administration and General Counsel from
March 1992 to January 1993 and Senior
Vice President and General Counsel from
July 1987 to March 1992.

Stephen E. Williams (45) Mr. Williams was elected to his present
Senior Vice President and position on January 1, 1993. He served
General Counsel as Associate General Counsel from
September 1992 to January 1993. From
April 1987 to September 1992, he served
as General Counsel and Secretary of CNG
Transmission.

David J. Dzuricky (42) Mr. Dzuricky was elected to his present
Vice President and Treasurer position on August 1, 1993. He served
as Vice President and Treasurer of
Virginia Natural Gas from July 1992 to
August 1993, and as its Vice President,
Treasurer and Controller from January
1991 to July 1992, and Vice President,
Treasurer, Secretary and Controller from
June 1990 to January 1991. From January
1988 to June 1990, he served as
Treasurer of CNG Transmission.

Stephen R. McGreevy (43) Mr. McGreevy was elected to his present
Vice President, Accounting position on March 1, 1993. He served as
and Financial Control Controller from January 1986 to March
1993.

Laura J. McKeown (35) Ms. McKeown was elected to her present
Secretary position on May 16, 1989. She served as
Assistant Secretary from August 1987 to
May 1989.

Thomas F. Garbe (41) Mr. Garbe was elected to his present
Controller position on March 1, 1993. He served as
Senior Assistant Controller from May
1991 to March 1993 and Assistant
Controller from January 1986 to May
1991.
_______________________________________________________________________________

Notes:
(1) The Company has been advised that there are no family relationships
between any of the officers listed, and there is no arrangement or
understanding between any of them and any other person pursuant to which
the individual was elected as an officer.
(2) The By-Laws of the Company provide that each officer shall hold office
until a successor is chosen and qualified.

18

ITEM 2. PROPERTIES

GENERAL INFORMATION ON FACILITIES (Maps are on pages 20 and 21.)

The total gross investment of the Company and its subsidiaries in property,
plant and equipment was $7.3 billion at December 31, 1993. The largest portion
of this investment (62%) is in facilities located in the Appalachian area.
Another significant portion (22%) is located in the Gulf of Mexico.

Of the $7.3 billion investment, $3.3 billion is in production and gathering
systems, of which 56 percent is invested in the Gulf of Mexico and the Gulf
coast and 29 percent in the Appalachian area. The Company's production
subsidiary, CNG Producing, accounts for $2.7 billion of the $3.3 billion
investment, and CNG Transmission and the distribution subsidiaries account for
the remaining $600 million. In addition to the wells and acreage listed
elsewhere in ITEM 2, this investment includes 7,188 miles of gathering lines
which are located almost entirely within the Appalachian area.

The Company's investment in its gas distribution network includes 28,165 miles
of pipe, exclusive of service pipe, the cost of which represents 61% of the
$1.5 billion invested in the total function.

The Company's storage operation, the largest in the industry, consists of 26
storage fields, 331,848 acres of operated leaseholds, 2,032 storage wells and
828 miles of pipe. The investment in storage properties is $644 million,
including $124 million of cushion gas stored.

Of the $1.5 billion invested in transmission facilities, 69% represents the
cost of 7,402 miles of pipe required to move large volumes of gas throughout
the Company's operating area.

The Company has 111 compressor stations with 452,157 installed compressor
horsepower. Some of the stations are used interchangeably for several
functions.

The Company's investment in its fully integrated natural gas system is
considered suitable to do all things necessary to bring gas to the consumer.
The Company's properties provided the capacity to meet a record system peak day
sendout, including transportation service, of 9.1 Bcf on January 18, 1994. The
system peak day sendout in 1993 was 7.9 Bcf on February 24.

19

Map of Principal Facilities at December 31, 1993
(GRAPHIC MATERIAL OMITTED)
20

Map of Exploration and Production Areas at December 31, 1993
(GRAPHIC MATERIAL OMITTED)
21

ITEM 2. PROPERTIES (Continued)

GAS AND OIL PRODUCING ACTIVITIES (See Note 17(A) to the Financial Statements,
page 72.)

Properties and activities subject to cost-of-service rate regulation are shown
together with non-cost-of-service properties (those subject to contractual
arrangements, and Canadian properties) and activities in the statistical
presentations which follow.

COMPANY-OWNED RESERVES

Estimated net quantities of proved gas and oil reserves at December 31, 1991
through 1993, follow:

_______________________________________________________________________________
________________________
December 31, 1993 1992
1991
_______________________________________________________________________________
________________________

Proved Total Proved
Total Proved Total
Developed Proved Developed
Proved Developed Proved
_______________________________________________________________________________
________________________

Gas Reserves (Bcf)
Non-cost-of-service . . . . . . 761 885 794
918 855 918
Cost-of-service . . . . . . . 75 75 80
80 87 87
______ ______ ______
______ ______ ______
Total . . . . . . . . . . 836 960 874
998 942 1,005
====== ====== ======
====== ====== ======

Oil Reserves (000 Bbls)
Non-cost-of-service . . . . . . 21,936 27,596 27,449
29,238 30,070 31,014
Cost-of-service . . . . . . . 287 287 283
283 313 313
______ ______ ______
______ ______ ______
Total . . . . . . . . . . 22,223 27,883 27,732
29,521 30,383 31,327
====== ====== ======
====== ====== ======
_______________________________________________________________________________
________________________

CNG Producing, East Ohio Gas, Hope Gas, Peoples Natural Gas and CNG
Transmission file Form EIA-23 with the Department of Energy. The reserves
reported at December 31, 1992, as well as those which will be reported at
December 31, 1993, are not reconcilable with Company-owned reserves because
they are calculated on an operated basis and include working interest reserves
of all parties.

QUANTITIES OF GAS AND OIL PRODUCED

Net quantities (net before royalty) of gas and oil produced during each of the
last three years follow:
_______________________________________________________________________________
Years Ended December 31, 1993 1992 1991
_______________________________________________________________________________

Gas Production (Bcf)
Non-cost-of-service . . . . . . . . . 124 121 126
Cost-of-service . . . . . . . . . . 6 7 7
_____ _____ _____
Total . . . . . . . . . . . . . 130 128 133
===== ===== =====

Oil Production (000 Bbls)
Non-cost-of-service . . . . . . . . . 3,907 4,508 5,246
Cost-of-service . . . . . . . . . . 29 31 33
_____ _____ _____
Total . . . . . . . . . . . . . 3,936 4,539 5,279
===== ===== =====
_______________________________________________________________________________

The average sales price (including transfers to other operations as determined
under Financial Accounting Standards Board rules) per Mcf of non-cost-of-
service gas produced during the calendar years 1991 through 1993 was $1.96,
$2.05 and $2.24, respectively. The respective average sales prices for oil
were $19.53, $18.15 and $15.66 per barrel. The average production (lifting)
cost per Mcf equivalent of non-cost-of-service gas and oil produced during the
years 1991 through 1993 was $.37, $.37 and $.33, respectively.

22

ITEM 2. PROPERTIES (Continued)

PRODUCTIVE WELLS

The number of productive gas and oil wells in which the subsidiary companies
have an interest at December 31, 1993, follow:
_______________________________________________________________________________
Gas Wells Oil Wells
Gross Net Gross Net
_______________________________________________________________________________

Non-cost-of-service* . . . . . . . . 5,601 4,715 853 407
Cost-of-service . . . . . . . . . . 2,181 1,811 3 3
_____ _____ ___ ___
Total. . . . . . . . . . . . . 7,782 6,526 856 410
===== ===== === ===
_______________________________________________________________________________
* Includes 46 gross (12 net) multiple completion gas wells and 5 gross (2 net)
multiple completion oil wells.

ACREAGE

The following table sets forth the gross and net developed and undeveloped
acreage of the subsidiary companies at December 31, 1993:
_______________________________________________________________________________
Developed Acreage Undeveloped Acreage
Gross Net Gross Net
_______________________________________________________________________________

Non-cost-of-service. . . . 1,621,117 1,227,844 1,309,456 933,323
Cost-of-service . . . . . 440,912 439,179 42,124 37,775
_________ _________ _________ _________
Total. . . . . . . . 2,062,029 1,667,023 1,351,580 971,098
========= ========= ========= ========
_______________________________________________________________________________

Approximately 32% of the foregoing non-cost-of-service undeveloped net acreage
and 100% of the cost-of-service undeveloped net acreage is located in the
Appalachian area.

NET WELLS DRILLED IN THE CALENDAR YEAR

The number of non-cost-of-service net wells completed during each of the last
three years follow (there were no cost-of-service wells completed during this
three-year period):
_______________________________________________________________________________
Exploratory Development Total
Productive Dry Productive* Dry Productive Dry
_______________________________________________________________________________

Years Ended December 31,
1993 . . . . . . . 2 6 13 1 15 7
1992 . . . . . . . 1 3 54 10 55 13
1991 . . . . . . . 3 7 39 7 42 14
_______________________________________________________________________________
* Includes Canadian completions: 1993 - 1 well, 1992 - 0 wells and 1991 - 4
wells.

As of December 31, 1993, 4 gross (2 net) non-cost-of-service wells were in
process of drilling, including wells temporarily suspended. As of December 31,
1993, Consolidated was engaged in waterflood projects in Oklahoma and Texas and
an enhanced oil recovery program in Alberta, Canada.

23

ITEM 2. PROPERTIES (Concluded)

GAS PURCHASE CONTRACT RESERVES (AT DECEMBER 31, 1993) AND AVAILABILITY OF
SUPPLY (CALENDAR YEAR 1994)

Gas purchase reserves under contract with independent producers in the
Appalachian area total 960 billion cubic feet at December 31, 1993. In
addition, at December 31, 1993, Consolidated had gas supply contracts with
various other producers and marketers with contract lengths ranging from a few
months to ten years. The volume of gas available to Consolidated under these
supply contracts totals 458 billion cubic feet if all volumes are requested.
These gas purchase contract reserve and gas supply contract volume amounts are
as contained in the February 15, 1994 report of Ralph E. Davis Associates, Inc.
Of the total 960 billion cubic feet under contract from Appalachian producers,
the volume of gas expected to be purchased in 1994 under such contracts is not
estimable as such contracts are generally life-of-the-well arrangements and
contain provisions adaptable to changing market conditions. Of the total 458
billion cubic feet available under contract from other producers and marketers,
approximately 229 billion cubic feet of gas will be available to Consolidated
in 1994, assuming all volumes are requested. During 1993, Consolidated
converted its remaining gas purchase contracts with interstate pipeline
companies to firm transportation contracts, and no gas purchases from pipeline
companies are expected in 1994.

The Company anticipates that substantial volumes of gas will be available for
purchase during 1994 on the spot market. Due to the nature of spot market
transactions, the volumes of such gas available to Consolidated in 1994 cannot
be reasonably estimated. However, for the calendar year 1994, Consolidated
expects its distribution subsidiaries to have approximately 409 billion cubic
feet of firm transport capacity available on upstream pipelines and 57 billion
cubic feet of storage capacity available to meet their customer requirements.

The volumes expected to be available from Company-owned wells in 1994 amount to
139 billion cubic feet of gas and 4,124 thousand barrels of oil. Included in
these amounts are 133 billion cubic feet of gas and 4,095 thousand barrels of
oil expected to be available from the Company's non-cost-of-service properties.
The foregoing volumes are based on the Company's current production estimates
of proved gas and oil reserves. Actual production may differ from these
amounts due to a number of factors, including changing market conditions and
the acquisition or sale of reserves.

24

ITEM 3. LEGAL PROCEEDINGS

As previously reported, in June 1993, CNG Transmission received a Notice of
Violation from the Pennsylvania Department of Environmental Resources ("DER")
alleging violations of the Pennsylvania Clean Streams Law and three Earth
Disturbance Permits issued thereunder. CNG Transmission was assessed a penalty
of $405,450 by the DER, which was paid in December 1993. CNG Transmission is
seeking recovery of a substantial portion of the penalty paid in this matter
from third party contractors under contractual indemnification provisions.

Reference is made to "Environmental Matters," page 42, and to Notes 15 and 16
to the Financial Statements, page 70, for additional environmental-related
information.

Reference is made to "Rate Matters," page 16, for descriptions of certain
regulatory proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

This information is included in Note 17(C) to the Financial Statements, page
77, and reference is made thereto.
25

ITEM 6. SELECTED FINANCIAL DATA

_______________________________________________________________________________
________________________________________
SUMMARY OF FINANCIAL DATA (Thousand $) 1993 1992
1991 1990 1989
_______________________________________________________________________________
________________________________________

EARNINGS
Gas sales . . . . . . . . . . . . . $ 2,615,036 $ 1,951,545
$ 2,082,927 $ 2,234,347 $ 2,387,401
Other operating revenues . . . . . . . . 569,049 569,305
524,079 480,524 414,497
Total operating revenues . . . . . . . 3,184,085 2,520,850
2,607,006 2,714,871 2,801,898
Purchased gas and other products . . . . . 1,665,338 1,059,177
1,237,227 1,344,588 1,446,904
Operation and maintenance, depreciation . . . 980,350 950,093
924,242 911,407 872,909
Total taxes . . . . . . . . . . . . 280,959 237,938
215,476 210,582 228,281
Operating income . . . . . . . . . . 257,438 273,642
230,061 248,294 253,804
Interest expense. . . . . . . . . . . 90,260 100,764
111,255 117,034 100,119
Interest during construction. . . . . . . 10,785 17,331
23,426 24,161 22,260
Other income (net) . . . . . . . . . . 10,531 4,749
26,381 8,349 5,829
Income before change in accounting principle . 188,494 194,958
168,613 163,770 181,774
Cumulative effect of applying SFAS No. 109 . . 17,422 -
- - - -
Net income . . . . . . . . . . . . 205,916 194,958
168,613 163,770 181,774
Per share of common stock
Income before change in accounting principle. $2.03 $2.19
$1.94 $1.91 $2.20
Cumulative effect of applying SFAS No. 109 . .19 -
- - - -
Net income . . . . . . . . . . . . $2.22 $2.19
$1.94 $1.91 $2.20
Average common shares outstanding . . . . . 92,808,156 89,127,805
86,836,920 85,683,172 82,492,459
Return on average stockholders' equity . . . 9.6% 9.7%
9.0% 9.3% 11.0%
Times fixed charges earned . . . . . . . 3.95 3.41
2.86 2.73 3.30
_______________________________________________________________________________
________________________________________
DIVIDENDS - CASH
Paid per common share . . . . . . . . . $1.92 $1.90
$1.88 $1.84 $1.76
Payout ratio . . . . . . . . . . . 86.5% 86.8%
96.9% 96.3% 80.0%
Declared per common share. . . . . . . . $1.925 $1.905
$1.885 $1.85 $1.78
_______________________________________________________________________________
________________________________________
ASSETS
Total assets . . . . . . . . . . . . $ 5,409,586 $ 5,155,662
$ 4,992,602 $ 5,006,038 $ 4,605,296
Property, plant and equipment
Total investment . . . . . . . . . . 7,346,028 7,087,102
6,749,165 6,433,527 5,910,198
Accumulated depreciation . . . . . . . 3,429,760 3,212,202
3,010,776 2,820,771 2,556,771
Capital expenditures and acquisitions. . . . 342,569 441,518
493,033 559,514 630,826
_______________________________________________________________________________
________________________________________
CAPITAL STRUCTURE
Total common stockholders' equity . . . . . $ 2,176,432 $ 2,132,838
$ 1,889,783 $ 1,844,594 $ 1,671,898
Long-term debt . . . . . . . . . . . 1,158,648 1,111,956
1,159,123 1,128,513 890,626
____________ ____________
____________ ____________ ____________
Total capitalization. . . . . . . . . $ 3,335,080 $ 3,244,794
$ 3,048,906 $ 2,973,107 $ 2,562,524
============ ============
============ ============ ============
Long-term debt ratio . . . . . . . . . 34.7% 34.3%
38.0% 38.0% 34.8%
Shares of common stock outstanding at year-end. 92,933,828 92,557,017
87,321,917 86,327,073 82,525,561
Common stockholders' equity per share . . . $23.42 $23.04
$21.64 $21.37 $20.26
_______________________________________________________________________________
________________________________________

26

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

NET INCOME

Net income in 1993 was $206 million, a 6 percent increase over the $195 million
earned in 1992. On a per share basis, 1993 net income was $2.22 compared with
$2.19 in 1992. The earnings per share amounts reported for 1993 and 1992
reflect the sale of 4.6 million shares of common stock in September 1992. Net
income in 1991 was $169 million, or $1.94 a share.

Colder weather, higher prices for natural gas production, increased gas
deliveries resulting from pipeline expansion projects, higher by-product
revenues and reduced interest expense were major factors for the earnings
improvement in 1993. While weather in Consolidated's retail service areas was
colder than in 1992, it was still warmer than normal for the fourth consecutive
year. Normal weather represents a measure of temperature experienced over a 30-
year period. Normal weather in 1993 would have added about $.06 a share to the
$2.22 a share reported.

Earnings in both 1993 and 1992 included the positive impact of deferred tax
benefits. In 1993, deferred tax benefits of $17.4 million, or $.19 a share,
resulting from the mandatory adoption of Statement of Financial Accounting
Standards (SFAS) No. 109 are reported as a separate component of net income as
the cumulative effect of the accounting change. By contrast, deferred tax
benefits recognized in 1992 under the previously applicable accounting standard
reduced income tax expense in that year by $13.0 million, or $.15 a share.

The positive factors in 1993 were offset in part, however, by higher income
taxes due to the increase in the federal corporate income tax rate from 34
percent to 35 percent enacted in August 1993. The effects of this rate change
included an $11.4 million, or $.12 a share, adjustment to previously recorded
deferred tax balances and a $2.7 million, or $.03 a share, increase in current
taxes to reflect the new tax law retroactive to January 1, 1993.

Colder weather compared with 1991, the continued expansion of the Company's
transmission operations, increased gas storage service revenues, and higher
wellhead prices for gas were major factors for the earnings improvement in 1992
compared with 1991. Although weather in Consolidated's retail service areas
was colder than in 1991, the weather was warmer than normal. If weather in the
retail service areas had been normal in 1992, earnings would have been $.16 a
share higher than the $2.19 reported. Gas wellhead prices fell sharply early
in 1992, but recovered and strengthened as gas demand increased due to cold
spring weather and concerns over possible supply shortages following Hurricane
Andrew. The increase in average gas wellhead prices for the year was offset to
a large extent by lower gas and oil production and lower average oil wellhead
prices. The net income comparison of the two years was also affected by the
recognition in 1991 of interest revenues related to the settlement of federal
income tax issues from prior years.

In 1991, warm weather depressed the level of earnings throughout all three of
Consolidated's major business components. If weather in Consolidated's retail
service areas had been normal in 1991, earnings would have been $.33 a share
higher than the $1.94 reported for that year. Reduced gas demand, declining
gas field prices and the curtailment of gas production resulted in sharply
lower exploration and production earnings. Higher other income, including
interest revenues related to the settlement of federal income tax issues from
prior years, was also a significant factor contributing to earnings in 1991.

27

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

INCOME FROM OPERATIONS

Operating income for Consolidated's business components for the last three
years is shown in the following table. Operating income is presented on an
after-tax basis consistent with the Statement of Income where income taxes are
classified as an operating expense.

Effective January 1, 1993, Consolidated's CNG Trading Company subsidiary was
renamed CNG Gas Services Corporation. In addition to continuing its
predecessor's role of marketing a portion of Company-owned production, CNG Gas
Services arranges gas supplies, transportation, storage and related services
for customers. The demand for these services was created by Federal Energy
Regulatory Commission (FERC) Order 636, which has restructured the natural gas
marketplace. As a result of this new role, amounts pertaining to the
operations of CNG Gas Services are included in the caption "Other" in the
following table, as well as in the other tables presented in this discussion
and analysis. Amounts applicable to CNG Trading for 1992 and 1991 remain in
the exploration and production component.

______________________________________________________________________________
OPERATING INCOME 1993 1992 1991
______________________________________________________________________________
(In Millions)
Distribution . . . . . . . . . . . $122.5 $130.0 $110.7
Transmission . . . . . . . . . . . 98.0 84.0 79.9
Exploration and production . . . . . . 35.3 50.7 37.6
Other* . . . . . . . . . . . . . .3 8.7 1.1
Intercompany eliminations and adjustments . 1.3 .2 .8
______ ______ ______
Total . . . . . . . . . . . . $257.4 $273.6 $230.1
====== ====== ======
______________________________________________________________________________
* Includes CNG Gas Services, CNG Energy, Consolidated System LNG, CNG Research,
CNG Coal and Parent companies.

Due to the regulated nature of the distribution and transmission components of
Consolidated'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 operation. Weather is also an important factor since a major
portion of the gas sold or transported by the distribution and transmission
operations is ultimately used for space heating.

DISTRIBUTION

"Distribution" represents the results of Consolidated's six retail gas
distribution subsidiaries, including their minor gas and oil production
activities. These subsidiaries are subject to price regulation by their
respective state utility commissions.

Operating income for the gas distribution operations in 1993 was down $7.5
million, or 6 percent, from 1992. Higher costs of operations and the increase
during 1993 in the federal corporate income tax rate more than offset the
impact of slightly colder weather and a minor increase in throughput in 1993.
Overall, weather in Consolidated's retail service areas was 2 percent colder
than in 1992, but 1 percent warmer than normal. The colder weather, the net
addition of about 17,800 residential and commercial gas sales customers and the
full year impact of general rate increases placed into effect by two
subsidiaries in the latter part of 1992 contributed favorably to 1993 results.
To help mitigate the effect of rising non-gas operating costs and to enable a
return to be earned on new facilities placed in service, Consolidated's two
largest distribution subsidiaries, The East Ohio Gas Company and The Peoples
Natural Gas Company, have filed for general rate increases. However,
resolution of these proceedings is not expected until the latter part of 1994.

28

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Operating income in 1992 increased $19.3 million, or 17 percent, over 1991 due
in large part to colder weather in the 1992 period. Overall, weather in
Consolidated's retail service areas was 12 percent colder than in 1991, but 3
percent warmer than normal. However, due to the seasonality of their
operations, the overall deviation from normal weather in 1992 was not entirely
indicative of the weather's financial impact on the distribution operations.
Specifically, in the five principal heating months of 1992, weather in
Consolidated's retail service areas was 3 percent colder than in 1991 and 8
percent warmer than normal. The net addition of some 21,000 residential and
commercial gas sales customers also contributed to the improved operating
results. Further, the distribution operations benefited from a full year of
general rate increases granted to two subsidiaries during 1991, and the impact
of general rate increases placed into effect by two subsidiaries in the latter
part of 1992.

Exceptionally warm weather in 1991 had a particularly noticeable impact on gas
distribution operations, limiting the level of gas deliveries and holding
operating income in that year to a relatively low level. Weather in
Consolidated's retail service areas was 14 percent warmer than normal in 1991.

TRANSMISSION

"Transmission" includes the results of the gas transmission, storage, by-
product and certain other activities of CNG Transmission Corporation and the
activities of CNG Storage Service Company. Gas and oil production activities
of CNG Transmission are included in exploration and production operations. The
interstate gas transmission and related operations of CNG Transmission are
regulated by the FERC.

Operating income of the gas transmission operations in 1993 increased $14.0
million, or 17 percent, over 1992. The improvement was due partly to expanded
service to customers in the Northeast as a result of the Company's pipeline
construction program, increased throughput to affiliated distribution
companies, and higher gas storage service and by-product revenues. Colder
weather also contributed to the increased operating income in 1993. The
operating results of the transmission operations in the year were also
favorably affected, but to a lesser extent, by sales of gas from storage
inventory and certain other steps taken to facilitate the transition to FERC
Order 636.

Operating income in 1992 was up $4.1 million, or 5 percent, over 1991. The
expansion of transportation service to both new customers and existing
wholesale customers and end-users on the East Coast, including power generation
customers, and increased demand by traditional Northern Market customers were
the most significant factors affecting the 1992 results. Colder weather and
increased storage service revenues also contributed to the improvement. The
increased transportation to utilities and end-users in the Northeast and along
the East Coast was the result of the completion of several of the Company's
pipeline expansion projects. The impact of these positive factors was
partially offset by higher operating costs in 1992.

The operating results in 1991 were influenced to a large extent by the
implementation of restructured service agreements in connection with the
settlement with the FERC of CNG Transmission's 1988 general rate case. The
impact of this settlement included a significant increase in storage service
revenues resulting from customers' increased access to CNG Transmission's
storage facilities and increased gas transportation volumes due to the
conversion by some customers from sales service to firm transportation.

29

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

EXPLORATION AND PRODUCTION

"Exploration and production" includes the results of CNG Producing Company, the
gas and oil production activities of CNG Transmission, and, in 1992 and 1991,
the results of CNG Trading Company.

The adjustment to deferred income tax balances to reflect the increase in the
federal corporate income tax rate had a significant impact on the operating
income of Consolidated's exploration and production operations in 1993.
Operating income of the exploration and production operations was $35.3 million
in 1993, down from $50.7 million in 1992. These amounts are on an after-tax
basis consistent with the Statement of Income where income taxes are classified
as an operating expense. However, as a result of the implementation of SFAS
No. 109 and the increase in the federal tax rate, the comparison of 1993
operating results with 1992 is significantly distorted. Deferred tax benefits
resulting from the adoption of SFAS No. 109 in 1993 are included separately as
a component of net income below the operating income line as part of the
cumulative effect of the accounting change. In addition, operating income in
1993 for the exploration and production operations was reduced by $8.8 million
due to the tax rate increase, including the adjustment to existing deferred tax
balances required by SFAS No. 109 and the current year effect of applying the
new higher rate retroactive to January 1, 1993. By contrast, operating income
in 1992 reflected an increase for certain deferred tax benefits that had been
recognized under the previous accounting standard. On a pretax basis,
operating income of the exploration and production operations was $47.3 million
in 1993, up $8.5 million, or 22 percent, compared with $38.8 million in 1992.
Positive factors affecting operating results in 1993 included higher wellhead
prices for natural gas and slightly higher gas production. Consolidated's gas
wellhead prices in 1993 averaged $2.24 per thousand cubic feet, a 9 percent
increase from 1992. The positive factors were offset by higher income taxes,
lower oil prices and production, and lower margins on the brokering of gas.
The average oil wellhead price realized of $15.66 per barrel was 14 percent
below 1992 levels.

Operating income in 1992 rose $13.1 million, an increase of 35 percent over
1991. The impacts of higher gas wellhead prices and reduced operation and
maintenance expense were offset somewhat by lower gas and oil production and
lower wellhead oil prices. Gas wellhead prices followed industry trends,
falling early in the year but recovering and strengthening as the year
progressed. Consolidated's gas wellhead prices in 1992 averaged $2.05 per
thousand cubic feet, up 5 percent from 1991. The decline in operation and
maintenance expense resulted from cost containment programs and, to a lesser
extent, the lower gas and oil production levels. Overall, gas production for
1992 was down 4 percent and oil production was down 14 percent.

The generally adverse conditions in natural gas markets nationwide -- including
excess supply, reduced demand due to the warmer-than-normal weather and the
dramatically low level of wellhead prices -- were the primary reasons for the
relatively low operating income in 1991. The average gas wellhead price
realized was $1.96 per thousand cubic feet in 1991, the lowest level on an
annual basis in over 10 years. The shut-in of certain high-deliverability
offshore gas production for a portion of the year, and lower oil production and
prices also contributed to the low 1991 operating income.

30

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

UTILITY GAS SALES AND TRANSPORTATION VOLUMES

During 1993, the final portion of the FERC's plan to restructure the interstate
natural gas pipeline industry was set in motion as pipeline companies began
implementating the provisions of FERC Order 636. Similar to previous FERC
actions to enable more direct access to gas supplies and open access to
pipeline transportation systems, Order 636 has significantly increased
competition in the natural gas industry. In the restructured marketplace,
local gas utilities and other large-volume end-users, including former pipeline
sales customers, now bear all the responsibilities and risks for arranging the
procurement and delivery of their gas supplies.

On October 1, 1993, CNG Transmission implemented Order 636 with the required
"unbundled" services and new rate structure. Since Consolidated's utility
subsidiaries had already been managing a part of their own gas supplies, the
transition to the more competitive environment under Order 636 did not have a
significant impact on their operations. In addition, Consolidated, through its
CNG Gas Services subsidiary, continues to offer the equivalent of bundled
services previously provided by CNG Transmission.

The gas sales and transportation volumes of the distribution and transmission
operations for the last three years are presented in the following table.
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. "Normal weather," as the term is used in the gas industry,
represents the mean of temperatures experienced, measured in terms of degree
days, over a 30-year period. A degree day is a measure of the coldness of the
weather based on the extent to which the daily mean temperature falls below 65
degrees Fahrenheit. The 30-year average, which is calculated by a federal
agency, is updated approximately every 10 years. For Consolidated, "normal
weather" is determined using the weighted average of the normal degree days
experienced in its retail service territories.

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. The distribution and transmission operations provide gas
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.

_______________________________________________________________________________
UTILITY GAS SALES AND TRANSPORTATION 1993 1992 1991
_______________________________________________________________________________
(In Billion Cubic Feet)

DISTRIBUTION OPERATIONS
Sales. . . . . . . . . . . . . 297.8 293.6 273.3
Transportation. . . . . . . . . . 145.4 143.5 134.4
_____ _____ _____
Throughput . . . . . . . . . . 443.2 437.1 407.7
===== ===== =====
TRANSMISSION OPERATIONS
Sales. . . . . . . . . . . . . 100.1 42.4 142.3
Transportation. . . . . . . . . . 610.9 596.8 403.7
_____ _____ _____
Throughput* . . . . . . . . . . 711.0 639.2 546.0
===== ===== =====

* Includes intercompany activity.
_______________________________________________________________________________

31

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

DISTRIBUTION

Sales growth in Consolidated's residential service areas in Ohio, Pennsylvania
and West Virginia has generally been limited since such areas have experienced
minimal population growth, and the vast majority of households in these areas
already use natural gas for space heating. Opportunity for growth in the
retail sales market is expected to continue at Virginia Natural Gas, Inc., due
to customer conversions from other energy sources and the past and potential
future expansion of its service territory. Since Consolidated's acquisition of
this subsidiary in 1990, it has experienced an annual customer growth rate of
about 4 percent, well above the 1 percent rate for Consolidated's other
distribution subsidiaries. In 1993, Virginia Natural Gas connected about 7,800
new residential and commercial customers. The completion in 1992 of the 135-
mile intrastate pipeline in Virginia has provided Virginia Natural Gas and its
customers with new gas supply sources through access to Consolidated's
transmission system and storage facilities and has afforded additional
opportunities for growth in both gas sales and transportation, especially in
the power generation markets. Additional growth in distribution operations may
also occur as industrial customers and electric generators turn to natural gas
as a means to ensure compliance with the provisions of the Clean Air Act. In
this connection, the development of new gas-burning technologies for industry
and the wider acceptance of natural gas as a fuel for motor vehicles provide
opportunities for increased gas usage in market sectors that are not weather-
sensitive.

Gas sales of the distribution subsidiaries were somewhat higher in 1993 due to
slightly colder weather while transportation volumes remained relatively
unchanged from 1992. The net addition of approximately 17,800 customers in
1993 also contributed to the higher sales volumes. The weather in 1993 was 2
percent colder than in 1992, resulting in higher space-heating sales.
Residential gas sales increased 4.2 Bcf to 212.3 Bcf in 1993, and commercial
sales volumes were virtually unchanged at 72.7 Bcf. Industrial sales volumes
were flat with 1992 at 12.5 Bcf, while transportation volumes for industrial
customers were up 1.5 Bcf to 116.0 Bcf. Gas transported for commercial
customers was 21.1 Bcf in 1993, up 1.4 Bcf compared with 1992, while
transportation to off-system customers declined by 1.0 Bcf to 8.3 Bcf in 1993.

Significantly colder weather and increased economic activity were the primary
reasons for the increased gas deliveries by the distribution operations in 1992
compared with 1991. The weather, which overall was 12 percent colder than in
1991, resulted in increased gas usage by space-heating customers. Residential
gas sales volumes increased 15.8 Bcf in 1992 to 208.1 Bcf, while sales to
commercial customers were up 3.2 Bcf to 72.6 Bcf. Sales to industrial
customers were 12.5 Bcf, up 1.3 Bcf over 1991, and transportation volumes for
these customers increased 4.8 Bcf to 114.5 Bcf. Transportation for commercial
customers was also higher in 1992, increasing by 2.5 Bcf.

TRANSMISSION

Changing regulatory policies intended to increase competition in the natural
gas industry have been the principal factor affecting the transmission
operations over the past several years. Beginning with open access
transportation and culminating with the significant service restructuring
required by FERC Order 636, the role of the Company's transmission operations
has changed from that of primarily a merchant, or wholesaler, of gas to one
that provides a range of gas transportation, storage, and other related
services. The changing regulatory environment has also 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 the efforts toward potentially high-volume, weather-sensitive
markets and areas with growing power generation needs located primarily in the
Northeast and along the East Coast. This expansion takes advantage of
Consolidated'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.

32

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

CNG Transmission implemented Order 636 effective October 1, 1993 and, as
required by the Order, "unbundled" its services and revised its customer
contracts and service tariffs. Customers now have even greater access to the
Company's pipeline and storage capacity, together with a range of options
available with respect to gas transportation and storage services. With the
implementation of Order 636, CNG Transmission abandoned its traditional sales
service which consisted of various elements of gas sales, transportation and
storage that were offered and priced as a single bundled service. However,
Consolidated continues to provide the equivalent of "bundled" services through
its unregulated CNG