<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Act of 1934 for the Quarterly Period ended
September 30, 1997.
Commission File Number: 0-22867
CONTINENTAL NATURAL GAS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oklahoma 73-1198957
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1412 South Boston, Suite 500
Tulsa, Oklahoma 74119
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(918) 582-4700
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of October 1,
1997, 6,315,000 common shares, $.01 par value, were outstanding.
<PAGE> 2
CONTINENTAL NATURAL GAS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I. Financial Information:
Item 1 -- Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets September 30, 1997 and
December 31, 1996....................................... 2
Consolidated Condensed Statements of Operations Three and
Nine Months Ended September 30, 1997 and 1996........... 3
Consolidated Condensed Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996........... 4
Notes to Consolidated Condensed Financial Statements........ 5
Report of Review by Independent Accountants................. 6
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7
PART II. Other Information:
Item 1 -- Legal Proceedings................................. 12
Item 2 -- Changes in Securities............................. 12
Item 3 -- Defaults Upon Senior Securities................... 13
Item 4 -- Submission of Matters to a Vote of Security
Holders........................................... 13
Item 5 -- Other Information................................. 14
Item 6 -- Exhibits and Reports on Form 8-K.................. 14
Signatures................................................................ 15
</TABLE>
1
<PAGE> 3
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1997 1996
------------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,287 $ 21,078
Accounts receivable:
Trade.................................................. 36,421 44,931
Affiliates............................................. 5,019 5,969
Other.................................................. 1,399 1,150
Notes receivable -- affiliates............................ 18 18
Gas inventory............................................. 650 3,149
Prepaid expenses.......................................... 82 164
-------- --------
Total current assets...................................... 49,876 76,459
Investments................................................. 527 656
Property and equipment, net of accumulated depreciation
and amortization of $9,035 for 1997 and $6,183 for 1996... 69,898 61,045
Deferred tax asset.......................................... 6,608 7,075
Other assets................................................ 672 694
-------- --------
Total assets................................................ $127,581 $145,929
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 47,916 $ 56,708
Affiliate payables........................................ -- 464
Contract advances......................................... 518 24,788
Current portion of long-term debt......................... 4,204 867
Current portion of capital lease obligations.............. 1,372 1,165
-------- --------
Total current liabilities................................. 54,010 83,992
Long-term debt.............................................. 23,301 32,946
Capital lease obligations................................... 6,588 6,583
Deferred gain on sale-leaseback............................. 163 254
-------- --------
Total liabilities........................................... 84,062 123,775
Commitments and contingencies
Shareholders' equity
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued................................ -- --
Convertible preferred stock, $1 par value, $40,000
liquidation value, 200 shares authorized and 149 shares
issued and outstanding in 1996......................... -- --
Common stock, $.01 par value, 60,000,000 shares
authorized and 6,621,003 shares issued in 1997 and
3,919,156 issued in 1996 .............................. 66 39
Additional paid-in capital................................ 33,797 12,376
Retained earnings......................................... 9,960 10,043
Treasury stock, at cost................................... (204) (204)
Receivable from stock sale................................ (100) (100)
-------- --------
Total shareholders' equity................................ 43,519 22,154
-------- --------
Total liabilities and shareholders' equity.................. $127,581 $145,929
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE> 4
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Natural gas sales............................ $ 63,609 $ 45,742 $ 188,270 $ 112,895
Natural gas sales -- related party........... 4,611 5,676 14,713 5,676
Natural gas liquids sales.................... 12,773 8,763 30,751 21,770
Gathering fees............................... 754 659 2,863 1,195
Other........................................ 15 194 21 884
---------- ---------- ---------- ----------
Total operating revenue...................... 81,762 61,034 236,618 142,420
---------- ---------- ---------- ----------
Operating costs and expenses:
Cost of purchased gas...................... 76,424 56,636 219,017 129,512
Operating expenses......................... 1,599 1,566 4,676 4,421
General and administrative................. 1,814 1,247 5,412 3,658
Depreciation, depletion and amortization... 1,020 811 2,852 1,947
---------- ---------- ---------- ----------
Total operating costs and expenses......... 80,857 60,260 231,957 139,538
---------- ---------- ---------- ----------
Operating income............................. 905 774 4,661 2,882
---------- ---------- ---------- ----------
Other income (expense):
Interest income............................ 80 22 491 96
Equity in loss of investee................. (31) (38) (94) (90)
Interest expense........................... (1,213) (823) (3,994) (1,798)
Other, net................................. 68 46 158 130
---------- ---------- ---------- ----------
Total other income (expense)............... (1,096) (793) (3,439) (1,662)
---------- ---------- ---------- ----------
Income before income taxes................... (191) (19) 1,222 1,220
Income tax (expense) benefit................. 73 (15) (493) (44)
---------- ---------- ---------- ----------
Net income (loss)............................ $ (118) $ (34) $ 729 $ 1,176
========== ========== ========== ==========
Net income (loss) per common share:
Primary.................................... $ (.02) $ (.05) $ .12 $ .21
========== ========== ========== ==========
Fully diluted.............................. $ (.02) $ (.05) $ .11 $ .20
========== ========== ========== ==========
Weighted average common shares outstanding:
Primary.................................... 5,414,384 3,613,153 4,213,563 3,510,488
Fully diluted.............................. 5,414,384 3,613,153 4,413,188 3,709,440
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 5
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1996
-------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash Flows from operating activities:
Net income................................................ $ 729 $ 1,176
-------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization............... 2,852 1,947
Amortization of debt issuance costs.................... 117 199
Gain on disposition of assets.......................... (91) (91)
Equity in loss of investee............................. 94 90
Deferred income tax expense............................ 467 --
Noncash compensation on stock issuance................. -- 46
Changes in operating assets and liabilities
Accounts receivable.................................. 9,211 (12,838)
Gas inventory........................................ 2,499 (761)
Prepaid expenses..................................... 82 (19)
Accounts payable..................................... (8,363) 16,448
Contract advance..................................... (24,270) --
-------- --------
Total Adjustments................................. (17,402) 5,021
-------- --------
Net cash provided by (used in) operating activities....... (16,673) 6,197
-------- --------
Cash flows from investing activities:
Capital expenditures...................................... (11,492) (27,765)
Proceeds from sale of fixed assets........................ 9 --
(Increase) decrease in investments........................ 35 --
-------- --------
Net cash used in investing activities..................... (11,448) (27,765)
-------- --------
Cash flows from financing activities:
Preferred dividends paid.................................. (811) --
Proceeds from sale of common stock........................ 21,448 --
Principal payments on long--term debt..................... (19,969) (7,091)
Proceeds of long--term debt............................... 13,661 27,163
Debt issuance costs....................................... (94) (387)
Principal payments under capital lease obligations........ (904) (441)
-------- --------
Net cash provided by financing activities................. 13,331 19,244
-------- --------
Net decrease in cash and cash equivalents................. (14,790) (2,324)
Cash and cash equivalents at beginning of year............ 21,078 4,656
-------- --------
Cash and cash equivalents at end of year.................. $ 6,287 2,332
======== ========
Supplemental disclosure of cash flow information:
Interest paid.......................................... $ 2,758 $ 1,515
======== ========
Income taxes paid...................................... $ 460 $ 100
======== ========
</TABLE>
The accompanying notes are integral part of the consolidated financial
statements.
4
<PAGE> 6
CONTINENTAL NATURAL GAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PREPARATIONS AND PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments necessary (all adjustments are of a
normal recurring nature) to present fairly the financial position of the Company
as of September 30, 1997 and the results of its operations for the three and
nine month periods ended September 30, 1997, and 1996 and cash flows for the
nine months ended September 30, 1997 and 1996. Results for the three and nine
months ended September 30, 1997 are not necessarily indicative of the results to
be realized during the full year. The year end consolidated balance sheet data
was derived from the audited financial statements (included in the Company's
Registration Statement on Form S-1) but does not include all disclosures
required by generally accepted accounting principles. These financial statements
should be read in conjunction with the Company's audited financials as of and
for the year ended December 31, 1996 included in the Form S-1.
NOTE 2 -- INITIAL PUBLIC OFFERING
The Company completed an initial public offering of Common Stock on August
6, 1997, selling 2,115,000 shares for $11.25 per share, yielding net proceeds of
approximately $21.4 million. The proceeds have been used to pay $17.3 million on
the Company's term loan facility, $2.0 million on its revolving facility, to pay
$0.6 million in accrued dividends on its Convertible Preferred Stock and the
remainder for other general purposes.
NOTE 3 -- NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("FAS 128"). FAS
128 will change the computation, presentation and disclosure requirements for
earnings per share. FAS 128 requires the presentation of "basic" and "diluted"
earnings per share, as defined, for all entities with complex capital
structures. FAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, and requires restatement of all prior period
earnings per share amounts. The Company has not yet determined the impact that
FAS 128 will have on its earnings per share when adopted.
5
<PAGE> 7
REPORT OF INDEPENDENT ACCOUNTANTS
We have reviewed the accompanying consolidated balance sheet of Continental
Natural Gas, Inc. and Subsidiaries as of September 30, 1997, and the related
consolidated statements of operations for the three and nine months ended
September 30, 1997 and 1996, and cash flows for the nine months ended
September 30, 1997 and 1996. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Continental Natural Gas Inc and
subsidiaries at December 31, 1996, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for the year then
ended (not presented herein); and our report dated March 21, 1997 expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet at
December 31, 1996, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
November 11, 1997
6
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The Company's results of operations are determined primarily by the
volume of natural gas purchased, processed and resold in its natural gas
gathering systems and processing plants. The Company also purchases for resale
natural gas unrelated to its gathering or processing business ("off-system
gas") which contributes to its profitability. Acquisitions in the first half
of 1996, of approximately 800 miles of natural gas gathering lines located
throughout the Texas panhandle (the "Texas Gathering Assets"), have had a
significant impact on the Company's results of operations.
Fluctuations in the price levels of natural gas and natural gas
liquids ("NGLS") also affect results of operations since the Company generally
receives a portion of the natural gas and NGLs revenue from natural gas
throughput. Most of the Company's operating expenses do not vary materially
with changes in natural gas throughput volume on existing systems; thus,
increases or decreases in volumes on existing systems generally have a direct
effect on the Company's profitability. Conversely, operating expenses such as
compression rental and compression maintenance expenses vary with volume
changes as compressor units are added or removed accordingly.
Third Quarter 1997 Compared to Third Quarter 1996
Revenues. Total operating revenue increased 34% to $81.8 million for
the third quarter of 1997 as compared to $61.0 million for the same period in
1996. Total natural gas sales increased 33% to $68.2 million for the third
quarter of 1997 from $51.4 million for the same period in 1996. The increase
was a result of a $11.9 million price-related increase due to average natural
gas sales prices of $2.55 per Mcf in 1997 compared to $2.11 per Mcf in 1996 and
a $4.9 million volume-related increase due to sales of 297.4 MMcf/d in 1997
compared to 271.4 MMcf/d in 1996. The increase in volume resulted mainly from
increases in off-system gas marketing sales.
NGL sales increased 46% to $12.8 million for the third quarter of 1997
as compared to $8.8 million for the same period last year primarily as a result
of a $3.2 million volume-related increase due to increased natural gas
processing throughput.
Gathering fees earned increased to $.8 million for the third quarter
of 1997 as compared to $0.7 million for the same period in 1996.
Costs and Expenses. Total operating costs and expenses increased 34%
to $78.0 million for the third quarter of 1997 compared to $58.2 million for
the same period in 1996. Total natural gas costs increased 35% to $76.4
million in 1997 from $56.6 million in 1996 as a result of increases in price
and volume. The
7
<PAGE> 9
$12.7 million price-related increase (resulting from a change in average
purchase prices of $2.50 per Mcf in 1997 from $2.08 per Mcf in 1996) was
mitigated by approximately $0.8 million of avoided gathering fees caused by the
integration of the Texas Gathering Assets into the Company's processing
business. A $7.1 million volume-related increase resulted from purchases of
339.7 MMcf/d in 1997 compared to 301.9 MMcf/d in 1996. This increase in volume
resulted primarily from increases in off-system gas marketing purchases.
General and administrative expenses increased 45% to $1.8 million for
the third quarter of 1997 from $1.2 million in the same period last year. This
increase was due primarily to the addition of marketing personnel and
administrative support activities related to the Texas Gathering Assets.
Depreciation, depletion and amortization increased to $1.0 million for
the third quarter of 1997 from $0.8 million for the same period in 1996
principally due to the various acquisitions and system expansions.
Other Income (Expense). Interest income increased to $80,000 for the
third quarter of 1997 from $22,000 for the third quarter of 1996 due to
increased cash investments associated with contract advances received in the
fourth quarter of 1996. During these same time periods, interest expense
increased 47% to $1.2 million from $0.8 million due primarily to increased
average borrowing levels including capital lease financings.
Income Taxes. For 1997, the Company's effective income tax rate
approximates the sum of the federal and state statutory rates while in 1996,
the Company's effective tax rate was significantly impacted by its net
operating loss carryforwards.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Revenues. Total operating revenue increased 66% to $236.6 million for
the nine months ended September 30, 1997 as compared to $142.4 million for the
same period in 1996. Total natural gas sales increased 71% to $203.0 million
for the nine months ended September 30, 1997 from $118.6 million for the same
period in 1996 as a result of a $32.0 million price-related increase due to
average sales prices of $2.58 per Mcf in 1997 compared to $2.18 per Mcf in 1996
and a $52.4 million volume-related increase due to sales of 291.2 MMcf/d in
1997 compared to 201.9 MMcf/d in 1996. This increase in volume resulted
primarily from increases in off-system gas marketing sales.
NGL sales increased 41% to $30.8 million for the nine months ended
September 30, 1997 as compared to $21.8 million for the same period last year
as a result of a $4.6 million price-related increase due to average NGL sales
prices of $0.36 per gallon in 1997 compared to $0.30 per gallon in 1996 and a
$4.4 million volume-related increase due to increased natural gas processing
throughput.
8
<PAGE> 10
The Company earned gathering fees of $2.9 million for the nine months
ended September 30, 1997 as compared to $1.2 million for the same period in
1996 as a result of the acquisition of the Texas Gathering Assets.
Costs and Expenses. Total operating costs and expenses increased 67%
to $223.7 million for the nine months ended September 30, 1997 as compared to
$133.9 million for the same period in 1996. Total natural gas costs increased
69% to $219.0 million in 1997 from $129.5 million in 1996 as a result of
increases in price and volume. The $36.0 million price-related increase
(resulting from a change in average purchase prices of $2.51 per Mcf in 1997
from $2.10 per Mcf in 1996) was mitigated by approximately $1.9 million of
avoided gathering fees caused by the integration of the Texas Gathering Assets
into the Company's processing business. A $53.5 million volume-related increase
resulted from purchases of 323.4 MMcf/d in 1997 compared to 228.9 MMcf/d in
1996. This increase in volume resulted primarily from increases in off-system
gas marketing purchases.
Operating expenses increased to $4.7 million for the nine months ended
September 30, 1997 from $4.4 million for the same period in 1996. This was due
mainly to operating activities from the acquisition of the Texas Gathering
Assets.
General and administrative expenses increased 48% to $5.4 million for
the nine months ended September 30, 1997 from $3.7 million in the same period
last year. This increase was due primarily to the addition of marketing
personnel and administrative support activities related to the Texas Gathering
Assets.
Depreciation, depletion and amortization increased 46% to $2.9
million for the nine months ended September 30, 1997 from $1.9 million for the
same period in 1996 principally due to the acquisition of the Texas Gathering
Assets and expansions at the Company's Beaver processing plant.
Other Income (Expense). Interest income increased to $0.5 million for
the nine months ended September 30, 1997 from $.1 million for the nine months
ended September 30, 1996 due to increased cash investments associated with
contract advances received in the fourth quarter of 1996. During these same
time periods, interest expense increased 122% to $4.0 million from $1.8 million
due primarily to additional debt incurred to finance the acquisition of the
Texas Gathering Assets and expansion of the company's existing facilities.
Income Taxes. Income tax expense increased to $.5 million for the nine
months ended September 30, 1997 from $44,000 for the same period in 1996. For
1997, the Company's tax rate approximates the sum of the federal and state
statutory rates while in 1996, the
9
<PAGE> 11
Company's effective tax rate was significantly impacted by the benefit from its
net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company's primary sources of liquidity and capital
resources historically have been net cash provided by operating activities and
bank borrowings. The Company completed an initial public offering of Common
Stock on August 6, 1997, selling 2,115,000 shares for $11.25 per share,
yielding net proceeds of approximately $21.4 million. The proceeds were used
to pay $17.3 million on the Company's term loan facility and $2.0 million on
its revolving facility, to pay $0.6 million in accrued dividends on its
Convertible Preferred Stock and the remainder for other general corporate
purposes.
The following summary table reflects comparative cash flows for the
Company for the years nine months ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
in thousands
<S> <C> <C>
Net cash provided by (used in)
operating activities...................................... (16,673) 6,197
Net cash provided by (used in)
investing activities...................................... (11,448) (27,765)
Net cash provided by (used in)
financing activities...................................... 13,331 19,244
</TABLE>
For the nine months ended September 30, 1997, net cash provided by
operating activities decreased by approximately $22.9 million from the same
period in 1996. This was mainly attributable to changes in working capital
including the repayment of contract advances totalling $24.3 million. Excluding
net changes in working capital components, the Company's operating activities
generated $4.2 million for this period in 1997 and $3.4 million in 1996.
Cash used in investing activities for the nine months ended September
30, 1997 was primarily for expansion projects on the Texas Gathering Assets and
the $2.9 million acquisition of 53% interest in a natural gas processing plant
located in Harper County, Oklahoma. Cash used in investing activities for the
same period in 1996 was mainly for the acquisition of the Texas Gathering
Assets in the second quarter of 1996.
Cash provided by financing activities for the nine months ended
September 30, 1997 resulted mainly from the net proceeds of the Company's
initial public offering. These proceeds were offset
10
<PAGE> 12
by repayments on the Company's revolving and term loan facility. Cash provided
by financing activities for the same period in 1996 resulted mainly from
long-term borrowing for the acquisition of the Texas Gathering Assets.
Financing Facilities. The Company entered into a Credit Agreement
with ING Capital Corporation as of December 3, 1996. The Credit Agreement
contains a revolving facility and a term loan facility. The revolving facility
has a maximum borrowing base of $25.0 million which had outstanding borrowings
of $8.0 million as of September 30, 1997. Under the term loan facility
approximately $19.5 million was outstanding as of September 30, 1997. Interest
rates under both the revolving facility and term facility are variable, at the
Company's election, at: (i) up to 3/4% (depending upon the Company's financial
performance) above the greater of (x) the arithmetic average of the prime rates
announced by Chase Manhattan Bank, Citibank, N.A. and Morgan Guaranty Trust
Company of New York or (y) the federal funds rate as published by the Federal
Reserve Bank of New York plus 1/2%; or (ii) 1.375% to 2.5% (depending upon the
Company's financial performance) above the London Interbank Offered Rate
(LIBOR). Current interest payments on the revolving facility and repayments
under the term facility began on January 31, 1997. The revolving facility
contains a sub-limit permitting the Company to issue Letters of Credit
amounting, in the aggregate, to $18.0 million. As of September 30, 1997, the
aggregate amount outstanding under the Letters of Credit was $6.9 million.
The Company had a Letter of Credit and Reimbursement Agreement with
Christiania Bank, New York, Branch. Under the Reimbursement Agreement,
Christiania Bank initially issued letters of credit in the aggregate amount of
approximately $21.0 million to secure the Company's obligation under various
contract advances. All letters of credit under this agreement expired during
the third quarter of 1997. The Company paid a fee of 1 1/2% per annum for the
amount of each Letter of Credit which was issued.
SEASONALITY
The Company's results of operations fluctuate from quarter to quarter,
due to variations in the prices and sales volumes of NGL's and natural gas. The
Company's primary NGL product is propane, which is used for agricultural and
home heating in the Company's market areas. Demand and prices of propane
usually increase during the winter season and decrease during the summer
season. The Company's principal commodity, natural gas, is used primarily for
heating fuel for homes and industry, and for electric power generation. Demand
and prices for natural gas usually increase during the winter season. While
the Company's gross revenues typically increase or decrease seasonally,
profitability from natural gas processing operations is affected by the margins
between the cost of natural gas purchased and the sales prices of the NGLs
extracted, which may not follow seasonal patterns.
11
<PAGE> 13
PART II --- OTHER INFORMATION
Item 1. Legal Proceedings.
As disclosed in its Registration Statement on Form S-1, File
Number 333-25719, filed April 24, 1997, as amended, Registrant filed a lawsuit,
Continental Natural Gas, Inc. v. Colorado Interstate Gas Company, Case No.
96-CV- 0041-BU, in the United States District Court for the Northern District
of Oklahoma. In addition to other claims, the Registrant alleged constructive
fraud in connection with negotiations between Registrant and Colorado
Interstate Gas Company ("CIG"). On September 30, 1997, the court ruled in
favor of CIG on its motion for partial summary judgment and dismissed
Registrant's fraud claims. Rather than appeal this ruling, the Registrant
dismissed the remainder of its claims against CIG without prejudice to the
refiling of those claims.
Two complaints were pending before the Federal Energy
Regulatory Commission (the "FERC") in which parties alleged that the FERC
should regulate the rates and operations of certain aspects of the Registrant's
business (GPM Gas Corporation v. Continental Natural Gas, Inc., Docket No.
C96-495-000; Plant Owners v. Continental Natural Gas, Inc., Docket No.
CP96-577-000). The persons initiating these proceedings alleged that the use
of the Registrant's facilities to receive natural gas from, and deliver natural
gas to, interstate pipelines renders those facilities subject to FERC's
jurisdiction. On September 12, 1997, the FERC issued an Order Denying
Complaint filed by GPM. On the same day the FERC issued an Order on Complaint
filed by the Plant Owners. The second Order issued by FERC determined that an
eleven (11) mile section of pipeline (the "Residue Line") from Registrant's
Beaver Plant to an interconnection with an interstate pipeline operated by ANR
Pipeline Company is subject to FERC jurisdiction. The second Order also
indicated that the FERC would exempt the Registrant's Residue Line from the
FERC's reporting and ratemaking regulations. The Registrant is currently
preparing an application to submit the Residue Line to FERC jurisdiction. The
Registrant does not believe that subjecting the Residue Line to FERC
jurisdiction will adversely effect Registrant's operations or financial
condition to any material degree.
Item 2. Changes in Securities.
The transactions described below were contemplated by and
described in the Registrant's Registration Statement on Form S-1 File Number
333-25719, filed April 24, 1997, as amended.
On July 28, 1997, all of the Registrant's issued and
outstanding Convertible Preferred Stock (plus accrued dividends) was converted
into 4,315 shares of the Registrant's common stock.
12
<PAGE> 14
On July 29, 1997, the Registrant adopted Amended and Restated
Articles of Incorporation. Under its Amended and Restated Articles of
Incorporation the authorized shares of common stock of the Registrant were
increased from 50,000 to 60,000,000 and the par value of such shares was
reduced from $1.00 to $.01. In addition, the authority of the Registrant to
issue Convertible Preferred Stock was terminated and replaced with the
authority to issue 5,000,000 shares of Preferred Stock, par value $.01. The
Preferred Stock may be issued with such rights and preferences as determined by
the Registrant's Board of Directors. Other terms and provisions of the Amended
and Restated Articles of Incorporation are more fully set forth therein and
described in the Registrant's Registration Statement on Form S-1 File Number
333-25719, filed on April 24, 1997, as amended.
In addition, the Registrant's Board of Directors adopted
Amended and Restated Bylaws on July 30, 1997. Pertinent provisions of the
Amended and Restated Bylaws are set forth in the Registrant's Registration
Statement on Form S-1, File Number 333-25719, filed on April 24, 1997, as
amended.
The Registrant's Registration Statement on Form S-1, File
Number 333-25719, filed on April 24, 1997, as amended, became effective on
July 31, 1997. The manager underwriters for the Registrant's offering were
Oppenheimer & Co., Inc. and Southwest Securities, Inc. Pursuant to the
Registration Statement the Registrant completed a public offering of 2,415,000
shares of the Registrant's common stock on August 1, 1997, (inclusive of
315,000 shares under an over-allotment option in favor of the Registrant's
underwriters). Three hundred thousand (300,000) of such shares were sold for
the benefit of a selling shareholder, Adams Affiliates, Inc. The aggregate
sales price for the account of the Registrant (calculated at the initial
offering price of $11.25) was $23,793,750 (inclusive of the funds received as a
result of the underwriter's over-allotment option). The aggregate sales price
for the account of the selling shareholder (calculated at the initial offering
price of $11.25) was $3,375,000.
For the period commencing on the effective date of its
Registration Statement the Registrant incurred total expenses in connection
with the offering of its common stock of $2,346,000. Of such amount, $1,839,000
represented underwriters' discounts and $507,000 in other expenses (such as
legal, printing, accounting and transfer agent fees). A portion of the
underwriters' discount (estimated to be approximately $400,000) was paid to
Oppenheimer & Co., Inc. -- William H. Bauch, a Senior Vice President of
Oppenheimer & Co., Inc. became a director of the Registrant effective as of
August 6, 1997. A portion of Registrant's legal expenses (estimated to be
approximately $160,000) in connection with the offering were paid to Hall,
Estill, Hardwick, Gable, Golden & Nelson, P.C. -- William W. Pritchard is of
counsel to Hall, Estill and became a director of the Registrant effective as
of August 6, 1997. All other expenses in connection with the offering were paid
to persons unaffiliated with the Registrant.
After deducting the expenses set forth in the preceding
paragraph, the Registrant received net offering proceeds of approximately $21.4
million. These proceeds were used in the following manner: $17.3 million to
repay a portion of Registrant's term loan facility with ING Capital, $2.0
million to repay a portion of Registrant's revolving facility with ING Capital,
$600,000 to pay accrued (and unpaid) dividends on Registrant's Convertible
Preferred Stock and the remaining $1.5 million for working capital. The
dividends paid with respect to Registrant's Convertible Preferred Stock were (as
described in the Registration Statement) paid to persons owning ten (10) percent
for more of a class of Registrant's equity securities.
Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The actions of the Shareholders described below were
contemplated by and originally described in the Registrant's Registration
Statement on Form S-1 File Number 333-25719, filed April 24, 1997, as amended.
By Certificate of Action dated July 28, 1997, the directors and shareholders of
Registrant unanimously approved a Stock Conversion Agreement whereby all of the
Registrant's Convertible Preferred Stock (plus accrued dividends) were
converted into shares of the Registrant's common stock.
13
<PAGE> 15
By Certificates of Action dated July 29, 1997, the directors
and shareholders of Registrant unanimously adopted, Amended and Restated
Articles of Incorporation for the Registrant. The terms of the Amended and
Restated Articles of Incorporation were filed as Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1, File Number 333-25719 filed
April 14, 1997, as amended. In connection with the adoption of Registrant's
Amended and Restated Articles of Incorporation, the Board of Directors of the
Registrant declared a 136.0016 for one stock split.
By Certificate of Action dated July 30, 1997, the shareholders
of the Registrant unanimously elected a Board of Directors and approved all
actions of the Board of Directors and officers of the Registrant since the
Registrant's last annual meeting. Scott C. Longmore and Terry K. Spencer were
elected as Class I Directors, Garry D. Smith and William H. Bauch were elected
as Class II Directors and Gary C. Adams and William W. Pritchard were elected
as Class III Directors. In addition, by Certificate of Action dated July 30,
1997, the Board of Directors and shareholders of the Registrant unanimously
adopted the Registrant's 1997 Stock Plan. The Board of Directors is identified
and the 1997 Stock Plan is described in (and attached as Exhibit 10.4 to) the
Registrant's Registration Statement, File Number 333-25719 filed on April 24,
1997, as amended.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Attached hereto are the following Exhibits:
Exhibit No. Description
11 Statement regarding computation of per share earnings.
27 Financial Data Schedule.
(b) No reports on Form 8-K were filed for the quarter for which
this report is filed.
14
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CONTINENTAL NATURAL GAS, INC.
Date: November 14, 1997 By: /s/ Garry D. Smith
----------------------------------
Garry D. Smith, Vice
President, Controller and Chief
Financial and Accounting
Officer
15
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
11 Statement regarding computation of per share earnings.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Net income.................................. $ (118,487) $ (34,101) $ 728,531 $1,176,136
Cumulative preferred dividends.............. -- (150,000) (223,500) (450,000)
Adjusted net income......................... (118,487) (184,101) 505,031 726,136
---------- ---------- ---------- ----------
Reconciliation of weighted average number of
shares outstanding to amount used in
primary earnings per share computation:
Weighted average number of shares
outstanding............................ 5,414,384 3,613,153 4,213,563 3,510,488
Weighted average number of common and
common equivalent shares outstanding... 5,414,384 3,613,153 4,213,563 3,510,488
---------- ---------- ---------- ----------
Primary net income (loss) per common
share.................................. $(0.02) $(0.05) $0.12 $0.21
-------- -------- ----- -----
FULLY DILUTED EARNINGS PER SHARE
Net income.................................. (118,487) (34,101) 728,531 1,176,136
Cumulative preferred dividends.............. -- (150,000) (223,500) (450,000)
Adjusted net income......................... (118,487) (184,101) 505,031 726,136
---------- ---------- ---------- ----------
Reconciliation of weighted average number of
shares outstanding to amount used in fully
diluted earnings per share computation:
Weighted average number of shares
outstanding............................ 5,414,384 3,613,153 4,213,563 3,510,488
Dilutive effect of assumed exercise of
options................................ N/A N/A 199,625 198,952
Dilutive effect of assumed conversion of
Preferred Stock........................
Weighted average number of common and
common equivalent shares outstanding... 5,414,384 3,613,153 4,413,188 3,709,440
---------- ---------- ---------- ----------
Fully diluted net income (loss) per
common share.............................. $(0.02) $(0.05) $0.11 $0.20
-------- -------- ----- -----
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF CONTINENTAL NATURAL GAS, INC. AND
SUBSIDIARIES UNDER COVER OF FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,287
<SECURITIES> 0
<RECEIVABLES> 42,857<F1>
<ALLOWANCES> 259
<INVENTORY> 650
<CURRENT-ASSETS> 49,876
<PP&E> 69,898
<DEPRECIATION> 2,852
<TOTAL-ASSETS> 127,581
<CURRENT-LIABILITIES> 54,010
<BONDS> 0
0
0
<COMMON> 66
<OTHER-SE> 43,453
<TOTAL-LIABILITY-AND-EQUITY> 127,581
<SALES> 236,597
<TOTAL-REVENUES> 236,618
<CGS> 219,017
<TOTAL-COSTS> 231,957
<OTHER-EXPENSES> 555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,994
<INCOME-PRETAX> 1,222
<INCOME-TAX> 493
<INCOME-CONTINUING> 729
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 729
<EPS-PRIMARY> .12
<EPS-DILUTED> .11
<FN>
<F1>ACCOUNTS RECEIVABLE IS PRESENTED NET IN THE CONSOLIDATED BALANCE SHEET.
</FN>
</TABLE>
