<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 Exchange Act of 1934 for the Quarterly Period ended
March 31, 1998
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.)
1437 SOUTH BOULDER, SUITE 1250
TULSA, OKLAHOMA 74119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (918) 582-4700
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.
Yes X 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 May 1, 1998,
6,315,000 common shares, $0.1 par value, were outstanding.
<PAGE> 2
CONTINENTAL NATURAL GAS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. Financial Information.
Item 1 - Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets March 31, 1998............ 2
and December 31, 1997
Consolidated Condensed Statements of Operations................. 3
Three Months Ended March 31, 1998 and 1997
Consolidated Condensed Statements of Cash Flows................. 4
Three Months Ended March 31, 1998 and 1997
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...................................... 11
Item 2 - Changes in Securities.................................. 12
Item 3 - Defaults Upon Senior Securities........................ 12
Item 4 - Submission of Matters to a Vote of Security Holders.... 12
Item 5 - Other Information...................................... 12
Item 6 - Exhibits and Reports on Form 8-K....................... 13
Signatures
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------- ------------
1998 1997
------------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,785 $ 1,237
Accounts receivable:
Trade.................................................. 37,384 38,184
Affiliates............................................. 5,241 7,386
Other.................................................. 3,806 5,533
Notes receivable -- affiliates............................ 18 18
Investments............................................... 6,000 --
Gas inventory............................................. 2,763 1,679
Prepaid expenses.......................................... 199 240
-------- --------
Total current assets...................................... 59,196 54,277
Investments................................................. 486 527
Property and equipment, net of accumulated depreciation and
amortization of $12,839 for 1998 and $10,271 for 1997..... 120,617 114,785
Deferred tax asset.......................................... 8,472 7,683
Other assets................................................ 1,652 1,662
-------- --------
Total assets................................................ $190,423 $178,934
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 45,969 $ 48,755
Current portion of long-term debt......................... 10,500 7,500
Current portion of capital lease obligations.............. 1,370 1,402
-------- --------
Total current liabilities................................. 57,839 57,657
Long-term debt.............................................. 86,125 73,500
Capital lease obligations................................... 5,919 6,226
Deferred gain on sale-leaseback............................. 102 132
-------- --------
Total liabilities........................................... 149,985 137,515
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
none outstanding ...................................... -- --
Common stock, $.01 par value, 60,000,000 shares
authorized and 6,621,003 shares issued ................ 66 66
Additional paid-in capital................................ 34,472 34,472
Retained earnings......................................... 6,730 7,987
Treasury stock, at cost................................... (204) (204)
Receivable from stock sale................................ (100) (100)
Unearned compensation associated with stock options....... (526) (802)
Total shareholders' equity................................ 40,438 41,419
-------- --------
Total liabilities and shareholders' equity.................. $190,423 $178,934
======== ========
</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
MARCH 31,
-----------------------
1998 1997
---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C>
Natural gas sales............................ $ 60,179 $ 72,956
Natural gas sales -- related party........... 4,635 5,832
Natural gas liquids sales.................... 11,513 8,881
Gathering fees............................... 1,996 1,287
Other........................................ 102 15
---------- ----------
Total operating revenue...................... 78,425 88,971
---------- ----------
Operating costs and expenses:
Cost of purchased gas...................... 72,040 81,861
Operating expenses......................... 2,713 1,559
General and administrative................. 2,517 1,842
Depreciation, depletion and amortization... 1,708 899
---------- ----------
Total operating costs and expenses......... 78,978 86,161
---------- ----------
Operating income (loss)...................... (553) 2,810
---------- ----------
Other income (expense):
Interest income............................ 47 280
Equity in loss of investee................. (41) (33)
Interest expense........................... (2,011) (1,466)
Other, net................................. 495 48
---------- ----------
Total other income (expense)............... (1,510) (1,171)
---------- ----------
Income (loss) before income taxes............ (2,063) 1,639
Income tax (expense) benefit................. 805 (652)
---------- ----------
Net income (loss)............................ $ (1,258) $ 987
========== ==========
Net income (loss) per common share:
Basic...................................... $ (.20) $ .24
========== ==========
Diluted.................................... $ (.20) $ .23
========== ==========
Weighted average common shares outstanding:
Basic...................................... 6,315,000 3,613,153
Diluted.................................... 6,315,000 4,200,000
</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>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash Flows from operating activities:
Net income................................................ $ (1,258) $ 987
-------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization............... 1,708 899
Amortization of debt issuance costs.................... 84 36
Gain on disposition of assets.......................... (30) (30)
Equity in loss of investee............................. 41 33
Deferred income tax (benefit) expense.................. (789) 617
Noncash compensation on grant of stock options......... 276
Changes in operating assets and liabilities
Accounts receivable.................................. 4,672 24,025
Gas inventory........................................ (1,084) (544)
Prepaid expenses..................................... 41 103
Accounts payable..................................... (2,512) (20,399)
Contract advance..................................... -- (14,530)
-------- --------
Total Adjustments................................. 2,407 (9,790)
-------- --------
Net cash provided by (used in) operating activities....... 1,149 (8,803)
-------- --------
Cash flows from investing activities:
Capital expenditures...................................... (7,812) (3,498)
(Increase) decrease in investments........................ (6,000) 34
-------- --------
Net cash used in investing activities..................... (13,812) (3,464)
-------- --------
Cash flows from financing activities:
Principal payments on long--term debt..................... (15,375) (217)
Proceeds of long--term debt............................... 31,000 6,500
Debt issuance costs....................................... (75) (28)
Principal payments under capital lease obligations........ (339) (281)
-------- --------
Net cash provided by financing activities................. 15,211 5,974
-------- --------
Net increase (decrease) in cash and cash equivalents...... 2,548 (6,293)
Cash and cash equivalents at beginning of year............ 1,237 21,077
-------- --------
Cash and cash equivalents at end of year.................. $ 3,785 14,784
======== ========
Supplemental disclosure of cash flow information:
Interest paid.......................................... $ 1,758 $ 842
======== ========
Income taxes paid...................................... $ -- $ 460
======== ========
</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 March 31, 1998 and the results of its operations for the three
month period ended March 31, 1998, and 1997 and cash flows for the three
months ended March 31, 1998 and 1997. Results for the three months ended March
31, 1998 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 Annual Report on
Form 10-K) 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,
1997 included in the Form 10-K.
NOTE 2 -- EARNINGS PER SHARE
The following data shows the amounts used in computing earnings per share
for income before extraordinary item.
<TABLE>
<CAPTION>
For the 3 Months Ended March 31, 1998
------------------------------------------
Loss Weighted Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------------
<S> <C> <C> <C>
Basic earnings per common share ($1,257,413) 6,315,000 ($0.20)
========
Diluted earnings per common share ($1,257,413) 6,315,000 ($0.20)
============ ========== ========
</TABLE>
<TABLE>
<CAPTION>
For the 3 Months Ended March 31, 1997
------------------------------------------
Income Weighted Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------------
<S> <C> <C> <C>
Income before extraordinary item $ 986,528
Less: Preferred stock dividends (111,750)
------------
Basic earnings per common share 874,778 3,613,153 $ 0.24
========
Convertible Preferred Stock 111,750 586,847
------------ ----------
Diluted earnings per common share $ 986,528 4,200,000 $ 0.23
============ ========== ========
</TABLE>
Options on 207,210 shares of common stock with an average exercise price of
$7.47 were not included in the computation of diluted earnings per share for
1998 because their effect would have been antidilutive. Contingently issuable
options on 204,000 shares of common stock with an exercise price of $.26 were
not included in the computation of diluted earnings per share for 1998 and 1997
in accordance with the provisions of FAS 128.
NOTE 3 -- INVESTMENTS
On January 23, 1998, the Company entered into an agreement with Gothic
Energy Corporation ("Gothic") to acquire interests in four natural gathering
systems and $6 million of Gothic Senior Redeemable Preferred Stock for a total
purchase price of $12 million. The closing of these purchase transactions was
consummated in January and March of 1998.
Subsequent to March 31, 1998, the Preferred Stock was redeemed by Gothic
for $6 million plus related fees and dividends.
NOTE 4 -- NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("FAS 131"). FAS 131 amends standards
regarding the disclosure of information on business segments in annual financial
statements and also requires selected financial information on segments for
interim financial statements. FAS 131 will become effective for the Company when
the annual financial statements are filed for the fourth quarter of 1998. Since
this Statement requires only additional disclosure, there will be no effect on
the Company's results of operations or financial position.
NOTE 5 -- RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial statement
amounts to conform to the 1998 presentation.
5
<PAGE> 7
REPORT OF INDEPENDENT ACCOUNTANTS
We have reviewed the accompanying consolidated balance sheet of Continental
Natural Gas, Inc. and Subsidiaries as of March 31, 1998, and the related
consolidated statements of operations for the three months ended March 31, 1998
and 1997, and cash flows for the three months ended March 31, 1998 and 1997.
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, 1997, 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 27, 1998 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, 1997, 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
May 5, 1998
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.
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. In the first quarter of 1998, natural gas prices relative to low
NGLs prices created a significant negative impact on operating results. 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.
Three Months Ended March 31, 1998 Compared to Three Months Ended March
31, 1997
Revenues. Total operating revenue decreased 12% to $78.4 million for
the three months ended March 31, 1998 as compared to $89.0 million for the same
period in 1997. Total natural gas sales decreased 18% to $64.8 million for the
three months ended March 31, 1998 from $78.8 million for the same period in
1997 as a result of a $21.5 million price- related decrease due to average
sales prices of $2.45 per Mcf in 1998 compared to $3.25 per Mcf in 1997 and a
$7.5 million volume-related increase due to sales of 294.6 MMcf/d in 1998
compared to 269.0 MMcf/d in 1997. This increase in volume resulted from
increases in both off-system and on-system gas marketing sales.
NGL sales increased 29% to $11.5 million for the three months ended
March 31, 1998 as compared to $8.9 million for the same period last year as a
result of a $2.7 million price-related decrease due to average NGL sales prices
of $.30 per gallon in 1998 compared to $.37 per gallon in 1997 and a $5.3
million volume-related increase due to increased natural gas processing
throughput.
The Company earned gathering fees of $2.0 million for the three months
ended March 31, 1998 as compared to $1.3 million for the same period in 1997 as
a result of increased gathering fees from the Company's existing systems and the
acquisition of four (4) gathering systems (the "Gothic Systems") from Gothic
Energy Corporation ("Gothic") in the first quarter of 1998.
Costs and Expenses. Total operating costs and expenses decreased 8%
to $79.0 million for the three months ended March 31, 1998 as compared to $85.7
million for the same period in 1997. Total natural gas costs decreased 12% to
$72.0 million in 1998 from $81.9 million in 1997 as a result of a $21.9 million
price-related decrease due to average
7
<PAGE> 9
purchase prices of $2.37 per Mcf in 1998 compared to $3.09 per Mcf in 1997 and
a $12.1 million volume-related increase due to purchases of 338.4 MMcf/d in
1998 compared to 294.8 MMcf/d in 1997. This increase in volume resulted from
increases in both off-system and on-system gas marketing purchases.
Operating expenses increased to $2.7 million for the three months
ended March 31, 1998 from $1.6 million for the same period in 1997. This was
due mainly to operating activities from the acquisition of Taurus Energy Corp
("Taurus").
General and administrative expenses increased 39% to $2.5 million for
the three months ended March 31, 1998 from $1.8 million in the same period last
year. This increase was due primarily to compensation expense of $0.3 million
related to the Company's Employee Stock Plan and the addition of administrative
support activities related to the Taurus acquisition.
Depreciation, depletion and amortization increased 89% to $1.7 million
for the three months ended March 31, 1998 from $0.9 million for the same period
in 1997 principally due to the acquisition of Taurus.
Other Income (Expense). Interest income decreased to $47,000 for the
three months ended March 31, 1998 from $0.3 million for the same period in 1997
due to decreased cash investments. During these same time periods, interest
expense increased 33% to $2.0 million from $1.5 million due primarily to
additional debt incurred to finance the acquisition of Taurus, a 56% interest in
Laverne plant and the Gothic Systems. In addition, the Company recognized $.4
million from fees and dividends earned on its investment in the Senior
Redeemable Preferred Stock of Gothic.
Income Taxes. The Company had an income tax benefit of $0.8 million
for the three months ended March 31, 1998 as compared to $0.7 million expense
for 1997.
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 $21.3 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.
8
<PAGE> 10
The following summary table reflects comparative cash flows for the
Company for the three months ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1998 1997
(in thousands)
<S> <C> <C>
Net cash provided by (used in)
operating activities.................... 1,149 (8,803)
Net cash provided by (used in)
investing activities.................... (13,812) (3,464)
Net cash provided by (used in)
financing activities.................... 15,211 5,974
</TABLE>
The increase in net cash provided by operating activities for the
period ended March 31, 1998 as compared to the same period in 1997, was mainly
attributable to changes in working capital. Excluding net changes in working
capital components, the Company's operating activities generated cash of
$32,000 for this period in 1998 and $2.5 million in 1997.
Cash used in investing activities for the three months ended March 31,
1998 was primarily for the $12 million Gothic acquisition including interests
in four gas gathering systems and $6.0 million of Gothic Redeemable Preferred
Stock. Cash used in investing activities for the same period in 1997 was
mainly for expansion projects on the Company's gathering assets located in the
Texas panhandle.
Cash provided by financing activities for the three months ended March
31, 1998 resulted from borrowings under the Company's revolving loan facility
and the Bridge Loan (see below) used for working capital requirements and
funding the Gothic acquisition. Cash provided by financing activities for the
same period in 1997 resulted mainly from borrowings under the Company's
revolving loan facility used for working capital requirements and funding
various capital projects.
The Company believes that cash generated from operations will be
adequate to fund working capital requirements, debt service payments and
planned capital expenditures. Future acquisitions or large capital
expenditures in excess of current plans would require additional financing that
the Company expects would be available through additional debt facilities.
At March 31, 1998, the Company had net operating loss carryforwards
(NOLs) totaling approximately $43 million for regular tax purposes and $41
million for alternative minimum tax purposes. If not utilized, these
carryforwards will expire from 2000 to 2012. Due to the lack of existing legal
precedent with respect to the tax rules governing the Company's NOLs, both the
availability of approximately $10 million of the Company's NOLs and its prior
utilization of NOLs (totaling approximately $34 million) may be challenged.
Disallowance of the use of the NOLs would result in certain taxes associated
with prior utilization of the NOLs being currently payable. In March of 1998,
the Company received notification that the Internal Revenue plans to audit the
Company's 1995 tax return.
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<PAGE> 11
Realization of the Company's deferred tax assets is dependent upon the
generation of sufficient taxable income prior to the expiration of the NOLs
and, for financial purposes, the resolution of the matters noted above.
Although realization is not assured, management believes it is more likely than
not that the recorded net deferred tax asset will be realized. The amount of
the deferred tax asset considered realizable could be increased or decreased by
a material amount in the near-term pending resolution of these matters.
Financing Facilities. The Company entered into an Amended and
Restated Credit Agreement (the "Credit Agreement") with ING (U.S.) Capital
Corporation as of November 25, 1997 (in turn, the Credit Agreement has been
syndicated to other lenders). The Credit Agreement contains a revolving loan
facility and a term loan facility. The revolving facility has a maximum
borrowing base of $25.0 million which had outstanding borrowings of $20.5
million as of March 31, 1998. 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 March 31, 1998, the aggregate amount outstanding under
the Letters of Credit was $3.9 million. Under the term loan facility
approximately $73.1 million was outstanding as of March 31, 1998. 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 and term loan facility
began on December 31, 1997. Repayments of principal under the term facility
began on March 31, 1998.
The Credit Agreement includes covenants regarding various financial
and legal matters. A breach of these covenants could constitute a default
under the Credit Agreement resulting in the Company's indebtedness becoming
immediately due and payable and entitling the lenders under the Credit
Agreement to foreclose against collateral pledged by the Company. For the
quarter ending March 31, 1998, the Company requested and obtained waivers of
some of the financial covenants contained in the Credit Agreement. There can
be no assurance that the Company's lenders will grant such waivers in the
future and, if such waivers are not granted, all of the Company's indebtedness
under the Credit Agreement would become immediately due and payable.
On February 11, 1998, the Company entered into a Subordinated Secured
Bridge Note (the "Bridge Loan") with ING (U.S.) Capital Corporation in the
amount of $3.0 million. The purpose of the Bridge Loan was to fund short term
capital requirements of the Company. Lender's under the Credit Agreement
consented to the Bridge Loan . Amounts outstanding under the Bridge Loan were
to bear interest at: (i) the arithmetic average of the base rates announced
publicly by the Chase Manhattan Bank (National Association), Citibank, N.A. and
Morgan Guaranty Trust Company, plus (ii) four percent (4%). Interest on the
Bridge Loan was payable on the first day of each month with a final
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<PAGE> 12
maturity of April 30, 1998. Although the Company had the option to extend the
maturity of the Bridge Loan until January 31, 2008, the Bridge Loan was paid in
full April 30, 1998.
SEASONALITY
The Company's results of operations fluctuate from quarter to quarter,
due to variations in the prices and sales volumes of NGLs and natural gas. The
Company's primary NGL product is propane, which is used for agricultural and
home heating 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.
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 was a party to two (2)
lawsuits with Colorado Interstate Gas Company ("CIG") - Colorado Interstate Gas
Company v. Continental Hydrocarbons, Inc., et al., Case No. 93-CV-1894 in the
District Court of El Paso County, Colorado and 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.
During the first quarter of 1998, the Company and CIG settled all
outstanding disputes which were subject to the lawsuits. In connection with
the settlement, the Company paid CIG $2 million in cash and the Company and CIG
entered into certain gathering and processing arrangements. CIG had sought
damages from the Company in excess of $3,000,000. Through September 30, 1997,
the Company had established reserves of approximately $1.4 million in
connection with CIG's claims. The Company recognized a $600,000 pre-tax charge
to earnings in the fourth quarter of 1997 resulting from the settlement. In
connection with the settlement, CIG has agreed, beginning June 1, 1998, to
transport up to 35,000 MMBtu per day of the Company's gas on CIG's Mocane
Gathering System for redelivery to the Company and subsequent processing at the
Company's Laverne Plant. The Company believes that the gathering/processing
arrangement will effect greater plant utilization and allow overall cost
reduction for the Company.
Two complaints were filed with 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
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<PAGE> 13
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 the Complaint filed by GPM. On the same day the
FERC issued an Order on the 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
Residue Line from the FERC's reporting and rate-making regulations.
On December 1, 1997, the Company filed its Application for Section 7
Certificate and blanket certificate under the Natural Gas Act (the "NGA"). In
its application, the Company requested a waiver of filing and rate-making
requirements under the NGA. On April 22, 1998, the Federal Energy Regulatory
Commission entered its Order Issuing Certificates as requested in the Company's
application. On April 30, 1998, the Company formally accepted the requested
certificates. In its Order Issuing Certificates the FERC exempted the Company
from certain filing requirements (including the requirement to file tariff
sheets) in connection with the Residue Line so long as the Company transports
natural gas solely on its own behalf. The Company must seek additional
approval from the FERC and will be subject to additional filing and rate-making
requirements in the event the Company transports gas on behalf of third
parties.
Item 2. Changes in Securities.
None.
Item 3. Defaults upon Senior Securities.
The Company's Credit Agreement includes various financial covenants. A
breach of these covenants constitutes a default under the Credit Agreement
resulting in the Company's indebtedness becoming immediately due and payable.
The Company was in violation of some of these financial covenants for the
quarter ending March 31, 1998. The Company requested and obtained waivers of
such financial covenants from its lenders. There can be no assurance that the
Company's lenders will grant such waivers in the future and, if such waivers are
not granted, all of the Company's indebtedness under the Credit Agreement would
become immediately due and payable.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Attached hereto as Exhibit 21.1 is an Amended list of the Company's
direct and indirect subsidiaries. The attached Exhibit 21.1 amends and
supplements Exhibit 21.1 to the Company's Annual Report on 10-K filed March 31,
1998.
From time to time forward-looking statements have been and will be
made in written documents and oral presentations of the Company. Such
statements are based on management's beliefs as well as assumptions made by and
information currently available to management. When used in the Company's
documents or oral presentations,
12
<PAGE> 14
the words "anticipate," "believe," "estimate," "expect," "objective" and
similar expressions are intended to identify forward-looking statements. The
Company hereby incorporates by reference the Cautionary Factors contained in
Exhibit 99.1 to the Company's Current Report on Form 8-K filed December 9,
1997.
The Company hereby amends its Form 8-K filed on December 9, 1997, and
its Form 8-K/A (the "Amended 8-K") filed on February 6, 1998. The Report of
Independent Accountants dated January 16, 1998, included as part of Item 7(a) of
the Amended 8-K disclaimed an opinion. The Report of Independent Accountants
has been reissued as of January 16, 1998, to express an unqualified opinion.
The Historical Financial Information of Taurus Energy Corp. required by Item
7(a) of Form 8-K is attached hereto as Exhibit 99.2 and the Pro forma financial
information required by Item 7(b) of Form 8-K is attached hereto as Exhibit
99.3.
Item 6. Exhibits and Reports on Form 8-K.
(a) Attached hereto are the following Exhibits:
Exhibit No. Description
----------- -----------
15 Letter Regarding Unaudited Interim Financial
Information
21.1 List of Subsidiaries.
23 Consent of Independent Accountants
27 Financial Data Schedule.
99.1 Continental Natural Gas, Inc. Cautionary
Factors (incorporated by reference to Exhibit
99.1 to Current Report in Form 8-K filed
December 9, 1997, (Commission File No.
022867).
99.2 Historical Financial Information of Taurus
Energy Corp.
99.3 Pro Forma Financial Information
(b) On February 6, 1998, the Company filed a Current Report on
Form 8-K/A. The Form 8-K/A was filed to amend the Company's
Current Report Form 8-K filed on December 9, 1997.
13
<PAGE> 15
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: May __, 1998 By:
---------------------------------
Garry D. Smith
Vice President, Controller and
Chief Financial and Accounting
Officer
14
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
15 Letter Regarding Unaudited Interim Financial Information
21.1 List of Subsidiaries
23 Consent of Independent Accountants
27 Financial Data Schedule
99.1 Continental Natural Gas, Inc. Cautionary Factors (incorporated by reference to Exhibit 99.1 to Current
Report in Form 8-K filed December 9, 1997, (Commission File No. 022867).
99.2 Historical Financial Information of Taurus Energy Corp.
99.3 Pro Forma Financial Information
</TABLE>
<PAGE> 1
EXHIBIT 15
May 13, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Continental Natural Gas, Inc.
Registration on Form S-8
We are aware that our reports dated May 5, 1998 on our review of interim
financial information of Continental Natural Gas, Inc. for the three month
periods ended March 31, 1998 and 1997 and included in the Company's quarterly
report on Form 10-Q for the quarter ended March 31, 1998 is incorporated by
reference in the Company's registration statements on Form S-8 (File No.
333-43015). Pursuant to Rule 436(c) under the Securities Act of 1933, this
report should not be considered a part of the registration statement prepared or
certified by us within the meaning of Sections 7 and 11 of that Act.
COOPERS & LYBRAND L.L.P.
<PAGE> 1
EXHIBIT 21.1
DESCRIPTION OF SUBSIDIARIES
SUBSIDIARY CORPORATIONS
<TABLE>
<CAPTION>
PARENT SUBSIDIARY INTEREST
------ ---------- --------
<S> <C> <C>
Continental Natural Gas, Inc. Continental Holdings Company 100%
Continental/Oklahoma Natural
Gas Gathering, L.L.C. Gothic Gas Corporation 100%
</TABLE>
SUBSIDIARY LIMITED LIABILITY COMPANIES
<TABLE>
<CAPTION>
PARENT SUBSIDIARY INTEREST
------ ---------- --------
<S> <C> <C>
Continental Natural Gas, Inc. Continental Natural Gas Gathering, 99% Ownership Interest*
L.L.C.
Continental Natural Gas, Inc. Continental Hydrocarbons, L.L.C. 99% Ownership Interest*
Continental Natural Gas, Inc. Continental Gas Processing L.L.C. 99% Ownership Interest*
Continental Natural Gas, Inc. Continental Laverne Gas Processing, 99% Ownership Interest*
L.L.C.
Continental Natural Gas, Inc. Continental Spearman Gas 99% Ownership Interest*
Processing, L.L.C.
Continental Natural Gas, Inc. Continental Energy Services, L.L.C. 99% Ownership Interest*
Continental Natural Gas, Inc. Continental/Oklahoma Natural Gas 100% Ownership Interest
Gathering, L.L.C.
Continental Natural Gas, Inc. Continental/Taurus Holdings 100% Ownership Interest
Company, L.L.C.
</TABLE>
SUBSIDIARY LIMITED PARTNERSHIP
<TABLE>
<CAPTION>
PARENT SUBSIDIARY INTEREST
------ ---------- --------
<S> <C> <C>
Continental/Taurus Holdings Continental/Taurus Energy 99% Ownership Interest* Company, L.L.C.
Company, L.P. (Delaware Limited Partnership)
</TABLE>
- ---------------------
* Remaining one percent (1%) interest is held by Continental Holdings Company
** Acquired January 1998
Except as indicated all entries are organized in Oklahoma.
<PAGE> 1
EXHIBIT 99.2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Continental Natural Gas
We have audited the accompanying balance sheet of Taurus Energy
Corporation as of December 31, 1996, and the related statements of operations
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our previous report dated January 16, 1998, we did not express an
opinion on the financial statements referred to above because we were unable to
obtain certain written representations from management as required by generally
accepted auditing standards. The Company has now provided the required written
representations. Accordingly, our present report on the 1996 financial
statements, which includes our opinion on these financial statements, is
different from our previous report.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Taurus Energy Corporation
at December 31, 1996, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
Tulsa, Oklahoma
January 16, 1998
1
<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 THREE MONTHS ENDED MARCH 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,785
<SECURITIES> 0
<RECEIVABLES> 46,449<F1>
<ALLOWANCES> 328
<INVENTORY> 2,763
<CURRENT-ASSETS> 59,196
<PP&E> 120,617
<DEPRECIATION> 1,708
<TOTAL-ASSETS> 190,423
<CURRENT-LIABILITIES> 57,839
<BONDS> 0
0
0
<COMMON> 66
<OTHER-SE> 40,372
<TOTAL-LIABILITY-AND-EQUITY> 190,423
<SALES> 78,323
<TOTAL-REVENUES> 78,425
<CGS> 72,040
<TOTAL-COSTS> 78,978
<OTHER-EXPENSES> 501
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,011
<INCOME-PRETAX> (2,063)
<INCOME-TAX> (805)
<INCOME-CONTINUING> (1,258)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,258)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
<FN>
<F1>ACCOUNTS RECEIVABLE IS PRESENTED NET IN THE CONSOLIDATED BALANCE SHEET.
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Continental Natural Gas
We have audited the accompanying balance sheet of Taurus Energy
Corporation as of December 31, 1996, and the related statements of operations
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our previous report dated January 16, 1998, we did not express an
opinion on the financial statements referred to above because we were unable to
obtain certain written representations from management as required by generally
accepted auditing standards. The Company has now provided the required written
representations. Accordingly, our present report on the 1996 financial
statements, which includes our opinion on these financial statements, is
different from our previous report.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Taurus Energy Corporation
at December 31, 1996, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
Tulsa, Oklahoma
January 16, 1998
1
<PAGE> 2
TAURUS ENERGY CORPORATION
BALANCE SHEETS
As of December 31, 1996 and September 30, 1997
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1996 1997
------ -------- --------
(Unaudited)
<S> <C> <C>
Current assets:
Accounts receivable $ 6,965 $ 5,113
Prepaid expenses 103 91
Inventory 56 --
-------- --------
7,124 5,204
-------- --------
Gas plants and processing systems 33,454 35,735
Other property and equipment 163 163
Less accumulated depreciation and amortization (2,113) (4,116)
-------- --------
31,504 31,782
-------- --------
Other assets:
Gas contract rights, net 844 459
Other assets 168 175
-------- --------
1,012 634
-------- --------
Total assets $ 39,640 $ 37,620
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 7,505 $ 5,415
-------- --------
Payable to parent company 15,100 15,111
-------- --------
Deferred income taxes 6,212 6,232
-------- --------
Stockholders' equity:
Common stock, $1 par value, 1,000 shares
authorized, issued and outstanding 1 1
Additional paid-in capital 10,036 10,036
Retained earnings 786 825
-------- --------
10,823 10,862
-------- --------
Total liabilities and stockholders' equity $ 39,640 $ 37,620
======== ========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
2
<PAGE> 3
TAURUS ENERGY CORPORATION
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1996
and the Nine Months Ended September 30, 1997
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---------- ----------
(Unaudited)
<S> <C> <C>
Revenue:
Gas sales $ 27,557 $ 22,697
Gas Sales--related party 1,173 --
Product sales 16,145 10,018
---------- ----------
44,875 32,715
---------- ----------
Expenses:
Cost of purchased gas 33,237 24,813
Operating expenses 4,155 3,223
Depreciation and amortization 3,082 2,394
General and administrative 1,866 1,490
Interest 1,168 736
---------- ----------
43,508 32,656
---------- ----------
Income before income taxes 1,367 59
Income taxes 465 20
---------- ----------
Net income $ 902 $ 39
========== ==========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
3
<PAGE> 4
TAURUS ENERGY CORPORATION
STATEMENTS OF CASH FLOWS
For the Year Ended December 31, 1996
and the Nine Months Ended September 30, 1997
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---------- ----------
(Unaudited)
<S> <C> <C>
Cash flow from operating activities:
Net income $ 902 $ 39
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,082 2,394
Deferred income tax expense 465 20
Effect of changes in:
Accounts receivable (2,586) 1,852
Other current assets 2 68
Accounts payable and accrued liabilities 2,106 (1,809)
---------- ----------
Net cash provided by operating activities 3,971 2,564
---------- ----------
Cash flows from investing activities:
Additions to gas plants and processing systems (600) (2,301)
Other 78 7
---------- ----------
Cash flows used by investing activities (522) (2,294)
---------- ----------
Cash flows from financing activities:
Increase (decrease) in payable to parent company (4,018) 11
Increase (decrease) in book overdraft 569 (281)
---------- ----------
Cash flows used by financing activities (3,449) (270)
Increase (decrease) in cash -- --
Cash at beginning of period -- --
---------- ----------
Cash at end of period $ -- $ --
========== ==========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
4
<PAGE> 5
TAURUS ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Information relating to September 30, 1997
and for nine months then ended is unaudited
1. GENERAL
Taurus Energy Corporation ("Taurus" or the "Company") is a Texas
corporation involved primarily in natural gas gathering, processing and
marketing with operations principally in Texas. On November 24, 1997,
Continental Natural Gas, Inc. ("Continental") acquired all of the
outstanding equity interest of Taurus from Coda Energy, Inc. ("Coda").
Coda is a majority-owned subsidiary of Joint Energy Development
Investment Limited Partnership ("JEDI").
The accompanying financial statements present the historical
financial condition, results of operations and cash flows of the
Company for periods during which the Company was owned by Coda and/or
JEDI.
2. SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash and
short-term, highly liquid investments that are readily convertible to
cash and have maturities of 90 days or less at the date of purchase. At
December 31, 1996 and at September 30, 1997, Taurus had outstanding
checks in excess of available cash balances. The resulting liabilities
are included in accounts payable.
ACCOUNTS RECEIVABLE - Substantially all of Taurus' accounts receivable
arise from sales of natural gas or natural gas liquids produced at its
plants. Most of Taurus' accounts receivable are from a broad and
diverse group of oil and gas companies and do not represent a
significant credit risk.
INVENTORY - Inventory consists of natural gas liquids and is stated at
the lower of cost, using the average cost method, or market.
5
<PAGE> 6
TAURUS ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Information relating to September 30, 1997
and for nine months then ended is unaudited
2. SIGNIFICANT ACCOUNTING POLICIES, Continued
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated
at cost. Depreciation is computed using the straight-line method over
estimated useful lives ranging from 5 to 15 years. When assets are
retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is
reflected in income for the period. Maintenance and repairs are
charged to expense as incurred.
The carrying value of property and equipment is reviewed for
possible impairment whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Assets
determined to be impaired based on estimated undiscounted future net
cash flows are reduced to estimated fair value. No such reduction in
the carrying value of assets has been reflected in the accompanying
financial statements.
OTHER ASSETS - Other assets at December 31, 1996 and September 30, 1997
include $844,000 and $459,000, respectively, of purchased gas contract
rights that are being amortized over the term of the related contract
which end July 31, 1998.
REVENUE RECOGNITION - Revenue is recognized when product is delivered.
INCOME TAXES - Taurus is a member of a consolidated group with Coda for
federal income tax purposes. The provision for income taxes reflected
in the financial statements is calculated on a separate company basis.
3. RELATED PARTY TRANSACTIONS
Coda provides certain accounting, land, data processing and
management services for which Coda has historically charged a fee of
$90,000 per month, based upon an allocation of Coda's overhead. Such
fee has been recorded as general and administrative expense in the
accompanying financial statements.
During the year ended December 31, 1996, Taurus paid Coda $218,000
for gas produced from wells operated by Coda. These amounts are
included in gas purchases in the accompanying statements of operations.
Revenues for the year ended December 31, 1996, include approximately
$1.1 million for sales to an affiliate of JEDI. No such affiliate
sales occurred for the nine months ended September 30, 1997. Accounts
receivable from this affiliate of JEDI at December 31, 1996, were
$11,000.
6
<PAGE> 7
TAURUS ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Information relating to September 30, 1997
and for nine months then ended is unaudited
3. RELATED PARTY TRANSACTIONS, Continued
Coda provided a corporate guaranty of Taurus' obligations under a
gas purchase contract in an amount up to $1.2 million which expires
with the production month of August 1998. The guaranty was terminated
on November 24, 1997, when Taurus was acquired by Continental.
4. COMMITMENTS AND CONTINGENCIES
The Company has an inter-company payable to its parent, Coda,
which represents an accumulated balance of advances and repayments
since the acquisition of Taurus by Coda. The balance includes amounts
originally borrowed to acquire Taurus, subsequent advances provided to
fund processing plant additions, and other items paid on behalf of
Taurus by Coda. This payable bears interest at a rate equivalent to
Coda's current borrowing rates (approximately 7% for the year ended
December 31, 1996). No specific repayment terms have been established
with respect to the payable; however, Coda committed that it will not
require repayment of the payable during 1997 and, therefore, the
advances have been classified as long-term.
During 1996 and 1997, Taurus was a joint and several guarantor of
borrowings under Coda's debt agreements. As of the date of the
acquisition by Continental, Taurus was released as a guarantor.
In connection with the Company's acquisition of a gas plant in
1994, the seller entered into a four year contract with Taurus to
purchase 10,000 MMBtu of gas per day at the Houston Ship Channel spot
price plus a specified amount. Associated with this contract, Taurus
entered into a contract to purchase 10,000 MMBtu of gas per day from an
unrelated third party at the Houston Ship Channel spot price less $.01
per MMBtu throughout the contract period which ends July 31, 1998.
5. CONCENTRATIONS
During the year ended December 31, 1996, Taurus had sales to two
customers which accounted for 21% and 11% of total revenues.
7
<PAGE> 8
TAURUS ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Information relating to September 30, 1997
and for nine months then ended is unaudited
5. CONCENTRATIONS, Continued
During 1996, one producer accounted for approximately 21% of the
natural gas volumes purchased through the Company's gas systems and
the four largest producers accounted for 42% of such volumes
purchased. The loss of these producers could impact Taurus' production
and the subsequent sale of its natural gas and natural gas liquids,
which may adversely affect operating results.
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial statement purposes and the amounts used for income tax
purposes. The components of Taurus' deferred tax liabilities and assets
are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1996
----------
<S> <C>
Deferred tax liability:
Book basis of gas plants and processing systems in excess of tax basis $ 6,867
Deferred tax assets:
Net operating loss carryforwards (655)
----------
Net deferred tax liabilities $ 6,212
==========
</TABLE>
All income tax expense and benefits shown on the accompanying
statements of operations are deferred benefits and were computed at the
U.S. statutory federal income tax rate.
As of December 31, 1996, Taurus had net operating loss
carryforwards ("NOLs") of approximately $1.9 million for income tax
purposes that expire beginning in 2006.
8
<PAGE> 9
TAURUS ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
Information relating to September 30, 1997
and for nine months then ended is unaudited
7. EMPLOYEE BENEFITS
The Company's parent sponsors a 401(k) defined contribution plan
in which Taurus employees may participate. The 401(k) plan is available
to all employees who have at least six months of service. The Company
annually matches between 50% and 100% (based on years of service) of an
employee's contribution up to 6% of an employee's annual compensation.
For the year ended December 31, 1996, the Company's 401(k) expense was
$53,000.
9
<PAGE> 1
EXHIBIT 99.3
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, 1997
<TABLE>
<CAPTION>
Continental Taurus Adjustments Pro Forma
----------- -------- ----------- ---------
ASSETS (in thousands)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 6,287 $ -- $ $ 6,287
Accounts receivable 42,839 5,113 47,952
Notes receivable - affiliates 18 -- 18
Gas inventory 650 -- 650
Prepaid expenses 82 91 173
-------- -------- -------- --------
Total current assets 49,876 5,204 55,080
Investments 527 -- 527
Property and equipment, net 69,898 31,782 (449)(a) 111,650
10,419 (b)
Deferred tax asset 6,608 -- 6,608
Other assets 672 634 (175)(a) 1,131
-------- -------- -------- --------
Total assets $127,581 $ 37,620 $ 9,795 $174,996
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 47,916 $ 5,415 $ $53,331
Contract advances 518 -- 518
Current portion of long-term debt 4,204 -- 4,204
Current portion of capital lease obligations 1,372 -- 1,372
-------- -------- -------- --------
Total current liabilities 54,010 5,415 59,425
Long-term debt 23,301 -- 42,000 (c) 65,301
Capital lease obligations 6,588 -- 6,588
Deferred gain on sale - leaseback 163 -- 163
Payable to Parent Company -- 15,111 (15,111)(b) --
Deferred income taxes -- 6,232 (6,232)(b) --
-------- -------- -------- --------
Total liabilities 84,062 26,758 20,657 131,477
Shareholders' equity 43,519 10,862 (10,862)(d) 43,519
-------- -------- -------- --------
Total liabilities and shareholders' equity $127,581 $ 37,620 $ 9,795 $174,996
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
10
<PAGE> 2
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
The pro forma condensed consolidated balance sheet, which has been
prepared utilizing the historical balance sheet of Continental Natural Gas, Inc.
and subsidiaries ("Continental") and Taurus Energy Corporation ("Taurus") as of
September 30, 1997, is based upon the assumptions that the acquisition by
Continental, accounted for under the purchase method, occurred as of September
30, 1997 and includes the following pro forma adjustments.
(a) Adjustment to remove certain assets owned by Taurus at
September 30, 1997 which were transferred to the owner of
Taurus prior to the acquisition by Continental.
(b) Adjustment to reflect the allocation of the total purchase
price for Taurus of $42,000,000 in cash to the assets acquired
and liabilities assumed.
The final allocation of the purchase price is contingent upon
the receipt of final information on the acquired assets, but
is not expected to differ materially from the preliminary
allocation herein.
(c) To reflect additional net borrowings of Continental
associated with the acquisition.
(d) To eliminate Taurus shareholders' equity.
The pro forma balance sheet should be read in conjunction with the
financial statements and notes of Continental and Taurus as of September 30,
1997 and December 31, 1996.
11
<PAGE> 3
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
Continental Taurus Adjustments Pro Forma
--------- --------- --------- ---------
(in thousands except per share)
<S> <C> <C> <C>
Natural gas sales $ 202,983 $ 22,697 $ $ 225,680
Natural gas liquids sales 30,751 10,018 (542)(a) 40,227
Gathering fees 2,863 -- 2,863
Other 21 -- 21
--------- --------- --------- ---------
Total operating revenue 236,618 32,715 (542) 268,791
--------- --------- --------- ---------
Operating costs and expenses:
Cost of purchased gas 219,017 24,813 (44)(a) 243,786
Operating expenses 4,676 3,223 (348)(a) 7,551
General and administrative 5,412 1,490 (810)(b) 6,092
Depreciation, depletion and amortization 2,852 2,394 (39)(a) 4,779
(428)(c)
--------- --------- --------- ---------
Total operating costs and expenses 231,957 31,920 (1,669) 262,208
--------- --------- --------- ---------
Operating income 4,661 795 1,127 6,583
--------- --------- --------- ---------
Other income (expense):
Interest expense (3,994) (736) (1,784)(d) (6,514)
Other, net 555 555
--------- --------- --------- ---------
Total other income (expense) (3,439) (736) (1,784) (5,959)
--------- --------- --------- ---------
Income (loss) before income taxes 1,222 59 (657) 624
Income tax benefit (expense) (493) (20) 250(e) (263)
--------- --------- --------- ---------
Net income (loss) $ 729 $ 39 $ (407) $ 361
========= ========= ========= =========
Net income (loss) per common share:
Primary $ 0.12 $ 0.03
========= =========
Fully diluted $ 0.11 $ 0.03
========= =========
Weighted average common shares outstanding:
Primary 4,214 4,214
Fully diluted 4,413 4,413
</TABLE>
See Accompanying Notes.
12
<PAGE> 4
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Continental Taurus Adjustments Pro Forma
--------- --------- --------- ---------
(in thousands except per share)
<S> <S> <S> <S> <S>
Operating revenue:
Natural gas sales $ 208,779 $ 28,730 $ $ 237,509
Natural gas liquids sales 34,757 16,145 (772)(a) 50,130
Gathering fees 1,995 -- 1,995
Marketing fees and other 1,130 -- 1,130
--------- --------- --------- ---------
Total operating revenue 246,661 44,875 (772) 290,764
--------- --------- --------- ---------
Operating costs and expenses:
Cost of purchased gas 225,535 33,237 (56)(a) 258,716
Operating expenses 5,978 4,155 (449)(a) 9,684
General and administrative 5,623 1,866 (1,080)(b) 6,409
Depreciation, depletion and amortization 2,854 3,082 (51)(a) 5,427
(458)(c)
--------- --------- --------- ---------
Total operating costs and expenses 239,990 42,340 (2,094) 280,236
--------- --------- --------- ---------
Operating income 6,671 2,535 1,322 10,528
--------- --------- --------- ---------
Other income (expense):
Interest expense (2,702) (1,168) (2,167)(d) (6,037)
Other, net 16 -- 16
--------- --------- --------- ---------
Total other income (expense) (2,686) (1,168) (2,167) (6,021)
--------- --------- --------- ---------
Income (loss) before income taxes and 3,985 1,367 (845) 4,507
extraordinary item
Income tax benefit (expense) 3,635 (465) 321(e) 3,491
--------- --------- --------- ---------
Income (loss) before extraordinary item $ 7,620 $ 902 $ (524) $ 7,998
========= ========= ========= =========
Income before extraordinary item per common share:
Primary $ 1.99 $ 2.10
========= =========
Fully diluted $ 1.71 $ 1.79
========= =========
Weighted average common shares outstanding:
Primary 3,536 3,536
Fully diluted 4,466 4,466
</TABLE>
See Accompanying Notes.
13
<PAGE> 5
NOTES TO UNAUDITED PRO FORMA CONDENSED
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
The pro forma condensed consolidated statement of operations, which has
been prepared utilizing the historical statements of operations of Continental
Natural Gas, Inc. and Subsidiaries ("Continental") and Taurus Energy Corporation
("Taurus") for the year ended December 31, 1996 and the nine months ended
September 30, 1997, are based upon the assumption that the acquisition by
Continental, accounted for under the purchase method, occurred as of January 1,
1996 and include the following pro forma adjustments.
(a) Adjustment to remove revenues and expense associated with
certain assets owned by Taurus during 1996 and 1997 which were
transferred to the owner of Taurus prior to the acquisition by
Continental.
(b) Adjustment to remove corporate overhead allocations charged by
the prior owner of Taurus, which costs will not be incurred by
Continental.
(c) Adjustment to depreciation expense to reflect the increase in
value of fixed assets acquired associated with the acquisition
and estimated depreciation lives associated with the acquired
assets.
(d) Adjustment to reflect increase in interest expense on debt
issued associated with the acquisitions.
(e) Adjustment to income tax expense recognized to reflect expense
associated with consolidated results of operations.
The pro forma financial statements should be read in conjunction with
the financial statements and notes of Continental and Taurus for the year ended
December 31, 1996 and the nine months ended September 30, 1997. These pro forma
statements may not be indicative of the results that actually would have
occurred if the combination had been in effect on the dates indicated or which
may be obtained in the future.
14
