<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
June 30, 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 July 31, 1998,
6,315,000 common shares, $0.1 par value, were outstanding.
<PAGE> 2
CONTINENTAL NATURAL GAS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. Financial Information.
Item 1 - Financial Statements (Unaudited) 1
Consolidated Condensed Balance Sheets June 30, 1998
and December 31, 1997 1
Consolidated Condensed Statements of Operations
Three and Six Months Ended June 30, 1998 and 1997 2
Consolidated Condensed Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 3
Notes to Consolidated Condensed Financial Statements 4
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 13
Item 2 - Changes in Securities 13
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
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------- ------------
1998 1997
------------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,339 $ 1,237
Accounts receivable:
Trade.................................................. 39,921 38,184
Affiliates............................................. 5,384 7,386
Other.................................................. 3,809 5,533
Notes receivable -- affiliates............................ 18 18
Gas inventory............................................. 1,361 1,679
Prepaid expenses.......................................... 260 240
-------- --------
Total current assets...................................... 57,092 54,277
Investments................................................. 479 527
Property and equipment, net of accumulated depreciation and
amortization of $13,598 for 1998 and $10,271 for 1997..... 121,096 114,785
Deferred tax asset.......................................... 6,836 7,683
Other assets................................................ 1,663 1,662
-------- --------
Total assets................................................ $187,166 $178,934
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 50,414 $ 48,755
Current portion of long-term debt......................... 7,500 7,500
Current portion of capital lease obligations.............. 1,316 1,402
-------- --------
Total current liabilities................................. 59,230 57,657
Long-term debt.............................................. 79,097 73,500
Capital lease obligations................................... 5,626 6,226
Deferred gain on sale-leaseback............................. 71 132
-------- --------
Total liabilities........................................... 144,024 137,515
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......................................... 9,339 7,987
Treasury stock, at cost................................... (204) (204)
Receivable from stock sale................................ (100) (100)
Unearned compensation associated with stock options....... (431) (802)
-------- --------
Total shareholders' equity................................ 43,142 41,419
-------- --------
Total liabilities and shareholders' equity.................. $187,166 $178,934
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
1
<PAGE> 4
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Natural gas sales............................ $ 50,844 $ 51,705 $ 111,023 $ 124,661
Natural gas sales -- related party........... 4,215 4,270 8,850 10,102
Natural gas liquids sales.................... 10,089 9,097 21,602 17,978
Gathering fees............................... 1,981 1,841 3,977 3,128
Other........................................ 140 (9) 242 6
---------- ---------- ---------- ----------
Total operating revenue...................... 67,269 66,904 145,694 155,875
---------- ---------- ---------- ----------
Operating costs and expenses:
Cost of purchased gas...................... 61,813 61,751 133,853 143,612
Operating expenses......................... 2,508 1,518 5,221 3,077
General and administrative................. 2,377 1,755 4,894 3,598
Depreciation, depletion and amortization... 1,843 933 3,551 1,832
---------- ---------- ---------- ----------
Total operating costs and expenses......... 68,541 65,957 147,519 152,119
---------- ---------- ---------- ----------
Operating income (loss)...................... (1,272) 947 (1,825) 3,756
---------- ---------- ---------- ----------
Other income (expense):
Interest income............................ 35 131 82 411
Equity in loss of investee................. (7) (30) (48) (63)
Interest expense........................... (2,218) (1,315) (4,229) (2,781)
Gain on sale of gathering system........... 7,515 -- 7,515 --
Other, net................................. 225 42 720 90
---------- ---------- ---------- ----------
Total other income (expense)............... 5,550 (1,172) 4,040 (2,343)
---------- ---------- ---------- ----------
Income before income taxes................... 4,278 (225) 2,215 1,413
Income tax (expense) benefit................. (1,669) 86 (864) (566)
---------- ---------- ---------- ----------
Net income (loss)............................ 2,609 (139) $ 1,351 $ 847
========== ========== ========== ==========
Less: preferred dividends.................... -- (112) -- (223)
---------- ---------- ---------- ----------
Net income (loss) available for common
shareholders............................... 2,609 (251) 1,351 624
========== ========== ========== ==========
Net income per common share:
Basic...................................... $ .41 $ (.07) $ .21 $ .17
========== ========== ========== ==========
Diluted.................................... $ .41 $ (.07) $ .21 $ .17
========== ========== ========== ==========
Weighted average common shares outstanding:
Basic...................................... 6,315,000 3,613,153 6,315,000 3,613,153
Diluted.................................... 6,344,846 3,613,153 6,355,115 3,613,153
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
2
<PAGE> 5
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
-------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Cash Flows from operating activities:
Net income................................................ $ 1,351 $ 847
-------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, depletion and amortization............... 3,551 1,832
Amortization of debt issuance costs.................... 173 76
Gain on disposition of gathering system................ (7,515) --
Gain on disposition of assets.......................... (61) (61)
Equity in loss of investee............................. 48 63
Deferred income tax expense............................ 847 536
Noncash compensation on grant of stock options......... 371 --
Changes in operating assets and liabilities
Accounts receivable.................................. 1,988 21,177
Gas inventory........................................ 319 1,892
Prepaid expenses..................................... (19) 70
Accounts payable..................................... 1,801 (21,563)
Contract advance..................................... -- (20,879)
-------- --------
Total Adjustments................................. 1,503 (16,857)
-------- --------
Net cash provided by (used in) operating activities....... 2,854 (16,010)
-------- --------
Cash flows from investing activities:
Proceeds from sale of gas system ......................... 12,000 --
Capital expenditures...................................... (14,488) (6,043)
Purchase of preferred stock investment.................... 6,000 --
Redemption of preferred stock investment.................. (6,000) --
Decrease in other investments............................. -- 34
-------- --------
Net cash used in investing activities..................... (2,488) (6,009)
-------- --------
Cash flows from financing activities:
Principal payments on long--term debt..................... (40,250) (433)
Proceeds of long--term debt............................... 45,847 7,861
Debt issuance costs....................................... (175) (83)
Principal payments under capital lease obligations........ (686) (579)
-------- --------
Net cash provided by financing activities................. 4,736 6,766
-------- --------
Net increase (decrease) in cash and cash equivalents...... 5,102 (15,476)
Cash and cash equivalents at beginning of the period...... 1,237 21,077
-------- --------
Cash and cash equivalents at end of the period............ $ 6,339 5,601
======== ========
</TABLE>
The accompanying notes are integral part of the
consolidated financial statements.
3
<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 June 1998 and the results of its operations for the three and six month
periods ended June 30, 1998, and 1997 and cash flows for the six months ended
June 1998 and 1997. Results for the three and six months ended June 30, 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 financial statements as of and for the year ended December
31, 1997 included in the Form 10-K.
Certain reclassifications have been made to the 1997 financial statement
amounts to conform to the 1998 presentation.
NOTE 2 -- MERGER WITH CMS
On August 3, 1998, the Company announced the completion of an agreement
with CMS Energy Corporation ("CMS") in which CMS will acquire 100 percent of the
Company's common stock in exchange for shares of CMS common stock totaling
approximately $65 million. The agreement is subject to ratification by the
holders of a majority of the Company's stock. The majority shareholders have
announced their intentions to vote in favor of the transaction and expect to
close the transaction early in the fourth quarter.
NOTE 3 -- EARNINGS PER SHARE
The following data shows the amounts used in computing earnings per share.
<TABLE>
<CAPTION>
For the 3 Months Ended June 30, 1998
------------------------------------------
Income Weighted Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------------
<S> <C> <C> <C>
Basic earnings per common share $2,609,015 6,315,000 .41
========
Effect of dilutive stock options -- 29,846
------------ ----------
Diluted earnings per common share $2,609,015 6,344,846 .41
============ ========== ========
</TABLE>
<TABLE>
<CAPTION>
For the 3 Months Ended June 30, 1997
------------------------------------------
Loss Weighted Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------------
<S> <C> <C> <C>
Net Income $ (139,510)
Less: Preferred stock dividends (111,750)
------------
Basic earnings per common share (251,260) 3,613,153 $ (0.07)
------------ ---------- --------
Diluted earnings per common share $ (251,260) 3,613,153 $ (0.07)
============ ========== ========
</TABLE>
<TABLE>
<CAPTION>
For the 6 Months Ended June 30, 1998
------------------------------------------
Income Weighted Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------------
<S> <C> <C> <C>
Basic earnings per common share $1,351,602 6,315,000 .21
========
Effect of dilutive stock options -- 40,115
------------ ----------
Diluted earnings per common share $1,351,602 6,355,115 .21
============ ========== ========
</TABLE>
<TABLE>
<CAPTION>
For the 6 Months Ended June 30, 1997
------------------------------------------
Income Weighted Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------------
<S> <C> <C> <C>
Net Income $ 847,018
Less: Preferred stock dividends (223,500)
------------
Basic earnings per common share 623,518 3,613,153 $ .17
------------ ---------- --------
Diluted earnings per common share $ 623,518 3,613,153 $ .17
============ ========== ========
</TABLE>
4
<PAGE> 7
Options on 31,000 shares of common stock with an average exercise price of
$11.41 were not included in the computation of diluted earnings per share for
three and six months ended June 30, 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 4 -- 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.
On April 27, 1998, the Preferred Stock was redeemed by Gothic for $6
million plus related fees and dividends.
NOTE 5 -- SALE OF GAS SYSTEM
On May 29 (effective as of June 1), 1998, the Company sold a gas system for
approximately $12 million, resulting in a gain on sale of approximately $7.5
million.
NOTE 6 -- CONTINGENCIES
On May 31, 1998, the Company was served with a summons in a lawsuit
initiated by Aurora National Gas, L.L.C. and filed in Dallas, Texas (Aurora
Natural Gas L.L.C. v. Continental Natural Gas, Inc. and Gary C. Adams, Case No.
DV-98-3831, District Court of Dallas County, Texas, 68th Judicial District). The
Company has removed the case to federal court in Dallas, Texas and has filed
pleadings to (i) dismiss Gary C. Adams as a defendant and (ii) transfer the case
to federal court in Tulsa, Oklahoma. Aurora has filed a motion in federal court
to remand the case to state court. The Company does not know whether any of
these motions will be granted.
Aurora's lawsuit is based on a gas purchase contract which the Company
entered into with Gothic on January 23, 1998. Aurora alleges that it had a prior
contract with Gothic and that the Company "tortiously interfered" with Aurora's
contract. This lawsuit is in the early stages of discovery it is not possible to
fully evaluate Aurora's claims. After consultation with the Company's trial
counsel, management believes that the Company will prevail on the claims made by
Aurora and intends to vigorously defend this lawsuit--accordingly, the outcome
of this lawsuit is not likely to have a material effect on the financial
condition, results of operations or prospects of the Company. However, the
Company cannot guarantee an outcome favorable to the Company.
At June 30, 1998, the Company had net operating loss carryforwards (NOLs)
totaling approximately $40.0 million for regular tax purposes and $40.0 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 $10.0 million of the Company's NOLs and its prior utilization of
NOLs (totaling approximately $34.0 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.
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.
NOTE 7 -- 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 1998. Since this Statement
requires only additional disclosure, there will be no effect on the Company's
results of operations or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"). FAS 133 is effective for fiscal
years beginning after June 15, 1999, but earlier application is permitted as of
the beginning of any fiscal quarter subsequent to June 15, 1998. FAS 133
standardizes the accounting for derivative instruments by requiring that all
derivatives be recognized as assets and liabilities and measured at fair value.
Upon the Statement's initial application, all derivatives are required to be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. The Company does not believe adoption
of the new standard will have a material impact on its financial statements.
5
<PAGE> 8
REPORT OF INDEPENDENT ACCOUNTANTS
We have reviewed the accompanying consolidated balance sheet of Continental
Natural Gas, Inc. and Subsidiaries as of June 30, 1998, and the related
consolidated statements of operations for the three and six months ended June
30, 1998 and 1997, and cash flows for the six months ended June 30, 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.
PRICEWATERHOUSECOOPERS LLP
Tulsa, Oklahoma
August 13, 1998
6
<PAGE> 9
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 half 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.
During the second quarter of 1998, the Company sold its interest in
the Sycamore gas gathering system for $12 million. The sale resulted in a gain
of approximately $7.5 million--$9 million in proceeds from the sale were
applied to the Company's outstanding indebtedness under its Credit Agreement
(as defined below). The remainder of the proceeds were used for capital
expenditures.
Second Quarter Ended June 30, 1998 Compared to Second Quarter Ended
June 30, 1997
Revenues. Total operating revenue increased to $67.3 million for
the second quarter of 1998 as compared to $66.9 million for the same period in
1997. Total natural gas sales decreased to $55.1 million for the second
quarter of 1998 from $56.0 million for the same period in 1997 as a result of a
$6.2 million price-related increase due to average sales prices of $2.48 per Mcf
in 1998 compared to $2.20 per Mcf in 1997 and a $7.1 million volume-related
decrease due to sales of 243.7 MMcf/d in 1998 compared to 279.0 MMcf/d in 1997.
This decrease in volume resulted from decreases in both off-system and on-system
gas marketing sales.
NGL sales increased 11% to $10.1 million for the second quarter of 1998
as compared to $9.1 million for the same period last year as a result of a $3.4
million price-related decrease due to average NGL sales prices of $.26 per
gallon in 1998 compared to $.35 per gallon in 1997 and a $4.4 million
volume-related increase due to increased natural gas processing throughput.
The Company earned gathering fees of $2.0 million for the second
quarter of 1998 as compared to $1.8 million for the same period in 1997 as a
result of increased fees from the Company's gathering assets located in the
Texas panhandle (the "Texas Gathering Assets") and gathering systems acquired
from Gothic Energy Corporation ("Gothic") during the first quarter of 1998.
Costs and Expenses. Total operating costs and expenses increased to
$68.5 million for the second quarter of 1998 as compared to $66.0 million for
the same period in 1997. Total natural gas costs were unchanged at $61.8 million
in 1998 as compared to 1997 as a result of a $4.7 million price-related
increase due to average purchase prices of $2.39 per Mcf in 1998 compared to
$2.21 per Mcf in 1997 and a $4.7 million volume-related decrease due to
purchases of 284.1 MMcf/d in 1998 compared to 307.3 MMcf/d in 1997. This
decrease in volume resulted from decreases in both off-system and on-system gas
marketing purchases.
Operating expenses increased to $2.5 million for the second quarter of
1998, from $1.5 million during the same period in 1997. This increase was due
primarily to operating activities from the acquisition of Taurus Energy Corp.
("Taurus") which the Company closed during the fourth quarter of 1997.
7
<PAGE> 10
General and administrative expenses increased 35% to $2.4 million for
the second quarter of 1998 from $1.8 million in the same period last year. This
increase was due primarily to the addition of administrative support activities
and related expenses associated with the Taurus acquisition.
Depreciation, depletion and amortization increased 100% to $1.8 million
for the second quarter of 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 $35,000 for the
second quarter of 1998 from $131,000 for the same period in 1997 due to
decreased cash investments. During these same time periods, interest expense
increased 69% to $2.2 million from $1.3 million due primarily to additional debt
incurred to finance the Taurus, Laverne plant and Gothic acquisitions. In
addition, the Company recognized a $7.5 million gain from the sale of the
Sycamore gas gathering system.
Income Taxes. The Company had income tax expense of $1.7 million for
the second quarter of 1998 as compared to a $86,000 benefit for 1997.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30,
1997
Revenues. Total operating revenue decreased 7% to $145.7 million for
the six months ended June 30, 1998 as compared to $155.9 million for the same
period in 1997. Total natural gas sales decreased 11% to $119.9 million for the
six months ended June 30, 1998 from $134.8 million for the same period in 1997
as a result of a $12.4 million price-related decrease due to average sales
prices of $2.46 per Mcf in 1998 compared to $2.72 per Mcf in 1997 and a $2.5
million volume-related decrease due to sales of 269.0 MMcf/d in 1998 compared to
274.0 MMcf/d in 1997. This decrease in volume resulted from decreases in
on-system gas marketing sales offset by increases in off-system gas marketing
sales.
NGL sales increased 20% to $21.6 million for the six months ended June
30, 1998 as compared to $18.0 million for the same period last year as a result
of a $6.1 million price-related decrease due to average NGL sales prices of $.28
per gallon in 1998 compared to $.36 per gallon in 1997 and a $9.7 million
volume-related increase due to increased natural gas processing throughput.
The Company earned gathering fees of $4.0 million for the six months
ended June 30, 1998 as compared to $3.1 million for the same period in 1997 as a
result of increased fees from the Texas Gathering Assets and the gathering
systems acquired from Gothic.
Costs and Expenses. Total operating costs and expenses decreased to
$147.5 million for the six months ended June 30, 1998 as compared to $152.1
million for the same period in 1997. Total natural gas costs decreased 7% to
$133.9 million in 1998 from $143.6 million in 1997 as a result of a $14.5
million price-related decrease due to average purchase prices of $2.38 per Mcf
in 1998 compared to $2.63 per Mcf in 1997 and a $4.8 million volume-related
increase due to purchases of 311.1 MMcf/d in 1998 compared to 301.1 MMcf/d in
1997. This increase in volume
8
<PAGE> 11
resulted from increases in off-system gas marketing purchases offset by
decreases in on-system gas marketing purchases.
Operating expenses increased to $5.2 million for the six months ended
June 30, 1998 from $3.1 million for the same period in 1997. This was due mainly
to operating activities from the acquisition of Taurus.
General and administrative expenses increased 36% to $4.9 million for
the six months ended June 30, 1998 from $3.6 million in the same period last
year. This increase was due primarily to compensation expense of $0.4 million
related to the Company's Employee Stock Plan and the addition of administrative
support activities and other related expenses associated with the Taurus
acquisition.
Depreciation, depletion and amortization increased 94% to $3.5 million
for the six months ended June 30, 1998 from $1.8 million for the same period in
1997 principally due to the acquisition of Taurus.
Other Income (Expense). Interest income decreased to $81,000 for the
six months ended June 30, 1998 from $411,000 million for the same period in 1997
due to decreased cash investments. During these same time periods, interest
expense increased 50% to $4.2 million from $2.8 million due primarily to
additional debt incurred to finance the Taurus, Laverne plant and Gothic
acquisitions. In addition, the Company recognized $.6 million from fees and
dividends earned on the Gothic Senior Redeemable Preferred Stock investment and
a $7.5 million gain from the sale of the Sycamore gathering system acquired from
Gothic in January of 1998.
Income Taxes. The Company had income tax expense of $.9 million for the
six months ended June 30, 1998 as compared to $ .6 million 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.
The following summary table reflects comparative cash flows for the
Company for the six months ended June 30, 1998 and 1997:
9
<PAGE> 12
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
(in thousands)
<S> <C> <C>
Net cash provided by (used in)
operating activities ......... 2,854 (16,010)
Net cash provided by (used in)
investing activities ......... (2,488) (6,009)
Net cash provided by (used in)
financing activities ......... 4,736 6,766
</TABLE>
The increase in net cash provided by operating activities for the
period ended June 30, 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 used cash of $1.2 million
for this period in 1998 and generated cash of $3.3 million in 1997.
Cash used in investing activities for the six months ended June 30,
1998 was primarily for the $12.0 million Gothic acquisition including interests
in four gas gathering systems and $6.0 million of Gothic Senior Redeemable
Preferred Stock. In addition, the Company acquired additional interests in the
Laverne gas processing plant for $3.0 million. Cash generated by investing
activities included the $6.0 million redemption of the Gothic Senior Redeemable
Preferred Stock and proceeds from the sale of the Sycamore gathering system for
$12.0 million. Cash used in investing activities for the same period in 1997 was
mainly for expansion projects on the Texas Gathering Assets.
Cash provided by financing activities for the six months ended June 30,
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.
Fluctuations of natural gas prices in relation to the price of NGL's
experienced by the Company have negatively impacted the Company's operating
results and the associated operating cash flows. Continued depressed margins
(and consequent negative operating cash flows) could delay or limit the
Company's planned capital expenditures, negatively impact the Company's ability
to service its debt or limit the Company's ability to fund working capital
requirements. Consequently, the Company may be required to seek additional
sources of funding.
At June 30, 1998, the Company had net operating loss carryforwards
(NOLs) totaling approximately $40.0 million for regular tax purposes and $40.0
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 $10.0 million of the Company's NOLs and its prior
utilization of
10
<PAGE> 13
NOLs (totaling approximately $34.0 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.
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 $21.3 million as of June 30, 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 June 30,
1998, the aggregate amount outstanding under the Letters of Credit was $3.7
million. Under the term loan facility approximately $65.2 million was
outstanding as of June 30, 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 June
30, 1998, the Company requested and obtained waivers of certain of the financial
covenants contained in the Credit Agreement. There can be no assurance that if
the Company violates covenants 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
11
<PAGE> 14
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 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.
On May 31, 1998, the Company was served with a summons in a lawsuit
initiated by Aurora National Gas, L.L.C. and filed in Dallas, Texas (Aurora
Natural Gas L.L.C. v. Continental Natural Gas, Inc. and Gary C. Adams, Case No.
DV-98-3831, District Court of Dallas County, Texas, 68th Judicial District). The
Company has removed the case to federal court in Dallas, Texas and has filed
pleadings in federal court to (i) dismiss Gary C. Adams as a defendant and (ii)
transfer the case to federal court in Tulsa, Oklahoma. Aurora has filed a motion
in federal court to remand the case to state court. The Company does not know
whether any of these motions will be granted.
Aurora's lawsuit is based on a gas purchase contract which the Company
entered into with Gothic on January 23, 1998. Aurora alleges that it had a prior
contract with Gothic and that the Company "tortiously interfered" with Aurora's
contract. This lawsuit is in the early stages of discovery it is not possible to
fully evaluate Aurora's claims. After consultation with the Company's trial
counsel, management believes that the Company will prevail on the claims made by
Aurora and intends to vigorously defend this lawsuit--accordingly, the outcome
of this lawsuit is not likely to have a material effect on the financial
condition, results of operations or prospects of the Company. However, the
Company cannot guarantee an outcome favorable to the Company.
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
quarters ending March 31, 1998 and June 30, 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.
At the Annual Meeting of Shareholders held on June 8, 1998, the
following proposals were adopted by the margins indicated:
12
<PAGE> 15
1. To elect two Class I directors to hold office for a three-year term
expiring at the Annual Meeting of Shareholders occurring in the year 2001 or
until the election and qualification of their respective successors.
<TABLE>
<CAPTION>
Number of Shares
For Withheld
--- --------
<S> <C> <C>
Scott C. Longmore 5,673,644 102,550
Terry K. Spencer 5,676,144 100,050
</TABLE>
The Company's Class II Directors, Garry D. Smith and William H. Bauch,
continued to hold their offices for a term which expires as of the Company's
1999 Annual Meeting of Shareholders. The Company's Class III, Directors, Gary C.
Adams and William W. Pritchard, continued to hold their offices for a term which
expires as of the Company's 2000 Annual Meeting of Shareholders.
2. To ratify the selection of Coopers & Lybrand, L.L.P. as the
Company's independent accountants for the fiscal year ending December 31, 1998.
<TABLE>
<CAPTION>
Number of Shares
For Against Abstain
--- ------- -------
<S> <C> <C>
5,766,884 5,900 3,410
</TABLE>
Item 5. Other Information.
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, 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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Attached hereto are the following Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.1 Purchase and Sale Agreement for Sycamore Gas
System (A General Partnership) by and between
Oneok Producer Services, Inc. and
Continental/Oklahoma Natural Gas Gathering,
L.L.C. dated May 29, 1998.
15 Letter Regarding Unaudited Interim Financial
Information
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).
</TABLE>
13
<PAGE> 16
(b) No reports on Form 8-K were filed during the quarter ended June 30,
1998.
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: August 13, 1998 By: /s/ GARRY D. SMITH
-----------------------------------------
Garry D. Smith
Vice President-Controller and Chief
Financial and Accounting Officer
14
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10.1 Purchase and Sale Agreement for Sycamore Gas System (A
General Partnership) by and between Oneok Producer Services,
Inc. and Continental/Oklahoma Natural Gas, L.L.C. dated May
29, 1998.
15 Letter Regarding Unaudited Interim Financial Information
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).
</TABLE>
<PAGE> 1
EXHIBIT 10.1
PURCHASE AND SALE AGREEMENT
FOR
SYCAMORE GAS SYSTEM
(A GENERAL PARTNERSHIP)
BY AND BETWEEN
ONEOK PRODUCER SERVICES, INC. ("BUYER")
AND
CONTINENTAL/OKLAHOMA NATURAL
GAS GATHERING, L.L.C. ("SELLER")
<PAGE> 2
PURCHASE AND SALE AGREEMENT
SYCAMORE GAS SYSTEM
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE
- -------
<S> <C> <C>
I Recitations 3
II Sale of Partnership Interest and Purchase Price 3
III Assignment and Receipts/Expenses 4
IV Title 4
V Representations and Warranties of Seller 4
VI Representations and Warranties of Buyer 5
VII Closing 5
VIII Condition of Closing 6
IX As Is - Where Is 7
X Miscellaneous Provisions 7
Signature Page 10
Acknowledgments 11
EXHIBITS
- --------
"A" Letter Agreement
"B" General Partnership Agreement of Sycamore Gas System
"C" Assignment
</TABLE>
<PAGE> 3
PURCHASE AND SALE AGREEMENT
SYCAMORE GAS SYSTEM
(A GENERAL PARTNERSHIP)
THIS AGREEMENT is made and entered into as of this 29th day of May, 1998 by and
between ONEOK Producer Services, Inc., an Oklahoma corporation, ("ONEOK" or
"Buyer") and Continental/Oklahoma Natural Gas Gathering, L.L.C. ("CONGG" or
"Seller").
WHEREAS, CONGG is owner of all of the issued and outstanding capital stock of
Gothic Gas Corporation ("Gothic Gas"); and
WHEREAS, Gothic Gas is the owner of the Partnership Interest (as hereinafter
defined); and
WHEREAS, in connection with Closing under this Agreement, CONGG will cause the
dissolution of Gothic Gas and receive an assignment of the Partnership Interest.
FOR AND IN CONSIDERATION of the premises and the mutual covenants contained
herein, the parties agree as follows:
ARTICLE I. RECITATIONS
1.1 Buyer and Seller entered into that certain Letter Agreement dated May 13,
1998 ("Letter Agreement"), attached hereto as Exhibit "A", whereby Seller
agreed to sell and Buyer agreed to purchase Seller's interest in the
Sycamore Gas System.
A. The Sycamore Gas System ("Sycamore Partnership"), formed by that
certain General Partnership Agreement of Sycamore Gas System dated
February 1, 1985 attached hereto as Exhibit "B", owns 100% of the
Sycamore Gas Pipeline and Gathering System ("Facilities") located
in Carter County, Oklahoma.
B. Seller's interest in the Sycamore Partnership is 55.23%.
1.2 Pursuant to the terms of this Agreement, Seller agrees to sell and Buyer
agrees to purchase all of Seller's interest in the Sycamore Partnership
("Partnership Interest").
ARTICLE II. SALE OF PARTNERSHIP INTEREST AND PURCHASE PRICE
2.1 Sale of Partnership Interest: Subject to the terms and conditions of this
Agreement, Seller agrees to sell and Buyer agrees to purchase, as of the
Effective Date, all of Seller's Interest.
2.2 Purchase Price: The purchase for the Partnership Interest shall be
$12,000,000.00, (twelve million dollars) in cash (hereinafter the
"Purchase Price").
<PAGE> 4
ARTICLE III. ASSIGNMENT AND RECEIPTS/EXPENSES
3.1 Effective Date: The Effective Date of the assignments of Partnership
Interest contemplated herein shall be 7:00 a.m. Central Daylight Time on
June 1, 1998 (the "Effective Date").
3.2 Revenues/Expenses: Subject to paragraph 9.2 hereof, all monies, proceeds,
receipts, credits, and income attributable to Seller's Partnership
Interest in the Sycamore Partnership and to periods of time before the
Effective Date shall be the sole property and entitlement of Seller; and
to the extent received by Buyer after the Effective Date, Buyer shall
fully disclose, account for, and except as otherwise provided herein,
remit same to Seller promptly. All costs, expenses, and disbursements
attributable to Seller's Partnership Interest in the Sycamore Partnership
to periods of time before the Effective Date shall be the sole obligation
of Seller and Seller shall promptly pay or, if paid by Buyer, promptly
reimburse Buyer for same.
ARTICLE IV. TITLE
4.1 Seller represents that it has not received notice of any claim contesting
the Sycamore Partnership's title to the Facilities or its right or
ability to own the Facilities.
4.2 If Buyer becomes aware of any defects in such title before Closing,
Seller shall, prior to Closing, take any steps that are reasonable in
attempting to eliminate such defects; provided, however, that if CONGG is
unable to cure any such defects, Buyer, at it's option may: (i) elect to
proceed with Closing under this Agreement whereupon Buyer shall take the
Partnership Interest subject to such defects; or (ii) terminate this
Agreement. In the event of termination under this paragraph 4.2, neither
Buyer nor Seller shall have any further liability to the other hereunder.
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Buyer, on the date hereof and at
Closing, as follows:
5.1 Authority: Seller has the power and authority to enter into and perform
this Agreement and to carry out the transactions contemplated herein.
Seller is a corporation duly organized and existing and in good standing
under the laws of the State of Oklahoma. The execution and delivery of
this Agreement and the consummation by Seller of the transactions
contemplated herein have been duly and validly authorized by all
necessary corporate action by Seller, and this Agreement constitutes a
valid and binding obligation of Seller enforceable in accordance with its
terms. To the best of Seller's knowledge, neither the execution nor
performance of this Agreement will constitute a violation of, or conflict
with, or be a default under any order, judgement, decree, or any law or
regulation of any governmental authority, or any contract, commitment,
agreement, understanding, arrangement, or restriction of any kind to
which Seller is a party or by which Seller is bound.
<PAGE> 5
5.2 Title: Seller has good, valid, and marketable title in the Partnership
Interest, free and clear of any and all liens and encumbrances arising
by, through and under Seller, but not otherwise.
5.3 Litigation: Seller is not engaged in or threatened, to Seller's
knowledge, with any legal or administrative action or proceeding relating
to the Facilities or the property upon which the same is located, nor is
Seller aware of any claim, investigation, or inquiry by any person,
entity, or governmental body relating to the Facilities and the real
property upon which the same is located.
ARTICLE VI. REPRESENTATIONS AND WARRANTIES BY BUYER
Buyer hereby represents and warrants to Seller, on the date hereof and at
Closing as follows:
6.1 Authority: Buyer has the power and authority to enter into and perform
this Agreement and to carry out the transactions contemplated herein.
Buyer is a corporation duly organized and existing and in good standing
under the laws of the State of Oklahoma. The execution and delivery of
this Agreement and the consummation by Buyer of the transactions
contemplated herein have been duly and validly authorized by all
necessary corporate action by Buyer, and this Agreement constitutes a
valid and binding obligation of Buyer enforceable in accordance with its
terms. To the best of Buyer's knowledge, neither the execution nor
performance of this Agreement will constitute a violation of, or conflict
with, or be a default under any order, judgement, decree, or any law or
regulation of any governmental authority, or any contract, commitment,
agreement, understanding, arrangement, or restriction of any kind to
which Buyer is a party or by which Buyer is bound. Buyer has obtained all
needed commitments for financing of the purchase price due at Closing and
is fully willing and able to perform the obligations of Seller under the
contracts to be assigned herein.
ARTICLE VII. CLOSING
7.1 Time and Place: Closing shall occur at the offices of Buyer as may be
mutually agreeable to the parties, including consummation of the
transaction via facsimile transmission and wire transfer of the purchase
price due. At Closing, Buyer will wire transfer to Seller the purchase
price in same-day available funds.
7.2 Dissolution of Gothic Gas: Immediately prior to Closing hereunder, CONGG
shall cause the dissolution of Gothic Gas Corporation and thereupon
receive an assignment of the Partnership Interest. Buyer hereby consents
to assignment of the Partnership Interest in connection with such
dissolution.
<PAGE> 6
7.3 Deliveries by Buyer: At Closing, Buyer shall:
A. Wire full payment of the purchase price in immediately available
same-day funds for credit to Continental/Oklahoma Natural Gas
Gathering, L.L.C., account number 621014844, in Bank One,
Oklahoma, NA, ABA number 103000648.
B. Deliver to Seller an executed Purchase Sale Agreement
C. Deliver to Seller an executed Assignment (Exhibit "C")
7.4 Deliveries by Seller: At Closing, Seller shall deliver to Buyer:
A. An executed Purchase and Sale Agreement
B. An executed Assignment (Exhibit "C")
ARTICLE VIII. CONDITIONS OF CLOSING
8.1 The obligations of Seller to transfer the Facilities to Buyer at closing
are subject to the satisfaction, on or prior to Closing, of each of the
following conditions:
A. Representations, Warranties, and Covenants: All representations
and warranties of Buyer contained in this Agreement shall be true
and correct in all material respects at and as of Closing as if
such representations and warranties were made at and as of
Closing, and Buyer shall have performed in and all material
respects all agreements and covenants required hereby to be
performed by it prior to or at Closing.
B. Consents: All consents, approvals, and waivers from governmental
authorities and other parties necessary to permit Seller to
transfer and Buyer to acquire the Facilities as contemplated
hereby shall have been obtained unless Buyer waives same.
C. No Governmental Proceeding or Litigation: No suit, action,
investigation, inquiry, or other proceeding by and other
governmental authority or other person shall have been instituted
or threatened which questions the validity of legality of the
transactions contemplated hereby and which could reasonably be
expected to materially damage Seller if the transactions
contemplated hereunder are consummated.
8.2 The obligations of Buyer to purchase the Facilities from Seller on
Closing are subject to the satisfaction, on or prior to Closing, of each
of the following conditions:
A. Representations, Warranties, and Covenants: All representations
and warranties of Seller contained in this Agreement shall be true
and correct in all material respects at and as of Closing as if
such representations and warranties were made at and as of
Closing, and Seller shall have performed in and all material
respects all agreements and covenants required hereby to be
performed by it prior to or at Closing.
B. Consents: All consents, approvals, and waivers from governmental
authorities and other parties necessary to permit Seller to
transfer and Buyer to acquire the Facilities as contemplated
hereby shall have been obtained unless Buyer waivers same.
<PAGE> 7
C. No Governmental Proceeding or Litigation: No suit, action,
investigation, inquiry, or other proceeding by any other
governmental authority or other person shall have been instituted
or threatened which questions the validity or legality of the
transactions contemplated hereby and which could reasonably be
expected to materially damage Buyer if the transactions
contemplated hereunder are consummated.
ARTICLE IX. AS IS - WHERE IS
9.1 Disclaimer of Warranties: It is expressly understood by the parties
hereto that the Facilities are accepted by the Buyer AS IS, WHERE IS, and
that Buyer has had or will have a reasonable opportunity to inspect and
examine the condition of each and every item thereof. WITHOUT LIMITING
THE GENERALITY OF THE FOREGOING, BUYER AGREES THAT THE PARTNERSHIP
INTEREST IS BEING TRANSFERRED WITHOUT REPRESENTATION OF WARRANTY, EITHER
EXPRESSED OR IMPLIED (ALL OF WHICH SELLER HEREBY DISCLAIMS), AS TO (i)
FITNESS FOR ANY PARTICULAR PURPOSE OR MERCHANTABILITY OR DESIGN OR
QUALITY, OR (ii) COMPLIANCE WITH SPECIFICATIONS, CONDITION, OPERATION, OR
ABSENCE OF LATENT DEFECTS. TO THE EXTENT APPLICABLE (AND WITHOUT
ADMITTING SUCH APPLICABILITY), BUYER ALSO HEREBY WAIVES THE PROVISIONS OF
THE OKLAHOMA DECEPTIVE TRADE PRACTICES ACT. EXCEPT AS EXPRESSLY SET FORTH
IN THIS AGREEMENT, THE PROVISIONS OF THIS DISCLAIMER OF WARRANTIES HAVE
BEEN NEGOTIATED BY THE SELLER AND BUYER AFTER DUE CONSIDERATION AND ARE
INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION OF ANY REPRESENTATIONS
OR WARRANTIES OR LIABILITIES OF THE SELLER TO THE BUYER, EXPRESS OR
IMPLIED, WITH RESPECT TO THE PARTNERSHIP INTEREST THAT MAY ARISE PURSUANT
TO ANY LAW NOR HEREAFTER IN EFFECT, OR OTHERWISE.
9.2 Environmental Compliance and Condition: Notwithstanding the terms of
paragraph 3.2 hereof, Buyer shall be responsible for and hereby assumes
liability for any and all past and future expenses (including any and all
remediation expenses - including costs of investigation and cleanup),
claims, liabilities, damages, fines and penalties arising with respect to
the Facilities under any state, federal and local environmental laws,
rules, regulations, or directives and agrees to defend and hold Seller
harmless from and against all such fines, expenses, claims, liabilities,
damages and penalties.
ARTICLE X. MISCELLANEOUS PROVISIONS
10.1 Commissions: Each of the parties hereto represents and warrants that
there are no claims for brokerage commissions or finders' fees in
connection with the transaction contemplated by this Agreement, and
Seller and Buyer will respectively pay or discharge, and will indemnify
the other for, brokerage commissions or finders' fees incurred by reason
of any action taken by such indemnifying party.
<PAGE> 8
10.2 Further Assurances: From time to time, and without further consideration,
each party will execute and deliver to the other party such documents and
take such actions as the other party may reasonably request in order to
consummate more effectively the transactions contemplated hereby.
10.3 Risk of Loss and Liability:
A. Seller shall assume all risk of loss accruing to the Partnership
Interest to be transferred hereunder until Closing. In the event
any of the Facilities shall be damaged by fire or other casualty
prior to Closing, and if Closing occurs, Buyer shall, subject to
the next succeeding sentence, close on the purchase of the
Partnership Interest without reduction in the Purchase Price and
shall be entitled to receive the insurance proceeds payable with
respect to such casualty loss. If the total of all damage shall
exceed twenty-five percent (25%) of the total purchase price, this
Agreement may be canceled at the option of Buyer. In no event
shall there be any requirement to repair or rebuild all or any
portion of the Facilities.
B. Buyer shall assume all risk, claims, costs, expenses, and
liabilities of whatever nature, accruing relative to the
Partnership Interest occurring from and after Closing, and agrees
to defend, indemnify, and hold Seller harmless from and against
such claims, costs, expenses, and liabilities.
10.4 Apportionment of Taxes: Real property taxes on the Facilities shall be
apportioned to Closing based on the most recent levy and the most recent
assessments. Personal property taxes shall also be apportioned to
Closing. It is hereby agreed that whichever party receiving statements
for 1998 and ad valorem taxes (or taxes imposed in lieu thereof) assessed
against the Facilities will pay such taxes prior to delinquency, and the
other party agrees to reimburse the paying party for its pro rata share
thereof promptly upon receipt of an invoice accompanied by evidence of
such payment.
10.5 Assignment: The terms, provisions, and conditions of this Agreement shall
extend to, be binding upon, and inure to the benefit of the parties
hereto, their respective successors, assigns, and legal representations.
10.6 Entire Agreement, Amendments: This Agreement and the Exhibits attached
hereto and incorporated by reference herein contain the entire
understanding of the parties with respect to its subject matter. There
are no restrictions, agreements, promises, warranties, covenants, or
undertakings other than those expressly set forth herein. This Agreement
supersedes all prior agreements and understandings between the parties
with respect to its subject matter. This Agreement may be amended only by
a written instrument duly executed by the parties. Any condition to a
party's obligations hereunder may be waived only in writing by such
party. No waiver by any party of any one or more defaults by the other in
performance of any of the provisions of this Agreement shall operate or
be construed as a waiver of any future default or defaults, whether of a
like or different character.
<PAGE> 9
10.7 Severability: Each portion of this Agreement is intended to be severable.
If any term or provision hereof is illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the validity
of the remainder of this Agreement.
10.8 Actions and Consents: Seller and Buyer, singularly and plurally, warrant
and agree that each shall use their best efforts to take or cause to be
taken all such action as may be necessary to consummate and make
effective the transaction as set forth in this Agreement and to assure
that it will not be under any material corporate, legal, or contractual
restriction that would prohibit or delay the timely consummation of such
transaction.
10.9 Time is of the Essence: Time is of the essence hereof and if any payment
or other condition hereof is not made, tendered, or performed by either
Seller or Buyer as herein provided, then this Agreement, at the option of
the party who is not in default, may be terminated by such party, in
which case the nondefaulting party may recover such damages as may be
proper. If the nondefaulting party elects to treat this Agreement as
being in full force and effect, the nondefaulting party shall have the
right to an action for specific performance and/or damages.
10.10 Counterparts: This Agreement may be executed simultaneously in any number
of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
10.11 Governing: This Agreement shall be governed by, enforced in accordance
with, and interpreted under the laws of the State of Oklahoma.
10.12 Notices and Addresses: Any notice, request, instruction, waiver, or other
communication to be given hereunder by any party shall be in writing and
shall be considered duly delivered if personally delivered, mailed by
certified mail with the postage prepaid, or sent by telegraph to the
addresses of the parties as follows:
Buyer: ONEOK Producer Services, Inc.
Attention: Mr. Don Jacobsen, Vice President
P. O. Box 345
Tulsa, Oklahoma 74101-0345
Seller: Continental/Oklahoma Natural Gas Gathering, L.L.C.
Attention: Mr. Terry Spencer, Vice President
1437 South Boulder, Suite 1250
Tulsa, OK 74119
or at such other address as either party may designate by written notice.
<PAGE> 10
10.13 Survival of Representations, Warranties, and Covenants: Each warranty,
representation, and covenant contained in this Agreement, whether in
Articles V and VI or elsewhere, is material and each has been relied upon
in entering this Agreement. Each such warranty, representation, and
covenant, and each agreement of indemnity contained in this Agreement,
shall survive the Closing and the delivery of the instruments of
conveyance of the parties hereto, and shall not be deemed to be
superseded by the conditions of the instruments delivered at Closing.
10.14 Table of Contents and Articles and Section Headings: The table of
contents and article and section headings contained in this Agreement are
for reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
10.15 Reference to a Section: All references herein to a particular section of
this Agreement shall be deemed to refer also to any subsections of the
referenced section.
IN WITNESS WHEREOF, the parties have hereto set their hands by their duly
authorized officials as of the date set forth above.
ONEOK PRODUCER SERVICES, INC. CONTINENTAL/OKLAHOMA NATURAL
GAS GATHERING, L.L.C.
("BUYER") ("SELLER")
By Continental Natural Gas, Inc.,
Manager
By: /s/ Don Jacobsen By: /s/ Gary C. Adams
------------------------------ ------------------------------
Don Jacobsen Name: Gary C. Adams
Vice President Title: President
<PAGE> 11
ACKNOWLEDGEMENT
STATE OF OKLAHOMA
COUNTY OF TULSA
This instrument was acknowledged before me on May 29, 1998 by Don Jacobsen, Vice
President of ONEOK Producer Services, Inc.
/s/ Martha Ryan
---------------------------
Notary Public
My Commission Expires:
Aug. 18, 2000
- ----------------------
================================================================================
ACKNOWLEDGEMENT
STATE OF OKLAHOMA
COUNTY OF TULSA
This instrument was acknowledged before me on May 29, 1998 by Gary Adams,
President, of Continental Natural Gas, Inc.
/s/ Martha Ryan
---------------------------
Notary Public
My Commission Expires:
Aug. 18, 2000
- ----------------------
<PAGE> 12
EXHIBIT "A"
LETTER AGREEMENT OMITTED
<PAGE> 13
EXHIBIT "B"
PARTNERSHIP AGREEMENT FOR SYCAMORE GAS SYSTEM OMITTED
<PAGE> 14
EXHIBIT "C"
FORM OF ASSIGNMENT OMITTED
<PAGE> 1
EXHIBIT 15
August 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 report dated August 13, 1998 on our review of interim
financial information of Continental Natural Gas, Inc. for the three and six
month periods ended June 30, 1998 and 1997 and included in the Company's
quarterly report on Form 10-Q for the quarter ended June 30, 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 the Act.
PricewaterhouseCoopers LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF UNIT CORPORATION AND
SUBSIDIARIES UNDER COVER OF FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,339
<SECURITIES> 0
<RECEIVABLES> 49,460<F1>
<ALLOWANCES> 328
<INVENTORY> 1,361
<CURRENT-ASSETS> 57,092
<PP&E> 134,694
<DEPRECIATION> 13,598
<TOTAL-ASSETS> 187,166
<CURRENT-LIABILITIES> 59,230
<BONDS> 0
0
0
<COMMON> 66
<OTHER-SE> 43,076
<TOTAL-LIABILITY-AND-EQUITY> 187,166
<SALES> 0
<TOTAL-REVENUES> 145,694
<CGS> 133,853
<TOTAL-COSTS> 147,519
<OTHER-EXPENSES> 8,269
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,229
<INCOME-PRETAX> 2,215
<INCOME-TAX> 864
<INCOME-CONTINUING> 1,351
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,351
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
<FN>
<F1>ACCOUNTS RECEIVABLE IS PRESENTED NET IN THE CONSOLIDATED CONDENSED BALANCE
SHEET.
</FN>
</TABLE>
