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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.
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CONTINENTAL NATURAL GAS, INC.
INDEX
PAGE
----
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
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PART I - FINANCIAL INFORMATION
CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, DECEMBER 31,
------------- ------------
1998 1997
------------- ------------
(UNAUDITED)
(IN THOUSANDS)
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
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
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
The accompanying notes are an integral part of the consolidated financial
statements.
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CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
(UNAUDITED)
(IN THOUSANDS)
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
======== ========
The accompanying notes are integral part of the consolidated financial
statements.
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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.
For the 3 Months Ended March 31, 1998
------------------------------------------
Loss Weighted Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------------
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)
============ ========== ========
For the 3 Months Ended March 31, 1997
------------------------------------------
Income Weighted Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------------
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
============ ========== ========
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.
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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
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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
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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.
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The following summary table reflects comparative cash flows for the
Company for the three months ended March 31, 1998 and 1997:
Three Months Ended
March 31,
------------------------
1998 1997
(in thousands)
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
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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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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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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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,
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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.
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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
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INDEX TO 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