AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 1997

REGISTRATION STATEMENT NO. 333-25719

================================================================================
SECURITIES AND EXCHANGE COMMISSION
---------------------

PRE-EFFECTIVE

AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------

CONTINENTAL NATURAL GAS, INC.
(Exact name of registrant as specified in its charter)

OKLAHOMA 4923 73-1198957
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)

1412 SOUTH BOSTON, SUITE 500
TULSA, OKLAHOMA 74119
(918) 582-4700
(address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------------

GARRY D. SMITH
VICE PRESIDENT, CONTROLLER
CONTINENTAL NATURAL GAS, INC.
1412 SOUTH BOSTON, SUITE 500
TULSA, OKLAHOMA 74119
(918) 582-4700
(name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------

Copies to:

WILLIAM W. PRITCHARD, ESQ. KENNETH F. ALBRIGHT, ESQ. BYRON F. EGAN, ESQ.
DEL L. GUSTAFSON, ESQ. ALBRIGHT & RUSHER, JACKSON & WALKER, L.L.P.
HALL, ESTILL, HARDWICK, GABLE, A PROFESSIONAL CORPORATION 901 MAIN STREET, SUITE 6000
GOLDEN & NELSON, P.C. FIFTEEN WEST SIXTH STREET, SUITE 2600 DALLAS, TEXAS 75202-3797
320 SOUTH BOSTON AVENUE, SUITE 400 TULSA, OKLAHOMA 74119-5434 (214) 953-5727
TULSA, OKLAHOMA 74103-3708 (918) 583-5800
(918) 594-0400

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE

=============================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------

Common Stock, $0.01 par value.......... 2,415,000 $14.00 $33,810,000 $10,245
=============================================================================================================================

(1) Includes 315,000 shares which the Underwriters may purchase to cover
over-allotments, if any.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
2

CONTINENTAL NATURAL GAS, INC.
FORM S-1 REGISTRATION STATEMENT
CROSS-REFERENCE SHEET

REGISTRATION STATEMENT
ITEMS AND HEADING LOCATION IN PROSPECTUS
---------------------- ----------------------

1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front Cover Page; Outside Back Cover
Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Prospectus Summary; The Company; Risk Factors
4. Use of Proceeds.................................... Use of Proceeds
5. Determination of Offering Price.................... Risk Factors
6. Dilution........................................... Risk Factors; Dilution
7. Selling Security Holders........................... Principal and Selling Shareholders
8. Plan of Distribution............................... Outside Front Cover Page; Underwriting
9. Description of Securities to Be Registered......... Description of Capital Stock
10. Interests of Named Experts and Counsel............. Not Applicable
11. Information with Respect to the Registrant
a. Description of Business....................... Prospectus Summary; Risk Factors; Management's
Discussion and Analysis of Financial Condition
and Results of Operations; Business; Certain
Transactions
b. Description of Property....................... Business -- Facilities
c. Legal Proceedings............................. Business -- Legal Proceedings
d. Market Price and Dividends on Equity
Securities.................................... Outside Front Cover Page; Dividend Policy;
Description of Capital Stock; Certain
Transactions; Shares Eligible for Future Sale
e. Financial Statements.......................... Financial Statements
f. Selected Financial Data....................... Prospectus Summary; Selected Consolidated
Financial and Other Information
g. Supplementary Financial Data.................. Not Applicable
h. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... Management's Discussion and Analysis of
Financial Condition and Results of Operations
i. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........ Not Applicable
j. Qualitative and Quantitative Disclosure about
Market Risk................................... Not Applicable
k. Directors and Executive Officers.............. Management; Principal and Selling Shareholders
l. Executive Compensation........................ Management
m. Security Ownership of Certain Beneficial
Owners and Management......................... Principal and Selling Shareholders
n. Certain Relationships and Related
Transactions.................................. Certain Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities..... Not Applicable

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY STATE.

SUBJECT TO COMPLETION, DATED JULY , 1997

2,100,000 SHARES

[LOGO] CONTINENTAL NATURAL GAS, INC.

COMMON STOCK

Of the 2,100,000 shares of Common Stock, par value $0.01 per share (the
"Common Stock") offered hereby (the "Offering"), 1,800,000 shares are being sold
by Continental Natural Gas, Inc. ("CNG" or the "Company") and 300,000 shares are
being sold by a shareholder of the Company (the "Selling Shareholder"). See
"Principal and Selling Shareholders." The Company will not receive any proceeds
from the sale of Common Stock by the Selling Shareholder. Prior to the Offering
there has been no public market for the Common Stock. It is currently estimated
that the initial public offering price will be between $12.00 and $14.00 per
share. See "Risk Factors -- No Prior Public Market" for the factors considered
in determining the initial public offering price. After the Offering, the
Company will remain under the control of affiliates of Gary C. Adams, Chairman
of the Board, President and Chief Executive Officer of the Company. Such
affiliates will be able to elect all of the Company's directors, control the
management and policies of the Company and determine the outcome of any matter
submitted to a vote of the Company's shareholders. See "Risk
Factors -- Continued Control by Majority Shareholders."

The Company has applied for listing on the Nasdaq National Market under the
symbol "CNGL".

FOR A DISCUSSION OF MATERIAL RISKS IN CONNECTION WITH THE PURCHASE OF
COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 9-13 OF THIS
PROSPECTUS.

---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

==================================================================================================================
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT COMPANY(2) SHAREHOLDER
- ------------------------------------------------------------------------------------------------------------------

Per Share......................... $ $ $ $
Total(3).......................... $ $ $ $
==================================================================================================================

(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.

(2) Before deducting expenses payable by the Company estimated to be $700,000.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
315,000 additional shares of Common Stock at the Price to Public, less the
Underwriting Discount, for the purpose of covering over-allotments, if any.
If such option is exercised in full, the total Price to Public, Underwriting
Discount, Proceeds to Company and Proceeds to Selling Shareholder, will be
$ , $ , $ and $ , respectively. See
"Underwriting."

---------------------

The shares of Common Stock are offered severally by the Underwriters when,
as and if delivered to and accepted by them, subject to their right to withdraw,
cancel or reject orders in whole or in part and subject to certain other
conditions. It is expected that delivery of certificates representing the shares
of Common Stock will be made against payment on or about , 1997 at
the offices of Oppenheimer & Co., Inc., Oppenheimer Tower, World Financial
Center, New York, New York 10281.

---------------------
OPPENHEIMER & CO., INC. SOUTHWEST SECURITIES, INC.

THE DATE OF THIS PROSPECTUS IS , 1997.
4

Inside cover will be a two-page fold out with pictures of the Company's
natural gas systems and plants and a map of Texas and Oklahoma showing the
location of the Company's natural gas systems and plants.

---------------------

ADDITIONAL INFORMATION

The Company has not previously been subject to the reporting requirements
of the Securities and Exchange Act of 1934, as amended (the "Exchange Act").

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 with respect to the shares of
Common Stock offered hereby, of which this Prospectus forms a part. In
accordance with the rules of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the securities offered hereby, reference is made
to the Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus concerning the provisions of such
documents are necessarily summaries of such documents and each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the Commission as an exhibit to the Registration Statement. Copies of
the Registration Statement and the exhibits and schedules thereto may be
inspected, without charge, at the offices of the Commission, or obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549.

The Company will provide without charge to each person who receives a copy
of this Prospectus, upon written or oral request of such person, a copy of any
of the information that is incorporated by reference in this Prospectus (not
including exhibits to the information that is incorporated by reference unless
the exhibits are themselves specifically incorporated by reference). Such
request should be directed to: Continental Natural Gas, Inc., Attention: Garry
D. Smith, 1412 South Boston, Suite 500, Tulsa, Oklahoma 74119, (918) 582-4700.

The Company intends to distribute to its shareholders annual reports
containing audited financial statements certified by its independent auditors
and to make available to its shareholders quarterly reports for the first three
quarters of each fiscal year containing unaudited financial information.

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. Certain terms, including several technical terms
commonly used in the oil and gas industry, are defined in the "Glossary." As
used in this Prospectus, the terms "Company" and "CNG" refer, unless the context
requires otherwise, to Continental Natural Gas, Inc., its subsidiaries
(including limited liability companies), joint venture entities managed by the
Company or its subsidiaries and their interests therein. Unless otherwise noted,
all references in this Prospectus to the number of shares of Common Stock
outstanding and to be offered in the Offering assume no exercise of the
over-allotment option granted to the Underwriters in connection with the
Offering and the conversion of all outstanding shares of Convertible Preferred
Stock of the Company ("Convertible Preferred Stock") into Common Stock prior to
the effectiveness of the Registration Statement of which this Prospectus is a
part. All information in this Prospectus has been adjusted to reflect an
approximate 136-for-1 stock split in June 1997.

THE COMPANY

The Company is an independent mid-stream energy company engaged in the
purchasing, gathering, treating, processing and marketing of natural gas and
natural gas liquids ("NGLs"). The Company owns and operates approximately 1,100
miles of natural gas gathering pipelines located in the Texas and Oklahoma
panhandle region (the "Panhandle Area") with a total throughput capacity of 383
MMcf/d and two interconnected natural gas processing plants with a total NGL
production capacity of 490 Mgal/d. CNG provides essential services to natural
gas producers in the Panhandle Area by (i) connecting the producers' wells to
the Company's gathering systems, (ii) treating the producers' natural gas to
ensure that it meets pipeline specifications, (iii) transporting the natural gas
from the wellhead to CNG's processing plants where NGLs are extracted from the
natural gas stream and (iv) providing access for the natural gas and NGLs to
various markets in the Midwestern, Mid-Continent, Rocky Mountain and southern
Texas regions (the "CNG Market Area") of the United States. The April 1996 and
January 1997, editions of "Hart's Report on Gas Customer Satisfaction" published
by Hart Publications, Inc. reported that CNG was rated the most preferred
natural gas purchaser in surveys of natural gas sellers. The Company markets the
natural gas it gathers or processes ("on-system gas"), as well as natural gas it
neither gathers nor processes ("off-system gas"), to utilities, end-users, other
marketers and pipeline affiliates.

From 1985 through 1990, CNG's activities were primarily limited to
marketing off-system gas. Concurrent with the evolving deregulation of the
natural gas industry, the Company began to acquire natural gas gathering systems
and processing plants to complement its marketing business. Since 1990, the
Company has completed approximately $64 million of acquisitions and system
expansion projects. During March 1997, CNG's average gathering system throughput
was 108 MMcf/d and average processing plant throughput was 135 MMcf/d. The
Company's NGL production for March 1997, averaged 281 Mgal/d. Over the three
years ended December 31, 1996, the Company's daily natural gas throughput has
increased 77%. Primarily as a result of this growth, the Company's EBITDA (as
defined in the Glossary) has increased to $9.5 million in 1996 from $1.7 million
in 1994. For the three months ended March 31, 1997, the Company's EBITDA was
$3.7 million.

The Company's principal assets are located in the Panhandle Area, which is
a major natural gas producing area with significant long-lived natural gas
reserves. CNG's Beaver Plant and Beaver Gathering System were acquired in 1990
from El Paso Natural Gas Company and currently consist of approximately 300
miles of natural gas gathering pipelines, a 65 MMcf/d cryogenic processing plant
and a 40 MMcf/d propane refrigeration plant. The Beaver Plant is interconnected
with the Company's Mocane Plant, which was acquired from affiliates of Conoco,
Inc. and Chevron USA, Inc. in 1995. The Mocane Plant consists of two
refrigerated lean oil absorption plants with a combined demonstrated capacity of
200 MMcf/d of natural gas and 280 Mgal/d of NGLs, approximately 140,000 barrels
of underground NGL storage and a 6,700 barrels per day NGL fractionator. During
the first half of 1996, the Company acquired approximately 800 miles of gas
gathering assets located throughout the Texas panhandle in three separate
transactions. These gathering assets (the "Texas Gathering Assets") were
acquired for approximately $20.2 million from subsidiaries of Enron Corporation.
3
6

BUSINESS STRATEGY

The Company's business strategy is to achieve sustainable growth in cash
flow and earnings by (i) acquiring and constructing natural gas gathering
systems and processing plants with excess capacity which complement CNG's
marketing operations, (ii) improving the profitability of the Company's existing
systems and plants by increasing their utilization and efficiency and (iii)
expanding its energy marketing services and sales volumes by offering natural
gas producers and purchasers flexible contract terms, value-added services and
other favorable arrangements.

Expansion of Facilities. The Company seeks to acquire or make investments
in projects that complement its existing systems or allow it to expand into new
strategic areas and provide enhanced marketing opportunities. These investments
typically include natural gas gathering, processing, treating or fractionation
assets. By acquiring assets with unused capacity, the Company has established
significant operating leverage in the Panhandle Area. As a result, the Company
can gather and process additional natural gas through its existing systems at
incrementally higher rates of return. In addition to acquiring or constructing
new facilities in the Panhandle Area, CNG will continue to evaluate
opportunities in new operating areas where the Company believes it can establish
a competitive marketing advantage, allowing the Company to increase the wellhead
prices of natural gas paid to producers and provide value-added services.

In implementing this strategy, CNG has completed approximately $64 million
of acquisitions and system expansion projects since 1990. The Company believes
that its acquisition track record and demonstrated ability to complete
transactions with large pipeline companies and other sellers strengthen its
ability to compete for future acquisitions. In addition, the Company believes
that its seasoned management team allows it to assess and evaluate acquisition
opportunities and integrate acquired assets into CNG's existing operations.

Improving the Profitability of Existing Facilities. The Company seeks to
maximize the profitability of its operations by (i) maintaining and increasing
natural gas throughput and processing levels, (ii) directing natural gas
throughput to a particular Company-owned gas processing plant that maximizes
product yields and/or margins, (iii) investing in assets that enhance product
value and (iv) controlling operating and overhead expenses. In order to maintain
or increase natural gas throughput and processing volumes. The Company obtains
additional natural gas supplies for its facilities by connecting new wells to
the Company's gathering systems, purchasing and integrating gathering systems
into the Company's existing operations and entering into contractual natural gas
supply arrangements with producers or other gatherers.

The opportunity to connect new wells to the Company's gathering systems is
primarily affected by the level of drilling activity near such gathering
systems. The Panhandle Area is within one of the most prolific natural gas
producing regions in the continental United States and continues to attract
significant exploration activity. Although the Company owns no oil and gas
reserves, the independent engineering firm of Lee Keeling & Associates estimates
that the leases and wells currently under contract with the Company have
approximately 700 Bcf of proved, producing natural gas reserves. The Company
believes it has sufficient gathering and processing capacity to capitalize on
the Panhandle Area's development.

By maintaining geographically-focused operations, the Company believes it
is able to control operating and overhead expenses. Furthermore, the location
and strategic nature of CNG's natural gas gathering systems and processing
plants allow the Company to maximize NGL yields and product returns by directing
natural gas between its Beaver and Mocane Plants. For example, under current
market conditions, CNG seeks to maximize the flow of natural gas through the
Beaver cryogenic processing plant, thereby allowing the Company to realize
greater volumes of NGLs from the natural gas stream and enhance the total value
of its on-system gas throughput.

Expanding Energy Marketing Services and Sales Volumes. CNG is a marketer of
natural gas and NGLs. The Company plans to expand its energy marketing
activities by continuing to offer creative, flexible contract terms that satisfy
the objectives of producers at the wellhead and purchasers in the marketing of
natural gas. By offering flexible contract terms and using a portfolio approach
to marketing natural gas, CNG has been able to substantially increase its
on-system gas and NGL volumes. The Company also seeks to increase its off-

4
7

system marketing. In addition, the Company intends to expand into the sale of
electric power to wholesale customers and industrial and commercial end-users.

The Company markets and sells natural gas primarily in the CNG Market Area.
The Company's gathering systems and processing plants are located in an area
where many interstate pipelines converge, allowing it to take advantage of
locational differences in natural gas prices. CNG provides a full range of
services including risk management, storage, transportation, scheduling and
peaking requirements to purchasers of the Company's marketed natural gas. The
Company's natural gas marketing operations are substantially enhanced by its
ability to market natural gas gathered and processed by the Company.
Furthermore, CNG's portfolio approach to marketing allows it to offer producers
and purchasers optimum flexibility with respect to pricing, contract terms and
volumes. By aggregating large volumes of natural gas and maintaining the
flexibility to sell into different markets, CNG has been able to maximize sales
prices by selling to purchasers who are willing to pay a premium for large,
reliable quantities of natural gas.

The Company also markets NGLs produced at its plants to wholesalers and
end-users. The Company's NGL marketing strategy is to increase sales to
end-users and to expand its NGL marketing operations into the purchase and sale
of third-party NGLs.

The Company is currently creating the staffing and operating infrastructure
necessary to market electric power in the CNG Market Area to wholesale customers
and industrial and commercial end-users in accordance with anticipated
nationwide state-by-state deregulation. The Company believes that it may have a
market for electric power with its existing natural gas industrial and
commercial end-user customers. During 1996, the Company applied for and received
a power marketing certificate from the FERC, permitting it to sell wholesale
electric power at market-based rates pursuant to the Federal Power Act. The
Company believes its expertise in marketing natural gas in a deregulated
environment, its expanding customer base and its firm supplies of natural gas
and NGL products will allow it to compete effectively in this emerging market.

RECENT DEVELOPMENT

The Company, Conoco, Inc. ("Conoco") and an affiliate of Conoco have
reached an informal agreement under which the Company will purchase from Conoco
and its affiliate a 36% interest in the Laverne gas processing plant (the
"Laverne Plant") located in Harper County, Oklahoma, for a purchase price of
$3.8 million (the "Laverne Plant Acquisition"). Although Conoco is the operator
of the Laverne Plant, it is owned by various entities. During 1997, the Company
has acquired approximately 17% of the plant for $1.4 million. Subject to the
execution of a definitive purchase and sale agreement and the satisfaction of
other conditions, the closing of the Laverne Plant Acquisition is expected to
take place in the third quarter of 1997 effective in April 1997. Concurrent with
the Laverne Plant Acquisition, certain litigation between the Company and the
Conoco affiliate will be settled. See "Business -- Legal Proceedings." Upon the
completion of the Laverne Plant Acquisition, the Company will own approximately
53% of the Laverne Plant. The Company's interest in the Laverne Plant will be
held by Continental Laverne Gas Processing, L.L.C., an Oklahoma limited
liability company which was formed on May 8, 1997, for the purpose of acquiring
interests in the Laverne Plant.

The Laverne Plant consists of a 200 MMcf/d cryogenic gas processing
facility, complete with NGL fractionation capability and above-ground storage.
The Laverne Plant straddles GPM Gas Corporation's Laverne natural gas gathering
system. Natural gas production feeding the Laverne Plant originates from the
Mocane-Laverne field. The plant is located approximately eight miles east of the
Beaver Plant. Current natural gas throughput at the Laverne Plant is 70 MMcf/d,
yielding 180 Mgal/d of NGLs. Due to the Laverne Plant's proximity to CNG's other
assets and its substantial underutilized capacity, the Company believes that the
Laverne Plant will enhance the Company's existing operations in the Panhandle
Area.

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8

THE OFFERING

Common Stock Offered by the Company....... 1,800,000 shares

Common Stock Offered by Selling
Shareholder............................... 300,000 shares
-------

Total................................... 2,100,000 shares
=========

Common Stock to be Outstanding after the
Offering(1)............................... 6,000,000 shares

Use of Proceeds........................... The net proceeds to the Company
from the Offering will be used to
repay outstanding bank borrowings,
pay accrued dividends on the
Convertible Preferred Stock and
for other general corporate
purposes. See "Use of Proceeds."
The Company will not receive any
of the proceeds from the sale of
shares by the Selling Shareholder.

Proposed Nasdaq National Market Symbol.... CNGL
----

- ---------------

(1) Excludes (i) 204,000 shares subject to outstanding options under the
Company's 1996 Incentive Stock Option Plan (the "1996 Stock Plan") and (ii)
600,000 shares reserved for future issuance and issuable upon grant of
options, stock appreciation rights and stock grants under the Company's 1997
Stock Plan (the "1997 Stock Plan").

6
9

SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA

The following table presents summary financial and operating information
for the Company as of the end of and for each of the five years in the period
ended December 31, 1996 and for the three month periods ended March 31, 1996 and
1997. The financial data for the years ended December 31, 1994, 1995 and 1996
have been derived from the Company's Consolidated Financial Statements included
herein which have been audited by Coopers & Lybrand L.L.P., independent
accountants. The data for and at the end of the three month periods ended March
31, 1996 and 1997, have been derived from the unaudited Consolidated Financial
Statements of the Company included elsewhere in this Prospectus and reflect, in
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary for fair presentation of the results for such periods.
Results of operations for the three months ended March 31, 1997, are not
necessarily indicative of the results to be achieved for the year ending
December 31, 1997. The summary financial data should be read in conjunction with
the Company's Financial Statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein.

THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------ -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)(UNAUDITED)

STATEMENT OF OPERATIONS DATA:
Revenues
Natural gas sales............................ $124,981 $126,583 $100,477 $ 95,631 $208,779 $ 32,670 $ 78,788
Natural gas liquids sales.................... 10,102 23,177 19,572 24,804 34,757 6,195 8,881
Gathering fees............................... -- -- -- -- 1,995 -- 843
Other........................................ 1,239 1,308 260 763 1,130 455 15
-------- -------- -------- -------- -------- -------- --------
Total operating revenue...................... 136,322 151,068 120,309 121,198 246,661 39,320 88,527
Operating costs and expenses
Cost of purchased natural gas................ 125,872 137,560 111,038 107,642 225,535 34,493 81,417
Operating expenses........................... 3,617 5,530 3,930 4,366 5,978 1,382 1,559
General and administrative................... 4,050 3,847 3,601 3,840 5,623 1,310 1,842
Depreciation, depletion and amortization..... 1,067 1,741 1,505 1,367 2,854 473 899
-------- -------- -------- -------- -------- -------- --------
Total operating costs and expenses........... 134,606 148,678 120,074 117,215 239,990 37,658 85,717
Operating income............................... 1,716 2,390 235 3,983 6,671 1,662 2,810
Other income (expense), net.................... (448) (1,028) 4,648 (1,047) (2,686) (264) (1,171)
-------- -------- -------- -------- -------- -------- --------
Income before income taxes, extraordinary item
and cumulative effect of accounting change..... 1,268 1,362 4,883 2,936 3,985 1,398 1,639
Income tax (expense) benefit..................... (47) (127) 2,174 3,635 (30) (652)
-------- -------- -------- -------- -------- -------- --------
Income before extraordinary item and cumulative
effect of accounting change.................... 1,268 1,315 4,756 5,110 7,620 1,368 987
-------- -------- -------- -------- -------- -------- --------
Net income....................................... $ 1,268 $ 1,695 $ 4,756 $ 5,110 $ 7,193 $ 1,368 $ 987
======== ======== ======== ======== ======== ======== ========
Pro forma operating revenue...................... $246,058(1) $ 88,527(1)
Pro forma income before extraordinary item....... $ 786(2) 8,277(1) 1,235(1)
-------- -------- --------
EARNINGS PER SHARE:
Primary:
Income before extraordinary item and cumulative
effect of accounting change.................. $ .41 $ .40 $ 1.46 $ 1.59 $ 1.99 $ .37 $ .24
Net income..................................... .41 .52 1.46 1.59 1.87 .37 .24
Fully Diluted:
Income before extraordinary item and cumulative
effect of accounting change.................. .40 .40 1.45 1.59 1.71 .33 .22
Net income..................................... .40 .52 1.45 1.59 1.61 .33 .22
Pro forma income before extraordinary item:
Primary........................................ .25(2) 1.47(1) .21(1)
Fully diluted.................................. .25(2) 1.34(1) .20(1)
Weighted average common shares outstanding:
Primary........................................ 3,131 3,217 3,215 3,185 3,536 3,305 3,613
Fully diluted.................................. 3,135 3,232 3,242 3,186 4,466 4,155 4,393
OTHER DATA:
Capital expenditures........................... $ 13,986 $ 2,267 $ 3,097 $ 12,311 $ 30,761 $ 10,418 $ 3,498
EBITDA(3)...................................... 2,782 4,132 1,739 5,350 9,525 2,135 3,709
Natural gas throughput gathered and/or
processed (MMcf/d)........................... 60 93 108 140 191 121 213
NGLs production (Mgal/d)....................... 105 251 257 288 264 245 269
Average NGL price (per gal).................... $ .27 $ .26 $ .22 $ .26 $ .36 $ .28 $ .37

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10

MARCH 31, 1997
--------------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
(IN THOUSANDS)
(UNAUDITED)

BALANCE SHEET DATA:
Working capital........................................... $ (2,773) $ (2,260)
Property, plant and equipment (net)....................... 62,751 62,751
Total assets.............................................. 117,064 118,082
Long-term debt, excluding current portion................. 38,071 18,071
Shareholders' equity...................................... 23,140 43,541

- ---------------

(1) Excludes the results of operations related to the Company's interests in oil
and gas properties which were sold to an affiliated company in 1996, and
includes the effect of debt to be extinguished with proceeds from the sale
of Common Stock pursuant to the Offering.

(2) Includes a pro forma income tax provision for 1992 when the Company was an
S-corporation and thus not subject to income taxes.

(3) See definition in the "Glossary" section of this Prospectus.

(4) Adjusted to give effect to the sale by the Company of 1,800,000 shares of
Common Stock in the Offering and the application of the net proceeds
therefrom.

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11

RISK FACTORS

In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating the Company and
its business before purchasing the Common Stock offered hereby.

COMMODITY PRICE FLUCTUATIONS

The Company's products, including NGLs, natural gas and related
by-products, are commodities. Because the Company's contracts generally do not
fix a long-term price for the products it purchases or sells, market changes in
the price of such products have a direct and immediate effect (whether favorable
or adverse) upon the revenues and profitability of the Company. In particular,
because the Company is a purchaser of natural gas at the wellhead and a seller
of NGLs extracted from natural gas, a contraction in the margin between the cost
of natural gas and the sales price of NGLs could adversely affect the Company.

Prices for the Company's products are subject to material change in
response to relatively minor changes in supply and demand, general economic
conditions and other market conditions over which the Company has no control.
Other conditions affecting the Company's business include the level of domestic
oil and gas production, the availability and prices of competing commodities and
of alternative energy sources, the availability of local, intrastate and
interstate transportation systems with adequate capacity, government regulation,
the seasons, the weather and the impact of energy conservation efforts.

AVAILABILITY OF NATURAL GAS SUPPLY

The Company must connect new wells to its gathering systems, contract for
new natural gas supplies with third party pipelines or acquire additional
gathering systems in order to maintain or increase throughput levels to offset
depletion of wells currently under contract. Historically, while certain
individual facilities have experienced decreases in dedicated reserves, the
Company has connected new wells and contracted for new supplies with third-party
pipelines which more than offset production depletion of existing wells. The
ability to connect new wells to existing facilities is dependent upon levels of
oil and gas development activity near existing facilities. Significant
competition for connections to newly drilled wells exists in every geographic
area served by the Company. Significant competition also exists for the
acquisition of existing gathering systems. There can be no assurance that the
Company will renew its existing supply contracts or that it will be able to
acquire new supplies of natural gas at a rate necessary to offset depletion of
wells currently under contract.

CONTINUED CONTROL BY MAJORITY SHAREHOLDERS

After giving effect to the Offering, Adams Affiliates, Inc. ("Adams
Affiliates") and Cottonwood Partnership (collectively, the "Majority
Shareholders"), will directly control approximately 57.3% of the outstanding
Common Stock (54.4% if the Underwriters' over-allotment option is exercised in
full). Gary C. Adams, the Chairman of the Board, President and Chief Executive
Officer of the Company, is chief executive officer of Cottonwood Partnership
which, in turn, owns a majority interest in Adams Affiliates. See "Certain
Transactions." After the Offering, the Majority Shareholders will be able to
elect all of the Company's directors, control the management and policies of the
Company and determine the outcome of any matter submitted to a vote of the
Company's shareholders. This presents the potential for a conflict of interest
between the Company and its controlling officers, shareholders and directors.
Provisions of the Company's Certificate of Incorporation also strengthen the
control of the Majority Shareholders over the Company and may act to reduce the
likelihood of a successful attempt to take over the Company or any acquisition
of a substantial amount of Common Stock without the Majority Shareholders'
consent. See "Principal and Selling Shareholders" and "Description of Capital
Stock."

DEPENDENCE ON THIRD-PARTY PIPELINES

In 1996, approximately 60% of the Company's natural gas volume was
delivered to its processing plants through the interstate pipeline systems of
Northern Natural Gas Company ("NNG") and Transwestern Pipeline Company ("TW"),
and substantially all sales of natural gas by the Company were effected through

9
12

deliveries on interstate pipelines. In addition, the Company has partially
relied on third-party gathering systems for access to and transportation of
contracted natural gas supplies. As a result, a curtailment of the Company's
supply of natural gas by pipelines or by third-party gathering systems, an
impairment of the Company's ability to transport natural gas on interstate
pipelines or a material increase in the rates charged to the Company for the
transportation of natural gas by reason of a change in federal regulations or
for any other reason, could have a material adverse effect upon the Company. In
such event, other transportation arrangements would have to be obtained or
alternative pipelines would need to be constructed by the Company. There can be
no assurance that economically alternative transportation would be available to
the Company or that alternative pipelines could be constructed economically.

Interstate pipelines are authorized under the FERC regulations to impose
penalties in the event the Company's deliveries and receipts from the pipeline
are not balanced on a daily or monthly basis. The Company attempts to balance
purchases and sales of natural gas on a daily and monthly basis so that the
Company's total purchases and sales on any given day (or in any given month) are
equal, thereby not incurring any significant pipeline imbalance penalties.
Nonetheless, in the event the Company is unable to balance its purchases and
sales within prescribed tolerances, the Company may incur severe pipeline
balancing penalties or may be compelled to purchase natural gas at unattractive
prices in order to alleviate these imbalances. In either instance, the Company
could incur substantial losses. See "Business -- Sales and
Marketing -- Transportation."

NET OPERATING LOSS CARRYFORWARDS

The Company has been able to utilize net operating loss carryforwards
("NOLs") to offset approximately $37 million of income in prior years and
thereby reduce or eliminate its tax liability. At December 31, 1996, the Company
had an available NOL of approximately $17.5 million, which it intends to utilize
to offset its taxable income for the current and future years. Due to the lack
of legal precedent with respect to the tax rules governing the Company's NOLs,
both the availability of the Company's NOLs and its prior utilization of NOLs
may be challenged. Management believes that the Company has been, and will
continue to be, legally entitled to use its NOLs. Should the Internal Revenue
Service audit and disallow prior or future use of the Company's NOLs and such
disallowance be upheld upon appeal, the Company would incur additional tax
liability, penalties and interest. Any such additional tax liability could have
a material adverse effect on the financial condition of the Company. The ability
of the Company to utilize its NOLs in the future will also depend upon the
generation of sufficient taxable income prior to the expiration of its NOLs.
Thus, there is no assurance that the Company will be able to utilize its NOLs
prior to expiration. See Note 8 of the Notes to the Consolidated Financial
Statements of the Company included herein.

Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended,
in the event that a substantial change in the ownership of the Company were to
occur in the future (whether through the sale of stock by the Majority
Shareholders, new issuances of stock by the Company, conversions, a redemption,
recapitalization, reorganization, any combination of the foregoing or any other
method) so that ownership of more than 50% of the value of the Company's capital
stock changed during any three-year period, the Company's ability to utilize its
NOLs could be substantially limited. For each taxable year ending after such a
change in ownership, the Company would not be able to fully use its NOLs; it
would only be able to use an amount equal to the "sec. 382 limitation." The sec.
382 limitation is an amount equal to a designated percentage of the equity value
of the Company at the time of the change of ownership. The percentage used is
the federal long-term tax-exempt rate.

At present, neither the Company nor the Majority Shareholders intend to
sell stock, issue additional stock, make any acquisitions in exchange for stock
or take any other action which would constitute such a change in ownership and
cause the sec. 382 limitation to apply.

OPERATIONAL RISKS

The Company is subject to all of the risks generally associated with the
gathering, processing, marketing and storage of natural gas and NGLs, including
damage or loss to its own personnel and property, as well as

10
13

the personnel and property of third-parties. Such loss or damage could result,
among other things, from acts of God, negligent acts of personnel, or systems
failures, resulting in fires and explosions, leakage of natural gas or spills of
NGLs. Any of these occurrences could result in the loss of natural gas and/or
NGLs, environmental pollution, personal injury claims or other damage to the
property of the Company and others. Losses resulting from the occurrence of such
events (notwithstanding insurance coverage for all or part of such losses) could
have a material adverse effect on the financial condition and results of
operation of the Company.

The Company's inability to negotiate natural gas purchase or sale
agreements or NGL sale agreements on favorable terms, or the failure of
contracting third-parties to perform agreements with the Company could have a
material adverse effect on the Company.

DEPENDENCE ON KEY PERSONNEL

The success of the Company will depend in large part on the personal
efforts of its Chairman of the Board, President and Chief Executive Officer,
Gary C. Adams, its Vice President of Marketing, Scott C. Longmore, its Vice
President of Operations, Terry K. Spencer, and its Vice President and
Controller, Garry D. Smith. The loss of the services of any of these persons
could have a material adverse effect on the Company.

RISKS PERTAINING TO ACQUISITIONS

Part of the Company's business strategy is to expand through acquisitions.
The Company's future growth is partially dependent upon its ability to complete
suitable acquisitions and effectively integrate acquired assets into the
Company's operations. Suitable acquisitions, on terms acceptable to the Company,
may not be available in the future or may require the Company to assume certain
liabilities, including, without limitation, environmental liabilities, known or
unknown.

POTENTIAL VARIABILITY IN QUARTERLY OPERATING RESULTS

Demand for the Company's primary NGL product, propane, and the Company's
principal commodity, natural gas, will generally increase during the winter
because both products are used as heating fuels. The amount of such increased
demand will depend to some extent upon the severity of the winter. Accordingly,
Company revenues are likely to increase during winter months although the amount
of increase and its effect on profitability cannot be predicted because of
variations in weather and because the Company is also a purchaser of natural gas
and typically experiences an increase in product costs during the winter. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality." Because of the seasonality of the Company's business
and fluctuations in the prices of its products, the Company's operating results
for any past quarterly period may not necessarily be indicative of results for
future periods and there can be no assurance that the Company will be able to
achieve or maintain profitability on a quarterly or annual basis in the future.

DEPENDENCE ON ONE CUSTOMER

Sales of NGLs to a single customer, a subsidiary of Mapco, Inc., accounted
for 12% and 23% of the total revenue of the Company for fiscal years 1996 and
1995, respectively; however, the Company does not believe that the loss of such
customer would have a material adverse effect on the Company because of the
availability of other customers for the Company's products.

NO PRIOR PUBLIC MARKET

There has been no prior public market for the Company's Common Stock. Even
if the Common Stock is approved for listing on the Nasdaq National Market, there
can be no assurance that an active trading market for the Common Stock will
develop or be sustained after the Offering or that purchasers of the Common
Stock will be able to resell their Common Stock at prices equal to or greater
than the initial public offering price. The initial public offering price for
the Common Stock will be determined by negotiation between the Company and the
representatives of the Underwriters based on several factors and may bear no
relationship to the market price of the Common Stock subsequent to the Offering.
Numerous factors, including the general

11
14

economy, announcements by the Company, its suppliers or competitors and
fluctuations in the Company's quarterly and annual operating results, changes in
earnings estimates by analysts, governmental regulatory action and general
trends in the industry could significantly affect the future market price of the
Common Stock. In addition, the stock market historically has experienced
volatility which has affected the market price of securities of many companies
and which has sometimes been unrelated to the operating performance of such
companies.

GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS

The Company is subject to various local, state and federal laws and
regulations including environmental laws and regulations. The Company believes
that it is in substantial compliance with such laws and regulations; however,
there is no assurance that such laws and regulations will not be changed in the
future in a manner which will increase the burden and cost of compliance. In
addition, significant liability could be imposed on the Company for damages,
cleanup costs and penalties in the event of certain discharges into the
environment. See "Business -- Government Regulation" and
"Business -- Environmental Matters."

In March 1992, an environmental site assessment of the Laverne Plant
indicated the presence of hydrocarbon-contaminated groundwater underlying a
portion of the plant site. Under the direction of the Oklahoma Corporation
Commission and based on the results of a pilot remediation project, a plan has
been developed to remediate the site utilizing a biofiltration process to be
installed during the last half of 1997 at an estimated cost of $1 million. The
Company's share of this total cost will be equal to its percentage ownership of
the Laverne Plant which is expected to reach approximately 53% upon completion
of the proposed acquisition from Conoco, Inc. and its affiliate. See
"Business -- Recent Development."

The Company is currently involved in pending proceedings at the FERC in
which certain parties allege that the primary function of the Company's
processing plants is interstate transportation and thus that they are subject to
FERC rate and certificate regulation. While the Company believes that its
business is not subject to regulation by the FERC, it cannot predict the outcome
of these proceedings, nor can it predict the effect a ruling would have on the
Company's business. See "Business -- Government Regulation."

LITIGATION

The Company is involved in certain legal proceedings. Although the Company
believes that the final outcome of any legal proceedings will not have a
material adverse effect on the Company, the inherent uncertainty of litigation
makes it impossible to give assurance regarding the effect of such litigation on
the Company. See "Business -- Legal Proceedings."

ANTI-TAKEOVER PROVISIONS

The Certificate of Incorporation and Bylaws of the Company and Oklahoma law
include certain provisions that may be deemed to have anti-takeover effects and
may delay, defer or prevent a takeover attempt that a shareholder of the Company
might consider to be in the best interests of the Company or its shareholders.
See "Description of Capital Stock."

DILUTION

Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the amount of $5.74 in the net tangible book value per
share of Common Stock from the initial public offering price. See "Dilution."

SHARES ELIGIBLE FOR FUTURE SALE

The availability for sale of certain shares of Common Stock held by
existing shareholders of the Company after the Offering could adversely affect
the market price of the Common Stock. The Company currently has outstanding
4,200,000 shares of its Common Stock. In addition, the Company has 600,000
shares reserved for future issuance upon the exercise of options or other rights
granted under the 1997 Stock Plan and 204,000

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15

shares subject to outstanding options under the 1996 Stock Plan. Of the
6,000,000 shares of Common Stock to be outstanding following the Offering, the
2,100,000 shares being offered hereby will be freely tradeable without
restrictions or additional registration under the Securities Act. The remaining
3,900,000 shares were issued and sold by the Company in private transactions in
reliance upon exemptions from registration under the Securities Act. All of
these shares, except as limited by lock-up agreements, will be eligible for
resale pursuant to Rule 144 under the Securities Act ("Rule 144"). In connection
with the Offering, all executive officers, directors and certain other
shareholders of the Company have agreed not to offer, sell or otherwise dispose
of a total of 3,900,000 shares held by them for a period of 180 days after the
effective date of the Offering, without the prior written consent of the
representatives of the Underwriters. Substantially all of the shares subject to
this lock-up agreement would otherwise be available for resale upon the
effective date of the Offering under Rule 144. Sales of a substantial amount of
the currently outstanding shares of Common Stock in the public market may
adversely affect the market price of the Common Stock and the ability of the
Company to raise additional capital should such sales occur at a time when it
would be beneficial for the Company to sell securities. See "Description of
Capital Stock," "Shares Eligible for Future Sale" and "Underwriting."

COMPETITION

The Company faces strong competition in every aspect of its business,
including the purchase and transportation of natural gas and the sale of natural
gas and NGLs. The Company's competitors include major integrated oil and gas
companies, affiliates of major interstate and intrastate pipeline companies,
natural gas gatherers, and natural gas marketers of varying size, financial
resources and experience. Many of these competitors, particularly those
affiliated with major oil and gas and interstate and intrastate pipeline
companies, have capital resources and control supplies of natural gas
substantially greater than those of the Company. See "Business -- Competition."

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements contained in this Prospectus, such as those concerning
the Company's business strategy, acquisition and expansion plans, future system
throughput and processing volumes, values and revenues, capital requirements,
governmental regulation and other statements regarding matters that are not
historical facts, are forward-looking statements (as such term is defined in the
Securities Act of 1933, as amended (the "Securities Act")). Because such
forward-looking statements include risks and uncertainties, actual results may
differ materially from those expressed in or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those discussed herein under "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." The Company undertakes no obligation to publicly
release the results of any revisions of those forward-looking statements that
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.

13
16

THE COMPANY

The Company is an independent mid-stream energy company engaged in the
purchasing, gathering, treating, processing and marketing of natural gas and
NGLs. From 1985 through 1990, CNG's activities were primarily limited to
marketing off-system gas. Concurrent with the evolving deregulation of the
natural gas industry, the Company began to acquire natural gas gathering systems
and processing plants to complement its marketing business. As a result of these
acquisitions, the Company now derives the majority of its revenues from
gathering, processing and marketing activities associated with these assets. CNG
does not own any natural gas reserves.

During 1996, CNG transferred substantially all of its operating assets to
three limited liability companies in order to limit the potential liability of
any single operating company to the assets and business of that company. The
Company owns 99% of each such limited liability company and the remaining 1% is
owned by Continental Holdings Company, a wholly-owned subsidiary of CNG.

Currently, approximately 90% of the outstanding Common Stock of the Company
is owned by the Majority Shareholders, which are affiliated entities. Gary C.
Adams, the Chairman of the Board, President and Chief Executive Officer of the
Company, is Chief Executive Officer of Cottonwood Partnership which, in turn,
owns a majority interest in Adams Affiliates. See "Principal and Selling
Shareholders." Following the Offering, those entities will own approximately
57.3% of the outstanding Common Stock of the Company.

The Company's principal offices are located at 1412 South Boston, Suite
500, Tulsa, Oklahoma 74119. Its telephone number is (918) 582-4700.

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17

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,800,000 shares of
Common Stock offered by the Company hereby, at an assumed initial public
offering price of $13.00 per share, after deduction of the underwriting discount
and offering expenses payable by the Company, are estimated to be approximately
$21.1 million ($24.8 million if the Underwriters' over-allotment option is
exercised in full). The Company will receive none of the proceeds from the sale
of Common Stock by the Selling Shareholder.

Of such proceeds, the Company plans to use approximately $20 million to pay
a portion of the Company's existing indebtedness to ING Capital Corporation
under its term loan, approximately $587,000 to pay accrued dividends on the
Convertible Preferred Stock and the balance for other general corporate
purposes. The interest rate under the Company's term loan varies at the
Company's election and may be either (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 2.50%
(depending upon the Company's financial performance) above the London Interbank
Offered Rate (LIBOR). The Company's term loan matures on July 31, 2001. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

Pending such uses, the net proceeds of the Offering will be invested in
short-term, interest-bearing investment grade securities, including government
obligations and other money market instruments.

15
18

DIVIDEND POLICY

Although the Company paid a dividend of $24,217 in 1995, the Company does
not intend to pay any cash dividends on its Common Stock and anticipates that,
for the foreseeable future, it will retain any earnings for use in the operation
and expansion of its business. Payment of cash dividends in the future will
depend upon the Company's earnings, financial condition, any contractual
restrictions (including restrictions contained in agreements relating to the
Company's credit facility), restrictions imposed by applicable law, capital
requirements and other factors deemed relevant by the Company's Board of
Directors. The Company's current credit facility prohibits the payment of
dividends on its Common Stock until December 30, 1997, and thereafter prohibits
the payment of dividends in excess of 10% of the Company's annual consolidated
net income.

16
19

DILUTION

The pro forma net tangible book value of the Company as of March 31, 1997
was approximately $22.4 million or $5.34 per share of Common Stock. Net tangible
book value per share represents the amount of total tangible assets of the
Company less total liabilities, divided by the number of shares of Common Stock
issued and outstanding, adjusted for the conversion of the Convertible Preferred
Stock into 586,847 shares of Common Stock and the payment of cumulative unpaid
dividends of $699,000 as of March 31, 1997. After giving effect to the sale of
the 1,800,000 shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $13.00 per share and the application of the
estimated net proceeds therefrom as described under "Use of Proceeds," the pro
forma net tangible book value of the Company as of March 31, 1997 would have
been $43.5 million, or $7.26 per share. This represents an immediate increase in
net tangible book value of $1.92 per share to existing shareholders and an
immediate dilution of $5.74 per share to new investors.

The following table illustrates this per share dilution:

Assumed initial public offering price....................... $13.00
Pro forma net tangible book value before the Offering..... 5.34
Increase in pro forma net tangible book value attributable
to new investors....................................... 1.92
Pro forma net tangible book value after the Offering........ 7.26
Dilution to new investors................................... $ 5.74
======

The computations in the table above exclude 204,000 shares of Common Stock
issuable upon the exercise of stock options granted under the 1996 Stock Plan
and 600,000 shares of Common Stock issuable pursuant to awards to be granted
under the 1997 Stock Plan. To the extent such awards under the 1997 Stock Plan
are made and vest or are exercised, there may be further dilution to new
investors. See "Management -- Executive Compensation."

The following table summarizes, on a pro forma basis as of March 31, 1997,
the differences in the total consideration paid and the average price per share
paid by the Company's existing shareholders during the past five years and by
purchasers of the shares offered hereby:

TOTAL CONSIDERATION AVERAGE
NUMBER PURCHASED ---------------------- PRICE
OF SHARES PERCENT AMOUNT PERCENT PER SHARE
--------- --------- ----------- ------- ---------

Existing shareholders........ 665,992 24% $ 153,040 1% $ .23
--------- --- ----------- --- ------
New investors................ 2,100,000 76 $27,300,000 99 13.00
--------- --- ----------- --- ------
Total.............. 2,765,992 100% $27,453,040 100%
========= === =========== === ======

The computation in the table above includes Common Stock acquired by
officers and directors during the past five years and shares issuable upon
exercise of outstanding options, which options are exercisable only if certain
performance criteria of the Company are met during the years of 1997 through
1999.

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20

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company as of March 31, 1997 (i) on an actual basis and (ii) as adjusted to give
effect to the issuance and sale by the Company of 1,800,000 shares of Common
Stock in the Offering at an assumed public offering price of $13.00 per share,
the application of the estimated net proceeds therefrom and the conversion of
the Convertible Preferred Stock into 586,847 shares of Common Stock. See "Use of
Proceeds" and the Company's Consolidated Financial Statements included herein.
This table should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto included elsewhere in this
Prospectus.

AS OF MARCH 31, 1997
----------------------
AS
ACTUAL ADJUSTED(1)
------- -----------
(IN THOUSANDS)

Current portion of long-term debt and capital lease
obligations............................................... $ 3,217 $ 3,217
======= =======
Long-term debt and capital lease obligations(2):
Bank borrowings........................................... $38,071 $18,071
Capital lease obligations................................. 6,276 6,276
------- -------
Total long-term debt and capital lease
obligations..................................... 44,347 24,347
Shareholders' equity(3):
Convertible preferred stock: $1 par value; $40,000
liquidation value; 200 shares authorized; 149 shares
issued and outstanding................................. 149 0
Common stock, $.01 par value, 60,000,000 shares
authorized; 3,919,156 shares issued, 6,000,000 as
adjusted............................................... 39 60
Additional paid-in capital................................ 12,376 33,455
Retained earnings......................................... 11,029 10,330
Treasury stock, at cost (306,003 shares).................. (204) (204)
Receivable from stock sale................................ (100) (100)
------- -------
Total shareholders' equity........................ $23,140 $43,541
------- -------
Total capitalization.............................. $67,487 $67,888
======= =======

- ---------------

(1) Adjusted to give effect to (i) the sale by the Company of 1,800,000 shares
of Common Stock in the Offering and the application of the net proceeds
therefrom and (ii) the conversion of the Convertible Preferred Stock into
586,847 shares of Common Stock and the payment of unpaid dividends of
$699,000 attributable to the Convertible Preferred Stock. See "Use of
Proceeds."

(2) See Notes 5 and 6 of the Notes to the Company's Consolidated Financial
Statements included herein.

(3) See Note 11 of the Notes to the Company's Consolidated Financial Statements
included herein.

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21

SELECTED CONSOLIDATED FINANCIAL DATA AND OTHER INFORMATION

The following table presents selected financial and operating information
for the Company as of the end of and for each of the five years in the period
ended December 31, 1996 and for the three month periods ended March 31, 1996 and
1997. The financial data for the years ended December 31, 1994, 1995 and 1996
have been derived from the Company's Consolidated Financial Statements included
herein which have been audited by Coopers & Lybrand L.L.P., independent
accountants. The data for and at the end of the three month periods ended March
31, 1996 and 1997, have been derived from the unaudited Consolidated Financial
Statements of the Company included elsewhere in this Prospectus and reflect, in
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary for fair presentation of the results for such periods.
Results of operations for the three months ended March 31, 1997, are not
necessarily indicative of the results to be achieved for the year ending
December 31, 1997. The selected financial data should be read in conjunction
with the Company's Financial Statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein.

THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED) (UNAUDITED)

STATEMENT OF OPERATIONS DATA:
Revenues
Natural gas sales.............................. $124,981 $126,583 $100,477 $ 95,631 $208,779 $ 32,670 $ 78,788
Natural gas liquids sales...................... 10,102 23,177 19,572 24,804 34,757 6,195 8,881
Gathering fees................................. -- -- -- -- 1,995 -- 843
Other.......................................... 1,239 1,308 260 763 1,130 455 15
-------- -------- -------- -------- -------- -------- --------
Total operating revenue.................... 136,322 151,068 120,309 121,198 246,661 39,320 88,527
Operating costs and expenses
Cost of purchased natural gas.................. 125,872 137,560 111,038 107,642 225,535 34,493 81,417
Operating expenses............................. 3,617 5,530 3,930 4,366 5,978 1,382 1,559
General and administrative..................... 4,050 3,847 3,601 3,840 5,623 1,310 1,842
Depreciation, depletion and amortization....... 1,067 1,741 1,505 1,367 2,854 473 899
-------- -------- -------- -------- -------- -------- --------
Total operating costs and expenses......... 134,606 148,678 120,074 117,215 239,990 37,658 85,717
Operating income................................. 1,716 2,390 235 3,983 6,671 1,662 2,810
Other income (expense), net...................... (448) (1,028) 4,648 (1,047) (2,686) (264) (1,171)
-------- -------- -------- -------- -------- -------- --------
Income before income taxes, extraordinary item and
cumulative effect of accounting change........... 1,268 1,362 4,883 2,936 3,985 1,398 1,639
Income tax (expense) benefit....................... (47) (127) 2,174 3,635 (30) 652
-------- -------- -------- -------- -------- -------- --------
Income before extraordinary item and cumulative
effect of accounting change...................... 1,268 1,315 4,756 5,110 7,620 1,368 987
======== ======== ======== ======== ======== ======== ========
Net income......................................... $ 1,268 $ 1,695 $ 4,756 $ 5,110 $ 7,193 $ 1,368 $ 987
======== ======== ======== ======== ======== ======== ========
Pro forma operating revenue........................ 246,058(1) $ 88,527(1)
--------
Pro forma income before extraordinary item......... $ 786(2) 8,277(1) $ 1,235(1)
-------- -------- --------
EARNINGS PER SHARE:
Primary:
Income before extraordinary item and cumulative
effect of accounting change.................... $ .41 $ .40 $ 1.46 $ 1.59 $ 1.99 $ .37 $ .24
Net income....................................... .41 .52 1.46 1.59 1.87 .37 .24
Fully Diluted:
Income before extraordinary item and cumulative
effect of accounting change.................... .40 .40 1.45 1.59 1.71 .33 .22
Net income....................................... .40 .52 1.45 1.59 1.61 .33 .22
Pro forma income before extraordinary item:
Primary.......................................... .25(2) 1.47(1) .21(1)
Fully diluted.................................... .25(2) 1.34(1) .20(1)
Weighted average common shares outstanding:
Primary.......................................... 3,131 3,217 3,215 3,185 3,536 3,305 3,613
Fully diluted.................................... 3,135 3,232 3,242 3,186 4,466 4,155 4,393

19
22

STATEMENT OF CASH FLOWS DATA:
Cash flows provided by (used in) operating
activities..................................... $ 174 $ 12,787 $ 1,785 $ 8,825 $ 23,535 $ (998) $ (8,804)
Cash flows provided by (used in) investing
activities..................................... (13,919) (1,444) 10,188 (12,286) (30,459) (10,418) (3,464)
Cash flows provided by (used in) financing
activities..................................... 14,036 (10,325) (7,800) 2,325 23,345 8,100 5,974
OTHER DATA:
Capital expenditures............................. $ 13,986 $ 2,267 $ 3,097 $ 12,311 $ 30,761 10,418 3,498
EBITDA(3)........................................ 2,782 4,132 1,739 5,350 9,525 2,135 3,709
Natural gas throughput gathered and/or processed
(MMcf/d)....................................... 60 93 108 140 191 121 213
NGLs production (Mgal/d)......................... 105 251 257 288 264 245 269
Average NGL price (per gal)........................ $ .27 $ .26 $ .22 $ .26 $ .36 $ .28 $ .37
BALANCE SHEET DATA:
Property, plant and equipment (net).............. $ 19,899 $ 22,231 $ 13,554 $ 28,346 $ 61,045 $ 37,332 $ 62,751
Total assets..................................... 55,824 46,298 35,264 58,099 145,929 64,661 117,064
Long-term debt, excluding current portion........ 5,641 5,626 3,750 6,534 32,946 11,494 38,071
Capital lease obligations, excluding current
portion........................................ 1,565 2,554 954 2,745 6,583 2,601 6,276
Shareholders' equity............................. 5,379 7,397 12,153 16,754 22,153 18,368 23,140

- ---------------

(2) Includes a pro forma income tax provision for 1992 when the Company was an
S-corporation, and thus not subject to income taxes.

(3) See definition in the "Glossary" section of this Prospectus.

20
23

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Since its formation, the Company has grown primarily as a result of
acquisitions, facilities expansions and connections of additional natural gas
reserves to its natural gas gathering systems. Additionally, the Company has
increased its natural gas and NGL marketing operations. All historical financial
information has been restated to reflect the Company's 136-for-1 stock split
effected in June 1997. This discussion and analysis should be read in
conjunction with the Consolidated Financial Statements of the Company and the
notes thereto included elsewhere in this Prospectus.

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's off-system gas marketing activities
also contribute to its profitability. Acquisitions of the Texas Gathering Assets
in the second quarter of 1996 and the Mocane Plant in the first quarter of 1995
have had a significant impact on the Company's results of operations.

Fluctuations in the price levels of natural gas and NGLs also affect
results of operations since the Company generally receives a portion of the
natural gas and NGLs revenue from natural gas throughput. Most of the Company's
operating expenses do not vary materially with changes in natural gas throughput
volume on existing systems; thus, increases or decreases in volumes on existing
systems generally have a direct effect on the Company's profitability.
Conversely, operating expenses such as compression rental and compression
maintenance expenses vary with volume changes as compressor units are added or
removed accordingly.

Three Months Ended March 31, 1997 Compared to Three Months Ended March 31,
1996

Revenues. Total operating revenue increased 125% to $88.5 million for the
three months ended March 31, 1997, compared to $39.3 million for the same period
in 1996. Total natural gas sales increased 141% to $78.8 million for the three
months ended March 31, 1997 from $32.7 million for the same period in 1996 as a
result of a $22.1 million price-related increase due to average sales prices of
$3.25 per Mcf in 1997 compared to $2.34 per Mcf in 1996 and a $24.0 million
volume-related increase due to sales of 66.3 MMcf/d in 1997 compared to 38.2
MMcf/d in 1996. This increase in volume resulted primarily from increases in
off-system gas marketing sales.

NGL sales increased 43% to $8.9 million for the three months ended March
31, 1997, compared to $6.2 million for the same period in 1996 primarily as a
result of a $2.1 million price-related increase due to average NGL sales prices
of $0.37 per gallon in 1997 compared to $0.28 per gallon in 1996.

The Company earned gathering fees of $0.8 million for the three months
ended March 31, 1997, as a result of the acquisition of the Texas Gathering
Assets. These assets are also utilized in the Company's processing activities by
purchasing natural gas from producers served by the Company's systems and
transporting it to the Beaver Plant for processing.

Costs and Expenses. Total operating costs and expenses increased 128% to
$85.7 million for the three months ended March 31, 1997, compared to $37.7
million for the same period in 1996. Total natural gas costs increased 136% to
$81.4 million in 1997 from $34.5 million in 1996 as a result of increases in
price and volume. The $24.4 million price-related increase (resulting from a
change in average purchase prices of $3.07 per Mcf in 1997 from $2.15 per Mcf in
1996) was mitigated by approximately $0.5 million of avoided gathering fees
caused by the integration of the Texas Gathering Assets into the Company's
processing business. A $22.6 million volume-related increase resulted from
purchases of 294.8 MMcf/d in 1997 compared to 178.2 MMcf/d in 1996. This
increase in volume resulted primarily from increases in off-system gas marketing
purchases.

Operating expenses increased 13% to $1.6 million for the three months ended
March 31, 1997 from $1.4 million for the same period in 1996. This was primarily
due to operating activities from the acquisition of the Texas Gathering Assets.

21
24

General and administrative expenses increased 41% to $1.8 million for the
three months ended March 31, 1997 from $1.3 million in the same period in 1996.
This increase was due primarily to the addition of marketing personnel and
administrative support activities related to the Texas Gathering Assets.

Depreciation, depletion and amortization increased 90% to $0.9 million for
the three months ended March 31, 1997 from $.5 million for the same period in
1996 primarily due to the acquisition of the Texas Gathering Assets and
expansions at the Beaver Plant.

Other Income (Expense). Interest income increased to $0.3 million for the
three months ended March 31, 1997 from $50,000 for the same period in 1996 due
to increased cash investments associated with contract advances received in the
fourth quarter of 1996. During these same time periods, interest expense
increased 350% to $1.5 million from $0.3 million primarily due to additional
debt incurred to finance the acquisition of the Texas Gathering Assets.

Income Taxes. Income tax expense increased to $0.7 million for the three
months ended March 31, 1997 from $30,000 for the same period in 1996. For the
three months ended March 31, 1997, the Company's effective income tax rate
approximates the sum of the federal and state statutory rates, while in 1996 the
Company's effective tax rate was significantly impacted by its net operating
loss carryforwards.

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Revenues. Total operating revenue increased 104% to $246.7 million for the
year ended December 31, 1996, compared to $121.2 million for the same period in
1995. Total natural gas sales increased 118% to $208.8 million in 1996 from
$95.6 million in 1995 as a result of a $79.1 million price-related increase due
to average sales prices of $2.56 per Mcf in 1996, compared to $1.59 per Mcf in
1995 and a $34.1 million volume-related increase due to sales of 224.1 MMcf/d in
1996, compared to 165.1 MMcf/d in 1995. This increase in volume resulted
primarily from increases in off-system gas marketing sales.

NGL sales increased 40% to $34.8 million for the year ended December 31,
1996, compared to $24.8 million in 1995, primarily as a result of a $10.0
million price-related increase due to average NGL sales prices of $0.36 per
gallon in 1996, compared to $0.26 per gallon in 1995.

The Company earned gathering fees of $2.0 million for the year ended
December 31, 1996, as a result of the acquisition of the Texas Gathering Assets
in the second quarter of 1996.

Other revenues including sales from oil and gas properties increased to
$1.1 million in 1996 from $0.8 million in 1995. All the Company's oil and gas
properties were sold to an affiliated entity in the third quarter of 1996 for
$0.3 million which approximated book value. Oil and gas producing activities
contributed revenues of $0.6 million, $0.5 million and $0.2 million in 1996,
1995 and 1994, respectively.

Costs and Expenses. Total operating costs and expenses increased 105% to
$240.0 million for the year ended December 31, 1996, compared to $117.2 million
for the same period in 1995. Total natural gas costs increased 110% to $225.5
million in 1996 from $107.6 million in 1995 as a result of increases in price
and volume. The $85.2 million price-related increase (resulting from a change in
average purchase prices of $2.46 per Mcf in 1996 from $1.53 per Mcf in 1995) was
mitigated by approximately $0.5 million of avoided gathering fees caused by the
integration of the Texas Gathering Assets into the Company's processing
business. A $32.7 million volume-related increase resulted from purchases of
251.1 MMcf/d in 1996, compared to 192.6 MMcf/d in 1995. This increase in volume
resulted primarily from increases in off-system marketing purchases.

Operating expenses increased 37% to $6.0 million in 1996 from $4.4 million
in 1995. This was due mainly to the increased operating activities from
acquisition of the Texas Gathering Assets, expansions at the Beaver Plant and
inclusion of Mocane Plant operating expenses for the full year.

General and administrative expenses increased 46% to $5.6 million in 1996
from $3.8 million in 1995. This increase was due primarily to the addition of
marketing personnel, administrative support activities related to the Texas
Gathering Assets and ad valorem tax increases in connection with the acquisition
of the Texas Gathering Assets and Beaver Plant expansion projects.

22
25

Depreciation, depletion and amortization increased 109% to $2.9 million in
1996 from $1.4 million in 1995 primarily due to the acquisition of the Texas
Gathering Assets, expansions at Beaver Plant and inclusion of the Mocane Plant
for the full year.

Other Income (Expense). Interest expense increased 196% to $2.7 million in
1996 from $0.9 million in 1995 due primarily to additional debt incurred to
finance the acquisition of the Texas Gathering Assets.

Income Taxes. The Company's effective income tax rate in 1996 and 1995 was
significantly impacted by its net operating loss carryforwards. For financial
statement purposes, recognition of the net operating loss carryforwards resulted
in a tax benefit of $3.6 million in 1996 and $2.2 million in 1995. The Company
anticipates that its effective tax rate in 1997 will approximate the sum of the
federal and state statutory rates. See Note 8 to the Company's financial
statements included elsewhere herein.

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

Revenues. Total operating revenue increased to $121.2 million for the year
ended December 31, 1995, from $120.3 million for the same period in 1994. Total
natural gas sales decreased 5% to $95.6 million in 1995 from $100.5 million in
1994 as a result of a $20.8 million price-related decrease due to average sales
prices of $1.59 per Mcf in 1995 compared to $1.93 per Mcf in 1994 and a $15.9
million volume-related increase due to sales of 165.1 MMcf/d in 1995, compared
to 142.4 MMcf/d in 1994. This increase in volume resulted primarily from
increases in on-system gas marketing sales.

NGL sales increased 27% to $24.8 million for the year ended December 31,
1995, compared to $19.6 million in 1994, primarily as a result of a $4.1 million
price-related increase due to average NGL sales prices of $0.26 per gallon in
1995, compared to $0.22 per gallon in 1994 and a $1.1 million volume-related
increase due to sales of 265 Mgal/d in 1995, compared to 249 Mgal/d in 1994.
This volume-related increase included NGL sales volume from the Mocane Plant
acquisition of 104.0 Mgal/d, which was partially offset by decreased sales
volume of 83.4 Mgal/d due to the divestiture of a gathering and processing
system in Carlsbad, New Mexico (the "Carlsbad System") in 1994.

Costs and Expenses. Total operating costs and expenses decreased to $117.2
million for the year ended December 31, 1995 from $120.1 million for the same
period in 1994. Total natural gas costs decreased to $107.6 million in 1995 from
$111.0 million in 1994 as a result of a $20.3 million price-related decrease due
to average purchase prices of $1.53 per Mcf in 1995 compared to $1.82 per Mcf in
1994 offset by a $16.9 million volume-related increase due to purchases of 192.6
MMcf/d in 1995, compared to 167.2 MMcf/d in 1994. This increase in volume
resulted primarily from increases in on-system gas marketing purchases.

Operating expenses increased 11% to $4.4 million in 1995 from $3.9 million
in 1994, due primarily to increased operating activities from the acquisition of
the Mocane Plant.

General and administrative expenses increased 7% to $3.8 million in 1995
from $3.6 million in 1994.

Depreciation, depletion and amortization decreased 9% to $1.4 million in
1995 from $1.5 million in 1994, due primarily to the sale of the Carlsbad System
in 1994 offset partially by the acquisition of the Mocane Plant in 1995.

Other Income (Expense). Interest expense decreased 27% to $0.9 million in
1995 from $1.3 million in 1994. A gain of approximately $3.9 million (net of
$1.3 million attributable to minority ownership interests) on the sale of
certain gathering and processing assets was recognized by the Company during the
fourth quarter of 1994. Additionally, in 1994, the Company recognized other
income of $2.0 million from key-man life insurance policy proceeds due to the
death of an officer.

Income Taxes. The Company's effective income tax rate in 1995 and 1994 was
significantly impacted by its net operating loss carryforwards. For financial
statement recognition purposes, the net operating loss carryforwards resulted in
a tax benefit of $2.2 million in 1995 while tax expense was $0.1 million in
1994.

23
26

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. In addition, in 1994, the Company received $12.8 million from the
sale of the Carlsbad System. The Company's principal uses of cash have been to
fund operations and acquisitions.

The following summary table reflects comparative cash flows for the Company
for the years ended December 31, 1994, 1995 and 1996 and the three months ended
March 31, 1996 and 1997:

THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- ------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- -------
(IN THOUSANDS)

Net cash provided by (used in)
operating activities................ $ 1,785 $ 8,825 $ 23,535 $ (998) $(8,804)
Net cash provided by (used in)
investing activities................ 10,188 (12,286) (30,459) (10,418) (3,464)
Net cash provided by (used in)
financing activities................ (7,800) 2,325 23,345 8,100 5,974

For the three months ended March 31, 1997, net cash used in operating
activities increased by approximately $7.8 million from the same period in 1996.
This was mainly attributable to changes in working capital including the
repayment of contract advances totaling $14.5 million. Excluding net changes in
working capital components, the Company's operating activities generated $2.5
million for this period in 1997 and $1.9 million in 1996. Net cash provided by
operating activities for the year ended 1996, increased by approximately $14.7
million from the same period in 1995. The increase resulted primarily from
changes in working capital, including contract advances of approximately $22.8
million received by the Company related to commitments to sell natural gas and
NGLs. It is anticipated that all such contract advances will be repaid in 1997,
which will result in a decrease in cash flows from operating activities.
Excluding net changes in working capital components, the Company's operating
activities generated $6.6 million during 1996 as compared to $4.7 million in
1995, an increase of $1.9 million. Net cash provided by operating activities for
1995 increased by $7.0 million from 1994. This increase was due to a $2.0
million increase in net earnings adjusted for depreciation and amortization and
other noncash items and a $5.0 million increase from working capital components.

Cash used in investing activities for the three months ended March 31, 1997
was primarily for expansion projects on the Texas Gathering Assets. Cash used in
investing activities for the same period in 1996 was mainly for the acquisition
of a portion of the Texas Gathering Assets on March 31, 1996. For the year ended
1996, cash used in investing activities was principally related to the
acquisition of the Texas Gathering Assets and various expansion projects on the
Texas Gathering Assets and the Beaver Gathering System. In 1995, cash used in
investing activities was related primarily to the acquisition of the Mocane
Plant and related expenditures for the expansion of the Mocane fractionation
facility and dual interconnecting pipelines from the Mocane Plant to the Beaver
Plant. Cash provided by investing activities in 1994 was related to the receipt
of $12.8 million from the sale of certain assets, which was offset by
approximately $3.1 million of various upgrade and expansion projects.

Cash provided by financing activities for the three months ended March 31,
1997 resulted from borrowing under the Company's revolving facility used for
working capital requirements and funding various capital projects. Cash provided
by financing activities for the same period in 1996 resulted mainly from
long-term borrowing for the acquisition of a portion of the Texas Gathering
Assets. For the year ended 1996, cash provided by financing activities resulted
principally from long-term borrowing for the acquisition of the Texas Gathering
Assets. In 1995, cash provided by financing activities resulted primarily from
increased borrowing levels for various capital expenditures. In 1994, cash used
in financing activities resulted primarily from the repayment of long-term debt.
In 1996, the Company issued preferred stock and canceled certain indebtedness to
acquire the minority interest ownership of a partnership holding one of the
Company's processing plants.

24
27

Also in 1996, the Company redeemed 51 shares of Convertible Preferred Stock in
exchange for the cancellation of indebtedness due from an affiliated entity.

At December 31, 1996, the Company had NOLs totaling approximately $17.5
million for regular tax purposes and $18.0 million for alternative minimum tax
purposes. If not utilized, these NOLs will expire from 1999 to 2003. Due to the
lack of existing legal precedent with respect to the tax rules governing the
Company's NOLs, both the availability of the Company's NOLs and its prior
utilization of NOLs (totaling approximately $37 million) may be challenged.
Disallowance of the use of the NOLs would result in taxes associated with prior
utilization of the NOLs being currently payable.

The Company believes that the net proceeds from the Offering, together with
its current credit facilities and cash flows generated by its operations, will
be sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next twelve months. Thereafter, if cash generated
from operations is insufficient to satisfy the Company's liquidity requirements,
the Company may seek to obtain additional credit facilities, sell additional
equity or debt securities or adjust the level of its operating and capital
expenditures. The sale of additional equity securities could result in
additional dilution to the Company's shareholders.

Financing Facilities. The Company entered into a Credit Agreement with ING
Capital Corporation as of December 30, 1996. The Credit Agreement contains a
revolving facility and a term loan facility. The revolving facility has a
maximum borrowing base of $25.0 million which had outstanding borrowings of $6.5
million as of March 31, 1997. Under the term loan facility approximately $33.6
million was outstanding as of March 31, 1997, while an additional $4.8 million
was available for certain future acquisitions, including the acquisition of
interests in the Laverne Plant. 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 2.50% (depending upon the Company's financial performance) above
the London Interbank Offered Rate (LIBOR). Current interest payments on the
revolving facility and repayments under the term facility began on January 31,
1997. The revolving facility contains a sub-limit permitting the Company to
issue Letters of Credit amounting, in the aggregate, to $18.0 million. As of
March 31, 1997, the aggregate amount outstanding under these Letters of Credit
was $6.0 million.

The Company has also entered into a Letter of Credit and Reimbursement
Agreement with Christiania Bank, New York Branch. Under the Reimbursement
Agreement, Christiania Bank initially issued letters of credit in the aggregate
amount of approximately $21.0 million to secure the Company's obligation under
various contract advances. As of March 31, 1997, the aggregate amount
outstanding under these Letters of Credit was $11.1 million. The Company pays
Christiania Bank a fee of 1 1/2% per annum for each Letter of Credit which is
issued.

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 in the Company's market areas. Demand and prices of propane usually
increase during the winter season and decrease during the summer season. The
Company's principal commodity, natural gas, is used primarily for heating fuel
for homes and industry, and for electric power generation. Demand and prices for
natural gas usually increase during the winter season. While the Company's gross
revenues typically increase or decrease seasonally, profitability from natural
gas processing operations is affected by the margins between the cost of natural
gas purchased and the sales prices of the NGLs extracted, which may not follow
seasonal patterns.

25
28

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("FAS 128"). FAS
128 will change the computation, presentation and disclosure requirements for
earnings per share. FAS 128 requires the presentation of "basic" and "diluted"
earnings per share, as defined, for all entities with complex capital
structures. FAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, and requires restatement of all prior period
earnings per share amounts. The Company has not yet determined the impact that
FAS 128 will have on its earnings per share when adopted.

Statement of Position 96-1, "Environmental Remediation Liabilities," issued
by the American Institute of Certified Public Accountants, will become effective
for the Company in 1997. This statement establishes the timing and measurement
of accruals for environmental liabilities. The Company does not anticipate that
this standard will have a material effect on its financial condition or results
of operations.

UNAUDITED QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited quarterly financial
information for each of the Company's last five quarters. The data has been
prepared on a basis consistent with the Company's audited consolidated financial
statements included elsewhere in the Prospectus and includes all necessary
adjustments, consisting only of normal recurring accruals that management
considers necessary for a fair presentation. The operating results for any
quarter are not necessarily indicative of results for any future period.

THREE MONTHS ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1996 1996 1996 1997
--------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)

STATEMENTS OF OPERATIONS DATA:
Operating revenues.................... $39,320 $42,098 $61,158 $104,085 $88,527
Operating income(1)................... 1,662 377 694 3,938 2,810
Income before extraordinary item...... 1,368 (157) (34) 6,443 987
Net income............................ 1,368 (157) (34) 6,016 987
EARNINGS PER SHARE:
Primary:
Income before extraordinary item...... .37 (.08) (.05) 1.75 .24
Net income............................ .37 (.08) (.05) 1.63 .24
Fully diluted:
Income before extraordinary item...... .33 (.08) (.05) 1.42 .22
Net income............................ .33 (.08) (.05) 1.33 .22
OTHER DATA:
General and administrative............ 1,310 1,101 1,247 1,965 1,842
Depreciation, depletion and
amortization....................... 473 732 890 759 899
EBITDA(2)............................. 2,135 1,108 1,585 4,697 3,709
Cash flows provided by (used in)
operating activities............... (998) 6,016 1,678 16,840 (8,804)

- ---------------

(1) Operating revenues less operating costs and expenses.

(2) See definition in the "Glossary" section of this Prospectus.

(3) Earnings per share are calculated independently for each quarter, and
accordingly the sum of the four quarters may not equal the annual earnings
per share amounts.

26
29

BUSINESS

GENERAL

The Company is an independent mid-stream energy company engaged in the
purchasing, gathering, treating, processing and marketing of natural gas and
NGLs. The Company owns and operates approximately 1,100 miles of natural gas
gathering pipelines located in the Panhandle Area with a total throughput
capacity of 383 MMcf/d and two interconnected natural gas processing plants with
a total NGL production capacity of 490 Mgal/d. CNG provides essential services
to natural gas producers in the Panhandle Area by (i) connecting the producers'
wells to the Company's gathering systems, (ii) treating the producers' natural
gas to ensure that it meets pipeline specifications, (iii) transporting the
natural gas from the wellhead to CNG's processing plants where NGLs are
extracted from the natural gas stream and (iv) providing access for the natural
gas and NGLs to various markets in the CNG Market Area of the United States. The
April 1996 and January 1997, editions of "Hart's Report on Gas Customer
Satisfaction" published by Hart Publications, Inc. reported that CNG was rated
the most preferred natural gas purchaser in surveys of natural gas sellers. The
Company markets on-system gas, as well as off-system gas, to utilities,
end-users, other marketers and pipeline affiliates.

The Company's principal assets are located in the Panhandle Area, which is
a major natural gas producing area with significant long-lived natural gas
reserves. CNG's Beaver Plant and Beaver Gathering System were acquired in 1990
from El Paso Natural Gas Company and currently consist of approximately 300
miles of natural gas gathering pipelines, a 65 MMcf/d cryogenic processing plant
and a 40 MMcf/d propane refrigeration plant. The Beaver Plant is interconnected
with the Company's Mocane Plant, which was acquired from affiliates of Conoco,
Inc. and Chevron USA, Inc. in 1995. The Mocane Plant consists of two
refrigerated lean oil absorption plants with a combined demonstrated capacity of
200 MMcf/d of natural gas and 280 Mgal/d of NGLs, approximately 140,000 barrels
of underground NGL storage and a 6,700 barrels per day NGL fractionator. During
the first half of 1996, the Company acquired approximately 800 miles of gas
gathering assets located throughout the Texas panhandle in three separate
transactions. These gathering assets were acquired for approximately $20.2
million from subsidiaries of Enron Corporation.

Although the Company's principal growth in recent years has been derived
from its gathering and processing operations, the Company's sale of off-system
gas, which does not enter its gathering or processing facilities, remains a
significant portion of its business. In 1996, revenue from the sale of
off-system gas accounted for approximately 53% of the Company's total operating
revenue. The Company marketed the off-system gas of over 70 producers via 15
interstate and intrastate pipelines during 1996. The Company's entry into and
continued participation in the off-system gas business has relied upon federal
regulations mandating the delivery of third-party natural gas by interstate
pipelines. A material change in such regulations could adversely affect the
Company's off-system gas operations. See "Risk Factors -- Dependence on
Third-Party Pipelines" and "Business -- Government Regulations."

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BUSINESS STRATEGY

Set forth below is a summary of the Company's significant acquisitions and
construction projects:

YEAR
ACQUIRED OR
PLACED INTO
NAME TYPE SERVICE COST
---- ---- ------------ -------------
(IN MILLIONS)

Occidental Petroleum Well Connection......... Construction 1996 $ 1.8
Texas Gathering Assets....................... Acquisition(1) 1996 20.2
Beaver-to-Mocane Gas Pipeline Construction
Interconnection............................ 1995 3.9
Mocane Fractionator.......................... Construction 1995 1.7
Mocane Processing Plant...................... Acquisition 1995 3.5
Beaver/ANR Pipeline Interconnection.......... Construction 1994 1.8
Carlsbad Cryogenic Plant(2).................. Construction 1992 5.8
Addition to Beaver System.................... Acquisition 1992 1.0
Beaver Cryogenic Plant....................... Construction 1992 4.9
Beaver Gathering System and Processing Acquisition
Plant...................................... 1990 1.2

- ---------------

(1) The Company sold the Carlsbad System, which includes the Carlsbad Cryogenic
Plant, in 1994.

(2) This acquisition was accomplished in three separate transactions.

Improving the Profitability of Existing Facilities. The Company seeks to
maximize the profitability of its operations by (i) maintaining and increasing
natural gas throughput and processing levels, (ii) directing natural gas
throughput to a particular Company-owned gas processing plant that maximizes
product yields and/or margins, (iii) investing in assets that enhance product
value and (iv) controlling operating and overhead expenses. In order to maintain
or increase natural gas throughput and processing volumes. The Company obtains
additional natural gas supplies for its facilities by connecting new wells to
the Company's gathering systems purchasing and integrating gathering systems
into the Company's existing operations and entering into contractual natural gas
supply arrangements with producers or other gatherers.

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RECENT DEVELOPMENT

The Company, Conoco and an affiliate of Conoco have reached an informal
agreement under which the Company will purchase from Conoco and its affiliate a
36% interest in the Laverne Plant for a purchase price of $3.8 million. Although
Conoco is the operator of the Laverne Plant, it is owned by various entities.
During 1997, the Company has acquired approximately 17% of the plant for $1.4
million. Subject to the execution of a definitive purchase and sale agreement
and the satisfaction of other conditions, the closing of the Laverne Plant
Acquisition is expected to take place in the third quarter of 1997 effective in
April 1997. Concurrent with the Laverne Plant Acquisition, certain litigation
between the Company and the Conoco affiliate will be

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32

settled. See "Business -- Legal Proceedings." Upon completion of the Laverne
Plant Acquisition, the Company will own approximately 53% of the Laverne Plant.
The Company's interest in the Laverne Plant will be held by Continental Laverne
Gas Processing, L.L.C., an Oklahoma limited liability company which was formed
on May 8, 1997, for the purpose of acquiring interests in the Laverne Plant.

The Laverne Plant consists of a 200 MMcf/d cryogenic gas processing
facility, complete with liquid fractionation capability and above-ground
storage. The Laverne Plant straddles GPM Gas Corporation's Laverne natural gas
gathering system. Natural gas production feeding the Laverne Plant originates
from the Mocane-Laverne field. The plant is located approximately eight miles
east of the Beaver Plant. Current throughput at the Laverne Plant is 70 MMcf/d,
yielding 180 Mgal/d of NGLs. Due to the proximity of the Laverne Plant to CNG's
other assets and its substantial underutilized capacity, the Company believes
that the Laverne Plant will enhance the Company's existing operations in the
Panhandle Area.

GATHERING AND PROCESSING

The Company's natural gas gathering and processing activities include
contracting to purchase natural gas supplies, operating and maintaining a system
of gathering pipelines that connect these natural gas supplies to transport
lines or natural gas processing plants and operating and maintaining processing
plants linked to its gathering systems.

Purchasing. In 1996, the Company purchased natural gas from over 75
suppliers, ranging from major producers to small independent companies primarily
in the Panhandle Area. The Company's natural gas throughput in its gathering
systems and processing plants is generally supplied by producers pursuant to
long-term contracts (i.e., contracts in excess of one year). In arranging new
purchase contracts, the Company submits to the producer an offer to purchase the
natural gas from the prospective acreage. The producer typically evaluates
various offers based upon the purchase price and other contract provisions, line
pressure, the time period required for well connection and the gathering
company's reputation for service and reliable marketing. The Company believes
that its flexibility in negotiating contract terms, prompt connection of wells,
reliable performance under its contracts and strong overall relationships with
producers provide it with an important competitive advantage in the acquisition
of new natural gas supplies.

The terms of the Company's natural gas purchase contracts are determined
based upon negotiations with producers, competition and the desire to maximize
the value to be realized from its gathering and processing systems. The Company
purchases a majority of its on-system gas supplies pursuant to long-term
contracts that require producers to dedicate all natural gas produced from
designated properties. The pricing of these producer contracts is generally not
fixed, however, and follows the market price.

The Company's on-system gas contracts with producers may be classified as
(i) processing contracts, (ii) purchase contracts or (iii) gathering contracts.
In March, 1997, the Company contracted 14% of its natural gas volumes pursuant
to processing contracts, 47% pursuant to purchase contracts (sometimes with
processing included) and 39% under gathering contracts (sometimes with
processing included). Under processing contracts, the Company agrees to process
the raw natural gas from the wells on behalf of the producers and to allocate
the NGLs recovered and the residue natural gas to each well connected to its
gathering system. The Company retains a percentage of the value of the NGLs
extracted net of plant fuel and NGL shrinkage. The producer bears a share of the
cost of NGL extraction in return for a share of NGL revenue. These processing
contracts are typically on a "keep-whole" basis, where the Company must
reimburse the producer for the fuel and shrinkage.

Under a purchase contract, the Company generally pays for natural gas
received at the wellhead or at some other delivery point. The Company then
usually resells the natural gas after processing the natural gas for its own
account at its processing facilities. The Company derives a gross margin equal
to the difference between sale proceeds of both the NGLs and the residue natural
gas and the cost of the natural gas purchased at the wellhead.

In (i) gas purchase, (ii) gathering contracts with processing and (iii)
keep-whole processing contracts, operating margins are enhanced by maximizing
the value of the NGLs extracted from the natural gas stream and minimizing the
operating costs which the Company incurs during processing and gathering.
Margins

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33

under these contracts can be affected by decreases or increases in NGL prices or
increases or decreases in natural gas prices.

Gathering. Under gathering contracts, the Company typically gathers natural
gas on behalf of a producer from various wellheads for redelivery to specific
pipeline interconnection or redelivery points. The producer is charged a
gathering fee plus a fuel charge for such gathering services. Generally, the
producer will pay the Company a discounted gathering fee in exchange for the
Company retaining some or all of the extracted NGLs.

In the first half of 1996, the Company acquired certain assets in three
separate transactions from subsidiaries of Enron Corporation. As modified by the
Company and then integrated into the Company's business, these assets
collectively comprise the Texas Gathering Assets, which include 800 miles of
gathering pipeline and connect the Beaver and Mocane Plants to new gas supplies
via third-party interstate pipelines.

Natural gas from the Company's Texas Gathering Assets is transported to the
Company's processing plants through interstate pipelines, primarily NNG and TW.
Approximately 60% of the natural gas transported by NNG and TW for the Company
is subject to firm transportation agreements which obligate the pipelines to
give priority to the transportation of the Company's natural gas. The Beaver
Gathering System delivers on-system gas to the Company's processing plants. In
addition, natural gas may be transported to the Company's processing plants
through interruptible transportation agreements with pipelines and third-party
natural gas gatherers. Interruptible transportation agreements require the
pipelines to deliver natural gas on a "first-come, first-serve" basis after
satisfaction of commitments under firm transportation agreements.

Processing. The Company owns and operates two interconnected natural gas
processing plants, one of which is connected to the Beaver Gathering System.
These processing plants complement the Company's gathering operations by
enabling the Company to offer to its producers the option of wellhead purchase
or processing contracts. The sale of NGLs contributes materially to the overall
earnings of the Company because of the added value from NGL extraction. In
addition, natural gas processing complements and diversifies the earnings
derived from natural gas sales. The Company's processing plants at present have
excess capacity which, if increased natural gas supplies can be obtained, can be
utilized to increase Company revenues with a minimal increase in operating
costs. Management of the Company will attempt to obtain the natural gas supplies
necessary to utilize such excess capacity and benefit by the resultant
efficiency.

The Company's Beaver and Mocane Plants extract NGLs and remove water vapor,
solids and other contaminants contained in the natural gas stream. Each of these
plants is capable of recovering substantially all isobutane, normal butane and
natural gasoline components from the natural gas stream. Propane and ethane are
the Company's two primary NGL products. The Beaver Plant, due to its cryogenic
process, is able to extract a higher percentage of NGLs than the Mocane Plant.

The location of the Company's processing plants provide access to nearby
markets for the sale of NGLs, thus reducing transportation costs. The Company
believes its processing plants provide it with a competitive advantage in the
acquisition of natural gas supplies. Much of the Company's natural gas
processing capacity has ethane rejection capability, which allows the Company to
optimize margins if ethane prices decline significantly relative to natural gas
prices. The Company's two processing plants are interconnected.

Beaver Plant. The Beaver Plant was built in 1961. When acquired by CNG in
1990, the Beaver Plant consisted of a 40 MMcf/d design capacity refrigeration
plant, capable of extracting approximately 40% of the propane, nearly all of the
butane and gasoline, and virtually none of the ethane from the inlet natural gas
stream. Average throughput was less than 10 MMcf/d prior to the Company's
acquisition of the facility. In 1992, the Company purchased and relocated a 65
MMcf/d cryogenic processing plant to the Beaver Plant. The added facility chills
natural gas to -155 degrees Fahrenheit and separates the natural gas from the
NGLs condensed at the low temperatures. The Beaver cryogenic processing plant
currently recovers 95% of the propane, 70% of the ethane and nearly 100% of the
heavier butane and natural gasoline from the natural gas stream.

The design of the Beaver Plant allows for relatively fuel-efficient,
low-pollution extraction of a high volume of NGLs from natural gas. The combined
cryogenic and refrigeration facilities have a processing capacity of 105 MMcf/d
of inlet natural gas and 215 Mgal/d of extracted NGLs. The Beaver Plant's
average throughput for March 1997 was 70 MMcf/d yielding 180 Mgal/d of NGLs. The
Beaver Plant and gathering

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34

system has over 28,000 horsepower of gathering and processing compression
capability. The cryogenic facilities typically run at full capacity while the
refrigeration unit is typically idle.

The NGLs produced consist of a mixture (commonly known as "Y-Grade") of
ethane, propane, isobutane, normal butane and natural gasoline. The Y-Grade
mixture is delivered into an NGL pipeline operated by an affiliate of Koch
Industries, Inc. which is connected to the Beaver Plant.

Mocane Plant. The Mocane Plant was built in 1959, was partially updated in
1985 and was acquired by CNG in early 1995. The Mocane Plant is located about 13
miles northwest of the Beaver Plant. The Mocane Plant has a demonstrated inlet
natural gas capacity of 200 MMcf/d and is designed to extract up to 280 Mgal/d
of NGLs. The Mocane Plant's average throughput for March 1997 was 65 MMcf/d,
yielding 101 Mgal/d of NGLs. Prior to the Company's acquisition of the Mocane
Plant in early 1995, recent historical throughput averaged less than 40 MMcf/d.

The Mocane Plant uses refrigeration and lean oil absorption processes to
extract NGLs. Propane recovery is approximately 85% and ethane recovery is
approximately 25% with nearly 100% of the heavier butane and natural gasoline
being recovered. The Mocane Plant has over 7,500 horsepower of compression used
in the NGL extraction process.

Y-Grade produced at the Mocane Plant may be sold and delivered to NGL
pipelines operated by affiliates of Koch Industries, Inc. and Mapco, Inc.
Alternatively, the Company may fractionate the NGLs into the various components
at its on-site fractionation facility and deliver these NGLs to purchasers via
truck racks. The Mocane Plant has fractionation capacity of 281 Mgal/d. The
Mocane facility can produce propane, isobutane, normal butane, natural gasoline
and a mixture of ethane and propane.

SALES AND MARKETING

Natural Gas Marketing. The Company markets natural gas to local
distribution companies ("LDCs"), marketing affiliates of pipeline companies,
electric utilities, various business and industrial end-users and other natural
gas marketers throughout the CNG Market Area. A portion of the natural gas which
the Company markets is produced in the Panhandle Area and is transported from
the Company's plants through pipeline interconnections with ANR Pipeline Company
("ANR"), Williams Natural Gas Company ("WNG"), NNG and Colorado Interstate Gas
Company ("CIG"). In addition, the Company purchases and resells off-system gas
on numerous pipeline systems located throughout the CNG Market Area.

The Company has multiple pipeline delivery connections, which it believes
allow it to negotiate favorable spot sales contracts and transportation rates
and to avoid curtailment of natural gas deliveries. Due to the flexibility
derived from multiple delivery points, the Company believes that the loss of any
of its markets on a particular pipeline would not have a material adverse effect
on the Company. The Company's facilities are located in an area where many
interstate pipelines converge, allowing it to take advantage of locational
differences in natural gas prices.

During the year ended December 31, 1996, the Company delivered natural gas
to approximately 125 customers located in 12 states. In 1996, the Company
delivered an average of approximately 224 MMcf/d (81.7 Bcf of natural gas for
the year) and had natural gas sales revenues of approximately $209 million. No
one customer accounted for more than 10% of total natural gas sales revenues
during 1996.

During 1994 and 1995, the Company experienced average daily natural gas
sales of 142 MMcf/d and 165 MMcf/d, respectively. In 1996, the Company's natural
gas sales averaged 224 MMcf/d and during the first quarter of 1997, this average
increased to 280 MMcf/d. Sales growth in 1996 and 1997 has resulted largely from
CNG's hiring of six additional marketing representatives during the period from
May 1, 1996 to the present. The Company plans to hire additional
representatives.

By aggregating large volumes of natural gas and maintaining the flexibility
to sell into different markets, CNG has been able to maximize sale prices by
selling to customers who are willing to pay a premium for large, reliable
quantities of natural gas. Accordingly, the Company expects to continue to
receive greater value than the commodity spot price for its delivered natural
gas.

The Company sells natural gas under sales agreements which may be
classified by (i) the duration of the contract, (ii) pricing terms and (iii) the
nature of the delivery obligations. "Term" contracts have a duration

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35

in excess of one month, "spot" contracts have a duration of one month or less
and "peaking" contracts apply during short periods of high demand. The Company
sells natural gas at "fixed" prices or at "index" prices which vary on a
month-to-month basis with market conditions. Under "baseload" contracts the
Company is required (subject to extremely limited exceptions) to deliver a
specific volume of natural gas, while under "best efforts" contracts delivery
obligations may be suspended at the option of the Company or the purchaser. Due
to varying market conditions, the "mix" of the Company's sales agreements vary
substantially from time to time.

Transportation. The Company arranges for transportation of the natural gas
it markets from the supplier's point of receipt to the sales customer's delivery
point. To facilitate the transportation of its natural gas the Company must
schedule, nominate and monitor transportation availability on a continual basis.
The Company believes that its knowledge of the pipeline network within the CNG
Market Area is an important element in its success as a natural gas marketer.
This allows the Company to provide its suppliers with multiple outlets for their
natural gas and, in times of changes in demand or supply due to weather or other
factors, to route natural gas to areas where higher sales prices may be
achieved. In an effort to improve profit margins, the Company attempts to reduce
transportation charges by taking advantage of its broad array of transportation
arrangements and by negotiating Capacity Release, storage and competitive
transportation discounts.

The Company transports natural gas on interstate pipelines under
interruptible and firm transportation agreements. Under interruptible
transportation agreements, a pipeline is usually obligated to transport on a
non-discriminatory basis up to a specified maximum quantity of natural gas,
subject to available capacity. In return, the Company pays a transportation fee
based on the quantity of natural gas actually transported. An interruptible
transportation agreement may provide the customer with priority over other
interruptible shippers based on the rate paid and subject to the availability of
capacity not utilized by parties shipping under firm transportation agreements.
As of December 31, 1996, the Company had over 150 interruptible transportation
contracts. The majority of off-system gas purchased and sold by the Company is
transported under interruptible transportation arrangements.

Under firm transportation agreements, a pipeline is obligated to transport
up to a specified maximum quantity of natural gas without interruption, except
upon the occurrence of a force majeure event. Certain of the Company's
customers, including LDCs and electric utilities, and some of the Company's
long-term supply contracts require dependable transportation services provided
under firm transportation agreements. Some customers who purchase natural gas
from the Company transport such natural gas under their own transportation
arrangements, while other customers require or allow the Company to arrange for
such transportation services on their behalf.

Under contractual arrangements with pipelines, the Company is required to
balance its deliveries and receipts from each pipeline on a monthly or daily
basis. The pipelines are authorized to impose "imbalance penalties" in the event
that the Company's deliveries or receipts from any pipeline are not balanced on
a monthly or daily basis. These penalties are typically quite severe. In
addition, the Company may be required to purchase or sell natural gas at
unacceptable prices in the event it has not accurately balanced its deliveries
or receipts from the pipeline (i.e. it must purchase natural gas to make up
deficient volumes or sell natural gas to reduce excess volumes). Historically,
the Company has not incurred any significant "imbalance penalties" or sustained
other significant losses as a result of pipeline imbalances.

Due to regulatory changes resulting from Order 636 of the FERC, the
availability of firm transportation has increased, while the availability of
interruptible transportation on certain pipelines has decreased. In particular,
Order 636 permits current holders of pipeline firm transportation rights,
generally LDCs and large end-users, either to enter into Capacity Releases of
dedicated capacity with replacement shippers or to turn that capacity back to
the pipeline to be posted on an electronic bulletin board for sale. Typically,
LDCs sell Capacity Release during periods of low demand and compete with
released capacity by other LDCs or the pipeline's unsubscribed capacity. As a
result, the Company is often able to purchase Capacity Release at a discount
from posted rates.

NGL Marketing. The Company presently sells NGLs primarily to wholesale
markets with some sales in the local retail market. The Company has recently
hired an NGL marketer with the intent of realizing higher

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margins on NGLs through increased sales to the retail market and increasing the
marketing of third-party NGLs. Generally, prices for NGLs tend not to vary
directly with natural gas prices, but more closely follow the prices of crude
oil derivatives. Processing margins increase when natural gas prices are lower
in relation to NGL prices. The Company had NGL sales of approximately $34.8
million in 1996, on NGL average volumes of 276 Mgal/d.

NGLs are typically used as petrochemical feedstocks, petroleum refinery
blendstocks or fuel. Petrochemical plants use ethane, propane, butane and
natural gasoline in the production of ethylene, which is used in the manufacture
of plastics, building materials, automobile antifreeze and other products.
Refineries use normal butane and isobutane as motor fuel additives. Propane has
agricultural applications and is used as fuel for household consumption,
vehicles and industrial heaters and boilers.

As feedstock, demand for NGLs is influenced by the demand for the end
products in which they are used. Also, the demand for normal butane and
isobutane, which are important feedstocks for the production of the oxygenate,
methyl tertiary butyl ether ("MTBE"), is expected to increase as demand for MTBE
increases in gasoline production. The required use of oxygenates in motor
gasoline under the Clean Air Act Amendments of 1990 in many parts of the United
States is expected to increase demand for MTBE. Seasonal requirements of
purchasers using NGLs as a fuel source also affect demand. NGL production is
dependent upon the supply and NGL content of domestic natural gas. The market
price of NGLs relative to natural gas affects the volume of natural gas
processed and the NGLs extracted from the natural gas. Certain NGLs are produced
outside North America and imported by ship, which may from time to time affect
NGL prices.

Risk Management Activities. The Company uses risk management tools to
reduce commodity price risk for (i) purchases of natural gas to replace fuel and
shrinkage in connection with processing operations and (ii) its NGL and natural
gas sales. With respect to fuel and shrinkage for processing operations the
Company examines the prevailing price environment on an ongoing basis to
determine if opportunities exist to lock-in prices for replacement natural gas
at levels acceptable to the Company. The Company's management is responsible for
monitoring the price environment for replacement natural gas and makes any
decisions necessary to implement the Company's hedging strategies.

The Company employs several procedures to manage its risk with respect to
the purchases and sales of natural gas. The Company's principal strategy is to
balance purchases and sales of natural gas on a daily and monthly basis. This
means on any given day or in any given month the Company has commitments to
purchase and sell approximately the same volume of natural gas. This strategy is
accomplished through active management and monitoring of natural gas supply and
sales through the Company's natural gas marketing department.

A second strategy employed by the Company to manage risk is to enter into
contracts for the "back-to-back" purchase and sale of natural gas. Under this
strategy, the Company enters into natural gas purchase contracts and natural gas
sales contracts for a corresponding volume of natural gas. The Company thereby
locks in its profit and also locks in a supply of natural gas in order to assure
performance under the applicable sales contract.

Finally, the Company enters into other hedging transactions with respect to
its fixed price purchases and sales of natural gas, which constitute less than
10% of its total purchases and sales. These transactions include futures
contracts, swaps and basis agreements and other arrangements common in the
financial markets. The Company consistently has hedging positions to cover
substantially all of its purchases and sales under fixed price agreements.

The Company does not use hedging transactions for speculative purposes. The
Company has, however, on certain occasions taken open positions on carefully
selected arbitrage opportunities. While these occasions have been relatively few
and are carefully reviewed by the Company's management, the Company believes
that the competitive information it obtains from its energy marketing activities
allows it to take advantage of certain opportunities in the market.

The Company's management oversees all hedging activity of the Company. A
daily book on all positions is maintained and daily and monthly reports are
given to management. See Note 12 to the Notes to Consolidated Financial
Statements of the Company included herein.

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In addition to the risk associated with price movements, credit risk is
also inherent in the Company's risk management activities. Credit risk relates
to the risk of loss resulting from the nonperformance of a counterparty of its
contractual obligations. The Company maintains credit policies with regard to
counterparties that the Company believes significantly minimize overall credit
risk. These policies include the thorough review of potential counterparties'
financial condition, collateral requirements under certain circumstances,
monitoring of net exposure to each counterparty and the use of standardized
agreements which allow for the netting of positive and negative exposures
associated with each counterparty.

Electric Power Marketing. The Company formed Continental Energy Services,
L.L.C. ("CES") in 1996 to pursue electric power marketing opportunities that are
being created as the domestic electric power industry becomes increasingly
deregulated pursuant to the Energy Policy Act of 1992 (the "Energy Policy Act")
and certain actions taken by the FERC (including implementation of wholesale
open access under Order 888) and public utility commissions in various states.
Just as the Company provides aggregation and marketing services for natural gas
producers and consumers, CES intends to provide similar services in a
deregulating domestic electric industry.

CES received authorization from the FERC in December 1996 to purchase, sell
and market wholesale electric power and engage in other energy-related
transactions and to charge market-based rates for such services and
transactions. CES initially intends to market electric power to electric
utilities, municipalities and electric cooperatives on a wholesale basis.

In the future, if the power industry continues to deregulate and subject to
state and federal regulations, CES also intends to pursue the direct marketing
of power to existing industrial and commercial natural gas customers of the
Company in states which permit such activities. There is no guarantee that the
states or the federal government will adopt programs permitting such activities
or that such programs will be adopted on terms beneficial to CES. If adopted,
however, these programs are anticipated to allow CES to market electric power
directly to industrial and commercial end-users while using the utilities,
municipalities and electric cooperatives solely to generate and transmit power
to these end-users, much like the Company markets natural gas to LDCs and
end-users using the pipelines for transportation services only. CES also expects
to offer a variety of risk management products and services to generators and
consumers including futures, options, swaps and basis agreements and other
financial instruments.

CES has not, as yet, entered into any contracts or conducted any
substantive activities. The timing, manner and extent to which the power
industry will deregulate, with respect to both wholesale power marketing and
retail direct access, is extremely uncertain. Even if the power industry
continues to deregulate in a manner beneficial to CES, there can be no assurance
that the operations of CES, when and if commenced, will be profitable.

CAPITAL INVESTMENT PROGRAM

Capital spending by the Company is expected to reach $8.6 million in 1997.
Approximately $4.3 million is expected to be spent in connection with the
proposed acquisition of the Laverne Plant. See "Business -- Recent Development."
The remainder will be spent on various expansions of the Company's gas gathering
systems to accommodate new gas supply development.

FACILITIES

Gathering Systems and Processing Plants. As of June 1, 1997, the Company
had approximately 1,100 miles of natural gas gathering pipelines, two natural
gas processing plants, each of which has extraction equipment and one of which
has fractionation equipment and 49 compressor units located at 18 field stations
and the two plant sites.

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The following table provides information concerning the Company's natural
gas processing plants and gathering systems:

AVERAGE NATURAL AVERAGE NGL
YEAR CAPACITY GAS THROUGHPUT PRODUCTION
ACQUIRED OR AS OF ------------------- -------------------
PLACED INTO MARCH 31, MARCH MARCH
SERVICE 1997 1996 1997 1996 1997
----------- --------- -------- -------- -------- --------
(MMCF/D) (MMCF/D) (MMCF/D) (MGAL/D) (MGAL/D)

PROCESSING PLANTS
Beaver Plant.......................... 1990 105 65 70 158 180
Mocane Plant.......................... 1995 200 64 65 106 101
GATHERING SYSTEMS
Beaver-Mocane Gathering............... 1990 195 25 25 N/A N/A
Texas Gathering Assets................ 1996 188 62 83 N/A N/A

The Company owns approximately 43 acres of land at its Beaver Plant site
and an additional 40 acres at its Mocane Plant site. While this real property is
necessary in order to operate its Beaver and Mocane Plants, it does not
contribute significantly to the value of the Company.

The Company's gas processing plants are fed directly by a network of low
and intermediate pressure steel and polypipe gas gathering pipelines. The Beaver
Gathering System consists of approximately 300 miles of pipelines connecting
over 100 wells for ultimate delivery to the Company's Beaver and Mocane Plants.
Approximately 22% of the Beaver and Mocane Plants' throughput originates from
the Beaver Gathering System. The Company's Texas Gathering Assets extend for
approximately 800 miles across the northern Texas Panhandle providing
substantial gathering exposure along the western edge of the Anadarko Basin,
south of its existing processing plants. Approximately 500 wells are connected
to the Texas Gathering Assets for redelivery to the interstate pipelines of
either NNG or TW. The Texas Gathering Assets, which are steel pipelines, operate
at low pressures.

The Company installed two pipelines connecting the Mocane Plant to the
Beaver Plant in 1995. These pipelines allow the Company to optimize processing
capacity utilization by shifting raw and processed natural gas between the
Beaver and Mocane Plants. In addition, the Company has constructed approximately
27 miles of residue interconnect line, connecting the Beaver Plant to the ANR,
WNG and CIG interstate pipelines, thus expanding the markets for the Company's
on-system gas.

The Company's operations in the Panhandle Area consist of the Beaver and
Mocane Plants, natural gas gathering systems, compression equipment, NGL
storage, fractionation and truck terminal facilities. The Company believes the
Panhandle Area has favorable production, supply and market access
characteristics. The Panhandle Area is one of the most prolific natural gas
producing regions in the continental United States. Production is obtained from
several geologic formations. Natural gas fields in the area have produced for
many years and currently produce at stabilized low rates of decline that
indicate substantial reserves. Estimates by an independent engineering firm, Lee
Keeling & Associates, attribute approximately 700 Bcf of natural gas to the
Company's contracted leases and/or wells as of January 1, 1997.

Compression and Storage Facilities. In connection with the operation of its
gathering systems, the Company operates 49 compressor units located at 18 field
stations and two plant sites with approximately 44,000 horsepower of natural gas
compression. Compressors are used to boost natural gas produced and gathered at
low field pressure to higher pipeline pressures. Approximately 30% of the
Company's compression capacity is leased under various capital lease agreements.
Under such capital lease agreements, the Company makes approximately $1.8
million per year in payments. The terms under such capital leases range from
1998 to 2003 at which time the Company has an option to purchase (generally at a
nominal price) the leased equipment. The Company continues to enter into capital
lease agreements for compression and other natural gas processing equipment.
Under its credit facility, the Company is permitted to incur capital lease
obligations which require incremental annual payments of up to $1 million per
year.

The Company has approximately 140,000 barrels of underground NGL storage
capacity at the Mocane Plant. Two of the five underground storage caverns
(amounting to approximately 20% of the total storage

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capacity located at the Mocane Plant) are currently operational. The Company is
currently evaluating the economic feasibility of placing the remaining storage
caverns in operation.

Corporate Offices. The Company leases its Tulsa, Oklahoma headquarters
under a commercial office lease covering approximately 17,000 square feet,
expiring in June 1997. The annual rental payments are approximately $161,000.

OPERATIONAL RISKS AND INSURANCE

The Company's operations are subject to potential hazards incident to the
gathering, processing, separation and storage of natural gas and NGLs, such as
explosions, product spills, leaks, emissions and fires. These hazards can cause
personal injury and loss of life, severe damage to and destruction of property
and equipment, and pollution or other environmental damage, and may result in
curtailment or suspension of operations at the affected facility.

The Company maintains general public liability, property and business
interruption insurance in amounts that it considers to be adequate for such
risks. Such insurance is subject to deductibles that the Company considers
reasonable and not excessive. Consistent with the Company's proactive approach
to risk management, the Company's pollution liability policies not only provide
protection for sudden and accidental occurrences, but also, subject to the
policy terms and conditions, provide protection for gradual pollution incidents
occurring over time.

The occurrence of a significant event for which the Company is not fully
insured or indemnified, and/or the failure of a party to meet its
indemnification obligations, could materially and adversely affect the Company's
operations and financial condition. Moreover, no assurance can be given that the
Company will be able to maintain adequate insurance in the future at rates it
considers reasonable. To date, however, the Company has maintained adequate
coverage at reasonable rates and has experienced no material uninsured losses.

COMPETITION

The Company faces intense competition in obtaining natural gas supplies for
its gathering and processing operations and in marketing its products and
services. Principal competitors include marketing affiliates of interstate
pipeline companies, national and local natural gas gatherers and marketers of
varying sizes, financial resources and experience. Many of the Company's
competitors have capital resources and control supplies of natural gas
substantially greater than those of the Company.

The Company competes against other companies in the natural gas processing
business both for supplies of natural gas and for customers to which it sells
its products. Competition for natural gas supplies is based primarily on price,
location of natural gas gathering facilities and gas processing plants, line
pressures, operating efficiency, reliability and quality producer relationships.
Competition for sales customers is based primarily on price, delivery
capabilities, reliability, price flexibility and maintenance of quality customer
relationships.

CNG's fractionation business competes against other fractionation
facilities that serve local markets. Competitive factors affecting its
fractionation business include proximity to customers, quality of NGL products,
price, efficiency and reliability of service.

In marketing its products and services, the Company has numerous
competitors, including marketing affiliates of major interstate pipelines, major
natural gas producers, and local and national gatherers and marketers of widely
varying sizes, financial resources and experience. Marketing competition is
primarily based upon reliability, transportation, flexibility and price.

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40

GOVERNMENT REGULATION

Currently, federal, state and local regulations do not materially affect
the purchase and sale of natural gas and the fees received for gathering and
processing by the Company. Therefore, except as constrained by competitive
factors and contracts, the Company has considerable pricing flexibility.
However, federal, state and local laws and regulations, directly or indirectly,
govern some aspects of the operations of the Company. These laws and regulations
may in the future have a significant impact upon the Company's overall
operations.

In 1992, the FERC issued Order 636 which generally opens access to
interstate pipelines by requiring the operators of such pipelines to unbundle
their transportation services from sales services and allow customers to choose
and pay for only the services they require, regardless of whether the customer
purchases natural gas from such pipeline or from other suppliers. Order 636 also
requires upstream pipelines to permit downstream pipelines to assign upstream
capacity to their suppliers, and places analogous, unbundled requirements on the
downstream pipelines. This mandated access to interstate pipelines was and is of
vital importance to the Company's off-system gas business and to the delivery of
natural gas from CNG's Texas Gathering Assets to its processing plants in
Oklahoma. A change in such regulation could adversely affect these portions of
the Company's business.

The FERC retains jurisdiction over the interstate transportation of natural
gas and of liquid hydrocarbons, such as NGLs and product streams derived
therefrom. The gathering and processing of natural gas for the removal of
liquids currently is not viewed by the FERC as an activity subject to its
jurisdiction. If a processing plant's primary function is extraction of NGLs and
not natural gas transportation, the FERC has traditionally maintained that the
plant is not a facility for transportation or sale for resale of natural gas in
interstate commerce and, therefore, is not subject to jurisdiction under the
Natural Gas Act of 1938 (the "NGA").

The NGA exempts natural gas gathering facilities from the jurisdiction of
the FERC. Interstate transmission facilities, on the other hand, remain subject
to the FERC jurisdiction. The FERC has historically distinguished between these
two types of facilities on a fact-specific basis. The Company believes that its
gathering facilities and operations meet the current tests that the FERC uses to
determine a nonjurisdictional gathering facility status. While certain recent
cases have applied these tests in a manner supporting the Company's view that
the FERC lacks jurisdiction over its gathering facilities, these cases are,
however, still subject to rehearing and appeal. In addition, the FERC's
articulation and application of the tests used to distinguish between
jurisdictional pipelines and nonjurisdictional gathering facilities have varied
over time. While the Company believes the current definitions create
nonjurisdictional status for the Company's gathering facilities, no assurance
can be given that such facilities will remain classified as natural gas
gathering facilities and the possibility exists that the rates, terms, and
conditions of the services rendered by those facilities, and the construction
and operation of the facilities, will be subject to regulation by the FERC.

There are two pending proceedings at the FERC in which parties allege that
the FERC should regulate the rates and operations of certain aspects of the
Company's business. (GPM Gas Corporation v. Continental Natural Gas, Inc.,
Docket No. CP96-495-000; Plant Owners v. Continental Natural Gas, Inc., Docket
No. CP96-577-000.) The entities initiating these proceedings allege that the use
of the Company's facilities to receive natural gas from, and deliver natural gas
to, interstate pipelines renders those facilities subject to FERC's
jurisdiction. The Company is contesting these allegations. While the Company
believes that its business is not subject to regulation by the FERC, it cannot
predict the outcome of these proceedings, nor can it predict the effect a ruling
would have on the Company's business. If the FERC issues a decision in either of
these cases that subject some or all of the Company's facilities to the FERC's
jurisdiction, the decision may limit the rates that the Company charges for its
services, may have the effect of precluding the Company from engaging in certain
transactions, or may impose other obligations on the Company which may have a
material adverse effect on the Company. Knowing violations of the NGA may result
in the imposition of fines, forfeitures or other criminal penalties; however,
the imposition of such has been extremely rare.

Traditionally, the FERC has regulated the rates for gathering service
performed by interstate pipelines and their affiliates. In 1995, the FERC held
that interstate pipeline affiliates that performed gathering services could have
their rates and services deregulated. In addition, the FERC established a
two-year default

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41

(i.e., transition) period during which the new owners of gathering facilities
formerly owned by interstate pipelines would have to provide service at the same
rates and on the same terms and conditions as was provided by the pipelines. As
a result, many interstate pipelines have transferred their facilities to
gathering affiliates or sold them to third-parties. On August 2, 1996, the
United States Court of Appeals for the District of Columbia Circuit upheld the
FERC's decision to deregulate gathering but voided the two year default period.
As a result, there could be numerous additional unregulated gathering companies.
Certain of those gathering companies may compete with the Company.
Notwithstanding the decision of the D.C. Circuit, many owners of facilities
acquired from interstate pipelines have committed to continue providing service
at the same rates and on the same terms and conditions during the default
period. At the expiration of these default periods, it is possible that the cost
of gathering service paid by the Company could increase substantially. In
addition, the Company (as a shipper on these systems) could be placed at a
competitive disadvantage vis-a-vis the owner of the gathering facilities in
acquiring natural gas and NGLs. It should be noted that the Company's Texas
Gathering Assets would also be free of the FERC-mandated rate controls when
their associated default period expires at the end of 1997. Except with respect
to the owners of gathering systems, the Company does not believe that it will be
affected by any action taken with respect to the FERC's gathering policy
materially differently than any other producers, gatherers, processors or
marketers with which it competes.

The Company purchased the Texas Gathering Assets from subsidiaries of Enron
Corporation that were regulated by the FERC prior to the purchase. In accordance
with federal regulations, the Company agreed that it would not charge rates that
exceed the rates that Enron was charging at the time of the sale until December
31, 1997, after which time the Company will be free to set rates in accordance
with market conditions at that time, subject, however, to future state or
federal laws or regulations.

Certain activities of the Company could be subject to regulation by the
Texas Railroad Commission ("RRC") pursuant to its jurisdiction over common
purchasers and natural gas utilities or its jurisdiction over the transportation
and gathering of natural gas. CNG is a "common purchaser" under Texas law. It is
not presently registered as a "gas utility" though no assurance can be given
that it will not at some future time be required to register as such.

Although the RRC does not regulate the activities of the Company at this
time, the RRC has authority to regulate the volumes of natural gas purchased by
common purchasers and the rates charged for the intrastate transportation,
gathering and sale of natural gas by gas utilities in Texas. Under the Gas
Utility Regulatory Act and other Texas statutes, the RRC has the duty to ensure
that rates for the transportation, gathering and sale of natural gas are just
and reasonable and gas utilities are prohibited from charging rates that are
unreasonably preferential, prejudicial or discriminatory. The Company believes
that its activities are in compliance with applicable laws and regulations.

All of the Company's pipeline operations are subject to federal safety
standards promulgated by the Department of Transportation under applicable
federal pipeline safety legislation, as supplemented by various state safety
statutes and regulations.

The Company's Oklahoma operations are subject to regulation by the State of
Oklahoma. The majority of these regulations are administered by the Oklahoma
Corporation Commission ("OCC"). Any entity engaged in the business of carrying
or transporting natural gas by pipeline is declared to be a common carrier under
Oklahoma law and is prohibited from any unjust or unlawful discrimination in the
carriage, transportation or delivery of natural gas. Although Oklahoma law may
be sufficiently broad to permit the OCC to set rates and terms of service for
the transportation and delivery of natural gas involving the Company's Oklahoma
assets, the OCC has not done so to date. There can be no assurance that the OCC
will not do so in the future. Recent Oklahoma legislation prohibits entities
which gather natural gas for hire from charging any fee which is unjustly or
unlawfully discriminatory. The Company does not expect this legislation to have
any significant impact on the Company's operations.

An entity carrying or transporting natural gas by pipeline which is engaged
in the business of purchasing natural gas is declared to be a common purchaser
under Oklahoma law and is required to purchase without discrimination in favor
of persons or price all natural gas in the vicinity of its lines. Ratable
purchase is

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42

required if a purchaser is unable to purchase all natural gas offered. To date,
such legislation has not had any significant effect on the Company's Oklahoma
operations.

The OCC and the RCC regulate the amount of natural gas which producers can
sell or deliver to the Company. Currently, substantially all natural gas
received by the Company in its Oklahoma and Texas operations is produced from
wells for which the OCC or RCC establish allowable rates. To date, the Company
has not experienced any material reductions in available supplies due to these
regulations. Nevertheless, future regulations could materially affect the
Company's ability to purchase natural gas supplies.

ENVIRONMENTAL MATTERS

The Company is subject to environmental risks normally incident to the
operation and construction of gathering lines, pipelines, plants and other
facilities for gathering, processing, treatment, storing and transporting
natural gas and other products. These environmental risks include uncontrollable
flows of natural gas, fluids and other substances into the environment,
explosions, fires, pollution and other environmental and safety risks. The
following is a discussion of certain environmental and safety concerns related
to the Company. It is not intended to constitute a complete discussion of the
various federal, state and local statutes, rules, regulations, or orders to
which the Company's operations may be subject. For example, the Company, without
regard to fault, could incur liability under the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended (also known as the
"Superfund" law), or state counterparts, in connection with the disposal or
other releases of hazardous substances and for damage to natural resources.
Further, the recent trend in environmental legislation and regulations is toward
stricter standards, and this will likely continue in the future.

The Company's activities in connection with the operation and construction
of gathering lines, pipelines, plants, storage caverns, and other facilities for
gathering, processing, treatment, storing and transporting natural gas and other
products are subject to environmental and safety regulation by federal and state
authorities, including, without limitation, the state environmental agencies and
the EPA, which can increase the costs of designing, installing and operating
such facilities. In most instances, the regulatory requirements relate to the
discharge of substances into the environment and include measures to control
water and air pollution.

Environmental laws and regulations may require the acquisition of a permit
or other authorization before certain activities may be conducted by the
Company. These laws also include fines and penalties for non-compliance.
Further, these laws and regulations may limit or prohibit activities on certain
lands lying within wilderness areas, wetlands, areas providing habitat for
certain species or other protected areas. The Company is also subject to other
federal, state, and local laws covering the handling, storage or discharge of
materials used by the Company, or otherwise relating to protection of the
environment, safety and health. The Company believes that it is in material
compliance with all applicable environmental laws and regulations. The Company
periodically conducts environmental assessments of its assets and is not aware
of any material environmental problems requiring remediation. Because the
requirements imposed by environmental laws and regulations frequently change,
the Company is unable to predict the ultimate costs of compliance with such
requirements or whether the incurrence of such costs would have a material
adverse effect on the operations of the Company.

In March 1992, an environmental site assessment of the Laverne Plant
indicated the presence of hydrocarbon contaminated groundwater underlying a
portion of the plant site. Under the direction of the Oklahoma Corporation
Commission and based on the results of a pilot remediation project, a plan has
been developed to remediate the site utilizing a biofiltration process to be
installed during the last half of 1997 at an estimated cost of $1 million. The
Company's share of this total cost will be approximately $170,000 upon
completion of the proposed acquisition from Conoco and its affiliate. See
"Business -- Recent Development."

EMPLOYEES

As of June 1, 1997, the Company had 95 employees. Of these, 53 employees
are located in the field and provide general operational and maintenance
activities on the Company's facilities located in the Panhandle

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43

Area while the balance are located at CNG's executive offices in Tulsa,
Oklahoma, and are engaged in gas marketing activities, plant supervision or
accounting and administration. The Company considers its relations with
employees to be excellent.

LEGAL PROCEEDINGS

The Company is currently a defendant in the case of Colorado Interstate Gas
Company v. Continental Hydrocarbons, Inc., et al., Case No. 93CV1894 (the
"Colorado Lawsuit"). The case as it pertains to the Company primarily involves
claims made by CIG that the Company and Continental Hydrocarbons, Inc. ("CHI"),
a former subsidiary of the Company, have improperly withheld from it proceeds
from the sale of NGLs processed by the Mocane Plant, have defamed CIG and
committed other wrongful acts, and are as a result liable to CIG for unspecified
actual and punitive damages. The Mocane Plant Sellers have also been sued by CIG
and have sought indemnity from CHI and the Company for some of the liability
they may have to CIG as well as other amounts allegedly owed them. The Company
and CHI have generally denied the allegations against them in the case and have
contended that they are owed certain amounts for the processing of natural gas.
Though impossible to estimate with any certainty, the Company believes that CIG
is seeking actual damages in excess of $3 million. The Company has reached a
settlement with one of the Mocane Plant Sellers which involves the Company's
payment of approximately $1.2 million plus accrued interest (on a portion of the
settlement) to such Mocane Plant Seller. The Company had previously recorded an
accrued liability for a portion of the proceeds received from the processing of
gas through the Mocane system and accordingly no additional accrual is required.
It is expected that this settlement will be concluded in the third quarter of
1997 at the same time as the Company purchases the interest of Conoco and its
affiliate in the Laverne Plant. See "Business -- Recent Development."

The Company has also filed a lawsuit, Continental Natural Gas, Inc. v.
Colorado Interstate Gas Company, Case No. 96-CV-0041-BU (the "Oklahoma
Lawsuit"), in the United States District Court for the Northern District of
Oklahoma against CIG. The Company's complaint alleges constructive fraud in
connection with negotiations between the Company and CIG in the first part of
1995 for natural gas processing and gathering in the area surrounding the Mocane
Plant. In general, the Company alleges that CIG misled it and thereby precluded
the Company from offering a bid on certain compression services ultimately sold
by CIG to its subsidiary, CIG Resources Company.

The Company is at various times a party to additional claims and involved
in various other litigation and administrative proceedings arising in the normal
course of business. The Company believes it is unlikely that the final outcome
of any of the claims, litigation or proceedings discussed above to which the
Company is a party would have a material adverse effect on the Company's
financial position or results of operations; however, due to the inherent
uncertainty of litigation, the Company cannot give assurance regarding the
effect on the Company of an adverse resolution of any particular claim or
proceeding.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following sets forth certain information concerning the directors and
executive officers of the Company as well as the two persons who have agreed to
become directors after completion of the Offering.

NAME AGE POSITIONS
---- --- ---------

Gary C. Adams............................. 46 Chairman, President, Chief Executive
Officer and Director(1)
Terry K. Spencer.......................... 37 Vice President of Operations and
Director
Scott C. Longmore......................... 37 Vice President of Marketing and
Director
Garry D. Smith............................ 40 Vice President, Controller and
Director(2)
William W. Pritchard...................... 46 (3)
William H. Bauch.......................... 35 (3)

- ---------------

(1) The named person will be appointed to the Compensation Committee of the
Board of Directors upon completion of the Offering.

(2) The named person will be appointed to the Audit Committee of the Board of
Directors upon completion of the Offering.

(3) The named person has agreed to become a member of the Board of Directors and
the Compensation and Audit Committees of the Board after completion of the
Offering.

Gary C. Adams has been the Company's Chairman of the Board since his
founding of the Company in 1983. In 1994 he assumed the role of Chief Executive
Officer, and in March 1997, was elected President. Mr. Adams is also Chairman of
Adams Affiliates, which is engaged in different segments of the oil and gas
industry. Most of Mr. Adams' 25-year career has been spent in the oil and gas
industry. Prior to his association with Adams Affiliates, Mr. Adams served as
Executive Vice President of OKC Corporation, then a New York Stock Exchange
listed company, where he was responsible for its oil and gas operations. Mr.
Adams graduated from the University of Kansas in 1973 with a Bachelor of Science
degree in Business Administration. Mr. Adams is the son of the late K.S. "Boots"
Adams, former Chairman of Phillips Petroleum Company.

Terry K. Spencer has been Vice President of Operations of the Company since
1991 and was elected to the Board of Directors of the Company in March 1997. He
is responsible for the management of pipeline and plant operations, engineering
design and construction, new project development, reservoir engineering and
economic evaluation. Prior to joining CNG in 1989, Mr. Spencer served as Manager
of Project Development for Stellar Gas Company and held various
engineering-related positions in Delhi Gas Pipeline Corporation. Mr. Spencer
earned his Bachelor of Science degree in Petroleum Engineering from the
University of Alabama in 1981.

Scott C. Longmore has been Vice President of Marketing of the Company since
1988 and was elected to the Board of Directors of the Company in March 1997. His
primary responsibilities are to supervise the acquisition of markets, supplies
and storage, the transportation of natural gas and risk management activities.
Prior to joining CNG in 1987, Mr. Longmore was employed with Cabot Energy
Marketing Corporation, where he served as a gas marketing and supply
representative. Mr. Longmore has 12 years of experience in the natural gas
marketing business. Prior to Cabot, he was an independent petroleum landman in
Oklahoma. Mr. Longmore graduated from the University of Oklahoma in 1982 with a
Bachelor of Business Administration degree in Petroleum Land Management.

Garry D. Smith has been Vice President and Controller of the Company since
1990 and was elected to the Board of Directors of the Company in March 1997. He
is responsible for managing the financial and accounting functions of the
Company. Prior to joining CNG in 1988, Mr. Smith served in various capacities at
Mustang Fuel Corporation, including managing the financial and oil and gas
revenue accounting functions. He

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45

received his Bachelor of Science degree in Accounting from Central Oklahoma
State University in 1979, and his Masters of Business Administration from the
University of Oklahoma in 1987. Mr. Smith is a Certified Public Accountant and a
Certified Management Accountant.

William W. Pritchard has agreed to become a member of the Board of
Directors of the Company and the Compensation and Audit Committees of the Board
after completion of the Offering. Mr. Pritchard has more than 21 years of
experience in the domestic and international oil and gas industry. Beginning in
1976, Mr. Pritchard assumed various managerial positions with Parker Drilling
Company, a New York Stock Exchange company, serving its domestic and
international operations, and in 1984 he became Vice President and General
Counsel with Parker Drilling, positions he held until he concluded his tenure at
Parker in 1996. Mr. Pritchard became Of Counsel to the law firm of Hall, Estill,
Hardwick, Gable, Golden & Nelson, P.C. ("Hall, Estill") in 1996 and his
corporate practice focuses on acquisitions, contracts, securities laws and other
legal matters related to the oil and gas industry. Mr. Pritchard received a
Bachelor of Arts from the University of Kansas and a Juris Doctorate from the
University of Tulsa.

William H. Bauch has agreed to become a member of the Board of Directors of
the Company and the Compensation and Audit Committees of the Board after
completion of the Offering. Mr. Bauch has been a Senior Vice President in the
corporate finance department of Oppenheimer & Co., Inc. since 1996. Prior to
that, he was a Vice President in the investment banking department of Prudential
Securities Incorporated from 1994 to 1996, a Vice President with Jefferies &
Company, Inc. from 1993 to 1994 and a Vice President with Howard, Weil,
Labouisse & Friedrichs from 1991 to 1993. He holds Bachelors of Accountancy and
Juris Doctorate degrees from the University of Mississippi and a Masters of Laws
degree from the New York University School of Law.

BOARD OF DIRECTORS AND COMMITTEES

The Company's Certificate of Incorporation and Bylaws provide for a
classified board of directors. The two class I directors, Scott C. Longmore and
Terry K. Spencer, have been elected for an initial term expiring at the 1998
annual meeting. The two class II directors, Garry D. Smith and William H. Bauch
(effective upon his appointment as a director), have been elected for an initial
term expiring at the 1999 annual meeting. The two class III directors, Gary C.
Adams and William W. Pritchard (effective upon his appointment as a director),
have been elected for an initial term expiring at the 2000 annual meeting. All
subsequent elections will be for successive three-year terms. No director is
selected or serves pursuant to any special arrangement or contract.

Officers serve at the discretion of the Board and are elected annually.
There are no family relationships between the directors or executive officers of
the Company. Mr. William W. Pritchard, who has agreed to serve as a director of
the Company upon completion of the Offering, is Of Counsel to Hall, Estill. The
Hall, Estill firm is rendering legal services to the Company in connection with
the Offering and may render other legal services to the Company in the future.
Mr. William H. Bauch, who has agreed to serve as a director of the Company upon
completion of the Offering, is an officer in the firm of Oppenheimer & Co.,
Inc., one of the Representatives of the Underwriters in the Offering.

Upon completion of the Offering, the Board of Directors intends to
establish a Compensation Committee and an Audit Committee. The Compensation
Committee will make recommendations to the Board concerning salaries and
incentive compensation for the Company's officers and employees. The Audit
Committee will aid management in the establishment and supervision of the
Company's financial controls, evaluate the scope of the annual audit, review
audit results, consult with management and the Company's independent auditors
prior to the presentation of financial statements to shareholders and, as
appropriate, initiate inquiries into aspects of the Company's financial affairs.

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46

EXECUTIVE COMPENSATION

The following table sets forth a summary of compensation for the fiscal
year ended December 31, 1996, for the chief executive officer and the three
other executive officers of the Company as of December 31, 1996, for services
rendered in all capacities.

LONG TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
---------------------------------- -------------
# OF SHARES
UNDERLYING
NAME AND OTHER ANNUAL STOCK OPTIONS ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION GRANTED COMPENSATION
------------------ -------- -------- ------------ ------------- ------------

Gary C. Adams
Chief Executive Officer........ -- -- --(1) -- $150,000(2)
Scott C. Longmore Vice
President of Marketing......... $ 97,500 $152,842 $16,800(3) 68,000 --
Garry D. Smith
Vice President and
Controller.................. $104,195 $ 80,293 $12,600(3) 68,000 --
Terry K. Spencer
Vice President of Operations... $ 97,500 $ 80,293 $12,600(3) 68,000 --

- ---------------

(1) The Company was charged a fee of $210,000 for management services in 1996 by
Adams Affiliates, an affiliate of the named person.

(2) The amounts shown represent the premiums paid by the Company under a split
dollar life insurance policy. Under this policy, the Company pays the
premiums for life insurance issued to the named person. Repayment of the
premiums is secured by the death benefit or the cash surrender value of the
policy, if any, if the named person cancels and surrenders the policy.

(3) Represents the difference between the fair market value of Common Stock
purchased by the named person in 1996 and the amount paid for such Common
Stock.

Employment and Consulting Agreements. The Company is a party to employment
agreements with Terry K. Spencer, Scott C. Longmore and Garry D. Smith which
will be amended effective upon the completion of the Offering. As then amended,
the employment agreements will continue in effect until December 31, 1999,
subject to customary termination provisions. The employment agreements will
provide for annual salary payments to each of such executive officers in the
amount of $150,000, subject to annual CPI adjustment, and for annual bonuses
based upon the Company exceeding designated annual income levels. In addition,
Mr. Longmore's employment agreement provides for the payment of annual
commissions based upon gross margins of natural gas sales.

The Company and Adams Affiliates are parties to a Consulting Agreement
dated as of April 1, 1997, under which Adams Affiliates has agreed to provide
consulting services to the Company in return for payments of $20,000 per month
($240,000 per year). It is anticipated that such consulting services will be
provided primarily by Gary C. Adams as an agent of Adams Affiliates. The
Consulting Agreement has a term extending until March 31, 1998, subject to
automatic one month renewals thereafter until terminated by one of the parties.
Mr. Adams is an affiliate of Adams Affiliates. See "Certain
Transactions -- General."

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The following table provides information regarding options granted to each
of the named executives during 1996:

POTENTIAL REALIZED
VALUE AT ASSUMED
ANNUAL RATES OF
# OF TOTAL STOCK PRICE
# OF SHARES OPTIONS APPRECIATION FOR
DATE OF UNDERLYING GRANTED EXERCISE EXPIRATION OPTION TERM
GRANT OPTIONS TO PRICE DATE ------------------------
NAME (MO/DAY) GRANTED EMPLOYEES ($ SHARE) (MO/YR) 0%(2) 5%(3) 10%(4)
---- ----------- ----------- ---------- --------- -------------- ------ ------ ------

Scott C. Longmore............. February 28 68,000 33.3% $0.26 December, 1999(1) $4,080 $4,959 $5,974
Garry D. Smith................ February 28 68,000 33.3% $0.26 December, 1999(1) $4,080 $4,959 $5,974
Terry K. Spencer.............. February 28 68,000 33.3% $0.26 December, 1999(1) $4,080 $4,959 $5,974

POTENTIAL REALIZED
VALUE ASSUMING
MARKET PRICE
EQUAL TO
NAME $13.00/SHARE
---- ------------------

Scott C. Longmore............. $866,320
Garry D. Smith................ $866,320
Terry K. Spencer.............. $866,320

- ---------------

(1) Term expires upon termination of the named person's employment agreement.

(2) Estimated fair value based on an independent valuation.

(3) Assumes 5% annual increase in stock price over term of option which is
assumed to expire on March 31, 2000. Exercise of option is subject to the
Company achieving certain specified annual financial performance goals.

(4) Assumes 10% annual increase in stock price over term of option which is
assumed to expire on March 31, 2000. Exercise of option is subject to the
Company achieving certain specified annual financial performance goals.

1996 Incentive Stock Option Plan. Effective as of February 28, 1996, the
Company adopted the 1996 Incentive Stock Option Plan (the "1996 Stock Plan"),
and granted options under the plan to acquire a total of 204,000 shares of
Common Stock to Terry K. Spencer, Garry D. Smith and Scott C. Longmore. The 1996
Stock Plan is intended to comply with Section 422 of the Internal Revenue Code
of 1986, as amended. Each incentive stock option ("ISO") granted entitles the
optionee to purchase up to 68,000 shares of Common Stock at an exercise price of
$0.26 per share, which the Board of Directors determined to represent the fair
market value of the Common Stock on the grant date. The exercise of each ISO is
conditioned upon the Company achieving certain specified financial performance
goals for each of calendar years 1997, 1998 and 1999, and the optionee may not
in any event exercise ISOs to acquire Common Stock having a fair market value in
excess of $150,000 for any one calendar year. The ISOs shall remain in effect
for the term of the Optionee's employment agreement with the Company. No more
ISOs may be issued under the 1996 Stock Plan.

1997 Stock Plan. The purpose of the Continental Natural Gas, Inc. 1997
Stock Plan (the "1997 Stock Plan") is to promote the overall financial
objectives of the Company and its shareholders by motivating those persons
selected to participate in the 1997 Stock Plan to achieve long-term growth in
shareholder equity in the Company and by retaining the association of those
individuals who are instrumental in achieving this growth. Executive officers,
key employees and non-employee directors, as well as such other employees or
consultants as the Board of Directors selects, are eligible recipients of awards
under the 1997 Stock Plan. The maximum number of shares authorized to be issued
under the 1997 Stock Plan is 600,000 shares of Common Stock. No grants or awards
have been made under the 1997 Stock Plan.

The 1997 Stock Plan is administered by the Board of Directors of the
Company. The Board of Directors is authorized to determine plan participants,
the types and amounts of awards to be granted and the terms, conditions and
provisions of awards, prescribe forms of award agreements, interpret the 1997
Stock Plan, establish, amend and rescind rules and regulations relating to the
1997 Stock Plan and make all other determinations which may be necessary or
advisable for the administration of the 1997 Stock Plan. The Board of Directors
has not made a determination as to the number of employees currently eligible
for consideration as participants in the 1997 Stock Plan.

The 1997 Stock Plan permits the granting of any or all of the following
types of awards: (a) stock options, (b) stock appreciation rights ("SARs"), and
(c) restricted stock. Generally, awards under the 1997 Stock Plan are granted
for no consideration other than prior and future services. Awards granted under
the 1997

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Stock Plan may, in the discretion of the Board, be granted alone or in addition
to, in tandem with or in substitution for any other award under the 1997 Stock
Plan or other plan of the Company. Such grants could include grants of options
after a decline in the market price of the Common Stock in substitution for
previously granted options having a higher exercise price.

Stock options granted pursuant to the 1997 Stock Plan may, at the
discretion of the Board, be either ISOs within the meaning of Section 422 of the
Code, or non-qualified stock options. The exercise price of an ISO may not be
less than the fair market value of the Common Stock on the date of grant (or
110% of such fair market value in the case of ISOs granted to employees who
possess more than 10% of the combined voting power of all classes of stock of
the Company). In the case of non-qualified stock options, the exercise price
shall be as determined by the Board in its sole discretion, but in no event
shall be less than 50% of the fair market value of the Common Stock on the date
of grant. Options granted pursuant to the 1997 Stock Plan are exercisable in
whole or in part at such time or times as may be determined by the Board, except
that ISOs may not be exercised after the expiration of 10 years from the date
granted (or 5 years in the case of ISOs granted to employees who possess more
than 10% of the combined voting power of all classes of stock of the Company).
Generally, options may be exercised by the payment of cash, promissory notes,
stock or a combination thereof.

Any SARs granted under the 1997 Stock Plan will give the holder the right
to receive cash or stock in an amount equal to the difference between the fair
market value of a share of Common Stock on the date of exercise and the exercise
price of the options issued in conjunction with the SARs or such other amount as
the Board has established with respect to SARs issued on a stand-alone basis.
Methods of exercise and settlement and other terms of SARs are determined by the
Board.

The Board may award restricted stock, generally consisting of shares which
may not be disposed of by participants until certain restrictions established by
the Board lapse. Such restrictions may lapse in whole or in installments as the
Board determines. A participant receiving restricted stock will have all of the
rights of a shareholder of the Company, including the right to vote the shares
and the right to receive any dividends, unless the Board otherwise determines,
but shall not be permitted to sell, assign, or otherwise transfer the stock
during the restriction period established by the Board. Upon termination of
employment during the restriction period for any reason other than death or
disability, restricted stock will be forfeited, subject to such exceptions, if
any, as are authorized by the Board.

In the event of any change affecting the shares of Common Stock by reason
of any stock dividend or split, recapitalization, merger, consolidation,
spin-off, combination or exchange of shares, or other corporate change or any
distributions to shareholders, the Board may make such substitution or
adjustment in the aggregate number or kind of shares which may be distributed
under the 1997 Stock Plan and in the number, kind and exercise, grant or
purchase price of shares subject to the outstanding awards granted under the
1997 Stock Plan, or make provisions for a cash payment relating to any award, as
it deems to be appropriate in order to maintain the purpose of the original
grant.

The Board of Directors may amend, alter, suspend, discontinue or terminate
the 1997 Stock Plan without the consent of shareholders or participants, except
that shareholder approval of such action will be sought if such approval is
required by any federal or state law or regulation or by any agreement, or if
the Board of Directors in its discretion determines that obtaining such
shareholder approval is advisable. Unless earlier terminated by the Board of
Directors, the 1997 Stock Plan will terminate when no shares remain reserved and
available for issuance, and the Company has no further obligation with respect
to any award granted under the 1997 Stock Plan.

In the event of a change of control of the Company, as defined in the 1997
Stock Plan, all outstanding awards under the 1997 Stock Plan, regardless of any
limitations or restrictions, become fully exercisable and freed of all
restrictions.

Director Compensation. Directors receive no compensation from the Company
for serving on the Board of Directors but are eligible to receive grants under
the 1997 Stock Plan and will be reimbursed for out-of-pocket expenses incurred
while attending board and committee meetings.

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LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

As permitted by the provisions of the Oklahoma General Corporation Act (the
"Oklahoma Corporate Act"), the Certificate of Incorporation of the Company
eliminates in certain circumstances the monetary liability of directors of the
Company for a breach of their fiduciary duty as directors. These provisions do
not eliminate the liability of a director for (i) a breach of the director's
duty of loyalty to the Company or its shareholders, (ii) acts or omissions by a
director not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) liability arising under Section 1053 of the Oklahoma
Corporate Act (relating to the declaration of dividends and purchase or
redemption of shares in violation of the Oklahoma Corporate Act) or (iv) any
transaction from which the director derived an improper personal benefit. In
addition, these provisions do not eliminate the liability of a director for
violations of Federal securities laws, nor do they limit the rights of the
Company or its shareholders, in appropriate circumstances, to seek equitable
remedies such as injunctive or other forms of non-monetary relief. Such remedies
may not be effective in all cases.

The Certificate of Incorporation and the Bylaws of the Company provide that
CNG shall indemnify all directors and officers of CNG to the full extent
permitted by the Oklahoma Corporate Act. Under such provisions, any director or
officer who in his capacity as such is made or threatened to be made, a party to
any suit or proceeding, may be indemnified by the Company if the Board of
Directors determines such director or officer acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interest of
CNG. The Certificate of Incorporation, Bylaws and the Oklahoma Corporate Act
further provide that such indemnification is not exclusive of any other rights
to which such individuals may be entitled under the Certificate of
Incorporation, the Bylaws, any agreement, vote of shareholders or disinterested
directors or otherwise.

At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification would
be required or permitted. The Company is not aware of any overtly threatened
litigation or proceeding that might result in a claim for indemnification.

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PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 1, 1997, and adjusted to
reflect the sale of shares in the Offering, (i) by each person (or group of
affiliated persons) who is known by the Company to own beneficially more than 5%
of the Company's Common Stock, (ii) by each executive officer of the Company,
(iii) by each of the Company's directors, and the two persons who have agreed to
become members of the Board of Directors after completion of the Offering, (the
"Future Directors"), (iv) by all directors, including the two Future Directors,
and executive officers as a group and (v) by the Selling Shareholder. Unless
indicated otherwise, each person has sole voting and dispositive power with
respect to such shares.

PERCENT BENEFICIALLY
OWNED
NUMBER SHARES --------------------------
OF SHARES BEING BEFORE AFTER
BENEFICIAL OWNER (1) OFFERED(1) OFFERING(1) OFFERING(1)
---------------- --------- ---------- ----------- ------------

EXECUTIVE OFFICERS AND DIRECTORS:
Gary C. Adams(2)................................... 3,738,004 300,000 89.0% 57.3%
1412 South Boston, Suite 500 Tulsa, Oklahoma
74119
Garry D. Smith..................................... 126,005 -- 3.0% 2.1%
Scott C. Longmore.................................. 167,962 -- 4.0% 2.8%
Terry K. Spencer................................... 126,005 -- 3.0% 2.1%
William W. Pritchard............................... -- -- -- --
William H. Bauch................................... -- -- -- --
All directors and executive officers as a group of
(6 people)....................................... 4,157,976 300,000 99% 64.3%
SELLING SHAREHOLDER:
Adams Affiliates, Inc.............................. 597,864 300,000 14.2% 5.0%

- ---------------

(1) Assumes the conversion of shares of Convertible Preferred Stock into Common
Stock prior to completion of the Offering.

(2) Gary C. Adams does not own of record any shares of Common Stock. Disclosed
here are shares held of record by Cottonwood Partnership (3,140,140 shares)
and Adams Affiliates (597,864 shares). See "Certain Transactions -- General"
for a description of Mr. Adams' relationship to such companies.

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CERTAIN TRANSACTIONS

GENERAL

Gary C. Adams, the Chairman of the Board, President and Chief Executive
Officer of the Company, is the chief executive officer of Cottonwood
Partnership. Cottonwood Partnership is owned by certain trusts, the
beneficiaries of which are members of the immediate family of Mr. Adams (the
"Family Trusts"). Cottonwood Partnership owns approximately 98% of the
outstanding common stock of Adams Affiliates and all of the outstanding common
stock of Bird Creek Resources, Inc. ("Bird Creek"). Mr. Adams is a director and
the chairman of Adams Affiliates and a director of Bird Creek. The Family Trusts
are also partners in Mountain Meadows Partnership, a general partnership.

Adams Affiliates owns, directly or indirectly, all of the outstanding
equity interests of Continental Natural Gas Marketing, L.L.C. ("CNGM"), Gary
Adams Ranch, Inc. ("G.A. Ranch"), CPA Ventures, Inc. ("CPA Ventures") and CPA
Aviation, Inc. ("CPA Aviation"). Mr. Adams is a director of G.A. Ranch, CPA
Ventures and CPA Aviation. Continental Gas Marketing, Inc. ("CGM") was a
subsidiary of Cottonwood Partnership until it was merged into Adams Affiliates
in 1997.

The Company believes that the transactions described below were made on
terms at least as fair to the Company as could have been obtained from
unaffiliated third parties except that sales of natural gas by the Company to
CNGM in 1996 were at cost and below market. The Company believes that its sales
to CNGM in 1997 and thereafter will be fair to the Company.

1996 TRANSACTIONS AMONG RELATED ENTITIES

The Beaver Plant was initially acquired by the Company and certain of its
affiliates. On January 1, 1996, the Company acquired the remaining 20% interest
in the Beaver Plant from Cottonwood Partnership, G.A. Ranch and CGM in exchange
for a total of 200 shares of Convertible Preferred Stock, and cancellation of an
account receivable from such affiliates in the amount of approximately $1.5
million. The terms of such exchange were not negotiated in an arms length
transaction. On December 1, 1996, the Company redeemed 51 shares of the
Convertible Preferred Stock for the liquidation value of $40,000 per share.
Prior to completion of the Offering, the remaining 149 shares of Convertible
Preferred Stock will be converted into 586,847 shares of Common Stock.

The Company sold approximately $12 million of natural gas to CNGM in 1996.
The natural gas was sold at cost to CNGM, which resold such volumes under
long-term sales contracts. At December 31, 1996, CNGM owed the Company
approximately $5 million for such purchases. For 1997 and thereafter, the
Company will sell sufficient natural gas to CNGM to satisfy the requirements of
its existing sales agreements at a price equal to the Company's cost plus $0.02
per Mcf.

In 1996, the Company purchased approximately $316,000 of natural gas
located in New Mexico and Oklahoma from Bird Creek under a month-to-month
contract. The Company's purchases from Bird Creek are made at a market index
price less gathering fees.

In 1996, the Company provided office space and general administrative
services to Bird Creek and billed it for rentals and fees in the aggregate
amount of $258,652. Additionally, the Company in 1996, was charged $14,766 by
Bird Creek for general and administrative expenses incurred on its behalf. In
1996, Adams Affiliates charged the Company $210,000 for management services.
Adams Affiliates and the Company are parties to a Consulting Agreement dated as
of April 1, 1997, under which Adams Affiliates provides consulting services to
the Company. See "Management --Executive Compensation."

Bird Creek and Adams Affiliates are parties to Administrative Services
Agreements with the Company dated as of April 1, 1997, under which the Company
provides office space, accounting, clerical and other administrative services to
Bird Creek and Adams Affiliates in return for reimbursement to the Company of
the allocable cost to the Company of providing such services. These
Administrative Services Agreements expire on March 31, 1998, subject to
automatic renewal on a month-to-month basis thereafter until terminated by any
of the contracting parties. Bird Creek provides certain accounting, clerical and
administrative services to

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the Company (primarily accounting services) under the terms of an Administrative
Services Agreement dated as of April 1, 1997. The Company reimburses Bird Creek
for the allocable cost to Bird Creek of providing such services. This
Administrative Services Agreement expires on March 31, 1998, subject to
automatic renewal on a month-to-month basis thereafter until terminated by one
of the parties.

In 1996, the Company sold its oil and gas producing properties to Adams
Affiliates for $308,000, which approximated book value.

In 1996, the Company paid CPA Aviation and CPA Ventures a total of $175,600
for aviation services. Approximately $56,000 of the amount paid in 1996 was
related to services rendered in 1995. The Company and CPA Aviation are parties
to a charter services agreement dated as of April 1, 1997, under which CPA
Aviation agrees to provide aviation services to the Company on an "as needed"
basis (the "Charter Services Agreement"). The Company is required to pay CPA
Aviation for such services at the rates of $100 per hour for usage of a Cessna
Model Turbo 210 aircraft and $1,000 per hour for usage of a Learjet Model 24A
aircraft plus reimbursement of any taxes, fees, customs duties or other charges
which CPA Aviation may be required to pay by reason of the Company's usage. The
Charter Services Agreement expires on March 31, 1998, subject to automatic
renewal on a month-to-month basis thereafter until terminated by one of the
parties.

As of December 31, 1996, Mountain Meadows Partnership was indebted to the
Company in the amount of approximately $800,000, and various other affiliates of
the Company were indebted to it in the aggregate amount of approximately
$180,000.

OTHER RELATIONSHIPS

Oppenheimer & Co., Inc. is an Underwriter and a representative of the
Underwriters in the Offering. See "Underwriting." Mr. William H. Bauch is an
officer of Oppenheimer & Co., Inc. and is expected to become a director of the
Company following the Offering. The law firm of Hall, Estill, has advised the
Company on certain legal matters related to the Offering. Mr. William W.
Pritchard is Of Counsel to Hall, Estill and is expected to become a director of
the Company following the Offering.

BOARD POLICY ON AFFILIATED TRANSACTIONS

The Board of Directors has adopted a policy requiring that any transactions
to be entered into between the Company and an affiliate of the Company after
completion of the Offering be reviewed by CNG's independent directors.

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DESCRIPTION OF CAPITAL STOCK

Upon the closing of the Offering, the authorized capital stock of the
Company will consist of 60,000,000 shares of Common Stock, $0.01 par value and
500,000 shares of Preferred Stock, $0.01 par value. The Convertible Preferred
Stock will be converted into 586,847 shares of Common Stock prior to completion
of the Offerings. Accordingly, the terms of the Convertible Preferred Stock are
not discussed herein.

COMMON STOCK

Each holder of Common Stock is entitled to one vote for each share on all
matters on which shareholders generally are entitled to vote, including
elections of directors, and, except as otherwise required by law or by the terms
of any series of Preferred Stock of the Company, the holders of Common Stock
exclusively possess all voting power. The Certificate of Incorporation of the
Company (the "Certificate") does not provide for cumulative voting for the
election of directors; therefore, the holders of a majority of the voting power
of the total number of outstanding shares of Common Stock are able to elect the
entire Board of Directors of the Company.

Subject to any preferential rights of any outstanding series of Preferred
Stock of the Company designated from time to time by the Board of Directors, the
holders of Common Stock are entitled to such dividends as may be declared from
time to time by the Board of Directors from funds legally available therefor
and, upon liquidation, dissolution or winding up, will be entitled to receive
pro rata all assets of the Company available for distribution to such holders.
No holder of Common Stock has any preemptive right to subscribe to any kind or
class of securities of the Company.

PREFERRED STOCK

The Board of Directors is empowered without shareholder approval to issue
up to 500,000 shares of Preferred Stock of the Company, from time to time, in
series and with respect to each series to determine (i) the number of shares
constituting such series, (ii) the dividend rate on the shares of each series,
whether such dividends shall be cumulative and the relation of such dividends
payable on any other class or series of stock, (iii) whether the shares of each
series shall be redeemable and the terms thereof, (iv) whether the shares shall
be convertible into Common Stock and the terms thereof, (v) the amount per share
payable on each series, or other rights of holders of such shares on liquidation
or dissolution of the Company, (vi) the voting rights, if any, of shares of each
series and (vii) generally, any other rights and privileges consistent with the
Certificate for each series and any qualifications, limitations or restrictions.
No shares of Preferred Stock are presently outstanding, and the Company has no
present intention to issue Preferred Stock.

ANTI-TAKEOVER PROVISIONS

Certain provisions of the Certificate and the Company's Bylaws may have the
effect of preventing, discouraging or delaying a change in the control of the
Company and may maintain the incumbency of the Board of Directors and
management. The Company's Bylaws limit the ability of shareholders of the
Company to raise matters at a meeting of shareholders without giving advance
notice. In addition, the Certificate and the Bylaws prohibit shareholders from
removing the Company's directors without cause. The Certificate of Incorporation
and Bylaws provide for a classified Board of Directors, which means that only
one-third of the members of the Board of Directors will be up for election in
any given year. The ability of the Board of Directors to issue Preferred Stock
as described above may also make it more difficult for, and may discourage,
other persons or companies from making a tender offer for, or attempting to
acquire substantial amounts of, the Company's Common Stock.

The Company is subject to the provisions of the Oklahoma Takeover
Disclosure Act of 1985 (the "Disclosure Act") regulating corporate takeovers.
The Disclosure Act requires certain notices to be given prior to making a
takeover offer. Such notices include filing a registration statement with the
Securities Administrator of Oklahoma and delivering a copy of such notice to the
Company. The Disclosure Act applies to offers to takeover an issuer of publicly
traded securities of which at least 20% are held by Oklahoma

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residents. A "takeover" offer includes offers in which the offerer discloses its
intention that, as a result of the offer: (i) the offeror will own 10% or more
of any class of equity securities or (ii) ownership of any class of equity
securities will be increased by 5% or more.

The Company is subject to the provisions of Section 1090.3 of the Oklahoma
Corporate Act. That section provides, with certain exceptions, that an Oklahoma
corporation may not engage in any of a broad range of business combinations with
a person or an affiliate or associate of such person who is an "Interested
Shareholder" for a period of three years from the date that such person became
an Interested Shareholder unless: (a) the transaction, or business combination,
resulting in a person's becoming an Interested Shareholder is approved by the
board of directors of the corporation before the person becomes an Interested
Shareholder, (b) upon consummation of the transaction which resulted in the
person becoming an Interested Shareholder, the Interested Shareholder owned 85%
or more of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding shares owned by persons who are both officers
and directors of the corporation and shares held by certain employee stock
ownership plans) or (c) on or after the date the person became an Interested
Shareholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66 2/3% of the corporation's
outstanding voting stock at an annual or special meeting, excluding shares owned
by the Interested Shareholder. An "Interested Shareholder" is defined as any
person that is (a) the owner of 15% or more of the outstanding voting stock of
the corporation or (b) an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an Interested Shareholder.

The Oklahoma Shares Control Act ("OSCA") (Section 1145 et seq. of the
Oklahoma Corporate Act) prohibits the voting of "control shares" without the
approval of a majority of shares held by non-interested shareholders. Under the
OSCA, "control shares" are shares acquired by a person which causes his
percentage ownership to exceed certain statutorily prescribed ranges of
ownership beginning at 20%. The OSCA was ruled unconstitutional shortly after
its adoption in 1987; however, it is believed that certain amendments to the
OSCA in 1990 and 1991 may have cured its constitutional infirmities.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is Bank Boston, N.A.

LISTING

The Company has applied for listing of the Common Stock on the Nasdaq
National Market.

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to the Offering, there has not been any public market for the Common
Stock. Sale of a substantial number of shares of Common Stock into the public
market following the Offering could adversely affect prevailing market prices
for the Common Stock.

Following the Offering, the Company will have outstanding an aggregate of
6,000,000 shares of Common Stock, assuming no exercise of the underwriters'
over-allotment option. In addition to the 2,100,000 shares of Common Stock
offered hereby, as of the effective date of the Offering, there will be
3,900,000 shares of Common Stock outstanding, all of which are restricted
securities (the "Restricted Shares") under the Securities Act of 1933 (the
"Securities Act"). All executive officers, directors and certain other
shareholders of the Company have agreed they will not sell 3,900,000 shares of
Common Stock held by them without the prior consent of the representatives of
the Underwriters for a period of 180 days from the date of this Prospectus (the
"180-day Lockup Period"). Following the 180-day Lockup Period, up to 3,900,000
Restricted Shares will become eligible for sale in the public market pursuant to
Rule 144 subject to the volume and other restrictions pursuant to such Rule. The
Underwriters may, in their sole discretion and at any time prior to the
expiration of the 180-day Lockup Period without notice, release all or any
portion of the securities subject to lock-up agreements.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), who has beneficially owned shares for at least one
year (including the holding period of any prior owner except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period, a number of shares that does not exceed the greater of (i)
1% of the then outstanding shares of Common Stock or (ii) generally, the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding the sale. Sales under Rule 144 are also subject to the filing of a
Form 144 with respect to such sale and certain other limitations and
restrictions. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, would be entitled to sell such shares without having to comply with the
manner of sale, volume limitation or notice filing provisions described above.

The Company is unable to estimate the number of shares that will be sold
under Rule 144, as this will depend on the market price for the Common Stock of
the Company, the personal circumstances of the sellers and other factors. Prior
to the Offering, there has been no public market for the Common Stock, and there
can be no assurance that a significant public market for the Common Stock will
develop or be sustained after the Offering. Any future sale of substantial
amounts of the Common Stock in the open market may adversely affect the market
price of the Common Stock offered hereby.

The Company intends to file a registration statement on Form S-8 under the
Securities Act to register up to 600,000 shares of Common Stock reserved for
issuance under the 1997 Stock Plan, thus permitting the resale of such shares by
nonaffiliates in the public market without restriction under the Securities Act,
subject to vesting restrictions with the Company. The 204,000 shares subject to
purchase under the Company's 1996 Stock Option Plan are Restricted Shares.

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UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting Agreement
among the Company, the Selling Shareholder and the Underwriters named below, for
whom Oppenheimer & Co., Inc. and Southwest Securities, Inc. are acting as
representatives (the "Representatives"), the following Underwriters have
severally agreed to purchase from the Company and the Selling Shareholder, and
the Company and the Selling Shareholder have agreed to sell to the Underwriters,
the number of shares of Common Stock at the initial public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus:

NUMBER
UNDERWRITERS OF SHARES
------------ ---------

Oppenheimer & Co., Inc......................................
Southwest Securities, Inc...................................

---------
Total............................................. 2,100,000
=========

The Underwriting Agreement provides that the obligations of the
Underwriters thereunder are subject to approval of certain legal matters
(including, among other things, the legality of the issuance of shares of Common
Stock in the Offering) by counsel and to various other conditions. The nature of
the Underwriters' obligations is such that they are committed to purchase all of
the above shares of Common Stock if any are purchased.

The Underwriters propose to offer the shares of Common Stock directly to
the public at the Offering price set forth on the cover page of this Prospectus
and at such price less a concession not in excess of $ per share of
Common Stock to certain securities dealers who are members of the National
Association of Securities Dealers, Inc. The Underwriters may allow and such
dealers may reallow concessions not in excess of $ per share to certain
other securities dealers. After the initial public offering, the offering price
and other selling terms may be changed by the Representatives.

The Underwriters have been granted a 30-day over-allotment option to
purchase from the Company up to an aggregate of 315,000 additional shares of
Common Stock at the public offering price less the underwriting discount and
commissions. If the Underwriters exercise such over-allotment option, the
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof as the number of shares of Common
Stock to be purchased by it as shown in the above table bears to the number of
shares of Common Stock offered hereby and the Company will be obligated,
pursuant to the over-allotment option, to sell such shares to the Underwriters.
The Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby.

The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Common Stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
Representatives to reclaim a selling concession from a syndicate member when the
Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions, penalty bids and
passive market making may cause the price of the Common Stock to be higher than
it would otherwise be in

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the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.

The Representatives have advised the Company that they do not intend to
confirm sales to any accounts over which they exercise discretionary authority.

The Company has agreed to pay the Representatives a financial advisory fee
equal to 3/4 of 1% of the total Offering Amount. In addition, the Company has
agreed to indemnify the Underwriters against certain liabilities, losses and
expenses, including liabilities under the Securities Act or to contribute to
payments that the Underwriters may be required to make in respect thereof.

The Company and its officers and directors beneficially holding 900,000
outstanding shares of Common Stock in the aggregate have agreed that for a
period of 180 days after the date of this Prospectus they will not sell,
contract to sell or otherwise dispose of, directly or indirectly, shares of
Common Stock without the prior written consent of the Representatives.

LEGAL MATTERS

The validity of the issuance of shares of Common Stock offered hereby will
be passed upon for the Company by Albright & Rusher, a Professional Corporation,
Tulsa, Oklahoma. Certain legal matters in connection with the Offering will be
passed upon for the Company by Hall, Estill, Hardwick, Gable, Golden & Nelson,
P.C., Tulsa, Oklahoma. Certain legal matters in connection with the Offering
will be passed upon for the Underwriters by Jackson & Walker, L.L.P., Dallas,
Texas.

INDEPENDENT PUBLIC ACCOUNTANTS

The consolidated balance sheets as of December 31, 1995 and 1996 and the
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996 included in this
prospectus, have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing. With respect to the unaudited interim
financial information for the periods ended March 31, 1996 and 1997, included in
this Prospectus, the independent accountants have reported that they have
applied limited procedures in accordance with professional standards for a
review of such information. However, their separate report included in the
Prospectus states that they did not audit and they do not express an opinion on
that interim financial information. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. The accountants are not subject to the
liability provisions of Section 11 of the Securities Act of 1933 for their
report on the unaudited interim financial information because that report is not
a "report" or a "part" of the registration statement prepared or certified by
the accountants within the meaning of Sections 7 and 11 of the Act.

EXPERTS

The estimate of the proved, producing natural gas reserves which are
underlying leases and wells under contract to the Company was provided by Lee
Keeling and Associates, Inc., and are included herein in reliance in the
authority of said firm as experts in petroleum engineering.

55
58

GLOSSARY

The definitions set forth below apply to the terms used in this Prospectus:

"Bcf" means billion cubic feet of natural gas.

"Beaver Gathering System" means the Company's natural gas gathering system
located in Beaver County, Oklahoma which gathers natural gas for delivery to the
Beaver Plant.

"Beaver Plant or Beaver" means the Company's natural gas processing plant
located in Beaver County, Oklahoma which is directly connected to the Beaver
Gathering System.

"Capacity Release" means firm transportation which the Company has acquired
by purchase or assignment from another party (typically a utility company) on a
particular pipeline.

"Convertible Preferred Stock" means the 149 shares of convertible preferred
stock of the Company, par value $1.00 per share, which will be converted into
shares of Common Stock prior to completion of the Offering.

"EBITDA" represents operating income plus, depreciation, depletion and
amortization. It should not be considered in isolation or as a substitute for
net income as a measure of the Company's operating results or to cash flows from
operating activities (determined in accordance with generally accepted
accounting principles) as a measure of liquidity. The Company believes that
EBITDA is a measure commonly reported and widely used by analysts, investors and
other interested parties in the natural gas industry. However, not all companies
calculate EBITDA using the same methods; therefore, the EBITDA figures set forth
herein may not be comparable to EBITDA reported by other companies.

"EPA" means the Environmental Protection Agency.

"Extraction" means removing liquid and liquefiable hydrocarbons (NGLs) from
natural gas.

"FERC" means the Federal Energy Regulatory Commission.

"Firm transportation" means the obligation of a pipeline to transport
natural gas without curtailment or reduction up to the quantity which the
pipeline has committed to transport under the contract with its customer. Under
firm transportation, the pipeline reserves sufficient capacity on its pipelines
to satisfy the transportation requirements of all firm transportation customers
without curtailment (except for curtailment which may result due to acts of God
or similar occurrences).

"Fractionation" is the process by which the NGL stream is subjected to
controlled temperatures, causing the NGLs to separate, or fractionate, into the
separate NGL products of ethane, propane, butane, isobutane and natural
gasoline.

"Fuel and shrinkage" is the heating value of the natural gas extracted in
the form of NGLs or consumed as fuel during processing.

"Interruptible transportation" means the obligation of a pipeline to
transport natural gas on a "first come -- first serve" basis after the pipeline
has satisfied all of its firm transportation obligations.

"Mcf" means thousand cubic feet of natural gas.

"Mgal/d" means thousand gallons per day.

"MMcf" means million cubic feet of natural gas.

"MMcf/d" or "MMcf per day" means million cubic feet per day.

"Mocane Plant or Mocane" means the Company's natural gas processing plant
located in Beaver County, Oklahoma which is not directly connected to the Beaver
Gathering System.

"NGLs" means the liquids which are extracted from natural gas which include
ethane, propane, butane, isobutane and natural gasoline.

56
59

"Off-system gas" means the natural gas, which the Company purchases from
time to time for resale to its customers which is neither gathered nor processed
by the Company.

"On-system gas" means the natural gas which is gathered or processed by the
Company.

"Panhandle Area" means the panhandle region of Oklahoma and Texas, where
the Company's gathering and processing assets are located.

"Processing" includes treatment, extraction and fractionation.

"Reserves" mean proven/producing natural gas reserves from wells whose
production is processed and/or gathered at the Company's plants and/or pipeline
systems.

"Texas Gathering Assets" means the natural gas gathering assets located in
various counties in the panhandle of Texas and Oklahoma which were acquired by
the Company from subsidiaries of Enron Corporation.

"Treatment" refers to the removal of water vapor, solids and other
contaminants, such as hydrogen sulfide or carbon dioxide, contained in the
natural gas stream that would interfere with pipeline transportation or
marketing of the natural gas to consumers.

57
60

CONTINENTAL NATURAL GAS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Reports of Independent Accountants.......................... F-1
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Shareholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
Unaudited Quarterly Results of Operations................... F-15
Unaudited Pro Forma Financial Data.......................... F-16

58
61

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
Continental Natural Gas, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Continental
Natural Gas, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years ended December 31, 1994, 1995 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Continental
Natural Gas, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1994, 1995 and 1996 in conformity with generally accepted
accounting principles.

COOPERS & LYBRAND L.L.P.

Tulsa, Oklahoma
March 21, 1997

F-1
62

REPORT OF INDEPENDENT ACCOUNTANTS

We have reviewed the accompanying consolidated balance sheet of Continental
Natural Gas, Inc. and Subsidiaries as of March 31, 1997, and the related
consolidated statements of operations and cash flows for the three-month periods
ended March 31, 1996 and 1997 and the consolidated statement of shareholders'
equity for the three-month period ended March 31, 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 inquires 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.

COOPERS & LYBRAND L.L.P.

Tulsa, Oklahoma
June 10, 1997

F-2
63

CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, MARCH 31,
--------------------------- ------------
1995 1996 1997
----------- ------------ ------------
(UNAUDITED)

ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,655,867 $ 21,077,438 $ 14,784,031
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$252,979, $257,619 and $287,619....................... 18,028,283 44,930,884 21,374,532
Affiliates.............................................. 272,926 5,969,458 4,624,111
Other................................................... 531,683 1,150,334 2,026,856
Notes receivable -- affiliates............................ 795,711 17,801 17,801
Gas inventory............................................. 885,247 3,148,657 3,693,112
Prepaid expenses.......................................... 61,106 164,085 61,143
----------- ------------ ------------
Total current assets...................................... 25,230,823 76,458,657 46,581,586
Investments (Note 3)........................................ 786,424 655,589 588,220
Property and equipment, net (Note 4)........................ 28,345,593 61,045,047 62,750,946
Notes receivable -- affiliates.............................. 542,442 -- --
Deferred tax asset.......................................... 2,600,000 7,075,000 6,458,000
Other assets................................................ 593,376 694,305 685,634
----------- ------------ ------------
Total assets................................................ $58,098,658 $145,928,598 $117,064,386
=========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $24,508,073 $ 56,707,979 $ 35,528,539
Affiliate payables........................................ 294,185 463,884 351,309
Contract advances......................................... -- 24,787,831 10,257,651
Current portion of long-term debt......................... 2,715,669 867,000 2,025,000
Current portion of capital lease obligations.............. 543,052 1,165,361 1,191,962
----------- ------------ ------------
Total current liabilities................................. 28,060,979 83,992,055 49,354,461
Long-term debt.............................................. 6,534,331 32,945,500 38,070,753
Capital lease obligations................................... 2,745,371 6,583,478 6,275,577
Deferred gain on sale-leaseback............................. 376,149 254,154 223,656
Contract advances........................................... 1,956,055 -- --
----------- ------------ ------------
Total liabilities........................................... 39,672,885 123,775,187 93,924,447
Minority interest........................................... 1,671,456 -- --
Commitments and contingencies (Notes 4, 6, 8 and 9)
Shareholders' equity (Note 11):
Convertible preferred stock, $1 par value, $40,000
liquidation value, 200 shares authorized and 149 shares
issued and outstanding in 1996.......................... -- 149 149
Common stock, $.01 par value, 60,000,000 shares
authorized and 3,457,159 shares issued in 1995 and
3,919,156 issued in 1996 and 1997..................... 34,571 39,191 39,191
Additional paid-in capital................................ 12,034,314 12,375,528 12,375,528
Retained earnings......................................... 4,889,652 10,042,763 11,029,291
Treasury stock, at cost................................... (204,220) (204,220) (204,220)
Receivable from stock sale................................ -- (100,000) (100,000)
----------- ------------ ------------
Total shareholders' equity................................ 16,754,317 22,153,411 23,139,939
----------- ------------ ------------
Total liabilities and shareholders' equity.................. $58,098,658 $145,928,598 $117,064,386
=========== ============ ============

The accompanying notes are an integral part of the consolidated financial
statements.

F-3
64

CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------- ---------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- ------------
(UNAUDITED)

Natural gas sales......................... $100,476,775 $ 95,630,817 $196,729,349 $32,669,849 $ 72,955,874
Natural gas sales -- related party........ -- -- 12,049,421 -- 5,832,255
Natural gas liquids sales................. 19,572,332 24,803,858 34,757,184 6,194,619 8,881,135
Gathering fees............................ -- -- 1,994,711 -- 843,020
Other..................................... 259,837 762,770 1,130,751 455,202 14,725
------------ ------------ ------------ ----------- ------------
Total operating revenue................... 120,308,944 121,197,445 246,661,416 39,319,670 88,527,009
------------ ------------ ------------ ----------- ------------
Operating costs and expenses:
Cost of purchased gas................... 111,038,275 107,641,631 225,535,172 34,492,516 81,416,588
Operating expenses...................... 3,930,447 4,366,125 5,977,953 1,381,758 1,559,243
General and administrative.............. 3,600,982 3,840,084 5,622,871 1,310,413 1,842,202
Depreciation, depletion and
amortization.......................... 1,504,608 1,366,544 2,854,624 473,031 899,089
------------ ------------ ------------ ----------- ------------
Total operating costs and expenses...... 120,074,312 117,214,384 239,990,620 37,657,718 85,717,122
------------ ------------ ------------ ----------- ------------
Operating income.......................... 234,632 3,983,061 6,670,796 1,661,952 2,809,887
------------ ------------ ------------ ----------- ------------
Other income (expense):
Interest income......................... 224,418 309,832 131,947 46,944 279,592
Equity in loss of investee.............. (51,486) (82,769) (136,196) (27,973) (33,000)
Interest expense........................ (1,251,747) (914,331) (2,702,304) (326,019) (1,465,682)
Minority interest....................... (1,501,550) (403,872) -- -- --
Gain on sale of gathering system and
processing plant...................... 5,178,925 -- -- -- --
Other, net.............................. 2,049,920 43,726 20,827 42,707 47,731
------------ ------------ ------------ ----------- ------------
Total other income (expense)............ 4,648,480 (1,047,414) (2,685,726) (264,341) (1,171,359)
------------ ------------ ------------ ----------- ------------
Income before income taxes and
extraordinary item...................... 4,883,112 2,935,647 3,985,070 1,397,611 1,638,528
Income tax (expense) benefit.............. (127,000) 2,174,304 3,635,210 (30,000) (652,000)
------------ ------------ ------------ ----------- ------------
Income before extraordinary item.......... 4,756,112 5,109,951 7,620,280 1,367,611 986,528
Extraordinary loss on retirement of debt
(net of income taxes of $261,842)....... -- -- (427,220) -- --
------------ ------------ ------------ ----------- ------------
Net income................................ $ 4,756,112 $ 5,109,951 $ 7,193,060 $ 1,367,611 $ 986,528
============ ============ ============ =========== ============
Primary earnings per share:
Income before extraordinary item........ $ 1.46 $ 1.59 $ 1.99 $ 0.37 $ 0.24
============ ============ ============ =========== ============
Net income.............................. $ 1.46 $ 1.59 $ 1.87 $ 0.37 $ 0.24
============ ============ ============ =========== ============
Fully diluted earnings per share:
Income before extraordinary item........ $ 1.45 $ 1.59 $ 1.71 $ 0.33 $ 0.22
============ ============ ============ =========== ============
Net income.............................. $ 1.45 $ 1.59 $ 1.61 $ 0.33 $ 0.22
============ ============ ============ =========== ============
Weighted average common shares
outstanding:
Primary................................. 3,215,349 3,185,428 3,536,176 3,305,110 3,613,153
Fully diluted........................... 3,242,277 3,186,244 4,466,291 4,155,391 4,392,986

The accompanying notes are an integral part of the consolidated financial
statements.

F-4
65

CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

NUMBER OF SHARES
-------------------------------- ADDITIONAL RETAINED
PREFERRED COMMON TREASURY PREFERRED COMMON PAID-IN EARNINGS TREASURY
STOCK STOCK STOCK STOCK STOCK CAPITAL (DEFICIT) STOCK
--------- --------- -------- --------- ------- ----------- ----------- ---------

Balance at December 31,
1993.................... 1,000 3,457,159 263,435 $ 315,000 $34,571 $12,034,314 $(4,830,132) $(156,470)
Net income................ 4,756,112
------ --------- ------- --------- ------- ----------- ----------- ---------
Balance at December 31,
1994.................... 1,000 3,457,159 263,435 315,000 34,571 12,034,314 (74,020) (156,470)
Acquisition of preferred
stock................... (1,000) (315,000)
Purchase of treasury
stock................. 42,568 (47,750)
Common stock dividends
($.01 per share)........ (24,217)
Preferred stock dividends
($122.06 per share)..... (122,062)
Net income................ 5,109,951
------ --------- ------- --------- ------- ----------- ----------- ---------
Balance at December 31,
1995.................... 3,457,159 306,003 34,571 12,034,314 4,889,652 (204,220)
Issuance of preferred
stock................... 200 200 199,834
Sale of common stock to
management (Note 11).... 461,997 4,620 141,380
Redemption of preferred
stock................... (51) (51) (2,039,949)
Net income................ 7,193,060
------ --------- ------- --------- ------- ----------- ----------- ---------
Balance at December 31,
1996.................... 149 3,919,156 306,003 149 39,191 12,375,528 10,042,763 (204,220)
Net income (unaudited).... 986,528
------ --------- ------- --------- ------- ----------- ----------- ---------
Balance at March 31, 1997
(unaudited)............. 149 3,919,156 306,003 $ 149 $39,191 $12,375,528 $11,029,291 $(204,220)
====== ========= ======= ========= ======= =========== =========== =========

RECEIVABLE
FROM
STOCK
SALE TOTAL
---------- -----------

Balance at December 31,
1993.................... $ $ 7,397,283
Net income................ 4,756,112
--------- -----------
Balance at December 31,
1994.................... 12,153,395
Acquisition of preferred
stock................... (315,000)
Purchase of treasury
stock................. (47,750)
Common stock dividends
($.01 per share)........ (24,217)
Preferred stock dividends
($122.06 per share)..... (122,062)
Net income................ 5,109,951
--------- -----------
Balance at December 31,
1995.................... 16,754,317
Issuance of preferred
stock................... 200,034
Sale of common stock to
management (Note 11).... (100,000) 46,000
Redemption of preferred
stock................... (2,040,000)
Net income................ 7,193,060
--------- -----------
Balance at December 31,
1996.................... (100,000) 22,153,411
Net income (unaudited).... 986,528
--------- -----------
Balance at March 31, 1997
(unaudited)............. $(100,000) $23,139,939
========= ===========

The accompanying notes are an integral part of the consolidated financial
statements.

F-5
66

CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ---------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)

Cash flows from operating activities:
Net income........................................ $ 4,756,112 $ 5,109,951 $ 7,193,060 $ 1,367,611 $ 986,528
------------ ------------ ------------ ------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization........ 1,504,608 1,366,544 2,854,624 473,031 899,089
Amortization of debt issuance costs............. 91,881 128,473 269,697 50,947 36,190
Gain on disposition of assets................... (5,196,221) (123,793) (133,945) (30,498) (30,498)
Minority interest............................... 1,501,550 403,872 -- -- --
Equity in loss of investee...................... 51,486 82,769 136,196 27,973 33,000
Deferred income tax benefit (expense)........... -- (2,220,000) (4,213,158) -- 617,000
Noncash compensation on stock issuance.......... -- -- 46,000 46,000 --
Extraordinary loss on retirement of debt........ -- -- 427,220 -- --
Changes in operating assets and liabilities:
Accounts receivable........................... 6,580,031 (6,716,615) (35,408,754) (1,670,585) 24,025,177
Gas inventory................................. (533,857) 85,070 (2,263,410) (701,849) (544,455)
Prepaid expenses.............................. 280,310 (42,424) (102,979) 30,967 102,942
Accounts payable.............................. (9,963,457) 11,508,016 31,899,220 (591,303) (20,398,859)
Contract advance.............................. 2,712,589 (756,534) 22,831,776 -- (14,530,180)
------------ ------------ ------------ ------------ ------------
Total adjustments........................... (2,971,080) 3,715,378 16,342,487 (2,365,317) (9,790,594)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities...................................... 1,785,032 8,825,329 23,535,547 (997,706) (8,804,066)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures.............................. (3,096,999) (12,310,634) (30,761,492) (10,418,248) (3,498,143)
Proceeds from sale of property and equipment...... 12,784,452 7,000 308,000 -- --
(Increase) decrease in investments................ 68,392 54,852 (5,361) -- 34,369
(Increase) decrease in notes receivable --
affiliate....................................... (260,000) 98 -- -- --
(Increase) decrease in other assets............... 692,642 (37,500) -- -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities...................................... 10,188,487 (12,286,184) (30,458,853) (10,418,248) (3,463,774)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Dividends paid.................................... -- (146,279) -- -- --
Purchase of preferred and Treasury Stock.......... -- (362,750) -- -- --
Principal payments on long-term debt.............. (47,950,348) (11,125,868) (45,903,667) (312,500) (216,747)
Proceeds of long-term debt........................ 41,700,000 14,750,000 70,466,167 8,643,000 6,500,000
Purchase of warrants.............................. -- (315,000) -- -- --
Debt issuance costs............................... (15,000) (141,716) (523,688) (100,376) (27,521)
Principal payments under capital lease
obligations..................................... (814,574) (333,074) (693,935) (129,703) (281,299)
Minority interest distributions................... (720,000) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities...................................... (7,799,922) 2,325,313 23,344,877 8,100,421 5,974,433
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents..................................... 4,173,597 (1,135,542) 16,421,571 (3,315,533) (6,293,407)
Cash and cash equivalents at beginning of year.... 1,617,812 5,791,409 4,655,867 4,655,867 21,077,438
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of year.......... $ 5,791,409 $ 4,655,867 $ 21,077,438 $ 1,340,334 $ 14,784,031
============ ============ ============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid................................... $ 1,159,866 $ 745,967 $ 2,472,515 $ 238,661 $ 841,750
============ ============ ============ ============ ============
Income taxes paid............................... $ 120,000 $ 100,000 $ 100,000 $ 100,000 $ 460,000
============ ============ ============ ============ ============

Supplemental disclosure of noncash investing and financing activities -- In
1994, 1995, and 1996, the Company incurred $1,997,249, $2,416,887 and
$5,154,349, respectively, relating to capital lease obligations for the
acquisition of equipment. In 1994, the Company retired $3,124,027 related to
capital lease obligations in the disposition of equipment. In 1996, the Company
issued preferred stock and cancelled certain indebtedness to acquire the
minority interest ownership of a partnership holding one of the Company's
processing plants. Also in 1996, the Company redeemed 51 shares of preferred
stock in exchange for the cancellation of indebtedness due from an affiliated
entity.

The accompanying notes are an integral part of the consolidated financial
statements.

F-6
67

CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS -- Continental Natural Gas, Inc. and Subsidiaries (the
"Company") is an Oklahoma corporation involved principally in natural gas
gathering, processing and marketing with operations principally in the central
United States. The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries and its investments in majority-owned
partnerships.

CASH EQUIVALENTS -- The Company considers all highly liquid investments
with maturities of three months or less at date of purchase to be cash
equivalents.

INVENTORY -- Gas inventory is stated at the lower of market or average
cost.

PROPERTY AND EQUIPMENT -- The Company's property and equipment is carried
at cost and depreciated on the straight-line basis over their estimated useful
lives ranging from 3 to 20 years. Gain or loss on disposal of such property and
equipment is reflected in operations. Maintenance and repairs are charged to
expense as incurred.

The carrying value of property and equipment is reviewed for possible
impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Assets determined to be impaired based on
estimated future net cash flows are reduced to estimated fair value. No such
reduction in the carrying value of assets has been reflected in the accompanying
financial statements.

OIL AND GAS PROPERTIES -- Costs incurred in the acquisition, exploration
and development of oil and gas properties owned in prior years were capitalized
utilizing the full cost method and depleted using the units-of-production method
based on proved reserves.

DEBT ISSUANCE COSTS -- Costs associated with obtaining financing are
capitalized and amortized using the straight-line method over the term of the
agreement.

REVENUE RECOGNITION -- Revenue is recognized when product is delivered or
when services are rendered.

INCOME TAXES -- The Company accounts for income taxes utilizing Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.

EARNINGS PER SHARE -- Earnings per share is based on the weighted average
number of shares outstanding. Primary earnings per share assumes that
outstanding dilutive stock options and warrants are exercised and the proceeds
used to purchase common shares. Fully diluted earnings per share gives effect to
the conversion of convertible preferred stock and the exercise of dilutive stock
options.

ACCOUNTING ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

RECLASSIFICATIONS -- Certain 1994 and 1995 amounts have been reclassified
to conform to the current year presentation.

2. RELATED PARTY TRANSACTIONS

In 1994, 1995 and 1996, the Company provided office space to an affiliated
entity and billed it for rentals of $47,759, $40,399 and $40,399, respectively.
The Company provided general and administrative services to

F-7
68

CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

affiliates and billed them $231,055, $265,351 and $218,253 in 1994, 1995 and
1996, respectively. Additionally, the Company in 1994, 1995 and 1996, was
charged by affiliates $11,212, $36,786 and $190,366, respectively, for general
and administrative expenses incurred on its behalf and $138,000 in 1994 and 1995
and $210,000 in 1996 for management services.

The Company purchased gas from Bird Creek Resources ("BCR"), an affiliated
entity, totaling $895,803, $125,284 and $316,466 in 1994, 1995 and 1996,
respectively. At December 31, 1995 and 1996, the Company had accounts payable to
BCR totaling $139,185 and $463,884, respectively.

In 1996, the Company sold its oil and gas producing properties to an
affiliated entity for approximately $308,000, which approximated book value.
Revenues from these properties are included in other revenues and totaled
$202,278, $461,984 and $602,656 for the years ended December 31, 1994, 1995 and
1996, respectively.

The Company had natural gas sales totaling $12,049,000 in 1996 to an
affiliated entity, which gas was sold at the Company's cost. Receivables at
December 31, 1996 related to these gas sales were $4,988,035. During 1996, the
Company entered into futures contracts on behalf of another affiliate, with
gains or losses or such contracts paid or billed to the affiliate. The Company
also had advances receivable from other affiliates totaling $981,423 at December
31, 1996.

At December 31, 1995 and 1996, notes receivable from affiliates related to
a sale of a gathering system in prior years were $17,801. This note bears
interest at 8% and is collateralized by the gathering system. Also, at December
31, 1995, the Company had notes receivable from affiliates totaling $1,320,352,
related to these parties' participation with the Company in the ownership of
certain gathering systems and processing plants. Accrued interest on these notes
totaling $153,206 at December 31, 1995, is included in accounts receivable-
affiliate. This receivable was collected in 1996 as part of the Company's
acquisition of the affiliate's interest in the plant.

3. INVESTMENTS

The Company, through two limited partnerships of which it is the general
partner, owns a 6.88% interest in a partnership which owns and operates a
natural gas gathering system in Texas. The Company's ownership interest is
accounted for using the equity method. Accordingly, during 1994, 1995 and 1996,
the Company has recognized losses of $51,486, $82,769 and $136,196,
respectively, from the investment.

4. PROPERTY AND EQUIPMENT

Property and equipment at December 31, 1995 and 1996, consisted of:

1995 1996
----------- -----------

Gathering systems and processing plants................... $25,720,568 $55,722,149
Compressor equipment...................................... 4,779,303 10,162,571
Oil and gas properties, under the full-cost method........ 753,647 --
Furniture, fixtures and other............................. 919,255 1,342,984
Less accumulated depreciation, depletion and
amortization............................................ (3,827,180) (6,182,657)
----------- -----------
Net property and equipment................................ $28,345,593 $61,045,047
=========== ===========

In March and May of 1996, the Company purchased gas gathering systems for
combined consideration of $20.2 million.

In December 1994, the Company sold a gathering system and processing plant
and recognized a $5.2 million gain on the sale, of which $1.3 million was
attributable to the minority ownership interests of related parties. The Company
utilized a portion of the proceeds from this sale to acquire a gas processing
plant and related assets in February 1995 for $3.5 million. The acquisition also
provides for contingent consideration

F-8
69

CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of up to $1.5 million ($500,000 per year for three years) plus associated
interest on any such amounts, based on the delivery of a certain supplier's gas
to the plant for processing. As the provisions of the agreement related to this
consideration were met in 1995, at December 31, 1995, the Company accrued
$500,000 plus interest related to this commitment. In 1996, the Company did not
receive gas for processing at this plant from the supplier, and accordingly,
does not believe that any additional consideration will be payable.

5. LONG-TERM DEBT

Long-term debt at December 31, 1995 and 1996 consists of the following:

1995 1996
----------- -----------

Term loan payable in quarterly installments with a final
maturity in 2001, plus interest at either the bank's
base rate plus .50% or LIBOR plus 2.25% (7.94% at
December 31, 1996)...................................... $ -- $33,812,500
Term loan payable in quarterly installments, plus interest
at either the bank's base rate plus .5% or LIBOR plus
2.5% (8.25% at December 31, 1995)....................... 9,250,000 --
Less current portion...................................... (2,715,669) (867,000)
----------- -----------
Long-term debt............................................ $ 6,534,331 $32,945,500
=========== ===========

In December 1996, the Company obtained a new credit facility including the
term loan above and a revolving credit facility of $25 million, of which up to
$18 million may be utilized to support letters of credit. Letters of credit
totalling $6,885,990 were outstanding related to this credit facility at
December 31, 1996. At December 31, 1996, no amount was outstanding on the
revolving credit facility which has a maturity of December 31, 1998 and also
accrues interest at either the bank's base rate plus .5% or LIBOR plus 2.25%.
The new agreement also provides borrowing availability of up to $4,800,000 for
approved capital projects. Associated with obtaining the new credit facility,
the Company retired its prior long-term debt and expensed the remaining
unamortized debt issuance costs of $689,062, which expense (net of income taxes
of $261,842) is classified as an extraordinary item in the statement of
operations.

The debt under the agreements is collateralized by inventory, accounts
receivable, property and equipment and other assets. The agreement includes
various restrictive covenants including the maintenance of specified levels of
working capital and net worth, limitations on the incurrence of additional
indebtedness and limitations on dividends to shareholders.

The Company's prior debt agreement included the issuance of stock purchase
warrants which entitled the holder of the warrants to purchase 127,840 shares of
common stock of the Company. During 1995, all such warrants were repurchased by
the Company for a total of $315,000.

At December 31, 1996, the aggregate amount of long-term debt is payable as
follows: $867,000 in 1997; $4,765,000 in 1998; $4,765,000 in 1999; $4,765,000 in
2000 and $18,650,500 in 2001. Beginning in 1998, certain additional principal
amounts may be due based on the Company's levels of operating cash flows as
defined by the agreement.

F-9
70

CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. CAPITAL LEASES

Property and equipment include the following property under capital leases
at December 31:

1995 1996
---------- ----------

Compressor equipment........................................ $3,950,912 $9,105,261
Less accumulated amortization............................... (344,703) (616,643)
---------- ----------
$3,606,209 $8,488,618
========== ==========

Future minimum lease payments as of December 31, 1996 under capital leases
are as follows:

1997........................................................ $ 1,807,303
1998........................................................ 1,807,303
1999........................................................ 1,483,203
2000........................................................ 1,452,026
2001........................................................ 1,452,026
Thereafter.................................................. 2,056,827
-----------
Future minimum lease payments............................... 10,058,688
Less amount representing interest........................... (2,309,849)
-----------
Present value of future minimum lease payments.............. 7,748,839
Less current portion........................................ (1,165,361)
-----------
Long-term portion........................................... $ 6,583,478
===========

7. CONTRACT ADVANCES

In December, 1996, the Company received contract advances totalling
approximately $22.8 million related to commitments to sell natural gas and
natural gas liquids. The advances do not bear interest and are payable in
product to be delivered over approximately nine months beginning in January
1997.

In June of 1994, the Company received a contract advance of approximately
$2.7 million related to a commitment to sell natural gas liquids. This advance
does not bear interest, is payable in cash or in product, and has a final
repayment date of June, 1997. The Company may terminate the contract and repay
this advance at its option with 30 days notice. During 1995, the Company elected
to reduce the contract advance by delivery of ethane volumes, reducing the
contract advance by approximately $756,000.

8. INCOME TAXES

Components of income tax expense (benefit) for the years ended December 31,
1994, 1995 and 1996 are as follows:

1994 1995 1996
-------- ----------- -----------

Current....................................... $127,000 $ 45,696 $ 577,948
Deferred...................................... -- (2,220,000) (4,213,158)
-------- ----------- -----------
$127,000 $(2,174,304) $(3,635,210)
======== =========== ===========

F-10
71

CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A reconciliation of the income tax expense computed by applying the federal
statutory rate to pre-tax income to the Company's effective income tax expense
(benefit) is as follows:

1994 1995 1996
---------- ----------- -----------

Income tax expense computed by applying
statutory rate............................. $1,660,258 $ 998,120 1,354,924
State income taxes........................... 195,324 117,425 159,403
Nontaxable life insurance proceeds........... (760,000) -- --
Other........................................ 24,530 18,825 29,506
Benefit of net operating loss carryforward... (993,112) (1,088,674) (965,885)
Change in valuation allowance associated with
deferred tax assets........................ -- (2,220,000) (4,213,158)
---------- ----------- -----------
Income tax expense (benefit)................. $ 127,000 $(2,174,304) $(3,635,210)
========== =========== ===========

Deferred tax assets and liabilities at December 31, 1995 and 1996 are
comprised of the following:

1995 1996
----------- -----------

Deferred tax assets:
Allowance for losses and other.......................... $ 127,900 $ 158,503
Deferred gain on sale leaseback......................... 142,936 96,579
Contract advances....................................... -- 9,419,375
Net operating loss carryforwards........................ 14,554,295 4,448,500
Deferred gain on futures contracts...................... -- 411,573
Alternative minimum tax credit carryforwards............ 195,700 773,851
----------- -----------
Total deferred tax assets............................... 15,020,831 15,308,381
----------- -----------
Deferred tax liabilities:
Depreciation, depletion and amortization of property and
equipment............................................ (617,700) (2,225,498)
Change from cash basis to accrual basis of accounting
for income tax purposes.............................. (441,800) --
----------- -----------
Total deferred tax liabilities............................ (1,059,500) (2,225,498)
----------- -----------
Valuation allowance....................................... (11,361,331) (6,007,883)
----------- -----------
Net deferred tax asset.................................... $ 2,600,000 $ 7,075,000
=========== ===========

At December 31, 1996, the Company had net operating loss carryforwards
(NOLs) totaling approximately $17.5 million for regular tax purposes and $18.0
million for alternative minimum tax purposes. If not utilized, these
carryforwards will expire from 1999 to 2003. Due to the lack of existing legal
precedent with respect to the tax rules governing the Company's NOLs, both the
availability of the Company's NOLs and its prior utilization of NOLs (totaling
approximately $37 million) may be challenged. Disallowance of the use of the
NOLs would result in taxes associated with prior utilization of the NOLs being
currently payable.

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 reporting 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.

9. COMMITMENTS AND CONTINGENCIES

The Company, in the ordinary course of business, enters into fixed price
sales contracts of natural gas. At December 31, 1995, the Company had fixed
price gas sales contracts for prices ranging between $1.43 and $2.30 for the
period January 1, 1996 and July 31, 1997. At December 31, 1996, the Company had
fixed price gas sales contracts for prices ranging between $1.83 and $2.46 for
the period January 1, 1997 to August 31, 1998.

F-11
72

CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As of December 31, 1996, the Company has outstanding $27,519,090 of letters
of credit from commercial banks related to its purchases and sales of gas and
has pledged inventory, accounts receivable, property and equipment and other
assets as collateral.

The Company occupies office space and maintains certain compressor
equipment under operating leases and incurred rent expense of $1,461,300,
$1,839,000 and $1,931,708 in 1994, 1995 and 1996, respectively. Future minimum
rental payments under the terms of the leases are $191,473 in 1997.

The Company is currently a defendant in litigation which involves primarily
claims made by Colorado Interstate Gas ("CIG") that the Company and Continental
Hydrocarbons, Inc. ("CHI"), a former subsidiary of the Company, improperly
withheld proceeds from the sale of natural gas liquids processed at one of the
Company's plants, have (among other things) defamed CIG and are, as a result,
liable to CIG for unspecified actual and punitive damages. The companies from
which CHI purchased the plant have also been sued by CIG and have sought
indemnity from CHI and the Company for any liability they may have to CIG as
well as other amounts allegedly owed them. The Company and CHI have generally
denied the allegations against them in the case and have contended that they are
owed certain amounts for the processing of natural gas. Though impossible to
estimate with certainty, the Company believes that CIG is seeking actual damages
in excess of $3 million. Additionally, the Company is currently involved in
pending proceedings at the FERC in which certain parties allege that the primary
function of the Company's processing plants is interstate transportation and
thus that they are subject to FERC rate and certificate regulation. While the
Company believes that its business is not subject to regulation by the FERC, it
cannot predict the outcome of these proceedings. Various other lawsuits against
the Company have arisen in the ordinary course of the Company's business. In the
opinion of management, resolution of the CIG litigation, the FERC proceedings
and such other matters will not have a material adverse effect on results of
operations or financial position.

10. PROFIT SHARING AND THRIFT PLAN

The Company currently participates with certain affiliates in a defined
contribution plan (the "Plan") covering substantially all employees. Under the
Plan provisions, the Company contributes 2% of each participant's annual salary,
plus up to an additional 3% to match voluntary contributions by employees.
Employees may make voluntary contributions of up to 10% of their annual
compensation. The Company makes contributions to the Plan each pay period. Total
expense for 1994, 1995 and 1996 was approximately $120,000, $106,000 and
$141,500, respectively.

11. SHAREHOLDERS' EQUITY

Preferred stock of the Company is convertible at the option of the holders
into 586,847 shares of common stock of the Company. The preferred stock includes
a liquidation preference equal to $40,000 per share plus all unpaid dividends.
Dividends on the preferred stock are cumulative from the date of issuance at a
rate of 7 1/2% applied to the liquidation value. At December 31, 1996, unpaid
dividends totaling $587,250 had accumulated on the Preferred Stock.

On January 1, 1996, the Company issued 200 shares of preferred stock in
exchange for the minority interest ownership in the Beaver gas processing plant.
As the minority interest ownership was held by affiliates of the Company with
common ownership, the assets and liabilities associated with the acquired
interest have been reflected at their historical amounts. Subsequently, the
Company redeemed 51 shares of the preferred stock in exchange for cancellation
of indebtedness owed the Company.

As of December 31, 1994, stock options were outstanding on 68,000 shares of
common stock exercisable at $1.47 per share through December 31, 1997. During
1995, all such stock options were canceled. Also during 1995, the Company
granted certain employees phantom stock rights under which certain amounts would
be due upon the occurrence of specified events. On February 28, 1996, these
phantom stock rights were cancelled

F-12
73

CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and certain members of management were granted stock options for 204,000 shares
of common stock. These options become exercisable only if certain performance
criteria of the Company are met during the years of 1997 through 1999. The
options, if earned, are exercisable at $.26 per share and expire at April 30,
2000. The amount of the options exercisable may also be limited based on the
fair value of the Company's common stock at the date of exercise. The Company
applies APB 25 in accounting for such stock options. Under this standard,
compensation expense may be recognized associated with these options when
earned, based on the fair value of the Company's common stock at the dates they
are earned. Based on the provisions of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation," the grant date fair value of these
options is not material and, accordingly, disclosure of pro forma information as
required by this standard has not been presented.

Also on February 28, 1996, the Company sold 461,992 shares of common stock
of the Company to certain members of Company management for $100,000, payable in
the form of notes receivable due in April of 1997 with interest at 8%. Based on
the fair value of the Company's common stock at this date, compensation expense
and a contribution of capital of $46,000 has been recognized in 1996.

12. FINANCIAL INSTRUMENTS

DERIVATIVES -- The Company enters into futures contracts and options
related to its buying and selling of natural gas. Specifically, the Company
hedges its cost of future purchases of natural gas associated with its fixed
price sales commitments. At December 31, 1995, the Company had futures contracts
to purchase natural gas totaling approximately $1.8 million for the period from
January of 1996 to April of 1996. At December 31, 1996, the Company had futures
contracts to purchase natural gas totaling approximately $6.5 million for the
period from January of 1997 to April of 1998. Also, at December 31, 1995, the
Company had swap contracts on natural gas totaling approximately $1.3 million
for the period of January and February of 1996. At December 31, 1996, the
Company had swap contracts whereby the Company had fixed its price with respect
to future purchases of natural gas totaling approximately $7.2 million for the
period of January of 1997 to August of 1997. At December 31, 1995, the Company
had sold put options on approximately 500,000 mcf of natural gas at prices of
$2.00 to $2.25. At December 31, 1995 and 1996, the Company had deposits totaling
$458,873 and $962,553, respectively, related to these contracts which are
reflected as Accounts Receivable -- Other.

Gains or losses on futures contracts, swaps and options designated as
hedges are reflected in the Consolidated Statement of Operations in the same
period as the associated sale of gas occurs. Gains or losses on futures
contracts, swaps and options not designated as hedges are recognized as
fluctuations occur in the value of the contracts. At December 31, 1996, all
futures and swap contracts relating to the purchase of natural gas were
designated as hedges. Gains on futures contracts totalling approximately $1.1
million at December 31, 1996 have been deferred. At December 31, 1996, the fair
value of the swap contracts was approximately $2 million, which amount has also
been deferred.

At December 31, 1994 and 1995, no futures contracts or options were
designated as hedges. At December 31, 1994, losses of $1,027,519 on futures
contracts have been included in costs of purchased gas. At December 31, 1995,
gains of $278,020 related to open futures contracts have been recognized and
included in Marketing Fees and Other Revenues.

Additionally, the Company periodically enters into futures contracts on
behalf of its gas purchasers, with gains or losses on such contracts paid or
billed to these customers. At December 31, 1995 and 1996, such contracts were
not material.

FAIR VALUE -- Based on the interest rates currently available to the
Company for borrowings with similar terms and maturities, long-term debt and
capital leases at December 31, 1995 and 1996 approximate fair value.

F-13
74

CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The estimated fair value of the contract advance liabilities at December
31, 1995 and 1996, assuming repayment under the scheduled terms of the
agreements, is approximately $1.7 and $24.3 million, respectively.

The fair value of the Company's futures and swaps at December 31, 1995 was
approximately $.3 million and $1.2 million, respectively. The fair value of the
Company's futures positions and swaps at December 31, 1996 was approximately
$1.1 million and $2 million, respectively.

13. CONCENTRATIONS

Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables with a
variety of companies located in the central United States. Such credit risk is
considered by management to be limited due to the large number of customers
comprising the Company's customer base. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral related
to its receivables. The Company's derivative activities also subject it to
credit risk. Such credit risk is considered by management to be limited based on
its assessment of the financial strength of the individual counterparties to its
derivative positions. Additionally, the Company had $5,039,000 and $32,197,000
of cash balances with banks at December 31, 1995 and 1996, respectively.

In fiscal years 1995 and 1996, one customer accounted for approximately 23%
and 12% of consolidated revenues, respectively. At December 31, 1995 and 1996,
accounts receivable from this customer were $3,538,932 and $2,429,622,
respectively.

14. SUBSEQUENT EVENTS

In February 1997, the Company began negotiations with certain underwriters
for a proposed public offering (the "Offering") of approximately $23 million of
common stock. In connection with the Offering, the Company intends to reduce the
par value of each share of common stock from $1.00 to $.01, increase the
authorized common stock to 60,000,000 shares, and, effective on the day prior to
the effective date of the Offering, effect an approximate 136 to 1 stock split.
The accompanying financial statements reflect these changes as if they had
occurred at December 31, 1993. The Company expects to use the net proceeds of
the Offering to retire a substantial portion of its outstanding long-term debt.

15. INTERIM FINANCIAL STATEMENTS (UNAUDITED)

The interim consolidated financial statements presented herein are
unaudited, but reflect, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary for fair presentation of
the results for such periods.

The Company has reached a settlement with one of the Mocane Plant Sellers
which involves the Company's payment of approximately $1.2 million plus accrued
interest (on a portion of the settlement) to such Mocane Plant Seller (See Note
9). The Company had previously recorded an accrued liability for a portion of
the proceeds received from the processing of gas through the Mocane system and
accordingly no additional provision is required. It is expected that this
settlement will be concluded in the third quarter of 1997 at the same time as
the Company purchases the interest of Conoco and its affiliate in the Laverne
Plant.

As a result of the utilization of the net operating loss carryforward for
financial reporting purposes in the fourth quarter of 1996, the income tax
provision for the first quarter of 1997 approximates the statutory rate for
federal and state income taxes.

F-14
75

CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

UNAUDITED PRO FORMA FINANCIAL DATA

UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE THREE MONTHS ENDED MARCH 31, 1997

(IN THOUSANDS, EXCEPT PER SHARE DATA)

The unaudited condensed pro forma statement of operations gives effect to
(i) the disposition of the Company's oil and gas properties, assuming such
transactions occurred at the beginning of the respective periods and (ii) the
sale of common stock pursuant to this offering and the application of the
estimated proceeds therefrom.

YEAR ENDED DECEMBER 31, 1996

ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------

Operating revenues...................... $246,661 (603)(a) $246,058
Operating expenses:
Cost of purchased gas................. 225,535 225,535
Operating expenses.................... 5,978 (91)(a) 5,887
General and administrative............ 5,623 5,623
Depreciation, depletion and
amortization....................... 2,854 (96)(a) 2,758
-------- ----- --------
Total operating costs and
expenses.................... 239,990 (187) 239,803
-------- ----- --------
Operating income........................ 6,671 (416) 6,255
Other income (expense).................. (2,686) 1,475(b) (1,211)
-------- --------
Income before income taxes and
extraordinary item.................... 3,985 1,059 5,044
-------- --------
Income tax (expense) benefit............ 3,635 (402)(c) 3,233
-------- --------
Income before extraordinary item........ $ 7,620 $ 8,277
======== ========
Primary earnings per share:
Income before extraordinary item...... $ 1.99 $ 1.47
======== ========
Fully diluted earnings per share:
Income before extraordinary item...... $ 1.71 $ 1.34
======== ========
Weighted average shares:
Primary............................... 3,536 1,706(d) 5,242
======== ========
Fully diluted......................... 4,466 1,706(d) 6,172
======== ========

- ---------------

(a) Adjustment to reflect the disposition of the Company's oil and gas
properties.

(b) Adjustment to reflect the decrease in interest expense related to debt to be
extinguished with proceeds from the sale of common stock.

(d) Adjustment to reflect the Company's sale of common stock to provide
sufficient proceeds to extinguish $20 million in debt.

F-15
76

CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

UNAUDITED PRO FORMA FINANCIAL DATA

UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE THREE MONTHS ENDED MARCH 31,
1997

(IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS ENDED MARCH 31, 1997

ACTUAL ADJUSTMENTS PRO FORMA
------- ----------- ---------

Operating revenues...................... $88,527 $88,527
------- ----- -------
Operating Expenses:
Cost of purchased gas................. 81,417 81,417
Operating expenses.................... 1,559 1,559
General and administrative............ 1,842 1,842
Depreciation, depletion and
amortization....................... 899 899
------- -------
Total operating costs and
expenses.................... 85,717 85,717
------- -------
Operating income........................ 2,810 2,810
------- -------
Other income (expense).................. (1,171) 400(b) (771)
------- -------
Income before income taxes and
extraordinary item.................... 1,639 2,309
------- -------
Income tax (expense) benefit............ (652) (152)(c) (804)
------- -------
Income before extraordinary item........ $ 987 $ 1,235
======= =======
Primary earnings per share:
Income before extraordinary item...... $ .24 .21
======= =======
Fully diluted earnings per share:
Income before extraordinary item...... $ .22 .20
======= =======
Weighted average shares:
Primary............................... 3,613 1,706(d) 5,319
======= =======
Fully diluted......................... 4,393 1,706(d) 6,099
======= =======

- ---------------

(a) Adjustment to reflect the disposition of the Company's oil and gas
properties.

(b) Adjustment to reflect the decrease in interest expense related to debt to be
extinguished with proceeds from the sale of common stock.

(d) Adjustment to reflect the Company's sale of common stock to provide
sufficient proceeds to extinguish $20 million in debt.

F-16
77

[Description of top of inside back of cover page]

======================================================

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.

---------------------
TABLE OF CONTENTS

PAGE
----

Additional Information................ 2
Prospectus Summary.................... 3
Risk Factors.......................... 9
The Company........................... 14
Use of Proceeds....................... 15
Dividend Policy....................... 16
Dilution.............................. 17
Capitalization........................ 18
Selected Consolidated Financial Data
and Other Information............... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 27
Management............................ 42
Principal and Selling Shareholders.... 48
Certain Transactions.................. 49
Description of Capital Stock.......... 51
Shares Eligible for Future Sale....... 53
Underwriting.......................... 54
Legal Matters......................... 55
Independent Public Accountants........ 55
Experts............................... 55
Glossary.............................. 56
Index to Consolidated Financial
Statements.......................... 58

---------------------

UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

======================================================

2,100,000 SHARES

[LOGO]

CONTINENTAL NATURAL GAS, INC.

COMMON STOCK

---------------------

PROSPECTUS

---------------------

OPPENHEIMER & CO., INC.

SOUTHWEST SECURITIES, INC.

, 1997

======================================================
79

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
the Common Stock being registered hereby. The Company is paying all of such
costs and expenses. All amounts shown are estimates except for the SEC
registration fee and the NASD filing fee.

ITEM AMOUNT
---- --------

SEC registration fee........................................ $ 10,245
NASD filing fee............................................. 3,881
Nasdaq National Market Listing Fee.......................... 5,000
Financial Advisory Fee to Underwriters...................... 204,750
Blue Sky fees and expenses.................................. 20,000
Printing and engraving expenses............................. 110,000
Legal fees and expenses..................................... 200,000
Auditors' accounting fees and expenses...................... 100,000
Transfer Agent and Registrar fees........................... 2,500
Fee for Custodian for Selling Shareholder................... 5,000
Miscellaneous expenses...................................... 38,624
--------
Total............................................. $700,000
========

- ---------------

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

INDEMNIFICATION OF DIRECTORS AND OFFICERS.

As permitted by the Oklahoma General Corporation Act (the "Oklahoma
Corporate Act"), the Company's Certificate of Incorporation eliminates the
personal liability of a director to the Company for monetary damages for breach
of fiduciary duty of care as a director. Liability is not eliminated for (i) any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) unlawful payment of dividends or stock
purchases or redemptions pursuant to Section 1053 of the Oklahoma Corporate Act,
or (iv) any transaction from which the director derived an improper personal
benefit.

Section 1031 of the Oklahoma Corporate Act permits an Oklahoma corporation
to indemnify any persons who are, or are threatened to be made, parties to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation), by reason of the fact that such person is or was an
officer, director, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was unlawful. An Oklahoma corporation may indemnify
any persons who were or are parties, or are threatened to be made a party, to
any threatened, pending or completed action or suit by or in the right of the
corporation by reason of the fact that such person is or was a director,
officer, employees or agent of such corporation, or enterprise. The indemnity
may include expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection with the defense or settlement of such
action or suit, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interest
except that no indemnification is permitted without judicial approval if the
officer is adjudged to be liable to the corporation.

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Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
against the expenses which such officer or director has actually and reasonably
incurred.

The Company's certificate of incorporation and bylaws provide for
indemnification of directors and officers of the Company and persons who serve
at the request of the Company as a director or officer of another corporation in
which the Company owns stock for all liabilities, expenses, (including
attorneys' fees) and costs incurred in a legal proceeding in which he is a party
by reason of his having been an officer or director. The Bylaws, however,
exclude indemnification for matters in which the officer or director is adjudged
to have been guilty of gross negligence or willful misconduct.

These indemnification provisions may be sufficiently broad to permit
indemnification of the Registrant's officers and directors for liabilities
(including reimbursement of expenses incurred) arising under the Securities Act
of 1933 as amended (the "Securities Act"). In the opinion of the Securities and
Exchange Commission, indemnification for liabilities arising under the
Securities Act is against public policy and, therefore, unenforceable.
Accordingly, these indemnification provisions may not limit the liability of
directors and executive officers under the Securities Act.

The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act, or otherwise.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

In February, 1995, the Company re-issued to Christiana Bank two stock
purchase warrants for the purchase of a total of 127,907 shares of Common Stock.
These warrants were redeemed by the Company and canceled in August, 1995.

In 1996, the Company issued Incentive Stock Options to three of its
executives as described in the Prospectus in the section
"Management -- Executive Compensation."

In 1996, the Company sold 461,992 shares of Common Stock to certain of its
executive officers and one other employee for a total consideration of $100,000,
payable in the form of notes receivable due in April, 1997.

The issuance of 200 shares of Convertible Preferred Stock on January 1,
1996, and the issuance immediately prior to the effectiveness of this
Registration Statement, of 586,847 shares of Common Stock upon the conversion of
149 shares of such Convertible Preferred Stock, are described in the Prospectus
in the "Certain Transactions" section.

All of the above-described transactions were exempt from registration under
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder as
transactions by an issuer not involving any public offering.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

a.) Exhibits

EXHIBIT NO. NAME OF EXHIBIT
----------- ---------------

II-2
81

EXHIBIT NO. NAME OF EXHIBIT
----------- ---------------

10.2 -- Employment Agreement between the Registrant and Terry K.
Spencer dated as of April , 1997.
10.3 -- Employment Agreement between the Registrant and Scott C.
Longmore dated as of April , 1997.
10.4 -- 1997 Stock Plan.
10.5 -- Asset Purchase Agreement dated as of March 13, 1996, by
and among Transwestern Gathering Company ("TW Gathering")
as Seller and Registrant as Buyer.
10.6 -- Asset Purchase Agreement dated as of March 22, 1996, by
and among TW Gathering and Enron Gathering Company
("Enron Gathering") as Sellers and Registrant as Buyer.
10.7 -- Asset Purchase Agreement dated as of April 11, 1996, by
and among TW Gathering and Enron Gathering as Sellers and
Registrant as Buyer.
10.8 -- Contribution Agreement dated as of January 1, 1996, by
and among Registrant, Cottonwood Partnership, Continental
Gas Marketing, Inc. and Gary Adams Ranch, Inc.*
10.9 -- Office Lease Agreement.
10.10 -- Credit Agreement between the Registrant and ING Capital
Corporation dated December 30, 1996.
10.11 -- Letter of Credit and Reimbursement Agreement between the
Registrant and Christiana Bank dated as of December 27,
1996.
10.12 -- 1996 Incentive Stock Option Plan.
10.13 -- Agreement dated as of January 1, 1997, between the
Registrant and Continental Natural Gas Marketing, L.L.C.
for the sale of natural gas to L.L.C.
10.14 -- Consulting Agreement dated as of April 1, 1997, between
the Registrant and Adams Affiliates, Inc. for the
provision of management services by Adams Affiliates to
the Registrant.
10.15 -- Administrative Services Agreement dated as of April 1,
1997, between the Registrant and Adams Affiliates, Inc.
for the provision of administrative services by the
Registrant to Adams Affiliates.
10.16 -- Administrative Services Agreement dated as of April 1,
1997, between the Registrant and Bird Creek Resources,
Inc. under which the Registrant will provide office space
and certain administrative services to Bird Creek
Resources, Inc.
10.17 -- Administrative Services Agreement dated as of April 1,
1997, between Bird Creek and the Registrant under which
Bird Creek will provide certain administrative services
to the Registrant.
10.18 -- Charter Services Agreement dated as of April 1, 1997,
between the Registrant and CPA Aviation, Inc. under which
CPA Aviation will provide the Registrant with certain air
transportation services.
10.19 -- Agreement between the Registrant and Mapco Petroleum,
Inc. for the sale of NGLs dated as of July 14, 1994.
10.20 -- Amendment dated February 16, 1996, to Firm Throughput
Service Agreement (CR# 101124) dated as of January 26,
1996, between the Registrant and Northern Natural Gas
Company ("NNG") together with the original agreement.
10.21 -- Amendments dated November 13, 1996, March 15, 1996, and
March 14, 1996, to Transportation Service Agreement-Form
M (No: 24690) dated as of April 1, 1996, between
Registrant and Transwestern Pipeline Company ("TW"),
together with the original agreement.
10.22 -- Amendment dated January 3, 1994, to Transportation
Service Agreement No: 20606 dated November 26, 1991,
between Registrant and TW, together with the original
agreement.
10.23 -- Interconnect and Operating Agreement dated as of March 1,
1996, between Registrant and NNG.

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EXHIBIT NO. NAME OF EXHIBIT
----------- ---------------

10.24 -- Amendment dated February 16, 1996, to Firm Throughput
Service Agreement (CR# 101125) between the Registrant and
NNG dated January 26, 1996, together with the original
agreement.
10.25 -- Interruptible Transportation Service Agreement, Rate
Schedule IT-1 between Registrant and NNG dated August 1,
1992.
10.26 -- Interruptible Throughput Service Agreement, Rate Schedule
TI, Throughput Agreement No. 22224, between Registrant
and NNG undated.
11.1 -- Computation of per share earnings.
15.1 -- Letter regarding unaudited interim financial information.
23.1 -- Consent of Coopers & Lybrand.
23.2 -- Consent of Albright and Rusher (to be included as part of
Exhibit 5.1).**
23.3 -- Consent of Lee Keeling & Associates.*
23.4 -- Consent of William W. Pritchard.*
23.5 -- Consent of William H. Bauch.*
23.6 -- Consent of Hart Publications, Inc.
24. -- Power of Attorney (included in Signature Page).*
27.1 -- Financial Data Schedules (Year ended December 31, 1996
and Quarter ended March 31, 1997)

b.) Financial statement schedules required by regulation S-X

SCHEDULE NO. NAME OF SCHEDULE
------------ ----------------

II -- Valuation and Qualifying Accounts and Reserves

- ---------------

* Filed on April 24, 1997 with Registration Statement on Form S-1, SEC File No.
333-25719.

** To be filed by amendment.

ITEM 17. UNDERTAKINGS.

The undersigned hereby undertakes to provide to the Underwriters, at the
Closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.

In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer of controlling person of the Registrant in the successful
defense of an action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the Registrant will treat the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the Registrant
under Rule 424(b)(1), or (4), or 497(h) under the Securities Act as part of
this Registration Statement as of the time the Commission declares it
effective.

(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the Offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Tulsa, State of Oklahoma, on the 27th day of June, 1997.

CONTINENTAL NATURAL GAS, INC.

By:
----------------------------------
Gary Clark Adams

Chairman, President, Chief

Executive Officer and Director
(Principal Executive Officer)

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement was signed by the following persons in the
capacities indicated below and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

Chairman, President and Chief June 27, 1997
- ----------------------------------------------------- Executive Officer (Principal
Gary C. Adams Executive Officer) and Director

Vice President and Controller June 27, 1997
- ----------------------------------------------------- (Principal Financial and Accounting
Garry D. Smith Officer) and Director

Vice President of Operations and June 27, 1997
- ----------------------------------------------------- Director
Terry K. Spencer

Vice President of Marketing and June 27, 1997
- ----------------------------------------------------- Director
Scott C. Longmore

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SCHEDULE II

CONTINENTAL NATURAL GAS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

ALLOWANCE FOR DOUBTFUL ACCOUNTS

ADDITIONS
-----------------------
CHARGED
BALANCE AT CHARGED TO TO OTHER DEDUCTIONS BALANCE
BEGINNING COSTS AND ACCOUNTS AND NET AT END OF
DESCRIPTION OF PERIOD EXPENSES RECOVERIES WRITE-OFFS PERIOD
- ----------- ---------- ---------- ---------- ---------- ---------

Year ended December 31, 1994................ $323 $ -- $ -- $ -- $323
Year ended December 31, 1995................ $323 $ -- $ -- $(70) $253
Year ended December 31, 1996................ $253 $ -- $ 5 $ -- $258

S-1
85

INDEX TO EXHIBITS

EXHIBIT NO. NAME OF EXHIBIT
----------- ---------------

1.1 -- Form of Underwriting Agreement.**
3.1 -- Amended and Restated Certificate of Incorporation of the
Registrant.*
3.2 -- Amended and Restated Bylaws of the Registrant.*
4.1 -- Specimen Common Stock Certificate of the Registrant.**
5.1 -- Opinion of Albright and Rusher.**
10.1 -- Employment Agreement between the Registrant and Garry D.
Smith dated as of April , 1997.**
10.2 -- Employment Agreement between the Registrant and Terry K.
Spencer dated as of April , 1997.**
10.3 -- Employment Agreement between the Registrant and Scott C.
Longmore dated as of April , 1997.**
10.4 -- 1997 Stock Plan.
10.5 -- Asset Purchase Agreement dated as of March 13, 1996, by
and among Transwestern Gathering Company ("TW Gathering")
as Seller and Registrant as Buyer.
10.6 -- Asset Purchase Agreement dated as of March 22, 1996, by
and among TW Gathering and Enron Gathering Company
("Enron Gathering") as Sellers and Registrant as Buyer.
10.7 -- Asset Purchase Agreement dated as of April 11, 1996, by
and among TW Gathering and Enron Gathering as Sellers and
Registrant as Buyer.
10.8 -- Contribution Agreement dated as of January 1, 1996, by
and among Registrant, Cottonwood Partnership, Continental
Gas Marketing, Inc. and Gary Adams Ranch, Inc.*
10.9 -- Office Lease Agreement.
10.10 -- Credit Agreement between the Registrant and ING Capital
Corporation dated December 30, 1996.
10.11 -- Letter of Credit and Reimbursement Agreement between the
Registrant and Christiana Bank dated as of December 27,
1996.
10.12 -- 1996 Incentive Stock Option Plan.
10.13 -- Agreement dated as of January 1, 1997, between the
Registrant and Continental Natural Gas Marketing, L.L.C.
for the sale of natural gas to L.L.C.
10.14 -- Consulting Agreement dated as of April 1, 1997, between
the Registrant and Adams Affiliates, Inc. for the
provision of management services by Adams Affiliates to
the Registrant.
10.15 -- Administrative Services Agreement dated as of April 1,
1997, between the Registrant and Adams Affiliates, Inc.
for the provision of administrative services by the
Registrant to Adams Affiliates.
10.16 -- Administrative Services Agreement dated as of April 1,
1997, between the Registrant and Bird Creek Resources,
Inc. under which the Registrant will provide office space
and certain administrative services to Bird Creek
Resources, Inc.
10.17 -- Administrative Services Agreement dated as of April 1,
1997, between Bird Creek and the Registrant under which
Bird Creek will provide certain administrative services
to the Registrant.
10.18 -- Charter Services Agreement dated as of April 1, 1997,
between the Registrant and CPA Aviation, Inc. under which
CPA Aviation will provide the Registrant with certain air
transportation services.
10.19 -- Agreement between the Registrant and Mapco Petroleum,
Inc. for the sale of NGLs dated as of July 14, 1994.