<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-2499
CORNERSTONE PROPANE PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0439862
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
432 WESTRIDGE DRIVE\WATSONVILLE, CALIFORNIA 95076
(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code: (831) 724-1921
NONE
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 14, 1999: 16,788,889 - Common Units
6,597,619 - Subordinated Units
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CORNERSTONE PROPANE PARTNERS, L.P.
TABLE OF CONTENTS
<TABLE>
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PAGES
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Part I. Financial Information
<S> <C> <C>
Item 1. Financial Statements
CORNERSTONE PROPANE PARTNERS, L.P.
Consolidated Balance Sheets as of March 31, 1999 and 1998, 1
and June 30, 1998
Consolidated Statements of Operations for the Three Months and Nine Months 2
Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations of Cornerstone Propane Partners, L.P.
for the Three Months Ended March 31, 1999 compared to the three months
ended March 31, 1998 and for the Nine Months ended March 31, 1999
compared to the Nine Months Ended March 31, 1998. 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
</TABLE>
ii
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CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
March 31,
--------------------- June 30,
1999 1998 1998
-------- -------- --------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 11,717 $ 6,025 $ 9,366
Trade receivables, net 48,218 34,729 18,467
Inventories 36,019 16,031 18,238
Prepaid expenses and other current assets 13,049 7,120 7,150
-------- -------- --------
Total current assets 109,003 63,905 53,221
Property, plant and equipment, net 328,303 271,256 275,288
Goodwill, net 309,732 227,317 224,064
Other assets, net 37,592 17,746 19,938
-------- -------- --------
Total assets $784,630 $580,224 $572,511
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current portion of long-term debt $ 3,214 $ 4,184 $ 3,800
Trade accounts payable 44,735 20,202 18,460
Accrued expenses 29,933 22,774 29,335
-------- -------- --------
Total current liabilities 77,882 47,160 51,595
Long-term debt, less current portion 360,812 232,905 237,138
Due to related party 689 1,621 1,684
Other noncurrent liabilities 9,096 4,254 2,500
-------- -------- --------
Total liabilities 448,479 285,940 292,917
-------- -------- --------
Commitments and contingencies
Partners' capital:
Common unitholders 237,113 197,776 185,803
Subordinated unitholders 92,140 90,538 88,117
General partners 6,898 5,970 5,674
-------- -------- --------
Total partners' capital 336,151 294,284 279,594
-------- -------- --------
Total liabilities and partners' capital $784,630 $580,224 $572,511
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
1
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CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit data)
(Unaudited)
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<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $338,536 $229,332 $732,579 $623,267
Cost of sales 268,189 179,362 589,273 505,302
-------- -------- -------- --------
Gross profit 70,347 49,970 143,306 117,965
-------- -------- -------- --------
Expenses:
Operating, general and administrative 34,406 25,340 90,372 72,757
Depreciation and amortization 7,848 4,714 18,657 13,615
-------- -------- -------- --------
42,254 30,054 109,029 86,372
-------- -------- -------- --------
Operating income 28,093 19,916 34,277 31,593
Interest expense 6,863 4,824 17,788 14,641
-------- -------- -------- --------
Income before provision for
income taxes 21,230 15,092 16,489 16,952
Provision for income taxes -- 43 67 95
-------- -------- -------- --------
Net income $ 21,230 $ 15,049 $ 16,422 $ 16,857
======== ======== ======== ========
General partner's interest in net income $ 425 $ 301 $ 328 $ 337
======== ======== ======== ========
Limited partners' interest in net income $ 20,805 $ 14,748 $ 16,094 $ 16,520
======== ======== ======== ========
Limited partners' net income per unit $ .89 $ .76 $ .76 $ .92
======== ======== ======== ========
Weighted average number of units outstanding 23,378 19,407 21,280 17,962
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine Months Ended
March 31,
---------------------------------
1999 1998
------------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,422 $ 16,857
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 18,657 13,615
Loss or (gain) on sale of assets 720 (676)
Changes in assets and liabilities, net of effect of acquisitions:
Trade receivables, net (21,223) 8,181
Inventories 7,091 (2,004)
Prepaid expenses and other current assets (7,183) (5,380)
Trade accounts payable and accrued expenses (4,298) (19,028)
--------------- ---------------
Net cash provided by operating activities 10,186 11,565
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment, net (13,724) (11,916)
Acquisitions, net of cash received (120,150) (13,162)
Other investments (148) ---
--------------- --------------
Net cash used in investing activities (134,022) (25,078)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on Working Capital Facility 24,730 (122)
Payments on purchase obligations (13,215) (3,117)
Proceeds from Senior Note Offering 85,000 --
Payments for debt financing (662) (2,420)
Proceeds from additional unit offering 58,900 40,795
Payments for additional unit offering (5,058) --
General Partners' contribution and payments, net 379 2,066
Partnership distributions (23,887) (26,070)
--------------- ---------------
Net cash provided by financing activities 126,187 11,132
-------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS 2,351 (2,381)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,366 8,406
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,717 $ 6,025
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 20,977 $ 10,429
============== ==============
NON INVESTING & FINANCING ACTIVITIES
Assets acquired in exchange for Common Units $ 8,805 $ 17,588
============== ==============
Assets acquired in exchange for debt $ 30,041 $ 6,054
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(In thousands, except unit data)
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Cornerstone Propane Partners, L.P. ("Cornerstone Partners") and its
subsidiary, Cornerstone Propane L.P. (the "Operating Partnership") and the
Operating Partnership's corporate subsidiaries, Cornerstone Sales and Service
Corporation ("Sales and Service"), Propane Continental, Inc., Flame, Inc.,
and Coast Energy Global Services, Inc. after elimination of all material
intercompany balances and transactions. Cornerstone Partners, the Operating
Partnership, Sales and Service, Propane Continental, Inc., Flame, Inc., and
Coast Energy Global Services, Inc. are collectively referred to as the
"Partnership."
The accompanying interim consolidated financial statements of the
Partnership are unaudited; however, in the opinion of management, all
adjustments necessary for a fair presentation of such consolidated financial
statements have been reflected in the interim periods presented. Such
adjustments consisted only of normal recurring items. The Partnership's
business is seasonal and, accordingly, interim results are not indicative of
results for a full year. The significant accounting policies and certain
financial information which are normally included in financial statements
prepared in accordance with generally accepted accounting principles, but
which are not required for interim reporting purposes, have been condensed or
omitted. The accompanying consolidated financial statements of the
Partnership should be read in conjunction with the consolidated financial
statements and related notes included in the Partnership's Annual Report on
Form 10-K for the fiscal year ended June 30, 1998.
2. DISTRIBUTIONS OF AVAILABLE CASH
The Partnership will make distributions to its partners with respect to
each fiscal quarter of the Partnership within 45 days after the end of each
fiscal quarter in an aggregate amount equal to its Available Cash for such
quarter. The Partnership will distribute 100% of its Available Cash (98% to
Unitholders and 2% to the General Partners) until the Minimum Quarterly
Distribution ("MQD") ($.54 per unit) for such quarter has been met. The MQD
will be subject to the payment of incentive distributions in the event
Available Cash exceeds the MQD of $.54 on all units. During the Subordination
Period, to the extent there is sufficient Available Cash, the holders of
Common Units have the right to receive the MQD, plus any arrearages, prior to
the distribution of Available Cash to holders of Subordinated Units.
Subordinated Units do not accrue arrearages with respect to distributions for
any quarter.
4
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CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Dollars in thousands, except unit data)
(Unaudited)
The MQD for the three-month period from July 1, 1998 to September 30, 1998,
of $.54 per common unit totaling $7,337 was paid on November 13, 1998. The
MQD for the three-month period from October 1, 1998 to December 31, 1998, of
$.54 per common unit totaling $9,247 was paid on February 12, 1999. On April
27, 1999, the MQD for the period January 1, 1999 to March 31, 1999 was
declared in the amount of $9,252 representing in the aggregate distributions
to the Common Unitholders and General Partner at $.54 per common unit. This
distribution was paid on May 14, 1999. No distributions have been declared
and subsequently paid on the Subordinated Units for the period from October
1, 1997 to March 31, 1999.
3. ACQUISITIONS
The Partnership acquired Propane Continental, Inc ("PCI") on December
11, 1998. In addition, the Partnership consummated twelve other acquisitions
during the nine months ended March 31, 1999. The total consideration for
these acquisitions was approximately $159.0 million, of which approximately
$8.8 million was in the form of Cornerstone Common Units, $120.2 million was
paid in cash and $30.0 million was for liabilities assumed, with all such
amounts principally related to the acquisition of PCI. Additional Common
Units and Senior Notes were issued to fund the PCI acquisition and related
expenses. All acquisitions have been accounted for using the purchase method
of accounting with the excess of the purchase price over the preliminary
estimates of fair value of net tangible and intangible assets acquired
recorded as goodwill. The amount of goodwill is subject to adjustments based
on more refined estimates of fair value. The results of operations of the
acquired assets have been included in the financial statements from the date
of acquisition. Due to the significance of the PCI acquisition, the following
information is provided to present pro forma results as if PCI had been
acquired on July 1, 1997. Proforma 1999 net income reflects a $3.3 million
litigation settlement that was paid prior to the completion of the PCI
acquisition.
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<CAPTION>
Pro Forma
Nine Months Ended
----------------------------------------------
March 1999 March 1998
------------ -------------
<S> <C> <C>
Revenue $ 795,873 784,281
Net income 12,526 20,341
Limited partners' net income per unit .52 .95
</TABLE>
4. LIMITED PARTNER NET INCOME PER UNIT
Basic net income per unit is computed by dividing net income, after
considering the General Partners 2% interest, by the weighted average number
of Common and Subordinated Units outstanding during the period.
5
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CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the historical financial condition and results of
operations for the Partnership should be read in conjunction with the
historical financial statements and notes thereto included elsewhere in this
Quarterly Report on Form 10-Q.
GENERAL
The Partnership is a Delaware limited partnership initially formed to own and
operate the propane business and assets of SYN Inc., Empire Energy
Corporation and CGI Holdings, Inc. The Partnership's management believes that
it is the fourth largest retail marketer of propane in the United States,
serving more than 440,000 residential, commercial, industrial and
agricultural customers from 307 customer service centers in 34 states.
Because a substantial portion of the Partnership's propane is used in the
weather-sensitive residential markets, the temperatures in the Partnership's
area of operations, particularly during the six-month peak heating season,
have a significant effect on the financial performance of the Partnership. In
any given area, warmer-than-normal temperatures will tend to result in
reduced propane use, while sustained colder-than-normal temperatures will
tend to result in greater propane use. Therefore, information on normal
temperatures is used by the Partnership in understanding how historical
results of operations are affected by temperatures that are colder or warmer
than normal and in preparing forecasts of future operations, which are based
on the assumption that normal weather will prevail in each of the
Partnership's regions.
Gross profit margins are not only affected by weather patterns but also by
changes in customer mix. For example, sales to residential customers
ordinarily generate higher margins than sales to other customer groups, such
as commercial or agricultural customers. In addition, gross profit margins
vary by geographic region. Accordingly, profit margins could vary
significantly from year to year in a period of identical sales volumes.
6
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS - THREE MONTH PERIOD ENDED
MARCH 31
The following discussion compares the results of operations and other data of
the Partnership for the three-month period ended March 31, 1999, to the
three-month period ended March 31, 1998.
VOLUME. During the three months ended March 31, 1999, the Partnership sold
107.8 million retail propane gallons, an increase of 24.3 million gallons or
29.1% from the 83.5 million retail propane gallons sold during the three
months ended March 31, 1998. Retail volumes were driven by acquisitions and
customer increases at "same store" locations, partially offset by the
unfavorable impact of warmer temperatures on residential customers' usage.
Newly acquired businesses accounted for approximately 87% of the increase
over prior year's comparable quarter.
Based on the average number of heating degree days in the markets served by
the Partnership, for the January to March 1999 period, temperatures were
approximately 13% and 3% warmer than normal and last year, respectively.
While this indicator generally measures the impact of temperatures on the
Partnership's business, other factors such as geographic mix, magnitude and
duration of temperature and weather conditions can also impact sales volumes.
The overall impact of weather had an adverse impact on the Partnership's
retail sales volume (excluding acquisitions) and earnings compared to normal
levels for the three months ended March 31, 1999. The three months ended
March 31 historically accounts for approximately 50% of the Partnership's
annual earnings before interest, taxes, depreciation and amortization
("EBITDA").
REVENUES. Revenues increased by $109.2 million or 47.6% to $338.5 million for
the three months ended March 31, 1999, as compared to $229.3 million for the
three months ended March 31, 1998. Wholesale revenues increased $91.0 million
or 63.8% to $233.5 million for the three months ended March 31, 1999, as
compared to $142.5 million for the three months ended March 31, 1998. This
increase was primarily attributable to acquisitions of wholesale businesses
at the beginning of the quarter. The revenues for the retail business
increased by $18.3 million or 21.0% to $105.1 million for the three months
ended March 31, 1999, as compared to $86.8 million for the three months ended
March 31, 1998. The increase in retail revenues reflects the impact of sales
from newly acquired retail businesses, which added approximately $20.8
million in revenue during the quarter, offset by reduced sales volumes
attributable to warmer weather and decreased selling prices related to lower
supply costs.
7
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CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COST OF PRODUCT SOLD. Cost of product sold increased by $88.8 million or
49.5% to $268.2 million for the three months ended March 31, 1999, as
compared to $179.4 million for the three months ended March 31, 1998. The
increase in cost of product sold was primarily due to the increased wholesale
sales from acquired operations described above, partially offset by lower
propane cost per gallon. As a percentage of revenues, cost of product sold
increased to 79.2% for the three months ended March 31, 1999, as compared to
78.2% for the three months ended March 31, 1998.
GROSS PROFIT. Gross profit increased $20.3 million or 40.8% to $70.3 million
for the three months ended March 31, 1999, compared to $50.0 million for the
three months ended March 31, 1998. Retail gross margins per gallon for the
three months ended March 31, 1999 were 2% better than last year. This was
attributable to improved margins which benefited from lower product cost per
gallon. Per gallon retail margins increased $.01 per gallon to $.57 for the
three months ended March 31, 1999, as compared to $.56 for the three months
ended March 31, 1998. As a percentage of revenues, gross profit decreased to
20.8% for the three months ended March 31, 1999, as compared to 21.8% for the
three months ended March 31, 1998. This decrease was driven by a change in
the wholesale and retail sales mix. For the quarter, wholesale gross profit
is a larger component of total gross profit. Wholesale margin percentages are
lower than retail margin percentages. Acquisitions accounted for $13.2
million of the gross profit increase compared to last year.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased by $9.1 million or 36.0% to $34.4 million
for the three months ended March 31, 1999, as compared to $25.3 million for
the three months ended March 31, 1998. Approximately $4.7 million, or 51.6%,
of this increase was attributable to increases in salaries and other
operating expenses from recently acquired businesses. As a percentage of
revenues, operating, general and administrative expenses decreased to 10.2%
for the three months ended March 31, 1999, as compared to 11.0% for the three
months ended March 31, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $3.1 million or 66.1% to $7.8 million for the three months ended
March 31, 1999, as compared to $4.7 million for the three months ended March
31, 1998. This increase is related primarily to assets purchased in
conjunction with business acquisitions subsequent to March 31, 1998.
INTEREST EXPENSE. Interest expense increased by $2.0 million or 42.3% to $6.9
million for the three months ended March 31, 1999, as compared to $4.8
million for the three months ended March 31, 1998. This increase is due
primarily to the issuance of $85.0 million of new 7.33% Senior Notes on
December 11, 1998, in conjunction with the Propane Continental, Inc.
acquisition.
8
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CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS - NINE MONTH PERIOD ENDED
MARCH 31
The following discussion compares the results of operations and other data of
the Partnership for the nine-month period ended March 31, 1999, to the
nine-month period ended March 31, 1998.
VOLUME. During the nine months ended March 31, 1999, the Partnership sold
220.8 million retail propane gallons, an increase of 21.1 million gallons or
10.6% from the 199.7 million retail propane gallons sold during the nine
months ended March 31, 1998. Retail volumes were driven by acquisitions and
customer increases at "same store" locations, partially offset by the
unfavorable impact of warmer temperatures on residential customers' usage.
Newly acquired businesses added approximately 29.2 million retail gallons,
offset by the adverse impact of weather conditions that were significantly
warmer than normal.
Based on the average number of heating degree days in the markets served by
the Partnership, for March 1999, fiscal year to date temperatures were
approximately 13% and 9% warmer than normal and last year, respectively.
While this indicator generally measures the impact of temperatures on the
Partnership's business, other factors such as geographic mix, magnitude and
duration of temperature and weather conditions can also impact sales volumes.
Mild seasonal weather conditions had an adverse impact on the Partnership's
retail sales volume (excluding acquisitions) and earnings compared to normal
levels.
REVENUES. Revenues of $732.6 million for the nine months ended March 31, 1999
increased $109.3 million, or 17.5% compared to $623.3 million for the nine
months ended March 31, 1998. Wholesale revenues increased $99.8 million or
24.0% to $515.6 million for the nine months ended March 31, 1999, as compared
to $415.8 million for the nine months ended March 31, 1998. This increase was
attributable to acquisitions of wholesale businesses ($110.1 million).
Revenues for the retail business increased by $9.5 million or 4.6% to $217.0
million for the nine months ended March 31, 1999, as compared to $207.5
million for the nine months ended March 31, 1998. The increase in retail
sales reflects the impact of acquisitions which added approximately $29.0
million in revenues for the period, offset by mild winter temperatures that
were warmer than both normal and last year. Additionally, selling prices were
reduced in line with lower propane supply costs.
9
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CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COST OF PRODUCT SOLD. Cost of product sold increased by $84.0 million or
16.6% to $589.3 million for the nine months ended March 31, 1999, as compared
to $505.3 million for the nine months ended March 31, 1998. The increase in
cost of product sold was due to the increased sales described above,
partially offset by lower per gallon cost of propane. As a percentage of
revenues, cost of product sold decreased to 80.4% for the nine months ended
March 31, 1999, as compared to 81.1% for the nine months ended March 31, 1998.
GROSS PROFIT. Gross profit increased $25.3 million or 21.5% to $143.3 million
for the nine months ended March 31, 1999, compared to $118.0 million for the
nine months ended March 31, 1998. Retail gross margins per gallon for the
nine months ended March 31, 1999 were 8% better than last year. This was
attributable to improved margins related to decreases in the cost of propane
on a per gallon basis. Per gallon retail margins increased $.04 per gallon to
$.57 for the nine months ended March 31, 1999, as compared to $.53 for the
nine months ended March 31, 1998. As a percentage of revenues, gross profit
increased to 19.6% for the nine months ended March 31, 1999, as compared to
18.9% for the nine months ended March 31, 1998. Acquisitions accounted for
$18.3 million of the gross profit increase compared to last year.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and
administrative expenses increased by $17.6 million or 24.2% to $90.4 million
for the nine months ended March 31, 1999, as compared to $72.8 million for
the nine months ended March 31, 1998. Approximately $7.9 million, or 44.9%,
of this increase was attributable to increases in salaries and other
operating expenses from recently acquired businesses. Other increases were
due to compensation programs to add new customers, vehicle repair and
maintenance costs, tax and license cost, increased staffing and systems
investments. As a percentage of revenues, operating, general and
administrative expenses increased to 12.3% for the nine months ended March
31, 1999, as compared to 11.7% for the nine months ended March 31, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $5.1 million or 37.1% to $18.7 million for the nine months ended
March 31, 1999, as compared to $13.6 million for the nine months ended March
31, 1998. This increase is related primarily to assets purchased in
conjunction with business acquisitions subsequent to March 31, 1998.
INTEREST EXPENSE. Interest expense increased by $3.2 million or 21.5% to
$17.8 million for the nine months ended March 31, 1999, as compared to $14.6
million for the nine months ended March 31, 1998. This increase is due
primarily to the issuance of $85.0 million of new 7.33% Senior Notes on
December 11, 1998, in conjunction with the Propane Continental, Inc.
acquisition and debt incurred in conjunction with other acquisitions
consummated subsequent to March 31, 1998.
10
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Cash provided from operating activities during the
nine-month period ended March 31, 1999 was $10.2 million. Cash flow from
operations included a net income of $16.4 million and non-cash charges of
$19.4 million for the period, comprised of depreciation and amortization
expense, and loss on sale of assets. The impact of working capital changes
decreased cash flow by approximately $25.6 million.
INVESTING ACTIVITIES. Cash used in investment activities for the nine-month
period ended March 31, 1999 totaled $134.0 million, which was principally
related to Partnership acquisitions ($120.2 million) and to a lesser extent
related to purchases of plant and equipment ($13.7 million).
FINANCING ACTIVITIES. Cash provided by financing activities totaled $126.2
million for the nine months ended March 31, 1999. Components included $24.7
million borrowings on the partnership's working capital facility, payments on
purchase obligations of $13.2 million, net proceeds from placement of senior
notes of $84.3 million and net proceeds from a common unit offering combined
with General Partner net proceeds of $54.3 million. This financing was
principally used to fund the purchase of PCI and other acquisitions. Cash
distributions for the period paid to Common Unitholders and the General
Partner 2% interest totaled $23.9 million.
FINANCING AND SOURCES OF LIQUIDITY
The Operating Partnership's obligations under its Senior Note Agreements
and Bank Credit Agreement are secured by a security interest in the Operating
Partnership's inventory, accounts receivable and certain customer storage
tanks. The Senior Note and Bank Credit Agreements contain various terms and
covenants including financial ratio covenants with respect to debt and
interest coverage and limitations, among others, on the ability of the
Operating Partnership and its subsidiaries to incur additional indebtedness,
create liens, make investments and loans, or enter into mergers,
consolidations or sales of all or substantially all assets. Generally, so
long as no default exists or would result, the Partnership is permitted to
make distributions during each fiscal quarter in an amount not in excess of
Available Cash with respect to the immediately preceding quarter. The
Operating Partnership was in compliance with all terms and covenants of the
Senior Note Agreements and Bank Credit Agreement at March 31, 1999.
11
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CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue is the result of computer programs using only the
last two digits to indicate the year. If uncorrected, such computer programs
will not be able to interpret dates correctly beyond the year 1999 and, in
some cases prior to that time (as some computer experts believe), which could
cause computer system failures or other computer errors disrupting business
operations. Recognizing the potentially severe consequences of the failure to
be Year 2000 compliant, the Partnership's management has developed and
implemented a company-wide program to identify and remedy the Year 2000
issues. A project team, consisting of the Partnership's Director of
Information Systems and the Partnership's key IS managers who supervise
operations at each of the Partnership's three main regional facilities in
California, Missouri and Texas, together with the Chief Information Officer
of Northwestern Corporation, the Managing General Partner's parent
corporation, was created to manage the company's Year 2000 problems, enabling
a smooth transition into the Year 2000. The project team reports directly to
executive management who have assigned a high priority to such efforts within
the Partnership.
The scope of the Partnership's Year 2000 readiness program includes the
review and evaluation of (i) the Partnership's information technology (IT)
such as hardware and software utilized in the operation of the Partnership's
business; (ii) the Partnership's non-IT systems or embedded technology such
as micro-controllers contained in various equipment and facilities; and (iii)
the readiness of third parties, including customers, suppliers and other key
vendors to the company, and the electronic data interchange (EDI) with those
key third parties. If needed modifications and conversions are not made on a
timely basis, the Year 2000 issue could have a material adverse effect on the
Partnership's operations.
The Partnership is currently using internal and external resources to
identify, correct and test large quantities of lines of application software
code for systems that were developed internally. Remediation of these systems
is expected to be completed by June 1999 except for the Partnership's Retail
Information System, consisting principally of its billing and accounts
receivable systems, which is already Year 2000 compliant. Since January 1997,
the Partnership has been converting its old billing system installed at each
customer service center to the new Retail Information System. Currently,
approximately two-thirds of the Partnership's customer service centers are
running the new system, with the roll-out to the balance of the centers
scheduled to be completed in the fall of 1999.
12
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Software developed externally is being evaluated for Year 2000
compliance and will be upgraded or replaced. In the case of the Partnership's
existing NT-platform-based financial systems and oil and gas applications, it
is anticipated that solutions will be acquired from third party vendors. In
addition, these systems are being evaluated for meeting current and future
business needs (which is an on-going process), and the Partnership is using
this process as an opportunity to upgrade and enhance its information
systems. The Partnership has recently installed a new financial system that
is Year 2000 compliant that encompasses general ledger, accounts payable and
fixed assets. Other systems integrated with the financial systems are
anticipated to be upgraded or replaced by June 1999.
In addition to internal Year 2000 remediation activities, the
Partnership is in contact with key suppliers, vendors and customers to assure
no interruption from activities with important third parties. While none of
the Partnership's products are directly date sensitive, the supply and
transportation of propane gas products are dependent upon companies whose own
systems may need to be Year 2000 compliant. If third parties do not convert
their systems in a timely manner and in a way compatible with the
Partnership's systems, the arrival of the Year 2000 could have an adverse
effect on Partnership operations. The Partnership believes that its actions
with key suppliers, vendors and customers will minimize these risks.
Furthermore, no single customer accounts for more than 10% of the
Partnership's consolidated gross profits, thus mitigating the adverse risk to
the Partnership's business if some but not all customers are not Year 2000
compliant. Also, only a minimal number of transactions are conducted through
EDI.
The Partnership's primary focus has been directed at resolving the Year
2000 problem. While the Partnership expects its internal IT and non-IT
systems to be Year 2000 compliant by the dates specified, the Partnership has
developed a contingency plan specifying what the Partnership will do if it or
important third parties are not Year 2000 compliant by the required dates. A
majority of such contingency plan is based on manual back-up systems,
procedures and practices. The contingency plan was completed in March 1999.
Through March 31, 1999, the Partnership estimates that incremental costs
of approximately $1.5 million have been incurred and expensed related to Year
2000 issues. Since many systems are being modified to provide significant
enhanced capabilities, the Year 2000 expenses have not been nor are planned
to be specifically tracked. The current estimated additional cost to complete
remediation is expected to be less than $0.5 million. The Partnership expects
that a portion of these costs will be capitalized, as they are principally
related to adding new software applications and functionality. Other costs
will continue to be expensed as incurred.
13
<PAGE>
CORNERSTONE PROPANE PARTNERS, L.P.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Partnership's current estimates of the amount of time and costs
necessary to remediate and test its computer systems are based on the facts
and circumstances existing at this time. The estimates were made using
assumptions of future events including the continued availability of existing
resources, Year 2000 modification plans, implementation success by
third-parties, and other factors. New developments may occur that could
affect the Partnership's estimates of the amount of time and costs necessary
to modify and test its IT and non-IT systems for Year 2000 compliance. These
developments include, but are not limited to: (i) the availability and cost
of personnel trained in this area, (ii) the ability to locate and correct all
relevant computer codes and equipment and (iii) the planning and Year 2000
compliance success that key suppliers, vendors and customers attain.
In October, 1998, President Clinton signed into law the Year 2000
Readiness Disclosure Act. The Partnership intends to obtain the benefits of
the Act's protections by implementing certain procedures described in that
Act.
FORWARD-LOOKING STATEMENTS
The information presented herein may contain certain "forward-looking
statements" within the meaning of the federal securities laws. The
Partnership's actual future performance will be affected by a number of
factors, risks and uncertainties, including without limitation, weather
conditions, regulatory changes, competitive factors, the Partnership's
success in dealing with the Year 2000 issues and the operations of vendors,
suppliers and customers, many of which are beyond the Partnership's control.
Future events and results may vary substantially from what the Partnership
currently foresees, and there can be no assurance that the Partnership's
actual results will not differ materially from its expectations. The
Partnership undertakes no obligation to publicly release any revision to
these forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
14
<PAGE>
CORNERSTONE PROPANE PARTNERS,L.P.
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
a) Exhibits:
(27) Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report is filed.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Cornerstone Propane Partners, L.P.
-------------------------------------
(Registrant)
By: Cornerstone Propane GP, Inc.
as Managing General Partner
By: /s/ Ronald J. Goedde
----------------------------------
Name: Ronald J. Goedde
Title: Executive Vice President
and Chief Financial Officer
By: /s/ Richard D. Nye
----------------------------------
Name: Richard D. Nye
Title: Vice President of
Finance and Administration
Date: May 14, 1999
16
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