<PAGE>
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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 SEPTEMBER 30, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-11994
CORNERSTONE NATURAL GAS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-1952257
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8080 N. CENTRAL EXPRESSWAY 75206
SUITE 1200 (Zip Code)
DALLAS, TEXAS
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 691-5536
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 FILINGS REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT. YES X NO
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
SHARES OUTSTANDING AT
CLASS OF COMMON STOCK NOVEMBER 8, 1994
--------------------- ----------------
$.10 PAR VALUE 12,515,959
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<PAGE>
CORNERSTONE NATURAL GAS, INC.
INDEX TO QUARTERLY REPORT FORM 10-Q
Page(s)
-------
PART I. Financial Information
ITEM 1. Financial Statements
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1994 and 1993.......... 3
Consolidated Balance Sheets as of September 30, 1994, and
December 31, 1993.......................................... 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1994, and 1993......................... 5
Notes to Consolidated Financial Statements................. 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 7-9
PART II. Other Information
ITEM 1. Legal Proceedings.......................................... 10
ITEM 6. Exhibits and Reports on Form 8-K........................... 10
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
------------------------- --------------------------
1994 1993 1994 1993
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues....................................... $20,780,000 $ 46,621,000 $80,079,000 $174,208,000
Expenses:
Cost of sales................................. 17,347,000 40,554,000 68,469,000 157,246,000
Operating expenses............................ 1,060,000 3,375,000 4,843,000 10,621,000
Depreciation and amortization................. 686,000 1,962,000 2,029,000 5,743,000
General and administrative.................... 1,179,000 1,846,000 3,855,000 4,873,000
----------- ------------ ----------- ------------
20,272,000 47,737,000 79,196,000 178,483,000
----------- ------------ ----------- ------------
Operating earnings (loss)...................... 508,000 (1,116,000) 883,000 (4,275,000)
----------- ------------ ----------- ------------
Other income (expense):
Interest income............................... 35,000 24,000 54,000 92,000
Interest expense.............................. (296,000) (266,000) (967,000) (2,493,000)
Equity in net earnings (losses) of
unconsolidated subsidiaries.................. 8,000 (18,000) (14,000) (28,000)
Other......................................... 15,000 (3,000) 15,000 10,000
Gain on sale of assets, net................... 3,000 -- 90,000 611,000
----------- ------------ ----------- ------------
(235,000) (263,000) (822,000) (1,808,000)
----------- ------------ ----------- ------------
Earnings (loss) before reorganization costs,
income taxes, and extraordinary item.......... 273,000 (1,379,000) 61,000 (6,083,000)
Reorganization items:
Loss on disposition and write downs of
property, plant and equipment................ -- 20,088,000 -- 20,088,000
Professional fees............................. -- 3,295,000 -- 4,532,000
----------- ------------ ----------- ------------
-- 23,383,000 -- 24,620,000
----------- ------------ ----------- ------------
Earnings (loss) before income taxes and
extraordinary item............................ 273,000 (24,762,000) 61,000 (30,703,000)
Provision for current income taxes............. 9,000 45,000 13,000 130,000
----------- ------------ ----------- ------------
Net earnings (loss) before extraordinary item.. 264,000 (24,807,000) 48,000 (30,833,000)
Extraordinary item - gain on extinguishment
of debt....................................... -- 9,206,000 -- 9,206,000
----------- ------------ ----------- ------------
Net earnings (loss)............................ 264,000 (15,601,000) 48,000 (21,627,000)
Preferred stock dividend requirements.......... -- -- -- (792,000)
----------- ------------ ----------- ------------
Net earnings (loss) applicable to common stock. $264,000 $(15,601,000) $ 48,000 $(22,419,000)
=========== ============ =========== ============
Earnings (loss) per common and common
equivalent share:
Earnings (loss) before extraordinary item..... $ 0.02 $ (3.12) $ -- $ (3.98)
Extraordinary item............................ -- 1.16 -- 1.16
----------- ------------ ----------- ------------
Net earnings (loss)........................... $ 0.02 $ (1.96) $ -- $ (2.82)
=========== ============ ============ ============
Weighted average common and common
equivalent shares outstanding................ 14,656,000 7,939,000 14,469,000 7,938,000
=========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-3-
<PAGE>
CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1994 1993
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents....................... $ 936,000 $ 2,416,000
Accounts receivable............................. 8,380,000 15,101,000
Inventory....................................... 328,000 1,711,000
Other current assets............................ 243,000 655,000
------------ ------------
Total current assets.......................... 9,887,000 19,883,000
Assets held for disposition...................... 1,000,000 --
Property, plant and equipment, at cost........... 54,559,000 54,457,000
Less: accumulated depreciation.................. (33,037,000) (31,805,000)
------------ ------------
Net property, plant and equipment............... 21,522,000 22,652,000
Goodwill......................................... 3,705,000 3,793,000
Other assets..................................... 1,067,000 118,000
------------ ------------
$ 37,181,000 $ 46,446,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt......... $ 4,271,000 $2,501,000
Accounts payable............................... 10,884,000 22,097,000
Accrued interest payable....................... 50,000 45,000
Income tax payable............................. 155,000 185,000
Other current liabilities...................... -- 206,000
------------ ------------
Total current liabilities..................... 15,360,000 25,034,000
Long-term debt................................... 7,726,000 7,768,000
Other liabilities................................ 2,493,000 2,090,000
Stockholders' equity:
Common stock, $.10 par value; 25,000,000 shares
authorized; 12,515,959 shares issued and
outstanding................................... 1,252,000 1,252,000
Additional paid-in capital...................... 51,298,000 51,298,000
Accumulated deficit............................. (40,948,000) (40,996,000)
------------ ------------
Total stockholders' equity.................... 11,602,000 11,554,000
------------ ------------
$ 37,181,000 $ 46,446,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE>
CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Month Period
Ended September 30,
--------------------
1994 1993
---- ----
<S> <C> <C>
Cash flows from operating activities:
Earnings (loss) before extraordinary item...................... $ 48,000 $(30,833,000)
Non-cash items included in loss before extraordinary item:
Loss on disposition and write downs of property,
plant and equipment.......................................... -- 20,088,000
Depreciation and amortization................................. 2,029,000 5,743,000
Interest compromised.......................................... -- 1,604,000
Write off of project development costs........................ -- 235,000
Equity in net losses of unconsolidated
subsidiaries................................................. 14,000 28,000
Gain on sale of assets, net................................... (90,000) (611,000)
Other......................................................... 22,000 123,000
Reorganization items.......................................... -- 4,532,000
------------ -------------
Working capital provided by operations before
reorganization items........................................... 2,023,000 909,000
Changes in operating assets or liabilities which provided
(used) cash during the period:
Decrease in accounts receivable................................ 6,721,000 3,120,000
Decrease in inventory.......................................... 1,384,000 871,000
(Increase) decrease in other current assets.................... 396,000 (2,664,000)
Decrease in accounts payable................................... (10,317,000) (3,171,000)
Increase (decrease) in accrued interest payable................ 5,000 (80,000)
Increase (decrease) in other current liabilities............... (237,000) 2,000
Increase in other liabilities.................................. 591,000 --
------------ -------------
Cash provided (used) by operations before
reorganization items........................................... 566,000 (1,013,000)
Cash used by reorganization items - professional fees........... (1,184,000) (1,277,000)
------------ -------------
Cash used by operating activities............................... (618,000) (2,290,000)
Cash flows from investing activities:
Proceeds from sale of assets................................... 1,063,000 851,000
Additions to property, plant and equipment..................... (3,585,000) (2,929,000)
(Increase) decrease in investment in
unconsolidated subsidiaries................................... (68,000) 130,000
Other.......................................................... -- 51,000
------------ -------------
Cash used by investing activities............................... (2,590,000) (1,897,000)
Cash flows from financing activities:
Borrowings of revolving debt................................... 2,460,000 (295,000)
Additional borrowings.......................................... 817,000 --
Reduction of long-term debt.................................... (1,549,000) (1,203,000)
Other.......................................................... -- 29,000
------------ -------------
Cash provided (used) by financing activities.................... 1,728,000 (1,469,000)
------------ -------------
Decrease in cash and cash equivalents........................... (1,480,000) (5,656,000)
Cash and cash equivalents:
Beginning of period............................................ 2,416,000 6,882,000
------------ -------------
End of period.................................................. $ 936,000 $ 1,226,000
============ =============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest....................................................... $ 911,000 $ 867,000
Income taxes................................................... $ 43,000 $ 34,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
<PAGE>
CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Rule 10-01 of Regulation S-X, "Interim Financial
Statements", and accordingly do not include all information and footnotes
required under generally accepted accounting principles for complete financial
statements. The financial statements have been prepared in conformity with the
accounting principles and practices as disclosed in the Company's Annual Report
on Form 10-K for the year ended December 31, 1993. In the opinion of
management, these interim financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company's financial position as of September 30, 1994, the
results of its operations for the three months and nine months ended
September 30, 1994, and the Company's cash flows for the nine months ended
September 30, 1994. Results of operations for the periods presented herein
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1994. Certain reclassifications of prior period financial
information have been made to conform to the 1994 presentation.
NOTE 2 - PROPERTY, PLANT, AND EQUIPMENT
Effective May 1, 1994, the Company sold its Claiborne refinery and inventories
to Arcadia Refining and Marketing Company, L.P. ("Arcadia"). The Company
received net cash proceeds of $2.4 million, a $900,000 subordinated note, and
retained a minority limited partnership interest in Arcadia. The Company has
signed a letter of intent to sell its Dubach refining assets to an affiliate of
Arcadia for $1 million. These assets have been written down to a carrying value
of $1 million in the second quarter of 1994. A net gain of approximately
$87,000 was recorded as a result of these events.
NOTE 3 - LONG-TERM DEBT
The Company expanded its revolving credit and term loan (the "Senior Loan")
effective September 30, 1994. The principal amount of the term loan was
increased to $5,000,000 with a straight line amortization which matures on
September 30, 1999. Interest is payable at the applicable prime rate plus two
percent. The expansion of the Senior Loan included a modification of the
requirements to maintain certain financial ratios and increased the amount of
capital expenditures which the Company would be allowed without financial
institution approval.
-6-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company expanded its revolving credit and term loan (the "Senior Loan")
effective September 30, 1994. The principal amount of the term loan was
increased to $5,000,000 with a straight line amortization which matures on
September 30, 1999. Interest is payable at the applicable prime rate plus two
percent. The expansion of the Senior Loan included a modification of the
requirements to maintain certain financial ratios and increased the amount of
capital expenditures which the Company would be allowed without financial
institution approval.
Working capital provided by operations was $2.0 million for the first nine
months of 1994 compared to $0.9 million for the same period in 1993. The
improvement in performance is primarily the result of the Company's efforts to
refocus on its core business of gas gathering, processing and marketing. This
included the installation of cryogenic gas processing plants at the Company's
North Louisiana facilities, the installation of additional compression to
increase the capacity of gas available to process at these facilities, and the
discontinuation of the Company's refining operations.
Cash used for investing activities was $2.6 million in the first nine months of
1994. Capital expenditures in the same period totaled $3.6 million. Of this
amount, approximately $3.1 million was expended for installing and expanding
the cryogenic gas processing facilities and related compression in North
Louisiana. The Company will continue to utilize its capital resources to
connect additional gas supply at these facilities.
Effective May 1, 1994, the Company sold its Claiborne refinery and inventories
to Arcadia Refining and Marketing Company, L.P. ("Arcadia"). The Company
received net proceeds of $2.4 million in cash, a $900,000 subordinated note,
and retained a minority limited partnership interest in Arcadia. The Company
also entered into a letter of intent to sell its Dubach refining assets to an
affiliate of Arcadia for $1 million. Although the Company expected to complete
this sale in the second quarter, negotiations are still underway to complete
the transaction. The sale of the refineries was one of the final steps
necessary to refocus the Company on its gas gathering, processing and marketing
business.
The Company had a working capital deficit of $5.5 million at September 30,
1994. The Company expects to maintain a working capital deficit in order to
effectively manage its cash. Management expects that cash provided by
operations combined with amounts available under its $6.0 million line of
credit will be sufficient to meet its cash requirements in 1994.
Cash provided by financing activities was $1.7 million for the nine months
ended September 30, 1994. The Company repaid $1.3 million on its Senior Note
and $262,000 on other debt. The Company borrowed an additional $817,000 on
September 30, 1994 under the expansion of the Senior Note. At September 30,
1994 the Company had borrowed $2.5 million under its revolving credit agreement
and the financial institution had issued, for the Company's benefit,
approximately $2.3 million in standby letters of credit for natural gas
purchases. The revolving credit agreement, which allows up to an aggregate of
$6.0 million in letters of credit and working capital loans, is subject to
certain borrowing base requirements. At September 30, 1994, the Company's
borrowing base requirements limited this line of credit to $5.6 million.
-7-
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1994 COMPARED
TO THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1993
GENERAL. The Company recorded net earnings applicable to common stock of
$264,000 in the third quarter of 1994 and $48,000 in the first nine months of
1994 compared to a net loss of $15.6 million and $22.4 million respectively for
the same periods in 1993. The third quarter earnings were primarily the result
of increased recoveries of natural gas liquids, lower fuel costs and increased
operating efficiencies from the Company's newly installed North Louisiana
cryogenic facilities. The Company's third quarter loss in 1993 included the
effects of transferring certain assets to the Company's former noteholders as
part of the Company's plan of reorganization.
NATURAL GAS PROCESSING OPERATIONS. The following table provides pertinent
information relating to the Company's gas processing operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1994 1993 1994 1993
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Gross margin........................... $2,059 $2,990 $7,792 $9,523
Earnings from operations before
depreciation.......................... 1,126 319 2,878 924
(Million cubic feet per day)
Natural gas gathered, treated or
processed............................. 103 114 97 116
</TABLE>
Although gross margin declined $931,000 (31%) in the third quarter and $1.7
million (18%) year-to-date, earnings from operations before depreciation
increased $807,000 (253%) and $2.0 million (211%) for the same time periods.
This is primarily the result of the operations of the installation of cryogenic
facilities at the Company's North Louisiana operations and the cessation of all
refining operations. With the installation of the cryogenic facilities the
Company now receives a portion of the natural gas liquids and the natural gas
as compensation for gathering and processing gas. The cryogenic facilities
have allowed the Company to increase natural gas liquids recovery and to lower
fuel and operating costs. Although the Company's refining operations had
operating earnings before depreciation of $281,000 in the third quarter of
1993, these operations had an operating loss of $575,000 for the first nine
months of 1993.
-8-
<PAGE>
NATURAL GAS PIPELINE OPERATIONS. The following table provides pertinent
information relating to the Company's natural gas pipeline operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1994 1993 1994 1993
----- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Gross margin................... 1,374 3,077 3,818 7,439
Earnings from operations before
depreciation.................. 908 1,705 2,391 3,271
Million cubic feet per day
Natural gas sales.............. 98 239 108 236
</TABLE>
Earnings from operations before depreciation decreased $797,000 (47%) in the
third quarter and $880,000 (27%) year-to-date. This was primarily the result
of the loss of earnings from the assets which were transferred to the Company's
former noteholders as a part of the Company's plan of reorganization. The
decrease in earnings from these assets was $693,000 in the third quarter and
$2.2 million year-to-date. This was partially offset year-to-date by earnings
from increased volumes on the Company's Mountain Creek and Port Hudson systems.
It was also partially offset by a refund from a major interstate pipeline for
transportation fees charged in excess of the final approved rate as determined
by the Federal Energy Regulatory Commission.
Natural gas volumes declined 141 million cubic feet per day ("MMCF/D") in the
third quarter and 128 MMCF/D in the first nine months. This was primarily
caused by the transferred assets which contributed 129 MMCF/D and 135 MMCF/D
in the third quarter and first nine months of 1993, respectively.
-9-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in certain legal actions and claims arising in the
ordinary course of business. It is the opinion of Management (based on advice
of legal counsel) that such litigation and claims will be resolved without
material adverse effect on the Company's financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
-------------------
None
-10-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
CORNERSTONE NATURAL GAS, INC.
(Registrant)
Date: November 10, 1994 By: /s/Robert L. Cavnar
----------------- --------------------------
Robert L. Cavnar
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: November 10, 1994 By: /s/Richard W. Piacenti
----------------- -------------------------------
Richard W. Piacenti
Vice President and Controller
(Principal Accounting Officer)
-11-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<CASH> 936,000
<SECURITIES> 0
<RECEIVABLES> 8,380,000
<ALLOWANCES> 0
<INVENTORY> 328,000
<CURRENT-ASSETS> 9,887,000
<PP&E> 54,559,000
<DEPRECIATION> 33,037,000
<TOTAL-ASSETS> 37,181,000
<CURRENT-LIABILITIES> 15,360,000
<BONDS> 0
<COMMON> 1,252,000
0
0
<OTHER-SE> 10,350,000
<TOTAL-LIABILITY-AND-EQUITY> 37,181,000
<SALES> 80,079,000
<TOTAL-REVENUES> 80,238,000
<CGS> 75,341,000
<TOTAL-COSTS> 79,196,000
<OTHER-EXPENSES> 14,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 967,000
<INCOME-PRETAX> 61,000
<INCOME-TAX> 13,000
<INCOME-CONTINUING> 48,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,000
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
