<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 JUNE 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 August 12, 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)
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PART I. Financial Information
ITEM 1. Financial Statements
Consolidated Statements of Operations for the three
months and six months ended June 30, 1994 and 1993 ..... 3
Consolidated Balance Sheets as of June 30, 1994,
and December 31, 1993................................... 4
Consolidated Statements of Cash Flows for the six
months ended June 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
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<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 Six Month Period
Ended June 30, Ended June 30,
------------------------ -------------------------
1994 1993 1994 1993
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues ................ $27,233,000 $62,215,000 $59,299,000 $127,587,000
Expenses:
Cost of sales ......... 23,574,000 56,687,000 51,122,000 116,692,000
Operating expenses .... 1,606,000 3,686,000 3,783,000 7,246,000
Depreciation and
amortization ......... 685,000 1,923,000 1,343,000 3,781,000
General and
administrative ....... 1,408,000 1,543,000 2,676,000 3,027,000
----------- ----------- ----------- ------------
27,273,000 63,839,000 58,924,000 130,746,000
----------- ----------- ----------- ------------
Operating earnings
(loss) ................. (40,000) (1,624,000) 375,000 (3,159,000)
----------- ----------- ----------- ------------
Other income (expense):
Interest income ....... 14,000 21,000 19,000 68,000
Interest expense ...... (351,000) (953,000) (671,000) (2,227,000)
Equity in net earnings
(losses) of unconsolidated
subsidiaries ......... (6,000) (19,000) (22,000) (10,000)
Other ................. (4,000) 15,000 -- 13,000
Gain (loss) on sale of
assets, net .......... 87,000 -- 87,000 611,000
----------- ----------- ----------- ------------
(260,000) (936,000) (587,000) (1,545,000)
----------- ----------- ----------- ------------
Loss before reorganization
items and income taxes . (300,000) (2,560,000) (212,000) (4,704,000)
Reorganization items .... -- 720,000 -- 1,237,000
----------- ----------- ----------- ------------
Loss before income
taxes ................. (300,000) (3,280,000) (212,000) (5,941,000)
Provision for current
income taxes .......... -- 35,000 4,000 85,000
----------- ----------- ----------- ------------
Net loss ............... (300,000) (3,315,000) (216,000) (6,026,000)
Preferred stock
requirements .......... -- (317,000) -- (792,000)
----------- ----------- ----------- ------------
Net loss applicable to
common stock .......... $ (300,000) $(3,632,000) $ (216,000) $ (6,818,000)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Loss per common and
common share
equivalent ............ $ (.03) $ (.46) $ (.02) $ (.86)
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Weighted average common
and common equivalent
shares outstanding .... 12,516,000 7,939,000 12,516,000 7,937,000
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated statements.
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<PAGE>
CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......... $ 136,000 $ 2,416,000
Restricted cash .................... 1,140,000 60,000
Accounts receivable ................ 7,754,000 15,101,000
Inventory .......................... 299,000 1,711,000
Other current assets ............... 386,000 595,000
------------ ------------
Total current assets ............. 9,715,000 19,883,000
Assets held for disposition .......... 1,000,000 --
Property, plant and equipment, at cost 53,686,000 54,457,000
Less: accumulated depreciation ..... (32,391,000) (31,805,000)
------------ ------------
Net property, plant and equipment .. 21,295,000 22,652,000
Goodwill ............................. 3,734,000 3,793,000
Other assets ......................... 1,053,000 118,000
------------ ------------
$ 36,797,000 $ 46,446,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term
debt .............................. $ 4,079,000 $ 2,501,000
Accounts payable ................... 11,945,000 22,097,000
Accrued interest payable ........... 47,000 45,000
Income tax payable ................. 149,000 185,000
Other current liabilities .......... -- 206,000
------------ ------------
Total current liabilities ........ 16,220,000 25,034,000
Long-term debt ....................... 6,934,000 7,768,000
Other liabilities .................... 2,304,000 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 ................ (41,211,000) (40,996,000)
------------ ------------
Total stockholders' equity ....... 11,339,000 11,554,000
------------ ------------
$ 36,797,000 $ 46,446,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<PAGE>
CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Month Period
Ended June 30,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................. $ (216,000) $(6,026,000)
Non-cash items included in net loss:
Depreciation and amortization ........... 1,343,000 3,781,000
Interest compromised .................... -- 1,604,000
Equity in net losses of unconsolidated
subsidiaries ........................... 22,000 10,000
Gain on sale of assets, net ............. (87,000) (611,000)
Other ................................... 16,000 62,000
Reorganization items .................... -- 720,000
----------- -----------
Working capital provided (used) by operations
before reorganization items ................ 1,078,000 (460,000)
Changes in operating assets or liabilities
which provided (used) cash during the period:
Decrease in accounts receivable ........... 7,346,000 1,871,000
Decrease in inventory ..................... 1,412,000 609,000
(Increase) decrease in other current
assets ................................... 192,000 (2,447,000)
Decrease in accounts payable .............. (9,597,000) (1,169,000)
Increase (decrease) in accrued interest
payable .................................. 2,000 (53,000)
Decrease in other current liabilities ..... (242,000) (216,000)
Increase in other liabilities ............. 340,000 --
----------- -----------
Cash provided (used) by operations before
reorganization items ....................... 531,000 (1,865,000)
Cash used by reorganization items -
professional fees .......................... (780,000) (720,000)
----------- -----------
Cash used by operating activities ........... (249,000) (2,585,000)
Cash flows from investing activities:
Proceeds from sale of assets .............. 1,060,000 851,000
Additions to property, plant and
equipment ................................ (2,700,000) (2,195,000)
(Increase) decrease in investment in
unconsolidated subsidiaries .............. (55,000) 37,000
Other ..................................... -- 15,000
----------- -----------
Cash used by investing activities ........... (1,695,000) (1,292,000)
Cash flows from financing activities:
Borrowings of revolving debt .............. 1,775,000 1,175,000
Reduction of long-term debt ............... (1,031,000) (818,000)
Other ..................................... -- 28,000
----------- -----------
Cash provided by financing activities ....... 744,000 385,000
----------- -----------
Decrease in cash and cash equivalents ....... (1,200,000) (3,492,000)
Cash and cash equivalents:
Beginning of period ....................... 2,476,000 7,282,000
----------- -----------
End of period ............................. $ 1,276,000 $ 3,790,000
----------- -----------
----------- -----------
Supplemental disclosures of cash flow
information
Cash paid during the period for:
Interest .................................. $ 617,000 $ 615,000
Income taxes .............................. $ -- $ 27,000
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
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<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 June 30, 1994, the
results of its operations for the three months and six months ended
June 30, 1994, and the Company's cash flows for the six months ended
June 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 interest in the Arcadia limited partnership. A gain of
approximately $1 million was recorded in the second quarter of 1994.
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 loss of
approximately $932,000 was recorded as a result of this transaction.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Working capital provided by operations was $1.1 million in the first half of
1994 compared to working capital used by operations of $460,000 in the first
half of 1993. This improvement in performance is the result of the Company's
direct actions in connection with the completion of its plan of reorganization.
The Company completed the installation of cryogenic facilities on March 31,
1994, and discontinued operations of its refineries effective May 1, 1994. For
a more detailed discussion of the Company's plan of reorganization see the
Company's Annual Report on Form 10-K for the year ended December 31, 1993.
Cash used for investing activities was $1.7 million in the first half of 1994.
Capital expenditures for the same period totaled $2.7 million. Of this amount,
approximately $2.5 million was expended for installing cryogenic gas
processing facilities and related compression in North Louisiana. Although the
cryogenic facilities became operational on March 31, 1994, most of the second
quarter was used to maximize their efficiency. The Company added compressors
not included in the original plans to increase the processing capacity of the
plant.
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 $6.5 million at June 30, 1994.
The Company expects to maintain a working capital deficit in order to
effectively manage 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 $744,000 in the first half of 1994.
The Company repaid $882,000 on its Senior Note and $149,000 on other debt. In
the first half of 1994 the Company borrowed $1.8 million under its revolving
credit agreement and the financial institution had issued, for the Company's
benefit, approximately $2.6 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.
-7-
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RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1994 COMPARED
TO THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1993
GENERAL. The Company recorded a net loss applicable to common stock of
$300,000 in the second quarter of 1994 and $216,000 in the first half of 1994
compared to a net loss of $3.6 million and $6.8 million respectively for the
same periods in 1993. The Company had a $40,000 operating loss in the second
quarter of 1994 compared to an operating loss of $1.6 million in the second
quarter of 1993. Year-to-date operating earnings in 1994 were $375,000
compared to an operating loss of $3.2 million in the prior year. The improved
performance is the result of the Company's plan of reorganization under which
the company has discontinued operations of its refineries in North Louisiana
and emphasized its core businesses of gas gathering, processing and marketing.
Also as a result of the plan of reorganization the Company has reduced
interest expense by $602,000 in the second quarter and $1.6 million
year-to-date. The Company no longer has any preferred dividend requirements.
NATURAL GAS PROCESSING OPERATIONS. The following table provides pertinent
information relating to the Company's gas processing operations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1994 1993 1994 1993
--------- -------- ------- -------
<S> <C> <C> <C> <C>
(In thousands)
Gross margin $2,337 $ 3,590 $5,733 $ 6,533
Earnings from operations before
depreciation 685 608 1,751 605
(Million cubic feet per day)
Natural gas inlet volumes
North Louisiana 60 66 59 65
Other 29 43 28 52
(Barrels per day)
Liquid sales volumes -
North Louisiana 6,395 15,899 7,719 15,780
</TABLE>
The Company ceased operations of its Dubach refinery on July 1, 1993 and sold
its remaining operating refinery effective May 1, 1994. The decreased liquid
sales volumes are the result of the company discontinuing its refining
operations. The Company completed installation of cryogenic gas processing
facilities on March 31, 1994. Most of the second quarter was used in
reconfiguring the Company's gas processing facilities and related
compression. Therefore, increased recoveries of natural gas products are
expected to be realized in the third quarter. The Company experienced
increased operating expenses related to the plant start up as was expected.
Despite these increased costs, the Company's operating earnings before
depreciation increased $77,000 (13%) in the second quarter. The Company
expects to achieve greater operating efficiencies, lower operating costs and
increased margins from its gas processing operations beginning in the third
quarter of 1994. Operating earnings before depreciation increased
$1.1 million (189%) in the first half of 1994. These results included an
increase in margin per barrel to $2.92 from $.95 in the first quarter of 1994
compared to the first quarter of 1993.
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<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 Six Months Ended
June 30, June 30,
------------------ ----------------
1994 1993 1994 1993
-------- -------- ------- -------
<S> <C> <C> <C> <C>
(In thousands)
Gross margin 1,322 1,938 2,444 4,362
Earnings from operations before
depreciation 820 516 1,483 1,565
Million cubic feet per day
Natural gas sales 129 201 114 234
</TABLE>
Earnings from operations before depreciation increased $304,000 (59%) in the
second quarter. This was the result of increased volume on the Company's Port
Hudson and Mountain Creek systems. Additionally, the Company received 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. These increases were partially offset by the loss of earnings from
the assets which were transferred to the Company's former noteholders as a
result of the Company's plan of reorganization. The Company had a decrease in
operating earnings of $669,000 in the second quarter and $1.5 million year-
to-date attributable to these assets. Natural gas volumes attributable to
these assets were 157 million cubic feet per day ("MMCF/D") and 138 MMCF/D in
the second quarter and first half of 1993, respectively.
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<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
None
(b) REPORTS ON FORM 8-K
(1) "Item 4. Changes in Registrant's Certifying Accountant" was
reported in a Current Report on Form 8-K filed May 13, 1994.
(2) "Item 5. Other Events" was reported in a Current Report on
Form 8-K filed May 23, 1994. The sale of the Claiborne
refinery and certain idle assets at the Dubach facility was
the subject matter of the filing.
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<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: August 12, 1994 By: /s/ Robert L. Cavnar
--------------- ---------------------------------
Robert L. Cavnar
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date: August 12, 1994 By: /s/ Richard W. Piacenti
--------------- ---------------------------------
Richard W. Piacenti
Vice President and Controller
(Principal Accounting Officer)
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