<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
[ ] 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
Common Stock, $0.10 par value per share American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 AND (2) HAS BEEN SUBJECT TO SUCH FILINGS
REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO
------ -----
INDICATE BY CHECK MARK WHETHER DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN THE PROXY STATEMENT INCORPORATED BY
REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K.
YES NO /X/
----- -----
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
----- -----
AS OF FEBRUARY 20, 1996, THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
WAS 12,515,959. THE AGGREGATE MARKET VALUE OF THE 7,006,629 SHARES OF COMMON
STOCK HELD BY NONAFFILIATES OF CORNERSTONE NATURAL GAS, INC. AS OF SUCH DATE WAS
APPROXIMATELY $19,268,230.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement to be filed with
the Securities and Exchange Commission on or before April 30, 1996, are
incorporated herein by reference into Part III of this Form 10-K.
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<PAGE>
TABLE OF CONTENTS TO FORM 10-K
<TABLE>
<CAPTION>
PART I PAGE
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<S> <C> <C>
1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-5
2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-7
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 8
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . 9
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-14
8. Financial Statements and Supplementary Data. . . . . . . . . . . .. . . . . . . . . . . . 14-29
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . 29
PART III
10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . 29
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . 29
13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . 29
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . . . . . . . . . . . . . 30-33
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Cornerstone Natural Gas, Inc., a Delaware corporation ("Cornerstone"), is
engaged through various subsidiaries in the business of natural gas gathering,
marketing, and processing. Cornerstone, its subsidiaries and affiliated
companies are herein collectively referred to as the "Company", unless the
context otherwise indicates. The Company's operations are located primarily in
Texas and Louisiana and include a natural gas marketing office in Pennsylvania.
The Company divides its operations into two lines of business. Natural gas
gathering and marketing includes purchasing, gathering, transporting and
marketing natural gas. Natural gas processing includes recovering and marketing
natural gas liquids from natural gas and treating natural gas by removing
noncommercial components. Natural gas processing also included refining
condensate and crude oil into various petroleum products until May 1, 1994, when
the Company discontinued its refining operations.
As used herein, "MMCF" means million cubic feet, "MMBTU" means million British
Thermal Units, "NGLs" means natural gas liquids, and "D" means per day.
Cornerstone was incorporated under the laws of Texas in 1977 as Endevco, Inc.
and was reincorporated under the laws of Delaware in May 1988. The Company's
principal administrative offices are located at 8080 North Central Expressway,
Suite 1200, Dallas, Texas 75206 and its telephone number is (214) 691-5536.
HISTORY
Historically, the Company was formed to develop projects in the energy business
concentrating on natural gas processing. In 1982, the Company expanded into
natural gas gathering and marketing and in 1983, instituted a pipeline
acquisition and construction program. In December 1985, the Company acquired a
301-mile natural gas gathering system in Southern Mississippi. The Company was
profitable until 1988 when it acquired a small 10,000 barrel per day refinery in
conjunction with two natural gas processing plants and 300 miles of natural gas
gathering lines. The Company began to concentrate on the refinery and expanded
this business in 1991 when another refinery was purchased along with 190 miles
of natural gas gathering lines. This second refinery had a capacity of 8,000
barrels per day and could produce solvents as well as gasoline, jet fuel, and
diesel fuel. During this time, the Company was also expanding its natural gas
gathering and marketing businesses. The Company had borrowed heavily and issued
preferred stock to fund its expansion. However, the Company's Mississippi
system became supply starved as natural gas prices were depressed in the late
80's and early 90's. In addition, refining margins began to decline and the
Company was no longer profitable. In late 1991, the Company began negotiating
with its lenders and preferred stockholders and, as a result, Endevco, Inc. and
several of its subsidiaries filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy code on June 4, 1993. For details about the plan
of reorganization see Note 2 of "Notes to Consolidated Financial Statements".
As part of the reorganization, a new management team led by Ray Davis initiated
a plan to cease operating the refineries and return to the Company's core
business of natural gas gathering, marketing, and processing. In July 1993,
the Company discontinued operations at its 10,000 barrel per day refinery. On
September 29, 1993, the Company's plan of reorganization was confirmed and the
Company emerged from bankruptcy on November 2, 1993, when the plan was
consummated. The Company's first major component of the plan was to relocate
two natural gas processing plants from Brazoria County, Texas to Lincoln Parish,
Louisiana. The cryogenic natural gas plants replaced the inefficient lean oil
natural gas processing plants originally acquired in conjunction with the 10,000
barrel per day refinery in 1988. The new plants have greater recoveries of
NGLs, lower operating expenses, and use less fuel. The cryogenic natural gas
plants became operational on March 31, 1994. The Company also installed
additional natural gas compression in order to increase the volume of natural
gas which could be delivered to its facilities for processing.
The Company completed its plan to discontinue its refining operations by selling
its remaining operating refinery effective May 1, 1994. See Note 3 of "Notes to
Consolidated Financial Statements". At this time, the Company began to actively
seek acquiring new natural gas gathering systems while putting idle assets back
into service.
CURRENT YEAR SUMMARY
Effective January 1, 1995, the Company completed the purchase of two natural gas
gathering systems in East Texas. The systems are the Willow Springs and North
Lansing systems (collectively referred to as the "Willow Springs" system) and
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are located in Gregg and Harrison Counties, Texas. The system consists of
approximately 52 miles of pipeline and gathered approximately 24 MMCFD of
natural gas in 1995.
During the first quarter of 1995, the Company expanded its Calhoun natural gas
processing plant and gathering system to allow for more natural gas to be
processed. The Company looped some pipeline, added compression, and made
enhancements to the plant which increased the volume of natural gas that could
be delivered to the plant for processing. Natural gas inlet volumes processed at
Calhoun averaged 46 MMCFD in the last nine months of 1995 compared with 27 MMCFD
in 1994.
The Company purchased all of the stock of Energy Transfer Corporation ("ETC")
and the outstanding partnership interests of Energy Transfer I, Ltd. ("ETI")
effective April 2, 1995. Effective July 1, 1995, the Company purchased the
outstanding partnership interests of Energy Transfer II, Ltd. ("ETII").
Collectively the partnerships owned 100% of the Oletha system in Limestone
County, Texas. This system in East Texas consists of approximately 17 miles of
pipeline and has averaged 34 MMCFD since its acquisition by the Company. See
Note 8 of "Notes to Consolidated Financial Statements".
On August 24, 1995, the Company resumed the operations at the Iola natural gas
processing plant located in Grimes County, Texas. The Company acquired the 50%
interest previously owned by a third party and refurbished the plant which had
been idle since 1988. The plant averaged processing 14 MMCFD since operations
were resumed.
Management believes it is essential to stay focused on the Company's core
businesses of natural gas gathering, marketing, and processing. The Company
will continue to pursue natural gas gathering and processing facilities through
acquisition or construction projects.
NATURAL GAS GATHERING AND MARKETING
GENERAL. Revenues from natural gas gathering and marketing accounted for 77%,
64%, and 53% of consolidated revenues in 1995, 1994, and 1993, respectively. For
information about revenues, operating earnings, and identifiable assets, see
Note 10 of "Notes to Consolidated Financial Statements". The Company typically
builds or acquires systems which gather natural gas at the wellhead or a central
gathering location. The natural gas is primarily owned by independent
producers, however, some is owned by major integrated oil companies. The
Company either transports for a fee or purchases the natural gas at the wellhead
and, if there is no local market, arranges transportation on intrastate or
interstate pipelines and resells it to local distribution companies ("LDCs"),
utilities, commercial or industrial end-users, or other natural gas marketing
companies.
The Company also specifically targets utilities or industrial end-users whose
sources of supply are limited. As a result of the limited competition, these
end-users often pay a premium price for their natural gas. Typically, the
Company will enter into a long-term contract (3-10 years) to construct a
pipeline and supply all, or some agreed upon minimum, of the end-user's natural
gas needs. The Company generally shares a portion of the price savings with the
end-user. This allows the end-user to pay less for its natural gas supply and
the Company to recover its capital expenditures over a relatively short period
of time.
In addition to marketing natural gas gathered and transported through its
systems, the Company purchases and sells natural gas acquired from others
utilizing only third-party systems. In such transactions, the Company usually
contracts on a short-term "best efforts" basis with producers, pipelines or
other suppliers. The Company then sells to LDCs, utilities, commercial or
industrial end-users or other natural gas marketing companies. The volume of
natural gas throughput for these sales can vary significantly from month to
month. However, these sales allow the Company to respond quickly to changing
market conditions particularly in peak demand periods. They also allow the
Company to develop new marketing relationships that can later be supplied by the
Company's own facilities.
NATURAL GAS SUPPLIES. The Company does not own any natural gas reserves.
However, the Company continually seeks new supplies of natural gas connected to
its systems, both to offset natural declines and to increase throughput. The
Company also purchases third-party natural gas which is not connected to its
systems from a variety of suppliers including independent producers, major
integrated oil companies, and other natural gas marketing companies. With the
advent of "open access" on the interstate pipelines, the Company has access to
an abundant source of natural gas to supply its current markets.
The Company generally purchases natural gas under contracts whose prices are
determined by prevailing market conditions. Natural gas is then sold at higher
prices under sales contracts with similar pricing terms. The Company earns a
margin equal to the difference between the natural gas purchase price it pays
the supplier and the sales price it receives from the purchaser less
transportation cost, if any. The Company also offers services such as
marketing, natural gas control, contract administration, and pipeline operations
which are not usually available to small producers.
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FINANCIAL INSTRUMENTS. The Company, on occasion, enters into swap agreements or
futures contracts to hedge the risks associated with fixed commitments and
certain anticipated transactions. The Company defers the change in the market
value of these contracts until such time as the hedge transaction is completed.
At December 31, 1995, the Company had open swap agreements for 5 MMCFD related
to February 1996 and 2.5 MMCFD for April through December 1996.
NATURAL GAS PROCESSING
GENERAL. The Company's natural gas processing segment consists of NGLs
extraction and natural gas treating.
NATURAL GAS LIQUIDS EXTRACTION. The Company's NGL extraction operations consist
primarily of extracting NGLs such as propane, butanes, and natural gasoline from
a natural gas stream. Gathering facilities collect natural gas from producers'
wells and transport it to a Company owned natural gas processing plant where it
is separated into NGLs and residue natural gas. In North Louisiana, the NGLs are
then fractionated into component products by the Company. Once fractionated,
NGLs are sold to end-users or wholesalers. Where the Company does not own
fractionation facilities, the products are delivered by truck or pipeline to a
central fractionation facility.
The Company historically has installed its natural gas processing plants in
areas where wells produce natural gas that either contains sufficient NGLs to
economically process or that requires processing to meet pipeline quality
standards. The NGLs are generally more valuable if extracted than if left in
the natural gas stream. The Company typically will agree to install a natural
gas processing plant in exchange for a portion of the proceeds from the NGLs
extracted. The Company may also receive a portion of the residue natural gas
for its processing services.
Generally, NGLs extraction services have been performed separately from the
Company's natural gas gathering and marketing operations. However, the Company
has fully integrated its gathering and processing facilities in North Louisiana
to provide a full range of services to the producers. The Company's North
Louisiana facilities are located in an area of known hydrocarbon production and
management believes that additional natural gas and NGLs reserves will be
developed to offset normal production declines in the area.
NATURAL GAS TREATING. Natural gas treating operations involve the treating of
unmarketable natural gas to remove impurities and thus make it marketable. This
service is generally performed for producers under contract, whereby the Company
agrees to install and operate a facility to remove noncommercial components from
natural gas dedicated to that facility. The services are normally conducted
under long-term contracts for a fixed fee, a per unit fee, or a combination
thereof.
MARKETS AND MAJOR CUSTOMERS
NATURAL GAS GATHERING AND MARKETING. During 1995, 1994, and 1993, the Company's
sales to Georgia Pacific Company accounted for 13%, 14%, and 12% of consolidated
revenues, respectively.
NATURAL GAS PROCESSING. The Company had no single customer from its natural gas
processing operations responsible for over 10% of consolidated revenues in 1995,
1994, or 1993.
PRODUCT PRICES. During the three years ended December 31, 1995, the average
sales prices for natural gas and NGLs were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
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<S> <C> <C> <C>
Natural gas sales ($/MMBTU)...................... $ 1.72 $ 1.98 $ 2.20
Average NGLs prices ($/Gal):
Ethane........................................ $ 0.12 $ - $ -
Propane....................................... $ 0.33 $ 0.31 $ 0.33
Isobutane..................................... $ 0.40 $ 0.36 $ 0.41
Normal butane................................. $ 0.34 $ 0.31 $ 0.32
Natural gasoline.............................. $ 0.41 $ 0.35 $ 0.45
Weighted Average NGLs prices ($/GAL)............. $ 0.35 $ 0.33 $ 0.34
</TABLE>
Revenues from natural gas processing are directly affected by fluctuations in
NGLs and natural gas prices. Revenues from natural gas gathering and marketing
sales contracts are generally interrelated with natural gas purchase contracts
in regard to terms and pricing. The Company's income is generally derived from
either a fixed spread or a fixed fee per unit of
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natural gas. Although the margin between purchase and resale prices tends to
fluctuate with the increase or decrease in the sales price of natural gas, such
fluctuations are generally less severe and not necessarily directly correlated
with the changes in natural gas prices. All operations are adversely affected
by reduced volumes.
COMPETITION
The natural gas gathering, marketing, and processing industries are highly
competitive. In marketing natural gas, the Company has numerous competitors,
including marketing affiliates of major interstate pipelines, the major
integrated oil companies, and local and national natural gas gatherers, brokers,
and marketers of widely varying sizes, financial resources and experience. Many
competitors, such as major oil companies, have capital resources many times
greater than those of the Company and control substantial supplies of natural
gas. Local utilities and distributors of natural gas (some of which are
customers of the Company) are, in some cases, engaged directly, and through
affiliates, in marketing activities that compete with the Company.
The Company competes against other companies in the gathering and marketing
business for supplies of natural gas, for customers to whom to sell its natural
gas, and for availability of pipeline capacity. Competition for natural gas
supplies is primarily based on efficiency, reliability, availability of
transportation and ability to pay a satisfactory price for the producer's
natural gas. Competition for customers is primarily based upon reliability of
supply and price of deliverable natural gas. Some of the Company's customers
have the capability of using alternative fuels. In these cases, the Company
also competes against companies capable of providing alternative fuels on the
basis of price.
At December 31, 1995, the Company had net operating loss ("NOL") carryforwards
for income tax purposes of approximately $29.9 million. In addition, the
Company had unused investment tax credits of approximately $1.6 million
available to offset future federal income tax liabilities. Management expects
these tax benefits to give the Company a competitive advantage when bidding on
new projects.
REGULATION
In general, the natural gas industry is regulated by local, state, and federal
authorities. The Company believes it is in substantial compliance with such
laws. Because the Company's systems operate intrastate, the natural gas
transportation and gathering facilities of the Company are primarily exempt from
the rate burden imposed by the Federal Energy Regulatory Commission. The
Company's systems are subject to certain federal and state regulatory agencies
for permitting, rates, and pipeline safety. To the limited extent the Company
provides transportation on behalf of an interstate pipeline, it does so under
Section 311 of the Natural Gas Policy Act and the rate is subject to the state
review of the Texas Railroad Commission. The Company's natural gas sales and
marketing, in general, are not regulated by a regulatory agency.
The Company's operations are subject to various local, state, and federal laws
and regulations relating to environmental protection. The federal Environmental
Protection Agency and similar state agencies regulate the management of
hazardous waste, discharge of pollutants into the air, surface and ground water,
new sources, and remediation of sites. The most significant new regulation is
the Title V of the Clean Air Amendment of 1990 that is now required to be
implemented. Several of the Company's operations are required to file for the
federal operating permit with state by state implementation and enforcement of
the permits. The Company estimates that compliance will not have a material
impact on the Company. The Company in acquiring its assets from third parties
often conducts environmental audits and generally requires the seller to
indemnify the Company against pre-closing environmental liabilities.
EMPLOYEES
At February 20, 1996, the Company had 102 employees.
5
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ITEM 2. PROPERTIES.
NATURAL GAS GATHERING AND TRANSMISSION SYSTEMS
The following table sets forth pertinent information with respect to the
Company's natural gas gathering and transmission systems at December 31, 1995:
<TABLE>
<CAPTION>
DAILY AVERAGE DAILY
GATHERING DATE OF CAPACITY VOLUME OF
TRANSMISSION ACQUISITION OR OF GAS GAS IN MILES OF
PIPELINE SYSTEMS INITIAL OPERATION (MMCF)(1) (MMCF)(1) PIPELINE (1)
- ---------------- ----------------- --------- ---------------- ------------
1995 1994 1993
----------------
<S> <C> <C> <C> <C> <C> <C>
Dubach/Claiborne Nov 1988/Aug 1991 210 89 69 66 505
Willow Springs January 1995 31 24 - - 52
Oletha (2) April 1995 45 34 - - 17
East Texas April 1984 131 3 3 3 84
Elm Grove October 1990 20 4 3 3 5
Mountain Creek (3) November 1989 225 52 42 26 16
Port Hudson April 1993 40 26 19 20 5
Other Various N/A(4) 6 6 4 20
</TABLE>
(1) All capacity, volume, and mileage information is approximate. Amounts
shown are for the total system and have not been reduced to reflect the
Company's net ownership interest. All capacity information is subject to
increases or decreases depending on operating pressures and point of
delivery into or out of the system.
(2) Average daily volume from date of acquisition.
(3) The Company owns a 50% interest in the joint venture that owns the Mountain
Creek system.
(4) Capacity for these systems is not meaningful.
The Company's gathering and transmission systems are located primarily in Texas
and Louisiana. The Company also owns a small transmission system in
Pennsylvania. Two of the Company's pipeline systems (the Dubach and Claiborne
systems) are utilized in connection with the Company's natural gas processing
operations.
TEXAS. The Oletha system gathers natural gas in Limestone County and delivers
it to an intrastate pipeline. The Company's Willow Springs system gathers
natural gas in Gregg and Harrison Counties and delivers it to both interstate
and intrastate pipelines. The East Texas system consists of two separate
pipelines, the Nacogdoches system and the Shelby County system. The East Texas
system gathers natural gas from the wellhead and is interconnected with four
major pipelines (two intrastate and two interstate) that serve the Gulf Coast
and Midwest markets. The Company's Mountain Creek system delivers natural gas
to a plant owned by a local electric company.
LOUISIANA. The principal purpose of the Dubach and Claiborne systems is to
gather natural gas to be processed at the Company's North Louisiana facilities.
The Company's Elm Grove system receives natural gas from a central gathering
point and delivers it to a natural gas processing plant in Bossier Parish,
Louisiana. The Company's Port Hudson system delivers natural gas to an
industrial end-user in East Baton Rouge Parish, Louisiana. This natural gas is
supplied to the Company through an interstate pipeline.
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NATURAL GAS PROCESSING AND TREATING FACILITIES
The following table sets forth pertinent information with respect to the
Company's significant operating natural gas processing and treating plants at
December 31, 1995:
<TABLE>
<CAPTION>
PLANT DAILY AVERAGE DAILY
CAPACITY OF AVERAGE DAILY NGLS
GAS VOLUME IN PRODUCED
PLANT PLANT TYPE (MMCF)(1) (MMCF)(1) (MGAL)(1)
- ----------- ---------- ----------- ---------------- ----------------
1995 1994 1993 1995 1994 1993
---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Iola (2) Processing 35 14 - - 43 - -
Tembec (3) Processing 14 10 11 10 16 17 15
Calhoun Processing 80 41 27 26 66 38 36
Dubach Processing 55 38 34 40 81 67 69
Gun Point III Treating 53 3 5 6 - - -
</TABLE>
(1) All capacity and volume information is approximate. Amounts shown are for
the total plant and have not been reduced to reflect the Company's net
ownership interest.
(2) Average daily volume since operations were resumed on August 24, 1995.
(3) The Company owns 50% of the Tembec Plant.
GENERAL. The Company's primary natural gas processing and treating facilities
are located in North Louisiana and South Texas. The Company also has facilities
in Mississippi and Pennsylvania. Several of the Company's facilities are
underutilized or idle as a result of diminished deliverability of the natural
gas reserves serviced by the plants. Most of the idle or underutilized
facilities are skid mounted to facilitate relocation.
NORTH LOUISIANA FACILITIES. The Calhoun plant is a refrigerated lean oil plant
that recovers NGLs and delivers them by pipeline to the Dubach facility for
fractionation. The Calhoun plant can deliver residue natural gas into several
interstate pipelines. The Company relocated two cryogenic natural gas processing
plants (collectively referred to as the "Dubach" plant) to North Louisiana and
began in April 1994 to process natural gas from its Dubach and Claiborne
gathering systems at these facilities. The Company also fractionates the NGLs
into their component parts at the Dubach facilities. The Dubach facility can
also deliver residue gas into several interstate pipelines.
TEXAS. The Company put its Iola plant, located in Grimes County, back into
service on August 24, 1995. The plant processes natural gas gathered in Grimes
County. The NGLs are extracted and delivered to a liquids pipeline for sale.
The Company is treating natural gas in Dewitt County, Texas at its Gun Point III
plant. The Company owns one idle cryogenic, one refrigerated lean oil, and two
natural gas treating plants in Texas.
OTHER. The Company owns a 50% interest in a cryogenic natural gas recovery
plant in Green County, Pennsylvania. The Company receives a portion of the NGLs
as its fee for processing the natural gas. The Company's natural gas treating
plant in Brandon, Mississippi ceased operations in May 1995.
ASSETS PLEDGED AS COLLATERAL
Virtually all of the Company's assets are pledged as collateral on various
loans. See Note 5 of "Notes to Consolidated Financial Statements".
7
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ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to various legal proceedings arising in the ordinary
course of its business. The Company believes, based on its current knowledge
and based in part on advice of counsel, that such legal proceedings will be
resolved without material effect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
"EXECUTIVE OFFICERS OF THE REGISTRANT."
The executive officers of the Registrant as defined under REGULATION S-K ITEM
401(b) as of February 20, 1996 were as follows:
<TABLE>
<CAPTION>
NAME (AGE) POSITIONS, OFFICES WITH REGISTRANT AND EXPERIENCE
- ---------- -------------------------------------------------
<S> <C>
RAY C. DAVIS (54) Chairman of the Board and Chief Executive Officer of
the Company since 1993; President of Capstone Capital
Corp., since 1992; Chairman of Capstone Partners,
Inc., 1988-1994; Director and General Partner of
Hydro Environmental Services, Inc., 1989 to 1992; CEO
of Healthco International, Inc., 1991 to 1992;
Chairman of HPSC, Inc., 1991 to 1992.
KELCY L. WARREN (40) President and Chief Operating Officer of the Company
since 1993; and from 1990 to 1992.
ROBERT L. CAVNAR (42) Executive Vice President of the Company since 1996;
Senior Vice President of the Company 1993-1996; Chief
Financial Officer and Treasurer of the Company since
1993; Vice President, Chief Financial Officer and
Treasurer of Mountain Gas Resources, Inc., 1990 to
1993; Manager Corporate Finance of Presidio Oil
Company, 1989 to 1990.
JIM S. HOLOTIK (43) Executive Vice President of the Company since 1996;
Vice President of the Company 1993-1996; Vice
President of Cornerstone Gas Resources, Inc., and
Vice President of Cornerstone Pipeline Company since
1990.
</TABLE>
The above named persons bear no family relationship with each other. The
officers serve at the pleasure of the Board.
8
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock of the Company, par value $.10 per share, is traded on the
American Stock Exchange under the symbol "CGA." Set forth below are the high
and low sales prices for the common stock.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1994
First Quarter . . . . . . . . . . . . . . . . $1.94 $1.44
Second Quarter. . . . . . . . . . . . . . . . 3.25 1.50
Third Quarter . . . . . . . . . . . . . . . . 2.75 2.06
Fourth Quarter. . . . . . . . . . . . . . . . 2.63 1.44
1995
First Quarter . . . . . . . . . . . . . . . . 2.31 1.56
Second Quarter. . . . . . . . . . . . . . . . 2.88 1.75
Third Quarter . . . . . . . . . . . . . . . . 3.31 2.50
Fourth Quarter. . . . . . . . . . . . . . . . 2.81 2.19
1996
First Quarter (through February 20, 1996) . . 2.88 2.25
</TABLE>
On February 20, 1996, the closing price for the common stock, as reported by the
American Stock Exchange, was $2.75 per share.
As of February 20, 1996, there were 482 holders of record of common stock. The
Company believes that there are substantially more beneficial holders of common
stock.
The Company has not paid any cash dividends on its common stock and intends to
retain its earnings for use in operations and for expansion of its business. In
addition, the Company is prohibited from paying dividends under the terms of its
loan agreements. See Note 5 of "Notes to Consolidated Financial Statements".
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial information for the years ended December 31,
1991 through 1995, is derived from the consolidated financial statements of the
Company for such years. The information should be read in conjunction with the
consolidated financial statements and the notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1994 1993(1) 1992 1991
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues from continuing operations ....... $131,909 $106,406 $215,625 $244,696 $209,272
Expenses .................................. 128,574 104,955 220,043 245,695 207,994
Operating earnings (loss) ................. 3,335 1,451 (4,418) (999) 1,278
Other expense ............................. (2,236) (1,110) (2,094) (5,428) (3,232)
Net earnings (loss) ....................... 1,099 315 (22,291) (5,630) (1,582)
Preferred stock dividend requirements ..... - - (791) (1,900) (1,900)
Net earnings (loss) applicable to
common stock ............................ 1,099 315 (23,082) (7,530) (3,482)
Net earnings (loss) per share ............. .08 .02 (2.66) (.97) (.46)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
1995 1994 1993(1) 1992 1991
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets .............................. $ 59,684 $ 40,303 $ 46,446 $114,549 $120,960
Net property, plant and equipment ......... 30,843 21,089 22,652 78,386 83,044
Working capital deficit ................... (2,343) (6,606) (5,151) (39,924)(2) (3,995)
Long-term debt ............................ 20,704 6,898 7,768 5,659 39,927
Preferred stock plus accrued dividends
in arrears .............................. - - - 25,736 23,725
Stockholders' equity ...................... 12,968 11,869 11,554 12,159 19,548
</TABLE>
(1) On November 2, 1993, the Company consummated the Plan. See Note 2 of
"Notes to Consolidated Financial Statements".
(2) Includes $36,965,000 of debt and $5,546,000 of interest which was subject
to a Standstill and Forbearance Agreement with the former noteholders of
the Company.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company's primary sources of capital in 1995 were cash provided by
operations and proceeds from borrowings under its term loan and revolving credit
agreement.
CASH FLOWS FROM OPERATING ACTIVITIES. Cash provided by operations before
reorganization items was $4.1 million in 1995 compared to $906,000 in 1994.
This was primarily the result of increased net income and a net increase in
changes in operating assets. The Company's accounts receivable and accounts
payable have increased as a result of the increased volumes in both the
natural gas transportation and natural gas processing operations.
The Company had a working capital deficit of $2.3 million at December 31, 1995,
compared to a working capital deficit of $6.6 million at December 31, 1994. The
Company was able to convert a portion of its line of credit to long-term
borrowing in 1995. The Company expects that cash provided by operations combined
with amounts available under its line of credit will be sufficient to meet its
cash requirements in 1996.
INVESTING ACTIVITIES. The Company made capital expenditures of approximately
$13 million in 1995. These expenditures were primarily for the following
projects; (i) the acquisition of the Willow Springs system; (ii) the acquisition
of the Oletha system; (iii) the purchase of the 50% interest previously owned by
a third party and subsequent refurbishment of the Iola plant; and (iv) the
connection of natural gas wells to the Company's gathering systems.
The Company continues to pursue projects that would require additional long-term
borrowing. The Company believes that its current relationships with existing
lenders will allow borrowing capacity for future capital requirements. However,
there can be no assurance regarding the Company's ability to obtain additional
capital when needed on acceptable terms.
FINANCING ACTIVITIES. Cash provided by financing activities was $9.4 million in
1995. On May 24, 1995, the Company entered into an agreement ("Bank Facility")
with a group led by Bank of Oklahoma, National Association ("Bank"). The Bank
Facility provides for up to $20 million in convertible loans ("Convertible
Facility") and a revolving $10 million working capital facility ("Working
Capital Facility"). The amount the Company was authorized to borrow under the
Convertible Facility was $16.5 million at December 31, 1995. The Convertible
Facility does not require principal amortization and the Company can borrow and
repay principal without penalty through December 31, 1996. Any outstanding
principal at that time will be repaid based on a five-year straight-line
amortization with a balloon payment due June 30, 1999. The Company's intention
is to renew this facility every 12 months as supported by its borrowing base, as
defined in the loan agreement. At December 31, 1995, the Company had borrowed
$15.6 million under the Convertible Facility. The Working Capital Facility has
an initial two-year term. Under the Working Capital Facility at December 31,
1995, the Company had borrowed $3.4 million and the Bank had issued, for the
Company's benefit, $3.4 million in standby letters of credit for natural gas
purchases. On January 31, 1996, the Company converted $2 million under the
Convertible Facility to a four-year term loan.
NOL CARRYFORWARDS. At December 31, 1995, the Company had NOL carryforwards for
income tax purposes of approximately $29.9 million which, if not utilized, will
expire at various times from 2001 until 2010. In addition, the Company has
unused investment tax credits of approximately $1.6 million available to offset
future federal income tax liability. The Company considers such carryforwards
and tax credits to be potentially valuable assets which may be used to shelter
future taxable earnings from income taxes. If a change of ownership as defined
in Internal Revenue Code Section 382 occurs, utilization of the NOL
carryforwards could be limited. The Company has adopted provisions in its
certificate of incorporation to help protect such benefits. The risk of
limitation of the NOL carryforwards will be significantly reduced on November 2,
1996, when the New Common Stock acquired by Ray Davis, Trustee, will no longer
be included in the three year test period for calculating ownership changes
under Code Section 382. See Note 2 of "Notes to Consolidated Financial
Statements".
11
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
GENERAL. Net income for 1995 was $1.1 million ($.08 per share) compared to
$315,000 ($.02 per share) in 1994. Earnings before interest, income taxes,
and depreciation ("EBITD") increased to $6.7 million in 1995 from $4.2
million in 1994. The increase in net income and EBITD are primarily
attributable to an increase in performance from the Company's natural gas
processing operations. Revenues increased 25% to $131.9 million in 1995 from
$106.4 million in 1994. Revenues in 1994 included $16.2 million from the
Company's refining operations which were discontinued effective May 1, 1994.
Revenues increased primarily as a result of increased production at the
Company's North Louisiana natural gas processing facilities and the
acquistion of two natural gas gathering systems in East Texas.
NATURAL GAS PROCESSING. The following table provides pertinent information
relating to the Company's natural gas processing operations excluding refining.
<TABLE>
<CAPTION>
INCREASE
1995 1994 (DECREASE)
------- ------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Revenues...................... $29,698 $21,624 $8,074
Gross margin.................. $11,925 $ 7,594 $4,330
EBITD......................... $ 7,169 $ 3,124 $4,045
(MMCFD)
Natural gas processed......... 89 67 22
Natural gas treated........... 7 17 (10)
Natural gas gathered.......... 10 8 2
(THOUSAND GALLONS PER DAY)
Liquid sales volumes.......... 174 141 33
</TABLE>
The Company's natural gas processing operations excluding refining provided
23% of gross revenues and 66% of gross margin in 1995 compared to 20% of
gross revenues and 49% of gross margin in 1994. Revenues, gross margin, and
EBITD increased 37%, 57%, and 129% respectively. These increases primarily
were the result of the increase in the volume of natural gas processed. The
Company completed two major natural gas processing projects in 1995. The
first project involved the expansion of the processing capabilities at the
Company's Calhoun plant in North Louisiana. The second project involved the
reactivation of the Company's Iola plant which had been idle since 1988. The
Company acquired the 50% interest previously owned by a third party,
refurbished the Iola plant, and resumed operations on August 24, 1995.
The volume of natural gas processed increased 33% in 1995. In connection
with the expansion of the Calhoun plant, the Company was successful in
securing additional natural gas supply in North Louisiana. The North
Louisiana facilities processed an average of 79 MMCFD in 1995 compared to 61
MMCFD in 1994. Additionally, the processed natural gas volume increased to
95 MMCFD in December 1995. Management intends to pursue further increases in
natural gas processing volumes in North Louisiana during 1996 to maximize
utilization of its natural gas processing plants.
A significant portion of the natural gas in northern Grimes County, Texas has
been dedicated to the Company's refurbished Iola plant. The Iola plant
processed 15 MMCFD in December 1995. Several major producers have active
drilling programs in the area and management expects the processed volumes to
increase in 1996.
REFINERY. The Company sold its Claiborne condensate refinery effective May 1,
1994. Revenues from refining operations were $16.2 million and EBITD was $1.1
million in 1994. The refinery historically lost money in the second half of the
year and was sold just prior to the period when margins were expected to
decline.
12
<PAGE>
NATURAL GAS GATHERING AND MARKETING. The following table provides pertinent
information relating to the Company's natural gas gathering and marketing
operations.
<TABLE>
<CAPTION>
INCREASE
1995 1994 (DECREASE)
------- ------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Revenues...................... $102,211 $68,564 $33,647
Gross margin.................. $ 6,266 $ 5,238 $ 1,028
EBITD......................... $ 3,313 $ 3,138 $ 175
(MMCFD)
Natural gas sales............. 199 118 81
</TABLE>
The Company's natural gas gathering and marketing operations provided 77% of
gross revenues and 34% of gross margin compared to 64% of gross revenues and
34% of gross margin in 1994. Revenues increased 49% primarily as the result
of the acquisition of the Willow Springs and Oletha systems in East Texas.
Although these systems contributed $1.4 million to EBITD, this was partially
offset by lower earnings on the Company's other systems. In addition, the
1994 earnings included 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 increased 69% primarily from the acquisition of the two
East Texas systems. The Willow Springs system averaged 24 MMCFD in 1995. The
Oletha system averaged 34 MMCFD since April 1995. Additionally, the Company's
third party marketing volumes increased 19 MMCFD in 1995. Management expects
to increase its natural gas gathering and marketing operations in 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and
administrative expenses increased 3.7% in 1995. This increase included the
additional administrative burden necessary as a result of the acquisition of
the Willow Springs and Oletha systems and the reactivation of the Iola plant.
General and administrative expenses as a percentage of revenues decreased to
4.1% in 1995 compared to 4.9% in 1994.
INTEREST EXPENSE. Interest expense increased $1 million primarily as a
result of increased borrowings under its term loan agreement. These
borrowings were primarily to fund the acquisition of the Willow Springs and
Oletha systems and the refurbishment of the Iola plant.
YEAR ENDED DECEMBER 31, 1994, COMPARED TO YEAR ENDED DECEMBER 31, 1993
GENERAL. The Company had earnings before depreciation, interest and taxes
("EBITD") of $4.2 million in 1994 which represented a 106% increase over the
EBITD of $2.0 million in 1993. The Company recorded this increased EBITD for
its first full year of operations since its plan of reorganization was
consummated on November 2, 1993. Operating earnings for the year were $1.5
million in 1994 compared to an operating loss of $4.4 million in 1993. Net
earnings were $315,000 ($0.02 per share) in 1994 compared to a net loss of
$23.1 million ($2.66 per share) in 1993.
NATURAL GAS PROCESSING. The Company's natural gas processing operations
provided 36% of the revenues and 66% of the gross margin in 1994 compared to
47% of the revenues and 56% of the gross margin in the prior year. However,
natural gas processing operations EBITD increased $3.4 million (401%). This
was primarily the result of the installation of cryogenic natural gas
facilities at the Company's North Louisiana operations and the cessation of
all refining operations. The cryogenic natural gas processing facilities
allowed the Company to increase NGLs recovered, to reduce operating expenses
and to lower fuel usage. The Company received a portion of the NGLs which
resulted in increased earnings.
REFINERY. The Company sold its Claiborne condensate refinery effective May
1, 1994. Revenues from refining operations were $16.2 million in 1994
compared to $78.5 million in 1993. The Company's EBITD increased $2.0 million
in 1994 as a result of the cessation of refining operations.
NATURAL GAS GATHERING AND MARKETING. Sales volumes for natural gas declined
in 1994 as a result of the transfer in November 1993 of certain assets (the
"Transferred Assets") to the Company's former Noteholders under its plan of
reorganization. See Note 2 of "Notes to Consolidated Financial Statements".
The Company's natural gas gathering and marketing operations provided 64% of
the revenues and 34% of the gross margin in 1994 compared to 53% of the
revenues and 44% of the gross margin in 1993. Natural gas gathering and
marketing EBITD decreased $2.1 million (47%) in 1994. This was primarily the
result of the loss of earnings from the Transferred Assets. This decrease was
partially offset by increased earnings from the Company's Mountain Creek and
Port Hudson systems. It was also
13
<PAGE>
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 97 MMCFD in 1994. This was primarily caused by
the Transferred Assets which contributed 112 MMCFD in 1993. Third party
marketing volumes increased 1 MMCFD in 1994. However, they accounted for 56%
of the throughput and 29% of the gross margin in 1994, compared to 30% of the
throughput and 10% of the gross margin in 1993.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and
administrative expenses decreased $1.1 million (17%) in 1994. This was the
result of cost reductions as part of the Plan as well as the sale of the
refineries.
OTHER INCOME (EXPENSE). Interest expense decreased in 1994 as a result of
the retirement of debt. The Company sold its interest in Three Rivers
Pipeline Company and Allegheny Energy Marketing Company (collectively
referred to as "Three Rivers") in January 1993. The Company recorded a gain
from the sale of its interest in Three Rivers of $611,000 in 1993.
REORGANIZATION ITEMS. The Company recorded a loss on the write downs and
disposition of property, plant and equipment of $20.3 million in 1993. This
included the Transferred Assets and other assets that were considered
impaired to the reorganized Company. The professional fees of $4.5 million
incurred for the reorganization included primarily legal fees, consultant
fees, and bankruptcy costs.
EXTRAORDINARY ITEM. The Company recorded a $9.1 million gain in 1993 from
the extinguishment of debt in conjunction with the reorganization.
OTHER MATTERS
ACCOUNTING FOR INCOME TAXES. Effective January 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS 109"). The adoption of FAS 109 changed the Company's method of
accounting for income taxes from the deferred method (APB 11) to the
liability method. Adoption of FAS 109 had no effect on the results of its
operations for the year ended December 31, 1993.
EFFECTS OF CHANGING PRICES. Natural gas and NGLs prices have fluctuated
significantly over the last three years. The Company's natural gas gathering
and marketing operations generally earn a margin which is the difference
between the revenues from the sale of natural gas over the purchase cost
thereof. The change in margin is much less volatile than the change in
product prices. The Company's natural gas processing operations generally
receive a portion of the products and or natural gas as its fee for services.
Therefore, product prices directly impact these operations. This effect is
somewhat offset as NGL prices tend to move inversely to natural gas prices.
Inflation has not had a significant impact on operating expenses in the last
three years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES
Report of Arthur Andersen LLP, Independent Public Accountants....... 15
Report of Ernst & Young LLP, Independent Auditors................... 16
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1994, and 1993.................................. 17
Consolidated Balance Sheets at December 31, 1995, and 1994.......... 18
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994, and 1993.................................. 19
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1995, 1994, and 1993.............. 20
Notes to Consolidated Financial Statements.......................... 21-29
</TABLE>
14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Cornerstone Natural Gas, Inc.
We have audited the accompanying consolidated balance sheets of Cornerstone
Natural Gas, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1995, and 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. 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 financial position of Cornerstone Natural Gas,
Inc. and subsidiaries as of December 31, 1995, and 1994, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 14, 1996
15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cornerstone Natural Gas, Inc.
We have audited the accompanying consolidated statements of operations, cash
flows and changes in stockholders' equity of Cornerstone Natural Gas, Inc.
and Subsidiaries (the "Company") for the year ended December 31, 1993. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and cash flows of the Company for the year ended December 31,
1993, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
March 7, 1994
16
<PAGE>
CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Revenues............................... $131,909,000 $106,406,000 $215,625,000
Expenses:
Cost of sales........................ 113,568,000 90,997,000 194,349,000
Operating expenses................... 6,180,000 5,975,000 12,912,000
Depreciation and amortization........ 3,380,000 2,733,000 6,451,000
General and administrative........... 5,446,000 5,250,000 6,331,000
------------ ------------ ------------
128,574,000 104,955,000 220,043,000
------------ ------------ ------------
Operating earnings (loss).............. 3,335,000 1,451,000 (4,418,000)
------------ ------------ ------------
Other income (expense):
Interest income...................... 85,000 79,000 103,000
Interest expense..................... (2,311,000) (1,284,000) (2,764,000)
Equity in net losses of
unconsolidated affiliates........... (29,000) (11,000) (52,000)
Other................................ 19,000 16,000 8,000
Gain on sale of assets, net.......... - 90,000 611,000
------------ ------------ ------------
(2,236,000) (1,110,000) (2,094,000)
------------ ------------ ------------
Earnings (loss) before reorganization
items, income taxes, and
extraordinary item................... 1,099,000 341,000 (6,512,000)
Reorganization items:
Loss on disposition and write downs
of property, plant and equipment.... - - 20,274,000
Professional fees.................... - - 4,545,000
------------ ------------ ------------
- - 24,819,000
------------ ------------ ------------
Earnings (loss) before income taxes
and extraordinary item................ 1,099,000 341,000 (31,331,000)
Provision for current income taxes..... - 26,000 45,000
------------ ------------ ------------
Net earnings (loss) before
extraordinary item.................... 1,099,000 315,000 (31,376,000)
Extraordinary item - gain on
extinguishment of debt................ - - 9,085,000
------------ ------------ ------------
Net earnings (loss).................... 1,099,000 315,000 (22,291,000)
Preferred stock dividend requirements.. - - (791,000)
------------ ------------ ------------
Net earnings (loss) applicable to
common stock.......................... $ 1,099,000 $ 315,000 $(23,082,000)
------------ ------------ ------------
------------ ------------ ------------
Earnings (loss) per common and common
equivalent share:
Earnings (loss) before extraordinary
item................................ $ .08 $ .02 $ (3.71)
Extraordinary item................... - - 1.05
------------ ------------ ------------
Net earnings (loss).................. $ .08 $ .02 $ (2.66)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common and common
equivalent shares outstanding......... 14,615,000 14,467,000 8,691,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 908,000 $ 655,000
Accounts receivable......................... 21,790,000 12,424,000
Inventory................................... 336,000 93,000
Other current assets........................ 283,000 286,000
------------ ------------
Total current assets...................... 23,317,000 13,458,000
Assets held for disposition................... 1,000,000 1,000,000
Property, plant and equipment, at cost........ 64,642,000 54,632,000
Less: accumulated depreciation.............. (33,799,000) (33,543,000)
------------ ------------
Net property, plant and equipment........... 30,843,000 21,089,000
Goodwill, net................................. 3,559,000 3,676,000
Other assets.................................. 965,000 1,080,000
------------ ------------
$ 59,684,000 $ 40,303,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt...... $ 464,000 $ 4,857,000
Accounts payable............................ 25,077,000 14,993,000
Accrued interest payable.................... 11,000 52,000
Income tax payable.......................... 108,000 162,000
------------ ------------
Total current liabilities................. 25,660,000 20,064,000
Long-term debt................................ 20,704,000 6,898,000
Other liabilities............................. 352,000 1,472,000
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......................... (39,582,000) (40,681,000)
------------ ------------
Total stockholders' equity................ 12,968,000 11,869,000
------------ ------------
$ 59,684,000 $ 40,303,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
18
<PAGE>
CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
------------ ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Earnings (loss) before extraordinary item..................... $ 1,099,000 $ 315,000 $ (31,376,000)
Non-cash items included in loss before extraordinary item:
Loss on disposition and write downs of property,
plant and equipment....................................... - - 20,274,000
Interest compromised........................................ - - 1,605,000
Depreciation and amortization............................... 3,380,000 2,733,000 6,451,000
Equity in net losses of unconsolidated affiliates........... 29,000 11,000 52,000
Loss (gain) on sale of assets, net.......................... - (90,000) (611,000)
Other....................................................... 90,000 30,000 402,000
Reorganization items........................................ - - 4,545,000
Changes in operating assets or liabilities which provided
(used) cash during the period:
(Increase) decrease in accounts receivable.................... (9,365,000) 2,676,000 4,760,000
(Increase) decrease in inventory.............................. (243,000) 1,619,000 1,940,000
(Increase) decrease in other current assets................... 3,000 352,000 (10,000)
Increase (decrease) in accounts payable....................... 10,150,000 (6,151,000) (3,152,000)
Increase (decrease) in accrued interest payable............... (41,000) 7,000 (55,000)
Decrease in other current liabilities......................... (54,000) (230,000) (481,000)
Increase (decrease) in other liabilities...................... (910,000) (366,000) 848,000
------------ ----------- -------------
Cash provided by operations before
reorganization items.......................................... 4,138,000 906,000 5,192,000
Cash used by reorganization items - professional fees............ (277,000) (1,303,000) (2,165,000)
------------ ----------- -------------
Cash provided (used) by operating activities..................... 3,861,000 (397,000) 3,027,000
Cash flows from investing activities:
Proceeds from sale of assets.................................. - 1,063,000 851,000
Additions to property, plant and equipment.................... (13,017,000) (3,825,000) (3,742,000)
(Increase) decrease in investment in
unconsolidated subsidiaries............................... 10,000 (87,000) 110,000
Other......................................................... (15,000) - 23,000
------------ ----------- -------------
Cash used by investing activities................................ (13,022,000) (2,849,000) (2,758,000)
Cash flows from financing activities:
Borrowings (reduction) of revolving debt...................... 350,000 3,050,000 (1,625,000)
Borrowings under long-term debt............................... 13,689,000 817,000 5,800,000
Reduction of long-term debt................................... (4,625,000) (2,382,000) (5,071,000)
Reorganization items:
Issuance of common stock and warrants..................... - - 3,000,000
Retirement of long-term debt.............................. - - (6,731,000)
Other......................................................... - - (108,000)
------------ ----------- -------------
Cash provided (used) by financing activities.............. 9,414,000 1,485,000 (4,735,000)
------------ ----------- -------------
Increase (decrease) in cash and cash equivalents................ 253,000 (1,761,000) (4,466,000)
Cash and cash equivalents:
Beginning of period........................................... 655,000 2,416,000 6,882,000
------------ ----------- -------------
End of period................................................. $ 908,000 $ 655,000 $ 2,416,000
------------ ----------- -------------
------------ ----------- -------------
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest..................................................... $ 2,196,000 $ 1,226,000 $ 1,042,000
Income taxess................................................ $ 5,000 $ 50,000 $ 34,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
----------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992................. $ 789,000 $ 29,284,000 $ (17,914,000) $ 12,159,000
Reorganization items:
Redemption of Series A Cumulative
Convertible Exchangeable
Preferred Stock......................... - 19,448,000 - 19,448,000
Issuance of common stock and
warrants................................ 458,000 2,543,000 - 3,001,000
Proceeds from issuance of common stock
to employee benefit plan.................. 5,000 23,000 - 28,000
Preferred stock dividend requirements........ - - (791,000) (791,000)
Net loss..................................... - - (22,291,000) (22,291,000)
----------- ------------ ------------- -------------
Balance at December 31, 1993................. 1,252,000 51,298,000 (40,996,000) 11,554,000
----------- ------------ ------------- -------------
Net earnings................................. - - 315,000 315,000
----------- ------------ ------------- -------------
Balance at December 31, 1994................. 1,252,000 51,298,000 (40,681,000) 11,869,000
----------- ------------ ------------- -------------
Net earnings................................. - - 1,099,000 1,099,000
----------- ------------ ------------- -------------
Balance at December 31, 1995................. $ 1,252,000 $ 51,298,000 $ (39,582,000) $ 12,968,000
----------- ------------ ------------- -------------
----------- ------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND SIGNIFICANT ACCOUNTING POLICIES
(a) General and Principles of Consolidation
Cornerstone Natural Gas, Inc., a Delaware corporation ("Cornerstone"), is
engaged through various subsidiaries in the business of natural gas
gathering, marketing, and processing. Natural gas gathering and marketing
includes purchasing, gathering, transporting, and marketing natural gas.
Natural gas processing includes recovering and marketing natural gas
liquids from natural gas and treating natural gas by removing noncommercial
components. Natural gas processing also included refining condensate and
crude oil into various petroleum products until May 1, 1994, when the
Company discontinued its refining operations. The Company's operations are
located primarily in Texas and Louisiana and include a natural gas
marketing office in Pennsylvania.
The consolidated financial statements include the accounts of Cornerstone
and its wholly owned and majority-owned subsidiaries (referred to
collectively as the "Company"). The consolidated financial statements of
the Company also include its proportionate share of the assets,
liabilities, revenues, and expenses of affiliated partnerships and joint
ventures if the Company owns at least a 50% interest. Affiliates in which
the Company owns less than a 50% interest are accounted for using the
equity method.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of 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. Certain reclassifications of prior years' financial
information have been made to conform to the current year presentation.
(b) Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
(c) Inventory
Inventory is stated at the lower of cost or market, determined by the first
in, first out method.
(d) Property, Plant and Equipment
Depreciation of property, plant and equipment is provided using the
straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Pipelines and pipeline rights-of-way ........................ 5-20
Natural gas liquids recovery, treating and refining plants .. 10-20
Equipment and other ......................................... 3-15
</TABLE>
Most of the Company's natural gas liquids extraction and natural gas
treating plants are skid-mounted and moveable from one service location
to another. The cost of moving the plants between service locations is
capitalized and amortized using the straight-line method over the life
of the related service contract.
21
<PAGE>
(e) Goodwill
Goodwill represents the excess of the cost over the net assets of
businesses acquired and is amortized on a straight-line basis over periods
of twenty to forty years. Goodwill is presented net of accumulated
amortization of $730,047 and $613,233 at December 31, 1995, and 1994,
respectively.
(f) Income Taxes
Deferred income taxes are computed using the liability method in
accordance with Statement of Financial Accounting Standards No. 109 ("FAS
109"), and are provided on all temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities.
See Note 6 for more information regarding income taxes.
(g) Earnings (Loss) per Common and Common Equivalent Share
Earnings (loss) per common and common equivalent share are based on the
weighted average number of shares outstanding during each year as adjusted
for outstanding stock options and warrants, if dilutive, using the treasury
stock method. Fully-diluted earnings per share for all years are not
presented because the effects are antidilutive.
(h) Concentrations of Credit Risk
The Company markets natural gas and natural gas liquids to utilities, local
distribution companies and industrial end-users and other natural gas
marketing companies. The Company performs ongoing credit evaluations of
its customers, and if deemed necessary, requires purchasers of the
Company's products to prepay or issue standby letters of credit as
collateral. As an additional safeguard against uncollectable receivables,
the Company maintains an insurance policy which covers a majority of its
customers. Credit losses are provided for in the consolidated financial
statements and consistently have been within management's expectations.
The Company has cash deposits with various banks consisting principally of
demand deposits and time deposits. These deposits generally have
maturities of one year or less and bear minimal risk. The Company has not
experienced any losses on its cash deposits.
(i) Financial Instruments
The Company, on occasion, enters into swap agreements or futures contracts
to hedge the risks associated with fixed commitments and certain
anticipated transactions. The Company defers the change in the market
value of these contracts until such time as the hedged transaction is
completed. At December 31, 1995, the Company had open swap agreements for
5 MMCFD related to February 1996 and 2.5 MMCFD for April through December
1996.
(j) Impairment of Assets
The Company will be required to adopt statement of Financial Accounting
Standards No. 121 ("FAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" in the first
quarter of 1996. FAS 121 requires the Company to assess the need for
impairment of capitalized costs based on expected future cash flows. The
Company estimates there will be no effect from the adoption of FAS 121.
2. PLAN OF REORGANIZATION
On June 4, 1993, Endevco, Inc. and its subsidiaries, ANGIC, Inc., Mississippi
Fuel Company and Endevco Taft Company (collectively, the "Debtors") filed
voluntary petitions for reorganization under Chapter 11 of the Bankruptcy
22
<PAGE>
Code with the United States Bankruptcy Court for the Eastern District of Texas,
Sherman Division (the "Bankruptcy Court").
On September 29, 1993, the Bankruptcy Court issued an order confirming the
Debtor's First Amended Joint Plan of Reorganization (the "Plan"). On November
2, 1993, the following transactions resulted from the consummation of the Plan:
(1) The Debtors paid approximately $2.1 million in cash and
transferred their Mississippi Fuel, Ada, Chalybeate Springs, and
Leaf River systems along with certain contractual rights owned by
the Debtors to the holders of the Debtor's 9% Senior Notes, 11.7%
Senior Notes, and 11.5% Subordinated Convertible Debentures
(collectively, the "Noteholders"). The cash payments and transfer
of assets was in full satisfaction of all allowed claims of the
Noteholders (approximately $44.1 million of debt and accrued
interest on the financial records of the Debtors). The Company paid
in full all other creditors.
(2) The Debtors paid approximately $4.6 million in cash and issued
promissory notes in the aggregate of $2.5 million (the
"Notes") to the holders (the "Preferred Stockholders") of the
Company's $9.50 Series A Cumulative Convertible Exchangeable
Preferred Stock (the "Preferred Stock") in satisfaction of all
allowed claims (approximately $27.0 million on the financial records
of the Debtors, which included the liquidation value of the
Preferred Stock and all accrued and unpaid dividends thereon). The
Notes were secured by a lien on the stock of all the subsidiaries of
Cornerstone and was guaranteed by its subsidiary, Cornerstone
Pipeline Company. Pursuant to the terms of the Notes, the Company
was prohibited from paying dividends or repurchasing shares of its
capital stock while the Notes were outstanding. The Notes were
retired on December 29, 1995.
(3) All outstanding common stock, par value $.10 per share (the "Former
Common Stock"), of Endevco, Inc. was canceled and each holder
thereof was issued one share of the common stock of Cornerstone (the
"New Common Stock") for each share of Former Common Stock held.
Holders of the Former Common Stock received approximately 63% of the
shares of New Common Stock. All outstanding stock options were
canceled.
(4) Pursuant to the First Amended Stock Purchase Agreement by and between
Ray Davis, Trustee (the "Purchaser") and Cornerstone dated May 28,
1993, Ray Davis and his assigns acquired 4,576,659 shares of New
Common Stock and warrants to acquire an additional 2,564,103 shares
of New Common Stock with an exercise price of $.78 per share. The
aggregate purchase price of such shares of New Common Stock and
warrants was $3.0 million. The purchased shares constituted
approximately 37% of Cornerstone's issued and outstanding shares of
New Common Stock. The purchased shares and the warrants, if
exercised, would constitute approximately 47% of the fully diluted
capital stock of Cornerstone.
(5) The Company entered into a term loan and revolving credit facility
(the "Senior Loan") with a financial institution. The term portion
of the Senior Loan was for $5.8 million and provided for monthly
principal and interest payments. The interest was calculated at the
applicable prime rate plus two percent. The revolving credit
facility allowed for working capital loans and standby letters of
credit up to an aggregate of $6.0 million. A portion of the proceeds
from the Senior Loan was used to retire the remaining debt
associated with the purchase of the original assets of Dubach as
well as the debt incurred when the assets of Claiborne Gasoline
Company were acquired.
(6) The Company amended its Certificate of Incorporation to (1) change the
Company's name to Cornerstone Natural Gas, Inc. and (2) provide for
certain restrictions on the transfer of New Common Stock, designed
to protect the Company's NOL carryforwards.
The Company has accounted for all transactions related to the reorganization
proceedings in accordance with the Statement of Position 90-7 of the American
Institute of Certified Public Accountants. In addition, certain other property
and equipment were written down as a result of the reorganization. These
transactions resulted in a loss on write downs and disposition of property,
plant, and equipment of approximately $20.3 million and an extraordinary gain
from the settlement of debt of approximately $9.1 million.
23
<PAGE>
3. PROPERTY, PLANT, AND EQUIPMENT
A summary of property, plant, and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
Pipeline and pipeline rights-of-way ......... $28,190,000 $19,962,000
Natural gas liquids recovery, and
treating .................................. 28,511,000 29,709,000
Equipment ................................... 5,508,000 2,841,000
Other ....................................... 2,433,000 2,120,000
----------- -----------
$64,642,000 $54,632,000
----------- -----------
----------- -----------
</TABLE>
Interest cost capitalized during the construction of projects was $44,000 in
1995, $37,000 in 1994, and $8,000 in 1993.
The Company has discontinued its refining operations and intends to sell its
remaining refining assets. As such, these assets are reflected as assets
held for disposition on the accompanying balance sheet. Effective May 1,
1994, the Company sold its Claiborne refinery and inventories to Arcadia.
See Note 4.
4. OTHER ASSETS
Other assets include a note receivable for $900,000 ("Arcadia Note") from
Arcadia Refining and Marketing Company, L.P. ("Arcadia"). The Arcadia Note
was received in conjunction with the May 1, 1994, sale of the Company's
Claiborne refinery to Arcadia. The Arcadia Note is part of a participation
agreement with BT Commercial Corporation ("BT"), a unit of Bankers Trust. BT
acts as the Company's agent under the participation agreement. The Company's
interest is subordinate to BT. The entire agreement is secured by
essentially all the assets of Arcadia. In November 1995, Arcadia ceased
making interest payments under the Arcadia Note. In February 1996, Arcadia
filed a voluntary petition for relief in the United States Bankruptcy Court
for the Western District of Louisiana, Shreveport Division. The Company
believes that the assets of Arcadia will be sufficient to satisfy the Arcadia
Note but no assurance can be made that the entire amount of the Arcadia Note
will be collected.
5. LONG-TERM DEBT
A summary of debt follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
Convertible Facility (a) .................... $15,600,000 $ 4,750,000
Working Capital Facility (a) ................ 3,400,000 3,050,000
Notes to former Preferred Stockholders (b) .. - 2,000,000
Secured note payable (c) .................... 1,728,000 1,948,000
Other ....................................... 440,000 7,000
----------- -----------
21,168,000 11,755,000
Less: Current installments.................. 464,000 4,857,000
----------- -----------
Long-term debt .............................. $20,704,000 $6,898,000
----------- -----------
----------- -----------
</TABLE>
(a) On May 24, 1995, the Company entered into an agreement ("Bank
Facility") with a group led by the Bank of Oklahoma, National
Association ("Bank"). The Bank Facility provides for up to $20 million
in convertible loans ("Convertible Facility") and a revolving $10
million working capital facility ("Working Capital Facility"). At
December 31, 1995, the amount the Company was authorized to borrow
under the Convertible Facility was $16.5 million. The Convertible
Facility does not require principal amortization and the Company can
borrow and repay principal without penalty through December 31, 1996.
Any outstanding principal at that time will be repaid based on a
five-year straight-line amortization with a balloon payment due June
30, 1999. Interest is calculated at the applicable prime rate plus two
percent (10.5% percent at December 31, 1995). At December 31, 1995, the
Company had borrowed $15.6 million under the Bank Facility. The
Working Capital
24
<PAGE>
Facility allows for working capital loans and standby letters of credit
up to an aggregate of $10 million. (Working capital loans are limited
to $5 million). Under the Working Capital Facility at December 31,
1995, the Company had borrowed $3.4 million and the Bank had issued,
for the Company's benefit, approximately $3.4 million in standby
letters of credit. The Working Capital Facility expires April 30, 1997,
and bears interest at the applicable prime rate plus two percent (10.5%
at December 31, 1995). The Bank Facility is secured by essentially all
the assets of the Company and requires the Company to maintain certain
financial ratios, prohibits the Company from paying dividends, and
places a limit on capital expenditures without Bank approval. The
Company exceeded the capital expenditure limit in 1995 by $255,000 and
subsequently received a Waiver of Default from the Bank.
(b) On December 29, 1995, the Company retired all of the Notes to its
former Preferred Stockholders. This was accomplished by utilizing $2.0
million of convertible loans under the Convertible Facility. On January
31, 1996, the Company converted this $2.0 million to a term note. The
term note will be repaid on a four-year straight line basis. The term
note bears interest at the applicable prime rate plus two percent (10.5%
at January 31, 1996). As part of the Bank Facility, the term note is
secured by essentially all the assets of the Company. Concurrently, the
amount available under the Convertible Facility was reduced to $14.5
million.
(c) On October 27, 1995, the debt of the Company's 50% owned Mountain
Creek Joint Venture ("MCJV") was refinanced with the Bank. The total
principal amount of the new loan was $3.5 million. The principal is
payable in 59 consecutive monthly installments of $25,000 with a
balloon payment due on September 30, 2000. The interest rate through
September 30, 1999, is fixed at 9.5% and the rate for the final year
is based on a published rate. The debt is secured by the MCJV
pipeline facilities and is jointly and severally guaranteed by the
partners of MCJV.
Aggregate maturities of long-term debt, for each of the five subsequent
fiscal years are as follows:
<TABLE>
<S> <C>
1996 ......................... $ 464,000
1997 ......................... 6,682,000
1998 ......................... 3,267,000
1999 ......................... 9,615,000
2000 ......................... 1,140,000
-----------
$21,168,000
-----------
-----------
</TABLE>
6. INCOME TAXES
The significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Current ............................... $ - $26,000 $45,000
Deferred .............................. - - -
------- ------- -------
$ - $26,000 $45,000
------- ------- -------
------- ------- -------
</TABLE>
Effective January 1, 1993, the Company adopted the provisions of FAS 109 which
changed the Company's method of accounting for income taxes from the deferred
method to the liability method. Deferred income taxes reflect the net tax
effect of temporary differences between the financial reporting carrying amounts
of assets and liabilities and income tax carrying amounts. The components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment ......... $(3,228,000) $(2,817,000)
Deferred tax assets:
NOL carryforwards ..................... 10,151,000 9,804,000
Investment tax credit carryforwards ... 1,618,000 1,618,000
Alternative minimum tax credit
carryforwards ....................... 104,000 104,000
Accrued liabilities and other ......... - 215,000
----------- -----------
11,873,000 11,741,000
Less valuation allowance ................ (8,645,000) (8,924,000)
----------- -----------
$ - $ -
----------- -----------
----------- -----------
</TABLE>
25
<PAGE>
The provision (benefit) for income taxes differed from amounts computed at
the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
--------- --------- ------------
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate.... $ 374,000 $ 116,000 $(10,653,000)
State income taxes, net of federal benefit... - 17,000 29,000
Valuation allowance on NOL................... (438,000) (174,000) 10,491,000
Other........................................ 64,000 67,000 178,000
--------- --------- ------------
$ - $ 26,000 $ 45,000
--------- --------- ------------
--------- --------- ------------
</TABLE>
The Company has NOL carryforwards of $29.9 million which, if not utilized,
will expire at various times from 2001 through 2010. In addition, the
Company has unused investment tax credits of approximately $1.6 million
available to offset future federal income tax liabilities. In general, the
credits expire at various times from 1996 through 2001, unless previously
utilized. The respective carryforwards are available to the Company in their
full amounts unless a "change of ownership", as defined in Internal Revenue
Code Section 382, occurs. If a change of ownership occurs, utilization of
the NOL carryforwards could be limited.
7. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases office space, equipment, and automobiles under lease
obligations classified as operating leases. Rental expense under these leases
was approximately $1.5 million in 1995, $869,000 in 1994, and $1.7 million
in 1993. At December 31, 1995, minimum future rental payments due under
operating leases were as follows:
<TABLE>
<S> <C>
1996....................... $1,678,000
1997....................... 867,000
1998....................... 297,000
1999....................... 297,000
2000....................... 257,000
</TABLE>
The Company is involved in certain other legal actions and claims arising in
the ordinary course of business. It is the opinion of management (based, in
part, on advice of legal counsel) that such litigation and claims will be
resolved without material effect on the Company's financial position or
results of operations.
8. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The Company believes that the following described related party transactions
are in the ordinary course of its business and are competitive and comparable
to those with unrelated persons and has taken measures to ensure they were
conducted on an arm's length basis.
The Company is a party to a consulting agreement with Cardinal Resources,
Inc. owned by Mr. James W. Bryant, a Director of the Company. The Company
pays $250,000 a year for providing engineering and project management
services through November 2, 1997. The Company entered into the consulting
agreement as part of the reorganization in 1993. The consulting agreement
was assigned to Cardinal Resources, Inc. in 1994 by Mr. Bryant, who
personally guarantees its performance. The original consulting agreement has
been amended and modified to include one additional consultant. In addition,
the consulting agreement provides that the Company has an option to
participate in any of Cardinal's projects.
The Company is a party to a joint venture with Mr. Ted Collins, Jr., a
Director of the Company. The joint venture was formed in 1993 to develop
certain targeted natural gas projects. Under the joint venture agreement,
each party bears a portion of the development costs and has a right of first
refusal on such projects.
The Company purchased all of the stock of Energy Transfer Corporation ("ETC")
and the outstanding partnership interests of Energy Transfer I, Ltd. ("ETI")
effective April 2, 1995. Effective July 1, 1995, the Company purchased the
outstanding partnership interests of Energy Transfer II, Ltd ("ETII"). ETC is
the general partner of both ETI and ETII. ETI and ETII own the Oletha
system. The Company had previously provided marketing and management services
to ETC since 1994 for $5,000 a month. Mr. Kelcy L. Warren, the Company
President, Chief Operating
26
<PAGE>
Officer, and Director received $57,600 as the sole owner of the stock of ETC,
$1,411,200 as 50% owner of the limited partnership interest of ETI and
$260,000 as the owner of 50% limited partnership interest of ETII. Mr. Ray
Davis, Chief Executive Officer and Chairman of the Board, and Mr. Ben H. Cook,
a Director of the Company, each received $705,000 from the sale of their
limited partnership interest in ETI. Mr. Davis, in addition, received
$130,000 from the sale of his limited partnership interest in ETII. Mr.
Warren was a Director of the Company, but neither Mr. Cook nor Mr. Davis were
officers or directors of the Company when ETI and ETII were formed to own and
operate the Oletha system. The Board of the Company formed a Special
Committee of Independent Directors to negotiate and determine the value of
the acquisitions.
9. EMPLOYEE BENEFIT PLANS
Under the Plan (Note 2) all outstanding stock options were canceled. An
incentive stock option plan (the "Stock Plan") was approved by the Board of
Directors in 1993 and the Stockholders in 1994. Under the Stock Plan,
options to purchase up to 1,250,000 shares of the Company's authorized but
unissued stock can be granted to key employees through 2003. Options under
the Stock Plan were granted at an exercise price equal to 100% of the fair
market value of the stock on the date of the grant. The options are
exercisable at a rate not to exceed 20% for each year of employment completed
(however 100% may be exercised under a change of control, as defined) after
the date of grant and expire ten years after the date of grant.
The following is a summary of activity under the Stock Plan and all former
stock option plans for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
------------ -------- ----------
<S> <C> <C> <C>
Outstanding at beginning of year......... 727,500 727,500 601,713
Granted during year...................... 272,500 - 727,500
Exercised or terminated during year...... - - (601,713)
------------ -------- ----------
Outstanding at end of year............... 1,000,000 727,500 727,500
------------ -------- ----------
------------ -------- ----------
Exercisable at end of year............... 291,000 145,500 -
------------ -------- ----------
------------ -------- ----------
Per share price of exercisable options... $1.125-$1.75 $ 1.125 $ -
------------ -------- ----------
------------ -------- ----------
Per share price of grants during year.... $ 1.75 $ - $ 1.125
------------ -------- ----------
------------ -------- ----------
Per share price of options exercised
during year............................. $ none $ none $ none
------------ -------- ----------
------------ -------- ----------
</TABLE>
The Company instituted an Annual Incentive Compensation Plan ("Compensation
Plan") in 1994. The purpose of the Compensation Plan is to provide annual
incentive compensation to those officers and key employees who contribute
significantly to the growth and success of the Company; to attract and retain
individuals of outstanding ability; and to align the interests of those who
hold positions of major responsibility in the Company with the interests of
Company stockholders.
The Compensation Plan is administered by the Compensation Committee of the
Board of Directors (the "Committee"). The Committee approves or modifies, as
appropriate, the recommendations of the Chief Executive Officer regarding
participants, size of awards, performance criteria, and the recommended
performance targets. These recommendations are subject to the final approval
of the full Board of Directors. The Company paid approximately $714,000 in
incentive compensation in January 1996 accrued under the 1995 Compensation
Plan.
The Company maintains an employee savings plan ("Savings Plan") under Section
401(k) of the Internal Revenue Code, which is available to all employees who
meet certain requirements. Under the Savings Plan, the Company matched 100%
of employees' contributions up to five percent (5%) of the participant's
compensation through 1993. The Savings Plan was amended effective January 1,
1994, whereby the Company matches 20% of the employees' contributions up to a
maximum of five percent (5%) of the participant's compensation. The Company
may, at its discretion, increase the matching percentage at year end and may
match in New Common Stock or cash. In
27
<PAGE>
February 1996, the Board of Directors voted to match 1995 contributions in
cash and did not increase the matching percentage. The Company recorded
expense of $33,000, $33,000, and $250,000 in 1995, 1994, and 1993,
respectively, for its matching contribution.
The Company currently provides no post-employment benefits.
10. SEGMENT INFORMATION
Segment data as of and for the years ended December 31, 1995, 1994 and 1993,
follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Revenue from unaffiliated sources
Gas gathering and marketing.......... $102,211,000 $ 68,564,000 $114,722,000
Gas processing....................... 29,698,000 37,842,000 100,903,000
------------ ------------ ------------
Total.............................. $131,909,000 $106,406,000 $215,625,000
------------ ------------ ------------
------------ ------------ ------------
Cost of sales
Gas gathering and marketing.......... $ 95,945,000 $ 63,326,000 $105,400,000
Gas processing....................... 17,623,000 27,671,000 88,949,000
------------ ------------ ------------
Total.............................. $113,568,000 $ 90,997,000 $194,349,000
------------ ------------ ------------
------------ ------------ ------------
Depreciation and amortization
Gas gathering and marketing.......... $ 1,403,000 $ 729,000 $ 4,281,000
Gas processing....................... 1,774,000 1,814,000 1,976,000
Corporate general and
administrative...................... 203,000 190,000 194,000
------------ ------------ ------------
Total.............................. $ 3,380,000 $ 2,733,000 $ 6,451,000
------------ ------------ ------------
------------ ------------ ------------
Operating earnings (loss)
Gas gathering and marketing.......... $ 1,910,000 $ (3,366,000) $ 285,000
Gas processing....................... 5,386,000 2,408,000 (1,134,000)
Corporate general and
administrative...................... (3,961,000) 2,409,000 (3,569,000)
------------ ------------ ------------
Total.............................. $ 3,335,000 $ 1,451,000 $ (4,418,000)
------------ ------------ ------------
------------ ------------ ------------
Identifiable assets
Gas gathering and marketing.......... $ 30,626,000 $ 15,336,000 $ 16,554,000
Gas processing....................... 23,361,000 20,013,000 25,383,000
Corporate general and
administrative...................... 5,697,000 4,954,000 4,509,000
------------ ------------ ------------
Total.............................. $ 59,684,000 $ 40,303,000 $ 46,446,000
------------ ------------ ------------
------------ ------------ ------------
Capital expenditures
Gas gathering and marketing.......... $ 8,602,000 $ 122,000 $ 1,913,000
Gas processing....................... 4,247,000 3,618,000 1,800,000
Corporate general and
administrative...................... 168,000 85,000 29,000
------------ ------------ ------------
Total.............................. $ 13,017,000 $ 3,825,000 $ 3,742,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
28
<PAGE>
Information regarding sales to major customers by segment for the years ended
December 31, 1995, 1994, and 1993 is as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
GAS GATHERING CONSOLIDATED
AND MARKETING GAS PROCESSING REVENUES
------------- -------------- -------------
<S> <C> <C> <C>
1995 Georgia Pacific $17,117,000 - 13%
1994 Georgia Pacific $14,631,000 - 14%
1993 Georgia Pacific $24,810,000 - 12%
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Refer to the Company's Form 8-K dated May 13, 1994, which discusses the
change in the Company's accountants for the year ended December 31, 1994.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the captions "Election of Directors" and
"Certain Relationships and Related Transactions" in the Company's definitive
proxy statement (the "Proxy Statement") relating to the 1996 annual
stockholders meeting (the "Annual Meeting"), is incorporated herein by
reference. The information regarding executive officers of the Registrant is
contained at the end of Part I of this Form 10-K under a separate item
captioned "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the caption "Executive Compensation" in the
Proxy Statement relating to the Annual Meeting is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Principal Stockholders" in the
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Certain Relationships and
Related Transactions" is incorporated herein by reference.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Consolidated Financial Statements.
Cornerstone Natural Gas, Inc. and Subsidiaries.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants.. 15
Report of Ernst & Young LLP, Independent Auditors.............. 16
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1994, and 1993............................. 17
Consolidated Balance Sheets at December 31, 1995, and 1994..... 18
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994, and 1993............................. 19
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1995, 1994, and 1993......... 20
Notes to Consolidated Financial Statements..................... 21-29
</TABLE>
(2) Consolidated Financial Statement Schedules.
No schedules have been included because they are not applicable or
the required information is shown in the consolidated financial
statements or notes thereto.
(3) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- --------
<C> <S>
3.1 By-Laws, as Amended and Restated August 9, 1994, currently in effect
(incorporated by reference to Exhibit 3.1 to December 31, 1994, Form 10-K).
3.2 Restated Certificate of Incorporation of Cornerstone Natural Gas, Inc.
(incorporated by reference to Exhibit 2 to January 10, 1994, Form 8-A).
+10.1 Cornerstone Natural Gas, Inc. 1993 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.1 to December 31, 1993, Form 10-K).
+10.2 Amended and Restated Cornerstone Natural Gas, Inc. Employee Savings Plan
effective July 1, 1991 (incorporated by reference to Exhibit 10.2 to
December 31, 1993, Form 10-K).
+10.3 Amended and Restated Cornerstone Natural Gas, Inc. Employee Savings Plan
adopting the Bank of Oklahoma, N.A. Defined Contribution Master Plan as of
January 1, 1989. (incorporated by reference to Exhibit 10.3 to December 31,
1994, Form 10-K).
10.4 Endevco, Inc. Employee Savings Trust (incorporated by reference to Exhibit
10.3 to Registration Statement No. 2-85830).
10.5 Amendment Number 1 to the Endevco, Inc. Employee Savings Trust (incorporated
by reference to Exhibit 10.6 to December 31, 1991, Form 10-K).
</TABLE>
30
<PAGE>
<TABLE>
<C> <S>
10.6 Amendment Number 2 to the Endevco, Inc. Employee Savings Trust (incorporated
by reference to Exhibit 10.7 to December 31, 1991, Form 10-K).
*10.7 Amendment Number 3 to the Endevco, Inc. Employee Savings Trust.
10.8 General Partnership Agreement of Mountain Creek Joint Venture dated as of March
7, l989, by and between Western Natural Gas Company and Cornerstone Natural Gas
Company (incorporated by reference to Exhibit 10.79 to December 31, 1989, Form 10-K).
*10.9 Assignment and Assumption Agreement assigning interest of Western Natural Gas Company
to Wesnat Pipeline Company, dated as of December 31, 1992, in Mountain Creek Joint
Venture.
*10.10 Assignment of Partnership Interest from Cornerstone Natural Gas Company to Cornerstone
Pipeline Company (f/k/a Endevco Pipeline Company) dated as of June 2, 1993, in Mountain
Creek Joint Venture.
10.11 Stock Purchase Agreement dated March 20, l993, by and between Endevco, Inc., and Ray
Davis, Trustee (incorporated by reference to Exhibit 10.136 to December 31, 1992,
Form 10-K).
10.12 First Amended Stock Purchase Agreement dated May 28, 1993, by and between Endevco, Inc.,
and Ray Davis, Trustee (incorporated by reference to Exhibit 10.1 to June 17, 1993,
Form 8-K).
10.13 Form and Schedule of Warrants to Purchase Common Stock of Cornerstone Natural Gas, Inc.
(incorporated by reference to Exhibit 10.42 to December 31, 1993, Form 10-K).
10.14 Joint Venture Agreement between Cornerstone Natural Gas, Inc. and Merit Natural Gas
Company dated October 28, 1993 (incorporated by reference to Exhibit 10.45 to December 31,
1993, Form 10-K).
*10.15 Assignment of Joint Venture Interest dated as of January 1, 1996, of Cornerstone Natural Gas,
Inc., in Cornerstone/Merit Joint Venture, to Cornerstone Pipeline Company.
+10.16 Consulting Agreement between Endevco, Inc. and James W. Bryant dated June 4, 1993
(incorporated by reference to Exhibit 10.48 to December 31, 1993, Form 10-K).
+*10.17 Modification to Consulting Agreement by and between Cardinal Resources, Inc., and Cornerstone
Natural Gas, Inc., dated February 15, 1995.
+*10.18 Second Modification to Consulting Agreement by and between Cardinal Resources, Inc., and
Cornerstone Natural Gas, Inc., dated November 1, 1995.
10.19 Loan Agreement dated as of May 24, 1995, between Cornerstone Natural Gas, Inc., et al as
"Borrowers" and Bank of Oklahoma, National Association as "Bank" (incorporated by
reference to Exhibit 10.1 to June 30, 1995, Form 10-Q).
*10.20 First Amendment to Loan Agreement, dated as of January 31, 1996, between Cornerstone Natural
Gas, Inc., et al as "Borrowers" and Bank of Oklahoma, National Association as "Bank".
10.21 Term Loan Agreement between Mountain Creek Joint Venture and Bank of Oklahoma, National
Association, dated as of September 30, 1995, (incorporated by reference to Exhibit 10.1 to
September 30, 1995, Form 10-Q).
</TABLE>
31
<PAGE>
<TABLE>
<C> <S>
10.22 Securities Purchase Agreement by and between Kelcy L. Warren, Individually as the Sole
Shareholder of Energy Transfer Corporation and as a Limited Partner of Energy Transfer
I, Ltd. and Flowstone L.P., as a Limited Partner of Energy Transfer I, Ltd. and
Cornerstone Pipeline Company dated June 6, 1995 (incorporated by reference to Exhibit
10.1 to June 20, 1995, Form 8-K).
10.23 Securities Purchase Agreement by and between Kelcy L. Warren, Individually as a Limited
Partner of Energy Transfer II, Ltd., Ray Davis, Individually, as a Limited Partner of
Energy Transfer II, Ltd., and TMcD, Ltd., as a Limited Partner of Energy Transfer II,
Ltd., and Cornerstone Pipeline Company dated June 15, 1995 (incorporated by reference to
Exhibit 10.2 to June 20, 1995, Form 8-K).
*21.1 List of Subsidiaries.
*23.1 Consent of independent public accountants Arthur Andersen LLP.
*23.2 Consent of independent auditors Ernst & Young LLP.
*27.1 Financial Data Schedule.
</TABLE>
______________________________________
* Filed Herewith.
+ Denotes management contract or compensatory plan.
(b) Reports on Form 8-K.
None.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CORNERSTONE NATURAL GAS, INC.
By: /s/ RAY C. DAVIS
- ------------------------------------
Ray C. Davis
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
Date: February 26, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
CAPACITY IN
SIGNATURES WHICH SIGNED
---------- ------------
<S> <C> <C>
/s/ RAY C. DAVIS Chairman of the Board of Directors February 26, 1996
- ------------------------------------ and Chief Executive Officer
(Ray C. Davis)
/s/ KELCY L. WARREN President, Chief Operating February 26, 1996
- ------------------------------------ Officer and Director
(Kelcy L. Warren)
/s/ ROBERT L. CAVNAR Executive Vice President and Chief February 26, 1996
- ------------------------------------ Financial Officer
(Robert L. Cavnar)
/s/ RICHARD W. PIACENTI Vice President and Controller February 26, 1996
- ------------------------------------
(Richard W. Piacenti)
/s/ RICHARD D. BRANNON Director February 26, 1996
- ------------------------------------
(Richard D. Brannon)
/s/ JAMES W. BRYANT Director February 26, 1996
- ------------------------------------
(James W. Bryant)
/s/ TED COLLINS, JR. Director February 26, 1996
- ------------------------------------
(Ted Collins, Jr.)
/s/ BEN H. COOK Director February 26, 1996
- ------------------------------------
(Ben H. Cook)
/s/ SCOTT G. HEAPE Director February 26, 1996
- ------------------------------------
(Scott G. Heape)
/s/ DAVID S. HUNT Director February 26, 1996
- ------------------------------------
(David S. Hunt)
/s/ W.J. MURRAY, JR. Director February 26, 1996
- ------------------------------------
(W.J. Murray, Jr.)
</TABLE>
33
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DOCUMENT
- ----------- --------
3.1 By-Laws, as Amended and Restated August 9, 1994, currently in effect
(incorporated by reference to Exhibit 3.1 to December 31, 1994, Form
10-K).
3.2 Restated Certificate of Incorporation of Cornerstone Natural Gas, Inc.
(incorporated by reference to Exhibit 2 to January 10, 1994, Form 8-A).
+10.1 Cornerstone Natural Gas, Inc. 1993 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.1 to December 31, 1993, Form
10-K).
+10.2 Amended and Restated Cornerstone Natural Gas, Inc. Employee
Savings Plan effective July 1, 1991 (incorporated by reference to
Exhibit 10.2 to December 31, 1993, Form 10-K).
+10.3 Amended and Restated Cornerstone Natural Gas, Inc. Employee
Savings Plan adopting the Bank of Oklahoma, N.A. Defined Contribution
Master Plan as of January 1, 1989. (incorporated by reference to
Exhibit 10.3 to December 31, 1994, Form 10-K).
10.4 Endevco, Inc. Employee Savings Trust (incorporated by reference to
Exhibit 10.3 to Registration Statement No. 2-85830).
10.5 Amendment Number 1 to the Endevco, Inc. Employee Savings Trust
(incorporated by reference to Exhibit 10.6 to December 31, 1991, Form
10-K).
10.6 Amendment Number 2 to the Endevco, Inc. Employee Savings Trust
(incorporated by reference to Exhibit 10.7 to December 31, 1991, Form
10-K).
*10.7 Amendment Number 3 to the Endevco, Inc. Employee Savings Trust.
10.8 General Partnership Agreement of Mountain Creek Joint Venture dated as
of March 7, l989, by and between Western Natural Gas Company and
Cornerstone Natural Gas Company (incorporated by reference to Exhibit
10.79 to December 31, 1989, Form 10-K).
*10.9 Assignment and Assumption Agreement assigning interest of Western
Natural Gas Company to Wesnat Pipeline Company, dated as of December
31, 1992, in Mountain Creek Joint Venture.
*10.10 Assignment of Partnership Interest from Cornerstone Natural
Gas Company to Cornerstone Pipeline Company (f/k/a Endevco Pipeline
Company) dated as of June 2, 1993, in Mountain Creek Joint Venture.
<PAGE>
10.11 Stock Purchase Agreement dated March 20, l993, by and between Endevco,
Inc., and Ray Davis, Trustee (incorporated by reference to Exhibit
10.136 to December 31, 1992, Form 10-K).
10.12 First Amended Stock Purchase Agreement dated May 28, 1993, by and
between Endevco, Inc., and Ray Davis, Trustee (incorporated by
reference to Exhibit 10.1 to June 17, 1993, Form 8-K).
10.13 Form and Schedule of Warrants to Purchase Common Stock of Cornerstone
Natural Gas, Inc. (incorporated by reference to Exhibit 10.42 to
December 31, 1993, Form 10-K).
10.14 Joint Venture Agreement between Cornerstone Natural Gas, Inc. and Merit
Natural Gas Company dated October 28, 1993 (incorporated by reference
to Exhibit 10.45 to December 31, 1993, Form 10-K).
*10.15 Assignment of Joint Venture Interest dated as of January 1, 1996, of
Cornerstone Natural Gas, Inc., in Cornerstone/Merit Joint Venture, to
Cornerstone Pipeline Company.
+10.16 Consulting Agreement between Endevco, Inc. and James W. Bryant dated
June 4, 1993 (incorporated by reference to Exhibit 10.48 to December
31, 1993, Form 10-K).
+*10.17 Modification to Consulting Agreement by and between Cardinal Resources,
Inc., and Cornerstone Natural Gas, Inc., dated February 15, 1995.
+*10.18 Second Modification to Consulting Agreement by and between Cardinal
Resources, Inc., and Cornerstone Natural Gas, Inc., dated November 1,
1995.
10.19 Loan Agreement dated as of May 24, 1995, between Cornerstone Natural
Gas, Inc., et al as "Borrowers" and Bank of Oklahoma, National
Association as "Bank" (incorporated by reference to Exhibit 10.1 to
June 30, 1995, Form 10-Q).
*10.20 First Amendment to Loan Agreement, dated as of January 31, 1996,
between Cornerstone Natural Gas, Inc., et al as "Borrowers" and Bank of
Oklahoma, National Association as "Bank".
10.21 Term Loan Agreement between Mountain Creek Joint Venture and Bank of
Oklahoma, National Association, dated as of September 30, 1995,
(incorporated by reference to Exhibit 10.1 to September 30, 1995, Form
10-Q).
10.22 Securities Purchase Agreement by and between Kelcy L. Warren,
Individually as the Sole Shareholder of Energy Transfer Corporation and
as a Limited Partner of Energy Transfer I, Ltd. and Flowstone L.P., as
a Limited Partner of Energy Transfer I, Ltd. and Cornerstone Pipeline
Company dated June 6, 1995 (incorporated by reference to Exhibit 10.1
to June 20, 1995, Form 8-K).
<PAGE>
10.23 Securities Purchase Agreement by and between Kelcy L. Warren,
Individually as a Limited Partner of Energy Transfer II, Ltd., Ray
Davis, Individually, as a Limited Partner of Energy Transfer II, Ltd.,
and TMcD, Ltd., as a Limited Partner of Energy Transfer II, Ltd., and
Cornerstone Pipeline Company dated June 15, 1995 (incorporated by
reference to Exhibit 10.2 to June 20, 1995, Form 8-K).
*21.1 List of Subsidiaries.
*23.1 Consent of independent public accountants Arthur Andersen LLP.
*23.2 Consent of independent auditors Ernst & Young LLP.
*27.1 Financial Data Schedule.
____________
* Filed Herewith.
+ Denotes management contract or compensatory plan.
<PAGE>
EXHIBIT 10.7
AMENDMENT NO. 3 TO THE
ENDEVCO, INC.
EMPLOYEE SAVINGS TRUST
Pursuant to the provisions of Section 4.1 thereof, the Endevco, Inc.
Employee Savings Trust, as amended (the "Trust"), is hereby amended in the
following respects only:
FIRST: The Trust is hereby renamed "Cornerstone Natural Gas, Inc. Employee
Savings Trust."
SECOND: The Trust is hereby amended so that the term "Company" therein
refers to Cornerstone Natural Gas, Inc., a Delaware corporation.
THIRD: The Trust is hereby amended so that the term "Trustee" therein
refers to Alliance Trust Company, a Texas trust company.
FOURTH: Section 1.1 of the Trust is hereby amended by restating the first
sentence thereof in its entirety to read as follows:
All of the property contributed to the CORNERSTONE NATURAL GAS, INC.
EMPLOYEE SAVINGS PLAN, as amended (the "Plan"), together with the
income therefrom and the increments thereof, shall constitute a trust
fund, known as the CORNERSTONE NATURAL GAS, INC. EMPLOYEE SAVINGS TRUST
(the "Trust"), to be held in trust by the Trustee under the terms and
provisions of this Agreement for the exclusive benefit of the
Participants and their beneficiaries pursuant to the Plan.
FIFTH: Section 1.2 of the Trust is hereby amended by restating the second
sentence thereof in its entirety to read as follows:
The Trustee shall have full power and authority to manage, handle,
invest, reinvest, sell for cash or credit, or for part cash or part
credit, exchange, hold, dispose of, lease for any period of time,
whether or not longer than the life of the trust, improve, repair,
maintain, work, develop, use, operate, mortgage, or pledge, all or any
part of the funds, assets and property constituting from time to time
any part of the Trust; borrow money; enter into contracts; execute
obligations, negotiable and
<PAGE>
nonnegotiable; vote shares of stock in person and by proxy, with or
without power of substitution, provided that, with respect to shares of
common stock of the Company held by the Trustee, the Trustee shall vote
such shares only in accordance with instructions received from
Participants pursuant to Section 13.8 of the Plan; register investments
in the name of a nominee; sell, convey, lease and/or otherwise deal with
any producing oil, gas and mineral leases or mineral rights and
royalties; pay all reasonable expenses; execute and deliver any deeds,
conveyances, leases, contracts, or written instruments of any character
appropriate to any of the powers or duties of the Trustee; write option
contracts against securities held by the Trust, and shall, in general,
have as broad power respecting the management, operation and handling of
the Trust properties and assets as if it were the owner of such assets
in its own right.
SIXTH: Section 3.1 of the Trust is hereby amended by restatement in its
entirety to read as follows:
Section 3.1 RESIGNATION OF TRUSTEE. Any Trustee may resign its
duties hereunder by filing its written resignation with the Company at
least 60 days prior to the effective date thereof. If such resigning
Trustee is the sole trustee then acting hereunder, such resignation
shall not take effect prior to the appointment of a successor trustee as
hereinafter provided.
SEVENTH: Section 3.3 of the Trust is hereby amended by restatement in its
entirety to read as follows:
Section 3.3 APPOINTMENT OF SUCCESSOR TRUSTEE. The appointment of a
successor trustee hereunder shall be accomplished by and shall take
effect upon the delivery to the resigning or removed Trustee, as the
case may be, of (a) an instrument in writing appointing such successor
trustee, executed by the Company, and (b) an acceptance in writing of
the office of successor trustee hereunder executed by the successor so
appointed. Any successor trustee hereunder may be either a corporation
authorized and empowered to exercise trust powers or may be one or more
individuals. All of the provisions set forth herein with respect to
the Trustee shall relate to each successor trustee so appointed with
the same force and effect as if such successor trustee had been
originally named herein as a trustee hereunder. If a successor trustee
has not been appointed within 30 days after notice of resignation or
removal has been given under the provisions of this Article, the
resigning or removed Trustee or the Committee or any member of the
Committee may apply to any court of competent jurisdiction for the
appointment of a successor trustee. If a successor trustee has not
been appointed within 30 days after the effective date of resignation
or removal specified in such notice, the Company shall
<PAGE>
appoint as successor trustee such members of the Committee as may accept in
writing the office of successor trustee.
EIGHTH: Section 5.3 of the Trust is hereby amended by restatement in its
entirety to read as follows:
Section 5.3 DEFINED TERMS. Unless the context clearly indicates
otherwise, the words and phrases used in this Agreement shall have the
meanings assigned to them under the provisions of the Plan, except
that the term "Committee" shall have the meaning assigned to the term
"Administrative Committee" under the provisions of the Plan and the
term "Affiliated Company" shall have the meaning assigned to it under
the provisions of the Endevco, Inc. Employee Savings Plan, as in
effect on June 30, 1991.
IN WITNESS WHEREOF, this Amendment has been executed this 10th day of May
1994, the EIGHTH provision hereof to be effective as of July 1, 1991, the SECOND
provision hereof to be effective as of November 2, 1993, and the remaining
provisions hereof to be effective as of January 1, 1994.
CORNERSTONE NATURAL GAS, INC.
(formerly ENDEVCO, INC.)
By: /s/ ROBERT L. CAVNAR
------------------------------------------
Title: Senior Vice President, Chief Financial
Officer & Treasurer
ALLIANCE TRUST COMPANY, Trustee
By: /s/ MARY J. STEICHEN
----------------------------------------------
Title: Vice President
<PAGE>
EXHIBIT 10.9
ASSIGNMENT AND ASSUMPTION AGREEMENT
This Assignment and Assumption Agreement dated as of December 31, 1992
(herein called the "Agreement") is entered into by and between Western
Natural Gas Company, a Delaware corporation (herein called "WNGC"), Wesnat
Pipeline Company, a Delaware corporation (herein called "Wesnat") and
Cornerstone Pipeline Company, a Delaware corporation (herein called
"Pipeline").
RECITALS:
A. WNGC and Cornerstone Natural Gas Company, a Delaware corporation ("CNGC"),
entered into that certain General Partnership Agreement dated as of March
7, 1989, as amended by Amendment No. 1 dated September 28, 1989 (as so
amended, the "Partnership Agreement"), creating Mountain Creek Joint
Venture ("MCJV").
B. WNGC and CNGC entered into that certain Natural Gas Transportation
Agreement dated February 3, 1989 (the "Transportation Agreement") with
Texas Utilities Fuel Company, a Texas corporation ("TUFCO"), and the
obligations under the Transportation Agreement have been performed by MCJV.
C. MCJV entered into that certain Permanent Loan Agreement dated September 28,
1989 (as from time to time amended, the "Loan Agreement"), with Chrysler
Capital Corporation ("Chrysler"). WNGC and Endevco, Inc. (now known as
Cornerstone Natural Gas, Inc.) ("Cornerstone") became liable for the
indebtedness of MCJV to Chrysler pursuant to Guarantee agreements executed
of even date therewith.
D. Pursuant to the three assignments attached hereto as Exhibit A, Exhibit B
and Exhibit C WNGC assigned its interest in MCJV to Wesnat, such
assignments having been previously consented to by the parties hereto or
their predecessors in interest.
E. On June 2, 1993 Cornerstone assigned its interests in MCJV to Pipeline and
Pipeline currently holds such interests and has the right to consent to the
assignment and withdrawal contemplated hereby.
F. On June 1, 1992 Chrysler assigned to General Electric Capital Corporation
("GECC") the Note (as such term is defined in the Loan Agreement), as well
as the Loan Agreement and the other Loan Papers referred to therein.
G. WNGC, in order to clarify the status of the ownership interest of MCJV and
the status of WNGC with regard thereto, desires to re-execute and assign to
Wesnat all of WNGC's rights and interest in, to and under the Partnership
Agreement and the Transportation
<PAGE>
Agreement, and Wesnat desires to assume such rights and obligations and to
indemnify and hold harmless WNGC for all liabilities occurring after the
effective date hereof. Pipeline, MCJV and Wesnat each have agreed to
consent to such assignment on the terms and conditions provided for herein
and to consent to the withdrawal of WNGC as a partner in MCJV effective
December 31, 1992.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereto hereby act and agree as follows:
1. ASSIGNMENT. WNGC, for and in consideration of the sum of Ten Dollars
($10.00) and for other good and valuable consideration to WNGC paid by Wesnat,
the receipt and sufficiency of which are hereby acknowledged, does by these
presents SELL, TRANSFER, CONVEY, ASSIGN, ENDORSE, SET OVER AND DELIVER unto
Wesnat the following:
(a) The General Partnership interest of WNGC in MCJV, together with all
rights, benefits, remedies and privileges of WNGC under the
Partnership Agreement and all of the interest of WNGC in the
Transportation Agreement (all of the foregoing are herein collectively
called the "Assigned Interest"); and
(b) All rights, titles, interest, privileges, claims, demands and equities
existing or to exist in connection with the Assigned Interest.
TO HAVE AND TO HOLD the Assigned Interest, together and along with all such
rights, titles, interest, privileges, claims, demands and equities now or
hereafter had by WNGC in connection therewith unto Wesnat forever.
2. REPRESENTATIONS AND WARRANTIES OF WNGC. The assignment made hereby
is made without recourse and without warranty of representation of any nature
whatsoever, expressed or implied, except WNGC does warrant that it is the
owner and the holder of the Assigned Interest and has the full right, power
and authority to transfer the Assigned Interest free of any lawful claim of
any person or entity, except as set forth on Exhibit A, Exhibit B and Exhibit
C hereto.
3. ASSUMPTION BY WESNAT. Wesnat hereby agrees to accept the Assigned
Interest and to assume and perform all of the obligations and duties that
WNGC has or will have under the Partnership Agreement and Transportation
Agreement and as set forth on Exhibit A, Exhibit B, and Exhibit C.
4. RATIFICATION BY WESNAT, MCJV AND ENDEVCO. Each of MCJV, Wesnat and
Pipeline hereby consents to the assignment and withdrawal contemplated
hereby, and each of MCJV, Pipeline and Wesnat hereby ratifies and confirms
the Partnership Agreement as modified by this Agreement and agrees that on
and after the effective date hereof all references in the Partnership
Agreement or any related document to WNGC, "Western," "Non-managing partner"
or similar references shall refer to Wesnat. Each of MCJV, Pipeline and
Wesnat further do hereby consent to the withdrawal of WNGC as a partner of
MCJV, effective December 31, 1992 and agrees to indemnify and hold harmless
WNGC from any liability relating to MCJV save and
<PAGE>
except for its Guarantee of the Note pursuant to the Permanent Loan
Agreement. WNGC hereby expressly agrees that this Assignment and Assumption
Agreement in no way affects its obligations under the Guarantee.
IN WITNESS WHEREOF, the parties hereto have each executed this
assignment to be effective for all purposes as of December 31, 1992.
WESTERN NATURAL GAS COMPANY
By: /s/ TED C. PARKER, JR.
-----------------------------------
Ted C. Parker, Jr., President
WESNAT PIPELINE COMPANY
By: /s/ TED C. PARKER, JR.
-----------------------------------
Ted C. Parker, Jr., President
CORNERSTONE PIPELINE COMPANY
By: /s/ KELCY L. WARREN
-------------------------------
Name: Kelcy L. Warren
-------------------------------
Title: President
-------------------------------
MOUNTAIN CREEK JOINT VENTURE
BY CORNERSTONE PIPELINE COMPANY, a General Partner
By: /s/ KELCY L. WARREN
-------------------------------
Name: Kelcy L. Warren
-------------------------------
Title: President
-------------------------------
BY WESNAT PIPELINE COMPANY, a General Partner
By: /s/ TED C. PARKER, JR.
-----------------------------------
Ted C. Parker, Jr., President
<PAGE>
EXHIBIT 10.10
ASSIGNMENT OF PARTNERSHIP INTEREST
THIS ASSIGNMENT OF PARTNERSHIP INTEREST dated as of June 2, 1993 (herein
called the "Assignment") is by CORNERSTONE NATURAL GAS COMPANY, a Delaware
corporation (herein called "Assignor"), in favor of ENDEVCO PIPELINE COMPANY, a
Delaware corporation (herein called "Assignee").
RECITALS:
A. Assignor and Western Natural Gas Company, a Delaware corporation
("Western"), entered into that certain General Partnership Agreement dated as of
March 7, 1989, as amended by Amendment No. 1 dated September 28, 1989 (as so
amended, the "Partnership Agreement"), creating Mountain Creek Joint Venture
("Mountain Creek").
B. On December 27, 1990, December 27, 1991, and December 31, 1992,
Western assigned its interest in Mountain Creek, the Partnership to Wesnat
Pipeline Company, a Delaware corporation ("Wesnat"), pursuant to that certain
Assignment, and Wesnat currently holds such interests and has the right to
consent to the assignments contemplated hereby.
C. Assignor and Western entered into that certain Natural Gas
Transportation Agreement dated February 3, 1989 (the "Transportation Agreement")
with Texas Utilities Fuel Company, a Texas corporation ("TUFCO"), and the
obligations under the Transportation Agreement have been performed by Mountain
Creek.
D. Mountain Creek entered into that certain Permanent Loan Agreement
dated September 28, 1989 (as from time to time amended, the "Loan Agreement")
with Chrysler Capital Corporation ("Chrysler"), pursuant to which Assignor, as a
general partner in Mountain Creek, became liable for the indebtedness of
Mountain Creek to Chrysler.
E. On June 1, 1992, Chrysler assigned to General Electric Capital
Corporation ("GECC") the Note (as such term is defined in the Loan Agreement),
as well as the Loan Agreement and the other Loan Papers referred to therein.
F. Assignor desires to assign to Assignee all of its rights and interests
in, to and under the Partnership Agreement and the Transportation Agreement, and
Western, Wesnat, Mountain Creek and GECC have each agreed to consent to such
assignment on the terms and conditions provided herein.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereto hereby act and agree as follows:
<PAGE>
ARTICLE I
ASSIGNMENT
Section 1.1. ASSIGNMENT. Assignor, for and in consideration of the sum of
Ten Dollars ($10.00) and for other good and valuable consideration to Assignor
paid by Assignee, the receipt and sufficiency of which are hereby acknowledged,
does by these presents SELL, TRANSFER, CONVEY, ASSIGN, ENDORSE, SET OVER AND
DELIVER unto Assignee the following:
(a) The general partnership interest of Assignor in Mountain Creek,
together with all rights, benefits, remedies and privileges of
Assignor under the Partnership Agreement and all of the interest of
Assignor in the Transportation Agreement (all of the foregoing are
herein collectively called the "Assigned Interest"); and
(b) All rights, titles, interests, privileges, claims, demands, and
equities existing or to exist in connection with the Assigned
Interest.
TO HAVE AND TO HOLD the Assigned Interest, together and along with all such
rights, titles, interests, privileges, claims, demands and equities, now or
hereafter had by Assignor in connection therewith, unto Assignee forever.
Section 1.2. REPRESENTATIONS AND WARRANTIES OF ASSIGNOR. The assignment
made hereby is made without recourse and without warranty or representation of
any nature whatsoever, express or implied, except Assignor does warrant that it
is the owner and holder of the Assigned Interest and has the full right, power
and authority to transfer the Assigned Interest free of any lawful claim of any
person or entity.
Section 1.3. ASSUMPTION BY ASSIGNEE. Assignee hereby agrees to accept the
Assigned Interest and to assume and perform all of the obligations and duties
that Assignor has or will have under the Partnership Agreement.
Section 1.4. RATIFICATION BY ASSIGNEE, MOUNTAIN CREEK AND WESNAT. Each of
Mountain Creek and Wesnat hereby consents to the assignment contemplated hereby,
and each of Mountain Creek, Wesnat and Assignee hereby ratifies and confirms the
Partnership Agreement, as modified by this Assignment, and agrees that on and
after the date hereof all references in the Partnership Agreement or any related
document to "Cornerstone," "Managing Partner" or similar references shall refer
to Assignee.
ARTICLE II
MISCELLANEOUS
Section 2.1. ADDRESSES. For the purposes of this Assignment, the
addresses of the parties shall hereafter be as shown beside their signatures
hereto.
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Section 2.2. ADDITIONAL DOCUMENTS. Assignor will from time to time, at
the request of Assignee and at no expense to Assignor, execute and deliver to
Assignee any documents deemed by Assignor to be reasonably necessary or
desirable to carry out more effectively the purposes of this Assignment,
including without limitation any assignments, properly completed (and
acknowledged when required).
Section 2.3. CHOICE OF LAW. THIS ASSIGNMENT SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS
APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE AND
THE LAWS OF THE UNITED STATES OF AMERICA.
Section 2.4. COUNTERPARTS. This Assignment may be executed in several
counterparts, all of such counterparts together constituting one and the same
instrument.
Section 2.5. FINAL AGREEMENT; NO ORAL AGREEMENTS. THIS WRITTEN ASSIGNMENT
REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have each executed this Assignment
on the dates set forth in their respective acknowledgements below to be
effective for all purposes as of the date first written above.
"ASSIGNOR"
CORNERSTONE NATURAL GAS COMPANY
a Delaware corporation
By: /s/ JAMES W. BRYANT
--------------------------
Name: James W. Bryant
-----------------------
Title: Chairman of the Board
-----------------------
Address of Assignor is:
8080 N. Central Expressway
Twelfth Floor, L.B. 47
Dallas, Texas 75206
<PAGE>
"ASSIGNEE"
ENDEVCO PIPELINE COMPANY
a Delaware corporation
By: /s/ JAMES W. BRYANT
--------------------------
Name: James W. Bryant
-----------------------
Title: Chairman of the Board
-----------------------
Address of Assignee is:
8080 N. Central Expressway
Twelfth Floor, L.B. 47
Dallas, Texas 75206
Each of the following, by its execution in the space provided below, hereby
consents to the Assignment and the transactions contemplated thereby.
WESNAT PIPELINE COMPANY
a Delaware corporation
By: /s/ TED C. PARKER, JR.
--------------------------
Name: Ted C. Parker, Jr.
-----------------------
Title: President
-----------------------
WESTERN NATURAL GAS COMPANY
a Delaware corporation
By: /s/ TED C. PARKER, JR.
--------------------------
Name: Ted C. Parker, Jr.
-----------------------
Title: President
-----------------------
<PAGE>
MOUNTAIN CREEK JOINT VENTURE
a Texas general partnership
By: CORNERSTONE NATURAL GAS COMPANY
By: /s/ JAMES W. BRYANT
--------------------------
Name: James W. Bryant
-----------------------
Title: Chairman of the Board
-----------------------
By: WESNAT PIPELINE COMPANY
By: /s/ TED C. PARKER, JR.
--------------------------
Name: Ted C. Parker, Jr.
-----------------------
Title: President
-----------------------
Address of Mountain Creek is:
8080 N. Central Expressway
Suite 1200, L.B. 47
Dallas, Texas 75206
GENERAL ELECTRIC CAPITAL CORPORATION
a New York corporation
By: /s/ JOYCE TAYLOR
------------------------
Name: Joyce Taylor
---------------------
Title: RCA
---------------------
<PAGE>
EXHIBIT 10.15
ASSIGNMENT OF JOINT VENTURE INTEREST
THIS ASSIGNMENT OF JOINT VENTURE INTEREST dated as of January 1, 1996
(herein called the "Assignment") is by CORNERSTONE NATURAL GAS, INC., a
Delaware corporation (herein called "Assignor"), in favor of CORNERSTONE
PIPELINE COMPANY, a Delaware corporation (herein called "Assignee").
RECITALS:
Assignor and Merit Natural Gas Company, a Texas corporation ("Merit"),
entered into that certain Joint Venture Agreement dated as of October 28,
1993, creating the Cornerstone/Merit Joint Venture ("Cornerstone/Merit").
Assignor desires to assign to Assignee all of its rights and interests
in, to and under the Joint Venture Agreement and Merit and Cornerstone/Merit
have each agreed to consent to such assignment on the terms and conditions
provided herein.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereto hereby act and agree as
follows:
ARTICLE I
ASSIGNMENT
Section 1.1 ASSIGNMENT. Assignor, for and in consideration of the sum
of Ten Dollars ($10.00) and for other good and valuable consideration to
Assignor paid by Assignee, the receipt and sufficiency of which are hereby
acknowledged, does by these presents SELL, TRANSFER, CONVEY, ASSIGN, ENDORSE,
SET OVER AND DELIVER unto Assignee the following:
(a) The joint venture interest of Assignor in Cornerstone/Merit, together
with all rights, benefits, remedies and privileges of Assignor under
the Agreement (called the "Assigned Interest"); and
(b) All rights, titles, interests, privileges, claims, demands and
equities existing or to exist in connection with the Assigned Interest
TO HAVE AND TO HOLD the Assigned Interest, together and along with all such
rights, titles, interests, privileges, claims, demands and equities, now or
hereafter had by Assignor in connection therewith, unto Assignee forever.
Section 1.2 REPRESENTATIONS AND WARRANTIES OF ASSIGNOR. The assignment
made hereby is made without recourse and without warranty or representation
of any nature whatsoever, expressed or implied, except Assignor does warrant
that it is the owner and holder of the
<PAGE>
Assigned Interest and has the full right, power and authority to transfer the
Assigned Interest free of any lawful claim of any person or entity.
Section 1.3 ASSUMPTION BY ASSIGNEE. Assignee hereby agrees to accept
the Assigned Interest and to assume and perform all of the obligations and
duties that Assignor has or will have under the Joint Venture Agreement.
Section 1.4 RATIFICATION BY ASSIGNEE, CORNERSTONE/MERIT AND MERIT.
Each of Cornerstone/Merit and Merit hereby consents to the assignment
contemplated hereby, and each of Cornerstone/Merit, Merit and Assignee hereby
ratifies and confirms the Agreement, as modified by this Assignment, and
agrees that on and after the date hereof all references in the Agreement or
any related document to "Cornerstone" or similar references shall refer to
Assignee.
ARTICLE II
MISCELLANEOUS
Section 2.1 ADDRESSES. For the purposes of this Assignment, the
addresses of the parties shall hereafter be as shown beside their signatures
hereto.
Section 2.2 ADDITIONAL DOCUMENTS. Assignor will from time to time, at
the request of Assignee and at no expense to Assignor, execute and deliver to
Assignee any documents deemed by Assignor to be reasonably necessary or
desirable to carry out more effectively the purposes of this Assignment,
including without limitation any assignments, properly completed (and
acknowledged when required).
Section 2.4 COUNTERPARTS. This Assignment may be executed in several
counterparts, all of such counterparts together constituting one and the same
instrument.
Section 2.5 FINAL AGREEMENT; NO ORAL AGREEMENTS. THIS WRITTEN
ASSIGNMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have each executed this
Assignment on the dates set forth in their respective acknowledgments below
to be effective for all purposes as of the date first written above.
"ASSIGNOR"
CORNERSTONE NATURAL GAS, INC.
By: /s/ RAY C. DAVIS
-------------------------------
Ray C. Davis
Chief Executive Officer
<PAGE>
Address of Assignor is:
8080 N. Central Expwy., Suite 1200
Dallas, TX 75206-1815
"ASSIGNEE"
CORNERSTONE PIPELINE COMPANY.
By: /s/ RAY C. DAVIS
-------------------------------
Ray C. Davis
Chief Executive Officer
Address of Assignee is:
8080 N. Central Expwy., Suite 1200
Dallas, TX 75206-1815
Each of the following, by its execution in the space provided below,
hereby consents to the Assignment and the transactions contemplated thereby.
"MERIT"
MERIT NATURAL GAS COMPANY,
a Texas joint venture
By: TED COLLINS, JR.
-------------------------------
Ted Collins, Jr., President
Address of Merit is:
P.O. Box 27
Midland, TX 79702
CORNERSTONE/MERIT JOINT VENTURE
By: Cornerstone Natural Gas, Inc.
/s/ RAY DAVIS
-------------------------------
Ray Davis
By: Merit Natural Gas Company
By: TED COLLINS, JR.
-------------------------------
Ted Collins, Jr.
<PAGE>
EXHIBIT 10.17
MODIFICATION TO CONSULTING AGREEMENT
Agreement by and between Cardinal Resources, Inc. ("Cardinal") and
Cornerstone Natural Gas, Inc. ("Company") dated this 15th day of February
1995.
WHEREAS, Company entered into that certain Consulting Agreement by and
between Company and James W. Bryant as ("Consultant") dated June 4, 1993
("Agreement");
WHEREAS, effective August 1, 1994, Consultant assigned the Consulting
Agreement to Cardinal Resources, Inc., in that Assignment of Consulting
Agreement, a copy of which is attached hereto as Exhibit "A";
WHEREAS, Consultant is desirous to commit additional consulting services
to the Company for a period of one year only and Company is agreeable to such
additional services,
W I T N E S S E T H :
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
the Company and Cardinal hereby agree to modify the Agreement as follows:
1. Consulting Services as defined in the Agreement shall be modified
to include Mr. Dale Wilson as an additional business consultant ("Additional
Consultant") for a period of one year only beginning on January 9, 1995.
2. The duties of the Consultant as defined in the Agreement shall be
modified and expanded so that between the Consultant and Additional
Consultant, a total of 60 hours per week will be devoted to the Company.
3. The Company shall provide to the Additional Consultant medical
insurance as provided to Consultant.
4. As compensation for Additional Consultant, the Company shall pay
Cardinal an additional $50,000 for the one-year period. Cardinal shall
invoice Company monthly over the one-year period. This additional
compensation shall not increase the rate paid to Consultant.
5. The Company shall provide to Additional Consultant office space it
has available and necessary secretarial support.
<PAGE>
6. All other terms and conditions of the Agreement shall not be
changed, modified, or enlarged except as specified in this Modification to
Consulting Agreement or Assignment of Consulting Agreement.
CARDINAL RESOURCES, INC.
By: /s/ JAMES W. BRYANT
-------------------------------
James W. Bryant
CORNERSTONE NATURAL GAS, INC.
By: /s/ RAY C. DAVIS
-------------------------------
Ray C. Davis, CEO
JAMES W. BRYANT, CONSULTANT AND GUARANTOR
By: /s/ JAMES W. BRYANT
-------------------------------
<PAGE>
EXHIBIT 10.18
SECOND MODIFICATION TO CONSULTING AGREEMENT
Agreement by and between Cardinal Resources, Inc. ("Cardinal") and
Cornerstone Natural Gas, Inc. ("Company") effective as of November 1, 1995;
WHEREAS, Company entered into that certain Consulting Agreement by and
between Company and James W. Bryant as ("Consultant") dated June 4, 1993
("Consulting Agreement");
WHEREAS, effective August 1, 1994, Consultant assigned the Consulting
Agreement to Cardinal Resources, Inc., in that Assignment of Consulting
Agreement;
WHEREAS, the Agreement was modified and amended in the Modification to
Consulting Agreement dated February 15, 1995, a copy of which is attached as
Exhibit "A";
WHEREAS, Consultant and Company desire to amend the Agreement, as amended,
to reflect the term of the Additional Consultant (as defined in the Modification
to Consulting Agreement) and the extension of the Agreement;
W I T N E S S E T H :
NOW, THEREFORE, in consideration of the premises and mutual covenants and
agreements, and notwithstanding anything to the contrary in the Agreement, and
intending to be legally bound, the Company and Cardinal agree to modify the
Agreement, as amended, as follows:
1. EXTENSION OF AGREEMENT. The Consulting Agreement, as amended, will be
extended for one additional year and will terminate on November 1, 1997.
2. ADDITIONAL CONSULTANT. The term of the Additional Consultant, as set
out in the Modification to Consulting Agreement, shall be amended to run
concurrently with the term of the Consulting Agreement, as amended, and any
extension thereof, currently expiring on November 1, 1997. The additional
$50,000 compensation for the Additional Consultant will remain unchanged during
the term of the Consulting Agreement.
3. All other terms and conditions of the Agreement, as amended, shall not
be changed, modified, or enlarged except as specified in this Second
Modification to Consulting Agreement.
<PAGE>
"Consultant"
CARDINAL RESOURCES, INC.
By: /s/ JAMES W. BRYANT
-----------------------------------
"Company"
CORNERSTONE NATURAL GAS, INC.
By: /s/ RAY C. DAVIS
-----------------------------------
Ray C. Davis, CEO
JAMES W. BRYANT, CONSULTANT AND
GUARANTOR
By: /s/ JAMES W. BRYANT
-----------------------------------
<PAGE>
EXHIBIT 10.20
FIRST AMENDMENT TO LOAN AGREEMENT
THIS FIRST AMENDMENT TO LOAN AGREEMENT, dated as of January 31, 1996
("Agreement"), is entered into among CORNERSTONE NATURAL GAS, INC. (formerly
Endevco, Inc.), a Delaware corporation ("Cornerstone"), ENDEVCO PRODUCING
COMPANY, a Delaware corporation ("EPRC"), CORNERSTONE GAS GATHERING COMPANY
(formerly Cornerstone Pipeline Company), a Delaware corporation ("CGGC"), DUBACH
GAS COMPANY, a Texas corporation ("Dubach"), CORNERSTONE GAS PROCESSING, INC.
(formerly Endevco Natural Gas Company), a Delaware corporation ("CGP"),
CORNERSTONE GAS RESOURCES, INC. (formerly Endevco Oil and Gas Company), a
Delaware corporation ("CGR"), CORNERSTONE PIPELINE COMPANY (formerly Endevco
Pipeline Company), a Delaware corporation ("CPC") and PENTEX PIPELINE COMPANY, a
Texas corporation ("PPC") (collectively the "Borrowers") and BANK OF OKLAHOMA,
NATIONAL ASSOCIATION (the "Bank").
W I T N E S S E T H:
A. WHEREAS, the Borrowers have applied to the Bank for conversion of
$2,000,000 of the outstanding principal amount of the Convertible Loans
evidenced by the Convertible Note described and defined in the Loan Agreement
dated as of May 24, 1995 by and among the Borrowers and the Bank (the "Existing
Credit Agreement") to a forty-eight (48) month term loan thereby decreasing the
maximum principal amount of the Convertible Borrowing Base from $16,500,000 to
$14,500,000, which $2,000,000 term loan is to be evidenced by Borrowers' joint
and several First Term Note hereinafter described and defined; and
B. WHEREAS, the Bank is willing to convert $2,000,000 of the Convertible
Loans to a forty-eight (48) month term loan to the Borrowers, subject to the
terms, conditions and provisions of the Existing Credit Agreement, as amended
and modified by the terms and provisions hereinafter set forth, all of which are
material to the Bank and without which the Bank would not be willing to convert
$2,000,000 of the Convertible Loans to a forty-eight (48) month term loan as
described above.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and other good and valuable consideration, receipt of which is
acknowledged by the parties hereto, the parties agree as follows:
1. DEFINITIONS. The following definitions in Article I of the Existing
Credit Agreement are hereby amended and modified or added as follows:
1.7 "COMMITMENTS" shall mean the Revolving Credit Commitment,
the Convertible Commitment and the Term Loan Commitment.
<PAGE>
1.11 "CORNERSTONE PLEDGE" shall have the meaning assigned to
that term in Article IV of the Existing Credit Agreement, as amended
by that certain First Amendment to Pledge Agreement from Cornerstone
to the Bank dated as of September 30, 1994, as further amended by
that certain Second Amendment to Pledge Agreement from Cornerstone to
the Bank dated as of January 4, 1995, as further amended by that
certain Third Amendment to Pledge Agreement from Cornerstone to the
Bank dated as of March 31, 1995 and as further amended by that
certain Fourth Amendment to Pledge Agreement dated as of May 24,
1995, and as further amended by that certain Fifth Amendment to
Pledge Agreement from Cornerstone to the Bank dated as of even date
herewith.
1.12 "CGP DEED OF TRUST" shall have the meaning assigned to that
term in Article IV of the Existing Credit Agreement, as amended by
that certain First Amended Deed of Trust, Security Agreement,
Financing Statement and Assignment (with Power of Sale) from CGP to
the Bank dated as of September 30, 1994, as further amended by that
certain Second Amended Deed of Trust, Security Agreement, Financing
Statement and Assignment (with Power of Sale) from CGP to the Bank
dated as of January 4, 1995, as further amended by that certain Third
Amended Deed of Trust, Security Agreement, Financing Statement and
Assignment (with Power of Sale) dated as of March 31, 1995, and as
further amended by that certain Fourth Amended Deed of Trust,
Security Agreement, Financing Statement and Assignment (with Power of
Sale) dated as of May 24, 1995, and as further amended by that
certain Fifth Amended Deed of Trust, Security Agreement, Financing
Statement and Assignment (with Power of Sale) from CGP to the Bank
dated as of even date herewith.
1.14 "CPC DEED OF TRUST" shall have the meaning assigned to that
term in Article IV of the Existing Credit Agreement, as amended by
that certain First Amended Deed of Trust, Security Agreement,
Financing Statement and Assignment from CPC to the Bank dated as of
September 30, 1994, as further amended by that certain Second Amended
Deed of Trust, Security Agreement, Financing Statement and Assignment
from CPC to the Bank dated as of January 4, 1995, as further amended
by that certain Third Amended Deed of Trust, Security Agreement,
Financing Statement and Assignment from CPC dated as of March 31,
1995, as further amended by that certain Fourth Amended Deed of
Trust, Security Agreement, Financing Statement and Assignment from
CPC dated as of May 24, 1995, and as further amended by that certain
Fifth Amended Deed of Trust, Security Agreement, Financing Statement
and Assignment from CPC to the Bank dated as of even date herewith.
1.16 "CPC PLEDGE" shall have the meaning assigned to that term
in Article IV of the Existing Credit Agreement, as amended by that
certain First
2
<PAGE>
Amended Assignment, Pledge and Security Agreement from CPC to the Bank
dated as of January 4, 1995 and as further amended by that certain
Second Amended Assignment, Pledge and Security Agreement from CPC to the
Bank dated as of March 31, 1995, and as further amended by that certain
Third Amended Assignment, Pledge and Security Agreement from CPC to the
Bank dated as of May 24, 1995, and as further amended by that certain
Fourth Amended Assignment, Pledge and Security Agreement from CPC to the
Bank dated as of even date herewith.
1.41 "LOANS" shall mean all advances made and Letter of Credit
draws funded hereunder pursuant to any of the Commitments, including
all sums evidenced by any one or more or all of the Notes.
1.45 "NOTES" shall mean the Revolving Credit Note, the
Convertible Note and the First Term Note, together with each and
every replacement, extension, renewal, modification, substitution,
rearrangement and change in form thereof which may be from time to
time and for any term or terms effected.
1.49 "PPC DEED OF TRUST" shall have the meaning assigned to that
term in Section 1.45 of the Existing Credit Agreement, as amended by
that certain First Amended Deed of Trust, Security Agreement,
Financing Statement and Assignment (with Power of Sale) from PPC to
the Bank dated as of January 4, 1995, as further amended by that
certain Second Amended Deed of Trust, Security Agreement, Financing
Statement and Assignment (with Power of Sale) from PPC to the Bank
dated as of March 31, 1995 and as further amended by that certain
Third Amended Deed of Trust, Security Agreement, Financing Statement
and Assignment (with Power of Sale) from PPC to the Bank dated as of
May 24, 1995 and as further amended by that certain Fourth Amended
Deed of Trust, Security Agreement, Financing Statement and Assignment
(with Power of Sale) from PPC to the Bank dated as of even date
herewith.
1.57 "SECURITY AGREEMENT" shall have the meaning assigned to
that term in Article V of the Original Credit Agreement, as amended
by that certain First Amended and Restated Security Agreement and
Assignment from the Borrowers to the Bank dated as of January 4,
1995, as further amended by that certain Second Amended and Restated
Security Agreement and Assignment from the Borrowers to the Bank
dated as of March 31, 1995, as further amended by that certain Third
Amended and Restated Security Agreement and Assignment from the
Borrowers to the Bank dated as of May 24, 1995 and as further amended
by that certain Fourth Amended and Restated Security Agreement and
Assignment from the Borrowers to the Bank dated as of even date
herewith.
3
<PAGE>
1.63 "CGGC DEED OF TRUST" shall have the meaning assigned to
that term in Section 4.1(b)(vi) of the Existing Credit Agreement, as
amended by that certain First Amended Deed of Trust, Security
Agreement, Financing Statement and Assignment from CGGC to the
Trustee and the Bank dated as of August 1, 1994, as further amended
by that certain Second Amended Deed of Trust, Security Agreement,
Financing Statement and Assignment from CGGC to the Trustee and the
Bank dated as of September 30, 1994, as further amended by that
certain Third Amended and Supplemental Deed of Trust, Security
Agreement, Financing Statement and Assignment from CGGC to the
Trustee and the Bank dated as of January 4, 1995, as further amended
by that certain Fourth Amended and Supplemental Deed of Trust,
Security Agreement, Financing Statement and Assignment from CGGC to
the Trustee and the Bank dated as of March 31, 1995, and as further
amended by that certain Fifth Amended and Supplemental Deed of Trust,
Security Agreement, Financing Statement and Assignment from CGGC to
the Trustee and the Bank dated as of May 24, 1995 and as further
amended by that certain Sixth Amended and Supplemental Deed of Trust,
Security Agreement, Financing Statement and Assignment from CGGC to
the Trustee and the Bank dated as of even date herewith.
1.64 "TERM LOAN COMMITMENT" shall mean the agreement of the Bank
to make the $2,000,000 Term Loan to the Borrowers as evidenced by the
First Term Note.
1.65 "FIRST TERM NOTE" shall mean that certain $2,000,000
promissory note from Borrowers, payable to the order of the Bank, as
described and defined in Section 3 of the First Amendment.
2. TERM LOAN. The Bank agrees, upon the terms subject to the conditions
set forth in the Existing Credit Agreement, as previously amended, and herein,
to convert $2,000,000 of the outstanding principal balance of the Convertible
Loans as evidenced by the Convertible Note to a forty-eight (48) month term loan
(the "Term Loan") to be evidenced by the First Term Note more particularly
described and defined in Paragraph 3 of this First Amendment, subject, however,
to the concurrent and automatic reduction of the maximum Convertible Borrowing
Base from $16,500,000 to $14,500,000.
3. FIRST TERM NOTE. To evidence the $2,000,000 conversion from the
Convertible Loan to the Term Loan, as funded pursuant to the provisions of
paragraph 2 above, the Borrowers shall execute and deliver to the order of the
Bank Borrowers' joint and several promissory note in the principal amount of
$2,000,000.00, the form of which is annexed hereto as EXHIBIT "A" and hereby
made a part hereof (hereinafter referred to as the "First Term Note"). The
First Term Note shall be dated as of the date hereof, shall be payable in forty-
seven (47) consecutive monthly principal installments, each in the amount of
$41,667, due on the last day of every month commencing
4
<PAGE>
February 29, 1996, and shall bear interest, payable monthly on the last
day of every month commencing February 29, 1996, and at final maturity
on January 31, 2000, on unpaid balances of principal from time to time
outstanding and on any past due interest at a variable annual rate equal
from day to day to the Applicable Prime Rate therein defined plus two
percentage points (2%), but in no event at a rate greater than permitted
by applicable law. All outstanding principal of and unpaid accrued
interest on the First Term Note not previously paid hereunder shall be
due and payable at final maturity on January 31, 2000, unless such
maturity shall be extended by the Bank in writing or accelerated
pursuant to the terms hereof. After maturity (whether by acceleration or
otherwise) the First Term Note shall bear interest at the Default Rate,
payable on demand. Interest shall be calculated on the basis of a year
of 360 days but assessed for the actual number of days elapsed in each
accrual period.
4. COLLATERAL. The repayment of the Indebtedness (including the Term
Loan) shall continue to be secured by all of the Collateral as more particularly
described and defined in the Existing Credit Agreement and/or in the Security
Instruments, including without limitation, the Security Agreement encumbering
the items and types of Collateral more particularly described in Section 4.1
thereof as continuing and continuous security for all of the Indebtedness.
Borrowers hereby incorporate by reference, ratify, confirm, continue and regrant
in favor of the Bank all of the security interests, liens and pledges set forth
or described in the Security Agreement and in Article IV of the Existing Credit
Agreement, including the priorities thereof, with the same force and effect as
if fully restated herein.
5. CONDITIONS PRECEDENT TO TERM LOAN. The obligation of the Bank to
extend the Term Loan is subject to satisfaction of all the following conditions
on or prior to the date such extension of the Term Loan, as evidenced by the
First Term Note, in the original principal sum of $2,000,000.00 occurs (in
addition to the other terms and conditions set forth in the Existing Credit
Agreement):
(a) FIRST TERM NOTE. The Borrower shall have delivered the
First Term Note to the order of the Bank, appropriately executed.
(b) BORROWERS' CERTIFICATES AND PROCEEDINGS. Each of the
Borrowers shall have delivered to the Bank a certificate satisfactory
to the Bank and its legal counsel, including corporate resolutions,
incumbency certificates and articles and certificates of
incorporation and bylaws as may be required by the Bank and its legal
counsel.
(c) SECURITY INSTRUMENTS. The Borrowers shall have delivered
to the Bank the Sixth Amended and Supplemental CGGC Deed of Trust,
the Fourth Amended and Restated Security Agreement and Assignment,
the Fifth Amendment to Pledge Agreement from Cornerstone and such
other supplemental and amendment instruments to the Security
Instruments more particularly described
5
<PAGE>
and defined in the Existing Credit Agreement, including without
limitation, the amendments more particularly described in Sections 1.11,
1.12, 1.14, 1.16, 1.49, 1.57 and 1.63 in paragraph 1 hereof.
(d) OPINION OF COUNSEL. The Bank shall have received from
Borrowers' counsel, Schlanger, Mills, Mayer and Grossberg LLP a
favorable closing opinion satisfactory in form and substance to the
Bank and its counsel.
(e) REDUCTION IN CONVERTIBLE BORROWING BASE. The Convertible
Borrowing Base, as described and defined in Section 3.5 of the
Existing Loan Agreement, is reduced (concurrently with the funding of
the Term Loan) to $14,500,000.
6. EXISTING CREDIT AGREEMENT. The remaining terms, provisions,
covenants, warranties, representations and conditions of the Existing Credit
Agreement are ratified, confirmed and continued in full force and effect with
the same effect as if fully restated and incorporated herein by reference.
7. COUNTERPARTS. This First Amendment may be executed in any number of
counterparts, all of which when taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have caused this First Amendment to be
duly executed and delivered by the Borrowers to the Bank in Tulsa, Oklahoma,
effective as of the day and year first above written.
"Borrowers"
CORNERSTONE NATURAL GAS, INC.
By: /s/ ROBERT L. CAVNAR
------------------------------
Robert L. Cavnar
Senior Vice President
ENDEVCO PRODUCING COMPANY
By: /s/ ROBERT L. CAVNAR
------------------------------
Robert L. Cavnar
Senior Vice President
6
<PAGE>
CORNERSTONE GAS GATHERING COMPANY,
formerly known as Cornerstone
Pipeline Company
By: /s/ ROBERT L. CAVNAR
------------------------------
Robert L. Cavnar
Senior Vice President
DUBACH GAS COMPANY
By: /s/ ROBERT L. CAVNAR
------------------------------
Robert L. Cavnar
Senior Vice President
CORNERSTONE GAS PROCESSING, INC.,
formerly known as Endevco Natural
Gas Company
By: /s/ ROBERT L. CAVNAR
------------------------------
Robert L. Cavnar
Senior Vice President
CORNERSTONE GAS RESOURCES, INC.,
formerly known as Endevco Oil &
Gas Company
By: /s/ ROBERT L. CAVNAR
------------------------------
Robert L. Cavnar
Senior Vice President
7
<PAGE>
CORNERSTONE PIPELINE COMPANY,
formerly known as Endevco Pipeline
Company
By: /s/ ROBERT L. CAVNAR
------------------------------
Robert L. Cavnar
Senior Vice President
PENTEX PIPELINE COMPANY
By: /s/ ROBERT L. CAVNAR
------------------------------
Robert L. Cavnar
Senior Vice President
"Bank"
BANK OF OKLAHOMA, NATIONAL
ASSOCIATION
By: /s/ JACK D. BRANNON
------------------------------
Jack D. Brannon, Vice President
8
<PAGE>
EXHIBIT 21.1
LIST OF WHOLLY OWNED SUBSIDIARIES
STATE OF INCORPORATION
NAME OF ENTITY OR ORGANIZATION
-------------- -----------------------
Cornerstone Gas Resources, Inc. Delaware
Cornerstone Pipeline Company Delaware
*Energy Transfer Corporation Texas
Cornerstone Gas Gathering Company Delaware
Cornerstone Gas Processing, Inc. Delaware
Endevco Producing Company Delaware
Dubach Gas Company Texas
Pentex Pipeline Company Texas
*Energy Transfer Corporation is a wholly owned subsidiary of
Cornerstone Pipeline Company
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 033-62205.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 14, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-62205) pertaining to the Cornerstone Natural Gas, Inc. 1993
Long Term Incentive Plan, of our report dated March 7, 1994, with respect to
the consolidated statements of operations, cash flows and changes in
stockholders' equity of Cornerstone Natural Gas, Inc. for the year ended
December 31, 1993, included in its Annual Report (Form 10-K) for the year
ended December 31, 1995.
ERNST & YOUNG LLP
Dallas, Texas
February 21, 1996
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<FISCAL-YEAR-END> DEC-31-1995
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