**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý**                | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES** |
|---------------------------|-------------------------------------------------------------------------|
| **EXCHANGE  ACT OF 1934** |

 

**For the quarterly period ended March 31, 2002**

 

**OR**

 
| **o**                     | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES** |
|---------------------------|--------------------------------------------------------------------------|
| **EXCHANGE  ACT OF 1934** |

 

**Commission File Number 1-2499**

 

**CORNERSTONE PROPANE PARTNERS, L.P.**

(Exact name of registrant as specified in its charter)

 

 

| **Delaware**                                                                        |   | **77-0439862**                          |
|-------------------------------------------------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction of incorporation  or organization)                     |   | (I.R.S. Employer Identification Number) |
|                                                                                |   |                                    |
| **432 Westridge Drive, Watsonville,  California**                                   |   | **95076**                               |
| (Address of principal executive offices)                                            |   | (Zip Code)                              |
|                                                                                |   |                                    |
| Registrant’s telephone number, including  area code:  **(831) 724-1921**  |
|                                                                                |   |                                    |
| **NONE**                                                                            |
| (Former name, former address and former  fiscal year, if changed since last report) |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý   No  o

 

Indicate the number of shares outstanding of each of the issuer’s classesof common stock as of May 14,2002:                17,310,561- Common Units

 

 

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CORNERSTONE PROPANE PARTNERS, L.P.

 

TABLE OF CONTENTS

 
| Part I. Financial Information                                                                        |
|------------------------------------------------------------------------------------------------------|
|                                                                                                 |
| Item 1                                                                                               |
|                                                                                                 |
| Financial Statements                                                                                 |
|                                                                                                 |
| Cornerstone Propane Partners, L.P.                                                                   |
|                                                                                                 |
| Consolidated Balance Sheets as of March 31, 2002 and 2001, and June  30, 2001                        |
|                                                                                                 |
| Consolidated Statements of Operations for  the Three and Nine Months Ended March 31, 2002 and 2001   |
|                                                                                                 |
| Consolidated Statements of Partner’s Capital  for the Nine Months Ended March 31, 2002 and 2001 |
|                                                                                                 |
| Consolidated Statements of Cash Flows for  the Nine Months Ended March 31, 2002 and 2001             |
|                                                                                                 |
| Notes to Consolidated Financial Statements                                                           |
|                                                                                                 |
| Item 2                                                                                               |
|                                                                                                 |
| Management’s Discussion and Analysis of  Financial Condition and Results of Operations          |
|                                                                                                 |
| Item 3                                                                                               |
|                                                                                                 |
| Quantitative and Qualitative Disclosures  About Market Risks                                         |
|                                                                                                 |
| Part II.  Other  Information                                                                         |
|                                                                                                 |
| Item 6                                                                                               |
|                                                                                                 |
| Exhibits and Reports on Form 8-k                                                                     |
|                                                                                                 |
| Signature                                                                                            |
|                                                                                                 |

 

i

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CORNERSTONEPROPANE PARTNERS, L.P. AND SUBSIDIARY

 

CONSOLIDATEDBALANCE SHEETS

(Dollars in thousands)

(Unaudited)

 
|                                                          |   | **March 31,** |       | **June 30,**                  |       |
|---------------------------------------------------------------|--------|---------------|------------|-------------------------------|------------|
|                                                          |   | **2002**      |       | **2001**                      |       | **2001** |   |
|                                                          |   |          | ** ** | ***(restated,  see Note 4)*** | ** ** |   | ** ** |
| **ASSETS**                                                    |   |          |       |                          |       |   |   |
| Current assets:                                               |   |          |       |                          |       |   |   |
| Cash and cash equivalents                                     |   | $             | 8,734      |                          | $          | 24,895 |   | $ | 6,400 |   |
| Trade receivables, net                                        |   | 60,194        |       | 254,724                       |       | 131,507 |   |
| Inventories                                                   |   | 19,298        |       | 37,894                        |       | 30,321 |   |
| Prepaid expenses                                              |   | 1,308         |       | 1,590                         |       | 2,503 |   |
| Other current assets                                          |   | 10,330        |       | 1,973                         |       | 8,550 |   |
| Due from related party                                        |   | —        |       | 9,730                         |       | — |   |
| Total current assets                                          |   | 99,864        |       | 330,806                       |       | 179,281 |   |
|                                                          |   |          |       |                          |       |   |   |
| Property, plant and equipment, net                            |   | 312,769       |       | 332,957                       |       | 328,848 |   |
| Goodwill, net                                                 |   | 305,811       |       | 317,111                       |       | 315,108 |   |
| Other intangibles, net                                        |   | 29,396        |       | 36,894                        |       | 32,624 |   |
| Due from related party                                        |   | —        |       | —                        |       | 4,839 |   |
| Other assets                                                  |   | 7,412         |       | 8,303                         |       | 8,141 |   |
| Total assets                                                  |   | $             | 755,252    |                          | $          | 1,026,071 |   | $ | 868,841 |   |
|                                                          |   |          |       |                          |       |   |   |
| **LIABILITIES  AND PARTNERS’ CAPITAL**                   |   |          | ** ** |                          | ** ** |   | ** ** |
| Current liabilities:                                          |   |          |       |                          |       |   |   |
| Current portion of long-term debt                             |   | $             | 5,921      |                          | $          | 7,053 |   | $ | 7,535 |   |
| Bank credit facility                                          |   | 10,700        |       | —                        |       | — |   |
| Trade accounts payable                                        |   | 70,439        |       | 232,781                       |       | 136,723 |   |
| Accrued expenses                                              |   | 24,166        |       | 21,103                        |       | 27,259 |   |
| Total current liabilities                                     |   | 111,226       |       | 260,937                       |       | 171,517 |   |
|                                                          |   |          |       |                          |       |   |   |
| Bank credit facility and long-term debt, less current portion |   | 423,137       |       | 497,914                       |       | 460,621 |   |
| Due to related party                                          |   | 15,120        |       | —                        |       | 7,986 |   |
| Other noncurrent liabilities                                  |   | 2,542         |       | 9,340                         |       | 3,189 |   |
| Total liabilities                                             |   | 552,025       |       | 768,191                       |       | 643,313 |   |
|                                                          |   |          |       |                          |       |   |   |
| Partners’ capital                                        |   |          |       |                          |       |   |   |
| Common Unitholders                                            |   | 121,782       |       | 165,346                       |       | 139,090 |   |
| Subordinated Unitholders                                      |   | 77,826        |       | 88,673                        |       | 82,204 |   |
| General Partners                                              |   | 4,122         |       | 5,292                         |       | 4,632 |   |
| Accumulated other comprehensive loss                          |   | (503          | )          | (1,431                        | )          | (398 | ) |
| Total partners’ capital                                  |   | 203,227       |       | 257,880                       |       | 225,528 |   |
|                                                          |   |          |       |                          |       |   |   |
| Total liabilities and partners’ capital                  |   | $             | 755,252    |                          | $          | 1,026,071 |   | $ | 868,841 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

1

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CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands)

(Unaudited)

 
|                                                                               |   | **For the  three months ended  March 31,** |    | **For the  nine months ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|-------------------------------------------|--------|
|                                                                               |   | **2002**                                   |    | **2001**                                  |   | **2002** |   | **2001** |   |
|                                                                               |   |                                       |    | ***(restated,  see Note 4)***             |   |   |   | ***(restated,  see Note 4******)*** |   |
| Revenues                                                                           |   | $                                          | 277,240 |                                      | $      | 865,401 |   | $ | 1,107,168 |   | $ | 3,776,026 |   |
|                                                                               |   |                                       |    |                                      |   |   |   |   |   |
| Cost of Sales                                                                      |   | 206,266                                    |    | 781,888                                   |   | 943,485 |   | 3,575,964 |   |
|                                                                               |   |                                       |    |                                      |   |   |   |   |   |
| Gross profit                                                                       |   | 70,974                                     |    | 83,513                                    |   | 163,683 |   | 200,062 |   |
|                                                                               |   |                                       |    |                                      |   |   |   |   |   |
| Expenses:                                                                          |   |                                       |    |                                      |   |   |   |   |   |
| Operating, general, and administrative                                             |   | 38,281                                     |    | 40,851                                    |   | 106,656 |   | 118,087 |   |
| Depreciation                                                                       |   | 6,548                                      |    | 5,913                                     |   | 18,542 |   | 18,139 |   |
| Amortization                                                                       |   | 3,331                                      |    | 6,405                                     |   | 12,341 |   | 17,511 |   |
| Non-recurring charges                                                              |   | 2,294                                      |    | —                                    |   | 13,169 |   | 5,580 |   |
|                                                                               |   | 50,454                                     |    | 53,169                                    |   | 150,708 |   | 159,317 |   |
|                                                                               |   |                                       |    |                                      |   |   |   |   |   |
| Operating income                                                                   |   | 20,520                                     |    | 30,344                                    |   | 12,975 |   | 40,745 |   |
|                                                                               |   |                                       |    |                                      |   |   |   |   |   |
| Gain (loss) in fair value of derivatives                                           |   | (840                                       | )       | 101                                       |   | (1,308 | ) | 5,730 |   |
| Interest expense                                                                   |   | (8,955                                     | )       | (10,464                                   | )      | (27,398 | ) | (30,648 | ) |
|                                                                               |   |                                       |    |                                      |   |   |   |   |   |
| Income (loss) before provision for income taxes                                    |   | 10,725                                     |    | 19,981                                    |   | (15,731 | ) | 15,827 |   |
|                                                                               |   |                                       |    |                                      |   |   |   |   |   |
| Income tax expense                                                                 |   | —                                     |    | 472                                       |   | 417 |   | 1,069 |   |
|                                                                               |   |                                       |    |                                      |   |   |   |   |   |
| Income  (loss) before cumulative effect of change in accounting principle          |   | 10,725                                     |    | 19,509                                    |   | (16,148 | ) | 14,758 |   |
| Cumulative effect of change in accounting principle                                |   | —                                     |    | —                                    |   | — |   | (5,329 | ) |
|                                                                               |   |                                       |    |                                      |   |   |   |   |   |
| Net income (loss)                                                                  |   | $                                          | 10,725  |                                      | $      | 19,509 |   | $ | (16,148 | ) | $ | 9,429 |   |
| General partners’ interest in net income (loss)                               |   | $                                          | 215     |                                      | $      | 390 |   | $ | (323 | ) | $ | 189 |   |
| Limited  partners’ interest in net income (loss)                              |   | $                                          | 10,510  |                                      | $      | 19,119 |   | $ | (15,825 | ) | $ | 9,240 |   |
|                                                                               |   |                                       |    |                                      |   |   |   |   |   |
| Income  (loss) per unit before cumulative effect of change in accounting principle |   | $                                          | 0.44    |                                      | $      | 0.80 |   | $ | (0.66 | ) | $ | 0.61 |   |
| Cumulative  effect per unit of change in accounting principle                      |   | $                                          | —  |                                      | $      | — |   | $ | — |   | $ | (0.22 | ) |
| Net income (loss) per unit                                                         |   | $                                          | 0.44    |                                      | $      | 0.80 |   | $ | (0.66 | ) | $ | 0.39 |   |
| Weighted average number of units outstanding                                       |   | 23,897                                     |    | 23,773                                    |   | 23,874 |   | 23,560 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

2

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CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL

(Dollars in thousands)

(Unaudited)

 
|                                                              |   |             |   | **Common** |   | **Subordinated** |    | **General  Partners** |   | **AccumulatedOther  Comprehensive  Loss** |   | **Total  Partners’  Capital** |   |
|-------------------------------------------------------------------|--------|------------------|--------|------------|--------|------------------|---------|-----------------------|--------|-------------------------------------------|--------|------------------------------------|--------|
| **Thousands of Units**                                            |
| **Common**                                                        |   | **Subordinated** |
|                                                              |   |             |   |       |   |             |    |                  |   |                                      |   |                               |   |   |   |
| Balance at June 30, 2001                                          |   | 17,260           |   | 6,598      |   | $                | 139,090 |                  | $      | 82,204                                    |   | $                                  | 4,632  |   | $ | (398 | ) | $ | 225,528 |   |
|                                                              |   |             |   |       |   |             |    |                  |   |                                      |   |                               |   |   |   |
| Comprehensive net loss:                                           |   |             |   |       |   |             |    |                  |   |                                      |   |                               |   |   |   |
| Net loss                                                          |   | —           |   | —     |   | (11,447          | )       | (4,378                | )      | (323                                      | )      | —                             |   | (16,148 | ) |
| Other comprehensive loss                                          |   | —           |   | —     |   | —           |    | —                |   | —                                    |   | (105                               | )      | (105 | ) |
|                                                              |   |             |   |       |   |             |    |                  |   |                                      |   |                               |   |   |   |
| Net comprehensive loss                                            |   | —           |   | —     |   | (11,447          | )       | (4,378                | )      | (323                                      | )      | (105                               | )      | (16,253 | ) |
|                                                              |   |             |   |       |   |             |    |                  |   |                                      |   |                               |   |   |   |
| Issuance  of Common Units and General Partners’ contribution |   | 51               |   | —     |   | 217              |    | —                |   | 4                                         |   | —                             |   | 221 |   |
|                                                              |   |             |   |       |   |             |    |                  |   |                                      |   |                               |   |   |   |
| Issuance  of warrants in payment of fees                          |   | —           |   | —     |   | 3,245            |    | —                |   | —                                    |   | —                             |   | 3,245 |   |
|                                                              |   |             |   |       |   |             |    |                  |   |                                      |   |                               |   |   |   |
| Quarterly distributions                                           |   | —           |   | —     |   | (9,323           | )       | —                |   | (191                                      | )      | —                             |   | (9,514 | ) |
|                                                              |   |             |   |       |   |             |    |                  |   |                                      |   |                               |   |   |   |
| Balance at March 31, 2002                                         |   | 17,311           |   | 6,598      |   | $                | 121,782 |                  | $      | 77,826                                    |   | $                                  | 4,122  |   | $ | (503 | ) | $ | 203,227 |   |
|                                                              |   |             |   |       |   |             |    |                  |   |                                      |   |                               |   |   |   |
| Balance at June 30, 2000                                          |   | 16,822           |   | 6,598      |   | $                | 176,961 |                  | $      | 86,163                                    |   | $                                  | 5,546  |   | $ | (560 | ) | $ | 268,110 |   |
|                                                              |   |             |   |       |   |             |    |                  |   |                                      |   |                               |   |   |   |
| Comprehensive net income:                                         |   |             |   |       |   |             |    |                  |   |                                      |   |                               |   |   |   |
| Net income                                                        |   | —           |   | —     |   | 6,730            |    | 2,510                 |   | 189                                       |   | —                             |   | 9,429 |   |
| Other comprehensive loss                                          |   | —           |   | —     |   | —           |    | —                |   | —                                    |   | (871                               | )      | (871 | ) |
|                                                              |   |             |   |       |   |             |    |                  |   |                                      |   |                               |   |   |   |
| Net comprehensive income                                          |   | —           |   | —     |   | 6,730            |    | 2,510                 |   | 189                                       |   | (871                               | )      | 8,558 |   |
|                                                              |   |             |   |       |   |             |    |                  |   |                                      |   |                               |   |   |   |
| Issuance  of Common Units and General Partners’ contribution |   | 59               |   | —     |   | 955              |    | —                |   | 9                                         |   | —                             |   | 964 |   |
|                                                              |   |             |   |       |   |             |    |                  |   |                                      |   |                               |   |   |   |
| Issuance  of warrants and conversion into common units            |   | 379              |   | —     |   | 5,511            |    | —                |   | 113                                       |   | —                             |   | 5,624 |   |
|                                                              |   |             |   |       |   |             |    |                  |   |                                      |   |                               |   |   |   |
| Issuance  of warrants in payment of fees                          |   | —           |   | —     |   | 2,713            |    | —                |   | —                                    |   | —                             |   | 2,713 |   |
|                                                              |   |             |   |       |   |             |    |                  |   |                                      |   |                               |   |   |   |
| Quarterly distributions                                           |   | —           |   | —     |   | (27,524          | )       | —                |   | (565                                      | )      | —                             |   | (28,089 | ) |
|                                                              |   |             |   |       |   |             |    |                  |   |                                      |   |                               |   |   |   |
| Balance at March 31, 2001                                         |   | 17,260           |   | 6,598      |   | $                | 165,346 |                  | $      | 88,673                                    |   | $                                  | 5,292  |   | $ | (1,431 | ) | $ | 257,880 |   |

 

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*Informationpresented for fiscal year 2001 has been restated to reflect the implementationof SEC Staff Accounting*

*BulletinNo. 101. See note 5.*

 

The accompanying notes are anintegral part of these financial statements.

 

3

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CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 
|                                                                               |   | **Nine Months Ended  March 31,** |    |
|------------------------------------------------------------------------------------|--------|----------------------------------|---------|
|                                                                               |   | **2002**                         |    | **2001** |   |
|                                                                               |   |                             |    | ***(restated,************see Note 4)*** |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                         |   |                             |    |   |   |
| Net (loss) income                                                                  |   | $                                | (16,148 | ) | $ | 9,429 |   |
| Adjustments to reconcile  net (loss) income to net cash from operating activities: |   |                             |    |   |   |
| Depreciation                                                                       |   | 18,542                           |    | 18,139 |   |
| Amortization                                                                       |   | 12,341                           |    | 17,511 |   |
| Loss (gain) on disposition of assets                                               |   | 8,778                            |    | (510 | ) |
| Other                                                                              |   | 317                              |    | (871 | ) |
| Cumulative effect of  adoption of accounting principle                             |   | —                           |    | 5,329 |   |
| Loss (gain) in fair value  of derivatives                                          |   | 1,308                            |    | (5,730 | ) |
| Changes in assets and  liabilities:                                                |   |                             |    |   |   |
| Trade receivables, net                                                             |   | 71,313                           |    | (200,290 | ) |
| Inventories                                                                        |   | 11,023                           |    | 31,750 |   |
| Prepaid expenses and other  current assets                                         |   | (585                             | )       | 5,910 |   |
| Trade accounts payable and  accrued expenses                                       |   | (72,360                          | )       | 168,301 |   |
| Net cash from operating  activities                                                |   | 34,529                           |    | 48,968 |   |
|                                                                               |   |                             |    |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                         |   |                             |    |   |   |
| Expenditures for property,  plant and equipment                                    |   | (10,579                          | )       | (9,733 | ) |
| Proceeds from sale of  assets                                                      |   | 10,551                           |    | 9,157 |   |
| Other                                                                              |   | (559                             | )       | (3,073 | ) |
| Net cash from investing  activities                                                |   | (587                             | )       | (3,649 | ) |
|                                                                               |   |                             |    |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                         |   |                             |    |   |   |
| Net change in Bank Credit  Facility                                                |   | (23,600                          | )       | 22,800 |   |
| Payments on other  long-term debt                                                  |   | (5,650                           | )       | (5,863 | ) |
| Issuance of common units                                                           |   | —                           |    | 3 |   |
| Payments for debt  financing                                                       |   | (2,488                           | )       | (1,339 | ) |
| Advances (to) from related  parties                                                |   | 9,644                            |    | (15,673 | ) |
| Partnership distributions                                                          |   | (9,514                           | )       | (28,089 | ) |
| Net cash from financing  activities                                                |   | (31,608                          | )       | (28,161 | ) |
|                                                                               |   |                             |    |   |   |
| **NET  CHANGE IN CASH AND CASH EQUIVALENTS**                                       |   | 2,334                            |    | 17,158 |   |
|                                                                               |   |                             |    |   |   |
| **CASH AND  CASH EQUIVALENTS, beginning of period**                                |   | 6,400                            |    | 7,737 |   |
|                                                                               |   |                             |    |   |   |
| **CASH AND  CASH EQUIVALENTS, end of period**                                      |   | $                                | 8,734   |   | $ | 24,895 |   |
|                                                                               |   |                             |    |   |   |
| **SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:**                             |   |                             |    |   |   |
| Cash paid for interest                                                             |   | $                                | 25,503  |   | $ | 28,332 |   |
|                                                                               |   |                             |    |   |   |
| **NON-CASH  INVESTING & FINANCING ACTIVITIES:**                                |   |                             |    |   |   |
| Common Units issued in  payment of debt                                            |   | $                                | 217     |   | $ | 580 |   |
| Warrants for Common Units  issued in payment of fees                               |   | $                                | 3,245   |   | $ | 8,186 |   |
| Guarantee fees accrued                                                             |   | $                                | 2,333   |   | $ | 4,550 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

4

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CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2002

(Dollars in thousands, except unit data)

(Unaudited)

 

1.             BASIS OF PRESENTATION

 

These consolidated financial statements include the accounts ofCornerstone Propane Partners, L.P. (“Cornerstone Partners”) and its subsidiary,Cornerstone Propane, L.P. (the “Operating Partnership”), and the OperatingPartnership’s corporate subsidiaries collectively referred to as the“Partnership”. All material intercompany balances and transactions have beeneliminated.

 

The accompanying interim consolidated financial statements of thePartnership are unaudited; however, in the opinion of management, alladjustments necessary for a fair presentation of such consolidated financial statementshave been reflected in the interim periods presented. Such adjustmentsconsisted only of normal recurring items. The Partnership’s business isseasonal and, accordingly, interim results are not indicative of results for afull year. The significant accounting policies and certain financialinformation, which are normally included in financial statements prepared inaccordance with generally accepted accounting principles, but are not requiredfor interim reporting purposes, have been condensed or omitted. Theaccompanying consolidated financial statements of the Partnership should beread in conjunction with the consolidated financial statements and relatednotes included in the Partnership’s Annual Report on Form 10-K for the fiscalyear ended June 30, 2001.

 

The Partnership has retained the services of Credit Suisse First Bostonto pursue strategic options, including the possible sale or merger of thePartnership. The Partnership may pursue extending or replacing the creditfacility, unless a merger or other appropriate strategic transaction has beenconcluded by the termination date of the facility. Any extension or replacementmay require a guarantee from NorthWestern. The Partnership has not received any commitment regarding an extensionor replacement, nor has NorthWestern undertaken to provide a guarantee inconnection therewith. The Partnership can give no assurances that an extensionof the facility or a replacement facility can be obtained upon the expirationof the existing facility or, if so, whether the terms will be favorable to thePartnership. This effort is further complicated by the Partnership’salternatives associated with the principal payments referred to in thefollowing paragraph.

 

Principal payments of $14.3 and $27.5 million on the Partnership’ssenior notes will become due in July 2003 and December 2003, respectively.Funds have not been established to pay these amounts, nor have commitments beenobtained from financial institutions to fund or refinance these payments. The Partnershipmay or may not be able to fund these payments from operating cash flows.Therefore, the Partnership can give no assurances that funding will beavailable to meet these obligations.

 

2.             NON-RECURRING CHARGES

 

During the nine months ended March 31, 2002,the partnership incurred losses of $13.2 million related primarily to the sale of the U.S. crudeoperations and the closure of the U.S. and Canadian natural gas operations.Of the loss, the cash component is $4.0 million for severance, loss on the assignmentof a natural gas pipeline contract, and expenses related to abandonment ofleased facilities. The non-cash component consisted principally of goodwill,which was related to specific acquisitions and allocated goodwill recorded atthe initial public offering.  Thisgoodwill

 

5

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was allocated to assets being disposed of as required by Statement ofFinancial Accounting Standards (“SFAS”) No. 142.

 

3.             DISTRIBUTIONS OF AVAILABLE CASH

 

The Partnership will make distributions to its partners with respect toeach fiscal quarter of the Partnership within 45 days after the end of eachfiscal quarter if the Partnership has sufficient available cash and there areno restrictions imposed by debt agreements. Currently, Partnershipdistributions have been suspended pursuant to terms in its debt agreements. Ifallowed, the Partnership ordinarily will distribute 100% of its Available Cash(98% to Unitholders and 2% to the General Partners) until the Minimum QuarterlyDistribution (“MQD”) of $.54 per unit for such quarter has been met. The MQDwill be subject to the payment of incentive distributions in the eventAvailable Cash exceeds the MQD of $.54 on all units. During the SubordinationPeriod, to the extent there is sufficient Available Cash, the holders of CommonUnits have the right to receive the MQD, plus any arrearages for previousunpaid distributions, prior to the distribution of Available Cash to holders ofSubordinated Units. Subordinated Units do not accrue arrearages with respect todistributions for any quarter.

 

The distributions for the quarters ended on December 31, 2001 and March31, 2002 were suspended and have not been paid. On October 26, 2001, thedistribution for the three month period from July 1, 2001 to September 30, 2001was declared in the amount of $4,758, representing in the aggregate,distributions to the Common Unitholders and General Partners at $0.27 percommon unit. This distribution was paid on November 15, 2001. No distributionshave been declared and subsequently paid on the Subordinated Units for theperiod from October 1, 1997 to March 31, 2002.

 

Distributions are determined on a quarterly basis by the Board ofDirectors based on inputs and recommendations of management. The assessment ofAvailable Cash is made by the Partnership by reviewing the cash produced by theoperations of the Partnership, the expected cash to be generated in the futureand the future cash needs of the Partnership. If Available Cash is not sufficient to meet these needs, the Partnershipcan distribute a lower amount.  If thedistribution to the Common Units Holders is below the MQD, arrearages willaccrue on a cumulative basis for the difference between the MQD and thedistribution paid. Through May 15, 2002, cumulative arrearages on Common Unitsare $1.62 per unit due to distributions being below the MQD for the quartersended on June 30, September 30, December 31, 2001, and March 31, 2002.

 

4.             NET INCOME PER UNIT

 

Net income per unit is computed by dividing net income, afterconsidering the General Partners’ 2% interest, by the weighted average numberof Common and Subordinated Units outstanding during the period.

 

5.             RECENTLY ADOPTED ACCOUNTINGSTANDARDS

 

The cumulative effect presented for the nine months ended March 31,2001, relates to the adoption of SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities”. See Note 10 in the Partnership’s annualreport on Form 10-K for the fiscal year ended June 30, 2001.

 

6

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*SEC Staff Accounting Bulletin No. 101, Revenue Recognition*

 

Financial information for the three and nine months ended March 31,2001 has been restated to reflect the effects of the application of StaffAccounting Bulletin No. 101, Revenue Recognition (“SAB 101”) issued by theSecurities and Exchange Commission regarding the recognition of rental incomeon propane storage tanks by the Partnership. The Partnership adopted SAB 101 inthe fourth quarter of fiscal 2001 retroactive to July 1, 2000. The effect ofthis implementation was to increase Revenues, Operating income and Net incomeby $857 for the three months ended March 31, 2001; and to decrease Revenues,and increase Operating loss and Net loss by $368 for the nine months ended March31, 2001. There was no significant cumulative effect upon initial adoption.

 

*Statement of Financial Accounting Standards No. 142 - Goodwill andOther Intangible Assets*

 

On July 20, 2001, the Financial Accounting Standards Board issued SFASNo. 142, *Goodwill and Other IntangibleAssets*. SFAS No. 142 eliminates the requirement to amortize goodwillover its estimated useful life; rather, goodwill will be subject to at least anannual fair-value based impairment test. SFAS No. 142 also requires that intangibleassets be recognized separately if the benefit of the intangible asset isobtained through contractual rights or if the intangible asset can be sold,transferred, licensed, rented or exchanged without regard to the acquirer’sintent to do so. The Partnership adopted SFAS No. 142 effective July 1, 2001and as a result, amortization expense for the three months and nine monthsended March 31, 2002 was reduced by approximately $2.0 million and $6.0million, respectively. The Partnership has completed its preliminary evaluationto determine whether any impairment of goodwill exists as of July 1, 2001 andhas tentatively determined no impairment existed at that date.  SFAS No. 142 also requires that goodwillcreated at the formation of the Partnership or purchases of multiple locationsis to be allocated to reporting units and this allocated goodwill is to beincluded in the determination of gain or loss upon the sale or otherdisposition of assets. This provision of SFAS No. 142 resulted in an additional$5.2 million loss on the disposition of assets for the nine months ended March31, 2002 which was included in non-recurring charges in the consolidatedstatement of operations.

 

7

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|                                                                                            |   | **For the three months endedMarch 31,** |   | **For the nine months endedMarch 31,** |   |
|-------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|----------------------------------------|--------|
|                                                                                            |   | **2002**                                |   | **2001**                               |   | **2002** |   | **2001** |   |
| Reported net income (loss) before cumulative effect of change in  accounting principle          |   | $                                       | 10,725 |                                   | $      | 19,509 |   | $ | (16,148 | ) | $ | 14,758 |   |
| Add back: Goodwill amortization                                                                 |   | —                                  |   | 1,990                                  |   | — |   | 6,199 |   |
|                                                                                            |   |                                    |   |                                   |   |   |   |   |   |
| Adjusted net income (loss) before cumulative  effect of change in accounting principle          |   | 10,725                                  |   | 21,499                                 |   | (16,148 | ) | 20,957 |   |
|                                                                                            |   |                                    |   |                                   |   |   |   |   |   |
| Cumulative effect of change in accounting principle                                             |   | —                                  |   | —                                 |   | — |   | (5,329 | ) |
|                                                                                            |   |                                    |   |                                   |   |   |   |   |   |
| Adjusted net income (loss)                                                                      |   | $                                       | 10,725 |                                   | $      | 21,499 |   | $ | (16,148 | ) | $ | 15,628 |   |
|                                                                                            |   |                                    |   |                                   |   |   |   |   |   |
| Reported net income (loss) per unit before cumulative effect of  change in accounting principle |   | $                                       | 0.44   |                                   | $      | 0.80 |   | $ | (0.66 | ) | $ | 0.61 |   |
| Add back: Goodwill amortization per unit                                                        |   | —                                  |   | 0.08                                   |   | — |   | 0.26 |   |
|                                                                                            |   |                                    |   |                                   |   |   |   |   |   |
| Adjusted net income (loss) per unit before cumulative effect of  change in accounting principle |   | 0.44                                    |   | 0.88                                   |   | (0.66 | ) | 0.87 |   |
|                                                                                            |   |                                    |   |                                   |   |   |   |   |   |
| Cumulative effect per unit of change in accounting principle                                    |   | —                                  |   | —                                 |   | — |   | (0.22 | ) |
|                                                                                            |   |                                    |   |                                   |   |   |   |   |   |
| Adjusted net income (loss) per unit                                                             |   | $                                       | 0.44   |                                   | $      | 0.88 |   | $ | (0.66 | ) | $ | 0.65 |   |

 

8

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6.             BANK CREDIT FACILITY, SENIORNOTES AND NOTES PAYABLE

 

The bank credit facility at March 31, 2002 is reported as a currentliability. At March 31, 2001 and June 30, 2001, the credit facility wasincluded in long-term liabilities.  Thefollowing table is provided for comparison purposes:

 
|                                                 |   | **March 31,** |    | **June 30,** |   |
|------------------------------------------------------|--------|---------------|---------|--------------|--------|
|                                                 |   | **2002**      |    | **2001**     |   | **2001** |   |
|                                                 |   |          |    |         |   |   |   |
| Bank Credit Facility                                 |   | $             | 10,700  |         | $      | 69,700 |   | $ | 34,300 |   |
| Senior Notes                                         |   | 410,000       |    | 410,000      |   | 410,000 |   |
| Current portion of Notes  Payable                    |   | 5,921         |    | 7,053        |   | 7,535 |   |
| Long Term Portion of Notes  Payable                  |   | 13,137        |    | 18,214       |   | 16,321 |   |
|                                                 |   |          |    |         |   |   |   |
| Total Bank Facility,  Senior Notes and Notes Payable |   | $             | 439,758 |         | $      | 504,967 |   | $ | 468,156 |   |

 

7.             SEGMENTAND RELATED INFORMATION

 

For the purpose of providing segmentinformation, the Partnership’s two principal business segments are its retailand Coast Energy Group (“CEG”) operations. The retail segment includes propanesales, principally to end-users; repair and maintenance of propane heatingsystems and appliances; and the sale of propane-related supplies, appliances,and other equipment. These transactions are accounted for as one businesssegment internally and share the same customer base. CEG provides supply,marketing, and logistic services to other resellers of propane and end-users.Principal products are propane and other natural gas liquids. The accountingpolicies of the segments are the same as those described in the summary ofsignificant accounting policies in the annual report on Form 10-K.Intra-company transactions between segments are recorded approximately atmarket value at the transaction date.

 

The segments are evaluated internally usingearnings before interest, taxes, depreciation, amortization, and non-recurringcharges (“EBITDA”). Depreciation, amortization, interest and some operating,general, and administrative expenses are not specifically tracked by businesssegment, and are therefore included in the “Other” category in the followingtables:

 

9

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| **Three Months Ended March 31, 2002**            |   |
|--------------------------------------------------|--------|
|                                             |   | **Retail** |   | **CEG** |   | **Other** |   | **Total** |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Revenues                                         |   | $ | 117,688 |   | $ | 159,552 |   | $ | — |   | $ | 277,240 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Cost of sales                                    |   | 53,877 |   | 152,389 |   | — |   | 206,266 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Gross profit                                     |   | 63,811 |   | 7,163 |   | — |   | 70,974 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Operating, general, and  administrative expenses |   | 27,347 |   | 7,186 |   | 3,748 |   | 38,281 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| EBITDA                                           |   | 36,464 |   | (23 | ) | (3,748 | ) | 32,693 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Non-recurring charges                            |   | — |   | (2,294 | ) | — |   | (2,294 | ) |
|                                             |   |   |   |   |   |   |   |   |   |
| Non-allocated expenses                           |   | — |   | — |   | (19,674 | ) | (19,674 | ) |
|                                             |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                |   | $ | 36,464 |   | $ | (2,317 | ) | $ | (23,422 | ) | $ | 10,725 |   |

 
| **Three Months Ended March 31, 2001**            |   |
|--------------------------------------------------|--------|
|                                             |   | **Retail** |   | **CEG** |   | **Other** |   | **Total** |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Revenues                                         |   | $ | 172,571 |   | $ | 692,830 |   | $ | — |   | $ | 865,401 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Cost of sales                                    |   | 96,784 |   | 685,104 |   | — |   | 781,888 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Gross profit                                     |   | 75,787 |   | 7,726 |   | — |   | 83,513 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Operating, general, and  administrative expenses |   | 31,628 |   | 6,406 |   | 2,817 |   | 40,851 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| EBITDA                                           |   | 44,159 |   | 1,320 |   | (2,817 | ) | 42,662 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Non-allocated expenses                           |   | — |   | — |   | (23,153 | ) | (23,153 | ) |
|                                             |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                |   | $ | 44,159 |   | $ | 1,320 |   | $ | (25,970 | ) | $ | 19,509 |   |

 

10

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| **Nine Months Ended March 31, 2002**             |   |
|--------------------------------------------------|--------|
|                                             |   | **Retail** |   | **CEG** |   | **Other** |   | **Total** | ** ** |
|                                             |   |   |   |   |   |   |   |   |   |
| Revenues                                         |   | $ | 263,408 |   | $ | 843,760 |   | $ | — |   | $ | 1,107,168 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Cost of sales                                    |   | 123,618 |   | 819,867 |   | — |   | 943,485 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Gross profit                                     |   | 139,790 |   | 23,893 |   | — |   | 163,683 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Operating, general, and  administrative expenses |   | 77,176 |   | 20,168 |   | 9,312 |   | 106,656 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| EBITDA                                           |   | 62,614 |   | 3,725 |   | (9,312 | ) | 57,027 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Non-recurring charges                            |   | (1,807 | ) | (11,362 | ) | — |   | (13,169 | ) |
|                                             |   |   |   |   |   |   |   |   |   |
| Non-allocated expenses                           |   | — |   | — |   | (60,006 | ) | (60,006 | ) |
|                                             |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                |   | $ | 60,807 |   | $ | (7,637 | ) | $ | (69,318 | ) | $ | (16,148 | ) |

 
| **Nine Months Ended March 31, 2001**             |   |
|--------------------------------------------------|--------|
|                                             |   | **Retail** |   | **CEG** |   | **Other** |   | **Total** |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Revenues                                         |   | $ | 373,712 |   | $ | 3,402,314 |   | $ | — |   | $ | 3,776,026 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Cost of sales                                    |   | 208,380 |   | 3,367,584 |   | — |   | 3,575,964 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Gross profit                                     |   | 165,332 |   | 34,730 |   | — |   | 200,062 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Operating, general, and  administrative expenses |   | 83,906 |   | 24,983 |   | 9,198 |   | 118,087 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| EBITDA                                           |   | 81,426 |   | 9,747 |   | (9,198 | ) | 81,975 |   |
|                                             |   |   |   |   |   |   |   |   |   |
| Non-recurring charges                            |   | — |   | (5,580 | ) | — |   | (5,580 | ) |
|                                             |   |   |   |   |   |   |   |   |   |
| Non-allocated expenses                           |   | — |   | — |   | (66,966 | ) | (66,966 | ) |
|                                             |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                |   | $ | 81,426 |   | $ | 4,167 |   | $ | (76,164 | ) | $ | 9,429 |   |

 

11

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| **As of March 31, 2002** |   |
|--------------------------|--------|
|                     |   | **Retail** |   | **CEG** |   | **Other** |   | **Total** |   |
|                     |   |   |   |   |   |   |   |   |   |
| Identifiable assets      |   | $ | 292,148 |   | $ | 52,915 |   | $ | 47,198 |   | $ | 392,261 | (a) |
| General corporate assets |   | — |   | — |   | 362,991 |   | 362,991 |   |
| Total assets             |   | $ | 292,148 |   | $ | 52,915 |   | $ | 410,189 |   | $ | 755,252 |   |

 
| **As of March 31, 2001** |   |
|--------------------------|--------|
|                     |   | **Retail** |   | **CEG** |   | **Other** |   | **Total** |   |
|                     |   |   |   |   |   |   |   |   |   |
| Identifiable assets      |   | $ | 331,978 |   | $ | 244,202 |   | $ | 57,545 |   | $ | 633,725 | (a) |
| General corporate assets |   | — |   | — |   | 392,346 |   | 392,346 |   |
| Total assets             |   | $ | 331,978 |   | $ | 244,202 |   | $ | 449,891 |   | $ | 1,026,071 |   |

 

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(a)- identifiable assets for the retail and CEG segments include accountsreceivable, inventories, 

and property, plant andequipment, net of accumulated depreciation 

 

Normal gains and losses from the sale ofassets are included in Operating, general and administrative expenses above,while gains and losses from the sale of business locations are excluded asthese are not used by management to track segment performance. EBITDA shouldnot be considered as an alternative to net income (as an indicator of operatingperformance) or as an alternative to cash flow (as a measure of liquidity or abilityto service debt obligations), and is not in accordance with nor superior togenerally accepted accounting principles, but provides additional informationfor evaluating the Partnership’s ability to pay its Minimum QuarterlyDistribution and to service and incur indebtedness.  Cash flows in accordance with generally accepted accountingprinciples consist of cash flows from operating, investing and financingactivities; cash flows from operating activities reflect net income (includingcharges for interest and income taxes, which are not reflected in EBITDA),adjusted for noncash charges or income (which are reflected in EBITDA) andchanges in operating assets and liabilities (which are not reflected inEBITDA).  Further, cash flows frominvesting and financing activities are not included in EBITDA.

 

12

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CORNERSTONE PROPANE PARTNERS, L.P. ANDSUBSIDIARY

 

ITEM 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of the historicalfinancial condition and results of operations for the Partnership should beread in conjunction with the historical financial statements and notes theretoincluded elsewhere in this Quarterly Report on Form 10-Q.

 

**General**

 

The Partnership is a Delaware limitedpartnership formed in March 1996.  ThePartnership’s management believes that it is the sixth largest retail marketerof propane in the United States, serving approximately 440,000 residential,commercial, industrial and agricultural customers from approximately 250customer service centers in 33 states. The Partnership’s two principal businesssegments are its retail and Coast Energy Group (“CEG”) operations. The retailsegment includes propane sales, principally to end-users; repair andmaintenance of propane heating systems and appliances; and the sale ofpropane-related supplies, appliances and other equipment. CEG provides supply,marketing, and distribution services to other resellers of propane andend-users. Principal products are propane and other natural gas liquids.

 

Because a substantial portion of thePartnership’s retail propane is used in the weather-sensitive residentialmarkets, the temperatures in the Partnership’s area of operations, particularlyduring the six-month peak heating season (October through March), have asignificant effect on the financial performance of the Partnership.  In any given area, warmer-than-normaltemperatures will tend to result in reduced propane use, while sustained colder-than-normaltemperatures will tend to result in greater propane use.  Therefore, information on normaltemperatures is used by the Partnership in understanding how temperaturesaffect historical results of operations and in preparing forecasts of future operations,which are based on the assumption that normal weather will prevail in each ofthe Partnership’s regions. In addition, increases in propane commodity pricescan result in customer conservation and reductions in gallons sold.

 

Gross profit margins are not only affected byweather patterns but also by changes in customer mix and underlying productcosts. For example, sales to residential customers ordinarily generate highermargins than sales to other customer groups, such as commercial or agriculturalcustomers.  In addition, gross profitmargins vary by geographic region. Accordingly, profit margins could vary significantly from year to yearin a period of identical sales volumes. Gross margins can also be impacted bysignificant increases in underlying product costs that may not in all instancesbe passed along to customers in the form of higher selling prices.

 

13

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**Analysis of Historical Results of Operations- Three Month Period Ended March 31**

 

The following discussion compares the resultsof operations and other data of the Partnership for the three-month periodended March 31, 2002, to the three-month period ended March 31, 2001.

 

*Volume*. During the three months ended March 31, 2002, the Partnership sold 93.3million retail propane gallons, a decrease of 8.2 million gallons or 8.1% fromthe 101.5 million retail propane gallons sold during the three months endedMarch 31, 2001. Due to weather patterns that were 10.2% warmer than normal and8.5% warmer than last year, the Partnership saw a significant decline in retailpropane sales volume. Residential gallons were down by 6.3% compared to theprior year, while non-residential gallons were down 10.9% from the prior year.Non-residential gallons include sales for commercial, agriculture, resale andfork lift cylinder exchange, which are impacted by the economy, crop dryinguse, small cylinders and fork lift uses. Due to the seasonal nature of thebusiness, the quarter ending in March traditionally represents approximately35% of the annual gallons sold to retail customers.

 

*Revenues*. Revenues decreased by $588.2 million or 68% to $277.2 million for thethree months ended March 31, 2002, as compared to $865.4 million for the threemonths ended March 31, 2001.  Thischange was primarily attributable to a decrease in CEG revenues of $533.2million or 77% to $159.6 million for the three months ended March 31, 2002, ascompared to $692.8 million for the three months ended March 31, 2001.  This decrease was due primarily to the sale of theU.S. crude operation, closure of U.S. and Canadian natural gas operations, andlower commodity prices for all energy products. The revenues for theretail business decreased by $54.9 million or 31.8% to $117.7 million for thethree months ended March 31, 2002, as compared to $172.6 million for the threemonths ended March 31, 2001. The reduction in retail revenues stemmed primarilyfrom lower propane prices and secondarily from fewer gallons sold due to warmerwinter weather compared to last year’s quarter.

 

*Cost of Sales*.  Cost of sales decreased by $575.6 million or 73.6% to $206.3million for the three months ended March 31, 2002, as compared to $781.9million for the three months ended March 31, 2001.  The decrease in cost of product sold was primarily due to thesale of the U.S. crude oil operations, the closure of U.S. and Canadian naturalgas operations, warmer winter weather, and lower propane prices.

 

*Gross Profit.* Gross profit decreased $12.6 million or 15.1% to $70.9 million for thethree months ended March 31, 2002, compared to $83.5 million for the threemonths ended March 31, 2001. Gross profit from the retail business decreased$12.0 million or 15.8% to $63.8 million for the three months ended March 31,2002, compared to $75.8 million for the three months ended March 31, 2001. Thiswas due to the lower gallons sold due to warmer weather during the quarter andlower margins per gallon. Retail gross margin per gallon for the three monthsended March 31, 2002 was 8.4% below last year. This was attributable to the lowering of LPG margins in order to remaincompetitive and retain market share. CEG’s gross profit decreased $0.5 millionor 6.5% to $7.2 million for the three months ended March 31, 2002, compared to$7.7 million for the three months ended March 31, 2001 due to warmer weatherand the sale and closure of its crude oil and natural gas operations.

 

*Cash Operating, General and Administrative Expenses.*  Cash operating, general and administrativeexpenses decreased by $2.6 million or 6.4% to $38.3 million for the threemonths ended March 31, 2002, as compared to $40.9 million for the three monthsended March 31, 2001.

 

14

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Retail cash operating expenses decreased $4.3million or 13.6% primarily due to lower personnel, bad debt, and vehicleoperating costs.  CEG’s operatingexpenses increased $0.8 million or 12.5% primarily due to foreign currencytransaction costs partially offset by lower personnel and operating costs fromthe divestiture of businesses. Corporate overhead expense increased by $0.9 million or 31% due to legaland investment banker fees associated with pursuing strategic options that mayinclude a possible sale/merger.  Theseoptions include engaging Credit Suisse First Boston as an investment banker tosolicit bids to purchase the Partnership by potential buyers and were partiallyoffset by lower personnel costs.

 

*Depreciation and Amortization.*  Depreciation and amortization decreased $2.4million or 19.5% to $9.9 million for the three months ended March 31, 2002, ascompared to $12.3 million for the three months ended March 31, 2001.  This decrease was primarily due to theadoption of SFAS No. 142, which decreased goodwill related amortization by $2.0million.

 

*Non-recurring charges.*  During the three months endedMarch 31, 2002, the partnership incurred losses of $2.3 million related to the sale of the U.S. crude operation, andclosure of U.S. and Canadian natural gas operations within CEG.

 

*Interest Expense.*  Interest expense decreased by $1.5 millionor 14.3% to $9.0 million for the three months ended March 31, 2002, as comparedto $10.5 million for the three months ended March 31, 2001.  The decrease was due principally to lowerborrowing levels on the Partnership’s working capital facility due to lowercredit needs caused by the sale of CEG businesses and by lower cost of productsold, coupled with lower interest rates.

 

15

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**Analysis of Historical Results of Operations– Nine Month Period Ended March 31**

 

The following discussion compares the resultsof operations and other data of the Partnership for the nine-month period endedMarch 31, 2002, to the nine-month period ended March 31, 2001.

 

*Volume*. During the nine months ended March 31, 2002, the Partnership sold 202.8million retail propane gallons, a decrease of 36.8 million gallons or 15.4%from the 239.6 million retail propane gallons sold during the nine months endedMarch 31, 2001. Due to weather patterns that were 12.7% warmer than normal and16.7% warmer than the prior year, the Partnership saw a significant decline inretail propane sales volume. Residential gallons were down by 14.6% compared tothe prior year, while non-residential gallons were down 16.4% from the prioryear. Non-residential gallons include sales for commercial, agriculture, resaleand fork lift cylinder exchange, which are impacted by the economy, crop dryinguse, small cylinders and fork lift uses.

 

*Revenues*. Revenues decreased by $2,668.8 million or 70.7% to $1,107.2 million forthe nine months ended March 31, 2002, as compared to $3,776.0 million for thenine months ended March 31, 2001.  Thischange was primarily attributable to a decrease in CEG revenues of $2,558.5million or 75.2% to $843.8 million for the nine months ended March 31, 2002, ascompared to $3,402.3 million for the nine months ended March 31, 2001.  This decrease was due primarily to the sale of theU.S. and Canadian crude oil operations, the closure of U.S. and Canadiannatural gas operations, and lower commodity prices for all energy products.The revenues for the retail business decreased by $110.3 million or 29.5% to$263.4 million for the nine months ended March 31, 2002, as compared to $373.7million for the nine months ended March 31, 2001. The reduction in retailrevenues stemmed from lower propane prices and from fewer gallons sold due towarmer weather compared to last year.

 

*Cost of Sales*.  Cost of sales decreased by $2,632.5 million or 73.6% to $943.5million for the nine months ended March 31, 2002, as compared to $3,576.0million for the nine months ended March 31, 2001.  The decrease in cost of product sold was primarily due to thesales of the U.S. and Canadian crude oil operations, the closure of U.S. andCanadian natural gas operations, warmer weather, and lower propane prices.

 

*Gross Profit.* Gross profit decreased $36.3million or 18.2% to $163.7 million for the nine months ended March 31, 2002,compared to $200.0 million for the nine months ended March 31, 2001. Grossprofit from the retail business decreased $25.5 million or 15.4% to $139.8million for the nine months ended March 31, 2002, compared to $165.3 millionfor the nine months ended March 31, 2001. The decrease in retail gross profitwas primarily due to the decline in gallons sold as the result of warmerweather. Retail gross margin per gallon for the nine months ended March 31,2002 was flat compared to the same period last year.  CEG’s gross profit decreased $10.8 million or 31.1% to $23.9million for the nine months ended March 31, 2002, compared to $34.7 million forthe nine months ended March 31, 2001 due to the sales of the U.S. and Canadiancrude oil operations, the closure of U.S. and Canadian natural gas operations,warmer weather, and lower propane prices.

 

*Cash Operating, General and Administrative Expenses.*  Cash operating, general and administrativeexpenses decreased by $11.4 million or 9.7% to $106.7 million for the ninemonths ended March 31, 2002, as compared to $118.1 million for the nine monthsended March 31, 2001. Retail cash operating expenses decreased $6.7 millionprincipally due to decrease in

 

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personnel and related expenses and lowervehicle operating costs.  CEG’soperating expenses decreased $4.8 million primarily due to lower personnel andlower operating costs resulting from divested businesses. Overall corporateoverhead expenses remained flat compared to the same period last year.  Higher legal and investment banker fees dueto pursuing strategic options were partially offset by lower personnel costs.

 

*Depreciation and Amortization.*  Depreciation and amortization decreased $4.8million or 13.4% to $30.9 million for the nine months ended March 31, 2002, ascompared to $35.7 million for the nine months ended March 31, 2001.  This decrease was primarily due to theadoption of SFAS No. 142, which decreased goodwill related amortization by $6.0million, partially offset by additional amortization expense associated withfinancing costs.

 

*Non-recurring charges.*  During the nine months endedMarch 31, 2002, the partnership incurred losses of $13.2 million related primarily to the sale of the U.S. crude oiloperations and the closure of the U.S. and Canadian natural gas operations.Of the loss, the cash component is $4.0 million for severance, loss on theassignment of a natural gas pipeline contract, and expenses related toabandonment of leased facilities. The non-cash component consisted principallyof goodwill, which was related to specific acquisitions and allocated goodwillrecorded at the initial public offering. This goodwill was allocated to assets being disposed of as required bySFAS 142.

 

*Interest Expense. *Interest expense decreased by $3.2million or 10.5% to $27.4 million for the nine months ended March 31, 2002, ascompared to $30.6 million for the nine months ended March 31, 2001.  The decrease was due principally to lowerborrowing levels on the Partnership’s bank credit facility due to lower creditneeds caused by the sale of CEG businesses and by lower cost of product sold,coupled with lower interest rates.

 

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**Liquidity and Capital Resources**

 

*Operating Activities.*  Cash provided byoperating activities during the nine-month period ended March 31, 2002 was$34.5 million.  Cash flow fromoperations included a net loss of $16.1 million and non-cash charges of $41.2million for the period, comprised primarily of depreciation and amortizationexpense, the loss on sale of assets and the net loss in the fair value ofderivatives.  The impact of workingcapital changes increased cash flow by approximately $9.4 million.

 

*Investing Activities.*  Net cash used ininvesting activities for the nine-month period ended March 31, 2002 totaled$0.6 million. This consisted of $10.6 million to purchase equipment andsoftware used in the business.  Proceedsfrom sales of several of the partnership’s retail service centers and the U.S.crude oil operations were $10.6 million. Other investing activities used $0.6million. The sale of selected retail service centers reflects the Partnership’scontinuing focus on the rationalization of under-performing operations.  The sale of the U.S. crude oil operationsrepresents a strategic change at CEG to focus exclusively on the natural gasliquids and logistic businesses.

 

*Financing Activities.*  Cash used by financing activities was $31.6million for the nine months ended March 31, 2002, which reflects a decrease of$23.6 million in the partnership’s bank credit facility, payments on long-termdebt of $5.7 million, $2.5 million in financing costs, which were partiallyoffset by the net addition in the amount due to related parties of $9.6million. Cash distributions paid to Unitholders for the period totaled $9.5million. Cash received from operations and sales of assets was used to pay downamounts owed on the partnership’s bank credit in line with the Partnership’sstrategy of reducing debt.

 

**Financing and Sources of Liquidity**

 

On January 18, 2002, the Partnershipannounced that unprecedented mild winter weather during its fiscal secondquarter, ended Dec. 31, 2001, negatively impacted the Partnership’s results,and that the Partnership would not meet certain covenants in its bank creditfacility. The banks agreed to waive and amend the credit agreement and tomodify the covenants for the remainder of the term of the agreement. Inconnection with this waiver and amendment, the banks required the Partnershipto suspend the payment of quarterly distributions. This amendment allows thePartnership continued access to the credit facility.

 

The Partnership’s current credit agreementhas a capacity of $50 million and was placed in November 2001. This facilityexpires November 28, 2002. NorthWestern Corporation (“NorthWestern”), the ownerof the managing general partner and also owner of all outstanding subordinatedunits and 379,438 class B common units, has provided a guaranty in connectionwith this credit agreement should the Partnership not be able to meet itsobligations.  With this guaranty, feesto NorthWestern of $2.3 million were accrued and warrants for 487,179 class Bcommon units at an exercise price of $0.10 per unit were granted to NorthWesternfor their guaranty of the debt.  Additionalfinancing costs were paid to banks and other outside parties as considerationfor the new credit facility.

 

Given the sale and discontinuance of certainCEG businesses, the Partnership believes the credit facility will be adequateto support the seasonal nature of its operations.  In addition, the suspension of the quarterly distribution throughthe termination date of the credit facility will

 

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provide additional liquidity to thePartnership during that period. After the termination of current the creditfacility, on a quarterly basis, the Board of Directors will analyze theoperating performance of the Partnership, capital expenditure needs, access tofinancing, the Partnership’s debt covenants, debt service requirements,prevailing economic, financial, business, weather and other factors, includingthe Partnership Agreement, to determine whether to make a distribution paymentfor that quarter and if so, at what level.

 

The Partnership has retained the services ofCredit Suisse First Boston to pursue strategic options, including the possiblesale or merger of the Partnership. The Partnership may pursue extending orreplacing the credit facility, unless a merger or other appropriate strategictransaction has been concluded by the termination date of the facility. Anyextension or replacement may require a guarantee from NorthWestern.  The Partnership has not received anycommitment regarding an extension or replacement, nor has NorthWesternundertaken to provide a guarantee in connection therewith. The Partnership cangive no assurances that an extension of the facility or a replacement facilitycan be obtained upon the expiration of the existing facility or, if so, whetherthe terms will be favorable to the Partnership. This effort is furthercomplicated by the Partnership’s alternatives associated with the principalpayments referred to in the following paragraph.

 

Principal payments of $14.3 and $27.5 millionon the Partnership’s senior notes will become due in July 2003 and December2003, respectively. Funds have not been established to pay these amounts, norhave commitments been obtained from financial institutions to fund or refinancethese payments. The Partnership may or may not be able to fund these paymentsfrom operating cash flows. Therefore, the Partnership can give no assurancesthat funding will be available to meet these obligations.

 

The Partnership’s obligations under itsSenior Note Agreements and Bank Credit Agreement are secured by a securityinterest in the Operating Partnership’s inventory, accounts receivable andcertain customer storage tanks.  TheSenior Note and Bank Credit Agreements contain various terms and covenantsincluding financial ratio covenants with respect to debt and interest coverageand limitations, among others, on the ability of the Partnership and itssubsidiaries to incur additional indebtedness, create liens, make investmentsand loans, and enter into mergers, consolidations or sales of all orsubstantially all assets.  The SeniorNote ratios are incurrence tests to be met in order for the Partnership toincur additional ratably secured debt, with certain exceptions. In addition,other financial ratios must be met for the Partnership to pay the MQD withoutapproval of the Senior Note holders. At March 31, 2002, the Partnership’sfinancial ratios were outside of the incurrence test thresholds; therefore thePartnership is currently precluded from borrowing additional parity seniorsecured debt until these financial ratios are within the thresholds stated inthe agreements.

 

To the extent any of the foregoingtransactions involved the offer or sale of a security, except as otherwisenoted, they were done under Section 4(2) of the Securities Act of 1933 based,among other things, on representations and warranties made by the investors,the small numbers of investors solicited and the absence of any advertising orgeneral solicitation.

 

**Related Party Transactions**

 

As noted above, NorthWestern has provided aguaranty of the Partnership’s credit facility and has received considerationfor this guaranty from the Partnership. In addition, the Partnership

 

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conducts transactions with NorthWestern as tocommodity transactions as well as reimbursement of costs incurred for thebenefit of the Partnership. The commodity transactions include the procurementof energy commodities utilized within NorthWestern’s operations. These arerecorded as sales, with related cost of sales by the Partnership producinggross profit, which approximates similar transactions with third parties, thathas been determined in advance of the procurement activity. The total grossprofit realized by the Partnership from these activities is immaterial. Inaddition, the Partnership conducts transactions with NorthWestern for energycommodities that will either be sold to third parties or transferred back tothe selling party, depending on business needs. These transactions are recordedat market value at the date of transfer and no sales, cost of sales or grossprofit is recorded in connection with these transactions.

 

**Forward-looking Statements**

 

This Quarterly Report on Form 10-Q containsforward-looking statements within the meaning of Section 21E of the SecuritiesExchange Act of 1934, as amended, relating to the Partnership’s future businessexpectations and predictions and financial condition and results of operations.These forward-looking statements involve certain risks and uncertainties. ThePartnership’s actual future performance will be affected by a number offactors, risks and uncertainties, including without limitation, weatherconditions, regulatory changes, competitive factors, the operations of vendors,suppliers and customers, and the Partnership’s liquidity and access tofinancing, many of which are beyond the Partnership’s control.  Future events and results may varysubstantially from what the Partnership currently foresees, and there can be noassurance that the Partnership’s actual results will not differ materially fromits expectations. All subsequent written and oral forward-looking statementsattributable to the Partnership or persons acting on its behalf are expresslyqualified in their entirety by such cautionary statements. The Partnershipundertakes no obligation to publicly release any revision to theseforward-looking statements to reflect events or circumstances after the date ofsuch statements or to reflect the occurrence of anticipated or unanticipatedevents.

 

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CORNERSTONE PROPANE PARTNERS, L.P. ANDSUBSIDIARY

 

ITEM 3:

QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISKS

 

**Risk**

 

The Partnership has significant exposure toweather-related risk and limited exposure to technology risk, credit risk,interest rate risk, foreign currency risk, and commodity price risk. In thenormal course of business, the Partnership employs various strategies andprocedures to manage its exposure to changes in interest rates, fluctuations inthe value of foreign currencies, and changes in commodity prices. ThePartnership’s exposure to any of these risks is not materially different thanas disclosed in the Partnership’s Annual Report on 10-K for the year ended June30, 2001.

 

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PART II.OTHER INFORMATION

 

Item 6:Exhibits and Reports on Form 8-K

 
| a)     | Exhibits             |
|--------|----------------------|
|   |                 |
|   | None.                |
|   |                 |
| b)     | Reports on Form 8-K: |
|   |                 |
|   | None.                |

 

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**SIGNATURE**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|   | Cornerstone Propane Partners, L.P. |
|--------|------------------------------------|
|   |                               | (Registrant) |
|   |                               |   |
|   | By:                                | Cornerstone Propane GP, Inc. |
|   |                               | as Managing General Partner |
|   |                               |   |
|   | By:                                | /s/ Richard D. Nye |   |
|   | Name:                              | Richard D. Nye |
|   | Title:                             | Vice President Finance  & Administration and  Acting Chief Financial Officer |
|   |                               |   |
|   | Date:                              | May 14, 2002 |

 

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