**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# **FORM 10-Q**

 

**ý    ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30,2001**

** **

**OR**

 

**o****    TRANSITIONREPORT 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)                              |
| **(831) 724-1921**                                                                  |
| Registrant’s telephone number, including  area code                            |
|                                                                                |
| **NONE**                                                                            |
| (Former name, former address and former  fiscal year, if changed since last report) |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No  o

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock as of November 13,2001: 17,267,827 - Common Units

 

 

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 September 30, 2001 and 2000, and June 30, 2001                                                  |
|                                                                                                                               |
| Consolidated Statements of Operations for  the Three Months Ended September 30, 2001 and 2000                                      |
|                                                                                                                               |
| Consolidated Statements of Partners'  Capital for the Three Months Ended September 30, 2001 and 2000                               |
|                                                                                                                               |
| Consolidated Statements of Cash Flows for  the Three Months Ended September 30, 2001 and 2000                                      |
|                                                                                                                               |
| Notes to Consolidated Financial Statements                                                                                         |
|                                                                                                                               |
| Item 2                                                                                                                             |
|                                                                                                                               |
| Management’s Discussion and Analysis of  Financial Condition and Results of Operations of Cornerstone Propane  Partners, L.P. |
|                                                                                                                               |
| Item 3                                                                                                                             |
|                                                                                                                               |
| Quantitative and Qualitative Disclosures  About Market Risks                                                                       |
|                                                                                                                               |
| Part II. Other Information                                                                                                         |
|                                                                                                                               |
| Item 6                                                                                                                             |
|                                                                                                                               |
| Exhibits and Reports on Form 8-K                                                                                                   |
|                                                                                                                               |
| Signature                                                                                                                          |

 

 

CORNERSTONE PROPANE PARTNERS, L.P. AND SUBSIDIARY

 

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

 
| **ASSETS**                              |   | **September 30,** |    | **June 30,**              |       |
|-----------------------------------------|--------|-------------------|---------|---------------------------|------------|
|                                    |   | **2001**          |    | **2000**                  |       | **2001** |   |
|                                    |   |              |    | *(restated,**see Note 4)* |       |   |   |
| Current assets:                         |   |              |    |                      |       |   |   |
| Cash and cash equivalents               |   | $                 | 8,187   |                      | $          | 8,940 |   | $ | 6,400 |   |
| Trade receivables, net                  |   | 125,305           |    | 61,598                    |       | 131,507 |   |
| Inventories                             |   | 36,596            |    | 73,741                    |       | 30,321 |   |
| Prepaid expenses                        |   | 1,793             |    | 3,038                     |       | 2,503 |   |
| Other current assets                    |   | 19,236            |    | 2,923                     |       | 8,550 |   |
| Total current assets                    |   | 191,117           |    | 150,240                   |       | 179,281 |   |
|                                    |   |              |    |                      |       |   |   |
| Property, plant, and equipment, net     |   | 323,469           |    | 338,192                   |       | 328,848 |   |
| Goodwill, net                           |   | 315,108           |    | 322,655                   |       | 315,108 |   |
| Other intangibles, net                  |   | 28,572            |    | 40,030                    |       | 32,624 |   |
| Due from related party                  |   | -                 |    | -                         |       | 4,839 |   |
| Other assets                            |   | 8,405             |    | 5,790                     |       | 8,141 |   |
| Total assets                            |   | $                 | 866,671 |                      | $          | 856,907 |   | $ | 868,841 |   |
|                                    |   |              |    |                      |       |   |   |
| **LIABILITIES AND PARTNERS' CAPITAL**   |   |              |    |                      | ** ** |   | ** ** |
|                                    |   |              |    |                      |       |   |   |
| Current liabilities:                    |   |              |    |                      |       |   |   |
| Current portion of long-term debt       |   | $                 | 63,988  |                      | $          | 8,721 |   | $ | 7,535 |   |
| Trade accounts payable                  |   | 142,936           |    | 72,109                    |       | 136,723 |   |
| Accrued expenses                        |   | 23,692            |    | 27,677                    |       | 27,259 |   |
| Total current liabilities               |   | 230,616           |    | 108,507                   |       | 171,517 |   |
|                                    |   |              |    |                      |       |   |   |
| Long-term debt, less current portion    |   | 425,051           |    | 490,521                   |       | 460,621 |   |
| Due to related party                    |   | 5,205             |    | 5,266                     |       | 7,986 |   |
| Other noncurrent liabilities            |   | 2,337             |    | 10,171                    |       | 3,189 |   |
| Total liabilities                       |   | 663,209           |    | 614,465                   |       | 643,313 |   |
|                                    |   |              |    |                      |       |   |   |
| Partners' capital                       |   |              |    |                      |       |   |   |
| Common Unitholders                      |   | 122,271           |    | 157,906                   |       | 139,090 |   |
| Subordinated Unitholders                |   | 77,557            |    | 80,183                    |       | 82,204 |   |
| General partners                        |   | 4,193             |    | 4,939                     |       | 4,632 |   |
| Accumulated other comprehensive income  |   | (559              | )       | (586                      | )          | (398 | ) |
| Total partners' capital                 |   | 203,462           |    | 242,442                   |       | 225,528 |   |
|                                    |   |              |    |                      |       |   |   |
| Total liabilities and partners' capital |   | $                 | 866,671 |                      | $          | 856,907 |   | $ | 868,841 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

CORNERSTONE PROPANE PARTNERS, L.P. ANDSUBSIDIARY

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands)

(Unaudited)

 
|                                                                      |   | **For the three months ended** |    |
|---------------------------------------------------------------------------|--------|--------------------------------|---------|
|                                                                      |   | **September 30,**              |    |
|                                                                      |   | **2001**                       |    | **2000** |   |
|                                                                      |   |                           |    | *(restated,**see Note 4)* |   |
| Revenues                                                                  |   | $                              | 439,873 |   | $ | 1,094,897 |   |
|                                                                      |   |                           |    |   |   |
| Cost of Sales                                                             |   | 403,123                        |    | 1,053,833 |   |
|                                                                      |   |                           |    |   |   |
| Gross profit                                                              |   | 36,750                         |    | 41,064 |   |
|                                                                      |   |                           |    |   |   |
| Expenses:                                                                 |   |                           |    |   |   |
| Operating, general, and administrative                                    |   | 33,857                         |    | 34,532 |   |
| Depreciation                                                              |   | 5,949                          |    | 6,275 |   |
| Amortization                                                              |   | 4,440                          |    | 4,697 |   |
| Non-recurring charge                                                      |   | -                              |    | 4,380 |   |
|                                                                      |   | 44,246                         |    | 49,884 |   |
|                                                                      |   |                           |    |   |   |
| Operating loss                                                            |   | (7,496                         | )       | (8,820 | ) |
|                                                                      |   |                           |    |   |   |
| Gain (loss) in fair value of derivatives                                  |   | (436                           | )       | 2,460 |   |
| Interest expense                                                          |   | 9,221                          |    | 9,949 |   |
|                                                                      |   |                           |    |   |   |
| Loss before provision for income taxes                                    |   | (17,153                        | )       | (16,309 | ) |
|                                                                      |   |                           |    |   |   |
| Income tax expense (benefit)                                              |   | (4                             | )       | 47 |   |
|                                                                      |   |                           |    |   |   |
| Loss before cumulative effect of change in accounting  principle          |   | (17,149                        | )       | (16,356 | ) |
| Cumulative effect of change in accounting principle                       |   | -                              |    | (5,329 | ) |
|                                                                      |   |                           |    |   |   |
| Net loss                                                                  |   | $                              | (17,149 | ) | $ | (21,685 | ) |
| General partners' interest in net loss                                    |   | $                              | (343    | ) | $ | (434 | ) |
| Limited partners' interest in net loss                                    |   | $                              | (16,806 | ) | $ | (21,251 | ) |
|                                                                      |   |                           |    |   |   |
| Loss per unit before cumulative effect of change in  accounting principle |   | $                              | (0.70   | ) | $ | (0.68 | ) |
| Cumulative effect per unit of change in accounting  principle             |   | $                              | -       |   | $ | (0.23 | ) |
| Net loss per unit                                                         |   | $                              | (0.70   | ) | $ | (0.91 | ) |
| Weighted average number of units outstanding                              |   | 23,859                         |    | 23,448 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

CORNERSTONEPROPANE PARTNERS, L.P. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL

(Dollars in thousands)

(Unaudited)

 
|                                                         |   | **Thousands of Units** |   |             |   |       |        |             |              | **Accumulated** |          |     |
|--------------------------------------------------------------|--------|------------------------|--------|------------------|--------|------------|-------------|------------------|-------------------|-----------------|---------------|----------|
|                                                         |   |                   |   |             |   |       |        |             | **Other**         |            | **Total**     |     |
|                                                         |   |                   |   |             |   |       | **General** |             | **Comprehensive** |            | **Partners'** |     |
|                                                         |   | **Common**             |   | **Subordinated** |   | **Common** |        | **Subordinated** |              | **Partners**    |          | **Loss** |   | **Capital** |   |
| Balance at June 30, 2001                                     |   | 17,260                 |   | 6,598            |   | $          | 139,090     |             | $                 | 82,204          |          | $        | 4,632 |   | $ | (398 | ) | $ | 225,528 |   |
|                                                         |   |                   |   |             |   |       |        |             |              |            |          |     |   |   |   |
| Comprehensive net loss:                                      |   |                   |   |             |   |       |        |             |              |            |          |     |   |   |   |
| Net loss                                                     |   | -                      |   | -                |   | (12,159    | )           | (4,647           | )                 | (343            | )             | -        |   | (17,149 | ) |
| Other comprehensive loss                                     |   | -                      |   | -                |   | -          |        | -                |              | -               |          | (161     | ) | (161 | ) |
|                                                         |   |                   |   |             |   |       |        |             |              |            |          |     |   |   |   |
| Net comprehensive loss                                       |   | -                      |   | -                |   | (12,159    | )           | (4,647           | )                 | (343            | )             | (161     | ) | (17,310 | ) |
|                                                         |   |                   |   |             |   |       |        |             |              |            |          |     |   |   |   |
| Quarterly distributions                                      |   | -                      |   | -                |   | (4,660     | )           | -                |              | (96             | )             | -        |   | (4,756 | ) |
|                                                         |   |                   |   |             |   |       |        |             |              |            |          |     |   |   |   |
| Balance at September 30, 2001                                |   | 17,260                 |   | 6,598            |   | $          | 122,271     |             | $                 | 77,557          |          | $        | 4,193 |   | $ | (559 | ) | $ | 203,462 |   |
|                                                         |   |                   |   |             |   |       |        |             |              |            |          |     |   |   |   |
| Balance at June 30, 2000                                     |   | 16,822                 |   | 6,598            |   | $          | 176,961     |             | $                 | 86,163          |          | $        | 5,546 |   | $ | (560 | ) | $ | 268,110 |   |
|                                                         |   |                   |   |             |   |       |        |             |              |            |          |     |   |   |   |
| Comprehensive net loss:                                      |   |                   |   |             |   |       |        |             |              |            |          |     |   |   |   |
| Net loss                                                     |   | -                      |   | -                |   | (15,271    | )           | (5,980           | )                 | (434            | )             | -        |   | (21,685 | ) |
| Other comprehensive loss                                     |   | -                      |   | -                |   | -          |        | -                |              | -               |          | (26      | ) | (26 | ) |
|                                                         |   |                   |   |             |   |       |        |             |              |            |          |     |   |   |   |
| Net comprehensive loss                                       |   | -                      |   | -                |   | (15,271    | )           | (5,980           | )                 | (434            | )             | (26      | ) | (21,711 | ) |
|                                                         |   |                   |   |             |   |       |        |             |              |            |          |     |   |   |   |
| Issuance of Common Units and General Partners'  contribution |   | 44                     |   | -                |   | 580        |        | -                |              | 14              |          | -        |   | 594 |   |
|                                                         |   |                   |   |             |   |       |        |             |              |            |          |     |   |   |   |
| Issuance of warrants in payment of fees                      |   | -                      |   | -                |   | 4,740      |        | -                |              | -               |          | -        |   | 4,740 |   |
|                                                         |   |                   |   |             |   |       |        |             |              |            |          |     |   |   |   |
| Quarterly distributions                                      |   | -                      |   | -                |   | (9,104     | )           | -                |              | (187            | )             | -        |   | (9,291 | ) |
|                                                         |   |                   |   |             |   |       |        |             |              |            |          |     |   |   |   |
| Balance at September 30, 2000                                |   | 16,866                 |   | 6,598            |   | $          | 157,906     |             | $                 | 80,183          |          | $        | 4,939 |   | $ | (586 | ) | $ | 242,442 |   |

 

*Information presented for fiscal year 2001 hasbeen restated to reflect the implementation of S.A.B. 101. See Note 4.*

 

Theaccompanying notes are an integral part of these financial statements.

 

CORNERSTONE PROPANEPARTNERS, L.P. AND SUBSIDIARY

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 
|                                                                      |   | **Three Months Ended** |    |
|---------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                      |   | **September 30,**      |    |
|                                                                      |   | **2001**               |    | **2000** |   |
|                                                                      |   |                   |    | *(restated,**see Note 4)* |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                 |   |                   |    |   |   |
| Net loss                                                                  |   | $                      | (17,149 | ) | $ | (21,685 | ) |
| Adjustments to reconcile net loss to net cash from  operating activities: |   |                   |    |   |   |
| Depreciation                                                              |   | 5,949                  |    | 6,275 |   |
| Amortization                                                              |   | 4,440                  |    | 4,697 |   |
| Gain on sale of assets                                                    |   | (63                    | )       | (873 | ) |
| Other                                                                     |   | (161                   | )       | (26 | ) |
| Cumulative effect of adoption of accounting principle                     |   | -                      |    | 5,329 |   |
| Gain in fair value of derivatives                                         |   | 436                    |    | (2,460 | ) |
| Changes in assets and liabilities:                                        |   |                   |    |   |   |
| Trade receivables-net                                                     |   | 6,202                  |    | (7,164 | ) |
| Inventories                                                               |   | (6,275                 | )       | (4,097 | ) |
| Prepaid expenses and other current assets                                 |   | (9,976                 | )       | 3,512 |   |
| Trade accounts payable and accrued expenses                               |   | 2,210                  |    | 13,692 |   |
| Net cash from operating activities                                        |   | (14,387                | )       | (2,800 | ) |
|                                                                      |   |                   |    |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                 |   |                   |    |   |   |
| Expenditures for property, plant and equipment, net                       |   | (1,761                 | )       | (977 | ) |
| Proceeds from sale of assets                                              |   | 1,254                  |    | 4,073 |   |
| Other                                                                     |   | (652                   | )       | (535 | ) |
| Net cash from investing activities                                        |   | (1,159                 | )       | 2,561 |   |
|                                                                      |   |                   |    |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                 |   |                   |    |   |   |
| Net change in Working Capital Facility                                    |   | 22,600                 |    | 12,700 |   |
| Payments on other long-term debt                                          |   | (2,569                 | )       | (1,424 | ) |
| Payments for debt financing                                               |   | -                      |    | (1,375 | ) |
| Advances from related parties                                             |   | 2,058                  |    | 818 |   |
| Issuance of Common Units                                                  |   | -                      |    | 14 |   |
| Partnership distributions                                                 |   | (4,756                 | )       | (9,291 | ) |
| Net cash from financing activities                                        |   | 17,333                 |    | 1,442 |   |
|                                                                      |   |                   |    |   |   |
| **NET CHANGE IN CASH AND CASH EQUIVALENTS**                               |   | 1,787                  |    | 1,203 |   |
|                                                                      |   |                   |    |   |   |
| **CASH AND CASH EQUIVALENTS, beginning of  period**                       |   | 6,400                  |    | 7,737 |   |
|                                                                      |   |                   |    |   |   |
| **CASH AND CASH EQUIVALENTS, end of period**                              |   | $                      | 8,187   |   | $ | 8,940 |   |
|                                                                      |   |                   |    |   |   |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:**                    |   |                   |    |   |   |
| Cash paid for interest                                                    |   | $                      | 7,235   |   | $ | 6,856 |   |
|                                                                      |   |                   |    |   |   |
| **NON-CASH INVESTING & FINANCING  ACTIVITIES:**                       |   |                   |    |   |   |
| Common Units issued in payment of debt                                    |   | $                      | -       |   | $ | 580 |   |
| Warrants for Common Units issued in payment of fees                       |   | $                      | -       |   | $ | 4,740 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

CORNERSTONE PROPANEPARTNERS, L.P. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30,2001

(Dollars in thousands, except unit data)

(Unaudited)

 

## 1.     BASIS OF PRESENTATION

 

These consolidated financialstatements include the accounts of Cornerstone Propane Partners, L.P. (“CornerstonePartners”) and its subsidiary, Cornerstone Propane, L.P. (the “OperatingPartnership”), and the Operating Partnership’s corporate subsidiariescollectively referred to as the “Partnership”. All material intercompanybalances and transactions have been eliminated. Certain 2000 amounts in theaccompanying consolidated financial statements have been reclassified toconform to the 2001 presentation. These reclassifications had no effect on netloss or Partners’ capital as previously reported, except as noted in Note 4.

 

The accompanying interimconsolidated financial statements of the Partnership are unaudited; however, inthe opinion of management, all adjustments necessary for a fair presentation ofsuch consolidated financial statements have been reflected in the interimperiods presented. Such adjustments consisted only of normal recurring items.The Partnership’s business is seasonal and, accordingly, interim results arenot indicative of results for a full year. The significant accounting policiesand certain financial information, which are normally included in financialstatements prepared in accordance with generally, accepted accountingprinciples, but which are not required for interim reporting purposes, havebeen condensed or omitted. The accompanying consolidated financial statementsof the Partnership should be read in conjunction with the consolidatedfinancial statements and related notes included in the Partnership’s AnnualReport on Form 10-K for the fiscal year ended June 30, 2001.

 

## 2.     DISTRIBUTIONSOF AVAILABLE CASH

 

The Partnership will makedistributions to its partners with respect to each fiscal quarter of thePartnership within 45 days after the end of each fiscal quarter in an aggregateamount equal to its Available Cash for such quarter. The Partnership willdistribute 100% of its Available Cash (98% to Unitholders and 2% to the GeneralPartners) until the Minimum Quarterly Distribution (“MQD”) of $.54 per unit forsuch quarter has been met. The MQD will be subject to the payment of incentivedistributions in the event Available Cash exceeds the MQD of $.54 on all units.During the Subordination Period, to the extent there is sufficient AvailableCash, the holders of Common Units have the right to receive the MQD, plus anyarrearages, prior to the distribution of Available Cash to holders ofSubordinated Units. Subordinated Units do not accrue arrearages with respect todistributions for any quarter.

 

On October 26, 2001, thedistribution for the three month period from July 1, 2001 to September 30, 2001was declared in the amount of $4,756, representing in the aggregate,distributions to the Common Unitholders and General Partners at $0.27 percommon unit. This distribution will be paid on November 15, 2001. Nodistributions have been declared and subsequently paid on the SubordinatedUnits for the period from October 1, 1997 to September 30, 2001.

 

Distributions are determined ona quarterly basis by the Board of Directors based on inputs and recommendationsof Management. The assessment of Available Cash is made by the Partnership byreviewing the cash produced by the operations of the Partnership, the expectedcash to be generated in the future and the future cash needs of thePartnership.  If Available Cash is notsufficient to meets these needs, the Partnership can distribute a loweramount.  If the distribution to theCommon Units Holders is below the MQD, arrearages will accrue on a cumulativebasis for the difference between the MQD and the distribution paid. As ofNovember 15, 2001, cumulative arrearages on Common Units will be $.54 unit dueto distributions being below the MQD for the quarters ended on June 30 andSeptember 30, 2001.

 

## 3.     NETINCOME PER UNIT

 

Net income per unit is computedby dividing net income, after considering the General Partners’ 2% interest, bythe weighted average number of Common and Subordinated Units outstanding duringthe period.

 

## 4.     RECENTLY ADOPTED ACCOUNTINGSTANDARDS

 

###### *SEC StaffAccounting Bulletin No. 101, Revenue Recognition*

 

Financial information for thequarter ended September 30, 2000 has been restated to reflect the effects ofthe application of Staff Accounting Bulletin No. 101, Revenue Recognition (“SAB101”) issued by the Securities and Exchange Commission regarding therecognition of rental income on propane storage tanks by the Partnership. ThePartnership adopted SAB 101 in the fourth quarter of fiscal 2001 retroactive toJuly 1, 2000. The effect of this implementation was to decrease Revenues, andincrease Operating loss and Net loss by $1,431 for the quarter ended September30, 2000. There was no significant cumulative effect upon initial adoption.

 

###### *Statement ofFinancial Accounting Standards No. 142 - Goodwill and Other Intangible Assets*

 

On July 20, 2001, the FinancialAccounting Standards Board issued SFAS No. 142, *Goodwill and Other Intangible Assets*(“SFAS No. 142”). 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 thatintangible assets be recognized separately if the benefit of the intangibleasset is obtained through contractual rights or if the intangible asset can besold, transferred, licensed, rented or exchanged without regard to theacquirer’s intent to do so. The Partnership adopted SFAS No. 142 effective July1, 2001 and as a result, amortization expense for the quarter ended September30, 2001 was reduced by approximately $2.0 million. The Partnership is evaluatingwhether any impairment of goodwill exists as of July 1, 2001 or whether theadoption of SFAS No. 142 will have any other effect on intangible assets. ThePartnership expects to substantially complete this analysis by December 31,2001, and will restate September 30, 2001 quarterly information if necessaryfor any other effects of adopting SFAS No. 142 in accordance with theprovisions of this statement.

 

 
|                                                                                   |   | **For the three months ended** |    |
|----------------------------------------------------------------------------------------|--------|--------------------------------|---------|
|                                                                                   |   | **September 30,**              |    |
|                                                                                   |   | **2001**                       |    | **2000** |   |
| Reported net loss before cumulative effect of change in  accounting principle          |   | $                              | (17,149 | ) | $ | (16,356 | ) |
| Add back: Goodwill amortization                                                        |   | -                              |    | 2,149 |   |
| Adjusted net loss before cumulative effect of change in  accounting principle          |   | (17,149                        | )       | (14,207 | ) |
|                                                                                   |   |                           |    |   |   |
| Cumulative effect of change in accounting principle                                    |   | -                              |    | (5,329 | ) |
| Adjusted net loss                                                                      |   | $                              | (17,149 | ) | $ | (19,536 | ) |
|                                                                                   |   |                           |    |   |   |
| Reported net loss per unit before cumulative effect of  change in accounting principle |   | $                              | (0.70   | ) | $ | (0.68 | ) |
| Add back: Goodwill amortization per unit                                               |   | -                              |    | 0.09 |   |
| Adjusted net loss per unit before cumulative effect of  change in accounting principle |   | (0.70                          | )       | (0.59 | ) |
|                                                                                   |   |                           |    |   |   |
| Cumulative effect per unit of change in accounting  principle                          |   | -                              |    | (0.23 | ) |
|                                                                                   |   |                           |    |   |   |
| Adjusted net loss per unit                                                             |   | $                              | (0.70   | ) | $ | (0.82 | ) |

 

## 5.     SEGMENT AND RELATEDINFORMATION

 

For the purpose of providingsegment information, the Partnership’s two principal business segments are itsretail and Coast Energy Group (“CEG”) operations. The retail segment includespropane sales, principally to end-users; repair and maintenance of propaneheating systems and appliances; and the sale of propane-related supplies,appliances, and other equipment. These transactions are accounted for as onebusiness segment internally and share the same customer base. CEG provides supply,marketing, and distribution services to other resellers of propane andend-users. Principal products are propane, other natural gas liquids, crudeoil, and natural gas. The accounting policies of the segments are the same asthose described in the summary of significant accounting policies in the annualreport on Form 10-K. Intra-company transactions between segments are recordedapproximately at market value at the transaction date.

 

The segments are evaluatedinternally using earnings before interest, taxes, depreciation, amortization,and non-recurring charges (“EBITDA”). Depreciation, amortization, interest andsome operating, general, and administrative expenses are not specificallytracked by business segment, and are therefore included in the “Other” categoryin the following tables:

 
|                                            |   | **Three Months Ended September 30, 2001** |   |
|-------------------------------------------------|--------|-------------------------------------------|--------|
|                                            |   | **Retail**                                |   | **CEG** |   | **Other** |   | **Total** |   |
| Revenues                                        |   | $                                         | 57,344 |   | $ | 382,529 |   | $ | - |   | $ | 439,873 |   |
|                                            |   |                                      |   |   |   |   |   |   |   |
| Cost of sales                                   |   | 27,780                                    |   | 375,343 |   | - |   | 403,123 |   |
|                                            |   |                                      |   |   |   |   |   |   |   |
| Gross profit                                    |   | 29,564                                    |   | 7,186 |   | - |   | 36,750 |   |
|                                            |   |                                      |   |   |   |   |   |   |   |
| Operating, general, and administrative expenses |   | 24,285                                    |   | 6,516 |   | 3,056 |   | 33,857 |   |
|                                            |   |                                      |   |   |   |   |   |   |   |
| EBITDA                                          |   | 5,279                                     |   | 670 |   | (3,056 | ) | 2,893 |   |
|                                            |   |                                      |   |   |   |   |   |   |   |
| Non-allocated expenses                          |   | -                                         |   | - |   | (20,042 | ) | (20,042 | ) |
|                                            |   |                                      |   |   |   |   |   |   |   |
| Net income (loss)                               |   | $                                         | 5,279  |   | $ | 670 |   | $ | (23,098 | ) | $ | (17,149 | ) |

 
|                                            |   | **Three Months Ended September 30, 2000** |   |
|-------------------------------------------------|--------|-------------------------------------------|--------|
|                                            |   | **Retail**                                |   | **CEG** |   | **Other** |   | **Total** |   |
| Revenues                                        |   | $                                         | 63,274 |   | $ | 1,031,623 |   | $ | - |   | $ | 1,094,897 |   |
|                                            |   |                                      |   |   |   |   |   |   |   |
| Cost of sales                                   |   | 35,268                                    |   | 1,018,565 |   | - |   | 1,053,833 |   |
|                                            |   |                                      |   |   |   |   |   |   |   |
| Gross profit                                    |   | 28,006                                    |   | 13,058 |   | - |   | 41,064 |   |
|                                            |   |                                      |   |   |   |   |   |   |   |
| Operating, general, and administrative expenses |   | 24,048                                    |   | 7,761 |   | 2,723 |   | 34,532 |   |
|                                            |   |                                      |   |   |   |   |   |   |   |
| EBITDA                                          |   | 3,958                                     |   | 5,297 |   | (2,723 | ) | 6,532 |   |
|                                            |   |                                      |   |   |   |   |   |   |   |
| Non-recurring charges                           |   | -                                         |   | (4,380 | ) | - |   | (4,380 | ) |
| Non-allocated expenses                          |   | -                                         |   | - |   | (23,837 | ) | (23,837 | ) |
|                                            |   |                                      |   |   |   |   |   |   |   |
| Net income (loss)                               |   | $                                         | 3,958  |   | $ | 917 |   | $ | (26,560 | ) | $ | (21,685 | ) |

 

 
|                     |   | **As of September 30, 2001** |    |
|--------------------------|--------|------------------------------|---------|
|                     |   | **Retail**                   |    | **CEG** |   | **Other** |   | **Total** |   |
| Identifiable assets      |   | $                            | 297,583 |   | $ | 142,942 |   | $ | 44,845 |   | $ | 485,370 |  (a) |
| General corporate assets |   | -                            |    | - |   | 381,301 |   | 381,301 |   |
| Total assets             |   | $                            | 297,583 |   | $ | 142,942 |   | $ | 426,146 |   | $ | 866,671 |   |

 
|                     |   | **As of September 30, 2000** |    |
|--------------------------|--------|------------------------------|---------|
|                     |   | **Retail**                   |    | **CEG** |   | **Other** |   | **Total** |   |
| Identifiable assets      |   | $                            | 323,306 |   | $ | 99,061 |   | $ | 51,164 |   | $ | 473,531 |  (a) |
| General corporate assets |   | -                            |    | - |   | 383,376 |   | 383,376 |   |
| Total assets             |   | $                            | 323,306 |   | $ | 99,061 |   | $ | 434,540 |   | $ | 856,907 |   |

 

----

(a) - identifiable assets for the retail and CEGsegments include accounts receivable, inventories, and property, plant andequipment, net of accumulated depreciation  

 

Normal gains and losses fromthe sale of assets are included in Operating, general and administrativeexpenses, while gains and losses from the sale of business units are excluded.EBITDA should not be considered as an alternative to net income (as anindicator of operating performance) or as an alternative to cash flow (as ameasure of liquidity or ability to service debt obligations) and is not inaccordance with nor superior to generally accepted accounting principles, butprovides additional information for evaluating the Partnership’s ability to payits Minimum Quarterly Distribution and to service and incur indebtedness.  Cash flows in accordance with generallyaccepted accounting principles consist of cash flows from operating, investingand financing activities; cash flows from operating activities reflect netincome (including charges for interest and income taxes, which are notreflected in EBITDA), adjusted for noncash charges or income (which arereflected in EBITDA) and changes in operating assets and liabilities (which arenot reflected in EBITDA).  Further, cashflows from investing and financing activities are not included in EBITDA.

 

CORNERSTONE PROPANE PARTNERS, L.P. ANDSUBSIDIARY

 

ITEM 2:

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of thehistorical financial condition and results of operations for the Partnershipshould be read in conjunction with the historical financial statements andnotes thereto included elsewhere in this Quarterly Report on Form 10-Q.

 

#### **General**

 

The Partnership is a Delawarelimited partnership formed in December 1996. The Partnership’s management believes that it is the fifth largestretail marketer of propane in the United States, serving more than 470,000residential, commercial, industrial and agricultural customers fromapproximately 260 customer service centers in 34 states. The Partnership’s twoprincipal business segments are its retail and Coast Energy Group (“CEG”)operations. The retail segment includes propane sales, principally toend-users; repair and maintenance of propane heating systems and appliances;and the sale of propane-related supplies, appliances and other equipment. CEGprovides supply, marketing, and distribution services to other resellers ofpropane and end-users. Principal products are propane, other natural gasliquids, crude oil, and natural gas.

 

Because a substantial portionof the Partnership’s retail propane is used in the weather-sensitiveresidential markets, the temperatures in the Partnership’s area of operations,particularly during the six-month peak heating season (October through March),have a significant effect on the financial performance of the Partnership.  In any given area, warmer-than-normaltemperatures will tend to result in reduced propane use, while sustainedcolder-than-normal temperatures will tend to result in greater propane use.  Therefore, information on normal temperaturesis used by the Partnership in understanding how temperatures affect historicalresults of operations and in preparing forecasts of future operations, whichare based on the assumption that normal weather will prevail in each of thePartnership’s regions. In addition, increase in propane commodity prices canresult in customer conservation and reductions in gallons sold.

 

Gross profit margins are notonly affected by weather patterns but also by changes in customer mix andunderlying product costs. For example, sales to residential customersordinarily generate higher margins than sales to other customer groups, such ascommercial or agricultural customers. In addition, gross profit margins vary by geographic region.  Accordingly, profit margins could varysignificantly from year to year in a period of identical sales volumes. Grossmargins can also be impacted by significant increases in underlying productcosts that may not in all instances be passed along to customers in the form ofhigher selling prices.

 

**Analysisof Historical Results of Operations - Three Month Period Ended September 30**

 

The following discussioncompares the results of operations and other data of the Partnership for thethree-month period ended September 30, 2001, to the three-month period endedSeptember 30, 2000.

 

*Volume*.   During the three months ended September 30,2001, the Partnership sold 42.7 million retail propane gallons, a decrease of3.2 million gallons or 7.0% from the 45.9 million retail propane gallons soldduring the three months ended September 30, 2000. Residential gallons were downslightly by 2% compared to the prior year. Non-residential gallons were down12% from the prior year. Non-residential gallons include sales for commercial,agriculture, resale and motor fuel, which are impacted by the economy, cropdrying use, small cylinders and fork lift uses. Due to the seasonal nature ofthe business, the quarter ending in September represents approximately 15% ofthe annual gallons sales to its retail customers.

 

*Revenues*.  Revenues decreased by $655.0 million or59.8% to $439.9 million for the three months ended September 30, 2001, ascompared to $1,094.9 million for the three months ended September 30, 2000.  This change was primarily attributable to adecrease in CEG revenues of $649.1 million or 62.9% to $382.5 million for thethree months ended September 30, 2001, as compared to $1,031.6 million for thethree months ended September 30, 2000. This decrease was due primarily to the sale of the CEG Canadian crudeoperations in fiscal 2001. The revenues for the retail business decreased by$6.0 million or 9.5% to $57.3 million for the three months ended September 30,2001, as compared to $63.3 million for the three months ended September 30,2000. This reflects a combination of the lower volumes of propane and lowerprices to customers.

 

*Cost of Product Sold*.Cost of product sold decreased by $650.7 million or 61.7% to $403.1 million forthe three months ended September 30, 2001, as compared to $1,053.8 million forthe three months ended September 30, 2000. The decrease in cost of product sold was primarily due to the sale ofthe CEG Canadian crude operations described above, combined with the decreasein retail propane volumes.

 

*Gross Profit.* Grossprofit decreased $4.3 million or 10.5% to $36.8 million for the three monthsended September 30, 2001, compared to $41.1 million for the three months endedSeptember 30, 2000. Gross profit on retail propane increased $1.5 million or5.4% to $29.5 million for the three months ended September 30, 2001, comparedto $28.0 million for the three months ended September 30, 2000. Retail grossmargin per gallon for the three months ended September 30, 2001 was 13.3%better than last year.  This wasattributable to increasing propane margins in selected retail markets andincreased revenues from additional services. Gross profit from thePartnership’s retail operations as a percent of revenues increased from 44% to51% over the prior year. CEG’s gross profit decreased $5.9 million or 45.0% to$7.2 million for the three months ended September 30, 2001, compared to $13.1million for the three months ended September 30, 2000 due principally to thesale of the CEG Canadian crude operations.

 

*Cash Operating, General and AdministrativeExpenses.*  Cashoperating, general and administrative expenses decreased by $0.6 million or1.7% to $33.9 million for the three months ended September 30, 2001, ascompared to $34.5 million for the three months ended September 30, 2000. CEG’soperating expenses decreased $1.3 million primarily due to decreases inpersonnel, outside services, and travel; due partially to the sale of the CEGCanadian crude operations. Partially offsetting these decreases were higherinsurance costs.

* *

*Depreciationand Amortization. *Depreciationand amortization decreased $0.6 million or 5.5% to $10.4 million for the threemonths ended September 30, 2001, as compared to $11.0 million for the threemonths ended September 30, 2000.  Thisdecrease was primarily due to the adoption of SFAS No. 142, which decreasedgoodwill related amortization, partially offset by additional amortizationexpense associated with financing costs.

 

*Interest Expense. *Interest expense decreased by $0.7million or 7.1% to $9.2 million for the three months ended September 30, 2001,as compared to $9.9 million for the three months ended September 30, 2000.  The decrease was due principally todecreases in interest rates and lower borrowing levels on the Partnership’s workingcapital facility.

 

**Liquidityand Capital Resources**

 

*Operating Activities.*Cash used by operating activities duringthe three month period ended September 30, 2001 was $14.4 million.  Cash flow from operations included a netloss of $17.1 million and non-cash charges of $10.5 million for the period,comprised of depreciation and amortization expense, the gain on sale of assetsand the net loss in the fair value of derivatives.  The impact of working capital changes decreased cash flow byapproximately $7.8 million.

 

*Investing Activities.*Cash used in investing activities for thethree month period ended September 30, 2001 totaled $1.2 million, which wasprincipally related to the purchases of plant and equipment, net of sales ofseveral of the Partnership’s retail service centers. The sale of selectedretail service centers reflects the Partnership’s continuing focus on therationalization of under-performing operations.

 

*Financing Activities.*Cash provided by financing activities was$17.3 million for the three months ended September 30, 2001 which reflects anincrease of $22.6 million in the partnership’s working capital facility, net ofpayments on long-term debt of $2.6 million and the net change in the amount duefrom related parties of $2.1 million. Cash distributions paid to Unitholdersfor the period totaled $4.8 million.

 

#### **Financing andSources of Liquidity**

 

On October 26, 2001, the Boardof Directors of the Managing General Partner announced a distribution for thequarter ending September 30, 2001 of $0.27 per unit to be paid on November 15,2001. The Board of Directors authorized a similar distribution for the quarterended June 30, 2001. The $0.54 “Minimum Quarterly Distribution” was notchanged, and the difference between $0.54 and the $0.27 distributed willtherefore accrete as a priority over any distribution on SubordinatedUnits.  Each quarter, the Board ofDirectors will review the amount of the distribution.  In that review, the Board will analyze the operating performanceof the Partnership, capital expenditure needs, access to financing, prevailingeconomic, financial, business, weather and other factors, including thePartnership Agreement, to determine the level of the distribution payment. Thereduction of the distribution, following a solid operating performance in fiscalyear 2001, was taken in recognition of the expiration of the Partnership’scurrent working capital and acquisition credit facility on November 30, 2001,the requirement to reduce leverage to maintain future financial flexibilitywith replacement financing, and the general national economic uncertainties andresulting conservatism in the credit community.

 

The Partnership is currentlynegotiating to extend the maturity date of the Credit Agreement to a date infiscal 2003. Contractual commitments have not been made as of November 13,2001, and the transaction has not been consummated. NorthWesternCorporation("NorthWestern," the owner of the Managing GeneralPartner), has agreed to extend credit to the Partnership on substantiallysimilar terms through July 1, 2002 in the event satisfactory third partyfinancing cannot be arranged by November 30, 2001. While the terms of suchcredit facility would need to be negotiated, NorthWestern has agreed that anysuch credit extension would not mature prior to July 1, 2002, unless analternative third party credit facility was in place.

 

To the extent any of theforegoing transactions involved the offer or sale of a security, except asotherwise noted, they were done under Section 4(2) of the Securities Act of1933 based, among other things, on representations and warranties made by theinvestors, the small numbers of investors solicited and the absence of anyadvertising or general solicitation.

 

The Partnership’s obligations under its Senior Note Agreements and BankCredit Agreement are secured by a security interest in the OperatingPartnership’s inventory, accounts receivable and certain customer storagetanks.  The Senior Note and Bank CreditAgreements contain various terms and covenants including financial ratio covenantswith respect to debt and interest coverage and limitations, among others, onthe ability of the Partnership and its subsidiaries to incur additionalindebtedness, create liens, make investments and loans, and enter into mergers,consolidations or sales of all or substantially all assets.  The Senior Note ratios are incurrence teststo be met in order for the Partnership to incur additional ratable secureddebt, with certain exceptions. In addition, other financial ratios must be metfor the Partnership to pay the Minimum Quarterly Distribution without approvalof the Senior Note holders. At September 30, 2001, the Partnership’s financialratios were outside of the incurrence test thresholds; therefore thePartnership is currently precluded from borrowing additional parity seniorsecured debt until these financial ratios are back within the thresholds statedin the agreements. The Partnership does not anticipate consummating anysignificant acquisitions until after the upcoming heating season to betterassess national heating degree-day patterns and their potential impact onretail sales volumes. The Partnership’s financial ratios meet all requirementswith respect to its ability to make quarterly distributions.

 

On November 20, 1998, thePartnership refinanced its then existing Bank Credit Facility under the termsof a new Bank Refunding Credit Agreement (the "Credit Agreement").The Credit Agreement was subsequently amended effective June 30, 2000 toprovide greater flexibility with respect to the financial covenants under theoriginal Credit Agreement. In connection with this amendment, NorthWesternprovided a guaranty of up to $70.0 million of Partnership obligations under theCredit Agreement, in return for a commitment fee of 6.50% per annum of theoutstanding amount guaranteed.  ThePartnership also issued warrants to NorthWestern for 568,750 Partnership commonunits at an exercise price of $0.10 per unit, and may issue additional warrantsunder certain circumstances. During the fiscal year ended June 30, 2001,NorthWestern exercised warrants for 379,438 warrants. As of September 30, 2001,189,312 warrants were unexercised. Any advances under the guaranty bear anadvance fee of 3% of the amount advanced and interest at LIBOR plus adesignated spread until the date of repayment, initially 9% per year, withcertain penalty provisions in the event of non-payment by the Partnership. ThePartnership has also agreed to indemnify NorthWestern against liabilitiesarising out of this arrangement.  ThePartnership incurred other fees and expenses related to the Credit Agreementunrelated to the arrangements with Northwestern.

 

**Forward-looking Statements**

 

This Quarterly Report on Form10-Q contains forward-looking statements within the meaning of Section 21E of theSecurities Exchange Act of 1934, as amended, relating to the Partnership’sfuture business expectations and predictions and financial condition andresults of operations. These forward-looking statements involve certain risksand uncertainties. The Partnership’s actual future performance will be affectedby a number of factors, risks and uncertainties, including without limitation,weather conditions, regulatory changes, competitive factors, the operations ofvendors, 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.

 

ITEM 3:

QUANTITATIVE AND QUALITATIVE

DISCLOSURES ABOUT MARKET RISKS

 

**Market Risk**

 

The Partnership has limitedexposure to technology risk, credit risk, interest rate risk, foreign currencyrisk, and commodity price risk. In the normal course of business, the Partnershipemploys various strategies and procedures to manage its exposure to changes ininterest rates, fluctuations in the value of foreign currencies, and changes incommodity prices. The Partnership’s exposure to any of these risks is notmaterially different than as disclosed in the Partnership’s Annual Report on10-K for the year ended June 30, 2001.

 

PART II. OTHERINFORMATION

 

Item 6: Exhibitsand Reports on Form 8-K

 

 
| a)     |   | Exhibits                                                                    |
|--------|--------|-----------------------------------------------------------------------------|
|   |   |                                                                        |
|   |   | The exhibits are listed on the exhibit index filed as part of this  report. |
|   |   |                                                                        |
| b)     |   | Reports on Form 8-K:                                                        |
|   |   |                                                                        |
|   |   | None                                                                        |

 

**SIGNATURE**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
|   | Cornerstone Propane Partners, L.P. |                           |
|--------|------------------------------------|--------------------------------|
|   |                               | (Registrant)                   |
|   |                               |                           |
|   | By:                                | Cornerstone Propane GP, Inc.   |
|   |                               | as Managing General Partner    |
|   |                               |                           |
|   | By:                                | /s/ Richard D. Nye             |   |
|   | Name:                              | Richard D. Nye                 |
|   | Title:                             | Vice President Finance         |
|   |                               | & Administration and       |
|   |                               | Acting Chief Financial Officer |
|   |                               |                           |
|   | Date:                              | November 13, 2001              |
|        |                                    |                                |  |  |

 

EXHIBIT INDEX

 
| Exhibits | Description                                                                           |
|----------|---------------------------------------------------------------------------------------|
|     |                                                                                  |
| 10.16    | Second Amendment and Waiver to Refunding Credit Agreement, dated as  of March 1, 2001 |