-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rf35vVmifSlSExei7xz85N4VmJWud3C4/k2EMwj6SYQQ+5XeimajycqMIMvELwJh 8OwjGoi7BfU4yK1ztmpVxA== 0000912057-96-003099.txt : 19960228 0000912057-96-003099.hdr.sgml : 19960228 ACCESSION NUMBER: 0000912057-96-003099 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960227 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNERSTONE NATURAL GAS INC CENTRAL INDEX KEY: 0000725625 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION [4922] IRS NUMBER: 741952257 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09103 FILM NUMBER: 96525841 BUSINESS ADDRESS: STREET 1: 8080 N CENTRAL EXPWY STE 1200 STREET 2: 12TH FLR LOCK BOX 47 CITY: DALLAS STATE: TX ZIP: 75206 BUSINESS PHONE: 2146915536 FORMER COMPANY: FORMER CONFORMED NAME: ENDEVCO INC DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-11994 CORNERSTONE NATURAL GAS, INC. (Exact name of registrant as specified in its charter) DELAWARE 74-1952257 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 8080 N. CENTRAL EXPRESSWAY 75206 SUITE 1200 (Zip Code) DALLAS, TEXAS (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 691-5536 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ---------------- Common Stock, $0.10 par value per share American Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILINGS REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO ------ ----- INDICATE BY CHECK MARK WHETHER DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN THE PROXY STATEMENT INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. YES NO /X/ ----- ----- INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN CONFIRMED BY A COURT. YES /X/ NO ----- ----- AS OF FEBRUARY 20, 1996, THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING WAS 12,515,959. THE AGGREGATE MARKET VALUE OF THE 7,006,629 SHARES OF COMMON STOCK HELD BY NONAFFILIATES OF CORNERSTONE NATURAL GAS, INC. AS OF SUCH DATE WAS APPROXIMATELY $19,268,230. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or before April 30, 1996, are incorporated herein by reference into Part III of this Form 10-K. - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ TABLE OF CONTENTS TO FORM 10-K
PART I PAGE ---- 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-5 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-7 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 8 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . 9 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11-14 8. Financial Statements and Supplementary Data. . . . . . . . . . . .. . . . . . . . . . . . 14-29 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . 29 PART III 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . 29 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . 29 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . 29 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . . . . . . . . . . . . . 30-33
PART I ITEM 1. BUSINESS. GENERAL Cornerstone Natural Gas, Inc., a Delaware corporation ("Cornerstone"), is engaged through various subsidiaries in the business of natural gas gathering, marketing, and processing. Cornerstone, its subsidiaries and affiliated companies are herein collectively referred to as the "Company", unless the context otherwise indicates. The Company's operations are located primarily in Texas and Louisiana and include a natural gas marketing office in Pennsylvania. The Company divides its operations into two lines of business. Natural gas gathering and marketing includes purchasing, gathering, transporting and marketing natural gas. Natural gas processing includes recovering and marketing natural gas liquids from natural gas and treating natural gas by removing noncommercial components. Natural gas processing also included refining condensate and crude oil into various petroleum products until May 1, 1994, when the Company discontinued its refining operations. As used herein, "MMCF" means million cubic feet, "MMBTU" means million British Thermal Units, "NGLs" means natural gas liquids, and "D" means per day. Cornerstone was incorporated under the laws of Texas in 1977 as Endevco, Inc. and was reincorporated under the laws of Delaware in May 1988. The Company's principal administrative offices are located at 8080 North Central Expressway, Suite 1200, Dallas, Texas 75206 and its telephone number is (214) 691-5536. HISTORY Historically, the Company was formed to develop projects in the energy business concentrating on natural gas processing. In 1982, the Company expanded into natural gas gathering and marketing and in 1983, instituted a pipeline acquisition and construction program. In December 1985, the Company acquired a 301-mile natural gas gathering system in Southern Mississippi. The Company was profitable until 1988 when it acquired a small 10,000 barrel per day refinery in conjunction with two natural gas processing plants and 300 miles of natural gas gathering lines. The Company began to concentrate on the refinery and expanded this business in 1991 when another refinery was purchased along with 190 miles of natural gas gathering lines. This second refinery had a capacity of 8,000 barrels per day and could produce solvents as well as gasoline, jet fuel, and diesel fuel. During this time, the Company was also expanding its natural gas gathering and marketing businesses. The Company had borrowed heavily and issued preferred stock to fund its expansion. However, the Company's Mississippi system became supply starved as natural gas prices were depressed in the late 80's and early 90's. In addition, refining margins began to decline and the Company was no longer profitable. In late 1991, the Company began negotiating with its lenders and preferred stockholders and, as a result, Endevco, Inc. and several of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy code on June 4, 1993. For details about the plan of reorganization see Note 2 of "Notes to Consolidated Financial Statements". As part of the reorganization, a new management team led by Ray Davis initiated a plan to cease operating the refineries and return to the Company's core business of natural gas gathering, marketing, and processing. In July 1993, the Company discontinued operations at its 10,000 barrel per day refinery. On September 29, 1993, the Company's plan of reorganization was confirmed and the Company emerged from bankruptcy on November 2, 1993, when the plan was consummated. The Company's first major component of the plan was to relocate two natural gas processing plants from Brazoria County, Texas to Lincoln Parish, Louisiana. The cryogenic natural gas plants replaced the inefficient lean oil natural gas processing plants originally acquired in conjunction with the 10,000 barrel per day refinery in 1988. The new plants have greater recoveries of NGLs, lower operating expenses, and use less fuel. The cryogenic natural gas plants became operational on March 31, 1994. The Company also installed additional natural gas compression in order to increase the volume of natural gas which could be delivered to its facilities for processing. The Company completed its plan to discontinue its refining operations by selling its remaining operating refinery effective May 1, 1994. See Note 3 of "Notes to Consolidated Financial Statements". At this time, the Company began to actively seek acquiring new natural gas gathering systems while putting idle assets back into service. CURRENT YEAR SUMMARY Effective January 1, 1995, the Company completed the purchase of two natural gas gathering systems in East Texas. The systems are the Willow Springs and North Lansing systems (collectively referred to as the "Willow Springs" system) and 2 are located in Gregg and Harrison Counties, Texas. The system consists of approximately 52 miles of pipeline and gathered approximately 24 MMCFD of natural gas in 1995. During the first quarter of 1995, the Company expanded its Calhoun natural gas processing plant and gathering system to allow for more natural gas to be processed. The Company looped some pipeline, added compression, and made enhancements to the plant which increased the volume of natural gas that could be delivered to the plant for processing. Natural gas inlet volumes processed at Calhoun averaged 46 MMCFD in the last nine months of 1995 compared with 27 MMCFD in 1994. The Company purchased all of the stock of Energy Transfer Corporation ("ETC") and the outstanding partnership interests of Energy Transfer I, Ltd. ("ETI") effective April 2, 1995. Effective July 1, 1995, the Company purchased the outstanding partnership interests of Energy Transfer II, Ltd. ("ETII"). Collectively the partnerships owned 100% of the Oletha system in Limestone County, Texas. This system in East Texas consists of approximately 17 miles of pipeline and has averaged 34 MMCFD since its acquisition by the Company. See Note 8 of "Notes to Consolidated Financial Statements". On August 24, 1995, the Company resumed the operations at the Iola natural gas processing plant located in Grimes County, Texas. The Company acquired the 50% interest previously owned by a third party and refurbished the plant which had been idle since 1988. The plant averaged processing 14 MMCFD since operations were resumed. Management believes it is essential to stay focused on the Company's core businesses of natural gas gathering, marketing, and processing. The Company will continue to pursue natural gas gathering and processing facilities through acquisition or construction projects. NATURAL GAS GATHERING AND MARKETING GENERAL. Revenues from natural gas gathering and marketing accounted for 77%, 64%, and 53% of consolidated revenues in 1995, 1994, and 1993, respectively. For information about revenues, operating earnings, and identifiable assets, see Note 10 of "Notes to Consolidated Financial Statements". The Company typically builds or acquires systems which gather natural gas at the wellhead or a central gathering location. The natural gas is primarily owned by independent producers, however, some is owned by major integrated oil companies. The Company either transports for a fee or purchases the natural gas at the wellhead and, if there is no local market, arranges transportation on intrastate or interstate pipelines and resells it to local distribution companies ("LDCs"), utilities, commercial or industrial end-users, or other natural gas marketing companies. The Company also specifically targets utilities or industrial end-users whose sources of supply are limited. As a result of the limited competition, these end-users often pay a premium price for their natural gas. Typically, the Company will enter into a long-term contract (3-10 years) to construct a pipeline and supply all, or some agreed upon minimum, of the end-user's natural gas needs. The Company generally shares a portion of the price savings with the end-user. This allows the end-user to pay less for its natural gas supply and the Company to recover its capital expenditures over a relatively short period of time. In addition to marketing natural gas gathered and transported through its systems, the Company purchases and sells natural gas acquired from others utilizing only third-party systems. In such transactions, the Company usually contracts on a short-term "best efforts" basis with producers, pipelines or other suppliers. The Company then sells to LDCs, utilities, commercial or industrial end-users or other natural gas marketing companies. The volume of natural gas throughput for these sales can vary significantly from month to month. However, these sales allow the Company to respond quickly to changing market conditions particularly in peak demand periods. They also allow the Company to develop new marketing relationships that can later be supplied by the Company's own facilities. NATURAL GAS SUPPLIES. The Company does not own any natural gas reserves. However, the Company continually seeks new supplies of natural gas connected to its systems, both to offset natural declines and to increase throughput. The Company also purchases third-party natural gas which is not connected to its systems from a variety of suppliers including independent producers, major integrated oil companies, and other natural gas marketing companies. With the advent of "open access" on the interstate pipelines, the Company has access to an abundant source of natural gas to supply its current markets. The Company generally purchases natural gas under contracts whose prices are determined by prevailing market conditions. Natural gas is then sold at higher prices under sales contracts with similar pricing terms. The Company earns a margin equal to the difference between the natural gas purchase price it pays the supplier and the sales price it receives from the purchaser less transportation cost, if any. The Company also offers services such as marketing, natural gas control, contract administration, and pipeline operations which are not usually available to small producers. 3 FINANCIAL INSTRUMENTS. The Company, on occasion, enters into swap agreements or futures contracts to hedge the risks associated with fixed commitments and certain anticipated transactions. The Company defers the change in the market value of these contracts until such time as the hedge transaction is completed. At December 31, 1995, the Company had open swap agreements for 5 MMCFD related to February 1996 and 2.5 MMCFD for April through December 1996. NATURAL GAS PROCESSING GENERAL. The Company's natural gas processing segment consists of NGLs extraction and natural gas treating. NATURAL GAS LIQUIDS EXTRACTION. The Company's NGL extraction operations consist primarily of extracting NGLs such as propane, butanes, and natural gasoline from a natural gas stream. Gathering facilities collect natural gas from producers' wells and transport it to a Company owned natural gas processing plant where it is separated into NGLs and residue natural gas. In North Louisiana, the NGLs are then fractionated into component products by the Company. Once fractionated, NGLs are sold to end-users or wholesalers. Where the Company does not own fractionation facilities, the products are delivered by truck or pipeline to a central fractionation facility. The Company historically has installed its natural gas processing plants in areas where wells produce natural gas that either contains sufficient NGLs to economically process or that requires processing to meet pipeline quality standards. The NGLs are generally more valuable if extracted than if left in the natural gas stream. The Company typically will agree to install a natural gas processing plant in exchange for a portion of the proceeds from the NGLs extracted. The Company may also receive a portion of the residue natural gas for its processing services. Generally, NGLs extraction services have been performed separately from the Company's natural gas gathering and marketing operations. However, the Company has fully integrated its gathering and processing facilities in North Louisiana to provide a full range of services to the producers. The Company's North Louisiana facilities are located in an area of known hydrocarbon production and management believes that additional natural gas and NGLs reserves will be developed to offset normal production declines in the area. NATURAL GAS TREATING. Natural gas treating operations involve the treating of unmarketable natural gas to remove impurities and thus make it marketable. This service is generally performed for producers under contract, whereby the Company agrees to install and operate a facility to remove noncommercial components from natural gas dedicated to that facility. The services are normally conducted under long-term contracts for a fixed fee, a per unit fee, or a combination thereof. MARKETS AND MAJOR CUSTOMERS NATURAL GAS GATHERING AND MARKETING. During 1995, 1994, and 1993, the Company's sales to Georgia Pacific Company accounted for 13%, 14%, and 12% of consolidated revenues, respectively. NATURAL GAS PROCESSING. The Company had no single customer from its natural gas processing operations responsible for over 10% of consolidated revenues in 1995, 1994, or 1993. PRODUCT PRICES. During the three years ended December 31, 1995, the average sales prices for natural gas and NGLs were as follows:
1995 1994 1993 ------- ------- ------- Natural gas sales ($/MMBTU)...................... $ 1.72 $ 1.98 $ 2.20 Average NGLs prices ($/Gal): Ethane........................................ $ 0.12 $ - $ - Propane....................................... $ 0.33 $ 0.31 $ 0.33 Isobutane..................................... $ 0.40 $ 0.36 $ 0.41 Normal butane................................. $ 0.34 $ 0.31 $ 0.32 Natural gasoline.............................. $ 0.41 $ 0.35 $ 0.45 Weighted Average NGLs prices ($/GAL)............. $ 0.35 $ 0.33 $ 0.34
Revenues from natural gas processing are directly affected by fluctuations in NGLs and natural gas prices. Revenues from natural gas gathering and marketing sales contracts are generally interrelated with natural gas purchase contracts in regard to terms and pricing. The Company's income is generally derived from either a fixed spread or a fixed fee per unit of 4 natural gas. Although the margin between purchase and resale prices tends to fluctuate with the increase or decrease in the sales price of natural gas, such fluctuations are generally less severe and not necessarily directly correlated with the changes in natural gas prices. All operations are adversely affected by reduced volumes. COMPETITION The natural gas gathering, marketing, and processing industries are highly competitive. In marketing natural gas, the Company has numerous competitors, including marketing affiliates of major interstate pipelines, the major integrated oil companies, and local and national natural gas gatherers, brokers, and marketers of widely varying sizes, financial resources and experience. Many competitors, such as major oil companies, have capital resources many times greater than those of the Company and control substantial supplies of natural gas. Local utilities and distributors of natural gas (some of which are customers of the Company) are, in some cases, engaged directly, and through affiliates, in marketing activities that compete with the Company. The Company competes against other companies in the gathering and marketing business for supplies of natural gas, for customers to whom to sell its natural gas, and for availability of pipeline capacity. Competition for natural gas supplies is primarily based on efficiency, reliability, availability of transportation and ability to pay a satisfactory price for the producer's natural gas. Competition for customers is primarily based upon reliability of supply and price of deliverable natural gas. Some of the Company's customers have the capability of using alternative fuels. In these cases, the Company also competes against companies capable of providing alternative fuels on the basis of price. At December 31, 1995, the Company had net operating loss ("NOL") carryforwards for income tax purposes of approximately $29.9 million. In addition, the Company had unused investment tax credits of approximately $1.6 million available to offset future federal income tax liabilities. Management expects these tax benefits to give the Company a competitive advantage when bidding on new projects. REGULATION In general, the natural gas industry is regulated by local, state, and federal authorities. The Company believes it is in substantial compliance with such laws. Because the Company's systems operate intrastate, the natural gas transportation and gathering facilities of the Company are primarily exempt from the rate burden imposed by the Federal Energy Regulatory Commission. The Company's systems are subject to certain federal and state regulatory agencies for permitting, rates, and pipeline safety. To the limited extent the Company provides transportation on behalf of an interstate pipeline, it does so under Section 311 of the Natural Gas Policy Act and the rate is subject to the state review of the Texas Railroad Commission. The Company's natural gas sales and marketing, in general, are not regulated by a regulatory agency. The Company's operations are subject to various local, state, and federal laws and regulations relating to environmental protection. The federal Environmental Protection Agency and similar state agencies regulate the management of hazardous waste, discharge of pollutants into the air, surface and ground water, new sources, and remediation of sites. The most significant new regulation is the Title V of the Clean Air Amendment of 1990 that is now required to be implemented. Several of the Company's operations are required to file for the federal operating permit with state by state implementation and enforcement of the permits. The Company estimates that compliance will not have a material impact on the Company. The Company in acquiring its assets from third parties often conducts environmental audits and generally requires the seller to indemnify the Company against pre-closing environmental liabilities. EMPLOYEES At February 20, 1996, the Company had 102 employees. 5 ITEM 2. PROPERTIES. NATURAL GAS GATHERING AND TRANSMISSION SYSTEMS The following table sets forth pertinent information with respect to the Company's natural gas gathering and transmission systems at December 31, 1995:
DAILY AVERAGE DAILY GATHERING DATE OF CAPACITY VOLUME OF TRANSMISSION ACQUISITION OR OF GAS GAS IN MILES OF PIPELINE SYSTEMS INITIAL OPERATION (MMCF)(1) (MMCF)(1) PIPELINE (1) - ---------------- ----------------- --------- ---------------- ------------ 1995 1994 1993 ---------------- Dubach/Claiborne Nov 1988/Aug 1991 210 89 69 66 505 Willow Springs January 1995 31 24 - - 52 Oletha (2) April 1995 45 34 - - 17 East Texas April 1984 131 3 3 3 84 Elm Grove October 1990 20 4 3 3 5 Mountain Creek (3) November 1989 225 52 42 26 16 Port Hudson April 1993 40 26 19 20 5 Other Various N/A(4) 6 6 4 20
(1) All capacity, volume, and mileage information is approximate. Amounts shown are for the total system and have not been reduced to reflect the Company's net ownership interest. All capacity information is subject to increases or decreases depending on operating pressures and point of delivery into or out of the system. (2) Average daily volume from date of acquisition. (3) The Company owns a 50% interest in the joint venture that owns the Mountain Creek system. (4) Capacity for these systems is not meaningful. The Company's gathering and transmission systems are located primarily in Texas and Louisiana. The Company also owns a small transmission system in Pennsylvania. Two of the Company's pipeline systems (the Dubach and Claiborne systems) are utilized in connection with the Company's natural gas processing operations. TEXAS. The Oletha system gathers natural gas in Limestone County and delivers it to an intrastate pipeline. The Company's Willow Springs system gathers natural gas in Gregg and Harrison Counties and delivers it to both interstate and intrastate pipelines. The East Texas system consists of two separate pipelines, the Nacogdoches system and the Shelby County system. The East Texas system gathers natural gas from the wellhead and is interconnected with four major pipelines (two intrastate and two interstate) that serve the Gulf Coast and Midwest markets. The Company's Mountain Creek system delivers natural gas to a plant owned by a local electric company. LOUISIANA. The principal purpose of the Dubach and Claiborne systems is to gather natural gas to be processed at the Company's North Louisiana facilities. The Company's Elm Grove system receives natural gas from a central gathering point and delivers it to a natural gas processing plant in Bossier Parish, Louisiana. The Company's Port Hudson system delivers natural gas to an industrial end-user in East Baton Rouge Parish, Louisiana. This natural gas is supplied to the Company through an interstate pipeline. 6 NATURAL GAS PROCESSING AND TREATING FACILITIES The following table sets forth pertinent information with respect to the Company's significant operating natural gas processing and treating plants at December 31, 1995:
PLANT DAILY AVERAGE DAILY CAPACITY OF AVERAGE DAILY NGLS GAS VOLUME IN PRODUCED PLANT PLANT TYPE (MMCF)(1) (MMCF)(1) (MGAL)(1) - ----------- ---------- ----------- ---------------- ---------------- 1995 1994 1993 1995 1994 1993 ---------------- ---------------- Iola (2) Processing 35 14 - - 43 - - Tembec (3) Processing 14 10 11 10 16 17 15 Calhoun Processing 80 41 27 26 66 38 36 Dubach Processing 55 38 34 40 81 67 69 Gun Point III Treating 53 3 5 6 - - -
(1) All capacity and volume information is approximate. Amounts shown are for the total plant and have not been reduced to reflect the Company's net ownership interest. (2) Average daily volume since operations were resumed on August 24, 1995. (3) The Company owns 50% of the Tembec Plant. GENERAL. The Company's primary natural gas processing and treating facilities are located in North Louisiana and South Texas. The Company also has facilities in Mississippi and Pennsylvania. Several of the Company's facilities are underutilized or idle as a result of diminished deliverability of the natural gas reserves serviced by the plants. Most of the idle or underutilized facilities are skid mounted to facilitate relocation. NORTH LOUISIANA FACILITIES. The Calhoun plant is a refrigerated lean oil plant that recovers NGLs and delivers them by pipeline to the Dubach facility for fractionation. The Calhoun plant can deliver residue natural gas into several interstate pipelines. The Company relocated two cryogenic natural gas processing plants (collectively referred to as the "Dubach" plant) to North Louisiana and began in April 1994 to process natural gas from its Dubach and Claiborne gathering systems at these facilities. The Company also fractionates the NGLs into their component parts at the Dubach facilities. The Dubach facility can also deliver residue gas into several interstate pipelines. TEXAS. The Company put its Iola plant, located in Grimes County, back into service on August 24, 1995. The plant processes natural gas gathered in Grimes County. The NGLs are extracted and delivered to a liquids pipeline for sale. The Company is treating natural gas in Dewitt County, Texas at its Gun Point III plant. The Company owns one idle cryogenic, one refrigerated lean oil, and two natural gas treating plants in Texas. OTHER. The Company owns a 50% interest in a cryogenic natural gas recovery plant in Green County, Pennsylvania. The Company receives a portion of the NGLs as its fee for processing the natural gas. The Company's natural gas treating plant in Brandon, Mississippi ceased operations in May 1995. ASSETS PLEDGED AS COLLATERAL Virtually all of the Company's assets are pledged as collateral on various loans. See Note 5 of "Notes to Consolidated Financial Statements". 7 ITEM 3. LEGAL PROCEEDINGS. The Company is a party to various legal proceedings arising in the ordinary course of its business. The Company believes, based on its current knowledge and based in part on advice of counsel, that such legal proceedings will be resolved without material effect on the Company's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. "EXECUTIVE OFFICERS OF THE REGISTRANT." The executive officers of the Registrant as defined under REGULATION S-K ITEM 401(b) as of February 20, 1996 were as follows:
NAME (AGE) POSITIONS, OFFICES WITH REGISTRANT AND EXPERIENCE - ---------- ------------------------------------------------- RAY C. DAVIS (54) Chairman of the Board and Chief Executive Officer of the Company since 1993; President of Capstone Capital Corp., since 1992; Chairman of Capstone Partners, Inc., 1988-1994; Director and General Partner of Hydro Environmental Services, Inc., 1989 to 1992; CEO of Healthco International, Inc., 1991 to 1992; Chairman of HPSC, Inc., 1991 to 1992. KELCY L. WARREN (40) President and Chief Operating Officer of the Company since 1993; and from 1990 to 1992. ROBERT L. CAVNAR (42) Executive Vice President of the Company since 1996; Senior Vice President of the Company 1993-1996; Chief Financial Officer and Treasurer of the Company since 1993; Vice President, Chief Financial Officer and Treasurer of Mountain Gas Resources, Inc., 1990 to 1993; Manager Corporate Finance of Presidio Oil Company, 1989 to 1990. JIM S. HOLOTIK (43) Executive Vice President of the Company since 1996; Vice President of the Company 1993-1996; Vice President of Cornerstone Gas Resources, Inc., and Vice President of Cornerstone Pipeline Company since 1990.
The above named persons bear no family relationship with each other. The officers serve at the pleasure of the Board. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The common stock of the Company, par value $.10 per share, is traded on the American Stock Exchange under the symbol "CGA." Set forth below are the high and low sales prices for the common stock.
HIGH LOW ---- --- 1994 First Quarter . . . . . . . . . . . . . . . . $1.94 $1.44 Second Quarter. . . . . . . . . . . . . . . . 3.25 1.50 Third Quarter . . . . . . . . . . . . . . . . 2.75 2.06 Fourth Quarter. . . . . . . . . . . . . . . . 2.63 1.44 1995 First Quarter . . . . . . . . . . . . . . . . 2.31 1.56 Second Quarter. . . . . . . . . . . . . . . . 2.88 1.75 Third Quarter . . . . . . . . . . . . . . . . 3.31 2.50 Fourth Quarter. . . . . . . . . . . . . . . . 2.81 2.19 1996 First Quarter (through February 20, 1996) . . 2.88 2.25
On February 20, 1996, the closing price for the common stock, as reported by the American Stock Exchange, was $2.75 per share. As of February 20, 1996, there were 482 holders of record of common stock. The Company believes that there are substantially more beneficial holders of common stock. The Company has not paid any cash dividends on its common stock and intends to retain its earnings for use in operations and for expansion of its business. In addition, the Company is prohibited from paying dividends under the terms of its loan agreements. See Note 5 of "Notes to Consolidated Financial Statements". 9 ITEM 6. SELECTED FINANCIAL DATA. The following selected financial information for the years ended December 31, 1991 through 1995, is derived from the consolidated financial statements of the Company for such years. The information should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere herein.
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1995 1994 1993(1) 1992 1991 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA Revenues from continuing operations ....... $131,909 $106,406 $215,625 $244,696 $209,272 Expenses .................................. 128,574 104,955 220,043 245,695 207,994 Operating earnings (loss) ................. 3,335 1,451 (4,418) (999) 1,278 Other expense ............................. (2,236) (1,110) (2,094) (5,428) (3,232) Net earnings (loss) ....................... 1,099 315 (22,291) (5,630) (1,582) Preferred stock dividend requirements ..... - - (791) (1,900) (1,900) Net earnings (loss) applicable to common stock ............................ 1,099 315 (23,082) (7,530) (3,482) Net earnings (loss) per share ............. .08 .02 (2.66) (.97) (.46)
AS OF DECEMBER 31, ---------------------------------------------------- 1995 1994 1993(1) 1992 1991 -------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA Total assets .............................. $ 59,684 $ 40,303 $ 46,446 $114,549 $120,960 Net property, plant and equipment ......... 30,843 21,089 22,652 78,386 83,044 Working capital deficit ................... (2,343) (6,606) (5,151) (39,924)(2) (3,995) Long-term debt ............................ 20,704 6,898 7,768 5,659 39,927 Preferred stock plus accrued dividends in arrears .............................. - - - 25,736 23,725 Stockholders' equity ...................... 12,968 11,869 11,554 12,159 19,548
(1) On November 2, 1993, the Company consummated the Plan. See Note 2 of "Notes to Consolidated Financial Statements". (2) Includes $36,965,000 of debt and $5,546,000 of interest which was subject to a Standstill and Forbearance Agreement with the former noteholders of the Company. 10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. LIQUIDITY AND CAPITAL RESOURCES GENERAL. The Company's primary sources of capital in 1995 were cash provided by operations and proceeds from borrowings under its term loan and revolving credit agreement. CASH FLOWS FROM OPERATING ACTIVITIES. Cash provided by operations before reorganization items was $4.1 million in 1995 compared to $906,000 in 1994. This was primarily the result of increased net income and a net increase in changes in operating assets. The Company's accounts receivable and accounts payable have increased as a result of the increased volumes in both the natural gas transportation and natural gas processing operations. The Company had a working capital deficit of $2.3 million at December 31, 1995, compared to a working capital deficit of $6.6 million at December 31, 1994. The Company was able to convert a portion of its line of credit to long-term borrowing in 1995. The Company expects that cash provided by operations combined with amounts available under its line of credit will be sufficient to meet its cash requirements in 1996. INVESTING ACTIVITIES. The Company made capital expenditures of approximately $13 million in 1995. These expenditures were primarily for the following projects; (i) the acquisition of the Willow Springs system; (ii) the acquisition of the Oletha system; (iii) the purchase of the 50% interest previously owned by a third party and subsequent refurbishment of the Iola plant; and (iv) the connection of natural gas wells to the Company's gathering systems. The Company continues to pursue projects that would require additional long-term borrowing. The Company believes that its current relationships with existing lenders will allow borrowing capacity for future capital requirements. However, there can be no assurance regarding the Company's ability to obtain additional capital when needed on acceptable terms. FINANCING ACTIVITIES. Cash provided by financing activities was $9.4 million in 1995. On May 24, 1995, the Company entered into an agreement ("Bank Facility") with a group led by Bank of Oklahoma, National Association ("Bank"). The Bank Facility provides for up to $20 million in convertible loans ("Convertible Facility") and a revolving $10 million working capital facility ("Working Capital Facility"). The amount the Company was authorized to borrow under the Convertible Facility was $16.5 million at December 31, 1995. The Convertible Facility does not require principal amortization and the Company can borrow and repay principal without penalty through December 31, 1996. Any outstanding principal at that time will be repaid based on a five-year straight-line amortization with a balloon payment due June 30, 1999. The Company's intention is to renew this facility every 12 months as supported by its borrowing base, as defined in the loan agreement. At December 31, 1995, the Company had borrowed $15.6 million under the Convertible Facility. The Working Capital Facility has an initial two-year term. Under the Working Capital Facility at December 31, 1995, the Company had borrowed $3.4 million and the Bank had issued, for the Company's benefit, $3.4 million in standby letters of credit for natural gas purchases. On January 31, 1996, the Company converted $2 million under the Convertible Facility to a four-year term loan. NOL CARRYFORWARDS. At December 31, 1995, the Company had NOL carryforwards for income tax purposes of approximately $29.9 million which, if not utilized, will expire at various times from 2001 until 2010. In addition, the Company has unused investment tax credits of approximately $1.6 million available to offset future federal income tax liability. The Company considers such carryforwards and tax credits to be potentially valuable assets which may be used to shelter future taxable earnings from income taxes. If a change of ownership as defined in Internal Revenue Code Section 382 occurs, utilization of the NOL carryforwards could be limited. The Company has adopted provisions in its certificate of incorporation to help protect such benefits. The risk of limitation of the NOL carryforwards will be significantly reduced on November 2, 1996, when the New Common Stock acquired by Ray Davis, Trustee, will no longer be included in the three year test period for calculating ownership changes under Code Section 382. See Note 2 of "Notes to Consolidated Financial Statements". 11 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 GENERAL. Net income for 1995 was $1.1 million ($.08 per share) compared to $315,000 ($.02 per share) in 1994. Earnings before interest, income taxes, and depreciation ("EBITD") increased to $6.7 million in 1995 from $4.2 million in 1994. The increase in net income and EBITD are primarily attributable to an increase in performance from the Company's natural gas processing operations. Revenues increased 25% to $131.9 million in 1995 from $106.4 million in 1994. Revenues in 1994 included $16.2 million from the Company's refining operations which were discontinued effective May 1, 1994. Revenues increased primarily as a result of increased production at the Company's North Louisiana natural gas processing facilities and the acquistion of two natural gas gathering systems in East Texas. NATURAL GAS PROCESSING. The following table provides pertinent information relating to the Company's natural gas processing operations excluding refining.
INCREASE 1995 1994 (DECREASE) ------- ------- ---------- (IN THOUSANDS) Revenues...................... $29,698 $21,624 $8,074 Gross margin.................. $11,925 $ 7,594 $4,330 EBITD......................... $ 7,169 $ 3,124 $4,045 (MMCFD) Natural gas processed......... 89 67 22 Natural gas treated........... 7 17 (10) Natural gas gathered.......... 10 8 2 (THOUSAND GALLONS PER DAY) Liquid sales volumes.......... 174 141 33
The Company's natural gas processing operations excluding refining provided 23% of gross revenues and 66% of gross margin in 1995 compared to 20% of gross revenues and 49% of gross margin in 1994. Revenues, gross margin, and EBITD increased 37%, 57%, and 129% respectively. These increases primarily were the result of the increase in the volume of natural gas processed. The Company completed two major natural gas processing projects in 1995. The first project involved the expansion of the processing capabilities at the Company's Calhoun plant in North Louisiana. The second project involved the reactivation of the Company's Iola plant which had been idle since 1988. The Company acquired the 50% interest previously owned by a third party, refurbished the Iola plant, and resumed operations on August 24, 1995. The volume of natural gas processed increased 33% in 1995. In connection with the expansion of the Calhoun plant, the Company was successful in securing additional natural gas supply in North Louisiana. The North Louisiana facilities processed an average of 79 MMCFD in 1995 compared to 61 MMCFD in 1994. Additionally, the processed natural gas volume increased to 95 MMCFD in December 1995. Management intends to pursue further increases in natural gas processing volumes in North Louisiana during 1996 to maximize utilization of its natural gas processing plants. A significant portion of the natural gas in northern Grimes County, Texas has been dedicated to the Company's refurbished Iola plant. The Iola plant processed 15 MMCFD in December 1995. Several major producers have active drilling programs in the area and management expects the processed volumes to increase in 1996. REFINERY. The Company sold its Claiborne condensate refinery effective May 1, 1994. Revenues from refining operations were $16.2 million and EBITD was $1.1 million in 1994. The refinery historically lost money in the second half of the year and was sold just prior to the period when margins were expected to decline. 12 NATURAL GAS GATHERING AND MARKETING. The following table provides pertinent information relating to the Company's natural gas gathering and marketing operations.
INCREASE 1995 1994 (DECREASE) ------- ------- ---------- (IN THOUSANDS) Revenues...................... $102,211 $68,564 $33,647 Gross margin.................. $ 6,266 $ 5,238 $ 1,028 EBITD......................... $ 3,313 $ 3,138 $ 175 (MMCFD) Natural gas sales............. 199 118 81
The Company's natural gas gathering and marketing operations provided 77% of gross revenues and 34% of gross margin compared to 64% of gross revenues and 34% of gross margin in 1994. Revenues increased 49% primarily as the result of the acquisition of the Willow Springs and Oletha systems in East Texas. Although these systems contributed $1.4 million to EBITD, this was partially offset by lower earnings on the Company's other systems. In addition, the 1994 earnings included a refund from a major interstate pipeline for transportation fees charged in excess of the final approved rate as determined by the Federal Energy Regulatory Commission. Natural gas volumes increased 69% primarily from the acquisition of the two East Texas systems. The Willow Springs system averaged 24 MMCFD in 1995. The Oletha system averaged 34 MMCFD since April 1995. Additionally, the Company's third party marketing volumes increased 19 MMCFD in 1995. Management expects to increase its natural gas gathering and marketing operations in 1996. GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and administrative expenses increased 3.7% in 1995. This increase included the additional administrative burden necessary as a result of the acquisition of the Willow Springs and Oletha systems and the reactivation of the Iola plant. General and administrative expenses as a percentage of revenues decreased to 4.1% in 1995 compared to 4.9% in 1994. INTEREST EXPENSE. Interest expense increased $1 million primarily as a result of increased borrowings under its term loan agreement. These borrowings were primarily to fund the acquisition of the Willow Springs and Oletha systems and the refurbishment of the Iola plant. YEAR ENDED DECEMBER 31, 1994, COMPARED TO YEAR ENDED DECEMBER 31, 1993 GENERAL. The Company had earnings before depreciation, interest and taxes ("EBITD") of $4.2 million in 1994 which represented a 106% increase over the EBITD of $2.0 million in 1993. The Company recorded this increased EBITD for its first full year of operations since its plan of reorganization was consummated on November 2, 1993. Operating earnings for the year were $1.5 million in 1994 compared to an operating loss of $4.4 million in 1993. Net earnings were $315,000 ($0.02 per share) in 1994 compared to a net loss of $23.1 million ($2.66 per share) in 1993. NATURAL GAS PROCESSING. The Company's natural gas processing operations provided 36% of the revenues and 66% of the gross margin in 1994 compared to 47% of the revenues and 56% of the gross margin in the prior year. However, natural gas processing operations EBITD increased $3.4 million (401%). This was primarily the result of the installation of cryogenic natural gas facilities at the Company's North Louisiana operations and the cessation of all refining operations. The cryogenic natural gas processing facilities allowed the Company to increase NGLs recovered, to reduce operating expenses and to lower fuel usage. The Company received a portion of the NGLs which resulted in increased earnings. REFINERY. The Company sold its Claiborne condensate refinery effective May 1, 1994. Revenues from refining operations were $16.2 million in 1994 compared to $78.5 million in 1993. The Company's EBITD increased $2.0 million in 1994 as a result of the cessation of refining operations. NATURAL GAS GATHERING AND MARKETING. Sales volumes for natural gas declined in 1994 as a result of the transfer in November 1993 of certain assets (the "Transferred Assets") to the Company's former Noteholders under its plan of reorganization. See Note 2 of "Notes to Consolidated Financial Statements". The Company's natural gas gathering and marketing operations provided 64% of the revenues and 34% of the gross margin in 1994 compared to 53% of the revenues and 44% of the gross margin in 1993. Natural gas gathering and marketing EBITD decreased $2.1 million (47%) in 1994. This was primarily the result of the loss of earnings from the Transferred Assets. This decrease was partially offset by increased earnings from the Company's Mountain Creek and Port Hudson systems. It was also 13 partially offset by a refund from a major interstate pipeline for transportation fees charged in excess of the final approved rate as determined by the Federal Energy Regulatory Commission. Natural gas volumes declined 97 MMCFD in 1994. This was primarily caused by the Transferred Assets which contributed 112 MMCFD in 1993. Third party marketing volumes increased 1 MMCFD in 1994. However, they accounted for 56% of the throughput and 29% of the gross margin in 1994, compared to 30% of the throughput and 10% of the gross margin in 1993. GENERAL AND ADMINISTRATIVE EXPENSES. The Company's general and administrative expenses decreased $1.1 million (17%) in 1994. This was the result of cost reductions as part of the Plan as well as the sale of the refineries. OTHER INCOME (EXPENSE). Interest expense decreased in 1994 as a result of the retirement of debt. The Company sold its interest in Three Rivers Pipeline Company and Allegheny Energy Marketing Company (collectively referred to as "Three Rivers") in January 1993. The Company recorded a gain from the sale of its interest in Three Rivers of $611,000 in 1993. REORGANIZATION ITEMS. The Company recorded a loss on the write downs and disposition of property, plant and equipment of $20.3 million in 1993. This included the Transferred Assets and other assets that were considered impaired to the reorganized Company. The professional fees of $4.5 million incurred for the reorganization included primarily legal fees, consultant fees, and bankruptcy costs. EXTRAORDINARY ITEM. The Company recorded a $9.1 million gain in 1993 from the extinguishment of debt in conjunction with the reorganization. OTHER MATTERS ACCOUNTING FOR INCOME TAXES. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). The adoption of FAS 109 changed the Company's method of accounting for income taxes from the deferred method (APB 11) to the liability method. Adoption of FAS 109 had no effect on the results of its operations for the year ended December 31, 1993. EFFECTS OF CHANGING PRICES. Natural gas and NGLs prices have fluctuated significantly over the last three years. The Company's natural gas gathering and marketing operations generally earn a margin which is the difference between the revenues from the sale of natural gas over the purchase cost thereof. The change in margin is much less volatile than the change in product prices. The Company's natural gas processing operations generally receive a portion of the products and or natural gas as its fee for services. Therefore, product prices directly impact these operations. This effect is somewhat offset as NGL prices tend to move inversely to natural gas prices. Inflation has not had a significant impact on operating expenses in the last three years. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES Report of Arthur Andersen LLP, Independent Public Accountants....... 15 Report of Ernst & Young LLP, Independent Auditors................... 16 Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994, and 1993.................................. 17 Consolidated Balance Sheets at December 31, 1995, and 1994.......... 18 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994, and 1993.................................. 19 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994, and 1993.............. 20 Notes to Consolidated Financial Statements.......................... 21-29
14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Cornerstone Natural Gas, Inc. We have audited the accompanying consolidated balance sheets of Cornerstone Natural Gas, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995, and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cornerstone Natural Gas, Inc. and subsidiaries as of December 31, 1995, and 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas February 14, 1996 15 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Cornerstone Natural Gas, Inc. We have audited the accompanying consolidated statements of operations, cash flows and changes in stockholders' equity of Cornerstone Natural Gas, Inc. and Subsidiaries (the "Company") for the year ended December 31, 1993. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of the Company for the year ended December 31, 1993, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Dallas, Texas March 7, 1994 16 CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------ 1995 1994 1993 ------------ ------------ ------------ Revenues............................... $131,909,000 $106,406,000 $215,625,000 Expenses: Cost of sales........................ 113,568,000 90,997,000 194,349,000 Operating expenses................... 6,180,000 5,975,000 12,912,000 Depreciation and amortization........ 3,380,000 2,733,000 6,451,000 General and administrative........... 5,446,000 5,250,000 6,331,000 ------------ ------------ ------------ 128,574,000 104,955,000 220,043,000 ------------ ------------ ------------ Operating earnings (loss).............. 3,335,000 1,451,000 (4,418,000) ------------ ------------ ------------ Other income (expense): Interest income...................... 85,000 79,000 103,000 Interest expense..................... (2,311,000) (1,284,000) (2,764,000) Equity in net losses of unconsolidated affiliates........... (29,000) (11,000) (52,000) Other................................ 19,000 16,000 8,000 Gain on sale of assets, net.......... - 90,000 611,000 ------------ ------------ ------------ (2,236,000) (1,110,000) (2,094,000) ------------ ------------ ------------ Earnings (loss) before reorganization items, income taxes, and extraordinary item................... 1,099,000 341,000 (6,512,000) Reorganization items: Loss on disposition and write downs of property, plant and equipment.... - - 20,274,000 Professional fees.................... - - 4,545,000 ------------ ------------ ------------ - - 24,819,000 ------------ ------------ ------------ Earnings (loss) before income taxes and extraordinary item................ 1,099,000 341,000 (31,331,000) Provision for current income taxes..... - 26,000 45,000 ------------ ------------ ------------ Net earnings (loss) before extraordinary item.................... 1,099,000 315,000 (31,376,000) Extraordinary item - gain on extinguishment of debt................ - - 9,085,000 ------------ ------------ ------------ Net earnings (loss).................... 1,099,000 315,000 (22,291,000) Preferred stock dividend requirements.. - - (791,000) ------------ ------------ ------------ Net earnings (loss) applicable to common stock.......................... $ 1,099,000 $ 315,000 $(23,082,000) ------------ ------------ ------------ ------------ ------------ ------------ Earnings (loss) per common and common equivalent share: Earnings (loss) before extraordinary item................................ $ .08 $ .02 $ (3.71) Extraordinary item................... - - 1.05 ------------ ------------ ------------ Net earnings (loss).................. $ .08 $ .02 $ (2.66) ------------ ------------ ------------ ------------ ------------ ------------ Weighted average common and common equivalent shares outstanding......... 14,615,000 14,467,000 8,691,000 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. 17 CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------------- 1995 1994 ------------ ------------ ASSETS Current assets: Cash and cash equivalents................... $ 908,000 $ 655,000 Accounts receivable......................... 21,790,000 12,424,000 Inventory................................... 336,000 93,000 Other current assets........................ 283,000 286,000 ------------ ------------ Total current assets...................... 23,317,000 13,458,000 Assets held for disposition................... 1,000,000 1,000,000 Property, plant and equipment, at cost........ 64,642,000 54,632,000 Less: accumulated depreciation.............. (33,799,000) (33,543,000) ------------ ------------ Net property, plant and equipment........... 30,843,000 21,089,000 Goodwill, net................................. 3,559,000 3,676,000 Other assets.................................. 965,000 1,080,000 ------------ ------------ $ 59,684,000 $ 40,303,000 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt...... $ 464,000 $ 4,857,000 Accounts payable............................ 25,077,000 14,993,000 Accrued interest payable.................... 11,000 52,000 Income tax payable.......................... 108,000 162,000 ------------ ------------ Total current liabilities................. 25,660,000 20,064,000 Long-term debt................................ 20,704,000 6,898,000 Other liabilities............................. 352,000 1,472,000 Stockholders' equity: Common stock, $.10 par value; 25,000,000 shares authorized; 12,515,959 shares issued and outstanding.................... 1,252,000 1,252,000 Additional paid-in capital.................. 51,298,000 51,298,000 Accumulated deficit......................... (39,582,000) (40,681,000) ------------ ------------ Total stockholders' equity................ 12,968,000 11,869,000 ------------ ------------ $ 59,684,000 $ 40,303,000 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. 18 CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------------------- 1995 1994 1993 ------------ ----------- ------------- Cash flows from operating activities: Earnings (loss) before extraordinary item..................... $ 1,099,000 $ 315,000 $ (31,376,000) Non-cash items included in loss before extraordinary item: Loss on disposition and write downs of property, plant and equipment....................................... - - 20,274,000 Interest compromised........................................ - - 1,605,000 Depreciation and amortization............................... 3,380,000 2,733,000 6,451,000 Equity in net losses of unconsolidated affiliates........... 29,000 11,000 52,000 Loss (gain) on sale of assets, net.......................... - (90,000) (611,000) Other....................................................... 90,000 30,000 402,000 Reorganization items........................................ - - 4,545,000 Changes in operating assets or liabilities which provided (used) cash during the period: (Increase) decrease in accounts receivable.................... (9,365,000) 2,676,000 4,760,000 (Increase) decrease in inventory.............................. (243,000) 1,619,000 1,940,000 (Increase) decrease in other current assets................... 3,000 352,000 (10,000) Increase (decrease) in accounts payable....................... 10,150,000 (6,151,000) (3,152,000) Increase (decrease) in accrued interest payable............... (41,000) 7,000 (55,000) Decrease in other current liabilities......................... (54,000) (230,000) (481,000) Increase (decrease) in other liabilities...................... (910,000) (366,000) 848,000 ------------ ----------- ------------- Cash provided by operations before reorganization items.......................................... 4,138,000 906,000 5,192,000 Cash used by reorganization items - professional fees............ (277,000) (1,303,000) (2,165,000) ------------ ----------- ------------- Cash provided (used) by operating activities..................... 3,861,000 (397,000) 3,027,000 Cash flows from investing activities: Proceeds from sale of assets.................................. - 1,063,000 851,000 Additions to property, plant and equipment.................... (13,017,000) (3,825,000) (3,742,000) (Increase) decrease in investment in unconsolidated subsidiaries............................... 10,000 (87,000) 110,000 Other......................................................... (15,000) - 23,000 ------------ ----------- ------------- Cash used by investing activities................................ (13,022,000) (2,849,000) (2,758,000) Cash flows from financing activities: Borrowings (reduction) of revolving debt...................... 350,000 3,050,000 (1,625,000) Borrowings under long-term debt............................... 13,689,000 817,000 5,800,000 Reduction of long-term debt................................... (4,625,000) (2,382,000) (5,071,000) Reorganization items: Issuance of common stock and warrants..................... - - 3,000,000 Retirement of long-term debt.............................. - - (6,731,000) Other......................................................... - - (108,000) ------------ ----------- ------------- Cash provided (used) by financing activities.............. 9,414,000 1,485,000 (4,735,000) ------------ ----------- ------------- Increase (decrease) in cash and cash equivalents................ 253,000 (1,761,000) (4,466,000) Cash and cash equivalents: Beginning of period........................................... 655,000 2,416,000 6,882,000 ------------ ----------- ------------- End of period................................................. $ 908,000 $ 655,000 $ 2,416,000 ------------ ----------- ------------- ------------ ----------- ------------- Supplemental disclosures of cash flow information Cash paid during the period for: Interest..................................................... $ 2,196,000 $ 1,226,000 $ 1,042,000 Income taxess................................................ $ 5,000 $ 50,000 $ 34,000
The accompanying notes are an integral part of these consolidated financial statements. 19 CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY THREE YEARS ENDED DECEMBER 31, 1995
ADDITIONAL TOTAL COMMON PAID-IN ACCUMULATED STOCKHOLDERS' STOCK CAPITAL DEFICIT EQUITY ----------- ------------ ------------- ------------- Balance at December 31, 1992................. $ 789,000 $ 29,284,000 $ (17,914,000) $ 12,159,000 Reorganization items: Redemption of Series A Cumulative Convertible Exchangeable Preferred Stock......................... - 19,448,000 - 19,448,000 Issuance of common stock and warrants................................ 458,000 2,543,000 - 3,001,000 Proceeds from issuance of common stock to employee benefit plan.................. 5,000 23,000 - 28,000 Preferred stock dividend requirements........ - - (791,000) (791,000) Net loss..................................... - - (22,291,000) (22,291,000) ----------- ------------ ------------- ------------- Balance at December 31, 1993................. 1,252,000 51,298,000 (40,996,000) 11,554,000 ----------- ------------ ------------- ------------- Net earnings................................. - - 315,000 315,000 ----------- ------------ ------------- ------------- Balance at December 31, 1994................. 1,252,000 51,298,000 (40,681,000) 11,869,000 ----------- ------------ ------------- ------------- Net earnings................................. - - 1,099,000 1,099,000 ----------- ------------ ------------- ------------- Balance at December 31, 1995................. $ 1,252,000 $ 51,298,000 $ (39,582,000) $ 12,968,000 ----------- ------------ ------------- ------------- ----------- ------------ ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. 20 CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL AND SIGNIFICANT ACCOUNTING POLICIES (a) General and Principles of Consolidation Cornerstone Natural Gas, Inc., a Delaware corporation ("Cornerstone"), is engaged through various subsidiaries in the business of natural gas gathering, marketing, and processing. Natural gas gathering and marketing includes purchasing, gathering, transporting, and marketing natural gas. Natural gas processing includes recovering and marketing natural gas liquids from natural gas and treating natural gas by removing noncommercial components. Natural gas processing also included refining condensate and crude oil into various petroleum products until May 1, 1994, when the Company discontinued its refining operations. The Company's operations are located primarily in Texas and Louisiana and include a natural gas marketing office in Pennsylvania. The consolidated financial statements include the accounts of Cornerstone and its wholly owned and majority-owned subsidiaries (referred to collectively as the "Company"). The consolidated financial statements of the Company also include its proportionate share of the assets, liabilities, revenues, and expenses of affiliated partnerships and joint ventures if the Company owns at least a 50% interest. Affiliates in which the Company owns less than a 50% interest are accounted for using the equity method. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications of prior years' financial information have been made to conform to the current year presentation. (b) Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. (c) Inventory Inventory is stated at the lower of cost or market, determined by the first in, first out method. (d) Property, Plant and Equipment Depreciation of property, plant and equipment is provided using the straight-line method over the following estimated useful lives:
YEARS ----- Pipelines and pipeline rights-of-way ........................ 5-20 Natural gas liquids recovery, treating and refining plants .. 10-20 Equipment and other ......................................... 3-15
Most of the Company's natural gas liquids extraction and natural gas treating plants are skid-mounted and moveable from one service location to another. The cost of moving the plants between service locations is capitalized and amortized using the straight-line method over the life of the related service contract. 21 (e) Goodwill Goodwill represents the excess of the cost over the net assets of businesses acquired and is amortized on a straight-line basis over periods of twenty to forty years. Goodwill is presented net of accumulated amortization of $730,047 and $613,233 at December 31, 1995, and 1994, respectively. (f) Income Taxes Deferred income taxes are computed using the liability method in accordance with Statement of Financial Accounting Standards No. 109 ("FAS 109"), and are provided on all temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. See Note 6 for more information regarding income taxes. (g) Earnings (Loss) per Common and Common Equivalent Share Earnings (loss) per common and common equivalent share are based on the weighted average number of shares outstanding during each year as adjusted for outstanding stock options and warrants, if dilutive, using the treasury stock method. Fully-diluted earnings per share for all years are not presented because the effects are antidilutive. (h) Concentrations of Credit Risk The Company markets natural gas and natural gas liquids to utilities, local distribution companies and industrial end-users and other natural gas marketing companies. The Company performs ongoing credit evaluations of its customers, and if deemed necessary, requires purchasers of the Company's products to prepay or issue standby letters of credit as collateral. As an additional safeguard against uncollectable receivables, the Company maintains an insurance policy which covers a majority of its customers. Credit losses are provided for in the consolidated financial statements and consistently have been within management's expectations. The Company has cash deposits with various banks consisting principally of demand deposits and time deposits. These deposits generally have maturities of one year or less and bear minimal risk. The Company has not experienced any losses on its cash deposits. (i) Financial Instruments The Company, on occasion, enters into swap agreements or futures contracts to hedge the risks associated with fixed commitments and certain anticipated transactions. The Company defers the change in the market value of these contracts until such time as the hedged transaction is completed. At December 31, 1995, the Company had open swap agreements for 5 MMCFD related to February 1996 and 2.5 MMCFD for April through December 1996. (j) Impairment of Assets The Company will be required to adopt statement of Financial Accounting Standards No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" in the first quarter of 1996. FAS 121 requires the Company to assess the need for impairment of capitalized costs based on expected future cash flows. The Company estimates there will be no effect from the adoption of FAS 121. 2. PLAN OF REORGANIZATION On June 4, 1993, Endevco, Inc. and its subsidiaries, ANGIC, Inc., Mississippi Fuel Company and Endevco Taft Company (collectively, the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy 22 Code with the United States Bankruptcy Court for the Eastern District of Texas, Sherman Division (the "Bankruptcy Court"). On September 29, 1993, the Bankruptcy Court issued an order confirming the Debtor's First Amended Joint Plan of Reorganization (the "Plan"). On November 2, 1993, the following transactions resulted from the consummation of the Plan: (1) The Debtors paid approximately $2.1 million in cash and transferred their Mississippi Fuel, Ada, Chalybeate Springs, and Leaf River systems along with certain contractual rights owned by the Debtors to the holders of the Debtor's 9% Senior Notes, 11.7% Senior Notes, and 11.5% Subordinated Convertible Debentures (collectively, the "Noteholders"). The cash payments and transfer of assets was in full satisfaction of all allowed claims of the Noteholders (approximately $44.1 million of debt and accrued interest on the financial records of the Debtors). The Company paid in full all other creditors. (2) The Debtors paid approximately $4.6 million in cash and issued promissory notes in the aggregate of $2.5 million (the "Notes") to the holders (the "Preferred Stockholders") of the Company's $9.50 Series A Cumulative Convertible Exchangeable Preferred Stock (the "Preferred Stock") in satisfaction of all allowed claims (approximately $27.0 million on the financial records of the Debtors, which included the liquidation value of the Preferred Stock and all accrued and unpaid dividends thereon). The Notes were secured by a lien on the stock of all the subsidiaries of Cornerstone and was guaranteed by its subsidiary, Cornerstone Pipeline Company. Pursuant to the terms of the Notes, the Company was prohibited from paying dividends or repurchasing shares of its capital stock while the Notes were outstanding. The Notes were retired on December 29, 1995. (3) All outstanding common stock, par value $.10 per share (the "Former Common Stock"), of Endevco, Inc. was canceled and each holder thereof was issued one share of the common stock of Cornerstone (the "New Common Stock") for each share of Former Common Stock held. Holders of the Former Common Stock received approximately 63% of the shares of New Common Stock. All outstanding stock options were canceled. (4) Pursuant to the First Amended Stock Purchase Agreement by and between Ray Davis, Trustee (the "Purchaser") and Cornerstone dated May 28, 1993, Ray Davis and his assigns acquired 4,576,659 shares of New Common Stock and warrants to acquire an additional 2,564,103 shares of New Common Stock with an exercise price of $.78 per share. The aggregate purchase price of such shares of New Common Stock and warrants was $3.0 million. The purchased shares constituted approximately 37% of Cornerstone's issued and outstanding shares of New Common Stock. The purchased shares and the warrants, if exercised, would constitute approximately 47% of the fully diluted capital stock of Cornerstone. (5) The Company entered into a term loan and revolving credit facility (the "Senior Loan") with a financial institution. The term portion of the Senior Loan was for $5.8 million and provided for monthly principal and interest payments. The interest was calculated at the applicable prime rate plus two percent. The revolving credit facility allowed for working capital loans and standby letters of credit up to an aggregate of $6.0 million. A portion of the proceeds from the Senior Loan was used to retire the remaining debt associated with the purchase of the original assets of Dubach as well as the debt incurred when the assets of Claiborne Gasoline Company were acquired. (6) The Company amended its Certificate of Incorporation to (1) change the Company's name to Cornerstone Natural Gas, Inc. and (2) provide for certain restrictions on the transfer of New Common Stock, designed to protect the Company's NOL carryforwards. The Company has accounted for all transactions related to the reorganization proceedings in accordance with the Statement of Position 90-7 of the American Institute of Certified Public Accountants. In addition, certain other property and equipment were written down as a result of the reorganization. These transactions resulted in a loss on write downs and disposition of property, plant, and equipment of approximately $20.3 million and an extraordinary gain from the settlement of debt of approximately $9.1 million. 23 3. PROPERTY, PLANT, AND EQUIPMENT A summary of property, plant, and equipment follows:
DECEMBER 31, ------------------------- 1995 1994 ----------- ----------- Pipeline and pipeline rights-of-way ......... $28,190,000 $19,962,000 Natural gas liquids recovery, and treating .................................. 28,511,000 29,709,000 Equipment ................................... 5,508,000 2,841,000 Other ....................................... 2,433,000 2,120,000 ----------- ----------- $64,642,000 $54,632,000 ----------- ----------- ----------- -----------
Interest cost capitalized during the construction of projects was $44,000 in 1995, $37,000 in 1994, and $8,000 in 1993. The Company has discontinued its refining operations and intends to sell its remaining refining assets. As such, these assets are reflected as assets held for disposition on the accompanying balance sheet. Effective May 1, 1994, the Company sold its Claiborne refinery and inventories to Arcadia. See Note 4. 4. OTHER ASSETS Other assets include a note receivable for $900,000 ("Arcadia Note") from Arcadia Refining and Marketing Company, L.P. ("Arcadia"). The Arcadia Note was received in conjunction with the May 1, 1994, sale of the Company's Claiborne refinery to Arcadia. The Arcadia Note is part of a participation agreement with BT Commercial Corporation ("BT"), a unit of Bankers Trust. BT acts as the Company's agent under the participation agreement. The Company's interest is subordinate to BT. The entire agreement is secured by essentially all the assets of Arcadia. In November 1995, Arcadia ceased making interest payments under the Arcadia Note. In February 1996, Arcadia filed a voluntary petition for relief in the United States Bankruptcy Court for the Western District of Louisiana, Shreveport Division. The Company believes that the assets of Arcadia will be sufficient to satisfy the Arcadia Note but no assurance can be made that the entire amount of the Arcadia Note will be collected. 5. LONG-TERM DEBT A summary of debt follows:
DECEMBER 31, ------------------------- 1995 1994 ----------- ----------- Convertible Facility (a) .................... $15,600,000 $ 4,750,000 Working Capital Facility (a) ................ 3,400,000 3,050,000 Notes to former Preferred Stockholders (b) .. - 2,000,000 Secured note payable (c) .................... 1,728,000 1,948,000 Other ....................................... 440,000 7,000 ----------- ----------- 21,168,000 11,755,000 Less: Current installments.................. 464,000 4,857,000 ----------- ----------- Long-term debt .............................. $20,704,000 $6,898,000 ----------- ----------- ----------- -----------
(a) On May 24, 1995, the Company entered into an agreement ("Bank Facility") with a group led by the Bank of Oklahoma, National Association ("Bank"). The Bank Facility provides for up to $20 million in convertible loans ("Convertible Facility") and a revolving $10 million working capital facility ("Working Capital Facility"). At December 31, 1995, the amount the Company was authorized to borrow under the Convertible Facility was $16.5 million. The Convertible Facility does not require principal amortization and the Company can borrow and repay principal without penalty through December 31, 1996. Any outstanding principal at that time will be repaid based on a five-year straight-line amortization with a balloon payment due June 30, 1999. Interest is calculated at the applicable prime rate plus two percent (10.5% percent at December 31, 1995). At December 31, 1995, the Company had borrowed $15.6 million under the Bank Facility. The Working Capital 24 Facility allows for working capital loans and standby letters of credit up to an aggregate of $10 million. (Working capital loans are limited to $5 million). Under the Working Capital Facility at December 31, 1995, the Company had borrowed $3.4 million and the Bank had issued, for the Company's benefit, approximately $3.4 million in standby letters of credit. The Working Capital Facility expires April 30, 1997, and bears interest at the applicable prime rate plus two percent (10.5% at December 31, 1995). The Bank Facility is secured by essentially all the assets of the Company and requires the Company to maintain certain financial ratios, prohibits the Company from paying dividends, and places a limit on capital expenditures without Bank approval. The Company exceeded the capital expenditure limit in 1995 by $255,000 and subsequently received a Waiver of Default from the Bank. (b) On December 29, 1995, the Company retired all of the Notes to its former Preferred Stockholders. This was accomplished by utilizing $2.0 million of convertible loans under the Convertible Facility. On January 31, 1996, the Company converted this $2.0 million to a term note. The term note will be repaid on a four-year straight line basis. The term note bears interest at the applicable prime rate plus two percent (10.5% at January 31, 1996). As part of the Bank Facility, the term note is secured by essentially all the assets of the Company. Concurrently, the amount available under the Convertible Facility was reduced to $14.5 million. (c) On October 27, 1995, the debt of the Company's 50% owned Mountain Creek Joint Venture ("MCJV") was refinanced with the Bank. The total principal amount of the new loan was $3.5 million. The principal is payable in 59 consecutive monthly installments of $25,000 with a balloon payment due on September 30, 2000. The interest rate through September 30, 1999, is fixed at 9.5% and the rate for the final year is based on a published rate. The debt is secured by the MCJV pipeline facilities and is jointly and severally guaranteed by the partners of MCJV. Aggregate maturities of long-term debt, for each of the five subsequent fiscal years are as follows: 1996 ......................... $ 464,000 1997 ......................... 6,682,000 1998 ......................... 3,267,000 1999 ......................... 9,615,000 2000 ......................... 1,140,000 ----------- $21,168,000 ----------- -----------
6. INCOME TAXES The significant components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31, --------------------------- 1995 1994 1993 ------- ------- ------- Current ............................... $ - $26,000 $45,000 Deferred .............................. - - - ------- ------- ------- $ - $26,000 $45,000 ------- ------- ------- ------- ------- -------
Effective January 1, 1993, the Company adopted the provisions of FAS 109 which changed the Company's method of accounting for income taxes from the deferred method to the liability method. Deferred income taxes reflect the net tax effect of temporary differences between the financial reporting carrying amounts of assets and liabilities and income tax carrying amounts. The components of the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31, -------------------------- 1995 1994 ----------- ----------- Deferred tax liabilities: Property, plant and equipment ......... $(3,228,000) $(2,817,000) Deferred tax assets: NOL carryforwards ..................... 10,151,000 9,804,000 Investment tax credit carryforwards ... 1,618,000 1,618,000 Alternative minimum tax credit carryforwards ....................... 104,000 104,000 Accrued liabilities and other ......... - 215,000 ----------- ----------- 11,873,000 11,741,000 Less valuation allowance ................ (8,645,000) (8,924,000) ----------- ----------- $ - $ - ----------- ----------- ----------- -----------
25 The provision (benefit) for income taxes differed from amounts computed at the statutory federal income tax rate as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 1995 1994 1993 --------- --------- ------------ Tax provision (benefit) at statutory rate.... $ 374,000 $ 116,000 $(10,653,000) State income taxes, net of federal benefit... - 17,000 29,000 Valuation allowance on NOL................... (438,000) (174,000) 10,491,000 Other........................................ 64,000 67,000 178,000 --------- --------- ------------ $ - $ 26,000 $ 45,000 --------- --------- ------------ --------- --------- ------------
The Company has NOL carryforwards of $29.9 million which, if not utilized, will expire at various times from 2001 through 2010. In addition, the Company has unused investment tax credits of approximately $1.6 million available to offset future federal income tax liabilities. In general, the credits expire at various times from 1996 through 2001, unless previously utilized. The respective carryforwards are available to the Company in their full amounts unless a "change of ownership", as defined in Internal Revenue Code Section 382, occurs. If a change of ownership occurs, utilization of the NOL carryforwards could be limited. 7. COMMITMENTS AND CONTINGENT LIABILITIES The Company leases office space, equipment, and automobiles under lease obligations classified as operating leases. Rental expense under these leases was approximately $1.5 million in 1995, $869,000 in 1994, and $1.7 million in 1993. At December 31, 1995, minimum future rental payments due under operating leases were as follows: 1996....................... $1,678,000 1997....................... 867,000 1998....................... 297,000 1999....................... 297,000 2000....................... 257,000
The Company is involved in certain other legal actions and claims arising in the ordinary course of business. It is the opinion of management (based, in part, on advice of legal counsel) that such litigation and claims will be resolved without material effect on the Company's financial position or results of operations. 8. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS The Company believes that the following described related party transactions are in the ordinary course of its business and are competitive and comparable to those with unrelated persons and has taken measures to ensure they were conducted on an arm's length basis. The Company is a party to a consulting agreement with Cardinal Resources, Inc. owned by Mr. James W. Bryant, a Director of the Company. The Company pays $250,000 a year for providing engineering and project management services through November 2, 1997. The Company entered into the consulting agreement as part of the reorganization in 1993. The consulting agreement was assigned to Cardinal Resources, Inc. in 1994 by Mr. Bryant, who personally guarantees its performance. The original consulting agreement has been amended and modified to include one additional consultant. In addition, the consulting agreement provides that the Company has an option to participate in any of Cardinal's projects. The Company is a party to a joint venture with Mr. Ted Collins, Jr., a Director of the Company. The joint venture was formed in 1993 to develop certain targeted natural gas projects. Under the joint venture agreement, each party bears a portion of the development costs and has a right of first refusal on such projects. The Company purchased all of the stock of Energy Transfer Corporation ("ETC") and the outstanding partnership interests of Energy Transfer I, Ltd. ("ETI") effective April 2, 1995. Effective July 1, 1995, the Company purchased the outstanding partnership interests of Energy Transfer II, Ltd ("ETII"). ETC is the general partner of both ETI and ETII. ETI and ETII own the Oletha system. The Company had previously provided marketing and management services to ETC since 1994 for $5,000 a month. Mr. Kelcy L. Warren, the Company President, Chief Operating 26 Officer, and Director received $57,600 as the sole owner of the stock of ETC, $1,411,200 as 50% owner of the limited partnership interest of ETI and $260,000 as the owner of 50% limited partnership interest of ETII. Mr. Ray Davis, Chief Executive Officer and Chairman of the Board, and Mr. Ben H. Cook, a Director of the Company, each received $705,000 from the sale of their limited partnership interest in ETI. Mr. Davis, in addition, received $130,000 from the sale of his limited partnership interest in ETII. Mr. Warren was a Director of the Company, but neither Mr. Cook nor Mr. Davis were officers or directors of the Company when ETI and ETII were formed to own and operate the Oletha system. The Board of the Company formed a Special Committee of Independent Directors to negotiate and determine the value of the acquisitions. 9. EMPLOYEE BENEFIT PLANS Under the Plan (Note 2) all outstanding stock options were canceled. An incentive stock option plan (the "Stock Plan") was approved by the Board of Directors in 1993 and the Stockholders in 1994. Under the Stock Plan, options to purchase up to 1,250,000 shares of the Company's authorized but unissued stock can be granted to key employees through 2003. Options under the Stock Plan were granted at an exercise price equal to 100% of the fair market value of the stock on the date of the grant. The options are exercisable at a rate not to exceed 20% for each year of employment completed (however 100% may be exercised under a change of control, as defined) after the date of grant and expire ten years after the date of grant. The following is a summary of activity under the Stock Plan and all former stock option plans for the years ended December 31:
1995 1994 1993 ------------ -------- ---------- Outstanding at beginning of year......... 727,500 727,500 601,713 Granted during year...................... 272,500 - 727,500 Exercised or terminated during year...... - - (601,713) ------------ -------- ---------- Outstanding at end of year............... 1,000,000 727,500 727,500 ------------ -------- ---------- ------------ -------- ---------- Exercisable at end of year............... 291,000 145,500 - ------------ -------- ---------- ------------ -------- ---------- Per share price of exercisable options... $1.125-$1.75 $ 1.125 $ - ------------ -------- ---------- ------------ -------- ---------- Per share price of grants during year.... $ 1.75 $ - $ 1.125 ------------ -------- ---------- ------------ -------- ---------- Per share price of options exercised during year............................. $ none $ none $ none ------------ -------- ---------- ------------ -------- ----------
The Company instituted an Annual Incentive Compensation Plan ("Compensation Plan") in 1994. The purpose of the Compensation Plan is to provide annual incentive compensation to those officers and key employees who contribute significantly to the growth and success of the Company; to attract and retain individuals of outstanding ability; and to align the interests of those who hold positions of major responsibility in the Company with the interests of Company stockholders. The Compensation Plan is administered by the Compensation Committee of the Board of Directors (the "Committee"). The Committee approves or modifies, as appropriate, the recommendations of the Chief Executive Officer regarding participants, size of awards, performance criteria, and the recommended performance targets. These recommendations are subject to the final approval of the full Board of Directors. The Company paid approximately $714,000 in incentive compensation in January 1996 accrued under the 1995 Compensation Plan. The Company maintains an employee savings plan ("Savings Plan") under Section 401(k) of the Internal Revenue Code, which is available to all employees who meet certain requirements. Under the Savings Plan, the Company matched 100% of employees' contributions up to five percent (5%) of the participant's compensation through 1993. The Savings Plan was amended effective January 1, 1994, whereby the Company matches 20% of the employees' contributions up to a maximum of five percent (5%) of the participant's compensation. The Company may, at its discretion, increase the matching percentage at year end and may match in New Common Stock or cash. In 27 February 1996, the Board of Directors voted to match 1995 contributions in cash and did not increase the matching percentage. The Company recorded expense of $33,000, $33,000, and $250,000 in 1995, 1994, and 1993, respectively, for its matching contribution. The Company currently provides no post-employment benefits. 10. SEGMENT INFORMATION Segment data as of and for the years ended December 31, 1995, 1994 and 1993, follows:
1995 1994 1993 ------------ ------------ ------------ Revenue from unaffiliated sources Gas gathering and marketing.......... $102,211,000 $ 68,564,000 $114,722,000 Gas processing....................... 29,698,000 37,842,000 100,903,000 ------------ ------------ ------------ Total.............................. $131,909,000 $106,406,000 $215,625,000 ------------ ------------ ------------ ------------ ------------ ------------ Cost of sales Gas gathering and marketing.......... $ 95,945,000 $ 63,326,000 $105,400,000 Gas processing....................... 17,623,000 27,671,000 88,949,000 ------------ ------------ ------------ Total.............................. $113,568,000 $ 90,997,000 $194,349,000 ------------ ------------ ------------ ------------ ------------ ------------ Depreciation and amortization Gas gathering and marketing.......... $ 1,403,000 $ 729,000 $ 4,281,000 Gas processing....................... 1,774,000 1,814,000 1,976,000 Corporate general and administrative...................... 203,000 190,000 194,000 ------------ ------------ ------------ Total.............................. $ 3,380,000 $ 2,733,000 $ 6,451,000 ------------ ------------ ------------ ------------ ------------ ------------ Operating earnings (loss) Gas gathering and marketing.......... $ 1,910,000 $ (3,366,000) $ 285,000 Gas processing....................... 5,386,000 2,408,000 (1,134,000) Corporate general and administrative...................... (3,961,000) 2,409,000 (3,569,000) ------------ ------------ ------------ Total.............................. $ 3,335,000 $ 1,451,000 $ (4,418,000) ------------ ------------ ------------ ------------ ------------ ------------ Identifiable assets Gas gathering and marketing.......... $ 30,626,000 $ 15,336,000 $ 16,554,000 Gas processing....................... 23,361,000 20,013,000 25,383,000 Corporate general and administrative...................... 5,697,000 4,954,000 4,509,000 ------------ ------------ ------------ Total.............................. $ 59,684,000 $ 40,303,000 $ 46,446,000 ------------ ------------ ------------ ------------ ------------ ------------ Capital expenditures Gas gathering and marketing.......... $ 8,602,000 $ 122,000 $ 1,913,000 Gas processing....................... 4,247,000 3,618,000 1,800,000 Corporate general and administrative...................... 168,000 85,000 29,000 ------------ ------------ ------------ Total.............................. $ 13,017,000 $ 3,825,000 $ 3,742,000 ------------ ------------ ------------ ------------ ------------ ------------
28 Information regarding sales to major customers by segment for the years ended December 31, 1995, 1994, and 1993 is as follows:
PERCENTAGE OF GAS GATHERING CONSOLIDATED AND MARKETING GAS PROCESSING REVENUES ------------- -------------- ------------- 1995 Georgia Pacific $17,117,000 - 13% 1994 Georgia Pacific $14,631,000 - 14% 1993 Georgia Pacific $24,810,000 - 12%
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Refer to the Company's Form 8-K dated May 13, 1994, which discusses the change in the Company's accountants for the year ended December 31, 1994. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information appearing under the captions "Election of Directors" and "Certain Relationships and Related Transactions" in the Company's definitive proxy statement (the "Proxy Statement") relating to the 1996 annual stockholders meeting (the "Annual Meeting"), is incorporated herein by reference. The information regarding executive officers of the Registrant is contained at the end of Part I of this Form 10-K under a separate item captioned "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The information appearing under the caption "Executive Compensation" in the Proxy Statement relating to the Annual Meeting is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing under the caption "Principal Stockholders" in the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing under the caption "Certain Relationships and Related Transactions" is incorporated herein by reference. 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Consolidated Financial Statements. Cornerstone Natural Gas, Inc. and Subsidiaries.
Page ---- Report of Arthur Andersen LLP, Independent Public Accountants.. 15 Report of Ernst & Young LLP, Independent Auditors.............. 16 Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994, and 1993............................. 17 Consolidated Balance Sheets at December 31, 1995, and 1994..... 18 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994, and 1993............................. 19 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994, and 1993......... 20 Notes to Consolidated Financial Statements..................... 21-29
(2) Consolidated Financial Statement Schedules. No schedules have been included because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (3) Exhibits.
EXHIBIT NO. DOCUMENT ----------- -------- 3.1 By-Laws, as Amended and Restated August 9, 1994, currently in effect (incorporated by reference to Exhibit 3.1 to December 31, 1994, Form 10-K). 3.2 Restated Certificate of Incorporation of Cornerstone Natural Gas, Inc. (incorporated by reference to Exhibit 2 to January 10, 1994, Form 8-A). +10.1 Cornerstone Natural Gas, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to December 31, 1993, Form 10-K). +10.2 Amended and Restated Cornerstone Natural Gas, Inc. Employee Savings Plan effective July 1, 1991 (incorporated by reference to Exhibit 10.2 to December 31, 1993, Form 10-K). +10.3 Amended and Restated Cornerstone Natural Gas, Inc. Employee Savings Plan adopting the Bank of Oklahoma, N.A. Defined Contribution Master Plan as of January 1, 1989. (incorporated by reference to Exhibit 10.3 to December 31, 1994, Form 10-K). 10.4 Endevco, Inc. Employee Savings Trust (incorporated by reference to Exhibit 10.3 to Registration Statement No. 2-85830). 10.5 Amendment Number 1 to the Endevco, Inc. Employee Savings Trust (incorporated by reference to Exhibit 10.6 to December 31, 1991, Form 10-K).
30 10.6 Amendment Number 2 to the Endevco, Inc. Employee Savings Trust (incorporated by reference to Exhibit 10.7 to December 31, 1991, Form 10-K). *10.7 Amendment Number 3 to the Endevco, Inc. Employee Savings Trust. 10.8 General Partnership Agreement of Mountain Creek Joint Venture dated as of March 7, l989, by and between Western Natural Gas Company and Cornerstone Natural Gas Company (incorporated by reference to Exhibit 10.79 to December 31, 1989, Form 10-K). *10.9 Assignment and Assumption Agreement assigning interest of Western Natural Gas Company to Wesnat Pipeline Company, dated as of December 31, 1992, in Mountain Creek Joint Venture. *10.10 Assignment of Partnership Interest from Cornerstone Natural Gas Company to Cornerstone Pipeline Company (f/k/a Endevco Pipeline Company) dated as of June 2, 1993, in Mountain Creek Joint Venture. 10.11 Stock Purchase Agreement dated March 20, l993, by and between Endevco, Inc., and Ray Davis, Trustee (incorporated by reference to Exhibit 10.136 to December 31, 1992, Form 10-K). 10.12 First Amended Stock Purchase Agreement dated May 28, 1993, by and between Endevco, Inc., and Ray Davis, Trustee (incorporated by reference to Exhibit 10.1 to June 17, 1993, Form 8-K). 10.13 Form and Schedule of Warrants to Purchase Common Stock of Cornerstone Natural Gas, Inc. (incorporated by reference to Exhibit 10.42 to December 31, 1993, Form 10-K). 10.14 Joint Venture Agreement between Cornerstone Natural Gas, Inc. and Merit Natural Gas Company dated October 28, 1993 (incorporated by reference to Exhibit 10.45 to December 31, 1993, Form 10-K). *10.15 Assignment of Joint Venture Interest dated as of January 1, 1996, of Cornerstone Natural Gas, Inc., in Cornerstone/Merit Joint Venture, to Cornerstone Pipeline Company. +10.16 Consulting Agreement between Endevco, Inc. and James W. Bryant dated June 4, 1993 (incorporated by reference to Exhibit 10.48 to December 31, 1993, Form 10-K). +*10.17 Modification to Consulting Agreement by and between Cardinal Resources, Inc., and Cornerstone Natural Gas, Inc., dated February 15, 1995. +*10.18 Second Modification to Consulting Agreement by and between Cardinal Resources, Inc., and Cornerstone Natural Gas, Inc., dated November 1, 1995. 10.19 Loan Agreement dated as of May 24, 1995, between Cornerstone Natural Gas, Inc., et al as "Borrowers" and Bank of Oklahoma, National Association as "Bank" (incorporated by reference to Exhibit 10.1 to June 30, 1995, Form 10-Q). *10.20 First Amendment to Loan Agreement, dated as of January 31, 1996, between Cornerstone Natural Gas, Inc., et al as "Borrowers" and Bank of Oklahoma, National Association as "Bank". 10.21 Term Loan Agreement between Mountain Creek Joint Venture and Bank of Oklahoma, National Association, dated as of September 30, 1995, (incorporated by reference to Exhibit 10.1 to September 30, 1995, Form 10-Q).
31 10.22 Securities Purchase Agreement by and between Kelcy L. Warren, Individually as the Sole Shareholder of Energy Transfer Corporation and as a Limited Partner of Energy Transfer I, Ltd. and Flowstone L.P., as a Limited Partner of Energy Transfer I, Ltd. and Cornerstone Pipeline Company dated June 6, 1995 (incorporated by reference to Exhibit 10.1 to June 20, 1995, Form 8-K). 10.23 Securities Purchase Agreement by and between Kelcy L. Warren, Individually as a Limited Partner of Energy Transfer II, Ltd., Ray Davis, Individually, as a Limited Partner of Energy Transfer II, Ltd., and TMcD, Ltd., as a Limited Partner of Energy Transfer II, Ltd., and Cornerstone Pipeline Company dated June 15, 1995 (incorporated by reference to Exhibit 10.2 to June 20, 1995, Form 8-K). *21.1 List of Subsidiaries. *23.1 Consent of independent public accountants Arthur Andersen LLP. *23.2 Consent of independent auditors Ernst & Young LLP. *27.1 Financial Data Schedule.
______________________________________ * Filed Herewith. + Denotes management contract or compensatory plan. (b) Reports on Form 8-K. None. 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CORNERSTONE NATURAL GAS, INC. By: /s/ RAY C. DAVIS - ------------------------------------ Ray C. Davis CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Date: February 26, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
CAPACITY IN SIGNATURES WHICH SIGNED ---------- ------------ /s/ RAY C. DAVIS Chairman of the Board of Directors February 26, 1996 - ------------------------------------ and Chief Executive Officer (Ray C. Davis) /s/ KELCY L. WARREN President, Chief Operating February 26, 1996 - ------------------------------------ Officer and Director (Kelcy L. Warren) /s/ ROBERT L. CAVNAR Executive Vice President and Chief February 26, 1996 - ------------------------------------ Financial Officer (Robert L. Cavnar) /s/ RICHARD W. PIACENTI Vice President and Controller February 26, 1996 - ------------------------------------ (Richard W. Piacenti) /s/ RICHARD D. BRANNON Director February 26, 1996 - ------------------------------------ (Richard D. Brannon) /s/ JAMES W. BRYANT Director February 26, 1996 - ------------------------------------ (James W. Bryant) /s/ TED COLLINS, JR. Director February 26, 1996 - ------------------------------------ (Ted Collins, Jr.) /s/ BEN H. COOK Director February 26, 1996 - ------------------------------------ (Ben H. Cook) /s/ SCOTT G. HEAPE Director February 26, 1996 - ------------------------------------ (Scott G. Heape) /s/ DAVID S. HUNT Director February 26, 1996 - ------------------------------------ (David S. Hunt) /s/ W.J. MURRAY, JR. Director February 26, 1996 - ------------------------------------ (W.J. Murray, Jr.)
33 INDEX TO EXHIBITS EXHIBIT NO. DOCUMENT - ----------- -------- 3.1 By-Laws, as Amended and Restated August 9, 1994, currently in effect (incorporated by reference to Exhibit 3.1 to December 31, 1994, Form 10-K). 3.2 Restated Certificate of Incorporation of Cornerstone Natural Gas, Inc. (incorporated by reference to Exhibit 2 to January 10, 1994, Form 8-A). +10.1 Cornerstone Natural Gas, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to December 31, 1993, Form 10-K). +10.2 Amended and Restated Cornerstone Natural Gas, Inc. Employee Savings Plan effective July 1, 1991 (incorporated by reference to Exhibit 10.2 to December 31, 1993, Form 10-K). +10.3 Amended and Restated Cornerstone Natural Gas, Inc. Employee Savings Plan adopting the Bank of Oklahoma, N.A. Defined Contribution Master Plan as of January 1, 1989. (incorporated by reference to Exhibit 10.3 to December 31, 1994, Form 10-K). 10.4 Endevco, Inc. Employee Savings Trust (incorporated by reference to Exhibit 10.3 to Registration Statement No. 2-85830). 10.5 Amendment Number 1 to the Endevco, Inc. Employee Savings Trust (incorporated by reference to Exhibit 10.6 to December 31, 1991, Form 10-K). 10.6 Amendment Number 2 to the Endevco, Inc. Employee Savings Trust (incorporated by reference to Exhibit 10.7 to December 31, 1991, Form 10-K). *10.7 Amendment Number 3 to the Endevco, Inc. Employee Savings Trust. 10.8 General Partnership Agreement of Mountain Creek Joint Venture dated as of March 7, l989, by and between Western Natural Gas Company and Cornerstone Natural Gas Company (incorporated by reference to Exhibit 10.79 to December 31, 1989, Form 10-K). *10.9 Assignment and Assumption Agreement assigning interest of Western Natural Gas Company to Wesnat Pipeline Company, dated as of December 31, 1992, in Mountain Creek Joint Venture. *10.10 Assignment of Partnership Interest from Cornerstone Natural Gas Company to Cornerstone Pipeline Company (f/k/a Endevco Pipeline Company) dated as of June 2, 1993, in Mountain Creek Joint Venture. 10.11 Stock Purchase Agreement dated March 20, l993, by and between Endevco, Inc., and Ray Davis, Trustee (incorporated by reference to Exhibit 10.136 to December 31, 1992, Form 10-K). 10.12 First Amended Stock Purchase Agreement dated May 28, 1993, by and between Endevco, Inc., and Ray Davis, Trustee (incorporated by reference to Exhibit 10.1 to June 17, 1993, Form 8-K). 10.13 Form and Schedule of Warrants to Purchase Common Stock of Cornerstone Natural Gas, Inc. (incorporated by reference to Exhibit 10.42 to December 31, 1993, Form 10-K). 10.14 Joint Venture Agreement between Cornerstone Natural Gas, Inc. and Merit Natural Gas Company dated October 28, 1993 (incorporated by reference to Exhibit 10.45 to December 31, 1993, Form 10-K). *10.15 Assignment of Joint Venture Interest dated as of January 1, 1996, of Cornerstone Natural Gas, Inc., in Cornerstone/Merit Joint Venture, to Cornerstone Pipeline Company. +10.16 Consulting Agreement between Endevco, Inc. and James W. Bryant dated June 4, 1993 (incorporated by reference to Exhibit 10.48 to December 31, 1993, Form 10-K). +*10.17 Modification to Consulting Agreement by and between Cardinal Resources, Inc., and Cornerstone Natural Gas, Inc., dated February 15, 1995. +*10.18 Second Modification to Consulting Agreement by and between Cardinal Resources, Inc., and Cornerstone Natural Gas, Inc., dated November 1, 1995. 10.19 Loan Agreement dated as of May 24, 1995, between Cornerstone Natural Gas, Inc., et al as "Borrowers" and Bank of Oklahoma, National Association as "Bank" (incorporated by reference to Exhibit 10.1 to June 30, 1995, Form 10-Q). *10.20 First Amendment to Loan Agreement, dated as of January 31, 1996, between Cornerstone Natural Gas, Inc., et al as "Borrowers" and Bank of Oklahoma, National Association as "Bank". 10.21 Term Loan Agreement between Mountain Creek Joint Venture and Bank of Oklahoma, National Association, dated as of September 30, 1995, (incorporated by reference to Exhibit 10.1 to September 30, 1995, Form 10-Q). 10.22 Securities Purchase Agreement by and between Kelcy L. Warren, Individually as the Sole Shareholder of Energy Transfer Corporation and as a Limited Partner of Energy Transfer I, Ltd. and Flowstone L.P., as a Limited Partner of Energy Transfer I, Ltd. and Cornerstone Pipeline Company dated June 6, 1995 (incorporated by reference to Exhibit 10.1 to June 20, 1995, Form 8-K). 10.23 Securities Purchase Agreement by and between Kelcy L. Warren, Individually as a Limited Partner of Energy Transfer II, Ltd., Ray Davis, Individually, as a Limited Partner of Energy Transfer II, Ltd., and TMcD, Ltd., as a Limited Partner of Energy Transfer II, Ltd., and Cornerstone Pipeline Company dated June 15, 1995 (incorporated by reference to Exhibit 10.2 to June 20, 1995, Form 8-K). *21.1 List of Subsidiaries. *23.1 Consent of independent public accountants Arthur Andersen LLP. *23.2 Consent of independent auditors Ernst & Young LLP. *27.1 Financial Data Schedule. ____________ * Filed Herewith. + Denotes management contract or compensatory plan. EX-10.7 2 EXHIBIT 10.7 EXHIBIT 10.7 AMENDMENT NO. 3 TO THE ENDEVCO, INC. EMPLOYEE SAVINGS TRUST Pursuant to the provisions of Section 4.1 thereof, the Endevco, Inc. Employee Savings Trust, as amended (the "Trust"), is hereby amended in the following respects only: FIRST: The Trust is hereby renamed "Cornerstone Natural Gas, Inc. Employee Savings Trust." SECOND: The Trust is hereby amended so that the term "Company" therein refers to Cornerstone Natural Gas, Inc., a Delaware corporation. THIRD: The Trust is hereby amended so that the term "Trustee" therein refers to Alliance Trust Company, a Texas trust company. FOURTH: Section 1.1 of the Trust is hereby amended by restating the first sentence thereof in its entirety to read as follows: All of the property contributed to the CORNERSTONE NATURAL GAS, INC. EMPLOYEE SAVINGS PLAN, as amended (the "Plan"), together with the income therefrom and the increments thereof, shall constitute a trust fund, known as the CORNERSTONE NATURAL GAS, INC. EMPLOYEE SAVINGS TRUST (the "Trust"), to be held in trust by the Trustee under the terms and provisions of this Agreement for the exclusive benefit of the Participants and their beneficiaries pursuant to the Plan. FIFTH: Section 1.2 of the Trust is hereby amended by restating the second sentence thereof in its entirety to read as follows: The Trustee shall have full power and authority to manage, handle, invest, reinvest, sell for cash or credit, or for part cash or part credit, exchange, hold, dispose of, lease for any period of time, whether or not longer than the life of the trust, improve, repair, maintain, work, develop, use, operate, mortgage, or pledge, all or any part of the funds, assets and property constituting from time to time any part of the Trust; borrow money; enter into contracts; execute obligations, negotiable and nonnegotiable; vote shares of stock in person and by proxy, with or without power of substitution, provided that, with respect to shares of common stock of the Company held by the Trustee, the Trustee shall vote such shares only in accordance with instructions received from Participants pursuant to Section 13.8 of the Plan; register investments in the name of a nominee; sell, convey, lease and/or otherwise deal with any producing oil, gas and mineral leases or mineral rights and royalties; pay all reasonable expenses; execute and deliver any deeds, conveyances, leases, contracts, or written instruments of any character appropriate to any of the powers or duties of the Trustee; write option contracts against securities held by the Trust, and shall, in general, have as broad power respecting the management, operation and handling of the Trust properties and assets as if it were the owner of such assets in its own right. SIXTH: Section 3.1 of the Trust is hereby amended by restatement in its entirety to read as follows: Section 3.1 RESIGNATION OF TRUSTEE. Any Trustee may resign its duties hereunder by filing its written resignation with the Company at least 60 days prior to the effective date thereof. If such resigning Trustee is the sole trustee then acting hereunder, such resignation shall not take effect prior to the appointment of a successor trustee as hereinafter provided. SEVENTH: Section 3.3 of the Trust is hereby amended by restatement in its entirety to read as follows: Section 3.3 APPOINTMENT OF SUCCESSOR TRUSTEE. The appointment of a successor trustee hereunder shall be accomplished by and shall take effect upon the delivery to the resigning or removed Trustee, as the case may be, of (a) an instrument in writing appointing such successor trustee, executed by the Company, and (b) an acceptance in writing of the office of successor trustee hereunder executed by the successor so appointed. Any successor trustee hereunder may be either a corporation authorized and empowered to exercise trust powers or may be one or more individuals. All of the provisions set forth herein with respect to the Trustee shall relate to each successor trustee so appointed with the same force and effect as if such successor trustee had been originally named herein as a trustee hereunder. If a successor trustee has not been appointed within 30 days after notice of resignation or removal has been given under the provisions of this Article, the resigning or removed Trustee or the Committee or any member of the Committee may apply to any court of competent jurisdiction for the appointment of a successor trustee. If a successor trustee has not been appointed within 30 days after the effective date of resignation or removal specified in such notice, the Company shall appoint as successor trustee such members of the Committee as may accept in writing the office of successor trustee. EIGHTH: Section 5.3 of the Trust is hereby amended by restatement in its entirety to read as follows: Section 5.3 DEFINED TERMS. Unless the context clearly indicates otherwise, the words and phrases used in this Agreement shall have the meanings assigned to them under the provisions of the Plan, except that the term "Committee" shall have the meaning assigned to the term "Administrative Committee" under the provisions of the Plan and the term "Affiliated Company" shall have the meaning assigned to it under the provisions of the Endevco, Inc. Employee Savings Plan, as in effect on June 30, 1991. IN WITNESS WHEREOF, this Amendment has been executed this 10th day of May 1994, the EIGHTH provision hereof to be effective as of July 1, 1991, the SECOND provision hereof to be effective as of November 2, 1993, and the remaining provisions hereof to be effective as of January 1, 1994. CORNERSTONE NATURAL GAS, INC. (formerly ENDEVCO, INC.) By: /s/ ROBERT L. CAVNAR ------------------------------------------ Title: Senior Vice President, Chief Financial Officer & Treasurer ALLIANCE TRUST COMPANY, Trustee By: /s/ MARY J. STEICHEN ---------------------------------------------- Title: Vice President EX-10.9 3 EXHIBIT 10.9 EXHIBIT 10.9 ASSIGNMENT AND ASSUMPTION AGREEMENT This Assignment and Assumption Agreement dated as of December 31, 1992 (herein called the "Agreement") is entered into by and between Western Natural Gas Company, a Delaware corporation (herein called "WNGC"), Wesnat Pipeline Company, a Delaware corporation (herein called "Wesnat") and Cornerstone Pipeline Company, a Delaware corporation (herein called "Pipeline"). RECITALS: A. WNGC and Cornerstone Natural Gas Company, a Delaware corporation ("CNGC"), entered into that certain General Partnership Agreement dated as of March 7, 1989, as amended by Amendment No. 1 dated September 28, 1989 (as so amended, the "Partnership Agreement"), creating Mountain Creek Joint Venture ("MCJV"). B. WNGC and CNGC entered into that certain Natural Gas Transportation Agreement dated February 3, 1989 (the "Transportation Agreement") with Texas Utilities Fuel Company, a Texas corporation ("TUFCO"), and the obligations under the Transportation Agreement have been performed by MCJV. C. MCJV entered into that certain Permanent Loan Agreement dated September 28, 1989 (as from time to time amended, the "Loan Agreement"), with Chrysler Capital Corporation ("Chrysler"). WNGC and Endevco, Inc. (now known as Cornerstone Natural Gas, Inc.) ("Cornerstone") became liable for the indebtedness of MCJV to Chrysler pursuant to Guarantee agreements executed of even date therewith. D. Pursuant to the three assignments attached hereto as Exhibit A, Exhibit B and Exhibit C WNGC assigned its interest in MCJV to Wesnat, such assignments having been previously consented to by the parties hereto or their predecessors in interest. E. On June 2, 1993 Cornerstone assigned its interests in MCJV to Pipeline and Pipeline currently holds such interests and has the right to consent to the assignment and withdrawal contemplated hereby. F. On June 1, 1992 Chrysler assigned to General Electric Capital Corporation ("GECC") the Note (as such term is defined in the Loan Agreement), as well as the Loan Agreement and the other Loan Papers referred to therein. G. WNGC, in order to clarify the status of the ownership interest of MCJV and the status of WNGC with regard thereto, desires to re-execute and assign to Wesnat all of WNGC's rights and interest in, to and under the Partnership Agreement and the Transportation Agreement, and Wesnat desires to assume such rights and obligations and to indemnify and hold harmless WNGC for all liabilities occurring after the effective date hereof. Pipeline, MCJV and Wesnat each have agreed to consent to such assignment on the terms and conditions provided for herein and to consent to the withdrawal of WNGC as a partner in MCJV effective December 31, 1992. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto hereby act and agree as follows: 1. ASSIGNMENT. WNGC, for and in consideration of the sum of Ten Dollars ($10.00) and for other good and valuable consideration to WNGC paid by Wesnat, the receipt and sufficiency of which are hereby acknowledged, does by these presents SELL, TRANSFER, CONVEY, ASSIGN, ENDORSE, SET OVER AND DELIVER unto Wesnat the following: (a) The General Partnership interest of WNGC in MCJV, together with all rights, benefits, remedies and privileges of WNGC under the Partnership Agreement and all of the interest of WNGC in the Transportation Agreement (all of the foregoing are herein collectively called the "Assigned Interest"); and (b) All rights, titles, interest, privileges, claims, demands and equities existing or to exist in connection with the Assigned Interest. TO HAVE AND TO HOLD the Assigned Interest, together and along with all such rights, titles, interest, privileges, claims, demands and equities now or hereafter had by WNGC in connection therewith unto Wesnat forever. 2. REPRESENTATIONS AND WARRANTIES OF WNGC. The assignment made hereby is made without recourse and without warranty of representation of any nature whatsoever, expressed or implied, except WNGC does warrant that it is the owner and the holder of the Assigned Interest and has the full right, power and authority to transfer the Assigned Interest free of any lawful claim of any person or entity, except as set forth on Exhibit A, Exhibit B and Exhibit C hereto. 3. ASSUMPTION BY WESNAT. Wesnat hereby agrees to accept the Assigned Interest and to assume and perform all of the obligations and duties that WNGC has or will have under the Partnership Agreement and Transportation Agreement and as set forth on Exhibit A, Exhibit B, and Exhibit C. 4. RATIFICATION BY WESNAT, MCJV AND ENDEVCO. Each of MCJV, Wesnat and Pipeline hereby consents to the assignment and withdrawal contemplated hereby, and each of MCJV, Pipeline and Wesnat hereby ratifies and confirms the Partnership Agreement as modified by this Agreement and agrees that on and after the effective date hereof all references in the Partnership Agreement or any related document to WNGC, "Western," "Non-managing partner" or similar references shall refer to Wesnat. Each of MCJV, Pipeline and Wesnat further do hereby consent to the withdrawal of WNGC as a partner of MCJV, effective December 31, 1992 and agrees to indemnify and hold harmless WNGC from any liability relating to MCJV save and except for its Guarantee of the Note pursuant to the Permanent Loan Agreement. WNGC hereby expressly agrees that this Assignment and Assumption Agreement in no way affects its obligations under the Guarantee. IN WITNESS WHEREOF, the parties hereto have each executed this assignment to be effective for all purposes as of December 31, 1992. WESTERN NATURAL GAS COMPANY By: /s/ TED C. PARKER, JR. ----------------------------------- Ted C. Parker, Jr., President WESNAT PIPELINE COMPANY By: /s/ TED C. PARKER, JR. ----------------------------------- Ted C. Parker, Jr., President CORNERSTONE PIPELINE COMPANY By: /s/ KELCY L. WARREN ------------------------------- Name: Kelcy L. Warren ------------------------------- Title: President ------------------------------- MOUNTAIN CREEK JOINT VENTURE BY CORNERSTONE PIPELINE COMPANY, a General Partner By: /s/ KELCY L. WARREN ------------------------------- Name: Kelcy L. Warren ------------------------------- Title: President ------------------------------- BY WESNAT PIPELINE COMPANY, a General Partner By: /s/ TED C. PARKER, JR. ----------------------------------- Ted C. Parker, Jr., President EX-10.10 4 EXHIBIT 10.10 EXHIBIT 10.10 ASSIGNMENT OF PARTNERSHIP INTEREST THIS ASSIGNMENT OF PARTNERSHIP INTEREST dated as of June 2, 1993 (herein called the "Assignment") is by CORNERSTONE NATURAL GAS COMPANY, a Delaware corporation (herein called "Assignor"), in favor of ENDEVCO PIPELINE COMPANY, a Delaware corporation (herein called "Assignee"). RECITALS: A. Assignor and Western Natural Gas Company, a Delaware corporation ("Western"), entered into that certain General Partnership Agreement dated as of March 7, 1989, as amended by Amendment No. 1 dated September 28, 1989 (as so amended, the "Partnership Agreement"), creating Mountain Creek Joint Venture ("Mountain Creek"). B. On December 27, 1990, December 27, 1991, and December 31, 1992, Western assigned its interest in Mountain Creek, the Partnership to Wesnat Pipeline Company, a Delaware corporation ("Wesnat"), pursuant to that certain Assignment, and Wesnat currently holds such interests and has the right to consent to the assignments contemplated hereby. C. Assignor and Western entered into that certain Natural Gas Transportation Agreement dated February 3, 1989 (the "Transportation Agreement") with Texas Utilities Fuel Company, a Texas corporation ("TUFCO"), and the obligations under the Transportation Agreement have been performed by Mountain Creek. D. Mountain Creek entered into that certain Permanent Loan Agreement dated September 28, 1989 (as from time to time amended, the "Loan Agreement") with Chrysler Capital Corporation ("Chrysler"), pursuant to which Assignor, as a general partner in Mountain Creek, became liable for the indebtedness of Mountain Creek to Chrysler. E. On June 1, 1992, Chrysler assigned to General Electric Capital Corporation ("GECC") the Note (as such term is defined in the Loan Agreement), as well as the Loan Agreement and the other Loan Papers referred to therein. F. Assignor desires to assign to Assignee all of its rights and interests in, to and under the Partnership Agreement and the Transportation Agreement, and Western, Wesnat, Mountain Creek and GECC have each agreed to consent to such assignment on the terms and conditions provided herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto hereby act and agree as follows: ARTICLE I ASSIGNMENT Section 1.1. ASSIGNMENT. Assignor, for and in consideration of the sum of Ten Dollars ($10.00) and for other good and valuable consideration to Assignor paid by Assignee, the receipt and sufficiency of which are hereby acknowledged, does by these presents SELL, TRANSFER, CONVEY, ASSIGN, ENDORSE, SET OVER AND DELIVER unto Assignee the following: (a) The general partnership interest of Assignor in Mountain Creek, together with all rights, benefits, remedies and privileges of Assignor under the Partnership Agreement and all of the interest of Assignor in the Transportation Agreement (all of the foregoing are herein collectively called the "Assigned Interest"); and (b) All rights, titles, interests, privileges, claims, demands, and equities existing or to exist in connection with the Assigned Interest. TO HAVE AND TO HOLD the Assigned Interest, together and along with all such rights, titles, interests, privileges, claims, demands and equities, now or hereafter had by Assignor in connection therewith, unto Assignee forever. Section 1.2. REPRESENTATIONS AND WARRANTIES OF ASSIGNOR. The assignment made hereby is made without recourse and without warranty or representation of any nature whatsoever, express or implied, except Assignor does warrant that it is the owner and holder of the Assigned Interest and has the full right, power and authority to transfer the Assigned Interest free of any lawful claim of any person or entity. Section 1.3. ASSUMPTION BY ASSIGNEE. Assignee hereby agrees to accept the Assigned Interest and to assume and perform all of the obligations and duties that Assignor has or will have under the Partnership Agreement. Section 1.4. RATIFICATION BY ASSIGNEE, MOUNTAIN CREEK AND WESNAT. Each of Mountain Creek and Wesnat hereby consents to the assignment contemplated hereby, and each of Mountain Creek, Wesnat and Assignee hereby ratifies and confirms the Partnership Agreement, as modified by this Assignment, and agrees that on and after the date hereof all references in the Partnership Agreement or any related document to "Cornerstone," "Managing Partner" or similar references shall refer to Assignee. ARTICLE II MISCELLANEOUS Section 2.1. ADDRESSES. For the purposes of this Assignment, the addresses of the parties shall hereafter be as shown beside their signatures hereto. Section 2.2. ADDITIONAL DOCUMENTS. Assignor will from time to time, at the request of Assignee and at no expense to Assignor, execute and deliver to Assignee any documents deemed by Assignor to be reasonably necessary or desirable to carry out more effectively the purposes of this Assignment, including without limitation any assignments, properly completed (and acknowledged when required). Section 2.3. CHOICE OF LAW. THIS ASSIGNMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE AND THE LAWS OF THE UNITED STATES OF AMERICA. Section 2.4. COUNTERPARTS. This Assignment may be executed in several counterparts, all of such counterparts together constituting one and the same instrument. Section 2.5. FINAL AGREEMENT; NO ORAL AGREEMENTS. THIS WRITTEN ASSIGNMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have each executed this Assignment on the dates set forth in their respective acknowledgements below to be effective for all purposes as of the date first written above. "ASSIGNOR" CORNERSTONE NATURAL GAS COMPANY a Delaware corporation By: /s/ JAMES W. BRYANT -------------------------- Name: James W. Bryant ----------------------- Title: Chairman of the Board ----------------------- Address of Assignor is: 8080 N. Central Expressway Twelfth Floor, L.B. 47 Dallas, Texas 75206 "ASSIGNEE" ENDEVCO PIPELINE COMPANY a Delaware corporation By: /s/ JAMES W. BRYANT -------------------------- Name: James W. Bryant ----------------------- Title: Chairman of the Board ----------------------- Address of Assignee is: 8080 N. Central Expressway Twelfth Floor, L.B. 47 Dallas, Texas 75206 Each of the following, by its execution in the space provided below, hereby consents to the Assignment and the transactions contemplated thereby. WESNAT PIPELINE COMPANY a Delaware corporation By: /s/ TED C. PARKER, JR. -------------------------- Name: Ted C. Parker, Jr. ----------------------- Title: President ----------------------- WESTERN NATURAL GAS COMPANY a Delaware corporation By: /s/ TED C. PARKER, JR. -------------------------- Name: Ted C. Parker, Jr. ----------------------- Title: President ----------------------- MOUNTAIN CREEK JOINT VENTURE a Texas general partnership By: CORNERSTONE NATURAL GAS COMPANY By: /s/ JAMES W. BRYANT -------------------------- Name: James W. Bryant ----------------------- Title: Chairman of the Board ----------------------- By: WESNAT PIPELINE COMPANY By: /s/ TED C. PARKER, JR. -------------------------- Name: Ted C. Parker, Jr. ----------------------- Title: President ----------------------- Address of Mountain Creek is: 8080 N. Central Expressway Suite 1200, L.B. 47 Dallas, Texas 75206 GENERAL ELECTRIC CAPITAL CORPORATION a New York corporation By: /s/ JOYCE TAYLOR ------------------------ Name: Joyce Taylor --------------------- Title: RCA --------------------- EX-10.15 5 EXHIBIT 10.15 EXHIBIT 10.15 ASSIGNMENT OF JOINT VENTURE INTEREST THIS ASSIGNMENT OF JOINT VENTURE INTEREST dated as of January 1, 1996 (herein called the "Assignment") is by CORNERSTONE NATURAL GAS, INC., a Delaware corporation (herein called "Assignor"), in favor of CORNERSTONE PIPELINE COMPANY, a Delaware corporation (herein called "Assignee"). RECITALS: Assignor and Merit Natural Gas Company, a Texas corporation ("Merit"), entered into that certain Joint Venture Agreement dated as of October 28, 1993, creating the Cornerstone/Merit Joint Venture ("Cornerstone/Merit"). Assignor desires to assign to Assignee all of its rights and interests in, to and under the Joint Venture Agreement and Merit and Cornerstone/Merit have each agreed to consent to such assignment on the terms and conditions provided herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto hereby act and agree as follows: ARTICLE I ASSIGNMENT Section 1.1 ASSIGNMENT. Assignor, for and in consideration of the sum of Ten Dollars ($10.00) and for other good and valuable consideration to Assignor paid by Assignee, the receipt and sufficiency of which are hereby acknowledged, does by these presents SELL, TRANSFER, CONVEY, ASSIGN, ENDORSE, SET OVER AND DELIVER unto Assignee the following: (a) The joint venture interest of Assignor in Cornerstone/Merit, together with all rights, benefits, remedies and privileges of Assignor under the Agreement (called the "Assigned Interest"); and (b) All rights, titles, interests, privileges, claims, demands and equities existing or to exist in connection with the Assigned Interest TO HAVE AND TO HOLD the Assigned Interest, together and along with all such rights, titles, interests, privileges, claims, demands and equities, now or hereafter had by Assignor in connection therewith, unto Assignee forever. Section 1.2 REPRESENTATIONS AND WARRANTIES OF ASSIGNOR. The assignment made hereby is made without recourse and without warranty or representation of any nature whatsoever, expressed or implied, except Assignor does warrant that it is the owner and holder of the Assigned Interest and has the full right, power and authority to transfer the Assigned Interest free of any lawful claim of any person or entity. Section 1.3 ASSUMPTION BY ASSIGNEE. Assignee hereby agrees to accept the Assigned Interest and to assume and perform all of the obligations and duties that Assignor has or will have under the Joint Venture Agreement. Section 1.4 RATIFICATION BY ASSIGNEE, CORNERSTONE/MERIT AND MERIT. Each of Cornerstone/Merit and Merit hereby consents to the assignment contemplated hereby, and each of Cornerstone/Merit, Merit and Assignee hereby ratifies and confirms the Agreement, as modified by this Assignment, and agrees that on and after the date hereof all references in the Agreement or any related document to "Cornerstone" or similar references shall refer to Assignee. ARTICLE II MISCELLANEOUS Section 2.1 ADDRESSES. For the purposes of this Assignment, the addresses of the parties shall hereafter be as shown beside their signatures hereto. Section 2.2 ADDITIONAL DOCUMENTS. Assignor will from time to time, at the request of Assignee and at no expense to Assignor, execute and deliver to Assignee any documents deemed by Assignor to be reasonably necessary or desirable to carry out more effectively the purposes of this Assignment, including without limitation any assignments, properly completed (and acknowledged when required). Section 2.4 COUNTERPARTS. This Assignment may be executed in several counterparts, all of such counterparts together constituting one and the same instrument. Section 2.5 FINAL AGREEMENT; NO ORAL AGREEMENTS. THIS WRITTEN ASSIGNMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have each executed this Assignment on the dates set forth in their respective acknowledgments below to be effective for all purposes as of the date first written above. "ASSIGNOR" CORNERSTONE NATURAL GAS, INC. By: /s/ RAY C. DAVIS ------------------------------- Ray C. Davis Chief Executive Officer Address of Assignor is: 8080 N. Central Expwy., Suite 1200 Dallas, TX 75206-1815 "ASSIGNEE" CORNERSTONE PIPELINE COMPANY. By: /s/ RAY C. DAVIS ------------------------------- Ray C. Davis Chief Executive Officer Address of Assignee is: 8080 N. Central Expwy., Suite 1200 Dallas, TX 75206-1815 Each of the following, by its execution in the space provided below, hereby consents to the Assignment and the transactions contemplated thereby. "MERIT" MERIT NATURAL GAS COMPANY, a Texas joint venture By: TED COLLINS, JR. ------------------------------- Ted Collins, Jr., President Address of Merit is: P.O. Box 27 Midland, TX 79702 CORNERSTONE/MERIT JOINT VENTURE By: Cornerstone Natural Gas, Inc. /s/ RAY DAVIS ------------------------------- Ray Davis By: Merit Natural Gas Company By: TED COLLINS, JR. ------------------------------- Ted Collins, Jr. EX-10.17 6 EXHIBIT 10.17 EXHIBIT 10.17 MODIFICATION TO CONSULTING AGREEMENT Agreement by and between Cardinal Resources, Inc. ("Cardinal") and Cornerstone Natural Gas, Inc. ("Company") dated this 15th day of February 1995. WHEREAS, Company entered into that certain Consulting Agreement by and between Company and James W. Bryant as ("Consultant") dated June 4, 1993 ("Agreement"); WHEREAS, effective August 1, 1994, Consultant assigned the Consulting Agreement to Cardinal Resources, Inc., in that Assignment of Consulting Agreement, a copy of which is attached hereto as Exhibit "A"; WHEREAS, Consultant is desirous to commit additional consulting services to the Company for a period of one year only and Company is agreeable to such additional services, W I T N E S S E T H : NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements herein contained, and intending to be legally bound hereby, the Company and Cardinal hereby agree to modify the Agreement as follows: 1. Consulting Services as defined in the Agreement shall be modified to include Mr. Dale Wilson as an additional business consultant ("Additional Consultant") for a period of one year only beginning on January 9, 1995. 2. The duties of the Consultant as defined in the Agreement shall be modified and expanded so that between the Consultant and Additional Consultant, a total of 60 hours per week will be devoted to the Company. 3. The Company shall provide to the Additional Consultant medical insurance as provided to Consultant. 4. As compensation for Additional Consultant, the Company shall pay Cardinal an additional $50,000 for the one-year period. Cardinal shall invoice Company monthly over the one-year period. This additional compensation shall not increase the rate paid to Consultant. 5. The Company shall provide to Additional Consultant office space it has available and necessary secretarial support. 6. All other terms and conditions of the Agreement shall not be changed, modified, or enlarged except as specified in this Modification to Consulting Agreement or Assignment of Consulting Agreement. CARDINAL RESOURCES, INC. By: /s/ JAMES W. BRYANT ------------------------------- James W. Bryant CORNERSTONE NATURAL GAS, INC. By: /s/ RAY C. DAVIS ------------------------------- Ray C. Davis, CEO JAMES W. BRYANT, CONSULTANT AND GUARANTOR By: /s/ JAMES W. BRYANT ------------------------------- EX-10.18 7 EXHIBIT 10.18 EXHIBIT 10.18 SECOND MODIFICATION TO CONSULTING AGREEMENT Agreement by and between Cardinal Resources, Inc. ("Cardinal") and Cornerstone Natural Gas, Inc. ("Company") effective as of November 1, 1995; WHEREAS, Company entered into that certain Consulting Agreement by and between Company and James W. Bryant as ("Consultant") dated June 4, 1993 ("Consulting Agreement"); WHEREAS, effective August 1, 1994, Consultant assigned the Consulting Agreement to Cardinal Resources, Inc., in that Assignment of Consulting Agreement; WHEREAS, the Agreement was modified and amended in the Modification to Consulting Agreement dated February 15, 1995, a copy of which is attached as Exhibit "A"; WHEREAS, Consultant and Company desire to amend the Agreement, as amended, to reflect the term of the Additional Consultant (as defined in the Modification to Consulting Agreement) and the extension of the Agreement; W I T N E S S E T H : NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements, and notwithstanding anything to the contrary in the Agreement, and intending to be legally bound, the Company and Cardinal agree to modify the Agreement, as amended, as follows: 1. EXTENSION OF AGREEMENT. The Consulting Agreement, as amended, will be extended for one additional year and will terminate on November 1, 1997. 2. ADDITIONAL CONSULTANT. The term of the Additional Consultant, as set out in the Modification to Consulting Agreement, shall be amended to run concurrently with the term of the Consulting Agreement, as amended, and any extension thereof, currently expiring on November 1, 1997. The additional $50,000 compensation for the Additional Consultant will remain unchanged during the term of the Consulting Agreement. 3. All other terms and conditions of the Agreement, as amended, shall not be changed, modified, or enlarged except as specified in this Second Modification to Consulting Agreement. "Consultant" CARDINAL RESOURCES, INC. By: /s/ JAMES W. BRYANT ----------------------------------- "Company" CORNERSTONE NATURAL GAS, INC. By: /s/ RAY C. DAVIS ----------------------------------- Ray C. Davis, CEO JAMES W. BRYANT, CONSULTANT AND GUARANTOR By: /s/ JAMES W. BRYANT ----------------------------------- EX-10.20 8 EXHIBIT 10.20 EXHIBIT 10.20 FIRST AMENDMENT TO LOAN AGREEMENT THIS FIRST AMENDMENT TO LOAN AGREEMENT, dated as of January 31, 1996 ("Agreement"), is entered into among CORNERSTONE NATURAL GAS, INC. (formerly Endevco, Inc.), a Delaware corporation ("Cornerstone"), ENDEVCO PRODUCING COMPANY, a Delaware corporation ("EPRC"), CORNERSTONE GAS GATHERING COMPANY (formerly Cornerstone Pipeline Company), a Delaware corporation ("CGGC"), DUBACH GAS COMPANY, a Texas corporation ("Dubach"), CORNERSTONE GAS PROCESSING, INC. (formerly Endevco Natural Gas Company), a Delaware corporation ("CGP"), CORNERSTONE GAS RESOURCES, INC. (formerly Endevco Oil and Gas Company), a Delaware corporation ("CGR"), CORNERSTONE PIPELINE COMPANY (formerly Endevco Pipeline Company), a Delaware corporation ("CPC") and PENTEX PIPELINE COMPANY, a Texas corporation ("PPC") (collectively the "Borrowers") and BANK OF OKLAHOMA, NATIONAL ASSOCIATION (the "Bank"). W I T N E S S E T H: A. WHEREAS, the Borrowers have applied to the Bank for conversion of $2,000,000 of the outstanding principal amount of the Convertible Loans evidenced by the Convertible Note described and defined in the Loan Agreement dated as of May 24, 1995 by and among the Borrowers and the Bank (the "Existing Credit Agreement") to a forty-eight (48) month term loan thereby decreasing the maximum principal amount of the Convertible Borrowing Base from $16,500,000 to $14,500,000, which $2,000,000 term loan is to be evidenced by Borrowers' joint and several First Term Note hereinafter described and defined; and B. WHEREAS, the Bank is willing to convert $2,000,000 of the Convertible Loans to a forty-eight (48) month term loan to the Borrowers, subject to the terms, conditions and provisions of the Existing Credit Agreement, as amended and modified by the terms and provisions hereinafter set forth, all of which are material to the Bank and without which the Bank would not be willing to convert $2,000,000 of the Convertible Loans to a forty-eight (48) month term loan as described above. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, receipt of which is acknowledged by the parties hereto, the parties agree as follows: 1. DEFINITIONS. The following definitions in Article I of the Existing Credit Agreement are hereby amended and modified or added as follows: 1.7 "COMMITMENTS" shall mean the Revolving Credit Commitment, the Convertible Commitment and the Term Loan Commitment. 1.11 "CORNERSTONE PLEDGE" shall have the meaning assigned to that term in Article IV of the Existing Credit Agreement, as amended by that certain First Amendment to Pledge Agreement from Cornerstone to the Bank dated as of September 30, 1994, as further amended by that certain Second Amendment to Pledge Agreement from Cornerstone to the Bank dated as of January 4, 1995, as further amended by that certain Third Amendment to Pledge Agreement from Cornerstone to the Bank dated as of March 31, 1995 and as further amended by that certain Fourth Amendment to Pledge Agreement dated as of May 24, 1995, and as further amended by that certain Fifth Amendment to Pledge Agreement from Cornerstone to the Bank dated as of even date herewith. 1.12 "CGP DEED OF TRUST" shall have the meaning assigned to that term in Article IV of the Existing Credit Agreement, as amended by that certain First Amended Deed of Trust, Security Agreement, Financing Statement and Assignment (with Power of Sale) from CGP to the Bank dated as of September 30, 1994, as further amended by that certain Second Amended Deed of Trust, Security Agreement, Financing Statement and Assignment (with Power of Sale) from CGP to the Bank dated as of January 4, 1995, as further amended by that certain Third Amended Deed of Trust, Security Agreement, Financing Statement and Assignment (with Power of Sale) dated as of March 31, 1995, and as further amended by that certain Fourth Amended Deed of Trust, Security Agreement, Financing Statement and Assignment (with Power of Sale) dated as of May 24, 1995, and as further amended by that certain Fifth Amended Deed of Trust, Security Agreement, Financing Statement and Assignment (with Power of Sale) from CGP to the Bank dated as of even date herewith. 1.14 "CPC DEED OF TRUST" shall have the meaning assigned to that term in Article IV of the Existing Credit Agreement, as amended by that certain First Amended Deed of Trust, Security Agreement, Financing Statement and Assignment from CPC to the Bank dated as of September 30, 1994, as further amended by that certain Second Amended Deed of Trust, Security Agreement, Financing Statement and Assignment from CPC to the Bank dated as of January 4, 1995, as further amended by that certain Third Amended Deed of Trust, Security Agreement, Financing Statement and Assignment from CPC dated as of March 31, 1995, as further amended by that certain Fourth Amended Deed of Trust, Security Agreement, Financing Statement and Assignment from CPC dated as of May 24, 1995, and as further amended by that certain Fifth Amended Deed of Trust, Security Agreement, Financing Statement and Assignment from CPC to the Bank dated as of even date herewith. 1.16 "CPC PLEDGE" shall have the meaning assigned to that term in Article IV of the Existing Credit Agreement, as amended by that certain First 2 Amended Assignment, Pledge and Security Agreement from CPC to the Bank dated as of January 4, 1995 and as further amended by that certain Second Amended Assignment, Pledge and Security Agreement from CPC to the Bank dated as of March 31, 1995, and as further amended by that certain Third Amended Assignment, Pledge and Security Agreement from CPC to the Bank dated as of May 24, 1995, and as further amended by that certain Fourth Amended Assignment, Pledge and Security Agreement from CPC to the Bank dated as of even date herewith. 1.41 "LOANS" shall mean all advances made and Letter of Credit draws funded hereunder pursuant to any of the Commitments, including all sums evidenced by any one or more or all of the Notes. 1.45 "NOTES" shall mean the Revolving Credit Note, the Convertible Note and the First Term Note, together with each and every replacement, extension, renewal, modification, substitution, rearrangement and change in form thereof which may be from time to time and for any term or terms effected. 1.49 "PPC DEED OF TRUST" shall have the meaning assigned to that term in Section 1.45 of the Existing Credit Agreement, as amended by that certain First Amended Deed of Trust, Security Agreement, Financing Statement and Assignment (with Power of Sale) from PPC to the Bank dated as of January 4, 1995, as further amended by that certain Second Amended Deed of Trust, Security Agreement, Financing Statement and Assignment (with Power of Sale) from PPC to the Bank dated as of March 31, 1995 and as further amended by that certain Third Amended Deed of Trust, Security Agreement, Financing Statement and Assignment (with Power of Sale) from PPC to the Bank dated as of May 24, 1995 and as further amended by that certain Fourth Amended Deed of Trust, Security Agreement, Financing Statement and Assignment (with Power of Sale) from PPC to the Bank dated as of even date herewith. 1.57 "SECURITY AGREEMENT" shall have the meaning assigned to that term in Article V of the Original Credit Agreement, as amended by that certain First Amended and Restated Security Agreement and Assignment from the Borrowers to the Bank dated as of January 4, 1995, as further amended by that certain Second Amended and Restated Security Agreement and Assignment from the Borrowers to the Bank dated as of March 31, 1995, as further amended by that certain Third Amended and Restated Security Agreement and Assignment from the Borrowers to the Bank dated as of May 24, 1995 and as further amended by that certain Fourth Amended and Restated Security Agreement and Assignment from the Borrowers to the Bank dated as of even date herewith. 3 1.63 "CGGC DEED OF TRUST" shall have the meaning assigned to that term in Section 4.1(b)(vi) of the Existing Credit Agreement, as amended by that certain First Amended Deed of Trust, Security Agreement, Financing Statement and Assignment from CGGC to the Trustee and the Bank dated as of August 1, 1994, as further amended by that certain Second Amended Deed of Trust, Security Agreement, Financing Statement and Assignment from CGGC to the Trustee and the Bank dated as of September 30, 1994, as further amended by that certain Third Amended and Supplemental Deed of Trust, Security Agreement, Financing Statement and Assignment from CGGC to the Trustee and the Bank dated as of January 4, 1995, as further amended by that certain Fourth Amended and Supplemental Deed of Trust, Security Agreement, Financing Statement and Assignment from CGGC to the Trustee and the Bank dated as of March 31, 1995, and as further amended by that certain Fifth Amended and Supplemental Deed of Trust, Security Agreement, Financing Statement and Assignment from CGGC to the Trustee and the Bank dated as of May 24, 1995 and as further amended by that certain Sixth Amended and Supplemental Deed of Trust, Security Agreement, Financing Statement and Assignment from CGGC to the Trustee and the Bank dated as of even date herewith. 1.64 "TERM LOAN COMMITMENT" shall mean the agreement of the Bank to make the $2,000,000 Term Loan to the Borrowers as evidenced by the First Term Note. 1.65 "FIRST TERM NOTE" shall mean that certain $2,000,000 promissory note from Borrowers, payable to the order of the Bank, as described and defined in Section 3 of the First Amendment. 2. TERM LOAN. The Bank agrees, upon the terms subject to the conditions set forth in the Existing Credit Agreement, as previously amended, and herein, to convert $2,000,000 of the outstanding principal balance of the Convertible Loans as evidenced by the Convertible Note to a forty-eight (48) month term loan (the "Term Loan") to be evidenced by the First Term Note more particularly described and defined in Paragraph 3 of this First Amendment, subject, however, to the concurrent and automatic reduction of the maximum Convertible Borrowing Base from $16,500,000 to $14,500,000. 3. FIRST TERM NOTE. To evidence the $2,000,000 conversion from the Convertible Loan to the Term Loan, as funded pursuant to the provisions of paragraph 2 above, the Borrowers shall execute and deliver to the order of the Bank Borrowers' joint and several promissory note in the principal amount of $2,000,000.00, the form of which is annexed hereto as EXHIBIT "A" and hereby made a part hereof (hereinafter referred to as the "First Term Note"). The First Term Note shall be dated as of the date hereof, shall be payable in forty- seven (47) consecutive monthly principal installments, each in the amount of $41,667, due on the last day of every month commencing 4 February 29, 1996, and shall bear interest, payable monthly on the last day of every month commencing February 29, 1996, and at final maturity on January 31, 2000, on unpaid balances of principal from time to time outstanding and on any past due interest at a variable annual rate equal from day to day to the Applicable Prime Rate therein defined plus two percentage points (2%), but in no event at a rate greater than permitted by applicable law. All outstanding principal of and unpaid accrued interest on the First Term Note not previously paid hereunder shall be due and payable at final maturity on January 31, 2000, unless such maturity shall be extended by the Bank in writing or accelerated pursuant to the terms hereof. After maturity (whether by acceleration or otherwise) the First Term Note shall bear interest at the Default Rate, payable on demand. Interest shall be calculated on the basis of a year of 360 days but assessed for the actual number of days elapsed in each accrual period. 4. COLLATERAL. The repayment of the Indebtedness (including the Term Loan) shall continue to be secured by all of the Collateral as more particularly described and defined in the Existing Credit Agreement and/or in the Security Instruments, including without limitation, the Security Agreement encumbering the items and types of Collateral more particularly described in Section 4.1 thereof as continuing and continuous security for all of the Indebtedness. Borrowers hereby incorporate by reference, ratify, confirm, continue and regrant in favor of the Bank all of the security interests, liens and pledges set forth or described in the Security Agreement and in Article IV of the Existing Credit Agreement, including the priorities thereof, with the same force and effect as if fully restated herein. 5. CONDITIONS PRECEDENT TO TERM LOAN. The obligation of the Bank to extend the Term Loan is subject to satisfaction of all the following conditions on or prior to the date such extension of the Term Loan, as evidenced by the First Term Note, in the original principal sum of $2,000,000.00 occurs (in addition to the other terms and conditions set forth in the Existing Credit Agreement): (a) FIRST TERM NOTE. The Borrower shall have delivered the First Term Note to the order of the Bank, appropriately executed. (b) BORROWERS' CERTIFICATES AND PROCEEDINGS. Each of the Borrowers shall have delivered to the Bank a certificate satisfactory to the Bank and its legal counsel, including corporate resolutions, incumbency certificates and articles and certificates of incorporation and bylaws as may be required by the Bank and its legal counsel. (c) SECURITY INSTRUMENTS. The Borrowers shall have delivered to the Bank the Sixth Amended and Supplemental CGGC Deed of Trust, the Fourth Amended and Restated Security Agreement and Assignment, the Fifth Amendment to Pledge Agreement from Cornerstone and such other supplemental and amendment instruments to the Security Instruments more particularly described 5 and defined in the Existing Credit Agreement, including without limitation, the amendments more particularly described in Sections 1.11, 1.12, 1.14, 1.16, 1.49, 1.57 and 1.63 in paragraph 1 hereof. (d) OPINION OF COUNSEL. The Bank shall have received from Borrowers' counsel, Schlanger, Mills, Mayer and Grossberg LLP a favorable closing opinion satisfactory in form and substance to the Bank and its counsel. (e) REDUCTION IN CONVERTIBLE BORROWING BASE. The Convertible Borrowing Base, as described and defined in Section 3.5 of the Existing Loan Agreement, is reduced (concurrently with the funding of the Term Loan) to $14,500,000. 6. EXISTING CREDIT AGREEMENT. The remaining terms, provisions, covenants, warranties, representations and conditions of the Existing Credit Agreement are ratified, confirmed and continued in full force and effect with the same effect as if fully restated and incorporated herein by reference. 7. COUNTERPARTS. This First Amendment may be executed in any number of counterparts, all of which when taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have caused this First Amendment to be duly executed and delivered by the Borrowers to the Bank in Tulsa, Oklahoma, effective as of the day and year first above written. "Borrowers" CORNERSTONE NATURAL GAS, INC. By: /s/ ROBERT L. CAVNAR ------------------------------ Robert L. Cavnar Senior Vice President ENDEVCO PRODUCING COMPANY By: /s/ ROBERT L. CAVNAR ------------------------------ Robert L. Cavnar Senior Vice President 6 CORNERSTONE GAS GATHERING COMPANY, formerly known as Cornerstone Pipeline Company By: /s/ ROBERT L. CAVNAR ------------------------------ Robert L. Cavnar Senior Vice President DUBACH GAS COMPANY By: /s/ ROBERT L. CAVNAR ------------------------------ Robert L. Cavnar Senior Vice President CORNERSTONE GAS PROCESSING, INC., formerly known as Endevco Natural Gas Company By: /s/ ROBERT L. CAVNAR ------------------------------ Robert L. Cavnar Senior Vice President CORNERSTONE GAS RESOURCES, INC., formerly known as Endevco Oil & Gas Company By: /s/ ROBERT L. CAVNAR ------------------------------ Robert L. Cavnar Senior Vice President 7 CORNERSTONE PIPELINE COMPANY, formerly known as Endevco Pipeline Company By: /s/ ROBERT L. CAVNAR ------------------------------ Robert L. Cavnar Senior Vice President PENTEX PIPELINE COMPANY By: /s/ ROBERT L. CAVNAR ------------------------------ Robert L. Cavnar Senior Vice President "Bank" BANK OF OKLAHOMA, NATIONAL ASSOCIATION By: /s/ JACK D. BRANNON ------------------------------ Jack D. Brannon, Vice President 8 EX-21.1 9 EXHIBIT 21.1 EXHIBIT 21.1 LIST OF WHOLLY OWNED SUBSIDIARIES STATE OF INCORPORATION NAME OF ENTITY OR ORGANIZATION -------------- ----------------------- Cornerstone Gas Resources, Inc. Delaware Cornerstone Pipeline Company Delaware *Energy Transfer Corporation Texas Cornerstone Gas Gathering Company Delaware Cornerstone Gas Processing, Inc. Delaware Endevco Producing Company Delaware Dubach Gas Company Texas Pentex Pipeline Company Texas *Energy Transfer Corporation is a wholly owned subsidiary of Cornerstone Pipeline Company EX-23.1 10 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File No. 033-62205. ARTHUR ANDERSEN LLP Dallas, Texas February 14, 1996 EX-23.2 11 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-62205) pertaining to the Cornerstone Natural Gas, Inc. 1993 Long Term Incentive Plan, of our report dated March 7, 1994, with respect to the consolidated statements of operations, cash flows and changes in stockholders' equity of Cornerstone Natural Gas, Inc. for the year ended December 31, 1993, included in its Annual Report (Form 10-K) for the year ended December 31, 1995. ERNST & YOUNG LLP Dallas, Texas February 21, 1996 EX-27.1 12 EXHIBIT 27.1 - FDS
5 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 908,000 0 21,790,000 0 336,000 23,317,000 64,642,000 (33,799,000) 59,684,000 25,660,000 0 0 0 1,252,000 11,716,000 59,684,000 131,909,000 132,013,000 123,128,000 128,574,000 29,000 0 2,311,000 1,099,000 0 1,099,000 0 0 0 1,099,000 .08 .08
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