UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ___________.
COMMISSION FILE NUMBER: 0-32453
INERGY, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1918951
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1101 WALNUT, SUITE 1500 64106
KANSAS CITY, MISSOURI (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(816) 842-8181
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
______________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days.
Yes [X] No [ ]
The following units were outstanding at February 12, 2002:
Common Units 2,617,872
Senior Subordinated Units 3,313,367
Junior Subordinated Units 572,542
INERGY, L.P.
INDEX TO FORM 10-Q
Page
----
PART I - FINANCIAL INFORMATION
Item 1 -- Financial Statements of Inergy, L.P.:
Consolidated Balance Sheets as of September 30, 2001 and December 31, 2001
(unaudited) 3
Unaudited Consolidated Statements of Income for the Three Months Ended
December 31, 2000 and 2001 5
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended
December 31, 2000 and 2001 6
Notes to Unaudited Consolidated Financial Statements 8
Item 2 -- Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk 15
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings 17
Item 2 -- Changes in securities and use of proceeds 17
Item 3 -- Defaults Upon Senior Securities 17
Item 4 -- Submission of Matters to a Vote of Security Holders 17
Item 5 -- Other information 17
Item 6 -- Exhibits and Reports on Form 8-K 17
Signatures 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INERGY, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
2001 2001
------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash $ 2,171 $ 3,864
Accounts receivable, less allowance for doubtful
accounts of $186 and $1,422 at September 30, and
December 31, 2001, respectively 11,457 24,297
Inventories 12,694 18,439
Prepaid expenses and other current assets 1,411 3,497
Assets from price risk management activities 9,187 11,699
-------- --------
Total current assets 36,920 61,796
Property, plant and equipment, at cost:
Land and buildings 4,511 11,125
Office furniture and equipment 1,172 5,736
Vehicles 11,435 17,299
Tanks and plant equipment 58,737 99,292
-------- --------
75,855 133,452
Less accumulated depreciation (5,812) (7,072)
-------- --------
Net property, plant and equipment 70,043 126,380
Intangible assets:
Covenants not to compete 3,771 6,119
Deferred financing costs 2,985 4,942
Deferred acquisition costs 115 -
Customer accounts 14,000 41,411
Goodwill 32,121 47,025
-------- --------
52,992 99,497
Less accumulated amortization (4,431) (5,126)
-------- --------
Net intangible assets 48,561 94,371
Other 129 357
-------- --------
Total assets $155,653 $282,904
======== ========
3
INERGY, L.P. AND SUBSIDIARY
(Successor to Inergy Partners, LLC and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
2001 2001
-------------- -------------
(Unaudited)
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 8,416 $ 13,815
Accrued expenses 5,679 9,384
Customer deposits 10,060 12,773
Liabilities from price risk management activities 4,612 2,075
Current portion of long-term debt (Note 2) 10,469 10,718
-------- --------
Total current liabilities 39,236 48,765
Long-term debt, less current portion (Note 2) 43,663 138,850
Partners' capital (Note 4):
Common unitholders (1,840,000 and 2,617,872 units
issued and outstanding as of September 30 and
December 31, 2001, respectively) 24,981 45,906
Senior subordinated unitholders (3,313,367 and units
issued and outstanding as of September 30 and
December 31, 2001, respectively) 45,060 46,223
Junior subordinated unitholders (572,542 and units
issued and outstanding as of September 30 and
December 31, 2001, respectively) 1,258 1,459
Non-managing general partner (2% interest with 116,855
and 132,730 equivalent units outstanding as of
September 30 and December 31, 2001, respectively) 1,455 1,701
-------- --------
Total partners' capital 72,754 95,289
-------- --------
Total liabilities and partners' capital $155,653 $282,904
======== ========
See accompanying notes.
4
INERGY, L.P. AND SUBSIDIARY
(Successor to Inergy Partners, LLC and Subsidiaries)
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Unit Data)
THREE MONTHS ENDED
DECEMBER 31
2000 2001
----------------------------
(Unaudited)
Revenue:
Propane $70,626 $58,989
Other 1,785 3,046
----------------------------
72,411 62,035
Cost of product sold 63,608 46,200
----------------------------
Gross profit 8,803 15,835
Operating and administrative expenses 3,958 8,292
Depreciation and amortization 769 1,774
Operating income 4,076 5,769
Other income (expense):
Interest expense (929) (1,238)
Loss on sale of property, plant and equipment - (90)
Other 62 56
----------------------------
Income before income taxes 3,209 4,497
Provision for income taxes - (32)
----------------------------
Net income $ 3,209 $ 4,465
============================
Partners' interest information for the three months ended December 31, 2001:
Non-managing general partners' interest in net income $ 89
=======
Limited partners' interest in net income:
Common unit interest $ 1,458
Senior subordinated interest 2,488
Junior subordinated unit interest 430
------
Total limited partners' interest in net income $4,376
======
Net income per limited partner unit:
Basic $ 0.75
======
Diluted $ 0.74
======
Weighted average limited partners' units outstanding:
Basic 5,827
======
Diluted 5,898
======
See accompanying notes.
5
INERGY, L.P. AND SUBSIDIARY
(Successor to Inergy Partners, LLC and Subsidiaries)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
THREE MONTHS ENDED
DECEMBER 31
2000 2001
----------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 3,209 $ 4,465
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for doubtful accounts 27 368
Depreciation 454 1,282
Amortization 288 492
Amortization of deferred financing costs 27 203
Gain on disposal of property, plant and equipment - 90
Net assets (liabilities) from price risk
management activities 1,888 (5,049)
Deferred compensation 19 -
Changes in operating assets and liabilities, net
of effects from acquisition of retail propane
companies:
Accounts receivable (18,938) (6,406)
Inventories (3,386) (1,913)
Prepaid expenses and other current assets (400) (1,558)
Other assets (10) 23
Accounts payable 17,130 3,364
Accrued expenses (1,160) 802
Customer deposits (472) 1,836
---------------------------
Net cash used in operating activities (1,324) (2,001)
INVESTING ACTIVITIES
Acquisition of retail propane companies, net of
cash acquired (520) (83,468)
Purchases of property, plant and equipment (1,116) (1,128)
Deferred financing and acquisition costs incurred - (1,957)
Proceeds from sale of property, plant and equipment - 60
---------------------------
Net cash used in investing activities (1,636) (86,493)
6
INERGY, L.P. AND SUBSIDIARY
(Successor to Inergy Partners, LLC and Subsidiaries)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
THREE MONTHS ENDED
DECEMBER 31
2000 2001
--------------------------
(Unaudited)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 13,175 191,383
Principal payments on long-term debt and
noncompete obligations (9,435) (99,543)
Contribution from non-managing general partner - 204
Proceeds from issuance of common units - 480
Redemption of preferred interests (3) -
Distributions to members/unitholders (356) (2,337)
--------------------------
Net cash provided by financing activities 3,381 90,187
--------------------------
Net increase in cash 421 1,693
Cash at beginning of period 1,373 2,171
--------------------------
Cash at end of period $ 1,794 $ 3,864
==========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 886 $ 1,281
==========================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisitions of retail propane companies through
the issuance of common units $ - $ 19,723
==========================
See accompanying notes.
7
INERGY, L.P. AND SUBSIDIARY
(Successor to Inergy Partners, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
(Unaudited)
NOTE 1 - ACCOUNTING POLICIES
Organization
The consolidated financial statements of Inergy, L.P. (the "Partnership")
include the accounts of the Partnership and its subsidiaries Inergy Propane, LLC
(the "Operating Company") and Inergy Sales & Service, Inc. ("ISSI") which,
collectively with the Partnership and Operating Company, are referred to as the
"Partnership Entities" or "Inergy" as a result of the Partnership's initial
public offering in July 2001. The Partnership has limited partner interests
consisting of 2,617,872 common units (including 777,872 common units issued in
December 2001 in connection with the acquisition of Independent Propane Company
discussed in Note 4) (the "Common Units"), 3,313,367 senior subordinated units
(the "Senior Subordinated Units"), and 572,542 junior subordinated units (the
"Junior Subordinated Units") outstanding. Inergy Partners, LLC (the "Non-
Managing General Partner"), an affiliate of Inergy Holdings, LLC, owns the non-
managing general partner interest representing a 2% unsubordinated general
partner's interest in the Partnership Entities (132,730 equivalent units
outstanding). Inergy GP, LLC, (the "Managing General Partner"), a wholly-owned
subsidiary of Inergy Holdings, LLC, owns the incentive distribution rights of
the Partnership and has sole responsibility for conducting our business and
managing our operations.
Basis of Presentation
The financial information as of December 31, 2001 and for the three-month
periods ended December 31, 2001 and 2000 contained herein is unaudited. The
Company believes this information has been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and Article 10 of Regulation S-X. The Company also
believes this information includes all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows for the periods then ended. The results of
operations for the three-month period ended December 2001 are not necessarily
indicative of the results of operations that may be expected for the entire
year.
The accompanying consolidated financial statements presented herein reflect
the effects of the partnership conveyance as a result of the Partnership's
initial public offering in July 2001and, as such, the consolidated financial
statements represent Inergy Partners, LLC prior to the partnership conveyance
and the Partnership Entities subsequent thereto.
Accounting for Price Risk Management
Inergy, through its wholesale operations, offers price risk management
services to its customers and, in addition, trades for its own account.
Financial instruments utilized in connection with trading activities are
accounted for using the mark-to-market method. Under the mark-to-market method
of accounting, forwards, swaps, options and storage contracts are reflected at
fair value, inclusive of reserves, and are shown in the consolidated balance
sheet as assets and liabilities from price risk management activities. In
addition, inventories for wholesale operations, which consist mainly of liquid
propane commodities, are also stated at market. Unrealized gains and losses from
newly originated contracts, contract restructuring and the impact of price
movements on these financial instruments and wholesale propane inventories are
recognized in cost of products sold. Changes in the assets and liabilities from
trading and price risk management activities result primarily from changes in
the market prices, newly originated transactions and the timing of settlement
relative to the receipt of cash for certain contracts. The market prices used to
value these transactions reflect management's best estimate considering various
factors including closing exchange and over-the-counter quotations, time value
and volatility factors underlying the commitments. The values are adjusted to
reflect the potential impact of liquidating Inergy's position in an orderly
manner over a reasonable period of time under present market conditions.
The cash flow impact of financial instruments is reflected as cash flows from
operating activities in the consolidated statements of cash flows.
8
Revenue Recognition
Sales of propane are recognized at the time product is shipped or delivered to
the customer. Revenue from the sale of propane appliances and equipment is
recognized at the time of sale or installation. Revenue from repairs and
maintenance is recognized upon completion of the service.
Adoption of Financial Accounting Standards Board Statement No. 142
In July, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 142, "Goodwill and Other Intangible Assets." Statement 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 also requires
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Inergy adopted the provisions of Statement 142 in the first quarter ended
December 31, 2001. Goodwill amortization expense was $0 and $144 for the three
months ended December 31, 2001 and 2000, respectively.
NOTE 2 - LONG-TERM DEBT
Long-term debt consisted of the following:
September 30, December 31,
2001 2001
--------------- ---------------
(Unaudited)
Credit agreement $53,000 $144,911
Obligations under non-competition
agreements and notes to former owners
of businesses acquired 1,101 4,628
Other 31 29
------- --------
54,132 149,568
Less current portion 10,469 10,718
------- --------
$43,663 $138,850
======= ========
Inergy's current credit agreement is a result of an amendment executed in
December 2001 in connection with the IPC Acquisition (December 2001 amendment),
as discussed in Note 4. This December 2001 amendment resulted in a $195 million
facility comprised of a $50 million revolving working capital facility, a $75
million revolving acquisition facility and a 1-year, $70 million term note. The
December 2001 amendment has a term of three years, expiring December 2004, and
has similar interest terms to the July 2001 amendment with prime rate and LIBOR
plus the applicable spreads resulting in interest rates between 4.06% and 4.75%
at December 31, 2001.
The credit agreement contains several covenants which, among other things,
require the maintenance of various financial performance ratios, restrict the
payment of dividends to unitholders, and require financial reports to be
submitted periodically to the financial institutions.
NOTE 3 - SEGMENTS
The Company's financial statements reflect two reportable segments: retail
sales operations and wholesale sales operations. Revenues, gross profit and
identifiable assets for each of the Company's reportable segments are presented
below. Identifiable assets associated with each reportable segment include
accounts receivable and inventories. The net asset/liability from price risk
management, as reported in the accompanying consolidated balance sheet, is
related to the wholesale trading activities.
Three Months Ended Three Months Ended
December 31, 2001 December 31, 2000
-----------------------------------------------------------------------------------------------------------------
Wholesale Wholesale
Retail Sales Sales Intersegment Retail Sales Sales Intersegment
Operations Operations Eliminations Total Operations Operations Eliminations Total
----------- ---------- ------------ ------- ---------- ---------- ------------ -------
Revenues $23,324 $45,514 ($6,803) $62,035 $14,457 $64,352 ($14,457) $72,411
Gross profit 13,759 2,339 (263) 15,835 7,514 2,237 (948) 8,803
Identifiable
assets 20,059 22,677 - 42,736 9,444 29,085 - 38,529
9
NOTE 4 - ACQUISITIONS AND RELATED FINANCING
Effective November 1, 2001, Inergy acquired substantially all of the assets
and assumed certain liabilities of Pro Gas Sales & Service, Spe-D Gas Company,
Great Lakes Propane Company and Ottawa LP Gas Company, four companies under
common control (collectively Pro Gas). Pro Gas is a retail propane distributor
located in central Michigan. Inergy purchased Pro Gas with cash funded through
its credit facility.
On December 20, 2001, Inergy, L.P., through an affiliate as further described
below, acquired the assets of Independent Propane Company Holdings, Inc ("IPC").
The purchase price approximated $96.7 million, including approximately $7.5
million of net working capital.
In connection with the IPC acquisition, Inergy, L.P. and several of its
affiliates entered into various transactions. IPCH Acquisition Corp., an
affiliate of Inergy L.P.'s managing general partner that ultimately became the
sole stockholder of IPC, borrowed approximately $27 million from financial
institution lenders. A portion of these loan proceeds were applied to acquire
365,019 common units from Inergy, L.P. The aggregate purchase price paid for
these common units was approximately $9.6 million. IPCH Acquisition Corp
utilized these common units to provide a portion of the merger consideration
distributed to certain former stockholders of IPC's parent corporation. The
balance of the loan proceeds, amounting to $17.4 million, were paid as
additional purchase price.
Immediately following the IPC acquisition, IPCH Acquisition Corp. sold,
assigned and transferred to our operating company the operating assets of IPC
and certain rights under the IPC acquisition agreement and related escrow
agreement. In consideration for the above sale, assignment and transfer, Inergy,
L.P. issued to IPCH Acquisition Corp. 394,601 common units, paid $83.9 million
in cash (including acquisition costs and $9.6 million of cash received from the
sale of 365,019 common units to IPCH Acquisition Corp.), and our operating
company assumed $2.5 million of notes payable. IPCH Acquisition Corp. used the
cash received from Inergy, LP. to repay the $27.0 million loan described above
and repaid approximately $52.9 million of long-term debt assumed in the
acquisition of IPC. Inergy, L.P. agreed that if it proposes to register any of
its common units under applicable securities laws, IPCH Acquisition Corp. will
have the right to include in such registration the 394,601 common units acquired
by it, subject to various conditions and limitations specified in a Registration
Rights Agreement entered into by IPCH Acquisition Corp. and Inergy, L.P. The
common units were issued in reliance upon the exemption from registration
afforded by Rule 506 of Regulation D. In addition, Inergy, L.P. issued 18,252
common units to certain members of IPC management, who remain as employees of
Inergy, L.P.,for approximately $0.5 million in cash at the time of the
acquisition.
Our operating company agreed that IPCH Acquisition Corp. may obtain loans from
financial institution lenders during the five year period following the date of
the Independent Propane acquisition for certain specified purposes, including
payment of tax liabilities arising from the sale of IPC to Inergy, L.P. If IPCH
Acquisition Corp. obtains any such loans, our operating company agreed to
reimburse IPCH Acquisition Corp. for all out-of-pocket costs and expenses
incurred to obtain $5.0 million of such borrowings, excluding interest.
IPCH Acquisition Corp. has the right to appoint two directors to the board of
directors of our managing general partner for a period of three years
immediately following the date of the IPC acquisition.
IPCH Acquisition Corp. agreed to guarantee the payment when due of the
obligations of our operating company with respect to the loan of up to $35.0
million.
An independent committee of the Board of Directors reviewed the transactions
described above on behalf of the unitholders who are not affiliated with our
managing general partner.
Inergy Partners, LLC contributed $203,857 in cash to Inergy, L.P. in
conjunction with the IPC acquisition in order to maintain its 2% non-managing
general partner interest.
Inergy, L.P. agreed that on or before August 1, 2002, it would use its best
efforts to file a shelf registration statement under federal securities laws and
to register approximately 349,914 common units issued to former IPC
shareholders, including J.P. Morgan Partners (SBIC) LLC, subject to various
conditions and limitations specified in a Registration Rights Agreement entered
into by Inergy, L.P. and the former IPC shareholders. In addition, Inergy, L.P.
also agreed that if it proposes to register any of its common
10
units under applicable securities laws, these former IPC shareholders will have
the right to include their common units in such registration, subject to various
conditions and limitations specified in the Registration Rights Agreement.
The following unaudited pro forma data summarize the results of operations for
the periods indicated as if these acquisitions had been completed October 1,
2000 and 2001, the beginning of the 2001 and 2002 fiscal years. The pro forma
data give effect to actual operating results prior to the acquisitions and
adjustments to interest expense, goodwill (amortization prior to the October 1,
2001 adoption of SFAS No. 142) and customer accounts amortization, among other
things. These pro forma amounts do not purport to be indicative of the results
that would have actually been obtained if the acquisitions had occurred on
October 1, 2000 and 2001 or that will be obtained in the future.
Three month period ended
December 31,
------------------------------
2000 2001
------------------------------
Sales $103,876 $73,597
Net income $ 9,069 $ 5,876
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
This "Management's Discussion and Analysis of Financial Condition and Results
of Operations" of Inergy, L.P. should be read in conjunction with the
accompanying condensed consolidated financial statements and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report on Form 10-K for the fiscal year ended
September 30, 2001 of Inergy, L.P. (or its predecessor, Inergy Partners, LLC for
the three month period ended December 31, 2000).
The statements in this Quarterly Report on Form 10-Q that are not historical
facts, including most importantly, those statements preceded by, or that include
the words "may", "believes", "expects", "anticipates" or the negation thereof,
or similar expressions, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such forward-
looking statements involve risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the Company and its
subsidiaries to be materially different from any future results, performance or
achievements express or implied by such forward-looking statements. Such factors
include, but are not limited to, the following: weather in the Company's area of
operations; market price of propane; availability of financing changes in, or
failure to comply with, government regulations; the costs, uncertainties and
other effects of legal and administrative proceedings and other risks and
uncertainties detailed in the Company's Securities and Exchange Commission
filings. For those statements, The Company claims the protection of the safe
harbor for forward-looking statements contained in the Reform Act. The Company
will not undertake and specifically declines any obligation to publicly release
the result of any revisions to any forward-looking statements to reflect events
or circumstances after the date of such statements or to reflect events or
circumstances after anticipated or unanticipated events. In addition, it is the
Company's policy generally not to make any specific projections as to future
earnings, and the Company does not endorse any projections regarding future
performance that may be made by third parties.
THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2000
Volume. During the three months ended December 31, 2001, Inergy, L.P. sold
17.9 million retail gallons of propane, an increase of 6.2 million gallons, or
53%, from the 11.7 million retail gallons sold during the same three month
period in 2000. The increase in retail sales volume was principally due to the
January 2001 acquisition of Hoosier Propane Group, the November 2001 acquisition
of the Pro Gas Companies and the December 2001 acquisition of Independent
Propane Company. The increases associated with these acquisitions were partially
offset by weather that was approximately 29% warmer in the three months ended
December 31, 2001 as compared to the same period in 2000 in the Partnership's
areas of operations.
Wholesale gallon sales increased 10.0 million gallons, or 12%, to 94.5 million
gallons in the three months ended December 31, 2001 from 84.5 million gallons in
the same three month period in 2000. This increase was attributable to the
acquisition of the Hoosier Propane Group with the balance of the increase
attributable to the growth of our existing wholesale operations. Partially
offsetting these increases were decreases as a result of the warmer weather in
2001 as described above.
Revenues. Revenues in the three months ended December 31, 2001 were $62.0
million, a decrease of $10.4 million, or 14%, from $72.4 million of revenues in
the same three month period in 2000.
Revenues from retail propane sales were $18.8 million in the three months
ended December 31, 2001, an increase of $6.1 million, or 48%, from $12.7 million
for the same three month period in 2000. This increase was attributable to the
acquisitions discussed above partially offset by (i) lower selling prices due to
the lower cost of propane and (ii) volume decreases as a result of warmer
weather in 2001 than in 2000. Other retail revenues increased approximately $1.2
million, or 71%, from $1.8 million in the three month period ended December 31,
2000 to $3.0 million in the same three month period in 2001. These revenues
consist of transportation revenues, tank rentals, heating oil sales, appliance
sales and service with the increase a result of the acquisitions.
Revenues from wholesale sales were $40.0 million (after elimination of sales
to our retail operations) in the three months ended December 31, 2001, a
decrease of $18.0 million, or 31%, from $58.0 million for the same three month
period in 2000. This decrease was attributable to decreased selling prices as a
result of the lower cost of propane, partially offset by the effect of the
acquisition of the Hoosier Propane Group and the growth of our wholesale
operations.
Cost of Product Sold. Cost of product sold in the three months ended December
31, 2001 was $46.2 million, a decrease of $17.4 million, or 27%, from cost of
product sold of $63.6 million in the same three month period in 2000. This
decrease was attributable to an approximate 38% decrease in the average cost of
propane partially offset by increases in retail and wholesale propane volumes.
Gross Profit. Retail gross profit was $13.8 million in the three months ended
December 31, 2001 compared to $7.5 million in the three months ended December
31, 2000, an increase of $6.3 million, or 83%. Wholesale gross profit was $2.1
million (after
12
elimination of gross profit attributable to our retail operations) in the three
months ended December 31, 2001 compared to $1.3 million in the same three month
period in 2000, an increase of $0.8 million. These increases were attributable
to higher retail and wholesale volumes, an increase in margin per gallon and
gross profits from the transportation business acquired in the Hoosier Propane
Group acquisition. The increase in margin per gallon was attributable to our
ability to maintain higher retail prices during periods of decreasing propane
costs.
Operating and Administrative Expenses. Operating and administrative expenses
increased $4.3 million, or 109%, to $8.3 million in the three month period ended
December 31, 2001 as compared to $4.0 million in the same period in 2000. This
increase resulted from the acquisitions discussed above and, to a lesser
extent,increased insurance costs as a result of higher premiums and self insured
retention amounts, and personnel costs associated with (i) the growth of the
company and (ii) the completion of the initial public offering of Inergy, L.P.
in July, 2001.
Depreciation and Amortization. Depreciation and amortization increased $1.0
million, or 131%, to $1.8 million in the three months ended December 31, 2001
from $0.8 million in the same three month period in 2000 primarily as a result
of the acquisitions since January 1, 2001, which included property, plant and
equipment and amortizable intangible assets of approximately $170 million.
Net Income. Net income increased $1.3 million, or 39%, to $4.5 million in the
three months ended December 31, 2001 from $3.2 million in the same three month
period in 2000. This increase in net income was attributable to the increase in
gross profit offset by increases in operating and administrative expenses,
depreciation and amortization and an increase in interest expense as a result of
higher average outstanding borrowings associated with the acquisitions.
EBITDA. In the three months ended December 31, 2001, income before interest,
taxes, depreciation and amortization was $7.5 million compared to $4.9 million
in the same period of fiscal 2000. The increase was attributable to increased
sales volumes and margins per gallon partially offset by an increase in
operating and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $2.0 million in the three months ended
December 31, 2001 compared to cash used in operating activities of $1.3 million
in the same fiscal 2000 period. The increase in cash used in operating
activities is primarily attributable to a greater use of cash in price risk
management activities and an increase in operating assets and liabilities offset
by higher depreciation and amortization charges and net income in 2001 as
compared to 2000. Net income increased to $4.5 million for the three months
ended December 31, 2001 from $3.2 million for the same fiscal 2000 period due to
the effects of the acquisitions completed in fiscal 2001 and the effects of
higher margins per gallon in existing operations, partially offset by the warmer
weather in the 2001 period. Depreciation and amortization increased to $1.8
million in the three months ended December 31, 2001 from $0.8 million in the
same fiscal 2000 period due to the effects of acquisitions. The change in
operating assets and liabilities, including net liabilities from price risk
management activities, required a use of cash amounting to $8.9 million in the
three months ended December 31, 2001 and $5.3 million in the same fiscal 2000
period to accommodate increased business volume.
Cash used in investing activities was $86.5 million in the three months ended
December 31, 2001 compared to $1.6 million in the same fiscal 2000 period. The
2001 period included $83.5 million of cash used for acquisitions and $1.1
million used for maintenance and growth capital expenditures. In addition, the
2001 period included a use of $2.0 million for payment of deferred financing
costs associated with the credit facilities used to finance the acquisitions.
Cash provided by financing activities of $90.2 million in the three months
ended December 31, 2001 and $3.4 million in the same period in fiscal 2000. The
2000 period included proceeds from and repayments of long term debt associated
with working capital needs, and distributions to members in the period of
approximately $0.4 million. The 2001 period included proceeds from and
repayments of long term debt associated with working capital needs and
borrowings and repayments related to amended credit facilities negotiated in
connection with acquisitions in that period. In addition, Inergy, L.P. received
cash of approximately $0.7 million in capital contributions and paid $2.3
million in distributions to unitholders in the 2001 period.
At December 31, 2001, we had goodwill of $47.0 million, representing
approximately 17% of total assets. This goodwill is attributable to our
acquisitions. We expect recovery of the goodwill through future cash flows
associated with these acquisitions.
DESCRIPTION OF CREDIT FACILITY
On December 20, 2001, in conjunction with the acquisition of Independent
Propane Company., Inergy Propane, LLC entered into a $195 million amended and
restated senior secured credit facility with its lenders. The credit facility
has a term of three years and is
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guaranteed by Inergy, L.P. and each subsidiary of Inergy Propane, LLC. At
February 12, 2002, the balance outstanding under the credit facility was $145.4
million, including $13.4 million under the working capital facility.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement retains the
fundamental provisions of Statement No. 121 for recognition and measurement of
the impairment of long-lived assets to be held and used, and measurement of
long-lived assets to be disposed of by sale. This statement is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and interim periods within those fiscal years, with early application
encouraged. Management has not determined the method, timing, or impact of
adopting Statement No. 144.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We have long-term debt and a revolving line of credit subject to the risk of
loss associated with movements in interest rates. At December 31, 2001, we had
floating rate obligations totaling approximately $144.9 million for amounts
borrowed under our revolving line of credit and long-term debt. These floating
rate obligations expose us to the risk of increased interest expense in the
event of increases in short-term interest rates. If the floating rate were to
increase by 100 basis points from December 2001 levels, our combined interest
expense would increase by a total of approximately $0.1 million per month.
PROPANE PRICE RISK
The propane industry is a "margin-based" business in which gross profits
depend on the excess of sales prices over supply costs. As a result, our
profitability will be sensitive to changes in wholesale prices of propane caused
by changes in supply or other market conditions. When there are sudden and sharp
increases in the wholesale cost of propane, we may not be able to pass on these
increases to our customers through retail or wholesale prices. Propane is a
commodity and the price we pay for it can fluctuate significantly in response to
supply or other market conditions. We have no control over supply or market
conditions. In addition, the timing of cost pass-throughs can significantly
affect margins. Sudden and extended wholesale price increases could reduce our
gross profits and could, if continued over an extended period of time, reduce
demand by encouraging our retail customers to conserve or convert to alternative
energy sources.
We engage in hedging transactions to reduce the effect of price volatility on
our product costs and to help ensure the availability of propane during periods
of short supply. We attempt to balance our contractual portfolio by purchasing
volumes only when we have a matching purchase commitment from our wholesale
customers. However, we may experience net unbalanced positions from time to
time, which we believe to be immaterial in amount. In addition to our ongoing
policy to maintain a balanced position, for accounting purposes we are required,
on an ongoing basis, to track and report the market value of our purchase
obligations and our sales commitments.
TRADING ACTIVITIES
Through our wholesale operations, we offer price risk management services to
energy related businesses through a variety of financial and other instruments,
including forward contracts involving physical delivery of propane. In addition,
we manage our own trading portfolio using forward, physical and futures
contracts. We attempt to balance our contractual portfolio in terms of notional
amounts and timing of performance and delivery obligations. However, net
unbalanced positions can exist or are established based on assessment of
anticipated short-term needs or market conditions. The price risk management
services are offered to propane retailers and other related businesses through a
variety of financial and other instruments including forward contracts involving
physical delivery of propane, swap agreements, which require payments to (or
receipt of payments from) counterparties based on the differential between a
fixed and variable price for propane, options and other contractual
arrangements. We have recorded our trading activities at fair value in
accordance with Emerging Issues Task Force Issue EITF No. 98-10, "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities." EITF No.
98-10 requires energy trading contracts to be recorded at fair value on the
balance sheet, with the changes in fair value included in earnings.
NOTIONAL AMOUNTS AND TERMS
The notional amounts and terms of these financial instruments at December 31,
2001 and September 30, 2001 include fixed price payor for 1.3 million and 2.5
million barrels, respectively and fixed price receiver for 2.5 million and 2.9
million barrels, respectively. Notional amounts reflect the volume of the
transactions, but do not represent the amounts exchanged by the parties to the
financial instruments. Accordingly, notional amounts do not accurately measure
our exposure to market or credit risks.
FAIR VALUE
The fair value of the financial instruments related to price risk management
activities as of December 31, 2001 and September 30, 2001 was assets of $11,699
and $9,187, respectively and liabilities of $2,075 and $4,612, respectively,
related to ,propane. All intercompany transactions have been appropriately
eliminated.
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MARKET AND CREDIT RISK
Inherent in the resulting contractual portfolio are certain business risks,
including market risk and credit risk. Market risk is the risk that the value of
the portfolio will change, either favorably or unfavorably, in response to
changing market conditions. Credit risk is the risk of loss from nonperformance
by suppliers, customers or financial counterparties to a contract. We take an
active role in managing and controlling market and credit risk and have
established control procedures, which are reviewed on an ongoing basis. We
monitor market risk through a variety of techniques, including daily reporting
of the portfolio's value to senior management. We attempt to minimize credit
risk exposure through credit policies and periodic monitoring procedures. The
counterparties associated with assets from price risk management activities, as
of December 31, 2001 and September 30, 2001 were energy marketers.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As part of the purchase price of Independent Propane Company Holdings,
Inc., ("IPC") we issued 759,620 common units with a value of
approximately $19.7 million. In addition, Inergy Partners, LLC
contributed approximately $0.2 million in cash to Inergy, L.P. in order
to maintain its 2% non-managing general partner interest at the time of
this transaction. Also in conjunction with the acquisition of IPC, we
issued 18,252 common units to certain members of IPC Management, who
remain as employees of Inergy, L.P., for approximately $0.5 million in
cash at the time of the acquisition.
ITEM3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) The registrant filed a Report on Form 8-K on November 16, 2001
which included information under Items 5 and 7 of such form
regarding the acquisition of the Pro Gas Companies of Michigan.
The registrant filed a Report on Form 8-K on January 4, 2002 which
included information under Items 2 and 7 of such form regarding the
acquisition of Independent Propane Company Holdings, Inc.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INERGY, L.P.
Date: February 14, 2002 By: /s/ R. Brooks Sherman Jr.
-------------------------
R. Brooks Sherman Jr.
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
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