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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 March 31, 2002
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
Kansas City, Missouri 64106
(Address of principal executive offices)
(816) 842-8181
(Registrant's telephone number, including area code)
----------------------
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 May 1, 2002:
Common Units 2,617,872
Senior Subordinated Units 3,313,367
Junior Subordinated Units 572,542
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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 March 31, 2002 (unaudited) 3
Unaudited Consolidated Statements of Income for the Three and Six Months Ended
March 31, 2001 and 2002 5
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31,
2001 and 2002 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 17
Part II -- Other Information
Item 1 - Legal Proceedings 19
Item 2 - Changes in Securities and Use of Proceeds 19
Item 3 - Defaults Upon Senior Securities 19
Item 4 - Submission of Matters to a Vote of Security Holders 19
Item 5 - Other information 19
Item 6 -- Exhibits and Reports on Form 8-K 19
Signatures 20
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, March 31,
2001 2002
------------- -----------
(Unaudited)
Assets
Current assets:
Cash $ 2,171 $ 2,475
Accounts receivable, less allowance for doubtful
accounts of $186 and $1,537 at September 30, 2001 and
March 31, 2002, respectively 11,457 24,111
Inventories 12,694 16,591
Prepaid expenses and other current assets 1,411 1,975
Assets from price risk management activities 9,187 8,897
------------- -----------
Total current assets 36,920 54,049
Property, plant and equipment, at cost:
Land and buildings 4,511 11,205
Office furniture and equipment 1,172 5,857
Vehicles 11,435 17,644
Tanks and plant equipment 58,737 100,147
------------- -----------
75,855 134,853
Less accumulated depreciation (5,812) (9,378)
------------- -----------
Net property, plant and equipment 70,043 125,475
Intangible assets:
Covenants not to compete 3,771 6,124
Deferred financing costs 2,985 4,977
Deferred acquisition costs 115 -
Customer accounts 14,000 41,411
Goodwill 32,121 47,053
------------- -----------
52,992 99,565
Less accumulated amortization (4,431) (6,489)
------------- -----------
Net intangible assets 48,561 93,076
Other 129 473
------------- -----------
Total assets $ 155,653 $ 273,073
============= ===========
3
INERGY, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, March 31,
2001 2002
------------- -----------
(Unaudited)
Liabilities and Partners' Capital
Current liabilities:
Accounts payable $ 8,416 $ 9,041
Accrued expenses 5,679 6,743
Customer deposits 10,060 5,314
Liabilities from price risk management activities 4,612 4,618
Current portion of long-term debt (Note 2) 10,469 3,722
------------- -----------
Total current liabilities 39,236 29,438
Long-term debt, less current portion (Note 2) 43,663 138,442
Partners' capital (Note 4):
Common unitholders (1,840,000 and 2,617,872 units 24,981 49,514
issued and outstanding as of September 30, 2001 and
March 31, 2002)
Senior subordinated unitholders (3,313,367 units 45,060 51,421
issued and outstanding as of September 30, 2001 and
March 31, 2002)
Junior subordinated unitholders (572,542 units issued 1,258 2,358
and outstanding as of September 30, 2001 and March
31, 2002)
Non-managing general partner (2% interest with 116,855 1,455 1,900
and 132,730 equivalent units outstanding as of
September 30, 2001 and March 31, 2002)
------------- -----------
Total partners' capital 72,754 105,193
------------- -----------
Total liabilities and partners' capital $ 155,653 $ 273,073
============= ===========
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 Six Months Ended
March 31, March 31,
-----------------------------------------
2001 2002 2001 2002
-----------------------------------------
(Unaudited) (Unaudited)
Revenue:
Propane $94,583 $ 97,453 $165,209 $156,442
Other 3,445 4,572 5,230 7,618
-----------------------------------------
98,028 102,025 170,439 164,060
Cost of product sold 77,817 67,587 141,425 113,787
-----------------------------------------
Gross profit 20,211 34,438 29,014 50,273
Operating and administrative expenses 7,506 15,034 11,464 23,326
Depreciation and amortization 1,979 3,371 2,748 5,145
-----------------------------------------
Operating income 10,726 16,033 14,802 21,802
Other income (expense):
Interest expense (1,931) (1,998) (2,860) (3,236)
Loss on sale of property, plant and equipment - (29) - (119)
Other 183 65 245 121
-----------------------------------------
Income before income taxes 8,978 14,071 12,187 18,568
Provision for income taxes - 20 - 52
-----------------------------------------
Net income $ 8,978 $ 14,051 $ 12,187 $ 18,516
=========================================
Partners' interest information:
Non-managing general partners' interest in net income $ 281 $ 370
========= =========
Limited partners' interest in net income:
Common unit interest $ 5,543 $ 6,702
Senior subordinated interest 7,015 9,758
Junior subordinated unit interest 1,212 1,686
--------- ---------
Total limited partners' interest in net income $ 13,770 $ 18,146
========= =========
Net income per limited partner unit:
Basic $ 2.12 $ 2.94
========= =========
Diluted $ 2.08 $ 2.90
========= =========
Weighted average limited partners' units outstanding:
Basic 6,504 6,162
========= =========
Diluted 6,607 6,249
========= =========
See accompanying notes.
5
INERGY, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
March 31,
--------------------------
2001 2002
--------------------------
(Unaudited)
Operating activities
Net income $ 12,187 $ 18,516
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts 812 680
Depreciation 1,368 3,633
Amortization 1,220 1,511
Amortization of deferred financing costs 160 547
Loss on disposal of property, plant and equipment - 119
Net assets (liabilities) from price risk
management activities 946 296
Deferred compensation 39 -
Changes in operating assets and liabilities, net
of effects from acquisition of retail propane
companies:
Accounts receivable (10,869) (6,532)
Inventories 2,922 (65)
Prepaid expenses and other current assets 22 (36)
Other assets (3) (92)
Accounts payable (3,596) (1,410)
Accrued expenses 807 (1,839)
Customer deposits (3,421) (5,623)
--------------------------
Net cash provided by operating activities 2,594 9,705
Investing activities
Acquisition of retail propane companies, net of
cash acquired (56,263) (83,625)
Purchases of property, plant and equipment (1,861) (2,524)
Deferred financing and acquisition costs incurred (1,989) (1,979)
Proceeds from sale of property, plant and equipment - 91
Other (66) -
--------------------------
Net cash used in investing activities (60,179) (88,037)
6
INERGY, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
March 31,
--------------------------------
2001 2002
--------------------------------
(Unaudited)
Financing activities
Proceeds from issuance of long-term debt $ 106,675 $ 220,621
Principal payments on long-term debt and
noncompete obligations (62,205) (136,184)
Contribution from non-managing general partner - 204
Proceeds from issuance of common units - 480
Proceeds from issuance of redeemable preferred 16,015 -
members' interest
Distributions to members/unitholders (745) (6,485)
------------------------------
Net cash provided by financing activities 59,740 78,636
------------------------------
Net increase in cash 2,155 304
Cash at beginning of period 1,373 2,171
------------------------------
Cash at end of period $ 3,528 $ 2,475
==============================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 1,929 $ 3,025
==============================
Supplemental schedule of noncash investing and
financing activities
Acquisitions of retail propane companies through
the issuance of common units $ 7,402 $ 19,723
==============================
Acquisitions of retail propane companies through
the issuance of subordinated debt $ 5,000 $ -
==============================
See accompanying notes.
7
INERGY, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Accounting Policies
Organization
The consolidated financial statements of Inergy, L.P. (the "Partnership")
include the accounts of the Partnership and its subsidiary Inergy Propane, LLC
(the "Operating Company") which, collectively, are referred to as the
"Partnership Entities" or "Inergy" as a result of the Partnership's initial
public offering in July 2001. As of March 31, 2002, 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) (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 at
March 31, 2002). 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 March 31, 2002 and for the three and six-month
periods ended March 31, 2001 and 2002 contained herein is unaudited. The
Partnership 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 Partnership 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 and six-month periods ended March 2001 and 2002 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 on July 31, 2001 and, as such, the consolidated
financial statements represent Inergy Partners, LLC prior to July 31, 2001 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
sheets 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 $0.5 million and $0 for
the three months ended March 31, 2001 and 2002, and $0.6 million and $0 for the
six months ended March 31, 2001 and 2002, respectively.
Note 2 - Long-Term Debt
Long-term debt consisted of the following (in thousands):
September 30, March 31,
2001 2002
--------------- ----------------
(Unaudited)
Credit agreement $ 53,000 $ 138,215
Obligations under non-competition agreements
and notes to former owners of businesses
acquired 1,101 3,929
Other 31 20
---------- -------------
54,132 142,164
Less current portion 10,469 3,722
---------- -------------
$ 43,663 $ 138,422
========== =============
Inergy's credit agreement was amended in December 2001 in connection with the
IPC Acquisition (December 2001 amendment). This December 2001 amendment was
comprised of a $195 million facility including a $50 million revolving working
capital facility, a $75 million revolving acquisition facility and a 1-year, $70
million term note which maturity date has been extended to April 2003. The
December 2001 amendment has similar interest terms to the previous credit
agreement amended in July 2001, and accrues interest at prime rate and LIBOR
plus applicable spreads, resulting in interest rates between 4.21% and 5.00% at
March 31, 2002. At March 31, 2002, the balance outstanding under the credit
facility was $138.2 million, including $6.2 million under the working capital
facility, $136.0 million of which is classified as long-term in the accompanying
2002 consolidated balance sheet.
The credit agreement contains several covenants which, among other things,
require the maintenance of various financial performance ratios, restrict the
payment of distributions to unitholders, and require financial reports to be
submitted periodically to the lenders. The Partnership is in compliance with
all covenants at March 31, 2002.
Note 3 - Segments
The Partnership's financial statements reflect two reportable segments: retail
sales operations and wholesale sales operations. Revenues, gross profit and
identifiable assets for each of the Partnership'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
9
management, as reported in the accompanying consolidated balance sheet, is
related to the wholesale trading activities.
The following segment information is in thousands of dollars:
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
-----------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Wholesale Wholesale
Retail Sales Sales Intersegment Retail Sales Sales Intersegment
Operations Operations Eliminations Total Operations Operations Eliminations Total
---------- ---------- ------------ -------- ------------ ------------ -------------- -------
Revenues $ 53,905 $ 58,891 ($10,771) $102,025 $ 39,031 $ 79,271 ($20,274) $98,028
Gross profit 33,143 1,483 (188) 34,438 16,737 4,565 (1,091) 20,211
Six Months Ended Six Months Ended
March 31, 2002 March 31, 2001
-----------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Wholesale Wholesale
Retail Sales Sales Intersegment Retail Sales Sales Intersegment
Operations Operations Eliminations Total Operations Operations Eliminations Total
---------- ---------- ------------ -------- ------------ ------------ -------------- -------
Revenues $ 77,229 $ 104,405 ($17,574) $164,060 $ 53,488 $ 143,623 ($26,672) $170,439
Gross profit 46,901 3,822 (450) 50,273 24,251 6,802 (2,039) 29,014
Identifiable
assets 19,292 21,410 - 40,702 12,919 14,835 (1,477) 26,277
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 $96.8 million, including approximately $7.5
million paid for 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 through this stock acquisition, 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 partnership 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
10
million in cash (including acquisition costs and the $9.6 million of cash
received from the sale of 365,019 common units to IPCH Acquisition Corp.), and
our operating partnership 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 partnership 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
partnership 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 partnership with respect to the loan of up to $35.0
million.
A special 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 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 the Pro Gas and IPC 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.
The following pro forma is in thousands of dollars:
Six-month period ended
March 31,
------------------------
2001 2002
------------------------
Sales $242,327 $178,823
Net income $ 23,051 $ 20,687
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.
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 include statements concerning our expected recovery of
goodwill attributable to our acquisitions. Such forward-looking statements
involve risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Partnership and its subsidiary 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 Partnership'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 Partnership's Securities and Exchange Commission
filings. For those statements, the Partnership claims the protection of the
safe harbor for forward-looking statements contained in the Reform Act. The
Partnership 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 Partnership's policy generally not to make any specific
projections as to future earnings, and the Partnership does not endorse any
projections regarding future performance that may be made by third parties.
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Volume. During the three months ended March 31, 2002, Inergy, L.P. sold 43.0
million retail gallons of propane, an increase of 20.7 million gallons, or 92%,
from the 22.3 million retail gallons sold during the same three-month period in
2001. The increase in retail sales volume was principally due to 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 9% warmer in the three
months ended March 31, 2002 as compared to the same period in 2001 in the
Partnership's areas of operations.
Wholesale gallon sales increased 59.3 million gallons, or 77%, to 136.6
million gallons in the three months ended March 31, 2002 from 77.3 million
gallons in the same three-month period in 2001. This increase was attributable
to the growth of our existing wholesale operations partially offset by a
decrease due to the warmer weather in 2002 as described above.
Revenues. Revenues in the three months ended March 31, 2002 were $102.0
million, an increase of $4.0 million, or 4%, from $98.0 million of revenues in
the same three-month period in 2001.
Revenues from retail propane sales were $47.6 million in the three months
ended March 31, 2002, an increase of $12.0 million, or 34%, from $35.6 million
for the same three-month period in 2001. 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 at existing retail locations
as a result of warmer weather in 2002 than in 2001. Other retail revenues
increased approximately $1.1 million, or 32%, from $3.5 million in the three-
month period ended March 31, 2001 to $4.6 million in the same three-month period
in 2002. These revenues consist of transportation revenues, tank rentals,
heating oil sales, appliance sales and service with the increase due to
acquisitions.
Revenues from wholesale sales were $49.8 million (after elimination of sales
to our retail operations) in the three months ended March 31, 2002, a decrease
of $9.2 million, or 16%, from $59.0 million for the same three-month period in
2001. This decrease was attributable to decreased selling prices as a result of
the lower cost of propane, partially offset by the effect of the growth of our
wholesale operations.
Cost of Product Sold. Cost of product sold in the three months ended March 31,
2002 was $67.6 million, a decrease of $10.2 million, or 13%, from cost of
product sold of $77.8 million in the same three month period in 2001. This
decrease was attributable to a significant decrease in the average cost of
propane partially offset by increases in retail and wholesale propane volumes as
discussed above.
12
Gross Profit. Retail gross profit was $33.1 million in the three months ended
March 31, 2002 compared to $16.7 million in the three months ended March 31,
2001, an increase of $16.4 million, or 98%. This increase was primarily
attributable to an increase in retail gallons sold due to acquisitions.
Wholesale gross profit was $1.3 million (after elimination of gross profit
attributable to our retail operations) in the three months ended March 31, 2002
compared to $3.5 million in the same three-month period in 2001, a decrease of
$2.2 million. This decrease was primarily attributable to a decrease in margin
per gallon, partially offset by the volume increases discussed above.
Operating and Administrative Expenses. Operating and administrative expenses
increased $7.5 million, or 100%, to $15.0 million in the three-month period
ended March 31, 2002 as compared to $7.5 million in the same period in 2001.
This increase resulted from the acquisitions discussed above and, to a lesser
extent, an increase in insurance costs as a result of higher premiums and self
insured retention amounts, and personnel costs associated with (i) the growth of
the partnership and (ii) the completion of our initial public offering in July
2001.
Depreciation and Amortization. Depreciation and amortization increased $1.4
million, or 70%, to $3.4 million in the three months ended March 31, 2002 from
$2.0 million in the same three-month period in 2001 primarily as a result of the
Pro Gas and IPC acquisitions.
Interest Expense. Interest expense increased $0.1 million, or 3%, to $2.0
million in the three months ended March 31, 2002 from $1.9 million in the same
period in 2001. This increase is the result of additional debt outstanding
during 2002 as compared to 2001, partially offset by lower interest rates in
2002.
Net Income. Net income increased $5.1 million, or 57%, to $14.1 million in the
three months ended March 31, 2002 from $9.0 million in the same three-month
period in 2001. This increase in net income was attributable to the increase in
gross profit partially offset by an increase in operating and administrative
expenses and depreciation and amortization expenses.
EBITDA. In the three months ended March 31, 2002, income before interest,
taxes, depreciation and amortization was $19.4 million compared to $12.9 million
in the same period of fiscal 2001. The increase was attributable to increased
sales volumes and margins per gallon partially offset by an increase in
operating and administrative expenses. We define EBITDA as income before income
taxes, plus interest, depreciation and amortization expense, less interest
income. EBITDA should not be considered an alternative to net income, income
before income taxes, cash flows from operating activities, or any other measure
of financial performance calculated in accordance with generally accepted
accounting principles as those items are used to measure operating performance,
liquidity or ability to service debt obligations. We believe that EBITDA
provides additional information for evaluating our ability to make the minimum
quarterly distribution and is presented solely as a supplemental measure.
Six Months Ended March 31, 2002 Compared to Six Months Ended March 31, 2001
Volume. During the six months ended March 31, 2002, Inergy, L.P. sold 60.9
million retail gallons of propane, an increase of 26.9 million gallons, or 79%,
from the 34.0 million retail gallons sold during the same six-month fiscal
period in 2001. 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 18% warmer in the six months
ended March 31, 2002 as compared to the same period in 2001 in the Partnership's
areas of operations.
Wholesale gallon sales increased 69.3 million gallons, or 43%, to 231.1
million gallons in the six months ended March 31, 2002 from 161.8 million
gallons in the same six-month period in 2001. This increase was attributable to
the January 2001 acquisition of the Hoosier Propane Group, partially offset be a
decrease due to the warmer weather in 2002 as described above.
Revenues. Revenues in the six months ended March 31, 2002 were $164.1 million,
a decrease of $6.3 million, or 4%, from $170.4 million of revenues in the same
six-month period in 2001.
Revenues from retail propane sales were $66.5 million in the six months ended
March 31, 2002, an increase of $18.3 million, or 38%, from $48.2 million for the
same six-month period in 2001. This increase was attributable to acquisition
related volume, partially offset by lower selling prices of propane due to the
lower cost of propane and volume decreases as a result of warmer weather in the
six-month period ended March 31, 2002. Other retail revenues increased
approximately $2.5 million, or 47% due primarily to acquisitions, from $5.2
million in the six-month period ended March 31, 2001 to $7.7 million in the same
period in
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2002. These revenues consist of transportation revenues, tank rentals, heating
oil sales, appliance sales and service with the increase due to acquisitions.
Revenues from wholesale sales were $89.8 million (after elimination of sales
to our retail operations) in the six months ended March 31, 2002, a decrease of
$27.2 million, or 23%, from $117.0 million for the same six-month period in
2001. This decrease was attributable to decreased selling prices as a result of
the lower cost of propane.
Cost of Product Sold. Cost of product sold in the six months ended March 31,
2002 was $113.8 million, a decrease of $27.6 million, or 20%, from cost of
product sold of $141.4 million in the same six-month period in 2001. This
decrease was attributable to a significant decrease in the average cost of
propane, partially offset by an increase in both wholesale and retail propane
volume as discussed above.
Gross Profit. Retail gross profit was $46.9 million in the six months ended
March 31, 2002 compared to $24.3 million in the six months ended March 31, 2001,
an increase of $22.6 million, or 93%. This increase was primarily attributable
to an increase in retail gallons sold due to acquisitions. Wholesale gross
profit was $3.4 million (after elimination of gross profit attributable to our
retail operations) in the six months ended March 31, 2002 compared to $4.8
million in the same six-month period in 2001, a decrease of $1.4 million. This
decrease was attributable to a decrease in margin per gallon partially offset by
an increase in wholesale volumes.
Operating and Administrative Expenses. Operating and administrative expenses
increased $11.8 million, or 103%, to $23.3 million in the six-month period ended
March 31, 2002 as compared to $11.5 million in the same period in 2001. This
increase resulted from the acquisitions discussed above and, to a lesser extent,
an increase in insurance costs as a result of higher premiums and self insured
retention amounts, and personnel costs associated with (i) the growth of the
partnership and (ii) the completion of our initial public offering in July 2001.
Depreciation and Amortization. Depreciation and amortization increased $2.4
million, or 87%, to $5.1 million in the six months ended March 31, 2002 from
$2.7 million in the same six-month period in 2001 primarily as a result of the
Hoosier, Pro Gas and IPC acquisitions.
Interest Expense. Interest expense increased $0.4 million, or 13%, to $3.2
million in the six months ended March 31, 2002 as compared to the same period in
2001. This increase is the result of additional debt outstanding during 2002 as
compared to 2001, partially offset by lower interest rates in 2002.
Net Income. Net income increased $6.3 million, or 52%, to $18.5 million in the
six months ended March 31, 2002 from $12.2 million in the same six-month period
in 2001. This increase in net income was attributable to the increase in gross
profit partially offset by an increase in operating and administrative expenses,
depreciation and amortization expenses.
EBITDA. In the six months ended March 31, 2002, income before interest, taxes,
depreciation and amortization was $26.9 million compared to $17.8 million in the
same period of fiscal 2001. The increase was primarily attributable to
increased sales volumes partially offset by an increase in operating and
administrative expenses.
Liquidity and Capital Resources
Cash provided by operating activities was $9.7 million in the six months ended
March 31, 2002 compared to $2.6 million in the same fiscal 2001 period. The
increase in cash provided by operating activities is primarily attributable to
higher net income and depreciation and amortization charges in 2002 as compared
to 2001,. Net income increased to $18.5 million for the six months ended March
31, 2002 from $12.2 million for the six months ended March 31, 2001 due to the
effects of the acquisitions completed in fiscal 2002 and the effects of higher
margins per gallon in existing operations, partially offset by the warmer
weather in the 2002 period. Depreciation and amortization increased to $5.1
million in the six months ended March 31, 2002 from $2.6 million in the same
fiscal 2001 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 $15.3 million in the six months
ended March 31, 2002 and $13.2 million in the same fiscal 2001 period to
accommodate increased business volume.
Cash used in investing activities was $88.0 million in the six months ended
March 31, 2002 compared to $60.2 million in the six months ended March 31, 2001.
The 2002 period included $83.6 million of cash used for acquisitions and $2.5
million used for
14
capital expenditures. In addition, the 2002 period included a use of $2.0
million for payment of deferred financing costs associated with the credit
facilities used to finance the acquisitions. The 2001 period included $56.3
million used for acquisitions.
Cash provided by financing activities of $78.6 million in the six months ended
March 31, 2002 and $59.7 million in the six months ended March 31, 2001. The
2002 period included net proceeds from long term debt of $84.4 million
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 $6.5 million in distributions to unitholders
in the 2002 period. The 2001 period included net proceeds from issuance of
long-term debt of $44.5 million and redeemable preferred members' interest of
$16.0 million.
The Partnership has received commitments for the purchase of $85 million of
long-term notes, to be used to partially repay indebtedness under the bank
credit facility. The Partnership expects to enter into a note purchase
agreement by June 2002.
At March 31, 2002, we had goodwill of $47.1 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.
The Partnership paid a $0.625 per limited partner unit distribution to its
unitholders in February 2002, which totaled $4.1 million. The Partnership
announced that it will distribute $0.66 per limited partner unit ($2.64
annually), an increase from its previous level of $0.625 per unit on May 15,
2002 to unitholders of record May 8, 2002. This distribution of $4.4 million is
the company's second full quarterly distribution and its second distribution
increase since its Initial Public Offering in July of 2001. Over the last two
quarters the Partnership has increased its annual rate of cash distribution by
10 percent.
The following tables summarizes the Partnership's long-term debt and operating
lease obligations as of March 31, 2002 in thousands of dollars:
Less than After
Total 1 year 1-3 years 4-5 years 5 years
--------------------------------------------------------------
Aggregate amount of principal to be
paid on the outstanding long-term
debt $142,164 $3,722 $137,559 $ 437 $446
Future minimum lease payments under
noncancelable operating leases 5,196 1,611 2,425 1,044 116
Standby letters of credit 2,000 2,000
As of September 30, 2001, total propane contracts had an outstanding fair
value of $4.6 million, as compared to total propane contracts outstanding net
fair value at March 31, 2002 of $4.3 million. The net change of $0.3 million
includes a net decrease in fair value of $1.0 million from contracts settled
during the six-month period, partially offset by an net $0.7 million increase
from other changes in fair value. Of the outstanding fair value as of March 31,
2002, contracts with a maturity of less than one year totaled $3.9 million, and
contracts maturing between one and two years totaled $0.4 million.
We believe that anticipated cash from operations and borrowings under our
amended and restated credit facility described below will be sufficient to meet
our liquidity needs for the foreseeable future. If our plans or assumptions
change or are inaccurate, or we make any acquisitions, we may need to raise
additional capital. We may not be able to raise additional funds or may not be
able to raise such funds on favorable terms.
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 guaranteed by Inergy, L.P. and each subsidiary
of Inergy Propane, LLC. At May 1, 2002, the balance outstanding under the
credit facility was $132.0 million, including none under the working capital
facility.
Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supercedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of, and the accounting and reporting provisions of
APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for a disposal of a segment of a business.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001,
with earlier application encouraged. The Partnership has adopted SFAS No. 144
as of December 31, 2001. The adoption of the statement has not had any impact
on the Partnership's financial position and results of operations.
15
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 supercedes APB
Opinion No. 16, Business Combinations, and FASB Statement No. 28, Accounting for
Preacquisition Contingencies of Purchased Enterprises. This statement requires
accounting for all business combination using the purchase method, and changes
the criteria for recognizing intangible assets apart from goodwill. This
statement is effective for all business combinations initiated after June 30,
2001. SFAS No. 142 supercedes APB opinion No. 17, Intangible Assets, and
addresses how purchased intangibles should be accounted for upon acquisition.
The statement also addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. All intangibles will be subject to periodic impairment testing and
will be adjusted to fair value. The Partnership has adopted SFAS No. 142
beginning in fiscal year 2002. Application of the nonamortization and
impairment provisions of the statement has not significantly impacted the
Partnership's financial position and results of operations.
16
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 March 31, 2002, we had
floating rate obligations totaling approximately $138.2 million for amounts
borrowed under our credit agreement. 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 March 2002 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 as of March 31,
2002 include fixed price payor for 3.6 million barrels, and fixed price receiver
for 4.2 million barrels. 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 March 31, 2002 was assets of $8.9 million and liabilities of
$4.6 million related to propane. All intercompany transactions have been
appropriately eliminated. 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.
17
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, periodic monitoring procedures and
obtaining customer deposits on sales contracts. The counter-parties associated
with assets from price risk management activities, as of March 31, 2002 and
September 30, 2001 were energy marketers.
18
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
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/A on March 1, 2002, which
amended its Form 8-K filed January 4, 2002 and which included
information under Items 2 and 7 of such form regarding the
acquisition of Independent Propane Company Holdings, Inc.
19
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.
By: INERGY GP, LLC, Its Managing General Partner
Date: May 15, 2002 By: /s/ R. Brooks Sherman Jr.
----------------------------------------
R. Brooks Sherman Jr.
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
20