- --------------------------------------------------------------------------------
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 June 30, 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 [_] No [X]
The following units were outstanding at September 7, 2001:
Common Units 1,840,000
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 Partners, LLC:
Consolidated Balance Sheets as of September 30, 2000 and June 30, 2001 (unaudited) 3
Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended June 30,
2000 and 2001 5
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended June 30,
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 13
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 PARTNERS, LLC
(a subsidiary of Inergy Holdings, LLC)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, June 30,
2000 2001
--------------- -----------------
(Unaudited)
Assets
Current assets:
Cash $ 1,373 $ 2,727
Accounts receivable, less allowance for doubtful
accounts of $225 and $979 at September 30, 2000 and
June 30, 2001, respectively 12,602 9,766
Inventories 3,630 4,616
Prepaid expenses and other current assets 1,014 2,535
Assets from price risk management activities 3,580 8,534
--------------- -----------------
Total current assets 22,199 28,178
Property, plant and equipment, at cost:
Land and buildings 740 4,503
Office furniture and equipment 808 1,054
Vehicles 4,138 11,106
Tanks and plant equipment 30,283 57,975
--------------- -----------------
35,969 74,638
Less accumulated depreciation (2,533) (4,782)
--------------- -----------------
Net property, plant and equipment 33,436 69,856
Intangible assets:
Covenants not to compete 3,228 3,763
Deferred financing costs 333 1,998
Deferred acquisition costs 460 -
Customer accounts 3,500 14,000
Goodwill 6,880 32,115
--------------- -----------------
14,401 51,876
Less accumulated amortization (1,246) (3,295)
--------------- -----------------
Net intangible assets 13,155 48,581
Other 134 143
--------------- -----------------
Total assets $ 68,924 $ 146,758
=============== =================
3
INERGY PARTNERS, LLC
(a subsidiary of Inergy Holdings, LLC)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, June 30,
2000 2001
---------------- ----------------
(Unaudited)
Liabilities and members' equity
Current liabilities:
Accounts payable $ 11,502 $ 8,308
Accrued expenses 3,715 3,450
Customer deposits 1,676 6,393
Liabilities from price risk management activities 2,294 6,484
Current portion of long-term debt (Note 3) 605 5,631
---------------- ----------------
Total current liabilities 19,792 30,266
Deferred income taxes 942 942
Long-term debt, less current portion (Note 3) 34,322 71,983
Redeemable preferred members' interest (Note 5) 10,896 34,413
Members' equity (Note 5):
Class A preferred interest 4,892 4,852
Common interest (1,686) 4,878
Accumulated other comprehensive loss - (400)
Deferred compensation (234) (176)
---------------- ----------------
Total members' equity 2,972 9,154
---------------- ----------------
Total liabilities and members' equity $ 68,924 $ 146,758
================ ================
See accompanying notes.
4
INERGY PARTNERS, LLC
(a subsidiary of Inergy Holdings, LLC)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
Three Months Ended Nine Months Ended
June 30 June 30
2000 2001 2000 2001
--------------------------- ----------------------------
(Unaudited) (Unaudited)
Revenue:
Propane $ 12,309 $ 18,506 $ 60,166 $ 183,715
Other 899 3,297 3,499 8,527
--------------------------- ----------------------------
13,208 21,803 63,665 192,242
Cost of product sold 11,976 16,375 54,030 157,800
--------------------------- ----------------------------
Gross profit 1,232 5,428 9,635 34,442
Operating and administrative expenses 1,989 5,905 6,082 17,369
Depreciation and amortization 541 1,723 1,428 4,471
--------------------------- ----------------------------
Operating income (1,298) (2,200) 2,125 12,602
Other income (expense):
Interest expense (713) (2,138) (1,870) (4,998)
Gain on sale of property, plant and
equipment - 27 - 27
Other 58 149 153 394
--------------------------- ----------------------------
Income (loss) before income taxes (1,953) (4,162) 408 8,025
Provision for income taxes - - - -
--------------------------- ----------------------------
Net income (loss) $ (1,953) $ (4,162) $ 408 $ 8,025
=========================== ============================
See accompanying notes.
5
INERGY PARTNERS, LLC
(a subsidiary of Inergy Holdings, LLC)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
June 30
2000 2001
------------------------------
(Unaudited)
Operating activities
Net income $ 408 $ 8,025
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for doubtful accounts - 584
Depreciation 938 2,090
Amortization 503 2,381
Gain on disposal of property, plant and
equipment - 27
Net liabilities from price risk management
activities (1,805) (1,164)
Deferred compensation 59 58
Changes in operating assets and liabilities, net
of effects from acquisition of retail propane
companies:
Accounts receivable (1,111) 15,390
Inventories 1,076 1,923
Prepaid expenses and other current
assets (997) (1,446)
Other assets (1) (9)
Accounts payable (2,288) (19,228)
Accrued expenses 1,764 (360)
Customer deposits (615) 2,212
------------------------------
Net cash provided by (used in) operating activities (2,069) 10,483
Investing activities
Acquisition of retail propane companies (9,389) (56,263)
Purchases of property, plant and equipment (1,830) (3,196)
Deferred financing and acquisition costs incurred (292) (1,998)
Proceeds from sale of property, plant and
equipment - 27
------------------------------
Net cash used in investing activities (11,511) (61,430)
6
INERGY PARTNERS, LLC
(a subsidiary of Inergy Holdings, LLC)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
June 30
2000 2001
------------------------------
(Unaudited)
Financing activities
Proceeds from issuance of long-term debt 29,786 108,152
Principal payments on long-term debt and
noncompete obligations (17,493) (70,465)
Net proceeds from issuance of redeemable preferred
members' interest 1,896 16,115
Redemption of preferred stock (3) (32)
Distributions to members (326) (1,469)
------------------------------
Net cash provided by financing activities 13,860 52,301
------------------------------
Net increase in cash 280 1,354
Cash at beginning of period 152 1,373
------------------------------
Cash at end of period $ 432 $ 2,727
==============================
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 1,296 $ 4,930
==============================
Supplemental schedule of noncash investing and
financing activities
Acquisitions of retail propane companies through
the issuances of common and preferred interests $ 9,000 $ 7,402
==============================
Acquisitions of retail propane companies through
the issuance of subordinated debt $ - $ 5,000
==============================
7
INERGY PARTNERS, LLC.
(a subsidiary of Inergy Holdings, LLC)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
(Unaudited)
Note 1 - Accounting Policies
Organization and Nature of Operations
Inergy Partners, LLC (the "Company") was organized as a Delaware limited
liability company on November 8, 1996. The Company terminates December 31, 2026
unless extended by agreement of its members. The Company is engaged primarily in
the sale, distribution, marketing and trading of propane and other natural gas
liquids. The retail market is seasonal because propane is used primarily for
heating in residential and commercial buildings, as well as for agricultural
purposes.
The business and affairs of the Company are conducted by the voting members of
the Company holding the majority of the common member interests. Under the terms
of the operating agreement, neither the members nor the managers of the Company
are liable for any debt, obligations or liabilities of the Company, other than
certain guarantees described in Note 2. In addition, the liability of each
member to third parties is limited to the amount of the member's capital
contribution. The Company has two classes of members' interests--common and
Class A preferred.
Inergy, L. P. (the "Partnership") was formed March 7, 2001, as a Delaware
limited partnership. The Partnership was formed to acquire, own and operate the
propane business and substantially all of the assets of the Company and its
subsidiary, Inergy Propane, LLC upon consummation of an initial public offering
of common units of the Partnership as a Master Limited Partnership which was
completed on July 31, 2001. These financial statements of Inergy Partners, LLC
should be read in conjunction with the audited financial statements for the year
ended September 30, 2000 included in the Registration Statement on Form S-1 of
Inergy, LP, filed with the Securities and Exchange Commission (File No. 333-
56976) and declared effective on July 25, 2001.
Principles of Consolidation
The unaudited consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Inergy Propane, LLC ("Inergy
Propane"), Wilson Oil Company of Johnston County, Inc. ("Wilson") and Rolesville
Gas & Oil Company, Inc. ("Rolesville"). All significant intercompany accounts
and transactions have been eliminated. The Company is a 98.5%-owned subsidiary
of Inergy Holdings, LLC (Holdings), and all operations of Holdings are conducted
through the Company and its subsidiaries.
Unaudited Financial Information
The financial information as of June 30, 2001 and for the three and nine-month
periods ended June 30, 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 nine-month period ended June 30, 2001 are not necessarily indicative of
the results of operations that may be expected for the entire year.
Accounting for Price Risk Management
The Company, 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.
Unrealized gains and losses from newly originated contracts, contract
restructuring and the impact of price movements are recognized as cost of sales.
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
8
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 the Company'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 statement of cash flows.
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.
Note 2 - Long-Term Debt
Long-term debt consisted of the following:
September 30, June 30,
2000 2001
---------------- ----------------
(Unaudited)
Credit agreement $ 33,250 $ 71,477
Obligations under noncompetition agreements 1,625 1,137
Subordinated debt issued to sellers of
acquired business -- 5,000
Other 52 --
---------------- ----------------
34,927 77,614
Less current portion 605 5,631
---------------- ----------------
$ 34,322 $ 71,983
================ ================
On January 12, 2001, the Company and its lenders amended the Company's credit
agreement under which $33,250 was outstanding as of September 30, 2000. The
amended credit agreement extended the maturity date of borrowings under the
facilities from June 22, 2001 to January 10, 2004. In addition, the credit
agreement provides for total available borrowings of $96,000 under three
separate credit facilities. Borrowings under the revolving credit facility are
ultimately due on January 10, 2004 and require quarterly interest payments,
which began on March 31, 2001. The other two credit facilities, which were
principally used to finance the Hoosier Propane Group acquisition, require
quarterly principal and interest payments that began March 31, 2001. The Company
also issued a $5,000 subordinated note payable to the former owners of the
Hoosier Propane Group in connection with this acquisition.
At June 30, 2001, borrowings under the working capital lines of credit and the
acquisition line of credit were $2,977 and $68,500, respectively. At September
30, 2000, borrowings under the working capital lines of credit and the
acquisition line of credit were $4,900 and $28,350, respectively. The prime
rate and LIBOR plus the applicable spreads were 8.25% and 7.09%, respectively,
at June 30, 2001. The prime rate and LIBOR plus the applicable spreads were
9.5% and 9.37% to 9.93%, respectively, at September 30, 2000. Unused borrowings
under the credit agreement amounted to $24,523 and $7,750 at June 30, 2001 and
September 30, 2000, respectively.
On July 25, 2001, immediately following the initial public offering of Inergy,
L.P., Inergy Propane, LLC entered into a $100 million amended and restated
senior secured credit facility with First Union National Bank and other 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 September 6, 2001, the balance
outstanding under this new credit facility was $50,562, including $11,562 under
the working capital facility.
9
At June 30, 2001, we had floating rate obligations totaling approximately
$71.5 million for amounts borrowed under our revolving line of credit and long-
term debt. We entered into interest rate hedging agreements in the form of
interest rate swaps that provided us with a fixed rate of approximately 7.5% on
$25,000 of these obligations at June 30, 2001, which is recorded as a liability
and accumulated other comprehensive income charge in the accompanying balance
sheet. As of June 30, 2001, the fair value of these fixed rate obligations
was approximately $400 greater than the recorded amount. The remaining floating
rate obligations of $46.5 million expose us to the risk of increased interest
expense in the event of increases in short-term interest rates. In July 2001,
$34,300 of the proceeds received from the initial public offering were used to
repay long-term debt, including the $25,000 of long-term debt subject to the
interest rate swap agreements. Subsequent to June 30, 2001 but immediately prior
to the closing of the initial public offering in July 2001, we terminated the
interest rate hedging agreements related to the long-term debt being repaid.
The termination of the interest rate swaps as discussed above will result in
an interest expense charge of $507 in the fourth quarter of fiscal 2001.
Note 3 - Comprehensive Income
Statement of Financial Accounting Standards No. 130 (SFAS No. 130),
Reporting Comprehensive Income, requires disclosure of all components of
comprehensive income on an annual and interim basis. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. The
Company's total comprehensive income is as follows:
Three Months Ended Nine Months Ended
-------------------------------------- --------------------------------------
June 30, 2000 June 30, 2001 June 30, 2000 June 30, 2001
--------------- --------------- --------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net income (loss) $(1,953) $(4,163) $(408) $8,025
Other comprehensive income (loss):
Unrealized loss on interest rate
swap cash flow -- (400) -- (400)
--------------- --------------- --------------- ---------------
Comprehensive net loss $(1,953) $(4,563) $(408) $7,625
=============== =============== =============== ===============
Note 4 - Segments
The Company's financial statements reflect two reportable segments: retail
sales operations and wholesale sales operations. The Company's retail sales
operations include propane sales to end users, the sale of propane-related
appliances and service work for propane-related equipment. The wholesale sales
operations, which originated in April 1999, provide marketing and distribution
services to other resellers of propane, including the Company's retail
operations. The Company's President and Chief Executive Officer has been
identified as the Chief Operating Decision Maker (CODM). The CODM evaluates
performance and allocates resources based on revenues and gross profit of each
segment. The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. All intersegment revenues and
profits associated with propane sales from the wholesale segment to the retail
segment have been eliminated.
10
The identifiable assets associated with each reportable segment reviewed by
the CODM 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 and is specifically
reviewed by the CODM. Capital expenditures, reported as purchases of property,
plant and equipment in the accompanying statements of cash flows, substantially
all relate to the retail sales segment. The Company does not report property,
plant and equipment, intangible assets, and depreciation and amortization by
segment to the CODM.
Revenues, gross profit and identifiable assets for each of the Company's
reportable segments are presented below.
Nine Months Ended Nine Months Ended
June 30, 2001 June 30, 2000
---------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Wholesale Wholesale
Retail Sales Sales Intersegment Retail Sales Sales Intersegment
Operations Operations Eliminations Total Operations Operations Eliminations Total
---------- ---------- ------------ ----- ---------- ---------- ------------ -----
Revenues $63,326 $162,928 $(34,012) $192,242 $17,283 $52,792 $(6,410) $63,665
Gross profit 28,859 7,926 (2,343) 34,442 8,756 1,599 (720) 9,635
Identifiable
assets 7,657 6,733 (8) 14,382 4,294 14,158 (6,645) 11,807
Three Months Ended Three Months Ended
June 30, 2001 June 30, 2000
----------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Wholesale Wholesale
Retail Sales Sales Intersegment Retail Sales Sales Intersegment
Operations Operations Eliminations Total Operations Operations Eliminations Total
---------- ---------- ------------ ----- ---------- ---------- ------------ -----
Revenues $9,839 $19,305 $(7,341) $21,803 $2,299 $11,951 $(1,040) $13,208
Gross profit 4,607 1,125 (304) 5,428 1,093 290 (151) 1,232
Note 5 - Hoosier Propane Group Acquisition and Related Financing
During January 2001, the Company issued Class A preferred interests to new and
existing members for total proceeds of $15,000. The preferred interests were
issued to facilitate the refinancing of the Company's credit facilities
described in Note 3 on a long-term basis and complete the acquisition discussed
below. Further, as discussed in Note 3, the Company negotiated an amended credit
facility in January 2001.
In connection with this issuance of Class A preferred interests, the Company
issued a warrant to one of the investors to acquire an additional $2,000 of
Class A preferred interests. The warrant was exercisable immediately and would
have expired on March 31, 2001 if unexercised. The Company was required to
approve the exercise of greater than $1,500 of the warrant and had the ability
to require the exercise of the warrant. In March 2001, the investor exercised
the warrant for $1,500.
These preferred interests were automatically converted into senior
subordinated units of the MLP in connection with the initial public offering.
The conversion rates were determined as of the issuance date based on
negotiations between the Company and the third party investors and were derived
by multiplying the recorded value of each party's preferred interest by a
multiple of 1.4 and dividing the resulting total by the $22 unit price in the
offering. The beneficial conversion feature that was present in these preferred
interest issuances valued at $6.6 million will be recognized in a manner
consistent with that described in Note 6.
On January 12, 2001, the Company acquired substantially all of the assets and
assumed certain liabilities of Investors 300, Inc., Domex, Inc. and L&L Leasing,
Inc., three companies owned by a common group of shareholders (referred to as
the Hoosier Propane Group). The acquisition was effective January 1, 2001 and
the Company's results of operations for the nine month period ended June 30,
2001 include the Hoosier Propane Group operating results from the effective
date. The Hoosier Propane Group is involved in the sale and transportation of
propane to local customer bases throughout the United States. The purchase price
of approximately $74 million consisted of cash payments of approximately $55.4
million funded by the issuance of long-term debt and Class A preferred interests
discussed above, acquisition costs of $0.6 million, Class A preferred interest
issued to certain former owners of the Hoosier Propane Group totaling $7.4
million, subordinated debentures issued to the Hoosier Propane Group
shareholders totaling $5.0 million, and $5.6 million of liabilities assumed.
This acquisition was accounted for using the purchase method of accounting.
11
The following unaudited pro forma data summarize the results of operations for
the periods indicated as if these acquisitions had been completed October 1,
1999 and 2000, the beginning of the 2000 and 2001 fiscal years. The pro forma
data give effect to actual operating results prior to the acquisitions and
adjustments to interest expense, goodwill and customer accounts amortization and
income taxes, 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, 1999 and 2000 or that will be obtained
in the future.
Nine month period ended
June 30,
-------------------------------
2000 2001
-------------------------------
Sales $123,546 $223,783
Net income 4,359 11,154
Note 6 - Initial Public Offering of Common Units
Inergy, L.P. (the "Partnership") was formed March 7, 2001, as a Delaware
limited partnership. The Partnership was formed to acquire, own and operate the
propane business and substantially all of the assets of the Company. In order to
simplify the Partnership's obligations under the laws of several jurisdictions
in which the Partnership will conduct business, the Partnership's activities
will be conducted through a subsidiary operating company, Inergy Propane, LLC
(the "Operating Company").
On July 31, 2001, the Partnership completed an initial public offering of
1,840,000 common units, which represent limited partner interests in the
Partnership, to the public at an offering price of $22.00 per unit. In
addition, 1,306,911 senior subordinated units and 572,542 junior subordinated
units, representing additional limited partner interests in the Partnership,
were concurrently issued to an affiliate of Holdings for the benefit of holders
of the common interest of the Company and certain Class A preferred interests of
the Company. Pursuant to the terms of certain of the Class A Preferred interest
agreements, in the event of an initial public offering, these interests would
automatically convert into senior subordinated units of a master limited
partnership. As such, an additional 2,006,456 senior subordinated units were
issued to holders of the remaining Class A preferred interests of the Company.
Further, a 2% general partner interest in the Partnership and the Operating
Company, on a combined basis, was issued to an affiliate of Holdings. Certain
of the Class A Preferred interests of the Company, aggregating $18,115 at June
30, 2001, contained conversion terms that were more advantageous than the terms
of the other preferred interests issued by the Company, converting at a rate of
2.25 to 1 on $2,000 and 1.4 to 1 on $16,115, compared to other preferred
interest which converted at a rate of 1 to 1. These beneficial conversion terms
will result in Inergy, L.P. recognizing a decrease in common unit capital of
$8.6 million with a corresponding increase in senior subordinated unit capital
in the fourth quarter of fiscal 2001. Net income available to common
unitholders for the fourth quarter and year ended September 30, 2001 will be
decreased by $8.6 million while net income attributable to senior subordinated
unitholders will be increased by the same amount.
12
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 Partners, LLC should be read in conjunction with the
accompanying condensed consolidated financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Registration Statement of Inergy, L.P. on Form S-1 declared effective by the
Securities Exchange Commission on July 25, 2001.
Inergy, L.P. (the "Partnership") was formed March 7, 2001, as a Delaware
limited partnership. The Partnership was formed to acquire, own and operate the
propane business and substantially all of the assets of the Company. In order to
simplify the Partnership's obligations under the laws of several jurisdictions
in which the Partnership will conduct business, the Partnership's activities
will be conducted through a subsidiary operating company, Inergy Propane, LLC
(the "Operating Company").
On July 31, 2001, the Partnership completed an initial public offering of its
common units, which represent limited partner interests in the Partnership, to
the public and concurrently issued subordinated units representing additional
limited partner interests in the Partnership to an affiliate of Holdings and to
Class A preferred interest holders of the Company, and a 2% general partner
interest in the Partnership and the Operating Company, on a combined basis, to
an affiliate of Holdings. Upon the closing of the initial public offering, the
Partnership issued 1,840,000 common units at an offering price of $22.00 per
unit.
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 June 30, 2001 Compared to Three Months Ended June 30, 2000
Volume. During the three months ended June 30, 2001, Inergy Partners sold 5.2
million retail gallons of propane, an increase of 3.8 million gallons, or 271%,
from the 1.4 million retail gallons sold during the same three month period in
2000. The increase in retail sales volume was principally due to the May 2000
acquisition of Country Gas (0.7 million gallons in 2001) and the January 2001
acquisition of Hoosier Propane Group (2.8 million gallons in 2001). In addition,
internal growth resulted in increased sales of approximately 0.3 million
gallons.
Wholesale gallon sales increased 5.2 million gallons, or 22%, to 28.5 million
gallons in the three months ended June 30, 2001 from 23.3 million gallons in the
same three month period in 2000. Approximately 3.8 million gallons of 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.
Revenues. Revenues in the three months ended June 30, 2001 were $21.8 million,
an increase of $8.6 million, or 65%, from $13.2 million of revenues in the same
three month period in 2000.
Revenues from retail propane sales were $6.5 million in the three months ended
June 30, 2001, an increase of $5.1 million, or 367%, from $1.4 million for the
same three month period in 2000. This increase was attributable to the
acquisitions of Country Gas ($1.1 million) and the Hoosier Propane Group ($3.0
million), higher sales prices ($0.3 million) with the remaining increase ($0.7
million) due to volume increases due primarily to our growth. Other retail
revenues increased approximately $2.4 million, or 267%, from $0.9 million in the
three month period June 30, 2000 to $3.3 million in the same three month period
in 2001. These revenues consist of tank rentals, heating oil sales, appliance
sales and service.
Revenues from wholesale sales were $12.0 million (after elimination of sales
to our retail operations) in the three months ended June 30, 2001, an increase
of $1.1 million, or 10%, from $10.9 million for the same three month period in
2000.
13
Approximately $2.2 million of this increase was attributable to the
acquisition of the Hoosier Propane Group, approximately $0.8 million was
attributable to the growth of our wholesale operations both of which were
partially offset by approximately $1.9 million due to decreased selling prices.
Cost of Product Sold. Cost of product sold in the three months ended June 30,
2001 was $16.4 million, an increase of $4.4 million, or 37%, over cost of
product sold of $12.0 million in the same three month period in 2000. This
increase was attributable to the increases in retail and wholesale propane
volumes and other product costs (approximately $5.3 million) offset by a
decrease in the average cost of propane (approximately $0.9 million).
Gross Profit. Retail gross profit was $4.6 million in the three months ended
June 30, 2001 compared to $1.1 million in the three months ended June 30, 2000,
an increase of $3.5 million, or 322%. Wholesale gross profit was $0.8 million
(after elimination of gross profit attributable to our retail operations) in the
three months ended June 30, 2001 compared to $0.1 million in the same three
month period in 2000, an increase of $0.7 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 market prices.
Operating and Administrative Expenses. Operating and administrative expenses
increased $3.9 million, or 197%, to $5.9 million in the three month period ended
June 30, 2001 as compared to $2.0 million in the same period in 2000.
Approximately $0.5 million of this increase was attributable to the Country Gas
acquisition and approximately $2.1 million of the increase resulted from the
Hoosier Propane Group acquisition. The balance of the increase, approximately
$1.3 million, was primarily attributable to increased 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 $1.2
million, or 218%, to $1.7 million in the three months ended June 30, 2001 from
$0.5 million in the same three month period in 2000 primarily as a result of the
Country Gas and the Hoosier Propane Group acquisitions, which included property,
plant and equipment and intangible assets of approximately $87.1 million.
Net Loss. Net loss increased $2.2 million, or 113%, to $4.2 million in the
three months ended June 30, 2001 from $2.0 million in the same three month
period in 2000. This increase in net loss was attributable to the 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, partially offset by the increase in
gross profit.
EBITDA. In the three months ended June 30, 2001, the loss before interest,
taxes, depreciation and amortization was $0.3 million compared to a loss of $0.7
million in the same period of fiscal 2000. The decrease was attributable to
increased sales volumes and margins per gallon partially offset by an increase
in operating expenses.
Nine Months Ended June 30, 2001 Compared to Nine Months Ended June 30, 2000
Volume. During the nine months ended June 30, 2001, Inergy Partners sold 39.2
million retail gallons of propane, an increase of 25.7 million gallons, or 190%,
from the 13.5 million retail gallons sold during the same nine month period in
2000. The increase in retail sales volume was principally due to the
acquisitions of Country Gas (7.8 million gallons) and the Hoosier Propane Group
(12.5 million gallons). In addition, internal growth and the fact that the nine
months ended June 30, 2001 were approximately 16% colder than the nine months
ended June 30, 2000 and only approximately 1% warmer than normal in our retail
areas of operation resulted in increased sales of approximately 5.4 million
gallons.
Wholesale gallon sales increased 84.9 million gallons, or 81%, to 190.3
million gallons in the nine months ended June 30, 2001 from 105.4 million
gallons in the same nine month period in 2000. Approximately 62.9 million
gallons of this increase was attributable to the growth of our wholesale
operations, which were initiated in April 1999, and colder weather in our
wholesale areas of operation, with the balance of the increase (approximately
22.0 million gallons) attributable to the acquisition of the Hoosier Propane
Group.
Revenues. Revenues in the nine months ended June 30, 2001 were $192.2 million,
an increase of $128.5 million, or 202%, from $63.7 million of revenues in the
same nine month period in 2000.
Revenues from retail propane sales were $54.8 million in the nine months ended
June 30, 2001, an increase of $41.0 million, or 298%, from $13.8 million for the
same nine month period in 2000. This increase was attributable to the
14
acquisitions of Country Gas ($10.6 million) and the Hoosier Propane Group ($16.6
million), higher sales prices ($6.3 million) with the remaining increase ($7.5
million) due to volume increases as a result of growth and colder weather in our
retail areas of operations. Other retail revenues increased approximately $5.0
million, or 144%, to $8.5million in the nine months ended June 30, 2001 from
$3.5 million in the same nine month period in 2000. These revenues consist of
transportation revenues, tank rentals, heating oil sales, appliance sales and
service with the increase attributable to the acquisitions of Country Gas and
the Hoosier Propane Group.
Revenues from wholesale sales were $128.9 million (after elimination of sales
to our retail operations) in the nine months ended June 30, 2001, an increase of
$82.5 million, or 178%, from $46.4 million for the same nine month period in
2000. Approximately $17.8 million of this increase was attributable to the
acquisition of the Hoosier Propane Group, approximately $37.4 million resulted
from increased selling prices and the remaining $27.3 million increase was
attributable to the growth of our wholesale operations as described above and
colder weather in our wholesale areas of operations.
Cost of Product Sold. Cost of product sold in the nine months ended June 30,
2001 was $157.8 million, an increase of $103.8 million, or 192%, over cost of
product sold of $54.0 million in the same nine month period in 2000. This
increase was primarily attributable to both a significant increase in retail and
wholesale propane volumes and other product costs (approximately $50.8 million)
and a significant increase in the average cost of propane (approximately $53.0
million).
Gross Profit. Retail gross profit was $28.9 million in the nine months ended
June 30, 2001 compared to $8.8 million in the nine months ended June 30, 2000,
an increase of $20.1 million, or 230%. Wholesale gross profit was $5.6 million
(after elimination of gross profit attributable to our retail operations) in the
nine months ended June 30, 2001 compared to $0.9 million in the same nine-month
period in 2000, an increase of $4.7 million. These increases were primarily
attributable to higher retail and wholesale volumes, an increase in margin per
gallon, and gross profit from transportation. The increase in margin per gallon
was attributable to our ability to increase retail prices during periods of
rising market prices while effectively controlling product costs.
Operating and Administrative Expenses. Operating and administrative expenses
increased $11.3 million, or 186%, to $17.4 million in the nine month period
ended June 30, 2001 as compared to $6.1 million in the same period in 2000.
Approximately $2.2 million of this increase was attributable to the Country Gas
acquisition and approximately $5.1 million of the increase resulted from the
Hoosier Propane Group acquisition. In addition, approximately $3.1 million of
the increase was primarily a result of increased personnel costs including
performance incentives accrued as a result of the increased profitability of the
nine months ended June 30, 2001 with the remaining increase primarily
attributable to higher vehicle fuel and maintenance costs as a result of the
increased retail volumes.
Depreciation and Amortization. Depreciation and amortization increased $3.1
million, or 213%, to $4.5 million in the nine months ended June 30, 2001 from
$1.4 million in the same nine-month period in 2000 primarily as a result of the
Country Gas and the Hoosier Propane Group acquisitions, which included property,
plant and equipment and intangible assets of approximately $87.1 million.
Net Income. Net income increased $7.6 million, to $8.0 million in the nine
months ended June 30, 2001 from $0.4 million in the same nine month period in
2000. This increase in net income was attributable to the effects of significant
volume increases whereby increases in gross profit exceeded the increases in
operating and administrative expenses, depreciation and amortization, and
interest expense discussed above.
EBITDA. EBITDA increased $13.8 million, or 372%, to $17.5 million in the nine
months ended June 30, 2001 from $3.7 million in the same nine-month period in
2000. This increase was attributable to significantly increased volumes and
margin per gallon associated with our retail and wholesale sales partially
offset by increased operating and administrative expenses.
15
Liquidity and Capital Resources
Cash provided by operating activities was $10.5 million in the nine months
ended June 30, 2001 compared to cash used in operating activities of $2.1
million in the same fiscal 2000 period. The increase in cash provided by
operating activities is attributable to our improved operating results in the
2001 period over the 2000 period. Net income increased to $8.0 million for the
nine months ended June 30, 2001 from $0.4 million for the same fiscal 2000
period due to the effects of the acquisitions completed in fiscal 2000 and 2001
and the colder weather in the 2001 period. Depreciation and amortization
increased to $4.5 million in the nine months ended June 30, 2001 from $1.4
million in the same fiscal 2000 period due to the effects of acquisitions,
particularly the Hoosier Propane Group acquisition completed in January 2001.
The change in operating assets and liabilities, including net liabilities from
price risk management activities, required a use of cash amounting to $2.7
million in the nine months ended June 30, 2001 and $4.0 million in the same
fiscal 2000 period.
Cash used in investing activities was $61.4 million in the nine months ended
June 30, 2001 compared to $11.5 million in the same fiscal 2000 period. The 2001
period included $56.2 million of cash used for acquisitions and $3.2 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.
Cash provided by financing activities of $52.3 million in the nine months
ended June 30, 2001 and $13.9 million in the same period in fiscal 2000 related
to issuances of long-term debt and redeemable preferred members' interests was
used to finance acquisitions, working capital and capital expenditures during
these periods.
At June 30, 2001, we had goodwill of $32.1 million, representing approximately
21.9% of total assets. This goodwill is primarily attributable to our
acquisitions of the Hoosier Propane Group and Country Gas. We expect recovery of
the goodwill through future cash flows associated with these acquisitions.
Description of Credit Facility
On July 25, 2001, immediately following the initial public offering of Inergy,
L.P., Inergy Propane, LLC entered into a $100 million amended and restated
senior secured credit facility with First Union National Bank and other 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 September 6, 2001, the balance
outstanding under the credit facility was $50.6 million, including $11.6 million
under the working capital facility.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill will
no longer be amortized, but will be subject to reviews for impairment on a
periodic basis. We expect to adopt SFAS No. 142 effective October 1, 2001.
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 June 30, 2001, we had
floating rate obligations totaling approximately $71.5 million for amounts
borrowed under our revolving line of credit and long- term debt. We entered into
interest rate hedging agreements in the form of interest rate swaps that
provided us with a fixed rate of approximately 7.5% on $25,000 of these
obligations at June 30, 2001, which is recorded as a liability and accumulated
other comprehensive income charge in the accompanying balance sheet. As of June
30, 2001, the fair value of these fixed rate obligations was approximately $400
greater than the recorded amount. The remaining floating rate obligations of
$46.5 million expose us to the risk of increased interest expense in the event
of increases in short-term interest rates. In July 2001, $35,100 of the proceeds
received from the initial public offering were used to repay long-term debt,
including the $25,000 of long-term debt subject to the interest rate swap
agreements. Subsequent to June 30, 2001 but immediately prior to the closing of
the initial public offering in July 2001, we terminated the interest rate
hedging agreements related to the long-term debt being repaid.
The termination of the interest rate swaps as discussed above will result in
an interest expense charge of $507 in the fourth quarter of fiscal 2001.
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 June 30, 2001
and September 30, 2000 include fixed price payor for 1.4 million and 1.5 million
barrels, respectively and fixed price receiver for 1.6 million and 1.5 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 June 30, 2001 and September 30, 2000 was assets of $8,534 and
$3,580, respectively and liabilities of $6,484 and $2,294, respectively related
to propane. All intercompany transactions have been appropriately eliminated.
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 and periodic monitoring procedures. The
counterparties associated with assets from price risk management activities, as
of June 30, 2001 and September 30, 2000 were energy marketers.
18
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
Initial Public Offering
On July 31, 2001, we completed the sale of 1,840,000 common units,
including the underwriters over-allotment option of 240,000 units, at
an initial public offering price of $22.00 per unit, pursuant to a
Registration Statement on Form S-1 (Registration No. 333-56976), which
was declared effective by the Securities and Exchange Commission on
July 25, 2001. The managing underwriters of our initial public offering
were A.G. Edwards & Sons, Inc., First Union Securities, Inc., and
Raymond James.
The aggregate gross proceeds raised in the offering were
approximately $40.5 million. Our total expenses in connection with the
offering were approximately $6.2 million, of which $2.8 million was for
underwriting discounts and commissions and, based on our reasonable
estimate, approximately $3.4 million was for other expenses. Our net
proceeds from the offering were approximately $34.3 million. We used
$5.0 million of the net proceeds of this offering to repay our
subordinated debt in full and $29.3 million to repay a portion of our
borrowings under our bank credit facility.
Item 3. 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) Reports on Form 8-K
We did not file any reports on Form 8-K during the quarter ended June
30, 2001.
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.
Date: September 10, 2001 By: /s/ R. Brooks Sherman Jr.
-------------------------
R. Brooks Sherman Jr.
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
20