Back to GetFilings.com
================================================================================
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, 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.)
Two Brush Creek, Suite 200
Kansas City, Missouri 64112
(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 August 1, 2002:
Common Units 3,828,877
Senior Subordinated Units 3,313,367
Junior Subordinated Units 572,542
================================================================================
INERGY, L.P.
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 -- Financial Statements of Inergy, L.P.:
Consolidated Balance Sheets as of September 30, 2001 and June 30, 2002 (unaudited) 3
Unaudited Consolidated Statements of Income for the Three
and Nine Months Ended June 30, 2001 and 2002 5
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended June 30,
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 18
PART II -- OTHER INFORMATION
Item 1 - Legal Proceedings 20
Item 2 - Changes in Securities and Use of Proceeds 20
Item 3 - Defaults Upon Senior Securities 20
Item 4 - Submission of Matters to a Vote of Security Holders 20
Item 5 - Other information 20
Item 6 - Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit 99.2 -Certificate of Chief Executive Officer 22
Exhibit 99.3 -Certificate of Chief Financial Officer 23
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, JUNE 30,
2001 2002
------------- -----------
(Unaudited)
ASSETS
Current assets:
Cash $ 2,171 $ 1,066
Accounts receivable, less allowance for
doubtful accounts of $186 and $1,112 at
September 30, 2001 and June 30, 2002,
respectively 11,457 13,607
Inventories 12,694 27,887
Prepaid expenses and other current assets 1,411 3,947
Assets from price risk management activities 9,187 5,120
------------- -----------
Total current assets 36,920 51,627
Property, plant and equipment, at cost:
Land and buildings 4,511 11,655
Office furniture and equipment 1,172 6,289
Vehicles 11,435 17,828
Tanks and plant equipment 58,737 100,648
------------- -----------
75,855 136,420
Less accumulated depreciation (5,812) (11,521)
------------- -----------
Net property, plant and equipment 70,043 124,899
Intangible assets:
Covenants not to compete 3,771 6,104
Deferred financing costs 2,985 5,785
Deferred acquisition costs 115 -
Customer accounts 14,000 41,411
Goodwill 32,121 47,167
------------- -----------
52,992 100,467
Less accumulated amortization (4,431) (7,659)
------------- -----------
Net intangible assets 48,561 92,808
Other 129 380
------------- -----------
Total assets $ 155,653 $ 269,714
============= ===========
3
INERGY, L.P. AND SUBSIDIARY
(Successor to Inergy Partners, LLC and Subsidiaries)
CONSOLIDATED BALANCE SHEETS
(In Thousands)
SEPTEMBER 30, JUNE 30,
2001 2002
------------- -----------
(Unaudited)
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 8,416 $ 20,187
Accrued expenses 5,679 5,989
Customer deposits 10,060 6,457
Liabilities from price risk management activities 4,612 2,383
Current portion of long-term debt (Note 2) 10,469 1,471
------------- -----------
Total current liabilities 39,236 36,487
Long-term debt, less current portion (Note 2) 43,663 106,912
Partners' capital (Note 4):
Common unitholders (1,840,000 and 3,678,877 units
issued and outstanding as of September 30, 2001
and June 30, 2002) 24,981 76,557
Senior subordinated unitholders (3,313,367 units
issued and outstanding as of September 30, 2001
and June 30, 2002) 45,060 45,972
Junior subordinated unitholders (572,542 units
issued and outstanding as of September 30, 2001
and June 30, 2002) 1,258 1,416
Non-managing general partner (2% interest with
116,855 and 154,383 equivalent units
outstanding as of September 30, 2001 and June
30, 2002) 1,455 2,370
------------- -----------
Total partners' capital 72,754 126,315
------------- -----------
Total liabilities and partners' capital $ 155,653 $ 269,714
============= ===========
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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------------
2001 2002 2001 2002
----------------------------------------------------------
(Unaudited) (Unaudited)
Revenue:
Propane $ 18,506 $ 54,219 $ 183,715 $ 210,608
Other 3,297 3,761 8,527 11,433
----------------------------------------------------------
21,803 57,980 192,242 222,041
Cost of product sold 16,375 45,818 157,800 159,605
----------------------------------------------------------
Gross profit 5,428 12,162 34,442 62,436
Operating and administrative expenses 5,905 11,898 17,369 35,225
Depreciation and amortization 1,591 3,174 4,179 8,319
----------------------------------------------------------
Operating income (loss) (2,068) (2,910) 12,894 18,892
Other income (expense):
Interest expense (2,270) (2,318) (5,290) (5,555)
Interest expense related to write-off of deferred
financing costs - (585) - (585)
Gain (loss) on sale of property, plant and equipment 27 (109) 27 (228)
Other 149 42 394 164
----------------------------------------------------------
Income (loss) before income taxes (4,162) (5,880) 8,025 12,688
Provision for income taxes - 30 - 82
----------------------------------------------------------
Net income (loss) $ (4,162) $ (5,910) $ 8,025 $ 12,606
==========================================================
Partners' interest information:
Non-managing general partners' interest in net income (loss) $ (118) $ 252
========== =========
Limited partners' interest in net income (loss):
Common unit interest $ (2,374) $ 4,738
Senior subordinated interest (2,914) 6,494
Junior subordinated unit interest (504) 1,122
---------- ---------
Total limited partners' interest in net income (loss) $ (5,792) $ 12,354
========== =========
Net income (loss) per limited partner unit:
Basic $ (0.88) $ 1.96
========== =========
Diluted $ (0.88) $ 1.93
========== =========
Weighted average limited partners' units outstanding:
Basic 6,585 6,303
========== =========
Diluted 6,585 6,402
========== =========
See accompanying notes.
5
INERGY, L.P. AND SUBSIDIARY
(Successor to Inergy Partners, LLC and Subsidiaries)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
NINE MONTHS ENDED
JUNE 30,
---------------------------
2001 2002
---------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 8,025 $ 12,606
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts 584 937
Depreciation 2,090 5,882
Amortization 2,089 2,437
Amortization of deferred financing costs 292 909
Interest expense related to write-off of
deferred financing costs - 585
Loss (gain) on disposal of property, plant
and equipment (27) 228
Net assets (liabilities) from price risk
management activities (1,164) 1,837
Deferred compensation 58 -
Changes in operating assets and liabilities,
net of effects from acquisition of retail
propane companies:
Accounts receivable 15,390 3,715
Inventories 1,923 (11,361)
Prepaid expenses and other current
assets (1,446) (2,008)
Other assets (9) -
Accounts payable (19,228) 9,736
Accrued expenses (360) (2,593)
Customer deposits 2,212 (4,481)
---------------------------
Net cash provided by operating activities 10,429 18,429
INVESTING ACTIVITIES
Acquisition of retail propane companies, net of
cash acquired (56,263) (83,531)
Purchases of property, plant and equipment (3,142) (4,424)
Deferred financing and acquisition costs
incurred (1,998) (3,696)
Proceeds from sale of property, plant and
equipment 27 209
Other - 20
---------------------------
Net cash used in investing activities (61,376) (91,422)
6
INERGY, L.P. AND SUBSIDIARY
(Successor to Inergy Partners, LLC and Subsidiaries)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
NINE MONTHS ENDED
JUNE 30,
---------------------------
2001 2002
---------------------------
(Unaudited)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt $ 108,152 $ 370,101
Principal payments on long-term debt and
noncompete obligations (70,465) (319,444)
Contribution from non-managing general partner - 880
Net proceeds from issuance of common units - 31,216
Proceeds from issuance of redeemable preferred
members' interest 16,115 -
Redemption of preferred stock (32) -
Distributions to members/unitholders (1,469) (10,865)
---------------------------
Net cash provided by financing activities 52,301 71,888
---------------------------
Net increase (decrease) in cash 1,354 (1,105)
Cash at beginning of period 1,373 2,171
---------------------------
Cash at end of period $ 2,727 $ 1,066
===========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 4,930 $ 4,322
===========================
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
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
June 30, 2002, the Partnership has limited partner interests consisting of
3,678,877 common units (including 777,872 common units issued in December 2001
in connection with the acquisition of Independent Propane Company ("IPC") and
1,061,005 common units issued in the 2002 secondary offering) (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 (154,383 equivalent units outstanding at June 30, 2002).
Inergy GP, LLC, (the "Managing General Partner"), a wholly owned subsidiary of
Inergy Holdings, LLC, has sole responsibility for conducting our business and
managing our operations. Inergy Holdings, LLC owns the incentive distribution
rights, as defined in the Partnership Agreement of the Partnership. On July 2,
2002, an additional 150,000 common units were issued as a result of the
underwriters' exercise of the over-allotment related to the secondary offering.
Basis of Presentation
The financial information as of June 30, 2002 and for the three and
nine-month periods ended June 30, 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 nine-month periods ended June 30, 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 on and subsequent to July 31, 2001.
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 June 30, 2001 and 2002, and $1.1 million and $0 for the nine
months ended June 30, 2001 and 2002, respectively.
NOTE 2 - LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
September 30, June 30,
2001 2002
------------- ------------
(Unaudited)
Credit agreement $ 53,000 $ 19,739
Senior secured notes - 85,000
Obligations under non-competition
agreements and notes to former owners of
businesses acquired 1,101 3,633
Other 31 11
------------- ------------
54,132 108,383
Less current portion 10,469 1,471
------------- ------------
$ 43,663 $ 106,912
============= ============
Inergy's credit agreement was amended in December 2001 in connection with
the IPC Acquisition (December 2001 amendment) discussed in Note 4. This December
2001 amendment was comprised of a $195 million facility including a $50 million
revolving working capital facility due December 2004, a $75 million revolving
acquisition facility due December 2004 and a $70 million term note due April
2003. The $70 million term note was repaid in June 2002 with proceeds from a
private placement of long-term senior secured notes as discussed below, thus
reducing the amount available under the credit facility to $125 million. 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 4.34% and 5.25% at
June 30, 2002. At June 30, 2002, the balance outstanding under the credit
facility was $19.7 million, including $1.7 million under the working capital
facility. All of the outstanding balance is classified as long-term in the
accompanying 2002 consolidated balance sheet.
On June 7, 2002, Inergy entered into a note purchase agreement with a group
of institutional lenders pursuant to which it issued $85.0 million aggregate
principal amount of senior secured notes with a weighted average interest rate
of 9.07% and a weighted average maturity of 5.9 years. The senior secured notes
consist of the following: $35 million principal amount of 8.85% senior secured
notes with a 5-year maturity, $25.0 million principal amount of 9.10% senior
secured notes with a 6-year maturity, and $25.0 million principal amount of
9.34% senior secured notes with a 7-year maturity. The net proceeds from these
senior secured notes were used to repay a portion of the amount outstanding
under the credit facility.
The credit agreement and senior secured notes contain 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 was in compliance with all covenants at June 30, 2002.
9
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 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
June 30, 2002 June 30, 2001
----------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Retail Wholesale Retail Wholesale
Sales Sales Intersegment Sales Sales Intersegment
Operations Operations Eliminations Total Operations Operations Eliminations Total
----------- ---------- ------------ -------- ---------- ---------- ------------ ---------
Revenues $ 19,570 $ 42,576 $ (4,166) $ 57,980 $ 9,839 $ 19,305 $ (7,341) $ 21,803
Gross profit 11,334 887 (59) 12,162 4,607 1,125 (304) 5,428
Nine Months Ended Nine Months Ended
June 30, 2002 June 30, 2001
-------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Retail Wholesale Retail Wholesale
Sales Sales Intersegment Sales Sales Intersegment
Operations Operations Eliminations Total Operations Operations Eliminations Total
----------- ---------- ------------ --------- ---------- ---------- ------------ ---------
Revenues $ 96,799 $ 146,982 $ (21,740) $ 222,041 $ 63,327 $ 162,928 $ (34,013) $ 192,242
Gross profit
58,236 4,709 (509) 62,436 28,858 7,927 (2,343) 34,442
Identifiable
assets 12,172 29,322 - 41,494 7,657 6,733 (8) 14,382
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 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 used 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.
10
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 $83.5 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. IPCH Acquisition Corp. declined to exercise its right under the
Registration Rights Agreement to include its 394,601 common units in the
registration statement prepared in connection with the 2002 secondary offering.
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 IPC 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 IPC term 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 $0.2 million 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 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 connection with
the 2002 secondary offering, 338,995 of the 349,914 common units covered by the
Registration Rights Agreement were included in Inergy, L.P.'s registration and
thereupon sold by the respective unitholders. As a result, only 10,919 common
units continue to be entitled to the benefits afforded by that 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 information is in thousands of dollars:
Nine-month period ended
June 30,
-------------------------------
2001 2002
-------------------------------
Sales $ 276,142 $ 236,804
Net income $ 18,855 $ 14,143
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 and the
sufficiency of cash received from operations and borrowings to meet our
foreseeable liquidity needs. 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 JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Volume. During the three months ended June 30, 2002, Inergy sold 13.1
million retail gallons of propane, an increase of 7.9 million gallons, or 152%,
from the 5.2 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 Pro Gas and the December 2001 acquisition of IPC.
Wholesale gallons delivered increased to 101.2 million gallons in the three
months ended June 30, 2002 from 28.5 million gallons in the same three-month
period in 2001. This increase was attributable to the growth of our existing
wholesale operations.
Revenues. Revenues in the three months ended June 30, 2002 were $58.0
million, an increase of $36.2 million, or 166%, from $21.8 million in the same
three-month period in 2001.
Revenues from retail sales were $18.5 million (after elimination of sales
to our wholesale operations) in the three months ended June 30, 2002, an
increase of $8.7 million, or 89%, from $9.8 million for the same three-month
period in 2001. This increase was primarily attributable to the acquisitions
partially offset by lower selling prices due to the lower cost of propane.
Retail revenues consist of retail propane sales, transportation revenues, tank
rentals, heating oil sales, appliance sales and service.
Revenues from wholesale sales were $39.5 million (after elimination of
sales to our retail operations) in the three months ended June 30, 2002, an
increase of $27.5 million, from $12.0 million for the same three-month period in
2001. This increase was attributable to the growth of our wholesale operations.
Cost of Product Sold. Cost of product sold in the three months ended June
30, 2002 was $45.8 million, an increase of $29.4 million, from cost of product
sold of $16.4 million in the same three-month period in 2001. This increase was
primarily attributable to a significant increase in the wholesale propane
volumes and acquisitions, partially offset by a slightly lower cost per gallon
of propane.
Gross Profit. Retail gross profit was $11.3 million in the three months
ended June 30, 2002 compared to $4.6 million in the three months ended June 30,
2001, an increase of $6.7 million. This increase was primarily attributable to
an increase in retail gallons sold due to acquisitions. Wholesale gross profit
was $0.8 million (after elimination of gross profit attributable to our retail
operations) in the three months ended June 30, 2002 compared to $0.8 million in
the same three-month period in 2001, due to a decline in the gross profit per
gallon offset by an increase in volume.
Operating and Administrative Expenses. Operating and administrative
expenses increased $6.0 million or 101%, to $11.9 million
12
in the three-month period ended June 30, 2002 as compared to $5.9 million in the
same period in 2001. This increase resulted from the acquisitions 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 the growth
of the partnership, including the completion of our initial public offering in
July 2001.
Depreciation and Amortization. Depreciation and amortization increased $1.6
million or 99%, to $3.2 million in the three months ended June 30, 2002 from
$1.6 million in the same three-month period in 2001 primarily as a result of the
Pro Gas and IPC acquisitions.
Interest Expense. Interest expense was $2.3 million in the three months
ended June 30, 2002 and 2001. The effect of the additional debt outstanding
during 2002 was offset by lower interest rates.
Interest Expense Related to Write-off of Deferred Financing Costs. A
one-time charge of $0.6 million was recorded as a result of the write-off of
deferred financing costs associated with the IPC term note that was repaid with
proceeds of a private placement of senior secured notes.
Net Loss. A net loss was recorded in the three months ended June 30, 2002
of $5.9 million, compared to a loss of $4.2 million in the same three-month
period in 2001. This increase in net loss was primarily attributable to an
increase in operating and administrative expenses and depreciation and
amortization expenses partially offset by an increase in gross profit.
EBITDA. In the three months ended June 30, 2002, income before interest,
taxes, depreciation and amortization was $0.2 million compared to a loss of $0.3
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 as a result of acquisitions, in addition
to higher gross profit per gallon at our existing retail locations. 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.
NINE MONTHS ENDED JUNE 30, 2002 COMPARED TO NINE MONTHS ENDED JUNE 30, 2001
Volume. During the nine months ended June 30, 2002, Inergy, L.P. sold 73.6
million retail gallons of propane, an increase of 34.4 million gallons, or 88%,
from the 39.2 million retail gallons sold during the same nine-month fiscal
period in 2001. The increase in retail sales volume was principally due to the
January 2001 acquisition of Hoosier Propane Group ("Hoosier"), the November 2001
acquisition of Pro Gas and the December 2001 acquisition of IPC. The increases
associated with these acquisitions were partially offset by weather that was
approximately 16% warmer in the nine months ended June 30, 2002 as compared to
the same period in 2001 in the Partnership's areas of operations.
Wholesale gallon delivered increased 142.1 million gallons, or 75%, to
332.3 million gallons in the nine months ended June 30, 2002 from 190.2 million
gallons in the same nine-month period in 2001. This increase was attributable to
the January 2001 acquisition of Hoosier and the growth of our existing
operations, partially offset by a decrease due to the warmer weather in 2002 as
described above.
Revenues. Revenues in the nine months ended June 30, 2002 were $222.0
million, an increase of $29.8 million, or 16%, from $192.2 million of revenues
in the same nine-month period in 2001.
Revenues from retail sales were $92.8 million (after elimination of sales
to our wholesale operations) in the nine months ended June 30, 2002, an increase
of $29.5 million, or 47%, from $63.3 million for the same nine-month period in
2001. This increase was primarily attributable to acquisition related volume,
partially offset by lower selling prices of propane due to the lower cost of
propane and volume decreases at our existing locations as a result of warmer
weather in the nine-month period ended June 30, 2002. These revenues consist of
retail propane sales, transportation revenues, tank rentals, heating oil sales,
appliance sales and service.
Revenues from wholesale sales were $129.3 million (after elimination of
sales to our retail operations) in the nine months ended June 30, 2002, a
increase of $0.4 million, from $128.9 million for the same nine-month period in
2001. This increase was attributable to an increase in gallons delivered,
partially offset by a decrease in selling prices as a result of the lower cost
of propane.
13
Cost of Product Sold. Cost of product sold in the nine months ended June
30, 2002 was $159.6 million, a decrease of $1.8 million, from cost of product
sold of $157.8 million in the same nine-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 $58.2 million in the nine months
ended June 30, 2002 compared to $28.9 million in the nine months ended June 30,
2001, an increase of $29.3 million, or 101%. This increase was primarily
attributable to an increase in retail gallons sold due to acquisitions.
Wholesale gross profit was $4.2 million (after elimination of gross profit
attributable to our retail operations) in the nine months ended June 30, 2002
compared to $5.6 million in the same nine-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 $17.8 million, or 103%, to $35.2 million in the nine-month
period ended June 30, 2002 as compared to $17.4 million in the same period in
2001. This increase resulted from acquisitions 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 the growth of the
partnership, including the completion of our initial public offering in July
2001.
Depreciation and Amortization. Depreciation and amortization increased $4.1
million, or 99%, to $8.3 million in the nine months ended June 30, 2002 from
$4.2 million in the same nine-month period in 2001 primarily as a result of the
Hoosier, Pro Gas and IPC acquisitions.
Interest Expense. Interest expense increased $0.3 million, or 5%, to $5.6
million in the nine months ended June 30, 2002 as compared to $5.3 million in
the same period in 2001. This increase is the result of higher average
borrowings outstanding during 2002 as compared to 2001, partially offset by
lower interest rates in 2002.
Interest Expense Related to Write-off of Deferred Financing Costs. A
one-time charge of $0.6 million was recorded as a result of the write-off of
deferred financing costs associated with the IPC term note that was repaid with
proceeds of a private placement of senior secured notes.
Net Income. Net income increased $4.6 million, or 57%, to $12.6 million in
the nine months ended June 30, 2002 from $8.0 million in the same nine-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 nine months ended June 30, 2002, income before interest,
taxes, depreciation and amortization was $27.1 million compared to $17.5 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
In the 2002 secondary offering, the Partnership issued 1,061,005 new common
units during June 2002 resulting in proceeds of $31.2 million, net of
underwriter's discount, commission, and offering expenses. Inergy Partners, LLC
contributed $0.7 million in cash to Inergy, L.P. in conjunction with the June
2002 issuance in order to maintain its 2% non-managing general partner interest.
The Partnership received an additional $4.5 million of net proceeds in July 2002
from the issuance of an additional 150,000 common units issued due to the
underwriters' exercise of the over-allotment option.
Cash provided by operating activities was $18.4 million in the nine months
ended June 30, 2002 compared to $10.4 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 $12.6 million for the nine months
ended June 30, 2002 from $8.0 million for the nine months ended June 30, 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
effects of the warmer weather in the 2002 period. Depreciation and amortization,
including the amortization and write-off of deferred financing costs increased
to $9.8 million in the nine months ended June 30, 2002 from $4.5 million in the
same fiscal 2001 period due to the effects of acquisitions and the write-off.
The change in operating assets and liabilities, including net assets/liabilities
from price risk management activities, required a use of cash amounting to $5.2
million in the nine months ended June 30, 2002 and $2.7 million in the same
fiscal 2001 period to accommodate increased business volume.
Cash used in investing activities was $91.4 million in the nine months
ended June 30, 2002 compared to $61.4 million in the nine
14
months ended June 30, 2001. The 2002 period included $83.5 million of cash used
for acquisitions and $4.4 million used for capital expenditures. In addition,
the 2002 period included a use of $3.7 million for payment of deferred financing
costs associated with the credit facilities used to finance the acquisitions,
together with costs associated with the private placement of senior secured
notes in 2002. The 2001 period included $56.3 million used for acquisitions and
$3.1 million for capital expenditure purchases.
Cash provided by financing activities of $71.9 million in the nine months
ended June 30, 2002 and $52.3 million in the nine months ended June 30, 2001.
The 2002 period included net proceeds from an $85.0 million private placement of
long-term debt (see below) and repayments related to amended credit facilities
negotiated in connection with acquisitions in that period. In addition, Inergy,
L.P. received cash of approximately $31.2 million in connection with the 2002
secondary offering from issuance of common units and paid $10.9 million in
distributions to unitholders in the 2002 period. The 2001 period included net
proceeds from issuance of long-term debt of $37.7 million and redeemable
preferred members' interest of $16.1 million.
The Partnership entered into a note purchase agreement in June 2002 with a
group of institutional lenders pursuant to which it issued $85.0 million
aggregate principal amount of senior secured notes with a weighted average
interest rate of 9.07% and a weighted average maturity of 5.9 years. The net
proceeds from this issuance were used to repay debt outstanding under the bank
credit facility.
At June 30, 2002, we had goodwill of $47.2 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 $0.66 per limited partner unit distribution to its
unitholders in May 2002, which totaled $4.4 million. The Partnership announced
that it will distribute $0.675 per limited partner unit ($2.70 annually) on
August 14, 2002, for a total distribution of $5.3 million.
The following tables summarizes the Partnership's long-term debt and
operating lease obligations as of June 30, 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 $ 108,383 $ 1,471 $ 21,322 $ 35,328 $ 50,262
Future minimum lease payments under
noncancelable operating leases 4,963 1,597 2,445 857 64
Standby letters of credit 3,956 3,956 - - -
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 June 30, 2002 of $2.7 million. The net change of $1.9 million
includes a net decrease in fair value of $4.6 million from contracts settled
during the nine-month period, partially offset by a net $2.7 million increase
from other changes in fair value. Of the outstanding fair value as of June 30,
2002, contracts with a maturity of less than one year totaled $2.6 million, and
contracts maturing between one and two years totaled $0.1 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
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 due in December 2004, a $75 million revolving acquisition
facility due in December 2004 and a $70 million term note due in April 2003. The
$70 million term note was repaid in June 2002 with proceeds from a private
placement of long-term senior secured notes,
15
thus reducing the amount available under the credit facility to $125 million.
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 4.34% and 5.25% at
June 30, 2002. At June 30, 2002, the balance outstanding under the credit
facility was $19.7 million, including $1.7 million under the working capital
facility, $19.7 million of which is classified as long-term in the accompanying
2002 consolidated balance sheet.
On June 7, 2002, Inergy entered into a note purchase agreement with a group
of institutional lenders pursuant to which it issued $85.0 million aggregate
principal amount of senior secured notes with a weighted average interest rate
of 9.07% and a weighted average maturity of 5.9 years. The senior secured notes
consist of the following: $35 million principal amount of 8.85% senior secured
notes with a 5-year maturity, $25.0 million principal amount of 9.10% senior
secured notes with a 6-year maturity, and $25.0 million principal amount of
9.34% senior secured notes with a 7-year maturity. On August 1, 2002, the
balance outstanding under the senior secured notes was $85.0 million, and under
the credit facility was $30.8 million, including $12.8 million 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. Management has not determined the
method, timing, or impact of adopting SFAS No. 144.
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, which
eliminates goodwill amortization that would have totaled approximately $2.1
million in fiscal 2002, based on the balances as of September 30, 2001 and
totaled approximately $1.7 million in fiscal 2001.
CRITICAL ACCOUNTING POLICIES
ACCOUNTING FOR PRICE RISK MANAGEMENT
Through our wholesale operations, we offer price risk management services
to our customers and, in addition, trades for our own account. Financial
instruments utilized in connection with trading activities are accounted for
using the mark-to-market method in accordance with Emerging Issues Task Force
Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk
Management Activities." 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 our 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.
16
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.
IMPAIRMENT OF LONG-LIVED ASSETS
We review our long-lived assets, other than goodwill, in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of," for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If such events or changes in
circumstances are present, a loss is recognized if the carrying value of the
asset is in excess of the sum of the undiscounted cash flows expected to result
from the use of the asset and its eventual disposition. An impairment loss is
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset. For assets identified to be disposed of in the future,
the carrying value of these assets is compared to the estimated fair value less
the cost to sell to determine if impairment is required. Until the assets are
disposed of, an estimate of the fair value is recalculated when related events
or circumstances change.
We review goodwill, in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets," for impairment on at least an annual basis by applying a
fair-value-based test. If the fair value of the goodwill is less than the
carrying value, a loss is recognized for the excess of the carrying value over
the fair value of the goodwill.
In connection with the transitional goodwill impairment evaluation,
Statement No. 142 requires us to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this we identify our reporting units and determine the carrying value of each
reporting unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of the date of
adoption. To the extent a reporting unit's carrying value exceeds its fair
value, an indication exists that the reporting unit's goodwill may be impaired
and we must perform the second step of the transitional impairment test. In the
second step, we must compare the implied fair value of the goodwill, determined
by allocating the fair value to all of its assets (recognized and unrecognized)
and liabilities in a manner similar to a purchase price allocation in accordance
with SFAS No. 141, to its carrying amount, both of which would be measured as of
the date of adoption. This second step is required to be completed as soon as
possible, but no later than the end of the year of adoption.
17
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, 2002, we had
floating rate obligations totaling approximately $19.7 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 June 2002 levels, our combined interest expense would increase by a
total of approximately $0.2 million per year.
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-through 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 June
30, 2002 include fixed price payor for 3.4 million barrels, and fixed price
receiver for 5.0 million barrels. Notional amounts reflect the volume of
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, 2002 was assets of $5.1 million and liabilities of
$2.4 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.
18
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 June 30, 2002 and
September 30, 2001 were energy marketers.
19
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
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
4.1 Note Purchase Agreement entered into as of June 7, 2002, by
Inergy Propane, LLC and the purchasers named therein (incorporated
herein by reference to Exhibit 4.4 of Inergy, L.P.'s Registration
Statement on Form S-1/A filed on June 13, 2002).
4.2 Parent Guaranty dated as of June 7, 2002, by Inergy, L.P. in
favor of the noteholders named therein (incorporated herein by
reference to Exhibit 4.5 of Inergy, L.P.'s Registration Statement
on Form S-1/A filed on June 13, 2002).
4.3 Limited Guaranty dated as of June 7, 2002, by IPCH Acquisition
Corp. in favor of the noteholders named therein (incorporated
herein by reference to Exhibit 4.6 of Inergy, L.P.'s Registration
Statement on Form S-1/A filed on June 13, 2002).
4.4 Subsidiary Guaranty dated as of June 7, 2002, by the
guarantors named therein in favor of the noteholders named therein
(incorporated herein by reference to Exhibit 4.7 of Inergy, L.P.'s
Registration Statement on Form S-1/A filed on June 13, 2002).
99.1 Intercreditor and Collateral Agency Agreement entered into as
of June 7, 2002, by and among Wachovia Bank, National Association,
the lenders named therein and the noteholders named therein
(incorporated herein by reference to Exhibit 10.19 of Inergy,
L.P.'s Registration Statement on Form S-1/A filed on June 13,
2002).
99.2 Certificate of the Chief Executive Officer of Inergy, L.P.
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Certificate of the Chief Financial Officer of Inergy, L.P.
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) The registrant filed a Report Form 8-K on June 13, 2002
regarding an $85 million aggregate principal amount of senior
secured notes.
20
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: August 9, 2002 By: /s/ R. Brooks Sherman Jr.
-------------------------------------------
R. Brooks Sherman Jr.
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
21