I N E R G Y, L . P.
A N N U A L R E P O R T 2 0 0 2
A N N U A L I Z E D
D I S T R I B U T I O N
I N C R E A S E S
$2.80
$2.70
$2.64
$2.50
$2.40
D E A R F E L L O W U N I T H O L D E R S ,
Thank you for the confidence you have demonstrated in us through your investment in Inergy.
As Inergy carries out the disciplined execution of our strategic plan, we have established a track record of
outstanding performance for our unitholders. Our performance is the result of our commitment to build long-term
value on your behalf.
In 2002 we met our key financial targets despite challenging industry conditions. Income before interest, taxes,
depreciation and amortization (EBITDA) was $28.8 million – up 64 percent over 2001. This resulted in an increase
in net income of over 90 percent. Most importantly, we increased your per unit distribution to an annualized rate of
$2.80 at year end, almost 17 percent higher than year end 2001.
As a unitholder, you’ll find Inergy to be a compelling investment
opportunity with the following benefits:
• Growth and Performance: Inergy has the best track record of
growth in our industry as demonstrated by consecutive cash
distribution increases.
• Safety in Distributions: We offer the safest cash distribution
in the propane industry as measured by common unit cash
distribution coverage.
• Financial Strength: Our strong balance sheet means the
company is positioned to weather a variety of industry and
economic climates while continuing to execute our growth strategy.
John Sherman addresses Inergy employees
10/01 1/02
4/02
7/02 10/02
investment versus alternatives in the overall market.
• Yield: As of this printing, our substantially tax deferred yield of 9.1% makes Inergy a very attractive
M O N T H/Y E A R
G R O S S P R O F I T
($ I N M I L L I O N S )
• Management Alignment: Our senior managers are significant owners and investors in the company right
alongside you – not just with stock options, but subordinated units. That means we only benefit when the
company performs well for you.
Inergy has attained an industry leadership position in a relatively short period of time by careful execution of
our business model. We financially out-performed the public markets and our competitors on a consistent basis.
In a period of time when market performance has been relatively poor, as of this printing Inergy has delivered a total
return to investors of more than 50% since our Initial Public Offering in July of 2001.
$80
$70
$60
$50
$40
$30
$20
$10
2000 2001 2002
T H E C O V E R
Pro Gas, one of Inergy’s eight
operating companies, serves
more than 15,000 customers
from ten locations in Michigan.
Other Inergy companies operate
under the following names:
Bradley Propane
Country Gas
Hancock Gas Service
Hoosier Propane
Independent Propane Company
McCracken Propane
L&L Transportation
Other important accomplishments this fiscal year include:
• Completing two strategic and accretive acquisitions – The Pro Gas Companies of Michigan and Independent
Propane Company, the largest propane retailer in Texas. Both companies have been successfully integrated
into our organization and are an important part of our ability to deliver continued growth.
• Securing an exclusive marketing agreement with a major propane producer. This relationship gives Inergy
control of a major supply base, lower product cost, increased reliability and an excellent expansion
opportunity for our industry-leading supply and logistics business.
• Substantially strengthening the company’s financial position. We executed an important long-term debt
issuance and accessed the public equity markets for a second time with a successful secondary offering.
Our strong balance sheet provides us with the financial flexibility to take Inergy to the next level.
We achieved all of this while maintaining a sterling safety record, which is our goal each and every year.
We are building the management team capable of moving the company well into the future. In 2002, Inergy
added to our outstanding team of employees on all levels of the organization. Please join me in congratulating our
talented team for their performance. Because of their contributions and individual efforts, we are poised for
continued success.
Our growth prospects are very exciting. The industry remains fragmented while our financial strength uniquely
positions us to execute on the opportunities available. We are experiencing solid internal growth while continually
evaluating quality acquisition candidates.
Thank you again for the confidence and trust you’ve placed in Inergy. We are a company committed to
delivering on your expectations for many years to come.
Sincerely,
John J. Sherman, President and CEO of Inergy, L.P.
Inergy, L.P. - headquartered in Kansas City, Missouri - is among the fastest
growing Master Limited Partnerships (MLPs) in the country. The company’s
operations include the retail marketing, sale and distribution of propane to
residential, commercial, industrial and agricultural customers. Today Inergy
serves nearly 200,000 retail customers from customer service centers
throughout the eastern half of the United States. The company also operates a
growing supply logistics, transportation and wholesale marketing business
that serves independent dealers and multi-state marketers in 35 states.
For more information, please visit our web site, www.InergyPropane.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
FORM 10-K
EXCHANGE ACT OF 1934
For the fiscal year ended September 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: 000-32453
INERGY, L.P.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
43-1918951
(I.R.S. Employer Identification No.)
Two Brush Creek Boulevard, Suite 200, Kansas City, Missouri 64112
(Address of principal executive offices) (Zip Code)
(816) 842-8181
(Registrant's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Title of Each Class
None
Name of Each Exchange on Which Registered
N/A
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Units representing limited partnership interests
(Title of Class)
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 past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X]
No[ ]
The aggregate market value of the 3,395,175 common units of the registrant held by non-affiliates computed by
reference to the $28.05 closing price of such common units on December 2, 2002, was approximately $95,235,000. The
aggregate market value of the 2,192,896 common units of the registrant held by non-affiliates computed by reference to the
$30.10 closing price of such common units on March 29, 2002, the last business day of the registrant’s most recently completed
second fiscal quarter, was approximately $66,006,000. As of December 2, 2002, the registrant had 3,827,176 common units
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the indicated parts of this report:
None.
GUIDE TO READING THIS REPORT
The following information should help you understand some of the conventions used in this
report.
• Throughout this report,
(1)
(2)
when we use the terms "we," "us," “our company,” or "Inergy, L.P.," we are
referring either to Inergy, L.P., the registrant itself, or to Inergy, L.P. and its
operating subsidiaries collectively, as the context requires, and
when we use the term "our predecessor," we are referring to Inergy Partners,
LLC, the entity that conducted our business prior to our initial public offering,
which closed on July 31, 2001. Inergy, L.P. was formed as a Delaware limited
partnership on March 7, 2001 and did not have operations until the closing of our
initial public offering. Our predecessor commenced operations in November
1996. The discussion of our business throughout this report relates to the business
operations of Inergy Partners, LLC prior to Inergy, L.P.'s initial public offering
and of Inergy, L.P. thereafter.
• We have a managing general partner and a non-managing general partner. Our managing
general partner is responsible for the management of our company and its operations are
governed by a board of directors. Our managing general partner does not have rights to
allocations or distributions from our company and does not receive a management fee, but it
is reimbursed for expenses incurred on our behalf. Our non-managing general partner owns
a 2% non-managing general partner interest in our company. Generally, we refer to each
general partner as managing or non-managing, as the case may be. We collectively refer to
our managing general partner and our non-managing general partner as our "general
partners."
INERGY, L.P.
INDEX TO ANNUAL REPORT ON FORM 10-K
PART I
Page
Item 1.
Item 2.
Item 3.
Item 4.
Business .................................................................................................
Properties ...............................................................................................
Legal Proceedings ..................................................................................
Submission of Matters to a Vote of Security Holders............................
PART II
Item 5.
Item 6.
Item 7.
Market for the Registrant’s Common Equity and Related Stockholder
Matters ...................................................................................................
Selected Financial Data..........................................................................
Management’s Discussion and Analysis of Financial Condition and
Results of Operations .............................................................................
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ................
Financial Statements and Supplementary Data......................................
Item 8.
Changes in and Disagreements with Accountants on Accounting and
Item 9.
Financial Disclosure...............................................................................
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors and Executive Officers of the Registrant ...............................
Executive Compensation........................................................................
Security Ownership of Certain Beneficial Owners and Management ...
Certain Relationships and Related Transactions....................................
Controls and Procedures ........................................................................
PART IV
1
13
13
14
14
15
18
34
36
36
36
40
47
50
55
Item 15.
Exhibits, Financial Statement Schedules and Reports on Form 8-K .....
55
PART I
Item 1. Business.
Recent Developments
As previously announced, we acquired the assets of three retail propane distributors
subsequent to September 30, 2002. In October 2002, we acquired the assets of Hancock Gas
Service, Inc. with headquarters in Findlay, Ohio; in December 2002, we acquired the assets of
Central Carolina Gas Company, Inc., with headquarters in Hamlet, North Carolina and Live Oak
Gas Company, Inc., with headquarters in Live Oak, Florida. These three companies distributed
approximately ten million gallons of propane during the 12 months ended September 30, 2002,
which represents approximately 11% of our retail propane gallons distributed during fiscal 2002.
Unless required and specifically indicated otherwise, all information in this Form 10-K
relates to the operations of Inergy, L.P. at or prior to September 30, 2002 and does not include
the assets or operations of the acquisitions made subsequent to September 30, 2002.
General
Inergy, L.P., a publicly traded Delaware limited partnership, was formed on March 7,
2001 but did not conduct operations until the July 31, 2001 closing of our initial public offering.
We own and operate, principally through our operating company, Inergy Propane, LLC, a
rapidly growing retail and wholesale propane marketing and distribution business. Since our
predecessor's inception in November 1996 through September 30, 2002, we have acquired 13
propane companies for an aggregate purchase price of approximately $230 million, including
working capital, assumed liabilities and acquisition costs. These acquisitions include two retail
propane companies acquired during fiscal 2002 for an aggregate purchase price of approximately
$109 million. For the fiscal year ended September 30, 2002, we sold and physically delivered
approximately 89 million gallons of propane to retail customers and approximately 428 million
gallons of propane to wholesale customers.
The address of our principal executive offices is Two Brush Creek Blvd., Suite 200
Kansas City, Missouri, 64112 and our telephone number at this location is 816-842-8181. Our
common units trade on the Nasdaq Stock Market under the symbol “NRGY”.
We believe we are the seventh largest propane retailer in the United States, based on
retail propane gallons sold. Our retail business includes the retail marketing, sale and
distribution of propane, including the sale and lease of propane supplies and equipment, to
residential, commercial, industrial and agricultural customers. We market our propane products
primarily under six regional brand names: Bradley Propane, Country Gas, Hoosier Propane,
McCracken, Pro Gas and Independent Propane Company (IPC). We serve approximately
190,000 retail customers in Arkansas, Florida, Georgia, Illinois, Indiana, Michigan, North
Carolina, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Virginia and Wisconsin from 99
customer service centers which have an aggregate of approximately 6 million gallons of above-
ground propane storage capacity. In addition to our retail business, we operate a wholesale
supply, marketing and distribution business, providing propane procurement, transportation and
supply and price risk management services to our customer service centers, as well as to
independent dealers, multistate marketers, petrochemical companies, refinery and gas processors
1
and a number of other natural gas liquids (NGL) marketing and distribution companies. We
currently provide wholesale supply and distribution services to approximately 350 customers in
24 states, primarily in the Midwest and Southeast.
We have grown primarily through acquisitions of propane operations and, to a lesser
extent, through internal growth. Since our initial acquisition of McCracken Oil & Propane
Company in 1996 and through September 30, 2002, we have completed twelve additional
acquisitions with headquarters in North Carolina, Tennessee, Illinois, Indiana, Michigan and
Texas. The following chart sets forth information about each company we have acquired,
including the three acquisitions subsequent to September 30, 2002:
Acquisition Date
Company (1)
Location
November 1996
McCracken Oil & Propane Company, LLC
Wake Forest, NC
December 1998
Wilson Oil Company of Johnston County, Inc.
Wilson's Mills, NC
December 1998
Ernie Lee Oil & LP Gas, LLC
May 1999
July 1999
Langston Gas & Oil Co., Inc.
Castleberry' s, Inc.
Raleigh, NC
Four Oaks, NC
Smithfield, NC
August 1999
Rolesville Gas & Oil Company, Inc.
Raleigh, NC
October 1999
Bradley Propane, Inc.
Chattanooga, TN
November 1999
Butane-Propane Gas Company of Tenn., Inc.
Marion, TN
June 2000
Country Gas Company, Inc.
November 2000
Bear-Man Propane
January 2001
Hoosier Propane Group
November 2001
Pro Gas Companies
Crystal Lake, IL
Hixson, TN
Kendallville, IN
Muskegon, MI
December 2001
Independent Propane Company Holdings
Irving, TX
Acquisitions Subsequent to September 30, 2002
October 2002
Hancock Gas Service, Inc.
December 2002
Central Carolina Gas Company, Inc.
December 2002
Live Oak Gas Company, Inc.
Findlay, OH
Hamlet, NC
Live Oak, FL
(1)
Name of acquired company as of acquisition date.
2
Industry Background and Competition
Propane, a by-product of natural gas processing and petroleum refining, is a clean-
burning energy source recognized for its transportability and ease of use relative to alternative
stand-alone energy sources. Our retail propane business consists principally of transporting
propane to our customer service centers and other distribution areas and then to tanks located on
our customers' premises. Retail propane falls into three broad categories: residential, industrial
and commercial and agricultural. Residential customers use propane primarily for space and
water heating. Industrial customers use propane primarily as fuel for forklifts and stationary
engines, to fire furnaces, as a cutting gas, in mining operations and in other process applications.
Commercial customers, such as restaurants, motels, laundries and commercial buildings, use
propane in a variety of applications, including cooking, heating and drying. In the agricultural
market, propane is primarily used for tobacco curing, crop drying, poultry brooding and weed
control.
Propane is extracted from natural gas or oil wellhead gas at processing plants or separated
from crude oil during the refining process. Propane is normally transported and stored in a liquid
state under moderate pressure or refrigeration for ease of handling in shipping and distribution.
When the pressure is released or the temperature is increased, it is usable as a flammable gas.
Propane is colorless and odorless; an odorant is added to allow its detection. Propane is clean-
burning, producing negligible amounts of pollutants when consumed.
The retail market for propane is seasonal because it is used primarily for heating in
residential and commercial buildings. Approximately 75% of our retail propane volume is sold
during the peak heating season from October through March. Consequently, sales and operating
profits are generated mostly in the first and fourth calendar quarters of each year.
According to the American Petroleum Institute, the domestic retail market for propane is
approximately 12.1 billion gallons annually. This represents approximately 5% of household
energy consumption in the United States. Propane competes primarily with natural gas,
electricity and fuel oil as an energy source, principally on the basis of price, availability and
portability. Propane is more expensive than natural gas on an equivalent BTU basis in locations
served by natural gas, but serves as an alternative to natural gas in rural and suburban areas
where natural gas is unavailable or portability of product is required. Historically, the expansion
of natural gas into traditional propane markets has been inhibited by the capital costs required to
expand pipeline and retail distribution systems. Although the extension of natural gas pipelines
tends to displace propane distribution in areas affected, we believe that new opportunities for
propane sales arise as more geographically remote neighborhoods are developed. Propane is
generally less expensive to use than electricity for space heating, water heating, clothes drying
and cooking. Although propane is similar to fuel oil in certain applications and market demand,
propane and fuel oil compete to a lesser extent than propane and natural gas, primarily because
of the cost of converting to fuel oil. The costs associated with switching from appliances that use
fuel oil to appliances that use propane are a significant barrier to switching. By contrast, natural
gas can generally be substituted for propane in appliances designed to use propane as a principal
fuel source.
In addition to competing with alternative energy sources, we compete with other
companies engaged in the retail propane distribution business. Competition in the propane
industry is highly fragmented and generally occurs on a local basis with other large full-service
3
multi-state propane marketers, smaller local independent marketers and farm cooperatives.
Based on industry publications, we believe that the ten largest retailers account for less than 36%
of the total retail sales of propane in the United States, and that no single marketer has a greater
than 10% share of the total retail market in the United States. Most of our customer service
centers compete with several marketers or distributors. Each customer service center operates in
its own competitive environment because retail marketers tend to locate in close proximity to
customers. Our typical customer service center generally has an effective marketing radius of
approximately 25 miles, although in certain rural areas the marketing radius may be extended by
a satellite location.
The ability to compete effectively further depends on the reliability of service,
responsiveness to customers and the ability to maintain competitive prices. We believe that our
safety programs, policies and procedures are more comprehensive than many of our smaller,
independent competitors and give us a competitive advantage over such retailers. We also
believe that our service capabilities and customer responsiveness differentiate us from many of
these smaller competitors. Our employees are on call 24-hours and seven-days-a-week for
emergency repairs and deliveries.
The wholesale propane business is highly competitive. Our competitors in the wholesale
business include producers and independent regional wholesalers. We believe that our wholesale
supply and distribution business provides us with a stronger regional presence and a reasonably
secure, efficient supply base, and positions us well for expansion through acquisitions or start-up
operations in new markets.
Retail propane distributors typically price retail usage based on a per gallon margin over
wholesale costs. As a result, distributors generally seek to maintain their operating margins by
passing costs through to customers, thus insulating themselves from volatility in wholesale
propane prices. During periods of sudden price increases in propane at the wholesale level costs,
distributors may be unable or unwilling to pass entire cost increases through to customers. In
these cases, significant decreases in per gallon margins may result.
The propane distribution industry is characterized by a large number of relatively small,
independently owned and operated local distributors. Each year a significant number of these
local distributors have sought to sell their business for reasons that include retirement and estate
planning. In addition, the propane industry faces increasing environmental regulations and
escalating capital requirements needed to acquire advanced, customer-oriented technologies.
Primarily as a result of these factors, the industry is undergoing consolidation, and we, as well as
other national and regional distributors, have been active consolidators in the propane market. In
recent years, an active, competitive market has existed for the acquisition of propane assets and
businesses. We expect this acquisition market to continue for the foreseeable future.
Business Strategy
Our primary objective is to increase distributable cash flow for our unitholders, while
maintaining the highest level of commitment and service to our customers. We intend to pursue
this objective by capitalizing on what we believe are our competitive strengths as follows:
4
Proven Acquisition Expertise
Since our predecessor's inception and through September 30, 2002, we have acquired and
successfully integrated 13 propane companies with an aggregate purchase price of approximately
$230 million, including seven propane distributors since September 1999. Our executive officers
and key employees, who average more than 15 years experience in the propane and energy-
related industries, have developed business relationships with retail propane owners and
businesses throughout the United States. These significant industry contacts have enabled us to
negotiate all of our acquisitions on an exclusive basis. This acquisition expertise should allow us
to continue to grow through strategic and accretive acquisitions. Our acquisition program will
continue to seek:
•
•
•
•
businesses in geographical areas experiencing higher-than-average population
growth;
established names with local reputations for customer service and reliability;
high concentration of propane sales to residential customers; and
the retention of key employees in acquired businesses.
Internal Growth
We consistently promote internal growth in our retail operations through a combination
of marketing programs and employee incentives. We enjoy strong relationships with builders,
mortgage companies and real estate agents which enable us to access customers as new
residences are built. We also provide various financial incentives for customers who sign up for
our automatic delivery program, including level payment, fixed price and price cap programs.
We provide all customers with supply, repair and maintenance contracts and 24-hour customer
service. In addition, we have an employee bonus program and other incentives that foster an
entrepreneurial environment by rewarding employees who expand revenues by attracting new
customers while controlling costs. We intend to continue to aggressively seek new customers
and promote internal growth through local marketing and service programs in our residential
propane business.
Operations in High Growth Markets
A majority of our operations are concentrated in higher-than-average population growth
areas, where natural gas distribution is not cost effective. These markets have experienced
strong economic growth which has spurred the development of sizable, low density and
relatively affluent residential communities which are significant consumers of propane. We
intend to pursue acquisitions in similar high growth markets.
Regional Branding
We believe that our success in generating internal growth at our customer service centers
results from our operation under established, locally recognized trade names. We attempt to
capitalize on the reputation of the companies we acquire by retaining their local brand names and
employees, thereby preserving the goodwill of the acquired business and fostering employee
loyalty and customer retention. Our local branch management will continue to manage our
marketing programs, new business development, customer service and customer billing and
5
collections. Our employee incentive programs encourage efficiency and allow us to control costs
at the corporate and field levels.
High Percentage of Retail Sales to Residential Customers
Our retail propane operations concentrate on sales to residential customers. Residential
customers tend to generate higher margins and are generally more stable purchasers than other
customers. For the fiscal year ended September 30, 2002, sales to residential customers
represented approximately 70% of our retail propane gallons sold. Although overall demand for
propane is affected by weather and other factors, we believe that residential propane
consumption is not materially affected by general economic conditions because most residential
customers consider home space heating to be an essential purchase. In addition, we own
approximately 65% of the propane tanks located at our customers' homes. In many states, fire
safety regulations restrict the refilling of a leased tank solely to the propane supplier that owns
the tank. These regulations, which require customers to switch propane tanks when they switch
suppliers, help enhance the stability of our customer base because of the inconvenience and costs
involved with switching tanks and suppliers.
Strong Wholesale Supply, Marketing and Distribution Business
One of our distinguishing strengths is our procurement and distribution expertise and
capabilities. For the fiscal year ended September 30, 2002, we delivered approximately 428
million gallons of propane on a wholesale basis to independent dealers, multistate marketers,
petrochemical companies, refinery and gas processors and a number of other natural gas liquids
(NGL) marketing and distribution companies. These operations are significantly larger on a
relative basis than the wholesale operations of most publicly traded propane businesses. We also
provide transportation services to these distributors through our fleet of transport vehicles and
price risk management services to our customers through a variety of financial and other
instruments. The presence of our trucks serving our wholesale customers across the Midwest
and Southeast allows us to take advantage of various pricing and distribution inefficiencies that
exist in the market from time to time. We believe our wholesale business enables us to obtain
valuable market intelligence and awareness of potential acquisition opportunities. Because we
sell on a wholesale basis to many residential and commercial retailers, we have an ongoing
relationship with a large number of businesses that may be attractive acquisition opportunities
for us. We believe that we will have an adequate supply of propane to support our growing retail
operations at prices which are generally available only to large wholesale purchasers. This
purchasing scale and resulting expertise also helps us avoid shortages during periods of tight
supply to an extent not generally available to other retail propane distributors.
Flexible Financial Structure
We have a $75.0 million revolving credit facility for acquisitions and a $50.0 million
revolving working capital facility. As of December 2, 2002, we had available capacity of
approximately $46.0 million under our acquisition facility and approximately $28.0 million
under our working capital facility. We believe our available capacity under these facilities
combined with our ability to fund acquisitions through the issuance of additional partnership
interests will provide us with a flexible financial structure that will facilitate our acquisition
strategy.
6
Operations
Our operations reflect our two reportable segments; retail sales operations and wholesale sales
operations.
Retail Operations
Customer Service Centers
We distribute propane to approximately 190,000 retail customers in 14 states from 99
customer service centers. We market propane primarily in rural areas, but also have a significant
number of customers in suburban areas where energy alternatives to propane such as natural gas
are generally not available.
We market our propane primarily in the Southeast and Midwest regions of the United
States and in Texas through our customer service centers using six regional brand names. The
following table shows our customer service centers by state:
State
Arkansas
Florida
Georgia
Illinois
Indiana
Michigan
North Carolina
Ohio
Oklahoma
South Carolina
Tennessee
Texas
Total
Number of Customer
Service Centers
1
2
4
2
10
10
9
2
6
1
4
48
99
From our customer service centers, we also sell, install and service equipment related to
our propane distribution business, including heating and cooking appliances. Typical customer
service centers consist of an office and service facilities, with one or more 12,000 to 30,000
gallon bulk storage tanks. Some of our customer service centers also have an appliance
showroom. We have several satellite facilities that typically contain only large capacity storage
tanks. We have approximately six million gallons of above-ground propane storage capacity at
our customer service centers and satellite locations.
Customer Deliveries
Retail deliveries of propane are usually made to customers by means of our fleet of
bobtail and rack trucks. During 2002, we operated approximately 400 bobtail and rack trucks.
Propane is pumped from the bobtail truck, which generally holds 2,500 to 3,000 gallons, into a
stationary storage tank at the customer's premises. The capacity of these tanks ranges from 100
7
gallons to 1,200 gallons, with a typical tank having a capacity of 100 to 300 gallons in milder
climates and 500 to 1,000 gallons in colder climates. We also deliver propane to retail customers
in portable cylinders, which typically have a capacity of five to 35 gallons. These cylinders are
picked up and replenished at our distribution locations, then returned to the retail customer. To a
limited extent, we also deliver propane to certain customers in larger trucks known as transports,
which have an average capacity of approximately 10,000 gallons. During 2002, we operated
over 100 transports. These customers include industrial customers, large-scale heating accounts
and large agricultural accounts.
During the fiscal year ended September 30, 2002, we delivered approximately 17% and
83% of our propane volume of gallons to retail and wholesale customers, respectively. Our retail
sales were made to residential, industrial and commercial, and agricultural customers as follows:
• approximately 70% to residential customers;
• approximately 23% to industrial and commercial customers; and
• approximately 7% to agricultural customers.
No single retail customer accounted for more than 1% of our revenue during the fiscal
year ended September 30, 2002. No single wholesale customer accounted for more than 5% of
our revenue for the same period.
Nearly half of our residential customers receive their propane supply under an automatic
delivery program. Under the automatic delivery program, we deliver propane to our heating
customers approximately six times during the year. We determine the amount of propane
delivered based on weather conditions and historical consumption patterns. Our automatic
delivery program eliminates the customer's need to make an affirmative purchase decision,
promotes customer retention by ensuring an uninterrupted supply and enables us to efficiently
route deliveries on a regular basis. We promote this program by offering level payment billing,
discounts, fixed price options and price caps. In addition, we provide emergency service 24
hours a day, seven days a week, 52 weeks a year. Approximately 65% of our retail propane
customers lease their tanks from us. In most states, due to fire safety regulations, a leased tank
may only be refilled by the propane distributor that owns that tank. The inconvenience and costs
associated with switching tanks and suppliers greatly reduces a customer's tendency to change
distributors. Our tank lease programs are valuable to us from the standpoint of retaining
customers and maintaining profitability.
The propane business is seasonal with weather conditions significantly affecting demand
for propane. We believe that the geographic diversity of our areas of operations helps to
minimize our exposure to regional weather. Although overall demand for propane is affected by
climate, changes in price and other factors, we believe our residential and commercial business
to be relatively stable due to the following characteristics: (i) residential and commercial demand
for propane has been relatively unaffected by general economic conditions due to the largely
non-discretionary nature of most propane purchases by our customers, (ii) loss of customers to
competing energy sources has been low, (iii) the tendency of our customers to remain with us
due to the product being delivered pursuant to a regular delivery schedule and to our ownership
of approximately 65% of the storage tanks utilized by our customers and (iv) our ability to offset
customer losses through internal growth of our customer base in existing markets. Since home
8
heating usage is the most sensitive to temperature, residential customers account for the greatest
usage variation due to weather. Variations in the weather in one or more regions in which we
operate, however, can significantly affect the total volumes of propane we sell and the margins
we realize and, consequently, our results of operations. We believe that sales to the commercial
and industrial markets, while affected by economic patterns, are not as sensitive to variations in
weather conditions as sales to residential and agricultural markets.
Transportation Assets, Truck Fabrication and Maintenance
Our transportation assets are operated by L&L Transportation, LLC, a wholly-owned
subsidiary of our operating company. The transportation of propane requires specialized
equipment. Propane trucks carry specialized steel tanks that maintain the propane in a liquefied
state. As of September 30, 2002, we owned a fleet of approximately 30 tractors, 80 transports,
350 bobtail and rack trucks and 250 other service and pick-up trucks. In addition to supporting
our retail and wholesale propane operations, our fleet is also used to deliver butane and ammonia
for third parties and to distribute natural gas for various processors and refiners.
We own truck fabrication and maintenance facilities located in Indiana, Florida, and
Texas. We believe that our ability to build and maintain the trucks we use in our propane
operations significantly reduces the costs we would otherwise incur in purchasing and
maintaining our fleet of trucks. We also sell a limited number of trucks to third parties.
Pricing Policy
Our pricing policy is an essential element in our successful marketing of propane. We
base our pricing decisions on, among other things, prevailing supply costs, local market
conditions and local management input. We rely on our regional management to set prices based
on these factors. Our local managers are advised regularly of any changes in the posted prices of
our propane suppliers. We believe our propane pricing methods allow us to respond to changes
in supply costs in a manner that protects our customer base and gross margins. In some cases,
however, our ability to respond quickly to cost increases could cause our retail prices to rise
more rapidly than those of our competitors, possibly resulting in a loss of customers.
Billing and Collection Procedures
We retain our customer billing and account collection responsibilities at the local level.
We believe that this decentralized approach is beneficial for a number of reasons:
•
•
•
•
customers are billed on a timely basis;
customers are more likely to pay a local business;
cash payments are received faster; and
local personnel have current account information available to them at all times in
order to answer customer inquiries.
Trademark and Tradenames
We use a variety of trademarks and tradenames which we own, including "Inergy" and
"Inergy Services." We believe that our strategy of retaining the names of the companies we
9
acquire has maintained the local identification of such companies and has been important to the
continued success of the acquired businesses. Our most significant trade names are "Bradley
Propane," "Country Gas," "Hoosier Propane," "McCracken," "Pro Gas" and "IPC." We regard
our trademarks, tradenames and other proprietary rights as valuable assets and believe that they
have significant value in the marketing of our products.
Wholesale Supply, Marketing and Distribution Operations
We currently provide wholesale supply, marketing and distribution services to
approximately 350 customers including independent dealers, multi-state marketers,
petrochemical companies, refinery and gas processors and a number of other natural gas liquids
(NGL) marketing and distribution companies, primarily in the Midwest and Southeast. Our
wholesale supply, marketing and distribution operations accounted for approximately 44% of
total revenue, but approximately 7% of our gross profit during the fiscal year ended September
30, 2002.
Marketing and Distribution
One of our distinguishing strengths is our procurement and distribution expertise and
capabilities. Because of the size of our wholesale operations, we have developed significant
procurement and distribution expertise. This is partly the result of the unique background of our
management team, which has significant experience in the procurement aspects of the propane
business. We also offer transportation services to these distributors through our fleet of transport
trucks and price risk management services to our customers through a variety of financial and
other instruments. Our wholesale supply, marketing and distribution business provides us with a
relatively stable and growing income stream as well as extensive market intelligence and
acquisition opportunities. In addition, these operations provide us with more secure supplies and
better pricing for our customer service centers. Moreover, the presence of our trucks across the
Midwest and Southeast allows us to take advantage of various pricing and distribution
inefficiencies that exist in the market from time to time.
Supply
We obtain propane from over 80 vendors at approximately 80 locations. During the
fiscal year ended September 30, 2002, Louis Dreyfus Energy Services, L.P. accounted for
approximately 13% of our volume of propane purchases. Most of these purchases were made
under supply contracts that have a term of one year, are subject to annual renewal and provide
various pricing formulas. No other single supplier accounted for more than 10% of volume
propane purchases during the past fiscal year. On May 1, 2002, we entered into a one-year
contract with Sunoco, Inc. (R&M) to purchase all of its propane production at its Toledo, Ohio
refinery, which is estimated to be approximately 62 million gallons per year. We believe that our
diversification of suppliers will enable us to purchase all of our supply needs at market prices if
supplies are interrupted from any of the sources without a material disruption of our operations.
We obtain a substantial majority of our propane from domestic suppliers, with our
remaining propane requirements provided by Canadian suppliers. During the fiscal year ended
September 30, 2002, a majority of our sales volume was purchased pursuant to contracts that
have a term of one year; the balance of our sales volume was purchased on the spot market. The
percentage of our contract purchases varies from year to year. Supply contracts generally
10
provide for pricing in accordance with posted prices at the time of delivery or the current prices
established at major storage points, and some contracts include a pricing formula that typically is
based on such market prices. Some of these agreements provide maximum and minimum
seasonal purchase guidelines.
Propane generally is transported from refineries, pipeline terminals, storage facilities and
marine terminals to our 175 storage facilities. We accomplish this by using our transports and
contracting with common carriers, owner-operators and railroad tank cars. Our customer service
centers and satellite locations typically have one or more 12,000 to 30,000 gallon storage tanks,
generally adequate to meet customer usage requirements for seven days during normal winter
demand. Additionally, we lease underground storage facilities from third parties under annual
lease agreements.
We engage in risk management activities in order to reduce the effect of price volatility
on our product costs and to help insure the availability of propane during periods of short supply.
We are currently a party to propane futures transactions on the New York Mercantile Exchange
and to forward and option contracts with various third parties to purchase and sell propane at
fixed prices in the future. We monitor these activities through enforcement of our risk
management policy.
For more information on our reportable business segments, see Note 11 to our
Consolidated Financial Statements.
Employees
As of December 2, 2002, we had 748 full-time employees of which 43 were general and
administrative and 705 were operational employees. We employed 43 part-time employees, all
of whom were operational employees. None of our employees is a member of a labor union.
We believe that our relations with our employees are satisfactory.
Government Regulation
We are subject to various federal, state and local environmental, health and safety laws
and regulations related to our propane business as well as those related to our ammonia and
butane transportation operations. Generally, these laws impose limitations on the discharge and
emission of pollutants and establish standards for the handling of solid and hazardous wastes.
These laws generally include the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), the Clean Air Act, the
Occupational Safety and Health Act, the Emergency Planning and Community Right to Know
Act, the Clean Water Act and comparable state or local statutes. CERCLA, also known as the
"Superfund" law, imposes joint and several liability without regard to fault or the legality of the
original conduct on certain classes of persons that are considered to have contributed to the
release or threatened release of a hazardous substance into the environment. While propane is not
a hazardous substance within the meaning of CERCLA, other chemicals used in our operations
may be classified as hazardous. The laws and regulations referred to above could result in the
imposition of civil or criminal penalties in cases of non-compliance or the imposition of liability
for remediation costs. We have not received any notices that we have violated these laws and
regulations in any material respect and we have not otherwise incurred any material liability
thereunder.
11
For acquisitions that involve the purchase of real estate, we conduct due diligence
investigations to attempt to determine whether any substance has been sold from, or stored on, or
released or spilled from any of that real estate prior to its purchase. This due diligence includes
questioning the seller, obtaining representations and warranties concerning the seller's
compliance with environmental laws and performing site assessments. During these due
diligence investigations, our employees, and, in certain cases, independent environmental
consulting firms, review historical records and databases and conduct physical investigations of
the property to look for evidence of hazardous substance contamination, compliance violations
and the existence of underground storage tanks.
National Fire Protection Association Pamphlets No. 54 and No. 58, which establish rules
and procedures governing the safe handling of propane, or comparable regulations, have been
adopted as the industry standard in all of the states in which we operate. In some states these
laws are administered by state agencies, and in others they are administered on a municipal level.
Regarding the transportation of propane, ammonia and butane by truck, we are subject to
regulations promulgated under the Federal Motor Carrier Safety Act. These regulations cover
the transportation of hazardous materials and are administered by the United States Department
of Transportation. We conduct ongoing training programs to help ensure that our operations are
in compliance with applicable regulations. We maintain various permits that are necessary to
operate some of our facilities, some of which may be material to our operations. Management
believes that the procedures currently in effect at all of our facilities for the handling, storage and
distribution of propane and the transportation of ammonia and butane are consistent with
industry standards and are in compliance in all material respects with applicable laws and
regulations.
On August 18, 1997, the U.S. Department of Transportation published its Final Rule for
Continued Operation of the Present Propane Trucks. This final rule is intended to address
perceived risks during the transfer of propane and required certain immediate changes in industry
operating procedures, including retrofitting all propane delivery trucks. We, as well as the
National Propane Gas Association and the propane industry in general, believe that the Final
Rule for Continued Operation of the Present Propane Trucks cannot practicably be complied
with in its current form. On October 15, 1997, five of the principal multi-state propane
marketers, all of whom were unrelated to us, filed an action against the U.S. Department of
Transportation in the United States District Court for the Western District of Missouri seeking to
enjoin enforcement of the Final Rule for Continued Operation of the Present Propane Trucks.
On February 13, 1998, the Court issued a preliminary injunction prohibiting the enforcement of
this final rule pending further action by the Court. This suit is still pending. In addition,
Congress passed, and on October 21, 1998, the President of the United States signed, the FY
1999 Transportation Appropriations Act, which included a provision restricting the authority of
the U.S. Department of Transportation from enforcing specific provisions of the Final Rule for
Continued Operation of the Present Propane Trucks. At this time, we cannot determine the likely
outcome of the litigation or the proposed legislation or what the ultimate long-term cost of
compliance with the Final Rule for Continued Operation of the Present Propane Trucks will be to
us and the propane industry in general.
Future developments, such as stricter environmental, health or safety laws and
regulations could affect our operations. It is not anticipated that our compliance with or
liabilities under environmental, health and safety laws and regulations, including CERCLA, will
have a material adverse effect on us. To the extent that we do not know of any environmental
12
liabilities, or environmental, health or safety laws, or regulations are made more stringent, there
can be no assurance that our results of operations will not be materially and adversely affected.
Item 2. Properties.
As of September 30, 2002, we owned 56 of our 99 customer service centers and leased
the balance. We refer you to “Retail Operations” under Item 1 for more information concerning
the location of our customer service centers. We lease our Kansas City, Missouri headquarters.
As of September 30, 2002, we operated bulk storage facilities at 175 locations and owned 118 of
the storage locations. We lease underground storage facilities with an aggregate capacity of
approximately 23 million gallons of propane at nine locations under annual lease agreements.
We also lease capacity in several pipelines pursuant to annual lease agreements.
Tank ownership and control at customer locations are important components to our
operations and customer retention. As of December 2, 2002, we owned the following:
•
•
•
approximately 300 bulk storage tanks with typical capacities of 12,000 to 30,000
gallons,
approximately 120,000 stationary customer storage tanks with typical capacities
of 100 to 1,200 gallons, and
approximately 34,000 portable propane cylinders with typical capacities of up to
35 gallons.
We believe that we have satisfactory title or valid rights to use all of our material
properties. Although some of these properties are subject to liabilities and leases, liens for taxes
not yet due and payable, encumbrances securing payment obligations under non-competition
agreements entered in connection with acquisitions and immaterial encumbrances, easements
and restrictions, we do not believe that any of these burdens will materially interfere with our
continued use of these properties in our business, taken as a whole. Our obligations under our
borrowings are secured by liens and mortgages on all of our real and personal property.
In addition, we believe that we have, or are in the process of obtaining, all required
material approvals, authorizations, orders, licenses, permits, franchises and consents of, and have
obtained or made all required material registrations, qualifications and filings with, the various
state and local governmental and regulatory authorities which relate to ownership of our
properties or the operations of our business.
Item 3. Legal Proceedings.
Our operations are subject to all operating hazards and risks normally incidental to
handling, storing, transporting and otherwise providing for use by consumers of combustible
liquids such as propane. As a result, at any given time we are a defendant in various legal
proceedings and litigation arising in the ordinary course of business. We maintain insurance
policies with insurers in amounts and with coverages and deductibles as the managing general
partner believes are reasonable and prudent. However, we cannot assure that this insurance will
be adequate to protect us from all material expenses related to potential future claims for
personal and property damage or that these levels of insurance will be available in the future at
economical prices. In addition, the occurrence of an explosion may have an adverse effect on the
public's desire to use our products.
13
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the holders of our Company's common units during
the fourth quarter of the fiscal year ended September 30, 2002.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Since July 31, 2001 our company’s common units representing limited partner interests
have been traded on Nasdaq's national market under the symbol "NRGY." The following table
sets forth the range of high and low bid prices of the common units, as reported by Nasdaq, as
well as the amount of cash distributions paid per common unit with respect to each such quarter.
Quarters Ended:
Fiscal 2002:
September 30, 2002
June 30, 2002
March 31, 2002
December 31, 2001
Low
High
Cash Distribution
Per Unit
$27.88
29.40
27.05
23.06
$30.75
35.10
30.30
28.65
$0.700
0.675
0.660
0.625
Fiscal 2001:
July 31 to September 30, 2001
$22.20
$27.45 $0.400 (a)
_____________
(a) Reflects the pro rata portion of the $0.60 minimum quarterly distribution per unit, representing the period from the
July 31, 2001 closing of the initial public offering through September 30, 2001.
As of December 2, 2002, our company had issued and outstanding 3,827,176 common
units, which were held of record by approximately 7,600 unitholders. In addition, as of that date
our company had 3,313,367 senior subordinated units representing limited partner interests and
572,542 junior subordinated units representing limited partner interests. There is no established
public trading market for our Company's subordinated units.
Our company makes quarterly distributions to its partners within approximately 45 days
after the end of each fiscal quarter in an aggregate amount equal to its available cash (as defined)
for such quarter. Available cash generally means, with respect to each fiscal quarter, all cash on
hand at the end of the quarter less the amount of cash that the managing general partner
determines in its reasonable discretion is necessary or appropriate to:
•
•
•
provide for the proper conduct of our business,
comply with applicable law, any of our debt instruments, or other agreements, or
provide funds for distributions to unitholders and to our non-managing general
partner for any one or more of the four quarters ending September 30, 2003,
plus all cash on hand on the date of determination of available cash for the quarter resulting from
working capital borrowings made after the end of the quarter. Working capital borrowings are
generally borrowings that are made under our working capital facility and in all cases are used
solely for working capital purposes or to pay distributions to partners. The full definition of
available cash is set forth in the Amended and Restated Agreement of Limited Partnership of
Inergy, L.P., which is incorporated by reference herein as an exhibit to this report.
14
During the subordination period referred to below, our common units will have the right
to receive distributions of available cash from operating surplus in an amount equal to the
minimum quarterly distribution of $0.60 per quarter, plus any arrearages in the payment of the
minimum quarterly distribution on the common units from prior quarters, before any
distributions of available cash from operating surplus may be made on any junior or senior
subordinated units. There is no guarantee that we will pay the minimum quarterly distribution on
the common units in any quarter, and we will be prohibited from making any distributions to
unitholders if it would cause an event of default under our credit facility. The information
concerning restrictions on distributions required by this Item 5 is incorporated herein by
reference to Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operation, Description of Credit Facility. The subordination period generally will not end
earlier than June 30, 2006 with respect to the senior subordinated units and June 30, 2008 with
respect to the junior subordinated units.
The following table sets forth in tabular format, a summary of our company's equity plan
information as of December 2, 2002:
Equity Compensation Plan Information
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(a)
(b)
(c)
498,232
$23.20
90,768
-
498,232
-
$23.20
-
90,768
Plan category
Equity compensation plans
approved by security
holders
Equity compensation plans
not approved by security
holders
Total
Item 6. Selected Financial Data.
The following table sets forth selected financial data and other operating data of Inergy,
L.P., and our predecessor, Inergy Partners, LLC. The selected historical financial data of Inergy
Partners, LLC for the years ended September 30, 2000, 1999 and 1998 and as of September 30,
2000, 1999 and 1998 are derived from the audited financial statements of Inergy Partners, LLC.
The selected historical financial data of Inergy, L.P. as of and for the years ended September 30,
2002 and 2001 are derived from the audited financial statements of Inergy Partners, LLC and
Inergy, L.P. The historical financial data of Inergy Partners, LLC and Inergy, L.P. include the
results of operations of the Hoosier Propane Group from January 1, 2001, the effective date of
the acquisition, which closed on January 12, 2001, the results of operations of Pro Gas from
15
November 1, 2001, the effective date of acquisition, and the results of operations of Independent
Propane Company from December 20, 2001, the effective date of the acquisition.
"EBITDA" shown in the table below is defined as income before income taxes, plus
interest expense and 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. EBITDA, as we define it, may not be comparable
to EBITDA or similarly titled measures used by other corporations or partnerships.
The data in the following tables should be read together with and are qualified in their
entirety by reference to, the historical financial statements and the accompanying notes included
in this report. The tables should be read together with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" under Item 7.
[This space intentionally left blank]
16
Statement of Operations Data:
Revenues(b)
Cost of product sold(b)
Gross profit
Expenses:
Operating and administrative(c)
Depreciation and amortization
Operating income
Other income (expense):
Interest expense
Interest expense related to write-off of
deferred financing costs
Gain on sale of property, plant and
equipment
Finance charges
Other
Income (loss) before income taxes
Provision for income taxes
Inergy L.P. and Predecessor (a)
Years Ended September 30,
2002
2001
2000
1999
1998
(in thousands except per unit data)
$ 208,700
$ 168,982
$ 63,512
$ 15,098
$ 7,507
134,242
74,458
46,057
11,444
128,425
40,557
23,501
6,532
51,553
11,959
8,990
2,286
9,641
5,457
4,119
690
4,215
3,292
2,424
394
16,957
10,524
683
648
474
(8,365)
(6,670)
(2,740)
(962)
(569)
(585)
140
115
140
8,402
93
-
37
290
168
4,349
-
-
-
176
59
(1,822)
7
-
101
79
5
(129)
56
-
-
59
1
(35)
-
Net income (loss)
$ 8,309
$ 4,349
$ (1,829)
$ (185)
$ (35)
Net income (loss) per limited partner unit:
Basic
Diluted
Weighted average limited partners’ units
outstanding:
Basic
Diluted
Cash distributions per unit
Balance Sheet Data (end of period):
Current assets
Total assets
Long-term debt, including current portion
Redeemable preferred members' interest
Members' equity
Partners' capital
$ 1.22
$ 1.20
6,658
6,760
$ 2.36
$ (0.40) (d)
$ (0.40) (d)
5,726 (d)
5,726 (d)
-
$ 70,016
$ 36,920
$ 22,199
$ 11,390
$ 2,119
288,232
124,462
-
-
155,653
54,132
-
-
120,916
72,754
68,924
34,927
10,896
2,972
-
38,896
22,337
-
5,269
-
10,230
5,694
-
2,611
-
17
Other Financial Data:
EBITDA (unaudited)
Net cash provided by (used in) operating
activities
Net cash used in investing activities
Net cash provided by financing activities
Maintenance capital expenditures(e) (unaudited)
Other Operating Data (unaudited):
Retail propane gallons sold
Wholesale propane gallons delivered
Reconciliation of Net Income (Loss) to
EBITDA:
Net income (loss)
Plus:
Income taxes
Interest expense
Interest expense related to write-off of
deferred financing costs
Depreciation and amortization expense
Less:
Interest Income
$ 28,796
$ 17,551
$ 3,204
$ 1,523
$ 928
7,779
(94,017)
86,155
1,556
4,659
(64,025)
60,164
1,901
(222)
(774)
362
(12,464)
(13,130)
(727)
13,907
14,056
336
283
156
61
88,515
428,128
46,750
238,649
18,112
8,006
5,612
146,644
24,735
N/A
$ 8,309
$ 4,349
$ (1,829)
$ (185)
$ (35)
93
8,365
585
11,444
28,796
-
6,670
6,532
17,551
7
56
-
2,740
962
569
2,286
690
394
3,204
1,523
928
-
-
-
-
-
EBITDA
$ 28,796
$ 17,551
$ 3,204
$ 1,523
$ 928
( a ) Represents selected financial data of Inergy Partners, LLC. and subsidiaries prior to July 31, 2001 and Inergy, L.P. thereafter.
( b )
New accounting standards contained in Emerging Issues Task Force Issue No. 02-3 affecting the reporting of gains or losses on energy trading
contracts related to our risk management activities with certain energy marketers and dealers became effective, requiring such contracts to be
reported on a net basis in the income statement, resulting in an equal reduction in revenue and cost of product sold. Adopting this standard also
required reclassifying revenue and cost of product sold for all prior periods. The adoption of the new standards required that we reduce both
revenue and cost of product sold by $69.6 million, $54.2 million, $30.1 million, $4.1 million, and $0 for the years ended September 30, 2002,
2001, 2000, 1999, and 1998, respectively.
The historical financial statements include non-cash charges related to amortization of deferred compensation of $234,000, $79,000 and
$78,000 for the years ended September 30, 2001, 2000 and 1999, respectively.
Amounts relate to the net loss incurred by Inergy, L.P. and the weighted average limited partners’ units outstanding for the period from July 31,
2001 (the closing date of our initial public offering) through September 30, 2001.
Capital expenditures fall generally into three categories: (1) growth capital expenditures, which include expenditures for the purchase of new
propane tanks and other equipment to facilitate expansion of our retail customer base, (2) maintenance capital expenditures, which include
expenditures for repair and replacement of property, plant and equipment, and (3) acquisition capital expenditures.
( c )
( d )
( e )
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operation.
General
We are a Delaware limited partnership formed to own and operate a rapidly growing
retail and wholesale propane marketing and distribution business. For the fiscal year ended
September 30, 2002, we sold approximately 89 million gallons of propane to retail customers
and delivered approximately 428 million gallons of propane to wholesale customers. Our retail
business includes the retail marketing, sale and distribution of propane, including the sale and
18
lease of propane supplies and equipment, to residential, commercial, industrial and agricultural
customers. In addition to our retail business, we operate a wholesale supply, marketing and
distribution business, providing propane procurement, transportation, supply and price risk
management services to our customer service centers, as well as to independent dealers,
multistate marketers, petrochemical companies, refinery and gas processors and a number of
other natural gas liquids (NGL) marketing and distribution companies.
The results of operations discussed below are those of Inergy, L.P. on and after July 31,
2001, the closing date of our initial public offering, and of our predecessor, Inergy Partners, LLC
prior to July 31, 2001. Audited financial statements for Inergy, L.P. and Inergy Partners, LLC are
included elsewhere in this Form 10-K.
Since the inception of our predecessor in November 1996 through September 30, 2002,
we have acquired 13 propane companies for an aggregate purchase price of approximately $230
million, including working capital, assumed liabilities and acquisition costs.
The retail distribution business is largely seasonal due to propane's primary use as a
heating source in residential and commercial buildings. As a result, cash flows from operations
are highest from November through April when customers pay for propane purchased during the
six-month peak heating season of October through March. We generally experience losses in the
six-month, off season of April through September.
Because a substantial portion of our propane is used in the weather-sensitive residential
markets, the temperatures realized in our areas of operations, particularly during the six-month
peak heating season, have a significant effect on our financial performance. In any given area,
warmer-than-normal temperatures will tend to result in reduced propane use, while sustained
colder-than-normal temperatures will tend to result in greater propane use. Therefore, we use
information on normal temperatures in understanding how historical results of operations are
affected by temperatures that are colder or warmer than normal and in preparing forecasts of
future operations, which are based on the assumption that normal weather will prevail in each of
our regions. "Heating degree days" are a general indicator of weather impacting propane usage
and are calculated by taking the difference between 65 degrees and the average temperature of
the day (if less than 65 degrees).
In determining actual and normal weather for a given period of time, we compare the
actual number of heating degree days for such period to the average number of heating degree
days for a longer time period assumed to more accurately reflect the average normal weather, in
each case as such information is published by the National Oceanic and Atmospheric
Administration, for each measuring point in each of our regions. When we discuss "normal"
weather in our results of operations presented below we are referring to a 30 year average
consisting of the years 1972 through 2001. We then calculate weighted averages, based on retail
volumes attributable to each measuring point, of actual and normal heating degree days within
each region. Based on this information, we calculate a ratio of actual heating degree days to
normal heating degree days, first on a regional basis and then on a partnership-wide basis.
The propane business is a “margin-based” business where the level of profitability is
largely dependent on the difference between sales prices and product cost. The unit cost of
propane is subject to volatile changes as a result of product supply or other market conditions.
Propane unit cost changes can occur rapidly over a short period of time and can impact margins.
19
There is no assurance that we will be able to fully pass on product cost increases, particularly
when product costs increase rapidly. We have generally been successful in passing on higher
propane costs to our customers and have historically maintained or increased our gross margin
per gallon in periods of rising costs. In periods of increasing costs, we have experienced a
decline in our gross profit as a percentage of revenues. In periods of decreasing costs, we have
experienced an increase in our gross profit as a percentage of revenues. Retail sales generate
significantly higher margins than wholesale sales and sales to residential customers generally
generate higher margins than sales to our other retail customers.
We believe our wholesale supply, marketing and distribution business complements our
retail distribution business. Through our wholesale operations, we distribute propane and also
offer price risk management services to propane retailers, resellers and other related businesses
as well as energy marketers and dealers, through a variety of financial and other instruments,
including:
•
forward contracts involving the 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; and
• options, futures contracts on the New York Mercantile Exchange and other
contractual arrangements.
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.
Results of Operations
Fiscal Year Ended September 30, 2002 Compared to Fiscal Year Ended September 30,
2001
Volume. During fiscal 2002, Inergy, L.P. sold 88.5 million retail gallons of propane, an
increase of 41.7 million gallons, or 89%, from the 46.8 million retail gallons sold in fiscal 2001.
The increase in retail sales volume was principally due to the January 2001 acquisition of
Hoosier Propane Group, the November 2001 acquisition of Pro Gas, and the December 2001
acquisition of Independent Propane Company. The increases associated with these acquisitions
were partially offset by weather that was approximately 17% warmer in fiscal 2002 as compared
to fiscal 2001 in our retail areas of operations, and 13% warmer than normal.
Wholesale gallons delivered increased 189.5 million gallons, or 79%, to 428.1 million
gallons in fiscal 2002 from 238.6 million gallons in fiscal 2001. This increase was primarily
20
attributable to the growth of our existing wholesale operations, partially offset by a decrease due
to the warmer weather in 2002 in our wholesale areas of operations.
Revenues. Revenues in fiscal 2002 were $208.7 million, an increase of $39.7 million, or
23%, from $169.0 million of revenues in fiscal 2001.
Revenues from retail sales were $111.7 million in fiscal 2002, an increase of $40.4 million,
or 57%, from $71.3 million in fiscal 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 fiscal
2002. These revenues consist of retail propane sales, transportation revenues, tank rentals,
heating oil sales, appliance sales and service.
Revenues from wholesale sales were $97.0 million (after elimination of sales to our retail
operations) in fiscal 2002, a decrease of $0.6 million, from $97.6 million in fiscal 2001. This
decrease was primarily attributable to warmer weather in 2002 and a decrease in selling prices as
a result of the lower cost of propane partially offset by higher wholesale volumes. During the
fourth quarter of 2002, new accounting standards contained in Emerging Issues Task Force Issue
No. 02-3 (EITF No. 02-3) affecting the reporting of gains or losses on energy trading contracts
became effective, requiring such contracts to be reported on a net basis in the income statement,
resulting in an equal reduction in revenue and cost of product sold. Adopting this standard also
required reclassifying revenue and cost of product sold for past years. The adoption of the new
standard required that we reduce both revenue and cost of product sold by $69.6 million and
$54.2 million in the fiscal years ended September 30, 2002 and 2001, respectively. This
reclassification had no impact on gross profit, net income or EBITDA. See Item 7, Recent
Accounting Pronouncements for more details.
Cost of Product Sold. Cost of product sold in fiscal 2002 was $134.2 million, an increase of
$5.8 million or 5%, from cost of product sold of $128.4 million in fiscal 2001. This increase was
primarily attributable to retail acquisition related volume, offset by a decrease in the average cost
of propane.
Gross Profit. Retail gross profit was $69.4 million in fiscal 2002 compared to $34.6 million
in fiscal 2001, an increase of $34.8 million, or 101%. This increase was primarily attributable to
an increase in retail gallons sold due to acquisitions and higher margins per gallon. Wholesale
gross profit was $5.1 million (after elimination of gross profit attributable to our retail
operations) in fiscal 2002 compared to $5.9 million in fiscal 2001, a decrease of $0.8 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
$22.6 million, or 96%, to $46.1 million in fiscal 2002 as compared to $23.5 million in fiscal
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 our company, including the completion of our initial public
offering in July 2001.
21
Depreciation and Amortization. Depreciation and amortization increased $4.9 million, or
75%, to $11.4 million in fiscal 2002 from $6.5 million in fiscal 2001 primarily as a result of the
Hoosier Propane Group, Pro Gas and Independent Propane Company acquisitions.
Interest Expense. Interest expense increased $2.3 million, or 34%, to $9.0 million in fiscal
2002 as compared to $6.7 million in fiscal 2001. This increase is the result of higher average
borrowings outstanding during fiscal 2002 as compared to fiscal 2001 and a one-time charge of
$0.6 million that was recorded in 2002 as a result of the write-off of deferred financing costs
associated with the Independent Propane Company term note that was repaid with proceeds of a
private placement of senior secured notes. These increases were partially offset by lower interest
rates in fiscal 2002.
Net Income. Net income increased $4.0 million, or 93%, to $8.3 million in fiscal 2002 from
$4.3 million in fiscal 2001. This increase in net income was attributable to the increase in retail
gross profit, partially offset by increases in operating expenses, depreciation and amortization,
and interest expense, all primarily the result of acquisitions..
EBITDA. In fiscal 2002, income before interest, taxes, depreciation and amortization was
$28.8 million compared to $17.6 million in fiscal 2001. The increase was primarily attributable
to increased sales volumes partially offset by an increase in operating and administrative
expenses.
Fiscal Year Ended September 30, 2001 Compared to Fiscal Year Ended September 30,
2000
Volume. During fiscal 2001, we sold 46.8 million retail gallons of propane, an increase
of 28.7 million gallons, or 158%, from the 18.1 million retail gallons sold in fiscal 2000. The
increase in retail sales volume was principally due to the acquisitions of Country Gas and the
Hoosier Propane Group. In addition, weather was approximately 16% colder in fiscal 2001 as
compared to fiscal 2000.
Wholesale gallons delivered increased 92.0 million gallons, or 63%, to 238.6 million
gallons in fiscal 2001 from 146.6 million gallons in fiscal 2000. This increase was attributable to
the continued growth of our wholesale sales operations, which were initiated after the fiscal 1999
winter season, and the acquisition of the Hoosier Propane Group. During 2002, new accounting
standards contained in EITF No. 02-3 affecting the reporting of gains or losses on energy trading
contracts became effective, requiring such contracts to be reported on a net basis in the income
statement, resulting in an equal reduction in revenue and cost of product sold. Adopting this
standard also required reclassifying revenue and cost of product sold for past years. The
adoption of the new standards required that we reduce both revenue and cost of product sold by
$54.2 million and $30.1 million in the fiscal years ended September 30, 2001 and 2000,
respectively. This reclassification had no impact on net income, gross profit or EBITDA. See
Item 7, Recent Accounting Pronouncements for more details.
Revenues. Revenues in fiscal 2001 were $169.0 million, an increase of $105.5 million or
166% over $63.5 million of revenues in fiscal 2000.
Revenues from retail sales were $71.3 million (after elimination of sales to our wholesale
operations) in fiscal 2001, an increase of $47.8 million, or 203%, from $23.5 million in fiscal
22
2000. This increase was attributable to the acquisitions of Country Gas and the Hoosier Propane
Group and higher sales prices, with the remaining increase due to volume increases due to
growth and colder weather in our retail areas of operations. These revenues consist of retail
propane sales, transportation revenues, tank rentals, heating oil sales, appliance sales and service.
Revenues from wholesale sales were $97.6 million (after elimination of sales to our retail
operations) in fiscal 2001, an increase of $57.5, from $40.1 million (after elimination of sales to
our retail operations) in fiscal 2000. This increase is primarily attributable to increased selling
prices, growth, and colder weather.
Cost of Product Sold. Cost of product sold in fiscal 2001 was $128.4 million, an increase
of $76.8 million, or 149%, over fiscal 2000 cost of sales of $51.6 million. The increase was
principally attributable to the significant increases in wholesale and retail volumes and an
increase in the average cost of propane. In addition, we recorded a charge to cost of product sold
in fiscal 2001 of approximately $0.6 million associated with a third party who was involuntarily
petitioned into bankruptcy in December 2001.
Gross Profit. Retail gross profit was $34.6 million in fiscal 2001 compared to $10.7
million in fiscal 2000, an increase of $23.9 million. This increase was primarily attributable to
an increase in retail gallons sold and an increase in margin per gallon. Wholesale gross profit
was $5.9 million (after elimination of gross profit attributable to our retail operations) in fiscal
2001 compared to $1.3 million in fiscal 2000, an increase of $4.6 million. This increase was
attributable to higher wholesale gallon sales in fiscal 2001, including the acquisition of the
wholesale operations within the Hoosier Propane Group and an increase in gross profit per
gallon.
Operating and Administrative Expenses. Operating and administrative expenses were
$23.5 million in fiscal 2001 as compared to $9.0 million in fiscal 2000, an increase of $14.5
million, or 161%. This increase primarily resulted from acquisitions and personnel costs,
including performance incentives accrued as a result of the increased profitability, 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 $4.2 million, or
186%, to $6.5 million in fiscal 2001 from $2.3 million in fiscal 2000. This increase was
primarily a result of the Country Gas and the Hoosier Propane Group acquisitions, which
included property, plant and equipment, and intangible assets of approximately $88.6 million.
Interest Expense. Interest expense increased $4.0 million, or 143%, to $6.7 million in
fiscal 2001 from $2.7 million in fiscal 2000. This increase was primarily a result of the higher
average outstanding borrowings in fiscal 2001 over fiscal 2000 associated with the debt incurred
in the Country Gas and the Hoosier Propane Group acquisitions. In addition, included in interest
expense in fiscal 2001 is a charge of $0.5 million associated with the early termination of an
interest rate swap agreement that was terminated by Inergy Partners, LLC immediately prior to
the July 2001 closing of our initial public offering.
Net Income (Loss). Net income increased $6.1 million to $4.3 million in fiscal 2001 from
a net loss of $1.8 million in fiscal 2000. This increase in net income was attributable to the
increase in gross profit in an amount greater than the increases in operating and administrative
23
expenses and depreciation and amortization expense partially offset by an increase in interest
expense as a result of higher average outstanding borrowings associated with the acquisitions.
EBITDA. EBITDA increased $14.4 million, or 448%, to $17.6 million in fiscal 2001
from $3.2 million in fiscal 2000. The increase in EBITDA was attributable to increased retail
and wholesale volumes and margin per gallon associated with our retail and wholesale sales
partially offset by increased operating and administrative expenses.
Liquidity and Sources of Capital
In our 2002 secondary offering, we issued 1,061,005 new common units during June
2002 resulting in net proceeds of $30.4 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. Our company 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 flows provided by (used in) operating activities of $7.8 million in fiscal 2002
consisted primarily of: net income of $8.3 million; net non-cash charges of $13.6 million,
principally related to depreciation and amortization of $11.4 million and $1.8 million related to
the amortization and write-off of deferred financing costs; and uses of cash of $14.1 million
associated with the changes in operating assets and liabilities, including net liabilities from price
risk management activities. The use of cash associated with the changes in operating assets and
liabilities is primarily due to an increase in propane inventory attributable to our retail and
wholesale growth partially offset by the effects of working capital provided by the increase in
price risk management liabilities related to the effect of rising propane prices on our company’s
forward sales and purchases contracts, which are marked to market. Cash flows provided by
(used in) operating activities of $4.7 million in fiscal 2001 consisted primarily of: net income of
$4.3 million; net non-cash charges of $8.1 million, principally related to depreciation and
amortization of $6.5 million related to acquisitions; and uses of cash of $7.8 million associated
with the changes in operating assets and liabilities due to increased business volume, including
net liabilities from price risk management activities. The use of cash in fiscal 2001 was
primarily due to the timing of the acquisition of the Hoosier Propane Group and the use of
working capital to finance business growth.
Cash used in investing activities was $94.0 million in fiscal 2002 as compared to $64.0
million in fiscal 2001. Fiscal 2002 investing activities included a use of cash of $74.8 million,
net of cash acquired, for the acquisition of Independent Propane Company and $10.0 million for
the acquisition of Pro Gas. During fiscal 2001, $56.3 million was used for the acquisition of the
Hoosier Propane Group and Bear Man Propane. Additionally, we expended $6.4 million in
fiscal 2002 and $4.8 million in fiscal 2001 for additions of property and equipment to
accommodate our growing operations. Deferred financing costs of $3.7 million and $3.1 million
were incurred in fiscal 2002 and 2001, respectively, related to debt incurred to complete the
acquisitions.
Cash provided by financing activities was $86.2 million in fiscal 2002 and $60.2 million
in fiscal 2001. Cash provided by financing activities in fiscal 2002 and fiscal 2001 included net
borrowings of $66.0 million and $14.2 million, respectively, under debt agreements, including
24
borrowings and repayments in conjunction with the January 2001 and July 2001 refinancings of
our credit facilities and borrowings and repayments of our revolving working capital facility. In
addition, net proceeds were received from the issuance of common units of $35.4 million in
fiscal 2002, the initial public offering of $34.3 million in fiscal 2001, and proceeds from the
issuance of redeemable preferred interests of our predecessor of $16.1 million in fiscal 2001.
Offsetting these cash sources were $16.2 million and $2.6 million of distributions in fiscal 2002
and fiscal 2001, respectively, and $1.8 million of cash retained by Inergy Partners at the time of
the conveyance of assets in conjunction with the initial public offering in fiscal 2001.
At September 30, 2002, we had net goodwill of $46.1 million, representing
approximately 16% 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 following table summarizes our company’s long-term debt and operating lease
obligations as of September 30, 2002 in thousands of dollars:
Total
Less than 1
year
1-3 years
4-5 years
After
5 years
Aggregate amount of principal to
be paid on the outstanding long-
term debt
Future minimum lease payments
under noncancelable operating
leases
124,462
$19,367
$18,698
$35,408
$50,989
6,372
1,826
2,959
1,327
260
–
Standby letters of credit
3,100
3,100
–
–
As of September 30, 2002, total propane contracts had an outstanding net fair value
(liability) of ($4.7 million), as compared to total propane contracts outstanding with a net fair
value at September 30, 2001 of $4.6 million. The net change of $9.3 million includes a net
decrease in fair value of $5.2 million from contracts settled during the 2002 fiscal year period,
and a net decrease of $4.1 million from other changes in fair value. Of the outstanding fair value
(loss) as of September 30, 2002, contracts with a maturity of less than one year totaled ($4.6)
million, and contracts maturing between one and two years totaled ($0.1) million.
In November 2002, Inergy filed a Form S-3 Registration Statement to sell up to $300
million of securities in combination of common units, partnership securities or debt securities.
The proceeds from the sale of these securities would be used for general business purpose,
including debt repayment, future acquisitions, capital expenditures and working capital.
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.
25
Description of Credit Facility
Our credit agreement was amended in December 2001 in connection with the
Independent Propane Company acquisition. This December 2001 amendment was comprised of
a $195.0 million facility including a $50.0 million revolving working capital facility due in
December 2004, a $75.0 million revolving acquisition facility due in December 2004 and a $70.0
million term note due in April 2003. The $70.0 million term note was repaid in June 2002 with
proceeds from a private placement of long-term senior secured notes, thus reducing the amount
available under the credit facility to $125.0 million. The December 2001 amendment has similar
interest terms to the previous credit agreement amended in July 2001, and accrues interest at
either prime rate or LIBOR plus applicable spreads, resulting in interest rates of between 3.87%
and 4.75% at September 30, 2002. At September 30, 2002, borrowings outstanding under the
credit facility were $35.5 million, including $22.0 million under the revolving working capital
facility. Of the outstanding credit facility balance of $35.5 million, $17.5 million is classified as
long-term in the accompanying 2002 consolidated balance sheet. At December 2, 2002, the
borrowings outstanding under the credit facility were $47.3 million, including $18.3 million
under the revolving working capital facility.
During each fiscal year beginning October 1, the outstanding balance of the revolving
working capital facility must be reduced to $4.0 million or less for a minimum of 30 consecutive
days during the period commencing March 1 and ending September 30 of each calendar year.
The obligations under the credit facility are secured by first priority liens on all assets of
Inergy Propane and its subsidiaries, the pledge of all of Inergy Propane's equity interests in its
subsidiaries and by a pledge of our membership interest in Inergy Propane.
Indebtedness under the credit facility bears interest at the option of Inergy Propane at
either prime rate or LIBOR (preadjusted for reserves), plus in each case, an applicable margin.
The applicable margin varies quarterly based on Inergy Propane's leverage ratio. Inergy Propane
will incur a fee based on the average daily unused commitments under the credit facility.
Inergy Propane is required to use 100% of the net cash proceeds (that are not applied to
purchase replacement assets) from asset dispositions (other than the sale of inventory and motor
vehicles in the ordinary course of business) to reduce borrowings under the credit facility during
any fiscal year in which unapplied net cash proceeds are in excess of $1 million. Any such
mandatory prepayments are applied first to reduce borrowings under the acquisition facility and
then under the working capital facility.
In addition, the credit facility contains various covenants limiting the ability of Inergy
Propane and its subsidiaries to (subject to various exceptions), among other things:
• grant or incur liens;
•
incur other indebtedness (other than permitted debt, including the senior secured notes
which are secured on a pari passu basis);
• make investments, loans and acquisitions;
• enter into a merger, consolidation or sale of assets;
26
• enter into in any sale-leaseback transaction or enter into any new business;
•
issue or modify the terms of any equity or other securities,
• enter into any agreement that conflicts with the credit facility or ancillary agreements;
• make any change in its principles and methods of accounting as currently in effect,
except as such changes are permitted by GAAP;
• enter into certain affiliate transactions;
• pay dividends or make distributions if we are in default under the credit agreement;
• permit operating lease obligations to exceed $5 million in any fiscal year;
• enter into any debt which contains covenants more restrictive than those of the credit
facility;
• enter into put agreements granting put rights with respect to equity interests of Inergy
Propane or its subsidiaries; and
• modify their respective organizational documents.
In addition, Inergy, L.P. is prohibited from incurring indebtedness except its guarantee of
the credit facility.
Furthermore, the credit facility contains the following financial covenants:
•
•
the ratio of consolidated EBITDA (as defined in the credit facility) to consolidated
interest expense (as defined in the credit facility) must be at least 2.5 to 1.0 for any
fiscal quarter; and
the ratio of total funded debt (as defined in the credit facility) to consolidated
EBITDA may not exceed 4.5 to 1.0.
Each of the following is an event of default under the credit facility:
• default in payment of principal when due;
• default in payment of interest, fees or other amounts within three days of their due
date;
• violation of specified affirmative and negative covenants;
• default in performance or observance of any term, covenant, condition or agreement
contained in the credit facility or ancillary agreements;
• specified cross-defaults;
27
• bankruptcy and other insolvency events of Inergy Propane, its subsidiaries or Inergy,
L.P.;
•
•
impairment of the enforceability or the validity of agreements relating to the credit
facility;
judgments exceeding $500,000 against Inergy Propane, its subsidiaries or Inergy, L.P.
are undischarged or unstayed for 30 days;
• certain change of control events; and
• a condition or event occurs that could have a material adverse effect in the reasonable
judgment of two-thirds of the credit facility lenders.
On June 7, 2002, we 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: $35.0 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 senior secured notes have covenants similar to the
credit agreement. The proceeds from the issuance of the senior secured notes were used to repay
borrowings under our credit facilities to fund the Independent Propane Company and Pro Gas
acquisitions earlier in fiscal 2002.
The notes represent senior secured obligations of our operating company and will rank at
least pari passu in right of payment with all other present and future senior indebtedness of our
operating company. The notes are secured, on an equal and ratable basis with the obligations of
the operating company under the credit facility, by (i) a first priority lien on substantially all of
the existing and future assets of the operating company and its current and future subsidiaries (as
defined in the note purchase agreement), (ii) a lien on all of our existing and future equity and
other interests in the operating company and (iii) a lien on all of the operating company's existing
and future equity and other interests in each of its current and future subsidiaries.
The senior secured notes are guaranteed by our operating company's subsidiaries, IPCH
Acquisition Corp., an affiliate of our managing partner, and us. See Item 13. Certain
Relationships and Related Transactions. The IPCH Acquisition Corp. guaranty is limited to
$35.0 million.
The senior secured notes are redeemable, at our operating company's option, at a
purchase price equal to 100% of the principal amount together with accrued interest, plus a
make-whole amount determined in accordance with the note purchase agreement.
Recent Accounting Pronouncements
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
28
combinations 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 are subject to periodic
impairment testing and will be adjusted to fair value. We adopted SFAS No. 142 on October 1,
2001, which eliminated 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.
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. An
assessment of the fair value of each reporting unit is compared with the carrying value of each
segment to determine whether any impairment exists. 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. We have performed the goodwill impairment appraisal and have
determined that based on the fair value of our reporting units, goodwill is not impaired.
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. We adopted the provisions of SFAS No. 144 on October 1, 2002.
This adoption does not materially affect our company’s consolidated financial position or results
of operations.
In June 2002, a consensus was reached in EITF Issue 02-3 which codifies and reconciles
existing guidance on the recognition and reporting of gains and losses on energy trading
contracts and addresses other aspects of the accounting for contracts involved in energy trading
and risk management activities. Among other things, the consensus requires that mark-to-market
gains and losses on energy trading contracts should be shown net in the income statement
irrespective of whether the contract is physically settled. This presentation is effective for
financial statements issued for periods ending after July 15, 2002. The effect of this EITF
pronouncement is that gains and losses from energy trading contracts be reported on a net basis
in the income statement regardless of whether the contracts settle in physical delivery resulting in
an equal reduction in revenue and cost of product sold. The adoption of the new standards
required that we reduce both revenue and cost of product sold by $69.6 million, $54.2 million
and $30.1 million in the fiscal years ended September 30, 2002, 2001 and 2000, respectively.
The required reclassifications have no impact on previously recorded gross margin, net income,
EBITDA, or cash provided by operating activities. Inergy physically delivered 171.2 million,
91.4 million and 59.3 million related to the reclassified amounts discussed above for the years
ended September 30, 2002, 2001, and 2000, respectively.
29
In October 2002, the EITF reached a consensus to rescind Issue 98-10, Accounting for
Contracts Involved in Energy Trading and Risk Management Activities, which is the basis for
mark-to-market accounting used for recording energy- trading activities not within the scope of
SFAS No. 133. The new pronouncement requires that all new energy-related contracts entered
into subsequent to October 25, 2002 should not be accounted for pursuant to Issue 98-10.
Instead, those contracts should be accounted for under accrual accounting and would not qualify
for mark-to-market accounting unless the contracts meet the requirements stated under SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities." The effective date for
the full rescission of Issue 98-10 will be for fiscal periods beginning after December 15, 2002.
Changes to the accounting for existing contracts and physical inventory as a result of the
rescission of EITF Issue 98-10 will be reported as a cumulative effect of a change in accounting
principle. We have not determined the impact that the rescission of EITF Issue 98-10 will have
on our financial position and results of operations.
The October 2002 EITF consensus also provides that inventory will no longer be
accounted for using mark-to-market accounting and must be accounted for at cost. Unless the
company elects to use the special hedge accounting rules in SFAS No. 133 and hedge the fair
value of inventory, whereby the inventory and the derivative hedge instruments would be marked
to market, there could be earnings volatility when market prices increase. The company intends
to and is currently evaluating the use of such a hedging strategy and the application of the SFAS
No. 133 hedge accounting rules.
Critical Accounting Policies
Accounting for Price Risk Management. Our company, through its wholesale operations,
sells propane to various propane users, retailers, resellers, petrochemical companies, refinery and
gas processors and a number of other natural gas liquids (NGL) marketing and distribution
companies and offers price risk management services to these customers as part of its marketing
and distribution operations. Our wholesale operations also sells propane and offers certain price
risk management services as part of our energy trading activities. Derivative financial
instruments utilized in connection with these activities are accounted for using the mark-to-
market method in accordance with Statement of Financial Accounting Standards (SFAS) No.
133, “Accounting for Derivative Instruments and Hedging Activities”, Emerging Issues Task
Force Issue (EITF) No. 98-10, “Accounting for Contracts Involved in Energy Trading and Risk
Management Activities”, and EITF No. 02-3, “Issues Related to Accounting for Contracts
Involved in Energy Trading and Risk Management Activities”, as discussed below. Our overall
objective for entering into such derivative financial instruments is to manage our exposure to
fluctuations in commodity prices and changes in the fair market value of inventories.
SFAS No. 133 requires recognition of all derivative and hedging instruments in the
balance sheets and measures them at fair value. If a derivative does not qualify for hedge
accounting, it must be adjusted to fair value through earnings. As of September 30, 2002, none
of our commodity derivative financial instruments have been designated as hedges, as defined in
SFAS No. 133 and the gain or loss associated with these derivatives has been recognized in
earnings. Energy trading activities have been accounted for in accordance with EITF No. 98-10,
which requires energy trading contracts to be recorded at fair value with changes in fair value
reported in earnings. Accordingly, any gain or loss associated with changes in fair value of
30
derivatives and physical delivery contracts related to our energy trading activities are
immediately recognized in earnings as profit or loss on such contracts.
Under the mark-to-market method of accounting, these pronouncements require that
derivative contracts including forwards, swaps, options and storage contracts be reflected at fair
value, inclusive of reserves, and be 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 have been
recognized in cost of products sold. Changes in the assets and liabilities associated with those
derivative contracts 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, recent transactions,
time value and volatility factors underlying the commitments. The cash flow impact of financial
instruments is reflected as cash flows from operating activities in the consolidated statements of
cash flows.
In June 2002, a consensus was reached in EITF No. 02-3 which codifies and reconciles
existing guidance on the recognition and reporting of gains and losses on energy trading
contracts and addresses other aspects of the accounting for contracts involved in energy trading
and risk management activities. Among other things, the consensus requires that mark-to-market
gains and losses on energy trading contracts should be shown net in the income statement,
irrespective of whether the contract is physically settled. This presentation is effective for
financial statements issued for periods ending after July 15, 2002. We have reclassified all
settled transactions that meet the definition of trading activities net in the income statement to
conform to the new presentation required under EITF No. 02-3. We previously reported these
transactions when settled in the income statement at their gross amounts in revenues and cost of
product sold.
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. In June 2001, the FASB issued Statement No. 141,
Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets.
Statement No. 141 requires all business combinations initiated after June 30, 2001, to be
accounted for using the purchase method of accounting. Under Statement No. 142, goodwill is
no longer subject to amortization over its estimated useful life. Rather, goodwill will be subject
to at least an annual assessment for impairment by applying a fair-value-based test. Additionally,
an acquired intangible asset should be separately recognized if the benefit of the intangible asset
is obtained through contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so. Those
assets will be amortized over their useful lives, other than assets what have an indefinite life.
Statement No. 142 is required to be applied starting with fiscal years beginning after December
15, 2001. Early application is permitted for entities with fiscal years beginning after March 15,
2001, provided that the first interim financial statements have not previously been issued.
31
We adopted Statement No. 142 on October 1, 2001 and accordingly discontinued the
amortization of goodwill existing at the time of adoption. Under the provisions of Statement No.
142, we completed the valuation of each of our operating segments and determined no
impairment existed as of September 30, 2002. The adoption of Statement No. 142 eliminates
goodwill amortization that would have totaled approximately $2.1 million in fiscal 2002, based
on the balances of September 30, 2001, and totaled approximately $1.7 million in fiscal 2001.
We review our remaining long-lived assets in accordance with 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. We have determined that no impairment existed as of
September 30, 2002.
Forward-Looking Statements
This report, including information included or incorporated by reference in this report,
contains forward-looking statements concerning the financial condition, results of operations,
plans, objectives, future performance and business of our Company and its subsidiaries. These
forward-looking statements include:
•
•
statements that are not historical in nature, and
statements preceded by, followed by or that contain forward-looking terminology
including the words "believes," "expects," "may," "will," "should," "could,"
"anticipates," "estimates," "intends" or similar expressions.
Forward-looking statements are not guarantees of future performance or results. They
involve risks, uncertainties and assumptions. Actual results may differ materially from those
contemplated by the forward-looking statements due to, among others, the following factors:
•
•
•
•
•
•
•
•
•
•
weather conditions;
price and availability of propane, and the capacity to transport to market areas;
costs or difficulties related to the integration of the business of our Company and
its acquisition targets may be greater than expected;
governmental legislation and regulations;
local economic conditions;
labor relations;
environmental claims;
competition from the same and alternative energy sources;
operating hazards and other risks incidental to transporting, storing, and
distributing propane;
energy efficiency and technology trends;
32
•
•
interest rates; and
large customer defaults.
We have described under " Factors That May Affect Future Results of Operations,
Financial Condition or Business" additional factors that could cause actual results to be
materially different from those described in the forward-looking statements. Other factors that
we have not identified in this report could also have this effect. You are cautioned not to put
undue reliance on any forward-looking statement, which speaks only as of the date it was made.
Factors That May Affect Future Results of Operations, Financial Condition or Business
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
We may not be able to generate sufficient cash from operations to allow us to pay
the minimum quarterly distribution.
Since weather conditions may adversely affect the demand for propane, our
financial condition and results of operations are vulnerable to, and will be
adversely affected by, warm winters.
If we do not continue to make acquisitions on economically acceptable terms, our
future financial performance will be reliant upon internal growth and efficiencies.
We cannot assure you that we will be successful in integrating our recent
acquisitions.
Sudden and sharp propane price increases that cannot be passed on to customers
may adversely affect our profit margins.
Our indebtedness may limit our ability to borrow additional funds, make
distributions to unitholders or capitalize on acquisition or other business
opportunities.
The highly competitive nature of the retail propane business could cause us to
lose customers, thereby reducing our revenues.
If we are not able to purchase propane from our principal supplier, our results of
operations would be adversely affected.
Competition from alternative energy sources may cause us to lose customers,
thereby reducing our revenues.
Our business would be adversely affected if service at our principal storage
facilities or on the common carrier pipelines we use is interrupted.
Terrorist attacks, such as the attacks that occurred on September 11, 2001, have
resulted in increased costs, and future war or risk of war may adversely impact
our results of operations.
We are subject to operating and litigation risks that could adversely affect our
operating results to the extent not covered by insurance.
33
(cid:131)
(cid:131)
(cid:131)
Our results of operations and financial condition may be adversely affected by
governmental regulation and associated environmental regulatory costs.
Energy efficiency and new technology may reduce the demand for propane.
Due to our lack of asset diversification, adverse developments in our propane
business would reduce our ability to make distributions to our unitholders.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate 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 September 30, 2002, we had floating rate
obligations totaling approximately $35.5 million for amounts borrowed under our credit
agreement and an additional $20.0 million of floating rate obligations as a result of interest rate
swap agreements executed in August 2002 as discussed below. These floating rate obligations
expose us to the risk of increased interest expense in the event of increases in short-term interest
rates.
In August 2002, our operating company entered into two interest rate swap agreements
scheduled to mature in June 2008 and June 2009, respectively, each designed to hedge $10
million in underlying fixed rate senior secured notes, in order to manage interest rate risk
exposure and reduce overall interest expense. The swap agreements, which expire on the same
dates as the maturity dates of the related senior secured notes, require the counterparty to pay us
an amount based on the stated fixed interest rate on the notes due every three months. In
exchange, our operating company is required to make quarterly floating interest rate payments on
the same dates to the counterparty based on an annual interest rate equal to the 3 month LIBOR
interest rate plus 4.83% to 4.84% applied to the same notional amount of $20 million. The swap
agreements have been recognized as fair value hedges. Amounts to be received or paid under the
agreements are accrued and recognized over the life of the agreements as an adjustment to
interest expense. At September 30, 2002, our company recognized the approximate $0.7 million
increase in the fair market value of the related senior secured notes with a corresponding increase
in the fair value of its interest rate swaps, which is recorded in other non-current assets.
In October 2002, our operating company entered into three additional interest rate swap
agreements scheduled to mature in June 2007, June 2008 and June 2009, respectively, each
designed to hedge $5 million in underlying fixed rate senior secured notes, in an effort to manage
interest rate risk exposure and reduce overall interest expense. The swap agreements, which
expire on the same dates as the maturity dates of the related notes, require the counterparty to
pay an amount based on the stated fixed interest rate on our notes due every three months. In
exchange, our operating company is required to make quarterly floating interest rate payments on
the same dates based on an annual interest rate equal to the three-month LIBOR interest rate plus
approximately 5.00% applied to the same notional amount of $15.0 million.
The swap agreements have been recognized as fair value hedges. If the floating rate were
to increase by 100 basis points from September 2002 levels, our combined interest expense
including the October 2002 swap agreements would increase interest expense by a total of
approximately $0.7 million per year.
34
Propane Price, 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 position 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 September 30, 2001 and 2002 were propane retailers, resellers and consumers and energy
marketers and dealers.
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.
Notional Amounts and Terms
The notional amounts and terms of these financial instruments as of September 30, 2002
and 2001 include fixed price payor for 3.7 million and 2.5 million barrels of propane,
respectively, and fixed price receiver for 5.6 million and 2.9 million barrels of propane,
respectively. 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 derivative financial instruments related to price risk management
activities as of September 30, 2002 and 2001 was assets of $9.7 million and $9.2 million related
to propane, respectively, and liabilities of $14.4 million and $4.6 million related to propane,
35
respectively. 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, recent transactions, time
value and volatility factors underlying the commitments. The net change in unrealized gains and
losses related to all price risk management activities and propane based financial instruments for
the years ended September 30, 2002, 2001 and 2000 of ($2.0) million, $2.2 million and $1.5
million, respectively, are included in cost of product sold in the accompanying consolidated
statements of operations.
Sensitivity Analysis
A theoretical change of 10% in the underlying commodity value would result in an
approximate $0.1 million change in the market value of the contracts as there were
approximately 1.6 million gallons of net unbalanced positions at September 30, 2002.
Item 8. Financial Statements and Supplementary Data.
Reference is made to the financial statements and report of independent auditors included
later in this report under Item 15.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Our Managing General Partner Manages Inergy, L.P.
Inergy GP, LLC, our managing general partner, manages our operations and activities.
Our managing general partner is not elected by our unitholders and will not be subject to re-
election on a regular basis in the future. Our managing general partner may not be removed
unless that removal is approved by the vote of the holders of not less than 66 2/3% of the
outstanding units, including units held by the general partners and their affiliates, and we receive
an opinion of counsel regarding limited liability and tax matters. Any removal of the managing
general partner is also subject to the approval of a successor managing general partner by the
vote of the holders of a majority of the outstanding common units and subordinated units, voting
as separate classes. Unitholders do not directly or indirectly participate in our management or
operation. Our managing general partner owes a fiduciary duty to the unitholders. Our
managing general partner is liable, as a general partner, for all of our debts (to the extent not paid
from our assets), except for specific non recourse indebtedness or other obligations. Whenever
possible, our managing general partner intends to incur indebtedness or other obligations that are
non-recourse.
Our managing general partner may appoint two independent directors to serve on a
conflicts committee to review specific matters which the board of directors believes may involve
conflicts of interest. A conflicts committee will determine if the resolution of any conflict of
36
interest submitted to it is fair and reasonable to us. In addition to satisfying certain other
requirements, the members of the conflicts committee must meet the independence standards for
service on an audit committee of a board of directors, which standards are established by the
Nasdaq stock market. Any matters approved by the conflicts committee will be conclusively
deemed to be fair and reasonable to us, approved by all of our partners, and not a breach by our
managing general partner of any duties it may owe us or our unitholders. For more information
relating to conflicts of interest that may arise, please read "Conflicts of Interest and Fiduciary
Responsibilities." Two members of the board of directors also serve on a compensation
committee, which oversees compensation decisions for the officers of Inergy GP, LLC as well as
the compensation plans described below. The members of the compensation committee are
Richard C. Green, Jr. and David J. Schulte. In addition, three members of the board of directors
serve on an audit committee which reviews our external financial reporting, engages our
independent auditors and reviews procedures for internal auditing and the adequacy of our
internal accounting controls. The members of the audit committee must meet the independence
standards established by the Nasdaq stock market. The members of the audit committee are
Warren H. Gfeller, Richard C. Green, Jr. and David J. Schulte.
As is commonly the case with publicly-traded limited partnerships, we are managed and
operated by the officers and are subject to the oversight of the directors of our managing general
partner. Effective January 1, 2002 all employees of our general partners, including our executive
officers, became employees of our operating company. The board of directors of our managing
general partner is presently composed of five directors.
Directors and Executive Officers
The following table sets forth certain information with respect to the executive officers
and members of the board of directors of our managing general partner. Executive officers and
directors will serve until their successors are duly appointed or elected.
Executive Officers and Directors
Age
Position with the Managing General Partner
John J. Sherman
Phillip L. Elbert
R. Brooks Sherman Jr.
Dean E. Watson
Carl A. Hughes
Michael D. Fox
William C. Gautreaux
Richard C. Green, Jr.
Warren H. Gfeller
David J. Schulte
47
44
37
44
48
45
39
48
50
41
President, Chief Executive Officer and Director
Executive Vice President—Operations and Director
Senior Vice President and Chief Financial Officer
Senior Vice President—Wholesale & Supply Logistics
Vice President—Business Development
Vice President—Wholesale Marketing
Vice President—Supply
Director
Director
Director
37
John J. Sherman. Mr. Sherman has served as President, Chief Executive Officer and a
director of our managing general partner since March 2001, and of our predecessor from 1997
until July 2001. Prior to joining our predecessor, he was a vice president with Dynegy Inc. from
1996 through 1997. He was responsible for all downstream propane marketing operations,
which at the time were the country's largest. From 1991 through 1996, Mr. Sherman was the
president of LPG Services Group, Inc., a company he co-founded and grew to become one of the
nation's largest wholesale marketers of propane before Dynegy acquired LPG Services in 1996.
From 1984 through 1991, Mr. Sherman was a vice president and member of the management
committee of Ferrellgas, which is one of the country's largest retail propane marketers.
Phillip L. Elbert. Mr. Elbert has served as Executive Vice President—Operations of our
managing general partner since March 2001. He joined our predecessor as Executive Vice
President—Operations in connection with our acquisition of the Hoosier Propane Group in
January 2001. Mr. Elbert joined the Hoosier Propane Group in 1992 and was responsible for
overall operations, including Hoosier's retail, wholesale, and transportation divisions. From
1987 through 1992, he was employed by Ferrellgas, serving in a number of management
positions relating to retail, transportation and supply. Prior to joining Ferrellgas, he was
employed by Buckeye Gas Products, a large propane marketer from 1981 to 1987.
R. Brooks Sherman, Jr. Mr. Brooks Sherman, Jr. (no relation to Mr. John Sherman) has
served as Senior Vice President since September 2002 and Chief Financial Officer of our
managing general partner since March 2001. Mr. Sherman previously served as Vice President
from March 2001 until September 2002. He joined our predecessor in December 2000 as Vice
President and Chief Financial Officer. From 1999 until joining our predecessor, he served as
chief financial officer of MCM Capital Group. From 1996 through 1999, Mr. Sherman was
employed by National Propane Partners, a publicly traded master limited partnership, first as its
controller and chief accounting officer and subsequently as its chief financial officer. From 1995
to 1996, Mr. Sherman served as chief financial officer for Berthel Fisher & Co. Leasing Inc. and
prior to 1995, Mr. Sherman was in public accounting with Ernst & Young and KPMG Peat
Marwick.
Dean E. Watson. Mr. Watson has served as Senior Vice President of Wholesale &
Supply Logistics of our managing general partner since August 2002. From 1999 to 2002 he
served as President and CEO of Texas Encore Materials. From 1982 to 1999, Mr. Watson
worked for Koch Industries, the second largest privately held company in the United States.
While at Koch, Mr. Watson served in a variety of roles, including President and CEO of Koch
Agriculture (1995-1999), President of Koch Nitrogen Company (1992-1995) and Vice President
of Koch Carbon, Inc. (1988-1990).
Carl A. Hughes. Mr. Hughes has served as Vice President of Business Development of
our managing general partner since March 2001. He joined our predecessor as Vice President of
Business Development in 1998. From 1996 through 1998, he served as a regional manager for
Dynegy Inc., responsible for propane activities in 17 midwest and northeastern states. From 1993
through 1996, Mr. Hughes served as a regional marketing manager for LPG Services Group.
From 1985 through 1992, Mr. Hughes was employed by Ferrellgas where he served in a variety
of management positions.
38
Michael D. Fox. Mr. Fox has served as Vice President of Wholesale Marketing
Operations of our managing general partner since March 2001. He joined our predecessor in
1998 as Vice President of Wholesale Marketing Operations. From 1996 through 1998, he served
as a regional manager with Dynegy Inc., responsible for wholesale propane marketing activities
in nine southeastern states. From 1992 through 1996, he served as regional marketing manager
for LPG Services Group, Inc. From 1985 through 1991, Mr. Fox was employed by Ferrellgas
where he served in a variety of sales and marketing positions.
William C. Gautreaux. Mr. Gautreaux has served as Vice President of Supply of our
managing general partner since March 2001. He joined our predecessor in 1998 as Vice
President of Supply. From 1996 through 1998, he served as a managing director for Dynegy Inc.,
responsible for bulk natural gas liquids marketing and risk management. Mr. Gautreaux was a
co-founder of LPG Services Group, Inc. and served as its vice president of supply from 1991
through 1996. From 1985 through 1991, Mr. Gautreaux was employed by Ferrellgas where he
served as a regional manager in the company's wholesale supply logistics division.
Richard C. Green, Jr. Mr. Green has been a member of our managing general partner's
board of directors since March 2001. He was a member of our predecessor's board of directors
since January 2001 until July 2001. He currently serves as chairman and chief executive officer
of Aquila, Inc., an international energy services company. Mr. Green is currently a special
limited partner of Kansas City Equity Partners and has previously served as its president and
chairman of its advisory board. He also serves as a director of Aquila, Inc., BHA Group, Inc.
and Yellow Corp.
Warren H. Gfeller. Mr. Gfeller has been a member of our managing general partner's
board of directors since March 2001. He was a member of our predecessor's board of directors
since January 2001 until July 2001. He has engaged in private investments since 1991. From
1985 to 1991, Mr. Gfeller served as president and chief executive officer of Ferrellgas, Inc., a
retail and wholesale marketer of propane and other natural gas liquids. Mr. Gfeller began his
career with Ferrellgas in 1983 as an executive vice president and financial officer. He also
serves as a director of Zapata Corporation.
David J. Schulte. Mr. Schulte has been a member of our managing general partner's
board of directors since March 2001. He was a member of our predecessor's board of directors
from January 2001 until July 2001. He has been a managing director of private equity firm
Kansas City Equity Partners since 1994. Prior to joining Kansas City Equity Partners, Mr.
Schulte was an investment banker with Fahnestock & Co. from 1988 to 1994. He is a member of
the AICPA, the AIMR and the Missouri Bar Association. He also serves as a director of Elecsys
Corp.
39
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our Company's directors
and executive officers, and persons who own more than 10% of any class of equity securities of
our Company registered under Section 12 of the Exchange Act, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in ownership in such
securities and other equity securities of our Company. Securities and Exchange Commission
regulations require directors, executive officers and greater than 10% unitholders to furnish our
Company with copies of all Section 16(a) reports they file.
To our Company's knowledge, based solely on review of the copies of such reports
furnished to our Company and written representations that no other reports were required, during
the fiscal year ended September 30, 2002, all Section 16(a) filing requirements applicable to our
directors, executive officers and greater than 10% unitholders were complied with, except that
Mr. John Sherman was late in filing five statements of changes in beneficial ownership on Form
4, resulting in a total of nine transactions not being reported on a timely basis. These late filings
were a result of transactions with respect to senior subordinated units.
Item 11. Executive Compensation.
Executive Compensation
The following table sets forth for the periods indicated, the compensation paid or accrued
by Inergy, L.P., its predecessor and our managing general partner to the chief executive officer
of our managing general partner and four other executive officers for services rendered to Inergy,
L.P. and its subsidiaries. In this report, we refer to these five individuals as the “named
executive officers.”
40
Summary Compensation Table
Annual Compensation
Long Term
Compensation
Awards
Name and
Principal Position
Fiscal
Year
Salary (1)
Bonus
Other
Annual
Compen-
sation (2)
Securities
Underlying
Options
All Other
Compen-
sation (3)
John. J. Sherman
President and Chief
Executive Officer
Phillip L.
Elbert
2002
$250,000
$150,000
$ 11,793
2001
$175,000
$200,000
$ 5,161
2000
$150,000
$ -
$ 6,614
-
-
-
$ -
$ -
$ -
Executive Vice President
2002
$200,000
$100,000
$12,774
-
$ -
Operations
R. Brooks
Sherman, Jr.
2001
$115,160
$112,500
$ 7,464
55,500
$ -
2000
$ -
$ -
$ -
-
$ -
Senior Vice President and
2002
$143,750
$ 75,000
$ 5,319
10,000
$ -
Chief Financial Officer
Carl A.
Hughes
Vice President-
Business Development
William C.
Gautreaux
Vice President-
Supply
2001
$ 98,958
$158,333
$ 730
27,750
$63,275
2000
$ -
$ -
$ -
-
$ -
2002
$125,000
$125,000
$11,739
-
$ -
2001
$ 97,917
$228,320
$ 9,212
38,850
$ -
2000
$ 75,000
$111,159
$ 9,864
-
$ -
2002
$135,000
$100,000
$ 12,005
-
$ -
2001
$108,542
$244,000
$ 9,093
27,750
$ -
(1) Salaries for Mr. Phil Elbert and Mr. Brooks Sherman in fiscal 2001 represent the pro rata portion of their annual salaries from the
dates of the beginning of their employment with us on January 12, 2001 and December 3, 2000, respectively.
2000
$ 80,000
$ 76,411
$ 7,425
-
$ -
(2) Excludes perquisites and other benefits, unless the aggregate amount of such compensation is equal to the lesser of either $50,000 or
10% of the total of annual salary and bonus reported for the named executive officer.
(3) “All Other Compensation” for Mr. R. Brooks Sherman, Jr. in fiscal 2001 represents reimbursement of relocation expenses.
41
The following table sets forth information concerning grants of unit options to each
named executive officer during fiscal 2002.
Option Grants in Last Fiscal Year
Individual Grants
Number of
Securities
Underlying
Options Granted (3)
Name
Percent of
Total
Options
Granted to
Employees
in Fiscal
Year
Potential Realizable Value at Assumed
Annual Rates of Unit Price
Appreciation for Option Term (2)
Exercise or Base
Price ($/Share) (1)
Expiration
Date
0%
5%
10%
R. Brooks Sherman, Jr.
10,000
5%
$29.44 Aug 30, 2012
-
$185,147
$469,198
______________
(1) All grants were made at 100% of the fair market value as of the grant date.
(2) The dollar amounts under these columns are the result of calculations at the 5% and 10% assumed annual growth rates mandated by the
Securities and Exchange Commission and, therefore, are not intended to forecast possible future appreciation, if any, in the unit price. The
calculations were based on the exercise prices and the 10-year term of the options. No gain to the optionees is possible without an increase
in unit price which will benefit all shareholders proportionately.
(3) These options generally vest in proportion to the conversion of senior subordinated units into common units.
The following table sets forth information with respect to each named executive officer
concerning the number and value of exercisable and unexercisable unit options held as of
September 30, 2002.
Aggregated Option/SAR Exercises in last Fiscal Year and September 30, 2002 Option Values
Units
Acquired on
Exercise
Value
Realized
Number of Securities Underlying
Unexercised Options at September 30,
2002
Value of Unexercised In-the-Money Options
at
September 30, 2002 (1)
Exercisable
Unexercisable
Exercisable
Unexercisable
--
--
--
--
--
--
--
--
--
--
-
-
-
-
-
-
55,500
37,750
38,850
27,750
-
-
-
-
-
-
$388,500
$194,250
$271,950
$194,250
Name
John J. Sherman
Phillip L. Elbert
R. Brooks Sherman, Jr.
Carl A. Hughes
William C. Gautreaux
___________________
(1) Based on the $29.00 per unit fair market value of our Company's common units on September 28, 2002, the last trading day of fiscal 2002,
less the option exercise price.
42
Employment Agreements
The following named executive officers have entered into employment agreements with
the managing general partner, which were transferred to our operating company effective
January 2002, with the exception of R. Brooks Sherman, Jr., whose employment contract was
entered into with the operating company effective September 11, 2002:
•
•
•
•
•
John J. Sherman, President and Chief Executive Officer;
Phillip L. Elbert, Executive Vice President--Retail Operations;
R. Brooks Sherman, Jr., Senior Vice President--Chief Financial Officer;
Carl A. Hughes, Vice President--Business Development; and
William C. Gautreaux, Vice President--Supply Logistics and Risk Management.
The following is a summary of the material provisions of these employment agreements,
each of which is incorporated by reference herein as an exhibit to this report.
All of these employment agreements are substantially similar, with certain exceptions as
set forth below. The employment agreements are for terms of five years. The annual salaries for
these individuals are as follows:
•
John J. Sherman…………………………...
$250,000
• Phillip L. Elbert……………………………
$200,000
• R. Brooks Sherman, Jr.………......………..
$170,000
• Carl A. Hughes……………………………
$125,000
• William C. Gautreaux……………………..
$135,000
These employees are reimbursed for all expenses in accordance with the managing
general partner's policies. They are also eligible for fringe benefits normally provided to other
members of executive management and any other benefits agreed to by the managing general
partner. Each of these employees is eligible to participate in the Inergy Long Term Incentive
Plan.
With the exception of Mr. John Sherman, each of these individuals is entitled to
performance bonuses upon our attaining certain levels of distributable cash flow on an annual
basis for each year during the term of his employment.
The employment agreements provide for additional bonuses conditioned upon the
conversion of subordinated units into common units. Messrs. Gautreaux and Hughes will be
entitled to bonuses in the amounts of $300,000 and $400,000, respectively, at the end of the
subordination period for the junior subordinated units. Messrs. Brooks Sherman and Elbert will
be entitled to bonuses in the amounts of $200,000 and $500,000, respectively, payable upon, and
in the same proportion as the conversion of senior and junior subordinated units into common
units. Finally, Mr. John Sherman may receive performance bonuses at the discretion of the
43
board of directors and will be entitled to a bonus in the amount of $625,000 at the end of the
subordination period for the junior subordinated units. The subordination period generally will
not end earlier than June 30, 2006 with respect to the senior subordinated units and June 30,
2008 with respect to the junior subordinated units.
Unless waived by the managing general partner, in order for any of these individuals to
receive any benefits under (i) the Inergy Long Term Incentive Plan, (ii) the performance bonus
based on target distributable cash flow, or (iii) the bonus tied to the expiration of the
subordination period for the junior subordinated units, the individual must have been
continuously employed by the managing general partner or one of our affiliates from the date of
his employment agreement up to the date for determining eligibility to receive such amounts.
Each employment agreement contains confidentiality and noncompetition provisions.
Also, each employment agreement contains a disclosure and assignment of inventions clause that
requires the employee to disclose the existence of any invention and assign such employee's right
in such invention to the managing general partner.
With respect to Mr. John Sherman, Mr. Elbert, Mr. Brooks Sherman, Mr. Hughes and
Mr. Gautreaux, in the event that the operating company terminates such person's employment
without cause, the operating company will be required to continue making payments to such
person for the remainder of the term of such person's employment agreement.
In addition to their employment agreements, Mr. Elbert and Mr. Brooks Sherman each
has entered into an option contract with Inergy Holdings under which Inergy Holdings has
granted them the right and option to invest in Inergy Holdings. Mr. Elbert has the right and
option to invest an aggregate of $2,292,000, subject to adjustment, for a percentage interest in
Inergy Holdings equal to 7.4%, subject to adjustment. Mr. Sherman has the right and option to
invest an aggregate of $3,211,498, subject to adjustment, for a percentage interest in Inergy
Holdings equal to 3.5%, subject to adjustment.
Pursuant to the partnership agreement, we will reimburse Inergy Holdings or its affiliates
for all expenses of the employment of these individuals related to our activities.
Long-Term Incentive Plan
Our managing general partner sponsors the Inergy Long-Term Incentive Plan for its
directors, consultants and employees and the employees and consultants of its affiliates who
perform services for us. The summary of the long-term incentive plan contained herein does not
purport to be complete but outlines its material provisions. The long-term incentive plan
currently permits the grant of awards covering an aggregate of 589,000 common units which are
granted in the form of unit options and/or restricted units; however not more than 192,000
restricted units may be granted under the plan. Through December 2, 2002, we have granted an
aggregate of 498,232 unit options pursuant to the Inergy Long-Term Incentive Plan. We have
not granted any restricted units pursuant to the Long-Term Incentive Plan. The plan is
administered by the compensation committee of the managing general partner's board of
directors.
Restricted Units. A restricted unit is a "phantom" unit that entitles the grantee to receive
a common unit upon the vesting of the restricted unit, or in the discretion of the compensation
44
committee, the cash equivalent to the value of a common unit. The compensation committee
may make grants under the plan to employees and directors containing such terms as the
compensation committee shall determine under the plan. In general, restricted units granted to
employees will vest three years from the date of grant; provided, however, that restricted units
will not vest before the conversion of any senior subordinated units and will only vest upon, and
in the same proportion as, the conversion of senior subordinated units into common units. In
addition, the restricted units will vest upon a change of control of the managing general partner
or us.
If a grantee's employment or membership on the board of directors terminates for any
reason, the grantee's restricted units will be automatically forfeited unless, and to the extent, the
compensation committee provides otherwise. Common units to be delivered upon the vesting of
restricted units may be common units acquired by the managing general partner in the open
market, common units already owned by the managing general partner, common units acquired
by the managing general partner directly from us or any other person or any combination of the
foregoing. The managing general partner will be entitled to reimbursement by us for the cost
incurred in acquiring common units. If we issue new common units upon vesting of the
restricted units, the total number of common units outstanding will increase. Following the
subordination period, the compensation committee, in its discretion, may grant tandem
distribution equivalent rights with respect to restricted units. Distribution equivalent rights
entitle the holder to receive "distributions" with respect to the restricted unit in the same amount
as if the holder owned a common unit.
We intend the issuance of the common units pursuant to the restricted unit portion of the
long-term incentive plan to serve as a means of incentive compensation for performance and not
primarily as an opportunity to participate in the equity appreciation of the common units.
Therefore, plan participants will not pay any consideration for the common units they receive,
and we will receive no remuneration for such units.
Unit Options. The long-term incentive plan currently permits, and our managing general
partner has made, grants of options covering common units. Pursuant to the plan, the
compensation committee determines which employees and directors shall be granted options and
the number of units that will be granted to such individual. Unit options will have an exercise
price equal to the fair market value of the units on the date of grant. In general, unit options
granted will become exercisable over a period determined by the compensation committee;
provided, however, that with the exception of approximately 28,000 unit options granted under
the plan to non-executive employees in exchange for option grants in our predecessor, unit
options will not vest before the conversion of any senior subordinated units and will only vest
upon, and in the same proportion as, the conversion of senior subordinated units into common
units. In addition, under most unit option grants, the unit options will become exercisable upon a
change of control of the managing general partner or us. Generally, unit options will expire after
10 years.
Upon exercise of a unit option, the managing general partner will acquire common units
in the open market, or directly from us or any other person, or use common units already owned
by the managing general partner, or any combination of the foregoing. The managing general
partner will be entitled to reimbursement by us for the difference between the cost incurred by
the managing general partner in acquiring these common units and the proceeds received by the
managing general partner from an optionee at the time of exercise. Thus, the cost of the unit
45
options will be borne by us. If we issue new common units upon exercise of the unit options, the
total number of common units outstanding will increase and the managing general partner will
pay us the proceeds it received from the optionee upon exercise of the unit options. The unit
option plan has been designed to furnish additional compensation to employees and directors and
to align their economic interests with those of common unitholders.
Termination and Amendment. The managing general partner's board of directors in its
discretion may terminate the long-term incentive plan at any time with respect to any common
units for which a grant has not yet been made. The managing general partner's board of directors
also has the right to alter or amend the long-term incentive plan or any part of the plan from time
to time, including increasing the number of common units with respect to which awards may be
granted subject to unitholder approval as required by the exchange upon which the common units
are listed at that time. However, no change in any outstanding grant may be made that would
materially impair the rights of the participant without the consent of the participant.
Unit Purchase Plan
Our managing general partner sponsors a unit purchase plan for its employees and the
employees of its affiliates. The unit purchase plan permits participants to purchase common
units in market transactions, from us, our general partners or any other person. We currently
expect such purchases to occur primarily in market transactions, although our plan allows us to
issue additional units. We have reserved 50,000 units for purchase under the unit purchase plan.
As determined by the compensation committee, the managing general partner may match each
participant's cash base pay or salary deferrals by an amount up to 10% of such deferrals and have
such amount applied toward the purchase of additional units. The managing general partner has
also agreed to pay the brokerage commissions, transfer taxes and other transaction fees
associated with a participant's purchase of common units. The maximum amount that a
participant may elect to have withheld from his or her salary or cash base pay with respect to unit
purchases in any calendar year may not exceed 10% of his or her base salary or wages for the
year. Units purchased on behalf of a participant under the unit purchase plan generally are to be
held by the participant for at least one year. To the extent a participant desires to sell or dispose
of such units prior to the end of this one year holding period, the participant will be ineligible to
participate in the unit purchase plan again until the one year anniversary of the date of such sale.
The unit purchase plan is intended to serve as a means for encouraging participants to invest in
our common units.
Reimbursement of Expenses of the Managing General Partner
Our managing general partner does not receive any management fee or other
compensation for its management of Inergy, L.P. Our managing general partner and its affiliates
are reimbursed for expenses incurred on our behalf. These expenses include the costs of
employee, officer and director compensation and benefits properly allocable to Inergy, L.P. and
all other expenses necessary or appropriate to the conduct of the business of, and allocable to,
Inergy, L.P. Our partnership agreement provides that our managing general partner will
determine the expenses that are allocable to Inergy, L.P. in any reasonable manner determined by
our managing general partner in its sole discretion.
46
Compensation of Directors
Officers of our managing general partner who also serve as directors will not receive
additional compensation. In connection with our initial public offering, each non-employee
director received an option under our long term incentive plan for 22,200 common units at an
exercise price equal to the initial public offering price. In addition, each director receives cash
compensation of $18,000 per year for attending our regularly scheduled quarterly board
meetings. Each non-employee director receives $1,000 for each special meeting of the board of
directors attended. Non-employee directors receive $500 per compensation or audit committee
meeting attended and $1,000 per conflicts committee meeting attended. Each non-employee
director is reimbursed for out-of-pocket expenses in connection with attending meetings of the
board of directors or committees. Each director is fully indemnified for actions associated with
being a director to the extent permitted under Delaware law.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors of our managing general partner
determines the compensation of our executive officers. Richard C. Green, Jr. and David J.
Schulte serve as the members of the Compensation Committee, and neither of them was an
officer or employee of our company or any of its subsidiaries during fiscal 2002. We refer you
to Item 13 for a discussion of certain relationships and related transactions involving Mr. Green
and Mr. Schulte.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of December 2, 2002 regarding the
beneficial ownership of our Company's units by:
•
•
•
•
each person who then beneficially owned more than 5% of such units then
outstanding,
each of the named executive officers of our managing general partner,
all of the directors of our managing general partner, and
all of the directors and executive officers of our managing general partner as a
group.
All information with respect to beneficial ownership has been furnished by the respective
directors, officers or 5% or more unitholders, as the case may be.
47
Name of Beneficial
Owner (1)
Inergy Holdings,
LLC (2)
Country Partners,
Inc. (3)
4010 Highway 14
Crystal Lake, IL
60014
KCEP Ventures II,
L.P. (4)
253 West 47th Street
Kansas City, MO
64112
Hoosier Propane
Group (5)
P.O. Box 9
Kendallville, IN
46755
Rocky Mountain
Mezzanine Fund (6)
1125 17th Street
Suite 2260 Denver,
CO 80202
John J. Sherman (7)
Phillip L. Elbert (5)
R. Brooks Sherman
Jr.
Carl A. Hughes
William C.
Gautreaux
Richard C. Green, Jr.
(8)
Warren H. Gfeller (9)
Common
Units
Beneficially
Owned
Percentage
of Common
Units
Beneficially
Owned
Senior
Subordinated
Units
Beneficially
Owned
Percentage of
Senior
Subordinated
Units
Beneficially
Owned
Junior
Subordinated
Units
Beneficially
Owned
Percentage of
Junior
Subordinated
Units
Beneficially
Owned
Percentage of
Total Units
Beneficially
Owned
404,601
10.6%
961,761
29.0%
507,063
88.6%
24.3%
-
-
-
-
-
-
-
-
409,091
12.3%
395,454
11.9%
336,456
10.2%
241,818
7.3%
-
-
-
-
-
-
-
-
5.3%
5.1%
4.4%
3.1%
404,795
10.6%
961,761
29.0%
507,063
88,6%
24.3%
9,000
1,012
-
14,500
-
-
*
*
-
*
-
-
*
-
-
-
-
-
-
-
-
31,818
1.0%
6,364
395,454
*
11.9%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
*
*
-
*
*
*
5.1%
David J. Schulte (4)
1,000
All directors and
executive officers as
a group (10 persons)
* less than 1%
432,001
11.3%
1,395,397
42.1%
507,063
88.6%
30.3%
(1)
(2)
Unless otherwise indicated, the address of each person listed above is: Two Brush Creek Boulevard, Suite
200, Kansas City, Missouri 64112. All persons listed have sole voting power and investment power with
respect to their units unless otherwise indicated.
The senior and junior subordinated units indicated as beneficially owned by Inergy Holdings are held by
New Inergy Propane, LLC, a wholly-owned subsidiary of Inergy Partners, LLC and an indirect subsidiary
of Inergy Holdings. Of the common units indicated as beneficially owned by Inergy Holdings, 10,000 units
are held by Inergy Partners, LLC and 394,601 units are held by IPCH Acquisition Corp. a wholly-owned
subsidiary of Inergy Holdings.
48
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Country Partners, Inc. (formerly Country Gas Company, Inc.) is controlled by Arlene Peterson and the
estate of Leonard Peterson.
KCEP Ventures II, LP ("KCEP II") owns 395,454 senior subordinated units. KCEP II is a Missouri limited
partnership. Mr. Schulte in his capacity as a managing director of KCEP II may be deemed to beneficially
own these units. Mr. Green is a special limited partner in KCEP II. Both Mr. Schulte and Mr. Green
disclaim beneficial ownership of these units.
The Hoosier Propane Group consisted of Domex, Inc., Investors, Inc. and L&L Leasing, Inc., each of
which was merged into DIL, Inc. (collectively, the "Hoosier Entities"). Each of Jerry Boman, Glen Cook
and Wayne Cook own 31.8% of the Hoosier Entities. Mr. Elbert, one of our executive officers, holds the
remaining ownership interest in the Hoosier Entities. He disclaims beneficial ownership of the units held by
the Hoosier Entities.
Edward C. Brown in his capacity as managing partner of Rocky Mountain Capital Partners, LLP, the
general partner of Rocky Mountain Mezzanine Fund, may be deemed to beneficially own these units. Mr.
Brown disclaims beneficial ownership of the units held by Rocky Mountain Mezzanine Fund.
Mr. Sherman holds an ownership interest in and has voting control of Inergy Holdings, as indicated in the
following table, and therefore may be deemed to beneficially own the units held by Inergy Holdings.
Mr. Green in his capacity as a general partner of RNG Investments, LP, a Delaware limited partnership
("RNG Investments"), may be deemed to beneficially own 31,818 senior subordinated units held by RNG
Investments.
Mr. Gfeller in his capacity as managing member of Clayton-Hamilton, LLC may be deemed to beneficially
own 6,364 units held by Clayton-Hamilton.
The following table shows the beneficial ownership as of December 2, 2002 of Inergy
Holdings, LLC of the directors and named executive officers of the managing general partner.
As reflected above, Inergy Holdings owns our managing general partner, non-managing general
partner, the incentive distribution rights and, through a subsidiary, approximately 24% of our
outstanding units.
Name of Beneficial Owner (1)
John J. Sherman
Phillip L. Elbert (3)
R. Brooks Sherman Jr. (4)
Carl A. Hughes
William C. Gautreaux
Richard C. Green, Jr.
Warren H. Gfeller
David J. Schulte
All directors and executive officers as a group (10 persons) (3)
Inergy Holdings, LLC
Percent of Class (2)
64.0%
-
-
8.0
8.0
-
-
-
88.0%
(1)
(2)
The address of each person listed above is Two Brush Creek Boulevard, Suite 200, Kansas City, Missouri
64112.
The ownership of Inergy Holdings has not been certificated. Voting rights attach only to Mr. John
Sherman's ownership interest. In the event Mr. John Sherman's ownership fails to exceed 50%, the
remaining owners of Inergy Holdings will acquire voting rights in proportion to the ownership interest.
49
(3)
(4)
Mr. Phil Elbert holds an option to acquire 7.4% of Inergy Holdings, which option is subject to the terms of
the Inergy Holdings, LLC Employee Option Plan. The option vests fully at the end of five years and upon
a sale of control as defined in the plan. The option vests 20% each year in the event Mr. Elbert's
employment terminates as a result of his death, disability or termination without cause (as defined in Mr.
Elbert's employment agreement). Mr. Elbert's option expires on January 12, 2011. In the event Mr. Elbert
exercises his option, the respective ownership interests of the persons listed above will be reduced on a pro
rata basis.
Mr. Brooks Sherman, Jr. holds an option to acquire 3.5% of Inergy Holdings, which option is subject to the
terms of the Inergy Holdings, LLC Employee Option Plan. The option vests fully at December 31, 2006
and upon a sale of control as defined in the plan. The option vests 20% each year in the event Mr.
Sherman's employment terminates as a result of his death, disability or termination without cause (as
defined in Mr. Sherman's employment agreement). Mr. Sherman's option expires on September 11, 2012.
In the event Mr. Sherman exercises his option, the respective ownership interests of the persons listed
above will be reduced on a pro rata basis.
We refer you to Item 5 of this report for certain equity plan information.
Item 13. Certain Relationships and Related Transactions.
Related Party Transactions
On December 31, 1999, KCEP Ventures II, L.P. ("KCEP II") acquired a preferred
interest in a predecessor entity of Inergy, L.P., for $2.0 million in cash ("KCEP II 1999
Investment"). David Schulte, one of our directors, holds voting power in KCEP II. Richard
Green, one of our directors, is a limited partner of KCEP II. Under the terms of its investment in
us, KCEP II's preferred interest automatically converted into 204,545 senior subordinated units
concurrently with the July 2001 closing of our initial public offering. As a result of favorable
conversion terms, there was a beneficial conversion feature associated with the KCEP II 1999
Investment. Further, pursuant to the terms of the KCEP II 1999 Investment, KCEP II has the
right to elect one member of the board of directors of our managing general partner until certain
events related to subordination occur. David Schulte is currently serving as KCEP II's board
designee. The terms of this investment also provide for certain limited registration rights which
are described below.
On June 1, 2000, a predecessor entity of Inergy, L.P. acquired all of the propane assets of
Country Gas Company, Inc. for a purchase price of approximately $18.6 million. The
consideration paid in respect of the purchase price consisted of approximately $9.6 million in
cash and assumed liabilities and a $9.0 million preferred interest in a predecessor entity. Under
the terms of its preferred interest, Country Gas exchanged its preferred interest for 409,091
senior subordinated units concurrently with the closing of our initial public offering.
As a result of the Country Gas acquisition, we lease three properties from Country
Enterprises, an Illinois general partnership ("Country Enterprises"). Country Enterprises is
controlled by Arlene Peterson and the estate of Leonard Peterson, the controlling shareholders of
Country Partners (formerly Country Gas). The leases provide for aggregate monthly payments
of $14,000, and are subject to adjustment based on the consumer price index. During the fiscal
year ended September 30, 2002, we paid Country Enterprises an aggregate of $168,000 in
respect of these leases. In addition, we pay for all utilities, taxes, insurance and normal
maintenance on these properties. Each lease has an initial term of five years expiring on May 31,
2005. We have the right to extend each lease for one successive term of five years.
50
On January 12, 2001, a predecessor entity of Inergy, L.P. sold preferred interests to
various investors (the "2001 Investor Group"), including KCEP II, RNG Investments, L.P. and
Clayton-Hamilton, LLC for $15 million in cash. KCEP II invested, as part of the 2001 Investor
Group, $3.0 million in our predecessor. Mr. Schulte, one of our directors, is a managing director
of KCEP II. Mr. Green, one of our directors, is a limited partner of KCEP II and is the managing
general partner of RNG Investments. Clayton-Hamilton is an affiliate of Mr. Gfeller, one of our
directors. KCEP II, RNG Investments and Clayton-Hamilton acquired their preferred interests,
for $3.0 million, $500,000 and $100,000, respectively. Concurrently with the closing of our
initial public offering, the preferred interests held by these investors automatically converted into
190,909, 31,818 and 6,364 senior subordinated units, respectively. As a result of favorable
conversion terms, there was a beneficial conversion feature associated with the investment of the
2001 Investor Group. As a group, all members of the 2001 Investor Group have the right to elect
one director to the board of directors of our managing general partner until certain events related
to subordination occur. Mr. Green is currently the board designee of these investors. These
investors are also entitled to registration rights, which are described below.
On January 12, 2001, our predecessor entered into an Investors Rights Agreement with
the 2001 Investor Group. That agreement provides the members of the 2001 Investor Group
with the following registration rights:
•
•
•
•
•
•
The 2001 Investor Group may demand registration once following each date
senior subordinated units are converted to common units. This demand, if made,
must be made with respect to 50% or more of the common units then held by the
2001 Investor Group.
If we meet the eligibility requirements of Form S-3, then members of the 2001
Investor Group representing 33 1/3% or more of the common units held by the
2001 Investor Group can demand that we file a registration statement on Form S-
3 to register their common units.
We are not required to effect more than one registration in any twelve-month
period.
If we file a registration statement (other than one relating to employee benefit
plans or exchange offers), the members of the 2001 Investor Group have piggy-
back registration rights subject to limitations specified in the Investors Rights
Agreement.
The right of the 2001 Investor Group to demand registration of their common
units expires on the third anniversary of the final subordination release date and
their right to piggy-back registration rights expires on the fifth anniversary of the
final subordination release date.
We will bear all costs of any registration exclusive of any underwriting discounts
or commissions.
On January 12, 2001, a predecessor entity of Inergy, L.P., acquired all of the propane
assets of Investors 300, Inc., Domex, Inc. and L&L Leasing, Inc. (collectively, the "Hoosier
Propane Group"), for a purchase price of approximately $74.0 million. Mr. Elbert, one of our
executive officers, is a stockholder of the companies comprising the Hoosier Propane Group.
The consideration paid in respect of the purchase price consisted of approximately $61.6 million
51
in cash and assumed liabilities, a subordinated promissory note of $5.0 million and a preferred
interest in our predecessor entity of $7.4 million. The subordinated promissory note was repaid
at the closing of this offering. The preferred interest held by the Hoosier Propane Group was
exchanged for 336,456 senior subordinated units concurrently with our initial public offering.
In order to consummate the Independent Propane Company acquisition, we and several
of our affiliates entered into various transactions. IPCH Acquisition Corp., an affiliate of our
managing general partner, borrowed approximately $27 million under a bridge facility financed
by one of our lenders. Approximately $9.6 million of these loan proceeds was used to acquire
365,019 common units from us. IPCH Acquisition Corp. utilized these common units to provide
a portion of the consideration paid to some of the former stockholders of Independent Propane
Company’s parent corporation, including the selling unitholders in this offering. The balance of
the loan proceeds of approximately $17.4 million was applied to the purchase price.
Immediately thereafter, IPCH Acquisition Corp. sold, assigned and transferred its interest in
Independent Propane Company and certain rights under the Independent Propane Company
acquisition agreement and related escrow agreement to our operating company. In consideration
for this sale, assignment and transfer, we issued to IPCH Acquisition Corp. 394,601 common
units, which were valued at $10.4 million, and paid $83.9 million in cash (including $9.6 million
of cash received from the sale of 365,019 common units to IPCH Acquisition Corp. and $1.7
million of cash acquisition costs) and our operating company assumed $2.5 million of notes
payable. We also issued 18,252 common units to members of Independent Propane Company’s
management, who are current employees of our operating company, for approximately $0.5
million in cash. Each common unit issued in connection with the Independent Propane
Company transaction was valued at $26.30, the 30-day average trading price of the common
units on Nasdaq immediately prior to December 19, 2001.
In connection with the Independent Propane Company transaction, we entered into a
registration rights agreement with J.P. Morgan Partners (SBIC), LLC, Summit Capital, Inc.,
Heller Financial, Inc. and Triad Ventures Limited, L.P. (the "IPC Investors"), which provides the
IPC Investors with the following registration rights:
•
•
•
•
We shall use our best efforts to file a shelf registration statement and to register
the common units issued to former Independent Propane Company shareholders,
including the IPC Investors, subject to various conditions and limitations
specified in the registration rights agreement.
If we file a registration statement, the IPC Investors have piggy-back registration
rights subject to various conditions and limitations specified in the registration
rights agreement.
The right of the IPC Investors to demand registration of their common units
expires upon the registration of all common units held by the IPC Investors.
We will bear all costs of any registration exclusive of any underwriting discounts
or commissions.
In June 2002, Inergy sold 1,400,000 common units, of which 1,061,005 were primary
units and 338,995 were secondary units sold on behalf of the selling unitholders. The 1,061,005
common units issued by the company resulted in proceeds of $30.4 million, net of underwriter’s
discount, commission, and offering expenses. The 338,995 secondary units resulted in proceeds
of $10.0 million, all of which went to the selling unitholders.
52
In July 2002, Inergy issued an additional 150,000 common units due to the underwriters’
exercise of the overallotment option, resulting in net proceeds of $4.5 million to the company.
In October 2002, we filed a registration statement on Form S-3 to register 42,575 of the
units issued in the above referenced transactions.
On December 19, 2001, Inergy, L.P. entered into a registration rights agreement with
IPCH Acquisition Corp., which provides IPCH Acquisition Corp. with the following registration
rights:
•
•
•
If Inergy, L.P. proposes to register any of its common units or other units under
applicable securities laws, IPCH Acquisition Corp. will have piggy-back
registration rights subject to various conditions and limitations specified in the
registration rights agreement.
The right of IPCH Acquisition Corp. to demand piggy-back registration rights of
its common units expires upon the registration of all common units held by IPCH
Acquisition Corp.
We will bear all costs of any registration exclusive of any underwriting discounts
or commissions.
Distributions and Payments to the Managing General Partner and the Non-managing
General Partner
The following table summarizes the distributions and payments to be made by us to our
managing general partner and its affiliates in connection with the formation, ongoing operation
and the liquidation of Inergy, L.P. These distributions and payments were determined by and
among affiliated entities and are not the result of arm's length negotiations.
Formation Stage
The consideration received by Inergy Holdings and its
affiliates for the transfer of the affiliates' interests in the
subsidiaries and a capital
contribution…………………………..
Operational Stage
Distributions of available cash to our managing general partner
and its affiliates………………
53
1,306,911 senior subordinated units and 572,542 junior
subordinated units; a 2% general partner interest in Inergy,
L.P.; and the incentive distribution rights.
Cash distributions will generally be made 98% to the
unitholders, including affiliates of the managing general
partner as holders of common units and senior and junior
subordinated units, and 2% to the non-managing general
partner. In addition, if distributions exceed the target levels in
excess of the minimum quarterly distribution, Inergy Holdings
will be entitled to receive increasing percentages of the
distributions, up to 48% of the distributions above the highest
target level.
Assuming we have sufficient available cash to pay the full
minimum quarterly distribution on all of our outstanding units
for four quarters, our non-managing general partner and its
affiliates would receive a distribution of approximately
Payments to our managing general partner and its
affiliates……………………………………
Withdrawal or removal of our managing general
partner………………………………..
Liquidation Stage
Liquidation……………………………………
$268,697 on the 2% general partner interest and a distribution
of approximately $4,510,687 on their senior and junior
subordinated units.
Our managing general partner and its affiliates will not receive
any management fee or other compensation for the
management of our company. Our managing general partner
and its affiliates will be reimbursed, however, for direct and
indirect expenses incurred on our behalf. For the fiscal year
ended September 30, 2002, the expense reimbursement to our
managing general partner and its affiliates was approximately
$4.6 million.
If our managing general partner withdraws in violation of the
partnership agreement or is removed for cause, a successor
general partner has the option to buy the general partner
interests and incentive distribution rights from our non-
managing general partner for a cash price equal to fair market
value. If our managing general partner withdraws or is
removed under any other circumstances, our non-managing
general partner has the option to require the successor general
partner to buy its general partner interests and incentive
distribution rights for a cash price equal to fair market value.
If either of these options is not exercised, the general partner
interests and incentive distribution rights will automatically
convert into common units equal to the fair market value of
those interests. In addition, we will be required to pay the
departing general partner for expense reimbursements.
Upon our liquidation, the partners, including our non-
managing general partner, will be entitled to receive
liquidating distributions according to their particular capital
account balances.
Rights of our Managing General Partner and our Non-managing General Partner
A subsidiary of our non-managing general partner owns an approximate 34% limited
partner interest in us. Inergy Holdings owns all of our non-managing general partner and our
managing general partner. The managing general partner's ability to manage and operate Inergy,
L.P. coupled with Inergy Holdings' ownership of an aggregate 34% limited partner interest in us
effectively gives Inergy Holdings the right to veto some actions of Inergy, L.P. and to control the
management of our company.
Contribution Agreement
Inergy, L.P., the managing general partner, the non-managing general partner and some
other parties have entered into a contribution agreement that effected the vesting of assets in, and
the assumption of liabilities by, the subsidiaries, and the application of the proceeds of our initial
public offering. This agreement was not the result of arm's-length negotiations, and we cannot
assure you that it, or that any of the transactions which it provides for, will be effected on terms
at least as favorable to the parties to this agreement as they could have been obtained from
54
unaffiliated third parties. All of the transaction expenses incurred in connection with these
transactions, including the expenses associated with vesting assets into our subsidiaries, were
paid from the proceeds of our initial public offering.
Item 14. Controls and Procedures.
(a)
Evaluation of disclosure controls and procedures. Within 90 days prior to the
filing of this report, our company's senior management, including our Chief Executive Officer
and our Vice President and Chief Financial Officer, carried out an evaluation of the effectiveness
of the design and operation of our company's disclosure controls and procedures. Our company's
disclosure controls and procedures are designed to ensure that information we are required to
disclose in our periodic filings with the SEC, including annual reports such as this report, is
reported accurately and suitably within the time periods specified in the SEC's rules and forms.
Based upon that evaluation, senior management concluded that our company's disclosure
controls and procedures are effective in causing material information related to our company
(including our consolidated subsidiaries) to be recorded, processed, summarized and reported on
a timely basis and to ensure that the quality and timeliness of our public disclosures comply with
applicable disclosure obligations.
(b)
Changes in internal controls. There were no significant changes in our internal
controls or in other factors that in management's estimation could significantly affect our
disclosure controls and procedures after the date of our company's most recent evaluation.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)
Exhibits, Financial Statements and Financial Statement Schedules:
1.
Financial Statements:
See Index Page for Financial Statements located on page 59.
2.
Financial Statement Schedules:
Valuation and Qualifying Accounts
Other financial statement schedules have been omitted because they either are not
required, are immaterial or are not applicable or because equivalent information has been
included in the financial statements, the notes thereto or elsewhere herein.
3.
Exhibits:
Exhibit No.
Description
*3.1
Certificate of Limited Partnership of Inergy, L.P. (incorporated by reference to
Exhibit 3.1 to Inergy, L.P.'s Registration Statement on Form S-1 (Registration No.
333-56976) filed on March 14, 2001)
55
*3.2
*3.2A
*3.3
*3.4
*3.5
*3.6
*3.7
*3.8
*4.1
*4.2
*4.3
*4.4
Form of Amended and Restated Agreement of Limited Partnership of Inergy, L.P.
(incorporated by reference to Exhibit 3.1 to Inergy, L.P.'s Registration Statement on
Form S-1 (Registration No. 333-56976) filed on March 14, 2001)
Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of
Inergy, L.P. (incorporated by reference to Exhibit 3.2A to Inergy, L.P.’s Registration
Statement on Form S-1/A (Registration No. 333-89010) filed on June 13, 2002)
Certificate of Formation as relating to Inergy Propane, LLC, as amended
(incorporated by reference to Exhibit 3.3 to Inergy, L.P.'s Registration Statement on
Form S-1/A (Registration No. 333-56976) filed on May 7, 2001)
Third Amended and Restated Limited Liability Company Agreement of Inergy
Propane, LLC, dated as of July 31, 2001
Certificate of Formation of Inergy GP, LLC (incorporated by reference to Exhibit
3.5 to Inergy, L.P.'s Registration Statement on Form S-1/A (Registration No. 333-
56976) filed on May 7, 2001)
Limited Liability Company Agreement of Inergy GP, LLC (incorporated by
reference to Exhibit 3.6 to Inergy, L.P.'s Registration Statement on Form S-1/A
(Registration No. 333-56976) filed on May 7, 2001)
Certificate of Formation as relating to Inergy Partners, LLC, as amended
(incorporated by reference to Exhibit 3.7 to Inergy, L.P.'s Registration Statement on
Form S-1/A (Registration No. 333-56976) filed on May 7, 2001)
Second Amended and Restated Limited Liability Company Agreement of Inergy
Partners, LLC, dated as of July 31, 2001
Specimen Unit Certificate for Senior Subordinated Units (incorporated by reference
to Exhibit 4.1 to Inergy, L.P.'s Registration Statement on Form S-1/A (Registration
No. 333-56976) filed on May 7, 2001)
Specimen Unit Certificate for Junior Subordinated Units (incorporated by reference
to Exhibit 4.2 to Inergy, L.P.'s Registration Statement on Form S-1/A (Registration
No. 333-56976) filed on May 7, 2001)
Specimen Unit Certificate for Common Units (incorporated by reference to Exhibit
4.3 to Inergy, L.P.'s Registration Statement on Form S-1/A (Registration No. 333-
56976) filed on May 7, 2001.)
Note Purchase Agreement entered into as of June 7, 2002, by Inergy Propane, LLC
and the purchasers named therein (incorporated by reference to Exhibit 4.4 to Inergy,
L.P.’s Registration Statement on Form S-1/A (Registration No. 333-89010) filed on
June 13, 2002)
56
*4.5
*4.6
*4.7
*10.1
*10.1A
*10.1B
Parent Guaranty dated as of June 7, 2002, by Inergy, L.P. in favor of the noteholders
named therein (incorporated by reference to Exhibit 4.5 to Inergy, L.P.’s
Registration Statement on Form S-1/A (Registration No. 333-89010) filed on June
13, 2002)
Limited Guaranty dated as of June 7, 2002, by IPCH Acquisition Corp.in favor of
the noteholders named therein (incorporated by reference to Exhibit 4.6 to Inergy,
L.P.’s Registration Statement on Form S-1/A (Registration No. 333-89010) filed on
June 13, 2002)
Subsidiary Guaranty dated as of June 7, 2002, by the guarantors named therein in
favor of the noteholders named therein (incorporated by reference to Exhibit 4.7 to
Inergy, L.P.’s Registration Statement on Form S-1/A (Registration No. 333-89010)
filed on June 13, 2002)
Fourth Amended and Restated Credit Agreement by and among Inergy Propane,
LLC and the lenders named therein, dated as of December 20, 2001 (incorporated by
reference to Exhibit 10.1 to Inergy, L.P.'s Annual Report on Form 10-K filed on
December 28, 2001)
Amendment No. 1 to Fourth Amended and Restated Credit Agreement (incorporated
by reference to Exhibit 10.1A to Inergy, L.P.’s Registration Statement on Form S-
1/A (Registration No. 333-89010) filed on May 24, 2002)
Amendment No. 2 to Fourth Amended and Restated Credit Agreement (incorporated
by reference to Exhibit 10.1B to Inergy, L.P.’s Registration Statement on Form S-
1/A (Registration No. 333-89010) filed on June 13, 2002)
**10.1C Waiver and Amendment No. 3 to Fourth Amended and Restated Credit Agreement
*10.2
*10.3
*10.4
Asset Purchase Agreement by and between Inergy Partners, LLC and Country Gas
Company, Inc., dated as of May 20, 2000 (incorporated by reference to Exhibit 10.2
to Inergy, L.P.'s Registration Statement on Form S-1/A (Registration No. 333-
56976) filed on May 7, 2001)
Securities Purchase Agreement by and among Inergy Partners, LLC and various
investors, dated as of January 12, 2001 (incorporated by reference to Exhibit 10.3 to
Inergy, L.P.'s Registration Statement on Form S-1/A (Registration No. 333-56976)
filed on May 7, 2001)
Investor Rights Agreement by and among Inergy Partners, LLC and various
investors, dated as of January 12, 2001 (incorporated by reference to Exhibit 10.4 to
Inergy, L.P.'s Registration Statement on Form S-1/A (Registration No. 333-56976)
filed on May 7, 2001)
*10.5
Asset Purchase Agreement by and among Inergy Partners, LLC and the Hoosier
Group, dated as of September 8, 2000 (incorporated by reference to Exhibit 10.5 to
57
*10.6
*10.7
*10.8
*10.9
Inergy, L.P.'s Registration Statement on Form S-1/A (Registration No. 333-56976)
filed on May 7, 2001)
Inergy Employee Long-Term Incentive Plan (incorporated by reference to Exhibit
10.6 to Inergy, L.P.'s Registration Statement on Form S-1/A (Registration No. 333-
56976) filed on July 2, 2001)
Inergy Unit Purchase Plan (incorporated by reference to Exhibit 10.1 to Inergy,
L.P.'s Registration Statement on Form S-8 filed on March 6, 2002)
Employment Agreement--John J. Sherman (incorporated by reference to Exhibit
10.8 to Inergy, L.P.'s Registration Statement on Form S-1/A (Registration No. 333-
56976) filed on July 2, 2001)
Employment Agreement--Phillip L. Elbert (incorporated by reference to Exhibit 10.9
to Inergy, L.P.'s Registration Statement on Form S-1/A (Registration No. 333-
56976) filed on May 7, 2001)
*10.9A
First Amendment to Employment Agreement--Phillip L. Elbert (incorporated by
reference to Exhibit 10.9A to Inergy, L.P.'s Registration Statement on Form S-1/A
(Registration No. 333-56976) filed on July 20, 2001)
*10.10
*10.11
*10.12
*10.13
*10.14
Employment Agreement--Carl A. Hughes (incorporated by reference to Exhibit
10.10 to Inergy, L.P.'s Registration Statement on Form S-1/A (Registration No. 333-
56976) filed on July 2, 2001)
Employment Agreement--Michael D. Fox (incorporated by reference to Exhibit
10.11 to Inergy, L.P.'s Registration Statement on Form S-1/A (Registration No. 333-
56976) filed on July 2, 2001
Employment Agreement--William C. Gautreaux (incorporated by reference to
Exhibit 10.12 to Inergy, L.P.'s Registration Statement on Form S-1/A (Registration
No. 333-56976) filed on July 2, 2001
Contribution, Conveyance, Assignment and Assumption Agreement by and among
Inergy, L.P., Inergy Partners, LLC and the other parties named therein, dated as of
July 31, 2001
Agreement and Plan of Merger, dated as of December 19, 2001 by and among
Inergy Holders, LLC, IPCH Acquisition Corp., IPCH Merger Corp., Inergy, L.P.,
Independent Propane Company Holdings, certain holders of Series E Preferred Stock
of Independent Propane Company Holdings and joined in by David L. Scott, Robert
R. Galvin and Inergy Propane, LLC. (incorporated by reference to Exhibit 2.1 of
Inergy, L.P.'s Current Report on Form 8-K filed on January 4, 2002)
*10.15
Transaction Agreement dated as of December 19, 2001 by and among Inergy, L.P.,
Inergy GP, LLC, Inergy Propane, LLC, Inergy Sales and Service, Inc., Inergy
Holdings, LLC, IPCH Acquisition Corp., and IPCH Merger Corp. (incorporated by
58
reference to Exhibit 2.2 of Inergy, L.P.'s Current Report on Form 8-K filed on
January 4, 2002)
*10.16
*10.17
*10.18
Registration Rights Agreement entered into as of December 19, 2001 by and among
Inergy, L.P. and certain investors (incorporated by reference to Exhibit 4.1 of Inergy,
L.P.'s Current Report on Form 8-K filed on January 4, 2002)
Registration Rights Agreement entered into as of December 19, 2001 by and
between Inergy, L.P. and IPCH Acquisition Corp. (incorporated by reference to
Exhibit 4.2 of Inergy, L.P.'s Current Report on Form 8-K filed on January 4, 2002)
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
**10.19 Option Agreement by and between Phillip L Elbert and Inergy Holdings, LLC, dated
January 12, 2001
**10.20
Employment Agreement – R. Brooks Sherman
**10.21 Option Agreement by and between R. Brooks Sherman and Inergy Holdings, LLC,
dated September 11, 2002
**12.1
Ratios of earnings to fixed charges
*21.1
List of subsidiaries of Inergy, L.P.
Consent of Ernst & Young LLP
**23.1
________________
* Previously filed
** Filed herewith
(b)
Reports on Form 8-K.
No reports on Form 8-K were filed by our company during the three month period
ended September 30, 2002 except for our report on Form 8-K filed with the SEC
on August 21, 2002 to report our acquisition of Hancock Gas Service, Inc.
(c)
Exhibits.
See exhibits identified above under Item 15(a)3.
(d)
Financial Statement Schedules.
See financial statement schedules identified above under Item 15(a)2, if any.
59
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Consolidated Financial Statements
September 30, 2002 and 2001 and each of the
Three Years in the Period Ended
September 30, 2002
Contents
Report of Independent Auditors.........................................................................................61
Audited Consolidated Financial Statements
Consolidated Balance Sheets .............................................................................................62
Consolidated Statements of Operations .............................................................................64
Consolidated Statements of Redeemable Preferred Members’ Interest and
Members’ Equity/Partners’ Capital ................................................................................65
Consolidated Statements of Cash Flows............................................................................68
Notes to Consolidated Financial Statements......................................................................70
60
Report of Independent Auditors
The Board of Directors and Partners
Inergy, L.P. and Subsidiary
We have audited the accompanying consolidated balance sheets of Inergy, L.P. and
subsidiary (successor to Inergy Partners, LLC and subsidiaries) (the Partnership) as of
September 30, 2002 and 2001, and the related consolidated statements of operations,
redeemable preferred members’ interest and members’ equity/partners’ capital and cash
flows for each of the three years in the period ended September 30, 2002. Our audits also
included the financial statement schedule listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of the Partnership’s management.
Our responsibility is to express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the
United States. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Inergy, L.P. and subsidiary (successor to
Inergy Partners, LLC and subsidiaries) at September 30, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the three years in
the period ended September 30, 2002 in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in the fiscal year ended
September 30, 2002, the Partnership changed its method of accounting for goodwill as a
result of the adoption of Statement of Accounting Standard No. 142 “Goodwill and Other
Intangible Assets.”
/s/ ERNST & YOUNG LLP
Kansas City, Missouri
November 15, 2002
61
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Consolidated Balance Sheets
Assets (Note 4)
Current assets:
Cash
Accounts receivable, less allowance for doubtful
accounts of $927,000 and $186,000 at September 30,
2002 and 2001, respectively
Inventories
Prepaid expenses and other current assets
Assets from price risk management activities
Total current assets
Property, plant and equipment, at cost:
Land and buildings
Office furniture and equipment
Vehicles
Tanks and plant equipment
Less accumulated depreciation
Property, plant and equipment, net
Intangible assets, (Note 2):
Covenants not to compete
Deferred financing costs
Deferred acquisition costs
Customer accounts
Goodwill
Less accumulated amortization
Intangible assets, net
Other
Total assets
September 30,
2002
2001
(In Thousands)
$ 2,088
$ 2,171
13,112
41,162
3,929
9,725
70,016
11,503
6,634
17,977
101,788
137,902
(13,352)
124,550
6,113
5,899
44
41,411
48,124
101,591
(8,941)
92,650
11,457
12,694
1,411
9,187
36,920
4,511
1,172
11,435
58,737
75,855
(5,812)
70,043
3,771
2,985
115
14,000
32,121
52,992
(4,431)
48,561
1,016
$288,232
129
$155,653
62
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Liabilities and partners’ capital
Current liabilities:
Accounts payable
Accrued expenses
Customer deposits
Liabilities from price risk management activities
Current portion of long-term debt (Note 4)
Total current liabilities
September 30,
2002
2001
(In Thousands)
$ 13,364
6,394
8,718
14,378
19,367
62,221
$ 8,416
5,679
10,060
4,612
10,469
39,236
Long-term debt, less current portion (Note 4)
105,095
43,663
Partners’ capital (Notes 2, 7 and 8):
Common unitholders (3,828,877 and 1,840,000 units
issued and outstanding as of September 30, 2002 and
2001, respectively)
Senior subordinated unitholders (3,313,367 units issued
and outstanding as of September 30, 2002 and 2001)
Junior subordinated unitholders (572,542 units issued and
76,762
24,981
41,292
45,060
outstanding as of September 30, 2002 and 2001)
607
1,258
Non-managing general partner (2% interest with 157,445
and 116,855 equivalent units outstanding as of
September 30, 2002 and 2001, respectively)
Total partners’ capital
Total liabilities and partners’ capital
See accompanying notes.
2,255
120,916
$288,232
1,455
72,754
$155,653
63
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Consolidated Statements of Operations
(In Thousands Except Per Unit Data)
Revenue:
Propane
Other
Cost of product sold
Gross profit
Expenses:
Operating and administrative
Depreciation and amortization
Operating income
Other income (expense):
Interest expense (Note 4)
Interest expense related to write-off of deferred financing costs
Gain on sale of property, plant and equipment
Finance charges
Other
Income (loss) before income taxes
Provision for income taxes (Note 6)
Net income (loss)
Year Ended September 30,
2002
2001
2000
$192,122
16,578
208,700
134,242
74,458
46,057
11,444
16,957
(8,365)
(585)
140
115
140
8,402
$158,284
10,698
168,982
128,425
40,557
23,501
6,532
10,524
(6,670)
–
37
290
168
4,349
$58,959
4,553
63,512
51,553
11,959
8,990
2,286
683
(2,740)
–
–
176
59
(1,822)
93
$ 8,309
–
$ 4,349
7
$ (1,829)
Predecessor net income for the period from October 1, 2000
through July 31, 2001
$ 6,664
Inergy, L.P. net income (loss) for the year ended September 30,
2002 and for the period from August 1, 2001 through
September 30, 2001
$ 8,309
$ (2,315)
Partners’ interest information for the year ended September 30,
2002 and for the period from August 1, 2001 through
September 30, 2001:
Non-managing general partners’ interest in net income (loss)
$ 166
$ (46)
Limited partners’ interest in net income (loss):
Common unit interest:
Allocation of net income (loss)
Less beneficial conversion value allocated to senior
subordinated units (Notes 1 and 7)
Net common unit interest
Senior subordinated unit interest:
Allocation of net income (loss)
Plus beneficial conversion value allocated to senior
subordinated units (Notes 1 and 7)
Net senior subordinated unit interest
Junior subordinated unit interest
Total limited partners’ interest in net income (loss)
Net income (loss) per limited partner unit:
Basic
Diluted
Weighted average limited partners’ units outstanding:
Basic
Diluted
See accompanying notes.
64
$3,391
$ (729)
-
3,391
4,052
-
4,052
700
$8,143
(8,600)
(9,329)
(1,313)
8,600
7,287
(227)
$ (2,269)
$ 1.22
$ 1.20
$ (0.40)
$ (0.40)
6,658
6,760
5,726
5,726
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Consolidated Statements of Redeemable Preferred Members’ Interest and
Members’ Equity/Partners’ Capital
(In Thousands)
Members’ Equity
Redeemable
Preferred
Members’
Interest
Class A
Preferred Common
Interest
Deferred
Interest Compensation
Partners’ Capital
Junior
Senior
Common Subordinated Subordinated Non-Managing
Unit
Capital
Unit
Capital
Unit
Capital
Balance at September 30, 1999
Redeemable preferred interests
$ –
$4,893
$ 690
$(314)
$ –
$ –
$ –
issued in acquisitions (Note 2)
9,000
Redeemable preferred interests
issued for cash, net of offering
costs of $104
Redemption of preferred interest
Amortization of deferred
compensation
Members’ distributions
Net loss
Balance at September 30, 2000
1,896
–
–
–
–
10,896
–
–
(1)
–
–
–
–
–
–
4,892
–
(547)
(1,829)
(1,686)
–
–
1
79
–
–
(234)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
65
Total
Members’
Equity/
Partners’
Capital
$ 5,269
–
–
–
79
(547)
(1,829)
2,972
General
Partner
$ –
–
–
–
–
–
–
–
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Consolidated Statements of Redeemable Preferred Members’ Interest and
Members’ Equity/Partners’ Capital (continued)
(In Thousands)
Members’ Equity
Class A
Preferred Common
Interest
Deferred
Interest Compensation
Partners’ Capital
Junior
Senior
Common Subordinated Subordinated Non-Managing
Unit
Capital
Unit
Capital
Unit
Capital
$4,892
$(1,686)
$(234)
$ –
$ –
$ –
General
Partner
$ –
–
–
–
–
–
–
–
–
–
Total
Members’
Equity/
Partners’
Capital
$2,972
6,664
–
–
(2,554)
(33)
65
(909)
169
34,310
34,385
–
–
–
–
–
–
–
–
34,310
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Redeemable
Preferred
Members’
Interest
$10,896
–
–
16,087
7,402
–
–
–
–
–
–
–
–
–
6,664
–
–
–
(41)
(2,554)
8
–
–
–
–
(909)
–
–
Balance at September 30, 2000
Net income October 1, 2000
through July 31, 2001
Redeemable preferred interests
issued for cash, net of offering
costs of $513
Redeemable preferred interests
issued in acquisition (Note 2)
Inergy Partners, LLC members’
distributions
Redemption of preferred interest
Amortization of deferred
compensation
Assets (liabilities) retained by
Inergy Partners LLC
Accelerated vesting of deferred
compensation due to initial
public offering
Net proceeds from initial public
offering
Transfers of capital in accordance
with initial public offering
Net loss August 1, 2001 through
September 30, 2001
Beneficial conversion feature of
the conversion of certain
Redeemable Preferred
Members’ Interests to Senior
Subordinated Units
Balance at September 30, 2001
–
–
–
–
–
65
–
169
–
–
–
–
–
66
(34,385)
(4,851)
(1,523)
–
–
–
–
–
–
–
–
–
–
37,773
1,485
1,501
(729)
(1,313)
(227)
(46)
(2,315)
(8,600)
24,981
8,600
45,060
–
1,258
–
1,455
–
72,754
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Consolidated Statements of Redeemable Preferred Members’ Interest and
Members’ Equity/Partners’ Capital (continued)
(In Thousands)
Members’ Equity
Redeemable
Preferred
Members’
Interest
Class A
Preferred Common
Interest
Deferred
Interest Compensation
Partners’ Capital
Junior
Senior
Common Subordinated Subordinated Non-Managing
Unit
Capital
Unit
Capital
Unit
Capital
General
Partner
Total
Members’
Equity/
Partners’
Capital
Balance at September 30, 2001
Common units issued in
acquisition of retail propane
companies
Net proceeds from issuance of
common units
Contribution from non-managing
general partner
Distributions
Net income
Balance at September 30, 2002
See accompanying notes.
$ -
$ -
$ -
$ -
$24,981
$45,060
$ 1,258
$1,455
$ 72,754
-
-
-
-
-
$ -
-
-
-
-
-
$ -
-
-
-
-
-
$ -
-
-
-
-
-
$ -
19,724
35,350
-
(6,684)
3,391
$76,762
-
-
-
-
-
(7,820)
4,052
$41,292
-
(1,351)
700
$ 607
-
-
976
(342)
166
$2,255
19,724
35,350
976
(16,197)
8,309
$120,916
67
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Consolidated Statements of Cash Flows
(In Thousands)
Operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation
Amortization
Amortization of deferred financing costs
Interest expense related to write-off of
deferred financing costs
Provision for doubtful accounts
Gain on disposal of property, plant and
equipment
Net liabilities from price risk management
activities
Deferred compensation
Changes in operating assets and liabilities,
net of effects from acquisition of retail
propane companies:
Accounts receivable
Inventories
Prepaid expenses and other current
assets
Other assets
Accounts payable
Accrued expenses
Customer deposits
Net cash provided by (used in) operating
activities
Investing activities
Acquisition of retail propane companies, net of
cash acquired
Purchases of property, plant and equipment
Deferred financing and acquisition costs
incurred
Proceeds from sale of property, plant and
equipment
Other
Net cash used in investing activities
68
Year Ended September 30,
2002
2001
2000
$8,309
$ 4,349
$ (1,829)
8,070
3,374
1,253
585
451
(140)
9,228
–
3,438
3,094
424
–
912
(37)
1,427
859
87
–
139
–
(3,289)
234
(2,492)
79
4,696
(24,636)
(1,990)
73
2,913
(2,188)
(2,219)
13,370
(6,154)
(321)
5
(19,115)
1,871
5,878
(5,842)
1,660
(388)
(121)
3,836
2,049
314
7,779
4,659
(222)
(84,759)
(6,385)
(56,263)
(4,758)
(9,600)
(2,275)
(3,660)
(3,114)
(573)
775
12
(94,017)
118
(8)
(64,025)
–
(16)
(12,464)
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Consolidated Statements of Cash Flows (continued)
(In Thousands)
Year Ended September 30,
2001
2002
2000
Financing activities
Proceeds from issuance of long-term debt
Principal payments on long-term debt and
noncompete obligations
Net proceeds from issuance of redeemable
preferred members’ interest
Contribution from non-managing general
partner
Net proceeds from issuance of common
units
Cash retained by Inergy Partners LLC
Redemption of preferred stock
Distributions
Net cash provided by financing activities
$ 421,237
$ 178,054
$ 35,787
(355,211)
(163,849)
(23,229)
-
16,087
1,896
976
-
-
35,350
-
-
(16,197)
86,155
34,310
(1,851)
(33)
(2,554)
60,164
-
-
-
(547)
13,907
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
(83)
2,171
$ 2,088
798
1,373
$ 2,171
1,221
152
$ 1,373
Supplemental disclosure of cash flow
information
Cash paid during the year for interest
$ 6,722
$ 6,171
$ 2,538
Supplemental schedule of noncash
investing and financing activities
Additions to covenants not to compete
through the issuance of noncompete
obligations
Acquisitions of retail propane companies
through the issuances of common units,
common member equity and preferred
interests
Acquisition of retail propane company
through the issuance of subordinated debt,
which was subsequently retired in 2001
$ -
$ -
$ 32
$ 19,724
$ 7,402
$ 9,000
$ -
$ 5,000
$ –
Increase in the fair value of senior secured
notes and the related interest rate swap
$ 709
$ -
$ -
See accompanying notes.
69
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies
Organization
Inergy, L.P. (the Partnership) was formed on March 7, 2001 as a Delaware limited partnership. The
Partnership and its subsidiary Inergy Propane, LLC (the Operating Company) were formed to
acquire, own and operate the propane business and substantially all the assets and liabilities (other
than a portion of the cash and deferred income tax liabilities) of Inergy Partners, LLC and
subsidiaries (Inergy Partners and referred to subsequent to the initial public offering described below
as the Non-managing General Partner). In addition, Inergy Sales and Service, Inc. (Services), a
subsidiary of the Operating Company, was formed to acquire and operate the service, work and
appliance parts and sales business of Inergy Partners. The Partnership, the Operating Company, and
Services are collectively referred to hereinafter as the Partnership Entities. 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 the Operating Company.
The Partnership Entities consummated in July 2001, an initial public offering (the Offering) of
1,840,000 common units representing limited partner interests in the Partnership (the Common
Units) for an offering price of $22.00 per Common Unit aggregating $40.5 million before
approximately $6.2 million of underwriting discounts and commissions and other expenses related to
the Offering. The Operating Company assumed the Non-managing General Partner’s obligation
under its funded debt in connection with the conveyance in July 2001 (the Partnership Conveyance)
by Inergy GP, LLC (the Managing General Partner) and the Non-managing General Partner
(together referred to as the General Partners), of substantially all of their assets and liabilities
(excluding $1.9 million of cash and the deferred tax liabilities associated with the subsidiaries of
Wilson Oil Company of Johnston County, Inc. (Wilson) and Rolesville Gas & Oil Company, Inc.
(Rolesville)). The net proceeds from the Offering were used to repay the subordinated debt issued in
connection with the acquisition of the Hoosier Propane Group (Note 2) and a portion of the
outstanding credit agreement borrowings.
Pursuant to the terms of certain of the redeemable Class A preferred interest agreements issued by
Inergy Partners prior to the Offering, in the event of an initial public offering, these interests would
automatically convert into senior subordinated units of a master limited partnership. As such, in
conjunction with the Offering, an additional 2,006,456 Senior Subordinated Units were issued to
holders of the remaining redeemable Class A preferred interests of Inergy Partners, representing a
34.3% limited partner interest in the Partnership Entities.
70
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
Certain of the redeemable Class A preferred interests of Inergy Partners contained conversion terms
that were more advantageous than the terms of the other preferred interests issued by Inergy Partners
as further described in Note 7. These beneficial conversion terms resulted 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 following the Offering. Net income
available to common unitholders for the fourth quarter and year ended September 30, 2001 is
decreased by $8.6 million while net income attributable to senior subordinated unitholders is
increased by the same amount.
Inergy, L.P. is managed by Inergy GP, LLC. Pursuant to the Partnership Agreement, Inergy GP,
LLC or any of its affiliates is entitled to reimbursement for all direct and indirect expenses incurred
or payments it makes on behalf of Inergy, L.P., and all other necessary or appropriate expenses
allocable to Inergy, L.P. or otherwise reasonably incurred by the Inergy GP, LLC in connection with
operating Inergy, L.P. business. These costs, which totaled approximately $4.6 million and $2.4
million for the year ended September 30, 2002 and the period from August 1, 2001 through
September 30, 2001, respectively, include compensation and benefits paid to officers and employees
of Inergy GP, LLC. Effective January 1, 2002, all employees of our General Partners, including
Inergy’s executive officers, became employees of the Operating Company.
The Non-managing General Partner owns a 2% general partner interest in the Partnership. In
addition, the Non-managing General Partner owns Senior Subordinated Units and Junior
Subordinated Units through its ownership of New Inergy Propane, LLC, approximating a 19%
limited partner interest.
Basis of Presentation
The accompanying consolidated financial statements reflect the effects of the Partnership
Conveyance, in which the Partnership Entities became the successor to the businesses of Inergy
Partners. As such, the consolidated financial statements represent Inergy Partners prior to the
Partnership Conveyance and the Partnership Entities subsequent to the Partnership Conveyance.
Because the Partnership Conveyance was a transfer of assets and liabilities in exchange for
partnership interests among a controlled group of companies, it has been accounted for in a manner
similar to a pooling of interests, resulting in the presentation of the Partnership Entities as the
successor to the continuing businesses of Inergy Partners. The entity representative of both the
operations of (i) Inergy Partners prior to the Partnership Conveyance; and (ii) the Partnership
Entities subsequent to the Partnership Conveyance, is referred to herein as ‘Inergy’. The Non-
Managing General Partner retained those assets and liabilities not conveyed to the Partnership. All
significant intercompany balances and transactions have been eliminated in consolidation.
71
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
Nature of Operations
Inergy 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. Inergy’s operations are
concentrated in the Midwest and Southeast regions of the United States.
Financial Instruments and Price Risk Management
Inergy, through its wholesale operations, sells propane to various propane users, retailers, and
resellers and offers price risk management services to these customers as part of its marketing and
distribution operations. Inergy’s wholesale operations also sell propane to energy marketers and
dealers as part of its energy trading activities. Derivative financial instruments utilized in connection
with these activities are accounted for using the mark-to-market method in accordance with
Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” Emerging Issues Task Force Issue (EITF) No. 98-10,
“Accounting for Contracts Involved in Energy Trading and Risk Management Activities,” and EITF
No. 02-3, “Issues Related to Accounting for Contracts Involved in Energy Trading and Risk
Management Activities,” as discussed below. Inergy’s overall objective for entering into such
derivative financial instruments is to manage its exposure to fluctuations in commodity prices and
changes in the fair market value of inventories.
SFAS No. 133 requires recognition of all derivative and hedging instruments in the balance sheets
and measures them at fair value. If a derivative does not qualify for hedge accounting, it must be
adjusted to fair value through earnings. As of September 30, 2002, none of Inergy’s commodity
derivative financial instruments have been designated as hedges, as defined in SFAS No. 133, and
the gain or loss associated with these derivatives has been recognized in earnings. Energy trading
activities have been accounted for in accordance with EITF No. 98-10, which requires energy
trading contracts to be recorded at fair value with changes in fair value reported in earnings.
Accordingly, any gain or loss associated with changes in fair value of derivatives and physical
delivery contracts related to Inergy’s energy trading activities are immediately recognized in
earnings as profit or loss on such contracts.
72
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
Under the mark-to-market method of accounting, these pronouncements require that derivative
contracts including forwards, swaps, options and storage contracts be reflected at fair value,
inclusive of reserves, and be 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 have been recognized in cost of products
sold. Changes in the assets and liabilities associated with those derivative contracts 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, recent transactions, time value and volatility factors
underlying the commitments.
The cash flow impact of financial instruments is reflected as cash flows from operating activities in
the consolidated statements of cash flows. See Note 3 for further discussion of Inergy’s financial
instruments.
In June 2002, a consensus was reached on EITF 02-3 “Issues Related to Accounting for Contracts
Involved in Energy Trading and Risk Management Activities,” which codifies and reconciles
existing guidance on the recognition and reporting of gains and losses on energy trading contracts
and addresses other aspects of the accounting for contracts involved in energy trading and risk
management activities. Among other things, the consensus requires that mark-to-market gains and
losses on energy trading contracts should be shown net in the income statement, irrespective of
whether the contract is physically settled. This presentation is effective for financial statements
issued for periods ending after July 15, 2002. Inergy has reclassified all settled transactions that
meet the definition of trading activities net in the income statement to conform to the new
presentation required under EITF 02-3. Inergy previously reported these transactions when settled in
the income statement at their gross amounts in revenues and cost of product sold. The reclassified
amounts for the years ended September 30, 2002, 2001, and 2000 was $69.6 million, $54.2 million,
and $30.1 million, respectively. The required reclassifications have no impact on previously
reported gross profit, net income (loss) or cash provided by (used in) operating activities. Inergy
physically delivered approximately 171.2 million, 91.4 million and 59.3 million gallons related to
the reclassified amounts discussed above for the years ended September 30, 2002, 2001 and 2000,
respectively.
73
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
In October 2002, the EITF reached a consensus to rescind EITF No. 98-10, the basis for mark-to-
market accounting used for recording energy trading activities by many companies, including
Inergy. The new ruling requires that all new energy-related contracts entered into subsequent to
October 25, 2002 should not be accounted for pursuant to EITF No. 98-10. Instead, those contracts
should be accounted for under accrual accounting and would not qualify for mark-to-market
accounting unless the contracts meet the requirements stated under SFAS No. 133. The effective
date for the full rescission of EITF No. 98-10 will be for fiscal periods beginning after December 15,
2002. The effect of rescinding EITF No. 98-10 will be reported as a cumulative effect of a change in
accounting principle in accordance with Accounting Principles Board (APB) Opinion No. 20 on
January 1, 2003. Inergy has not yet determined the impact that the rescission of EITF No. 98-10 will
have on its financial position and results of operations.
The October 2002 EITF consensus also provides that inventory will no longer be accounted for
using mark-to-market accounting and must be accounted for at cost. Unless Inergy elects to use the
special hedge accounting rules in SFAS No. 133 and hedge the fair value of inventory, whereby the
inventory and the derivative hedge instruments would be marked to market, there could be earnings
volatility when market prices increase. Inergy intends to and is currently evaluating the use of such
a hedging strategy and the application of the SFAS No. 133 hedge accounting rules.
The October 2002 EITF consensus rescinding Issue 98-10 requires all derivatives held for trading
purposes to be reported on a net basis in the income statement regardless of whether these
derivatives are settled physically. This netted requirement is also effective for fiscal periods
beginning after December 15, 2002. As Inergy already reports these contracts on a net basis, this
netting requirement will not significantly impact our financial statement reporting.
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.
Credit Concentrations
Inergy is both a retail and wholesale supplier of propane gas. Inergy generally extends unsecured
credit to its wholesale customers throughout the Midwestern and Eastern portions of the United
States. Credit is generally extended to retail customers through delivery into company and customer
owned propane gas storage tanks. Provisions for doubtful accounts receivable are reflected in
Inergy’s consolidated financial statements and have generally been within management’s
expectations.
74
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the year. Actual results could differ from
those estimates.
Inventories
Inventories for retail operations, which mainly consist of liquid propane, are stated at the lower of
cost, determined using the average-cost method or market. Inventories for wholesale operations,
which consist mainly of liquid propane commodities, are stated at market, as discussed in Note 3.
The market adjustment was an unrealized gain of $6.8 million at September 30, 2002, and an
unrealized loss of $0.4 million at September 30, 2001.
Shipping and Handling Costs
Shipping and handling costs are recorded as part of cost of products sold at the time product is
shipped or delivered to the customer.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is computed by the straight-line
method over the assets’ estimated useful lives, as follows:
Buildings and improvements
Office furniture and equipment
Vehicles
Tanks and plant equipment
Years
25
5–10
5–10
10–30
Inergy reviews its long-lived assets in accordance with 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. Inergy has determined
that no impairment exists as of September 30, 2002.
75
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
Intangible Assets
Intangible assets are amortized on a straight-line basis over their estimated economic lives, as
follows:
Covenants not to compete
Deferred financing costs
Customer accounts
Goodwill (prior to adoption of SFAS No. 142 effective October 1, 2001)
Years
5–10
3–7
15
15
Estimated amortization expense for the next five years ending September 30, in thousands of dollars:
2003
2004
2005
2006
2007
$3,178
2,735
1,792
1,687
1,331
Deferred financing costs represent financing costs incurred in obtaining financing and are being
amortized over the term of the debt. Covenants not to compete, customer accounts and goodwill
arose from the various acquisitions by Inergy and are discussed in Note 2. Deferred acquisition
costs represent costs incurred to date on acquisitions that Inergy is actively pursuing, most of which
relate to the acquisitions completed subsequent to year end, as discussed in Note 12.
In June 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142,
Goodwill and Other Intangible Assets. Statement No. 141 requires all business combinations
initiated after June 30, 2001, to be accounted for using the purchase method of accounting. Under
Statement No. 142, goodwill is no longer subject to amortization over its estimated useful life.
Rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-
value-based test. Additionally, an acquired intangible asset should be separately recognized if the
benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible
asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do
so. Those assets will be amortized over their useful lives, other than assets that have an indefinite
life. Statement No. 142 is required to be applied starting with fiscal years beginning after December
15, 2001. Early application is permitted for entities with fiscal years beginning after March 15,
2001, provided that the first interim financial statements have not previously been issued.
76
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
In connection with the transitional goodwill impairment evaluation, Statement No. 142 requires an
assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the reporting units are identified and carrying value of each reporting unit
determined 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 the second step of the transitional impairment test must be performed. In the second step, the
implied fair value of the goodwill is compared 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.
Inergy adopted SFAS No. 142 on October 1, 2001 and accordingly has discontinued the amortization
of goodwill existing at the time of adoption. Under the provisions of Statement No. 142, Inergy
completed the valuation of each of Inergy’s operating segments and determined no impairment
exists as of September 30, 2002. The adoption of Statement No. 142 eliminates goodwill
amortization that would have totaled approximately $2.1 million in fiscal 2002, based on the
balances of September 30, 2001, and totaled approximately $1.7 million in fiscal 2001.
77
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
The following pro forma table reflects the effects of the adoption of SFAS No. 142 on net income
(loss) and basic and diluted income (loss) per limited partner unit to exclude amortization (in
thousands, except per unit data).
Net income (loss)
Add back goodwill amortization
Adjusted net income (loss)
Predecessor net income for the period from October 1, 2000
through July 31, 2001
Add back goodwill amortization
Adjusted predecessor net income
Inergy, L.P. net income (loss) for the year ended September 30,
2002 and for the period from August 1, 2001 through
September 30, 2001
Add back goodwill amortization
Adjusted Inergy, L.P net income (loss)
Year Ended September 30,
2002
$ 8,309
-
$ 8,309
2000
$ (1,829)
282
$ (1,547)
2001
$ 4,349
1,720
$ 6,069
$ 6,664
1,363
$ 8,027
$ 8,309
-
$ 8,309
$ (2,315)
357
$ (1,958)
Adjusted partners’ interest information:
Non-managing general partners’ interest in net income (loss)
$ 166
$ (39)
Limited partners’ interest in net income (loss)
Common unit interest:
Total adjusted limited partners’ interest in net income (loss)
$ 8,143
$ (1,919)
Net income (loss) per limited partner unit:
Basic
Diluted
Add back goodwill amortization
Adjusted net income (loss) per limited partner unit:
Basic
Diluted
$ 1.22
$ 1.20
-
$ 1.22
$ 1.20
$ (0.40)
$ (0.40)
.06
$ (0.34)
$(0.34)
78
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
Income Taxes
The earnings of the Partnership and Operating Company are included in the Federal and state
income tax returns of the individual partners. As a result, no income tax expense has been reflected
in Inergy’s consolidated financial statements relating to the earnings of the Partnership and
Operating Company. Federal and state income taxes are, however, provided on the earnings of
Services. The effect of temporary differences between Services’ basis of assets and liabilities for
income tax and financial statement purposes is immaterial. Provision for income tax for the years
ended September 30, 2002, 2001 and 2000 was $93,000, $0, and $7,000 respectively. Net earnings
for financial statement purposes may differ significantly from taxable income reportable to
unitholders as a result of differences between the tax basis and the financial reporting basis of assets
and liabilities and the taxable income allocation requirements under the partnership agreement.
Federal and state income tax expense for periods prior to the Partnership Conveyance relate to
Wilson and Rolesville, wholly owned subsidiaries of Inergy Partners, which were C Corporations
and accounted for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. In
connection with the Partnership Conveyance, all income tax liabilities of Inergy Partners were
retained by the Non-managing General Partner.
Customer Deposits
Customer deposits primarily represent cash received by Inergy from wholesale and retail customers
for propane purchased that will be delivered at a future date.
Fair Value
The carrying amounts of cash, accounts receivable and accounts payable approximate their fair
value. Based on the estimated borrowing rates currently available to Inergy for long-term debt with
similar terms and maturities, the aggregate fair value of Inergy’s long-term debt approximates the
aggregate carrying amount as of September 30, 2002 and 2001. See Note 4 for a discussion of
interest rate swap agreements in effect with respect to certain of Inergy’s fixed rate debt obligations.
79
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
Income (Loss) Per Unit
Basic net income (loss) per limited partner unit is computed by dividing net income (loss), after
considering the General Partner’s interest, by the weighted average number of Common and
Subordinated Units outstanding. Diluted net income (loss) per limited partner unit is computed by
dividing net income (loss), after considering the General Partner’s interest, by the weighted average
number of Common and Subordinated Units outstanding and the dilutive effect of unit options
granted under the long-term incentive plan. Unit options were antidilutive in 2001 due to the loss
incurred for the period from August 1, 2001 through September 30, 2001. As such, basic and diluted
net income (loss) per limited partner unit are identical in 2001. The following table presents the
calculation of basic and dilutive income (loss) per limited partner unit (in thousands, except per unit
data):
Year Ended
September 30, 2002
Period from
August 1, 2001 to
September 30, 2001
Numerator:
Net income (loss)
Less: Non-managing general partners’ interest in net
income (loss)
Limited partners’ interest in net income (loss) – basic
and diluted
Denominator:
Weighted average limited partners’ units outstanding
– basic
Effect of dilutive unit options outstanding
Weighted average limited partners’ units outstanding
– dilutive
Net income (loss) per limited partner unit:
$8,309
166
$8,143
6,658
102
6,760
$(2,315)
(46)
$(2,269)
5,726
-
5,726
Basic
Diluted
$1.22
$1.20
$(0.40)
$(0.40)
80
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
Segment Information
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information establishes
standards for reporting information about operating segments, as well as related disclosures about
products and services, geographic areas, and major customers. Further, SFAS No. 131 defines
operating segment as components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and assessing performance. In determining the Company’s reportable segments
under the provisions of SFAS No. 131, the Company examined the way it organizes its business
internally for making operating decisions and assessing business performance. See Note 11 for
disclosures related to the Company’s retail and wholesale segments. No single customer represents
10% or more of consolidated revenues. In addition, nearly all of the Company’s revenues are derived
from sources within the United States, and all of its long-lived assets are located in the United States.
Recently Issued Accounting Pronouncements
In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. This Statement supersedes FASB Statement 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. This statement retains the fundamental provisions of Statement
No. 121 for recognition and measurement of the impairment of long-lived assets to be held and used,
and measurement of long-lived assets to be disposed of by sale. This statement is effective for
financial statements issued for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years, with early application encouraged. Inergy adopted SFAS No. 144 on
October 1, 2002; and the effect of this adoption is not considered material.
Reclassifications
Certain reclassifications have been made to the 2000 and 2001 consolidated financial statements to
conform to the 2002 presentation.
81
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
2. Acquisitions
During fiscal year 2000, Inergy acquired substantially all of the assets of Butane-Propane Gas
Company of Tenn., Inc. (November 1999) and substantially all of the assets of Country Gas
Company, Inc. (June 2000). These acquired retail companies are involved in the sale of propane to
local customer bases throughout the United States. The acquisitions have been accounted for using
the purchase method of accounting. The acquired companies were purchased in separate transactions
for an aggregate purchase price of $19.8 million, including acquisition costs, and $1.2 million in
liabilities assumed. The consideration utilized in the 2000 acquisitions consisted of cash payments of
$9.6 million funded by the issuance of long-term debt, redeemable Class A preferred interests issued
to certain former owners of these companies totaling $9.0 million (see Note 7) and the issuance of
noncompete obligations in the amount of $32,000. Of the aggregate purchase price, $0.1 million
(including cash paid at closing) was allocated to covenants not to compete. The excess of aggregate
purchase prices over the fair market values of the net tangible and identifiable intangible assets
acquired, including $3.5 million allocated to customer accounts, amounted to $5.6 million and has
been recorded as an increase in goodwill. The operating results of all acquisitions are included in
Inergy’s consolidated results of operations from the dates of acquisition.
During fiscal 2001, Inergy acquired substantially all of the assets of Bear-Man Propane (November
2000) and 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) (January 2001). These acquisitions have been accounted for using the
purchase method of accounting. These acquired retail companies are involved in the sale and
transportation of propane to local customer bases throughout the United States. The purchase price
of approximately $74.5 million consisted of cash payments of approximately $56.5 million funded
by the issuance of long-term debt and redeemable Class A preferred interests, acquisition costs of
$0.7 million, a redeemable 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. The excess of purchase
price over the fair market value of the net tangible and identifiable intangible assets acquired,
including $10.5 million allocated to customer accounts, amounted to $25.2 million and has been
recorded as an increase in goodwill. The operating results of all acquisitions are included in Inergy’s
consolidated results of operations from the dates of acquisition.
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) for
approximately $12.5 million. Pro Gas is a retail propane distributor located in central Michigan.
82
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
2. Acquisitions (continued)
Effective December 20, 2001, IPCH Acquisition Corp., a newly formed and wholly-owned
subsidiary of Inergy Holdings, LLC, purchased all of the outstanding stock and assumed the
outstanding debt of Independent Propane Company, Inc., a retail propane distributor located in
Texas, for total consideration of $84.8 million including working capital acquired. Immediately
thereafter, Inergy purchased from Inergy Holdings, LLC substantially all of the assets and assumed
certain liabilities of IPCH Acquisition Corp. for $74.6 million in cash, including acquisition costs
funded through its credit facility, and the issuance of 759,620 common units with a fair value of
approximately $19.7 million, $3.5 million of assumed liabilities including liabilities identified in
purchase price allocation for total consideration of $97.8 million, including working capital of
approximately $7.5 million (the IPC Acquisition). $10.4 million of the excess consideration paid by
Inergy over that paid by IPCH Acquisition Corp. relates to the tax liability generated by the sale of
the assets by IPCH Acquisition Corp. to Inergy with the remainder due to acquisition costs incurred
by Inergy. Independent Propane Company, Inc. operates as a retail distributor of propane in seven
states, with its primary operations in Texas. As of September 30, 2002, an escrow existed which
held 19,287 units and approximately $4.5 million cash for a total fair value of approximately $5.1
million, which is available for uncollected accounts receivable and environmental claims. The
operating results of all fiscal 2002 acquisitions are included in Inergy’s consolidated results of
operations from the dates of acquisition.
The following reflects the acquisitions in purchase business combinations of the assets of Hoosier
Propane Group in January 2001, Pro Gas in November 2001 and Independent Propane Company in
December 2001, in millions:
Pro Gas
Independent
Propane Company
Cash
Assumed liabilities
9% redeemable preferred interests
9% subordinated debentures
5% seller note payable
Common units
Property, plant and equipment
Goodwill
Customer accounts
Covenant not to compete
Net current assets
$10.9
0.8
-
-
0.8
-
$12.5
$10.9
-
-
1.3
0.3
$12.5
$74.6
3.5
-
-
-
19.7
$97.8
$45.9
16.0
27.4
1.0
7.5
$97.8
The difference between cash paid for acquisitions and the cash amount recorded above is the cash received in
connection with the Independent Propane Company acquisition.
83
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
2. Acquisitions (continued)
The following unaudited pro forma data summarize the results of operations for the periods indicated
as if the Pro Gas and Independent Propane Company acquisitions had been completed October 1,
2001 and 2000, the beginning of the 2002 and 2001 fiscal years and as if the Hoosier Propane Group
Acquisition effective January 1, 2001 had been completed October 1, 2000. 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,
2001 and 2000 or that will be obtained in the future.
Year Ended
September 30,
2002
2001
(in thousands, except per unit data)
Revenues
Net income
Net income per limited partner unit - basic
$223,463
9,941
1.49
$296,263
14,877
2.24
84
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
3. Price Risk Management and Financial Instruments
Inergy, through its wholesale operations, sells propane and offers 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, Inergy manages its own trading
portfolio using forward physical and futures contracts. Inergy attempts to balance its 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 offered to propane users, retailers and resellers, and other
related businesses utilize 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.
Energy trading contracts involving sales of propane to energy marketers and dealers and other
financial instruments not related to the distribution of propane to end users, retailers and resellers are
accounted for in accordance with EITF No. 02-03 as discussed in Note 1. Instruments used for
energy trading purposes include forwards, swaps and options, as discussed above, as well as futures
contracts.
As discussed in Note 1, all these financial instruments are accounted for using mark-to-market
method of accounting in accordance with SFAS No. 133, EITF No. 98-10 and EITF No. 02-3.
Inergy has entered into these derivative financial instruments to manage its exposure to fluctuation in
commodity prices. The effects of commodity price volatility have generally been mitigated by
Inergy’s attempts to maintain a balanced portfolio of derivative financial instruments and inventory
positions in terms of notional amounts and timing of performance.
85
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
3. Price Risk Management and Financial Instruments (continued)
Notional Amounts and Terms
The notional amounts and terms of these financial instruments at September 30, 2002 and 2001
include fixed price payor for 3.7 million and 2.5 million barrels, respectively, and fixed price
receiver for 5.6 million and 2.9 million barrels, respectively.
Notional amounts reflect the volume of the transactions, but do not represent the amounts exchanged
by the parties to the financial instruments. Accordingly, notional amounts do not accurately measure
Inergy’s exposure to market or credit risks.
Fair Value
The fair value of all derivative financial instruments related to price risk management activities as of
September 30, 2002 and 2001 was assets of $9.7 million and $9.2 million, respectively, and
liabilities of $14.4 million and $4.6 million, respectively, related to propane. Of the outstanding fair
value (loss) as of September 30, 2002, contracts with a maturity of less than one year totaled $(4.6)
million, and contracts maturing between one and two years totaled $(0.1) million. The effects of all
intercompany transactions have been appropriately eliminated.
The net change in unrealized gains and losses related to all price risk management activities and
propane based financial instruments for the years ended September 30, 2002, 2001 and 2000 of
($2.0) million, $2.2 million and $1.5 million, respectively, are included in cost of product sold in the
accompanying consolidated statements of operations.
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. Inergy takes an
active role in managing and controlling market and credit risk and has established control
procedures, which are reviewed on an ongoing basis. Inergy monitors market risk through a variety
of techniques, including daily reporting of the portfolio’s value to senior management. Inergy
provides for such risks at the time derivative financial instruments are adjusted to fair value and
when specific risks become known. Inergy attempts to minimize credit risk exposure through credit
policies and periodic monitoring procedures. The counterparties associated with assets from price
risk management activities as of September 30, 2002 and 2001 are generally propane users, retailers
and resellers, and energy marketers and dealers.
86
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
4. Long-Term Debt
Long-term debt consisted of the following (in thousands):
Credit agreement
Senior secured notes
Obligations under noncompetition agreements and
notes to former owners of businesses acquired
Other
Less current portion
September 30,
2002
$35,500
85,709
3,244
9
124,462
19,367
$105,095
2001
$53,000
-
1,101
31
54,132
10,469
$43,663
Inergy’s credit agreement was amended in January 2001 in connection with the Hoosier Propane
Group acquisition and resulted in a $96 million facility consisting of a $25 million revolving
working capital line of credit and an acquisition term note of $71 million, with a maturity date of
January 10, 2004. On July 25, 2001, in conjunction with the Initial Public Offering (July 2001
amendment), the credit facility was again amended such that Inergy Propane, LLC was made the
sole borrower and resulted in a $30 million revolving working capital line of credit and a $70 million
revolving acquisition facility for acquisition and growth capital borrowings. The credit facility had a
term of three years expiring July 2004. Inergy’s credit agreement was again amended in December
2001 in connection with the IPC Acquisition (December 2001 amendment), as discussed in Note 2.
This December 2001 amendment resulted in a $195 million facility comprised of a $50 million
revolving working capital facility, a $75 million revolving acquisition facility and a $70 million term
note. 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 a term of three years, expiring
December 2004, and is guaranteed by Inergy, L.P. and each subsidiary of Inergy Propane, LLC.
Inergy is required to reduce the principal outstanding on the revolving working capital line of credit
to $4 million or less for a minimum of 30 consecutive days during the period commencing March 1
and ending September 30. As such, $4 million of the outstanding balance at September 30, 2002 and
2001 has been classified as a long-term liability in the accompanying consolidated balance sheets.
At September 30, 2002 and 2001, the balance outstanding under this amended credit facility was
$35.5 million and $53.0 million, including $22.0 million and $14.0 million, respectively, under the
working capital facility. The prime rate and LIBOR plus the applicable spreads were between 3.87%
and 4.75% at September 30, 2002, and between 5.10% and 6.00% at September 30, 2001, for all
outstanding debt under the credit agreement.
87
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
4. Long-Term Debt (continued)
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 the senior secured notes contain several covenants which, among other
things, require the maintenance of various financial performance ratios, restrict the payment of
dividends to unitholders, and require financial reports to be submitted periodically to the financial
institutions. Unused borrowings under the credit agreement amounted to $89.5 million and $47.0
million at September 30, 2002 and 2001, respectively.
Noninterest-bearing obligations due under noncompetition agreements and other note payable
agreements consist of agreements between Inergy and the sellers of retail propane companies
acquired from fiscal years 1999 through 2002 with payments due through 2010 and imputed interest
ranging from 5.1% to 10.0%. Noninterest-bearing obligations consist of $3.8 million and $1.4
million in total payments due under agreements, less unamortized discount based on imputed interest
of $0.6 million and $0.3 million at September 30, 2002 and 2001, respectively.
The aggregate amounts of principal to be paid on the outstanding long-term debt during the next five
years ending September 30 and thereafter, are as follows, in thousands of dollars:
2003
2004
2005
2006
2007
Thereafter
$ 19,367
618
18,080
208
35,200
50,989
$124,462
88
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
4. Long-Term Debt (continued)
In August 2002, the Operating Company entered into two interest rate swap agreements scheduled to
mature in June 2008 and June 2009, respectively, each designed to hedge $10 million in underlying
fixed rate senior secured notes, in order to manage interest rate risk exposure and reduce overall
interest expense. The swap agreements, which expire on the same dates as the maturity dates of the
related senior secured notes, require the counterparty to pay us an amount based on the stated fixed
interest rate on the notes due every three months. In exchange, the Operating Company is required
to make quarterly floating interest rate payments on the same dates to the counterparty based on an
annual interest rate equal to the 3 month LIBOR interest rate plus 4.83% to 4.84% applied to the
same notional amount of $20 million. The swap agreements have been recognized as fair value
hedges. Amounts to be received or paid under the agreements are accrued and recognized over the
life of the agreements as an adjustment to interest expense. At September 30, 2002, the Partnership
recognized the approximate $0.7 million increase in the fair market value of the related senior
secured notes with a corresponding increase in the fair value of its interest rate swaps, which is
recorded in other non-current assets.
During fiscal 2001, Inergy entered into interest rate hedging agreements in the form of interest rate
swaps. Immediately prior to the closing of the Offering in July 2001, the interest rate hedging
agreements were terminated in connection with the repayment of the long-term debt with offering
proceeds. The termination of the interest rate swaps resulted in an interest expense charge of $0.5
million in the fourth quarter of fiscal 2001.
5. Leases
Inergy has several noncancelable operating leases mainly for office space and vehicles, which expire
at various times over the next nine years.
Future minimum lease payments under noncancelable operating leases for the next five years ending
September 30 and thereafter consist of the following, in thousands of dollars:
Year Ending September 30,
2003
2004
2005
2006
2007
Thereafter
Total minimum lease payments
$1,826
1,593
1,366
743
584
260
$6,372
Rent expense for all operating leases during 2002, 2001, and 2000 amounted to $1.9 million, $0.6
million, and $0.4 million, respectively.
89
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
6. Income Taxes
The provision for income taxes for the years ended September 30, 2002, 2001, and 2000 consists of
the following, in thousands of dollars:
Current:
Federal
State
Total current
September 30,
2001
2000
2002
$84
9
$93
$-
-
$-
$-
7
$7
For the year ended September 30, 2000, the Wilson and Rolesville effective tax rate differed from
the statutory rate primarily due to the effect of graduated rates and state taxes. The income tax
provision for the years ended September 30, 2002 and 2001 relates to taxable income of the Services
operations as discussed in Note 1.
7. Redeemable Preferred Members’ Interests and Members’ Equity
During December 1999, Inergy issued redeemable Class A preferred interests to a new member for
total proceeds of $2.0 million less offering costs of $0.1 million. During June 2000, Inergy issued
redeemable Class A preferred interests to certain former owners of Country Gas Company, Inc.
totaling $9.0 million in connection with the acquisition of Country Gas Company, Inc. These
preferred interests were automatically converted into Senior Subordinated Units of Inergy, L.P. in
connection with the Offering. The conversion rates were determined as of the issuance date based on
negotiations between Inergy and the unrelated third parties and were derived by multiplying the
recorded value of each party’s preferred interest by a multiple of 2.25 for the December 1999
transaction and 1.0 for the June 2000 transaction and dividing the resulting total by the $22.00 unit
price in the Offering.
The beneficial conversion feature present in the December 1999 issuance, valued at $2.0 million,
was recognized upon completion of the Offering as discussed in Note 1.
During January 2001, Inergy issued redeemable Class A preferred interests to new and existing
members for total proceeds of $15 million, less offering costs of $0.5 million. The preferred interests
were issued to facilitate the refinancing of Inergy’s credit facilities described in Note 4 on a long-
term basis and complete the Hoosier Propane Group acquisition in January 2001. In March and May
2001, additional redeemable preferred interests were issued at the same valuation for total proceeds
of $1.6 million less offering costs of $28,000.
90
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
7. Redeemable Preferred Members’ Interests and Members’ Equity (continued)
These preferred interests were automatically converted into Senior Subordinated Units of Inergy,
L.P. in connection with the Offering. The conversion rates were determined as of the issuance date
based on negotiations between Inergy 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 $22.00 unit price in the Offering. The beneficial conversion feature present in these
preferred interest issuances valued at $6.6 million was recognized upon completion of the Offering.
The redeemable preferred interests issued in December 1999, June 2000, and January 2001 provided
the holders the option to require Inergy to redeem the preferred interests, as provided in the
agreements, but no earlier than the fifth anniversary of the issuance. The preferred interest issued to
members for cash in December 1999 and January 2001 were redeemable in an amount between one
and two times face value at issuance, depending on Inergy’s operating performance, as defined in the
agreement. The preferred interests issued to certain former owners of Country Gas Company, Inc.
and the Hoosier Propane Group were redeemable in an amount equal to face value at issuance plus
any unpaid dividends. No amounts were required to be redeemed during the next five years
following issuance, except in certain circumstances, as provided for in the agreements. All preferred
interests were converted into Senior Subordinated Units as described above.
8. Partners’ Capital
Partners’ capital at September 30, 2002 consists of 3,828,877 Common Units representing a 48.6%
limited partner interest, 3,313,367 Senior Subordinated Units representing a 42.1% limited partner
interest, 572,542 Junior Subordinated Units representing a 7.3% limited partner interest and a 2%
general partner interest.
In December 2001, Inergy issued 18,252 common units to members of Independent Propane
Company’s management, one of which is a current employee of the operating company, for
approximately $0.5 million.
In June 2002, Inergy registered 1,400,000 common units, of which 1,061,005 previously unissued
units were sold by Inergy and 338,995 units were units sold on behalf of the selling unitholders. The
1,061,005 common units issued by the company resulted in proceeds of $30.4 million, net of
underwriter’s discount, commission, and offering expenses. In July 2002, Inergy issued an
additional 150,000 common units due to the underwriters’ exercise of the overallotment option,
resulting in net proceeds of $4.5 million to the company.
The amended and restated Agreement of Limited Partnership of Inergy, L.P. (Partnership
Agreement) contains specific provisions for the allocation of net earnings and losses to each of the
partners for purposes of maintaining the partner capital accounts.
91
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
8. Partners’ Capital (continued)
During the Subordination Period (as defined below), the Partnership may issue up to 800,000
additional Common Units (excluding Common Units issued in connection with conversion of
Subordinated Units into Common Units) or an equivalent number of securities ranking on a parity
with the Common Units and an unlimited number of partnership interests junior to the Common
Units without a Unitholder vote. The Partnership may also issue additional Common Units during
the Subordination Period in connection with certain acquisitions or the repayment of certain
indebtedness. After the Subordination Period, the Partnership Agreement authorizes the General
Partner to cause the Partnership to issue an unlimited number of limited partner interests of any type
without the approval of any Unitholders.
Quarterly Distributions of Available Cash
The Partnership is expected to make quarterly cash distributions of all of its Available Cash,
generally defined as income (loss) before income taxes plus depreciation and amortization,
maintenance capital expenditures and net changes in reserves established by the General Partner for
future requirements. These reserves are retained to provide for the proper conduct of the Partnership
business, or to provide funds for distributions with respect to any one or more of the next four fiscal
quarters.
Distributions by the Partnership in an amount equal to 100% of its Available Cash will generally be
made 98% to the Common and Subordinated Unitholders and 2% to the General Partner, subject to
the payment of incentive distributions to the holders of Incentive Distribution Rights to the extent
that certain target levels of cash distributions are achieved. To the extent there is sufficient Available
Cash, the holders of Common Units have the right to receive the Minimum Quarterly Distribution
($0.60 per Unit), plus any arrearages, prior to any distribution of Available Cash to the holders of
Subordinated Units. Common Units will not accrue arrearages for any quarter after the
Subordination Period (as defined below) and Subordinated Units will not accrue any arrearages with
respect to distributions for any quarter.
In general, the Subordination Period will continue indefinitely until the first day of any quarter
beginning after June 30, 2006 for the Senior Subordinated Units and June 30, 2008 for the Junior
Subordinated Units in which distributions of Available Cash equal or exceed the Minimum
Quarterly Distribution on the Common Units and the Subordinated Units for each of the three
consecutive four-quarter periods immediately preceding such data. Prior to the end of the
Subordination Period, 828,342 Senior Subordinated Units will convert to Common Units after June
30, 2004 and 143,136 Junior Subordinated Units will convert to Common Units after June 30, 2006
and another 828,342 Senior Subordinated Units will convert to Common Units after June 30, 2005
and 143,136 Junior Subordinated Units will convert to Common Units after June 30, 2007, if
distributions of Available Cash on the Common Units and Subordinated Units equal or exceed the
Minimum Quarterly Distribution for each of the three consecutive four-quarter periods preceding
such date. Upon expiration of the Subordination Period, all remaining Subordinated Units will
convert to Common Units.
92
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
8. Partners’ Capital (continued)
The Partnership is expected to make distributions of its Available Cash within 45 days after the end
of each fiscal quarter ending December, March, June, and September to holders of record on the
applicable record date. The Partnership made distributions to unitholders, including the non-
managing general partner, amounting to $16.2 million during the year ended September 30, 2002, or
$2.36 per unit for the periods to which these distributions relate.
Long-Term Incentive Plan
Inergy’s managing general partner sponsors the Inergy Long-Term Incentive Plan for its employees,
consultants, and directors and the employees of its affiliates that perform services for Inergy. The
long-term incentive plan currently permits the grant of awards covering an aggregate of 589,000
common units, which can be granted in the form of unit options and/or restricted units; however, not
more than 192,000 restricted units may be granted under the plan. With the exception of 28,038 unit
options (exercise prices from $3.83 to $10.67) granted to non-executive employees in exchange for
option grants made by the predecessor in fiscal 1999, all of which have been grandfathered into the
long-term incentive plan and are presented as grants in the table below, all unit options and restricted
units granted under the plan will vest no sooner than, and in the same proportion as, Senior
Subordinated Units convert into Common Units as described above. The compensation committee of
the managing general partner’s board of directors administers the plan.
Restricted Units
A restricted unit is a “phantom” unit that entitles the grantee to receive a common unit upon the
vesting of the phantom unit, or at the discretion of the compensation committee, cash equivalent to
the value of a common unit. In general, restricted units granted to employees will vest three years
from the date of grant and are subject to the vesting provisions described above in connection with
the subordination period. In addition, the restricted units will become exercisable upon a change of
control of the managing general partner or Inergy.
The restricted units are intended to serve as a means of incentive compensation for performance and
not primarily as an opportunity to participate in the equity appreciation of the common units.
Therefore, plan participants will not pay any consideration for the common units they receive, and
Inergy will receive no remuneration for the units.
As of September 30, 2002, there were no restricted units issued under the long-term incentive plan.
93
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
8. Partners’ Capital (continued)
Unit Options
Unit options issued under the long-term incentive plan will generally have an exercise price equal to
the fair market value of the units on the date of grant. In general, unit options will expire after 10
years and are subject to the vesting provisions described above in connection with the subordination
period. In addition, most unit option grants made under the plan provide that the unit options will
become exercisable upon a change of control of the managing general partner or Inergy. None of the
outstanding unit options were exercisable at September 30, 2002.
A summary of the Company's unit option activity for the year ended September 30, 2002 and the
period July 31, 2001 through September 30, 2001 is provided below:
Range of
Exercise Prices
Weighted-
Average
Exercise Price
Outstanding prior to July 31, 2001
Granted
Exercised
Canceled
Outstanding at September 30, 2001
Granted
Exercised
Canceled
$3.83-$22.00
-
-
$3.38-$22.00
$22.49-$30.69
-
-
$ -
20.39
-
-
20.39
27.12
-
22.00
Number
of Shares
-
331,920
-
-
331,920
182,500
-
16,188
Outstanding at September 30, 2002
$3.38-$30.69
23.20
498,232
Inergy applies APB Opinion No. 25, Accounting for Stock Issued to Employees. Inergy follows the
disclosure only provision of SFAS No. 123, Accounting for Stock-based Compensation.
94
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
8. Partners’ Capital (continued)
The weighted-average remaining contract life for options outstanding at September 30, 2002 is
approximately nine years. Pro forma information regarding net income and earnings per share is
required by SFAS No. 123. SFAS No. 123 requires the pro forma information be determined as if
the Company has accounted for its employee unit options under the fair value method of that
statement. As described below, the fair value accounting provided under SFAS No. 123 requires the
use of option valuation models that were not developed for use in valuing employee unit options.
The per unit weighted average fair value for these options granted during 2002 and 2001 was $1.83
and $2.16, respectively, on the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rate of 3.05%; a dividend yield of
approximately 10%; volatility factor of the expected market price of the Company's common unit of
0.283; and a weighted-average expected life of the option of five years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions, including the expected unit
price volatility. Because the Company's employee unit options have characteristics significantly
different from those of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee unit options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense
over the option's vesting period. The Company's pro forma information for the years ended
September 30, 2002 and September 30, 2001 is as follows (in thousands, except per unit data):
September 30,
2002
2001
Pro forma net income (loss)
Pro forma net income (loss) per limited partner unit:
Basic
Diluted
$8,167
$(4,330)
$1.20
$1.18
$ (.40)
$ (.40)
9. Employee Benefit Plans
A 401(k) profit-sharing plan is available to all of Inergy’s employees who have completed 30 days
of service. The plan permits employees to make contributions up to 75% of their salary, up to
statutory limits, currently $11,000 in 2002. The plan provides for matching contributions by Inergy
for employees completing one year of service of 1,000 hours. Matching contributions made by
Inergy were $193,000; $101,000; and $52,000 in 2002, 2001, and 2000, respectively.
95
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
10. Commitments and Contingencies
Inergy periodically enters into agreements to purchase fixed quantities of liquid propane at fixed
prices with suppliers. At September 30, 2002, the total of these firm purchase commitments was
approximately $47.7 million.
At September 30, 2002, Inergy was contingently liable for letters of credit outstanding totaling $3.1
million, which guarantees various transactions.
Inergy is periodically involved in litigation proceedings. The results of litigation proceedings cannot
be predicted with certainty; however, management believes that Inergy does not have material
potential liability in connection with these proceedings that would have a significant financial impact
on its consolidated financial condition and results of operations.
11. Segments
Inergy’s financial statements reflect two reportable segments: retail sales operations and wholesale
sales operations. Inergy’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, distribute propane and provide marketing and price risk
management services to other users, retailers and resellers of propane, including Inergy’s retail
operations. Inergy’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 and other services between the wholesale and
retail segments have been eliminated.
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 sheets, is related to the wholesale segment and is
specifically reviewed by the CODM. Capital expenditures, reported as purchases of property, plant
and equipment in the accompanying consolidated statements of cash flows, substantially all relate to
the retail sales segment. Inergy does not report property, plant and equipment, intangible assets, and
depreciation and amortization by segment to the CODM.
96
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
11. Segments (continued)
Revenues, gross profit, and identifiable assets for each of Inergy’s reportable segments are presented
below, in thousands of dollars.
Year Ended September 30, 2002
Retail
Sales
Wholesale
Intersegment
Sales
Operations Operations Eliminations
Revenues
Gross profit
Identifiable assets
$116,811
69,362
12,132
$120,737
5,698
42,142
$(28,848)
(602)
-
Total
$208,700
74,458
54,274
Year Ended September 30, 2001
Retail
Sales
Wholesale
Intersegment
Sales
Operations Operations Eliminations
Revenues
Gross profit
Identifiable assets
$74,415
34,633
5,704
$133,364
8,747
18,447
$(38,797)
(2,823)
–
Total
$168,982
40,557
24,151
Year Ended September 30, 2000
Retail
Sales
Wholesale
Intersegment
Sales
Operations Operations Eliminations
Revenues
Gross profit
Identifiable assets
$23,461
10,693
5,006
$48,434
2,179
11,623
$(8,383)
(913)
(397)
Total
$63,512
11,959
16,232
97
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
12. Subsequent Events
Subsequent to September 30, 2002, Inergy entered into three interest rate swap agreements designed
to hedge $15 million in underlying fixed rate senior secured notes, in order to manage interest rate
risk exposure and reduce overall interest expense. The swap agreements require Inergy to make
quarterly floating interest rate payments based on an annual interest rate equal to the three-month
LIBOR interest rate plus approximately 5.00% applied to the notional amount of $15.0 million. In
exchange, the counterparty is required to pay an amount based on the fixed interest rate on our notes
due every three months.
Effective in October 2002, Inergy acquired the assets of Hancock Gas Service, Inc. of Ohio with
headquarters in Findlay, Ohio. Hancock distributed approximately eight million gallons of propane
during the past 12 months, which represents less than 10% of our retail propane gallons distributed
during fiscal 2002.
13. Quarterly Financial Data (Unaudited)
Summarized unaudited quarterly financial data is presented below. Inergy’s business is seasonal due
to weather conditions in its service areas. Propane sales to residential and commercial customers are
affected by winter heating season requirements, which generally results in higher operating revenues
and net income during the period from October through March of each year and lower operating
revenues and either net losses or lower net income during the period from April through September
of each year. Sales to industrial and agricultural customers are much less weather sensitive.
(In Thousands of Dollars, except per unit information)
Quarter Ended
December 31
March 31
June 30
September 30
Fiscal 2002
Revenues
Operating income (loss)
Net income (loss)
Net income (loss) per limited partner unit:
Basic
Diluted
Fiscal 2001
Revenues
Operating income (loss)
Net income (loss)
Basic and diluted net income (loss) per
limited partner unit for the period from
August 1, 2001 through September 30,
2001
$49,630
5,769
4,465
0.75
0.74
$45,874
4,076
3,209
$83,186
16,033
14,051
2.12
2.08
$83,762
10,726
8,978
$36,699
(2,910)
(5,910)
(0.88)
(0.88)
$18,073
(2,200)
(4,162)
$39,185
(1,935)
(4,297)
(0.55)
(0.55)
$21,273
(2,078)
(3,676)
(0.40)
98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: December 26, 2002
INERGY, L.P.
By Inergy GP, LLC
(its managing general partner)
By /s/John J. Sherman
John J. Sherman, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following officers and directors of Inergy GP, LLC, as managing general
partner of Inergy, L.P., the registrant, in the capacities and on the dates indicated.
Date
Signature and Title
December 26, 2002
/s/John. J. Sherman
John J. Sherman, President, Chief Executive
Officer and Director (Principal Executive Officer)
December 26, 2002
/s/R. Brooks Sherman, Jr.
R. Brooks Sherman, Jr., Senior Vice President and
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
December 26, 2002
December 26, 2002
December 26, 2002
December 26, 2002
/s/Phillip L. Elbert
Phillip L. Elbert, Director
/s/Richard C. Green, Jr.
Richard C. Green, Jr., Director
/s/Warren H. Gfeller
Warren H. Gfeller, Director
/s/David J. Schulte
David J. Schulte, Director
99
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Valuation and Qualifying Accounts
(in thousands)
Schedule II
Year ended September 30,
Allowance for doubtful accounts
Balance at Charged to
beginning costs and
of period expenses
Other
Additions
(recoveries)
Balance at
Deductions end
(write-offs) of period
2002
2001
2000
$186
225
86
$451
912
139
$540
9
73
$(250)
(960)
(73)
$927
186
225
100
CERTIFICATIONS
I, John J. Sherman, certify that:
1. I have reviewed this annual report on Form 10-K of Inergy, L.P.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant's ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether
or not there were significant changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 26, 2002
/s/ John J. Sherman
John J. Sherman
President and Chief Executive Officer
101
CERTIFICATIONS
I, R. Brooks Sherman, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Inergy, L.P.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant's ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether
or not there were significant changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 26, 2002
/s/ R. Brooks Sherman, Jr.
R. Brooks Sherman, Jr.
Senior Vice President and Chief Financial Officer
102
O F F I C E R S
O F F I C E R S I N P I C T U R E
J O H N J. S H E R M A N
President/CEO
P H I L L I P E L B E R T
Executive Vice President, Retail Operations
R. B R O O K S S H E R M A N
Senior Vice President/CFO
D E A N E. W A T S O N
Senior Vice President
Wholesale, Supply, Transportation
W I L L I A M C. G A U T R E A U X ,
Vice President, Supply
O F F I C E R S N O T P I C T U R E D
C A R L H U G H E S
Vice President, Business Development
K U R T K O L B E C K
Vice President, Wholesale Marketing
L A U R A O Z E N B E R G E R
Vice President, General Counsel
LEFT TO RIGHT: BILL GAUTREAUX, JOHN SHERMAN,
DEAN WATSON, PHIL ELBERT, BROOKS SHERMAN
EBITDA *
( $ I N M I L L I O N S )
R E TA I L G A L L O N S A L E S
( I N M I L L I O N S )
$28.8
$17.5
$30
$25
$20
$15
$10
$5
$3.2
88.5
46.7
18.1
90
80
70
60
50
40
30
20
10
D I R E C T O R S
I N E R G Y O F F I C E R S
J O H N J. S H E R M A N
P H I L L I P E L B E R T
I N D E P E N D E N T D I R E C T O R S
W A R R E N H. G F E L L E R
R I C H A R D C. G R E E N, J R.
D A V I D J. S C H U L T E
“Because of the contributions
and individual efforts of
our talented team of employees,
Inergy is poised for
continued success.”
JOHN SHERMAN
S H A R E H O L D E R T O TA L R E T U R N
J U L Y 3 1 , 2 0 0 1 ( I P O ) —
D E C E M B E R 3 1 , 2 0 0 2
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
NRGY
Propane MLPs
S&P 500
2000 2001 2002
2000 2001 2002
* When we use the term EBITDA we are defining it
in the way that we describe on page 16 of this report.
We suggest that you refer to that description.
I N V E S T O R R E L A T I O N S
Mary Adams
Two Brush Creek Blvd., Suite 200
Kansas City, Missouri 64112
1-877-4-INERGY
investorrelations@inergyservices.com
K-1 I N F O R M A T I O N
1-800-230-1134
TRANSFER AGENT
American Stock Transfer & Trust Company
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T W O B R U S H C R E E K B L V D., S U I T E 200, K A N S A S C I T Y , MO 64112