I N E R G Y, L . P.
A N N U A L R E P O R T 2 0 0 3
G R O S S P R O F I T
($ I N M I L L I O N S )
$100
$97.3
$74.5
$40.6
$90
$80
$70
$60
$50
$40
$30
$20
$10
2001 2002 2003
A N N U A L I Z E D
D I S T R I B U T I O N
$3.08
$3.00
$2.92
$2.86
$2.80
11/02 2/03
5/03
8/03 11/03
M O N T H /Y E A R
( P R E- S P L I T)
T H E C O V E R
United Propane, one of Inergy’s
divisional operations, serves nearly
30,000 customers in Maryland,
Delaware and West Virginia.
Inergy also operates under the
following names: Bradley Propane,
Country Gas, Hancock Gas Service,
Hoosier Propane, Inergy Services,
Independent Propane, McCracken
Propane, ProGas Propane, and
L&L Transportation.
D E A R F E L L O W U N I T H O L D E R S ,
As of this printing, we are pleased to have just completed our first two-for-one unit split, which is the result of
our company’s success and our confidence in the future.
In 2003, Inergy achieved all of its key financial objectives. Earnings before interest, taxes, depreciation and
amortization (EBITDA) were up 30 percent. Net income increased by over 62 percent. Importantly, we increased
your cash distribution every quarter to an annualized rate of $3.08, a 28 cent per unit increase over 2002.
The stock market rewarded us for our performance. If you owned our units on
January 1, 2003, you earned a total return of 87 percent by the turn of the new year.
We not only lead the propane industry in total return; we are one of the leaders in the entire
Master Limited Partnership (MLP) sector.
Building on our track record, in 2003 we moved the organization forward in
meaningful ways. Our accomplishments include:
• Another year with an outstanding safety record.
• The acquisition of eleven retail propane operations, which expanded our
geographic footprint and our customer base. The largest transaction was
Baltimore-based United Propane, the country’s 24th largest propane marketer,
moving us into the growing markets of the Mid-Atlantic states.
John Sherman leads a
management discussion.
• Continued growth in our wholesale, supply and logistics business, including strategic partnerships with major
propane producers and significant expansion of our truck and rail car transportation fleets.
• The establishment of Inergy Canada based in Calgary, Alberta, enhancing our North American supply strategy.
• Expansion into the western natural gas liquids (NGL) markets with the acquisition of strategically located assets in
Bakersfield, California. These assets include state-of-the-art storage, terminaling, distribution and gas processing
facilities. This transaction will lead to more expansion opportunities in the west.
I am very proud of our management team and all of our valuable employees. Once again, they came through in
a year in which we faced difficult business conditions. While we experienced a normal winter, rapidly escalating energy
prices – brought about by the build-up to the conflict in Iraq and other international factors – created challenges for our
people and our customers. We managed the business profitably while performing on our commitment to outstanding
service and reliability.
We continue to build the leadership team and employee base capable of moving the company to the next level.
We added strength and depth at all levels in 2003.
Going forward, we expect to deliver to our unitholders, and you should expect from us:
PERFORMANCE: We have a track record of growth as demonstrated by eight consecutive cash distribution increases.
INCOME: In a market where it is difficult for investors to find meaningful income, Inergy has provided a stable, growing
income stream that is substantially tax deferred.
FINANCIAL STRENGTH AND FLEXIBILITY: Our balance sheet is the strongest in our industry by any measure.
This positions us to continue to execute our growth strategy now and in changing economic and industry environments.
MANAGEMENT COMMITMENT: The people that show up here every day on your behalf are significant investors.
We only benefit if you benefit.
TRANSPARENCY: This should go without saying, but in today’s environment, I am proud of the way our company
communicates openly with investors. The accountability associated with sending you cash every quarter as an MLP
reinforces this.
In the two and a half years since our IPO, Inergy has generated a total return for our investors of 152 percent.
We have financially out-performed our industry peers as well as the overall stock market on a steady and consistent basis.
Our objective is to deliver industry-leading returns to you again in 2004.
We are still at the beginning. The fundamentals of our industry and the capital markets point to vast opportunities
for our company.
Thank you for the confidence you have demonstrated in us through your investment in Inergy. We take our
responsibilities to you very seriously. It is our objective to build a great company and to continue to create value on your
behalf in 2004 and beyond.
Sincerely,
John J. Sherman, President and CEO
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/A
AMENDMENT NO. 1
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2003
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 PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class
None
Name of Each Exchange on Which Registered
N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE 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 4,215,506 Common Units of the registrant held by non-affiliates computed by
reference to the $46.99 closing price of such Common Units on December 1, 2003, was approximately $198.1 million. The
aggregate market value of the 4,197,549 Common Units of the registrant held by non-affiliates computed by reference to the
$32.07 closing price of such Common Units on March 31, 2003, the last business day of the registrant’s most recently completed
second fiscal quarter, was approximately $134.6 million. As of December 1, 2003, the registrant had 5,522,411 Common Units
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the indicated parts of this report:
None.
INTRODUCTORY NOTE
Inergy, L.P. is filing this Amendment No. 1 on Form 10-K/A to include additional information
relating to Inergy’s United Propane acquisition and Robert Pascal, one of the directors of
Inergy’s managing general partner, set forth below that was inadvertently omitted from Item 13
of Inergy’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003, which
was originally filed on December 23, 2003 (the “Original Filing”). Only the first subsection of
Item 13 of the Original Filing is amended by this Amendment No. 1. This Amendment No. 1
does not reflect events occurring after the date of the Original Filing.
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 before 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 before Inergy, L.P.'s initial public offering and of Inergy, L.P. thereafter.
(3)
when we use the term "operating company," we are referring to Inergy Propane, LLC
itself, or to Inergy Propane, LLC and its operating subsidiaries collectively, as the
context requires.
(4)
when we use the term "managing general partner," we are referring to Inergy GP, LLC.
(5)
(6)
when we use the term "non-managing general partner," we are referring to Inergy
Partners, LLC.
when we use the term "general partners," we are referring to our managing general
partner and our non-managing general partner.
• 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.
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 Unitholder
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...............................................................................
Item 9A. Controls and Procedures ........................................................................
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
and Related Stockholder Matters ...........................................................
Certain Relationships and Related Transactions....................................
Principal Accountant Fees and Services ................................................
PART IV
1
13
14
14
14
16
19
35
38
38
38
39
43
50
53
55
Item 15.
Exhibits, Financial Statement Schedules and Reports on Form 8-K .....
55
PART I
Item 1. Business.
Recent Developments
In October 2003, we acquired from EOTT Energy, L.P. its West Coast NGL business,
which includes gas processing, fractionation, 6.1 million gallons of above-ground NGL storage,
truck and rail distribution facilities, and a 23-tractor NGL transportation fleet all located in south
central California. In October 2003, we also acquired the assets of Smith Propane, with
headquarters in La Crosse, Virginia and of Peoples Gas and Appliance, with headquarters in
Beaufont, South Carolina. In November 2003, we acquired the assets of Pembroke Propane,
with headquarters in Pembroke, Georgia. These four companies generated revenue during the 12
months ended September 30, 2003, of less than 10% of our consolidated revenue during fiscal
2003.
On December 10, 2003, our company announced a two-for-one unit split to be distributed
on or about January 12, 2004, to unitholders of record on January 2, 2004. The stock split will
require retroactive restatement of all historical per unit data in the first quarter ended December
31, 2003.
Unless required and specifically indicated otherwise, all information in this Form 10-K
relates to the operations of Inergy, L.P. at or before September 30, 2003 and does not include the
assets or operations of the acquisitions made after September 30, 2003.
General
Inergy, L.P., a publicly traded Delaware limited partnership, was formed on March 7,
2001 but did not conduct operations until the closing of our initial public offering, on July 31,
2001. 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, 2003, we have acquired 25
companies for an aggregate purchase price of approximately $309 million, including working
capital, assumed liabilities and acquisition costs. These acquisitions include twelve propane
companies acquired during fiscal 2003 for an aggregate purchase price of approximately $80
million. For the fiscal year ended September 30, 2003, we sold and physically delivered
approximately 119.7 million gallons of propane to retail customers and approximately 284.7
million gallons of propane to wholesale customers.
The address of our principal executive offices is Two Brush Creek Boulevard, Suite 200,
Kansas City, Missouri, 64112 and our telephone number at this location is 816-842-8181. Our
Common Units trade on the Nasdaq national market under the symbol "NRGY". We
electronically file certain documents with the Securities and Exchange Commission (SEC). We
file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
(as appropriate), along with any related amendments and supplements. From time-to-time, we
also may file registration and related statements pertaining to equity or debt offerings. You may
read and download our SEC filings over the internet from several commercial document retrieval
services as well as at the SEC’s website at www.sec.gov. You may also read and copy our SEC
filings at the SEC’s public reference room located at Judiciary Plaza, 450 Fifth Street, N.W.,
1
Washington, D.C. 20549. Please call the SEC 1-800-SEC-0330 for further information
concerning the public reference room and any applicable copy charges. In addition, our SEC
filings are available at no cost as soon as reasonably practicable after the filing thereof on our
website at www.inergypropane.com. Please note that any internet addresses provided in this
Form 10-K are for information purposes only and are not intended to be hyperlinks.
Accordingly, no information found and/or provided at such internet addresses is intended or
deemed to be incorporated by reference herein.
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 eight regional brand names: Bradley Propane, Country Gas, Hancock Gas,
Hoosier Propane, Independent Propane Company (IPC), McCracken, Pro Gas and United
Propane. We serve approximately 240,000 retail customers in Arkansas, Delaware, Florida,
Georgia, Illinois, Indiana, Maryland, Michigan, North Carolina, Ohio, Oklahoma, South
Carolina, Tennessee, Texas, Virginia and West Virginia from 131 customer service centers
which have an aggregate of approximately 8.5 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 and a number of
other natural gas liquids (NGL) marketing and distribution companies in 35 states, primarily in
the Midwest and Southeast.
We have grown primarily through acquisitions of propane operations and, to a lesser
extent, through internal growth. Including our initial acquisition of McCracken Oil & Propane
Company in 1996 and through September 30, 2003, we have completed 25 acquisitions in North
Carolina, Tennessee, Illinois, Indiana, Michigan, Texas, Ohio, Florida, Canada and Maryland.
The following chart sets forth information about each company we acquired during the fiscal
year ended September 30, 2003, and the four recent acquisitions after September 30, 2003:
Acquisition Date
Company (1)
Location
October 2002
Hancock Gas Service, Inc.
Findlay, OH
December 2002
Central Carolina Gas Company, Inc.
Hamlet, NC
December 2002
Live Oak Gas Company, Inc.
April 2003
Johnson and Johnson Propane, Inc.
April 2003
Coleman’s Gas, Inc.
Live Oak, FL
Madison, FL
Hastings, FL
May 2003
Resource Energy Marketing, Ltd.
(wholesale operations)
Calgary, Alberta,
Canada
2
July 2003
July 2003
July 2003
June 2003
Phillips Propane, Inc.
Nelson Propane
Leipsic, OH
Tallahassee, FL
Five locations of Large Regional Distributor
GA and Northern FL
United Propane, Inc.
Millersville, MD
August 2003
Marshall Propane Supply, Inc.
Marshall, IN
August 2003
Mount Vernon Bottled Gas Company
Mount Vernon, OH
Acquisitions Subsequent to September 30, 2003
October 2003
EOTT Energy, LP’s West Coast natural gas
liquids (NGL) business
Bakersfield, CA
October 2003
Smith Propane
October 2003
Peoples Gas and Appliance
November 2003
Pembroke Propane
La Crosse, VA
Beaufont, SC
Pembroke, GA
(1)
Name of acquired company or assets as of acquisition date.
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.
3
The retail market for propane is seasonal because it is used primarily for heating in
residential and commercial buildings. Approximately three-quarters 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
calendar year.
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
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 one-
third 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.
4
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:
Proven Acquisition Expertise
Since our predecessor's inception and through September 30, 2003, we have acquired and
successfully integrated 25 companies. 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 most of our acquisitions on an
exclusive basis. We believe that 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
5
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. We expect our local branch management to continue to manage
our marketing programs, new business development, customer service and customer billing and
collections. We believe that 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, 2003, sales to residential customers
represented approximately 67% 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 over
70% 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, 2003, we delivered approximately 284.7
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
6
price risk management services to our customers through a variety of financial and other
instruments. The presence of our trucks serving our wholesale customers 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 that 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 $150.0 million revolving credit facility for acquisitions and a $50.0 million
revolving working capital facility. As of December 1, 2003, we had available capacity of
approximately $109.3 million under our acquisition facility and approximately $12.9 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.
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 240,000 retail customers from 131 customer
service centers in 15 states. 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 eastern half of the United States through our
customer service centers using eight regional brand names. The following table shows our
customer service centers by state:
State
Arkansas
Delaware
Florida
Georgia
Illinois
Indiana
Number of
Customer
Service Centers
2
1
7
8
2
12
7
Maryland
Michigan
North Carolina
Ohio
Oklahoma
South Carolina
Tennessee
Texas
West Virginia
Total
10
10
10
7
6
1
5
49
1
131
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 8.5 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. 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 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. These customers include industrial customers, large-scale heating accounts and large
agricultural accounts.
During the fiscal year ended September 30, 2003, we delivered approximately 30% and
70% 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 67% to residential customers;
• approximately 26% 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, 2003. During the fiscal year ended September 30, 2003, Louis Dreyfus
Energy Services, L.P. accounted for approximately 6% of our revenue. No other single
wholesale customer accounted for more than 5% of our revenue for the same period.
8
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. Over 70% 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 over 70% 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 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, 2003, we owned a fleet of approximately 30 tractors, 85 transports,
425 bobtail and rack trucks and 335 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.
9
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
acquire has maintained the local identification of such companies and has been important to the
continued success of the acquired businesses. Our most significant tradenames are "Bradley
Propane," "Country Gas," "Hancock Gas," "Hoosier Propane," "Independent Propane,"
"McCracken," "Pro Gas" and "United Propane." 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
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. While our wholesale supply, marketing and
distribution operations accounted for approximately 52% of total revenue, this business
represented approximately 11% of our gross profit during the fiscal year ended September 30,
2003.
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
10
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 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, 2003, 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
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.
No single supplier accounted for more than 10% of volume propane purchases during the
past fiscal 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.
Propane generally is transported from refineries, pipeline terminals, storage facilities and
marine terminals to our approximately 200 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.
11
Employees
As of December 1, 2003, we had 1,025 full-time employees of which 65 were general
and administrative and 960 were operational employees. Additionally, we employed 37 part-
time employees, all of whom were operational employees. None of our employees is a member
of a labor union. We believe that our relationship with our employees is 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.
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 law 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 county or 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
12
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.
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 any environmental 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, 2003, we owned 67 of our 131 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.
We lease underground storage facilities with an aggregate capacity of approximately 56 million
gallons of propane at ten 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 September 30, 2003, we owned the following:
•
•
•
approximately 370 bulk storage tanks at approximately 200 locations with typical
capacities of 12,000 to 30,000 gallons,
approximately 175,000 stationary customer storage tanks with typical capacities
of 100 to 1,200 gallons, and
approximately 45,000 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 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.
13
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.
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, 2003.
PART II
Item 5. Market for Registrant's Common Equity and Related Unitholder 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 for the periods indicated.
Quarters Ended:
Fiscal 2003:
September 30, 2003
June 30, 2003
March 31, 2003
December 31, 2002
Fiscal 2002:
September 30, 2002
June 30, 2002
March 31, 2002
December 31, 2001
Low
High
Cash Distribution
Per Unit
$37.10
31.31
28.31
27.46
$27.88
29.40
27.05
23.06
$42.25
40.00
32.87
29.45
$30.75
35.10
30.30
28.65
$0.770
0.750
0.730
0.715
$0.700
0.675
0.660
0.625
As of December 1, 2003, our company had issued and outstanding 5,522,411 Common
Units, which were held of record by approximately 6,700 unitholders. In addition, as of that date
our company had 3,567,626 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.
14
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 next four quarters,
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.
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 "Management's Discussion and Analysis of Financial Condition and Results of
Operation-- Description of Credit Facility" under Item 7 and Note 4 to our Consolidated
Financial Statements. 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.
On November 22, 2002, a shelf registration statement (File No. 333-101165) was
declared effective by the SEC for the periodic sale by us of up to $300 million of Common
Units, partnership securities and debt securities, or any combination thereof. In March 2003, we
issued 805,000 Common Units pursuant to this registration statement. No other offerings of
Common Units, partnership securities or debt securities under the shelf registration statement
have been made since it was declared effective. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation -- Liquidity and Sources of Capital" under Item 7.
During fiscal 2003, we made the following issuances of Common Units in reliance on
one or more exemptions from registration under the Securities Act:
•
In June 2003, Inergy, L.P. issued 2,651 Common Units as a portion of the
consideration for our acquisition of the assets from Phillips Propane, Inc. These
Common Units were issued in reliance upon Section 4(2) of the Securities Act.
15
•
In July 2003, Inergy, L.P. issued 889,906 Common Units and 254,259 Senior
Subordinated Units to United Propane, Inc. in conjunction with our acquisition of
substantially all the propane assets of United Propane, Inc. These Common Units
and Senior Subordinated Units were issued in reliance upon Section 4(2) of the
Securities Act.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Sources of Capital" under Item 7.
The following table sets forth in tabular format, a summary of our company's equity plan
information as of September 30, 2003:
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)
538,532
$26.19
329,018
-
538,532
-
$26.19
-
329,018
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 as of and for the years ended September 30, 2000 and 1999 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, 2003, 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 November 1, 2001, the effective date
of acquisition, the results of operations of Independent Propane Company from December 20,
2001, the effective date of the acquisition, and the results of operations of United Propane, Inc.
from July 31, 2003, the effective date of the acquisition.
16
"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 consolidated 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.
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 (loss) 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,
2003
2002
2001
2000
1999
(in thousands except per unit data)
$ 363,365
$ 208,700
$ 168,982
$ 63,512
$ 15,098
266,094
97,271
60,165
13,843
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
23,263
16,957
10,524
683
648
(9,982)
(8,365)
(6,670)
(2,740)
(962)
-
(91)
339
86
13,615
103
(585)
140
115
140
8,402
93
-
37
290
168
4,349
-
-
-
176
59
(1,822)
7
-
101
79
5
(129)
56
Net income (loss)
$ 13,512
$ 8,309
$ 4,349
$ (1,829)
$ (185)
Net income (loss) per limited partner unit:
Basic
Diluted
Weighted average limited partners’ units
outstanding:
Basic
Diluted
Cash distributions per unit
$ 1.59
$ 1.56
$ 1.22
$ 1.20
$ (0.40) (d)
$ (0.40) (d)
8,338
8,471
$ 2.90
17
6,658
6,760
$ 2.36
5,726
(d)
5,726
(d)
-
2003
2002
2001
2000
1999
(in thousands except per unit data)
$ 73,953
$ 70,016
$ 36,920
$ 22,199
$ 11,390
362,393
-
-
288,232
124,462
-
-
155,653
54,132
-
-
178,983
120,916
72,754
68,924
34,927
10,896
2,972
-
38,896
22,337
-
5,269
-
Long-term debt, including current portion
131,127
Balance Sheet Data (end of period):
Current assets
Total assets
Redeemable preferred members' interest
Members' equity
Partners' capital
Other Financial Data:
EBITDA (e) (unaudited)
Net cash provided by (used in) operating
activities
$ 37,440
$ 28,796
$ 17,551
$ 3,204
$ 1,523
34,428
7,779
4,659
(222)
(774)
Net cash used in investing activities
(34,488)
(94,017)
(64,025)
(12,464)
(13,130)
Net cash provided by financing activities
Maintenance capital expenditures(f) (unaudited)
1,491
1,039
86,155
1,556
60,164
13,907
14,056
1,901
283
156
Other Operating Data (unaudited):
Retail propane gallons sold
119,697
88,515
46,750
18,112
8,006
Wholesale propane gallons delivered
284,721
256,893
147,258
87,340
24,735
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
$ 13,512
$ 8,309
$ 4,349
$ (1,829)
$ (185)
103
9,982
-
13,843
37,440
93
8,365
585
11,444
28,796
-
7
56
6,670
2,740
962
6,532
2,286
690
17,551
3,204
1,523
-
-
-
-
-
EBITDA (e)
$ 37,440
$ 28,796
$ 17,551
$ 3,204
$ 1,523
( 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 affecting the reporting of gains or losses on certain contracts related to our risk management activities became
effective in the past year requiring such contracts to be reported on a net basis in the income statement. 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, and $4.1 million for the years
ended September 30, 2002, 2001, 2000, and 1999, respectively. This reclassification had no impact on gross profit, net income or EBITDA.
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.
EBITDA is defined as income before 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 accounting principles generally accepted in the United States 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.
Maintenance capital expenditures are defined as those capital expenditures which do not increase operating capacity or revenues from existing
levels.
( c )
( d )
( e )
( f )
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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, 2003, we sold approximately 119.7 million gallons of propane to retail customers
and delivered approximately 284.7 million gallons of propane to wholesale customers. 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. 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, 2003,
we have acquired 25 propane companies for an aggregate purchase price of approximately $309
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 net 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 number of days with a 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"
19
weather in our results of operations presented below we are referring to a 30-year average
consisting of the years 1973 through 2002. 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
as sales prices may not change as rapidly. 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.
20
Results of Operations
Fiscal Year Ended September 30, 2003 Compared to Fiscal Year Ended September 30,
2002
Volume. During fiscal 2003, Inergy, L.P. sold 119.7 million retail gallons of propane, an
increase of 31.2 million gallons, or 35%, from the 88.5 million retail gallons sold in fiscal 2002.
The increase in retail sales volume was principally due to the November 2001 acquisition of Pro
Gas, the December 2001 acquisition of Independent Propane Company, the October 2002
acquisition of Hancock Gas, and the July 2003 acquisition of United Propane. In addition, the
weather was approximately 18% colder in fiscal 2003 as compared to fiscal 2002 in our retail
areas of operations, and approximately 6% colder than normal.
Wholesale gallons delivered increased 27.8 million gallons, or 11%, to 284.7 million gallons
in fiscal 2003 from 256.9 million gallons in fiscal 2002. This increase was primarily attributable
to growth of our existing wholesale operations and partially due to the colder weather in 2003 in
our wholesale areas of operations.
Revenues. Revenues in fiscal 2003 were $363.4 million, an increase of $154.7 million, or
74%, from $208.7 million of revenues in fiscal 2002.
Revenues from retail sales were $173.1 million in fiscal 2003 (after elimination of sales to
our wholesale operations), an increase of $61.4 million, or 55%, from $111.7 million in fiscal
2002. This increase was primarily attributable to acquisition-related volume, higher selling prices
of propane due to the higher cost of propane and volume increases at our existing locations
primarily as a result of colder weather in fiscal 2003. These revenues consist of retail propane
sales, transportation revenues, tank rentals, heating oil sales, appliance sales and service.
Revenues from wholesale sales were $190.3 million (after elimination of sales to our retail
operations) in fiscal 2003, an increase of $ 93.3 million or 96%, from $97.0 million in fiscal
2002. This increase was primarily attributable to colder weather in 2003, thus higher wholesale
volumes, and an increase in selling prices as a result of the higher cost of propane.
Cost of Product Sold. Retail cost of product sold in fiscal 2003 was $86.1 million, an
increase of $43.8 million or 103%, from retail cost of product sold of $42.3 million in fiscal
2002. Wholesale cost of product sold in fiscal 2003 was $180.0 million, an increase of $88.1
million or 96%, from wholesale cost of product sold of $91.9 million in 2002. These increases
were primarily attributable to an increase in the average cost of propane, retail acquisition related
volume and higher wholesale volume.
Gross Profit. Retail gross profit was $87.0 million in fiscal 2003 compared to $69.4 million
in fiscal 2002, an increase of $17.6 million, or 25%. This increase was primarily attributable to
an increase in retail gallons sold due to acquisitions and from existing locations due to the colder
weather, partially offset by lower margins per gallon. Wholesale gross profit was $10.3 million
(after elimination of gross profit attributable to our retail operations) in fiscal 2003 compared to
$5.1 million in fiscal 2002, an increase of $5.2 million or 102%. This increase was attributable to
an increase in wholesale volume primarily due to the colder weather.
21
Operating and Administrative Expenses. Operating and administrative expenses increased
$14.1 million, or 31%, to $60.2 million in fiscal 2003 as compared to $46.1 million in fiscal
2002. This increase resulted primarily from acquisitions, including an increase in personnel,
transportation, and facility costs associated with the growth of our company.
Depreciation and Amortization. Depreciation and amortization increased $2.4 million, or
21%, to $13.8 million in fiscal 2003 from $11.4 million in fiscal 2002 primarily as a result of
retail acquisitions.
Interest Expense. Interest expense increased $1.0 million, or 12%, to $10.0 million in fiscal
2003 as compared to $9.0 million, including interest expense related to write-off of deferred
financing costs of $0.6 million, in fiscal 2002. This increase is the result of the higher interest
rates associated with the senior secured notes issued in June 2002 and higher average borrowings
outstanding during fiscal 2003 as compared to fiscal 2002 principally related to acquisition
financing.
Net Income. Net income increased $5.2 million, or 63%, to $13.5 million in fiscal 2003 from
$8.3 million in fiscal 2002. This increase in net income was attributable to the increase in retail
and wholesale gross profit, partially offset by increases in operating expenses, depreciation and
amortization, and interest expense, all primarily the result of acquisitions.
EBITDA. In fiscal 2003, income before interest, taxes, depreciation and amortization was
$37.4 million compared to $28.8 million in fiscal 2002. The increase was primarily attributable
to increased sales volumes partially offset by an increase in operating and administrative
expenses. EBITDA is defined as income before 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.
EBITDA (in thousands)
EBITDA:
Net income
Interest expense
Interest expense related to write-off
of deferred financing costs
Provision for income taxes
Depreciation and amortization
EBITDA
Year Ended
September 30,
2003
2002
$ 13,512
9,982
$ 8,309
8,365
-
103
13,843
$ 37,440
585
93
11,444
$28,796
22
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 109.6 million gallons, or 74%, to 256.9 million
gallons in fiscal 2002 from 147.3 million gallons in fiscal 2001. This increase was primarily
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 (after elimination of sales to
our wholesale operations), 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. Retail cost of product sold in fiscal 2002 was $42.3 million, an
increase of $5.6 million or 15%, from retail cost of product sold of $36.7 million in fiscal 2001.
This increase was primarily attributable to retail acquisition related volume, offset by a decrease
in the average cost of propane. Wholesale cost of product sold in fiscal 2002 was $91.9 million,
an increase of $0.2 million from wholesale cost of product sold of $91.7 million in fiscal 2001.
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
23
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.
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 associated with our credit agreement.
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. EBITDA is defined as income before 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.
24
EBITDA (in thousands)
EBITDA:
Net income
Interest expense
Interest expense related to write-off
of deferred financing costs
Provision for income taxes
Depreciation and amortization
EBITDA
Year Ended
September 30,
2002
2001
$ 8,309
8,365
$ 4,349
6,670
585
93
11,444
$ 28,796
-
-
6,532
$17,551
Liquidity and Sources of Capital
In March 2003, Inergy, L.P. issued 805,000 Common Units in a public offering, resulting
in proceeds of $23.3 million, net of underwriter’s discount, commission, and offering expenses.
Inergy Partners, LLC contributed $0.5 million in cash to Inergy, L.P. in conjunction with the
issuance in order to maintain its 2% non-managing general partner interest. These funds were
used to repay borrowings under our credit agreement.
In June 2003, Inergy, L.P. issued 2,651 Common Units in conjunction with the
acquisition of Phillips Propane, Inc. Inergy Partners, LLC contributed $2,000 in cash to Inergy,
L.P. in conjunction with the issuance in order to maintain its 2% non-managing general partner
interest.
In July 2003, Inergy, L.P. issued 889,906 Common Units and 254,259 Senior
Subordinated Units to United Propane, Inc. in conjunction with the acquisition of substantially
all the propane assets of United Propane, Inc. Inergy Partners, LLC contributed $0.9 million in
cash to Inergy, L.P. in conjunction with the issuance in order to maintain its 2% non-managing
general partner interest.
Cash flows provided by operating activities of $34.4 million in fiscal 2003 consisted
primarily of: net income of $13.5 million; net non-cash charges of $16.2 million, principally
related to depreciation and amortization of $13.8 million and $1.5 million related to the
amortization of deferred financing costs; and $4.7 million associated with the changes in
operating assets and liabilities, including net liabilities from price risk management activities.
The cash provided by the changes in operating assets and liabilities is primarily due to a decrease
in propane inventory resulting from our decision to reduce physical position in our wholesale
operations due to higher propane costs, and an increase in accounts payable due primarily to
acquisition related growth. These changes were partially offset by the effects of working capital
used by the reduction in price risk management liabilities, consistent with the reduction in
wholesale propane inventories, and an increase in accounts receivable related to the growth of
our retail and wholesale operations. Cash flows provided by 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
25
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 used in investing activities was $34.5 million in fiscal 2003 as compared to $94.0
million in fiscal 2002. Fiscal 2003 investing activities included a use of cash of $25.9 million,
net of cash acquired, for the acquisition of twelve retail propane companies. During fiscal 2002,
$74.8 million was used for the acquisition of Independent Propane Company and $10.0 million
for the acquisition of Pro Gas. Additionally, in fiscal 2003 and fiscal 2002, we expended $6.2
million and $6.4 million, respectively, for additions of property and equipment to accommodate
our growing operations. Deferred financing costs of $3.0 million and $3.7 million were incurred
in fiscal 2003 and 2002, respectively, related to debt incurred to complete the acquisitions.
Cash provided by financing activities was $1.5 million in fiscal 2003 and $86.2 million in
fiscal 2002. Cash provided by financing activities in fiscal 2003 and fiscal 2002 included net
borrowings of $1.9 million and $66.0 million, respectively, under debt agreements, including
borrowings and repayments in conjunction with the June 2002 issuance of senior secured notes
and borrowings and repayments of our revolving working capital facility. In addition, net
proceeds were received from the issuance of Common Units of $23.3 million and $35.4 million
in fiscal 2003 and 2002, respectively. Offsetting these cash sources were $25.2 million and
$16.2 million of distributions in fiscal 2003 and fiscal 2002, respectively.
At September 30, 2003 and 2002, we had goodwill of $64.5 million and $46.1 million,
representing approximately 18% and 16% of total assets, respectively. 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, 2003, 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
$131,127
$12,449
$30,737
$61,894
$26,047
12,919
3,285
5,144
3,932
558
-
Standby letters of credit
4,060
4,060
-
-
As of September 30, 2003, total propane contracts had an outstanding net fair value of
$3.1 million, as compared to total propane contracts outstanding with a net fair value (liability) at
September 30, 2002 of $(4.7 million). The net change of $7.8 million includes a net increase in
fair value of $3.3 million from contracts settled during the 2003 fiscal year period, and a net
26
increase of $4.5 million from other changes in fair value related to net unrealized gains on
contracts still outstanding at the end of fiscal 2003. Of the outstanding fair value as of
September 30, 2003, contracts with a maturity of less than one year totaled $3.1 million, and
contracts maturing between one and two years totaled less than $0.1 million.
On November 22, 2002, shelf registration statement (File No. 101165) was declared
effective by the Securities and Exchange Commission for the periodic sale by us of up to $300
million of Common Units, partnership securities and debt securities, or any combination thereof.
Pursuant to the shelf registration statement, we are permitted to issue these securities from time
to time for general business purposes, including debt repayment, future acquisitions, capital
expenditures and working capital, or for other potential uses identified in a prospectus
supplement. In March 2003, we issued 805,000 Common Units, resulting in proceeds of $23.3
million net of underwriter’s discount, commission, and offering expenses. Our non-managing
general partner contributed $0.5 million in cash to our company in conjunction with the issuance
in order to maintain its 2% non-managing general partner interest. No offerings of partnership
securities or debt securities under the shelf registration statement have been made since it was
declared effective.
We believe that anticipated cash from operations and borrowings under our amended and
restated credit facility described below will be sufficient to meet our liquidity needs for the
foreseeable future. If our plans or assumptions change or are inaccurate, or we make any
acquisitions, we may need to raise additional capital. We may not be able to raise additional
funds or may not be able to raise such funds on favorable terms.
Description of Credit Facility
Effective July 30, 2003, Inergy, L.P. executed an Amended and Restated Credit
Agreement (the "Amended Facility") with its existing lenders in addition to others. The
Amended Facility consists of a $50 million revolving working capital facility and a $150 million
revolving acquisition facility. The Amended Facility expires in July 2006 and carries terms,
conditions and covenants substantially similar to the previous credit agreement. The Amended
Facility is guaranteed by Inergy, L.P. and its subsidiary. The July 2003 amendment has similar
interest terms to the previous credit agreement amended in December 2001, and accrues interest
at either prime rate or LIBOR plus applicable spreads, resulting in interest rates of between
3.11% and 4.00% at September 30, 2003. At September 30, 2003, borrowings outstanding under
the credit facility were $41.0 million, including $15.5 million under the revolving working
capital facility. Of the outstanding credit facility balance of $41.0 million, $29.5 million is
classified as long-term in the accompanying 2003 consolidated balance sheet. At December 1,
2003, the borrowings outstanding under the credit facility were $73.7 million, including $33.0
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.
27
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 $5 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;
• 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 $7.5 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.
28
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 4.75 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;
• 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 $2.5 million 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.
29
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 "Certain Relationships and
Related Transactions" under Item 13. 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
The June 2002 consensus reached on EITF No. 02-3 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 was effective for financial
statements issued for periods ending after July 15, 2002. As such, we have reclassified all settled
transactions that meet the definition of trading activities in the income statement to conform to
the new presentation required under EITF No. 02-3. We had 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 fiscal years ended September 30, 2002 and 2001
were $69.6 million and $54.2 million, respectively. This required reclassification has no impact
on previously reported gross profit, net income (loss) or cash provided by operating activities.
Inergy physically delivered approximately 171.2 million and 91.4 million gallons related to
transactions considered trading activities as defined by EITF No. 02-3 for the fiscal years ended
September 30, 2002 and 2001, respectively.
In October 2002, the EITF reached a consensus in EITF No. 02-3 to rescind EITF No. 98-10,
the basis for mark-to-market accounting used for recording energy trading activities by many
companies, including ours. The October 2002 EITF consensus 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 Statement of Financial Accounting Standards ("SFAS") No. 133. 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 the lower of cost or market. Beginning
in the first quarter of fiscal 2003, we have elected to use the special hedge accounting rules in
SFAS No. 133 and hedge the fair value of certain inventory positions, whereby the hedged
30
inventory and the related derivative instruments are both marked to market. Inventories
purchased under energy contracts subsequent to October 25, 2002, and not otherwise designated
as being hedged, as discussed above, are carried at the lower-of-cost or market effective January
1, 2003.
The effective date for the full rescission of EITF No. 98-10 was for fiscal periods beginning
after December 15, 2002. The effect of the rescission of EITF No. 98-10 did not have a material
impact on our financial position or results of operations.
In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation
No. 46, "Consolidation of Variable Interest Entities." Interpretation No. 46 requires that the
assets, liabilities and results of the activity of variable interest entities be consolidated into the
financial statements of the company that has the controlling financial interest. Interpretation No.
46 also provides the framework for determining whether a variable interest entity should be
consolidated based on voting interests or significant financial support provided to it.
Interpretation No. 46 became effective for us on October 1, 2003 for variable interest entities
created prior to February 1, 2003. Our company does not expect the adoption of Interpretation
No. 46 to have a material impact on its consolidated financial statements.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity. This statement
is effective for the fiscal year ending September 30, 2004. Our company does not expect the
adoption of SFAS No. 150 to have a material effect on its consolidated financial statements.
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 SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", 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, 2003, certain
of our commodity derivative financial instruments have been designated as hedges of inventory
position, as defined in SFAS No. 133, both the derivative and related inventory is marked to
market. The gain or loss associated with other derivatives has been recognized in earnings.
31
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.
In October 2002, the EITF reached a consensus in EITF No. 02-3 to rescind EITF No.
98-10, the basis for mark-to-market accounting used for recording energy trading activities. The
October 2002 EITF consensus 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 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 the lower of cost or
market. As noted above, we have elected to use the special hedge accounting rules in SFAS No.
133 and hedge the fair value of certain of its inventory positions, whereby the hedged inventory
and the related derivative instruments are both marked to market. Inventories purchased under
energy contracts subsequent to October 25, 2002, and not otherwise designated as being hedged,
as discussed above, are carried at the lower-of-cost or market effective January 1, 2003.
The effective date for the full rescission of EITF No. 98-10 was for quarterly periods
beginning after December 15, 2002. The effect of the rescission of EITF No. 98-10 did not have
a material impact on Inergy’s financial position or results of operations.
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
32
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 SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for
using the purchase method of accounting. Under SFAS No. 142, goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is 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. SFAS No. 142 was
required to be applied starting with fiscal years beginning after December 15, 2001, with early
application permitted for entities with fiscal years beginning after March 15, 2001, provided that
the first interim financial statements had not previously been issued.
We adopted SFAS 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, 2003.
SFAS No. 144 modifies the financial accounting and reporting for long-lived assets to be
disposed of by sale and it broadens the presentation of discontinued operations to include more
disposal transactions. We implemented SFAS No. 144 beginning in the fiscal year ending July
31, 2003, with no material effect on our financial position, results of operations and cash flows.
Self Insurance. We are insured by third parties, subject to varying retention levels of
self-insurance, which management considers prudent. Such self-insurance relates to losses and
liabilities primarily associated with workers’ compensation claims and general, product and
vehicle liability. Losses are accrued based upon management’s estimates of the aggregate
liability for claims incurred using certain assumptions followed in the insurance industry and
based on past experience.
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, but not limited to, our belief that our
acquisition expertise should allow us to continue to grow though acquisitions; our
belief that we will have adequate propane supply to support our retail operations;
and our belief that our diversification of suppliers will enable us to meet supply
needs, and
33
•
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;
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)
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.
34
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
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.
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, 2003, we had floating rate
obligations totaling approximately $41.0 million for amounts borrowed under our credit
agreement and an additional $35.0 million of floating rate obligations as a result of interest rate
swap agreements executed in 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.
35
Our operating company has five interest rate swap agreements designed to hedge $35.0
million of our fixed rate senior secured notes, in order to manage interest rate risk exposure and
attempt to 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 counterparties 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 counterparties based on an annual interest rate equal to the 3 month LIBOR interest
rate plus an average spread of approximately 5.00% applied to the same notional amount of
$35.0 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, 2003, we recognized the approximate
$1.3 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.
The swap agreements have been recognized as fair value hedges. If the floating rate were
to increase by 100 basis points from September 2003 levels, our combined interest expense
would increase by a total of approximately $0.8 million per year.
Propane Price, Market and Credit Risk
Inherent in our 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, 2003 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.
36
We engage in hedging transactions, including various types of forward contracts, options,
swaps and future contracts, to reduce the effect of price volatility on our product costs, protect
the value of our inventory positions, 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, 2003
and 2002 include fixed price payor for 3.0 million and 3.7 million barrels of propane,
respectively, and fixed price receiver for 4.8 million and 5.6 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, 2003 and 2002 was assets of $8.9 million and $9.7 million related
to propane, respectively, and liabilities of $5.8 million and $14.4 million related to propane,
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, 2003, 2002 and 2001 of $1.7 million, $(2.0) million and $2.2
million, respectively, are included in cost of product sold in the accompanying consolidated
statements of operations.
The following table summarizes the change in the unrealized fair value of our propane contracts
related to our risk management activities for the years ended September 30, 2003 and 2002
where settlement has not yet occurred (in thousands of dollars):
Net unrealized gains and (losses) in fair
value of contracts outstanding at
beginning of period
Other unrealized gains and (losses)
recognized
Less: realized gains and (losses) recognized
Net unrealized gains and (losses) in fair
value of contracts outstanding at
September 30, 2003 and 2002
37
Year Ended
September 30, 2003
Year Ended
September 30, 2002
$ (4,653)
4,479
3,278
$ 4,574
(4,040)
(5,187)
$ 3,104
$(4,653)
Of the outstanding unrealized gain (loss) as of September 30, 2003 and 2002, contracts
with a maturity of less than one year totaled $3.1 million and $(4.6) million, respectively.
Contracts maturing in excess of one year totaled less than $0.1 million and $(0.1) million,
respectively.
Sensitivity Analysis
A theoretical change of 10% in the underlying commodity value would result in an
approximate $0.2 million change in the market value of the contracts as there were
approximately 3.3 million gallons of net unbalanced positions at September 30, 2003.
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.
Item 9A. Controls and Procedures
Our company's management has evaluated, with the participation of our principal
executive and principal financial officers, the effectiveness of our disclosure controls and
procedures as of September 30, 2003. Based upon and as of the date of that evaluation, our
principal executive and principal financial officers concluded that our disclosure controls and
procedures were effective to ensure that information required to be disclosed in the reports we
file and submit under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported as and when required. It should be noted that any system of disclosure controls and
procedures, however well designed and operated, can provide only reasonable, and not absolute,
assurance that the objectives of the system are met. In addition, the design of any system of
disclosure controls and procedures is based in part upon assumptions about the likelihood of
future events. Because of these and other inherent limitations of any such system, there can be
no assurance that any design will always succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
There has been no change in our company's internal control over financial reporting that
occurred during the fiscal quarter ended September 30, 2003 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
38
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 nonrecourse indebtedness or other
obligations. Whenever possible, our managing general partner intends to incur indebtedness or
other obligations that are nonrecourse.
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
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. 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 Warren H. Gfeller and David J. Schulte. In
addition, three members of the board of directors serve on an audit committee. The audit
committee’s primary responsibilities are to monitor: (a) the integrity of our financial reporting
process and internal control system; (b) the independence and performance of the outside
auditors; and (c) the disclosure controls and procedures established by management. The
members of the audit committee must meet the independence standards established by the
Nasdaq national market. The members of the audit committee are Warren H. Gfeller, Arthur B.
Krause and David J. Schulte. The board of directors of our managing general partner has
determined that Mr. Gfeller is an audit committee financial expert. We believe that he is
independent of management.
As is commonly the case with publicly-traded limited partnerships, we are managed and
operated by our officers and are subject to the oversight of the directors of our managing general
partner. The board of directors of our managing general partner is presently composed of six
directors.
39
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
48
President, Chief Executive Officer and Director
Phillip L. Elbert
45
Executive Vice President—Operations and Director
David G. Dehaemers
43
Executive Vice President—Corporate Development
R. Brooks Sherman Jr.
38
Senior Vice President and Chief Financial Officer
Dean E. Watson
45
Senior Vice President—Wholesale, Supply Logistics
& Transportation
Carl A. Hughes
49 Vice President—Business Development
Laura L. Ozenberger
45 Vice President—General Counsel & Secretary
Warren H. Gfeller
51 Director
Arthur B. Krause
62 Director
David J. Schulte
42 Director
Robert A. Pascal
69 Director
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.
40
David G. Dehaemers. Mr. Dehaemers has served as Executive Vice President –
Corporate Development since November 2003. Prior to joining Inergy, Mr. Dehaemers served as
the Vice President-Corporate Development of Kinder Morgan G.P., Inc. (the general partner of
Kinder Morgan Energy Partners, L.P.) and Kinder Morgan, Inc. from 2000 until 2003. He
served as Vice President and Chief Financial Officer of Kinder Morgan, Inc. from 1999 until
2000. He served as Vice President, Chief Financial Officer and Treasurer of Kinder Morgan
G.P., Inc. from 1997 until 2000.
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 & Transportation of our managing general partner since September 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. While at Koch, Mr. Watson served in a variety of roles,
including President and CEO of Koch Agriculture from 1995 to 1999, President of Koch
Nitrogen Company from 1992 to 1995 and Vice President of Koch Carbon, Inc. from 1988 to
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.
Laura L. Ozenberger. Ms. Ozenberger has served as Vice President - General Counsel
& Secretary since February 2003. From 1990 to 2003, Ms Ozenberger worked for Sprint
Corporation. While at Sprint, Ms. Ozenberger served in a number of management roles in the
Legal and Finance departments, including Assistant Corporate Secretary from 1996 through
2003. Prior to 1996, Ms. Ozenberger was in a private legal practice.
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
1984 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
41
career with Ferrellgas in 1983 as an executive vice president and financial officer. He also
serves as a director of Zapata Corporation.
Arthur B. Krause. Mr. Krause has been a member of our managing general partner’s
board of directors since May 2003. Mr. Krause retired from Sprint Corporation in 2002, where
he served as Executive Vice President and Chief Financial Officer from 1988 to 2002. He was
President of United Telephone-Eastern Group from 1986 to 1988. From 1980 to 1986, he was
Senior Vice President of United Telephone System. He also serves as a director of Westar
Energy and Callnet Enterprises, Inc.
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 from 1989 to 1994. He also serves as a director of Elecsys
Corp.
Robert A. Pascal. Mr. Pascal joined our managing general partner’s board of directors
in July 2003, upon our acquisition of the assets of United Propane, Inc. As the owner and Chief
Executive Officer of United Propane, he has 40 years of industry experience.
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, 2003, all Section 16(a) filing requirements applicable to our
directors, executive officers and greater than 10% unitholders were complied with, except that
William C. Gautreaux and Carl A. Hughes each were late in filing one statement of changes in
beneficial ownership on Form 4, resulting in one purchase transaction not being reported on a
timely basis for each of them. In addition, John J. Sherman was late in filing two statements of
changes in beneficial ownership on Form 4, resulting in a total of two purchase transactions not
being reported on a timely basis. Mr. Sherman's late filings were the result of transactions with
respect to Junior and Senior Subordinated Units.
42
Code of Ethics
We have adopted a code of ethics that applies to our principal executive officer, principal
financial officer, principal accounting officer or controller or persons performing similar
functions, as well as to all of our other employees. This code of ethics may be found on our
website at www.inergypropane.com.
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 five other executive officers for services rendered to Inergy,
L.P. and its subsidiaries. In this report, we refer to these six individuals as the "named executive
officers."
Summary Compensation Table
Name and
Principal Position
John. J. Sherman
President and Chief
Executive Officer
Annual Compensation
Fiscal
Year
Salary (1)
Bonus
Other Annual
Compen-
sation (2)
2003
$250,000
$150,000
$ -
2002
$250,000
$150,000
$ -
Long Term
Compensation
Awards
Securities
Underlying
Options
-
-
All Other
Compen-
sation (3)
$ -
$ -
2001
$175,000
$200,000
$ -
-
$ -
Phillip L. Elbert
Executive Vice President
Operations
2003
$200,000
$100,000
$ -
2002
$200,000
$100,000
$ -
-
-
$ -
$ -
2001
$115,160
$112,500
$ -
55,500
$ -
R. Brooks Sherman, Jr.
2003
$170,000
$100,000
$ -
-
$ -
Senior Vice President and
Chief Financial Officer
2002
$143,750
$ 75,000
$ -
10,000
$ -
2001
$ 98,958
$158,333
$ -
27,750
$ 63,275
43
Annual Compensation
Name and
Principal Position
Fiscal
Year
Salary (1)
Bonus
Long Term
Compensation
Awards
Securities
Underlying
Options
All Other
Compen-
sation (3)
Other Annual
Compen-
sation (2)
Dean E. Watson
Senior Vice President-
Wholesale, Supply, Logistics
& Transportation
2003
$180,000
$ 90,000
$ -
-
$ -
2002
$ 15,000
$ -
$ -
37,500
$ -
2001
$ -
$ -
$ -
William C. Gautreaux
Vice President-Supply
2003
$135,000
$100,000
$ -
2002
$135,000
$100,000
$ -
-
-
-
$ -
$ -
$ -
2001
$108,542
$244,000
$ -
27,750
$ -
Carl A. Hughes
Vice President-
2003
$125,000
$ 75,000
$ -
Business Development
2002
$125,000
$125,000
$ -
-
-
$ -
$ -
2001
$ 97,917
$228,320
$ -
38,850
$ -
(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. Salary for Mr. Dean Watson in fiscal 2002 represents the pro rata portion of his annual salary
from the date of his employment with us on September 2, 2002.
(2)
lesser of $50,000 or 10% of the total annual salary and bonus reported for the named executive officer.
Excludes perquisites and other benefits, unless the aggregate amount of such compensation is equal to the
" All Other Compensation" for Mr. R. Brooks Sherman, Jr. in fiscal 2001 represents reimbursement of
(3)
relocation expenses.
There were no grants of unit options to a named executive officer during fiscal 2003.
44
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, 2003.
Aggregated Option/SAR Exercises in last Fiscal Year and September 30, 2003 Option Values
Units
Acquired
on
Exercise
Value
Realized
Number of Securities
Underlying Unexercised
Options at September 30, 2003
Value of Unexercised In-the-
Money Options at
September 30, 2003 (1)
Exercisable
Unexercisable
Exercisable
Unexercisable
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
--
55,500
37,750
37,500
27,750
38,850
--
--
--
--
--
--
-
$1,065,600
$650,400
$446,250
$532,800
$745,920
Name
John J. Sherman
Phillip L. Elbert
R. Brooks
Sherman, Jr.
Dean E. Watson
William C.
Gautreaux
Carl A. Hughes
___________________
(1) Based on the $41.20 per unit fair market value of our company's Common Units on September 30, 2003,
the last trading day of fiscal 2003, less the option exercise price.
Employment Agreements
The following named executive officers have entered into employment agreements with
our company:
•
•
•
•
•
•
John J. Sherman, President and Chief Executive Officer;
Phillip L. Elbert, Executive Vice President--Operations;
R. Brooks Sherman, Jr., Senior Vice President--Chief Financial Officer;
Dean E. Watson, Senior Vice President--Wholesale, Supply & Transportation;
William C. Gautreaux, Vice President--Supply
Carl A. Hughes, Vice President--Business Development.
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.
45
All of these employment agreements are substantially similar, with certain exceptions as
set forth below. The employment agreements are for terms of three or 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
• Dean E. Watson…………………………… $180,000
• William C. Gautreaux.………......………..
$135,000
• Carl A. Hughes…………………………… $125,000
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.
Some of 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 amount 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. Mr. Watson will be entitled to a bonus in the amount of $400,000 payable upon Inergy
paying four consecutive quarterly distributions to all unitholders in an amount equal to at least
$0.90 per quarter. Finally, Mr. John Sherman may receive performance bonuses at the discretion
of the 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 or meeting certain quarterly distribution
amounts, 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.
46
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. Watson, Mr.
Gautreaux and Mr. Hughes, 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 to
exercise an option for a percentage interest in Inergy Holdings equal to 7.6%, subject to
adjustment. Mr. Sherman has the right to exercise an option for a percentage interest in Inergy
Holdings equal to 3.6%, 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 867,550 Common Units which
are granted in the form of unit options and/or restricted units; however not more than 282,500
restricted units may be granted under the plan. Through December 1, 2003, we have granted an
aggregate of 538,532 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
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
47
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, 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
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
48
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. All purchases
made have been 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. Units
purchased through the unit purchase plan for the fiscal years ended September 30, 2003 and 2002
were 5,138 units and 1,640 units, respectively. No units were purchased through the plan prior
to fiscal year 2002.
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.
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, Mr. Gfeller and Mr.
Schulte each 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. Upon joining the board of directors,
Mr. Krause received an option under our long-term incentive plan for 20,000 Common Units at
an exercise price equal to the closing trading price on the Nasdaq national market of our
Common Units on the granting date. 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
49
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
oversees the compensation of our executive officers. Warren H. Gfeller 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 2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Unitholder Matters.
The following table sets forth certain information as of December 1, 2003 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.
50
Common
Units
Beneficially
Owned
Percentage
of Common
Units
Beneficially
Owned
Senior
Subordinated
Units
Beneficially
Owned
Percentage of
Senior
Subordinated
Units
Beneficially
Owned
404,601
889,906
7.3%
16.1%
922,761
254,259
25.9%
7.1%
Junior
Subordinated
Units
Beneficially
Owned
487,962
Percentage
of Junior
Subordinated
Units
Beneficially
Owned
Percentage
of Total
Units
Beneficially
Owned (10)
85.2%
0.0%
20.4%
11.6%
-
-
-
-
-
-
-
-
409,091
11.5%
395,454
11.1%
336,456
9.4%
241,818
6.8%
-
-
-
-
-
-
-
-
4.1%
4.0%
3.4%
2.5%
Name of Beneficial Owner
(1)
Inergy Holdings, LLC (2)
United Propane, Inc. (3)
28 Floral Avenue
Key West, FL 33040
Country Partners, Inc. (4)
4010 Highway 14
Crystal Lake, IL 60014
KCEP Ventures II, L.P. (5)
253 West 47th Street
Kansas City, MO 64112
Hoosier Propane Group (6)
P.O. Box 9
Kendallville, IN 46755
Rocky Mountain
Mezzanine Fund (7)
1125 17th Street Suite
2260 Denver, CO 80202
John J. Sherman (8)
405,182
7.3%
922,761
25.9%
487,962
85.2%
20.4%
Phillip L. Elbert (6)
R. Brooks Sherman Jr.
Dean E. Watson
William C. Gautreaux
Carl A. Hughes
Warren H. Gfeller (9)
Arthur B. Krause
9,000
1,275
202
14,790
313
-
-
*
*
*
*
*
-
-
Robert A. Pascal (3)
889,906
16.1%
David J. Schulte (5)
1,000
*
-
-
-
-
-
6,364
-
254,259
395,454
-
-
-
-
-
*
-
7.1%
11.1%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
*
*
*
*
*
*
-
11.6%
4.0%
All directors and executive
officers as a group (11
persons)
1,306,905
23.7%
1,578,838
44.3%
487,962
85.2%
36.2%
*
(1)
(2)
(3)
(4)
less than 1%
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.
United Propane, Inc. owns 889,906 Common Units and 254,259 Senior Subordinated Units. Mr. Pascal in
his capacity as the sole shareholder of United Propane may be deemed to beneficially own these units.
Country Partners, Inc. (formerly Country Gas Company, Inc.) is controlled by Arlene Peterson and the
estate of Leonard Peterson.
51
(5)
(6)
(7)
(8)
(9)
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. Schulte disclaims 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 and
directors, 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. Gfeller in his capacity as managing member of Clayton-Hamilton, LLC may be deemed to beneficially
own 6,364 units held by Clayton-Hamilton.
(10)
The percentage of total units beneficially owned includes the 2% implied units of the non-managing
general partner.
The following table shows the beneficial ownership as of December 1, 2003 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 20% of our
outstanding units.
Name of Beneficial Owner (1)
Inergy Holdings, LLC
Percent of Class (2)
John J. Sherman
Phillip L. Elbert (3)
R. Brooks Sherman Jr. (4)
Dean E. Watson
William C. Gautreaux
Carl A. Hughes
Warren H. Gfeller
Arthur B. Krause
Robert A. Pascal
David J. Schulte
65.8%
-
-
-
7.5%
7.2%
-
-
-
-
All directors and executive officers as a group (11 persons) (5)
74.5%
(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.
52
(3)
(4)
Mr. Phil Elbert holds an option to acquire 7.6% of Inergy Holdings, which option is subject to the terms of
the Inergy Holdings, LLC Employee Option Plan. The option vests fully on January 12, 2006 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 3.6% of Inergy Holdings, which option is subject to the
terms of the Inergy Holdings, LLC Employee Option Plan. The option vests fully on 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.
(5)
Our management holds a total interest of approximately 92% in Inergy Holding, LLC.
We refer you to Item 5 of this report for certain information regarding securities
authorized for issuance under equity compensation plans.
Item 13. Certain Relationships and Related Transactions.
Related Party Transactions
On July 31, 2003, we acquired substantially all of the propane assets of United Propane,
Inc. In exchange for these assets, we issued 889,906 Common Units and 254,259 Senior
Subordinated Units, paid approximately $2.7 million in cash for inventory, accounts receivable,
and other current assets, and assumed approximately $5.0 million of United Propane’s liabilities.
We filed a registration statement related to these 889,906 Common Units on August 29, 2003
and it was declared effective by the SEC on September 12, 2003.
Pursuant to a Unitholder Agreement with us, United Propane agreed that for a three-year
period it would vote 508,518 of the Common Units it holds in favor of and in accordance with
the recommendation of the majority of our managing general partner's board of directors. United
Propane also agreed, during this three-year period, to give us a right of first refusal with respect
to those same Common Units.
In connection with our acquisition of assets from United Propane, we entered into ten
leases of real property formerly used by United Propane in its business. We entered into five of
these leases with United Propane, three of these leases with Pascal Enterprises, Inc. and two of
these leases with Robert A. Pascal. Each of these leases provides for an initial five-year term,
and is renewable by us for up to two additional terms of five years each. During the initial term
of these leases we are required to make monthly rental payments totaling $59,167, of which
$17,167 is payable to United Propane, $16,800 is payable to Pascal Enterprises, and $25,200 is
payable to Mr. Pascal. Rental payments are subject to a 5% increase for any renewal term under
a lease.
Robert A. Pascal is the sole shareholder of United Propane and is on our managing
general partner's board of directors.
53
Distributions and Payments to the Managing General Partner and the Non-managing
General Partner
Distributions and payments are made by us to our managing general partner and its
affiliates in connection with the ongoing operation 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.
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 $473,268 on the 2% general
partner interest and a distribution of approximately $4,356,778 on their Common, Senior
Subordinated 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, 2003, the expense reimbursement to our managing
general partner and its affiliates was approximately $2.1 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
Inergy Holdings owns an aggregate 20% interest in us inclusive of ownership of all of
our non-managing general partner and our managing general partner. Our managing general
partner manages our operations and activities.
54
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
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. Principal Accountant Fees and Services
Principal Accountant Fees and Service disclosure is effective for filings related to fiscal
years ending after December 15, 2003, and therefore is not applicable to this filing.
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 60.
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
*3.1A
*3.2
Certificate of Limited Partnership of Inergy, L.P. (incorporated herein 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)
Certificate of Correction of Certificate of Limited Partnership of Inergy, L.P.
(incorporated herein by reference to Exhibit 3.1 to Inergy, L.P.’s Form 10-Q
(Registration No. 000-32543) filed on May 12, 2003.)
Form of Amended and Restated Agreement of Limited Partnership of Inergy, L.P.
(incorporated herein 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
*3.2A
Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of
Inergy, L.P. (incorporated herein 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)
*3.3
*3.4
*3.5
*3.6
*3.7
*3.8
*4.1
*4.2
*4.3
*4.4
Certificate of Formation as relating to Inergy Propane, LLC, as amended
(incorporated herein 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 (incorporated herein by reference to Exhibit
3.4 to Inergy, L.P.'s Registration Statement on Form S-1 (Registration No. 333-
89010 filed on May 24, 2002)
Certificate of Formation of Inergy GP, LLC (incorporated herein 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 herein 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 herein 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 (incorporated herein by reference to Exhibit
3.8 to Inergy, L.P.'s Registration Statement on Form S-1 (Registration No. 333-
89010 filed on May 24, 2002)
Specimen Unit Certificate for Senior Subordinated Units (incorporated herein 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 herein 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 herein 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 herein 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
Parent Guaranty dated as of June 7, 2002, by Inergy, L.P. in favor of the noteholders
named therein (incorporated herein by reference to Exhibit 4.5 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 herein 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 herein 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)
**10.1
Fifth Amended and Restated Credit Agreement by and among Inergy Propane, LLC
and the lenders named therein, dated as of July 30, 2003
*10.2
*10.3
*10.4
Securities Purchase Agreement by and among Inergy Partners, LLC and various
investors, dated as of January 12, 2001 (incorporated herein 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 herein 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)
Inergy Employee Long-Term Incentive Plan (incorporated herein 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) ***
*10.4A
Amendment to Inergy Employee Long-Term Incentive Plan, adopted April 4, 2003.
(incorporated herein by reference to Exhibit 10.1 to Inergy, L.P.'s Form 10-Q
(Registration No. 000-32543) filed on May 12, 2003) ***
*10.5
*10.6
Employment Agreement--John J. Sherman (incorporated herein 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 herein 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) ***
*10.6A
First Amendment to Employment Agreement--Phillip L. Elbert (incorporated herein
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) ***
57
*10.7
*10.8
*10.9
*10.10
*10.11
*10.12
Employment Agreement--Carl A. Hughes (incorporated herein 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--William C. Gautreaux (incorporated herein 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 ***
Intercreditor and Collateral Agency Agreement entered into as of June 7, 2002, by
and among Wachovia Bank, National Association, the lenders named therein and the
noteholders named therein (incorporated herein by reference to Exhibit 10.19 to
Inergy, L.P.'s Registration Statement on Form S-1/A (Registration No. 333-89010)
filed on June 13, 2002)
Option Agreement by and between Phillip L. Elbert and Inergy Holdings, LLC,
dated January 12, 2001 (incorporated herein by reference to Exhibit 10.19 to Inergy,
L.P.’s Form 10-K (Registration No. 000-32453) filed on December 26, 2002)***
Employment Agreement – R. Brooks Sherman (incorporated herein by reference to
Exhibit 10.20 to Inergy, L.P.’s Form 10-K (Registration No. 000-32453) filed on
December 26, 2002)***
Option Agreement by and between R. Brooks Sherman and Inergy Holdings, LLC,
dated September 11, 2002 (incorporated herein by reference to Exhibit 10.21 to
Inergy, L.P.’s Form 10-K (Registration No. 000-32453) filed on December 26, 2002)
***
**10.13
Employment Agreement – Dean E. Watson ***
**12.1
Ratios of earnings to fixed charges
**14.1
Inergy's Code of Business Conduct & Ethics
**21.1
List of subsidiaries of Inergy, L.P.
**23.1
Consent of Ernst & Young LLP
**31.1
**31.2
**32.1
**32.2
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
58
________________
* Previously filed
** Filed herewith
*** Management contracts or compensatory plans or arrangements required to be identified by
Item 15(a).
(b)
Reports on Form 8-K. Our company filed three reports on Form 8-K with the
SEC during the three months ended September 30, 2003:
Form 8-K dated July 1, 2003, was filed with respect to Item 5 to report that we
had reached agreement to acquire substantially all of the propane assets of United
Propane, Inc., headquartered in Millersville, Maryland.
Form 8-K dated August 15, 2003, was filed with respect to Items 2 and 7 to report
that we had acquired substantially all of the propane assets of United Propane,
Inc.
Form 8-K dated August 18, 2003, was filed with respect to Items 7 and 12 to
report our issuance of a press release dated August 13, 2003 announcing our
financial results for the fiscal third quarter ended June 30, 2003.
(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.
59
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Consolidated Financial Statements
September 30, 2003 and 2002 and each of the
Three Years in the Period Ended
September 30, 2003
Contents
Report of Independent Auditors.........................................................................................61
Audited Consolidated Financial Statements
Consolidated Balance Sheets .............................................................................................62
Consolidated Statements of Income...................................................................................64
Consolidated Statements of Redeemable Preferred Members' Interest and
Members’ Equity/Partners' Capital.................................................................................65
Consolidated Statements of Cash Flows............................................................................67
Notes to Consolidated Financial Statements......................................................................69
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, 2003 and 2002, and the related consolidated statements of income,
redeemable preferred members' interest and members' equity/partners' capital, and cash
flows for each of the three years in the period ended September 30, 2003. 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, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the three years in
the period ended September 30, 2003 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.
/s/ ERNST & YOUNG LLP
Kansas City, Missouri
November 14, 2003, except for
Note 12, as to which the
date is December 10, 2003
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 $997,000 and $927,000 at September 30,
2003 and 2002, 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,
2003
2002
(In Thousands)
$ 3,528
$ 2,088
21,841
35,722
3,957
8,905
73,953
14,265
8,614
21,986
135,040
179,905
(22,704)
157,201
8,752
7,994
849
59,951
64,546
142,092
(12,383)
129,709
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
46,073
99,540
(6,890)
92,650
1,530
$362,393
1,016
$288,232
62
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Consolidated Balance Sheets (continued)
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,
2003
2002
(In Thousands)
$ 22,733
11,919
11,830
5,801
12,449
64,732
$ 13,364
6,394
8,718
14,378
19,367
62,221
Long-term debt, less current portion (Note 4)
118,678
105,095
Partners' capital (Notes 2 and 8):
Common unitholders (5,522,411 and 3,828,877 units
issued and outstanding as of September 30, 2003 and
2002, respectively)
Senior subordinated unitholders (3,567,626 and
3,313,367 units issued and outstanding as of September
30, 2003 and 2002, respectively)
Junior subordinated unitholders (572,542 units issued and
outstanding as of September 30, 2003 and 2002)
Non-managing general partner (2% interest)
Total partners' capital
Total liabilities and partners' capital
See accompanying notes.
129,168
76,762
46,842
41,292
(141)
3,114
178,983
$362,393
607
2,255
120,916
$288,232
63
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Consolidated Statements of Income
(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
Interest expense related to write-off of deferred financing costs
Gain (loss) on sale of property, plant and equipment
Finance charges
Other
Income before income taxes
Provision for income taxes
Net income
Predecessor net income for the period from October 1, 2000
through July 31, 2001
Inergy, L.P. net income (loss) for the years ended September 30,
2003 and 2002 and for the period from August 1, 2001 through
September 30, 2001
Partners' interest information for the years ended September 30,
2003 and 2002 and for the period from August 1, 2001 through
September 30, 2001:
Non-managing general partners' interest in net income (loss)
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 (Note 1):
Basic
Diluted
Weighted average limited partners' units outstanding:
Basic
Diluted
See accompanying notes.
64
Year Ended September 30,
2003
2002
2001
$343,578
19,787
363,365
266,094
97,271
60,165
13,843
23,263
(9,982)
–
(91)
339
86
13,615
$192,122
16,578
208,700
$158,284
10,698
168,982
134,242
74,458
46,057
11,444
16,957
(8,365)
(585)
140
115
140
8,402
128,425
40,557
23,501
6,532
10,524
(6,670)
–
37
290
168
4,349
103
$ 13,512
93
$ 8,309
–
$ 4,349
$ 6,664
$ 13,512
$ 8,309
$ (2,315)
$ 270
$ 166
$ (46)
$7,003
$ 3,391
$ (729)
–
7,003
–
3,391
(8,600)
(9,329)
5,330
4,052
(1,313)
–
5,330
909
$13,242
$ 1.59
$ 1.56
8,338
8,471
–
4,052
700
$ 8,143
8,600
7,287
(227)
$ (2,269)
$ 1.22
$ 1.20
$ (0.40)
$ (0.40)
6,658
6,760
5,726
5,726
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Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Consolidated Statements of Cash Flows
(In Thousands)
Operating activities
Net income
Adjustments to reconcile net income 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) loss on disposal of property, plant and
equipment
Net assets (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 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
Year Ended September 30,
2003
2002
2001
$13,512
$ 8,309
$ 4,349
9,856
3,987
1,506
–
719
91
(7,757)
–
(7,420)
7,038
(73)
42
6,981
2,981
2,965
34,428
(25,941)
(6,230)
(3,037)
720
–
(34,488)
8,070
3,374
1,253
585
451
(140)
9,228
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4,696
(24,636)
(1,990)
73
2,913
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(2,219)
7,779
(84,759)
(6,385)
(3,660)
775
12
(94,017)
3,438
3,094
424
–
912
(37)
(3,289)
234
13,370
(6,154)
(321)
5
(19,115)
1,871
5,878
4,659
(56,263)
(4,758)
(3,114)
118
(8)
(64,025)
67
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Consolidated Statements of Cash Flows (continued)
(In Thousands)
Financing activities
Proceeds from issuance of long-term debt
Principal payments on long-term debt
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
Year Ended September 30,
2002
2003
2001
$ 174,794
(172,855)
$ 421,237
(355,211)
$ 178,054
(163,849)
–
1,430
23,339
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(25,217)
1,491
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976
35,350
–
–
(16,197)
86,155
16,087
–
34,310
(1,851)
(33)
(2,554)
60,164
Effect of exchange rate changes on cash
9
–
–
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
Supplemental disclosure of cash flow
information
1,440
2,088
$ 3,528
(83)
2,171
$ 2,088
798
1,373
$ 2,171
Cash paid during the year for interest
$ 8,705
$ 6,722
$ 6,171
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
$ 1,953
$ 1,934
$ –
$ 45,100
$ 19,724
$ 7,402
Acquisition of retail propane companies through the
assumption of seller debt
$ 2,218
$ 1,661
$ –
Acquisition of retail propane company through the
issuance of subordinated debt, which was
subsequently retired in 2001
Increase in the fair value of senior secured notes
and the related interest rate swap
See accompanying notes.
68
$ –
$ –
$ 5,000
$ 556
$ 709
$ –
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 or the company) 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.
69
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 Inergy GP, LLC in connection with
operating the Inergy, L.P. business. These costs, which totaled approximately $2.1 million, $4.6
million, and $2.4 million for the years ended September 30, 2003, 2002, and for the period from
August 1, 2001 through September 30, 2001, respectively, include compensation and benefits paid to
officers and employees of Inergy GP, LLC and its affiliates.
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 wholly-owned subsidiary, New Inergy Propane, LLC, approximating
a 14.3% 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.
70
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. 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," and
Emerging Issues Task Force Issue ("EITF") No. 02-3, "Issues Involved in Accounting for Contracts
Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management
Activities," as discussed below and, prior to its October 2002 rescission effective for periods
beginning after December 15, 2002, EITF No. 98-10, "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities." Inergy's overall objective for entering into such
derivative financial instruments, including those designated as fair value hedges of Inergy’s
inventory positions, is to manage its exposure to fluctuations in commodity prices and changes in the
fair market value of its inventories.
SFAS No. 133 requires recognition of all derivative 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. Beginning in December 2002, certain of Inergy’s commodity derivative
financial instruments have been designated as hedges of selected inventory positions, and qualify as
fair value hedges, as defined in SFAS No. 133. For derivative instruments designated as hedges,
Inergy uses regression analysis to formally assesses, both at the hedge contract's inception and on an
ongoing basis, whether the hedge contract is highly effective in offsetting changes in fair value of
hedged items. Changes in the fair value of derivative instruments designated as fair value hedges are
reported in the balance sheet as price risk management assets or liabilities. The ineffective portions
of hedging derivatives are recognized immediately in cost of product sold. At September 30, 2003,
the fair value of approximately 46.3 million gallons of propane inventory was being hedged by
various commodity derivatives with a fair value of $0.2 million recorded as a liability from price risk
management activities in accordance with Inergy’s hedging strategies. Changes in the fair value of
derivative instruments that are not designated as hedges are recorded in current period earnings in
accordance with SFAS No. 133.
71
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
During the year ended September 30, 2003, Inergy recognized net gains of $0.2 million, related to
the ineffective portion of its hedging instruments and a net loss of $(0.5) million related to the
portion of the hedging instruments Inergy excluded from its assessment of hedge effectiveness.
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.
The June 2002 consensus reached on EITF No. 02-3 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 was effective for financial statements issued for periods ending after July
15, 2002. As such, 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 No.
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 and 2001 were $69.6 million and $54.2 million, respectively. This required
reclassification has no impact on previously reported gross profit, net income or cash provided by
operating activities. Inergy physically delivered approximately 171.2 million and 91.4 million
gallons related to transactions considered trading activities as defined by EITF No. 02-3 for the years
ended September 30, 2002 and 2001, respectively.
In October 2002, the EITF reached a consensus in EITF No. 02-3 to rescind EITF No. 98-10, the
basis for mark-to-market accounting used for recording energy trading activities. The October 2002
EITF consensus 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 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 the lower of cost or market. As noted above, Inergy has elected to use the
special hedge accounting rules in SFAS No. 133 and hedge the fair value of certain of its inventory
positions, whereby the hedged inventory and the related derivative instruments are both marked to
market. Inventories purchased under energy contracts subsequent to October 25, 2002, and not
otherwise designated as being hedged, as discussed above, are carried at the lower-of-cost or market
effective January 1, 2003.
72
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
The effective date for the full rescission of EITF No. 98-10 was for quarterly periods beginning after
December 15, 2002. The effect of the rescission of EITF No. 98-10 did not have a material impact
on Inergy’s financial position or results of operations.
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 in the United States and Canada. 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, are based on specific identification and historical collection results and have generally
been within management’s expectations. Finance charges of trade receivables are generally
recognized upon billing of customers.
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.
73
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
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. Prior to the adoption of EITF 02-3, in
fiscal 2003, inventories for wholesale operations, which consist mainly of liquid propane
commodities, were stated at market. At September 30, 2003, wholesale propane inventories are
stated at the lower of cost, determined using the average-cost method, or market unless designated as
being hedged by forward sales contracts, as discussed above, in which case the inventories are
marked to market. Wholesale propane inventories being hedged and carried at market at September
30, 2003 amount to $28.9 million.
Inventories consist of (in thousands):
Propane gas and other liquids
Appliances, parts and supplies
September 30, 2003
September 30, 2002
$32,247
3,475
$35,722
$38,171
2,991
$41,162
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
25-40
3–10
5–10
5–30
74
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
Inergy reviews its long-lived assets in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," 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, 2003.
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
2–10
1–7
15
15
Estimated amortization, including amortization of deferred financing cost reported as interest
expense, for the next five years ending September 30, in thousands of dollars is as follows:
2004
2005
2006
2007
2008
$6,800
5,881
5,616
4,905
4,779
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.
75
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated
after June 30, 2001, to be accounted for using the purchase method of accounting. Under SFAS No.
142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is
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.
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 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 reporting units and determined no impairment existed at
adoption or as of September 30, 2003.
76
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
Add back goodwill amortization
Adjusted net income
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 years ended September 30,
2003 and 2002 and for the period August 1, 2001 through
September 30, 2001
Add back goodwill amortization
Adjusted Inergy, L.P net income (loss)
Year Ended September 30,
2003
$ 13,512
–
$ 13,512
2002
$ 8,309
–
$ 8,309
2001
$ 4,349
1,720
$ 6,069
$ 6,664
1,363
$ 8,027
$ 13,512
-
$ 13,512
$ 8,309
-
$ 8,309
$ (2,315)
357
$ (1,958)
Adjusted partners’ interest information:
Non-managing general partners’ interest in net income (loss)
$ 270
$ 166
$ (39)
Limited partners’ interest in net income (loss)
$ 13,242
$ 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
$ 1.59
$ 1.56
$ 1.59
$ 1.56
$ 1.22
$ 1.20
-
$ 1.22
$ 1.20
$ (0.40)
$ (0.40)
.06
$ (0.34)
$(0.34)
77
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. The provision for income tax for the years ended
September 30, 2003, 2002 and 2001 was $103,000, $93,000 and $0, 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.
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 was approximately
$139 million and $125 million as of September 30, 2003 and 2002, respectively. See Note 4 for a
discussion of interest rate swap agreements in effect with respect to certain of Inergy's fixed rate debt
obligations.
78
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
Accounting for Unit-Based Compensation
Inergy has a unit-based employee compensation plan, which is accounted for under the recognition
and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees"
for all periods presented and presents the fair value method pro forma disclosures required under the
provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS
No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure.” No unit-based
employee compensation cost is reflected in net income (loss), as all options granted under the plan
had an exercise price equal to the market value of the underlying Common Units on the date of
grant. The following table illustrates the effect on net income (loss) and net income (loss) per
limited partner unit as if Inergy had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to unit-based employee compensation. For purposes
of pro forma disclosures, the estimated fair value of an option is amortized to expense over the
option’s vesting period. Inergy’s pro forma information for each of the three years in the period
ended September 30, 2003 is as follows (in thousands, except per unit data):
Net income as reported
Deduct: Total unit-based employee
compensation expense determined
under fair value method for all awards(1)
Pro forma net income
Pro forma limited partners’ interest in net
income (loss) for the years ended
September 30, 2003 and 2002 and for
the period from August 1, 2001 through
September 30, 2001
Net income (loss) per limited partner unit
Basic – as reported
Basic – pro forma
Pro forma net income (loss) per limited
partner unit:
Diluted – as reported
Diluted – pro forma
2003
2002
2001
$13,512
$8,309
$4,349
(164)
$13,348
(142)
$8,167
(19)
$4,330
$13,081
$8,004
$(2,287)
$1.59
$1.57
$1.56
$1.54
$1.22
$1.20
$(0.40)
$(0.40)
$1.20
$1.18
$(0.40)
$(0.40)
________________________
1All awards refer to unit options granted, for which the fair value would be required to be measured under SFAS No.
123.
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 Non-Managing 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 Non-Managing 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
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):
Numerator:
Net income (loss)
Less: Non-Managing General Partners’ interest in net
income (loss)
Limited partners’ interest in net income (loss) – basic
Ended
September 30,
2003
2002
Period from
August 1,
2001 through
September 30,
2001
$ 13,512
$ 8,309
$ (2,315)
270
166
(46)
and diluted
$ 13,242
$ 8,143
$ (2,269)
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
Basic
Diluted
8,338
133
8,471
$1.59
$1.56
6,658
102
6,760
$1.22
$1.20
5,726
-
5,726
$(0.40)
$(0.40)
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 segments 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
80
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
1. Accounting Policies (continued)
allocate resources and assessing performance. In determining Inergy’s reportable segments under the
provisions of SFAS No. 131, Inergy examined the way it organizes its business internally for making
operating decisions and assessing business performance. See Note 11 for disclosures related to
Inergy’s retail and wholesale segments. No single customer represents 10% or more of consolidated
revenues. In addition, nearly all of Inergy’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 January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46,
“Consolidation of Variable Interest Entities.” Interpretation No. 46 requires that the assets, liabilities
and results of the activity of variable interest entities be consolidated into the financial statements of
the company that has the controlling financial interest. Interpretation No. 46 also provides the
framework for determining whether a variable interest entity should be consolidated based on voting
interests or significant financial support provided to it. Interpretation No. 46 became effective for
Inergy on October 1, 2003 for variable interest entities created prior to February 1, 2003. Inergy
does not expect the adoption of Interpretation No. 46 to have a material impact on its consolidated
financial statements.
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity. This statement is
effective for the fiscal year ending September 30, 2004. Inergy does not expect the adoption of
SFAS No. 150 to have a material effect on its consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the 2002 and 2001 consolidated financial statements to
conform to the 2003 presentation.
81
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
2. Acquisitions
During fiscal 2001, Inergy acquired substantially all of the assets of three companies owned by a
common group of shareholders, referred to as the Hoosier Propane Group. These acquisitions have
been accounted for using the purchase method of accounting. 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, issued
redeemable Class A preferred interest totaling $7.4 million, subordinated debentures totaling $5.0
million, and $5.6 million of assumed liabilities. 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 goodwill. The operating
results of all fiscal 2001 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 four companies under common control referred to as Pro Gas, for approximately $12.5
million. Pro Gas is a retail propane distributor located in central Michigan.
Effective December 20, 2001, IPCH Acquisition Corp., a 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 seven states, with its
primary operations 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. The operating results of all fiscal 2002 acquisitions are
included in Inergy's consolidated results of operations from the dates of acquisition.
On July 31, 2003, Inergy purchased substantially all of the retail propane assets and assumed certain
liabilities of United Propane, Inc. ("United Propane"), a retail propane distributor located in
Maryland, Delaware and West Virginia. The purchase price of $52.7 million consisted of the
issuance of 889,906 Common Units and 254,259 Senior Subordinated Units with a fair value of
approximately $45.0 million, $2.7 million in cash, and the assumption of $5.0 million of liabilities
for total consideration of $52.7 million.
82
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
2. Acquisitions (continued)
During the fiscal year ended September 30, 2003, Inergy also acquired substantially all of the assets
of ten other retail propane companies located in Ohio, Florida, Indiana and North Carolina, and one
wholesale company located in Calgary, Canada. The aggregate purchase price for these acquisitions
totaled approximately $27.5 million, which included cash of approximately $23.2 million, assumed
liabilities of approximately $2.3 million, seller notes payable of $1.9 million and $0.1 million in
common and Senior Subordinated Units. The purchase price allocation related to these acquisitions
included goodwill of $4.4 million, customer accounts of $1.6 million and other intangible assets
acquired of $2.6 million. In the aggregate, these acquisitions are not material for pro forma
disclosure purposes. These acquisitions were financed primarily using the acquisition facility and
were accounted for by the purchase method under SFAS No. 141. The operating results for all fiscal
2003 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 retail assets of Pro
Gas in November 2001, Independent Propane Company in December 2001 and United Propane in
July 2003, in millions:
Cash
Assumed liabilities
5% seller note payable
Common and Senior
Subordinated Units
Property, plant and equipment
Goodwill
Customer accounts
Covenant not to compete
Net current assets
Independent
Propane
Company
United
Propane
Pro Gas
$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
$2.7
5.0
-
45.0
$52.7
$19.6
13.9
16.9
-
2.3
$52.7
The weighted average amortization period of amortizable intangible assets acquired was
approximately 15 years.
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 summarizes the results of operations for the periods
indicated as if the United Propane, Pro Gas and Independent Propane Company acquisitions had
been completed at the beginning of the periods presented. The pro forma data gives effect to actual
operating results prior to the acquisitions and adjustments to interest expense and intangible assets
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, 2002
and 2001 or that will be obtained in the future.
Revenues
Net income
Net income per limited partner unit - basic
Year Ended
September 30,
2003
2002
(in thousands, except per unit data)
$247,221
11,831
$ 1.49
$393,116
15,708
$1.69
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.
As discussed in Note 1, all of these financial instruments are accounted for using the mark-to-market
method of accounting in accordance with SFAS No. 133, EITF No. 02-3 and, prior to its October
2002 recession effective for periods beginning after December 15, 2002, EITF No. 98-10. 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.
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 (continued)
Notional Amounts and Terms
The notional amounts and terms of these financial instruments at September 30, 2003 and 2002
include fixed price payor for 3.0 million and 3.7 million barrels, respectively, and fixed price
receiver for 4.8 million and 5.6 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, 2003 and 2002 was assets of $8.9 million and $9.7 million, respectively, and
liabilities of $5.8 million and $14.4 million, respectively, related to propane.
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, 2003, 2002 and 2001 of $1.7
million, ($2.0) million, and $2.2 million, respectively, are included in cost of product sold in the
accompanying consolidated statements of operations.
The following table summarizes the change in the unrealized fair value of propane contracts related
to risk management activities for the years ended September 30, 2003 and 2002 where settlement has
not yet occurred (in thousands of dollars):
Year Ended
September 30, 2003
Year Ended
September 30, 2002
Net unrealized gains and (losses) in fair
value of contracts outstanding at
beginning of period
Other unrealized gains and (losses)
recognized
Less: realized gains and (losses) recognized
Net unrealized losses in fair value of
contracts outstanding at September 30,
2003 and 2002
$ (4,653)
$ 4,574
4,479
3,278
(4,040)
(5,187)
$ 3,104
$ (4,653)
Of the outstanding unrealized gain (loss) as of September 30, 2003 and 2002, contracts with a
maturity of less than one year totaled $3.1 million and $(4.6) million, respectively. Contracts
maturing in excess of one year totaled less than $0.1 million and $(0.1) million in 2003 and 2002,
respectively.
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)
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, 2003 and 2002 are generally propane users, retailers
and resellers, and energy marketers and dealers.
4. Long-Term Debt
Long-term debt consisted of the following (in thousands):
Credit agreement
Senior secured notes (including interest rate swap
liability)
Obligations under noncompetition agreements and
notes to former owners of businesses acquired
Other
Less current portion
September 30,
2003
$ 41,024
2002
$ 35,500
86,265
85,709
3,833
5
131,127
12,449
$118,678
3,244
9
124,462
19,367
$105,095
Effective July 30, 2003, Inergy executed an Amended and Restated Credit Agreement (the
"Amended Facility") with its existing lenders in addition to others. The Amended Facility consists
of a $50 million revolving working capital facility and a $150 million revolving acquisition facility.
The Amended Facility expires in July 2006 and carries terms, conditions and covenants substantially
similar to the previous credit agreement. The Amended Facility is also guaranteed by Inergy, L.P.
and its subsidiary.
86
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
4. Long-Term Debt (continued)
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, 2003 and
2002 has been classified as a long-term liability in the accompanying consolidated balance sheets. At
September 30, 2003 and 2002, the balance outstanding under this amended credit facility was $41.0
million and $35.5 million, respectively, including $15.5 million and $22.0 million, respectively,
under the working capital facility. The prime rate and LIBOR plus the applicable spreads were
between 3.11% and 4.00% at September 30, 2003, and between 3.87% and 4.75% at September 30,
2002, for all outstanding debt under the credit agreement.
In June 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
distributions to unitholders, and require financial reports to be submitted periodically to the financial
institutions. Unused borrowings under the credit agreement amounted to $154.9 million and $89.5
million at September 30, 2003 and 2002, 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 2003 with payments due through 2013 and imputed interest
ranging from 5.1% to 10.0%. Noninterest-bearing obligations consist of $4.6 million and $3.8
million in total payments due under agreements, less unamortized discount based on imputed interest
of $0.8 million and $0.6 million at September 30, 2003 and 2002, 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:
2004
2005
2006
2007
2008
Thereafter
87
$ 12,449
834
29,903
35,529
26,365
26,047
$131,127
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. In October 2002, the Operating Company entered into three additional interest rate
swap agreements scheduled to mature in June 2007, June 2008, and June 2009 each designed to
hedge $5 million in underlying fixed rate senior secured notes. These 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 spreads between 4.83% and 5.02% applied to the same notional amount of
$35 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. The Partnership recognized the approximate $1.3 and $0.7
million increases in the fair market value of the related senior secured notes at September 30, 2003
and 2002, respectively, with a corresponding increase in the fair value of its interest rate swaps,
which are recorded in other non-current assets.
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,
2004
2005
2006
2007
2008
Thereafter
Total minimum lease payments
$ 3,285
2,776
2,368
2,047
1,885
558
$12,919
Rent expense for all operating leases during 2003, 2002, and 2001 amounted to $2.8 million, $1.9
million, and $0.6 million, respectively.
88
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, 2003, 2002, and 2001 consists of
the following, in thousands of dollars:
Current:
Federal
State
Total current
September 30,
2002
2001
2003
$ 81
22
$103
$ 84
9
$ 93
$ -
-
$ -
The income tax provision for the years ended September 30, 2003, 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.
89
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, 2003 consists of 5,522,411 Common Units representing a 56.0%
limited partner interest, 3,567,626 Senior Subordinated Units representing a 36.2% limited partner
interest, 572,542 Junior Subordinated Units representing a 5.8% limited partner interest and a 2%
general partner interest.
In conjunction with the December 2001 acquisition of Independent Propane Company, Inc., an
escrow, consisting of cash and Common Units, was available for uncollected accounts receivable
and environmental claims. During fiscal 2003, two claims were settled that resulted in the return to
the Partnership of 4,023 Common Units. The units were subsequently cancelled, resulting in a
reduction in Common Units outstanding.
In March 2003, Inergy issued 805,000 Common Units in a public offering, resulting in proceeds of
$23.3 million, net of underwriter's discount, commission, and offering expenses. Inergy Partners,
LLC contributed $0.5 million in cash to Inergy, L.P. in conjunction with the issuance in order to
maintain its 2% non-managing general partner interest.
In June 2003, Inergy issued 2,651 Common Units in conjunction with the acquisition of Phillips
Propane, Inc. Inergy Partners, LLC contributed $2,000 in cash to Inergy, L.P. in conjunction with
the issuance in order to maintain its 2% non-managing general partner interest.
90
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
8. Partners' Capital (continued)
In July 2003, Inergy issued 889,906 Common Units and 254,259 Senior Subordinated Units to the
owner of United Propane, Inc. in conjunction with the acquisition of substantially all the propane
assets of United Propane, Inc. Inergy Partners, LLC contributed $0.9 million in cash to Inergy, L.P.
in conjunction with the issuance in order to maintain its 2% non-managing general partner interest.
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.
The Partnership Agreement provides that 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. During 2003, the Partnership issued 123,186
of such Common Units, thus the Partnership currently retains the ability to issue 676,814 additional
Common Units under this provision. The Partnership Agreement also provides that an unlimited
number of partnership interests junior to the Common Units may be issued 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, less
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.
91
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
8. Partners' Capital (continued)
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.
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 $25.2 million and $16.2 million during the years ended
September 30, 2003 and 2002, respectively, or $2.895 and $2.360 per unit, respectively, for the
periods to which these distributions relate.
Unit Purchase Plan
Inergy’s 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 Inergy, the general partners or any other person. All purchases made
have been in market transactions, although the plan allows Inergy to issue additional units. Inergy
has 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 Common Units. Units purchased through the unit purchase
92
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
8. Partners' Capital (continued)
plan by Inergy and its employees for the fiscal years ended September 30, 2003 and 2002 were 5,138
units and 1,640 units, respectively. No units were purchased through the plan prior to fiscal year
2002.
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 867,550
Common Units, which can be granted in the form of unit options and/or restricted units; however,
not more than 282,500 restricted units may be granted under the plan. With the exception of 28,000
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, 2003, there were no restricted units issued under the long-term incentive plan.
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, 2003.
93
Inergy, L.P. and Subsidiary
(Successor to Inergy Partners, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
8. Partners' Capital (continued)
A summary of Inergy's unit option activity for the years ended September 30, 2003 and 2002, and
for the period from 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
$3.83-$22.00
-
-
Outstanding at September 30, 2001
Granted
Exercised
Canceled
$3.83-$22.00
$22.49-$30.69
-
$22.00
Outstanding at September 30, 2002
Granted
Exercised
Canceled
$3.83-$30.69
$27.50-$40.25
-
$20.00-$30.69
$ -
20.39
-
-
20.39
27.12
-
22.00
23.20
33.06
-
21.08
Number
of Units
-
331,920
-
-
331,920
182,500
-
16,188
498,232
154,000
-
113,700
Outstanding at September 30, 2003
$3.83-$40.25
$26.19
538,532
Information regarding options outstanding as of September 30, 2003 is as follows:
Range of Exercise Prices
$ 3.83 - $16.37
$20.00 - $22.00
$27.50 - $33.79
$38.86 - $40.25
Weighted
Average
Remaining
Contracted Life
(years)
Weighted
Average
Exercise Price
7.8
7.8
9.0
9.9
8.5
$ 4.74
21.65
30.20
39.85
$26.19
Options
Outstanding
12,782
254,250
236,500
35,000
538,532
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, 2003 is
approximately eight years. Pro forma information regarding net income and earnings per share, as
required by SFAS No. 123 is included in Note 1. SFAS No. 123 requires the pro forma information
be determined as if Inergy 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 fair value of each option grant was estimated as of the grant date using the Black-
Scholes option pricing model with the following assumptions:
Weighted average fair value of
options granted
Expected volatility
Distribution yield
Expected life of option in years
Risk-free interest rate
2003
2002
2001
$1.97
.230
7.5%
5
3.0%
$1.83
.283
10.0%
5
3.1%
$2.16
.283
10.0%
5
3.1%
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 Inergy'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.
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 $12,000 in 2003. 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 $0.3 million, $0.2 million, and $0.1 million in 2003, 2002, and 2001, 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, 2003, the total of these firm purchase commitments was
approximately $64.3 million.
At September 30, 2003, Inergy was contingently liable for letters of credit outstanding totaling $4.1
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.
Inergy utilizes third-party insurance subject to varying retention levels of self-insurance, which
management considers prudent. Such self-insurance relates to losses and liabilities primarily
associated with workers’ compensation claims and general, product and vehicle liability. Losses are
accrued based upon management’s estimates of the aggregate liability for claims incurred using
certain assumptions followed in the insurance industry and based on past experience.
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 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, 2003
Retail
Sales
Wholesale
Intersegment
Sales
Operations Operations Eliminations
Revenues
Gross profit
Identifiable assets
$179,936
87,004
16,554
259,934
11,326
41,009
$(76,505)
(1,059)
–
Total
$363,365
97,271
57,563
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
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, 2003 Inergy completed the acquisition of a natural gas liquids (NGL)
business. In October 2003, Inergy acquired from EOTT Energy, L.P. its West Coast NGL business,
which includes gas processing, fractionation, 6.1 million gallons of above-ground NGL storage,
truck and rail distribution facilities, and a 23-tractor NGL transportation fleet all located in south
central California. In October 2003, Inergy also acquired the assets of Smith Propane, with
headquarters in La Crosse, Virginia and of Peoples Gas and Appliance, with headquarters in
Beaufont, South Carolina. In November 2003, Inergy acquired the assets of Pembroke Propane,
with headquarters in Pembroke, Georgia. These four companies generated revenue during the 12
months ended September 30, 2003, of less than 10% of Inergy’s consolidated revenue during fiscal
2003, and represents less than 10% of consolidated assets and partners’ capital.
On December 10, 2003, Inergy announced a two-for-one unit split to be distributed on or about
January 12, 2004, to unitholders of record on January 2, 2004. The stock split will require
retroactive restatement of all historical per unit data in the first quarter ended December 31, 2003.
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 2003
Revenues
Gross profit
Operating income (loss)
Net income (loss)
Net income (loss) per limited partner unit:
Basic
Diluted
Fiscal 2002
Revenues
Gross profit
Operating income (loss)
Net income (loss)
Net income (loss) per limited partner unit:
Basic
Diluted
$109,690
28,367
10,467
7,716
0.98
0.97
$49,630
15,835
5,769
4,465
0.75
0.74
$158,650
40,957
20,090
17,785
2.22
2.19
$83,186
34,438
16,033
14,051
2.12
2.08
$39,481
11,137
(4,352)
(6,548)
(0.75)
(0.75)
$36,699
12,162
(2,910)
(5,910)
(0.88)
(0.88)
$55,544
16,810
(2,942)
(5,441)
(0.57)
(0.57)
$39,185
12,023
(1,935)
(4,297)
(0.55)
(0.55)
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 23, 2003*
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 23, 2003
/s/John. J. Sherman
John J. Sherman, President, Chief Executive
Officer and Director (Principal Executive Officer)
December 23, 2003
/s/R. Brooks Sherman, Jr.
R. Brooks Sherman, Jr., Senior Vice President and
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
December 23, 2003
December 23, 2003
December 23, 2003
December 23, 2003
December 23, 2003
/s/Phillip L. Elbert
Phillip L. Elbert, Director
/s/Warren H. Gfeller
Warren H. Gfeller, Director
/s/David J. Schulte
David J. Schulte, Director
/s/Arthur B. Krause
Arthur B. Krause, Director
/s/Robert A. Pascal
Robert A. Pascal, Director
* Amendment signed by John J. Sherman on January 7, 2004.
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
2003
2002
2001
$927
186
225
$719
451
912
$96
540
9
$(745)
(250)
(960)
$997
927
186
100
O F F I C E R S
J O H N J. S H E R M A N
President/ CEO
P H I L L I P L. E L B E R T
Executive Vice President, Retail Operations
D A V I D G. D E H A E M E R S, J R.
Executive Vice President, Corporate Development
R. B R O O K S S H E R M A N , J R.
Senior Vice President/CFO
D E A N E. W A T S O N
Senior Vice President,
Wholesale, Supply, Transportation
W I L L I A M C. G A U T R E A U X
Vice President, Supply
C A R L A. H U G H E S
Vice President, Business Development
K U R T W. K O L B E C K
Vice President, Wholesale Marketing
L A U R A L. O Z E N B E R G E R
Vice President, General Counsel
R I C H A R D C. K R E U L
Vice President, Inergy Services
A N D R E W L. A T T E R B U R Y
Director, Corporate Development
D I R E C T O R S
J O H N J. S H E R M A N
P H I L L I P L. E L B E R T
W A R R E N H. G F E L L E R
A R T H U R B. K R A U S E
R O B E R T A. P A S C A L
D A V I D J. S C H U L T E
STANDING, LEFT TO RIGHT:
CARL HUGHES, DAVID DEHAEMERS,
ANDY ATTERBURY, KURT KOLBECK,
LAURA OZENBERGER, DEAN WATSON
SEATED, LEFT TO RIGHT:
BROOKS SHERMAN, JOHN SHERMAN,
RICK KREUL, BILL GAUTREAUX
NOT PICURED: PHIL ELBERT
“We take our responsibilities
to you very seriously.”
JOHN SHERMAN
EBITDA *
($ 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)
$37.4
$28.8
$17.6
$40
$35
$30
$25
$20
$15
$10
$5
119.7
88.5
120
110
100
90
80
70
60
50
40
30
20
10
46.8
2001
2002
2003
2001
2002
2003
S H A R E H O L D E R TOTA L R E T U R N
JULY 31, 2001 (IPO) —
DECEMBER 31, 2003
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
-20%
152%
48%
(8%)
S&P
500
Propane
MLPs
NRGY
* EBITDA is defined on page 18 of this report.
I N V E S T O R R E L A T I O N S
Mike Campbell
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
59 Maiden Lane, Plaza Level
New York, New York 10038
Shareholder Services: 1-800-937-5449
Info@AmStock.com
T W O B R U S H C R E E K B LV D., S U I T E 200, K A N S A S C I T Y, MO 64112